-----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, INIX7t6YpjHBNCvV6p+ui+i6HXcFtjm6kc2CHjg7E1pVVlKj0hepTZRKhrn+A6RU b9xJqLebw4YfNADbgCOZLw== 0000950130-97-001443.txt : 19970401 0000950130-97-001443.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950130-97-001443 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHYSICIANS HEALTH SERVICES INC CENTRAL INDEX KEY: 0000867098 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HEALTH SERVICES [8000] IRS NUMBER: 061116976 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21098 FILM NUMBER: 97571028 BUSINESS ADDRESS: STREET 1: 120 HAWLEY LANE STREET 2: 1243 BROADRICK DRIVE CITY: TRUMBULL STATE: CT ZIP: 06611 BUSINESS PHONE: 2033816400 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ COMMISSION FILE NUMBER 0-21098 --------- PHYSICIANS HEALTH SERVICES, INC. (Exact name of Company as specified in charter) Delaware 06-1116976 (State or other jurisdiction of (IRS employer incorporation or organization) identification number) One Far Mill Crossing 06484 Shelton, Connecticut (ZIP Code) (Address of principal executive offices) Company's telephone number, including area code (203) 381-6400 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the Company: (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 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] Aggregate market value of the voting stock held by non-affiliates at March 25, 1997 amounted to $114,394,815 (assuming for purposes of this calculation only, that all directors and executive officers are affiliates). (Class B Common Stock is assumed to have a market value of $19.875 per share) Indicate the number of shares of each of the Company's classes of Common Stock, as of the latest practicable date. Shares of Common Stock outstanding as of March 25, 1997: 5,763,905 shares of Class A Common Stock 3,546,212 shares of Class B Common Stock DOCUMENTS INCORPORATED BY REFERENCE: 1997 Proxy Statement (Part III) PART I ITEM 1. BUSINESS GENERAL Physicians Health Services, Inc., a Delaware corporation ("PHS" or the "Company"), is the parent of three health maintenance organizations ("HMOs"): (1) Physicians Health Services of Connecticut, Inc., a Connecticut corporation ("PHS/CT"), operating in Connecticut; (2) Physicians Health Services of New York, Inc., a New York corporation ("PHS/NY"), operating in New York's Westchester, Dutchess, Orange, Putnam, Rockland, Nassau and Suffolk Counties, and the five boroughs of New York City; and (3) Physicians Health Services of New Jersey, Inc., a New Jersey corporation ("PHS/NJ"), operating in New Jersey. In addition, the Company is the parent of Physicians Health Insurance Services, Inc. ("PHIS"), which is licensed in Connecticut as an insurance broker to offer various insurance products, PHS Investments, Inc. ("PHSI"), the Company's investment subsidiary, PHS Insurance of Connecticut, Inc. ("Insurance/CT"), which holds a health insurance license in the State of Connecticut, Physicians Health Services Insurance of New York, Inc. ("Insurance/New York"), which holds a health insurance license in the State of New York, Physicians Health Services (Bermuda), Ltd. ("Bermuda"), an insurance company licensed as a reinsurer in Bermuda, and PHS Real Estate, Inc. ("PHSRE"), a Delaware corporation which owns all of the outstanding stock of the Company's one indirect subsidiary, PHS Real Estate II, Inc. ("PHSREII"), a Delaware corporation which owns the Company's corporate headquarters in Shelton, Connecticut. All of the aforementioned subsidiaries are wholly-owned, either directly or indirectly, by the Company, except for PHS/NJ, in which MasterCare Companies, Inc. ("MasterCare") holds a 20% minority interest. The Company is federally qualified as an HMO throughout its Connecticut and New York service areas. The Company conducts substantially all of its operations through its subsidiaries. Unless the context otherwise requires, the terms "Company and PHS" refer to Physicians Health Services, Inc. and its subsidiaries. Its principal offices are located at One Far Mill Crossing, Shelton, Connecticut 06484 , and its telephone number is (203) 381-6400. The Company's managed care products include traditional HMO products, in both open access and gatekeeper models, point of service ("POS") products, administrative services only ("ASO") plans and Medicare and Medicaid plans. The Company's HMO subsidiaries contract for medical and related services with individual practice associations ("IPAs"), physician hospital organizations ("PHOs"), physicians, physician groups, hospitals and other health care providers. The Company arranges for health care coverage for its members for a fixed monthly payment, generally without regard to the frequency or extent of health care services actually furnished, although small copayments may apply and members pay a deductible and coinsurance in connection with the out-of-network benefits in POS plans. As of January 1997, the Company had contracted with 23,298 providers and 183 hospitals throughout its tri-state service area. It had enrolled 400,021 members as of December 31, 1996 (424,940 as of January 1, 1997). PRODUCTS The Company offers a broad assortment of managed care products. Its POS products enable members to choose health care providers from the Company's network of 23,298 providers and 183 hospitals or to obtain covered services outside its network. The POS products combine the features of an HMO with the features of an indemnity-type benefit for out-of-network utilization. Under the POS plans, a member who obtains benefits outside of the PHS network pays a deductible and coinsurance. As used herein, a plan with a POS out-of-network benefit is referred to as a POS plan. The Company's traditional HMO plans include a gatekeeper model HMO plan, which requires prior approval by a member's primary care physician before the member may obtain the services of specialists (the "Passport" plan), and an open access HMO plan in which members can obtain services from all PHS participating physicians without the need for a referral (the "Charter" plan). The Charter and Passport plans can be obtained as traditional HMO plans or as the underlying HMO product for a POS plan. Under the Company's traditional HMO plans, a member who selects a hospital or physician from outside the network bears the entire cost of such services, unless the care is related to an emergency or the member has received prior approval from the Company. The Company sells its products both on a proprietary basis and through a joint marketing arrangement with The Guardian Life Insurance Company of America ("The Guardian"). See "Business - Joint Marketing Arrangement with The Guardian." Proprietary products are sold to medium and large size groups, typically as one of several health care plans made available by the employer to its employees ("alternative products"). Under the agreements with The Guardian, jointly developed managed care products are marketed to existing customers of The Guardian, as well as to new customers, under the tradename "Healthcare Solutions". The Healthcare Solutions products are offered principally in the small employer group market on a total replacement basis. Under this arrangement, employees are offered the choice of traditional HMO products, POS products, and, in certain cases, The Guardian indemnity products. Through the first nine months of 1996, PHS and The Guardian shared profits and losses on the Healthcare Solutions products through a combination of reinsurance and profit sharing arrangements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". Effective October 1, 1996, the Company and The Guardian converted all of the Healthcare Solutions products to a reinsurance basis. As of October 1, 1996, the Company no longer shared profits and losses with The Guardian with respect to indemnity products sold under the joint marketing arrangement. The joint marketing arrangement covers PHS's New York, New Jersey and Connecticut service areas. The Company offers third party administrator ("TPA") services for administrative services only ("ASO") plans, Medicare risk and cost plans, Medicaid plans, and individual plans in the New York service area. The Company has a contract with the Mashantucket Pequot Tribe Employee Benefit Plan to provide access to the Company's network of health care providers and utilization management programs. In 1995, the Company began marketing plans to the small group market through the Connecticut Business and Industry Association ("CBIA"). The Company is one of only four participants in the CBIA program. The Company has a three-year contract with the Electric Boat Division of General Dynamics to provide managed health care services to all of its salaried employees in Connecticut. This contract was effective January 1, 1995 and has been recently expanded to include the members of the Metal Trades Council Union. The Company has a three-year contract to provide services to General Electric Company for its employees in Connecticut. The General Electric plan, which was effective January 1, 1996, combines elements of a fully insured HMO plan and an ASO plan. Effective December, 1996, the Company initiated coverage for the New York State Nurses Association Benefits Fund and its almost 29,000 members under a Charter POS Plan. HMO PLANS The Company's traditional HMO plans provide comprehensive health care services to enrollees for a fixed monthly premium per enrollee, typically charged to the enrollee's employer group, that does not vary with the nature, frequency, or cost of services provided, although, where allowed by regulation, premiums are age/sex adjusted according to the demographic characteristics of the employer group. Adjusted community rating, which includes factors related to a specific employer's claims experience, is used with some of the Company's larger accounts in certain of its service areas. The Company is also able to experience rate certain groups insured under its Healthcare Solutions products. See "Business - Enrollment, Employer Groups and Marketing." Under the traditional HMO plans, the Company does not cover health care services provided by non-participating physicians or other health care providers unless pre- approval for an out-of-plan referral has been obtained or such services are the result of a medical emergency. Members are required to receive hospital care at participating hospitals except for preauthorized out-of-plan referrals or emergency admissions. The traditional HMO benefit plans range from a plan with limited copayments to a plan combining lower monthly premiums with higher copayments paid by the member. The plans provide coverage for physicians' services, surgery, hospital care, x-ray and laboratory services, emergency care, maternity services, well baby and other preventive health services and, to a limited extent, skilled nursing, home health care, alcohol and drug rehabilitation and mental health services. The traditional HMO plans are marketed to employer groups of all sizes, generally as alternative products. As of December 31, 1996, 33% of total membership was enrolled in traditional HMO products (23.2% commercial enrollees, 1.6% ASO enrollees and 8.2% government enrollees). 2 The Company's traditional HMO plans are the Charter and Passport plans. The Charter plan is an open access model which permits members to use PHS participating physicians generally without a referral or pre-authorization. The Passport plan is a gatekeeper plan that the Company developed in response to employer interest in such plans. Under the Passport plan, each member selects or is assigned to a primary care provider, typically a family practice physician, who is responsible for seeing that the member's medical needs are met. Use by the Passport member of specialists for treatment typically requires a referral by the primary care provider in order for the services to be covered. POS PLANS POS Plans are marketed to all size employer groups as either a total replacement or alternative product. Under a POS Plan, an enrollee chooses, at the time of services, whether to use participating providers and hospitals, or non-participating providers and hospitals. If the enrollee chooses to use out- of-network services, the enrollee is subject to deductibles, coinsurance and claim forms. The POS products have become increasingly popular because of the freedom of choice afforded enrollees under such plans. The POS plans are wrapped around the Company's traditional HMO plans so that an enrollee has the in- network benefits of the Charter or Passport HMO plan. An enrollee who has a POS Passport plan can elect to see participating or non-participating providers without the customary prior referrals required in the Passport plan, in which event such non-referred services are treated as out-of-network services. A significant portion of the Company's recent growth in membership has occurred in its POS plans. As of December 31, 1996, 60.7% of total membership was enrolled in POS products (51.1% commercial enrollees, 9.6% ASO enrollees). Only 36% of total membership was enrolled in such plans at December 31, 1995. The Company expects this trend to continue for the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement". ASO PRODUCTS Under self-funded medical plans, the employer self-insures its health care expenses and pays for health claims only as they are incurred, rather than paying monthly premiums for insurance which covers the cost of medical services as well as administrative expenses. The Company, as a TPA, typically provides claims processing and health care cost containment services through its provider network and utilization management programs, and is paid a fee only in conjunction with these administrative services. The Company's ASO products enable employers to access the Company's provider network and to realize savings through certain of the Company's discounted fee arrangements and medical cost containment capabilities, while allowing employers to design custom health benefit plans in accordance with their own requirements and objectives. Certain of the Company's ASO products include performance guarantees. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement." As of December 31, 1996, 16.9% of total membership was enrolled in ASO products (9.6% in POS plans, 1.6% in HMO plans and 5.7% in the Mashantucket Peqout plan). 3 MEDICARE/MEDICAID PRODUCTS The Company offers PHS/SmartChoice, a federal Medicare program, to Medicare eligible individuals under the terms of risk contracts with the Health Care Financing Administration ("HCFA"). PHS/SmartChoice is typically marketed directly to individuals. The Company also offers PHS/SmartChoice as a POS product in the group market. It is currently offered in New York and Connecticut. Enrollees in PHS/SmartChoice have limited copayments as long as they use health care providers within the Company's network. PHS/SmartChoice replaces both Medicare Part A and Part B coverage for enrollees and extends coverage for preventive care, acute hospitalization and skilled nursing care. In the PHS/SmartChoice gatekeeper product, in the event an enrollee chooses to receive health care from a non-participating physician, neither PHS/SmartChoice nor Medicare will cover the costs of such care absent an emergency or urgent situation. Under its risk contracts with HCFA, the Company is paid a fixed per member per month capitation amount by HCFA based upon a formula established by HCFA establishing the projected cost to provide the covered services to each Medicare member. The Company bears the risk that the actual costs of health care services may exceed the per member per month capitation amount. Medicare risk contracts provide revenues that are generally higher per member than those for non-Medicare members, and thus provide an opportunity for increased profits and cash flow. Such risk contracts, however, also carry certain risks such as higher comparative medical costs, government regulatory and reporting requirements, the possibility of reduced or insufficient government reimbursement in the future, and higher marketing and advertising costs per member as the result of marketing to individuals rather than to groups. In Connecticut the PHS/SmartChoice product is intended to replace another Medicare product (PHS/Carefree) formerly offered by the Company pursuant to a cost contract with HCFA. As of December 31, 1996, the Company had 9,638 members enrolled in PHS/Carefree. The Company anticipates that almost all of these members will convert to the PHS/SmartChoice product by the end of 1997. The Company participates in Connecticut's Medicaid managed care program pursuant to a contract with the Connecticut Department of Social Services. PHS had enrolled 20,781 members in this program as of December 31, 1996. The Company receives fixed monthly premiums per member under the contract with the Connecticut Department of Social Services and bears the risk that the actual costs of health care may exceed the per member per month capitation amounts received by the Company. Medicaid plans also involve the risk of reduced or insufficient government reimbursement and higher marketing and advertising costs per member as a result of marketing to individuals rather than to groups. PHS has participated in the New York Medicaid managed care program in Westchester County since February, 1994. It contracts with Westchester Prepaid Health Service Plans, Inc. for the provision of services under this program. As of December 31, 1996, 9% of total membership was enrolled in a government program, almost all in HMO plans. 4 OTHER PRODUCTS The Company has entered into marketing arrangements with three prominent HMO networks, UltraLink/SM/, HMO National Network/SM/ and National Managed Care, Inc., to facilitate cooperative marketing efforts focusing on national employer groups with employees in the Company's service area. The Company's affiliations with national networks allow it to compete with national managed care companies for employers desiring a national managed care network. In 1996, the Company generated almost $7 million in premium revenues from employer groups accessing these national networks. The Company has a multi-year contract with Dental Benefit Providers, Inc. to market managed dental products in New York and Connecticut. These managed dental products offer different levels of dental benefits through a selected panel of dentists at a cost that is below average indemnity plan prices. These products are designed to increase the Company's managed care product market penetration and to promote retention of its enrollee base. The Company also offers prescription drug riders to its HMO and POS plans. The prescription drug riders are offered through PCS, Inc., an unaffiliated company that has established contracts with most of the local pharmacies in the Company's service area. The prescription drug rider pays the cost of all covered prescriptions, less, in some instances, a deductible or copayment. The Company also offers a Connecticut small employer plan to groups of fewer than 50 employees. The Company also offers an individual HMO and an individual POS plan throughout its New York State service area. The Company's insurance brokerage subsidiary, 5 PHIS, markets various insurance products of unaffiliated companies such as dental and life insurance, short-term disability and stop-loss coverage available from other insurers. PHIS's insurance activities are solely as an agent and represented less than 0.1% of the Company's total revenues in 1996 . The Company contracts with Davis Vision of Plainview, New York for provision of certain routine and non-routine vision services to both commercial and government product members. OTHER INVESTMENTS In 1995, the Company invested $2.3 million in MasterCare Companies, Inc. ("MasterCare"), a company offering workers compensation managed care services in New Jersey and Connecticut. See "Business - Arrangement with MasterCare." PROVIDER ARRANGEMENTS PHYSICIANS AND OTHER HEALTH CARE PROVIDERS The Company contracts with physician groups, such as IPAs, PHOs, and multi-specialty groups (collectively, "Physician Groups"), individual physicians and other health care providers for a defined range of health services, including primary and specialty care. As of January 1, 1997, the Company had agreements with 23,298 providers and 183 hospitals in its tri-state service area. The Company's contracts with providers include discounted fee for service arrangements as well as capitated group arrangements in which the contracting Physician Group assumes a significant amount of the risk of overutilization. The Company currently has contracts with four IPAs, three PHOs and one large physician group ("Group") that provide for most of its physician services in its Connecticut service area. In New York and New Jersey, the Company generally contracts directly with physicians and other health care providers. Under the typical Physician Group arrangements, the Physician Group receives a fixed monthly capitation payment for each member selecting a primary care physician from that Physician Group. Capitation payments may be for all members selecting a primary care physician in the Physician Group or only as to members in certain commercial HMO and POS plans, depending upon the negotiated arrangement with the Physician Group. Capitation rates and any increases thereto are negotiated for the term of the contract. The capitation payment is designed to cover not only the professional medical services (including ancillary tests and services) rendered by the physicians and other providers associated with that Physician Group but also includes payments for certain other services rendered to the enrollee by providers who are not members of the Physician Group. Services covered by the capitation payment include, among other things, virtually all physician claims (whether inpatient or outpatient, including authorized out-of- plan care) and care rendered by other professionals such as physical therapists and psychologists. In certain of the contracts, the Physician Groups also are at risk for hospital, pharmacy and other facility expenses. The Company does not capitate physicians directly. Three of the Company's four Connecticut IPA contracts expire on December 31, 1997; the Company has reached an agreement in principle with the fourth IPA to extend its present arrangements through December 31, 1997 on slightly different terms. In the event that the Company was unable or chose not to renew any Physician Group contract, it would seek alternative arrangements to ensure the continuation of health care services to its enrollees. However, if the Company failed to renew any Physician Group contract covering a significant number of its enrollees and the Company was unable to obtain satisfactory alternative arrangements, there could be a significant disruption in the Company's business. Each Physician Group reimburses its member physicians and other providers out of the capitation payment paid to it by the Company according to a maximum fee-for-service schedule for claims submitted by those physicians and providers affiliated with the Physician Group. A portion of each physician's and provider's payment is withheld and is 6 contributed to the Physician Group's risk pool to cover those expenses that exceed the Physician Group's budget for health care expenses. The withheld portion is returned to providers if the Physician Group operates within its prescribed budget for services. Because in most instances the capitation payments received by the Physician Group are fixed amounts unrelated to the services provided, the provision of excessive services would obligate the Physician Group to pay more to its physicians than the Physician Group receives from the Company. The principal exception is the Greater Bridgeport IPA, where overruns are shared equally between the Company and IPA. The Company's capitation system is designed to place upon the Physician Group and its member physicians the responsibility for managing the use of hospital and other medical services. In the event that the Physician Group is required to pay more to its physicians than it receives from the Company, the Physician Group must continue to cover ongoing expenses and will be required to take corrective action to restore its financial position. Corrective action may include, among other things, lowering its fee-for-service schedule or increasing its withhold percentage. The Company believes that the member physicians of its Physician Groups have an interest in supporting the financial condition of their Physician Group through temporary reductions in fee schedules and increases in withhold. In 1996, each Physician Group received a return of all or a portion of its withhold account. Physician Groups may incur an operating loss which would result in the Physician Group having a retained earnings deficit. If such deficit were not eliminated through corrective action, the Company might find it necessary to advance funds to cover such deficit, although it would not be obligated to do so. Certain of the Company's IPA stockholders, through their ownership of Company stock or through members who serve on the Company's Board of Directors, may seek to have the Company fund such deficits in the future and failure by the IPAs to eliminate such future deficits, if any, could result in unrecovered cash advances. Any such funding is subject to approval by the Board's Audit Committee, a majority of which is composed of independent directors. If any Physician Group with which the Company contracts for services became insolvent, such insolvency could have a material adverse effect on the business of the Company. The capitation payments to Physician Groups other than the PHOs typically do not cover hospital and other facility expenses, although the Physician Groups are partially at risk for non-Medicare and non-Medicaid hospital utilization. The Company establishes an annual per member, per month target for hospital expenses. The amount varies by benefit plan and Physician Group, and encompasses both inpatient and outpatient costs. If total hospital expenses generated by the Physician Group exceed the applicable hospital expense target, the Company withholds from amounts owed by it to the Physician Group all or a portion of the excess over budget, in most cases one-half of the excess over budget. If actual costs are less than budgeted targets, the Physician Group receives from the Company an incentive credit typically equal to forty to fifty percent of the amount by which actual costs are less than budgeted targets. In its New York and New Jersey expansion areas and in areas in Connecticut not served through Physician Group contracts, the Company contracts for services principally through direct contracts with individual physicians and other health care providers. In addition, the Company contracts with two IPAs in the northern counties of its New York service area. The Company withholds a percentage of reimbursement for services rendered pursuant to its direct physician contracts against budgeted amounts to manage excessive utilization. The Company provides services to enrollees in PHS/SmartChoice pursuant to a combination of direct physician agreements, and, in New York, risk sharing agreements with the aforementioned IPAs. In Connecticut, the Company has contracted with and is in negotiations with PHOs and other risk entities for its Medicare risk product to shift the risk of all medical costs to the risk entity in return for a fixed percentage of the Medicare premium received by the Company. The Company's agreements in connection with its Medicare risk products are subject to compliance with new risk sharing regulations adopted by HCFA, which require disclosure and reinsurance for specified levels of risk sharing, and proposed state regulations that could affect physician risk sharing. 7 HOSPITALS The Company maintains contracts with 30 acute care hospitals in its Connecticut service area. In New York, the Company contracts with 83 hospitals in its service area. The Company has direct and indirect (through MasterCare) arrangements with 70 hospitals in New Jersey. The Company generally negotiates contracts with hospitals that include compensation on a per diem basis (at a daily rate, without regard to the scope of services actually provided). Other compensation arrangements with hospitals include charged-based discounts (negotiated discounts from the hospital's billed charges) and all inclusive case rates. In the case of non-participating hospitals, the Company pays either hospital billed charges or negotiated discounted charges. Additionally, some hospital contracts include per case, all-inclusive, payment arrangements for select procedures such as maternity care. OTHER HEALTH CARE PROVIDERS PHS maintains contracts with outside vendors to provide certain ancillary services. Laboratory services are provided in Connecticut through an exclusive arrangement with Diagnostic Medical Laboratory, Inc. Laboratory services in New York and New Jersey are provided through arrangements with Quest Diagnostics. Both are capitated arrangements that are effective through December 31, 1999 and December 31, 1997, respectively. Mental health, substance abuse and detoxification services are provided in New York City and Long Island through a capitated arrangement with CMG Health, Inc. ("CMG"). This agreement is now in a renewal period and may be terminated by either party with at least 120 days notice. CMG also provides these services for the Company's Medicaid members in Connecticut under a fully capitated arrangement, which began on August 1, 1995 for a period of 27 months and is automatically renewable thereafter for one year periods unless terminated by either party on 120 days notice. In Westchester, Dutchess, Orange, Putnam, and Rockland Counties, New York, CMG provides case management services only. This agreement is in a renewal period and may be terminated by either party on at least 120 days notice. MEDICAL COST CONTROLS Control of health care expenses is critical to the profitability of a managed care company. Expansion into new areas, introduction of new products, changes in health care practices, medical cost inflation, new technologies, government regulation, major epidemics, natural disasters and numerous other factors affecting the delivery and costs of health care may adversely affect the Company's operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement." PHYSICIAN COSTS. The Company has developed several integrated mechanisms and procedures for the control of health care costs. The Company's health care programs are designed around primary care physicians who assume overall responsibility for the care of enrollees and determine or recommend the nature and extent of services provided to enrollees. In the case of enrollees enrolled in Passport products, primary care physicians are also responsible for making referrals to contracted specialist physicians and hospitals. Although the primary care physician's prior approval for most specialist services is not required in the Company's Charter products, it is recommended. Prior approval is required in the Company's Charter products for the enrollee's use of certain services such as home health care, hospice care, cardiac rehabilitation, private duty nurses, skilled nursing care, drug and alcohol rehabilitation and, except for enrollees in a POS plan, elective services rendered out-of-network. In addition to the prior approval process for certain services, the Company monitors services rendered to enrollees and provides utilization review information to its Physician Groups. In cases of possible excessive utilization, the Company counsels the enrollee with respect to the possible duplication of services or medications. With respect to physicians who contract with PHS through Physician Groups, costs are also controlled through contracts that provide for payment to the Physician Group on a capitation basis. The capitation method of payment, together with the withhold provisions in its contracts, transfers much of the Company's risk of excessive physician utilization to the Physician Group. Physicians who contract with PHS directly are not capitated, although withholds apply in order to mitigate the risk to PHS of excessive utilization. 8 The Company also endeavors to monitor the practice patterns of all participating physicians and providers in order to identify inappropriate or excessive utilization. Each physician's utilization pattern is reviewed against other physicians within the relevant specialty area in the physician's Physician Group or relevant geographic area to determine whether average costs per patient are consistent with utilization generally. In the event there are insufficient aggregate data in a particular area, the Company's Medical Directors review utilization data on a specific case basis. If inappropriate utilization is determined, PHS will typically institute corrective measures including, if necessary, financial sanctions or, in rare instances, termination of the physician's membership as a participating physician. The Company has developed a measurement tool called the "practice profile" to evaluate and promote the quality of care being provided to the Company's members. The practice profile compares providers to their peers in relation to specific quality indicators that measure quality across a broad spectrum of areas. The practice profile also provides feedback to providers to assist them in assessing and enhancing their performance. HOSPITAL COSTS; UTILIZATION REVIEW. The control of the use of hospital and other medical services by a member is primarily the responsibility of the member's primary care physician. The Company requires preadmission notification of non-emergency hospital admissions and stays, pre-certification of selected inpatient and outpatient procedures, and retrospective review of ambulatory health services. The Company also maintains nurse coordinators who are assigned to certain participating hospitals to conduct concurrent reviews of hospital admissions. In the event that the nurse coordinator believes that utilization is inappropriate, the nurse coordinator first addresses his/her concerns with the attending physician, then consults with a physician advisor, who reviews admission information and patient records. Physician advisors as well as PHS Medical Directors are available to assist the attending physician in determining whether it is appropriate for a patient to remain hospitalized. The physician advisor, Medical Director and/or nurse coordinator works with the responsible physician to arrange alternative health care where appropriate, thereby reducing the length of hospital stays. The Company performs telephonic reviews at certain hospitals where it is not practical to perform on-site concurrent reviews. The Company has implemented special review procedures for pharmaceutical usage and the treatment of mental health and substance abuse conditions. In addition to the foregoing controls, the Company has adopted certain policies relating to the timing of admissions and the use of ambulatory facilities for certain surgical procedures, among other services, in order to reduce costs associated with hospital utilization. For catastrophic cases, the Company uses case management techniques to work with the attending physician, facility, patient and his/her family, to provide care in a cost-efficient manner consistent with the medical needs of the patient. The Company has a pre-certification program for selected elective inpatient and outpatient procedures to determine the medical necessity of those services. The pre-certification program requires the physicians performing the designated procedures to obtain advance authorization, and permits appeal if the procedure is initially denied. Procedures that are denied through this program are ineligible for coverage by the Company. As a pre-certification tool, the Company utilizes the Value Health Sciences Medical Review System. Since implementation of this program in March 1993, the program has achieved an overall 21% decrease in the utilization of procedures subject to the program. Hospital inpatient costs are also controlled through several contractual mechanisms. The Company's contracts with Physician Groups contain risk sharing mechanisms designed to provide incentives to control utilization of hospital services and its contracts with PHOs include both professional/physician and hospital/facility services within the capitation payment to the PHO. In addition, the Company maintains insurance coverage that reimburses the Company for hospital expenses incurred above certain levels, limiting the risk to the Company of an individual enrollee's inpatient hospital expense exceeding specified amounts. See "Business - Stop Loss and Other Insurance." 9 MANAGEMENT INFORMATION SYSTEMS The Company believes that timely and relevant information is critical to the success of its managed health care business. The Company utilizes its management information systems to process claims on an accurate and timely basis; to analyze health care utilization; to support provider, member and employer requirements; and to control administrative costs. The Company's claims operation is supported by staff and manager training, adherence to performance standards (for both productivity and accuracy), auditing of claims for claims processing accuracy, and adequate staffing and system programming to ensure adherence to all benefit provisions of the Company's provider policies. Currently, approximately 30% of physician/provider (non-facility) claims and approximately 20% of institutional claims are received electronically from the Company's providers. The Company intends to increase the amount of claims that it processes electronically. The Company's imaging system enables further automation of the claims process. The Company believes that its electronic claims capabilities combined with the Company's imaging system have enabled the Company to establish highly efficient claims processing and information retrieval systems. The Company has in place a disaster recovery plan that provides for a back-up of its management information system in case of an emergency. The Company is in the process of completing a significant upgrade of its management information systems. The new systems are expected to begin to come on line during the second quarter of 1997. At December 31, 1996, the costs associated with this project included capital expenditures of approximately $18.6 million, including enhancements beyond the original scope of the project. The capital expenditures are expected to be amortized over five years commencing with fiscal year 1997. When completed, the conversion to the new system is expected to yield significant gains in productivity, accuracy and speed as well as permit more significant information evaluation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement. " QUALITY ASSURANCE AND CUSTOMER SERVICE Prior to a physician's acceptance for participation in the Company's network of providers, the Company reviews the physician's credentials and background. Each physician must be board certified in his/her specialty, or become board certified within five years of becoming credentialled. PHS has a rigorous credentialling process that consists of primary verification of all credentials; query of the National Practitioner Data Base, state medical boards and admitting hospitals for malpractice history, disciplinary actions and/or restrictions of hospital privileges; and on-site office evaluations including a review of medical records to determine compliance with PHS's standards. The Company biennially recredentials all its providers. Recredentialing includes repeating the initial credentialling process as well as a reviewing the provider's practice history with PHS. After acceptance, the Company monitors various aspects of the physician's performance on an ongoing basis, including the quality and appropriateness of care delivered. The Company evaluates the quality and appropriateness of medical care provided to its enrollees by performing medical care evaluation and member satisfaction studies, by reviewing utilization of certain services and by responding to enrollee and physician questions and concerns. In August 1995, the Company was awarded full three-year accreditation in its then current service areas from the National Committee for Quality Assurance ("NCQA"), an independent organization that reviews HMOs for compliance with their quality standards. This accreditation is effective from May, 1994 through May, 1997. In connection with the re-accreditation process, the NCQA staff made an on-site visit in late March, 1997. The Company has also established a formal system for documenting and responding to customer grievances. The Company had no grievances upheld against it during 1993, 1994 and 1995 by the New York Insurance Department. The Company also had no complaints upheld against it during 1994 and only one complaint upheld against it in 1995 by the Connecticut Department of Insurance. The Company anticipates similarly good results for 1996. The Company believes that it has established a reputation for high standards of service. 10 ENROLLMENT, EMPLOYER GROUPS AND MARKETING As of December 31, 1996, the Company provided managed health care coverage to 400,021 enrollees. The Company offers its products to small groups, generally on a total replacement basis, and to medium and large groups on both a total replacement as well as alternative bases. The small group market segment is currently marketed throughout the Company's tri-state service area through its alliance with The Guardian and, in Connecticut, also through CBIA. In the large group market, the Company sells both its proprietary HMO and POS products, as well as ASO products. The Company's enrollee base is diverse and includes federal and state employees and employees of banks, hospitals and major industries. The Company's five largest fully insured employer groups represent approximately 17% of its 332,363 fully insured enrollees and 14% of its total enrollees. The New York State Nurses Association Benefits Fund, which constitutes the largest fully insured employer group, represents 7.2% of the Company's total enrollees and 8.6% of its fully insured enrollees. Employer groups of 50 or less are subject to community rating restrictions throughout the Company's service area. In these areas, the Company uses underwriting guidelines and rating practices that comply with state mandated community rating regulations. In Connecticut and New Jersey, groups of over 50 members are not subject to community rating regulation. For these groups, the Company employs rating techniques and underwriting guidelines designed to price its products according to expected health care utilization based on group experience. In New York, all groups written on the Company's HMO license are subject to community rating regulations. The Company uses underwriting guidelines and rating practices that comply with New York mandated community rating regulations. See "Business - Competition." The Company expects to begin marketing an experience rated POS product in the over 50 employee group market in mid-1997. In addition, the Company currently experience rates certain of its Healthcare Solutions products offered in the over 50 employee group market in New York. Subject to underwriting guidelines, the Company solicits new employer groups for its proprietary products through its marketing staff and employee benefits consultants. Most larger employer groups are represented by brokers and consultants, who are typically paid by the employers, and work with the employer to recommend or design employee benefit packages. The Company utilizes an internal staff of sales and account service representatives and managers to market its benefit plans to employers. Healthcare Solutions products are sold through the Company's and The Guardian's respective marketing staffs, as well as through independent brokers. Marketing the Company's benefit plans in the alternative carrier market is typically a two-step process in which presentations are first made to employers and, after the employer selects the Company as one of its health care providers, to its employees. In the total replacement market, sales are made solely at the employer levels and employees then can select from a number of PHS products, or in the case of Healthcare Solutions, PHS or The Guardian products. The marketing process is continuous because contracts with employers are typically renewed annually, employees are permitted to change plans annually and employer groups experience regular employee turnover. JOINT MARKETING ARRANGEMENT WITH THE GUARDIAN The Company has a joint marketing arrangement with The Guardian throughout its tri-state service area. The products that are subject to the joint marketing arrangement are distributed through the brokerage community in an integrated marketing effort. The products are generally sold on a total replacement basis, which eliminates the need for marketing to employees once the products are sold to the employer group. Products are marketed under the trade name "Healthcare Solutions" and employees are able to choose among PHS's traditional HMO and POS products as well as, in certain instances, The Guardian's indemnity products. The Company and The Guardian target groups that are currently enrolled in The Guardian's indemnity products. Because of the higher premiums associated with indemnity insurance generally, such groups are often receptive to conversion to the Healthcare Solutions products. The Company and The Guardian also market to new groups. 11 The joint marketing arrangements with The Guardian are for an unlimited term but can be terminated by either party either with or without cause, subject to potentially significant payments upon termination in the event of a termination without cause, by the party electing to terminate, and in the event of certain for cause terminations, by the party breaching the agreement. The agreements can also be terminated by either party with respect to new business following a change in control of the other party, in which event the parties would continue to share profits and losses on business in effect on the date of the change in control for a period of up to ten years. For a description of the Company's financial arrangements with The Guardian in connection with the Healthcare Solutions business, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 10 to the Consolidated Financial Statements. As of December 31, 1996, there were 112,566 members enrolled in Healthcare Solutions products (43,773 in Connecticut, 53,153 in New York and 15,640 in New Jersey). STOP-LOSS AND OTHER INSURANCE The Company maintains reinsurance coverage for its existing business to limit the risk of an individual member's inpatient hospital expense exceeding specified amounts. The Company believes that its reinsurance coverage substantially limits its risk of incurring catastrophic costs at a reasonable premium cost. Beginning January 1, 1996 and continuing throughout 1997, the reinsurance arrangement for the Company's HMO products throughout its entire service area covers 80% of the next $400,000 of any member's inpatient hospital expense and emergency out-of-area services (up to a stated daily maximum) in excess of a $600,000 deductible. The reinsurance agreement provides a limit of $1,000,000 per member, per contract period (12 months) and $2,000,000 per member, per lifetime. The Company also maintains general liability, property, fidelity and contingent malpractice insurance coverage in amounts it believes to be adequate. Such insurance may become increasingly important if plaintiffs prove successful in recent efforts to expand the liability of a managed health care company for the negligence of providers with whom the Company directly or indirectly contracts. The Company also requires contracting Physician Groups and hospitals to maintain malpractice insurance coverage. ARRANGEMENT WITH MASTERCARE The Company has entered into a marketing relationship with MasterCare and its affiliates. In addition, the parties have network access agreements with each other stemming from their respective expansion activities. In connection with the formation of PHS/NJ, the Company used the MasterCare network of providers to help it develop a network in New Jersey. As consideration, the Company issued a 20% interest in PHS/NJ to MasterCare. In addition, at December 31, 1996 PHS owned an interst in MasterCare Companies, Inc. and its subsidiary, MasterCare of Connecticut, formerly Total Employee Care, a workers compensation company formerly wholly-owned by the Company. See Note 11 to the Condolidated Financial Statements. GOVERNMENT REGULATION FEDERAL REGULATION The Company is subject to the Health Maintenance Organization Act of 1973, as amended, and the rules and regulations promulgated thereunder ("HMO Act"), which prescribe the manner in which an HMO must be organized and operated in order to meet and maintain federal qualification and to be eligible to enter into Medicare contracts with the federal government. PHS/CT and PHS/NY are federally qualified under the HMO Act. In order to maintain this status the Company must file periodic reports with, and is subject to periodic review by, the Department of Health and Human Services through HCFA and the Office of Prepaid Health Care. In addition, HCFA has the 12 right to audit the Company to determine compliance with HCFA's regulations and to monitor the quality of care rendered to PHS/CT's and PHS/NY's Medicare enrollees. Reimbursements payable to PHS/CT and PHS/NY under the Medicare risk contracts are subject to periodic unilateral revision by the federal government. Future levels of such payments may be affected by federal government efforts to contain health care costs and cannot be predicted with certainty. Each of the Company's Medicare contracts are renewable on an annual basis. Health plans which offer a Medicare risk product must also comply with requirements established by peer review organizations, which are organizations which contract with HCFA to monitor the quality of health care received by Medicare beneficiaries. These requirements relate to quality assurance and utilization review procedures. Recent requirements of HCFA impose requirements relating to physician incentive plans, which place physicians participating in Medicaid and Medicare HMO plans at substantial financial risk. Enrollment under the Medicare risk program cannot exceed 50% of a health plan's total enrollment. Termination of the Company's Medicare program could have a material adverse effect on its business. As a result of its Medicaid contract, PHS/CT is subject to both federal and state regulation regarding services provided to Medicaid enrollees, payment for those services and other aspects of the Medicaid program. Medicaid regulations require that enrollment of Medicaid and other federal government program beneficiaries cannot exceed 25% of a health plan's total enrollment. The Company is also required by federal and state regulatory agencies to maintain restricted cash reserves and/or a minimum net worth. To remain licensed, it may be necessary for the Company to make changes from time to time in its services, procedures, structure and marketing methods. Such changes may be required as a result of amendment to, or other significant modification of, federal and state laws and regulations controlling the Company's operations. Any changes in federal or state government regulation could affect the Company's operations, profitability and business prospects. STATE REGULATION The Company's HMO and insurance subsidiaries are subject to substantial state government regulation. PHS/CT is licensed by the Insurance Commissioner of Connecticut to be a health maintenance organization and is subject to regulation by the Connecticut Department of Insurance. PHS/NY is also licensed as a health maintenance organization by the Commissioner of Health of the State of New York and is subject to regulation by the Department of Health of the State of New York and the Department of Insurance of the State of New York. PHS/NJ is licensed as a health maintenance organization by the Commissioner of Health and Senior Services and Commissioner of Banking and Insurance of the State of New Jersey and is subject to regulation by the Department of Health and Senior Services of the State of New Jersey and the Department of Banking and Insurance of the State of New Jersey. State regulatory authorities exercise oversight regarding the Company's provider networks, medical care delivery and quality assurance programs, contract forms and their provisions, and financial condition, including reserve and cash flow requirements. Applicable state law requires periodic financial reports, imposes minimum standards for investments, capital, deposits and reserves, and regulates marketing, rates, medical benefits, payment of dividends and affiliate transactions. In addition, the premiums charged by the Company are subject to review and changes in rates must be approved in advance by state regulatory authorities. The Company's HMOs are also subject to periodic examination by the relevant state regulatory authorities. Insurance/CT is an accident and health company licensed by the Connecticut Department of Insurance, Insurance/NY is a property and casualty company licensed by the New York Department of Insurance and Bermuda is an insurance company licensed as a reinsurer in Bermuda. Applicable laws contain requirements relating to Insurance/CT's, Insurance/NY's and Bermuda's financial condition, reserve requirements, premium rates and contracts and require periodic filings and examinations. Applicable Connecticut, New York and New Jersey statutes and regulations require the prior approval of the Connecticut Commissioner of Insurance, New York Commissioner of Health and New Jersey Commissioner of Health, respectively, for any acquisition of control of the Company or its subsidiaries. For purposes of these statutes and regulations, "control" means the direct or indirect possession of the power to direct or cause the direction of the 13 management and policies of an entity. Control is presumed to exist when a person, group of persons or entity acquires the power to vote 10% or more of the voting securities of another entity. New York law requires health insurers to accept all individuals and small groups (between three and fifty employees or group members) without regard to their age, sex, occupation or medical condition at a "community rated" premium based on the experience of the entire pool of risks covered by the insurer. The New York community rating law establishes a pooling mechanism providing for payments to insurers writing such policies for a disproportionate share of individuals with certain demographic characteristics and catastrophic medical expenses. Depending on the age and sex characteristics of an insurer's members and the incidence of certain high-cost medical conditions among members, an insurer will either make payments to or receive payments from the state pooled fund. To date, the Company has incurred expenses related to this fund amounting to $1,152,000 in 1994, $1,483,000 in 1995 and $3,180,000 in 1996. The New York community rating law also provides, among other things, for portability of health insurance, thereby facilitating continued coverage for those wishing to seek new employment or insurers, and allows members of a small group to continue their coverage after their membership is terminated. New York law requires all HMOs to offer an individual HMO plan and an individual POS plan. The benefits available under these plans are mandated by law and do not differ between health plans. Connecticut law also regulates health insurance for employer groups of fifty and fewer employees. The Connecticut small employer insurance law includes guaranteed issue, pre-existing condition restrictions and guaranteed renewability provisions. Connecticut applies adjusted community rating restrictions to all small employer medical plans. Under adjusted community rating, the only factors that may be used are age, gender, geographic area, industry, group size and family composition. Such factors are further limited by applicable Connecticut law. New Jersey regulates health insurance for employer groups of two to forty-nine employees through the New Jersey Small Employer Health Benefits Program. The law sets out six standard plans, only one of which is an HMO plan (the others are all indemnity plans). The law also mandates the benefits to be offered under such plans and sets out the participation and contribution requirements, applies a preexisting condition restriction, guaranteed renewability and rating restrictions. The Company's HMO subsidiaries are subject to statutory regulations that restrict the payment of dividends. Connecticut law imposes a 1.75% premium tax on the Company's fully insured business written in Connecticut. All HMOs in Connecticut are now assessed for the costs of the HRA (Health Reinsurance Association), which offers individual coverage to any person residing in Connecticut and special health care plans to low income groups of ten or less. The assessments are used to cover the losses incurred by the program. In addition, all Connecticut HMOs are now assessed a portion of the cost of funding the Connecticut Department of Insurance, which until recently had been funded entirely by assessments only on insurers operating in the state. If the Company acquires or establishes HMOs in states where it does not presently operate, it will have to comply with the applicable state statutes which vary from state to state. RECENT REGULATORY DEVELOPMENTS AND INITIATIVES Federal The recently enacted Federal Health Insurance Portability and Accountability Act of 1996 (i) insures portability of health insurance to individuals changing jobs or moving to individual coverage by limiting application of pre-exiting condition exclusions, (ii) guarantees availability of health insurance to employees in the small group market and (iii) prevents exclusion of individuals from coverage under group plans based on health status. The Act also permits offering Medical Savings Account plans on a pilot basis and includes programs targeting fraud and abuse. The provisions are effective beginning July 1, 1997. The Company is currently subject to similar state law provisions in New York limiting pre-existing conditions for new group and individual enrollees who had continuous prior coverage and requiring issuance of group coverage to small group employers. Recently enacted federal legislation mandates coverage for minimum hospital stays after childbirth (consistent with many new state law requirements) and parity between any lifetime limits imposed on mental health benefits and those for other medical 14 benefits. In addition, HCFA adopted rules in 1996 imposing reinsurance, disclosure and other reporting requirements relating to physician incentive plans which place physicians participating in Medicare and Medicaid HMO plans at substantial financial risk. Congress is also considering significant changes to both Medicare and Medicaid programs, including changes that would significantly reduce reimbursement to HMOs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement". In addition, proposed Medicare reform bills contain provisions that would facilitate entry of competing HMOs in the Company's service area by repealing the rule that Medicare risk contractors have one commercial enrollee for each Medicare or other government program enrollee and creating permissive licensure for HMOs sponsored by provider networks. In Connecticut, the Department of Social Services is expected to request HMOs participating in its Medicaid program to resubmit bids in 1997. It is expected that Connecticut will mandate additional reporting requirements and other changes that will reduce the number of companies willing to participate. State There is a national trend among state governments to enact legislation which increases regulation of HMOs and managed care companies and to mandate certain policies and procedures. Each state that the Company does business in is considering or has implemented wide-ranging "Patient Protection" and "Consumer Disclosure" bills and regulations. The New York State legislature enacted the Health Care Reform Act of 1996 ("HCRA"), effective January 1, 1997, that eliminated regulation of hospital rates and adopted surcharges and covered lives assessments to fund various public programs. This deregulation allows all private health care payors to negotiate payment rates for inpatient hospital services. Previously, only HMOs could negotiate rates for these services. As a result of the enactment of HCRA, non-HMOs who compete with the Company may be able to negotiate better rates with hospitals in New York because of the volume of patients they represent, which would have an adverse effect on the Company's ability to compete effectively in New York. Also, effective January 1, 1997, the Company is required to make payments to state funding pools to finance hospital bad debt and charity care, graduate medical education, and other state programs under HCRA. Previously, hospital bad debt and charity care and graduate medical education were financed by surcharges on payments to hospitals for inpatient services. The Company has renegotiated many of its hospital contracts in New York to reflect the surcharges. These adjustments are generally effective as of January 1, 1997, but they are not expected to result in savings equal to the cost of the surcharges. The New York legislature also recently passed legislation related to operation of managed care plans, which contains provisions relating to, among other things, utilization review, consumer disclosure and the right of a physician to a hearing on termination from a health plan network. In addition, the New Jersey Department of Health and Senior Services recently issued a comprehensive revision to its existing HMO regulations, which encompasses many of the same features as the aforementioned New York law, but also includes a non-binding external appeals process. Connecticut is considering increased regulation which, like New York and New Jersey, includes extensive new reporting and data collection requirements. These regulatory developments are likely to increase the Company's medical and administrative costs. COMPETITION The health care industry in the Company's market area is highly competitive. The Company has numerous competitors, including for-profit and not- for-profit HMOs , preferred provider organizations ("PPOs") and indemnity insurance carriers, and certain of the Company's competitors have substantially greater enrollment and financial 15 resources than the Company. The Company's major competitors include independent HMOs, such as Oxford Health Plans, Inc., and United Health Care, which have significant enrollment in the New York metropolitan area, and HMOs and managed care plans sponsored by large health insurance companies, such as Aetna/U.S. Healthcare, Inc., Blue Cross/Blue Shield, The New York Life Insurance Company and CIGNA. Additional competitors may enter the Company's market in the future. In addition, the managed care industry has experienced significant consolidation recently, and such consolidation is expected to continue, possibly resulting in fewer but larger competitors in the Company's service area. The Company competes on the basis of price, quality and scope of services provided, including the extent of its provider network. The Company believes the quality of its service and physicians, as well as its reputation, are important competitive factors. However, the cost of providing benefits is in many instances the controlling factor in obtaining and retaining employer groups and certain of PHS's competitors have set premium rates at levels below PHS's rates for comparable products. The Company anticipates that premium pricing will continue to be highly competitive. TRADEMARKS AND TRADENAMES The Company has a number of registered trademarks. The Company believes that its trademarks and tradenames are important to its marketing efforts. Any challenge to the use of a material tradename, trademark or service mark could have an adverse effect upon the Company's business. EMPLOYEES As of December 31, 1996, the Company had 971 full-time employees. The Company is not a party to any collective bargaining agreement and has not experienced any work stoppage since its organization. The Company believes its relations with its employees to be good. ITEM 2. PROPERTIES The Company's corporate headquarters offices were relocated to Shelton, Connecticut in early 1997 and comprise 327,195 square feet, located in three adjacent building, which the Company purchased in June, 1996 for $16.6 million. The Company presently occupies approximately 65% of the available space in this facility. The Company expects that the remainder of the available space will require renovation before it can be occupied by the Company's employees. The Company continues to own and occupy its former headquarters in Trumbull, Connecticut which comprises 74,350 square feet. PHS/CT leases properties at three locations, for an aggregate of 97,488 square feet. PHS/NY leases 11,752 square feet of property in White Plains, New York, 18,415 square feet in New York City and 3,415 square feet in Lake Success, New York. PHS/NJ leases 12,895 square feet of space in Paramus, New Jersey. ITEM 3. LEGAL PROCEEDINGS The Company is involved in litigation arising in the ordinary course of its business, a significant portion of which involves claims for coverage or payment of medical services rendered to enrollees. In the opinion of the Company's management, based upon discussions with legal counsel, existing litigation will not have a material adverse effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter. 16 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company completed its initial public offering of 2,975,000 shares of Class A Common Stock in January, 1993. The Company's Class A Common Stock is traded in the over-the-counter market on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System under the symbol "PHSV." There is no market for the Company's Class B Common Stock. The following table sets forth the range of high and low sale prices for the Class A Common Stock for each of the periods indicated as reported on the NASDAQ National Market System. Quotations represent prices between dealers and do not reflect retail mark-ups, mark-downs or commissions. There was no market for the Company's Class A Common Stock prior to its initial public offering in January, 1993. High Low ------ ------ January 1, 1995 through March 31, 1995 $33.75 $26.75 April 1, 1995 through June 30, 1995 $34.25 $24.50 July 1, 1995 through September 30, 1995 $28.75 $22.00 October 1, 1995 through December 31, 1995 $43.25 $27.25 January 1, 1996 through March 31, 1996 $40.75 $29.50 April 1, 1996 through June 30, 1996 $34.50 $19.75 July 1, 1996 through September 30, 1996 $25.50 $14.50 October 1, 1996 through December 31, 1996 $20.00 $14.00 There were an aggregate of 390 holders of record of the Company's Class A and Class B Common Stock (the "Common Stock") as of March 25, 1997. The Company has not paid any dividends on its Common Stock since its issuance. The Company does not intend to pay any cash dividends in the foreseeable future. Rather, the Company intends to retain its earnings to provide for the operation and expansion of its business. The Company's ability to declare and pay dividends to its stockholders may be dependent upon its ability to obtain cash distributions from its operating subsidiaries. The ability to pay dividends is also restricted by insurance and health regulations applicable to its subsidiaries. See "Business - Government Regulation." 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The income statement data and balance sheet data set forth below have been derived from the audited consolidated financial statements of the Company. The information below is qualified by reference to and should be read in conjunction with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
Year Ended December 31 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (in thousands, except per share amounts and operating statistics) INCOME STATEMENT DATA: REVENUES: Premiums $ 481,534 $342,975 $289,784 $274,795 $265,436 Investment and other income 6,574 6,968 4,160 5,435 3,459 ---------- ---------- ---------- ---------- ---------- Total revenues 488,108 349,943 293,944 280,230 268,895 ---------- ---------- ---------- ---------- ---------- Health care expenses: Hospital services 178,059 111,947 94,934 105,592 107,638 Physicians and related health care services 198,591 131,019 117,393 110,599 106,617 Other health care services 42,382 18,707 12,943 9,741 9,724 Indemnity costs 7,008 2,157 -- -- -- ---------- ---------- ---------- ---------- ---------- Total health care expenses 426,040 263,830 225,270 225,932 223,979 ---------- ---------- ---------- ---------- ---------- Selling, general and administrative 86,728 58,504 44,089 33,730 28,590 Guardian joint marketing (income) expense, net (809) 2,298 -- -- -- Proxy defense costs 892 Interest 388 -- -- 378 875 ---------- ---------- ---------- ---------- ---------- Total expenses 512,347 325,524 269,359 260,040 253,444 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes (24,239) 24,419 24,585 20,190 15,451 Income tax expense (benefit) (11,275) 8,449 10,451 8,299 6,890 ---------- ---------- ---------- ---------- ---------- Net income (loss) ($12,964) $ 15,970 $ 14,134 $ 11,891 $ 8,561 ========== ========== ========== ========== ========== Net income (loss) per Common Share ($1.39) $1.70 $1.52 $ 1.31 $ 1.36 Weighted average shares outstanding 9,301 9,403 9,307 9,101 6,283 BALANCE SHEET DATA: Working capital $ 16,744 $ 62,585 $ 64,037 $ 58,714 $ 13,091 Total assets 238,310 211,068 207,148 171,456 120,031 Total long term debt -- -- -- -- 5,000 Stockholders' equity 96,286 108,881 91,206 77,968 25,586 OPERATING STATISTICS: Enrollment (1) 400,021 267,116 179,550 158,984 136,832 Enrollment (monthly average) 342,576 219,475 173,523 153,251 135,506 Hospital days per thousand (2) 272 281 327 360 403 Medical loss ratio (3) 89.8% 78.2% 79.0% 82.9% 84.4%
- ---------- (1) At end of period. (2) On an annualized basis for commercial products only. (3) Health care expenses as a percentage of premium revenues excluding self-funded product revenues. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows certain income statement data expressed as a percentage of total revenues for the years indicated:
Year Ended December 31 ---------------------------------- 1996 1995 1994 -------- -------- -------- Revenues: Premiums 98.7 % 98.0 % 98.6% Investment and other income 1.3 2.0 1.4 -------- -------- -------- Total revenues 100.0 100.0 100.0 -------- -------- -------- Health care expenses: Hospital services 36.5 32.0 32.3 Physicians and related health care services 40.7 37.5 39.9 Other health care services 8.7 5.3 4.4 Indemnity costs 1.4 0.6 -------- -------- -------- Total health care expenses 87.3 75.4 76.6 -------- -------- -------- Selling, general and administrative expenses 17.8 16.7 15.0 Guardian joint marketing (income) expense, net (0.2) 0.7 0.0 Proxy defense costs -- 0.2 -- Interest 0.1 0.0 0.0 -------- -------- -------- Total expenses 105.0 93.0 91.6 -------- -------- -------- Income (loss) before taxes (5.0) 7.0 8.4 Income tax expense (benefit) (2.3) 2.4 3.6 -------- -------- -------- Net income (loss) (2.7)% 4.6 % 4.8 % ======== ======== ========
The Company's subsidiaries, PHS/CT, PHS/NY, PHS/NJ and Bermuda, have entered into several marketing and reinsurance agreements with The Guardian. Under these agreements, jointly developed managed care and indemnity products are offered to existing Guardian insureds as well as to new prospects. The Company and The Guardian have implemented different ways to share profits and losses under these agreements which vary among the particular states and time periods as described below. In Connecticut, PHS/CT wrote 100% of the managed care business and The Guardian wrote 100% of the indemnity business. The parties shared profits and losses through September 30, 1996 pursuant to a "selection adjustment payment" mechanism. Under this arrangement, each party calculated its quarterly profit or loss (net premiums earned, minus claims payments, capitation payments and withholds paid with respect to managed care plans, reserve increases or decreases, administrative charges, commissions and premium taxes, plus investment income). The selection adjustment payment, which was designed to mitigate the effect of potential adverse selection in groups which selected Healthcare Solutions products and enable the parties to share in any long-term profits or loses, then provided that if both parties had losses, no adjustment would be made from one to the other, and each would retain its respective loss. If both parties had profits, the amounts were combined, and the party with the greater profit would make a selection adjustment payment to the other, in an amount equal to half of the profit differential. If only one party had a profit, the 19 profitable party made a selection adjustment payment equal to that party's reported profit, thereby partially or fully reimbursing the other party's loss. If the result was a combined profit, the profitable party would make a selection adjustment payment equal to the other party's loss, increased by half of the combined profit. Selection adjustment calculations were done on a cumulative basis, and accordingly, losses are carried forward to offset against future profits. Because both PHS and The Guardian incurred losses in Connecticut in 1996, no selection adjustment payment was made, and the Company reported 100% of the cumulative losses on the managed care products sold under the Healthcare Solutions product line. The parties entered into new agreements with respect to the Connecticut Healthcare Solutions business that were effective as of October 1, 1996. The selection adjustment methodology was replaced with a reinsurance agreement pursuant to which the Company cedes 50% of the risk on the managed care portion of the Healthcare Solutions products to The Guardian. In connection with the conversion to reinsurance, the parties agreed that 50% of the cumulative losses in Connecticut would be offset from amounts otherwise due to The Guardian under the reinsurance agreement when profits, if any, are generated. In New York, The Guardian cedes 50% of its risk for the out-of-network portion of the POS Healthcare Solutions products to Bermuda and the Company cedes 50% of its risk for HMO products and the in-network portion of the POS Healthcare Solutions products to The Guardian. In New Jersey, the Company cedes 100% of the risk of the out-of-network portion of the POS Healthcare Solutions products and 50% of the risk on the other HMO Healthcare Solutions products to The Guardian and The Guardian retrocedes 50% of the risk for the out-of-network portion of the POS Healthcare Solutions products back to Bermuda. The reinsurance agreements were amended in 1996 to reduce the Company's risk for indemnity Healthcare Solutions products. In New York, the Company was responsible for 10% of the associated losses on the indemnity business between January 1 and June 30, 1996 and did not share risk with respect to the indemnity portion of the Healthcare Solutions business after June 30, 1996. In Connecticut, the agreements were amended effective October 1, 1996 so that the Company will not share risk with respect to the indemnity business in those states following September 30, 1996. As a result of its arrangements with the Guardian, the Company's percentage growth in its aggregate premium revenue has lagged its percentage growth in enrollment, since a portion of the Healthcare Solutions revenues and expenses that were ceded to The Guardian are omitted from the Company's Statement of Operations. The Company expects that this trend will continue if its Healthcare Solutions products continue to be successful and the enrollment mix between its proprietory products and the Healthcare Solutions products shifts to a greater percentage in Healthcare Solutions. The aggregate revenue is impacted by this mix due to the fact that for its proprietary products the Company retains 100% of the revenue and related healthcare expenses while under the Healthcare Solutions product, 50% of the revenue and related health care expenses are ceded to The Guardian, therefore impacting the aggregate revenue growth compared to aggregate membership growth. Per member, per month ("PMPM") amounts are similarly impacted by this mix due to the fact Healthcare Solutions membership is reflected at 100% and revenue and related health care expenses are reflected at 50%. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Premium revenue increased 40.4% to $481.5 million in 1996 from $343.0 million in 1995, while enrollment at December 31, 1996 increased 49.8% over 1995 to 400,021. As of December 31, 1996, fully-insured enrollees increased 59.9% to 332,363 members up from 207,856 as of December 31, 1995, while self-funded enrollees increased 14.2% to 67,658 members as of December 31, 1996, up from 59,260 at December 31, 1995. The aggregate premium revenue increase lagged the membership growth due primarily to the growth of membership in the Healthcare Solutions product where 50% of the premium revenue and related healthcare costs are ceded to The Guardian pursuant to the agreement and a membership shift in the fully insured product mix to lower benefit, lower PMPM revenue products. Also, enrollee statistics include 100% of the approximately 112,000 members enrolled in Healthcare Solution products at December 31, 1996, while premium revenue includes only the Company's 50% share of the Healthcare Solutions revenues derived from the New York arrangements which became effective July 1, 1995, the New Jersey arrangements effective January 1, 1996, and the Connecticut arrangements effective October 1, 1996. 20 Investment and other income declined 5.6% in 1996 from $7.0 million for the year ended December 31, 1995 to $6.6 million for the year ended December 31, 1996. The decline in investment income is due primarily to a decline in invested assets and lower investment yields due to lower interest rates. Health care expenses as a percentage of premium revenue (medical loss ratio) increased to 89.8% for 1996 from 78.2% for 1995. The increase in the medical loss ratio resulted from a 7.4% increase in medical costs on a PMPM basis (primarily hospital and prescription drug costs as discussed below) and a decline of 6.5% in the PMPM premium revenue. Hospital services expenses increased 59.1% to $178.1 million in 1996 from $111.9 million in 1995. The increase is due primarily to an increase in fully- insured membership. On a PMPM basis, however, hospital services increased 5.7% from 1995 to 1996. This increase is attributable primarily to the recent trend to perform certain lower cost services, which historically had been performed in an in-patient setting, in an out-patient setting. This results in a higher average cost for those services which are still performed in an in-patient setting. Inpatient hospital utilization for fully-insured commercial enrollees decreased 3.2% to 272 days per thousand members, per year for the year ending December 31, 1996 from 281 days per thousand members, per year for the same 1995 period. This decrease was primarily due to the continued trend towards less expensive treatment being provided in the out-patient setting and more effective medical management techniques. Physician and related health care expenses increased 51.6% in 1996 from 1995. The increase is primarily due to the 59.9% increase in fully insured membership as well as increases in non-capitated expenses, including costs for out-of-network physicians' services. Other health care expenses increased by $23.7 million from 1995 to 1996 due primarily to higher prescription drug costs resulting from an increase in the number of members covered by prescription drug riders. Additionally, there was a shift in membership to drug riders which offered greater benefits. At the same time, fewer generic drugs were prescribed resulting in increased pharmacy costs. Indemnity costs reflect the medical costs associated with the indemnity revenue assumed in connection with The Guardian reinsurance arrangement in New York which began in 1995. The Company's net indemnity costs for 1996 were $7.0 million, up from $2.2 million for 1995. As a result of continuing adverse experience related to this business, the Company amended the New York reinsurance agreement to reduce the Company's share of the indemnity business assumed from 50% to 10%, for the period from January 1, 1996 to June 30, 1996. The impact of this adjustment reduced the after tax loss associated with the indemnity business by approximately $900 thousand, which was recorded in the second quarter of 1996. The amendment also provided that the Company will assume no further indemnity risk in the New York market for claims incurred after June 30, 1996. As noted above, after September 30, 1996 the Company did not share risk in connection with the Healthcare Solutions indemnity business in the Connecticut market. Selling, general and administrative expenses increased 48.2% to $86.7 million in 1996 from $58.5 million in 1995. The increase was principally due to additional staffing, outside services and other costs needed to support geographic expansion, product diversification and enrollment growth. The Company's effective tax benefit rate was 46.5% for the year ended December 31, 1996, as compared to an effective tax provision rate of 34.6% for the comparable 1995 period. The 1996 effective tax rate resulted primarily from the favorable effect of the income from tax exempt securities which increases the tax benefit when there are losses. The Company has undertaken a number of actions intended to restore profitability in 1997. It increased its premiums an average of 4.4% at the end of 1996 for groups renewing in 1997 and may make further adjustments subject to competitive conditions. It has moved to introduce enhanced medical management, which is intended to result in reduced health care expenses on a PMPM basis in 1997. In addition, its contracts with risk entities shift a greater amount of the risk of overutilization to the risk entities, which will provide further protection against rising health care costs. Moreover, the Company has shifted a portion of the Healthcare Solutions membership to capitation arrangements with the Physician Groups. Although there can be no assurance that these changes, among others, will enable the 21 Company to be profitable in 1997, the Company expects to see significant improvement in its financial results in 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Cautionary Statement." YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Premium revenue increased 18.4% to $343.0 million in 1995 from $289.8 million in 1994 while enrollment at December 31, 1995 increased 48.8% over 1994 to 267,116. As of December 31, 1995, fully-insured enrollees increased 55.5% to 207,856 members from 133,676 as of December 31, 1994, while self-funded enrollees increased 29.2% to 59,260 members as of December 31, 1995, up from 45,874 as of December 31, 1994. The premium revenue increase lagged the membership growth due to more aggressive pricing and a shift in fully insured product mix to lower revenue yielding products. Also, enrollee statistics include 100% of the enrollees in New York, while premium revenue includes only the Company's 50% share of revenues derived from the New York Guardian arrangements which become effective July 1, 1995. Investment and other income was up 67.5% in 1995 from $4.2 million for the year ended December 31, 1994 to $7.0 million for the year ended December 31, 1995. The increase in investment income was due to improved portfolio yields and a reduction in realized losses. Health care expenses as a percentage of premium revenue (medical loss ratio) decreased to 78.2% for 1995 from 79.0% for 1994. The decrease in the medical loss ratio resulted from a 7.0% decline in medical costs on a per member per month basis which was partially offset by a 6.4% decline in the per member per month premium revenue. Total health care expenses increased 17.1% to $263.8 million in 1995 from $225.3 million for 1994. Hospital services expenses increased 17.9% to $111.9 million in 1995 from $94.9 million in 1994. On a PMPM basis, hospital services declined 6.8% from 1994 to 1995. The decline was due primarily to a reduction in in-patient hospital utilization which was partially offset by higher out-patient utilization. In-patient hospital utilization for fully-insured enrollees, excluding Medicare cost contract enrollees, decreased 14.1% to 281 days per thousand members per year for the year ending December 31, 1995 from 327 days per thousand members for the same 1994 period. Physician and related health care expenses increased 11.6% in 1995 from 1994 despite a 55.5% increase in fully insured enrollees. As a result, physician expense declined 11.8% on a per member per month basis for the year ended December 31, 1995 as compared to the same 1994 period. The decrease is largely due to more favorable capitation arrangements with providers and a shift in membership to lower cost capitated products. Other health care expenses increased by $5.8 million from 1994 to 1995 due primarily to higher prescription drug expense resulting from an increase in prescription drug benefit coverage and increased utilization. Additionally, in 1995, other health care expenses includes the Healthcare Solutions profit sharing expense which resulted from The Guardian reinsurance arrangement in Connecticut. Indemnity costs reflect the medical costs associated with the indemnity revenue assumed in connection with The Guardian reinsurance arrangement in New York which began in 1995. Selling, general and administrative expenses increased 32.7% to $58.5 million in 1995 from $44.1 million in 1994. The increase was principally due to continuing resource commitments to support enrollment growth and the expansion into the Connecticut, New York and New Jersey tri-state region. Additionally, the related administrative infrastructure was also expanded to accommodate the increased growth. The Company's effective tax rate declined to 34.6% for the year ended December 31, 1995 from 42.5% for the comparable 1994 period. The decline in the effective tax rate resulted primarily from the shift of much of the Company's investment portfolio into tax exempt municipal bonds and to a slight decline in the statutory state income tax rates. Additionally, the effective tax rate for 1995 was favorably affected by the reconciliation of prior provisions. 22 LIQUIDITY AND CAPITAL RESOURCES PHS has historically financed its operations primarily through internally generated funds. The Company's primary capital requirements are for working capital, principally to fund geographic and product expansion, and to maintain necessary regulatory capital. In addition, the Company's HMO subsidiaries, PHS/CT, PHS/NY and PHS/NJ, and its insurance subsidiaries, are subject to statutory regulations that restrict the payment of dividends. Net cash flows for the year ended December 31, 1996 resulted in an increase in cash and cash equivalents of $31.7 million. Although operating cash flows were unfavorably affected by the Company's 1996 loss of $13.0 million, net cash was provided by operating activities of $24.6 million for the year ended December 31, 1996. The difference between the net loss and the net cash provided from operating activities resulted primarily from a $22.3 million increase in hospital incurred but not reported ("IBNR") claims, which was generated from the increase in the volume of claims activity due to the rise in membership and the timing of the related claims payments and from the collection of outstanding advances to hospitals which totalled $5.5 million. Additionally, the amounts due to IPAs, physicians and other providers increased $15.3 million in 1996, reflecting an increase in the amounts payable to non-capitated providers, such as out of network providers, and the timing of those related payments. These items were offset in part by the net increase in receivables of approximately $10.0 million which occurred due to the growth in enrollment from both the Company's proprietary business and from its arrangements with The Guardian. Approximately $44.0 million of net cash was provided by the sales and maturities of marketable securities, of which $34.6 million was used to fund the enhancement of the Company's computer infrastructure and to purchase the Company's new corporate headquarters . PHS's net cash used in operations amounted to $9.5 million in 1995. Since The Guardian holds the funds generated by Healthcare Solutions, on which the Company earns interest, and since the funds were not released by year end, operating cash flows in 1995 were unfavorably affected by the arrangements with The Guardian. In addition, IPA withhold percentages were generally decreased in 1995, and as a result, the amounts owed to the IPAs tended to be paid over on a more rapid schedule. Further, accelerated payments related to income taxes and the Medicare cost contract decreased operating cash flows. These items were partially offset by the net income of $16.0 million generated during the year. Cash used for investing activities was $11.7 million for the year ended December 31, 1995, primarily due to capital expenditures of $15.2 million which represented investments in optical imaging technology and other improvements in the computer infrastructure needed to support the Company's expansion. Net cash flow during 1994 resulted in an increase in cash and investments to $139.8 million at December 31, 1994 from $112.2 million at December 31, 1993. Cash provided by operating activities totaled $39.3 million, resulting primarily from net income of $14.1 million generated during the period, the timing of the receipt of medical claims and the timing of payments related to other liabilities. At December 31, 1994, PHS was no longer required to maintain a restricted cash reserve to comply with the requirement of the Office of Prepaid Healthcare in connection with the Medicare cost contract. In New York, the Company is required to maintain an escrow reserve equal to 5% of estimated health care expenses for the current year, for the protection of enrollees, which, as of December 31, 1996 was $9.0 million. In Connecticut, the Company is required to maintain a statutory minimum unimpaired capital surplus of $1.0 million. The Company is currently in compliance with all applicable statutory capital requirements. The Company is subject to various laws and regulations which, at December 31, 1996, caused the aggregate amount of its restricted net assets to be approximately $38.8 million. The Company's expenditures for capital equipment, primarily for computers and related equipment, and in 1996 for the purchase of the Company's new headquarters, totaled $34.6 million, $15.2 million and $9.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. The Company expects to spend additional capital, principally in computer and technology systems enhancements, over the next several years. The Company expects to require additional capital over the next several years and, although it can provide no assurances in this regard, believes that in addition to its current capital resources and internally generated funds, it will be able to obtain financing, if necessary, sufficient for its continued operations. EFFECT OF INFLATION Health care industry costs have been rising annually at rates higher than the Consumer Price Index. To offset this trend, PHS has been able to achieve premium rate increases for its 1997 business which should help mitigate the effect of medical cost inflation on its operations. The Company's premiums are higher than many of its competitors, however, and there can be no assurance that the Company will be able to increase premiums sufficiently to offset the rise in health care costs without jeopardizing the Company's competitive position. In addition, PHS contracts with several major hospitals on a multi-year basis with fixed annual increases. The 23 Company's risk sharing arrangements with its Physician Groups and other cost control measures, such as its utilization review program, also help to mitigate the effects of price increases on operations. There can be no assurance that the Company's efforts to reduce the impact of inflation will be successful. CAUTIONARY STATEMENT In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby making cautionary statements identifying important risk factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements made by or on behalf of the Company. The Company wishes to caution readers that the following important factors, among others, could cause the Company's actual financial or enrollment results to differ materially from those expressed in any projected, estimated or forward-looking statements relating to the Company. PREMIUM STRUCTURE; UNPREDICTABILITY OF MEDICAL COSTS. A substantial amount of the Company's revenues are generated by premiums which represent fixed monthly payments for each person enrolled in the Company's plans. If the Company is unable to obtain adequate premiums because of competitive or regulatory considerations, the Company could incur decreased margins or significant losses. The Company believes that commercial premium pricing will continue to be highly competitive. The Company's revenues from its Medicare and Medicaid programs could be adversely affected if reimbursement rates do not keep pace with rising medical costs. Historically, these rates have been subject to wide variations from year to year. In the event reimbursement were to decline from projected amounts, the Company would attempt to renegotiate its contracts with its health care providers. There can be no assurance that it could successfully renegotiate these financial arrangements and failure to reduce the health care costs associated with such programs could have a material adverse effect upon the Company's business. The Company's profitability is also dependent, in large part, upon its ability to accurately project and manage health care costs, including without limitation, appropriate benefit design, utilization review and case management programs, and its risk sharing arrangements with providers, while providing members with quality health care. Health care costs are affected by a variety of factors that are difficult to predict and are not entirely within the Company's control, including the severity and frequency of claims. Medical cost inflation, mandated benefits and other regulatory changes, new technologies, natural disasters, epidemics and other external factors relating to the delivery of health care services, inability to establish acceptable risk sharing arrangements with providers and other factors may adversely affect the Company's ability to manage the costs of providing health care services. In addition, the Company experienced high out-of-network utilization in connection with its POS products in 1996 in New York, which resulted in medical costs for the POS products exceeding budgeted amounts. The Company is seeking to expand its network in New York and institute other measures to limit the risk of high out- of-network utilization. The Company is implementing a variety of measures to help it manage health care costs better. However, there can be no assurance that the Company will be able to continue to reduce its medical costs sufficiently to restore profitability in all its product lines. In light of the expected continuing growth of the POS products, failure to reduce out-of-network utilization could adversely affect the Company's profitability. Accrued health care expenses payable in the Company's financial statements include reserves for incurred but not reported claims ("IBNR"), the amount of which is estimated by the Company. The Company estimates the amount of such reserves using standard actuarial methodologies based upon historical data including the average interval between the date services are rendered and the date claims are paid, expected medical cost inflation, seasonality patterns and increases in membership. The Company believes that its reserves for IBNR are adequate in order to satisfy its ultimate claims liability. However, there can be no assurances as to the ultimate accuracy or completeness of such estimates or that adjustments to reserves will not cause volatility in the Company's results of operations. DEPENDENCE UPON KEY EMPLOYER AGREEMENTS. The Company's ability to obtain and maintain favorable group benefit agreements with employer groups affects the Company's profitability. Currently, 17% of its total 24 commercial enrollment (those groups which are fully insured, which includes 332,363 enrollees) is derived from its largest five fully insured accounts. Fully insured groups produce the highest PMPM revenues for the Company. Although during the Company's most recent fiscal year, no employer group accounted for more than 7.5% of total revenues, the loss of one or more of the larger employer group accounts could have a material adverse effect upon the Company's business. Although only 8% of the Company's total membership in 1996 was enrolled in Medicare and Medicaid programs, that percentage is expected to increase in the future. Loss of one or more of the contracts the Company currently has or expects to have to serve Medicaid or Medicare participants could have a material adverse effect upon the Company's business. Finally, the Company has agreed to certain performance guarantees for certain of the large employer groups with which it contracts. Failure to satisfy such guarantees could result in financial penalties. KEY PARTNERSHIP. The Company's contracts with The Guardian are expected to represent a significant percentage of the Company's revenue and enrollment in future years. See "Business-Joint Marketing Arrangement with The Guardian." The loss of this relationship could have a material adverse effect on the Company's business. COMPETITION. Managed care companies and HMOs operate in a highly competitive environment. The Company has numerous types of competitors, both local and national, including, among others, HMOs, PPOs, self-insured employer plans and traditional indemnity carriers, many of which have substantially larger total enrollments, greater financial resources and other characteristics that give them an advantage in competing with the Company. Additional competitors with needs or desires for immediate market share or those with greater financial resources than the Company have entered or may enter the Company's market. The Company also believes that the addition of new competitors can occur relatively easily. In addition, certain of the Company's customers may decide to perform for themselves certain administrative services currently provided by the Company, which could adversely affect the Company's revenues. Significant merger and acquisition activity has occurred in the managed care industry as well as in industries which are suppliers to the Company. This activity may result in stronger competitors or increase health care costs. Increased competitive pressures may limit the Company's ability to increase, or in some instances, maintain premiums, reduce membership levels or decrease profit margins, and there can be no assurance that the Company will not incur increased pricing and enrollment pressure from local and national competitors. Any such pressures could materially affect the Company's results of operations. GOVERNMENT REGULATION. The Company's business is subject to extensive federal and state laws and regulations, including, but not limited to, financial requirements, licensing requirements, enrollment requirements and periodic examinations by governmental agencies. The laws and regulations governing the Company's business and the interpretation of those laws and regulations are subject to frequent change. Existing or future laws or regulations could force the Company to change the way it does business and may restrict the Company's revenue or enrollment growth or increase its health care and/or administrative costs. In particular, the Company's HMO and insurance subsidiaries are subject to regulations relating to cash reserves, minimum net worth, premium rates and approval of policy language and benefits. Although such regulations have not significantly impeded the growth of the Company's business to date, there can be no assurance that the Company will be able to continue to obtain or maintain required governmental approvals or licenses or that regulatory changes will not have a material adverse effect on the Company's business. In addition, delays in obtaining regulatory approvals or moratoriums imposed by regulatory authorities could adversely effect the Company's ability to bring new products to market as forecasted. The Company is also subject to various governmental audits and investigations. Such activities could result in the loss of required licenses or the right to participate in certain programs, or the imposition of penalties and/or other sanctions . In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect the Company's reputation in various markets and make it more difficult for the Company to sell its products and services. MANAGEMENT INFORMATION SYSTEM. The Company's management information system is critical to its current and future operations. The information gathered and processed by the Company's management information system assists the Company in, among other things, pricing its services, monitoring utilization and other cost factors, processing provider claims, providing bills on a timely basis and identifying accounts for collection. Any difficulty associated with or failure to successfully implement the current conversion of its management information system, or any inability to expand processing capability in the future in accordance with its business needs, could result in a loss of 25 existing customers and difficulty in attracting new customers, customer and provider disputes, regulatory problems, increases in administrative expenses or other adverse consequences. NEW SERVICE AREAS AND PRODUCTS. The Company recently undertook a significant expansion of its geographic market area. In addition, it recently introduced several new products, including Medicare risk and Medicaid products. The success of its geographic and product expansion efforts depends in large part on its ability to develop market share in a highly competitive market and to develop the infrastructure necessary to support the forecasted enrollment growth. The Company believes that it has budgeted sufficient amounts to meet its growth expectations; however, there can be no assurance that it will not require greater resources than expected or that it will be successful in its marketing efforts. Furthermore, although it believes it has introduced programs to effectively manage its new products, there can be no assurance that the health care and other costs associated with such programs will not be greater than revenues. Medicare risk contracts provide revenues which are generally higher per member than those for non-Medicare members, and thus provide an opportunity for increased profits and cash flow. Such risk contracts, however, also carry certain risks such as higher comparative medical costs, government regulatory and reporting requirements, the possibility of reduced or insufficient government reimbursement in the future, and higher marketing and advertising costs per member as the result of marketing to individuals as opposed to groups. POSSIBLE VOLATILITY OF COMMON STOCK PRICE. Recently, there has been significant volatility in the market prices of securities of companies in the health care industry, including the price of the Company's Common Stock. Many factors, including medical cost increases, analysts' comments, speculation about a possible merger or acquisition, announcements of new legislative proposals or laws relating to health care reform, the performance of, and investor expectations for, the Company, the trading volume of the Company's Common Stock and general economic and market conditions, may influence the trading price of the Company's Common Stock. Accordingly, there can be no assurance as to the price at which the Company's Common Stock will trade in the future. NEGATIVE PUBLICITY. The managed care industry has recently received a significant amount of negative publicity. Such general publicity, or any negative publicity regarding the Company in particular, could adversely affect the Company's ability to sell its products or services or could create regulatory problems for the Company. Recently, the managed care industry has experienced significant merger and acquisition activity. Speculation or uncertainty about the Company's future could adversely affect the ability of the Company to market its products. ACCREDITATION. Certain of the Company's customers or potential customers consider rating, accreditation or certification of the Company by various private or governmental bodies or rating agencies as necessary and/or important. The Company currently has three year accreditation from the National Committee on Quality Assurance ("NCQA") which will expire in May, 1997. NCQA visited the Company's offices in connection with its reaccrediation in late March 1997. Should the Company fail to maintain three-year NCQA accreditation, or obtain any other certification or accreditation as may be deemed to be necessary and/or important by customers, it may adversely affect the Company's ability to obtain or retain the business of such customers. ADMINISTRATIVE EXPENSE. The level of administrative expense is a partial determinant of the Company's profitability. While the Company attempts to effectively manage such expenses, increases in staff-related and other administrative expenses may occur as a result of business or product expansion, changes in business, acquisitions, regulatory requirements or other reasons. Such expense increases are not clearly predictable and increases in administrative expenses may adversely affect financial results. The Company currently believes that it has a relatively experienced, capable management staff. Loss of certain managers or a number of such managers could adversely affect the Company's ability to administer and manage its business. LITIGATION AND INSURANCE. The Company is subject to a variety of legal actions to which any corporation may be subject. In addition, because of the nature of its business, the Company incurs and likely will continue to incur potential liability for claims related to its business, such as failure to pay for or provide health care, poor outcomes for care delivered or arranged, provider disputes and claims related to self-funded business. It is possible that punitive or substantial non-economic damages may be sought in cases of this nature. While the Company currently has insurance coverage for some of these potential liabilities, others may not be covered by insurance, the insurers may dispute coverage or the amount of insurance may not be enough to cover the damages awarded. In 26 addition, certain types of damages, such as punitive damages, may not be covered by insurance and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. PROVIDER RELATIONS. One of the significant techniques that the Company uses to manage health care costs and utilization is contracting with physicians, hospitals and other providers. Because of the large number of providers with which the Company contracts, the Company currently believes that it has a limited exposure to provider relations issues. In any particular market, however, providers could refuse to contract with the Company, demand higher payments or take other actions which could result in higher health care costs, less desirable products for customers and members or difficulty in meeting regulatory or accreditation requirements. In some markets, certain providers, particularly hospitals, physician/hospital organization or multi-speciality physician groups, may have significant market positions. Such groups may also compete directly with the Company. If such providers refuse to contract with the Company or utilize their market position to negotiate favorable contacts or place the Company at a competitive disadvantage, the Company's ability to market products or to be profitable in those areas could be adversely affected. In addition, the Company has recently entered into a number of contracts with physician/hospital organizations and other physician groups that place a significant percentage of the risk of overutilization on those groups. Although this technique is believed to be advantageous to the Company insofar as it limits the Company's risk, failure of one or more of the physician/hospital or other physician groups to successfully manage the risk could have a material adverse effect on the Company's business and results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is submitted in Item 14 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information required by this Item is incorporated herein by reference to the Company's 1997 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the Company's 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the Company's 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the Company's 1997 Proxy Statement. 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. All financial statements - see Index to Consolidated Financial Statements and Schedules on page 33. 2. Financial statement schedules - see Index to Consolidated Financial Statements and Schedules on page 33. 3. Exhibits - see Exhibit Index on page 55. (b) Reports on Form 8-K None 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Shelton and State of Connecticut on the 27th day of March, 1997. PHYSICIANS HEALTH SERVICES, INC. By: /S/Robert L. Natt ----------------- President and Co-Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities indicated on March 27th, 1996. Signature Title --------- ----- /S/Robert L. Natt Principal Executive Officer - ----------------- Robert L. Natt /S/James L. Elrod, Jr. Principal Financial Officer - ---------------------------- James L. Elrod, Jr. /S/Craig Dupont Principal Accounting Officer - -------------------- Craig Dupont /S/Lewis Bader, M.D. Director - -------------------- Lewis Bader, M.D. /S/Larry Coletti, M.D. Director - ---------------------- Larry Coletti, M.D. 30 /S/Melvin P. Coolidge, M.D. Director - --------------------------- Melvin P. Coolidge, M.D. /S/Arnold DoRosario, M.D. Director - ------------------------- Arnold DoRosario, M.D. /S/Santiago Escobar, M.D. Director - ------------------------- Santiago Escobar, M.D. /S/Richard Freeman Director - ------------------ Richard Freeman /S/David Grayer, M.D. Director - --------------------- David Grayer, M.D. /S/Michael E. Herbert Director - --------------------- Michael E. Herbert /S/A. Thomas Licciardello, M.D. Director - ------------------------------- A. Thomas Licciardello, M.D. /S/Andrew Lozyniak Director - ------------------ Andrew Lozyniak /S/Murray A. Morrison, M.D. Director - --------------------------- Murray A. Morrison, M.D. /S/Joseph E. Nechasek, Ph.D. Director - ---------------------------- Joseph E. Nechasek, Ph.D. 31 /S/Noel R. Newman, Esq. Director - ----------------------- Noel R. Newman, Esq. /S/Kenneth Sacks, M.D. Director - ---------------------- Kenneth Sacks, M.D. /S/Edward Sawicki, M.D. Director - ----------------------- Edward Sawicki, M.D. /S/Arthur H. Sheer Director - ------------------ Arthur H. Sheer /S/Bernard Sherlip, M.D. Director - ------------------------ Bernard Sherlip, M.D. /S/John C. Washburn Director - ------------------- John C. Washburn 32 PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page ---- Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . 34 Consolidated Balance Sheets as of December 31, 1996 and 1995. . . . . . . . . . 35 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 36 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 39 Schedule I - Condensed Financial Information of Registrant . . . . . . . . . . 51 Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . 54
33 Report of Independent Auditors Board of Directors Physicians Health Services, Inc. We have audited the consolidated balance sheets of Physicians Health Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Physicians Health Services, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 2 to the consolidated financial statements, in 1994 the Company changed its method of accounting for certain investments in debt and equity securities. Stamford, Connecticut March 14, 1997 ERNST & YOUNG LLP 34 Physicians Health Services, Inc. Consolidated Balance Sheets
DECEMBER 31 1996 1995 ---------------------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 39,213 $ 7,536 Investments available for sale, at fair value: Fixed maturity securities 59,115 102,130 Equity securities -- 1,355 Accounts receivable, less allowances 38,028 31,548 (1996-$1,781 and 1995-$1,050) Other receivables 19,696 14,815 Advances to participating hospitals 400 5,903 Prepaid expenses and other 1,154 204 ---------------------- TOTAL CURRENT ASSETS 157,606 163,491 Property, plant and equipment: Land 8,822 3,322 Building and improvements 26,938 14,645 Furniture and equipment 46,559 29,817 ---------------------- 82,319 47,784 Less accumulated depreciation and amortization 15,273 11,028 ---------------------- 67,046 36,756 Other assets (including restricted investments) 13,658 10,821 ---------------------- TOTAL ASSETS $238,310 $211,068 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accrued hospital and other health care expenses $ 46,153 $ 23,878 Unearned premiums 27,757 25,022 Amounts due to IPAs, physicians and other providers 53,103 37,806 Accounts payable and accrued expenses 13,849 14,199 ---------------------- TOTAL CURRENT LIABILITIES 140,862 100,905 Excess of net assets over cost of company acquired 1,162 1,282 ---------------------- TOTAL LIABILITIES 142,024 102,187 Stockholders' equity: Preferred Stock, par value $0.01 per share - authorized 500 shares, none issued -- -- Class A Common Stock, par value $0.01 per share - authorized 13,000,000 shares; issued and outstanding 1996 - 5,566,023 shares; 1995 - 5,310,347 shares; voting rights - 1 per share 56 53 Class B Common Stock, par value $0.01 per share; non-transferable; authorized and issued 1996 - 3,829,880 shares; 1995 - 4,052,974 shares; voting rights - 10 per share 38 41 Additional paid-in capital 41,360 40,760 Net unrealized gains on marketable securities, net of tax 279 510 Retained earnings 54,554 67,518 ---------------------- 96,287 108,882 Less cost of Class B Common Stock (86,400 shares) in Treasury 1 1 ---------------------- TOTAL STOCKHOLDERS' EQUITY 96,286 108,881 ---------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $238,310 $211,068 ======================
See notes to consolidated financial statements. 35 PHYSICIANS HEALTH SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 1996 1995 1994 -------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES: Premiums $481,534 $342,975 $289,784 Investment and other income 6,574 6,968 4,160 -------------------------------- 488,108 349,943 293,944 Costs and expenses: Hospital services 178,059 111,947 94,934 Physicians and related health care services 198,591 131,019 117,393 Other health care services 42,382 18,707 12,943 Indemnity costs 7,008 2,157 -- Selling, general and administrative expenses 86,728 58,504 44,089 Guardian joint marketing expense (income), net (809) 2,298 -- Proxy defense costs -- 892 -- Interest expense 388 -- -- -------------------------------- 512,347 325,524 269,359 Income (loss) before income taxes (24,239) 24,419 24,585 Income tax expense (benefit) (11,275) 8,449 10,451 -------------------------------- Net income (loss) $(12,964) $ 15,970 $ 14,134 ================================ Net income (loss) per common share $(1.39) $1.70 $1.52 ================================ Weighted average number of common and common equivalent shares outstanding 9,301 9,403 9,307 ================================
See notes to consolidated financial statements. 36 PHYSICIANS HEALTH SERVICES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31 1996 1995 1994 ------------------------------- (DOLLARS IN THOUSANDS) CLASS A COMMON STOCK Balance at beginning of period $ 53 $ 49 $ 45 Conversion of Class B Common Stock into Class A Common Stock: 1996 - 223,094 shares, 1995 - 437,537 shares, 1994 - 435,228 shares 3 4 4 Options exercised: 1996 - 32,582 shares, 1995 - 14,974 shares, 1994 - 3,558 shares ------------------------------- Balance at end of period $ 56 $ 53 $ 49 =============================== CLASS B COMMON STOCK Balance at beginning of period $ 41 $ 45 $ 49 Conversion of Class B Common Stock into Class A Common Stock: 1996 - 223,094 shares, 1995 - 437,537 shares, 1994 - 435,228 shares (3) (4) (4) ------------------------------- Balance at end of period $ 38 $ 41 $ 45 =============================== ADDITIONAL PAID-IN CAPITAL Balance at beginning of period $ 40,760 $ 40,514 $40,461 Exercise of stock options 600 246 53 ------------------------------- Balance at end of period $ 41,360 $ 40,760 $40,514 =============================== NET UNREALIZED GAINS (LOSSES) ON MARKETABLE SECURITIES, NET OF TAX Balance at beginning of period $ 510 $ (949) $ -- Net unrealized gain at date of adoption of SFAS 115, net of tax -- -- 184 Net unrealized gain (loss) (231) 1,459 (1,133) ------------------------------- Balance at end of period $ 279 $ 510 $ (949) =============================== RETAINED EARNINGS Balance at beginning of period $ 67,518 $ 51,548 $37,414 Net income (loss) (12,964) 15,970 14,134 ------------------------------- Balance at end of period $ 54,554 $ 67,518 $51,548 =============================== TREASURY STOCK Balance at beginning and end of period $ (1) $ (1) $ (1) TOTAL STOCKHOLDERS' EQUITY Balance at beginning of period $108,881 $ 91,206 $77,968 Exercise of stock options 600 246 53 Net income (loss) (12,964) 15,970 14,134 Net unrealized gain (loss) on marketable securities, net of tax (231) 1,459 (949) ------------------------------- Balance at end of period $ 96,286 $108,881 $91,206 ===============================
See notes to consolidated financial statements. 37 PHYSICIANS HEALTH SERVICES, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1996 1995 1994 ----------------------------------- (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income (loss) $ (12,964) $ 15,970 $ 14,134 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 4,302 3,064 2,364 Provision for doubtful accounts 1,485 103 1,423 Amortization of excess of net assets over cost of company acquired (120) (120) (120) Deferred income tax expense (benefit) 690 1,421 (233) Changes in assets and liabilities: Accounts receivable (7,965) (4,453) (3,273) Other receivables (4,881) (13,043) (1,217) Advances to participating hospitals 5,503 1,619 3,794 Prepaid expenses and other (950) 708 (114) Accrued health care expenses 22,275 (1,232) (4,028) Unearned premiums 2,735 631 2,233 Due to IPAS, Physicians and other providers 15,297 (5,793) 8,076 Accounts payable and accrued expenses (856) (8,367) 16,292 --------------------------------- Net cash provided by (used for) operating activities 24,551 (9,492) 39,331 INVESTING ACTIVITIES Purchases of property, plant and equipment (34,633) (15,168) (9,711) Disposals of property, plant and equipment 41 14 226 Net increase in other assets (2,837) (6,916) (674) Purchases of marketable securities (242,451) (324,877) (340,176) Proceeds from sales of marketable securities 286,406 335,262 332,629 --------------------------------- Net cash provided from (used for) investing activities 6,526 (11,685) (17,706) FINANCING ACTIVITIES Proceeds from revolving credit line 18,000 -- -- Repayment of revolving credit line (18,000) -- -- Exercise of stock options 600 246 53 --------------------------------- Net cash provided by financing activities 600 246 53 --------------------------------- Increase (decrease) in cash and cash equivalents 31,677 (20,931) 21,678 Cash and cash equivalents at beginning of year 7,536 28,467 6,789 --------------------------------- Cash and cash equivalents at end of year $ 39,213 $ 7,536 $ 28,467 =================================
See notes to consolidated financial statements. 38 Physicians Health Services, Inc. Notes to Consolidated Financial Statements December 31, 1996 1. ORGANIZATION AND BUSINESS Physicians Health Services, Inc. (the "Company" or "PHS") is a holding company which owns nine subsidiary corporations: Physicians Health Services of Connecticut, Inc. (PHS/CT), Physicians Health Services of New York, Inc. (PHS/NY), Physicians Health Insurance Services, Inc. (PHIS), PHS Investments, Inc., Physicians Health Services (Bermuda), Ltd. (PHS/Bermuda), Physicians Health Services of New Jersey, Inc. (PHS/NJ), (which was licensed in January 1996), PHS Insurance of Connecticut, Inc. (PHS Insurance CT), Physicians Health Services Insurance of New York, Inc. (PHS Insurance NY), and PHS Real Estate, Inc. (PHS RE). PHS/CT and PHS/NY have been designated by the Department of Health and Human Services (DHHS) as federally qualified Health Maintenance Organizations (HMOs). PHS/CT, PHS/NY and PHS/NJ operate as health maintenance organizations in Connecticut, New York and New Jersey, respectively, and are regulated by their respective state insurance departments. PHS/NY and PHS/NJ are also regulated by the Department of Health and Human Services and New Jersey Department of Health and Senior Services, respectively. State regulations include reserve and cash flow requirements and restrictions on the ability to pay dividends. Subscribers pay monthly premiums which entitle them to comprehensive health services as needed, according to the terms of their contracts. PHIS, which is licensed as an insurance broker, was formed to market insurance products to enrollees. The operations of PHIS for all years presented were not significant. PHS Insurance CT and PHS Insurance NY operate in and are regulated by the Insurance Departments of Connecticut and New York, respectively. These companies are licensed to write accident and health indemnity insurance although no business has yet been written. PHS/Bermuda is an offshore property and casualty reinsurer that was formed to support the business needs of the Company. This includes an agreement to reinsure certain business with The Guardian Life Insurance Company of America (see Note 10). PHS/CT operates throughout most of Connecticut with a significant portion of its enrollees currently located in Fairfield County. PHS/NY operates only in New York's Westchester, Putnam, Dutchess, Rockland and Orange Counties, and the metropolitan New York City and Long Island regions. PHS/NJ operates throughout New Jersey. The Company's membership consists of commercial, government and self-funded members. PHS RE has a wholly owned subsidiary, PHS Real Estate II, Inc. (PHS RE II), which owns the Company's new corporate headquarters. The operations of PHS RE and PHS RE II were not significant. The Company's managed care products include traditional HMO products, in both open access and gatekeeper models, point of service ("POS") products, administrative services only ("ASO") plans and Medicare and Medicaid plans. The Company contracts with physician groups, such as IPAs, PHOs, and multi-specialty groups (collectively, "Physician Groups"), individual physicians and other health care providers for a defined range of health services, including primary and specialty care. The Company's contracts with providers include discounted fee for service arrangements as well as capitated group arrangements in which the contracting Physician Group assumes a significant amount of the risk of overutilization. The Company currently has contracts with four IPAs, three PHOs and one large physician group ("Group") that provide for most of its physician services in its Connecticut service area. In New York and New Jersey, the Company generally contracts directly with physicians and other health care providers. Under the typical Physician Group arrangements, the Physician Group receives a fixed monthly capitation payment for each member selecting a primary care physician from that Physician Group. Capitation rates and any increases thereto are negotiated for the term of the contract. The capitation payment is designed to cover not only the professional medical services (including ancillary tests and services) rendered by the physicians and other providers associated with that Physician Group but also includes payments for certain other services rendered to the enrollee by providers who are not members of the Physician Group. Services covered by the capitation payment include, among other things, virtually all physician claims (whether inpatient or outpatient, including authorized out-of-plan care) and care rendered by other professionals such as physical therapists and psychologists. In certain of the contracts, the Physician Groups also are at risk for hospital, pharmacy and other facility expenses. The Company does not capitate physicians directly. The capitation payments to Physician Groups other than the PHOs typically do not cover hospital and other facility expenses, although the Physician Groups are partially at risk for non-Medicare and non-Medicaid hospital utilization. The Company establishes an annual per member, per month target for hospital expenses. The amount varies by benefit plan and Physician Group, and encompasses both inpatient and outpatient costs. If total hospital expenses generated by the Physician Group exceed the applicable hospital expense target, the Company withholds from amounts owed by it to the Physician Group all or a portion of the excess over budget, in most cases one-half of the excess over budget. If actual costs are less than budgeted targets, the Physician Group receives from the Company an incentive credit typically equal to forty to fifty percent of the amount by which actual costs are less than budgeted targets. In its New York and New Jersey expansion areas and in areas in Connecticut not served through Physician Group contracts, the Company contracts for services principally through direct contracts with individual physicians and other health care providers. In addition, the Company contracts with two IPAs in the northern counties of its New York service area. The Company withholds a percentage of reimbursement for services rendered pursuant to its direct physician contracts against budgeted amounts to manage excessive utilization. The Company generally negotiates contracts with hospitals that include compensation on a per diem basis (at a daily rate, without regard to the scope of services actually provided). Other compensation arrangements with hospitals include charged-based discounts (negotiated discounts from the hospital's billed charges) and all inclusive case rates. In the case of non-participating hospitals, the Company pays either hospital billed charges or negotiated discounted charges. Additionally, some hospital contracts include per case, all-inclusive payment arrangements for select procedures such as maternity care. 39 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND BUSINESS (CONTINUED) At December 31, 1996, three of the IPA's own common stock of the Company aggregating approximately 32% (which entitle them to 68% of the vote on matters submitted to the Stockholders), with one IPA (Greater Bridgeport Individual Practice Association) owning approximately 27% (58% of the vote). Capitation expenses incurred relating to these three IPA's which are included in physician and related healthcare expenses in the accompanying statements of operations amounted to $55,019,000, $68,523,000 and $65,091,000 for the years ended December 31, 1996, 1995 and 1994 respectively. At December 31, 1996 and 1995 amounts payable to these IPA's were $21,622,000 and $10,388,000, respectively. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned except for PHS/NJ which is 80% owned by the Company with a 20% minority interest owned by Mastercare Companies, Inc. (See Note 11). Such minority interest was not material to the accompanying consolidated financial statements. Significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Premiums from subscribers and assumed or ceded under reinsurance agreements are reflected in operations as earned on a pro-rata basis over the period of coverage. Premiums for periods extending beyond year-end are classified as unearned premiums. The Company maintains an allowance for doubtful accounts at a level management believes is sufficient to cover potentially uncollectible amounts. PHYSICIANS AND RELATED HEALTH CARE SERVICES The costs of physicians and related health care services are accrued for in the period they are provided to enrollees. For the services provided for by individually contracted physicians, the accrual for the incurred but not reported claims represent the estimated liability on outstanding claims, based upon an evaluation of reported claims. Such estimates are continually monitored and, as estimates are adjusted, they are reflected in current operations. The amounts accrued under capitation arrangements with IPA's are increased or decreased based on a comparison of the HMO's hospitalization costs to contractual targets. 40 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) HOSPITAL AND OTHER HEALTH CARE SERVICES The cost of health care services is accrued in the period they are provided to enrollees. The amounts accrued for hospital and other health care expenses represent the estimated liabilities for reported and unreported claims. The reserves for incurred but not reported claims represent the estimated liability on outstanding claims, based on an evaluation of reported claims. The estimates are continually monitored and reviewed and, as settlements are made or estimates adjusted, the resulting differences are reflected in current operations. Although considerable variability is inherent in such estimates, management believes that reported reserves are adequate in the aggregate to cover the ultimate resolution of incurred claims. CONTRACTS WITH HEALTH CARE FINANCING ADMINISTRATION Prior to 1996, the Company had entered into a "cost based" contract with the Health Care Financing Administration ("HCFA"). Under this contract, HCFA pays the Company a fixed per member per month amount for physician services, while HCFA pays the costs for inpatient and outpatient services. During 1996, the Company entered into a "risk based" contract with HCFA. Under the risk-based contract the Company is paid a fixed per member, per month amount by HCFA for all services provided. The Company bears the risk that the actual costs of health care services may exceed the per member, per month amount. The risk based contract is intended to replace the cost based contract for new enrollees. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Provisions for depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the terms of the leases, if shorter. Included in property, plant and equipment are the costs related to the development of a new managed care information system, approximately $18,600,000 at December 31, 1996. This new system is expected to be implemented in late 1997. Amortization of the cost of the new system will begin upon its implementation and continue on a straight-line basis over its estimated useful life. EXCESS OF NET ASSETS OVER COST OF COMPANY ACQUIRED The excess of net assets over the cost of company acquired is being amortized by the straight-line method over a 20 year period ending August 31, 2006. Accumulated amortization was $1,240,000 and $1,120,000 at December 31, 1996 and 1995, respectively. PER SHARE DATA Per share data are based on the weighted average number of common and common equivalent shares outstanding during the period. Common stock equivalents consist of stock options. Fully diluted per share data are not presented as they are not materially different from primary earnings per share data. 41 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK BASED COMPENSATION In 1996, the Company implemented the supplemental pro forma provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123, if adopted, requires companies to recognize compensation expense for grants of restricted stock, stock options and similar equity instruments to employees and directors based on their respective fair values at the date of grant. However, the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") may still be utilized with supplemental pro forma disclosures of net income and earnings per share being made in the footnotes as if the accounting provisions of SFAS 123 had been adopted. SFAS 123 is effective for fiscal years beginning after December 15, 1995. The Company continues to apply the requirements of APB 25 in the accompanying financial statements with supplemental pro forma disclosures provided in the notes to the consolidated financial statements (See note 8). CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the time of purchase. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and cash equivalents, accounts receivable, other receivables, advances to participating hospitals and all current liabilities have fair values that approximate their carrying amounts. INVESTMENTS In May 1993, the Financial Accounting Standards Board issued SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company adopted the provisions of the new standard as of January 1, 1994, and categorizes its investments in fixed maturity and equity securities as "available for sale." Accordingly, such investments are reported at fair value with changes in unrealized gains and losses disclosed separately, net of taxes, in stockholders' equity. Fair values are based primarily on quoted market prices. Investment income includes realized investment gains and losses on the sale or maturity of investments, determined by the specific identification method, and dividends and interest, which are recognized when earned. The amortization of premium and accretion of discount for fixed maturities is computed utilizing the interest method. INCOME TAXES Income taxes have been provided using the liability method in accordance with SFAS 109, "Accounting for Income Taxes." RECLASSIFICATIONS Certain reclassifications were made to conform prior year amounts to current year presentation. 42 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 3. EXCESS OF LOSS REINSURANCE AGREEMENT During 1996 the Company limited the amount of its risk on eligible hospital claims for any one member in a contract year by acquiring reinsurance coverage for claims in excess of $600,000 per member, per year for PHS/CT, PHS/NY and PHS/NJ. The reinsurance contracts allow the Company to transfer to the reinsurer 80% of the next $400,000 of claims per member per year. The contract limits covered claims to $2 million per member per lifetime (including the deductible). During 1995 and 1994, the Company acquired reinsurance coverage for claims in excess of $250,000 per member, per year for PHS/CT and $100,000 per member, per year for PHS/NY. Those reinsurance policies allowed the Company to transfer to the reinsurer 80% of the next $750,000 (PHS/CT) and $900,000 (PHS/NY) of the amount of claims in excess of the aforementioned annual retentions. Reinsurance expense and recoveries are included in other health care services. Reinsurance expense was $910,000, $1,300,000, and $636,000, for 1996, 1995 and 1994, respectively. Recoveries were $311,000, $60,000, and $106,000 for 1996, 1995, and 1994, respectively. 4. INVESTMENTS AND OTHER INCOME The amortized cost, gross unrealized gains and losses, and estimated fair values of investments are as follows (in thousands):
DECEMBER 31, 1996 ----------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------- U.S. Government and its agencies $ 5,598 $ - $15 $ 5,583 Corporate securities 12,803 5 20 12,788 Municipals 40,242 503 1 40,744 ----------------------------------------- Total fixed securities $ 58,643 $508 $36 $ 59,115 =========================================
DECEMBER 31, 1995 ----------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------- U.S. Government and its agencies $ 10,629 $ 22 $ - $ 10,651 Corporate securities 1,535 14 - 1,549 Municipals 89,017 936 23 89,930 ----------------------------------------- Fixed securities 101,181 972 23 102,130 Equity securities 1,417 - 62 1,355 ----------------------------------------- Total $102,598 $972 $85 $103,485 =========================================
43 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 4. INVESTMENTS AND OTHER INCOME (CONTINUED) At December 31, 1996, the contractual maturities of investments in fixed maturities are as follows (in thousands): AMORTIZED FAIR COST VALUE --------------------------- Due in one year or less $ 25,037 $25,131 Due after one year through five years 33,106 33,485 Due after ten years 500 499 --------------------------- $ 58,643 $59,115 =========================== Major sources of and related amounts of net investment and other income are as follows (in thousands): YEAR ENDED DECEMBER 31 1996 1995 1994 ---------------------------------- Dividends and interest income from investments $5,444 $7,099 $ 5,091 Realized gains 139 385 290 Realized losses (99) (366) (1,170) Investment expenses (132) (193) (258) ---------------------------------- Net investment income 5,352 6,925 3,953 Interest on Guardian Receivable 866 -- -- Other income 356 43 207 ---------------------------------- Net investment and other income $6,574 $6,968 $ 4,160 ================================== 5. INCOME TAXES Significant components of income tax expense (benefit) were as follows (in thousands): YEAR ENDED DECEMBER 31 1996 1995 1994 ---------------------------------- Current income tax expense (benefit): Federal $(10,004) $5,428 $ 7,720 State (1,961) 1,600 2,964 ---------------------------------- (11,965) 7,028 10,684 Deferred income tax expense (benefit) 690 1,421 (233) ---------------------------------- Income tax expense (benefit) $(11,275) $8,449 $10,451 ================================== The following is a reconciliation of federal income tax expense computed at statutory rates to the amount of income tax expense reflected in the consolidated statements of operations (in thousands): YEAR ENDED DECEMBER 31 1996 1995 1994 ---------------------------------- Federal income tax (benefit) at statutory rates $(8,484) $ 8,547 $ 8,605 State income taxes (net of federal tax benefit) (1,750) 1,773 1,938 Tax exempt interest (1,239) (1,790) - Other 198 (81) (92) ---------------------------------- Income tax expense (benefit) $(11,275) $ 8,449 $10,451 ================================== 44 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 5. INCOME TAXES (CONTINUED) Net deferred tax liabilities, which are included in accounts payable and accrued expenses, reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the Company's net deferred tax liabilities as of December 31 are as follows (in thousands): 1996 1995 ----------------------- Deferred tax assets: Provision for bad debts $ 748 $ 444 Nondeductible hospitalization accruals 968 643 Accrued vacation 611 428 State net operating loss carryforward 1,864 - Other 370 - ----------------------- Total deferred tax assets 4,561 1,515 Deferred tax liabilities: Unrealized gains on investments 193 377 Depreciation 1,075 1,090 Tax credit for research activities 4,242 751 Prepaid expenses 240 - Accrued market discount on bonds held 443 423 ----------------------- Total deferred tax liabilities 6,193 2,641 ----------------------- Net deferred tax liability $1,632 $1,126 ======================= As a result of current year losses, approximately $27.0 million of state tax loss carryforwards will be available for use to offset future state taxable income through 2001. The Company paid income taxes of $904,000 in 1996, $10,754,000 in 1995, and $7,059,000 in 1994. 6. LEASES The Company leases office space for ten branch locations. Future minimum lease payments under noncancelable operating leases with remaining terms of one year or more consisted of the following at December 31, 1996 (in thousands): 1997 $ 2,530 1998 2,573 1999 2,465 2000 2,264 2001 1,779 2002 and thereafter 5,094 ----------- $16,705 =========== Total rent expense was $2,784,000 in 1996, $1,423,000 in 1995, and $420,000 in 1994. 45 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 7. COMMITMENTS AND CONTINGENCIES The Company is involved in various litigation and claims arising in the normal course of business which management believes, based upon discussions with legal counsel, will not have a material adverse effect on the accompanying financial statements. During 1996, the Company entered into a revolving credit agreement under which it borrowed $18 million to provide short-term financing for the purchase of the Company's new headquarters. In the fourth quarter the Company repaid amounts due under the credit agreement and terminated the credit line. Total interest expense paid in connection with this agreement was approximately $388,000. The Health Reinsurance Association ("HRA") provides for otherwise unavailable health insurance coverage to uninsured or underinsured Connecticut residents. All health insurers, including HMOs, licensed in Connecticut are subject to assessment by the HRA to the extent the HRA incurs net losses. Assessments are based on premiums written and amounted to $1,018,000, $692,000, and $800,000 in 1996, 1995 and 1994, respectively. PHS/NY is subject to a community rating law which establishes a pooling mechanism providing for payments to insurers writing policies for a disproportionate share of individuals with certain demographic characteristics and catastrophic medical expenses. Depending on the age and sex characteristics of an insurer's members, an insurer will either make payments to or receive payments from the state pooled fund. Expenses related to the demographic pool were $3,180,000 in 1996, $1,483,000 in 1995 and $1,152,000 in 1994. For further commitments, refer to Note 11. 8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS The Company sponsors a defined contribution pension plan covering all full-time eligible employees (as defined). Contributions are based on a percentage of eligible salaries as determined by the Board of Directors. This plan also allows for additional voluntary contributions by covered full-time employees. Pension cost was approximately $1,061,000 in 1996, $853,000 in 1995 and $696,000 in 1994. The Company also has a 401(k) plan which covers substantially all eligible employees (as defined). This plan allows for voluntary employee contributions and a corporate match of 75% up to 4% of each employee's compensation. In addition, the Company contributes 1% of each eligible employee's compensation (as defined) to the plan. Expense related to the 401(k) plan was $858,000 in 1996, $654,000 in 1995, and $519,000 in 1994. The Company's Board of Directors, on November 17, 1992, and subsequently on November 21, 1995, adopted two Stock Option Plans (the "Plans") under which the Company may grant to certain officers and key employees (and, under the 1995 Plan, directors) incentive and nonqualified stock options for up to an aggregate maximum of 1,400,000 shares of Class A Common Stock. Under the Plans, the Board or Compensation Committee sets the exercise price for such options, but for incentive stock options, the exercise price shall not be less than the fair market value of the stock at the date of grant. Under the Plans, options may be exercised only at such times and under such conditions as determined by the Board or the Compensation Committee, but in no event more than ten years after the date of grant. The options that have been granted to date become exerciseable in equal installments over a period of three years and expire after ten years except for ten percent shareholders for which such options expire five years after the grant dates and certain performance based options granted in 1996, whose vesting may be accelerated based upon achievement of certain earnings targets. 46 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED) Information relating to stock options during 1996, 1995, and 1994 is as follows:
1996 1995 1994 ------------------------------------------------------------------------------------------- NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED OF SHARES AVERAGE OF SHARES AVERAGE OF SHARES AVERAGE EXERCISE EXERCISE EXERCISE PRICE PRICE PRICE ------------------------------------------------------------------------------------------- Outstanding at beginning of year 574,478 $24.78 187,514 $18.40 86,848 $15.00 Granted 565,040 22.09 413,098 27.45 111,950 20.86 Exercised (32,582) 18.43 (14,974) 16.73 (3,558) 15.00 Canceled (37,153) 29.29 (11,160) 27.05 (7,726) 17.36 ------------------------------------------------------------------------------------------- Outstanding at end of year 1,069,783 $23.40 574,478 $24.78 187,514 $18.40 =========================================================================================== Exercisable at end of year 317,478 $22.90 73,364 $17.55 25,318 $15.00 Available for grant, at end of year 279,103 - 506,990 - 408,928 -
Supplemental and Pro Forma Disclosure: The following pro forma information regarding net income (loss) and net income (loss) per share, required by SFAS 123, has been determined as if the Company had accounted for its stock-based compensation plans under the fair value methods described in that statement. The fair value of options granted under the Company's stock-based compensation plans was estimated at the date of grant using a Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected dividend yield, the expected life of the options, the expected price volatility and the risk free interest rate. The weighted averages of the assumptions used are set forth in the following paragraph. The weighted average dividend yield for stock option grants during 1996 and 1995 was 0%. The weighted average expected life for 1996 and 1995 was 5 years. The weighted average volatility for 1996 and 1995 was .46%. The weighted average risk-free interest rate for 1996 and 1995 was 5.87% and 6.99%, respectively. For purposes of pro forma disclosure, the estimated fair values of the options awarded are amortized to expense over the options' vesting period and do not include grants prior to January 1, 1995. As such, the pro forma information is not indicative of future years. The Company's pro forma information was as follows (in thousands, except per share data): 1996 1995 --------------------------- Net income (loss): As reported $(12,964) $15,970 Pro forma (14,379) 15,535 Net income (loss) per common share: As reported $(1.39) $1.70 Pro forma (1.54) 1.65 47 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 9. DIVIDEND AND INVESTMENT RESTRICTIONS OF SUBSIDIARIES The Company's HMO and insurance subsidiaries are subject to statutory regulations that restrict the payment of dividends. Based on laws currently in effect, PHS/CT generally may not pay dividends in excess of the greater of (1) the net gain from operations for the preceding calendar year, or (2) 10% of capital and surplus as of the preceding year end, both as determined in accordance with statutory accounting practices, without receiving approval of the Connecticut Insurance Commissioner. The maximum amount of cash dividends that PHS/CT could pay in 1997 without regulatory approval is approximately $2,800,000. The Company is required by the State of New York to maintain an escrow reserve, currently held in U.S. government obligations, equal to 5% of PHS/NY's estimated health care expenses for the upcoming year. The escrow reserve was approximately $9,113,000 and $7,087,000 at December 31, 1996 and 1995, respectively. The Company is required by the New Jersey State Insurance Department to maintain an escrow reserve of $300,000 in the event of insolvency. The escrow reserve was approximately $322,000 at December 31, 1996. Based on statutory rules and restrictions, the amount of restricted net assets of consolidated subsidiaries at December 31, 1996 was approximately $38.8 million. 10. ARRANGEMENT WITH THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA In 1995, the Company's subsidiaries, PHS/CT, PHS/NY and PHS/Bermuda, entered into several marketing and reinsurance agreements with The Guardian Life Insurance Company of America ("Guardian") and, together, the "companies". Under these agreements, jointly developed managed care and indemnity products are marketed to existing insureds of Guardian. In addition, the companies distributed these products through the brokerage community and an integrated marketing effort by the companies under the trade name "Healthcare Solutions." In 1995 and for the first nine months of 1996, PHS/CT, under the terms of the marketing agreement, wrote 100% of the HMO/POS business and Guardian wrote 100% of the indemnity business in Connecticut. Under the terms of the profit sharing agreement, a profit or loss was determined for each line of business. If both lines were profitable, profits, after provisions for related expenses, as defined, were shared equally. If neither line were profitable, each company retained losses, after provisions for related expenses, for its line of business written. If one line was profitable and the other unprofitable, payments, as defined, were to be made by the company writing the profitable line to the company with the unprofitable line, before net profits, if any, were shared. In connection with this agreement, PHS/CT reported losses of $7.6 million for the HMO/POS business. As of October 1, 1996, PHS/CT writes 100% of the HMO/POS business and, under the terms of a quota share reinsurance agreement, cedes 50% of it to Guardian. Accordingly, profits and losses, after provisions for related expenses, as defined, are shared equally. Additionally, 50% of losses previously reported under the agreement discussed in the preceeding paragraph are recoverable from future profits, if any, under the reinsurance agreement. After September 30, 1996, PHS/CT no longer participates in the indemnity business. In 1995, PHS/NY wrote the HMO/POS In-Network business and, under the terms of a quota share reinsurance agreement, ceded 50% of it to Guardian, while Guardian wrote 100% of the Indemnity/POS Out-of-Network business and, under the terms of a quota share reinsurance agreement with PHS/Bermuda, ceded 50% of it to PHS/ Bermuda. As such, profits and losses, after provisions for related expenses, as defined, were shared equally. From January 1, 1996 to June 30, 1996, PHS/NY's participation in the Indemnity business was reduced from 50% to 10%. After June 30, 1996, PHS/NY no longer participates in the Indemnity business. 48 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 10. AGREEMENT WITH THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA (CONTINUED) In 1996, PHS/NJ entered into marketing and reinsurance agreements with Guardian. PHS/NJ writes the HMO/POS In-Network business and, under the terms of the quota share reinsurance agreement, cedes 50% of it to Guardian PHS/NJ writes the HMO/POS out-of-network business and under the terms of a quota share reinsurance agreement, ceded 100% of it to Guardian, who retrocedes 50% of it back to PHS. As such, profits and losses, after provisions for related expenses, as defined, are shared equally. In 1996, these jointly marketed products generated approximately $114.5 million of revenue and $129.1 million of medical costs and other expenses for PHS. In 1995, these jointly marketed products generated approximately $21.5 million of revenue and $20.2 million of medical costs and other expenses for PHS. Other receivables at December 31, 1996 and 1995 includes amounts due from Guardian under profit sharing and reinsurance agreements of approximately $18.4 million and $11.8 million, respectively. In October 1996, Guardian canceled its warrant that was issued by the Company in 1995, which originally provided for the purchase of one million shares of the Company's Class A common stock, once certain operating conditions had been met. Based upon a subsequent agreement with Guardian, the number of shares available for purchase under the warrant at the time it was canceled had been substantially reduced as a result of the Guardian's purchase of shares of the Company's Class A common stock on the open market. The Company had not recognized any expense related to the warrant as the conditions to its exercisability had not been met, nor was it deemed probable that they would be met up to the date of cancellation. 11. SALE OF TEC AND INVESTMENT IN MASTERCARE COMPANIES, INC. In September 1995, the Company sold 81% of its wholly-owned subsidiary Total Employee Care, Inc. to Mastercare Companies, Inc. (Mastercare) for 625,000 voting shares of Mastercare common stock. In addition, the Company purchased additional shares of Mastercare voting stock in the amount of 1,250,000 shares at $1.20 per share. The Company owns less than 20% of the voting stock and does not have the ability to exercise significant influence over the operating and financial policies of Mastercare and, accordingly has reported this investment at the lower of cost or market. 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Selected unaudited data reflecting the Company's results of operations for each of the last eight fiscal quarters are shown in the following table (dollars in millions): 1996 1ST 2ND 3RD 4TH ------------------------------------------- Premium revenues $111.8 $118.4 $123.2 $128.1 Total health care expenses 92.9 108.9 109.6 114.6 Selling general and administrative expenses 19.4 20.0 23.4 23.2 Net income (loss) .9 (5.0) (4.5) (4.4) Net income (loss) per share 0.09 (0.54) (0.49) (0.46) 49 Physicians Health Services, Inc. Notes to Consolidated Financial Statements (continued) 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED) 1995 1ST 2ND 3RD 4TH ------------------------------------------- Premium revenues $ 79.6 $ 78.7 $ 85.7 $ 99.0 Total health care expenses 62.5 60.8 63.7 76.8 Selling general and administrative expenses 12.6 14.0 15.4 18.8 Net income 3.1 3.7 5.2 4.0 Net income per share 0.33 0.39 0.55 0.42 Note: The sum of the quarters' net income (loss) per share does not equal the full year per share amount due to rounding. 50 Schedule I Physicians Health Services, Inc. Condensed Financial Information of Registrant (Dollars in Thousands) Balance Sheets (Parent Company) DECEMBER 31 1996 1995 ----------------------- Assets Cash $ 15,572 $ 187 Other receivables 219 192 Prepaid expenses and other 1,128 99 ----------------------- TOTAL CURRENT ASSETS 16,919 478 ----------------------- Property, plant and equipment 408 250 Other assets 2,319 2,306 Investment in and advances to wholly-owned subsidiaries 86,603 106,206 ----------------------- TOTAL ASSETS $106,249 $109,240 ======================= Liabilities and stockholders' equity Accounts payable and accrued expenses $ 9,963 $ 359 ----------------------- TOTAL CURRENT LIABILITIES 9,963 359 ----------------------- Stockholders' equity Common Stock 94 94 Additional paid-in capital 41,360 40,760 Net unrealized gains on marketable securities of subsidiaries, net of tax 279 510 Retained earnings 54,554 67,518 ----------------------- 96,287 108,882 Less treasury stock (1) (1) ----------------------- TOTAL STOCKHOLDERS' EQUITY 96,286 108,881 ----------------------- TOTAL LIABILITIES AND $106,249 $109,240 STOCKHOLDERS' EQUITY ======================= The condensed financial information should be read in conjunction with the consolidated financial information and the accompanying notes thereto. 51 Schedule I Physicians Health Services, Inc. Condensed Financial Information of Registrant (Dollars in Thousands) Statements of Operations (Parent Company) YEAR ENDED DECEMBER 31 1996 1995 1994 ---------------------------------- Revenue: Investment income $ 92 $ 8 $ - ---------------------------------- Costs and expenses: General and administrative expenses - 2,188 1,243 Interest expense 381 - - ---------------------------------- 381 2,188 1,243 ---------------------------------- LOSS BEFORE INCOME TAXES (289) (2,180) (1,243) Income tax expense (benefit) 249 505 (154) ---------------------------------- Loss before equity in net income (loss) of wholly-owned subsidiaries (538) (2,685) (1,089) Equity in net income (loss) of wholly-owned subsidiaries, net of taxes (12,426) 18,655 15,223 ---------------------------------- NET INCOME (LOSS) ($ 12,964) $15,970 $14,134 ================================== The condensed financial information should be read in conjunction with the consolidated financial information and the accompanying notes thereto. 52 Schedule I Physicians Health Services, Inc. Condensed Financial Information of Registrant (Dollars in Thousands) Statements of Cash Flows (Parent Company) YEAR ENDED DECEMBER 31 1996 1995 1994 ---------------------------------- OPERATING ACTIVITIES Net income (loss) ($12,964) 15,970 $ 14,134 Plus equity in net loss (income) of 12,426 (18,655) (15,223) subsidiaries Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities 8,377 2,382 1,271 ---------------------------------- Net cash provided by (used for) 7,839 (303) 182 operating activities FINANCING ACTIVITIES Advances to subsidiaries (40,198) (9,000) (10,000) Dividends and return of capital from subsidiaries 47,144 9,000 10,000 Exercise of stock options 600 246 53 ---------------------------------- Net cash provided by financing activities 7,546 246 53 Increase (decrease) in cash 15,385 (57) 235 Cash at beginning of year 187 244 9 ---------------------------------- Cash at end of year $ 15,572 $ 187 $ 244 ================================== The condensed financial information should be read in conjunction with the consolidated financial information and the accompanying notes thereto. 53 Schedule II Physicians Health Services, Inc. and Subsidiaries December 31, 1996 Valuation and Qualifying Accounts (Dollars in Thousands) Balance at Charge to Balance at Beginning Cost and End of of Period Expenses Deductions Period ------------------------------------------------ Year ended December 31, 1994 Allowance for doubtful accounts $926 $1,423 ($549) $1,800 ==== ====== ====== ======== Year ended December 31, 1995 Allowance for doubtful accounts $1,800 $103 ($853) $1,050 ====== ==== ====== ====== Year ended December 31, 1996 Allowance for doubtful accounts $1,050 $1,485 ($754) $1,781 ====== ====== ====== ====== 54 EXHIBIT INDEX
SEQUENTIAL EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER 3 Amended and Restated Certificate of Incorporation of Company (Incorporated by reference to Exhibit 3 in Company's Registration Statement on Form S-1 (File No. 33-54918)) 3(a) Bylaws of the Company (Incorporated by reference to Exhibit 3(a) in Company's Registration Statement on Form S-1 (File No. 33-54918)) 4 Form of Stock Certificate (Incorporated by reference to Exhibit 4 in Company's Registration Statement on Form 8-A (File No. 0-21098)) 4.1 Stock Warrant Purchase Agreement, dated November 28, 1995, between the Company and The Guardian Life Insurance Company of America (Incorporated by reference to Exhibit 4.1 in Company's Current Report on Form 8-K, dated November 28, 1995) 4.2 Warrant Certificate No. AC-1, dated November 28, 1995, issued by the Company to The Guardian Life Insurance Company of America (Incorporated by reference to the Company's Current Report on Form 8-K, dated November 28, 1995) 4.3 Agreement, dated October 21, 1996, between The Guardian Life Insurance Company of America and Physicians Health Services, Inc. relinquishing rights to purchase common stock pursuant to warrant dated November 28, 1995. (Incorporated by reference to Exhibit 10(a) in Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) 4.4 Agreement, dated August 7, 1996, between Physicians Health Services, Inc. and The Guardian Life Insurance Company of America (Incorporated by reference to Exhibit 5.1 in the Company's Current Report on Form 8-K, dated August 26, 1996) 10(a) Employment Agreement, dated October 29, 1996, between the Company and Robert L. Natt (Incorporated by reference to Exhibit 10(b) in Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) 10(b) Amendment, dated August 28, 1996, to the Employment Agreement dated December 17, 1995 between Michael E. Herbert and Physicians Health Services, Inc. (Incorporated by reference to Exhibit 10(c) in Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) 10(c) Employment Agreement, dated February 27, 1990, between the Company and Michael E. Herbert, as amended by Amendment to Employment Agreement, dated November 19, 1992 (Incorporated by reference to Exhibit 10(b) in Company's Registration Statement on Form S-1 (File No. 33-54918))
55
SEQUENTIAL EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER 10(d) Employment Agreement, dated December 19, 1995, between the Company and Michael E. Herbert (Incorporated by reference to Exhibit 10(d) in Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10(e) Employment Agreement, dated December 31, 1994, between the Company and Richard C. O'Connor, M.D. (Incorporated by reference to Exhibit 10(c) in Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994) 10(f) Employment Agreement, dated December 31, 1994, between the Company and Regina M. Campbell (Incorporated by reference to Exhibit 10(c) in Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994) 10(g) Employment Agreement, dated as of January 1, 1994, between the Company and Stanley M. Stier, M.D. (Incorporated by reference to Exhibit 10(g) in Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993) 10(h) Employment Agreement, dated December 1994, between the Company and James L. Elrod, Jr. (Incorporated by reference to Exhibit 10(g) in Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994) 10(i) Employment Agreement, dated August 24, 1994, between the Company and Steven Black (Incorporated by reference to Exhibit 10(h) in Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994) 10(j) Employment Agreement, dated April 28, 1994, between the Company and Paul M. Philpott (Incorporated by reference to Exhibit 10(i) in Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994) 10(k) Employment Agreement, dated May 9, 1995, between the Company and Paul M. Philpott (Incorporated by reference to Exhibit 10(k) in Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10(l) Agreement of Sale, dated March 12, 1996, between the Company and Richardson-Vicks Real Estate, Inc. (filed herewith)
56
SEQUENTIAL EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER 10(m) Amended and Restated Marketing and Services Agreement, dated October 1, 1996, By and Among Physicians Health Services, Inc., Physicians Health Services of Connecticut, Inc., and The Guardian Life Insurance Company of America (filed herewith) 10(n) Amended and Restated Marketing and Services Agreement, dated October 1, 1996, By and Among Physicians Health Services, Inc., Physicians Health Services of New York, Inc. and The Guardian Life Insurance Company of America (filed herewith) 10(o) Amended and Restated Marketing and Services Agreement, dated October 1, 1996, By and Among Physicians Health Services, Inc., Physicians Health Services of New Jersey, Inc. and The Guardian Life Insurance Company of America (filed herewith) 10(p) Reinsurance Agreement, dated October 1, 1996, Between Physicians Health Services of Connecticut, Inc. and The Guardian Life Insurance Company of America (filed herewith) 10(q) Amended and Restated Reinsurance Agreement, dated October 1, 1996, Between Physicians Health Services of New York, Inc. and The Guardian Life Insurance Company of America (filed herewith) 10(r) Amended and Restated Reinsurance Agreement, dated October 1, 1996, Among Physicians Health Services of New Jersey, Inc. Physicians Health Services (Bermuda) Ltd. and The Guardian Life Insurance Company of America (filed herewith) 10(s) Amended and Restated Reinsurance Agreement, dated October 1, 1996, Between Physicians Health Services (Bermuda) Ltd. and The Guardian Life Insurance Company of America (filed herewith) 10(t) GBIPA Service Agreement, dated as of January 1, 1997, between the Company and Greater Bridgeport Individual Practice Association, Inc. (filed herewith) 10(u) HMO-IPA Service Agreement, dated as of January 1, 1997, between the Company and Fairfield Individual Practice Association, Inc. (filed herewith) 10(v) HMO-IPA Service Agreement, dated as of January 1, 1997, between the Company and Heritage Individual Practice Association, Inc. (filed herewith)
57
SEQUENTIAL EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER 10(w) HMO-IPA Service Agreement, dated as of April 26, 1984, between the Company and Colonial Individual Practice Association, Inc., as amended effective January 1, 1994 (Incorporated by reference to Exhibit 10(j) in Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10(x) HMO-IPA Service Agreement, dated as of May 19, 1987, between the Company and White Plains IPA, Inc., as amended effective January 1, 1992 (Incorporated by reference to Exhibit 10(m) in Company's Registration Statement on Form S-1 (File No. 33-54918)) 10(y) Amendment to HMO-IPA Service Agreement, dated as of April 28, 1993, between the Company and White Plains - Sound Shore IPA, Inc. (f/k/a White Plains IPA, Inc.) (Incorporated by reference to Exhibit 10(o) in Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10(z) 1994-1996 Amendment to HMO-IPA Service Agreement, dated September 20, 1993, between the Company and White Plains - Sound Shore IPA, Inc., effective January 1, 1994 (Incorporated by reference to Exhibit 10(p) in Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10(aa) HMO-IPA Service Agreement, dated as of May 19, 1987, between the Company and Hudson IPA, Inc., as amended, effective January 1, 1992 (Incorporated by reference to Exhibit 10(n) in Company's Registration Statement on Form S-1 (File No. 33-54918)) 10(bb) Amendment to HMO-IPA Service Agreement, dated as of April 29, 1993, between the Company and Hudson IPA, Inc. (Incorporated by reference to Exhibit 10(r) in Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10(cc) 1994-1996 Amendment to HMO-IPA Service Agreement, dated August 20, 1993, between the Company and Hudson IPA, Inc. effective January 1, 1994 (Incorporated by reference to Exhibit 10(s) in Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10(dd) Amended and Restated 1995 Stock Option Plan (filed herewith) 10(ee) HMO-PHO Service Agreement, dated as of December 23, 1993, between the Company and Saint Francis/Mount Sinai Physicians Hospital Organization (Incorporated by reference to Exhibit 10(t) in Company's Annual Report on Form 10-K for the year ended December 31, 1993)
58
SEQUENTIAL EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER 10(ff) Letter Amendment to HMO-PHO Service Agreement, dated September 28, 1995, between the Company and Saint Francis/Mount Sinai Physicians Hospital Organization (Incorporated by reference to Exhibit 10(y) in Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10(gg) Service Agreement between the Company and Hartford Physician Hospital Corporation effective January 1, 1996 (Incorporated by reference to Exhibit 10(z) in Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10(hh) Agreement between Company and Yale-New Haven Hospital- Physicians Corporation Agreement regarding covered services (Incorporated by reference to Exhibit 10(gg) in Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10(ii) Financial Letter, dated September 24, 1991, to Bridgeport Hospital summarizing the arrangements between the Company and Bridgeport Hospital (Incorporated by reference to Exhibit 10(o) in Company's Registration Statement on Form S-1 (File No. 33-54918)) 10(jj) 1992 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10(x) in Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10(kk) Company's 401(k) Plan (Incorporated by reference to Exhibit 10(x) in Company's Registration Statement on Form S-1 (File No. 33-54918)) 10(ll) Amendment to Company's 401(k) Plan (Incorporated by reference to Exhibit 10(z) in Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10(mm) Agreement between the Company and Phoenix Mutual Life Insurance Company ("Phoenix") (Incorporated by reference to Exhibit 10(r) in Company's Registration Statement on Form S-1 (File No. 33-54918)) 10(nn) Letter Agreement, dated as of September 19, 1990 between the Company and Phoenix (Incorporated by reference to Exhibit 10(s) in Company's Registration Statement on Form S-1 (File No. 33-54918))
59
SEQUENTIAL EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER 10(oo) Form of Change in Control Agreement entered into between the Company and Messrs. Herbert and Natt, Drs. Stier and O'Connor and Ms. Campbell. (Incorporated by reference to Exhibit 10(z) in Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10(pp) Form of Conditional Employment Agreement entered into between the Company and Messrs. Herbert, Natt, Elrod and Philpott, Drs. O'Connor and Stier and Ms. Campbell (Incorporated by reference to Exhibit 10(dd) in Company's Annual Report on Form 10-K for the year ended December 31, 1994) 10(qq) Form of Change in Control Agreement entered into between the Company and certain other members of senior management (Incorporated by reference to Exhibit 10(aa) in Company's Annual Report on Form 10-K for the year ended December 31, 1993) 21 Subsidiaries of the Company (filed herewith) 23 Consent of Independent Auditors (filed herewith)
60 EX-10.(DD) 2 AMENDED AND RESTATED 1995 STOCK OPTION PLAN EXHIBIT 10(dd) AMENDED AND RESTATED PHYSICIANS HEALTH SERVICES, INC. 1995 STOCK OPTION PLAN ARTICLE I PURPOSE OF STOCK OPTION PLAN; DEFINITIONS Reference is hereby made to the Physicians Health Services 1995 Stock Option Plan adopted by the Board of Directors on November 21, 1995. This Amended and Restated 1995 Stock Option Agreement dated as of November 1, 1996 supersedes and replaces the 1995 Stock Option Plan in its entirety. A. Purpose. The purpose of the Physicians Health Services, Inc., 1995 Stock ------- Option Plan is to provide an incentive, in the form of Incentive Stock Options and Non-Qualified Stock Options, to key employees of the Employer, who are in a position to contribute materially to the long-term success of the Employer, to increase their interest in the Employer's welfare, and to aid in attracting and retaining Employees of outstanding ability (terms defined below). 2. Definitions. Unless the context clearly indicates otherwise, the ----------- following terms shall have the meanings set forth below: (1) "BOARD" shall mean the Board of Directors of the Company. (2) "CODE" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time. (3) "COMPENSATION COMMITTEE" shall mean a committee consisting of two or more directors who are not officers of, or otherwise employed by, PHS or any parent or subsidiary, and who do not posses an interest in any transaction for which disclosure would be required under Section 404(a) or (b) of Regulation S-K promulgated by the Securities and Exchange Commission, and do not receive compensation, directly or indirectly, in excess of $60,000 from PHS or any parent or subsidiary. (4) "COMPANY" shall mean Physicians Health Services, Inc. and any successor thereto. (5) "DIRECTORS" shall mean those members of the Board of Directors of the Company and its subsidiaries who are not Employees. (6) "DISABILITY" shall mean a medically determinable physical or mental condition which causes an Employee to be unable to engage in any substantial gainful activity and which can be expected to result in death or to be of long-continued and indefinite duration. (7) "EMPLOYEE" shall mean any common law employee, including officers of the Employer, including its subsidiaries, as determined in the Code and the Treasure Regulations thereunder. (8) "EMPLOYER" shall mean Physicians Health Services, Inc., a Delaware corporation, and its subsidiaries. (9) "FAIR MARKET VALUE" shall mean the average daily public trading price on the applicable date or the fair market value of the Stock as determined by the Compensation Committee on the basis of a review of the facts and circumstances at the time. (10) "GRANTEE" shall mean an Employee granted a Stock Option under this Plan. (11) "INCENTIVE STOCK OPTION" shall mean an option granted pursuant to the Incentive Stock Option provisions as set forth in Article II of this Plan and in the form of Exhibit A attached hereto. --------- (12) "NON-QUALIFIED STOCK OPTION" shall mean an option granted pursuant to the Non-Qualified Stock Option provisions as set forth in Article III of this Plan and in the form of Exhibit B attached --------- hereto. (13) "PLAN" shall mean the Amended and Restated Physicians Health Services, Inc. 1995 Stock Option Plan as set forth herein and as amended from time to time. (14) "STOCK" shall mean authorized but unissued shares of the Class A Common Stock of the Company or reacquired shares of the Company's Class A Common Stock. (15) "STOCK OPTION" shall mean an option granted pursuant to the Plan to purchase shares of Stock. (16) "TEN PERCENT STOCKHOLDER" shall mean an Employee who at the time a Stock Option is granted owns stock possessing more than ten percent (10%) of the total combined voting power of all stock of the Company or of its parent or subsidiary corporation. C. Shares of Stock Subject to the Plan. Subject to the provisions of ------------------------------------ Paragraph B of Part IV, the Stock which may be issued or transferred pursuant to Stock Options granted under the Plan and the Stock which is subject to outstanding but unexercised Stock Options under the Plan shall not exceed 800,000 shares in the aggregate. If a Stock Option shall expire and terminate for any reason, whole or in part, without being exercised, the number of shares of Stock as to which such expired or terminated Stock Option shall not have been exercised may again become available for the grant of Stock Options. There shall be no terms and conditions in a Stock Option which provide that the exercise of an Incentive Stock Option reduces the number of shares of Stock for which an outstanding Non-Qualified Stock Option may be exercised; and there shall be no terms and conditions in a Stock Option which provide that the exercise of a Non-Qualified Stock Option reduces the number of shares of Stock for which an outstanding Incentive Stock Option may be exercised. D. Administration of the Plan. The Plan shall be administered by the -------------------------- Compensation Committee. Subject to the express provisions of the Plan, the Compensation Committee shall have authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of Stock Option agreements, and to make all other determinations necessary or advisable for the administration of the Plan. Any controversy or claim arising out of or related to this Plan shall be determined unilaterally by and at the sole discretion of the Compensation Committee. E. Amendment or Termination. The Board may, at any time, alter, amend, ------------------------ suspend, discontinue, or terminate this Plan; provided, however, that such action shall not adversely affect the right of Grantees to Stock Options previously granted. F. Effective Date and Duration of the Plan. The Plan shall become effective --------------------------------------- upon its approval by the Board. This Plan shall terminate ten years from the date the Plan becomes effective, and no Stock Option may be granted under the Plan thereafter, but such termination shall not affect any Stock Option theretofore granted. ARTICLE II INCENTIVE STOCK OPTION PROVISION A. Granting of Incentive Stock Options. ----------------------------------- (1) Incentive Stock Options shall be available for grant under the Plan only in the event that a majority of the stockholders of the Company approve the adoption of the Plan. (2) Only key Employees of the Employer shall be eligible to receive Incentive Stock Options under the Plan. Directors of the Company who are not also Employees shall not be eligible for Incentive Stock Options. (3) The purchase price of each share of Stock subject to an Incentive Stock Option shall not be less than 100% of the Fair Market Value of a share of the Stock on the date the Incentive Stock Option is granted; provided, however, that the purchase price of each share of Stock subject to an Incentive Stock Option granted to a Ten Percent Stockholder shall not be less that 110% of the Fair Market Value of a share of the Stock on the date the Incentive Stock Option is granted. (4) No Incentive Stock Option shall be exercisable more than ten years from the date the Incentive Stock Option was granted; provided, however, that an Incentive Stock Option granted to a Ten Percent Stockholder shall not be exercisable more than five years from the date the Incentive Stock Option was granted. (5) The Compenstion Committee shall determine and designate from time to time those Employees who are to be granted Incentive Stock Options and specify the number of shares subject to each Incentive Stock Option and such other terms, including vesting requirements and the minimum number of options exercisable at a time. (6) Notwithstanding any other provisions hereof, the aggregate Fair Market Value (determined at the time the option is granted) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by the Employee during any calendar year (under all such plans of the Grantee's employer corporation and its parent and subsidiary corporations) shall not exceed $100,000. (7) The Compensation Committee, in its sole discretion, shall determine whether any particular Incentive Stock Option shall become exercisable in one or more installments, specify the installment dates, and, within the limitations herein provided, determine the total period during which the Incentive Stock Option is exercisable. Further, the Compensation Committee may make such other provisions as may appear generally acceptable or desirable to the Compensation Committee or necessary to qualify its grants under the provisions of Section 422 of the Code. (8) The Compensation Committee may grant at any time new Incentive Stock Options to an Employee who has previously received Incentive Stock Options or other options whether such prior Incentive Stock Options or other options are still outstanding, have previously been exercised in whole or in part, or are canceled in connection with the issuance of new Incentive Stock Options. The purchase price of the new Incentive Stock Option may be established by the Compensation Committee without regard to the existing Incentive Stock Options or other options. B. Exercise of Incentive Stock Options. ----------------------------------- (1) The option price of an Incentive Stock Option shall be payable on exercise of the option (i) in cash or by check, bank draft or postal express money order, (ii) by promissory note, (iii) by the surrender of Stock or Class B Common Stock then owned by the Grantee, provided that the stock surrendered by the Grantee has been owned by the Grantee for at least six (6) months, or (iv) a combination of clauses (i), (ii) or (iii). Shares of Stock or Class B Common Stock so surrendered in accordance with clause (iii) or (IV) shall be valued at the Fair Market Value thereof on the date of exercise, surrender of such Stock or Class B Common Stock to be evidenced by delivery of the certificate(s) representing such shares in such manner, and endorsed in such form, or accompanied by stock powers endorsed in such form, as the Compensation Committee may determine. C. Termination of Employment. ------------------------- (1) If a Grantee's employment is terminated (other than by Disability or death) the terms of any then outstanding Incentive Stock Option held by the Grantee shall extend for a period ending on the earlier of the date on which such option would otherwise expire or three months after such termination of employment, and such option shall be exercisable to the extent it was exercisable as of the date of termination of employment. (2) If a Grantee's employment is terminated by reason of Disability, the term of any then outstanding Incentive Stock Option held by the Grantee shall extend for a period ending on the earlier of the date on which such option would otherwise expire or twelve months after the Grantee's last date of employment, and such option shall be exercisable to the extent it was exercisable as of such last date of employment. (3) If a Grantee's employment is terminated by death, the representative of his estate or beneficiaries thereof to whom the option has been transferred shall have the right during the three-month period following his death to exercise any then outstanding Incentive Stock Options in whole or in part. If a Grantee dies within three months after his retirement without having fully exercised any then outstanding Incentive Stock Options, the representative of his estate or beneficiaries thereof to whom the option has been transferred shall have the right during such three-month period to exercise such options in whole or in part. The number of shares of Stock in respect of which an Incentive Stock Option may be exercised after a Grantee's death shall be the number of shares in respect of which such option could be exercised as of the date of the Grantee's death or retirement, whichever occurs first. In no event may the period for exercising an Incentive Stock Option extend beyond the date on which such option would otherwise expire. (4) The Board may grant a leave of absence to any Grantee for purposes of continuing such Grantee's employment with the Employer. ARTICLE III NON-QUALIFIED STOCK OPTION PROVISIONS A. Granting of Non-Qualified Stock Options. --------------------------------------- (1) Only key Employees of the Employer and Directors shall be eligible to receive Non-Qualified Stock Options under the Plan. (2) The Compensation Committee shall determine and designate from time to time those Employees who are to be granted Non-Qualified Stock Options and the amount subject to each Non-Qualified Stock Option. (3) The Compensation Committee may grant at any time new Non-Qualified Stock Options to an Employee who has previously received Non-Qualified Stock Options or other options, whether such prior Non-Qualified Stock Options or other options are still outstanding, have previously been exercised in whole or in part, or are canceled in connection with the issuance of new Non-Qualified Stock Options. (4) When granting a Non-Qualified Stock Option, the Compensation Committee shall determine the purchase price of the Stock subject thereto. Such price may be less that 100% of the Fair Market Value of such stock on the date the Non-Qualified Stock Option is granted. (5) The Compensation Committee, in its sole discretion, shall determine whether any particular Non-Qualified Stock Option shall become exercisable in one or more installments, specify the installment dates, and, within the limitations herein provided, determine the total period during which the Non-Qualified Stock Option is exercisable. Further, the Compensation Committee may make such other provisions as may appear generally acceptable or desirable to the Compensation Committee. (6) No Non-Qualified Stock Option shall be exercisable more than ten years from the date such option is granted. B. Exercise of Stock Options. ------------------------- (1) The option price of a Non-Qualified Stock Option shall be payable on exercise of the option (i) in cash or by check, bank draft or postal or express money order, (ii) by promissory note, (iii) by the surrender of Class B Common Stock or Stock then owned by the Grantee provided that the Stock surrendered has been held by for at least six months, or (iv) by a combination of clauses (i), (ii) and (iii). Shares of Class B Common Stock or Stock so surrendered in accordance with clause (iii) or (iv) shall be valued at the Fair Market Value thereof on the date of exercise, surrender of such to be evidenced by delivery of the certificate(s) representing such shares in such manner, and endorsed in such form, or accompanied by stock powers endorsed in such form, as the Compensation Committee may determine. C. Termination of Employment. ------------------------- (1) If a Grantee's employment is terminated (other than by Disability or death), the terms of any then outstanding Non-Qualified Stock Option held by the Grantee shall extend for a period ending on the earlier of the date on which such option would otherwise expire or three months after such termination of employment and such option shall be exercisable to the extent it was exercisable as of the date of termination of employment. (2) If a Grantor's employment is terminated by reason of Disability, the term of any then outstanding Non-Qualified Stock Option held by the Grantee shall extend for a period ending on the earlier of the date on which such option would otherwise expire or twelve months after the Grantee's last date of employment, and such option shall be exercisable to the extent it was exercisable as of such last date of employment. (3) If a Grantee's employment is terminated by death, the representative of his estate or beneficiaries thereof to whom the option has been transferred shall have the right during the three-month or less period following his death to exercise any then outstanding Non-Qualified Stock Options in whole or in part. If a Grantee dies within three months after his retirement without having fully exercised any then outstanding Non-Qualified Stock Options, the representative of his estate or beneficiaries thereof to whom the option has been transferred shall have the right during such three month period to exercise such options in whole or in part. The number of shares of Stock in respect of which a Non-Qualified Stock Option may be exercised after a Grantee's death shall be the number of shares of Stock in respect of which such option could be exercised as of the date of the Grantee's death or retirement, whichever first occurs. In no event may the period for exercising a Non-Qualified Stock Option extend beyond the date on which such option would otherwise expire. (4) The Board may grant a leave of absence to any Grantee for purposes of continuing such Grantee's employment with the Employer. ARTICLE IV GENERAL PROVISIONS A. Substitution of Options. In the event of a corporate merger or ----------------------- consolidation, or the acquisition by the Employer of property or stock of an acquired corporation or any reorganization or other transaction qualifying under Section 425 of the Code, the Compensation Committee may, in accordance with the provisions of that Section, substitute options under this Plan for options under the plan of the acquired corporation provided (i) the excess of the aggregate fair market value of the shares subject to option immediately after the substitution over the aggregate option price of such shares is not more than the similar excess immediately before such substitution and (ii) the new option does not give the Employee additional benefits, including any extension of the exercise period. B. Accelerated Vesting of Options. Notwithstanding anything herein to the ------------------------------ contrary, in the event of a corporate merger or consolidation of the Employer with another entity, or acquisition of all or substantially all of the property or stock of the Employer, or any other reorganization or other transaction (a "Change of Control"), all then outstanding Stock Options shall be immediately exercisable as of the date immediately preceding such Change of Control. C. Adjustment Provision. -------------------- (1) If the shares of Stock outstanding are changed in number or class by reason of a split-up, merger, consolidation, reorganization, reclassification, recapitalization, or any capital adjustment, including stock dividend, or if any distribution is made to the holders of common stock other than a cash dividend, then (i) the aggregate number and class of shares or other securities that may be issued or transferred pursuant to Paragraph C of Article I, (ii) the number and class of shares or other securities which are issuable under outstanding Stock Options, and (iii)the purchase price to be paid per share under outstanding Stock Options shall be adjusted as provided hereinafter. (2) Adjustment under this Paragraph B shall be made in an equitable manner by the Compensation Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding, and conclusive. D. General. ------- (1) Each Stock Option shall be evidenced by a written instrument containing such terms and conditions, not inconsistent with this Plan, as the Board shall approve. (2) The granting of a Stock Option in any year shall not give the Grantee any right to similar grants in future years or any right to be retained in the employ of the Employer, and all Employees shall remain subject to discharge to the same extent as if the Plan were not in effect. (3) No employee, and no beneficiary or other person claiming under or through him, shall have any right, title or interest by reason of any Stock Option to any particular assets of the Employer, or any shares of Stock allocated or reserved for the purposes of the Plan or subject to any Stock Option except as set forth herein. The Employer shall not be required to establish any fund or make any other segregation of assets to assure the payment of any Stock Option. (4) No right under the Plan shall be subject to anticipation, sale, assignment, pledge, encumbrance, or charge except by will or the laws of descent and distribution, and a Stock Option shall be exercisable during the Grantee's lifetime only by the Grantee. (5) Notwithstanding any other provision of this Plan or agreements made pursuant thereto, the Company's obligation to issue or deliver any certificate or certificates for shares of Stock under a Stock Option, and the transferability of Stock acquired by exercise of a Stock Option, shall be subject to all of the following conditions: (i) Any registration or other qualification of such shares under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Board shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; (ii) The obtaining of any other consent, approval, or permit from any state or federal government agency which the Board shall, in its absolute discretion upon the advice of counsel, determine to be necessary or advisable; and (iii)Each stock certificate issued pursuant to a Stock Option shall bear the following legend: "The transferability of this certificate and the shares of Stock represented hereby are subject to restrictions, terms and conditions contained in the Physicians Health Services, Inc. 1995 Stock Option Plan, and an Agreement between the registered owner of such Stock and Physicians Health Services, Inc. A copy of the Plan and Agreement are on file in the office of the Secretary of Physicians Health Services, Inc." (6) All payments to Grantees or to their legal representatives shall be subject to any applicable tax, community property, or other statutes or regulations of the United States or of any state having jurisdiction thereof. The Grantee may be required to pay to the Employer the amount of any withhold taxes which the Employer is required to withhold with respect to a Stock Option or its exercise. In the event that such payment is not made when due, the Employer shall have the right to deduct, to the extent permitted by law, from any payment of any kind otherwise due to such person all or part of the amount required to be withheld. (7) In the case of a grant of a Stock Option to any Employee of a subsidiary of the Company, the Company may, if the Compensation Committee so directs, issue or transfer the shares, if any, covered by the Stock Option to the subsidiary, for such lawful consideration as the Compensation Committee may specify, upon the condition or understanding that the subsidiary will transfer the shares to the Employee in accordance with the terms of the Stock Option specified by the Compensation Committee pursuant to the provisions of the Plan. For purposes of this Section, a subsidiary shall mean any subsidiary corporation of the Company as defined in Section 425 of the Code. (8) A Grantee entitled to Stock as a result of the exercise of an option shall not be deemed for any purpose to be, or have rights as, a stockholder of the Employer by virtue of such exercise, except to the extent a stock certificate is issued therefor and then only from the date such certificate is issued. No adjustments shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate is issued. The Employer shall issue any stock certificates required to be issued in connection with the exercise of a Stock Option with reasonable promptness after such exercise. (9) The grant or exercise of Stock Options granted under the Plan shall be subject to, and shall in all respects comply with, applicable Delaware corporate law relating to such grant or exercise. Adopted by the Board of Directors: November 21, 1995 Amended as of November 1, 1996 EXHIBIT A --------- PHYSICIANS HEALTH SERVICES, INC. 1995 INCENTIVE STOCK OPTION AGREEMENT Agreement made this _______ day of _________ between Physicians Health Services, Inc. a corporation organized under the laws of the State of Delaware (hereinafter called the "Corporation") and ___________________ (hereinafter called the "Grantee"). WHEREAS, the Corporation desires to provide the Grantee with an opportunity to acquire or increase his proprietary interest in the business of the Corporation and, through stock ownership, to possess an increased personal interest in its continued success and progress; NOW THEREFORE, in consideration of the premises, the mutual covenants hereinafter set forth, and other good and valuable consideration, the Corporation and the Grantee agree as follows: 1. Award of Option. The Corporation hereby awards to the Grantee, as a --------------- matter of separate inducement and agreement, and not in lieu of salary or any other compensation for services, an option to purchase an aggregate of ______ shares of the Corporation's Class A Common Stock pursuant to the Incentive Stock Option provisions contained in Article II of the Plan, on the terms and conditions hereinafter set forth, at the purchase price of $_______ per share (such shares, number of shares and purchase price being subject to adjustment as provided in Paragraph A of Article IV of the Plan). 2. Terms of Plan. The Plan, a copy of which is attached hereto, is ------------- incorporated herein by reference and is made part of this Agreement as if fully set forth herein. This Agreement is subject to, and the Corporation and the Grantee agree to be bound by, all of the terms and conditions of the Plan as the Plan exists at the time of this Agreement's execution. The Plan shall control in the event there is any express conflict between the Plan and the terms hereof, and on such matters that are not expressly covered in this Agreement. Subsequent amendments of the Plan shall not adversely affect the Grantee's rights under this Agreement. 3. Exercise of Option. The Stock Option granted pursuant to this ------------------ Agreement is exercisable in accordance with the vesting schedule approved by the Compensation Committee, as set forth below. Installments, if applicable, shall be cumulative, but each exercise must encompass at lease one installment of _____ shares, whichever is less. In the event the Grantee's exercise includes a fractional share, the Corporation will not be required to issue a fractional share but will pay the Grantee in Cash the value of such fraction. All unexercised rights shall lapse and forever terminate after the expiration of ten years from the date of this Agreement, provided, however, that all unexercised rights granted to ten percent stockholders shall lapse and forever terminate after the expiration of five years from the date of this Agreement. 4. Termination of Employment. If the Grantee's employment is terminated ------------------------- (other than by Disability or death) the terms of any then outstanding Incentive Stock Option held by the Grantee shall extend for a period ending on the earlier of the date on which such option would otherwise expire or three months after such termination of employment, and such option shall be exercisable to the extent it was exercisable as of the Grantee's last date of employment. If a Grantee's employment is terminated by reason of Disability, the term of any then outstanding Incentive Stock Option held by the Grantee shall extend for a period ending on the earlier of the date on which such option would otherwise expire or twelve months after the Grantee's last date of employment, and such option shall be exercisable to the extent it was exercisable as of the Grantee's last date of employment. If a Grantee's employment is terminated by death, the representative of his estate or beneficiaries thereof to whom the option has been transferred shall have the right, during the period ending on the earlier of the date on which such option would otherwise expire or three months after such termination of employment, or exercise such options in whole or in part. If a Grantee dies without having fully exercised any then outstanding Incentive Stock Options, the representative of his estate of beneficiaries thereof to whom the option has been transferred shall have the right to exercise such options in whole or in part during the then existing exercise period. The number of shares of Stock in respect of which an Incentive Stock Option may be exercised after a Grantee's death shall be the number of shares in respect of which such option could be exercised as of the Grantee's last date of employment. 5. Manner of Exercise. Full payment for the shares of Stock purchased ------------------ shall be made at the time of any exercise of this Agreement. The purchase price shall be payable to the Corporation either (i) in cash or by check, bank draft, or postal or express money order, (ii) by promissory note, (iii) through the delivery of shares of Class A or Class B Common Stock then owned by the Grantee having a Fair Market Value on the date of exercise equal to the full purchase price, provided that the shares so delivered have been owned by the Grantee for at least six (6) months, or (iv) by a combination of (i), (ii) or (iii) above; provided, however, that no fractional share shall be accepted by the Corporation in partial payment of the purchase price of any Stock, and the value of any such fractional interest shall be paid to the Corporation in the manner specified in (i) above. Subject to the terms and conditions hereof, the options shall be exercisable by notice to the Corporation on the form provided by the Corporation, a copy of which is attached hereto. In the event that the options are being exercised by any person or persons other than the Grantee, the notice shall be accompanied by proof, satisfactory to the Corporation, of the right of such person or persons to exercise any right under this Agreement. 6. Rights of Grantee. The grant of an option in any year shall give such ----------------- Grantee neither any right to similar grants in future years nor any right to be retained in the employ of the Corporation or any of its subsidiaries, such employment being terminable to the same extent as if the Plan and this Agreement were not in effect. Neither the Grantee nor any other person legally entitled to exercise any rights under this Agreement shall be entitled to any of the rights or privileges of a stockholder of the Corporation with respect to any shares which may be issuable upon any exercise pursuant to this Agreement, unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Grantee or such person. 7. Non-Transferability of Option. Except as otherwise provided herein, ----------------------------- an option and the rights and privileges conferred hereby may not be transferred, assigned pledged or hypothecated in any way, other than by will or the laws of descent and distribution, and an option shall be exercisable during the Grantee's lifetime only by the Grantee or his conservator. 8. Taxes and Withholding. All payments to Grantee or to his legal --------------------- representative shall be subject to any applicable tax, community property, or other statutes or regulations of the United States or of any state having jurisdiction thereof. The Grantee may be required to pay to the Corporation the amount of any withholding taxes which the Corporation is required to withhold with respect to a Stock option or its exercise. In the event that such payment is not made when due, the Corporation shall have the right to deduct, to the extent permitted by law, from any payment of any kind otherwise due to such person all or part of the amount required to be withheld. 9. Premature Disposition of Shares. If the Grantee or Grantee's estate ------------------------------- sells or otherwise disposes of any shares acquired upon exercise of this option within one year from the date of shares involved were acquired or two years from the date of this Agreement, the Grantee (or such person exercising this option) agrees that the Grantee or the Grantee's estate will deliver a written report to the Secretary of the Corporation within 30 days following the sale or other disposition, which report shall set forth the date of sale or other disposition of said shares and the net proceeds of such sale or disposition. 10. Notices. Each notice relating to this Agreement shall be in writing ------- and delivered in person or by registered mail to the Corporation at its office, 120 Hawley Lane, Trumbull, Connecticut, 06611 to the attention of the Chief Financial Officer. All notices to the Grantee or other person or persons then entitled to exercise any right pursuant to this Agreement shall be delivered to the Grantee or such other person or persons at the Grantee's address specified below or at such other address as the Grantee or such other person may specify in writing to the Corporation by a notice delivered in accordance with this paragraph. 11. Restriction on Shares. The Corporation's obligation to issue or --------------------- deliver any certificate for shares of Stock under this option, and the transferability of shares acquired by the exercise of this option, shall be subject to all of the following conditions: (a) Any registration or other qualification of such shares under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Corporation shall in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (b) The obtaining of any other consent, approval, or permit from any state or federal governmental agency which the Corporation shall, in its absolute discretion upon the advice of counsel, determine to be necessary or advisable. (c) Each stock certificate issued pursuant to exercise of this option shall bear the following legend: "The transferability of this certificate and the shares of Stock represented hereby are subject to restrictions, terms and conditions contained in the Amended and Restated Physicians Health Services, Inc. 1995 Stock Option Plan, and an Agreement between the registered owner of such Stock and Physicians Health Services, Inc. A copy of the Plan and Agreement are on file in the office of the Secretary of Physicians Health Services, Inc." 12. Miscellaneous. This Agreement comprises the whole agreement between ------------- the parties hereto. It may not be modified or terminated orally, and it shall be deemed to be a Connecticut contract, subject to construction and enforcement in accordance with the laws of Connecticut. This Agreement shall inure to the benefit of and be binding upon each successor of the Corporation and to the extent specifically provided herein and in the Plan, inure to the benefit of and shall be binding upon the Grantee's heirs, legal representatives, and successors. IN WITNESS WHEREOF, this Agreement is executed by the Grantee and by the Corporation through its duly authorized officer or officers as of the day and year first above written. PHYSICIANS HEALTH SERVICES, INC. By ------------------------------- --------------------------------- (Grantee) --------------------------------- (Address) --------------------------------- (Social Security No.) LETTER OF STOCK OPTION EXERCISE Dated______ Physicians Health Services, Inc. 120 Hawley Lane Trumbull, CT 06611 Attention: Chief Financial Officer Gentlemen: I wish to purchase the following shares of Common Stock pursuant to the option granted to me on _________________________ under the Physicians Health Services, Inc. 1995 Stock Option Plan: Incentive Stock Option Shares: __________ Non Qualified Stock Option Shares: __________ Total Shares being exercised: __________ The purchase price for these shares is $_____ per share. My check payable to Physicians Health Services, Inc. in the amounts of $_______ in payment of the purchase price is enclosed.* Please issue the stock certificate(s) for these shares in my name as follows: **Name Address Social Security Number Sincerely yours, Signature Office Telephone Home Telephone * If stock is used in payment, please contact ________________'s office at (203)_________ ** If you wish to have the shares issued in your name and that of another person jointly, we suggest that the following form be used: "(Your name) and (name of other person), as joint tenants with right of survivorship." LETTER OF STOCK OPTION GRANT ______________ 1994 (Grantee) Dear _________ I am pleased to confirm that you have been awarded an Incentive Stock Option under the Physicians Health Services, Inc. 1995 Stock Option Plan. Enclosed are two copies of an Incentive Stock Option Agreement, which have been signed by Physicians Health Services, Inc. Please sign both copies and return one to me in the enclosed envelope. Also enclosed are copies of the Physicians Health Services, Inc. 1995 Stock Option Plan and the form to be used based upon exercise of any part of the option. The option covers shares of Class A Common Stock of Physicians Health Services, Inc. and becomes exercisable in installments over the next _____ years, provided you remain in the employment of Physicians Health Services, Inc. In addition, the shares covered by this option have not been registered under state or federal securities laws. Accordingly, under these laws, until such time as an effective registration statement is filed or an exemption becomes available with respect to these shares, there are prohibitions upon the exercise of this option and the later sale of any shares purchased under this option. These prohibitions stem from the securities laws and will be discussed with you at a later date. Meanwhile, we wish to forward the copies of the option agreement to you at this time. Sincerely, Regina M. Campbell Senior Vice President of Legal Affairs and Human Resources EXHIBIT B --------- PHYSICIANS HEALTH SERVICES, INC. 1995 NON-QUALIFIED STOCK OPTION AGREEMENT Agreement made this ______ day of ___________, _____ between Physicians Health Services, Inc., a corporation organized under the laws of the State of Delaware (hereinafter called the "Corporation" and _____________ (herein after called the "Grantee"). WHEREAS, the Corporation desires to provide the Grantee with an opportunity to acquire or increase his proprietary interest in the business of the Corporation and, through stock ownership, to possess an increased personal interest in its continued success and progress; NOW, THEREFORE, in consideration of the premises, the mutual covenants hereinafter set forth, and other good and valuable consideration, the Corporation and the Grantee agree as follows: 1. Award of Option. The Corporation hereby awards to the Grantee, as a --------------- matter of separate inducement and agreement, and not in lieu of salary or any other compensation for services, an option or purchase an aggregate of _____ shares of the Corporation's Class A Common Stock pursuant to the Non-Qualified Stock Option provisions contained in Article III of the Plan, on the terms and conditions hereinafter set forth, at the purchase price of $17.00 per share (such shares, number of shares and purchase price being subject to adjustment as provided in Paragraph A of Article IV of the Plan). 2. Terms of the Plan. The Plan, a copy of which is attached hereto, is ----------------- incorporated herein by reference and is made part of this Agreement as if fully set forth herein. This Agreement is subject to, and the Corporation and the Grantee agree to be bound by, all of the terms and conditions of the Plan as the Plan exists at the time of this Agreement's execution. The Plan shall control in the event there is any express conflict between the Plan and the terms hereof, and on such matters that are not expressly covered in this Agreement. Subsequent amendments of the Plan shall not adversely affect the Grantee's rights under this Agreement. 3. Exercise of Option. The Stock Options granted pursuant to this ------------------ Agreement are exercisable in accordance with the vesting schedule approved by the Compensation Committee, as set forth below. Installments, if applicable, shall be cumulative, but each exercise must encompass at least one installment of 100 shares, whichever is less. In the event the Grantee's exercise includes a fractional share, the Corporation will not be required to issue a fractional share but will pay the Grantee in Cash the value of such fraction. All unexercised rights shall lapse and forever terminate after the expiration of ten years from the date of this Agreement. 4. Termination of Employment. If the Grantee's employment is terminated ------------------------- (other than by Disability or death), the terms of any then outstanding Non-Qualified Stock Option held by the Grantee shall extend for a period ending on the earlier of the date on which such option would otherwise expire or three months after such termination of employment, and such option shall be exercisable to the extent it was exercisable as of the Grantee's last date of employment. If the Grantee's employment with the Corporation is terminated by reason of Disability, the term of any then outstanding Non-Qualified Stock Option held by the Grantee shall extend for a period ending on the earlier of the date on which such option would otherwise expire or twelve months after such termination of employment, and such option shall be exercisable to the extent it was exercisable as of the Grantee's last date of employment. If a Grantee's employment is terminated by reason of death, the representative of his estate or beneficiaries thereof to whom the option has been transferred shall have the right, during the period ending on the earlier of the date on which such option would otherwise expire or three months after such termination of employment, to exercise any then outstanding Non-Qualified Stock Options in whole or in part. If a Grantee dies without having fully exercised any then outstanding Non-Qualified Stock Options, the representative of his estate or beneficiaries thereof to whom the option has been transferred shall have the right to exercise such options in whole or in part. The number of shares of Stock in respect of which a Non-Qualified Stock Option may be exercised after a Grantee's death shall be the number of shares of Stock in respect of which such option could be exercised as of the Grantee's last date of employment. 5. Manner of Exercise. Full payment for the shares of Stock purchased ------------------ shall be made at the time of any exercise of this Agreement. The purchase price shall be payable to the Corporation either (i) in cash or by check, bank draft, or postal or express money order, (ii) by promissory note, (iii) through the delivery of shares of Class A or Class B Common Stock then owned by the Grantee having a Fair Market Value on the date of exercise equal to the full purchase price, provided that the shares so delivered have been owned by the Grantee for at least six (6) months, or (iv) by a combination of (i), (ii) or (iii) above; provided, however, that no fractional share shall be accepted by the Corporation in partial payment of the purchase price of any Stock but the value of any such fractional interest shall be paid to the Corporation in the manner specified in (i) above. Subject to the terms and conditions hereof, the options shall be exercisable by notice to the Corporation on the form provided by the Corporation, a copy of which is attached hereto. In the event that the options are being exercised by any person or persons other than the Grantee, the notice shall be accompanied by proof, satisfactory to the Corporation, of the right of such person or persons to exercise any right under this Agreement. 6. Rights of Grantee. The grant of an option in any year shall give such ----------------- Grantee neither any right to similar grants in future years nor any right to be retained in the employ of the Corporation or any of its subsidiaries, such employment being terminable to the same extent as if the Plan and this Agreement were not in effect. Neither the Grantee nor any other person legally entitled to exercise any rights under this Agreement shall be entitled to any of the rights or privileges of a stockholder of the Corporation with respect to any shares which may be issuable upon any exercise pursuant to this Agreement, unless and until a certificate or certificates representing such shares shall have been actually issued and delivered to the Grantee or such person. 7. Non-Transferability of Option. Except as otherwise provided herein, ----------------------------- an option and the rights and privileges conferred hereby may not be transferred, assigned, pledged or hypothecated in any way, other than by will or the laws of descent and distribution, and an option shall be exercisable during the Grantee's lifetime only by the Grantee or his conservator. 8. Taxes and Withholding. All payments to a Grantee or to his legal --------------------- representative shall be subject to any applicable tax, community property, or other statutes or regulations of the United States or of any state having jurisdiction thereof. The Grantee may be required to pay to the Corporation the amount of any withholding taxes which the Corporation is required to withhold with respect to a Stock Option or its exercise. In the event that such payment is not made when due, the Corporation shall have the right to deduct, to the extent permitted by law, from any payment of any kind otherwise due to such person all or part of the amount required to be withheld. 9. Notices. Each notice relating to this Agreement shall be in writing ------- and delivered in person or by registered mail to the Corporation at its office, 120 Hawley Lane, Trumbull, Connecticut 06611, to the attention of the Chief Financial Officer. All notices to the Grantee or other person or persons then entitled to exercise any right pursuant to this Agreement shall be delivered to the Grantee or such other person or persons at the Grantee's address specified below or at such other address as the Grantee or such other person may specify in writing to the Corporation by a notice delivered in accordance with this paragraph. 10. Restriction on Shares. The Corporation's obligation to issue or ---------------------- deliver any certificate or certificates for shares of Stock under this option, and the transferability of shares acquired by the exercise of this option, shall be subject to all of the following conditions: (a) Any registration or other qualification of such shares under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Corporation shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (b) The obtaining of any other consent, approval, or permit from any state or federal governmental agency which the Corporation shall, in its absolute discretion upon the advice of counsel, determine to be necessary to advisable. (c) Each stock certificate issued pursuant to exercise of this option shall bear the following legend: "The transferability of this certificate and the share of stock represented hereby are subject to restrictions, terms and conditions contained in the Amended and Restated Physicians Health Services, Inc. 1995 Stock Option Plan, and an Agreement between the registered owner of such Stock and Physicians Health Services, Inc. A copy of the Plan and Agreement are on file in the office of the Secretary of Physicians Health Services, Inc." 11. Miscellaneous. This Agreement comprises the whole agreement between ------------- the parties hereto. It may not be modified or terminated orally, and it shall be deemed to be a Connecticut contract, subject to construction and enforcement in accordance with the laws of Connecticut. This Agreement shall inure to the benefit of and be binding upon each successor of the Corporation and to the extent specifically provided herein and in the Plan inure to the benefit of and shall be binding upon the Grantee's heirs, legal representatives, and successors. IN WITNESS WHEREOF, this Agreement is executed by the Grantee and by the Corporation through its duly authorized officer or officers as of the day and year first above written. PHYSICIANS HEALTH SERVICES, INC. By ------------------------------- --------------------------------- (Grantee) --------------------------------- (Address) --------------------------------- (Social Security No.) LETTER OF STOCK OPTION EXERCISE Dated_______________ Physicians Health Services, Inc. 120 Hawley Lane Trumbull, CT 06611 Attention: Chief Financial Officer Gentlemen: I wish to purchase the following shares of Common Stock pursuant to the option granted to me on ________________, _____ under the Physicians Health Services, Inc. 1995 Stock Option Plan: Incentive Stock Option shares: ___________ Non-Qualified Stock Option shares: ___________ Total shares being exercised: ___________ The purchase price for these shares is $______ per share. My check payable to Physicians Health Services, Inc. in the amount of $______ in payment of the purchase price is enclosed.* Please issue the stock certificate(s) for these shares in my name as follows: **Name Address Social Security Number Sincerely yours, Signature * If stock is issued in payment, please contact _______'s office at (203) ________. ** If you wish to have the shares issued in your name and that of another person jointly, we suggest that the following form be used: "(Your name) and (name of other person), as joint tenants with the right of survivorship." LETTER OF STOCK OPTION GRANT ________________ 1995 (Grantee) Dear___________ I am pleased to confirm that you have been awarded a Non-Qualified Stock Option under the Physicians Health Services, Inc. 1995 Stock Option Plan. Enclosed are two copies of a Non-Qualified Stock Option Plan Agreement, which have been signed by Physicians Health Services, Inc. Please sign both copies and return one to me in the enclosed envelope. Also enclosed are copies of the Physicians Health Services, Inc. 1995 Stock Option Plan and the form to be used upon exercise of any part of the option. The option covers shares of Class A Common Stock of Physicians Health Services, Inc. and becomes exercisable in installments over the next ______ years, provided you remain in the employment of Physicians Health Services, Inc. In addition, the shares covered by this option have not been registered under state or federal securities laws. Accordingly, under these laws, until such time as an effective registration statement is filed or an exemption becomes available with respect to these shares, there are prohibitions upon the exercise of this option and the later sale of any shares purchased under this option. These prohibitions stem from the securities laws and will be discussed with you at a later date. Meanwhile, we wish to forward the copies of the option agreement to you at this time. Sincerely, Physicians Health Services, Inc. By: ___________ Its EX-10.(L) 3 AGREEMENT OF SALE Exhibit 10 (1) Agreement of Sale AGREEMENT OF SALE (the "Agreement") made as of this 12th day of March, 1996 by and between, RICHARDSON-VICKS REAL ESTATE, INC. ("Seller"), an Ohio corporation having a place of business at 2 Procter & Gamble Plaza, Cincinnati, Ohio 45201-3314, and PHYSICIAN'S HEALTH SERVICES, INC. ("Purchaser"), a Delaware corporation, having a place of business at 120 Hawley Lane, Trumbull, Connecticut 06611-5343. Witnesseth: 1. DESCRIPTION OF PROPERTY. Subject to the terms and conditions hereof, and for the Purchase Price set forth in Schedule C (the "Purchase Price") hereto, Purchaser agrees to purchase, and Seller agrees to sell, the following (collectively, the "Property"): A. The Land and Improvements. Fee simple marketable title in and to certain land located in the State of Connecticut, County of Fairfield and Town of Shelton, commonly known as One Far Mill Crossing, consisting of 74.864 acres together with a second adjoining parcel consisting of 0.9376 acres, and being more particularly described on Schedule A attached hereto (the "Land"), together with all of the buildings and other improvements located on the Land, including, but not limited to three (3) interconnected buildings (collectively, the "Improvements"), subject only to the encumbrances, liens or exceptions to title set forth on Schedule B attached hereto (the "Permitted Encumbrances"); B. Furnishings and Equipment. All mechanical systems, fixtures and equipment, electrical systems, fixtures and equipment, plumbing fixtures, systems and equipment, heating fixtures, systems and equipment and air conditioning fixtures, systems and equipment and all furnishings currently installed in, belonging to or constructed as components of, the Improvements, including, but not limited to, all office furniture, window covers, cafeteria furniture and kitchen equipment, video and audio equipment and exercise equipment located in the fitness center (collectively, the "Furnishings and Equipment"), subject only to the Permitted Encumbrances; C. Tangible Personal Property. All tangible personal property located on the Land or Improvements and belonging to the Property and/or used in the normal operation and maintenance of the Land and Improvements, including that listed on Schedule E attached hereto (the "Personal Property"); D. Appurtenant Interests. All of the Seller's interest in and to the appurtenances to the Land and in and to all streets, alleys and other public ways adjacent thereto; and E. Other. All interest of the Seller in and to (i) any warranties covering the Personal Property and/or the Improvements to the extent assignable; (ii) all assignable service or maintenance contracts, held by Seller relating to the Property as described at Schedule F, providing Purchaser provides Seller with written notice of Purchaser's election to assume same prior to the Closing (as defined herein) (the "Service Contracts"); and (iii) all assignable licenses, permits, approvals and other intangible property rights relating to the ownership and operation of the Property (it being the agreement of the parties that the cost and expense of effecting said assignments shall be the sole responsibility of Purchaser. Purchaser acknowledges that any warranties, Service Contracts or licenses, permits, approvals and other intangible property rights shall not be deemed assignable in the event that Seller's future obligations thereunder do not terminate upon assignment). 2. CONDITION OF THE PROPERTY. Subject to Purchaser's due diligence investigation under paragraph 10 of this Agreement and the representations, warranties and covenants of Seller set forth in paragraph 19 of this Agreement (it being the agreement of the parties that said representations, warranties and covenants of Seller shall not survive the Closing), Seller shall convey full and exclusive possession of the entire Property, "as is," to Purchaser at the Closing, free of the claim of any tenants or others claiming possessory rights in the Property, in the same condition the Property is in on the date of this Agreement, -2- subject only to reasonable use, wear and tear, and natural deterioration between the date hereof and the date of Closing hereunder. 3. FORM OF DEED (the "Deed"); OTHER CLOSING DOCUMENTS. The deed of conveyance shall be a limited warranty deed in the usual Connecticut form sufficient to convey to Purchaser fee simple marketable title to the Property subject only to the Permitted Encumbrances. The Deed shall be in the form attached hereto as Schedule H and shall be duly executed and acknowledged by Seller and in proper form for recording and shall be delivered to Purchaser at Closing together with the following (hereafter, the "Closing Documents"): A. Conveyance Taxes. Seller's checks in payment of the State of Connecticut and City of Shelton conveyance taxes; B. Bill of Sale. A bill of sale, duly executed by Seller and witnessed with warranties of title, conveying to Purchaser good title to the Furnishings and Equipment and Personal Property, together with appropriate endorsements or such other instruments as may be necessary to transfer title to the Furnishings and Equipment and Personal Property to Purchaser; C. Assignment of Service Contracts. A transfer and assignment of Seller's interest in and to all assignable Service Contracts, set forth at Schedule F hereto, which Purchaser elects to assume and continue by written notice provided to Seller prior to Closing, together with the originals of each of said Service Contracts, provided said original Service Contracts are in Seller's possession, or in the event that an original Service Contract is not in Seller's possession, a complete photocopy of said Service Contract (it being the agreement of the parties that the cost and expense of effecting said assignment shall be the sole responsibility of Purchaser. Purchaser acknowledges that Service Contracts shall not be deemed assignable in the event that Seller's future obligations thereunder do not terminate upon assignment); D. Assignment of Warranties. A transfer and assignment of Seller's interest in and to all existing -3- and assignable warranties (if any) respecting the Improvements including, but not limited to, roofs, foundations, plumbing, heating, air conditioning, and electrical, and the Furnishings and Equipment with the originals of each of said warranties, provided said original warranties are in seller's possession, or in the event that an original warranty is not in Seller's possession, a complete photocopy of the warranty (it being the agreement of the parties that the cost and expense of effecting said assignment shall be the sole responsibility of Purchaser. Purchaser acknowledges that warranties shall not be deemed assignable in the event that Seller's future obligations thereunder do not terminate upon assignment); E. Assignment of Intangible Property. A transfer and assignment of Seller's assignable right, title and interest in and to any and all licenses, permits, approvals and other intangible property or rights relating to the Land and/or Property, with the originals of each of said licenses, permits, approvals and other intangible property or rights, provided said originals are in Seller's possession, or in the event that an original is not in Seller's possession, a complete photocopy of the original (it being the agreement of the parties that the cost and expense of effecting said assignment shall be the sole responsibility of Purchaser. Purchaser acknowledges that licenses, permits, approvals and other intangible property or rights relating to the Land and/or Property shall not be deemed assignable in the event that Seller's future obligations thereunder do not terminate upon assignment); F. Seller's Affidavit. An affidavit from Seller that, as of the Closing: (i) there are no outstanding unsatisfied judgments, tax liens or bankruptcies against the Seller; (ii) there has been no labor or materials furnished to the Property within the ninety (90) day period preceding the Closing other than: (a) the Demolition and Removal (as that term is hereinafter defined) of the Farmhouse (as that term is hereinafter defined) as provided in paragraph 10 this -4- Agreement and (b) labor or materials furnished to the Property by Purchaser or its affiliates or their respective officers, directors, employees, agents or contractors, except as otherwise expressly stated in writing by Seller to Purchaser prior to Closing. Seller shall deliver to Purchaser at Closing fully executed mechanic's lien waivers from all persons undertaking any work, or supplying any materials, to the Property on behalf of Seller, or its affiliates or their respective officers, directors, employees, agents or contractors, within the ninety (90) day period preceding the Closing; (iii) there are no leases, tenancies or occupancy agreements in effect respecting any portion of the Property; and (iv) there are no fixtures leased by Seller, or security interests in any fixtures owned by Seller on the Property; G. Seller's Incumbency Certificate. An incumbency certificate or certificates with respect to the officers of, or other authorized persons acting for, Seller executing any document or instrument, on behalf of the Seller, in connection with the transactions contemplated by this Agreement, including the Closing Documents; H. Nonforeign Taxpayer Certificate. A certification, signed by Seller under penalties of perjury, containing the following: (i) Seller's Taxpayer Identification Number; (ii) the business address of Seller; and (iii) a statement that Seller is not a foreign person within the meaning of Sections 1445 and 7701 of the Internal Revenue Code (i.e., that Seller is not a nonresident alien, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations)); In the event Seller fails to deliver such certification at the Closing or in the event Seller delivers such certification but Purchaser has actual knowledge that such certification is false or Purchaser receives notice that the certification is false from any agent of Purchaser or Seller, then Purchaser shall be entitled to withhold from the -5- Purchase Price payable hereunder a sum equal to ten percent (10%) of the total amount which otherwise would have been realized by Seller from the sale, which sum will be paid by Purchaser to the United States Treasury pursuant to the requirements of Section 1445 of the Internal Revenue Code and the regulations promulgated thereunder; I. Compliance with Hazardous Waste Establishment Transfer Act. Seller agrees to comply, at its sole expense, with all the provisions of the Connecticut Hazardous Waste Establishment Transfer Act, Connecticut General Statutes Sections 22a-134, et seq. (the "Transfer Act"). Seller shall, at its sole cost and expense, prepare and file a "Form I," "Form II" or "Form "III" pursuant to the Transfer Act in connection with this transaction. Seller shall be the Certifying Party, as defined under the Transfer Act with respect to all matters identified in the "Form II" or "Form "III," and shall be responsible for all fees payable under the Transfer Act in connection with the transfer contemplated hereunder. J. Underground Tank Reporting. Seller shall provide Purchaser, no later than fifteen (15) days prior to the Closing, with all information Seller is required to disclose to Purchaser under Regulations of Connecticut State Agencies 22a-449(d), with respect to all underground tanks located on the Property, including a certain 550-gallon diesel underground storage tank located on the Property; K. Seller's Good Standing Certificate. A recent good standing certificate for Seller issued by the Secretaries of State for the States of Ohio and Connecticut; and L. Other Documents Requested by Purchaser's Title Insurance Company. Any other document or instrument reasonably requested by Purchaser's title insurance company which is appropriate to consummate the transactions contemplated by this Agreement. -6- The delivery to and acceptance by Purchaser of the executed Deed of conveyance and all other Closing Documents shall constitute full performance by Seller of all of the terms, covenants, conditions and representations made herein that are on Seller's part to be performed, except as set forth herein. 4. DURATION OF OFFER. The offer to sell on the terms set forth in this Agreement is conditioned on Purchaser executing this Agreement and delivering said executed Agreement to Seller together with the payment called for in subparagraph (a) of Schedule C (the "Deposit") on or before March 14, 1996. If this Agreement is not executed and delivered to Seller together with the required payments by that date, this offer to sell shall terminate. 5. CLOSING AND AFFIDAVITS. The closing of title ("Closing") shall take place at the offices of Gregory and Adams, P.C., 190 Old Ridgefield Road, Wilton, Connecticut, on May 31, 1996 at 10:00 a.m. or at such other place or time as agreed to by the parties, at which time the Deed and all checks and other Closing Documents to be delivered by Seller shall be delivered upon receipt by Seller of the balance of the Purchase Price. Counsels for Seller and Purchaser hereby are respectively authorized to execute an agreement or agreements on behalf of the parties confirming or adjourning the date of Closing. 6. ADJUSTMENTS TO PURCHASE PRICE. Purchaser shall assume and pay all taxes, sewer assessments and other public improvement assessments affecting the Property and personal property taxes affecting the Furnishings and Equipment and Personal Property which become due and payable on or after the date of Closing. All real estate taxes, personal property taxes, tax assessments, sewer assessments, water rents, and other assessments and charges affecting the Property, Furnishings and Equipment and Personal Property shall be apportioned as of the date of Closing in accordance with local custom. Should any tax or charge, tax assessment or rate be undetermined on the date of Closing, the last determined tax or charge, assessment or rate shall be used for the purpose of the apportionment and a readjustment shall be made after the tax or charge, assessment or rate is determined. Purchaser shall pay Seller at the Closing for the value of any fuel oil, bottled gas or gasoline stored on the Property at the time of Closing. Seller shall be responsible for the payment of all expenses on account of services and supplies furnished to and for the benefit of the Property for the period from the date hereof through the day immediately preceding the date of the Closing, except as such expenses may be paid in advance or arrears for periods ending prior or subsequent to the date of the Closing, in which event the same shall be prorated on and as of the date of the Closing. The readjustment provisions contained in this Paragraph 6 shall survive the Closing. 7. UTILITIES. Utility charges shall not be prorated but, rather, instructions shall be given to the utility companies by Seller (with a duplicate copy of such instruction being provided concurrently to Purchaser) to read the meters on the date of the Closing and to issue separate statements thereafter. Deposits with utility companies, if any, will be returned to Seller after the Closing of Title. -7- 8. INSURANCE AND RISK OF LOSS. Throughout the period between the date of this Agreement and the Closing, Seller shall keep the buildings on the Property insured against loss by fire and other casualty to the extent they are presently insured as set forth in Schedule G. If during said period any of the buildings on the Property shall be destroyed or damaged by fire or other casualty resulting in more than $2,500,000.00 in damage (according to estimate of one appraiser appointed by agreement of Seller and Purchaser, or if Seller and Purchaser cannot agree, then by three appraisers, one appointed by Seller, one by Purchaser, and the third appointed by the first two appraisers so appointed), Seller shall so notify Purchaser, and Purchaser may elect by giving Seller written notice, within fifteen (15) business days of said notice, to either: (a) terminate this Agreement, in which event Seller shall return to Purchaser the Deposit and any interest accrued thereon together with a certified check or cashier's check to the order of Purchaser in payment of all reasonable expenses actually incurred by Purchaser (not to exceed $80,000.00) for: (i) the due diligence investigation provided for in subparagraphs A, B, D and E of paragraph 10 of this Agreement; and (ii) reasonable legal fees in connection with the transactions contemplated by this Agreement, and Purchaser shall return to Seller any and all documents and plans delivered to Purchaser by Seller, whereupon all rights and liabilities of the parties hereunder shall be at an end, with the exception of the parties' indemnification obligations as provided in paragraph 10 of this Agreement or (b) declare this Agreement to remain in full force and effect and at Closing, Seller shall assign, transfer and set over to Purchaser all of the right, title and interest of Seller in and to any insurance proceeds or claims that have been or that may thereafter be made for such damage, and the Purchase Price shall be reduced by the amount of any insurance deductible (which reduction to the Purchase Price shall reduce the cash payable by Purchaser at Closing). If such damage is reasonably estimated by the appraiser or appraisers to be less than $2,500,000.00, then this Agreement shall remain in full force and effect and Seller may elect, by written notice delivered to Purchaser not later than ten (10) business days following the occurrence of such damage, to: (i) repair such damage to its pre-existing condition prior to Closing; or (ii) reduce the Purchase Price by an amount sufficient to effect a repair of such damage to its pre-existing condition. 9. TITLE. At the Closing, Seller shall convey to Purchaser or its designee good and marketable fee simple title to the Property, subject only to the Permitted Encumbrances. It is mutually understood and agreed that no matter shall be construed to be an encumbrance or defect in title so long as such matter is not considered an encumbrance or defect under the Standards of Title of the Connecticut Bar Association as amended or ss. ss.47-33b through 47-33l of the Connecticut General Statutes, where applicable. Purchaser shall have a period of thirty (30) days from the execution of this Agreement to obtain a commitment for title insurance on the Property (the "Title Commitment"). Within ten (10) days thereafter, Purchaser's attorney shall notify Seller's attorney in writing of any exceptions to title which do not appear as Permitted Encumbrances on Schedule B. Seller shall proceed diligently and in good faith to cure any defects of title within sixty (60) days of receipt of such notice at Seller's sole cost and expense. Seller shall be required to undertake any necessary and reasonable measures and to bring any action or proceeding -8- necessary and reasonable and to incur any reasonable expense necessary to render the title to the Property marketable at the Closing. If Seller is unable to cure such defect within said sixty (60) day period, Seller shall so advise Purchaser and Purchaser shall have the right to either: (i) accept such title as Seller can convey, upon the payment of the balance of the Purchase Price; or (ii) terminate this Agreement. In the event Purchaser terminates this Agreement pursuant to this paragraph 9, Seller shall return the Deposit and any interest accrued thereon to Purchaser together with a certified check or cashier's check to the order of Purchaser in payment of all reasonable expenses actually incurred by Purchaser (not to exceed $80,000.00) for: (i) the due diligence investigation provided for in subparagraphs A, B, D and E of paragraph 10 of this Agreement; and (ii) reasonable legal fees in connection with the transactions contemplated by this Agreement, and Purchaser shall return to Seller any and all documents and plans delivered to Purchaser by Seller, whereupon all rights and liabilities of the parties hereunder shall be at an end, with the exception of the parties' indemnification obligations as provided in paragraph 10 of this Agreement. No later than five (5) business days prior to the Closing, Purchaser shall cause an update of the Title Commitment to be prepared. As a condition of Closing, the updated Title Commitment shall reflect no change since the date of the original Title Commitment in the state or quality of title to the Property, except such changes as have been requested by Purchaser, which shall thereafter be deemed a Permitted Encumbrance. If the updated Title Commitment should disclose that the Property is affected by an outstanding exception to title which is not a Permitted Encumbrance and is not disclosed in the original Title Commitment and is not accepted by Purchaser as an additional Permitted Encumbrance, Purchaser shall notify Seller in writing of the outstanding exception and Seller shall have sixty (60) days from the date that it receives notice from Purchaser of said exception to remove the objection to title or otherwise reasonably satisfy Purchaser with respect thereto and the Closing hereunder shall be adjourned until the date which is twenty (20) days following the earlier of the expiration of Seller's sixty (60) day cure period or the date that Seller satisfies Purchaser that the objection to title has been removed. If after any applicable adjournment Seller shall be unable to convey title to the Property in accordance with the provisions of this Agreement, then Purchaser shall have the right to either: (i) accept such title as Seller can convey, upon the payment of the balance of the Purchase Price; or (ii) terminate this Agreement. In the event Purchaser terminates this Agreement pursuant to this paragraph 9, Seller shall return the Deposit and any interest accrued thereon to Purchaser together with a certified check or cashier's check to the order of Purchaser in payment of all reasonable expenses actually incurred by Purchaser (not to exceed $80,000.00) for: (i) the due diligence investigation provided for in subparagraphs A, B, D and E of paragraph 10 of this Agreement; and (ii) reasonable legal fees in connection with the transactions contemplated by this Agreement, and Purchaser shall return to Seller any and all documents and plans delivered to Purchaser by Seller, whereupon all rights and liabilities of the parties hereunder shall be at an end, with the exception of the parties' indemnification obligations as provided in paragraph 10 of this Agreement. -9- Purchaser shall bear all costs of any title insurance insuring Purchaser's interest in the Property. 10. DUE DILIGENCE INVESTIGATION. Purchaser acknowledges and agrees that the Property is to be sold and conveyed to, and purchased and accepted by, Purchaser in its present condition, "as is" and with all faults. Purchaser further acknowledges and agrees that Purchaser is not relying on, and Seller has not made and will not make, any representation or warranty, express or implied, with respect to the Property or its condition (environmental and otherwise and its potential for further development), present state of repair, compliance with laws and regulations (environmental and otherwise) or its potential for further development, merchantability or suitability for any purpose except as provided in this Agreement, and that Seller shall have no further liability with respect to any of the foregoing. Between the date of execution of this Agreement by both parties and May 25, 1996 (the "Due Diligence Period") Purchaser shall have the opportunity to inspect the Property, observe its physical characteristics and existing condition, and conduct such investigations, tests and studies on and of the Property as Purchaser, in its sole discretion, deems necessary or appropriate to satisfy itself as to its condition, environmental and otherwise, and its potential for further development. Seller acknowledges that Purchaser's due diligence may, in Purchaser's sole discretion, include, but not be limited to: A. building structural, mechanical and other engineering inspections of the Improvements, B. environmental investigations, inspections and Phase II testing of the Land (including groundwater, streams and ponds located on the Land) and the Improvements, C. investigations and negotiations with the Town of Shelton relative to the feasibility of obtaining a reduction in the tax assessment for the Property, D. title search, E. surveying, including locating wetlands, F. zoning investigations as noted in Schedule D hereto, G. soils compression testing relative to the construction of future improvements, -10- H. traffic studies and investigations relative to the feasibility of increasing the traffic to the Property, and I. investigations relative to increasing water usage to and sanitary waste disposal from the Property in connection with a contemplated expansion of building area on the Property. At Purchaser's reasonable request during the Due Diligence Period, Seller shall use reasonable efforts to respond to requests to provide or make available to Purchaser documentation and information in Seller's (or Richardson-Vicks Inc.'s) or Cushman & Wakefield of Connecticut, Inc.'s, in its capacity as the manager of the Property, possession which pertains to Purchaser's due diligence investigations relating to the Property. Purchaser acknowledges that Seller has provided to Purchaser a copy of Seller's "ASTM Phase I Environmental Site Assessment" (the "Phase I") pertaining to the Property dated June, 1995 and "Phase II Environmental Site Assessment" (the "Phase II") pertaining to the Property, dated February, 1996, prepared by Geraghty & Miller. Purchaser agrees that it has not and will not rely on such reports to any degree, and will not seek to hold Seller or its consultant responsible for anything stated or not stated in such reports, and Seller does not represent or warrant that such reports are comprehensive or accurate. Notwithstanding the foregoing, at the request of Purchaser, Seller shall request Geraghty & Miller to issue to Purchaser a letter advising Purchaser that it may rely on the Phase I and the Phase II to the extent and subject to the conditions set forth in said letter, it being the agreement of the parties that Purchaser shall be solely responsible for any costs or expenses associated with the issuance of the letter. Upon reasonable oral or written notice, Purchaser, its employees, agents and contractors, may, at their own risk and expense, enter the Property, from time to time, during the Due Diligence Period for purposes of conducting Purchaser's due diligence investigations and studies. Purchaser shall indemnify and hold Seller, its affiliates and all of their respective directors, officers, employees, contractors and agents harmless from any claims, damages, loss, judgments and expenses of any kind, including but not limited to reasonable attorneys' fees, for damage to the property or person (including death) of Seller, Purchaser, their respective affiliates, their respective directors, officers, employees, contractors, agents and any other third party whomsoever arising out of or in connection with Purchaser's or Purchaser's directors', officers', employees', agents' or contractors' entry onto the Property, provided, however, that Seller shall remain fully liable for and shall indemnify and hold Purchaser, its affiliates and all of their respective officers, directors, employees, agents or contractors harmless from and against, any and all liability, claims, loss and damage, including, but not limited to, reasonable attorney fees, arising out of any negligence or misconduct of Seller or its affiliates or their respective officers, directors, employees, agents or contractors. In the event such entry by Purchaser or its affiliates or -11- their respective directors, officers, employees, contractors or agents results in any property damage to the Property, including, but not limited to, lost opportunity and other damages relating to any delay in Seller's ability or Seller's inability to promptly market the Property and this Agreement fails to be consummated for any reason, Purchaser immediately shall restore the Property to its pre-existing condition reasonable wear and tear and damage due to casualty not caused by Purchaser's activities excepted (or to the extent reasonably practicable with respect to any invasive environmental testing) or reimburse Seller for the reasonable cost of repair of the damage so caused. Purchaser shall, at Purchaser's sole expense, keep and maintain a policy of comprehensive public liability insurance which shall include contractual liability coverage of the indemnification set forth in this paragraph 10. This insurance policy shall name Seller as an additional insured and afford protection in limits of not less than $2,000,000.00 for bodily injury or death in any one accident, and not less than $1,000,000.00 for property damage on an "occurrence" not "claims made" basis and shall expire no earlier than one (1} year from the date hereof. All insurance shall be effected under standard form policies, issued by insurers of recognized responsibility authorized to do business in the State of Connecticut and having A.M. Best's rating of "A" or better. Purchaser shall deliver a copy of the policy to Seller prior to the commencement of the inspections. Except as otherwise provided in this Agreement, any costs or expenses incurred by Purchaser in connection with the inspection of the Property shall be the sole responsibility of Purchaser. Any objection(s) Purchaser may have to the condition of the Property as a result of Purchaser's due diligence inspections, tests and studies (including without limitation objections as to any hazardous substances, hazardous waste, hazardous materials or other contamination in, at, on, under or related to the Property) shall be noticed to Seller by the expiration of the Due Diligence Period or thereafter shall be deemed waived for all purposes. The parties hereby agree that Seller, in its sole discretion, may elect not to remedy or resolve the objection. Seller shall provide Purchaser with written notice of its election within ten (10) days of receipt from Purchaser of notice of objection(s). In the event Seller elects to remedy the defect giving rise to the objection(s), Seller shall have sixty (60) days from the date that it notifies Purchaser of said election to remedy the defect or otherwise reasonably satisfy Purchaser with respect thereto and the Closing hereunder shall be adjourned until the date which is twenty (20) days following the earlier of the expiration of Seller's sixty (60) day cure period or the date that Seller satisfies Purchaser that the objection has been remedied. In the event Seller: (i) fails to deliver said notice within said ten (10) day period or (ii) elects not to remedy the objection(s) or (iii) fails to remedy or resolve the objection(s) to Purchaser's satisfaction, then Purchaser in its sole discretion, may terminate this Agreement. In the event Purchaser terminates this Agreement pursuant to this paragraph 10, Seller shall return the Deposit and any interest accrued thereon to Purchaser together with a certified check or cashier's check to the order of Purchaser in payment of all reasonable expenses actually incurred by Purchaser (not to exceed $80,000.00) for: (i) the -12- due diligence investigation provided for in subparagraphs A, B, D and E of this paragraph 10; and (ii) reasonable legal fees in connection with the transactions contemplated by this Agreement, and Purchaser shall return to Seller any and all documents and plans delivered to Purchaser by Seller, whereupon all rights and liabilities of the parties hereunder shall be at an end, with the exception of the parties' indemnification obligations as provided in this paragraph 10. Notwithstanding the provisions of this paragraph 10 to the contrary, in the event Purchaser's termination is not based upon the due diligence investigation provided for in subparagraphs A, B, D and E of this paragraph 10, Seller shall return the Deposit and any interest accrued thereon to Purchaser and Purchaser shall return to Seller any and all documents and plans delivered to Purchaser by Seller, whereupon all rights and liabilities of the parties hereunder shall be at an end, with the exception of the parties' indemnification obligations as provided in this paragraph 10. The provisions of this paragraph 10 will survive the closing as necessary to effectuate their purpose and will not merge in any deed or conveyance. As a condition precedent to Purchaser's obligation to close herein, Seller agrees that it shall demolish and remove the residential structure (formerly a farmhouse) (hereinafter the "Farmhouse") located on the Property and shall dispose of the Farmhouse structure and all items and debris located within and about the Farmhouse to the extent required by and in full compliance with all applicable laws, including, but not limited to all environmental laws (the "Demolition and Removals"). Any costs or expenses incurred by Seller in connection with the Demolition and Removal of the Farmhouse to the extent required by and in full compliance with all applicable laws, shall be the sole responsibility of Seller. Seller shall make reasonable efforts to complete the Demolition and Removal on or before May 4, 1996. Upon reasonable notice to Seller, Purchaser, at its risk, may be present at the Property during the Demolition and Removal and may conduct, at its sole cost and expense, such due diligence investigations with respect to the Demolition and Removal as reasonably may be conducted under the circumstances. In the event that the Demolition and Removal is not completed by Seller on or before May 4, 1996, Purchaser shall make its reasonable efforts to complete its due diligence with respect to the Demolition and Removal prior to May 25, 1996. If, despite its reasonable efforts, Purchaser does not complete its due diligence with respect to the Demolition and Removal prior to May 25, 1996, Purchaser may elect, upon written notice to Seller, to extend the Due Diligence Period with respect to the Demolition and Removal one (1) day for each day beyond May 4, 1996 that the Demolition and Removal was not completed by Seller. 11. DEFAULT. A. Default by Purchaser. If, through no fault of Seller, Purchaser defaults in its obligation to close title as required by this Agreement, then providing Seller is not in default of any of its obligations under this Agreement, Seller by written notice of default to Purchaser, may terminate this Agreement and immediately may demand the Deposit from the Trustee (as identified in Schedule C) and thereafter, as Seller's sole and exclusive remedy -13- therefor, may retain the Deposit and any interest accrued thereon as agreed upon Seller's liquidated damages. The parties recognize that Purchaser's default will cause substantial injury to Seller and agree that the amount represented by the Deposit and any interest accrued thereon shall be a fair and reasonable approximation of the damages Seller will suffer in the event of Purchaser's default. It is understood and agreed that upon Purchaser's default and Seller's retention of the Deposit and any interest accrued thereon, this Agreement will terminate and the parties will have no further liability or obligation hereunder except for: (i) Purchaser's obligation to return to Seller all documents and plans delivered to Purchaser by Seller; and (ii) the indemnification obligations of the parties as provided in paragraph 10 of this Agreement. Purchaser's and Seller's obligation to indemnify the Trustee and hold it harmless (as provided in Schedule C) shall survive any termination of this Agreement. Payment of said liquidated damages shall be Seller's sole remedy and it shall have no right against Purchaser for specific performance or monetary damages. B. Default by Seller. If, through no fault of Purchaser, Seller defaults in the performance of its obligations hereunder, then provided Purchaser is not in default of any of its obligations under this Agreement, Purchaser by written notice of default to Seller, may elect to terminate this Agreement and immediately may demand the return of the Deposit from the Trustee and any interest accrued thereon together with a certified check or cashier's check to order of Purchaser in payment of all reasonable expenses actually incurred by Purchaser for: (i) the due diligence investigations provided for in subparagraphs A, B. C, D, E, F, G, H and I of paragraph 10 of this Agreement; and (ii) reasonable legal fees in connection with the transactions contemplated by this Agreement. The parties recognize that Seller's default will cause substantial injury to Purchaser and agree that the amount represented by the interest accrued on the Deposit, and the liquidated damages as calculated in subparagraphs 11.B.(i) and (ii) above shall be a fair and reasonable approximation of the damages Purchaser will suffer in the event of Seller's default. It is understood and agreed upon that upon Seller's default and Purchaser's receipt of the Deposit together with any interest accrued thereon, and a certified check or cashier's check to the order of Purchaser in the amount of said liquidated damages due Purchaser, this Agreement will terminate and the parties will have no further liability or obligation hereunder except for: (i) Purchaser's obligation to return to Seller all documents and plans delivered to Purchaser by Seller; and (ii) the indemnification obligations of the parties as provided in paragraph 10 of this Agreement. Seller's and Purchaser's obligation to indemnify the Trustee and hold it harmless (as provided in Schedule C) shall survive any such termination of this Agreement. As an alternative to Purchaser's election to terminate this Agreement by reason of Seller's default, Purchaser shall have the right to: (i) specifically enforce this Agreement and Seller's obligations hereunder; and (ii) seek actual damages, including, but not limited to, reasonable legal fees incurred by Purchaser by reason of Seller's default (excluding expenses incurred by Purchaser for the due diligence investigations provided for in subparagraphs A, B, C, D, E, F, G, H and I of paragraph 10 of this Agreement and legal fees in connection with the transactions contemplated by this Agreement prior to Seller's default). -14- 12. ASSIGNMENT. Purchaser may not assign this Agreement or any right, title or interest therein, except to any affiliated or subsidiary entity, without Seller's prior written consent, which shall not be unreasonably delayed or withheld. Upon any effective assignment of Purchaser's rights hereunder, Purchaser and Purchaser's assignee shall become and be jointly and severally liable hereunder. 13. POSSESSION. Simultaneously with the Closing, Seller shall deliver exclusive possession of the Property to Purchaser. 14. BROKERS. The parties hereto recognize Rostenberg-Doern Company, Inc. and Cushman & Wakefield of Connecticut, Inc. as the sole brokers who negotiated the sale of the Property, and Seller shall pay said brokers a commission in accordance with a listing agreement between Seller and Rostenberg-Doern Company, Inc. The parties enter into this Agreement in reliance on the representation of each party, hereby made, that no other broker or agent brought the Property to Purchaser's attention or was in any way a procuring cause of this sale and purchase. In the event any other broker shall make a claim against either of the parties (the "Claimant") based upon dealing with the other party, such other party shall indemnify the Claimant from and hold it harmless against any and all damages or reasonable attorney's fees the Claimant may pay as a result of such claim (it being the agreement of the parties that the Claimant will not settle or compromise any claim without the other party's prior written consent). Seller represents that no broker other than Rostenberg-Doern has a listing agreement for the Property. The representations contained in this Paragraph 14 shall survive the Closing. 15. ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits referred to in the body of this Agreement and attached hereto) constitutes the entire agreement between the parties and they hereby acknowledge that neither relies on any express or implied representations, warranties, conditions or understandings except those expressly set forth herein. 16. LANGUAGE. Wherever herein used, the singular number shall include the plural, the plural the singuIar, and the use of any gender shall be applicable to all genders. 17. BINDING AGREEMENT. This Agreement shall be binding upon, and inure to the benefit of the successors and permitted assigns of Seller and Purchaser. 18. NOTICES. All notices, elections or other communications to be given hereunder shall be deemed to have been validly given only if in writing, sent by the parties or their respective counsel, and either (a) mailed, postage prepaid, by registered or certified mail, return receipt requested, or (b) delivered in person or by overnight mail, or (c) forwarded by facsimile transmission, to the address of the receiving party set forth below: -15- If to Seller: Richardson-Vicks Real Estate, Inc. 2 Procter & Gamble Plaza Cincinnati, Ohio 45202-3314 Attention: E.E. Curry, Manager, Real Estate Department If to Purchaser: Physician's Health Services, Inc. 120 Hawley Lane Trumbull, Connecticut 06611-5343 Attention: Regina M. Campbell, Esq. A copy of all such notices, elections or other communications shall be similarly and simultaneously sent to the attorneys for the parties addressed as follows: if for Seller, to J. Casey Healy, Esq., Gregory and Adams, P.C., 190 Old Ridgefield Road, Wilton, Connecticut 06897; if for Purchasers, to Michael J. Hinton, Esq., Cummings & Lockwood, 4 Stamford Plaza, P.O. Box 120, Stamford, Connecticut 06904. Said notices, elections and other communications may be given by the attorneys for the party giving such notice. All such notices, elections or other communications shall be deemed given and received on the next business day after the date of such mailing or on the day of the facsimile tramsmission server or delivery in person. The parties shall retain all proofs of delivery furnished by the messenger, overnight mail delivery service or facsimile transmission server. 19. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER. Seller hereby warrants, represents and covenants with Purchaser that each of the following statements is true and correct as of the date of this Agreement and shall be true and correct on the date of the Closing: A. Seller shall have, as of the Closing, good and marketable fee simple title to the Property free and clear of all liens, charges, encumbrances, or restrictions, except for the Permitted Encumbrances. B. There are no leases, tenancies or other occupancy agreements in effect with respect to the Property and no individuals occupy the Property or any portion thereof. C. Seller and Richardson-Vicks Inc. have no actual knowledge of any current violations of zoning and/or building, inland-wetlands, environmental, zoning and planning laws, statutes, ordinances, orders, or -16- requirements affecting the Property, with the exception of the 550 gallon underground diesel fuel tank located on the Property (which tank shall be brought into full compliance with all applicable laws by Seller, at its sole cost and expense, prior to Closing), nor has Seller ever received any notice concerning such noncompliance, the terms of which have not been complied with, and no breach presently exists under any public or private covenant, condition, restriction, right-of-way or easement which affects the use and/or access to the Property or any portion thereof and Seller will promptly notify Purchaser of the receipt of any notice of any such violations received by Seller between the date hereof and the date set for the Closing hereunder. D. To the best of Seller's knowledge and belief, no litigation, investigation, condemnation, eminent domain or other proceeding or taking of any kind is pending or contemplated against the Property or any portion thereof and there is no litigation, eviction, proceeding or administrative proceeding pending or threatened against, or relating to the Property. E. Seller has not filed a voluntary petition in bankruptcy or has not been adjudicated a bankrupt or insolvent, or filed any petition or answer seeking any reorganization, liquidation, dissolution or similar relief under any federal bankruptcy, insolvency, or other law relating to relief for debtors, or sought or consented to or acquiesced in the appointment of any trustee, receiver, conservator or liquidator of all or any substantial part of its properties or its interests in the Property. No court of competent jurisdiction has entered an order, judgment, or decree approving a petition filed against Seller seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any federal bankruptcy act, and no other liquidator has been appointed for Seller or of all or any substantial part of its properties or its interest in the Property. Seller has not given notice to any governmental body of insolvency or pending -17- insolvency, or suspension or pending suspension of operations. F. To Seller's and Richardson-Vicks Inc.'s actual knowledge, neither Seller nor Richardson-Vicks Inc. has received any notice from or on behalf of any of its insurance carriers regarding any dangerous, illegal, or other condition on the Property requiring corrective action or indicating that the insurance rates for any part of the Property will be increased, or that such insurance carriers will not renew such existing policies, or that alterations to all or any part of the Property will be required as a condition to any such renewal or as a requirement of avoiding any such increase in premiums, with the exception that Richardson-Vicks Inc. may have been advised by its insurance carrier to install a sprinkler system in the Farmhouse. G. To the best of Seller's knowledge and belief, there are no intended public improvements which would result in any special assessments being levied against the Property or any portion thereof and no special assessments are currently levied against the Property or any portion thereof, except as may be disclosed on Schedule B hereto. H. Seller has not entered into any operation, maintenance, or service contract for the Property except those listed on Schedule F attached hereto. I. Seller has full power and authority to enter into and perform this Agreement in accordance with its terms and this Agreement has been duly authorized and executed by Seller and is enforceable against Seller in accordance with its terms, and the documents to be delivered by Seller to Purchaser at the Closing will be duly executed by Seller and enforceable against Seller in accordance with their terms and no consent, license, approval or authorization of, or filing, registration or declaration with, or exemption or other action by any governmental or public body, authority, bureau or agency is required in connection with the execution, delivery or performance by Seller -18- of this Agreement or the transactions herein contemplated or the Closing Documents to which Seller is a party. J. Seller is not a foreign person within the meaning of Sections 1445 and 7701 of the Internal Revenue Code (i.e., Seller is not a nonresident alien, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations)). K. There are no outstanding agreements to sell, options or rights of first refusal held by any third parties to purchase the Property, or any portion thereof or any interest therein, except as created under this Agreement. L. To the best of Seller's knowledge and belief, the Seller, Richardson-Merrell, Inc. and Richardson-Vicks Inc. have each obtained all necessary permits, licenses and governmental authorizations required for the ownership and current operation of the Property and all such permits, licenses and governmental authorizations remain in full force and effect. M. At the Closing, there will be no claim in favor of any person or entity which is or could become a lien on the Property or the Improvements arising out of the furnishing of labor or materials to the Property; and there will be no unpaid assessments against the Property, except for property taxes assessed but not due and payable at the time of Closing. N. Seller will cause all existing policies of insurance for fire and extended coverage risks, business interruption, rent loss and liability to be kept in full force and effect through and including the Closing of title hereunder 0. Seller, and to the actual knowledge of Seller, Richardson-Vicks Inc., have not used, consented to the use of, and has no knowledge of the use of any -19- portion of the Property in a manner not permitted by the Certificate of Occupancy related to the Property. P. The Property abuts on and has direct vehicular access to Far Mill Crossing which is a public road. Q. There are no leased fixtures on the Property. R. To Seller's actual knowledge, neither Seller nor Richardson-Vicks Inc. have violated any of the covenants, conditions, restrictions, rights-of-way or easements that are listed as Permitted Encumbrances and Seller has not violated any other covenants, conditions, restrictions, rights-of-way or easements which affect the Properly, IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. SELLER: RICHARDSON-VICKS REAL ESTATE INC, By: /s/ Eugene E. Curry ----------------------------------------- Eugene E. Curry Its Manager, Real Estate Department Tax Identification No: 31-1193927 PURCHASER: PHYSICIAN'S HEALTH SERVICES, INC. By: /s/ Robert L. Natt ----------------------------------------- Robert L. Natt Its Executive Vice President and Chief Operating Officer Tax Identification No: 06-1116976 -20- SCHEDULE A PROPERTY DESCRIPTION All those certain pieces, parcels and tracts of land (collectively the "Land") located in the City of Shelton, County of Fairfield and State of Connecticut more particularly described on Exhibit A-1 attached hereto and made a part hereof. Together with: 1. All easements, rights of way and passage and other rights appurtenant to the Property, including those set forth in the following agreements: A. Easement Agreement dated November 27, 1979 and recorded in Volume 410 of the Shelton Land Records at Page 9. B. Easement and Agreement to Sell dated November 27, 1979 and recorded in Volume 401 of the Shelton Land Records at Page 12. 2. The buildings and other improvements situated on the Land ("Improvements"). 3. All fixtures, systems, equipment, and machinery attached, affixed or appurtenant to the Land and Improvements (the "Fixtures"), except pipes, wires, poles, conduits and related equipment of public utilities. -21- SCHEDULE A PARCELS 1, 2 and 3: All those three (3) certain tracts or parcels of land, with all the buildings and improvements thereon erected, located in the City of Shelton, County of Fairfield and State of Connecticut, being a contiguous tract of land containing 74.8364 acres ("Parcels 1 and 2") and an adjoining tract of land containing 0.9376 acres ("Parcel 3"). Parcel 1 is more specifically described as follows: 1. Commencing at a point designated by a Connecticut Highway Department monument, as more particularly shown in Detail "A" of a certain map entitled "Map of Property Prepared for Richardson-Merrell Inc., Shelton, Connecticut, Scale 1" = 120', dated May 9, 1979, Prepared by Shaughnessy and Plain, Land Surveyors, Fairfield, Connecticut, recorded on the Shelton land records in Volume 29, Page 1650 (the "Map"), running in a northeasterly direction, bounded by land of the State of Connecticut as shown on map of "Conn. Dept. of Transportation Right of Way Map, Sheet No. 3 of 4, August, 1978, Scale 1 in. = 80 ft. and as shown on "Town of Shelton Map showing land acquired from Anna M. Clapp by the State of Conn., Relocation of Route No. 8, Revised to April 13, 1970, Town No. 126, Project No. 126-91, Serial No. 36, Sheet No. 1 of 2. Also Map Serial No. 61, Sheet No. 1 of 3, Revised to March 11, 1971" having the following course and distance: N41-19-56E, 42.59 feet; 2. Thence in a general easterly direction, bounded by land now or formerly of Lyman L. Wells and more particularly described in "Map of land to be conveyed to Lyman L. Wells, Shelton, Connecticut, Scale: 1 in. = 100 ft., December 13, 1976." Prepared by Joseph L. Alberti, Civil Engineer and Land Surveyor. Said map is on file in the Shelton Town Clerk's office in Volume No. 27, Page No. 1386, the following courses and distances: S62-40-42E, 90.29 feet; S66-29-50E, 42.86 feet; S54-27-22E, 41.37 feet; S59-38-12E, 90.68 feet; S58-37-36E, 155.54 feet; S63-11-32E, 143.02 feet. 2 3. Thence in a general northerly direction, bounded by land now or formerly of Lyman L. Wells, and more particularly described in the map referred to in paragraph 2 above, the following courses and distances; N53-26-14E, 14.80 feet; N35-47-36E, 69.80 feet; N23-34-44E, 121.32 feet; N30-53-03E, 46.13 feet; N36-41-36E, 83.88 feet; N19-17-59E, 230.68 feet; N84-02-55W, 19.57 feet; N14-48-57W, 86.67 feet; N27-27-25E, 352.90 feet; N21-09-21E, 52.89 feet; N36-52-55E, 128.66 feet. 4. Thence in a general easterly direction, bounded by land now or formerly of Lyman L. Wells and more particularly described in the map referred to in paragraph 2 above, by Old Mill Road, and by Lot No. 46 more particularly described in "Final Map of Proposed Lots at Laurel Wood Manor, owned by Nicholas Conti, Shelton, Conn., Scale 1 in. = 100 ft., October, 1958." Said map is on file in the Shelton Town Clerk's office, File No. 301, the following courses and distances: S50-54-21E, 341.40 feet; S49-30-48E, 141.27 feet; S54-38-37E, 74.50 feet; S79-53-28E, 59.16 feet; S68-42-54E, 39.62 feet; S21-05-21W, 136.60 feet; S70-46-52E, 196.57 feet; S78-10-54E, 61.11 feet. 5. Thence in a general southerly direction, bounded by lots 41, 42, 43, 44, 45, 46, 47, 48, 49, 50 and 51 more particularly described in Map of "Section Two, Soundcrest Estates, Shelton, Conn., owned and developed by Walter V. Brown, Inc., Taulman Road, Orange, Conn., Scale: 1 in. = 100 ft., Revised to September 5, 1961." Said Map is on file in the Shelton Town Clerk's office file No. 545, the following courses and distances: S35-49-22W, 28.59 feet; S16-23-30W, 146.30 feet; S6-07-09W, 248.33 feet; 3 S11-26-28W, 63.66 feet; S7-00-l1E, 259.90 feet; S8-01-30W, 66.10 feet; S22-50-13E, 122.19 feet; S21-00-49W, 98.18 feet; S31-27-22E, 95.64 feet; S25-41-00E, 48.81 feet; S27-31-06E, 151.17 feet; S32-34-20E, 63.54 feet; S41-30-13E, 74.72 feet; S31-05-14E, 120.74 feet; S2-53-40W, 385.44 feet; S62-06-16E 124.69 feet; S72-19-03E 207.20 feet; S73-27-SOE, 90.00 feet. 6. Thence in a general southwesterly direction bounded by lots 95 and 94 more particularly described in Map of "Final Plan, Soundcrest Estates, Section 4, owned and developed by Soundcrest Development Corp., Shelton, Conn., Scale; 1 in. = 100 ft., May 27, 1962." Said Map is on file in the Shelton Town Clerk's office, file No. 644, the following courses and distances: S34-27-0lW, 110.01 feet; S27-02-23W, 266.92 feet; S49-03-20W, 93.16 feet; S36-48-03W, 193.23 feet; S19-18-42W, 151.03 feet; S13-05-28W, 101.19 feet. 7. Thence in a general westerly direction bounded by land now or formerly of Mibern Corp. and by land now or formerly of Myrtle Perri Gutmann to an intersection with the center line of Far Mill River, the following course and distance: S73-48-08W, 230.90 feet; 8. Thence in a northerly, northwesterly, westerly and again northerly direction to an iron pipe, bounded by the centerline of Far Mill River and Beard Saw Mill Road, the following courses and distances: N18-34-34E, 251.88 feet; N15-59-58E, 165.25 feet; N00-51-02E, 169.46 feet; 4 N16-05-26W, 107.46 feet; N38-23-59W, 222.51 feet; N44-16-32W, 354.85 feet; N62-09-27W, 140.49 feet; S54-51-35W, 173.58 feet; S77-17-40W, 251.78 feet; S66-30-37W, 202.23 feet; S75-23-15W, 44.67 feet; N51-41-49W, 99.04 feet; N23-18-36W, 167.55 feet; N57-25-llW, 79.61 feet; N31-58-00W, 122.61 feet; N48-23-39E, 67.70 feet to the iron pipe. 9. Thence from the iron pipe in the general northerly direction bounded by Beard Saw Mill Road the following courses and distances: N3-35-0lE, 64.98 feet; N30-42-27W, 153.15 feet to a railroad spike in Twin Oak; N12-52-05W, 93.68 feet; N17-07-SlW, 70.19 feet; N19-03-55W, 322.31 feet; N20-02-33W, 142.58 feet; N34-09-37W, 201.33 feet; N38-12-26W, 179.93 feet. 10. Thence in a general northeasterly direction to the point or place of beginning at the Connecticut Highway Department monument as more particularly described in paragraph 1 above, and bounded by land of the State of Connecticut also as more particularly described in paragraph 1 above, the following course and distance: N26-40-59E, 221.51 feet. Excepting therefrom from said Parcel 1 the following described premises: All that certain parcel of land situated in the City of Shelton, County of Fairfield and State of Connecticut, consisting of .3730 acre, shown as "Parcel to be Conveyed to Lyman L. Wells" on a map entitled "Survey Map Showing Proposed Exchange of Property Between Lyman L. Wells and Richardson-Merrell Inc., Beard Saw Mill & Route 8- Shelton, CT" scale 1" = 40', dated March 7, 1980, Revised October 26, 1981, and prepared by J. & D. Kasper & Associates, which map has been filed in the Shelton Town Clerk's Office, in Volume 32, Page 1898, to which reference is made. 5 Parcel 2 Parcel 2 is more specifically described as follows: All that certain parcel of land situated in the City of Shelton, County of Fairfield and State of Connecticut, consisting of .3730 acre, shown as "Parcel to be Conveyed to Richardson-Merrell Inc." on a map entitled "Survey Map Showing Proposed Exchange of Property Between Lyman L. Wells and Richardson-Merrell Inc., Beard Saw Mill & Route 8 - Shelton, CT" scale 1" = 40', dated March 7, 1980, Revised October 26, 1981, and prepared by J. & D. Kasper & Associates, which map has been filed in the Shelton Town Clerk's Office, in Volume 32, Page 1898, to which reference is made. Parcel 3 Parcel 3 is more specifically described as follows: All that certain parcel of land situated in the City of Shelton, County of Fairfield and State of Connecticut, consisting of .9376 acres, shown as "Area 40,842 Sq. Ft. Or .9376 acres" on the Map, recorded in Volume 29, Page 1650 of the Shelton land records, being more particularly bounded and described as follows: Commencing at a point in the westerly streetline of Beard Saw Mill Road; thence southwesterly along land now of Matthew F. Smith and Elma K. Smith the following course and distance: S 61(degree) 49' 50" W, 155.87 feet; Thence, in a general northerly direction, bounded by the centerline of Far Mill River the following courses and distances: N 14(degree) 21' 24" W, 321.65 feet, N 34(degree) 08' 24" W. 86.29 feet; Thence, in a general northeasterly direction, bounded by land of the State of Connecticut and more particularly described in Map of "Conn. Dept. of Transportation Right of Way Map, Sheet No. 3 of 4, August, 1978, Scale: 1 in. = 80 ft.," and "Town of Shelton, Map Showing Land Acquired From Anna M. Clapp by the State of Conn., Relocation of Route No. 8, Revised to April 13, 1970, Town No. 126, Project No. 126-91, Serial No. 36, Sheet No. 1 of 2. Also Map Serial No. 61, Sheet No. 1 of 3, Revised to March 11, 1971", N. 26(degree) 40' 59" E, 55.22 feet to the streetline of Beard Saw Mill Road; Thence, in a general southerly direction, bounded by Beard Saw Mill Road to the point or place of beginning, the following courses and distances: S 38(degree) 12' 26" E, 167.33 feet, S 34(degree) 09' 37" E, 197.34 feet, S 22(degree) 29' 04" E, 69.27 feet. 6 Parcels 1 and 2 are conveyed Together With all rights of the Grantor in and to the easements recorded Vol. 401 at Page 9 and in Vol. 401 at Page 12 of the Shelton Land Records. EXHIBIT A-1 Legal Description -22- SCHEDULE B PERMITTED ENCUMBRANCES The Property is subject to such liens and encumbrances as are set forth below: 1. Any restrictions or limitations imposed or to be imposed by governmental authority, including, but not limited to, laws and regulations pertaining to environment, toxic hazards, zoning and planning and inland wetlands and watercourses, of the City of Shelton, State of Connecticut and United States of America and any agency thereof, provided none have been violated as of Closing. 2. Taxes of the City of Shelton which become due and payable after the date of Closing, and which taxes Purchaser assumes and agrees to pay as part of the consideration for the deed. 3. Sewer maintenance charges, water rents, fire district taxes, special assessments, other public improvement assessments and any unpaid installments thereof, which assessments or installments become due and payable after the date of Closing, and which assessments or installments Purchaser will assume and pay as part of the consideration for the Deed. 4. Any state of facts an accurate survey of the Property would show, which Purchaser has not objected to on or before May 25, 1996, provided the same does not render Seller's title thereto unmarketable. 5. Riparian rights of others in and to any brooks, streams or other bodies of water running through, bordering upon or situated on the Property. 6. Waterflow rights to the Bridgeport Hydraulic Company dated July 27, 1915 and recorded in Volume 60 of the Shelton Land Records at Page 103. 7. Denial of rights of access and other easements in favor of the State of Connecticut as set forth in certificates dated March 30, 1971 and recorded in Volume 245 of the Shelton Land Records at Page 20 and dated January 17, 1973 and recorded in Volume 260 at Page 632. -23- 8. Easement to Southern New England Telephone dated January 20, 1982 and recorded in Volume 458 of the Shelton Land Records at Page 19. 9. Waiver to Matthew F. Smith dated April 12, 1982 and recorded in Volume 468 of the Shelton Land Records at Page 159 (If requested by Purchaser, Seller shall make a reasonable effort to obtain a release from Matthew F. Smith of whatever rights he has to enter the Property). 10. Inland Wetlands Notices recorded in Volume 776 at Page 207 and in Volume 869 at Page 106 of the Shelton Land Records. 11. Notes on filed map numbered Volume 29 at Page 1650 in the Shelton City Clerk's office. 12. Easement to excavate referenced in deed from Anna M. Clapp to Richardson-Merrell Inc. dated November 27, 1979 and recorded in Volume 401 of the Shelton Land Records at Page 2. 13. Easement agreement dated November 27, 1979 and recorded in Volume 401 of the Shelton Land Records at Page-9. 14. Easement and Agreement to Sell dated November 27, 1979 and recorded in Volume 401 of the Shelton Land Records at Page 12. 15. Easement in favor of Iroquois Gas Transmission System, L.P. dated November 19, 1991 and recorded in Volume 1040 of the Shelton Land Records at Page 209. 16. Slope rights in favor of Lyman L. Wells as set forth in a warranty deed dated January 20, 1983 and recorded in Volume 494 of the Shelton Land Records at Page 240. 17. Notice of the Water Pollution Control Authority of the City of Shelton dated April 24, 1992 and recorded in Volume 1063 of the Shelton Land Records at Page 103. 18. Easement in favor of the Water Pollution Control Authority of the City of Shelton recorded on May 20, 1992 in Book 1069 of the Shelton Land Records at Page 197. -24- SCHEDULE C PURCHASE PRICE The Purchase Price is EIGHTEEN MILLION FIVE HUNDRED THOUSAND and 00/100 {$18,500,000.00) DOLLARS which Purchaser shall pay as follows: (a) Upon the signing of this Agreement, by wire transfer, certified check of Purchaser or bank check payable to Gregory and Adams, P.C., Trustee for Richardson-Vicks Real Estate, Inc., the sum of $ 1,000,000.00 (b) At the Closing, by wire transfer to a bank and account designated by Seller, subject to adjustments as provided herein, the sum of $17,500,000.00 -------------- TOTAL $18,500,000.00 ============== The Purchase Price shall be allocated as follows: $16,588,000.00 to the Land and Improvements; and $1,912,000.00 to the Furnishings and Equipment and Tangible Personal Property. The Seller shall be solely responsible for the payment of any sales tax to the State of Connecticut which may be due by reason of the sale of the Furnishings and Equipment and Personal Property. The proceeds of the $1,000,000.00 check ("Deposit") to the order of Gregory and Adams, P.C., Trustee for Richardson-Vicks Real Estate, Inc. (the "Trustee") shall be held by the Trustee in escrow and the Trustee shall invest the Deposit in one or more interest bearing accounts or instruments maintained at an F.D.I.C. insured bank or financial institution jointly selected by the parties at the time of delivery to the Trustee. The Trustee shall pay over the Deposit and all interest accrued thereon to Seller at the Closing or sooner in accordance with the terms of this Schedule C. In the event that the Trustee receives a letter ("Demand for Deposit") from either party dated not earlier than ten (10) days after the Closing date set forth in paragraph 5 certifying that the other party has defaulted under this Agreement by failing to close and further certifying that the party demanding payment of the Deposit is not in default under this Agreement and demanding payment of the Deposit, the Trustee promptly will notify the alleged defaulting party by certified mail of the Demand for Deposit and if the alleged defaulting party does not notify the Trustee of its objection to such payment within ten (10) days of receipt of the written notification, the Trustee shall pay over the Deposit and all interest accrued thereon to the party demanding same. Purchaser and Seller understand that upon being served with a Demand for Deposit or the alleged defaulting party's objection thereto, the Trustee shall not be required to substantiate any claim of -25- default or of objection alleged by Seller or Purchaser and except for the Deposit and any interest accrued thereon each party hereby waives any claim either may have against the Trustee as a result of the making or withholding of the payment referred to above and each agrees to indemnify the Trustee and hold it harmless from and against any and all claims or losses (including reasonable attorneys fees) relating thereto except claims or losses arising in instances where the Trustee: (i.) fails to pay a Demand for Deposit when the alleged defaulting party has not objected to such payment within the period allowed for said objection as set forth above; (ii.) pays a Demand for Deposit when the alleged defaulting party has objected to said payment within the period allowed for said objection as set forth above; (iii.) fails to deliver the Deposit and any interest accrued thereon to the Seller at the Closing or when otherwise required to do so under the terms of this Agreement; or (iv.) fails to refund the Deposit and any interest accrued thereon to Purchaser when required to do so under the terms of this Agreement. -26- SCHEDULE D ADDITIONAL CONDITIONS OF CLOSING This Agreement is conditioned upon: 1. The satisfaction of Purchaser that an additional 500 parking spaces can be constructed on the Property at a location and in such configuration which is acceptable to Purchaser in the exercise of its reasonable discretion. Purchaser undertakes to use its reasonable, good faith efforts to make this determination as soon as reasonably possible. In the event that the Purchaser is unable to satisfy itself on or before May 25, 1996 as to whether the additional 500 parking spaces can be constructed on the Property, Purchaser shall have the option to terminate this Agreement by giving written notice thereof to the Seller by 5:00 p.m Eastern Standard Time on May 25, 1996. In such event, the Deposit, together with all interest accrued thereon, shall be delivered to Purchaser by the Trustee whereupon all rights and liabilities of the parties hereunder shall be at an end except for Purchaser's obligation to return to Seller all documents and Plans delivered to Purchaser by Seller and the parties' indemnification obligations as provided in paragraph 10 of this Agreement. Failure of Purchaser to give such notice on or before the date and time specified hereunder shall constitute a waiver by Purchaser of the aforesaid condition. 2. The satisfaction of Purchaser that a minimum of 150,000 square feet of additional floor area can be constructed on the Property at a location and in such configuration which is acceptable to Purchaser in the exercise of its reasonable discretion. Purchaser undertakes to use its reasonable, good faith efforts to make this determination as soon as reasonably possible. In the event that the Purchaser is unable to satisfy itself on or before May 25, 1996 as to whether a minimum of 150,000 square feet of additional floor area can be constructed on the Property, Purchaser shall have the option to terminate this Agreement by giving written notice thereof to the Seller or Seller's attorneys by 5:00 p.m Eastern Standard Time on May 25, 1996. In such event, the Deposit, together with all interest accrued thereon, shall be delivered to Purchaser by the Trustee whereupon all rights and liabilities of the parties hereunder shall be at an end except for Purchaser's obligation to return to Seller all documents and Plans delivered to Purchaser by Seller and the parties' indemnification -27- obligations as provided in paragraph 10 of this Agreement. Failure of Purchaser to give such notice on or before the date and time specified hereunder shall constitute a waiver by Purchaser of the aforesaid condition. 3. The satisfaction of Purchaser that the terms of Permitted Encumbrances numbered 1, 11, 17 and/or 18 as set forth in Schedule B of this Agreement do not prevent Purchaser from constructing an additional 500 parking spaces and a minimum of 150,000 square feet of additional floor area on the Property at a location and in such configuration which is acceptable to Purchaser in the exercise of its reasonable discretion. Purchaser undertakes to use its reasonable, good faith efforts to make this determination as soon as reasonably possible. In the event that the Purchaser is unable to satisfy itself on or before May 25, 1996 as to whether the terms of Permitted Encumbrances numbered 1, 11, 17 and/or 18 prevent Seller from constructing an additional 500 parking spaces and a minimum of 150,000 square feet of additional floor area on the Property, Purchaser shall have the option to terminate this Agreement by giving written notice thereof to Seller or Seller's attorneys by 5:00 p.m Eastern Standard Time on May 25, 1996. In such event, the Deposit, together with all interest accrued thereon, shall be delivered to Purchaser by the Trustee whereupon all rights and liabilities of the parties hereunder shall be at an end except for Purchaser's obligation to return to Seller all documents and Plans delivered to Purchaser by Seller and the parties' indemnification obligations as provided in paragraph 10 of this Agreement. Failure of Purchaser to give such notice on or before the date and time specified hereunder shall constitute a waiver by Purchaser of the aforesaid condition. -28- SCHEDULE E PERSONAL PROPERTY Seller promptly shall determine whether it or its affiliated entities have a listing of the Personal Property. If such a listing can be located, Seller promptly shall provide it to Purchaser, provided, however, Seller shall not warrant the accuracy or completeness of said listing. -29- SCHEDULE F SERVICE CONTRACTS 1. Management contract with Cushman & Wakefield of Connecticut, Inc., dated December 1, 1992. -30- SCHEDULE G INSURANCE Seller maintains an insurance policy insuring certain named perils (fire, lightning, removal, wind, hail, leaking from fire protection equipment, explosion (except for boilers or rotating equipment), smoke, aircraft or vehicles, some shockwave, civil commotion, vandalism, molten material and civil or military action with respect to the Property, which provides loss coverage in an amount equal to the smallest of: (i) limit of specified liability ($51,000,000.00); (ii) actual cash value at the time of loss; or (iii) reduction in the fair market value as a result of the loss or damage. -31- SCHEDULE H FORM OF LIMITED WARRANTY DEED -32- Limited Warranty Deed To all People to Whom these Presents shall Come, Greeting: Know Ye, That RICHARDSON-VICKS REAL ESTATE, INC., a Delaware corporation, having a place of business at 2 Proctor & Gamble Plaza, Cincinnati, Ohio ("Grantor") for the consideration of Ten Dollars ($10.00) and other good and valuable consideration received to its full satisfaction of PHYSICIANS HEALTH SERVICES, INC., a___________________ corporation, having an office at 120 Hawley Lane, Trumbull, Connecticut 06611-5343 ("Grantee") Does give, grant, bargain, sell and confirm, unto the said Grantee, its successors and assigns forever, ALL THAT CERTAIN piece, parcel or tract of land situated in the City of Shelton, County of Fairfield and State of Connecticut described on Schedule A attached hereto and incorporated herein. SAID PREMISES being conveyed subject only to the matters set forth on Schedule B attached hereto and incorporated herein. To have and to hold the above granted and bargained premises, with the privileges and appurtenances thereof, unto it, the said Grantee, its successors and assigns forever, to its and their own proper use and behoof. And also, it, the said Grantor, does, for itself and its successors and assigns, executors and administrators, covenant with the said Grantee, its successors and assigns, that, at and until the ensealing of these presents, Grantee is well seized of the premises as a good indefeasible estate in fee simple and has good rights to bargain and sell the same in the manner and form as is above written. And furthermore, it, the said Grantor, does, by these presents, bind itself and its successors and assigns forever to Warrant and Defend the above granted and bargained premises to it, said Grantee, its successors and assigns against all claims and demands of any person SCHEDULE A PARCELS 1,2 and 3: All those three (3) certain tracts or parcels of land, with all the buildings and improvements thereon erected, located in the City of Shelton, County of Fairfield and State of Connecticut, being a contiguous tract of land containing 74.8364 acres ("Parcels 1 and 2") and an adjoining tract of land containing 0.9376 acres ("Parcel 3"). Parcel 1 is more specifically described as follows: 1. Commencing at a point designated by a Connecticut Highway Department monument, as more particularly shown in Detail "A" of a certain map entitled "Map of Property Prepared for Richardson-Merrell Inc., Shelton, Connecticut, Scale 1" = 120', dated May 9, 1979, Prepared by Shaughnessy and Plain, Land Surveyors, Fairfield, Connecticut, recorded on the Shelton land records in Volume 29, Page 1650 (the "Map"), running in a northeasterly direction, bounded by land of the State of Connecticut as shown on map of "Cone. Dept. of Transportation Right of Way Map, Sheet No. 3 of 4, August, 1978, Scale 1 in. = 80 ft. and as shown on "Town of Shelton Map showing land acquired from Anna M. Clapp by the State of Conn., Relocation of Route No. 8, Revised to April 13, 1970, Town No. 126, Project No. 126-91, Serial No. 36, Sheet No. 1 of 2. Also Map Serial No. 61, Sheet No. 1 of 3, Revised to March 11, 1971" having the following course and distance: N41-19-56E, 42.59 feet; 2. Thence in a general easterly direction, bounded by land now or formerly of Lyman L. Wells and more particularly described in "Map of land to be conveyed to Lyman L. Wells, Shelton, Connecticut, Scale: 1 in. = 100 ft., December 13, 1976." Prepared by Joseph L. Alberti, Civil Engineer and Land Surveyor. Said map is on file in the Shelton Town Clerk's office in Volume No. 27, Page No. 1386, the following courses and distances: S62-40-42E, 90.29 feet; S66-29-5OE, 42.86 feet; S54-27-22E, 41.37 feet; S59-38-12E, 90.68 feet; S58-37-36E, 155.54 feet; S63-11-32E, 143.02 feet. 2 3. Thence in a general northerly direction, bounded by land now or formerly of Lyman L. Wells, and more particularly described in the map referred to in paragraph 2 above, the following courses and distances; N53-26-14E, 14.80 feet; N35-47-36E, 69.80 feet; N23-34-44E, 121.32 feet; N30-53-03E, 46.13 feet; N36-41-36E, 83.88 feet; N19-17-59E, 230.68 feet; N84-02-55W, 19.57 feet; N14-48-57W, 86.67 feet; N27-27-25E, 352.90 feet; N21-09-21E, 52.89 feet; N36-52-SSE, 128.66 feet. 4. Thence in a general easterly direction, bounded by land now or formerly of Lyman L. Wells and more particularly described in the map referred to in paragraph 2 above, by Old Mill Road, and by Lot No. 46 more particularly described in "Final Map of Proposed Lots at Laurel Wood Manor, owned by Nicholas Conti, Shelton, Conn., Scale 1 in. = 100 ft., October, 1958." Said map is on file in the Shelton Town Clerk's office, File No. 301, the following courses and distances: S50-54-21E, 341.40 feet; S49-30-48E, 141.27 feet; S54-38-37E, 74.50 feet; S79-53-28E, 59.16 feet; S68-42-54E, 39.62 feet; S21-05-21W, 136.60 feet; S70-46-52E, 196.57 feet; S78-10-54E, 61.11 feet. 5. Thence in a general southerly direction, bounded by lots 41, 42, 43, 44, 45, 46, 47, 48, 49, 50 and 51 more particularly described in Map of "Section Two, Soundcrest Estates, Shelton, Conn., owned and developed by Walter V. Brown, Inc., Taulman Road, Orange, Conn., Scale: 1 in. = 100 ft., Revised to September 5, 1961." Said Map is on file in the Shelton Town Clerk's office file No. 545, the following courses and distances: S35-49-22W, 28.59 feet; S16-23-30W, 146.30 feet; S6-07-09W, 248.33 feet; 3 S11-26-28W, 63.66 feet; S7-00-llE, 259.90 feet; S8-01-30W, 66.10 feet; S22-50-13E, 122.19 feet; S21-00-49W, 98.18 feet; S31-27-22E, 95.64 feet; S25-41-00E, 48.81 feet; S27-31-06E, 151.17 feet; S32-34-20E, 63.54 feet; S41-30-13E, 74.72 feet; S31-05-14E, 120.74 feet; S2-53-40W, 385.44 feet; S62-06-16E 124.69 feet; S72-19-03E 207.20 feet; S73-27-SOE, 90.00 feet. 6. Thence in a general southwesterly direction bounded by lots 95 and 94 more particularly described in Map of "Final Plan, Soundcrest Estates, Section 4, owned and developed by Soundcrest Development Corp., Shelton, Conn., Scale; 1 in. = 100 ft., May 27, 1962." Said Map is on file in the Shelton Town Clerk's office, file No. 644, the following courses and distances: S34-27-0lW, 110.01 feet; S27-02-23W, 266.92 feet; S49-03-20W, 93.16 feet; S36-48-03W, 193.23 feet; S19-18-42W, 151.03 feet; S13-05-28W, 101.19 feet. 7. Thence in a general westerly direction bounded by land now or formerly of Mibern Corp. and by land now or formerly of Myrtle Perri Gutmann to an intersection with the center line of Far Mill River, the following course and distance: S73-48-08W, 230.90 feet; 8. Thence in a northerly, northwesterly, westerly and again northerly direction to an iron pipe, bounded by the centerline of Far Mill River and Beard Saw Mill Road, the following courses and distances: N18-34-34E, 251.88 feet; N15-59-58E, 165.25 feet; N00-51-02E, 169.46 feet; 4 N16-05-26W, 107.46 feet; N38-23-59W, 222.51 feet; N44-16-32W, 354.85 feet; N62-09-27W, 140.49 feet; S54-51-35W, 173.58 feet; S77-17-40W, 251.78 feet; S66-30-37W, 202.23 feet; S75-23-15W, 44.67 feet; N51-41-49W, 99.04 feet; N23-18-36W, 167.55 feet; N57-25-llW, 79.61 feet; N31-58-00W, 122.61 feet; N48-23-39E, 67.70 feet to the iron pipe. 9. Thence from the iron pipe in the general northerly direction bounded by Beard Saw Mill Road the following courses and distances: N3-35-0lE, 64.98 feet; N30-42-27W, 153.15 feet to a railroad spike in Twin Oak; N12-52-05W, 93.68 feet; N17-07-SlW, 70.19 feet; N19-03-l5W, 322.31 feet; N20-02-33W, 142.58 feet; N34-09-37W, 201.33 feet; N38-12-26W, 179.93 feet. 10. Thence in a general northeasterly direction to the point or place of beginning at the Connecticut Highway Department monument as more particularly described in paragraph 1 above, and bounded by land of the State of Connecticut also as more particularly described in paragraph 1 above, the following course and distance: N26-40-59E, 221.51 feet. Excepting therefrom from said Parcel 1 the following described premises: All that certain parcel of land situated in the City of Shelton, County of Fairfield and State of Connecticut, consisting of .3730 acre, shown as "Parcel to be Conveyed to Lyman L. Wells" on a map entitled "Survey Map Showing Proposed Exchange of Property Between Lyman L. Wells and Richardson-Merrell Inc., Beard Saw Mill & Route 8 -Shelton, CT" scale 1" = 40', dated March 7, 1980, Revised October 26, 1981, and prepared by J. & D. Kasper & Associates, which map has been filed in the Shelton Town Clerk's Office, in Volume 32, Page 1898, to which reference is made. 5 Parcel 2 Parcel 2 is more specifically described as follows: All that certain parcel of land situated in the City of Shelton, County of Fairfield and State of Connecticut, consisting of .3730 acre, shown as "Parcel to be Conveyed to Richardson-Merrell Inc." on a map entitled "Survey Map Showing Proposed Exchange of Property Between Lyman L. Wells and Richardson-Merrell Inc., Beard Saw Mill & Route 8 - Shelton, CT" scale 1" = 40', dated March 7, 1980, Revised October 26, 1981, and prepared by J. & D. Kasper & Associates, which map has been filed in the Shelton Town Clerk's Of lice, in Volume 32, Page 1898, to which reference is made. Parcel 3 Parcel 3 is more specifically described as follows: All that certain parcel of land situated in the City of Shelton, County of Fairfield and State of Connecticut, consiting of .9376 acres, shown as "Area 40,842 Sq. Ft. Or .9376 acres" on the Map, recorded in Volume 29, Page 1650 of the Shelton land records, being more particularly bounded and described as follows: Commencing at a point in the westerly streetline of Beard Saw Mill Road; thence southwesterly along land now of Matthew F. Smith and Elma K. Smith the following course and distance: S 61(degree) 49' 50" W. 155.87 feet; Thence, in a general northerly direction, bounded by the centerline of Far Mill River the following courses and distances: N 14(degree) 21' 24" W. 321.65 feet, N 34(degree) 08' 24" W. 86.29 feet; Thence, in a general northeasterly direction, bounded by land of the State of Connecticut and more particularly described in Map of "Conn. Dept. of Transportation Right of Way Map, Sheet No. 3 of 4, August, 1978, Scale: 1 in. = 80 ft.," and "Town of Shelton, Map Showing Land Acquired From Anna M. Clapp by the State of Conn., Relocation of Route No. 8, Revised to April 13, 1970, Town No. 126, Project No. 126-91, Serial No. 36, Sheet No. 1 of 2. Also Map Serial No. 61, Sheet No. 1 of 3, Revised to March 11, 1971 ", N. 26(degree) 40' 59" E, 55.22 feet to the streetline of Beard Saw Mill Road; Thence, in a general southerly direction, bounded by Beard Saw Mill Road to the point or place of beginning, the following courses and distances: S 38(degree) 12' 26" E, 167.33 feet, S 34(degree) 09' 37" E, 197.34 feet, S 22(degree) 29' 04" E, 69.27 feet. 6 Parcels 1 and 2 are conveyed Together With all rights of the Grantor in and to the easements recorded Vol. 401 at Page 9 and in Vol. 401 at Page 12 of the Shelton Land Records. EX-10.(M) 4 AMENDED & RESTATED MRKTG & SVCS AGRMT, DTD 10/01/96 Exhibit 10(m) AMENDED AND RESTATED MARKETING AND SERVICES AGREEMENT By and Among PHYSICIANS HEALTH SERVICES, INC. and its affiliate, PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC. and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA AMENDED AND RESTATED MARKETING AND SERVICES AGREEMENT Reference is hereby made to the Marketing and Services Agreement (the "Marketing and Services Agreement") made and entered into as of December 2, 1994 (the "Inception Date") by and among PHYSICIANS HEALTH SERVICES, INC., a corporation organized under the laws of the State of Delaware, and its affiliate, PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC., a corporation organized under the laws of the State of Connecticut as a health care center (collectively, "PHS," unless the context indicates reference to Physicians Health Services. Inc. or Physicians Health Services of Connecticut, Inc. as separate corporate entities), and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a mutual life insurance company organized under the laws of the State of New York ("Guardian"). This Amended and Restated Marketing and Services Agreement is dated as of October 1, 1996, and when executed by the parties hereto, shall supersede and replace the Marketing and Services Agreement and shall constitute a binding and enforceable amendment to the Marketing and Services Agreement in its entirety. THE MARKETING AND SERVICES AGREEMENT IS AMENDED AND RESTATED IT ITS ENTIRETY AS FOLLOWS: This Amended and Restated Marketing and Services Agreement (this "Agreements) is made and entered into as of this 1st day of October, 1996 by and among PHYSICIANS HEALTH SERVICES, INC., PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC. and GUARDIAN. RECITALS WHEREAS, PHS, which is licensed to operate a health care center in the State of Connecticut, maintains a network of health care providers in the State of Connecticut, and is authorized to offer for sale plans providing managed care health care benefits in such State; WHEREAS, Guardian desires to make different types of managed care health coverage plans available for sale by the Guardian Marketing Force (as defined herein) in the State of Connecticut; WHEREAS, PHS is willing to make its managed care health coverage plans available for sale by the Guardian Marketing Force; WHEREAS, Guardian is authorized to offer for sale preferred provider organization plans and indemnity insurance contracts (collectively, "Health Insurance Contracts," as defined herein) to individuals and groups in the State of Connecticut and to offer certain other insurance plans in such State, including group life, disability and dental insurance plans ("Ancillary Products," as defined herein); 2 WHEREAS. PHS desires to make Health Insurance Contracts and Ancillary Products available for sale by PHS in the State of Connecticut; WHEREAS, PHS and Guardian each desire to market "multi-choice" plans, which give employees the option of choosing benefits under pre-selected combinations of health coverage plans; and WHEREAS, PHS and Guardian desire to enter into a reinsurance transaction, pursuant to which Guardian will reinsure PHS with respect to risks under HMO Plans (as defined herein); NOW THEREFORE, in consideration of the mutual agreements contained herein, the sufficiency of which is hereby acknowledged, and in consideration of the performance by the parties of their obligations under this Agreement, the parties agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (definitions are applicable to both the singular and the plural form of each term defined herein): 3 "Ancillary Products" means the life insurance, short- and long-term disability insurance, accidental death and dismemberment insurance, and dental insurance products offered by Guardian as designated by the parties from time to time. "Business Day" means any day except Saturday or Sunday or any legal Federal or Connecticut holiday. "Change of Control" means the acquisition, in a single transaction or in a series of related transactions, by a person, an entity, or a group of persons or entities acting in concert of: (i) twenty-five percent (25 %) or more (a) of the voting common stock of Physicians Health Services, Inc. or Physicians Health Services of Connecticut, Inc. (excluding any acquisition of stock by a party currently owning twenty-five percent (25 %) or more of such common stock), or (b) fifty-one percent (51 %) or more of the aggregate value of the assets of Physicians Health Services, Inc. or Physicians Health Services of Connecticut, Inc.; or (ii) twenty-five percent (25 %) or more of any ownership interest in Guardian. "Continuation Plan" has the meaning given such term in the HMO Reinsurance Agreement "Contractholder" means an employer in the Service Area who or which executes an enrollment agreement with respect to any Managed Care Contract subject to this Agreement. 4 Contract Termination Date" means the effective date upon which the Agreement terminates pursuant to the applicable Section in Article X below. "Eligible Employee" means an employee who is eligible to enroll in the Contractholder's Plan. "Effective Date" shall have the meaning set forth in Section 10.1. "Guardian Marketing Force" means employees of Guardian, and any agents under contract with Guardian who or which are licensed in the State of Connecticut to sell individual and/or group health insurance contracts and who or which are acting on behalf of Guardian, but not including employees or agents of PHS, or independent brokers. "Health Insurance Contracts" means contracts for health insurance offered on a fee for service or indemnity basis by Guardian in the Service Area when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. Health Insurance Contracts include preferred provider plans using the PHS Network or PHCS' network of providers offered by Guardian in the Service Area. "HMO Plans" means commercial contracts for health care services provided by PHS to Contractholders in the Service Area utilizing the PHS Network to provide health care services 5 when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. HMO Plans include HMO Plans with a "point-of-service" feature. "HMO Reinsurance Agreement" means the form of Reinsurance Agreement described in Section 9.1 and attached hereto as Exhibit A-1. "Managed Care Contracts" means any HMO Plan or Health Insurance Contract purchased by a Contractholder pursuant to Article II below. "Marketing Materials" shall have the meaning set forth in Section 2.6. "Material Change" shall have the meaning set forth in Section 6.3. "PHCS" means Private Healthcare Systems, Incorporated, a Delaware corporation with its headquarters in Waltham, Massachusetts, that organizes managed care networks. "PHS Network" means the network of health care providers in the Service Area, including physicians and other individual practitioners and health care facilities or individual practice associations, who or which are under direct or indirect contract with PHS to provide services to Subscribers under a HMO Plan. 6 "Plans" means the HMO Plans, Health Insurance Contracts and Ancillary Products sold pursuant to this Agreement. "Quarter" means each of the four consecutive three-month periods in a calendar year. "Quarterly Accounting Report" shall have the meaning set forth in Section 8.1. "Service Area" means the State of Connecticut. "Subscriber" means the persons, including, but not limited to, Eligible Employees, who have enrolled in a Managed Care Contract and who meet the Contractholder's and the Managed Care Contract's eligibility requirements. ARTICLE 11 MARKETING AND SALES 2.1 Marketing and Sale of the HMO Plans by Guardian. (a) During the term of this Agreement, Guardian shall have the right to market HMO Plans to its existing and prospective customers through the Guardian Marketing Force, pursuant to the terms of Section 2.3 below. 7 (b) Except as permitted by 2.1(c) below, Guardian shall not enter into any marketing agreements or similar agreements with any managed care organization other than PHS for purpose of offering managed care products for sale in the Service Area. (c) Nothing contained in this Agreement shall limit Guardian's right to contract with PHCS for the purpose of developing managed care networks in the Service Area or elsewhere; provided, however, that during the term of this Agreement, Guardian shall not, without consulting with PHS, replace a HMO Plan with a similar type of plan utilizing a PHCS network. (d) Nothing contained in this Agreement shall limit Guardian's right to market Health Insurance Contracts and Ancillary Products not subject to this Agreement directly to employers with whom Guardian contracts. 2.2 Marketing and Sale of Health Insurance Contracts by PHS: Ancillary Products. (a) During the term of this Agreement, PHS shall have the right to market Health Insurance Contracts and Ancillary Products to its existing and prospective customers in the Service Area, pursuant to the terms of Section 2.3 below. (b) Except with Guardian's prior written consent and except as permitted by Section 2.2(c) below, PHS shall not enter into marketing or similar agreements with any entity other than Guardian with respect to marketing in the Service Area of HMO Plans, Health Insurance 8 Contracts or Ancillary Products or insurance products substantially similar to the Health Insurance Contracts or Ancillary Products. (c) PHS expressly acknowledges and agrees that notwithstanding anything to the contrary stated in this Section 2.2(c), that it has not, and that it will not, enter into any joint marketing or similar agreement with any entity other than Guardian with respect to marketing in the Service Area of any commercial, fully insured HMO Plan, Health Insurance Contract or Ancillary Product. Guardian acknowledges and agrees that PHS may enter into arrangements in the Service Area with respect to marketing Ancillary Products in connection with PHS' Medicare and Medicaid health maintenance organization plans ("Government Plans") Guardian also acknowledges and agrees that prior to the Effective Date that PHS entered into an arrangement with Dental Benefit Providers to market dental products (the "DBP Plans") in the Service Area. PHS agrees that from and after 12/31/97 that it will not market the DBP Plans other than in connection with the marketing of the Government Plans. Guardian further acknowledges and agrees that prior to the Effective Date that PHS entered into arrangements with All America Financial Services, Inc. ("AAFS"), International Netherlands Group and its subsidiaries (collectively, "ING") and Lincoln National Life Insurance Company of America ("LNLICA") to market specific and aggregate stop-loss premium health maintenance organization plans ("Stop-Loss Plans") and that PHS marketed the life insurance products of AAFS, ING and LNLICA in connection with such arrangements. PHS agrees that from and after the Effective Date that it will not market Stop-Loss Plans or life insurance products in connection with such Stop-Loss Plans unless it gives Guardian the opportunity to provide such stop-loss coverage to PHS. If 9 Guardian is able to provide such stop-loss coverage at a rate which does not exceed by more than five percent (5 %) the average of the rates provided by AAFS, ING and LNLICA, then PHS will utilize Guardian to provide such stop-loss coverage. In the event there is a Change of Control and PHS is acquired by, or PHS is merged with, any entity, the limitations set forth in Section 2.2(b) of this Agreement shall apply to the surviving entity. (d) Nothing contained in this Agreement shall limit PHS's right to market HMO plans not subject to this Agreement directly to employers with whom PHS contracts. 2.3 Multi-Choice and Stand-Alone Arrangements. (a) Guardian shall have the right to market HMO Plans after regulatory approval has been obtained, (i) under multi-choice arrangements with Contractholders, pursuant to which Eligible Employees will be offered health care coverage options consisting of HMO Plans or Health Insurance Contracts, and (ii) under stand-alone arrangements, pursuant to which Eligible Employees will be provided with only the HMO Plan purchased by the Contractholder. (b) PHS shall have the right to market Health Insurance Contracts after regulatory approval has been obtained (i), under multi-choice arrangements with Contractholders, pursuant to which Eligible Employees will be offered health care coverage options consisting of HMO Plans or Health Insurance Contracts, and (ii) under stand-alone arrangements, pursuant to which Eligible Employees will be provided with only the Health Insurance Contract purchased by the Contractholder. 10 (c) PHS agrees to use its best efforts to market Ancillary Products to its existing and prospective customers; provided, however, that, the failure of PHS to use its best efforts to market such Ancillary Products shall not entitle Guardian to terminate this Agreement pursuant to Article X below. 2.4 Priority. Neither party shall solicit any employer group with which the other party had an existing contractual relationship as of the Inception Date for the provision of health care services or health insurance (or with which, as of the Inception Date. such other party was engaged in negotiating or renegotiating a contract for such services) without the prior consent of such other party. 2.5 Identification of Managed Care Contracts. The Managed Care Contracts shall be marketed under the collective designation "The Guardian & PHS Healthcare Solutions." Each Managed Care Contract shall be assigned a specific trade name, to be agreed to by the parties. 2.6 Marketing Materials. PHS and Guardian shall jointly develop handbooks, enrollment forms, identification cards and all other marketing materials relating to the Managed Care Contracts (collectively, "Marketing Materials"). The parties agree that the cost of the initial development and production of such Marketing Materials shall be shared equally by the parties pursuant to Section 7.4 below. Thereafter, the party responsible for reproducing such Marketing Materials shall include the cost of such reproduction in Schedule B as a reimbursable expense. To the extent consistent with administrative requirements, and to the 11 extent permitted by law or regulations, all Marketing Materials will consist of each party's existing Marketing Materials, modified to reflect the terms of this Agreement. Neither party will use Marketing Materials reflecting this Agreement or using the name of the other party, without the other party's prior approval. 2.7 Training. PHS and Guardian shall jointly develop training programs regarding marketing and administering the Managed Care Contracts for all members of the Guardian Marketing Force and for Guardian and PHS personnel engaging in marketing or administrative functions. ARTICLE III UNDERWRITING. RATES AND ADMINISTRATION 3.1 Underwriting and Administration of HMO Plans. (a) PHS shall be responsible for developing and filing with the appropriate regulatory authorities the rates for the HMO Plans. Guardian shall utilize such filed rates and shall be responsible for calculating premiums according to established underwriting guidelines for the HMO Plans subject to the requirements of applicable law; provided, however, that, the parties agree that they will mutually develop the premiums for any HMO Plan marketed to a group of more than five hundred (500) employees. PHS shall provide Guardian with all information reasonably relating 12 to rating methodology, including, without limitation, cost assumptions, anticipated loss ratios and other actuarial assumptions, and provider and facility agreements. Underwriting guidelines for HMO Plans that are to be marketed pursuant to this Agreement will be mutually developed by the parties. (b) Except as otherwise expressly provided for herein, PHS shall be solely responsible for administration of the HMO Plans, including the payment of claims, withholds, taxes and all other amounts (other than commissions) payable to any person with respect to HMO Plans. 3.2 Underwriting and Administration of Health Insurance Contracts and Ancillary Products. (a) Guardian shall be responsible for developing and filing with the appropriate regulatory authorities the rates for the Health Insurance Contracts and Ancillary Products. Guardian shall utilize such filed rates and shall be responsible for calculating premiums for the Health Insurance Contracts and Ancillary Products, subject to the requirements of applicable law. (b) Guardian shall be solely responsible for administration of Health Insurance Contracts and Ancillary Products, including the payment of claims, taxes and all other amounts payable with respect to such contracts. 13 3.3 Discounts. Any discount of manual rates for any HMO Plan which exceeds a mutually agreed upon amount (as set forth in the underwriting guidelines mutually agreed upon by the parties), must be jointly authorized by 9the underwriting departments of each of the parties, subject to the laws and regulations of the State of Connecticut applicable to such Plans. ARTICLE IV BILLING AND COLLECTION OF PREMIUMS: PAYMENT OF COMMISSIONS 4.1 Billing and Collection of Premiums. (a) Guardian shall be responsible for billing and collection of premiums for all Plans, regardless of how such Plans are marketed. (b) Premiums received by Guardian from Contractholders with respect to HMO Plans will be held for the benefit of PHS during the Quarter in which such premiums are received. Interest shall be credited on the cash balances held by Guardian, as set forth in Article VII of the HMO Reinsurance Agreement. (c) The amount of net premiums held by Guardian at the end of each Quarter with respect to HMO Plans (i.e., premiums received, plus interest credited in accordance with Section 4.1(b) above, less commissions paid to agents or brokers pursuant to Section 4.2 below), reduced by any claims reimbursed to PHS (including withholds) and other amounts as agreed to by the parties shall be paid to PHS in accordance with Section 7.3 of the HMO Reinsurance Agreement. 14 4.2 Commissions. (a) Commissions with respect to Plans sold pursuant to this Agreement shall be paid according to the schedule of commissions set forth in Schedule B. The commission rates to be paid with respect to Plans may be changed from time to time, as agreed to jointly by PHS and Guardian, provided that the party not proposing the change shall not unreasonably withhold its consent to a change by the proposing party. All Managed Care Contracts shall be priced to include expense factors for appropriate commission payments. (b) Guardian shall make payment of all commissions to members of the Guardian Marketing Force, to independent brokers and to Physicians Health Insurance Services, Inc., an insurance agency ("PHIS"), to the extent that such commissions become due as a result of the sale of Plans subject to this Agreement. Guardian shall act as PHS's agent in the payment of commissions for HMO Plans. PHS shall have responsibility for any other compensation with respect to Plans sold by PHIS. (c) Each party shall be responsible for ensuring that its employees or agents are appropriately licensed and appointed, as necessary, to sell Plans and to receive commissions. All payments of commissions to agents, brokers or employees shall comply with applicable laws, rules, ordinances and regulations. 15 (d) Limitations on Commission and Marketing Fees. Notwithstanding any other provision of this contract, the total of commissions and marketing fees payable by Guardian under this Agreement shall not exceed any limitations set forth in Section 4228 of the New York State Insurance Law. ARTICLE V ENROLLMENT: MEMBERSHIP SERVICES 5.1 Enrollment. (a) Guardian and PHS shall jointly enroll new Contractholders and Subscribers purchasing Managed Care Contracts. (b) Each party shall be responsible for obtaining enrollment information from Contractholders and Subscribers with respect to those Managed Care Contracts sold by such party's Marketing Force and shall transmit such information to the other party on a timely basis in a format that is acceptable to the other party. 5.2 Meetings with Contractholders and Subscribers. Guardian and PHS shall cooperate in conducting employee on-site enrollment meetings. 5.3 Enrollment Materials. All enrollment agreements, forms and other materials, including Subscriber handbooks and identification cards, used for Contractholders and 16 Subscribers shall be either PHS's or Guardian's existing approved forms, modified as necessary to reflect the terms of this Agreement. and the administrative requirements of PHS and Guardian, respectively. All such materials shall specify that PHS is the underwriter of HMO Plans, and that Guardian is the underwriter of Health Insurance Contracts and Ancillary Products. Neither party will use enrollment materials reflecting this Agreement, or using the name of the other party, without the other party's approval. 5.4 Enrollment Reports. (a) PHS and Guardian shall prepare periodic and timely reports as set forth in Schedule C showing all Managed Care Contracts sold, renewed or terminated, and other enrollment information required by either party in order to perform its duties with respect to such Contracts. Such reports shall be made by each party on a periodic and timely basis on the Business Day following the date of transactions or other matters reported, and shall be transmitted by electronic transmission in a form reasonably acceptable to the receiving party. (b) PHS and Guardian shall prepare periodic reconcilations of the enrollment information in the possession of each party. 5.5 Membership Services. All membership services with respect to Subscribers under HMO Plans shall be provided by PHS. 17 ARTICLE Vl PHS NETWORK MANAGEMENT 6.1 PHS Network Management. (a) PHS shall be solely responsible for development and maintenance (including, without limitation, quality assurance, utilization management and credentialing protocols) of the PHS Network. PHS shall provide Guardian with an accurate listing of the composition of the PHS Network at the Effective Date, and thereafter shall update the listing periodically, showing additions and deletions to the composition of the PHS Network. (b) PHS shall be solely responsible for any loss or liability arising from any inaccuracy in such listings. (c) Guardian may recommend additions to, or deletions from, the PHS Network, and PHS shall endeavor to be responsive to accommodate Guardian's recommendation. PHS shall have the sole authority to enter into contracts with providers. 6.2 Medical Management. PHS shall be solely responsible for all claims processing and auditing, health services (including hospital pre-certification, outpatient pre-certification, large claim case management and utilization review) and all risk accounting for the provider bonus arrangements under the HMO Plans. 18 6.3 Material Change in PHS Network. PHS acknowledges that maintenance of an adequate network of health care providers is of primary concern to Guardian, and agrees to notify Guardian if the PHS Network fails to meet the criteria set forth below. PHS further acknowledges and agrees that any failure to meet the following criteria constitutes material change in PHS Network. (i) The PHS Network will contain that number of physicians as determined by the parties, from time to time, equaling 70% or more of the number of physicians (practicing as individuals or in practice groups or clinics) determined by averaging the number of such physicians under contract with the three largest health maintenance organizations operating in the Service Area (measured by the number of persons eligible to receive benefits under such plans, but not including any plans offered by Blue Cross/Blue Shield of Connecticut). (ii) The PHS network will contain a number of acute care institutions equaling 80% or more of the number of such institutions determined as in (i) above. (iii) The PHS Network will further contain a number of tertiary care institutions (as defined by the Connecticut Hospital Association) equaling 67 % or more of all such institutions determined as in (i) above. 6.4 Professional Liability Insurance. (a) PHS shall require each physician member of the PHS Network to maintain professional liability insurance, with limits of at least $1,000,000 per occurrence, and $3,000,000 in the aggregate for individual practitioners and practice groups, and $1,000,000 per occurrence and $3,000,000 aggregate for hospitals, 19 clinics and other institutional providers. Guardian accepts that hospitals and other institutional providers may self-insure or self-retain with respect to such liability limits, as permitted by applicable Connecticut law and regulations. Guardian also recognizes that liability limits for the following individual non-physician members of the PHS Network may be $1,000,000 per occurrence and $1,000,000 in the aggregate: chiropractors, social workers, audiologists, speech pathologists, optometrists, physical therapists and occupational therapists. ARTICLE VII MARKETING AND ADMINISTRATIVE SERVICES FEE AND EXPENSES 7.1 Guardian's Marketing and Administrative Services Fee. PHS shall pay Guardian a Marketing and Administrative Services Fee for the duties assigned to Guardian under this Marketing and Services Agreement equal to the amount shown on Schedule B, as it may be amended from time to time, for each Quarter, or portion thereof, during which this Agreement is in effect. 7.2 PHS's Administrative Services Fee. PHS shall be entitled to an Administrative Services Fee for the administrative duties assigned to PHS under this Marketing and Services Agreement equal to the amount shown on Schedule B, as it may be amended from time to time, for each Quarter, or portion thereof, during which this Agreement is in effect. 7.3 Adjustments of Fee. The Fees set forth in Schedule B shall remain in effect for four Quarters, or portion thereof, beginning with the Quarter that includes the Effective Date. 20 Each party shall have the right to adjust the Fees payable hereunder for any subsequent period of four Quarters by providing notice to the other party of an amendment of Schedule B no less than forty-five (45) calendar days prior to the beginning of the next such period. Such adjustment will be limited to an amount necessary to cover changes in that party's costs of providing services hereunder, without provision of profit. 7.4 Expenses. Each party shall be responsible for its expenses incurred in connection with this Agreement; provided, however, that expenses attributable to the development and initial production of Marketing Materials shall be shared equally. Each party shall calculate such expenses (including, without limitation, a reasonable allocation of internal expenses, production and printing expenses and legal expenses incurred in connection with obtaining regulatory approval of any forms) on a Quarterly basis, and shall provide the other party with a schedule of such expenses in connection with each Quarterly Accounting Report. A party whose expenses under this Section 7.4 exceed one-half of the aggregate of the expenses incurred by both parties for the Quarter shall be entitled to reimbursement for such excess within forty-five (45) days from the end of such Quarter. 7.5 Reinsurance Agreement. At the option of the parties, the fees and expenses hereunder may be incorporated in any Reinsurance Agreement entered into between the parties (or affiliates of the parties) to the extent that such fees relate to reinsured Managed Care Contracts. 21 ARTICLE V111 ACCOUNTING AND REPORTING 8.1 Ouarterly Accounting Reports. Within forty-five (45) calendar days of the end of each Quarter, each party shall supply the other with a Quarterly Accounting Report as defined in Section 7.3 of the Reinsurance Agreement. Quarterly Accounting Reports shall be made for the Quarter that includes the Effective Date, and shall be made for each Quarter following the Contract Termination Date if any amount is due any party under this Agreement. 8.2 Settlements. Settlement of all amounts due pursuant to this Agreement shall be made on a net basis in connection with the Quarterly Accounting Report. If one party owes a net amount to the other, such amount shall be paid in accordance with Section 7.3 of the HMO Reinsurance Agreement. 8.3 Reconciliation. Each party shall have the right to review all individual components of transactions entered into each Quarterly Accounting Report. The parties shall have twenty (20) Business Days from the day the Quarterly Accounting Report is submitted to report any deficiency in such report and to request an adjustment of any payment made to or received by either party. Any amount due either party in connection with such reconciliation shall be paid within twenty (20) calendar days of the receipt of notice that additional amounts are due. 8.4 Best Efforts to Supply Actual Data. In preparing all reports required in this Agreement, Guardian or the PHS, as the case may be, shall make its best efforts to supply the 22 actual data. If the actual data cannot be supplied with the appropriate report, Guardian or PHS, as the case may be, shall produce best estimates, and shall provide amended reports based on actual data no more than thirty (30) calendar days after such report was originally due. 8.5 Statement of Actuarial Opinion. (a) Within forty-five (45) calendar days after the end of the calendar year, each party shall provide the other with a Statement of Actuarial Opinion certifying the adequacy of the reserve for products covered under this Agreement. The Actuarial Opinion must state whether or not the reserve for products covered under this Agreement meet the minimum standards of all states where each party is licensed, and if not, the Actuarial Opinion must state the difference between reserves and state minimums (b) The Actuarial Opinion shall meet the requirements set forth in the NAIC's Actuarial Opinion and Memorandum Regulation and shall be signed by each party's "Appointed Actuary." The Appointed Actuary may or may not be an employee of such party. ARTICLE IX REINSURANCE AGREEMENTS 9.1 HMO Reinsurance Agreement. The parties each hereby acknowledge that. simultaneously with the execution of this Agreement, they intend to enter into a reinsurance agreement in the form attached hereto as Exhibit A-1 (the "HMO Reinsurance Agreement"). The parties intend, under the terms of the HMO Reinsurance Agreement, that PHS will cede 23 to Guardian certain specified percentages of the risks under the HMO Plans, including those HMO Plans with a point-of-service feature, as more fully described in the HMO Reinsurance Agreement. In return, Guardian shall be allocated specified percentages of premiums received by PHS with respect to the HMO Plans, all as more fully described in the HMO Reinsurance Agreement. 24 ARTICLE X TERM AND TERMINATION 10.1 Effective Date. This Agreement shall become effective on October 1, 1996 (the "Effective Date"), and shall continue in effect unless terminated pursuant to the terms of this Article X. Nothwithstanding anything to the contrary stated in this Article X, this Agreement shall continue in effect, solely with respect to the provision of administrative services, for any Managed Care Contract in effect on the Contract Termination Date until 180 days subsequent to the next succeeding renewal date of any Managed Care Contract following such Contract Termination Date; and provided, further however, that in the event of a termination pursuant to Section 8.6 of the HMO Reinsurance Agreement, this Agreement shall remain in effect solely with respect to the provision of administrative services with respect to any Continuation Plan for the period stated in Section 8.6 of the HMO Reinsurance Agreement. 10.2 Termination Due to Change of Control. In the event of a Change of Control in one party, the other party shall have the right to terminate this Agreement as set forth in Section 8.6 of the HMO Reinsurance Agreement. The Contract Termination Date under this Section 10.2 shall be the effective date of the Change of Control. 10.3 Termination Without Cause. (a) Either party shall have the right to terminate this Agreement without cause upon 180 days prior written notice to the other party. The 25 Contract Termination Date under this Section 10.3 shall be the 180th day following the giving of notice required by this Section 10.3. (b) If PHS terminates this Agreement pursuant to Section 10.3(a), it agrees to pay Guardian an amount equal to one half the fair market value of all HMO Plans in force on the effective date of termination, other than HMO Plans that (i) resulted from the conversion of pre-existing PHS contracts to Managed Care Contracts, or (ii) are not continued as PHS plans on or before the first renewal date for such contracts following the Contract Termination date. (c) The parties will agree to a method of valuation of the HMO Plans (using methods of valuation customarily used in valuing HMO Plans or health insurance business). If the parties are unable to agree on valuation, the matter will be referred to arbitration. Payments required under this Section 10.3 shall be made in connection with the final Annual Accounting Report. 10.4 Termination For Cause. (a) In the event that either party shall default in the performance of the duties and obligations imposed on it pursuant to the terms of this Agreement or the Reinsurance Agreement(s), or breach any of the provisions contained herein or therein, including the failure to pay any amount when due, or the failure of either party to maintain a level of services under this Agreement that is reasonably satisfactory to the other party, the defaulting party shall be allowed thirty (30) days from written notice of such default 26 or breach to present to the non-defaulting party a plan to cure such default or breach that is reasonably satisfactory to the non-defaulting party. If a reasonably satisfactory plan to cure the default or breach is not submitted within that time, or if the plan is not carried out according to its terms, the non-defaulting party shall have the right to terminate this Agreement and the Reinsurance Agreement(s) upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non defaulting party by reason of such default or breach. (b) In the event that either party shall engage in fraudulent, illegal or grossly negligent conduct with respect to its duties and obligations under this Agreement or the Reinsurance Agreement(s), the other party shall have the right to terminate this Agreement and the Reinsurance Agreement(s) upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non defaulting party by reason of the defaulting party's conduct. (c) In the event that this Agreement is terminated by Guardian pursuant to this Section 10.4, the provisions of Section 10.3(b) shall apply as if PHS elected to terminate this Agreement. (d) The Contract Termination Date under this Section 10.4 shall be the date of receipt of notification of termination. 10.5 Termination Due to Financial Impairment or Loss of Authority. In the event that either party shall become unable to perform its obligations under the Managed Care 27 Contracts because of financial impairment or loss of authority to act under law, or by action of any regulatory authority, the other party shall have the right, subject to the requirements of relevant law and receipt of necessary approvals, to terminate this Agreement and have the Managed Care Contracts assigned to, and all obligations assumed by, an appropriately licensed organization that provides substantially similar healthcare services as described in this Agreement. The Contract Termination Date under this Section 10.5 shall be the date set forth in Section 8.8 of the HMO Reinsurance Agreement. 10.6 Termination for Material Change in PHS Network. In the event that the PHS Network undergoes a material change within the meaning of Section 6.3 of this Agreement, PHS shall be allowed thirty (30) days to present to Guardian a plan to cure such Material Change that is reasonably satisfactory to Guardian. If a reasonably satisfactory plan to cure the Material Change is not submitted within that time, or if the plan is not carried out according to its terms, Guardian shall have the right to terminate this Agreement, and the Reinsurance Agreement, upon delivery of written notice of such termination to PHS, which shall be effective upon receipt, without prejudice to any other rights or remedies available to Guardian. The Contract Termination Date under this Section 10.6 shall be the date of receipt of notification to terminate. 10.7 Buy-Out Provisions. The parties acknowledge and agree that the "buy-out" provisions set forth in Section 10.3(b) above apply only to terminations under Sections 10 3(a) 28 and 10.4 above. Such buy-out provisions do not apply to terminations under any other section of this Agreement or to terminations under the HMO Reinsurance Agreement. ARTICLE XI INDEMNIFICATION 11.1 PHS's Indemnification. PHS shall indemnify Guardian against all liabilities, losses, suits, damages, costs, and expenses (including, without limitation, damages resulting from breach of this Agreement and reasonable fees of Guardian's attorneys and other expenses of litigation), net of recoveries from third parties, arising out of or in connection with PHS's obligations under this Agreement, including acts or omissions to act, or negligent, willful, reckless or intentional wrongs, fraud, oppression or bad faith. 11.2 Guardian's Indemnification. Guardian shall indemnify PHS against all liabilities, losses, suits, damages, costs and expenses (including, without limitation, damages resulting from breach of this Agreement, reasonable fees of PHS's attorneys and other expenses of litigation), net of recoveries from third parties, arising out of or in connection with Guardian's obligations under this Agreement, including acts or omissions to act, or negligent, willful, reckless or intentional wrongs, fraud, oppression or bad faith. 29 11.3 Liability under PHS's HMO Plans. Except as specifically set forth in any Reinsurance Agreement(s) to be entered into between the parties, Guardian is not a guarantor, insurer, or reinsurer of, or joint venturer with, PHS. Guardian does not accept any risk of loss for, nor provide any indemnification to PHS, any Contractholder or Subscriber, any provider or any other person with respect to an HMO Plan. PHS shall indemnify Guardian for all liabilities, losses, suits, damages, costs and expenses (including reasonable fees of Guardian's attorneys, and other expenses of litigation), net of recoveries from third parties, arising in connection with a HMO Plan or the PHS Network, including action or failure to act by PHS, or its employees or agents (excluding health care providers who or which are not employees of, or under an agency agreement with, PHS). 11.4 Liability under Health Insurance Contracts and Ancillary Products. PHS is not a guarantor, insurer, or reinsurer of, or joint venturer with, Guardian. PHS does not accept any risk of loss, nor provide any indemnification to Guardian, any Contractholder or Subscriber, any provider or any other person with respect to a Health Insurance Contract or Ancillary Product. Guardian shall indemnify PHS for all liabilities, losses, suits, damages, costs and expenses (including reasonable fees of PHS's attorneys, and other expenses of litigation), net of recoveries from third parties, arising in connection with a Health Insurance Contract or Ancillary Product, including action or failure to act by Guardian, or its employees or agents. 30 11.5 Survival of Article. This Article XI shall survive the termination or nonrenewal of this Agreement. ARTICLE Xl1 ARBITRATION 12.l Appointment of Arbitrators. In the event of any disputes or differences arising hereafter between the parties with reference to any transaction under or relating in any way to this Agreement, as to which agreement between the parties hereto cannot be reached, the dispute or difference shall be resolved by arbitration. Three arbitrators shall decide any dispute or difference. The arbitrators must be disinterested officers or retired officers of life and health insurance or health maintenance organizations other than the two parties to this Agreement or their affiliates. Each of the parties agrees to appoint one of the arbitrators with the third, to be chosen by the two appointed arbitrators. In the event that either party should fail to choose an arbitrator within thirty (30) calendar days following a written request by the other party to do so, the requesting party may choose a second arbitrator before entering upon arbitration. In the event that the two arbitrators shall not be able to agree on the choice of the third arbitrator within twenty (20) calendar days following their appointment, each arbitrator shall nominate five (5) candidates within ten (l0) calendar days thereafter, four (4) of whom the other party shall decline, and the third arbitrator shall be chosen by the President of the American Arbitration Association or his designee. Should the chosen third arbitrator so 31 selected decline to serve, the candidate who was not chosen by the President shall be appointed. This process shall continue until a candidate has agreed to serve. 12.2 Decision. The arbitrators shall consider customary and standard practices in the health insurance and managed care business. They shall decide by a majority vote of the arbitrators. There shall be no appeal from their written decision. Judgment may be entered on the decision of the arbitrators by any court having jurisdiction. If, in the opinion of the arbitrators, a dispute cannot be otherwise resolved, this Agreement shall be terminated in accordance with Section 10.4 hereof. 12.3 Expenses of Arbitration. Each party shall bear the expense of its own arbitrator (whether selected by that party, or by the other party pursuant to the procedures set out in Section 12.1) and related outside attorneys' fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator. 12.4 Applicable Law. Any arbitration instituted pursuant to this Article shall be held in Connecticut and the laws of the State of Connecticut and, to the extent applicable, the Federal Arbitration Act, shall govern the interpretation and application of this Agreement. 32 12.5 Survival of Article. This Article shall survive termination of this Agreement. ARTICLE XIII MISCELLANEOUS 13. l Stop-Loss Coverage. Guardian shall have the right to provide Contractholders with stop-loss insurance or reinsurance with respect to HMO Plans that are Managed Care Contracts subject to this Agreement. Guardian shall have the right to bid on stop-loss reinsurance protection for all other business of PHS. Nothing herein shall require PHS to reinsure HMO Plans that are not Managed Care Contracts with Guardian. In addition, Guardian acknowledges that PHS has certain existing arrangements, and may enter into additional arrangements in the future, for stop-loss reinsurance coverage for HMO Plans that are not Managed Care Contracts which shall remain in effect regardless of this Agreement. 13.2 Misunderstandings and Oversights. If any delay, omission, error or failure to perform any act required by this Agreement is unintentional and caused by misunderstanding or oversight, PHS and Guardian will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. The party that first discovers such oversight or incorrect act as a result of the misunderstanding will notify the other party in writing promptly upon discovery of the misunderstanding or oversight. The parties shall act to correct the error, omission or oversight within thirty (30) days of notification of the problem. This Section 13.2 33 shall not be construed as a waiver by either party of its right to enforce strictly the terms of this Agreement. 13.3 Non-Solicitation. (a) During the term of this Agreement, neither Guardian nor any entity under Guardian's control shall contact, solicit or contract for services with any PHS Network health care provider then under contract with PHS. Nothing in this Agreement shall preclude PHCS from contracting with any PHS Network health care provider. (b) During the term of this Agreement, neither party shall knowingly solicit for employment an employee of the other party who has been engaged in activities covered by this Agreement, without written consent of the other party. 13.4 Regulatory Approval. Performance of the obligations of either party under this Agreement shall be subject to the receipt of necessary regulatory approvals under the laws, regulations and practices of regulatory authorities in New York and Connecticut. PHS and Guardian shall cooperate in attempting to obtain expeditiously any necessary regulatory approvals from regulatory authorities. Each party will bear its own expenses in obtaining such approvals. 13.5 Audits. Each party shall have the right, upon reasonable notice to the other party, and at the requesting party's expense, to audit the books and records of the other party 34 relating to receipts, enrollment, service standards and other matters relating to this Agreement during regular business hours at the premises of the audited party where such records are normally maintained. The audited party shall reasonably cooperate in any such audit. 13.6 Headings and Schedules. Headings used herein are not part of this Agreement. Any Schedules or Exhibits attached hereto are part of this Agreement. 13.7 Compliance with Applicable Laws and Regulations. It is the intention of the parties that this Agreement comply with all existing applicable laws and regulations, as from time to time are in effect, so that the Agreement remains in full force. Each of the parties agrees to comply with all laws, ordinances, rules, regulations and orders of regulatory bodies applicable to the transactions contemplated by this Agreement, including those relating to maintenance of appropriate licenses and the appointment of agents and payment of commissions. Either party shall promptly notify the other party of any complaint, inquiry or lawsuit by any regulatory authority relating to the Managed Care Contracts or to this Agreement. 13.8 Successors and Assigns: Binding Effect. Except as otherwise provided herein and in the HMO Reinsurance Agreement, this Agreement cannot be assigned by PHS or Guardian without the prior written approval of the other party. The provisions of this 35 Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective permitted successors and assigns. 13.9 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same agreement. 13.10 Entire Agreement: Amendment. This Agreement and the Reinsurance Agreement constitute the entire agreement between the parties with respect to the Managed Care Contracts and Ancillary Products, and supersede any previous written or oral agreements. This Agreement shall be amended only by written agreement signed by a duly authorized officer of each of PHS and Guardian, and any change to this Agreement shall be null and void unless made by such written agreement; provided, however, that where, under insurance, health or other applicable laws or regulations, the approval of any such amendment to this Agreement by one or more federal, state or local governmental or regulatory authorities is required, the amendment shall not take effect unless and until all such necessary approvals have been obtained and received by both PHS and Guardian. In the event that any such approval is required, PHS and Guardian shall each take all necessary actions in order to obtain such approval. 36 13.11 Waivers. The waiver by either of the parties of the other party's prompt and complete performance, or breach or violation, of any provisions of this Agreement and related documents shall not operate or be construed as a waiver of any subsequent breach or violation, and the waiver by any of the parties to exercise any right or remedy which it may possess hereunder shall not operate or be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 13.12 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to the principles of conflicts of laws thereof. 13.13 Severability. In the event any section or provision of this Agreement or related documents is found to be void and unenforceable by a court of competent jurisdiction, the remaining sections and provisions of this Agreement or related documents shall nevertheless be binding upon the parties with the same force and effect as though the void or unenforceable part had not been severed or deleted. 37 13.14 Notices. Any notice to be given pursuant to the terms of this Agreement shall be given in writing either by personal delivery or by mail, registered or certified, return receipt requested and postage prepaid. Mail notices shall be sent to the parties at their respective addresses as shown: If to Guardian: The Guardian Life Insurance Company of America 201 Park Avenue South New York, New York 10003 Attention: Edward K. Kane, Esq. If to Physicians Health Services, Inc.: Physicians Health Services, Inc. 120 Hawley Lane Trumbull, Connecticut 06611 Attention: Regina M. Campbell Senior Vice President & Chief Administrative Officer If to Physicians Health Services of Connecticut, Inc.: Physicians Health Services of Connecticut, Inc. 120 Hawley Lane Trumbull, Connecticut O6611 Attention: Regina M. Campbell Senior Vice President & Chief Administrative Officer 13.15 Confidentiality. (a) Neither Guardian nor PHS shall disclose any proprietary or confidential information of the other party to a third party without the express written consent of the other party to this Agreement. For purposes of this Agreement, "proprietary and 38 confidential" information will include, without limitation, all internal business practices and business records, information concerning products and pricing, contracts, computer hardware and software or business methods in any form whatsoever, peer review, quality assurance and grievance procedures, any aspect of the utilization review program, provider fee schedules, reimbursement schedules, or discounts, and advertising or marketing information, but not including information otherwise available to the public. Neither party shall use any proprietary and confidential information of the other party for its own benefit. Upon termination of this Agreement, each party will immediately return to the other party any confidential information, claims files necessary for the continued administration of any Plan, and other property of the other party. (b) Guardian and PHS agree to maintain the confidentiality of any health care information pertaining to Subscribers including, without limitation, files, records, reports, and other information prepared and maintained in connection with this Agreement, in accordance with all applicable laws and regulations. (c) Each Party shall obtain any necessary consent from Subscribers with respect to the release to the other party of any confidential information relating to such Subscribers, by means of general or specific releases, as appropriate. Each party shall notify the other if it becomes aware that proper releases have not been obtained. 39 (d) Guardian shall not make any list of PHS providers available to any person other than appropriate regulatory authorities, Guardian employees who are engaged in operations relating to this Agreement, and independent brokers and other persons engaged in marketing of Managed Care Contracts. 13.16 Press Releases. No public statement or press release regarding the existence of this Agreement shall be made by either party without obtaining the prior written consent of the other party, except as required by applicable laws or regulations. 13.17 Relationship of Parties. The parties to this Agreement are and shall remain independent contractors. Neither party is the employee or agent of the other party, except as set forth herein, and neither party has an express or implied right to bind the other party. The parties do not intend to form a joint venture, partnership, or to be governed by laws relating to any relationship other than that of independent contractors. Neither party is authorized to modify, alter or waive the terms of any product issued by the other party. 13.18 Offset. In the event that either party to this Agreement shall fail to make payment of any amount that is due and owing to the other party under this Agreement, all mutual debts shall be offset, and only the balance of such debts shall be paid. 40 13.19 Financial Statements. Each party shall furnish financial statements as filed with the appropriate regulatory authority to the other party upon request 13.20 Regulatory Review. The parties acknowledge and agree that this Agreement is subject to the review and approval of the New York State Department of Insurance. The parties expressly agree that any revisions to this Agreement required by the New York State Department of Insurance will be addressed in an amendment to, or restatement of, the Agreement. 41 EXECUTION IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. PHYSICIANS HEALTH SERVICES, INC. By /s/ Regina M. Campbell ----------------------------- Name Regina M. Campbell Title Senior Vice President PHYSICIANS HEALTH SERVICES OF CONNECTICUT By /s/ Regina M. Campbell ----------------------------- Name Regina M. Campbell Title Senior Vice President THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA By /s/ Joseph D. Sargent ----------------------------- Name Joseph D. Sargent Title President and CEO 42 SCHEDULE A DESCRIPTION OF MANAGED CARE CONTRACTS [DESCRIBE CT PLANS] A-1
CONNECTICUT CHARTER POS - HEALTHCARE SOLUTIONS ==================================================================================================================================== Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ C3627G PHS 5 $200 $500 70% of the $1,700 $4,250 NA (1) 5CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3637G PHS 5 $300 $750 70% of the $1,800 $4,500 NA (1) 6CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3657G PHS 5 $500 $1,250 70% of the $2,000 $5,000 NA (1) 7CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3628G PHS 5 $200 $500 80% of the $1,200 $3,000 NA (1) 8CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA (1) 9CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA (1) 10CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3837G PHS 5/250 $300 $750 70% of the $1,800 $4,500 NA (1) 11CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3857G PHS 5/250 $500 $1,250 70% of the $2,000 $5,000 NA (1) 12CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3838G PHS 5/250 $300 $750 80% of the $1,300 $3,250 NA (1) 13CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3858G PHS 5/250 $500 $1,250 80% of the $1,500 $3,750 NA (1) 14CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3727G PHS 15 $200 $500 70% of the $1,700 $4,250 NA (1) 15CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA (1) 16CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3757G PHS 15 $500 $1,250 70% of the $2,000 $5,000 NA (1) 17CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3728G PHS 15 $200 $500 80% of the $1,200 $3,000 NA (1) 18CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------
2
CONNECTICUT CHARTER POS - HEALTHCARE SOLUTIONS ==================================================================================================================================== Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ C3738G PHS 15 $300 $750 80% of the $1,300 $3,250 NA (1) 19CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3758G PHS 15 $500 $1,250 80% of the $1,500 $3,750 NA (1) 20CTC next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA (1) 21CTC 15/500 next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3958G PHS $500 $1,250 80% of the $1,500 $3,750 NA (1) 22CTC 15/500 next $5,000 - ------------------------------------------------------------------------------------------------------------------------------------ C3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available eff. 23CTC 15/500 next $10,000 1-1-97(1) - ------------------------------------------------------------------------------------------------------------------------------------ C3918G PHS $1,000 $2,500 80% of the $2,800 $7,000 NA Available eff. 24CTC 15/500 next $10,000 1-1-97(1) - ------------------------------------------------------------------------------------------------------------------------------------ C3717G PHS 15 $1,000 $2,500 70% of the $3,700 $9,250 NA Available eff. 25CTC next $10,000 1-1-97(1) - ------------------------------------------------------------------------------------------------------------------------------------ C3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available eff. 26CTC next $10,000 1-1-97(1) - ------------------------------------------------------------------------------------------------------------------------------------
3
CONNECTICUT PASSPORT POS - HEALTHCARE SOLUTIONS ==================================================================================================================================== Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ C3627G PHS 5 $200 $500 70% of the $1,700 $4,250 NA Available for sale 5CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3637G PHS 5 $300 $750 70% of the $1,800 $4,500 NA Available for sale 6CTP next $5,000 eff. 7/1/95(1) - ------------------------------------------------------------------------------------------------------------------------------------ C3657G PHS 5 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 7CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3628G PHS 5 $200 $500 80% of the $1,200 $3,000 NA Available for sale 8CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA Available for sale 9CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 10CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3837G PHS 5/250 $300 $750 70% of the $1,800 $4,500 NA Available for sale 11CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3857G PHS 5/250 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 12CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3838G PHS 5/250 $300 $750 80% of the $1,300 $3,250 NA Available for sale 13CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3858G PHS 5/250 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 14CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------
4
CONNECTICUT PASSPORT POS - HEALTHCARE SOLUTIONS ==================================================================================================================================== Copy In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ C3727G PHS 15 $200 $500 70% of the $1,700 $4,250 NA Available for sale 15CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA Available for sale 16CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3757G PHS 15 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 17CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3728G PHS 15 $200 $500 80% of the $1,200 $3,000 NA Available for sale 18CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3738G PHS 15 $300 $750 80% of the $1,300 $3,250 NA Available for sale 19CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3758G PHS 15 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 20CTP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 21CTP 15/500 next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3958G PHS $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 22CTP 15/500 next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale 23CTP 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3918G PHS $1,000 $2,500 80% of the $2,800 $7.000 NA Available for sale 24CTP 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3717G PHS 15 $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale 25CTP next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ C3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale 26CTP next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------
5
CONNECTICUT PASSPORT HMO - HEALTHCARE SOLUTIONS ==================================================================================================================================== C36000 (5-10CTP) PHS 5 (Customized) Healthcare Solutions, eff. 3/1/95 - ------------------------------------------------------------------------------------------------------------------------------------ C37000 (15-20, 25 and PHS 15 (Customized) Healthcare Solutions, eff. 3/1/95 26CTP) - ------------------------------------------------------------------------------------------------------------------------------------ C38000 (11-14CTP) PHS 5/250 (Customized) Healthcare Solutions, eff. 3/1/95 - ------------------------------------------------------------------------------------------------------------------------------------ C39000 (21-24CTP) PHS 15/500 (Customized) Healthcare Solutions, eff. 3/1/95 - ------------------------------------------------------------------------------------------------------------------------------------
6 CT Schedule B Contract Allowances Administrative Service Fee
I. Guardian's Administrative Services Fee (as a percentage of premium) HMO POS --- --- Marketing 0.63% 0.63% Sales 1.38% 1.38% Administration 1.30% 1.30% Billing/Collections 1.69% 1.69% Advertising 0.15% 0.15% Total 5.15% 5.15% II. PHS' Administrative Services Fee (as a Percentage of premium) HMO POS --- --- Health Services, UR 1.67% 1.67% Net Mgt, MDD, QA 2.43% 2.43% Operations 3.55% 3.58% Acct Svc., Cust Srv. 1.44% 1.44% Marketing 0.63% 0.63% Sales 0.15% 0.15% Administration 1.30% 1.30% Advertising 0.15% 0.15% Total 11.35% 11.35%
EXHIBIT A-l HMO REINSURANCE AGREEMENT EX-I EX-10.(N) 5 AMENDED & RESTATED MRKTG & SVCS AGRMT, DTD 10/01/96 Exhibit 10 (n) AMENDED AND RESTATED MARKETING AND SERVICES AGREEMENT By and Among PHYSICIANS HEALTH SERVICES, INC. and its affiliate, PHYSICIANS HEALTH SERVICES OF NEW YORK, INC. and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA AMENDED AND RESTATED MARKETING AND SERVICES AGREEMENT Reference is hereby made to the Marketing and Services Agreement (the "Marketing and Services Agreement") made and entered into as of April 27, 1995 (the "Inception Date") by and among PHYSICIANS HEALTH SERVICES, INC., a corporation organized under the laws of the State of Delaware, and its affiliate, PHYSICIANS HEALTH SERVICES OF NEW YORK, INC., a corporation organized under the laws of the State of New York as a health maintenance organization (collectively, "PHS," unless the context indicates reference to Physicians Health Services, Inc. or Physicians Health Services of New York, Inc. as separate corporate entities), and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a mutual life insurance company organized under the laws of the State of New York ("Guardian"). This Amended and Restated Marketing and Services Agreement is dated as of October 1, 1996, and when executed by the parties hereto, shall supersede and replace the Marketing and Services Agreement and shall constitute a binding and enforceable amendment to the Marketing and Services Agreement in its entirety. THE MARKETING AND SERVICES AGREEMENT IS AMENDED AND RESTATED IT ITS ENTIRETY AS FOLLOWS: This Amended and Restated Marketing and Services Agreement (this "Agreement") is made and entered into as of this 1st day of October, 1996 by and among PHYSICIANS HEALTH SERVICES, INC., PHYSICIANS HEALTH SERVICES OF NEW YORK, INC. and GUARDIAN. RECITALS WHEREAS, PHS, which is licensed to operate a health maintenance in the State of New York, maintains a network of health care providers in the State of New York and is authorized to offer for sale plans providing managed care health care benefits in such State; WHEREAS, Guardian desires to make different types of managed care health coverage plans available for sale by the Guardian Marketing Force (as defined herein) in the State of New York; WHEREAS, PHS is willing to make its managed care health coverage plans available for sale by the Guardian Marketing Force; WHEREAS, Guardian is authorized to offer for sale preferred provider organization plans and indemnity insurance contracts ("collectively, Health Insurance Contracts," as defined herein) to individuals and groups in the State of New York and to offer certain other insurance plans in such State, including group life. disability and dental insurance plans ("Ancillary Products," as defined herein); 2 WHEREAS, PHS desires to make Health Insurance Contracts and Ancillary Products available for sale by PHS in the State of New York; WHEREAS, PHS and Guardian each desire to market "multi-choice" plans, which give employees the option of choosing benefits under pre-selected combinations of health coverage plans; and WHEREAS, PHS and Guardian desire to enter into certain reinsurance transactions, pursuant to which Guardian will reinsure PHS with respect to risks under HMO Plans (as defined herein) and an affiliate of PHS, Physicians Health Services (Bermuda) Ltd., will reinsure Guardian with respect to risks under Out-of-Network Contracts (as defined herein). NOW THEREFORE, in consideration of the mutual agreements contained herein, the sufficiency of which is hereby acknowledged, and in consideration of the performance by the parties of their obligations under this Agreement, the parties agree as follows: 3 ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (definitions are applicable to both the singular and the plural form of each term defined herein): "Ancillary Products" means the life insurance, short- and long-term disability insurance, accidental death and dismemberment insurance, and dental insurance products offered by Guardian as designated by the parties from time to time. "Business Day" means any day except Saturday or Sunday or any legal Federal or New York State holiday. "Change of Control" means the acquisition, in a single transaction or in a series of related transactions, by a person, an entity, or a group of persons or entities acting in concert of: (i) twenty-five percent (25%) or more (a) of the voting common stock of Physicians Health Services, Inc. or Physicians Health Services of New York, Inc. (excluding any acquisition of stock by a party currently owning twenty-five percent (25%) or more of such common stock), or (b) fifty-one percent (51 %) or more of the aggregate value of the assets of Physicians Health Services, Inc. or Physicians Health Services of New York, Inc.; or (ii) twenty-five percent (25%) or more of any ownership interest in Guardian. 4 "Continuation Plan" has the meaning given such term in Section 8.6 of the HMO and Indemnity Reinsurance Agreements. "Contractholder" means an employer in the Service Area who or which executes an enrollment agreement with respect to any Managed Care Contract subject to this Agreement. "Contract Termination Date" means the effective date upon which this Agreement terminates pursuant to the applicable section in Article X below. "Eligible Employee" means an employee who is eligible to enroll in the Contractholder's Plan. "Effective Date" shall have the meaning set forth in Section 10.1. "Guardian Marketing Force" means employees of Guardian. and any agents under contract with Guardian who or which are licensed in the State of New York to sell individual and/or group health insurance contracts and who or which are acting on behalf of Guardian, but not including employees or agents of PHS, or independent brokers. "Health Insurance Contracts" means contracts for health insurance offered on a fee for service or indemnity basis by Guardian in the Service Area when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. Health Insurance Contracts 5 include preferred provider plans using the PHS Network or PHCS' network of providers and Out-of-Network Contracts offered by Guardian in the Service Area. "HMO Plans" means commercial contracts for health care services provided by PHS to Contractholders in the Service Area utilizing the PHS Network to provide health care services when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. HMO Plans include HMO Plans with a "point-of-service" feature sold together with an Out-of-Network Contract. "HMO Reinsurance Agreement" means the form of Reinsurance Agreement described in Section 9.1 and attached hereto as Exhibit A-1. "Indemnity Reinsurance Agreement" means the form of Reinsurance Agreement described in Section 9.2 and attached hereto as Exhibit A-2. "Managed Care Contracts" means any HMO Plan or Health Insurance Contract purchased by a Contractholder pursuant to Article II below. "Marketing Materials" shall have the meaning set forth in Section 2.6. 6 "Material Change" shall have the meaning set forth in Section 6.3. "Out-of-Network Contract" means a Health Insurance Contract underwritten by Guardian which is marketed and sold as the "out-of-network" component of a HMO Plan with a "point-of-service" feature. "PHCS" means Private Healthcare Systems, Incorporated, a Delaware corporation with its headquarters in Waltham, Massachusetts, that organizes managed care networks. "PHS Network" means the network of health care providers in the Service Area, including physicians and other individual practitioners and health care facilities or individual practice associations, who or which are under direct or indirect contract with PHS to provide services to Subscribers under a HMO Plan. "Plans" means the HMO Plans, Health Insurance Contracts and Ancillary Products sold pursuant to this Agreement. "Quarter" means each of the four consecutive three-month periods in a calendar year. "Quarterly Accounting Report" shall have the meaning set forth in Section 8.1. 7 "Service Area" means the Counties of Bronx, Dutchess, Kings, Nassau, New York, Queens, Richmond, Rockland, Suffolk, Orange, Putnam and Westchester in the State of New York. "Subscriber" means the persons, including, but not limited to, Eligible Employees, who have enrolled in a Managed Care Contract and who meet the Contractholder's and the Managed Care Contract's eligibility requirements. ARTICLE II MARKETING AND SALES 2.1 Marketing and Sale of the HMO Plans by Guardian. (a) During the term of this Agreement, Guardian shall have the right to market HMO Plans to its existing and prospective customers through the Guardian Marketing Force, pursuant to the terms of Section 2.3 below. (b) Except as permitted by 2.1(c) below, Guardian shall not enter into any marketing agreements or similar agreements with any managed care organization other than PHS for purpose of offering managed care products for sale in the Service Area. (c) Nothing contained in this Agreement shall limit Guardian's right to contract with PHCS for the purpose of developing managed care networks in the Service Area or elsewhere; 8 provided, however, that during the term of this Agreement, Guardian shall not, without consulting with PHS, replace a HMO Plan with a similar type of plan utilizing a PHCS network. (d) Nothing contained in this Agreement shall limit Guardian's right to market Health Insurance Contracts and Ancillary Products not subject to this Agreement directly to employers with whom Guardian contracts. 2.2 Marketing and Sale of Health Insurance Contracts by PHS: Ancillary Products. (a) During the term of this Agreement, PHS shall have the right to market Health Insurance Contracts and Ancillary Products to its existing and prospective customers in the Service Area, pursuant to the terms of Section 2.3 below. (b) Except with Guardian's prior written consent and except as permitted by Section 2.2(c) below, PHS shall not enter into marketing or similar agreements with any entity other than Guardian with respect to marketing in the Service Area of HMO Plans, Health Insurance Contracts or Ancillary Products or insurance products substantially similar to the Health Insurance Contracts or Ancillary Products (c) PHS expressly acknowledges and agrees that notwithstanding anything to the contrary stated in this Section 2.2(c), that it has not, and that it will not, enter into any marketing or similar agreement with any entity other than Guardian with respect to marketing in the Service Area of any commercial, fully insured HMO Plan, Health Insurance Contract or Ancillary Product. Guardian acknowledges and agrees that PHS may enter into arrangements 9 in the Service Area with respect to marketing Ancillary Products in connection with PHS' Medicare and Medicaid health maintenance organization plans ("Government Plans"). Guardian also acknowledges and agrees that prior to the Effective Date that PHS entered into an arrangement with Dental Benefit Providers to market dental products (the "DBP Plans") in the Service Area. PHS agrees that from and after December 31, 1997 that it will not market the DBP Plans other than in connection with the marketing of the Government Plans. Guardian further acknowledges and agrees that prior to the Effective Date that PHS entered into arrangements with All America Financial Services, Inc. ("AAFS"), International Netherlands Group and its subsidiaries (collectively, "ING") and Lincoln National Life Insurance Company of America ("LNLICA") to market specific and aggregate stop-loss premium health maintenance organization plans ("Stop-Loss Plans") and that PHS marketed the life insurance products of AAFS, ING and LNLICA in connection with such arrangements. PHS agrees that from and after the Effective Date that it will not market Stop-Loss Plans or life insurance products in connection with such Stop-Loss Plans unless it gives Guardian the opportunity to provide such stop-loss coverage to PHS. If Guardian is able to provide such stop-loss coverage at a rate which does not exceed by more than five percent (5 %) the average of the rates provided by AAFS, ING and LNLICA, then PHS will utilize Guardian to provide such stop-loss coverage. In the event there is a Change of Control and PHS is acquired by, or PHS is merged with, any entity, the limitations set forth in Section 2.2(b) of this Agreement shall apply to the surviving entity. (d) Nothing contained in this Agreement shall limit PHS's right to market HMO plans not subject to this Agreement directly to employers with whom PHS contracts. 10 [THIS PAGE MISSING FROM ORIGINAL COPY] 11 engaged in negotiating or renegotiating a contract for such services) without the prior consent of such other party. 2.5 Identification of Managed Care Contracts. The Managed Care Contracts shall be marketed under the collective designation '`The Guardian & PHS Healthcare Solutions." Each Managed Care Contract shall be assigned a specific trade name, to be agreed to by the parties. 2.6 Marketing Materials. PHS and Guardian shall jointly develop handbooks, enrollment forms, identification cards and all other marketing materials relating to the Managed Care Contracts (collectively, "Marketing Materials"). The parties agree that the cost of the initial development and production of such Marketing Materials shall be shared equally by the parties pursuant to Section 7.4 below. Thereafter, the party responsible for reproducing such Marketing Materials shall include the cost of such reproduction in Schedule B as a reimbursable expense. To the extent consistent with administrative requirements, and to the extent permitted by New York law or regulations, all Marketing Materials will consist of each party's existing Marketing Materials, modified to reflect the terms of this Agreement. Neither party will use Marketing Materials reflecting this Agreement or using the name of the other party, without the other party's prior approval. 2.7 Training. PHS and Guardian shall jointly develop training programs regarding marketing and administering the Managed Care Contracts for all members of the Guardian 12 Marketing Force and for Guardian and PHS personnel engaging in marketing or administrative functions. ARTICLE III UNDERWRITING. RATES AND ADMINISTRATION 3.1 Underwriting and Administration of HMO Plans. (a) PHS shall be responsible for developing and filing with the appropriate regulatory authorities the rates for the HMO Plans. Guardian shall utilize such filed rates and shall be responsible for calculating premiums according to established underwriting guidelines for the HMO Plans subject to the requirements of applicable law; provided, however, that, the parties agree that they will mutually develop the premiums for any HMO Plan marketed to a group of more than five hundred (500) employees. PHS shall provide Guardian with all information reasonably relating to rating methodology, including, without limitation, cost assumptions, anticipated loss ratios and other actuarial assumptions, and provider and facility agreements. Underwriting guidelines for HMO Plans that are to be marketed pursuant to this Agreement will be mutually developed by the parties, subject to the requirements of New York law, including Section 4317 of the Insurance Law. 13 (b) Guardian shall develop premiums for HMO Plans subject to this Agreement by using PHS' filed and approved adjusted community rating methodology, subject to applicable law (c) Except as otherwise expressly provided for herein, PHS shall be solely responsible for administration of the HMO Plans, including the payment of claims, withholds, taxes and all other amounts (other than commissions) payable to any person with respect to HMO Plans. 3.2 Underwriting and Administration of Health Insurance Contracts and Ancillary Products. (a) Guardian shall be responsible for underwriting of the Health Insurance Contracts (including the Out-of-Network Contracts) and Ancillary Products. Underwriting guidelines for the Out-of-Network Contracts that are to be marketed pursuant to this Agreement will be developed in consultation with PHS subject to the requirements of New York law, including Section 3731 of the New York State Insurance Law. (b) Guardian shall have sole responsibility for rating of Health Insurance Contracts (including the Out-of-Network Contracts) and Ancillary Products. With respect to the Out-of-Network Contracts, Guardian shall provide PHS with all information reasonably relating to rating methodology, including, without limitation, cost assumptions, anticipated loss ratios and other actuarial assumptions. 14 (c) Guardian shall be solely responsible for administration of Health Insurance Contracts (including the Out-of-Network Contracts) and Ancillary Products, including the payment of claims, taxes and all other amounts payable with respect to such contracts; provided, however, that, PHS shall act as the agent of Guardian and shall pay claims and provide certain other administrative services under the Out-of-Network Contracts, subject to mutually agreed upon claims standards. 3.3 "Point-of-Service" HMO Plans. The out-of-network component of any point-of-service HMO Plan shall be made available as a Guardian Health Insurance Contract. 3.4 Discounts. Any discount of manual rates for any HMO Plan or Out-of-Network Contract which exceeds a mutually agreed upon amount (as set forth in the underwriting guidelines mutually agreed upon by the parties), must be jointly authorized by the underwriting departments of each of the parties, subject to the laws and regulations of the State of New York applicable to such Plans. 15 ARTICLE IV BILLING AND COLLECTION OF PREMIUMS: PAYMENT OF COMMISSIONS 4.1 Billing and Collection of Premiums. (a) Guardian shall be responsible for billing and collection of premiums for all Plans, regardless of how such Plans are marketed. (b) Premiums received by Guardian from Contractholders with respect to HMO Plans will be held for the benefit of PHS during the Quarter in which such premiums are received. Interest shall be credited on cash balances held by Guardian, as set forth in Article VII of the HMO Reinsurance Agreement. (c) The amount of net premiums held by Guardian at the end of each Quarter with respect to HMO Plans i.e., premiums received plus interest credited in accordance with Section 4. l(b) above, less commissions paid to agents or brokers pursuant to Section 4.2 below), reduced by any claims reimbursed to PHS (including withholds) and other amounts as agreed to by the parties shall be paid to PHS in accordance with Section 7.3 of the HMO Reinsurance Agreement. 4.2 Commissions. (a) Commissions with respect to Plans sold pursuant to this Agreement shall be paid according to the schedule of commissions set forth in Schedule B. Subject to the provisions of New York laws and regulations, the commission rates to be paid with respect to Plans may be changed from time to time, as agreed to jointly by PHS and Guardian, provided that the party not proposing the change shall not unreasonably withhold its 16 consent to a change by the proposing party. All Managed Care Contracts shall be priced to include expense factors for appropriate commission payments (b) Guardian shall make payment of all commissions to members of the Guardian Marketing Force, to independent brokers and to Physicians Health Insurance Services, Inc., an insurance agency ("PHIS"), to the extent that such commissions become due as a result of the sale of Plans subject to this Agreement. Guardian shall act as PHS's agent in the payment of commissions for HMO Plans. PHS shall have responsibility for any other compensation with respect to Plans sold by PHIS. (c) Each party shall be responsible for ensuring that its employees or agents are appropriately licensed and appointed, as necessary, to sell Plans and to receive commissions. All payments of commissions to agents, brokers or employees shall comply with applicable laws, rules, ordinances and regulations. (d) Limitations on Commission and Marketing Fees. Notwithstanding any other provision of this contract, the total of commissions and marketing fees payable by Guardian under this Agreement shall not exceed any limitations set forth in Section 4228 of the New York State Insurance Law. 17 ARTICLE V ENROLLMENT: MEMBERSHIP SERVICES 5.1 Enrollment. (a) Guardian and PHS shall jointly enroll new Contractholders and Subscribers purchasing Managed Care Contracts. (b) Each party shall be responsible for obtaining enrollment information from Contractholders and Subscribers with respect to those Managed Care Contracts sold by such party's Marketing Force and shall transmit such information to the other party on a timely basis in a format that is acceptable to the other party. 5.2 Meetings with Contractholders and Subscribers. Guardian and PHS shall cooperate in conducting employee on-site enrollment meetings. 5.3 Enrollment Materials. All enrollment agreements, forms and other materials, including Subscriber handbooks and identification cards, used for Contractholders and Subscribers shall be either PHS's or Guardian's existing approved forms, modified as necessary to reflect the terms of this Agreement, and the administrative requirements of PHS and Guardian, respectively. All such materials shall specify that PHS is the underwriter of HMO Plans, and that Guardian is the underwriter of Health Insurance Contracts (including the Out-of-Network Contracts) and Ancillary Products. Neither party will use enrollment 18 materials reflecting this Agreement, or using the name of the other party, without the other party's approval. 5.4 Enrollment Reports. (a) PHS and Guardian shall prepare periodic and timely reports as set forth in Schedule C showing all Managed Care Contracts sold, renewed or terminated, and other enrollment information required by either party in order to perform its duties with respect to such Contracts. Such reports shall be made by each party on a periodic and timely basis on the Business Day following the date of transactions or other matters reported, and shall be transmitted by electronic transmission in a form reasonably acceptable to the receiving party. (b) PHS and Guardian shall prepare periodic reconciliations of the enrollment information in the possession of each party. 5.5 Membership Services. All membership services with respect to Subscribers under HMO Plans shall be provided by PHS. 19 ARTICLE VI PHS NETWORK MANAGEMENT 6.1 PHS Network Management. (a) PHS shall be solely responsible for development and maintenance (including, without limitation, quality assurance, utilization management and credentialing protocols) of the PHS Network. PHS shall provide Guardian with an accurate listing of the composition of the PHS Network at the Effective Date, and thereafter shall update the listing periodically, showing additions and deletions to the composition of the PHS Network. (b) PHS shall be solely responsible for any loss or liability arising from any inaccuracy in such listings. (c) Guardian may recommend additions to, or deletions from, the PHS Network, and PHS shall endeavor to be responsive to accommodate Guardian's recommendation. PHS shall have the sole authority to enter into contracts with providers. 6.2 Medical Management. PHS shall be solely responsible for all claims processing and auditing, health services (including hospital pre-certification, outpatient pre-certification, large claim case management and utilization review) and all risk accounting for the provider bonus arrangements under the HMO Plans. 20 6.3 Material Change in PHS Network. PHS acknowledges that maintenance of an adequate network of health care providers is of primary concern to Guardian, and agrees to notify Guardian if the PHS Network fails to meet the criteria set forth below. PHS further acknowledges and agrees that any failure to meet the following criteria constitutes material change in PHS Network. (i) The PHS Network will contain that number of physicians as determined by the parties, from time to time, equaling 80% or more of the number of physicians (practicing as individuals or in practice groups or clinics) determined by averaging the number of such physicians under contract with the three largest health maintenance organizations operating in the Service Area (measured by the number of persons eligible to receive benefits under such plans, but not including any plans offered by Blue Cross/Blue Shield of New York). (ii) The PHS network will contain a number of acute care institutions equaling 80% or more of the number of such institutions determined as in (i) above. (iii) The PHS Network will further contain a number of tertiary care institutions (as defined by the New York Hospital Association) equaling 80% or more of all such institutions determined as in (i) above. 6.4 Professional Liability Insurance. (a) PHS shall require each physician member of the PHS Network to maintain professional liability insurance, with limits of at least $1,000,000 per occurrence, and $3,000,000 in the aggregate for individual practitioners and practice groups, and $1,000,000 per occurrence and $3,000,000 aggregate for hospitals, 21 clinics and other institutional providers. Guardian accepts that hospitals and other institutional providers may self-insure or self-retain with respect to such liability limits, as permitted by applicable New York law and regulations. Guardian also recognizes that liability limits for the following individual non-physician members of the PHS Network may be $1,000,000 per occurrence and $1,000,000 in the aggregate: chiropractors, social workers, audiologists. speech pathologists, optometrists, physical therapists and occupational therapists. ARTICLE VII MARKETING AND ADMINISTRATIVE SERVICES FEE AND EXPENSES 7.1 Guardian's Marketing and Administrative Services Fee. PHS shall pay Guardian a Marketing and Administrative Services Fee for the duties assigned to Guardian under this Marketing and Services Agreement equal to the amount shown on Schedule B. as it may be amended from time to time, for each Quarter, or portion thereof, during which this Agreement is in effect. 7.2 PHS's Administrative Services Fee. PHS shall be entitled to an Administrative Services Fee for the administrative duties assigned to PHS under this Marketing and Services Agreement equal to the amount shown on Schedule B. as it may be amended from time to time, for each Quarter, or portion thereof, during which this Agreement is in effect. 7.3 Adjustments of Fee. The Fees set forth in Schedule B shall remain in effect for four Quarters, or portion thereof, beginning with the Quarter that includes the Effective Date. 22 Each party shall have the right to adjust the Fees payable hereunder for any subsequent period of four Quarters by providing notice to the other party of an amendment of Schedule B no less than forty-five (45) calendar days prior to the beginning of the next such period. Such adjustment will be limited to an amount necessary to cover changes in that party's costs of providing services hereunder, without provision of profit. 7.4 Expenses. Each party shall be responsible for its expenses incurred in connection with this Agreement; provided, however, that expenses attributable to the development and initial production of Marketing Materials shall be shared equally. Each party shall calculate such expenses (including, without limitation, a reasonable allocation of internal expenses, production and printing expenses and legal expenses incurred in connection with obtaining regulatory approval of any forms) on a Quarterly basis, and shall provide the other party with a schedule of such expenses in connection with each Quarterly Accounting Report. A party whose expenses under this Section 7.4 exceed one-half of the aggregate of the expenses incurred by both parties for the Quarter shall be entitled to reimbursement for such excess within forty-five (45) calendar days from the end of such Quarter. 7.5 Reinsurance Agreement. At the option of the parties, the fees and expenses hereunder may be incorporated in any Reinsurance Agreement entered into between the parties (or affiliates of the parties) to the extent that such fees relate to reinsured HMO Plans or Out-of-Network Contracts. 23 ARTICLE VIII ACCOUNTING AND REPORTING 8.1 Quarterly Accounting Reports. Within forty-five (45) calendar days of the end of each Quarter, each party shall supply the other with a Quarterly Accounting Report as defined in Section 7.3 of the Reinsurance Agreement. Quarterly Accounting Reports shall be made for the Quarter that includes the Effective Date, and shall be made for each Quarter following the effective date of termination of this Agreement if any amount is due any party under this Agreement. 8.2 Settlements. Settlement of all amounts due pursuant to this Agreement shall be made on a net basis in connection with the Quarterly Accounting Report. If one party owes a net amount to the other, such amount shall be paid in accordance with Section 7.3 of the HMO Reinsurance Agreement (with respect to amounts relating to the HMO Plans) and Section 7.3 of the Indemnity Reinsurance Agreement (with respect to amounts relating to the Health Insurance Contracts). 8.3 Reconciliation. Each party shall have the right to review all individual components of transactions entered into each Quarterly Accounting Report. The parties shall have twenty (20) Business Days from the day the Quarterly Accounting Report is submitted to report any deficiency in such report and to request an adjustment of any payment made to or received by either party. Any amount due either party in connection with such reconciliation 24 shall be paid within twenty (20) calendar days of the receipt of notice that additional amounts are due. 8.4 Best Efforts to Supply Actual Data. In preparing all reports required in this Agreement, Guardian or PHS, as the case may be, shall make its best efforts to supply the actual data. If the actual data cannot be supplied with the appropriate report, Guardian or PHS, as the case may be, shall produce best estimates, and shall provide amended reports based on actual data no more than thirty (30) calendar days after such report was originally due. 8.5 Statement of Actuarial Opinion. (a) Within forty-five (45) calendar days after the end of the calendar year, each party shall provide the other with a Statement of Actuarial Opinion certifying the adequacy of the reserve for products covered under this Agreement. The Actuarial Opinion must state whether or not the reserve for products covered under this Agreement meet the minimum standards of all states where each party is licensed, and if not, the Actuarial Opinion must state the difference between reserves and state minimums (b) The Actuarial Opinion shall meet the requirements set forth in the NAIC's Actuarial Opinion and Memorandum Regulation and shall be signed by each party's "Appointed Actuary." The Appointed Actuary may or may not be an employee of such party. 25 ARTICLE IX REINSURANCE AGREEMENTS 9.1 HMO Reinsurance Agreement. The parties each hereby acknowledge that, simultaneously with the execution of this Agreement, they intend to enter into a reinsurance agreement in the form attached hereto as Exhibit A-1 (the "HMO Reinsurance Agreement"). The parties intend, under the terms of the HMO Reinsurance Agreement, that PHS will cede to Guardian certain specified percentages of the risks under the HMO Plans, including those HMO Plans with a point of service feature, as more fully described in the HMO Reinsurance Agreement. In return. Guardian shall be allocated specified percentages of premiums received by PHS with respect to the HMO Plans, all as more fully described in the HMO Reinsurance Agreement. 9.2 Indemnity Reinsurance Agreement. The parties each hereby acknowledge that, simultaneously with the execution of this Agreement, they intend to enter into a reinsurance agreement in the form attached hereto as Exhibit A-2 (the "Indemnity Reinsurance Agreement"). The parties intend, under the terms of the Indemnity Reinsurance Agreement, that Guardian will cede to Physicians Health Services (Bermuda) Ltd. ("PHS (Bermuda)"), an affiliate of PHS, certain specified percentages of the risks under the Out-of-Network Contracts, as more fully described in the Indemnity Reinsurance Agreement. In return, PHS (Bermuda) shall be allocated specified percentages of premiums received by Guardian with 26 respect to the Out-of-Network Contracts. all as more fully described hi the indemnity Reinsurance Agreement. ARTICLE X TERM AND TERMINATION 10.1 Effective Date. This Agreement shall become effective on October 1, 1996 (the "Effective Date"), and shall continue in effect unless terminated pursuant to the terms of this Article X. Notwithstanding anything to the contrary stated in this Article X. this Agreement shall continue in effect. solely with respect to the provision of administrative services, for any Managed Care Contract in effect on the Contract Termination Date until 180 days subsequent to the next succeeding renewal date of any Managed Care Contract following such Contract Termination Date; and provided, further however, that in the event of a termination pursuant to Section 8.6 of the HMO and Indemnity Reinsurance Agreements, this Agreement shall remain in effect solely with respect to the provision of administrative services with respect to any Continuation Plan for the period stated in Section 8.6 of the HMO and Indemnity Reinsurance Agreements. 10.2 Termination Due to Change of Control. In the event of a Change of Control in one party, the other party shall have the right to terminate this Agreement as set forth in Section 8.6 in the HMO and Indemnity Reinsurance Agreements. The Contract Termination Date under this Section 10.2 shall be the effective date of the Change of Control. 27 10.3 Termination Without Cause. (a) Either party shall have the right to terminate this Agreement without cause upon 180 days prior written notice to the other party. The Contract Termination Date under this Section 10.3 shall be the 180th day following the giving of notice required by this Section 10.3. (b) If PHS terminates this Agreement pursuant to Section 10.3(a), it agrees to pay Guardian an amount equal to one half the fair market value of all HMO Plans in force on the effective date of termination, other than HMO Plans that (i) resulted from the conversion of pre-existing PHS contracts to Managed Care Contracts, or (ii) are not continued as PHS plans on or before the first renewal date for such contracts following the effective date of termination. In the event that Guardian terminates this Agreement pursuant to Section 10.3(a), Guardian agrees to pay PHS an amount equal to one half the fair market value of all Out-of-Network Contracts in force on the effective date of termination, other than Out-of-Network Contracts that (i) resulted from the conversion of pre-existing Guardian contracts to Managed Care Contracts, or (ii) are not continued as Guardian health insurance contracts on or before the first renewal date for such contracts following the effective date of termination. (c) The parties will agree to a method of valuation of the HMO Plans and Out-of-Network Contracts (using methods of valuation customarily used in valuing HMO Plans or health insurance business). If the parties are unable to agree on valuation, the matter 28 will be referred to arbitration. Payments required under this Section 10.3 shall be made in connection with the final Annual Accounting Report. 10.4 Termination For Cause. (a) In the event that either party shall default in the performance of the duties and obligations imposed on it pursuant to the terms of this Agreement or the Reinsurance Agreement(s), or breach any of the provisions contained herein or therein, including the failure to pay any amount when due, or the failure of either party to maintain a level of services under this Agreement that is reasonably satisfactory to the other party, the defaulting party shall be allowed thirty (30) calendar days from written notice of such default or breach to present to the non-defaulting party a plan to cure such default or breach that is reasonably satisfactory to the non-defaulting party. If a reasonably satisfactory plan to cure the default or breach is not submitted within that time, or if the plan is not carried out according to its terms, the non-defaulting party shall have the right to terminate this Agreement, and the Reinsurance Agreement(s), upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non defaulting party by reason of such default or breach. (b) In the event that either party shall engage in fraudulent, illegal or grossly negligent conduct with respect to its duties and obligations under this Agreement or the Reinsurance Agreement(s), the other party shall have the right to terminate this Agreement, 29 and the Reinsurance Agreement(s), upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non defaulting party by reason of the defaulting party's conduct. (c) In the event that this Agreement is terminated pursuant to this Section 10.4, the provisions of Section 10.3(b) shall apply as if the defaulting party elected to terminate this Agreement. (d) The Contract Termination Date under this Section 10.4 shall be the date of receipt of notification of termination. 10.5 Termination Due to Financial Impairment or Loss of Authority. In the event that either party shall become unable to perform its obligations under the Managed Care Contracts because of financial impairment or loss of authority to act under law, or by action of any regulatory authority, the other party shall have the right, subject to the requirements of relevant law and receipt of necessary approvals, to terminate this Agreement and have the Managed Care Contracts assigned to, and all obligations assumed by, an appropriately licensed organization that provides substantially similar healthcare services as described in this Agreement. The Contract Termination Date under this Section 10.5 shall be the date set forth in Section 8.8 of the HMO and Indemnity Reinsurance Agreements. 10.6 Termination for Material Change in PHS Network. In the event that the PHS Network undergoes a material change within the meaning of Section 6.3 of this Agreement, 30 PHS shall be allowed thirty (30) days to present to Guardian a plan to cure such Material Change that is reasonably satisfactory to Guardian. If a reasonably satisfactory plan to cure the Material Change is not submitted within that time, or if the plan is not carried out according to its terms, Guardian shall have the right to terminate this Agreement, and the Reinsurance Agreement(s), upon delivery of written notice of such termination to PHS, which shall be effective upon receipt, without prejudice to any other rights or remedies available to Guardian. The Contract Termination Date under this Section 10.6 shall be the date of receipt of notification to terminate. 10.7 Buy-Out Provisions. The parties acknowledge and agree that the "buy-out" provisions set forth in Section 10.3(b) above apply only to terminations under Sections 10.3(a) and 10.4 above. Such buy-out provisions do not apply to terminations under any other section of this Agreement or to terminations under the HMO Reinsurance Agreement or the Indemnity Reinsurance Agreement. ARTICLE XI INDEMNIFICATION 11.1 PHS's Indemnification. PHS shall indemnify Guardian against all liabilities, losses, suits, damages, costs, and expenses (including, without limitation, damages resulting from breach of this Agreement and reasonable fees of Guardian's attorneys and other expenses 31 of litigation), net of recoveries from third parties, arising out of or in connection with PHS's obligations under this Agreement, including acts or omissions to act, or negligent, willful, reckless or intentional wrongs, fraud, oppression or bad faith. 11.2 Guardian's Indemnification. Guardian shall indemnify PHS against all liabilities, losses, suits, damages, costs and expenses (including, without limitation, damages resulting from breach of this Agreement, reasonable fees of PHS's attorneys and other expenses of litigation), net of recoveries from third parties, arising out of or in connection with Guardian's obligations under this Agreement, including acts or omissions to act, or negligent, willful, reckless or intentional wrongs, fraud, oppression or bad faith. 11.3 Liability under PHS's HMO Plans. Except as specifically set forth in any Reinsurance Agreement(s) to be entered into between the parties, Guardian is not a guarantor, insurer, or reinsurer of, or joint venturer with, PHS. Guardian does not accept any risk of loss for, nor provide any indemnification to PHS, any Contractholder or Subscriber, any provider or any other person with respect to an HMO Plan. PHS shall indemnify Guardian for all liabilities, losses, suits, damages, costs and expenses (including reasonable fees of Guardian's attorneys, and other expenses of litigation), net of recoveries from third parties, arising in connection with a HMO Plan or the PHS Network, including action or failure to act by PHS, or its employees or agents (excluding health care providers who or which are not employees of, or under an agency agreement with, PHS). 32 11.4 Liability under Health Insurance Contracts and Ancillary Products. Except as set forth in any Reinsurance Agreement(s) to be entered into between the parties, PHS is not a guarantor, insurer, or reinsurer of, or joint venturer with, Guardian. PHS does not accept any risk of loss, nor provide any indemnification to Guardian, any Contractholder or Subscriber, any provider or any other person with respect to a Health Insurance Contract or Ancillary Product. Guardian shall indemnify PHS for all liabilities, losses, suits, damages, costs and expenses (including reasonable fees of PHS's attorneys, and other expenses of litigation), net of recoveries from third parties, arising in connection with a Health Insurance Contract or Ancillary Product, including action or failure to act by Guardian, or its employees or agents. 11.5 Survival of Article. This Article XI shall survive the termination or nonrenewal of this Agreement. ARTICLE XII ARBITRATION 12.1 Appointment of Arbitrators. In the event of any disputes or differences arising hereafter between the parties with reference to any transaction under or relating in any way to this Agreement, as to which agreement between the parties hereto cannot be reached, the dispute or difference shall be resolved by arbitration. Three arbitrators shall decide any 33 dispute or difference. The arbitrators must be disinterested officers or retired officers of life and health insurance or health maintenance organizations other than the two parties to this Agreement or their affiliates. Each of the parties agrees to appoint one of the arbitrators with the third, to be chosen by the two appointed arbitrators. In the event that either party should fail to choose an arbitrator within thirty (30) calendar days following a written request by the other party to do so, the requesting party may choose a second arbitrator before entering upon arbitration. In the event that the two arbitrators shall not be able to agree on the choice of the third arbitrator within twenty (20) calendar days following their appointment. each arbitrator shall nominate five (5) candidates within ten (10) calendar days thereafter, four (4) of whom the other party shall decline, and the third arbitrator shall be chosen by the President of the American Arbitration Association or his designee. Should the chosen third arbitrator so selected decline to serve, the candidate who was not chosen by the President shall be appointed. This process shall continue until a candidate has agreed to serve. 12.2 Decision. The arbitrators shall consider customary and standard practices in the health insurance and managed care business. They shall decide by a majority vote of the arbitrators. There shall be no appeal from their written decision. judgment may be entered on the decision of the arbitrators by any court having jurisdiction. If, in the opinion of the arbitrators, a dispute cannot be otherwise resolved. this Agreement shall be terminated in accordance with Section 10.4 hereof. 34 12.3 Expenses of Arbitration. Each party shall bear the expense of its own arbitrator (whether selected by that party, or by the other party pursuant to the procedures set out in Section 12.1) and related outside attorneys' fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator. 12.4 Applicable Law. Any arbitration instituted pursuant to this Article shall be held in New York and the laws of the State of New York and, to the extent applicable, the Federal Arbitration Act, shall govern the interpretation and application of this Agreement. 12.5 Survival of Article. This Article shall survive termination of this Agreement. ARTICLE XIII MISCELLANEOUS 13.1 Stop-Loss Coverage. Guardian shall have the right to provide Contractholders with stop-loss insurance or reinsurance with respect to HMO Plans that are Managed Care Contracts subject to this Agreement. Guardian shall have the right to bid on stop-loss reinsurance protection for all other business of PHS. Nothing herein shall require PHS to reinsure HMO Plans that are not Managed Care Contracts with Guardian. In addition, Guardian acknowledges that PHS has certain existing arrangements, and may enter into 35 additional arrangements in the future, for stop-loss reinsurance coverage for HMO Plans that are not Managed Care Contracts which shall remain in effect regardless of this Agreement. 13.2 Misunderstandings and Oversights. If any delay, omission, error or failure to perform any act required by this Agreement is unintentional and caused by misunderstanding or oversight, PHS and Guardian will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. The party that first discovers such oversight or incorrect act as a result of the misunderstanding will notify the other party in writing promptly upon discovery of the misunderstanding or oversight. The parties shall act to correct the error, omission or oversight within thirty (30) days of notification of the problem. This Section 13.2 shall not be construed as a waiver by either party of its right to enforce strictly the terms of this Agreement. 13.3 Non-Solicitation. (a) During the term of this Agreement, neither Guardian nor any entity under Guardian's control shall contact, solicit or contract for services with any PHS Network health care provider then under contract with PHS. Nothing in this Agreement shall preclude PHCS from contracting with any PHS Network health care provider. (b) During the term of this Agreement, neither party shall knowingly solicit for employment an employee of the other party who has been engaged in activities covered by this Agreement, without written consent of the other party. 36 13.4 Regulatory Approval. Performance of the obligations of either party under this Agreement shall be subject to the receipt of necessary regulatory approvals under the laws, regulations and practices of regulatory authorities in New York. PHS and Guardian shall cooperate in attempting to obtain expeditiously any necessary regulatory approvals from regulatory authorities. Each party will bear its own expenses in obtaining such approvals. 13.5 Audits. Each party shall have the right, upon reasonable notice to the other party, and at the requesting party's expense, to audit the books and records of the other party relating to receipts, enrollment, service standards and other matters relating to this Agreement during regular business hours at the premises of the audited party where such records are normally maintained. The audited party shall reasonably cooperate in any such audit. 13.6 Headings and Schedules. Headings used herein are not part of this Agreement. Any Schedules or Exhibits attached hereto are part of this Agreement. 13.7 Compliance with Applicable Laws and Regulations. It is the intention of the parties that this Agreement comply with all existing applicable laws and regulations, as from time to time are in effect, so that the Agreement remains in full force. Each of the parties agrees to comply with all laws, ordinances, rules, regulations and orders of regulatory bodies applicable to the transactions contemplated by this Agreement, including those relating to 37 maintenance of appropriate licenses and the appointment of agents and payment of commissions. Either party shall promptly notify the other party of any complaint, inquiry or lawsuit by any regulatory authority relating to the Managed Care Contracts or to this Agreement. 13.8 Successors and Assigns: Binding Effect. Except as otherwise provided herein and in the HMO and Indemnity Reinsurance Agreements this Agreement cannot be assigned by PHS or Guardian without the prior written approval of the other party. The provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective permitted successors and assigns. 13.9 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same agreement. 13.10 Entire Agreement: Amendment. This Agreement and the Reinsurance Agreements constitute the entire agreement between the parties with respect to the Managed Care Contracts and Ancillary Products, and supersede any previous written or oral agreements. This Agreement shall be amended only by written agreement signed by a duly authorized officer of each of PHS and Guardian, and any change to this Agreement shall be null and void unless made by such written agreement; provided, however, that where, under insurance, 38 health or other applicable laws or regulations, the approval of any such amendment to this Agreement by one or more federal, state or local governmental or regulatory authorities is required, the amendment shall not take effect unless and until all such necessary approvals have been obtained and received by both PHS and Guardian. In the event that any such approval is required, PHS and Guardian shall each take all necessary actions in order to obtain such approval. 13.11 Waivers. The waiver by either of the parties of the other party's prompt and complete performance, or breach or violation, of any provisions of this Agreement and related documents shall not operate or be construed as a waiver of any subsequent breach or violation, and the waiver by any of the parties to exercise any right or remedy which it may possess hereunder shall not operate or be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 13.12 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflicts of laws thereof. 13.13 Severability. In the event any section or provision of this Agreement or related documents is found to be void and unenforceable by a court of competent jurisdiction, the remaining sections and provisions of this Agreement or related documents shall nevertheless be 39 binding upon the parties with the same force and effect as though the void or unenforceable part had not been severed or deleted. 13.14 Notices. Any notice to be given pursuant to the terms of this Agreement shall be given in writing either by personal delivery or by mail, registered or certified, return receipt requested and postage prepaid. Mail notices shall be sent to the parties at their respective addresses as shown: If to Guardian: The Guardian Life Insurance Company of America 201 Park Avenue South New York, New York 10003 Attention: Edward K. Kane, Esq. Senior Vice President and General Counsel If to Physicians Health Services, Inc.: Physicians Health Services, Inc. 120 Hawley Lane Trumbull, Connecticut O6611 Attention: Regina M. Campbell Senior Vice President & Chief Administrative Officer If to Physicians Health Services of New York, Inc.: Physicians Health Services of New York, Inc. 399 Knollwood Road, Suite 212 White Plains, New York 10603 Attention: Executive Director 40 13.15 Confidentiality. (a) Neither Guardian nor PHS shall disclose any proprietary or confidential information of the other party to a third party without the express written consent of the other party to this Agreement. For purposes of this Agreement, "proprietary and confidential" information will include, without limitation, all internal business practices and business records, information concerning products and pricing, contracts, computer hardware and software or business methods in any form whatsoever, peer review, quality assurance and grievance procedures, any aspect of the utilization review program, provider fee schedules, reimbursement schedules, or discounts, and advertising or marketing information, but not including information otherwise available to the public. Neither party shall use any proprietary and confidential information of the other party for its own benefit. Upon termination of this Agreement, each party will immediately return to the other party any confidential information, claims files necessary for the continued administration of any Plan, and other property of the other party. (b) Guardian and PHS agree to maintain the confidentiality of any health care information pertaining to Subscribers including, without limitation, files, records, reports, and other information prepared and maintained in connection with this Agreement, in accordance with all applicable laws and regulations. (c) Each Party shall obtain any necessary consent from Subscribers with respect to the release to the other party of any confidential information relating to such 41 Subscribers, by means of general or specific releases, as appropriate. Each party shall notify the other if it becomes aware that proper releases have not been obtained. (d) Guardian shall not make any list of PHS providers available to any person other than appropriate regulatory authorities, Guardian employees who are engaged in operations relating to this Agreement, and independent brokers and other persons engaged in marketing of Managed Care Contracts. 13.16 Press Releases. No public statement or press release regarding the existence of this Agreement shall be made by either party without obtaining the prior written consent of the other party, except as required by applicable laws or regulations. 13.17 Relationship of Parties. The parties to this Agreement are and shall remain independent contractors. Neither party is the employee or agent of the other party, except as set forth herein, and neither party has an express or implied right to bind the other party. The parties do not intend to form a joint venture, partnership, or to be governed by laws relating to any relationship other than that of independent contractors. Neither party is authorized to modify, alter or waive the terms of any product issued by the other party. 42 13.18 Offset. In the event that either party to this Agreement shall fail to make payment of any amount that is due and owing to the other party under this Agreement, all mutual debts shall be offset, and only the balance of such debts shall be paid. 13.19 Financial Statements. Each party shall furnish financial statements as filed with the appropriate regulatory authority to the other party upon request. 13.20 Regulatory Review. The parties acknowledge and agree that this Agreement is subject to the review and approval of the New York State Department of Insurance. The parties expressly agree that any revisions to this Agreement required by the New York State Department of Insurance will be addressed in an amendment to, or restatement of, the Agreement. 43 EXECUTION IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. PHYSICIANS HEALTH SERVICES, INC. By /s/ REGINA M. CAMPBELL -------------------------- Name Regina M. Campbell Title Senior Vice President PHYSICIANS HEALTH SERVICES OF NEW YORK By /s/ REGINA M. CAMPBELL -------------------------- Name Regina M. Campbell Title Senior Vice President THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA By /s/ JOSEPH D. SARGENT -------------------------- Name Joseph D. Sargent Title President and CEO 44 SCHEDULE A DESCRIPTION OF MANAGED CARE CONTRACTS [DESCRIBE NY PLANS] A-1 NEW YORK PASSPORT HMO - HEALTHCARE SOLUTIONS =============================================================================================================== N36000 (5-lONYP) PHS 5 (Customized) Healthcare Solutions, eff. 7/1/95 - --------------------------------------------------------------------------------------------------------------- N37000 (15-20, 25 and PHS 15 (Customized) Healthcare Solutions, eff. 7/1/95 26NYP - --------------------------------------------------------------------------------------------------------------- N38000 (11-14NYP) PHS 5/250 (Customized) Healthcare Solutions, eff. 7/1/95 - --------------------------------------------------------------------------------------------------------------- N39000 (21-24NYP) PHS 15/500 (Customized) Healthcare Solutions, eff. 7/1/95 - ---------------------------------------------------------------------------------------------------------------
12/18/96 6 NEW YORK CHARTER POS - HEALTHCARE SOLUTIONS
- ------------------------------------------------------------------------------------------------------------------------------------ Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ N3627G PHS 5 $200 $5OO 70% of the $1,700 $4,250 NA Available for sale 5NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3637G PHS 5 $300 $750 70% of the $1,800 $4,500 NA Available for sale 6NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3657G PHS 5 $500 $l,250 70% of the $2,000 $5,000 NA Available for sale 7NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3628G PHS 5 $200 $500 80% of the $1,200 $3,000 NA Available for sale 8NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA Available for sale 9NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 1ONYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3837G PHS 5/250 $300 $750 70% of the $1,800 $4,500 NA Available for sale 11NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3857G PHS 5/250 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 12NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3838G PHS 5/25O $300 $750 80% of the $1,300 $3,250 NA Available for sale 13NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3858G PHS 5/250 $500 $1,250 80% of the $l,500 $3,750 NA Available for sale 14NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3727G PHS 15 $200 $500 70% of the $1,700 $4,250 NA Available for sale 15NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3737G PHS 15 $300 $750 70% of the $l,800 $4,500 NA Available for sale 16NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3757G PHS 15 $500 $l,250 70% of the $2,000 $5,000 NA Available for sale 17NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3728G PHS 15 $200 $500 80% of the $1,200 $3,000 NA Available for sale 18NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------
7 12/18/96 NEW YORK CHARTER POS - HEALTHCARE SOLUTIONS
- ------------------------------------------------------------------------------------------------------------------------------------ Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ N3738G PHS 15 $300 $75O 80% of the $1,300 $3,250 NA Available for sale 19NYC next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3758G PHS 15 $500 $l,250 80% of the $1,500 $3,750 NA Available for sale 20NYC next $5,OOO eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3957G PHS $500 $l,2SO 70% of the $2,000 $5,000 NA Available for sale 21NYC 15/500 next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3958G PHS $5OO $l,250 80% ofthe $l,500 $3,750 NA Available for sale 22NYC 15/500 next $5,000 eff. 7/1 /95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3917G PHS $l,OOO $2,500 70% of the $3,700 $9,250 NA Available for sale 23NYC 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3918G PHS $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale 24NYC 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3717G PHS 15 $l,OOO $2,500 70% of the $3,700 $9,250 NA Available for sale 25NYC next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale 26NYC next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------
12/18/96 8 NEW YORK PASSPORT POS - HEALTHCARE SOLUTIONS
- ------------------------------------------------------------------------------------------------------------------------------------ Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ N3627G PHS 5 $200 $500 70% of the $l,700 $4,2SO NA Available for sale 5NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3637G PHS 5 $300 $750 70% of the $l,800 $4,500 NA Available for safe 6NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3657G PHS 5 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 7NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3628G PHS 5 $200 $500 80% of the $l,200 $3,000 NA Available for sale 8NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA Available for sale 9NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale lONYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3837G PHS 5/250 $300 $750 70% Of the $l,800 $4,500 NA Available forsale 11NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3857G PHS 5/250 $500 $l,250 70% of the $2,000 $5,000 NA Available for sale 12NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3838G PHS 5/250 $300 $750 80% of lhe $l,300 $3,250 NA Available for sale 13NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3858G PHS 5/250 $500 $l,250 80% of the $l,500 $3,750 NA Available for sale 14NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------
12/18/96 9 NEW YORK PASSPORT POS - HEALTHCARE SOLUTIONS
- ------------------------------------------------------------------------------------------------------------------------------------ Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ N3727G PHS 15 $200 $500 70% of tbe $l,700 $4,250 NA Available for sale 15NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA Available for sale 16NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3757G PHS i5 $500 $l,250 70% of the $2,000 $5,000 NA Available forsale 17NYP next $5,OOO eff. 7/1/95(1) - ------------------------------------------------------------------------------------------------------------------------------------ N3728G PHS 15 $200 $500 80%of the $1,200 $3,000 NA Available forsale 18NYP next $5,000 eff. 7/l/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3738G PHS 15 $300 $750 80% of the $1,300 $3,250 NA Available for sale 19NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3758C PHS 15 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 20NYP next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA Availabic for sale 21NYP 15/500 next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3958G PHS $500 $1,250 80% of the $l,500 $3,750 NA Available for sale 22NYP 15/500 next $5,000 eff. 7/1/95 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale 23NYP 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3918G PHS $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale 24NYP 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3717G PHS 15 $l,OOO $2,500 70% of the $3,700 $9,250 NA Available for sale 25NYP next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ N3718G PHS 15 $1,OO0 $2,500 80% of the $2,800 $7,000 NA Availabic for sale 26NYP next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------
12/18/96 10 NY (IN) Schedule B Contract Allowances Administrative Service Fee I. Guardian's Administrative Services Fee (as a percentage of premium) HMO POS(In) --- ------- Marketing 0.63% 0.63% Sales 1.38% 1.38% Administration 1.30% 1.30% Billing/Collections 1.69% 1.69% Advertising 0.15% 0.15% Total 5.15% 5.15% II. PHS' Administrative Services Fee (as a percentage of premium) HMO POS(In) --- ------- Health Services, UR 1.67% 1.67% Net Mgt, MDD, QA 2.43% 2.43% Operations 3.58% 3.58% Acct Svc., Cust Srv. 1.44% 1.44% Marketing 0.63% 0.63% Sales 0.15% 0.15% Administration 1.30% 1.30% Advertising 0.15% 0.15% Total 11.35% 11.35% NY (OUT) Schedule B Contract Allowances, Administrative Service Fee I. Guardian's Administrative Services Fee (as a percentage of premium) POS (Out) --------- Marketing 0.63% Sales 1.38% Administration 1.30% Claims N/A Billing/Collections 1.69% Advertising 0.15% Total 5.15% II. PHS' Administrative Services Fee (as a percentage of premium) POS (Out) --------- Health Services, UR 1.67% Net Mgt, MDD, QA 2.43% Operations 3.58% Acct Svc., Cust Srv. 1.44% Marketing 0.63% Sales 0.15% Administration 1.30% Advertising 0.15% Total 11.35% EXHIBIT A-1 HMO REINSURANCE AGREEMENT EX-1 EXHIBIT A-l INDEMNITY REINSURANCE AGREEMENT EX-2 EX-10.(O) 6 AMENDED & RESTATED MRKTG & SVCS AGRMT, DTD 10/01/96 Exhibit 10 (o) AMENDED AND RESTATED MARKETING AND SERVICES AGREEMENT By and Among PHYSICIANS HEALTH SERVICES, INC. and its affiliate, PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC. and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA AMENDED AND RESTATED MARKETING AND SERVICES AGREEMENT Reference is hereby made to the Marketing and Services Agreement (the "Marketing and Services Agreement") made and entered into as of April 17, 1996 (the "Inception Date") by and among PHYSICIANS HEALTH SERVICES, INC., a corporation organized under the laws of the State of Delaware, and its affiliate, PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC., a corporation organized under the laws of the State of New Jersey as a health maintenance organization (collectively, "PHS," unless the context indicates reference to Physicians Health Services, Inc. or Physicians Health Services of New Jersey, Inc. as separate corporate entities), and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a mutual life insurance company organized under the laws of the State of New York ("Guardian"). This Amended and Restated Marketing and Services Agreement is dated as of October 1, 1996, and when executed by the parties hereto, shall supersede and replace the Marketing and Services Agreement and shall constitute a binding and enforceable amendment to the Marketing and Services Agreement in its entirety. THE MARKETING AND SERVICES AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY AS FOLLOWS: This Amended and Restated Marketing and Services Agreement (this "Agreement") is made and entered into as of this 1st day of October, 1996 by and among PHYSICIANS HEALTH SERVICES, INC., PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC. and GUARDIAN. RECITALS WHEREAS, PHS, which is licensed to operate a health maintenance organization in the State of New Jersey, maintains a network of health care providers in the State of New Jersey, and is authorized to offer for sale plans providing managed care health care benefits in such State; WHEREAS, Guardian desires to make different types of managed care health coverage plans available for sale by the Guardian Marketing Force (as defined herein) in the State of New Jersey: WHEREAS, PHS is willing to make its managed care health coverage plans available for sale by the Guardian Marketing Force; WHEREAS, Guardian is authorized to offer for sale preferred provider organization plans and indemnity insurance contracts (collectively, "Health Insurance Contracts," as defined herein) to individuals and groups in the State of New Jersey and to offer certain other insurance plans in such State, including group life, disability and dental insurance plans ("Ancillary Products," as defined herein); WHEREAS, PHS desires to make Health Insurance Contracts and Ancillary Products available for sale by PHS in the State of New Jersey; 2 WHEREAS, PHS and Guardian each desire to market "multi-choice" plans, which give employees the option of choosing benefits under pre-selected combinations of health coverage plans; and WHEREAS, PHS and Guardian desire to enter into a reinsurance transaction, pursuant to which Guardian will reinsure PHS with respect to risks under HMO Plans (as defined herein); NOW THEREFORE, in consideration of the mutual agreements contained herein, the sufficiency of which is hereby acknowledged, and in consideration of the performance by the parties of their obligations under this Agreement, the parties agree as follows: 3 ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (definitions are applicable to both the singular and the plural form of each term defined herein): "Ancillary Products" means the life insurance, short- and long-term disability insurance, accidental death and dismemberment insurance, and dental insurance products offered by Guardian as designated by the parties from time to time. "Business Day" means any day except Saturday or Sunday or any legal Federal or New Jersey holiday. "Change of Control" means the acquisition, in a single transaction or in a series of related transactions, by a person, an entity, or a group of persons or entities acting in concert of: (i) twenty-five percent (25 %) or more (a) of the voting common stock of Physicians Health Services, Inc. or Physicians Health Services of New Jersey, Inc. (excluding any acquisition of stock by a party currently owning twenty-five percent (25 %) or more of such common stock), or (b) fifty-one percent (51 %) or more of the aggregate value of the assets of Physicians 4 Health Services, Inc. or Physicians Health Services of New Jersey, Inc.; or (ii) twenty-five percent (25 %) or more of any ownership interest in Guardian. "Continuation Plan" has the meaning given such term in the HMO Reinsurance Agreement. "Contractholder" means an employer in the Service Area who or which executes an enrollment agreement with respect to any Managed Care Contract subject to this Agreement. "Contract Termination Date" means the effective date upon which the Agreement terminates pursuant to the applicable Section in Article X below. "Eligible Employee" means an employee who is eligible to enroll in the Contractholder's Plan. "Effective Date" shall have the meaning set forth in Section 10.1. "Guardian Marketing Force" means employees of Guardian, and any agents under contract with Guardian who or which are licensed in the State of New Jersey to sell individual and/or group health insurance contracts and who or which are acting on behalf of Guardian, but not including employees or agents of PHS, or independent brokers. 5 "Health Insurance Contracts" means contracts for health insurance offered on a fee for service or indemnity basis by Guardian in the Service Area when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. Health Insurance Contracts include preferred provider plans using the PHS Network or PHCS' network of providers offered by Guardian in the Service Area. "HMO Plans" means commercial contracts for health care services provided by PHS to Contractholders in the Service Area utilizing the PHS Network to provide health care services when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. HMO Plans include HMO Plans with a "point-of-service" feature. "HMO Reinsurance Agreement" means the form of Reinsurance Agreement described in Section 9.1 and attached hereto as Exhibit A-1. "Managed Care Contracts" means any HMO Plan or Health Insurance Contract purchased by a Contractholder pursuant to Article 11 below. 6 "Marketing Materials" shall have the meaning set forth in Section 2.6. "Material Change" shall have the meaning set forth hi Section 6.3. "PHCS" means Private Healthcare Systems, Incorporated, a Delaware corporation with its headquarters in Waltham, Massachusetts, that organizes managed care networks. "PHS Network" means the network of health care providers in the Service Area; including physicians and other individual practitioners and health care facilities or individual practice associations, who or which are under direct or indirect contract with PHS to provide services to Subscribers under a HMO Plan. "Plans" means the HMO Plans, Health Insurance Contracts and Ancillary Products sold pursuant to this Agreement. "Quarter" means each of the four consecutive three-month periods in a calendar year. "Quarterly Accounting Report" shall have the meaning set forth in Section 8.1. "Service Area" means the State of New Jersey. 7 "Subscriber" means the persons, including, but not limited to, Eligible Employees, who have enrolled in a Managed Care Contract and who meet the Contractholder's and the Managed Care Contract's eligibility requirements. 8 ARTICLE II MARKETING AND SALES 2.1 Marketing and Sale of the HMO Plans by Guardian. (a) During the term of this Agreement, Guardian shall have the right to market HMO Plans to its existing and prospective customers through the Guardian Marketing Force, pursuant to the terms of Section 2.3 below. (b) Except as permitted by 2.1(c) below, Guardian shall not enter into any marketing agreements or similar agreements with any managed care organization other than PHS for purpose of offering managed care products for sale in the Service Area. (c) Nothing contained in this Agreement shall limit Guardian's right to contract with PHCS for the purpose of developing managed care networks in the Service Area or elsewhere: provided, however, that during the term of this Agreement, Guardian shall not, without consulting with PHS, replace a HMO Plan with a similar type of plan utilizing a PHCS network. (d) Nothing contained in this Agreement shall limit Guardian's right to market Health Insurance Contracts and Ancillary Products not subject to this Agreement directly to employers with whom Guardian contracts. 9 2.2 Marketing and Sale of Health Insurance Contracts by PHS: Ancillary Products. (a) During the term of this Agreement, PHS shall have the right to market Health Insurance Contracts and Ancillary Products to its existing and prospective customers in the Service Area, pursuant to the terms of Section 2.3 below. (b) Except with Guardian's prior written consent and except as permitted by Section 2.2(c) below, PHS shall not enter into marketing or similar agreements with any entity other than Guardian with respect to marketing in the Service Area of HMO Plans, Health Insurance Contracts or Ancillary Products or insurance products substantially similar to the Health Insurance Contracts or Ancillary Products. (c) PHS expressly acknowledges and agrees that notwithstanding anything to the contrary stated in this Section 2.2(c), that it has not, and that it will not, enter into any marketing or similar agreement with any entity other than Guardian with respect to marketing in the Service Area of any commercial, fully insured HMO Plan, Health Insurance Contract or Ancillary Product. Nothing contained in this Agreement shall limit PHS' right to contract with Mastercare Companies, Inc. ("Mastercare") for the purpose of marketing a managed care workers compensation plan; provided, however, that during the term of this Agreement, PHS shall not, without consulting with Guardian, solicit any Contractholder for the purpose of replacing a Managed Care Contract with a plan jointly marketed by PHS and Mastercare. Guardian acknowledges and agrees that PHS may enter into arrangements in the Service Area with respect to marketing Ancillary Products in connection with PHS' Medicare and Medicaid health maintenance organization plans ("Government Plans"). Guardian also acknowledges 10 and agrees that prior to the Effective Date that PHS entered into an arrangement with Dental Benefit Providers to market dental products (the "DBP Plans") in the Service Area. PHS agrees that from and after the Effective Date that it will not market the DBP Plans other than in connection with the marketing of the Government Plans. Guardian further acknowledges and agrees that prior to the Effective Date that PHS entered into arrangements with All America Financial Services, Inc. ("AAFS"), International Netherlands Group and its subsidiaries (collectively, "ING") and Lincoln National Life Insurance Company of America ("LNLICA") to market specific and aggregate stop-loss premium health maintenance organization plans ("Stop-Loss Plans") and that PHS marketed the life insurance products of AAFS, ING and LNLICA in connection with such arrangements. PHS agrees that from and after the December 31, 1997, that it will not market Stop-Loss Plans or life insurance products in connection with such Stop-Loss Plans unless it gives Guardian the opportunity to provide such stop-loss coverage to PHS. If Guardian is able to provide such stop-loss coverage at a rate which does not exceed by more than five percent (5 %) the average of the rates provided by AAFS, ING and LNLICA, then PHS will utilize Guardian to provide such stop-loss coverage. In the event there is a Change of Control and PHS is acquired by, or PHS is merged with, any entity, the limitations set forth in Section 2.2(b) of this Agreement shall apply to the surviving entity. (d) Nothing contained in this Agreement shall limit PHS's right to market HMO plans not subject to this Agreement directly to employers with whom PHS contracts. 11 2.3 Multi-Choice and Stand-Alone Arrangements. (a) Guardian shall have the right to market HMO Plans after regulatory approval has been obtained, (i) under multi-choice arrangements with Contractholders, pursuant to which Eligible Employees will be offered health care coverage options consisting of HMO Plans or Health Insurance Contracts, and (ii) under stand-alone arrangements, pursuant to which Eligible Employees will be provided with only the HMO Plan purchased by the Contractholder. (b) PHS shall have the right to market Health Insurance Contracts (i) after regulatory approval has been obtained, under multi-choice arrangements with Contractholders, pursuant to which Eligible Employees will be offered health care coverage options consisting of HMO Plans or Health Insurance Contracts, and (ii) under stand-alone arrangements, pursuant to which Eligible Employees will be provided with only the Health Insurance Contract purchased by the Contractholder. (c) PHS agrees to use its best efforts to market Ancillary Products to its existing and prospective customers; provided, however, that, the failure of PHS to use its best efforts to market such Ancillary Products shall not entitle Guardian to terminate this Agreement pursuant to Article X below. 2.4 Priority. Neither party shall solicit any employer group with which the other party had an existing contractual relationship as of the Inception Date for the provision of health care services or health insurance (or with which, as of the Inception Date, such other party was engaged in negotiating or renegotiating a contract for such services) without the prior consent of such other party. 12 2.5 Identification of Managed Care Contracts. The Managed Care Contracts shall be marketed under the collective designation "The Guardian & PHS Healthcare Solutions." Each Managed Care Contract shall be assigned a specific trade name, to be agreed to by the parties. 2.6 Marketing Materials. PHS and Guardian shall jointly develop handbooks, enrollment forms, identification cards and all other marketing materials relating to the Managed Care Contracts (collectively, "Marketing Materials"). The parties agree that the cost of the initial development and production of such Marketing Materials shall be shared equally by the parties pursuant to Section 7.4 below. Thereafter, the party responsible for reproducing such Marketing Materials shall include the cost of such reproduction in Schedule B as a reimbursable expense. To the extent consistent with administrative requirements, and to the extent permitted by law or regulations, all Marketing Materials will consist of each party's existing Marketing Materials, modified to reflect the terms of this Agreement. Neither party will use Marketing Materials reflecting this Agreement or using the name of the other party, without the other party's prior approval. 2.7 Training. PHS and Guardian shall jointly develop training programs regarding marketing and administering the Managed Care Contracts for all members of the Guardian Marketing Force and for Guardian and PHS personnel engaging in marketing or administrative functions. 13 ARTICLE III UNDERWRITING, RATES AND ADMINISTRATION 3.1 Underwriting and Administration of HMO Plans. (a) PHS shall be responsible for developing and filing with the appropriate regulatory authorities the rates for the HMO Plans. Guardian shall utilize such filed rates and shall be responsible for calculating premiums according to established underwriting guidelines for the HMO Plans subject to the requirements of applicable law; provided, however, that, the parties agree that they will mutually develop the premiums for any HMO Plan marketed to a group of more than five hundred (500) employees. PHS shall provide Guardian with all information reasonably relating to rating methodology, including, without limitation, cost assumptions, anticipated loss ratios and other actuarial assumptions, and provider and facility agreements. Underwriting guidelines for HMO Plans that are to be marketed pursuant to this Agreement will be mutually developed by the parties. (b) Except as otherwise expressly provided for herein, PHS shall be solely responsible for administration of the HMO Plans, including the payment of claims, withholds, taxes and all other amounts (other than commissions) payable to any person with respect to HMO Plans. 14 3.2 Underwriting and Administration of Health Insurance Contracts and Ancillary Products. (a) Guardian shall be responsible for developing and filing with the appropriate regulatory authorities the rates for the Health Insurance Contracts and Ancillary Products. Guardian shall utilize such filed rates and shall be responsible for calculating premiums for the Health Insurance Contracts and Ancillary Products, subject to the requirements of applicable law. (b) Guardian shall be solely responsible for administration of Health Insurance Contracts and Ancillary Products, including the payment of claims, taxes and all other amounts payable with respect to such contracts. 3.3 Discounts. Any discount of manual rates for any HMO Plan which exceeds a mutually agreed upon amount (as set forth in the underwriting guidelines mutually agreed upon by the parties), must be jointly authorized by the underwriting departments of each of the parties, subject to the laws and regulations of the States of New Jersey and New York applicable to such Plans. 15 ARTICLE IV BILLING AND COLLECTION OF PREMIUMS: PAYMENT OF COMMISSIONS 4.1 Billing and Collection of Premiums. (a) Guardian shall be responsible for billing and collection of premiums for all Plans, regardless of how such Plans are marketed. (b) Premiums received by Guardian from Contractholders with respect to HMO Plans will be held for the benefit of PHS during the Quarter in which such premiums are received. Interest shall be credited on the cash balances held by Guardian, at an annual rate equal to as set forth in Article VII of the HMO Reinsurance Agreement. (c) The amount of net premiums held by Guardian at the end of each Quarter with respect to HMO Plans (i.e., premiums received, plus interest credited in accordance with Section 4.l(b) above, less commissions paid to agents or brokers pursuant to Section 4.2 below), reduced by any claims reimbursed to PHS (including withholds) and other amounts as agreed to by the parties shall be paid in accordance with Section 7.3 of the HMO Reinsurance Agreement. 4.2 Commissions. (a) Commissions with respect to Plans sold pursuant to this Agreement shall be paid according to the schedule of commissions set forth in Schedule B. The commission rates to be paid with respect to Plans may be changed from time to time, as agreed to jointly by PHS and Guardian, provided that the party not proposing the change shall 16 not unreasonably withhold its consent to a change by the proposing party. All Managed Care Contracts shall be priced to include expense factors for appropriate commission payments. (b) Guardian shall make payment of all commissions to members of the Guardian Marketing Force, to independent brokers and to Physicians Health Insurance Services, Inc., an insurance agency ("PHIS"), to the extent that such commissions become due as a result of the sale of Plans subject to this Agreement. Guardian shall act as PHS's agent in the payment of commissions for HMO Plans. PHS shall have responsibility for any other compensation with respect to Plans sold by PHIS. (c) Each party shall be responsible for ensuring that its employees or agents are appropriately licensed and appointed, as necessary, to sell Managed Care Contracts or Ancillary Products and to receive commissions. All payments of commissions to agents, brokers or employees shall comply with applicable laws, rules, ordinances and regulations. (d) Limitations on Commission and Marketing Fees. Notwithstanding any other provision of this contract, the total of commissions and marketing fees payable by Guardian under this Agreement shall not exceed any limitations set forth in Section 4228 of the New York State Insurance Law. 17 ARTICLE V ENROLLMENT: MEMBERSHIP SERVICES 5.1 Enrollment. (a) Guardian and PHS shall jointly enroll new Contractholders and Subscribers purchasing Managed Care Contracts. (b) Each party shall be responsible for obtaining enrollment information from Contractholders and Subscribers with respect to those Managed Care Contracts sold by such party's Marketing Force and shall transmit such information to the other party on a timely basis in a format that is acceptable to the other party. 5.2 Meetings with Contractholders and Subscribers. Guardian and PHS shall cooperate in conducting employee on-site enrollment meetings. 5.3 Enrollment Materials. All enrollment agreements, forms and other materials, including Subscriber handbooks and identification cards, used for Contractholders and Subscribers shall be either PHS's or Guardian's existing approved forms, modified as necessary to reflect the terms of this Agreement, and the administrative requirements of PHS and Guardian, respectively. All such materials shall specify that PHS is the underwriter of HMO Plans, and that Guardian is the underwriter of Health Insurance Contracts and Ancillary 18 Products. Neither party will use enrollment materials reflecting this Agreement, or using the name of the other party; without the other party's approval. 5.4 Enrollment Reports. (a) PHS and Guardian shall prepare periodic and timely reports as set forth in Schedule C showing all Managed Care Contracts sold, renewed or terminated, and other enrollment information required by either party in order to perform its duties with respect to such Contracts. Such reports shall be made by each party on a periodic and timely basis on the Business Day following the date of transactions or other matters reported, and shall be transmitted by electronic transmission in a form reasonably acceptable to the receiving party. (b) PHS and Guardian shall prepare periodic reconciliations of the enrollment information in the possession of each party. 5.5 Membership Services. All membership services with respect to Subscribers under HMO Plans shall be provided by PHS. 19 ARTICLE VI PHS NETWORK MANAGEMENT 6.1 PHS Network Management. (a) PHS shall be solely responsible for development and maintenance (including, without limitation, quality assurance, utilization management and credentialing protocols) of the PHS Network. PHS shall provide Guardian with an accurate listing of the composition of the PHS Network at the Effective Date, and thereafter shall update the listing periodically, showing additions and deletions to the composition of the PHS Network. (b) PHS shall be solely responsible for any loss or liability arising from any inaccuracy in such listings. (c) Guardian may recommend additions to, or deletions from, the PHS Network, and PHS shall endeavor to be responsive to accommodate Guardian's recommendation. PHS shall have the sole authority to enter into contracts with providers. 6.2 Medical Management. PHS shall be solely responsible for all claims processing and auditing, health services (including hospital pre-certification, outpatient pre-certification, large claim case management and utilization review) and all risk accounting for the provider bonus arrangements under the HMO Plans. 20 6.3 Material Change in PHS Network. (a) PHS acknowledges that maintenance of an adequate network of health care providers in the Service Area is of primary concern to Guardian, and agrees to notify Guardian if the PHS Network fails to meet the criteria set forth below. PHS further acknowledges and agrees that any failure to meet the PHS Network adequacy criteria to be developed by the parties constitutes a material change in PHS Network. (b) PHS agrees to use its best efforts to develop an adequate network of health care providers. A review of PHS Network adequacy shall be made by the parties at quarterly intervals for the twelve (12) months following the Effective Date of this Agreement to monitor the progress of development of the PHS Network in the Service Area. If, at the end of this twelve (12) month period, Guardian reasonably determines that the PHS Network is not be "marketable;" Guardian shall provide written notice of such determination to PHS. PHS shall be allowed thirty (30) days from the receipt of such notice to present to Guardian a plan to cure the deficiencies in the PHS Network, which plan shall be reasonably satisfactory to Guardian. If PHS does not present a reasonably satisfactory plan to cure such deficiencies within such thirty (30) day period, or if the plan is not carried out according to its terms, then Guardian shall have the termination rights provided by Section 10.7 of this Agreement. (c) At the end of the twelve (12) month period described in Section 6.3(b) above, the parties shall develop specific PHS Network adequacy standards, taking into account both the number of health care providers in the PHS Network in each county in the Service Area, and the number of providers in other managed care organizations operating in the same counties. 21 6.4 Professional Liability Insurance. (a) PHS shall require each physician member of the PHS Network to maintain professional liability insurance, with limits of at least $1,000,000 per occurrence, and $3,000,000 in the aggregate for individual practitioners and practice groups, and $1,000,000 per occurrence and $3,000,000 aggregate for hospitals, clinics and other institutional providers. Guardian accepts that hospitals and other institutional providers may self-insure or self-retain with respect to such liability limits, as permitted by applicable New Jersey law and regulations. Guardian also recognizes that liability limits for the following individual non-physician members of the PHS Network may be $1,000,000 per occurrence and $1,000,000 in the aggregate: chiropractors, social workers, audiologists, speech pathologists, optometrists, physical therapists and occupational therapists. ARTICLE VII MARKETING AND ADMINISTRATIVE SERVICES FEE AND EXPENSES 7.1 Guardian's Marketing and Administrative Services Fee. PHS shall pay Guardian a Marketing and Administrative Services Fee for the duties assigned to Guardian under this Marketing and Services Agreement equal to the amount shown on Schedule B; as it may be amended from time to time, for each Quarter, or portion thereof, during which this Agreement is in effect. 7.2 PHS's Administrative Services Fee. PHS shall be entitled to an Administrative Services Fee for the administrative duties assigned to PHS under this Marketing and Services 22 Agreement equal to the amount shown on Schedule B, as it may be amended from time to time, for each Quarter, or portion thereof, during which this Agreement is in effect. 7.3 Adjustments of Fee. The Fees set forth in Schedule B shall remain in effect for four Quarters, or portion thereof, beginning with the Quarter that includes the Effective Date. Each party shall have the right to adjust the Fees payable hereunder for any subsequent period of four Quarters by providing notice to the other party of an amendment of Schedule B no less than forty-five (45) calendar days prior to the beginning of the next such period. Such adjustment will be limited to an amount necessary to cover changes in that party's costs of providing services hereunder, without provision of profit. 7.4 Expenses. Each party shall be responsible for its expenses incurred in connection with this Agreement; provided, however, that expenses attributable to the development and initial production of Marketing Materials shall be shared equally. Each party shall calculate such expenses (including, without limitation, a reasonable allocation of internal expenses, production and printing expenses and legal expenses incurred in connection with obtaining regulatory approval of any forms) on a Quarterly basis, and shall provide the other party with a schedule of such expenses in connection with each Quarterly Accounting Report. A party whose expenses under this Section 7.4 exceed one-half of the aggregate of the expenses incurred by both parties for the Quarter shall be entitled to reimbursement for such excess within forty-five (45) calendar days from the end of such Quarter. 7.5 Reinsurance Agreement. At the option of the parties, the fees and expenses hereunder may be incorporated in any Reinsurance Agreement entered into between the parties 23 (or affiliates of the parties) to the extent that such fees relate to reinsured Managed Care Contracts. ARTICLE VIII ACCOUNTING AND REPORTING 8.1 Quarterly Accounting Reports. Within forty-five (45) calendar days of the end of each Quarter, each party shall supply the other with a Quarterly Accounting Report as defined in Section 7.3 of the Reinsurance Agreement. Quarterly Accounting Reports shall be made for the Quarter that includes the Effective Date, and shall be made for each Quarter following the Contract Termination Date if any amount is due any party under this Agreement. 8.2 Settlements. Settlement of all amounts due pursuant to this Agreement shall be made on a net basis in connection with the Quarterly Accounting Report. If one party owes a net amount to the other, such amount shall be paid in accordance with Section 7.3 of the HMO Reinsurance Agreement. 8.3 Reconciliation. Each party shall have the right to review all individual components of transactions entered into each Quarterly Accounting Report. The parties shall have twenty (20) Business Days from the day the Quarterly Accounting Report is submitted to report any deficiency in such report and to request an adjustment of any payment made to or received by either party. Any amount due either party in connection with such reconciliation shall be paid within twenty (20) calendar days of the receipt of notice that additional amounts are due. 24 8.4 Best Efforts to Supply Actual Data. In preparing all reports required in this Agreement, Guardian or the PHS, as the case may be, shall make its best efforts to supply the actual data. If the actual data cannot be supplied with the appropriate report, Guardian or PHS, as the case may be, shall produce best estimates, and shall provide amended reports based on actual data no more than thirty (30) calendar days after such report was originally due. 8.5 Statement of Actuarial Opinion. (a) Within forty-five (45) calendar days after the end of the calendar year, each party shall provide the other with a Statement of Actuarial Opinion certifying the adequacy of the reserve for products covered under this Agreement. The Actuarial Opinion must state whether or not the reserve for products covered under this Agreement meet the minimum standards of all states where each party is licensed, and if not, the Actuarial Opinion must state the difference between reserves and state minimums (b) The Actuarial Opinion shall meet the requirements set forth in the NAIC's Actuarial Opinion and Memorandum Regulation and shall be signed by each party's "Appointed Actuary." The Appointed Actuary may or may not be an employee of such party. ARTICLE IX REINSURANCE AGREEMENTS 9.1 HMO Reinsurance Agreement. The parties each hereby acknowledge that, simultaneously with the execution of this Agreement, they intend to enter into a reinsurance agreement in the form attached hereto as Exhibit A-1 (the "HMO Reinsurance Agreement"). 25 The parties intend, under the terms of the HMO Reinsurance Agreement, that PHS will cede to Guardian certain specified percentages of the risks under the HMO Plans, including those HMO Plans with a point-of-service feature, as more fully described in the HMO Reinsurance Agreement. The parties further intend that Guardian will retrocede to Physicians Health Services (Bermuda) Ltd., a affiliate of PHS, a specified percentage of the risks under the out-of-network portion of those HMO Plans with a point-of-service feature. In return, Guardian and Physicians Health Services (Bermuda) Ltd. shall be allocated specified percentages of premiums received by Company with respect to the HMO Plans, all as more fully described in the HMO Reinsurance Agreement. 26 ARTICLE X TERM AND TERMINATION 10.1 Effective Date. This Agreement shall become effective on October 1, 1996 (the "Effective Date"), and shall continue in effect unless terminated pursuant to the terms of this Article X. Notwithstanding anything to the contrary stated in this Article X, this Agreement shall continue in effects solely with respect to the provision of administrative services, for any Managed Care Contract in effect on the Contract Termination Date until 180 days subsequent to the next succeeding renewal date of any Managed Care Contract following such Contract Termination Date; and provided, further however, that in the event of a termination pursuant to Section 8.6 of the HMO Reinsurance Agreement, this Agreement shall remain in effect solely with respect to the provision of administrative services with respect to any Continuation Plan for the period stated in Section 8.6 of the HMO Reinsurance Agreement. 10.2 Termination for Insufficient Premiums. Either party shall have the right to terminate this Agreement if, on the first anniversary of the day on which the Managed Care Contracts are first available for sale pursuant to this Agreement, the total annualized premiums for Managed Care Contracts do not exceed five million dollars ($5,000,000). Notice of termination under this Section 10.2 shall be made within thirty (30) days after the anniversary date, and shall be effective ninety (90) days after such notice is given. 27 10.3 Termination Due to Change of Control. In the event of a Change of Control in one party, the other party shall have the right to terminate this Agreement as set forth in Section 8.6 of the HMO Reinsurance Agreement. The Contract Termination Date under this Section 10.3 shall be the effective date of the Change of Control. 10.4 Termination Without Cause. (a) Either party shall have the right to terminate this Agreement without cause upon 180 days prior written notice to the other party. The Contract Termination Date under this Section 10.4 shall be the 180th day following the giving of the notice required by this Section 10.4. (b) If PHS terminates this Agreement pursuant to Section 10.4(a), it agrees to pay Guardian an amount equal to one half the fair market value of all HMO Plans in force on the effective date of termination, other than HMO Plans that (i) resulted from the conversion of pre-existing PHS contracts to Managed Care Contracts, or (ii) are not continued as PHS plans on or before the first renewal date for such contracts following the effective date of termination. (c) The parties will agree to a method of valuation of the HMO Plans (using methods of valuation customarily used in valuing HMO Plans or health insurance business). If the parties are unable to agree on valuation, the matter will be referred to arbitration. Payments required under this Section 10.4 shall be made in connection with the final Annual Accounting Report. 28 10.5 Termination For Cause. (a) In the event that either party shall default in the performance of the duties and obligations imposed on it pursuant to the terms of this Agreement or the Reinsurance Agreement(s), or breach any of the provisions contained herein or therein, including the failure to pay any amount when due, or the failure of either party to maintain a level of services under this Agreement that is reasonably satisfactory to the other party, the defaulting party shall be allowed thirty (30) days from written notice of such default or breach to present to the non-defaulting party a plan to cure such default or breach that is reasonably satisfactory to the non-defaulting party. If a reasonably satisfactory plan to cure the default or breach is not submitted within that time, or if the plan is not carried out according to its terms, the non-defaulting party shall have the right to terminate this Agreement and the Reinsurance Agreement(s) upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non defaulting party by reason of such default or breach. (b) In the event that either party shall engage in fraudulent, illegal or grossly negligent conduct with respect to its duties and obligations under this Agreement or the Reinsurance Agreement(s), the other party shall have the right to terminate this Agreement and the Reinsurance Agreement(s) upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non defaulting party by reason of the defaulting party's conduct. 29 (c) In the event that this Agreement is terminated by Guardian pursuant to this Section 10.5, the provisions of Section 10.4(b) shall apply as if the PHS elected to terminate this Agreement. (d) The Contract Termination Date under this Section 10.5 shall be the date of receipt of notification of termination. 10.6 Termination Due to Financial Impairment or Loss of Authority. In the event that either party shall become unable to perform its obligations under the Managed Care Contracts because of financial impairment or loss of authority to act under law, or by action of any regulatory authority, the other party shall have the right, subject to the requirements of relevant law and receipt of necessary approvals; to terminate this Agreement and to have the Managed Care Contracts assigned to, and all obligations assumed by, an appropriately licensed organization that provides substantially similar healthcare services as described in this Agreement. The Contract Termination Date under this Section 10.6 shall be the date set forth in Section 8.8 of the HMO Reinsurance Agreement. 10.7 Termination for Material Change in PHS Network. In the event that the PHS Network undergoes a material change within the meaning of Section 6.3 of this Agreement, PHS shall be allowed thirty (30) days to present to Guardian a plan to cure such Material Change that is reasonably satisfactory to Guardian. If a reasonably satisfactory plan to cure the Material Change is not submitted within that time, or if the plan is not carried out 30 according to its terms, Guardian shall have the right to terminate this Agreement, and the HMO Reinsurance Agreement, upon delivery of written notice of such termination to PHS, which shall be effective upon receipt, without prejudice to any other rights or remedies available to Guardian. The Contract Termination Date under this Section 10.7 shall be the date of receipt of notification to terminate. 10.8 Buy-Out Provisions. The parties acknowledge and agree that the "buy-out" provisions set forth in Section 10.4(b) above apply only to terminations under Sections 10.4(a) and 10.5 above. Such buy-out provisions do not apply to terminations under any other section of this Agreement or to terminations under the HMO Reinsurance Agreement. ARTICLE XI INDEMNIFICATION 11.1 PHS's Indemnification. PHS shall indemnify Guardian against all liabilities, losses, suits, damages, costs, and expenses (including, without limitation, damages resulting from breach of this Agreement and reasonable fees of Guardian's attorneys and other expenses of litigation), net of recoveries from third parties, arising out of or in connection with PHS's obligations under this Agreement; including acts or omissions to act, or negligent, willful, reckless or intentional wrongs, fraud, oppression or bad faith. 31 11.2 Guardian's Indemnification. Guardian shall indemnify PHS against all liabilities, losses, suits, damages, costs and expenses (including, without limitation, damages resulting from breach of this Agreement, reasonable fees of PHS's attorneys and other expenses of litigation), net of recoveries from third parties, arising out of or in connection with Guardian's obligations under this Agreement, including acts or omissions to act, or negligent, willful, reckless or intentional wrongs, fraud, oppression or bad faith. 11.3 Liability under PHS's HMO Plans. Except as specifically set forth in any Reinsurance Agreement(s) to be entered into between the parties, Guardian is not a guarantor, insurer, or reinsurer of, or joint venturer with, PHS. Guardian does not accept any risk of loss for, nor provide any indemnification to PHS, any Contractholder or Subscriber, any provider or any other person with respect to an HMO Plan. PHS shall indemnify Guardian for all liabilities, losses, suits, damages, costs and expenses (including reasonable fees of Guardian's attorneys, and other expenses of litigation), net of recoveries from third parties, arising in connection with a HMO Plan or the PHS Network, including action or failure to act by PHS, or its employees or agents (excluding health care providers who or which are not employees of, or under an agency agreement with, PHS). 11.4 Liability under Health Insurance Contracts and Ancillary Products. PHS is not a guarantor, insurer, or reinsurer of, or joint venturer with, Guardian. PHS does not accept any risk of loss, nor provide any indemnification to Guardian, any Contractholder or Subscriber, 32 any provider or any other person with respect to a Health Insurance Contract or Ancillary Product. Guardian shall indemnify PHS for all liabilities; losses; suits; damages; costs and expenses (including reasonable fees of PHS's attorneys, and other expenses of litigation), net of recoveries from third parties, arising in connection with a Health Insurance Contract or Ancillary Product, including action or failure to act by Guardian, or its employees or agents. 11.5 Survival of Article. This Article XI shall survive the termination or nonrenewal of this Agreement. 33 ARTICLE XII ARBITRATION 12.1 Appointment of Arbitrators. In the event of any disputes or differences arising hereafter between the parties with reference to any transaction under or relating in any way to this Agreement, as to which agreement between the parties hereto cannot be reached, the dispute or difference shall be resolved by arbitration. Three arbitrators shall decide any dispute or difference. The arbitrators must be disinterested officers or retired officers of life and health insurance or health maintenance organizations other than the two parties to this Agreement or their affiliates. Each of the parties agrees to appoint one of the arbitrators with the third, to be chosen by the two appointed arbitrators. In the event that either party should fail to choose an arbitrator within thirty (30) calendar days following a written request by the other party to do so, the requesting party may choose a second arbitrator before entering upon arbitration. In the event that the two arbitrators shall not be able to agree on the choice of the third arbitrator within twenty (20) calendar days following their appointment, each arbitrator shall nominate five (5) candidates within ten (10) calendar days thereafter, four (4) of whom the other party shall decline, and the third arbitrator shall be chosen by the President of the American Arbitration Association or his designee. Should the chosen third arbitrator so selected decline to serve, the candidate who was not chosen by the President shall be appointed. This process shall continue until a candidate has agreed to serve. 34 12.2 Decision. The arbitrators shall consider customary and standard practices in the health insurance and managed care business. They shall decide by a majority vote of the arbitrators. There shall be no appeal from their written decision. Judgment may be entered on the decision of the arbitrators by any court having jurisdiction. If, in the opinion of the arbitrators, a dispute cannot be otherwise resolved, this Agreement shall be terminated in accordance with Section 10.5 hereof. 12.3 Expenses of Arbitration. Each party shall bear the expense of its own arbitrator (whether selected by that party, or by the other party pursuant to the procedures set out in Section 12.1) and related outside attorneys' fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator. 12.4 Applicable Law. Any arbitration instituted pursuant to this Article shall be held in New Jersey and the laws of the State of New Jersey and, to the extent applicable, the Federal Arbitration Act, shall govern the interpretation and application of this Agreement. 12.5 Survival of Article. This Article shall survive termination of this Agreement. 35 ARTICLE XIII MISCELLANEOUS 13.1 Stop-Loss Coverage. Guardian shall have the right to provide Contractholders with stop-loss insurance or reinsurance with respect to HMO Plans that are Managed Care Contracts subject to this Agreement. Guardian shall have the right to bid on stop-loss reinsurance protection for all other business of PHS. Nothing herein shall require PHS to reinsure HMO Plans that are not Managed Care Contracts with Guardian. In addition, Guardian acknowledges that PHS has certain existing arrangements, and may enter into additional arrangements in the future, for stop-loss reinsurance coverage for HMO Plans that are not Managed Care Contracts which shall remain in effect regardless of this Agreement. 13.2 Misunderstandings and Oversights. If any delay, omission, error or failure to perform any act required by this Agreement is unintentional and caused by misunderstanding or oversight, PHS and Guardian will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. The party that first discovers such oversight or incorrect act as a result of the misunderstanding will notify the other party in writing promptly upon discovery of the misunderstanding or oversight. The parties shall act to correct the error, omission or oversight within thirty (30) days of notification of the problem. This Section 13.2 shall not be construed as a waiver by either party of its right to enforce strictly the terms of this Agreement. 36 13.3 Non-Solicitation. (a) During the term of this Agreement, neither Guardian nor any entity under Guardian's control shall contact, solicit or contract for services with any PHS Network health care provider then under contract with PHS. Nothing in this Agreement shall preclude PHCS from contracting with any PHS Network health care provider. (b) During the term of this Agreement, neither party shall knowingly solicit for employment an employee of the other party who has been engaged in activities covered by this Agreement, without written consent of the other party. 13.4 Regulatory Approval. Performance of the obligations of either party under this Agreement shall be subject to the receipt of necessary regulatory approvals under the laws, regulations and practices of regulatory authorities in New York and New Jersey. PHS and Guardian shall cooperate in attempting to obtain expeditiously any necessary regulatory approvals from regulatory authorities. Each party will bear its own expenses in obtaining such approvals. 13.5 Audits. Each party shall have the right, upon reasonable notice to the other party, and at the requesting party's expense, to audit the books and records of the other party relating to receipts, enrollment, service standards and other matters relating to this Agreement 37 during regular business hours at the premises of the audited party where such records are normally maintained. The audited party shall reasonably cooperate in any such audit. 13.6 Headings and Schedules. Headings used herein are not part of this Agreement. Any Schedules or Exhibits attached hereto are part of this Agreement. 13.7 Compliance with Applicable Laws and Regulations. It is the intention of the parties that this Agreement comply with all existing applicable laws and regulations, as from time to time are in effect, so that the Agreement remains in full force. Each of the parties agrees to comply with all laws; ordinances, rules, regulations and orders of regulatory bodies applicable to the transactions contemplated by this Agreement, including those relating to maintenance of appropriate licenses and the appointment of agents and payment of commissions. Either party shall promptly notify the other party of any complaint, inquiry or lawsuit by any regulatory authority relating to the Managed Care Contracts or to this Agreement. 13.8 Successors and Assigns: Binding Effect. Except as otherwise provided herein and in the HMO Reinsurance Agreement; this Agreement cannot be assigned by PHS or Guardian without the prior written approval of the other party. The provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective permitted successors and assigns. 38 13.9 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original; but all of which will constitute one and the same agreement. 13.10 Entire Agreement: Amendment. This Agreement and the Reinsurance Agreement constitute the entire agreement between the parties with respect to the Managed Care Contracts and Ancillary Products, and supersede any previous written or oral agreements. This Agreement shall be amended only by written agreement signed by a duly authorized officer of each of PHS and Guardian, and any change to this Agreement shall be null and void unless made by such written agreement; provided, however, that where, under insurance, health or other applicable laws or regulations, the approval of any such amendment to this Agreement by one or more federal, state or local governmental or regulatory authorities is required, the amendment shall not take effect unless and until all such necessary approvals have been obtained and received by both PHS and Guardian. In the event that any such approval is required, PHS and Guardian shall each take all necessary actions in order to obtain such approval. 13.11 Waivers. The waiver by either of the parties of the other party's prompt and complete performance, or breach or violation, of any provisions of this Agreement and related documents shall not operate or be construed as a waiver of any subsequent breach or violation, 39 and the waiver by any of the parties to exercise any right or remedy which it may possess hereunder shall not operate or be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 13.12 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to the principles of conflicts of laws thereof. 13.13 Severability. In the event any section or provision of this Agreement or related documents is found to be void and unenforceable by a court of competent jurisdiction, the remaining sections and provisions of this Agreement or related documents shall nevertheless be binding upon the parties with the same force and effect as though the void or unenforceable part had not been severed or deleted. 40 13.14 Notices. Any notice to be given pursuant to the terms of this Agreement shall be given in writing either by personal delivery or by mail, registered or certified, return receipt requested and postage prepaid. Mail notices shall be sent to the parties at their respective addresses as shown: If to Guardian: The Guardian Life Insurance Company of America 201 Park Avenue South New York, New York 10003 Attention: Edward K. Kane, Esq. If to Physicians Health Services, Inc.: Physicians Health Services' Inc. 120 Hawley Lane Trumbull, Connecticut 06611 Attention: Regina M. Campbell Senior Vice President & Chief Administrative Officer If to Physicians Health Services of New Jersey, Inc.: Physicians Health Services of New Jersey, Inc. Mack Center 4 South 61 Paramus Road Paramus, New Jersey 07652 Attention: Executive Director 13.15 Confidentiality. (a) Neither Guardian nor PHS shall disclose any proprietary or confidential information of the other party to a third party without the express written consent 41 of the other party to this Agreement. For purposes of this Agreement, "proprietary and confidential" information will include, without limitation, all internal business practices and business records, information concerning products and pricing, contracts, computer hardware and software or business methods in any form whatsoever, peer review, quality assurance and grievance procedures, any aspect of the utilization review program, provider fee schedules, reimbursement schedules, or discounts, and advertising or marketing information, but not including information otherwise available to the public. Neither party shall use any proprietary and confidential information of the other party for its own benefit. Upon termination of this Agreement, each party will immediately return to the other party any confidential information, claims files necessary for the continued administration of any Plan, and other property of the other party. (b) Guardian and PHS agree to maintain the confidentiality of any health care information pertaining to Subscribers including, without limitation, files, records, reports, and other information prepared and maintained in connection with this Agreement, in accordance with all applicable laws and regulations. (c) Each Party shall obtain any necessary consent from Subscribers with respect to the release to the other party of any confidential information relating to such Subscribers, by means of general or specific releases, as appropriate. Each party shall notify the other if it becomes aware that proper releases have not been obtained. 42 (d) Guardian shall not make any list of PHS providers available to any person other than appropriate regulatory authorities. Guardian employees who are engaged in operations relating to this Agreement, and independent brokers and other persons engaged in marketing of Managed Care Contracts. 13.16 Press Releases. No public statement or press release regarding the existence of this Agreement shall be made by either party without obtaining the prior written consent of the other party, except as required by applicable laws or regulations. 13.17 Relationship of Parties. The parties to this Agreement are and shall remain independent contractors. Neither party is the employee or agent of the other party, except as set forth herein, and neither party has an express or implied right to bind the other party. The parties do not intend to form a joint venture, partnership, or to be governed by laws relating to any relationship other than that of independent contractors. Neither party is authorized to modify, alter or waive the terms of any product issued by the other party. 13.18 Offset. In the event that either party to this Agreement shall fail to make payment of any amount that is due and owing to the other party under this Agreement, all mutual debts shall be offset, and only the balance of such debts shall be paid. 43 13.19 Financial Statements. Each party shall furnish financial statements as filed with the appropriate regulatory authority to the other party upon request. 13.20 Regulatory Review. The parties acknowledge and agree that this Agreement is subject to the review and approval of the New Jersey and the New York State Departments of Insurance. The parties expressly agree that any revisions to this Agreement required by the New Jersey or the New York State Departments of Insurance will be addressed in an amendment to, or restatement of, the Agreement. 44 EXECUTION IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. PHYSICIANS HEALTH SERVICES, INC. By /s/ Regina M. Campbell ------------------------------ Name Regina M. Campbell Title Senior Vice President PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC. By /s/ Regina M. Campbell ------------------------------ Name Regina M. Campbell Title Senior Vice President THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA By /s/ Joseph D. Sargent ------------------------------ Name Joseph D. Sargent Title President and CEO 45 SCHEDULE A DESCRIPTION OF MANAGED CARE CONTRACTS [DESCRIBE NJ PLANS] A-1 NEW JERSEY--STATUTORY PLANS--GROUPS WITH 2-49 EMPLOYEES--HEALTHCARE SOLUTIONS PASSPORT HMO ================================================================================ J40000 PHS/NJ 5/75 Benefits are based on New Jersey INJSP mandated plan design. Available eff. 5/1/96 - -------------------------------------------------------------------------------- J41000 PHS/I4J lO/lOO Benefits are based on New Jersey 2NJSP mandated plan design. Available eff. 5/1/96 - -------------------------------------------------------------------------------- J42000 PHS/NJ 15/150 Benefits are based on New Jersey 3NJSP mandated plan design. Available eff. 5/1/96 - -------------------------------------------------------------------------------- J43000 PHS/NJ 20/250 Benefits are based on New Jersey 4NJSP mandated plan design. Available eff. 5/1/96 - --------------------------------------------------------------------------------
CHARTER POS ================================================================================ Statutory Charter POS plans in this market are being developed, and are anticipated to receive DOI approval Fall, 1996. These plans will be sold under Healthcare Solutions. - --------------------------------------------------------------------------------
11 NEW JERSEY STATUTORY PLANS GROUPS WITH 2-49 EMPLOYEES--HEALTHCARE SOLUTIONS PASSPORT POS (With Inpatient Hospital Copay)
==================================================================================================================================== Copay In Individual Family Coinsurance Coinsured Family Out Annual COMMENTS Schedule Network Deductible Deductible (paid by PHS) Charge of Pocket Benefit Plans Limit* Maximum Limit - ------------------------------------------------------------------------------------------------------------------------------------ J4628S PHS/NJ $250 $5OO 80% $10,000 N/A NA Available eff. 7-1-96 5NJSP $5/75 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4658S PHS/NJ $500 $l,OOO 80% $10,000 N/A NA Available eff. 7-1-96 6NJSP $5/75 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4727S PHS/NJ $250 $500 70% $10,000 N/A NA Available eff. 7-1-96 7NJSP $10/100 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4728S PHS/NJ $250 $500 80% $10,000 N/A NA Available eff. 7-1-96 8NJSP $10/100 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4757S PHS/NJ $500 $ 1,000 70% $10,000 N/A NA Available eff. 7-1-96 9NJSP $10/100 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4758S PHS/NJ $500 $1,000 80% $10,000 N/A NA Available eff. 7-1-96 10NJSP $10/100 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4718S PHS/NJ $l,OOO $2,000 80% $10,000 N/A NA Available eff. 7-1-96 11NJSP $10/100 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4828S PHS/NJ $250 $500 80% $10,000 N/A NA Available eff. 7-1-96 12NJSP $15/150 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4857S PHS/NJ $500 $l,000 70% $10,000 N/A NA Available eff. 7-1-96 13NJSP $15/150 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4957S PHS/NJ $500 $ 1,000 70% $10,000 N/A NA Available eff. 7-1-96 14NJSP $20/250 per member - ------------------------------------------------------------------------------------------------------------------------------------ J4917S PHS/NJ $l,OOO $2,000 70% $10,000 N/A NA Available eff. 7-1-96 15NJSP $20/250 per member - ------------------------------------------------------------------------------------------------------------------------------------
* The Coinsured Charge Limit is the amount of covered charges a member must incur each Calendar Year before no Coinsurance is required. Charges for Mental or Nervous Conditions and Substance Abuse Treatment are not subject to or eligible for the Coinsured Charge Limit. 12 NEW JERSEY STATUTORY PLANS GROUPS WITH 2-49 EMPLOYEES--HEALTHCARE SOLUTIONS PASSPORT POS (with $0 (Zero) Hospital Copay)
==================================================================================================================================== Copay In Individual Family Coinsurance Coinsured Family Out Annual COMMENTS Schedule Network Deductible Deductible (paid by PHS) Charge of Pocket Benefit Plans Limit* Maximum Limit - ------------------------------------------------------------------------------------------------------------------------------------ J5028S PHS/NJ $250 $500 80% $10,000 N/A NA Available 5NJSPZ $5 per member eff. 10-1-96 - ------------------------------------------------------------------------------------------------------------------------------------ J5058S PHS/NJ $500 $1,000 80% $10,000 N/A NA Available 6NJSPZ $5 per member eff. 10-1-96 - ------------------------------------------------------------------------------------------------------------------------------------ J5127S PHS/NJ $250 $500 70% $10,000 N/A NA Available 7NJSPZ $10 per member eff. 10-1-96 - ------------------------------------------------------------------------------------------------------------------------------------ J5128S PHS/NJ S250 $500 80% $10,000 N/A NA Available 8NJSPZ $10 per member eff. 10-1-96 - ------------------------------------------------------------------------------------------------------------------------------------ J5157S PHS/NJ $500 $1,000 70% $1O,OOO N/A NA Available 9NJSPZ $10 per member eff. 10-1-96 - ------------------------------------------------------------------------------------------------------------------------------------ J5158S PHS/NJ $500 $1,000 80% $10,000 N/A NA Available 10NJSPZ $10 per member eff. 10-1-96 - ------------------------------------------------------------------------------------------------------------------------------------ J5118S PHS/NJ $1,000 $2,000 80% $lO,OO0 N/A NA Available 11NJSPZ $10 per member eff. 10-1-96 - ------------------------------------------------------------------------------------------------------------------------------------
* The Coinsured Charge Limit is the amount of covered charges a member must incur each Calendar Year before no Coinsurance is required. Charges for Mental or Nervous Conditions and Substance Abuse Treatment are not subject to or eligible for the Coinsured Charge Limit. 13 NEW JERSEY STATUTORY PLANS GROUPS WITH 2-49 EMPLOYEES--HEALTHCARE SOLUTIONS PASSPORT POS with $0 (Zero) Hospital Copay and $5,000 Coinsured Charge Limit
==================================================================================================================================== Copay In Individual Family Coinsurance Coinsured Family Out Annual COMMENTS Schedule Network Deductible Deductible (paid by PHS) Charge of Pocket Benefit Plans Limit* Maximum Limit - ------------------------------------------------------------------------------------------------------------------------------------ J50285 PHS/NJ $250 $500 80% $5,000 N/A NA Available 5NJSPZF $5 per member eff. 1-1-97 - ------------------------------------------------------------------------------------------------------------------------------------ J50585 PHS/NJ $500 $1,000 80% $5,000 N/A NA Available 6NJSPZF $5 per member eff. 1-1-97 - ------------------------------------------------------------------------------------------------------------------------------------ J51285 PHS/NJ $250 $500 80% $5,000 N/A NA Available 8NJSPZF $10 per member eff. 1-1-97 - ------------------------------------------------------------------------------------------------------------------------------------ J51585 PHS/NJ $500 $1,000 80% $5,000 N/A NA Available lONJSPZF $10 per member eff. 1-1-97 - ------------------------------------------------------------------------------------------------------------------------------------ J151185 PHS/NJ $1,000 $2,000 80% $5,000 N/A NA Available 11NJSPZF $10 per member eff. 1-1-97 - ------------------------------------------------------------------------------------------------------------------------------------
* The Coinsured Charge Limit Is the amount of covered charges a member must incur each Calendar Year before no Coinsurance is required. Charges for Mental or Nervous Conditions and Substance Abuse Treatment are not subject to or eligible for the Coinsured Charge Limit. 14 NEW JERSEY--GROUPS WITH 50 OR MORE EMPLOYEES PASSPORT HMO--HEALTHCARE SOLUTIONS ================================================================================ J36000 (5-10NJP) PHS 5 (Customized) Healthcare Solutions, eff. 5/1/96 - -------------------------------------------------------------------------------- J37000 (15-20,25 PHS 15 (Customized) Healthcare Solutions, eff. 5/1/96 and 26NJP) - -------------------------------------------------------------------------------- J38000 (11-14NJP) PHS 5/250 (Customized) Healthcare Solutions, eff. 5/1/96 - -------------------------------------------------------------------------------- J39000 (15-214NJP) PHS 15/500 (Customized) Healthcare Solutions, eff. 5/1/96 - --------------------------------------------------------------------------------
15 NEW JERSEY--GROUPS W1TH 50 OR MORE EMPLOYEES--HEALTHCARE SOLUTIONS CHARTER POS (Note: NJ Regulations probibit the sale of open access POS plans with less than a $250 deductible).
==================================================================================================================================== Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (paid by PHS) Out of of Pocket Benefit Plans Pocket Max. Maximum Limit - ------------------------------------------------------------------------------------------------------------------------------------ J3637G PHS 5 $300 $750 70% of the $1,800 $4,500 NA Available for sale 6NJC next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3657G PHS 5 $5OO $1,250 70% of the $2,000 $5,000 NA Available for sale 7NJC next $5,OOO eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3638G PHS 5 $300 $750 80% of the $l,300 $3,250 NA Available for sale 9NJC next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3658G PHS 5 $500 $1,250 80% of the $l,500 $3,750 NA Available for sale 10NJC next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3837G PHS 5/250 $300 $750 70% of the $1,800 $4,500 NA Available for sale 11NJC next $5,OOO eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3857G PHS 5/250 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 12NJC next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3838G PHS 5/250 $300 $750 80% of the $l,300 $3,250 NA Available for sale 13NJC next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3858H PHS 5/250 $500 $l,250 80% of the $1,500 $3,750 NA Available for sale 14NJC next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA Available for sale 16NJC next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3757G PHS 15 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 17NJC next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ 13738G PHS 15 $300 $750 80% ofthe $l,300 $3,250 NA Available for sale l9NJC next $5 000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3758G PHS 15 $500 $1,250 80% of the $l,500 $3,750 NA Available for sale 20NJC next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------
16 NEW JERSEY--GROUPS WITH 50 OR MORE EMPLOYEES--HEALTHCARE SOLUTIONS CHARTER POS (Note: NJ Regulations probibit the sale of open access POS plans with less than a $250 deductible).
==================================================================================================================================== Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ J3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 21NJC 15/500 next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3958G PHS $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 22NJC 15/500 next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale 23NJC 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3918G PHS 5 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale 24NJC 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3717G PHS 15 $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale 25NJC next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale 26NJC next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------
17 NEW JERSEY--GROUPS W1TH 50 OR MORE EMPLOYEES--HEALTHCARE SOLUTIONS PASSPORT POS
==================================================================================================================================== Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (paid by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ J3627G PHS 5 $200 $500 70% of the $1,700 $4,250 NA Available for sale 5NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3637G PHS 5 $3OO $750 70% of the $1,800 $4,500 NA Available for sale 6NJP next $5,OOO eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3657G PHS 5 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 7NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3628G PHS 5 $200 $500 80% of the $l,200 $3,000 NA Available for sale 8NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA Available for sale 9NJP next $5,OOO eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 10NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3837G PHS 5/250 $300 $750 70% of the $l,800 $4,500 NA Available for sale 11NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3857G PHS 5/250 $500 $l,250 70% of the $2,000 $5,000 NA Available for sale 12NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3838G PHS 5/250 $300 $750 80% of the $1,300 $3,250 NA Available for sale 13NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3858H PHS 5/250 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 14NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------
18 NEW JERSEY--GROUPS WITH 50 OR MORE EMPLOYEES--HEALTHCARE SOLUTIONS PASSPORT POS
==================================================================================================================================== Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit Plans Pocket Max. Max. Limit - ------------------------------------------------------------------------------------------------------------------------------------ J3727G PHS 15 $200 $500 70% of the $1,700 $4,250 NA Available for sale 15NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA Available for sale 16NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3757G PHS 15 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 17NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3728G PHS 15 $200 $500 80% of the $l,200 $3,000 NA Available for sale 18NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3738G PHS 15 $300 $750 80% of the $1,300 $3,250 NA Available for sale 19NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3758G PHS 15 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale 20NJP next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA Available for sale 21NJP 15/500 next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3958G PHS $500 $l,250 80% of the $1,500 $3,750 NA Available for sale 22NJP 15/500 next $5,000 eff. 5/1/96 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale 23NJP 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3918G PHS $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale 24NJP 15/500 next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3717G PHS 15 $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale 25NJP next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------ J3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale 26NJP next $10,000 eff. 1-1-97 (1) - ------------------------------------------------------------------------------------------------------------------------------------
19 NJ Schedule B Contracts Allowances Administrative Service Fee I. Guardian's Administrative Services Fee (as a percentage of premium)
HMO POS --- --- Marketing 0.63% 0.63% Sales 1.38% 1.38% Administration 1.30% 1.30% Billing/Collections 1.69% 1.69% Advertising 0.15% 0.15% Total 5.15% 5.15%
II. PHS' Administrative Services Fee (as a percentage of premium)
HERO POS ---- --- Health Services, UR 1.67% 1.67% Net Mgt, MDD, QA 2.43% 2.43% Operations 3.58% 3.58% Acct Svc., CustSrv. 1.44% 1.44% Marketing 0.63% 0.63% Sales 0.15% 0.15% Administration 1.30% 1.30% Advertising 0.15% 0.15% Total 11.35% 11.35%
EXHIBIT A-l HMO REINSURANCE AGREEMENT EX-1 EX-10.(P) 7 REINSURANCE AGREEMENT Exhibit 10(p) REINSURANCE AGREEMENT between PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC and Trumbull, Connecticut THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA New York, New York REINSURANCE AGREEMENT This Reinsurance Agreement (this "Agreement") is made and entered into as of this 1st day of October, 1996 between PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC., a corporation organized under the laws of the State of Connecticut as a health maintenance organization (the "Company") and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a mutual life insurance company organized under the laws of the State of New York (the "Reinsurer"). The Company and the Reinsurer mutually agree to enter into the Agreement on the terms and conditions stated herein. This Agreement is a reinsurance agreement solely between the Company and the Reinsurer, and the performance of the obligations of each party under this Agreement shall be rendered solely to the other parties. In no instance, except as set forth in Article XII, shall anyone other than the Company or the Reinsurer have any rights under this Agreement, and the Company shall be and remain solely liable to any insured, contractholder, physician or other provider or beneficiary under any contract reinsured hereunder. ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (definitions are applicable to both the singular and the plural forms of each term defined in this Article): "Accounting Period" means the Fiscal Quarter, except that the first Accounting Period shall be the period commencing with the Effective Date and ending with the last day of the then current Fiscal Quarter, and the last Accounting Period shall be the period commencing with the first day of the last Fiscal Quarter preceding the Terminal Accounting Date and ending on the Terminal Accounting Date. "Administrative Expense" means an expense which will be reimbursable each Accounting Period and is intended to compensate the Company or the Reinsurer for a reasonable estimate of the actual cost of performing administrative services in connection with the HMO Plans, as set forth in the Marketing and Services Agreement, without provision for profit. "Affiliate" means with respect to a specified person, a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified. "Business Day" means any day except Saturday or Sunday or any legal Federal or Connecticut holiday. "Capitation Agreement" means a health care provider contract pursuant to which the Company agrees to pay a provider or risk entity a per subscriber fee in lieu of all or a portion of actual claims made. "Capitation Fees" means the per subscriber fees to health care providers incurred under Capitation Agreements, net of amounts paid or payable to the Company by providers under such agreements. 2 "Change of Control" means the acquisition, in a single transaction or in a series of related transactions, by a person, an entity, or a group of persons or entities acting in concert of: (i) twenty-five percent (25 %) or more (a) of the voting common stock of the Company or PHS (excluding any acquisition of stock by a party currently owning twenty-five percent (25 %) or more of such common stock), or (b) fifty-one percent (51 %) or more of the of the aggregate value of the assets of the Company or PHS; or (ii) twenty-five percent (25 %) or more of any ownership interest in the Reinsurer. "Commissions" means commissions and other incentives or bonuses applicable to the marketing of the HMO Plans. "Continuation Plan" has the meaning set forth in Section 8.6. "Contract Termination Date" means the effective date upon which the Agreement terminates pursuant to the applicable Section in Article VIII below. "Contractholder" means an employer in the Service Area who or which executes an enrollment agreement with respect to any HMO Plan subject to this Agreement. "Direct Paid Claims" means amounts paid to health care providers for medical claims and/or to subscribers for services covered by HMO Plans, including withholds paid to providers, but not including Capitation Fees. "Direct Paid Premium" means premiums received. "Earned Premium" shall consist of the item shown on Schedule C, line I.A.7. 3 "Effective Date" shall have the meaning set forth in Section 2.1. "Fiscal Quarter" means each of the four consecutive three-month periods in a fiscal year commencing on January 1 of each year and ending on December 31 of that calendar year. "HMO Plans" means commercial contracts for health care services provided by Company to Contractholders in the Service Area utilizing the Company's network of healthcare providers to provide health care services when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. HMO Plans include HMO Plans with a "point-of-service" feature. "Insurance Taxes" means all taxes, licenses and fees directly imposed on the HMO Plans reinsured hereunder and shall be given the same meaning as Insurance Taxes, Licenses and Fees, Excluding Federal Income Taxes in the Summary of Operations Schedule in the NAIC Life, Accident and Health Convention Blank which is taken from the Taxes, Licenses and Fees Exhibit, or similar entries on financial statements filed by the Company. Such term shall not include any franchise or other federal, state or local tax measured by net income. "Interest Compensation Rate" means the rate of interest defined in Schedule D as applicable to delayed payments. "LIBOR" means, at any time of determination, the London Interbank Offered Rate paid on U.S. dollar deposits for the applicable period of time as published under "Money Rates" in the New York City edition of the Wall Street Journal or, if 4 there is no such publication or statement therein as to LIBOR, then in any publication used in the New York City financial community. "Marketing and Services Agreement" shall have the meaning set forth in Section 3.1. "PHCS" shall mean Private Health Care Systems Incorporated, a corporation with its corporate offices in Waltham, Massachusetts that develops medical provider networks and provides utilization review services. "PHS" shall mean Physicians Health Services, Inc., a Delaware corporation and the parent of the Company. "Profit or Loss" shall have the meaning set forth in Article X. "Quarterly Accounting Report" means the report required to be prepared in accordance with Section 7.2 and providing the data as shown on Schedules C and F. "Quarterly Settlement" means the net amount due and payable to any party with respect to any Accounting Period as set forth in Section 7.3. "Renewal Date" means, with respect to a HMO Plan, the date that is the anniversary of the day on which the liability of the Company began under such HMO Plan. "Reserves" means amounts shown in the Company's annual statement as filed with the State of Connecticut as reserves for the HMO Plans. "Service Area" means the State of Connecticut. 5 "Stop Loss Reinsurance" means reinsurance other than the reinsurance under this Agreement obtained by the Company and provided in connection with HMO Plans. "Stop Loss Reinsurance Premium" means consideration paid by the Company for Stop Loss Reinsurance provided. "Stop Loss Reinsurance Recoveries Received" means amounts collected pursuant to Stop Loss Reinsurance. "Terminal Accounting and Settlement" means the final accounting and payment of any amount due any party upon the termination of this Agreement, as described in Section 9.1. "Terminal Accounting Date" shall have the meaning set forth in Section 9.1. "Withholds" means amounts withheld by the Company from payments of claims submitted by primary care physicians and specialists. ARTICLE II REINSURANCE COVERAGE 2.1 Coverage. (a) Effective October 1, 1996 (the "Effective Date"), the Company agrees to cede to the Reinsurer fifty percent (50%) of the risks under the HMO Plans, all as more specifically described in Schedule A, and the Reinsurer agrees to indemnify the Company against fifty percent (50%) of the risks under such HMO Plans. 6 (b) The parties acknowledge that, pursuant to the terms of Schedule C (Selection Adjustment) to the Marketing and Services Agreement, the parties agreed to apportion profit or loss realized on the HMO Plans sold under the Marketing and Services Agreement. The parties also agreed to apportion profit or loss realized on the Reinsurer's Health Insurance Contracts sold under the Marketing and Services Agreement. As of the date hereof, the loss realized on the HMO Plans sold under the Marketing and Services Agreement is $3,800,000 and the loss realized on the Health Insurance Contracts sold under the Marketing and Services Agreement is $500,000. The parties further acknowledge and agree that the net loss amount of $3,300,000 (the "Net Loss Amount"), payable by the Reinsurer to the Company, will be deducted from the profit portion of the amounts otherwise payable by the Company to the Reinsurer pursuant to Section 7.3 below. After the entire Net Loss Amount has been paid to the Company, profit and loss shall be allocated between the parties as set forth in Article VII below. The amounts set forth herein shall be subject to quarterly settlement and may be subject to change as mutually agreed to by the Company and Reinsurer. 2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a coinsurance basis. Each party agrees to establish and maintain Reserves in an amount appropriate for the risks assumed by such party, as set forth in Section 2.1. 2.3 Conditions. The reinsurance hereunder is subject to the same limitations and conditions as the HMO Plans, except as otherwise expressly provided for in this Agreement. 7 2.4 Exclusions. The reinsurance hereunder does not apply to the following risks: (i) any portion of the risk under any HMO Plan issued by the Company other than the risk reinsured hereunder; (ii) any HMO Plan issued and delivered in a jurisdiction in which issuance and delivery of such contract constituted the doing of business where the Company was not properly licensed; and (iii) those risks for which the Reinsurer is not liable pursuant to the provisions of Section 3.11 hereof. ARTICLE III GENERAL PROVISIONS 3.1 Contract Administration. The Company and the Reinsurer each shall have responsibility for certain aspects of the marketing and administration of the HMO Plans, in accordance with the Amended and Restated Marketing and Services Agreement dated as of October 1, 1996 between the Reinsurer, the Company and PHS (which amended and restated in its entirety the Marketing and Services Agreement dated December 2, 1994) (the "Marketing and Services Agreement"). 3.2 Non-Solicitation. (a) During the term of this Agreement, the Reinsurer shall not contact, solicit or contract for services with any health care provider in the Service Area under contract with the Company. In addition, during the term of this Agreement, and following its termination, the Reinsurer will not provide any party with lists of health care providers under contract with the Company or non-public information concerning contracts between the Company (or its Affiliates) and its health care providers under contract; provided, however, that provider lists must be made available to the Departments of Health or Insurance of the State of Connecticut, to 8 prospective Contractholders, to the Reinsurer's insureds and as otherwise required under applicable law. This Section 3.2 shall not apply (i) to contracting efforts by third parties, including, but not limited to, PHCS acting on behalf of the Reinsurer, for the purpose of developing managed care networks, provided, however, that, the names of health care providers solicited by such third parties shall not have been furnished by the Reinsurer, its employees or agents, or (ii) following the Termination Date of this Agreement, as described in the provisions of Article VIII hereof. The Reinsurer further agrees not to replace a HMO Plan with a PHCS managed health care plan during the term of this Agreement. (b) No party, nor any of its Affiliates, shall contact, solicit or contract with any other party's full-time employees who have been engaged in the activities covered by this Agreement without the consent of such other party. 3.3 Inspection. Any party, or its designated representative, may inspect, at the offices of the Company or the Reinsurer, as the case may be, where such records are located, and conduct reasonable audits of, the papers and any and all other books or documents of the Company or the Reinsurer reasonably relating to the HMO Plans and the administrative responsibilities hereunder, during normal business hours for such period as this Agreement is in effect or for as long thereafter as the Company or the Reinsurer, as the case may be, seeks performance by the other party pursuant to the terms of this Agreement. The information obtained shall be used only for purposes relating to the reinsurance provided under this Agreement and shall not be disclosed to any person without the express permission of the other party, except to the extent that 9 disclosure is required by law. Each party's rights under this Section 3.3 shall survive termination of this Agreement. 3.4 Misunderstandings and Oversights. If any delay, omission, error or failure to pay amounts due or to perform any other act required by this Agreement is unintentional and caused by misunderstanding or oversight, the Company and the Reinsurer will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. The party that first discovers such oversight or incorrect act as a result of the misunderstanding will notify the other parties in writing promptly upon discovery of the misunderstanding or oversight. The parties shall act to correct the error, omission or oversight within twenty (20) calendar days of notification of the problem. This Section 3.4 shall not be construed as a waiver by any party of its right to enforce strictly the terms of this Agreement. 3.5 Reinstatements. If a HMO Plan reinsured hereunder that was terminated or lapsed is reinstated while this Agreement is in effect, the reinsurance for such HMO Plan shall be reinstated automatically as if such HMO Plan had not been terminated or lapsed. All amounts received in connection with such reinstatement shall be treated as Direct Paid Premiums. 3.6 Contract Changes or Reserve Changes. The Company and the Reinsurer shall share, based upon the percentages set forth in Section 2.1 and Schedule A, in any increase or decrease in the Company's liability that results from any change in the terms or conditions of any HMO Plan reinsured hereunder or in the calculation of Reserves. The Company must provide written notification to the Reinsurer within 10 fifteen (15) calendar days after any such change, if such change can reasonably be expected to have a significant effect on the transactions contemplated by this Agreement. 3.7 Compliance with Applicable Laws and Regulations. It is the intention of the parties that this Agreement comply with all existing applicable laws and regulations, as from time to time are in effect, so that the agreement remains in full force and the HMO Plans remain reinsured hereunder. Each of the parties agrees to comply with all laws, ordinances, rules, regulations and orders of regulatory bodies applicable to the transactions contemplated by this Agreement, including those relating to the payment of commissions. 3.8 Amendment and/or Termination Upon Failure to Comply. In the event that it is determined by an insurance or health regulatory authority, the Internal Revenue Service or any other federal, state or local regulatory authority or by any party to this Agreement upon the advice of an insurance or health regulatory authority or the Internal Revenue Service that this Agreement fails to conform to, or that the intent of this Agreement cannot be effected as a result of, the requirements of existing applicable laws and regulations and that this Agreement may be brought into conformity with said requirements, or the intent of this Agreement may be effected, only by means of a material change to this Agreement, or in the event that such laws or regulations are changed subsequent to the Effective Date and such change has a material adverse effect on any party or requires a material change to this Agreement in order for this Agreement to conform with applicable laws and regulations or for its intent to be 11 effected, the parties shall exercise reasonable efforts to reach an agreement to amend this Agreement so as to return the parties to the economic position that they would have been in had no such change occurred or so that both parties share the economic detriment of such change proportionately. If the parties are unable to reach an agreement to amend the Agreement, then the differences between the parties shall be resolved through arbitration in accordance with the provisions of Article XIII. In the event that any required change is not material, this Agreement shall be amended in accordance with such requirement. 3.9 Notification of Disapproval or Change in Law. The Company shall promptly notify the Reinsurer of any actual or anticipated disapprovals or required changes regarding this Agreement that are made by any insurance or health regulatory authority or taxing authority and of any change in the laws, regulations or rulings affecting this Agreement or related documents. The Reinsurer shall be allowed to participate in the defense of this Agreement or related documents on its own behalf with such authority after consultation with the Company. 3.10 Setoff. It is expressly understood that any debts or credits, matured or unmatured, liquidated or unliquidated, arising or incurred pursuant to the terms hereof, including but not limited to such debts and credits arising under Articles IV, V and VI shall, at all times and under all circumstances relevant to the rights and liabilities of the parties to this Agreement, be deemed mutual debts or credits, as the case may be, and shall be set off, and only the net balance shall be allowed or paid. 12 3.11 Limitations on Liability. (a) The Reinsurer shall not indemnify or be liable pursuant to this Agreement or otherwise for any of the Company's risk, to the extent any damages result from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Company. The Reinsurer shall be liable and indemnify the Company fully for all losses arising from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Reinsurer acting in connection with a HMO Plan reinsured hereunder. (b) The Company does not indemnify and shall not be liable pursuant to this Agreement or otherwise for any of the Reinsurer's risk, to the extent any damages result from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Reinsurer. The Company shall be liable and indemnify the Reinsurer fully for all losses arising from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Company acting in connection with a HMO Plan reinsured hereunder. (c) The Reinsurer shall be liable, based on the applicable percentages set forth in Section 2.1 and Schedule A, and subject to the election permitted by Section 6.2, for any losses arising from non-negligent acts or omissions to act taken by the Company in good faith pursuant to HMO Plans reinsured hereunder. (d) For purposes of this Agreement, any damages, claims, liabilities or other expenses for which the Reinsurer shall be liable shall be net of the appropriate share of any recoveries from third parties, including, without limitation, recoveries under Stop-Loss Reinsurance Contracts. 13 (e) The Reinsurer shall not be liable for any damages incurred by the Company or the Reinsurer to the extent such liability or damages arise from the action or actions of a health care provider or health care facility in connection with the HMO Plans reinsured hereunder. 3.12 Exclusivity. The Company and the Reinsurer shall not enter into an arrangement with other parties similar to this Agreement for reinsurance of Managed Care Contracts (as defined in the Marketing and Services Agreement) offered in the Service Area, except as expressly permitted under the Marketing and Services Agreement. 3.13 Press Releases. No public statement or press release regarding the existence of this Agreement or the terms thereof shall be made by any party hereto without the prior written consent of the other parties, except as required by applicable laws, ordinances, rules and regulations. 3.14 Restrictions on the Reinsurer and the Company Relating to Other Agreements. During the period from the Effective Date through the last date on which the provisions of this Agreement are in effect, the Reinsurer and the Company shall be prohibited from, directly or indirectly, entering into any contract, lease, sublease, license, sublicense, promissory note, evidence of indebtedness or other contract or commitment (whether oral or written), which will, or can reasonably be expected to at any time, place any material restriction or restrictions on such party's ability to perform any or all of its obligations under this Agreement; provided, however, that, nothing 14 herein shall limit either party's right to enter into a Change of Control transaction in accordance with the provisions set forth herein. 3.15 Investigations. Each party to this Agreement shall immediately notify the other parties, in writing, of any and all investigations of such party or its directors, principal officers or shareholders conducted by any federal, state or local governmental or regulatory authority other than routine examinations or surveys by state insurance or health regulatory authorities and federal or state tax authorities. 3.16 Change of Control. Each party shall fully disclose the details of any pending Change of Control known to it to the other party, and shall provide the other party with copies of any and all applications for approval therefor made to Federal, state or local regulatory authorities. Such disclosure shall be made prior to or concurrent with notification and/or application for approval to such Federal, state or local regulatory authorities of a Change of Control. In the event that such Change of Control shall be approved, the party that intends to undergo the Change of Control shall notify the other party immediately thereof and the other party shall have the rights set forth in Section 8.6. 3.17 Reinsurance or Sale of HMO Plans. (a) The Company agrees that, during the period in which this Agreement is in effect, it shall not reinsure. sell or assign the HMO Plans to another entity (other than in connection with Stop Loss Reinsurance). (b) Notwithstanding paragraph (a) above, this Section 3.17 shall not restrict the ability of the Company to (i) enter into a merger or consolidation, (ii) effect a sale 15 of all or a portion of its capital stock or (iii) effect a sale of its business as an entirety or substantially as an entirety; provided, however, that the Company may not enter into a transaction listed in (i), (ii) or (iii) above with another entity unless such other entity provides the Reinsurer with a writing, in form and substance satisfactory to the Reinsurer which shall state that the entity agrees to be bound by the terms of this Agreement to the same extent and effect as if such entity had been a party to this Agreement. 3.18 Commission Scale and Commission Scale Changes. Commission payments made with respect to any HMO Plans reinsured hereunder shall be made according to the same commission scale used by the Company with respect to the specific types of products listed in Schedule A, or substantially similar products, that are not subject to this Agreement, as that scale may be changed from time to time. 3.19 Stop-Loss Reinsurance. The Company agrees, during the period that this Agreement is in effect, that it will maintain Stop-Loss Reinsurance with respect to the HMO Plans in effect, with deductibles, coverages and limits of liability that are substantially the same as those that apply under the Stop Loss Reinsurance contract or contracts of the Company that are in effect on the Effective Date, a copy or copies of which are attached as Exhibit I; provided, however, that each Stop Loss Reinsurance contract or contracts of the Company relating to HMO Plans must provide coverage with respect to claims relating to any periods during which the Company is obligated to provide services with respect to HMO Plans, without regard to (i) the failure of the Company to remain qualified to conduct the business for which it is organized, or (ii) 16 the insolvency or the commencement of supervision, conservation, rehabilitation, liquidation or similar proceedings against the Company. In the event that any Stop Loss Reinsurance contract issued to the Company does not meet the requirements of this Section 3.l9 at the Effective Date, or at any time thereafter, the Company will obtain substitute Stop Loss Reinsurance meeting such requirements from a qualified reinsurer, including the Reinsurer. 3.20 Statement of Actuarial Opinion. Within forty-five (45) calendar days after the end of the calendar year, the Company shall provide the Reinsurer with a Statement of Actuarial Opinion certifying the adequacy of the reserves which are covered under this Agreement. In addition, the Actuarial Opinion must state whether or not the reserves covered under this Agreement meet the minimum standards of all states where the Company is licensed, and if not the difference between the Company's reserves and state minimums. The Actuarial Opinion shall meet the requirements as set forth in the NAIC's Actuarial Opinion and Memorandum Regulation. The Opinion shall be signed by the Company's "Appointed Actuary." ARTICLE IV PREMIUMS AND RESERVES 4.1 Premiums - HMO Plans. After the Net Loss Amount described in Section 2.1(b) above is satisfied, Premiums under HMO Plans received by the Reinsurer, pursuant to the terms of the Marketing and Services Agreement, shall be allocated to the Company and the Reinsurer in accordance with the applicable 17 percentages set forth in Section 2.1 and in Schedule A, and the portion of the Premiums allocated to the Reinsurer shall constitute the consideration in respect of the Reinsurer's acceptance of risk under this Agreement. The portion of Premiums allocated to the Company shall be paid over to the Company in accordance with the settlements required by Section 7.3 of this Agreement. Until the Net Loss Amount is satisfied, the portion of the Premiums allocated to the Reinsurer shall also be paid over to the Company in accordance with Section 2.1(b) above. 4.2 HMO Plan Reserves. With respect to the HMO Plans reinsured hereunder, each of the Company and the Reinsurer shall establish and maintain Reserves in accordance with the risk assumed by each party and all applicable regulatory requirements. ARTICLE V EXPENSE ALLOWANCE 5.1 Administrative Expenses. Each party shall be entitled to reimbursement for its Administrative Expenses (not including pre-marketing expenses), identified in Schedule B, for each Accounting Period. Such Administrative Expenses, plus any Insurance Taxes and Commissions, paid by such party with respect to the HMO Plans during the Accounting Period, shall be considered reimbursable expenses. 5.2 Payment. The Company and the Reinsurer shall be reimbursed for the amounts shown as Company Expenses or Reinsurer Expenses, as set forth in Section 7.3 below. 18 ARTICLE VI CLAIMS 6.1 Notice of Claim. Upon receipt of any claim on any HMO Plan, which claim is reasonably anticipated to exceed fifty thousand dollars ($50,000), the Company shall promptly notify the Reinsurer of such claim. Copies of notification, claim papers, and proofs shall be furnished by the Company to the Reinsurer upon request. 6.2 Determination of Claims by the Company. The Reinsurer will accept the decision of the Company with respect to the payment of a claim under a HMO Plan; provided, however, that the Company shall promptly advise the Reinsurer of the Company's intention to contest a claim under a HMO Plan, and the Reinsurer shall have the right to advise and assist the Company in its determination of liability and in the best procedure to follow with respect to any such claim of doubtful validity. The Company and the Reinsurer shall share, in accordance with the applicable percentages set forth in Section 2.1 and Schedule A, all expenses incurred in connection with contesting, compromising or settling claims under a HMO Plan, subject to the limitations of Section 3.11. Such expenses may include, but are not limited to, all costs and expenses of investigation, settlement of claims, litigation costs and judgments. If, however, the Reinsurer has advised the Company that a contested claim should be paid, and elects to assume liability for its applicable percentage (as set forth in Section 2.1 and Schedule A) of the claim as originally presented, the Reinsurer shall not share in any additional costs or expenses associated with such claim. 19 ARTICLE VII ACCOUNTING AND REPORTING 7.1 Reinsurance Accounting. The Company shall maintain separate books or details of account with respect to the HMO Plans reinsured hereunder, setting forth the data required in Schedules C and E. 7.2 Quarterly Accounting Reports. Following the end of each Accounting Period, the Company shall supply the Reinsurer with a Quarterly Accounting Report providing the data required in Schedules C and E. The Quarterly Accounting Report shall be submitted within forty-five (45) calendar days of the end of each calendar quarter. 7.3 Settlements. Settlement of amounts payable between the Company and the Reinsurer shall be made in a reasonably expeditious manner once the amounts or estimates are known or determined. All settlement payments shall be made by wire transfer with same or next day availability unless otherwise agreed. (a) Weekly Settlements. The Reinsurer shall make reimbursement payments to the Company for estimated weekly cash claims paid by the Company. Such estimates are to be mutually determined, and appropriately adjusted from time to time, to reasonably approximate the timing and amounts of cash claim expenditures made by the 20 Company and to minimize the quarterly settlement amounts with respect to claims. Such payments are due weekly based upon a mutually agreed upon schedule. (b) Monthly Settlements. The Reinsurer shall make reimbursement payments to the Company monthly for any actual or estimated monthly administrative expenses, premium taxes, licenses, fees or assessments incurred by the Company. Such payments are due within 20 Business Days after the end of each month in which they were incurred. The Reinsurer's actual or estimated administrative or commission expenses incurred are also deemed payable at that time. By mutual agreement, certain expenses may be added to or deleted from this monthly reimbursement. (c) Quarterly Settlements. Based upon the Quarterly Accounting Reports, including Schedules C and E, settlement payment shall be made to the Company or Reinsurer, as the case may be, within 45 calendar days from the end of such quarter. If such reports or schedules are not finalized within this time frame, a reasonable estimated payment shall be made followed by an adjustment payment. The Quarterly Settlement payment shall represent settlement, net of any interim reimbursements or other related settlement payments, of all amounts due during that quarter and any mutually agreed upon adjustments to prior periods. The quarterly calculation of this payment shall be substantially in the form of Schedule E with any positive amounts listed on Line 24 of such Schedule being payable from the Reinsurer to the Company and any negative amounts being payable from the Company to the Reinsurer. For the 21 purpose of calculating interest on delayed payments relating to this quarterly settlement payment, the parties agree that the due date is the 15th day (unless such 15th day falls on a day other than a Business Day, in which case the due date is the Business Day immediately preceding such 15th day) of the middle month of the settlement quarter unless otherwise mutually agreed. (d) Other Settlements. Other settlement payments between the Company and the Reinsurer such as payment adjustments, preliminary quarterly settlements, withhold payout reimbursements or interest compensation may be made separately or along with other settlement payments upon mutual agreement. For the purpose of calculating interest on delayed payments relating to these payments, due dates are to be mutually agreed upon if not otherwise specified in this Agreement. 7.4 Reconciliation. Each party shall have the right to review all individual components of transactions entered into each Quarterly Accounting Report, such as Premiums received, Commissions and Insurance Taxes, claims incurred or paid, and similar items. The parties shall have a reasonable period from the day the Quarterly Accounting Report is submitted to report any deficiency in such report and to request an adjustment of any payment made to or received by either party. Any amount due either party in connection with such reconciliation shall be paid within forty-five (45) calendar days of the receipt of notice that additional amounts are due. 22 7.5 Best Efforts to Supply Actual Data. In preparing all reports required in this Agreement, the Reinsurer and the Company shall make their best efforts to supply the actual data. If the actual data cannot be supplied with the appropriate report, the Reinsurer or the Company shall produce best estimates, and shall provide amended reports based on actual data no more than forty-five (45) days after such report was originally due. 7.6 Interest Delayed Payments. Should any payment in connection with the Settlements due the Company or the Reinsurer as set forth in Section 7.3 above be delayed beyond its due date as defined or determined, such delayed payment shall accrue interest during such period of delay at the Interest Compensation Rate as defined on Schedule D. Interest is to be calculated based upon an actual/365 day basis. Any such interest accrued or paid shall not be included in Schedule C as a jointly shared income or expense item, but rather be paid directly to the deficient party either separately or as a separate item added to the Schedule E settlement. The application of this calculation shall also apply to any over payments, with interest accruing back to the deficient party. 23 ARTICLE VIII DURATION AND TERMINATION 8.1 Duration. Except as otherwise provided herein, this Agreement shall be unlimited in duration. 8.2 Commencement of Liability. The liability of the Reinsurer on reinsurance ceded hereunder shall commence on the later of the Effective Date and the date the liability of the Company commences under a HMO Plan reinsured hereunder. 8.3 Termination of Liability. Except as provided in the next sentence of this Section 8.3, the liability of the Reinsurer with respect to any HMO Plan shall terminate on the date the liability of the Company on such HMO Plan is terminated. If this Agreement is terminated as provided in this Article VIII, the Reinsurer's liability with respect to HMO Plans that remain in force shall terminate on the day that all Direct Paid Claims incurred prior to the date of such termination are satisfied. 8.4 Termination of Agreement. Either party shall have the right to terminate this Agreement without cause upon the giving of one hundred eighty (180) days advance written notice to the other party; provided, however, that, the liability of the Reinsurer with respect to HMO Plans that remain in force will terminate on the day that all Direct Paid Claims incurred prior to the date of such termination are satisfied. The Contract Termination Date under this Section 8.4 shall be the 180th day following the giving of the notice required by this Section 8.4. 8.5 Automatic Termination. If, at the end of an Accounting Period, none of the HMO Plans is in force, this Agreement shall automatically terminate. In the event 24 of termination pursuant to this Section 8.5, the last day of such Accounting Period shall be the Contract Termination Date. 8.6 Termination Subsequent to a Change of Control. In the event of a Change of Control of the Company (for purposes of this Section 8.6, the term "Company" shall include PHS) or the Reinsurer, the party not undergoing the Change of Control may elect to terminate this Agreement. In the event that this Agreement is terminated as a result of a Change of Control: (i) without any further action required of either party, the Marketing and Services Agreement shall be deemed to be terminated as of the effective date of the Change of Control, except with respect to the provisions regarding the administration of the HMO Plans continued under this Section 8.6 which provisions shall be deemed to survive such termination for the period set forth in clause (ii) of this sentence; and (ii) the party not undergoing the Change of Control may elect to continue this Agreement solely with respect to reinsurance of any case that was originally written as an HMO Plan and that was in force on the Contract Termination Date, until the tenth (10th) succeeding Renewal Date applicable to such HMO Plan, or continuation managed care contract issued by the Company (collectively, "Continuation Plans") following the Contract Termination Date. The Contract Termination Date under this Section 8.6 shall be the effective date of the Change of Control. 8.7 Termination for Cause. (a) In the event that either party shall default in the performance of the duties and obligations imposed on it pursuant to the terms of 25 this Agreement or the Marketing and Services Agreement, or breach any of the provisions contained herein or therein, including the failure to pay any amount when due, or the failure of either party to maintain a level of services under the Marketing and Services Agreement that is reasonably satisfactory to the other party, the defaulting party shall be allowed thirty (30) calendar days from receipt of written notice of such default or breach to present to the non-defaulting party a plan to cure such default or breach that is reasonably satisfactory to the non-defaulting party. If a reasonably satisfactory plan to cure the default or breach is not submitted within that time, or if the plan is not carried out according to its terms, the non-defaulting party shall have the right to terminate this Agreement upon delivery of written notice of such termination to the defaulting party, which shall be effective on receipt, without prejudice to any other rights or remedies available to the non-defaulting party by reason of such default or breach. (b) In the event that either party shall engage in fraudulent, illegal or grossly negligent conduct with respect to its duties and obligations under this Agreement or the Marketing and Services Agreement, the other party shall have the right to terminate this Agreement upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non-defaulting party by reason of the defaulting party's conduct. (c) The Contract Termination Date under this Section 8.7 shall be the date of receipt of the notice of termination. 26 8.8 Termination of Agreement Upon the Occurrence of Certain Events. (a) Upon the occurrence of either of the following events: (i) one of the parties to this Agreement fails to remain in good standing under the laws of its state of domicile, or fails for any reason to remain qualified to engage in the transaction contemplated by this Agreement under applicable laws, ordinances, rules or regulations; or (ii) a voluntary or involuntary proceeding is commenced in any state by or against one of the parties to this Agreement for the purpose of supervising, conserving, rehabilitating or liquidating such party; this Agreement may be terminated at the election of the other party pursuant to a written notice. The Contract Termination Date under this Section 8.8 will be the day of receipt of the notice of termination. In the event that the Company shall be subject to (i) or (ii) above, the Reinsurer shall have the exclusive right (subject to appropriate regulatory approvals) to acquire the HMO Plans or to require the Company to assign the HMO Plans to a designated entity authorized to operate a health maintenance organization in the geographic areas in which the Company operates. 8.9 Termination for Material Change in PHS Network. In the event that the PHS Network (as that term is defined in the Marketing and Services Agreement) undergoes a material change within the meaning of Section 6.3 of the Marketing and Services Agreement, Company shall be allowed thirty (30) calendar days to present to 27 Reinsurer a plan to cure such Material Change that is reasonably satisfactory to Reinsurer. If a reasonably satisfactory plan to cure the Material Change is not submitted within that time, or if the plan is not carried out according to its terms, Reinsurer shall have the right to terminate this Agreement upon delivery of written notice of such termination to Company, which shall be effective upon receipt (the date of receipt being the Contract Termination Date under this Section 8.9), without prejudice to any other rights or remedies available to Reinsurer. ARTICLE IX PAYMENTS UPON TERMINATION OF AGREEMENT 9.1 Payments on Termination. (a) In the event that this Agreement shall be terminated pursuant to Article VIII, a net accounting and settlement as to any balance due under this Agreement shall be undertaken by the parties to this Agreement (the "Terminal Accounting and Settlement"), which calculations shall be performed as of the day that is one (1) year from the date that the liability of the Reinsurer shall have terminated (the "Terminal Accounting Date"). During the period between the termination of this Agreement and the Terminal Accounting Date, Direct Paid Claims that accrued prior to the termination of this Agreement shall continue to be paid, and Reserves shall continue to be held, in accordance with the terms set forth herein. (b) The Company shall supply the Reinsurer with final Schedules C and D which shall show the Terminal Accounting and Settlement. If the Terminal Accounting and Settlement shows that the Company owes the Reinsurer, then the Company shall pay the amount owing to the Reinsurer. If the Terminal Accounting and Settlement 28 shows that the Reinsurer owes the Company, then the Reinsurer shall pay the amount owing the Company. Such Schedules shall be supplied by the Company within the period agreed by the parties. (c) Any payment required under the Terminal Accounting and Settlement by the Company shall be paid by the Company no later than the day on which the final Schedules C and E, as required by Section 9.l(b), are due. The Reinsurer shall make any payment required to be made by the Reinsurer hereunder within ten (10) calendar days of receipt of such final schedules. In the event that the calculation for the payment required under the Terminal Accounting and Settlement cannot be accurately calculated by such date, then an estimate shall be paid with a supplemental accounting being made when the accurate information shall become available. 9.2 Supplemental Accounting. In the event that, subsequent to the Terminal Accounting and Settlement, an adjustment is made with respect to any amount taken into account in the Terminal Accounting and Settlement, or in the event that the Company pays a Direct Paid Claim that accrued prior to the termination hereof, a supplemental accounting shall be made. Any net amount owed to the Reinsurer or the Company by reason of such supplemental accounting, plus any interest due pursuant to Section 7.6, shall be paid promptly upon the completion of such supplemental accounting. 29 ARTICLE X CALCULATION OF PROFIT AND LOSS 10.1 Determination and Allocation of Profit or Loss. The Company shall calculate Profit or Loss with respect to the HMO Plans, and the Reinsurer or the Company, as appropriate, shall make settlements as required by Section 7.3 or Section 9.1, as appropriate, according to the calculations as shown on Schedules C and E and shall be made part of each Quarterly Accounting Report. ARTICLE XI CONDITION PRECEDENT 11.1 Condition Precedent. When under insurance, public health or other applicable laws or regulations, approval of arrangements of the type contemplated by this Agreement by one or more Federal, state or local governmental or regulatory authorities is required, the receipt by the Company and the Reinsurer of any and all such approvals shall be a condition precedent to the other party's liability under this Agreement. Subject to Section 11.2, if this condition precedent is not met by the Company or the Reinsurer by the Effective Date, this Agreement shall be void as of the Effective Date. 11.2 Extension of Time. In the event that the necessary approvals set forth in Section 11.1 have not been obtained by the Company or the Reinsurer as of the Effective Date, the parties may mutually agree to modify the Effective Date of this Agreement. 30 11.3 Cooperation of the Parties. Each of the Reinsurer and the Company shall each use its best efforts to cooperate with and assist the other parties in obtaining the necessary approvals referred to in Section 11.1. ARTICLE XII INSOLVENCY OF THE COMPANY 12.1 Payments by the Reinsurer. In the event of the insolvency of the Company, payments due the Company on all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall, subject to Section 12.2, be payable by the Reinsurer directly to the Company or to its liquidator, receiver, or statutory successor on the basis of the liability of the Company and the Reinsurer under the HMO Plans reinsured hereunder without diminution because of the insolvency of the Company. 12.2 Claims. In the event of the insolvency of the Company, the Reinsurer shall be given written notice of the pendency of a claim against the insolvent Company on a HMO Plan reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable' subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of 31 the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more assuming reinsurers are involved in the same claim and a majority in interest elect to interpose defenses to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company. ARTICLE XIII ARBITRATION 13.1 Appointment of Arbitrators. In the event of any disputes or differences arising hereafter between the contracting parties with respect to any transaction, matter or issue arising from or relating in any way to this Agreement on which agreement between the parties hereto cannot be reached, the same shall be decided by arbitration. Three arbitrators will decide any dispute or difference. The arbitrators must be disinterested officers or retired officers of health maintenance organizations or managed health care companies, or insurance companies with experience in managed health care, other than the parties to this Agreement or their Affiliates. Each of the Company and the Reinsurer agrees to appoint one of the arbitrators with the third, the "Umpire," to be chosen by the other arbitrators. In the event that either such party should fail to choose an arbitrator within 30 days following a written request by the other party to do so, the requesting party may choose an Umpire before entering upon arbitration. In the event that the two arbitrators shall not be able to agree on the choice of the Umpire within 30 days following their appointment, each arbitrator shall nominate five 32 candidates within 10 days thereafter, four of whom the other arbitrator shall decline, and the Umpire shall be chosen from the two remaining nominees by the President of the American Arbitration Association. 13.2 Decision of Arbitrators: Expenses. The arbitrators shall consider customary and standard practices in the HMO and managed health care insurance businesses. They shall decide by a majority vote of the arbitrators. There shall be no appeal from their written decision. Judgment may be entered on the decision. Each party shall bear the expense of its own arbitrator and outside attorney fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator. 13.3 Applicable Law: Survival. Any arbitration instituted pursuant to this Article XIII shall be held in Connecticut and the laws of the State of Connecticut and, to the extent applicable, the Federal Arbitration Act shall apply. This Article XIII shall survive termination of this Agreement. 13.4 Other Actions. Submission of a matter to arbitration shall be a condition precedent to any right to institute a proceeding at law or in equity concerning such matter, except for injunctive or other provisional relief pending the arbitration of a matter subject to arbitration pursuant to this Agreement. ARTICLE XIV REPRESENTATIONS AND WARRANTIES 14.1 Representations and Warranties of the Reinsurer. The Reinsurer hereby represents and warrants to the Company as follows: 33 The Reinsurer is a mutual life insurance company organized and existing under the laws, including the insurance laws, of the State of New York and is in good standing under these laws. The Reinsurer further represents and warrants that it is duly licensed and admitted as an insurer under the laws of those jurisdictions in which the HMO Plans reinsured hereunder have been issued and is authorized under the laws and regulations of said jurisdictions to act as a reinsurer in those jurisdictions. In addition, the Reinsurer covenants that, so long as this Agreement is in effect, the Reinsurer shall take all actions reasonably necessary to remain duly licensed under the laws of those jurisdictions wherein the HMO Plans have been issued. The Reinsurer shall notify the Company immediately in the event that any license shall be revoked or suspended in any jurisdiction hereunder. The Reinsurer has full corporate power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to carry out all of its obligations hereunder. The execution and delivery by the Reinsurer of this Agreement and the other agreements and documents contemplated hereby, the consummation by the Reinsurer of the transactions as herein contemplated and the carrying out by the Reinsurer of its obligations contemplated hereby have been duly and validly authorized by all necessary corporate action. 14.2 Representations and Warranties of the Company. The Company hereby represents and warrants to the Reinsurer as follows: 34 The Company is a corporation organized and existing under the laws, including the insurance and/or public health laws, of the State of Connecticut and is in good standing under these laws. The Company further represents and warrants that it is duly licensed as a health maintenance organization under the laws of those jurisdictions wherein the HMO Plans have been issued. In addition, the Company covenants that, so long as this Agreement is in effect, the Company shall take all reasonable actions necessary to remain duly licensed as a health maintenance organization within the purview of this Agreement under the laws of those jurisdictions wherein the HMO Plans have been issued. The Company shall notify the Reinsurer immediately in the event that any license shall be revoked or suspended in any jurisdiction hereunder. The Company has full corporate power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to carry out all of its obligations hereunder. The execution and delivery by the Company of this Agreement and the other agreements and documents contemplated hereby, the consummation by the Company of the transactions as herein contemplated and the carrying out by the Company of its obligations contemplated hereby have been duly and validly authorized by all necessary corporate action. 35 ARTICLE XV CONFIDENTIALITY 15.1 Obligations of the Parties. Each party agrees that all information concerning the business affairs of the Company or the Reinsurer, as the case may be, which is not generally available to the public, including but not limited to, lists of physicians and other health care providers, lists of brokers and other information of a proprietary nature relating to methods of doing business heretofore or hereinafter received by it from the other parties shall be kept and maintained as confidential and in complete secrecy. No party shall, without the prior written consent of the other parties, disclose at any time, either orally, or in writing, or otherwise, in any manner, directly or indirectly, to any person or entity, except to other employees or agents of the non-disclosing party, any such proprietary information. Any breach of confidentiality shall give the non-breaching party the right of injunctive relief in addition to any other remedy permitted by law. 15.2 Survival of Article XV. This Article XV shall survive termination of this Agreement. ARTICLE XVI MISCELLANEOUS PROVISIONS 16.1 Notices. All notices required pursuant to this Agreement shall be in writing and shall become effective when received. Each written notice shall be sent by certified or registered mail, return receipt requested, or a nationally recognized 36 overnight delivery service (providing for delivery receipt) or delivered by hand. All notices under this Agreement shall be addressed as follows: If to the Reinsurer: The Guardian Life Insurance Company of America 201 Park Avenue South New York, New York 10003 ATTENTION: Edward K. Kane, Esq. Senior Vice President & General Counsel If to the Company: Physicians Health Services of Connecticut, Inc. 120 Hawley Lane Trumbull, Connecticut 06611 ATTENTION: Regina M. Campbell Senior Vice President & Chief Administrative Officer If to PHS: Physicians Health Services, Inc. 120 Hawley Lane Trumbull, Connecticut 06611 ATTENTION: Regina M. Campbell Senior Vice President & Chief Administrative Officer 16.2 Successors and Assigns. Except as provided in Section 3.17(b) this Agreement cannot be assigned by the Company or the Reinsurer without the prior written approval of the other party. The provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective permitted successors and assigns. 37 16.3 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same agreement. 16.4 Currency. All payments and accounts shall be made in United States Dollars, and all fractional amounts shall be rounded to the nearest whole dollar. 16.5 Amendment. This Agreement shall be amended only by written agreement signed by a duly authorized officer of each of the Company and the Reinsurer, and any change to this Agreement shall be null and void unless made by such amendment; provided, however, that where, under insurance, public health or other applicable laws or regulations, the approval of any such amendment to this Agreement by one or more Federal, state or local governmental or regulatory authorities is required, the amendment shall not take effect unless and until all such necessary approvals have been received by the Company. In the event that such an approval is required, the Company and the Reinsurer shall each be obligated to take all necessary actions in order to obtain such approval. 16.6 Entire Agreement. This Agreement and the Schedules and Exhibits attached hereto, together with the Marketing and Services Agreement, supersede all prior discussions and written and oral agreements between the parties with respect to the subject matter of this Agreement, and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof. Headings are not part of this Agreement, and shall not affect the terms hereof. 38 16.7 Binding Effect. This Agreement is binding upon and will inure to the benefit of the parties and their respective successors and permitted assigns. 16.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to its provisions relating to conflicts of law. 16.9 Severability. In the event any section or provision of this Agreement or related documents is found to be void and unenforceable by a court of competent jurisdiction, the remaining sections and provisions of this Agreement or related documents shall nevertheless be binding upon the parties with the same force and effect as though the void or unenforceable part had not been severed or deleted. 16.10 Waivers and Remedies. The waiver by any of the parties of any other party's prompt and complete performance, or breach or violation, of any provisions of this Agreement and related documents shall not operate nor be construed as a waiver of any subsequent breach or violation, and the waiver by any of the parties to exercise any right or remedy which it may possess hereunder shall not operate nor be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 16.11 Regulatory Review. The parties acknowledge and agree that this Agreement is subject to the review and approval of the New York State Department of Insurance. The parties expressly agree that any revisions to this Agreement required by 39 the New York State Department of Insurance will be addressed in an amendment to, or restatement of, the Agreement. 40 EXECUTION IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC. By /s/ Regina M. Campbell ----------------------------- Name Regina M. Campbell Title Senior Vice President THE GUARDIAN LIFE INSURANCE COMPANY, OF AMERICA By /s/ Joseph D. Sargent ----------------------------- Name Joseph D. Sargent Title President and CEO 41 CT SCHEDULE A CONTRACTS AND RISKS REINSURED
- -------------------------------------------------------------------------------- CONTRACT RISKS REINSURED - -------------------------------------------------------------------------------- - - HMO AND POS The Reinsurer agrees to accept 50% of the risks Contracts under such contracts - --------------------------------------------------------------------------------
A-1 CT Schedule B Contract Allowances Administrative Service Fee I. Guardian's Administrative Services Fee (as a percentage of premium)
HMO POS --- --- Marketing 0.63% 0.63% Sales 1.38% 1.38% Administration 1.30% 1.30% Billing/Collections 1.69% 1.69% Advertising 0.15% 0.15% Total 5.15% 5.15%
II. PHS Administrative Services Fee (as a percentage of premium)
HMO POS --- --- Health Services, UR 1.67% 1.67% Net Mgt, MOD, QA 2.43% 2.43% Operations 3.58% 3.58% Acct Svc., Cust Srv. 1.44% 1.44% Marketing 0.63% 0.63% Sales 0.15% 0.15% Administration 1.30% 1.30% Advertising 0.15% 0.15% Total 11.35% 11.35%
- -------------------------------------------------------------------------------- Schedule C - -------------------------------------------------------------------------------- Year to Date Accounting - -------------------------------------------------------------------------------- Quarter Ending: - -------------------------------------------------------------------------------- CT - -------------------------------------------------------------------------------- HMO - -------------------------------------------------------------------------------- & POS - -------------------------------------------------------------------------------- I. Profits/losses From Underwriting - -------------------------------------------------------------------------------- A. Earned Premium - -------------------------------------------------------------------------------- 1 Cash Received - -------------------------------------------------------------------------------- 2 Change in D/U - -------------------------------------------------------------------------------- 3 Change in UPR - -------------------------------------------------------------------------------- 4 Change in Advance Premium - -------------------------------------------------------------------------------- 5 Gross Earned Premium (A1+A2+A3+A4) - -------------------------------------------------------------------------------- 6 CSEHRP & Other Reins. Pool Premium Ceded - -------------------------------------------------------------------------------- 7 Net Earned Premium (A5+A6) - -------------------------------------------------------------------------------- B. Incurred Claims - -------------------------------------------------------------------------------- 1 Cash Claims (including Capitations) Paid - -------------------------------------------------------------------------------- 2 Cash Withholds +PCP Bonuses Paid - -------------------------------------------------------------------------------- 3 Cash Rein. PI.,COB, Subrog. Recov. - -------------------------------------------------------------------------------- 4 Nurses Line Expenses - -------------------------------------------------------------------------------- 5 Total Cash Claims (B1+B2+B3+B4) - -------------------------------------------------------------------------------- 6 Changes in IBNR - -------------------------------------------------------------------------------- 7 Change in Withholds + PCP Bonuses Payable - -------------------------------------------------------------------------------- 8 Changes in Rein. PL, COB, Subrog. Recov. - -------------------------------------------------------------------------------- 9 Total Change in Reserves (B6+B7+B8) - -------------------------------------------------------------------------------- 10 Total Incurred Claims (B5+B9) - -------------------------------------------------------------------------------- C. Expenses - -------------------------------------------------------------------------------- 1 Commissions - -------------------------------------------------------------------------------- a. Cash - -------------------------------------------------------------------------------- b. Change in Liability - -------------------------------------------------------------------------------- c. Total Incurred (C1a+C1b) - -------------------------------------------------------------------------------- 2 Px Taxes , Licenses & Fees (if applicable). - -------------------------------------------------------------------------------- a. Cash - -------------------------------------------------------------------------------- b. Change in Liability - -------------------------------------------------------------------------------- c. Total Incurred (C2a+C2b) - -------------------------------------------------------------------------------- 3 Assessments (if applicable) - -------------------------------------------------------------------------------- a. Cash - -------------------------------------------------------------------------------- b. Change in Liability - -------------------------------------------------------------------------------- c. Total Incurred (C3a+C3b) - -------------------------------------------------------------------------------- 4 Field Expenses - -------------------------------------------------------------------------------- a. Cash - -------------------------------------------------------------------------------- b. Change in Liability - -------------------------------------------------------------------------------- c. Total Incurred (C4a+C4b) - -------------------------------------------------------------------------------- 5 Guardian Admin. Exp. - -------------------------------------------------------------------------------- 6 PHS Admin. Exp. - -------------------------------------------------------------------------------- 7 Total Incurred Expenses (C1c+C2c+C3c+C4c+C5+C6) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- II Profit(Loss)(A7-B10-C7) - -------------------------------------------------------------------------------- D. Guardian Profit (50%) - -------------------------------------------------------------------------------- E. PHS Profit (50%) - --------------------------------------------------------------------------------
SCHEDULE D INTERST RATES The Interest Compensation Rate applicable for any given fiscal quarter is defined as the annual rate of interest equal to the closed yield on 3-month LIBOR as of the last trading day of the prior fiscal quarter plus 1.00%. Such rate shall remain in effect for that entire quarter regardless of any interim fluctuations or changes in 3-month LIBOR yields. The above interest rate may be changed or modified as appropriate upon mutual agreement between the Company and the Reinsurer. - -------------------------------------------------------------------------------- Schedule E - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Cash Flow and Funds Reconciliation - -------------------------------------------------------------------------------- Quarter Ending: - -------------------------------------------------------------------------------- CT - -------------------------------------------------------------------------------- (All numbers to reflect year to date totals.) HMO - -------------------------------------------------------------------------------- & POS - -------------------------------------------------------------------------------- Underwriting Cash Flows 1 Cash Premiums Received (Sched C:A1) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 Reins. Pool Premiums Ceded (Sched C:A6) - -------------------------------------------------------------------------------- 3 Cash Claims (Total) (Sched C:B4) - -------------------------------------------------------------------------------- 4 Commissions Incurred (Sched C:C1c) - -------------------------------------------------------------------------------- 5 Premium Tx, Licenses, Fees Incurred (Sched C:C2c) - -------------------------------------------------------------------------------- 6 HRA Assessment Incurred (Sched C:C3c) - -------------------------------------------------------------------------------- 7 Field Expenses (Sched C: C4c) - -------------------------------------------------------------------------------- 8 Guardian Admin. Expenses (Sched C:C5) - -------------------------------------------------------------------------------- 9 PHS Admin. Expenses (Sched C:C6) - -------------------------------------------------------------------------------- 10 Total Cash Out (2+3+4+5+6+7+8+9) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 11 Net Cash Generated for Period (1-10) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Distribution of Cash Flows - -------------------------------------------------------------------------------- 12 Cash Flow to PHS (1-4-7-8-50% of 11) - -------------------------------------------------------------------------------- 13 Cash Flow to Guardian (4+7+8+50% of 11) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 14 Marketing Expenses Reimbursable from Guardian - -------------------------------------------------------------------------------- 15 Marketing Expenses Reimbursable from PHS - -------------------------------------------------------------------------------- 16 Interest on Delayed Payments Owed from Guardian - -------------------------------------------------------------------------------- 17 Interest on Delayed Payments Owed from PHS - -------------------------------------------------------------------------------- 18 Interest on Cash Reserves held Owed from Guardian - -------------------------------------------------------------------------------- 19 Interest on Cash Reserves held Owed from PHS - -------------------------------------------------------------------------------- 20 Other amounts Owed from Guardian - -------------------------------------------------------------------------------- 21 Other amounts Owed from PHS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 22 Gross Amount Due to PHS (12+14-15+16-17+18-19+20-21) - -------------------------------------------------------------------------------- 23 Less Related YTD Payments Made - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 24 Net Amount Due to (from) PHS (22-23) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
EX-10.(Q) 8 AMENDED & RESTATED REINSURANCE AGRMT Exhibit 10 (q) AMENDED AND RESTATED REINSURANCE AGREEMENT between PHYSICIANS HEALTH SERVICES OF NEW YORK, INC. White Plains, New York and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA New York, New York AMENDED AND RESTATED REINSURANCE AGREEMENT Reference is hereby made to the Reinsurance Agreement (the "Reinsurance Agreement") made and entered into as of April 27, 1995 between THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a mutual life insurance company organized under the laws of the State of New York (the "Reinsurer") and PHYSICIANS HEALTH SERVICES OF NEW YORK, INC., a corporation organized under the laws of the State of New York as an health maintenance organization (the "Company"). This Amended and Restated Reinsurance Agreement is dated as of October 1, 1996, and when executed by the parties hereto, shall supersede and replace the Reinsurance Agreement and shall constitute a binding and enforceable amendment to the Reinsurance Agreement in its entirety. THE REINSURANCE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY AS FOLLOWS: This Amended and Restated Reinsurance Agreement (this "Agreement") is made and entered into as of this 1st day of October, 1996 between the Company and the Reinsurer. The Company and the Reinsurer mutually agree to enter into a reinsurance agreement (the "Agreements) on the terms and conditions stated herein. This Agreement is a reinsurance agreement solely between the Company and the Reinsurer, and the performance of the obligations of each party under this Agreement shall be rendered solely to the other party. In no instance, except as set forth in Article XII, shall anyone other than the Company or the Reinsurer have any rights under this Agreement, and the Company shall be and remain solely liable to any insured, contractholder, physician or other provider or beneficiary under any contract reinsured hereunder. ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (definitions are applicable to both the singular and the plural forms of each term defined in this Article): "Accounting Period" means the Fiscal Quarter, except that the first Accounting Period shall be the period commencing with the Effective Date and ending with the last day of the then current Fiscal Quarter, and the last Accounting Period shall be the period commencing with the first day of the last Fiscal Quarter preceding the Terminal Accounting Date and ending on the Terminal Accounting Date. "Administrative Expense" means an expense which will be reimbursable each Accounting Period and is intended to compensate the Company or the Reinsurer for a reasonable estimate of the actual cost of performing administrative services in connection with the HMO Plans, as set forth in the Marketing and Services Agreement, without provision for profit. 2 "Affiliate" means with respect to a specified person, a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. "Business Day" means any day except Saturday or Sunday or any legal Federal or New York State holiday. "Capitation Agreement" means a health care provider contract pursuant to which the Company agrees to pay a provider or risk entity a per subscriber fee in lieu of all or a portion of actual claims made. "Capitation Fees" means the per subscriber fees to health care providers incurred under Capitation Agreements, net of amounts paid or payable to the Company by providers under such agreements. "Change of Control" means the acquisition, in a single transaction or in a series of related transactions, by a person, an entity, or a group of persons or entities acting in concert of: (i) twenty-five percent (25 %) or more (a) of the voting common stock of the Company or PHS (excluding any acquisition of stock by a party currently owning twenty-five percent (25 %) or more of such common stock), or (b) fifty-one percent (51 %) or more of the value of the assets of the Company or PHS; or (ii) twenty-five percent (25 %) or more of any ownership interest in the Reinsurer. "Commissions" means commissions and other incentives or bonuses applicable to the marketing of the HMO Plans. "Continuation Plan" has the meaning set forth in Section 8.6. 3 "Contract Termination Date" means the effective date upon which the Agreement terminates pursuant to the applicable Section in Article VIII below. "Contractholder" means an employer in the Service Area who or which executes an enrollment agreement with respect to any HMO Plan subject to this Agreement. "Direct Paid Claims" means amounts paid to health care providers for medical claims and/or to subscribers for services covered by HMO Plans, including withholds paid to providers, but not including Capitation Fees. "Direct Paid Premium" means premiums received. "Earned Premium" shall consist of the item shown on Schedule C, line I.A.7. "Effective Date" shall have the meaning set forth in Section 2.1. "Fiscal Quarter" means each of the four consecutive three-month periods in a fiscal year commencing on January I of each year and ending on December 31 of that calendar year. "HMO Plans" means commercial contracts for health care services provided by Company to Contractholders in the Service Area utilizing the Company's network of healthcare providers to provide health care services when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. HMO Plans include HMO Plans with a "point-of-service" feature. 4 "Insurance Taxes" means all taxes, licenses and fees directly imposed on the HMO Plans reinsured hereunder and shall be given the same meaning as Insurance Taxes, Licenses and Fees, Excluding Federal Income Taxes in the Summary of Operations Schedule in the NAIC Life, Accident and Health Convention Blank which is taken from the Taxes, Licenses and Fees Exhibit, or similar entries on financial statements filed by the Company. Such term shall not include any franchise or other federal, state or local tax measured by net income. "Interest Compensation Rate" means the rate of interest defined in Schedule D as applicable to delayed payments. "LIBOR" means, at any time of determination the London Interbank Offered Rate paid on U.S. dollar deposits for the applicable period of time as published under "Money Rates" in the New York City edition of the Wall Street Journal or, if there is no such publication or statement therein as to LIBOR, then in any publication used in the New York City financial community. "Marketing and Services Agreement" shall have the meaning set forth in Section 3. 1. "PHCS" shall mean Private Health Care Systems Incorporated, a corporation with its corporate offices in Waltham, Massachusetts that develops medical provider networks and provides utilization review services. "PHS" shall mean Physicians Health Services, Inc., a Delaware corporation and the parent of the Company. "Profit or Loss" shall have the meaning set forth in Article X. 5 "Quarterly Accounting Report" means the report required to be prepared in accordance with Section 7.2 and providing the data as shown on Schedule C and F. "Quarterly Settlement" means the net amount due and payable to any party with respect to any Accounting Period as set forth in Section 7.3. "Renewal Date" means, with respect to a HMO Plan, the date that is the anniversary of the day on which the liability of the Company began under such HMO Plan. "Reserves" means amounts shown in the Company's annual statement as filed with the State of New York as reserves for the HMO Plans. "Service Area" means the Counties of Bronx, Dutchess, Kings, Nassau, New York, Queens, Richmond, Rockland, Suffolk, Orange, Putnam and Westchester in the State of New York. "Small Case N.Y. Reinsurance" means reinsurance (other than Stop Loss Reinsurance or the reinsurance under this Agreement) provided by "specified medical condition" pools established with respect to HMO Plans relating to fifty (50) or fewer employees, as required by New York State Insurance Department Regulation 146 (ll NYCRR ss. 361.4) and related circular letters of the New York State Insurance Department. "Small Case N.Y. Reinsurance Premium" means the charge paid by the Company for Small Case N.Y. Reinsurance provided by pools established pursuant to Regulation 146. 6 "Stop Loss Reinsurance" means reinsurance (other than Small Case N.Y. Reinsurance and the reinsurance under this Agreement) obtained by the Company and provided in connection with HMO Plans. "Stop Loss Reinsurance Premium" means consideration paid by the Company for Stop Loss Reinsurance provided. "Stop Loss Reinsurance Recoveries Received" means amounts collected pursuant to Stop Loss Reinsurance. "Terminal Accounting and Settlement" means the final accounting and payment of any amount due either party upon the termination of this Agreement, as described in Section 9.1. "Terminal Accounting Date" shall have the meaning set forth in "Withholds" means amounts withheld by the Company from payments of claims submitted by primary care physicians and specialists. ARTICLE II REINSURANCE COVERAGE 2.1 Coverage. Effective April 27, 1995 (the "Effective Date"), the Company agrees to cede to the Reinsurer fifty percent (50%) of the risks under the HMO Plans, as more specifically described in Schedule A, and the Reinsurer agrees to indemnify the Company against fifty percent (50%) of the risks under such HMO Plans. 7 2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a coinsurance basis. Each party agrees to establish and maintain Reserves in an amount appropriate for the risks assumed by such party. 2.3 Conditions. The reinsurance hereunder is subject to the same limitations and conditions as the HMO Plans, except as otherwise expressly provided for in this Agreement. 2.4 Exclusions. The reinsurance hereunder does not apply to the following risks: (i) any portion of the risk under any HMO Plan issued by the Company other than the risk reinsured hereunder; (ii) any HMO Plan issued and delivered in a jurisdiction in which issuance and delivery of such contract constituted the doing of business where the Company was not properly licensed; and (iii) those risks for which the Reinsurer is not liable pursuant to the provisions of Section 3.11 hereof. ARTICLE III GENERAL PROVISIONS 3.1 Contract Administration. The Company and the Reinsurer each shall have responsibility for certain aspects of the marketing and administration of the HMO Plans, in accordance with the Amended and Restated Marketing and Services Agreement dated as of October 1, 1996 between the Reinsurer, the Company and PHS (the "Marketing and Services Agreements). 3.2 Non-Solicitation. (a) During the term of this Agreement, the Reinsurer shall not contact, solicit or contract for services with any health care provider in the Service Area under contract with the Company. In addition. during the term of this 8 Agreement, and following its termination, the Reinsurer will not provide any party with lists of health care providers under contract with the Company or non-public information concerning contracts between the Company (or its Affiliates) and its health care providers under contract; provided, however, that provider lists must be made available to the Departments of Health or Insurance of the State of New York, to prospective Contractholders, to the Reinsurer's insureds and as otherwise required under applicable law. This Section 3.2 shall not apply (i) to contracting efforts by third parties, including, but not limited to, PHCS acting on behalf of the Reinsurer, for the purpose of developing managed care networks, provided, however, that, the names of health care providers solicited by such third parties shall not have been furnished by the Reinsurer, its employees or agents, or (ii) following the Termination Date of this Agreement, as described in the provisions of Article VIII hereof. The Reinsurer further agrees not to replace a HMO Plan with a PHCS managed health care plan during the term of this Agreement. (b) Neither party, nor any of its Affiliates, shall contact, solicit or contract with any of the other party's full-time employees who have been engaged in the activities covered by this Agreement without the consent of the other party. 3.3 Inspection. Either party, or its designated representative, may inspect, at the offices of the Company or the Reinsurer, as the case may be, where such records are located, and conduct reasonable audits of, the papers and any and all other books or documents of the Company or the Reinsurer reasonably relating to the HMO Plans and the administrative responsibilities hereunder, during normal business hours for such 9 period as this Agreement is in effect or for as long thereafter as the Company or the Reinsurer, as the case may be, seeks performance by the other party pursuant to the terms of this Agreement. The information obtained shall be used only for purposes relating to the reinsurance provided under this Agreement and shall not be disclosed to any person without the express permission of the other party, except to the extent that disclosure is required by law. Each party's rights under this Section 3.3 shall survive termination of this Agreement. 3.4 Misunderstandings and Oversights. If any delay, omission, error or failure to pay amounts due or to perform any other act required by this Agreement is unintentional and caused by misunderstanding or oversight, the Company and the Reinsurer will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. The party that first discovers such oversight or incorrect act as a result of the misunderstanding will notify the other party in writing promptly upon discovery of the misunderstanding or oversight. The parties shall act to correct the error, omission or oversight within twenty (20) calendar days of notification of the problem. This Section 3.4 shall not be construed as a waiver by either party of its right to enforce strictly the terms of this Agreement. 3.5 Reinstatements. If a HMO Plan reinsured hereunder that was terminated or lapsed is reinstated while this Agreement is in effect, the reinsurance for such HMO Plan shall be reinstated automatically as if such HMO Plan had not been terminated or lapsed. All amounts received in connection with such reinstatement shall be treated as Direct Paid Premiums. 10 3.6 Contract Changes or Reserve Changes. The Company and the Reinsurer shall share, based upon the percentages set forth in Section 2.1 and Schedule A, in any increase or decrease in the Company's liability that results from any change in the terms or conditions of any HMO Plan reinsured hereunder or in the calculation of Reserves. The Company must provide written notification to the Reinsurer within fifteen (15) calendar days after any such change, if such change can reasonably be expected to have a significant effect on the transactions contemplated by this Agreement. 3.7 Compliance with Applicable Laws and Regulations. It is the intention of the parties that this Agreement comply with all existing applicable laws and regulations, as from time to time are in effect, so that the agreement remains in full force and the HMO Plans remain reinsured hereunder. Each of the parties agrees to comply with all laws, ordinances, rules, regulations and orders of regulatory bodies applicable to the transactions contemplated by this Agreement, including those relating to the payment of commissions. 3.8 Amendment and/or Termination Upon Failure to Comply. In the event that it is determined by an insurance or health regulatory authority, the Internal Revenue Service or any other federal, state or local regulatory authority or by either party to this Agreement upon the advice of an insurance or health regulatory authority or the Internal Revenue Service that this Agreement fails to conform to, or that the intent of this Agreement cannot be effected as a result of, the requirements of existing applicable laws and regulations and that this Agreement may be brought into 11 conformity with said requirements. or the intent of this Agreement may be effected. only by means of a material change to this Agreement, or in the event that such laws or regulations are changed subsequent to the Effective Date and such change has a material adverse effect on either party or requires a material change to this Agreement in order for this Agreement to conform with applicable laws and regulations or for its intent to be effected, the parties shall exercise reasonable efforts to reach an agreement to amend this Agreement so as to return the parties to the economic position that they would have been in had no such change occurred or so that both parties share the economic detriment of such change proportionately. If the parties are unable to reach an agreement to amend the Agreement, then the differences between the parties shall be resolved through arbitration in accordance with the provisions of Article XIII. In the event that any required change is not material, this Agreement shall be amended in accordance with such requirement. 3.9 Notification of Disapproval or Change in Law. The Company shall promptly notify the Reinsurer of any actual or anticipated disapprovals or required changes regarding this Agreement that are made by any insurance or health regulatory authority or taxing authority and of any change in the laws, regulations or rulings affecting this Agreement or related documents. The Reinsurer shall be allowed to participate in the defense of this Agreement or related documents on its own behalf with such authority after consultation with the Company. 3.10 Setoff. It is expressly understood that any debts or credits, matured or unmatured, liquidated or unliquidated, arising or incurred pursuant to the terms hereof, 12 including but not limited to such debts and credits arising under Articles IV, V and VI shall, at all times and under all circumstances relevant to the rights and liabilities of the parties to this Agreement, be deemed mutual debts or credits, as the case may be, and shall be set off, and only the net balance shall be allowed or paid. 3.11 Limitations on Liability. (a) The Reinsurer shall not indemnify or be liable pursuant to this Agreement or otherwise for any of the Company's risk, to the extent any damages result from the negligent acts or omissions to act. reckless or intentional wrongs, fraud, oppression or bad faith of the Company. The Reinsurer shall be liable and indemnify the Company fully for all losses arising from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Reinsurer acting in connection with a HMO Plan reinsured hereunder. (b) The Company does not indemnify and shall not be liable pursuant to this Agreement or otherwise for any of the Reinsurer's risk, to the extent any damages result from the negligent acts or omissions to act, reckless or intentional wrongs, fraud. Oppression or bad faith of the Reinsurer. The Company shall be liable and indemnify the Reinsurer fully for all losses arising from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Company acting in connection with a HMO Plan reinsured hereunder. (c) The Reinsurer shall be liable, based on the applicable percentages set forth in Section 2.1 and Schedule A, and subject to the election permitted by Section 6.2, for any losses arising from non-negligent acts or omissions to act taken by the Company in good faith pursuant to HMO Plans reinsured hereunder. 13 (d) The Reinsurer shall not be liable for any extracontractual liability of the Company, or for other loss or liability arising from the action or actions of a health care provider in connection with the provision of services under HMO Plans. (e) For purposes of this Agreement, any damages, claims, liabilities or other expenses for which the Reinsurer shall be liable shall be net of the appropriate share of any recoveries from third parties, including, without limitation, recoveries under Stop-Loss Reinsurance Contracts. 3.12 Exclusivity. The Company and the Reinsurer shall not enter into an arrangement with other parties similar to this Agreement for reinsurance of Managed Care Contracts (as defined in the Marketing and Services Agreement) offered in the Service Area, except as expressly permitted under the Marketing and Services Agreement. 3.13 Press Releases. No public statement or press release regarding the existence of this Agreement or the terms thereof shall be made by either party hereto without the prior written consent of the other party, except as required by applicable laws, ordinances, rules and regulations. 3.14 Restrictions on the Reinsurer and the Company Relating to Other Agreements. During the period from the Effective Date through the last date on which the provisions of this Agreement are in effect, each of the Reinsurer and the Company shall be prohibited from, directly or indirectly, entering into any contract, lease, sublease, license, sublicense, promissory note, evidence of indebtedness or other contract or commitment (whether oral or written), which will, or can reasonably be 14 expected to at any time, place any material restriction or restrictions on such party's ability to perform any or all of its obligations under this Agreement; provided, however, that, nothing herein shall limit either party's right to enter into a Change of Control transaction in accordance with the provisions set forth herein. 3.15 Investigations. Each party to this Agreement shall immediately notify the other party, in writing, of any and all investigations of such party or its directors, principal officers or shareholders conducted by any Federal, state or local governmental or regulatory authority other than routine examinations or surveys by state insurance or health regulatory authorities and federal or state tax authorities. 3.16 Change of Control. Each party shall fully disclose the details of any pending Change of Control known to it to the other party, and shall provide the other party with copies of any and all applications for approval therefor made to Federal, state or local regulatory authorities. Such disclosure shall be made prior to or concurrent with notification and/or application for approval to such Federal, state or local regulatory authorities of a Change of Control. In the event that such Change of Control shall be approved, the party that intends to undergo the Change of Control shall notify the other party immediately thereof and the other party shall have the rights set forth in Section 8.6. 3.17 Reinsurance or Sale of HMO Plans. (a) The Company agrees that, during the period in which this Agreement is in effect, it shall not reinsure, sell or assign the HMO Plans to another entity (other than in connection with Stop Loss Reinsurance and Small Case N.Y. Reinsurance). 15 (b) Notwithstanding paragraph (a) above, this Section 3.17 shall not restrict the ability of the Company or PHS to (i) enter into a merger or consolidation, (ii) effect a sale of all or a portion of its capital stock or (iii) effect a sale of its business as an entirety or substantially as an entirety; provided, however, that the Company or PHS may not enter into a transaction listed in (i), (ii) or (iii) above with another entity unless such other entity provides the Reinsurer with a writing, in form and substance satisfactory to the Reinsurer which shall state that the entity agrees to be bound by the terms of this Agreement to the same extent and effect as if such entity had been a party to this Agreement. 3.18 Commission payments made with respect to any HMO Plans reinsured hereunder shall be made according to the same commission scale used by the Company with respect to the specific types of products listed in Schedule A, or substantially similar products, that are not subject to this Agreement, as that scale may be changed from time to time. 3.19 Stop-Loss Reinsurance. The Company agrees, during the period that this Agreement is in effect. that it will maintain Stop-Loss Reinsurance with respect to the HMO Plans in effect, with deductibles, coverages and limits of liability that are substantially the same as those that apply under the Stop Loss Reinsurance contract or contracts of the Company that are in effect on the Effective Date, a copy or copies of which are attached as Exhibit 1; provided, however, that each Stop Loss Reinsurance contract or contracts of the Company relating to HMO Plans must provide coverage with respect to claims relating to any periods during which the Company is obligated to 16 provide services with respect to HMO Plans, without regard to (i) the failure of the Company to remain qualified to conduct the business for which it is organized, or (ii) the insolvency or the commencement of supervision, conservation, rehabilitation, liquidation or similar proceedings against the Company. In the event that any Stop Loss Reinsurance contract issued to the Company does nor meet the requirements of this Section 3.19 at the Effective Date, or at any time thereafter, the Company will obtain substitute Stop Loss Reinsurance meeting such requirements from a qualified reinsurer, including the Reinsurer. 3.20 Statement of Actuarial Opinion. Within forty-five (45) calendar days after the end of the calendar year, the Company shall provide the Reinsurer with a Statement of Actuarial Opinion certifying the adequacy of the reserves which are covered under this Agreement. In addition, the Actuarial Opinion must state whether or not the reserves covered under this Agreement meet the minimum standards of all states where the Company is licensed, and if not the difference between the Company's reserves and state minimums. The Actuarial Opinion shall meet the requirements as set forth in the NAIC's Actuarial Opinion and Memorandum Regulation. The Opinion shall be signed by the Company's "Appointed Actuary." 17 ARTICLE IV PREMIUMS AND RESERVES 4.1 Premiums - HMO Plans. Premiums under HMO Plans received by the Reinsurer, pursuant to the terms of the Marketing and Services Agreement, shall be allocated to the Company and the Reinsurer in accordance with the applicable percentages set forth in Section 2.1 and in Schedule A, and the portion of the Premiums allocated to the Reinsurer shall constitute the consideration in respect of the Reinsurer's acceptance of risk under this Agreement. The portion of Direct Paid Premiums allocated to the Company shall be paid over to the Company in accordance with the settlements required by Section 7.3 of this Agreement. 4.2 HMO Plan Reserves. With respect to the HMO Plans reinsured hereunder, each of the Company and the Reinsurer shall establish and maintain Reserves in an amount appropriate for the risks assumed by such party and all applicable regulatory requirements. ARTICLE V EXPENSE ALLOWANCE 5.1 Administrative Expenses. Each party shall be entitled to reimbursement for its Administrative Expenses (not including pre-marketing expenses), identified in Schedule B, for each Accounting Period. Such Administrative Expenses, plus any Insurance Taxes and Commissions, paid by such party with respect to the HMO Plans during the Accounting Period, shall be considered reimbursable expenses. 18 5.2 Payment. The Company and the Reinsurer shall be reimbursed for the amounts shown as Company Expenses or Reinsurer Expenses, as set forth in Section 7.3 below. ARTICLE VI CLAIMS 6.1 Notice of Claim. Upon receipt of any claim on any HMO Plan, which claim is reasonably anticipated to exceed fifty thousand dollars ($50,000), the Company shall promptly notify the Reinsurer of such claim. Copies of notification, claim papers, and proofs shall be furnished by the Company to the Reinsurer upon request. 6.2 Determination of Claims by the Company. The Reinsurer will accept the decision of the Company with respect to the payment of a claim under a HMO Plan; provided, however, that the Company shall promptly advise the Reinsurer of the Company's intention to contest a claim under a HMO Plan, and the Reinsurer shall have the right to advise and assist the Company in its determination of liability and in the best procedure to follow with respect to any such claim of doubtful validity. The Company and the Reinsurer shall share, in accordance with the applicable percentages set forth in Section 2.1 and Schedule A, all expenses incurred in connection with contesting, compromising or settling claims under a HMO Plan, subject to the limitations of Section 3. 11. Such expenses may include, but are not limited to, all costs and expenses of investigation, settlement of claims, litigation costs and judgments. If, however, the Reinsurer has advised the Company that a contested claim 19 should be paid, and elects to assume liability for its applicable percentage (as set forth in Section 2.1 and Schedule A) of the claim as originally presented, the Reinsurer shall not share in any additional costs or expenses associated with such claim. ARTICLE VII ACCOUNTING AND REPORTING 7.1 Reinsurance Accounting. The Company shall maintain separate books or details of account with respect to the HMO Plans reinsured hereunder, setting forth the data required in Schedules C, E and F. 7.2 Ouarterly Accounting Reports. Following the end of each Accounting Period, the Company shall supply the Reinsurer with a Quarterly Accounting Report providing the data required in Schedules C and E. The Quarterly Accounting Report shall be submitted within forty-five (45) calendar days of the end of each calendar quarter. 7.3 Settlements. Settlement of amounts payable between the Company and the Reinsurer shall be made in a reasonably expeditious manner once the amounts or estimates are known or determined. All settlement payments shall be made by wire transfer with same or next day availability unless otherwise agreed. 20 (a) Weekly Settlements. The Reinsurer shall make reimbursement payments to the Company for estimated weekly cash claims paid by the Company. Such estimates are to be mutually determined, and appropriately adjusted from time to time, to reasonably approximate the timing and amounts of cash claim expenditures made by the Company and to minimize the quarterly settlement amounts with respect to claims. Such payments are due weekly based upon a mutually agreed upon schedule. (b) Monthly Settlements. The Reinsurer shall make reimbursement payments to the Company monthly for any actual or estimated monthly administrative expenses. premium taxes, licenses, fees or assessments incurred by the Company. Such payments are due within 20 Business Days after the end of each month in which they were incurred. Reinsurer's actual or estimated administrative or commission expenses incurred are also deemed payable at that time. By mutual agreement, certain expenses may be added to or deleted from this monthly reimbursement. (c) Quarterly Settlements. Based upon the Quarterly Accounting Reports, including Schedules C, E and F, settlement payment shall be made to the Company or the Reinsurer, as the case may be, within 45 calendar days from the end of such quarter. If such reports or schedules are not finalized within this time frame, a reasonable estimated payment shall be made followed by an adjustment payment. The Quarterly Settlement payment shall represent settlement, net of any interim reimbursements or other related settlement payments, of all amounts due during that 21 quarter and any mutually agreed upon adjustments to prior periods. The quarterly calculation of this payment shall be substantially in the form of Schedule E with any positive amounts listed on Line 24 of such Schedule being payable from the Reinsurer to the Company and any negative amounts being payable from the Company to the Reinsurer. For the purpose of calculating interest on delayed payments relating to this quarterly settlement payment, the parties agree that the due date is the 15th day (unless such 15th day falls on a day other than a Business Day, in which case the due date is the Business Day immediately preceding such 15th day) of the middle month of the settlement quarter unless otherwise mutually agreed. (d) Other Settlements. Other settlement payments between the Company and the Reinsurer such as payment adjustments, preliminary quarterly settlements, withhold payout reimbursements or interest compensation may be made separately or along with other settlement payments upon mutual agreement. For the purpose of calculating interest on delayed payments relating to these payments, due dates are to be mutually agreed upon if not otherwise specified in this Agreement. 7.4 Reconciliation. Each party shall have the right to review all individual components of transactions entered into each Quarterly Accounting Report, such as Premiums received, Commissions and Insurance Taxes, claims incurred or paid, and similar items. The parties shall have a reasonable period from the day the Quarterly Accounting Report is submitted to report any deficiency in such report and to request 22 an adjustment of any payment made to or received by either party. Any amount due either party in connection with such reconciliation shall be paid within forty-five (45) calendar days of the receipt of notice that additional amounts are due. 7.5 Best Efforts to Supply Actual Data. In preparing all reports required in this Agreement, the Reinsurer and the Company shall make their best efforts to supply the actual data. If the actual data cannot be supplied with the appropriate report, the Reinsurer or the Company shall produce best estimates, and shall provide amended reports based on actual data no more than forty-five (45) calendar days after such report was originally due. 7.6 Interest Delayed Payments. Should any payment in connection with the Quarterly Settlements due the Company or the Reinsurer in accordance with Section 7.3 above be delayed beyond its due date as defined or determined, such delayed payment shall accrue interest during such period of delay at the Interest Compensation Rate as defined on Schedule E. Interest is to be calculated based upon an actual/365 day basis. Any such interest accrued or paid shall not be included in Schedule C as a jointly shared income or expense item, but rather be paid directly to the deficient party either separately or as a separate item added to the Schedule F settlement. The application of this calculation shall also apply to any over payments, with interest accruing back to the deficient party. ARTICLE VIII 23 DURATION AND TERMINATION 8.1 Duration. Except as otherwise provided herein, this Agreement shall be unlimited in duration. 8.2 Commencement of Liability. The liability of the Reinsurer on reinsurance ceded hereunder shall commence on the later of the Effective Date and the date the liability of the Company commences under a HMO Plan reinsured hereunder. 8.3 Termination of Liability. Except as provided in the next sentence of this Section 8.3, the liability of the Reinsurer with respect to any HMO Plan shall terminate on the date the liability of the Company on such HMO Plan is terminated. If this Agreement is terminated as provided in this Article VIII, the Reinsurer's liability with respect to HMO Plans that remain in force shall terminate on the day that all Direct Paid Claims incurred prior to the date of such termination are satisfied. 8.4 Termination of Agreement. Either party shall have the right to terminate this Agreement without cause upon the giving of one hundred eighty (180) days advance written notice to the other party; provided, however, that, the liability of the Reinsurer with respect to HMO Plans that remain in force will terminate on the day that all Direct Paid Claims incurred prior to the date of such termination are satisfied. The Contract Termination Date under this Section 8.4 shall be the 180th day following the giving of the notice required by this Section 8.4. 8.5 Automatic Termination. If, at the end of an Accounting Period, none of the HMO Plans is in force, this Agreement shall automatically terminate. In the event 24 of termination pursuant to this Section 8.5, the last day of such Accounting Period shall be the Contract Termination Date. 8.6 Termination Subsequent to a Change of Control. In the event of a Change of Control of the Company (for purposes of this Section 8.6, the term "Company" shall include PHS) or the Reinsurer, the party not undergoing the Change of Control may elect to terminate this Agreement. In the event that this Agreement is terminated as a result of a Change of Control: (i) without any further action required of either party, the Marketing and Services Agreement shall be deemed to be terminated as of the effective date of the Change of Control except with respect to the provisions regarding the administration of the HMO Plans continued under this Section 8.6 which provisions shall be deemed to survive such termination for the period set forth in clause (ii) of this sentence; and (ii) the party not undergoing the Change of Control may elect to continue the reinsurance arrangements provided in this Agreement solely with respect to the reinsurance of any case that was originally written as an HMO Plan and that was in force on the Contract Termination Date, until the tenth (lOth) Renewal Date applicable to such HMO Plan, or continuation managed care contract issued by the Company (collectively, "Continuation Plans,") following the Contract Termination Date. The Contract Termination Date under this Section 8.6 shall be the effective date of the Change of Control. 8.7 Termination for Cause. (a) In the event that either party shall default in the performance of the duties and obligations imposed on it pursuant to the terms of 25 this Agreement or the Marketing and Services Agreement, or breach any of the provisions contained herein or therein, including the failure to pay any amount when due, or the failure of either party to maintain a level of services under the Marketing and Services Agreement that is reasonably satisfactory to the other party, the defaulting party shall be allowed thirty (30) calendar days from receipt of written notice of such default or breach to present to the non-defaulting party a plan to cure such default or breach that is reasonably satisfactory to the non-defaulting party. If a reasonably satisfactory plan to cure the default or breach is not submitted within that time, or if the plan is not carried out according to its terms, the non-defaulting party shall have the right to terminate this Agreement upon delivery of written notice of such termination to the defaulting party, which shall be effective on receipt, without prejudice to any other rights or remedies available to the non-defaulting party by reason of such default or breach. (b) In the event that either party shall engage in fraudulent, illegal or grossly negligent conduct with respect to its duties and obligations under this Agreement or the Marketing and Services Agreement, the other party shall have the right to terminate this Agreement upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non-defaulting party by reason of the defaulting party's conduct. (c) The Contract Termination Date under this Section 8.7 shall be the date of receipt of the notice of termination. 26 8.8 Termination of Agreement Upon the Occurrence of Certain Events. (a) Upon the occurrence of either of the following events: (i) one of the parties to this Agreement fails to remain in good standing under the laws of its state of domicile, or fails for any reason to remain qualified to engage in the transaction contemplated by this Agreement under applicable laws, ordinances, rules or regulations; or (ii) a voluntary or involuntary proceeding is commenced in any state by or against one of the parties to this Agreement for the purpose of supervising, conserving, rehabilitating or liquidating such party; this Agreement may be terminated at the election of the other party pursuant to a written notice. The Contract Termination Date under this Section 8.8 will be the day of receipt of the notice of termination. In the event that the Company shall be subject to (i) or (ii) above, the Reinsurer shall have the exclusive right (subject to appropriate regulatory approvals) to acquire the HMO Plans or to require the Company to assign the HMO Plans to a designated entity authorized to operate a health maintenance organization in the geographic areas in which the Company operates. 8.9 Termination for Material Change in PHS Network. In the event that the PHS Network (as that term is defined in the Marketing and Services Agreement) undergoes a material change within the meaning of Section 6.3 of the Marketing and Services Agreement, Company shall be allowed thirty (30) calendar days to present to 27 Reinsurer a plan to cure such Material Change that is reasonably satisfactory to Reinsurer. If a reasonably satisfactory plan to cure the Material Change is not submitted within that time, or if the plan is not carried out according to its terms, Reinsurer shall have the right to terminate this Agreement upon delivery of written notice of such termination to Company, which shall be effective upon receipt (the date of receipt being the Contract Termination Date under this Section 8.9), without prejudice to any other rights or remedies available to Reinsurer. ARTICLE IX PAYMENTS UPON TERMINATION OF AGREEMENT 9.1 Payments on Termination. (a) In the event that this Agreement shall be terminated pursuant to Article VIII, a net accounting and settlement as to any balance due under this Agreement shall be undertaken by the parties to this Agreement (the "Terminal Accounting and Settlements"), which calculations shall be performed as of the day that is one (1) year from the date that the liability of the Reinsurer shall have terminated (the "Terminal Accounting Date"). During the period between the termination of this Agreement and the Terminal Accounting Date, Direct Paid Claims that accrued prior to the termination of this Agreement shall continue to be paid, and Reserves shall continue to be held, in accordance with the terms set forth herein. (b) The Company shall supply the Reinsurer with final Schedules C and D which shall show the Terminal Accounting and Settlement. If the Terminal Accounting and Settlement shows that the Company owes the Reinsurer, then the Company shall pay the amount owing to the Reinsurer. If the Terminal Accounting and Settlement 28 shows that the Reinsurer owes the Company, then the Reinsurer shall pay the amount owing the Company. Such Schedules shall be supplied by the Company within the period agreed by the parties. (c) Any payment required under the Terminal Accounting and Settlement by the Company shall be paid by the Company no later than the day on which the final Schedules C, E and F, as required by Section 9.1(b), are due. The Reinsurer shall make any payment required to be made by the Reinsurer hereunder within ten (10) calendar days of receipt of such final schedules. In the event that the calculation for the payment required under the Terminal Accounting and Settlement cannot be accurately calculated by such date, then an estimate shall be paid, with a supplemental accounting being made when the accurate information shall become available. 9.2 Supplemental Accounting. In the event that, subsequent to the Terminal Accounting and Settlement, an adjustment is made with respect to any amount taken into account in the Terminal Accounting and Settlement, or in the event that the Company pays a Direct Paid Claim that accrued prior to the termination hereof, a supplemental accounting shall be made. Any net amount owed to the Reinsurer or the Company by reason of such supplemental accounting, plus any interest due pursuant to Section 7.6, shall be paid promptly upon the completion of such supplemental accounting. 29 ARTICLE X CALCULATION OF PROFIT AND LOSS 10.1 Determination and Allocation of Profit or Loss. The Company shall calculate Profit or Loss with respect to the HMO Plans, and the Reinsurer or the Company, as appropriate, shall make settlements as required by Section 7.3 or Section 9.1, as appropriate, according to the calculations as shown on Schedules C and F and shall be made part of each Quarterly Accounting Report. ARTICLE XI CONDITION PRECEDENT 11.1 Condition Precedent. When, under insurance, public health or other applicable laws or regulations, approval of arrangements of the type contemplated by this Agreement by one or more Federal, state or local governmental or regulatory authorities is required, the receipt by the Company and the Reinsurer of any and all such approvals shall be a condition precedent to the other party's liability under this Agreement. Subject to Section 11.2, if this condition precedent is not met by the Company or the Reinsurer by the Effective Date, this Agreement shall be void as of the Effective Date. 11.2 Extension of Time. In the event that the necessary approvals set forth in Section 11.1 have not been obtained by the Company or the Reinsurer as of the Effective Date, the parties may mutually agree to modify the Effective Date of this Agreement. 30 11.3 Cooperation of the Parties. The Reinsurer and the Company shall each use its best efforts to cooperate with and assist the other party in obtaining the necessary approvals referred to in Section 11.1 ARTICLE XII INSOLVENCY OF THE COMPANY 12.1 Payments by the Reinsurer. In the event of the insolvency of the Company, payments due the Company on all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall, subject to Section 12.2, be payable by the Reinsurer directly to the Company or to its liquidator, receiver, or statutory successor on the basis of the liability of the Company and the Reinsurer under the HMO Plans reinsured hereunder without diminution because of the insolvency of the Company. 12.2 Claims. In the event of the insolvency of the Company, the Reinsurer shall be given written notice of the pendency of a claim against the insolvent Company on a HMO Plan reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of 31 the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more assuming reinsurers are involved in the same claim and a majority in interest elect to interpose defenses to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company. ARTICLE XIII ARBITRATION 13.1 Appointment of Arbitrators. In the event of any disputes or differences arising hereafter between the contracting parties with respect to any transaction, matter or issue arising from or relating in any way to this Agreement on which agreement between the parties hereto cannot be reached, the same shall be decided by arbitration. Three arbitrators will decide any dispute or difference. The arbitrators must be disinterested officers or retired officers of health maintenance organizations or managed health care companies, or insurance companies with experience in managed health care, other than the parties to this Agreement or their Affiliates. Each of the Company and the Reinsurer agrees to appoint one of the arbitrators with the third, the "Umpire," to be chosen by the other arbitrators. In the event that either such party should fail to choose an arbitrator within 30 days following a written request by the other party to do so, the requesting party may choose an Umpire before entering upon arbitration. In the event that the two arbitrators shall not be able to agree on the choice of the Umpire within 30 days following their appointment, each arbitrator shall nominate five 32 candidates within 10 days thereafter. four of whom the other arbitrator shall decline. and the Umpire shall be chosen from the two remaining nominees by the President of the American Arbitration Association. 13.2 Decision of Arbitrators: Expenses. The arbitrators shall consider customary and standard practices in the HMO and managed health care insurance businesses. They shall decide by a majority vote of the arbitrators. There shall be no appeal from their written decision. Judgment may be entered on the decision of the arbitrators by any court having jurisdiction. Each party shall bear the expense of its own arbitrator and outside attorney fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator. 13.3 Applicable Law: Survival. Any arbitration instituted pursuant to this Article XIII shall be held in New York, New York and the laws of the State of New York and, to the extent applicable, the Federal Arbitration Act shall apply. This Article XIII shall survive termination of this Agreement. 13.4 Other Actions. Submission of a matter to arbitration shall be a condition precedent to any right to institute a proceeding at law or in equity concerning such matter, except for injunctive or other provisional relief pending the arbitration of a matter subject to arbitration pursuant to this Agreement. 33 ARTICLE XIV REPRESENTATIONS AND WARRANTIES 14.1 Representations and Warranties of the Reinsurer. The Reinsurer hereby represents and warrants to the Company as follows: The Reinsurer is a mutual life insurance company organized and existing under the laws, including the insurance laws, of the State of New York and is in good standing under these laws. The Reinsurer further represents and warrants that it is duly licensed and admitted as an insurer under the laws of those jurisdictions in which the HMO Plans reinsured hereunder have been issued and is authorized under the laws and regulations of said jurisdictions to act as a reinsurer in those jurisdictions. In addition, the Reinsurer covenants that, so long as this Agreement is in effect, the Reinsurer shall take all actions reasonably necessary to remain duly licensed under the laws of those jurisdictions wherein the HMO Plans have been issued. The Reinsurer shall notify the Company immediately in the event that any license shall be revoked or suspended in any jurisdiction hereunder. The Reinsurer has full corporate power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to carry out all of its obligations hereunder. The execution and delivery by the Reinsurer of this Agreement and the other agreements and documents contemplated hereby, the consummation by the Reinsurer of the transactions as herein contemplated and the carrying out by the Reinsurer of its 34 obligations contemplated hereby have been duly and validly authorized by all necessary corporate action. 14.2 Representations and Warranties of the Company. The Company hereby represents and warrants to the Reinsurer as follows: The Company is a corporation organized and existing under the laws, including the insurance and/or public health laws, of the State of New York and is in good standing under these laws. The Company further represents and warrants that it is duly licensed as a health maintenance organization under the laws of those jurisdictions wherein the HMO Plans have been issued. In addition, the Company covenants that, so long as this Agreement is in effect, the Company shall take all reasonable actions necessary to remain duly licensed as a health maintenance organization within the purview of this Agreement under the laws of those jurisdictions wherein the HMO Plans have been issued. The Company shall notify the Reinsurer immediately in the event that any license shall be revoked or suspended in any jurisdiction hereunder. The Company has full corporate power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to carry out all of its obligations hereunder. The execution and delivery by the Company of this Agreement and the other agreements and documents contemplated hereby, the consummation by the Company of the transactions as herein contemplated and the carrying out by the Company of its obligations contemplated hereby have been duly and validly authorized by all necessary corporate action. 35 ARTICLE XV CONFIDENTIALITY 15.1 Obligations of the Parties. Each party agrees that all information concerning the business affairs of the Company or the Reinsurer, as the case may be, which is not generally available to the public, including but not limited to, lists of physicians and other health care providers, lists of brokers and other information of a proprietary nature relating to methods of doing business heretofore or hereinafter received by it from the other party shall be kept and maintained as confidential and in complete secrecy. Neither party shall, without the prior written consent of the other party, disclose at any time, either orally, or in writing, or otherwise, in any manner, directly or indirectly, to any person or entity, except to other employees or agents of the non-disclosing party, any such proprietary information. Any breach of confidentiality shall give the non-breaching party the right of injunctive relief in addition to any other remedy permitted by law. 15.2 Survival of Article XV. This Article XV shall survive termination of this Agreement. ARTICLE XVI MISCELLANEOUS PROVISIONS 16.1 Notices. All notices required pursuant to this Agreement shall be in writing and shall become effective when received. Each written notice shall be sent by certified or registered mail, return receipt requested, or a nationally recognized 36 overnight delivery service (providing for delivery receipt) or delivered by hand. All notices under this Agreement shall be addressed as follows: If to the Reinsurer: The Guardian Life Insurance Company of America 201 Park Avenue South New York, New York 10003 ATTENTION: Edward K. Kane, Esq. Senior Vice President & General Counsel If to the Company: Physicians Health Services of New York, Inc. Crosswest Office Center, Suite 212 399 Knollwood Road White Plains, New York 10603 ATTENTION: Executive Director If to PHS: Physicians Health Services, Inc. 120 Hawley Lane Trumbull, Connecticut O6611 ATTENTION: Regina M. Campbell Senior Vice President & Chief Administrative Officer 16.2 Successors and Assigns. Except as provided in Section 3.17(b) this Agreement cannot be assigned by the Company or the Reinsurer without the prior written approval of the other party. The provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective permitted successors and assigns. 37 16.3 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same agreement. 16.4 Currency. All payments and accounts shall be made in United States Dollars, and all fractional amounts shall be rounded to the nearest whole dollar. 16.5 Amendment. This Agreement shall be amended only by written agreement signed by a duly authorized officer of each of the Company and the Reinsurer, and any change to this Agreement shall be null and void unless made by such amendment; provided, however, that where, under insurance, public health or other applicable laws or regulations, the approval of any such amendment to this Agreement by one or more Federal, state or local governmental or regulatory authorities is required, the amendment shall not take effect unless and until all such necessary approvals have been received by the Company. In the event that such an approval is required, the Company and the Reinsurer shall each be obligated to take all necessary actions in order to obtain such approval. 16.6 Entire Agreement. This Agreement and the Schedules and Exhibits attached hereto, together with the Marketing and Services Agreement, supersede all prior discussions and written and oral agreements between the parties with respect to the subject matter of this Agreement, and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof. Headings are not part of this Agreement, and shall not affect the terms hereof. 38 16.7 Binding Effect. This Agreement is binding upon and will inure to the benefit of the parties and their respective successors and permitted assigns. 16.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to its provisions relating to conflicts of law. 16.9 Severability. In the event any section or provision of this Agreement or related documents is found to be void and unenforceable by a court of competent jurisdiction, the remaining sections and provisions of this Agreement or related documents shall nevertheless be binding upon the parties with the same force and effect as though the void or unenforceable part had not been severed or deleted. 16.10 Waivers and Remedies. The waiver by any of the parties of any other party's prompt and complete performance, or breach or violation, of any provisions of this Agreement and related documents shall not operate nor be construed as a waiver of any subsequent breach or violation, and the waiver by any of the parties to exercise any right or remedy which it may possess hereunder shall not operate nor be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 16.11 Regulatory Review. The parties acknowledge and agree that this Agreement is subject to the review and approval of the New York State Department of Insurance. The parties expressly agree that any revisions to this Agreement requested 39 by the New York State Department of Insurance will be addressed in an amendment to, or restatement of, the Agreement. 40 EXECUTION IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. PHYSICIANS HEALTH SERVICES OF NEW YORK, INC. By /s/ Regina M. Campbell -------------------------------- Name REGINA M. CAMBELL Title Senior Vice President THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA By /s/ Joseph D. Sargent -------------------------------- Name Joseph D. Sargent Title President and CEO 41 NY (IN) SCHEDULE A CONTRACTS AND RlSKS REINSURED - -------------------------------------------------------------------------------- CONTRACT RISKS REINSURED - -------------------------------------------------------------------------------- - HMO Contracts and In-Network Portion - The Reinsurer agrees to accept 50% of POS Contracts of the risks under such Contracts" - -------------------------------------------------------------------------------- A-1 NY (IN) Schedule B Contract Allowances, Administrative Service Fee I. Guardian's Administrative Services Fee
HMO POS(in) --- -------- Marketing 0.63% 0.63% Sales 1.38% 1.38% Administration 1.30% 1 30% Billing/Collections 1.69% 1.69% Advertising 0.15% 0.15% Total 5.15% 5.15%
II. PHS Administrative Services Fee (as a percentage of premium)
HMO POS(in) --- ------- Health Services, UR 1.67% 1.67% Net Mgt, MDD, QA 2.43% 2.43% Operations 3.58% 3.58% Acct Svc., Cust Srv. 1.44% 1.44% Marketing 0.63% 0.83% Sales 0.15% 0.15% Administration 1.30% 1.30% Advertising 0.15% 0.15% Total 11.35% 11.35%
- -------------------------------------------------------------------------------- Schedule C - -------------------------------------------------------------------------------- Year To Date Accounting - -------------------------------------------------------------------------------- Quarter Ending: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HMO - -------------------------------------------------------------------------------- & POS-IN - -------------------------------------------------------------------------------- I. Profits/Losses From Underwriting - -------------------------------------------------------------------------------- A. Earned Premium - -------------------------------------------------------------------------------- 1 Cash Received - -------------------------------------------------------------------------------- 2 Change in D/U - -------------------------------------------------------------------------------- 3 Change in UPR - -------------------------------------------------------------------------------- 4 Change in Advance Premium - -------------------------------------------------------------------------------- 5 Gross Earned Premium (A1+A2+A3+A4) - -------------------------------------------------------------------------------- 6 CSEHRP & Other Reins. Pool Premium Ceded - -------------------------------------------------------------------------------- 7 Net Earned Premium (A5+A6) - -------------------------------------------------------------------------------- B. Incurred Claims - -------------------------------------------------------------------------------- 1 Cash Claims (Included Capitations) Paid - -------------------------------------------------------------------------------- 2 Cash Withholds + PCP Bonuses Paid - -------------------------------------------------------------------------------- 3 Cash Rein. PI., COB, Subrog. Recov. - -------------------------------------------------------------------------------- 4 Nurses Line Expenses - -------------------------------------------------------------------------------- 5 Total Cash Claims (B1+B2+B3+B4) - -------------------------------------------------------------------------------- 6 Change in IBNR - -------------------------------------------------------------------------------- 7 Change In Withholds + PCP Bonuses Payable - -------------------------------------------------------------------------------- 8 Change in Rein. Pl., Subrog. Recov. - -------------------------------------------------------------------------------- 9 Total Change in Reserves (B6+B7+B8) - -------------------------------------------------------------------------------- 10 Total Incurred Claims (B5+B9) - -------------------------------------------------------------------------------- C. Expenses - -------------------------------------------------------------------------------- 1 Commissions - -------------------------------------------------------------------------------- a. Cash - -------------------------------------------------------------------------------- b. Change in Liability - -------------------------------------------------------------------------------- c. Total Incurred (C1a+C1b) - -------------------------------------------------------------------------------- 2 Px Taxes, Licenses & Fees (if applicable) - -------------------------------------------------------------------------------- a. Cash - -------------------------------------------------------------------------------- b. Change in Liability - -------------------------------------------------------------------------------- c. Total Incurred (C2a+C2b) - -------------------------------------------------------------------------------- 3 Assessments (if applicable) - -------------------------------------------------------------------------------- a. Cash - -------------------------------------------------------------------------------- b. Change in Liability - -------------------------------------------------------------------------------- c. Total Incurred (C3a+C3b) - -------------------------------------------------------------------------------- 4 Field Expenses - -------------------------------------------------------------------------------- a. Cash - -------------------------------------------------------------------------------- b. Change in Liability - -------------------------------------------------------------------------------- c. Total Incurred (C4a+C4b) - -------------------------------------------------------------------------------- 5 Guardian Admin. Exp. - -------------------------------------------------------------------------------- 6 PHS Admin. Exp. - -------------------------------------------------------------------------------- 7 Total Incurred Expenses (C1c+C2c+C3c+C4c+C5+C6) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- II. Profit/(Loss) (A7-B10-C7) - -------------------------------------------------------------------------------- D. Guardian Profit (50%) - -------------------------------------------------------------------------------- E. PHS Profit (50%) - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- SCHEDULE D INTEREST RATES The Interest Compensation Rate applicable for any given fiscal quaver is defined as the annual rate of interest equal to the closing yield on 3-month LIBOR as of the last trading day of the prior fiscal quarter plus 1.00%. Such rate shall remain in effect for that entire quarter regardless of any interim fluctuations or changes in 3-month LIBOR yields. The above interest rate may be changed or modified as appropriate upon mutual agreement between the Company and the Reinsurer.
- -------------------------------------------------------------------------------- Schedule E - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Cash Flow and Funds Reconciliation - -------------------------------------------------------------------------------- Quarter Ending: - -------------------------------------------------------------------------------- NY - -------------------------------------------------------------------------------- (All numbers to reflect year to date totals.) HMO - -------------------------------------------------------------------------------- & POS-IN - -------------------------------------------------------------------------------- Underwriting Cash Flows - -------------------------------------------------------------------------------- 1 Cash Premiums Received (Sched C: A1) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 Reins. Pool Premiums Ceded (Sched C: A6) - -------------------------------------------------------------------------------- 3 Cash Claims (Total) (Sched C: B4) - -------------------------------------------------------------------------------- 4 Commissions Incurred (Sched C: C1c) - -------------------------------------------------------------------------------- 5 Premium Tx, Licenses, Fees Incurred (Sched C: C2c) - -------------------------------------------------------------------------------- 6 HRA Assessment Incurred (Sched C: C3c) - -------------------------------------------------------------------------------- 7 Field Expenses (Sched C: C4c) - -------------------------------------------------------------------------------- 8 Guardian Admin. Expenses (Sched C: C5) - -------------------------------------------------------------------------------- 9 PHS Admin. Expenses (Sched C: C6) - -------------------------------------------------------------------------------- 10 Total Cash Out (2+3+4-5+6+7+8-9) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 11 Net Cash Generated for Period (1-10) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Distribution of Cash Flows - -------------------------------------------------------------------------------- 12 Cash Flow to PHS (1-4-7-8-50% of 11) - -------------------------------------------------------------------------------- 13 Cash Flow to Guardian (4+7+8+50% of 11) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 14 Marketing Expenses Reimbursable from Guardian - -------------------------------------------------------------------------------- 15 Marketing Expenses Reimbursable from PHS - -------------------------------------------------------------------------------- 16 Interest on Delayed Payments Owed from Guardian - -------------------------------------------------------------------------------- 17 Interest on Delayed Payments Owed from PHS - -------------------------------------------------------------------------------- 18 Interest on Cash Reserves held Owed from Guardian - -------------------------------------------------------------------------------- 19 Interest on Cash Reserves held Owed from PHS - -------------------------------------------------------------------------------- 20 Other Amounts Owed from Guardian - -------------------------------------------------------------------------------- 21 Other amounts Owed from PHS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 22 Gross Amount Due to PHS (12+14+15+16-17+18-19+20-21) - -------------------------------------------------------------------------------- 23 Less Related YDT Payments Made - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 24 Net Amount Due to (from) PHS (22-23) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
EX-10.(R) 9 AMENDED & RESTATED REINSURANCE AGRMT, DTD 10/01/96 Exhibit 10(r) AMENDED AND RESTATED REINSURANCE AGREEMENT among PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC. Paramus, New Jersey, PHYSICIANS HEALTH SERVICES (BERMUDA) LTD. Hamilton, Bermuda and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA New York, New York AMENDED AND RESTATED REINSURANCE AGREEMENT ------------------------------------------ Reference is hereby made to the Reinsurance Agreement (the "Reinsurance Agreement") made and entered into as of May 1, 1996 by and among PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC., a corporation organized under the laws of the State of New Jersey as a health maintenance organization (the "Company"), PHYSICIANS HEALTH SERVICES (BERMUDA) LTD., a stock insurance company organized under the laws of Bermuda ("PHS (Bermuda)") and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a mutual life insurance company organized under the laws of the State of New York (the "Reinsurer"). This Amended and Restated Reinsurance Agreement is dated as of October 1, 1996, and when executed by the parties hereto, shall supersede and replace the Reinsurance Agreement and shall constitute a binding and enforceable amendment to the Reinsurance Agreement in its entirety. THE REINSURANCE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY AS FOLLOWS: This Amended and Restated Reinsurance Agreement (this "Agreement") is made and entered into as of this 1st day of October, 1996 between the Company, PHS (BERMUDA) and the Reinsurer. The Company, PHS (Bermuda) and the Reinsurer mutually agree to enter into the Agreement on the terms and conditions stated herein. This Agreement is a reinsurance agreement solely between the Company, PHS (Bermuda) and the Reinsurer, and the performance of the obligations of each party under this Agreement shall be rendered solely to the other parties. In no instance, except as set forth in Article XII, shall anyone other than the Company, PHS (Bermuda) or the Reinsurer have any rights under this Agreement, and the Company shall be and remain solely liable to any insured, contractholder, physician or other provider or beneficiary under any contract reinsured hereunder. ARTICLE I DEFINITIONS ----------- As used in this Agreement, the following terms shall have the following meanings (definitions are applicable to both the singular and the plural forms of each term defined in this Article): "Accounting Period" means the Fiscal Quarter, except that the ----------------- first Accounting Period shall be the period commencing with the Effective Date and ending with the last day of the then current Fiscal Quarter, and the last Accounting Period shall be the period commencing with the first day of the last Fiscal Quarter preceding the Terminal Accounting Date and ending on the Terminal Accounting Date. "Administrative Expense" means an expense which will be ---------------------- reimbursable each Accounting Period and is intended to compensate the Company or the Reinsurer for a reasonable estimate of the actual cost of performing administrative services in connection with the HMO and POS Plans, as set forth in the Marketing and Administrative Services Agreement, without provision for profit. 2 "Affiliate" means with respect to a specified person, a person --------- that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. "Business Day" means any day except Saturday or Sunday or any ------------ legal Federal or New Jersey holiday. "Capitation Agreement" means a health care provider contract -------------------- pursuant to which the Company agrees to pay a provider or risk entity a per subscriber fee in lieu of all or a portion of actual claims made. "Capitation Fees" means the per subscriber fees to health care --------------- providers incurred under Capitation Agreements, net of amounts paid or payable to the Company by providers under such agreements. "Change of Control" means the acquisition, in a single ----------------- transaction or in a series of related transactions, by a person, an entity, or a group of persons or entities acting in concert of: (i) twenty-five percent (25%) or more (a) of the voting common stock of the Company, PHS or PHS (Bermuda) (excluding any acquisition of stock by a party currently owning twenty-five percent (25%) or more of such common stock), or (b) fifty-one percent (51%) or more of the of the aggregate value of the assets of the Company, PHS or PHS (Bermuda); or (ii) twenty-five percent (25%) or more of any ownership interest in the Reinsurer. "Commissions" means commissions and other incentives or ----------- bonuses applicable to the marketing of the HMO and POS Plans. "Continuation Plan" has the meaning set forth in Section 8.6. ----------------- 3 "Contract Termination Date" means the effective date upon which the ------------------------- Agreement terminates pursuant to the applicable Section in Article VIII below. "Contractholder" means an employer in the Service Area who or which -------------- executes an enrollment agreement with respect to any Plan subject to this Agreement. "Direct Paid Claims" means amounts paid to health care providers for ------------------ medical claims and/or to subscribers for services covered by HMO and POS Plans, including withholds paid to providers, but not including Capitation Fees. "Direct Paid Premium" means premiums received. ------------------- "Earned Premium" shall consist of the item shown on Schedule C, line -------------- I.A.7. "Effective Date" shall have the meaning set forth in Section 2.1. -------------- "Fiscal Quarter" means each of the four consecutive three-month -------------- periods in a fiscal year commencing on January 1 of each year and ending on December 31 of that calendar year. "HMO Plans" means commercial contracts for health care services, other --------- than POS Plans, provided by Company to Contractholders in the Service Area utilizing Company's network of healthcare providers to provide health care services when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. 4 "Insurance Taxes" means all taxes, licenses and fees directly imposed --------------- on the HMO and POS Plans reinsured hereunder and shall be given the same meaning as Insurance Taxes, Licenses and Fees, Excluding Federal Income Taxes in the Summary of Operations Schedule in the NAIC Life, Accident and Health Convention Blank which is taken from the Taxes, Licenses and Fees Exhibit, or similar entries on financial statements filed by the Company. Such term shall not include any franchise or other federal, state or local tax measured by net income. "Interest Compensation Rate" means the rate of interest defined in -------------------------- Schedule D as applicable to delayed payments. "Investment Rate" means the rate of interest defined in Schedule D as --------------- applicable to cash reserve balances held by the Company, the Reinsurer or PHS (Bermuda) for the benefit of any other party. "LIBOR" means, at any time of determination, the London Interbank ----- Offered Rate paid on U.S. dollar deposits for the applicable period of time as published under "Money Rates" in the New York City edition of the Wall Street Journal or, if there is no such publication or statement therein as to LIBOR, then in any publication used in the New York City financial community. "Marketing and Services Agreement" shall have the meaning set forth in -------------------------------- Section 3.1. "PHCS" shall mean Private Health Care Systems Incorporated, a ---- corporation with its corporate offices in Waltham, Massachusetts that develops medical provider networks and provides utilization review services. 5 "PHS" shall mean Physicians Health Services, Inc., a Delaware --- corporation and the parent of the Company. "POS Plans" means commercial contracts for health care services, other --------- than HMO Plans, provided by Company to Contractholders in the Service Area utilizing Company's network of healthcare providers to provide health care services when such contracts are marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as the parties may mutually agree to from time to time. POS Plans include: (i) an in-network benefit ("In-Network") under which enrollees are required to utilize health care providers who are part of the PHS Network (as defined in the Marketing and Services Agreement); and (ii) an "out-of-network" benefit ("Out-of-Network") under which enrollees may choose to utilize health care providers who are not part of the PHS Network. "Profit or Loss" shall have the meaning set forth in Article X. -------------- "Quarterly Accounting Report" means the report required to be prepared --------------------------- in accordance with Section 7.2 and providing the data as shown on Schedules C and F. "Quarterly Settlement" means the net amount due and payable to any -------------------- party with respect to any Accounting Period as set forth in Section 7.3. "Renewal Date" means, with respect to a HMO or POS Plan, the date that ------------ is the anniversary of the day on which the liability of the Company began under such HMO or POS Plan. "Reserves" means amounts shown in the Company's annual statement as -------- filed with the State of New Jersey as reserves for the HMO and POS Plans. 6 "Service Area" means the State of New Jersey. ------------ "Stop Loss Reinsurance" means reinsurance other than the reinsurance --------------------- under this Agreement obtained by the Company and provided in connection with HMO and POS Plans. "Stop Loss Reinsurance Premium" means consideration paid by the ----------------------------- Company for Stop Loss Reinsurance provided. "Stop Loss Reinsurance Recoveries Received" means amounts collected ----------------------------------------- pursuant to Stop Loss Reinsurance. "Terminal Accounting and Settlement" means the final accounting and ---------------------------------- payment of any amount due any party upon the termination of this Agreement, as described in Section 9.1. "Terminal Accounting Date" shall have the meaning set forth in ------------------------ Section 9.1. "Withholds" means amounts withheld by the Company from payments of --------- claims submitted by primary care physicians and specialists. 7 ARTICLE II REINSURANCE COVERAGE -------------------- 2.1 Coverage. (a) Effective May 1, 1996 (the "Effective Date"), the -------- Company agrees to cede to the Reinsurer: (i) fifty percent (50%) of the risks under the HMO Plans, and (ii) fifty percent (50%) of the risks under the In- Network portion of the POS Plans, all as more specifically described in Schedule A, and the Reinsurer agrees to indemnify the Company against fifty percent (50%) of the risks under such HMO and In-Network portion of the POS Plans. (b) Effective the Effective Date, the Company agrees to cede to the Reinsurer one hundred percent (100%) of the risks under the Out-of-Network portion of the POS Plans, all as more specifically described in Schedule A, and the Reinsurer agrees to indemnify the Company against one hundred percent (100%) of the risks under such Out-of-Network portion of the POS Plans. (c) Effective the Effective Date, the Reinsurer agrees to retrocede to PHS (Bermuda) fifty percent (5O%) of the risks under the Out-of-Network portion of the POS Plans, all as more specifically described in Schedule A, and PHS (Bermuda) agrees to indemnify the Reinsurer against fifty percent (50%) of the risks under such Out-of-Network portion of the POS Plans. 2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a ------------------- coinsurance basis. Each party agrees to establish and maintain Reserves in an amount 8 appropriate for the risks assumed by such party, as set forth in Section 2.1 above; provided, however, that, the parties agree that the Reinsurer will -------- ------- ---- establish and maintain 100% of the Reserves for the Out-of-Network portion of the POS Plans. 2.3 Conditions. The reinsurance hereunder is subject to the same ---------- limitations and conditions as the HMO and POS Plans, except as otherwise expressly provided for in this Agreement. 2.4 Exclusions. The reinsurance hereunder does not apply to the following ---------- risks: (i) any portion of the risk under any HMO or POS Plan issued by the Company other than the risk reinsured hereunder; (ii) any HMO or POS Plan issued and delivered in a jurisdiction in which issuance and delivery of such contract constituted the doing of business where the Company was not properly licensed; and (iii) those risks for which the Reinsurer is not liable pursuant to the provisions of Section 3.11 hereof. ARTICLE III GENERAL PROVISIONS ------------------ 3.1 Contract Administration. The Company and the Reinsurer each shall have ----------------------- responsibility for certain aspects of the marketing and administration of the HMO and POS Plans, in accordance with the Amended and Restated Marketing and Services Agreement dated as of October 1, 1996 between the Reinsurer, the Company and PHS (the "Marketing and Services Agreement"). 3.2 Non-Solicitation. (a) During the term of this Agreement, the Reinsurer ---------------- shall not contact, solicit or contract for services with any health care provider in the 9 Service Area under contract with the Company. In addition, during the term of this Agreement, and following its termination, the Reinsurer will not provide any party with lists of health care providers under contract with the Company or non-public information concerning contracts between the Company (or its Affiliates) and its health care providers under contract; provided, however, -------- ------- that provider lists must be made available to the Departments of Health or Insurance of the State of New Jersey, to prospective Contractholders, to the Reinsurer's insureds and as otherwise required under applicable law. This Section 3.2 shall not apply (i) to contracting efforts by third parties, including, but not limited to, PHCS acting on behalf of the Reinsurer, for the purpose of developing managed care networks, provided, however, that, the names of health care providers solicited by such third parties shall not have been furnished by the Reinsurer, its employees or agents, or (ii) following the Contract Termination Date, as described in the provisions of Article VIII hereof. The Reinsurer further agrees not to replace a HMO or POS Plan with a PHCS managed health care plan during the term of this Agreement. (b) No party, nor any of its Affiliates, shall contact, solicit or contract with any other party's full-time employees who have been engaged in the activities covered by this Agreement without the consent of such other party. 3.3 Inspection. Any party, or its designated representative, may inspect, ---------- at the offices of the Company, PHS (Bermuda) or the Reinsurer, as the case may be, where such records are located, and conduct reasonable audits of, the papers and any and all other books or documents of the Company, PHS (Bermuda) or the Reinsurer 10 reasonably relating to the HMO or POS Plans and the administrative responsibilities hereunder, during normal business hours for such period as this Agreement is in effect or for as long thereafter as the Company, PHS (Bermuda) or the Reinsurer, as the case may be, seeks performance by any other party pursuant to the terms of this Agreement. The information obtained shall be used only for purposes relating to the reinsurance provided under this Agreement and shall not be disclosed to any person without the express permission of the other party, except to the extent that disclosure is required by law. Each party's rights under this Section 3.3 shall survive termination of this Agreement. 3.4 Misunderstandings and Oversights. If any delay, omission, error or -------------------------------- failure to pay amounts due or to perform any other act required by this Agreement is unintentional and caused by misunderstanding or oversight, the Company, PHS (Bermuda) and the Reinsurer will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. The party that first discovers such oversight or incorrect act as a result of the misunderstanding will notify the other parties in writing promptly upon discovery of the misunderstanding or oversight. The parties shall act to correct the error, omission or oversight within twenty (20) calendar days of notification of the problem. This Section 3.4 shall not be construed as a waiver by any party of its right to enforce strictly the terms of this Agreement. 3.5 Reinstatements. If a HMO or POS Plan reinsured hereunder that was -------------- terminated or lapsed is reinstated while this Agreement is in effect, the reinsurance for such Plan shall be reinstated automatically as if such Plan had not been terminated or 11 lapsed. All amounts received in connection with such reinstatement shall be treated as Direct Paid Premiums. 3.6 Contract Changes or Reserve Changes. The Company, PHS (Bermuda) and ----------------------------------- the Reinsurer shall share, based upon the percentages set forth in Section 2.1 and Schedule A, in any increase or decrease in the Company's liability that results from any change in the terms or conditions of any HMO or POS Plan reinsured hereunder or in the calculation of Reserves. The Company must provide written notification to the Reinsurer and PHS (Bermuda) within fifteen (15) calendar days after any such change, if such change can reasonably be expected to have a significant effect on the transactions contemplated by this Agreement. 3.7 Compliance with Applicable Laws and Regulations. It is the intention ----------------------------------------------- of the parties that this Agreement comply with all existing applicable laws and regulations, as from time to time are in effect, so that the agreement remains in full force and the HMO and POS Plans remain reinsured hereunder. Each of the parties agrees to comply with all laws, ordinances, rules, regulations and orders of regulatory bodies applicable to the transactions contemplated by this Agreement, including those relating to the payment of commissions. 3.8 Amendment and/or Termination Upon Failure to Comply. In the event that --------------------------------------------------- it is determined by an insurance or health regulatory authority, the Internal Revenue Service or any other federal, state or local regulatory authority or by any party to this Agreement upon the advice of an insurance or health regulatory authority or the Internal Revenue Service that this Agreement fails to conform to, or that the intent of 12 this Agreement cannot be effected as a result of, the requirements of existing applicable laws and regulations and that this Agreement may be brought into conformity with said requirements, or the intent of this Agreement may be effected, only by means of a material change to this Agreement, or in the event that such laws or regulations are changed subsequent to the Effective Date and such change has a material adverse effect on any party or requires a material change to this Agreement in order for this Agreement to conform with applicable laws and regulations or for its intent to be effected, the parties shall exercise reasonable efforts to reach an agreement to amend this Agreement so as to return the parties to the economic position that they would have been in had no such change occurred or so that both parties share the economic detriment of such change proportionately. If the parties are unable to reach an agreement to amend the Agreement, then the differences between the parties shall be resolved through arbitration in accordance with the provisions of Article XIII. In the event that any required change is not material, this Agreement shall be amended in accordance with such requirement. 3.9 Notification of Disapproval or Change in Law. The Company shall -------------------------------------------- promptly notify the Reinsurer and PHS (Bermuda) of any actual or anticipated disapprovals or required changes regarding this Agreement that are made by any insurance or health regulatory authority or taxing authority and of any change in the laws, regulations or rulings affecting this Agreement or related documents. The Reinsurer and PHS (Bermuda) shall be allowed to participate in the defense of this 13 Agreement or related documents on its own behalf with such authority after consultation with the Company. 3.10 Setoff. It is expressly understood that any debts or credits, matured ------ or unmatured, liquidated or unliquidated, arising or incurred pursuant to the terms hereof, including but not limited to such debts and credits arising under Articles IV, V and VI shall, at all times and under all circumstances relevant to the rights and liabilities of the parties to this Agreement, be deemed mutual debts or credits, as the case may be, and shall be set off and only the net balance shall be allowed or paid. 3.11 Limitations on Liability. (a) The Reinsurer shall not indemnify or be ------------------------ liable pursuant to this Agreement or otherwise for any of the Company's risk, to the extent any damages result from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Company. PHS (Bermuda) or the Reinsurer, as the case may be, shall be liable and indemnify the Company fully for all losses arising from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Reinsurer or PHS (Bermuda), as the case may be, acting in connection with a HMO or POS Plan reinsured hereunder. (b) The Company does not indemnify and shall not be liable pursuant to this Agreement or otherwise for any of the Reinsurer's risk, to the extent any damages result from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the reinsurer. The company shall be liable and indemnify the Reinsurer fully for all losses arising from the negligent acts or omissions to act, 14 reckless or intentional wrongs, fraud, oppression or bad faith of the Company acting in connection with a HMO or POS Plan reinsured hereunder. (c) The Reinsurer and PHS Bermuda shall be liable, based on the applicable percentages set forth in Section 2.1 and Schedule A, and subject to the election permitted by Section 6.2, for any losses arising from non-negligent acts or omissions to act taken by the Company in good faith pursuant to HMO or POS Plans reinsured hereunder. (d) For purposes of this Agreement, any damages, claims, liabilities or other expenses for which the Reinsurer shall be liable shall be net of the appropriate share of any recoveries from third parties, including, without limitation, recoveries under Stop-Loss Reinsurance Contracts. (e) The Reinsurer shall not be liable for any damages incurred by the Company, PHS (Bermuda) or the Reinsurer to the extent such liability or damages arise from the action or actions of a health care provider or health care facility in connection with the HMO or POS Plans reinsured hereunder. 3.12 Exclusivity. The Company and the Reinsurer shall not enter into an ----------- arrangement with other parties similar to this Agreement for reinsurance of Managed Care Contracts (as defined in the Marketing and Services Agreement), except as expressly permitted under the Marketing and Services Agreement. 3.13 Press Releases. No public statement or press release regarding the -------------- existence of this Agreement or the terms thereof shall be made by any party hereto 15 without the prior written consent of the other parties, except as required by applicable laws, ordinances, rules and regulations. 3.14 Restrictions on the Reinsurer PHS (Bermuda) and the Company Relating -------------------------------------------------------------------- to Other Agreements. During the period from the Effective Date through the last - ------------------- date on which the provisions of this Agreement are in effect, each of the Reinsurer, PHS (Bermuda) and the Company shall be prohibited from directly or indirectly, entering into any contract, lease, sublease, license, sublicense, promissory note, evidence of indebtedness or other contract or commitment (whether oral or written), which will, or can reasonably be expected to at any time, place any material restriction or restrictions on such party's ability to perform any or all of its obligations under this Agreement; provided, however, that, nothing herein shall limit either party's right to enter into a Change of Control transaction in accordance with the provisions set forth herein. 3.15 Investigations. Each party to this Agreement shall immediately notify -------------- the other parties, in writing, of any and all investigations of such party or its directors, principal officers or shareholders conducted by any federal, state or local governmental or regulatory authority other than routine examinations or surveys by state insurance or health regulatory authorities and federal or state tax authorities. 3.16 Change of Control. Each party shall fully disclose the details of any ----------------- pending Change of Control known to it to the other parties, and shall provide the other parties with copies of any and all applications for approval therefor made to Federal, state or local regulatory authorities. Such disclosure shall be made prior to or 16 concurrent with notification and/or application for approval to such Federal, state or local regulatory authorities of a Change of Control. In the event that such Change of Control shall be approved, the party that intends to undergo the Change of Control shall notify the other parties immediately thereof and the other parties shall have the rights set forth in Section 8.6. 3.17 Reinsurance or Sale of HMO or POS Plans. (a) The Company agrees that, --------------------------------------- during the period in which this Agreement is in effect, it shall not reinsure, sell or assign the HMO or POS Plans to another entity (other than in connection with Stop Loss Reinsurance). (b) Notwithstanding paragraph (a) above, this Section 3.17 shall not restrict the ability of the Company to (i) enter into a merger or consolidation, (ii) effect a sale of all or a portion of its capital stock or (iii) effect a sale of its business as an entirety or substantially as an entirety; provided, however, that the Company may not enter into a transaction listed in (i), (ii) or (iii) above with another entity unless such other entity provides the Reinsurer and PHS (Bermuda) with a writing, in form and substance satisfactory to the Reinsurer and PHS (Bermuda) which shall state that the entity agrees to be bound by the terms of this Agreement to the same extent and effect as if such entity had been a party to this Agreement. 3.18 Commission Scale and Commission Scale Changes. Commission payments --------------------------------------------- made with respect to any HMO or POS Plans reinsured hereunder shall be made according to the same commission scale used by the Company with respect to the 17 specific types of products listed in Schedule A, or substantially similar products, that are not subject to this Agreement, as that scale may be changed from time to time. 3.19 Stop-Loss Reinsurance. The Company agrees, during the period that --------------------- this Agreement is in effect, that it will maintain Stop-Loss Reinsurance with respect to the HMO Plans and the POS Plans in effect, with deductibles, coverages and limits of liability that are substantially the same as those that apply under the Stop Loss Reinsurance contract or contracts of the Company that are in effect on the Effective Date, a copy or copies of which are attached as Exhibit I; provided, however, that each Stop Loss Reinsurance contract or contracts of the Company relating to HMO or POS Plans must provide coverage with respect to claims relating to any periods during which the Company is obligated to provide services with respect to HMO or POS Plans, without regard to (i) the failure of the Company to remain qualified to conduct the business for which it is organized, or (ii) the insolvency or the commencement of supervision, conservation, rehabilitation, liquidation or similar proceedings against the Company. In the event that any Stop Loss Reinsurance contract issued to the Company does not meet the requirements of this Section 3.19 at the Effective Date, or at any time thereafter, the Company will obtain substitute Stop Loss Reinsurance meeting such requirements from a qualified reinsurer, including the Reinsurer. 3.20 Statement of Actuarial Opinion. Within forty-five (45) calendar days ------------------------------ after the end of the calendar year, the Company shall provide the Reinsurer with a Statement of Actuarial Opinion certifying the adequacy of the reserves which are covered under this Agreement. In addition, the Actuarial Opinion must state whether 18 or not the reserves covered under this Agreement meet the minimum standards of all states where the Company is licensed, and if not the difference between the Company's reserves and state minimums. The Actuarial Opinion shall meet the requirements as set forth in the NAIC'S Actuarial Opinion and Memorandum Regulation. The Opinion shall be signed by the Company's "Appointed Actuary." ARTICLE IV PREMIUMS AND RESERVES --------------------- 4.1 Premiums - HMO Plans and In-Network Portion of the POS Plans. ------------------------------------------------------------- Premiums under HMO Plans and under the In-Network portion of the POS Plans received by the Reinsurer, pursuant to the terms of the Marketing and Services Agreement, shall be allocated to the Company and the Reinsurer in accordance with the applicable percentages set forth in Section 2.1 and in Schedule A, and the portion of the Premiums allocated to the Reinsurer shall constitute the consideration in respect of the Reinsurer's acceptance of risk under this Agreement. The portion of Premiums allocated to the Company shall be paid over to the Company in accordance with the settlements required by Section 7.3 of this Agreement. 4.2 Premiums - Out-of-Network Portion of the POS Plans. Premiums under the -------------------------------------------------- Out-of-Network portion of the POS Plans received by the Reinsurer, pursuant to the terms of the Marketing and Services Agreement, shall be allocated to the Reinsurer and PHS (Bermuda) in accordance with the applicable percentages set forth in Section 2.1 and in Schedule A, and the portion of the Premiums allocated to the Reinsurer and 19 PHS (Bermuda) shall constitute the consideration in respect of the Reinsurer's and PHS (Bermuda)'s acceptance of risk under this Agreement. The portion of Premiums allocated to PHS (Bermuda) shall be paid over to PHS (Bermuda) in accordance with the settlements required by Section 7.3 of this Agreement. 4.3 HMO and POS Plan Reserves. With respect to the HMO Plans and the In- ------------------------- Network portion of the POS Plans reinsured hereunder, the Company and the Reinsurer shall establish and maintain Reserves in an amount appropriate for the risk assumed by such party and all applicable regulatory requirements. With respect to the Out-of-Network portion of the POS Plans reinsured hereunder, the Reinsurer shall establish and maintain 100% of the Reserves in accordance with all applicable regulatory requirements. The Reinsurer will fund 50% of such Reserves on behalf of PHS (Bermuda) by deducting the appropriate amount from the Quarterly Settlements due PHS (Bermuda), as set forth in Section 7.3, to the extent that such Quarterly Settlements are sufficient for such purpose. To the extent that the Quarterly Settlements are not sufficient for such purpose, PHS (Bermuda) will, within 45 calendar days of a request by Reinsurer, pay to the Reinsurer the amount necessary to fund 50% of such Reserves. The Reinsurer will credit interest on the Reserve funds held on behalf of PHS (Bermuda) at a rate equal to the Investment Rate set forth in Schedule E. 20 ARTICLE V EXPENSE ALLOWANCE ----------------- 5.1 Administrative Expenses. Each party shall be entitled to reimbursement ----------------------- for its Administrative Expenses (not including pre-marketing expenses), identified in Schedule B, for each Accounting Period. Such Administrative Expenses, plus any Insurance Taxes and Commissions, paid by such party with respect to the HMO and POS Plans during the Accounting Period, shall be considered reimbursable expenses. 5.2 Payment. The Company, PHS (Bermuda) and the Reinsurer shall be ------- reimbursed for the amounts shown as Company Expenses, PHS (Bermuda) Expenses or Reinsurer Expenses, as set forth in Section 7.3 below. ARTICLE VI CLAIMS ------ 6.1 Notice of Claim. Upon receipt of any claim on any HMO or POS Plan, --------- ----- which claim is reasonably anticipated to exceed fifty thousand dollars ($5O,OOO), the Company shall promptly notify the Reinsurer and PHS (Bermuda) of such claim. Copies of notification, claim papers, and proofs shall be furnished by the Company to the Reinsurer and to PHS (Bermuda) upon request. 6.2 Determination of Claims by the Company. The Reinsurer and PHS -------------------------------------- (Bermuda) will accept the decision of the Company with respect to the payment of a claim under a HMO or POS Plan; provided, however, that the Company shall promptly advise the Reinsurer and PHS (Bermuda) of the Company's intention to contest a claim 21 under a HMO or POS Plan, and the Reinsurer and PHS (Bermuda) shall have the right to advise and assist the Company in its determination of liability and in the best procedure to follow with respect to any such claim of doubtful validity. The Company, PHS (Bermuda) and the Reinsurer shall share, in accordance with the applicable percentages set forth in Section 2.1 and Schedule A, all expenses incurred in connection with contesting, compromising or settling claims under a HMO or POS Plan, subject to the limitations of Section 3.11. Such expenses may include, but are not limited to, all costs and expenses of investigation, settlement of claims, litigation costs and judgments. If, however, the Reinsurer or PHS (Bermuda), as the case may be, has advised the Company that a contested claim should be paid, and elects to assume liability for its applicable percentage (as set forth in Section 2.1 and Schedule A) of the claim as originally presented, the Reinsurer or PHS (Bermuda), as the case may be, shall not share in any additional costs or expenses associated with such claim. ARTICLE VII ACCOUNTING AND REPORTING ---------- ------------- 7.1 Reinsurance Accounting. The Company shall maintain separate books or ---------------------- details of account with respect to the HMO and POS Plans reinsured hereunder, setting forth the data required in Schedules C, E and F. 7.2 Ouarterly Accounting Reports. Following the end of each Accounting ---------------------------- Period, the Company shall supply the Reinsurer and PHS (Bermuda) with a Quarterly Accounting Report providing the data required in Schedules C and E. The Quarterly 22 Accounting Report shall be submitted within forty-five (45) calendar days of the end of each calendar quarter. 7.3 Settlements. Settlement of amounts payable between the Company, ----------- the Reinsurer and PHS (Bermuda) shall be made in a reasonably expeditious manner once the amounts or estimates are known or determined. All settlement payments shall be made by wire transfer with same or next day availability unless otherwise agreed. (a) Weekly Settlements. Reinsurer shall make reimbursement payments to the ------------------ Company for estimated weekly cash claims paid by the Company. Such estimates are to be mutually determined, and appropriately adjusted from time to time, to reasonably approximate the timing and amounts of cash claim expenditures made by the Company and to minimize the quarterly settlement amounts with respect to claims. Such payments are due weekly based upon a mutually agreed upon schedule. (b) Monthly Settlements. Reinsurer shall make reimbursement payments to the ------------------- Company monthly for any actual or estimated monthly administrative expenses, premium taxes, licenses, fees or assessments incurred by the Company. Such payments are due within 20 Business Days after the end of each month in which they were incurred. Reinsurer's actual or estimated administrative or commission expenses incurred are also deemed payable at that time. By mutual agreement, certain expenses may be added to or deleted from this monthly reimbursement. 23 (c) Quarterly Settlements. Based upon the Quarterly Accounting Reports, --------------------- including Schedules C, E and F, settlement payment or payments shall be made to the Company or Reinsurer, or PHS Bermuda as the case may be, within 45 calendar days from the end of such quarter. If such reports or schedules are not finalized within this time frame, reasonable estimated payments shall be made followed by adjustment payments. The Quarterly Settlement payments shall represent settlement, net of any interim reimbursements or other related settlement payments, of all amounts due during that quarter and any mutually agreed upon adjustments to prior periods. The quarterly calculation of this payment shall be substantially in the form of Schedule E with any positive amounts listed on Line 24 of such Schedule being payable from the Reinsurer to the Company and any negative amounts being payable from the Company to the Reinsurer. For the purpose of calculating interest on delayed payments relating to this quarterly settlement payment, the parties agree that the due date is the 15th day (unless such 15th day falls on a day other than a Business Day, in which case the due date is the Business Day immediately preceding such 15th day) of the middle month of the settlement quarter unless otherwise mutually agreed. (d) Other Settlements. Other settlement payments between the Company and ----------------- the Reinsurer such as payment adjustments, preliminary quarterly settlements, withhold payout reimbursements or interest compensation may be made separately or along with other settlement payments upon mutual agreement. For the purpose of calculating 24 interest on delayed payments relating to these payments, due dates are to be mutually agreed upon if not otherwise specified in this Agreement. 7.4 Reconciliation. Each party shall have the right to review all -------------- individual components of transactions entered into each Quarterly Accounting Report, such as Premiums received, Commissions and Insurance Taxes, claims incurred or paid, and similar items. The parties shall have a reasonable period from the day the Quarterly Accounting Report is submitted to report any deficiency in such report and to request an adjustment of any payment made to or received by any party. Any amount due any party in connection with such reconciliation shall be paid within forty-five (45) calendar days of the receipt of notice that additional amounts are due. 7.5 Best Efforts to Supply Actual Data. In preparing all reports required ---------------------------------- in this Agreement, the Reinsurer, PHS (Bermuda) or the Company, as the case may be, shall make its best efforts to supply the actual data. If the actual data cannot be supplied with the appropriate report, the Reinsurer, PHS (Bermuda) or the Company, as the case may be, shall produce best estimates, and shall provide amended reports based on actual data no more than forty-five (45) days after such report was originally due. 7.6 Interest on Delayed Payments. Should any payment in connection with ---------------------------- the Quarterly Settlements due the Company, PHS (Bermuda) or the Reinsurer as set forth in Section 7.3 above be delayed beyond its due date, as defined or determined, such delayed payment shall accrue interest during such period of delay at the Interest Compensation Rate as defined on Schedule D. Interest is to be calculated based upon 25 an actual/365 day basis. Any such interest accrued or paid shall not be included in Schedule C as a jointly shared income or expense item, but rather be paid directly to the deficient party either separately or as a separate item added to the Schedule E settlement. The application of this calculation shall also apply to any over payments, with interest accruing back to the deficient party. 7.7 Interest on Cash Reserves. The Reinsurer shall pay PHS (Bermuda) at ------------------------- the Investment Rate as defined in Schedule D for any net cumulative cash reserve balances held by the Reinsurer for the benefit of PHS (Bermuda) after adjusting for any settlement payments. Interest will be calculated quarterly based upon an actual/365 day basis and is due and payable at the time of the Quarterly Settlement. Any such interest accrued or paid shall not be included in Schedule C as a jointly shared income or expense item, but will be paid directly to PHS (Bermuda) either separately or as a separate item added to the Schedule E settlement. Such interest shall be calculated and reported as set forth in Schedule G. ARTICLE VIII DURATION AND TERMINATION ------------------------ 8.1 Duration. Except as otherwise provided herein, this Agreement shall be -------- unlimited in duration. 8.2 Commencement of Liability. The liability of the Reinsurer and PHS ------------------------- (Bermuda) on reinsurance ceded hereunder shall commence on the later of the Effective 26 Date and the date the liability of the Company commences under a HMO or POS Plan, as the case may be, reinsured hereunder. 8.3 Termination of Liability. Except as provided in the next sentence of ------------------------ this Section 8.3, the liability of the Reinsurer or PHS (Bermuda) with respect to any HMO or POS Plan, as the case may be, shall terminate on the date the liability of the Company on such HMO Plan or POS Plan is terminated. If this Agreement is terminated, as provided in this Article VIII, the Reinsurer's and PHS (Bermuda)'s liability with respect to HMO and POS Plans that remain in force shall terminate on the day that all Direct Paid Claims incurred prior to the date of such termination are satisfied. 8.4 Termination of Agreement. Any party shall have the right to terminate ------------------------ this Agreement without cause upon the giving of one hundred eighty (180) days advance written notice to the other parties; provided, however, that, the liability of the Reinsurer and PHS (Bermuda) with respect to HMO and POS Plans that remain in force will terminate on the day that all Direct Paid Claims incurred prior to the date of such termination are satisfied. The Contract Termination Date under this Section 8.4 shall be the 180th day following the giving of the notice required by this Section 8.4. 8.5 Automatic Termination. If, at the end of an Accounting Period, none of --------------------- the HMO or POS Plans is in force, this Agreement shall automatically terminate. In the event of termination pursuant to this Section 8.5, the last day of such Accounting Period shall be the Contract Termination Date. 27 8.6 Termination Due to Insufficient Premium. If the total annualized --------------------------------------- premiums for (i) all HMO and POS Plans reinsured hereunder, plus (ii) premiums for health insurance contracts issued by the Reinsurer in multi-choice arrangements with HMO or POS Plans do not exceed five million dollars ($5,000,000) on the first anniversary of the implementation of this Agreement, then any party May, within forty-five (45) days thereafter, elect to terminate this Agreement. The Termination Date shall be ninety (90) days thereafter. The implementation of this Agreement shall be construed as the date the HMO and POS Plans are available for sale under the Marketing and Services Agreement. The Contractholder of each HMO or POS Plan reinsured hereunder shall, in compliance with applicable law, be given the choice of terminating its coverage at the Termination Date or continuing coverage under such Contract until the Renewal Date applicable thereto next following the Termination Date. 8.7 Termination Subsequent to a Change of Control. In the event of a --------------------------------------------- Change of Control of the Company (for purposes of this Section 8.7, the term "Company" shall include PHS), PHS (Bermuda) or the Reinsurer, the party not undergoing the Change of Control may elect to terminate this Agreement. In the event that this Agreement is terminated as a result of a Change of Control: (i) without any further action required of any party, the Marketing and Services Agreement shall be deemed to be terminated as of the effective date of the Change of Control except with respect to the provisions regarding the administration of the HMO and POS Plans continued under this Section 8.7 which provisions shall be deemed to survive such 28 termination for the period set forth in clause (ii) of this sentence; and (ii) the party not undergoing the Change of Control may elect to continue the reinsurance arrangements provided in this Agreement solely with respect to the reinsurance of any case that was originally written as an HMO Plan or POS Plan and that was in force on the Contract Termination Date, until the tenth (10th) Renewal Date applicable to such HMO or POS Plan, or continuation managed care contract issued by the Company (collectively, "Continuation Plans,") following the Contract Termination Date. The Contract Termination Date under this Section 8.7 shall be the effective date of the Change of Control. 8.8 Termination for Cause. (a) In the event that any party shall default --------------------- in the performance of the duties and obligations imposed on it pursuant to the terms of this Agreement or the Marketing and Services Agreement, or breach any of the provisions contained herein or Therein, including the failure to pay any amount when due, or the failure of any party to maintain a level of services under the Marketing and Services Agreement that is reasonably satisfactory to the other parties, the defaulting party shall be allowed thirty (30) calendar days from receipt of written notice of such default or breach to present to the non-defaulting parties a plan to cure such default or breach that is reasonably satisfactory to the non-defaulting parties. If a reasonably satisfactory plan to cure the default or breach is not submitted within that time, or if the plan is not carried out according to its terms, each of the non-defaulting parties shall have the right to terminate this Agreement upon delivery of written notice of such termination to the defaulting party, which shall be effective on receipt, without prejudice to any other 29 rights or remedies available to the non-defaulting parties by reason of such default or breach. (b) In the event that any party shall engage in fraudulent, illegal or grossly negligent conduct with respect to its duties and obligations under this Agreement or the Marketing and Services Agreement, each of the other parties shall have the right to terminate this Agreement upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non- defaulting parties by reason of the defaulting Party's conduct. (c) The Contract Termination Date under this Section 8.8 shall be the date of receipt of the notice of termination. 8.9 Termination of Agreement Upon the Occurrence of Certain Events. (a) -------------------------------------------------------------- Upon the occurrence of either of the following events: (i) one of the parties to this Agreement fails to remain in good standing under the laws of its state of domicile, or fails for any reason to remain qualified to engage in the transaction contemplated by this Agreement under applicable laws, ordinances, rules or regulations; or (ii) a voluntary or involuntary proceeding is commenced in any state by or against one of the parties to this Agreement for the purpose of supervising, conserving, rehabilitating or liquidating such party; this Agreement may be terminated at the election of either of the other parties pursuant to a written notice. 30 The Contract Termination Date under this Section 8.9 will be the day of receipt of the notice of termination. In the event that the Company shall be subject to (i) or (ii) above, the Reinsurer shall have the exclusive right (subject to appropriate regulatory approvals) to acquire the HMO and POS Plans or to require the Company to assign the HMO and POS Plans to a designated entity authorized to operate a health maintenance organization in the geographic areas in which the Company operates. 8.10 Termination for Material Change in PHS Network. In the event that ---------------------------------------------- the PHS Network (as that term is defined in the Marketing and Services Agreement) undergoes a material change within the meaning of Section 6.3 of the Marketing and Services Agreement, Company shall be allowed thirty (30) calendar days to present to Reinsurer a plan to cure such Material Change that is reasonably satisfactory to Reinsurer. If a reasonably satisfactory plan to cure the Material Change is not submitted within that time, or if the plan is not carried out according to its terms, Reinsurer shall have the right to terminate this Agreement upon delivery of written notice of such termination to Company, which shall be effective upon receipt (the date of receipt being the Contract Termination Date under this Section 8.10), without prejudice to any other rights or remedies available to Reinsurer. 31 ARTICLE IX PAYMENTS UPON TERMINATION OF AGREEMENT -------------------------------------- 9.1 Payments on Termination. (a) In the event that this Agreement shall be ----------------------- terminated pursuant to Article VIII, a net accounting and settlement as to any balance due under this Agreement shall be undertaken by the parties to this Agreement (the "Terminal Accounting and Settlement"), which calculations shall be performed as of the day that is one (1) year from the date that the liability of the Reinsurer and PHS (Bermuda) shall have terminated (the "Terminal Accounting Date"). During the period between the termination of this Agreement and the Terminal Accounting Date, Direct Paid Claims that accrued prior to the termination of this Agreement shall continue to be paid, and Reserves shall continue to be held, in accordance with the terms set forth herein. (b) The Company shall supply the Reinsurer and PHS (Bermuda) with final Schedules C and D which shall show the Terminal Accounting and Settlement. If the Terminal Accounting and Settlement shows that the Company owes the Reinsurer, then the Company shall pay the amount owing to the Reinsurer. If the Terminal Accounting and Settlement shows that the Reinsurer owes the Company or PHS (Bermuda), then the Reinsurer shall pay the amount owing the Company or PHS (Bermuda), as the case may be. If the Terminal Accounting and Settlement shows that PHS (Bermuda) owes the Reinsurer, then PHS (Bermuda) shall pay the amount owing the Reinsurer. Such Schedules shall be supplied by the Company within the period agreed by the parties. 32 (c) Any payment required under the Terminal Accounting and Settlement by the Company shall be paid by the Company no later than the day on which the final Schedules C, E and F, as required by Section 9.1(b), are due. The Reinsurer and PHS (Bermuda) shall make any payment required to be made by the Reinsurer or PHS (Bermuda) hereunder within ten (10) calendar days of receipt of such final schedules. In the event that the calculation for the payment required under the Terminal Accounting and Settlement cannot be accurately calculated by such date, then an estimate shall be paid, with a supplemental accounting being made when the accurate information shall become available. 9.2 Supplemental Accounting. In the event that, subsequent to the Terminal ----------------------- Accounting and Settlement, an adjustment is made with respect to any amount taken into account in the Terminal Accounting and Settlement, or in the event that the Company pays a Direct Paid Claim that accrued prior to the termination hereof, a supplemental accounting shall be made. Any net amount owed to the Reinsurer, PHS (Bermuda) or the Company by reason of such supplemental accounting, plus any interest due pursuant to Section 7.6, shall be paid promptly upon the completion of such supplemental accounting. ARTICLE X CALCULATION OF PROFIT AND LOSS ------------------------------ 10.1 Determination and Allocation of Profit or Loss. The Company shall ---------------------------------------------- calculate Profit or Loss with respect to the HMO and POS Plans, and the Reinsurer, PHS (Bermuda) or the Company, as appropriate, shall make settlements as required by 33 Section 7.3 or Section 9.1, as appropriate, according to the calculations as shown on Schedules C and E and shall be made part of each Quarterly Accounting Report. ARTICLE XI CONDITION PRECEDENT ------------------- 11.1 Condition Precedent. When, under insurance, public health or other ------------------- applicable laws or regulations, approval of arrangements of the type contemplated by this Agreement by one or more Federal, state or local governmental or regulatory authorities is required, the receipt by the Company, PHS (Bermuda) and the Reinsurer of any and all such approvals shall be a condition precedent to the other party's liability under this Agreement. Subject to Section 11.2, if this condition precedent is not met by the Company, PHS (Bermuda) or the Reinsurer by the Effective Date, this Agreement shall be void as of the Effective Date. 11.2 Extension of Time. In the event that the necessary approvals set ------------ ---- forth in Section 11.1 have not been obtained by the Company, PHS (Bermuda) or the Reinsurer as of the Effective Date, the parties may mutually agree to modify the Effective Date of this Agreement. 11.3 Cooperation of the Parties. Each of the Reinsurer, PHS (Bermuda) and -------------------------- the Company shall each use its best efforts to cooperate with and assist the other parties in obtaining the necessary approvals referred to in Section 11.1. 11.4 Guarantee of PHS (Bermuda). As a further condition precedent to the -------------------------- obligation of the Reinsurer to retrocede the Out-of-Network portion of the POS Plans. 34 on or before the Effective Date hereof PHS (Bermuda) shall deliver to the Reinsurer an agreement by PHS to guarantee the solvency of PHS (Bermuda). Such agreement shall be in the form attached hereto as Exhibit A, and shall be effective for as long as the Reinsurer seeks performance by PHS (Bermuda) under this Agreement. Any termination or substantial amendment of PHS' agreement to guarantee the obligations of PHS (Bermuda) shall be cause for termination by the Reinsurer under Section 8.8 above. 35 ARTICLE XII INSOLVENCY OF THE COMPANY ------------------------- 12.1 Pavments by the Reinsurer or PHS (Bermuda). (a) In the event of the ------------------------------------------ insolvency of the Company, payments due the Company on all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall, subject to Section 12.2, be payable by the Reinsurer directly to the Company or to its liquidator, receiver, or statutory successor on the basis of the liability of the Company and the Reinsurer under the HMO Plans and the In- Network Portion of the POS Plans reinsured hereunder without diminution because of the insolvency of the Company. (b) In the event of the insolvency of the Reinsurer, payments due the Reinsurer on all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall, subject to Section 12.2, be payable by PHS (Bermuda) directly to the Reinsurer or to its liquidator, receiver, or statutory successor on the basis of the liability of the Reinsurer and PHS Bermuda under the Out-of-Network Portion of the POS Plans reinsured hereunder without diminution because of the insolvency of the Reinsurer. 12.2 Claims (a) In the event of the insolvency of the Company, the ------ Reinsurer shall be given written notice of the pendency of a claim against the insolvent Company on a HMO or the In-Network portion of a POS Plan reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense 36 or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more assuming reinsurers are involved in the same claim and a majority in interest elect to interpose defenses to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company. (b) In the event of the insolvency of the Company, the Reinsurer and PHS (Bermuda) shall be given written notice of the pendency of a claim against the insolvent Company on the Out-of-Network portion of a POS Plan reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Reinsurer or PHS (Bermuda), as the case may be, may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer or PHS Bermuda), as the case may be, shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer or PHS (Bermuda), as the case may be. Where two or more assuming reinsurers are involved in the same claim 37 and a majority in interest elect to interpose defenses to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company. ARTICLE XIII ARBITRATION ----------- 13.1 Appointment of Arbitrators. In the event of any disputes or -------------- ----------- differences arising hereafter between the contracting parties with respect to any transaction, matter or issue arising from or relating in any way to this Agreement on which agreement between the parties hereto cannot be reached, the same shall be decided by arbitration. Three arbitrators will decide any dispute or difference. The arbitrators must be disinterested officers or retired officers of health maintenance organizations or managed health care companies, or insurance companies with experience in managed health care, other than the parties to this Agreement or their Affiliates. Each of the Company and the Reinsurer agrees to appoint one of the arbitrators with the third, the "Umpire," to be chosen by the other arbitrators. In the event that either such party should fail to choose an arbitrator within 30 days following a written request by the other party to do so, the requesting party may choose an Umpire before entering upon arbitration. In the event that the two arbitrators shall not be able to agree on the choice of the Umpire within 30 days following their appointment, each arbitrator shall nominate five candidates within 10 days thereafter, four of whom the other arbitrator shall decline, 38 and the Umpire shall be chosen from the two remaining nominees by the President of the American Arbitration Association. 13.2 Decision of Arbitrators: Expenses. The arbitrators shall consider --------------------------------- customary and standard practices in the HMO and managed health care insurance businesses. They shall decide by a majority vote of the arbitrators. There shall be no appeal from their written decision. Judgment may be entered on the decision. Each party shall bear the expense of its own arbitrator and outside attorney fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator. 13.3 Applicable Law; Survival. Any arbitration instituted pursuant to this ------------------------ Article XIII shall be held in New Jersey and the laws of the State of New Jersey and, to the extent applicable, the Federal Arbitration Act shall apply. This Article XIII shall survive termination of this Agreement. 13.4 Other Actions. Submission of a matter to arbitration shall be a ------------- condition precedent to any right to institute a proceeding at law or in equity concerning such matter, except for injunctive or other provisional relief pending the arbitration of a matter subject to arbitration pursuant to this Agreement. ARTICLE XIV REPRESENTATIONS AND WARRANTIES ------------------- ---------- 14.1 Representations and Warranties of the Reinsurer. The Reinsurer hereby ----------------------------------------------- represents and warrants to the Company and PHS (Bermuda) as follows: 39 The Reinsurer is a mutual life insurance company organized and existing under the laws, including the insurance laws, of the State of New York and is in good standing under these laws. The Reinsurer further represents and warrants that it is duly licensed and admitted as an insurer under the laws of those jurisdictions in which the HMO and POS Plans reinsured hereunder have been issued and is authorized under the laws and regulations of said jurisdictions to act as a reinsurer in those jurisdictions. In addition, the Reinsurer covenants that, so long as this Agreement is in effect, the Reinsurer shall take all actions reasonably necessary to remain duly licensed under the laws of those jurisdictions wherein the HMO and POS Plans have been issued. The Reinsurer shall notify the Company and PHS (Bermuda) immediately in the event that any license shall be revoked or suspended in any jurisdiction hereunder. The Reinsurer has full corporate power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to carry out all of its obligations hereunder. The execution and delivery by the Reinsurer of this Agreement and the other agreements and documents contemplated hereby, the consummation by the Reinsurer of the transactions as herein contemplated and the carrying out by the Reinsurer of its obligations contemplated hereby have been duly and validly authorized by all necessary corporate action. 14.2 Renresentations and Warranties of PHS (Bermuda). PHS (Bermuda) hereby ----------------------------------------------- represents and warrants to the Company and the Reinsurer as follows: 40 PHS (Bermuda) is a corporation organized and existing under the laws, including the insurance laws, of Bermuda and is in good standing under these laws. PHS (Bermuda) covenants that, so long as this Agreement is in effect, that it shall take all reasonable actions necessary to remain duly licensed within the purview of this Agreement under the insurance laws of Bermuda. PHS (Bermuda) shall notify the Company and the Reinsurer immediately in the event that its license shall be revoked or suspended in any jurisdiction hereunder. PHS (Bermuda) has full corporate power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to carry out all of its obligations hereunder. The execution and delivery by PHS (Bermuda) of this Agreement and the other agreements and documents contemplated hereby, the consummation by PHS (Bermuda) of the transactions as herein contemplated and the carrying out by PHS (Bermuda) of its obligations contemplated hereby have been duly and validly authorized by all necessary corporate action. 14.3 Representations and Warranties of the Company. The Company hereby --------------------------------------------- represents and warrants to the Reinsurer and PHS (Bermuda) as follows: The Company is a corporation organized and existing under the laws, including the insurance and/or public health laws, of the State of New Jersey and is in good standing under these laws. The Company further represents and warrants that it is duly licensed as a health maintenance organization under the laws of those jurisdictions 41 wherein the HMO and POS Plans have been issued. In addition, the Company covenants that, so long as this Agreement is in effect, the Company shall take all reasonable actions necessary to remain duly licensed as a health maintenance organization within the purview of this Agreement under the laws of those jurisdictions wherein the HMO and POS Plans have been issued. The Company shall notify the Reinsurer and PHS (Bermuda) immediately in the event that any license shall be revoked or suspended in any jurisdiction hereunder. The Company has full corporate power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to carry out all of its obligations hereunder. The execution and delivery by the Company of this Agreement and the other agreements and documents contemplated hereby, the consummation by the Company of the transactions as herein contemplated and the carrying out by the Company of its obligations contemplated hereby have been duly and validly authorized by all necessary corporate action. ARTICLE XV CONFIDENTIALITY --------------- 15.1 Obligations of the Parties. Each party agrees that all information -------------- ----------- concerning the business affairs of the Company, PHS (Bermuda) or the Reinsurer, as the case may be, which is not generally available to the public, including but not limited to, lists of physicians and other health care providers, lists of brokers and other 42 information of a proprietary nature relating to methods of doing business heretofore or hereinafter received by it from the other parties shall be kept and maintained as confidential and in complete Secrecy. No party shall, without the prior written consent of the other parties, disclose at any time, either orally, or in writing, or otherwise, in any manner, directly or indirectly, to any person or entity, except to other employees or agents of the non-disclosing party, any such proprietary information. Any breach of confidentiality shall give the non-breaching party the right of injunctive relief in addition to any other remedy permitted by law. 15.2 Survival of Article XV. This Article XV shall survive termination of ---------------------- this Agreement. ARTICLE XVI MISCELLANEOUS PROVISIONS ------------------------ 16.1 Notices. All notices required pursuant to this Agreement shall be in ------- writing and shall become effective when received. Each written notice shall be sent by certified or registered mail, return receipt requested, or a nationally recognized overnight delivery service providing for delivery receipt) or delivered by hand. All notices under this Agreement shall be addressed as follows: If to the Reinsurer: The Guardian Life Insurance Company of America 201 Park Avenue South New York, New York 10003 ATTENTION: Edward K. Kane, Esq. Senior Vice President & General Counsel 43 If to the Company: Physicians Health Services of New Jersey, Inc. Mach Center 4 South 61 Paramus Road Paramus, New Jersey 07652 ATTENTION: Executive Director If to PHS (Bermuda): Physicians Health Services (Bermuda) Ltd. 120 Hawley Lane Trumbull, Connecticut 06611 ATTENTION: Regina M. Campbell Senior Vice President & Chief Administrative Officer If to PHS: Physicians Health Services, Inc. 120 Hawley Lane Trumbull, Connecticut 06611 ATTENTION: Regina M. Campbell Senior Vice President & Chief Administrative Officer 16.2 Successors and Assigns. Except as provided in Section 3.17(b) this ---------------------- Agreement cannot be assigned by the Company, PHS (Bermuda) or the Reinsurer without the prior written approval of the other parties. The provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective permitted successors and assigns. 16.3 Counterparts. This Agreement may be executed simultaneously in any ------------ number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same agreement. 44 16.4 Currency. All payments and accounts shall be made in United States -------- Dollars, and all fractional amounts shall be rounded to the nearest whole dollar. 16.5 Amendment. This Agreement shall be amended only by written agreement --------- signed by a duly authorized officer of each of the Company, PHS (Bermuda) and the Reinsurer, and any change to this Agreement shall be null and void unless made by such amendment; provided, however, that where, under insurance, public health or other applicable laws or regulations, the approval of any such amendment to this Agreement by one or more Federal, state or local governmental or regulatory authorities is required, the amendment shall not take effect unless and until all such necessary approvals have been received by the Company. In the event that such an approval is required, the Company, PHS (Bermuda) and the Reinsurer shall each be obligated to take all necessary actions in order to obtain such approval. 16.6 Entire Agreement. This Agreement and the Schedules and Exhibits ---------------- attached hereto, together with the Marketing and Services Agreement, supersede all prior discussions and written and oral agreements between the parties with respect to the subject matter of this Agreement, and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof. Headings are not part of this Agreement, and shall not affect the terms hereof. 16.7 Binding Effect. This Agreement is binding upon and will inure to the -------------- benefit of the parties and their respective successors and permitted assigns. 45 16.8 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of New Jersey, without giving effect to its provisions relating to conflicts of law. 16.9 Severability. In the event any section or provision of this Agreement ------------ or related documents is found to be void and unenforceable by a court of competent jurisdiction, the remaining sections and provisions of this Agreement or related documents shall nevertheless be binding upon the parties with the same force and effect as though the void or unenforceable part had not been severed or deleted. 16.10 Waivers and Remedies. The waiver by any of the parties of any other -------------------- party's prompt and complete performance, or breach or violation, of any provisions of this Agreement and related documents shall not operate nor be construed as a waiver of any subsequent breach or violation, and the waiver by any of the parties to exercise any right or remedy which it may possess hereunder shall not operate nor be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 16.11 Regulatory Review. The parties acknowledge and agree that this ----------------- Agreement is subject to the review and approval of the New Jersey and New York State Departments of Insurance. The parties expressly agree that any revisions to this Agreement required by the New Jersey or New York State Departments of Insurance will be addressed in an amendment to, or restatement of, the Agreement. 46 EXECUTION --------- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. PHYSICIANS HEALTH SERVICES OF NEW JERSEY By /s/ Regina M. Campbell ------------------------------- Name REGINA M. CAMPBELL Title Senior Vice President PHYSICIANS HEALTH SERVICES (BERMUDA) LTD. By /s/ Regina M. Campbell ------------------------------- Name REGINA M. CAMPBELL Title THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA By /s/ Joseph D. Sargent ------------------------------- Name JOSEPH D. SARGENT Title Vice President and CEO 47 SCHEDULE A ---------- CONTRACTS AND RISKS REINSURED -----------------------------
- ------------------------------------------------------------------------------------------------------------ CONTRACT RISKS REINSURED - ------------------------------------------------------------------------------------------------------------ - - HMO Contracts and In-Network Portion of POS - The Reinsurer agrees to accept 50% of the risks Contracts under such Contracts - ------------------------------------------------------------------------------------------------------------ - - Out of Network Portion of POS Contracts - The Reinsurer agrees to accept 100% of the risks under such Contracts and to re-trocede 50% of such risks to PHS (Bermuda) - PHS (Bermuda) agrees to accept 50% of the risks under such Contracts - ------------------------------------------------------------------------------------------------------------
A-1 NJ Schedule B Contract Allowances Administrative Service Fee ---------------------------------------------- I. Guardian's Adminstrative Services Fee (as a percentage of premium) - ---------------------------------------------------------------------- HMO POS --- --- Marketing 0.63% 0.63% Sales 1.38% 1.38% Administration 1.30% 1.30% Billing/Collections 1.69% 1.69% Advertising 0.15% 0.15% Total 5.15% 5.15% II. PHS' Adminstrative Services Fee (as a percentage of premium) - ---------------------------------------------------------------- HMO POS --- --- Health Services, UR 1.67% 1.67% Net Mgt, MDD, QA 2.43% 2.43% Operations 3.58% 3.58% Acct Svc., Cust Srv. 1.44% 1.44% Marketing 0.63% 0.63% Sales 0.15% 0.15% Administration 1.30% 1.30% Advertising 0.15% 0.15% Total 11.35% 11.35%
Schedule C Year To Date Accounting Quarter Ending: NJ NJ HMO & POS-IN POS-OUT 1. Profits/Losses From Underwriting A. Earned Premium -------------- 1 Cash Received 2 Change in D/U 3 Change in UPR 4 Change in Advance Premium 5 Gross Earned Premium (A1+A2+A3+A4) 6 CSEHRP & Other Reins. Pool Premium Ceded 7 Net Earned Premium (A5+A6) B. Incurred Claims --------------- 1 Cash Claims (including Capitations) Paid 2 Cash Withholds + PCP Bonuses Paid 3 Cash Rein. Pl., COB, Subrog. Recov. 4 Nurses Line Expenses 5 Total Cash Claims (B1+B2+B3+B4) 6 Change in IBNR 7 Change in Withholds + PCP Bonuses Payable 8 Change in Rein. Pl., COB, Subrog. Recov. 9 Total Change in Reserves (B6+B7+B8) 10 Total Incurred Claims (B5+B9) C. Expenses -------- 1 Commissions a. Cash b. Change in Liability c. Total Incurred (C1a+C1b) 2 PX Taxes, Licenses & Fees (if applicable) a. Cash b. Change in Liability c. Total Incurred (C2a+C2b) 3 Assessments (if applicable) a. Cash b. Change in Liability c. Total Incurred (C3a+C3b) 4 Field Expenses a. Cash b. Change in Liability c. Total Incurred (C4a+C4b) 5 Guardian Admin. Exp. 6 PHS Admin. Exp. 7 Total Incurred Expenses (C1c+C2c+C3c+C4c+C5+C6) II. Profit (Loss) (A7-B10-C7) D. Guardian Profit (50%) E. PHS Profit (50%)
SCHEDULE D ---------- INTEREST RATES -------------- The Interest Compensation Rate applicable for any given fiscal quarter is -------------------------- defined as the annual rate of interest equal to the closing yield on 3-month LIBOR as of the last trading day of the prior fiscal quarter plus 1.00%. Such rate shall remain in effect for that entire quarter regardless of any interim fluctuations or changes in 3-month LIBOR yields. The Investment Rate applicable for any given fiscal quarter is defined as the annual rate of interest equal to the closing yield on the then current 2-year Treasury Note as of the last trading day of the prior fiscal quarter plus 1.00%. Such rate shall remain in effect for that entire quarter regardless of any interim fluctuations or changes in 2-year Treasury Note yields. The above interest rates may be changed or modified as appropriate upon mutual agreement between the Company, Reinsurer and PHS (Bermuda).
Schedule E NJ NJ Cash Flow and Funds Reconciliation HMO Quarter Ending: & POS-IN POS-OUT (All numbers reflect year to date totals.) Underwriting Cash Flows 1 Cash Premiums Received (Sched C: A1) 2 Reins. Pool Premiums Ceded (Sched C: A6) 3 Cash Claims (Total) (Sched C: B4) 4 Commissions Incurred (Sched C: C1c) 5 Premium Tx, Licenses, Fees Incurred (Sched C: C2c) 6 HRA Assessment Incurred (Sched C: C3c) 7 Field Expenses (Sched C: C4c) 8 Guardian Admin. Expenses (Sched C: C5) 9 PHS Admin. Expenses (Sched C: C6) 10 Total Cash Out (2+3+4+5+6+7+8+9) 11 Net Cash Generated for Period (1-10) Distribution of Cash Flows For HMO POS In: 12 Cash Flow to PHS (1-4-7-8-50% of 11) 13 Cash Flow to Guardian (4+7+8+50% of 11) For POS Out: 12 Cash Flow to PHS (3+9+Sched C: E) 13 Cash Flow to Guardian (1-3-9-Sched C: E) 14 Marketing Expenses Reimbursable from Guardian 15 Marketing Expenses Reimbursable from PHS 16 Interst on Delayed Payments Owed from Guardian 17 Interest on Delayed Payments Owed from PHS 18 Interest on Cash Reserves held Owed from Guardian 19 Interest on Cash Reserves held Owed from PHS 20 Other amounts Owed from Guardian 21 Other amounts Owed from PHS 22 Gross Amount Due to PHS (12+14+15+16+17+18+-19+20-21) 23 Less Related YTD Payments Made 24 Net Amount Due to (from) PHS (22-23)
SCHEDULE F CALCULATION OF INTEREST ON CASH RESERVES HELD --------------------------------------------- A. Beginning of the calendar quarter's cash reserve balance held for the benefit of the Reinsurer* $ ---- Plus 50% of the net cash generated for the quarter (from Schedule E Line 11**) $ ---- Minus Reinsurer's Quarterly Profit (Loss) (from Schedule C Line E**) $ ---- B. Equals End of Quarter's cash reserve balance held for the benefit of the Reinsurer $ ==== C. Interest on Cash Reserve = ((A + B)/2) x (Investment Rate from Schedule E) x (Number of days in the quarter/365) $ ==== * The Beginning of the calendar quarter's cash reserve balance is defined as the prior quarter's cash reserve balance (prior quarter's Schedule F line B). ** Schedules C and E are annual exhibits; however, the above calculation will use quarterly values. The quarterly values are defined as the current quarter's year to date values less the current year's prior quarter year to date values, if applicable. EX-10.(S) 10 AMENDED AND RESTATED REINSURANCE AGRMT, DTD 10/01/96 Exhibit 10(s) AMENDED AND RESTATED REINSURANCE AGREEMENT between PHYSICIANS HEALTH SERVICES (BERMUDA) LTD. Hamilton, Bermuda and THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA New York, New York AMENDED AND RESTATED REINSURANCE AGREEMENT ------------------------------------------ Reference is hereby made to the Reinsurance Agreement (the "Reinsurance Agreement") made and entered into as of April 27, 1995 between THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a mutual life insurance company organized under the laws of the State of New York (the "Company") and PHYSICIANS HEALTH SERVICES (BERMUDA) LTD., a stock insurance company organized under the laws of Bermuda (the "Reinsurer"). This Amended and Restated Reinsurance Agreement is dated as of October 1, 1996, and when executed by the parties hereto, shall supersede and replace the Reinsurance Agreement and shall constitute a binding and enforceable amendment to the Reinsurance Agreement in its entirety. THE REINSURANCE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY AS FOLLOWS: This Amended and Restated Reinsurance Agreement (this "Agreement") is made and entered into as of this 1st day of October, 1996 between the Company and the Reinsurer. The Company and the Reinsurer mutually agree to enter into a reinsurance agreement (the "Agreement") on the terms and conditions stated herein. This Agreement is a reinsurance agreement solely between the Company and the Reinsurer, and the performance of the obligations of each party under this Agreement shall be rendered solely to the other party. In no instance, except as set forth in Article XII, shall anyone other than the Company or the Reinsurer have any rights under this Agreement, and the Company shall be and remain solely liable to any insured, contractholder, physician or other provider or beneficiary under any contract reinsured hereunder. ARTICLE I DEFINITIONS ----------- As used in this Agreement, the following terms shall have the following meanings (definitions are applicable to both the singular and the plural forms of each term defined in this Article): "Accounting Period" means the Fiscal Quarter, except that the first ----------------- Accounting Period shall be the period commencing with the Effective Date and ending with the last day of the then current Fiscal Quarter, and the last Accounting Period shall be the period commencing with the first day of the last Fiscal Quarter preceding the Terminal Accounting Date and ending on the Terminal Accounting Date. "Administrative Expense" means an expense which will be reimbursable ---------------------- each Accounting Period and is intended to compensate the Company or the Reinsurer for a reasonable estimate of the actual cost of performing administrative services in connection with the Health Insurance Contracts, as set forth in the Marketing and Services Agreement, without provision for profit. "Affiliate" means with respect to a specified person, a person that --------- directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. "Business Day" means any day except Saturday or Sunday or any legal ------------ Federal or New York State holiday. 2 "Change of Control" means the acquisition, in a single transaction or --------- ------- in a series of related transactions, by a person, an entity, or a group of persons or entities acting in concert of: (i) twenty-five percent (25 %) or more (a) of the voting common stock of the Reinsurer or PHS (excluding any acquisition of stock by a party currently owning twenty-five percent (25 %) or more of such common stock), or (b) fifty-one percent (51 %) or more of the aggregate value of the assets of the Reinsurer or PHS; or (II) twenty-five percent (25 %) or more of any ownership interest in the Company. "Commissions" means commissions and other incentives or bonuses ----------- applicable to the marketing of the Health Insurance Contracts. "Continuation Plan" has the meaning set forth in Section 8.6. ----------------- "Contract Termination Date" means the effective date upon which the -------- ---------------- Agreement terminates pursuant to the applicable Section in Article VIII below. "Contractholder" means an employer in the Service Area who or which -------------- executes an enrollment agreement with respect to any Health Insurance Contract subject to this Agreement. "Direct Paid Claims" means amounts paid to health care providers for ------------------ medical claims and/or to subscribers for services covered by Health Insurance Contracts. "Direct Paid Premium" means premiums received. ------------------- "Earned Premium" shall consist of the item shown on Schedule C, line -------------- I.A.7. "Effective Date" shall have the meaning set forth in Section 2.1. ------------- 3 "Fiscal Quarter" means each of the four consecutive three-month -------------- periods in a fiscal year commencing on January 1 of each year and ending on December 31 of that calendar year. "Health Insurance Contracts" means only those health insurance -------------------------- contracts issued by the Company in the Service Area that are the "out-of- network" component of a HMO Plan (as defined in the Marketing and Services Agreement) with a "point-of-service" feature. "Insurance Taxes" means all insurance taxes, licenses and fees -------------- directly imposed with respect to premiums on the Health Insurance Contracts reinsured hereunder and shall be given the same meaning as Insurance Taxes, Licenses and Fees, Excluding Federal Income Taxes in the Summary of Operations Schedule in the NAIC Life, Accident and Health Convention Blank which is taken from the Taxes, Licenses and Fees Exhibit, or similar entries on financial statements filed by the Company. Such term shall not include any franchise or other federal, state or local tax measured by net income. "Interest Compensation Rate" means the rate of interest defined in -------------------------- Schedule D as applicable to delayed payments. "Investment Rate" means the rate of interest defined in Schedule D as --------------- applicable to cash reserve balances held by either the Company or the Reinsurer for the benefit of the other. "LIBOR" means, at any time of determination, the London Interbank ----- Offered Rate paid on U.S. dollar deposits for the applicable period of time as published under "Money Rates" in the New York City edition of the Wall Street Journal or, if there is no such 4 publication or statement therein as to LIBOR, then in any publication used in the New York City financial community. "Marketing and Services Agreement" shall have the meaning set forth -------------------------------- in Section 3.1. "PHCS" shall mean Private Health Care Systems Incorporated, a ---- corporation with its corporate offices in Waltham, Massachusetts that develops medical provider networks and provides utilization review services. "PHS" shall mean Physicians Health Services, Inc., a Delaware --- corporation with administrative offices in Trumbull, Connecticut, which is the ultimate parent corporation of the Reinsurer. "PHS New York" shall mean Physicians Health Services of New ------------ York, Inc., a corporation organized as a health maintenance organization in the State of New York. "Profit or Loss" shall have the meaning set forth in Article X. --------------- "Quarterly Accounting Report" means the report required to be --------------------------- prepared in accordance with Section 7.2 and providing the data as shown on Schedule C. "Quarterly Settlement" means the net amount due and payable to any -------------------- Accounting Period as set forth in Section 7.3. "Renewal Date" means, with respect to a Health Insurance ------------ Contract, the date the anniversary of the day on which the liability of the Company began under such Insurance Contract. "Reserves" means the amounts shown in the Company's Annual -------- Statement as filed with the State of New York as reserves for the Health Insurance Contracts. 5 "Service Area" means the Counties of Bronx, Dutchess, Kings, Nassau, ------------ New York, Queens, Richmond, Rockland, Suffolk, Orange, Putnam and Westchester in the State of New York. "Small Case N.Y. Reinsurance" means reinsurance provided by "specified --------------------------- medical condition" pools established with respect to Health Insurance Contracts relating to fifty (50) or fewer employees, as required by New York State Insurance Department Regulation 146 (11 NYCRR (S) 361.4) and related circular letters of the New York State Insurance Department. "Small Case N.Y. Reinsurance Premium" means the charge paid by the ----------------------------------- Company for Small Case N.Y. Reinsurance provided by pools established pursuant to Regulation 146. "Terminal Accounting and Settlement" means the final accounting and ---------------------------------- payment of any amount due either party upon the termination of this Agreement, as described in Section 9.1. "Terminal Accounting Date" shall have the meaning set forth in Section ------------------------ 9.1. "Written Premiums" means the consideration paid for the Health ---------------- Insurance Contracts reinsured hereunder, and shall consist of the items shown on Schedule C, line I.A.7 plus line I.A.3. ARTICLE II REINSURANCE COVERAGE ----------- -------- 6 2.1 Coverage. Effective April 27, 1995 (the "Effective Date"), the -------- Company agrees to cede to the Reinsurer fifty percent (50%) of the risks under the Health Insurance Contracts, all as more specifically described in Schedule A, and the Reinsurer agrees to indemnify the Company against fifty percent (50%) of the risks under such Health Insurance Contracts. 2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a calendar ------------------- year renewable term basis. The parties agree that the Company will establish and maintain 100% of the Reserves for the Health Insurance Contracts. 2.3 Conditions. The reinsurance hereunder is subject to the same ---------- limitations and conditions as the Health Insurance Contracts, except as expressly provided for in this Agreement. 2.4 Exclusions. The reinsurance hereunder does not apply to the following ---------- risks: (i) any portion of the risk under any Health Insurance Contract issued by the Company other than the risk reinsured hereunder; (ii) any Health Insurance Contract issued and delivered in a jurisdiction in which issuance and delivery of such contract constituted the doing of business where the Company was not properly licensed; and (iii) those risks for which the Reinsurer is not liable pursuant to the provisions of Section 3.11 hereof. ARTICLE III GENERAL PROVISIONS ------- ---------- 3.1 Contract Administration. The Company and PHS New York, an affiliate of -------- -------------- the Reinsurer, each shall have responsibility for certain aspects of the marketing and 7 administration of the Health Insurance Contracts, in accordance with the Amended and Restated Marketing and Services Agreement dated as of October 1,1996 between the Company, PHS and PHS New York (the "Marketing and Services Agreement"). 3.2 Non-Solicitation. During the term of this Agreement, neither party, ---------------- nor any of its Affiliates, shall contact, solicit or contract with any of the other party's full-time employees who have been engaged in the activities covered by this Agreement without the consent of the other party. 3.3 Inspection. Either party or its designated representative may inspect, --------- at the offices of the Company or the Reinsurer, as the case may be, where such records are located, and conduct reasonable audits of, the papers and any and all other books or documents of the Company or the Reinsurer reasonably relating to the Health Insurance Contracts and the administrative responsibilities hereunder, during normal business hours for such period as this Agreement is in effect or for as long thereafter as the Company or the Reinsurer, as the case may be, seeks performance by the other party pursuant to the terms of this Agreement. The information obtained shall be used only for purposes relating to the reinsurance provided under this Agreement and shall not be disclosed to any person without the express permission of the other party, except to the extent that disclosure is required by law. Each party's rights under this Section 3.3 shall survive termination of this Agreement. 3.4 Misunderstandings and Oversights. If any delay, omission, error or -------------------------------- failure to pay amounts due or to perform any other act required by this Agreement is unintentional and caused by misunderstanding or oversight, the Company and the Reinsurer will adjust the situation to what it would have been had the misunderstanding or oversight not occurred. The 8 party that first discovers such oversight or incorrect act as a result of the misunderstanding will notify the other party in writing promptly upon discovery of the misunderstanding or oversight. The parties shall act to correct the error, omission or oversight within twenty (20) days of notification of the problem. This Section 3.4 shall not be construed as a waiver by either party of its right to enforce strictly the terms of this Agreement. 3.5 Reinstatements. If a Health Insurance Contract reinsured hereunder -------------- that was terminated or lapsed is reinstated while this Agreement is in effect, the reinsurance for such Health Insurance Contract under this Agreement will be reinstated automatically as if the Health Insurance Contract had not been terminated or lapsed. All amounts received in connection with such reinstatement shall be treated as Direct Paid Premiums. 3.6 Contract Changes or Reserve Changes. The Company and the Reinsurer ----------------------------------- shall share, based upon the percentages specified in Section 2.1 and Schedule A, in any increase or decrease in the Company's liability that results from any change in the terms or conditions of any Health Insurance Contract reinsured hereunder or in the calculation of Reserves. The Company must provide written notification to the Reinsurer within fifteen (15) calendar days after any such change, if such change can reasonably be expected to have a significant effect on the transactions contemplated by this Agreement. 3.7 Compliance with Applicable Laws and Regulations. It is the intention ----------------------------------------------- of the parties that this Agreement comply with all existing applicable laws and regulations, as from time to time are in effect, so that the agreement remains in full force and the Health Insurance Contracts remain reinsured on a calendar year renewable term basis. Each of the parties agrees to comply with all laws, ordinances, rules, regulations and orders of regulatory bodies 9 applicable to the transactions contemplated by this Agreement, including those relating to the payment of commissions. 3.8 Amendment and/or Termination Upon Failure to Comply. In the event that --------------------------------------------------- it is determined by an insurance or health regulatory authority, the Internal Revenue Service or any other Bermuda or U.S. federal, state or local regulatory authority or by either party to this Agreement upon the advice of an insurance or health regulatory authority or the Internal Revenue Service that this Agreement fails to conform to, or that the intent of this Agreement cannot be effected as a result of, the requirements of existing applicable laws and regulations and that this Agreement may be brought into conformity with said requirements, or the intent of this Agreement may be effected, only by means of a material change to this Agreement, or in the event that such laws or regulations are changed subsequent to the Effective Date and such change has a material adverse effect on either party or requires a material change to this Agreement in order for this Agreement to conform with applicable laws and regulations or for its intent to be effected, the parties shall exercise reasonable efforts to reach an agreement to amend this Agreement so as to return the parties to the economic position that they would have been in had no such change occurred or so that both parties share the economic detriment of such change proportionately. If the parties are unable to reach an agreement to amend the Agreement, then the differences between the parties shall be resolved through arbitration in accordance with the provisions of Article XIII. In the event that any required change is not material, this Agreement shall be amended in accordance with such requirement. 3.9 Notification of Disapproval or Change in Law. The Company shall ------------ -- ---------------------------- promptly notify the Reinsurer of any actual or anticipated disapprovals or required changes regarding 10 this Agreement that are made by any insurance or health regulatory authority or taxing authority and of any change in the laws, regulations or rulings affecting this Agreement or related documents. The Reinsurer shall be allowed to participate in the defense of this Agreement or related documents on its own behalf with such authority after consultation with the Company. 3.10 Setoff. It is expressly understood that any debts or credits, matured ------ or unmatured, liquidated or unliquidated, arising or incurred pursuant to the terms hereof, including but not limited to such debts and credits arising under Articles IV, V and VI shall, at all times and under all circumstances relevant to the rights and liabilities of the parties to this Agreement, be deemed mutual debts or credits, as the case may be, and shall be set off, and only the net balance shall be allowed or paid. 3.11 Limitations on Liability. (a) The Reinsurer does not indemnify and ------------------------ shall not be liable pursuant to this Agreement or otherwise for any of the Company's risk, to the extent any damages result from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Company. The Reinsurer shall be liable and indemnify the Company fully for all losses arising from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Reinsurer or any Affiliate of the Reinsurer, acting in connection with a Health Insurance Contract reinsured hereunder. (b) The Company does not indemnify and shall not be liable pursuant to this Agreement or otherwise for any of the Reinsurer's risk, to the extent any damages result from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Reinsurer or of an Affiliate of the Reinsurer. The Company shall be liable and 11 indemnify the Reinsurer fully for all losses arising from the negligent acts or omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith of the Company acting in connection with a Health Insurance Contract reinsured hereunder. (c) The Reinsurer shall be liable, based on the applicable percentages set forth in Section 2.1 and Schedule A, and subject to the election permitted by Section 6.3, for any losses arising from non-negligent acts or omissions to act taken by the Company in good faith pursuant to Health Insurance Contracts reinsured hereunder. 3.12 Exclusivity. The Company and the Reinsurer shall not enter into an ----------- arrangement with other parties similar to this Agreement for reinsurance of health insurance products to be offered in the Service Area, except as expressly permitted under the Marketing and Services Agreement. 3.13 Press Releases. No public statement or press release regarding the -------------- existence of this Agreement or the terms thereof shall be made by either party hereto without the prior written consent of the other party, except as required by applicable laws, ordinances, rules and regulations. 3.14 Restrictions on the Reinsurer and the Company Relating to Other --------------------------------------------------------------- Agreements. During the period from the Effective Date through the last date on - ---------- which the provisions of this Agreement are in effect, each of the Reinsurer and the Company shall be prohibited from, directly or indirectly, entering into any contract, lease, sublease, license, sublicense, promissory note, evidence of indebtedness or other contract or commitment (whether oral or written), which will, or can reasonably be expected to at any time, place any material restriction or restrictions on such party's ability to perform any or all of its obligations under 12 this Agreement; provided, however, that, nothing herein shall limit either party's right to enter into a Change of Control transaction in accordance with the provisions set forth herein. 3.15 Investigations. Each party to this Agreement shall immediately notify -------------- the other party, in writing, of any and all investigations of such party or its directors, principal officers or shareholders conducted by any Federal, foreign or local governmental or regulatory authority other than routine examinations or surveys by insurance or health regulatory authorities and federal or state tax authorities. 3.16 Change of Control. Each party shall fully disclose the details of any --------- ------- pending Change of Control known to it to the other party, and shall provide the other party with copies of any and all applications for approval therefor made to Federal, state or local regulatory authorities (for purposes of this Section 3.16, PHS shall be deemed to be a party hereto). Such disclosure shall be made prior to or concurrent with notification and/or application for approval to such Federal, state or local regulatory authorities of a Change of Control. In the event that such Change of Control shall be approved, the party that intends to undergo the Change of Control shall notify the other party immediately thereof and the other party shall have the rights set forth in Section 8.6. 3.17 Reinsurance or Sale of Health Insurance Contracts. (a) The Company ---------------------- -------------------------- agrees that, during the period in which this Agreement is in effect, it shall not reinsure, sell or assign the Health Insurance Contracts to another entity. (b) Notwithstanding paragraph (a) above, this Section 3.17 shall not restrict the ability of the Company to (i) enter into a merger or consolidation, or (ii) effect a sale of its business as an entirety or substantially as an entirety; provided, however, that the Company 13 may not enter into a transaction listed in (i) or (ii) above with another entity unless such other entity provides the Reinsurer with a writing, in form and substance satisfactory to the Reinsurer, which shall state that the entity agrees to be bound by the terms of this Agreement to the same extent and effect as if such entity had been a party to this Agreement. 3.18 Commission Scale and Commission Scale Changes. Commission payments --------------------------------------------- made with respect to any Health Insurance Contracts reinsured hereunder shall be according to the same commission scale used by the Company with respect to the specific types of products listed on Schedule A, or substantially similar products, that are not subject to this Agreement, as that scale may be changed from time to time. 3.19 Statement of Actuarial Opinion. Within forty-five (45) calendar days ------------ ----------------- after the end of the calendar year, the Company shall provide the Reinsurer with a Statement of Actuarial Opinion certifying the adequacy of the Reserves which are covered under this Agreement. In addition, the Actuarial Opinion must state whether or not the Reserves covered under this Agreement meet the minimum standards of all states where the Company is licensed, and if not the difference between the Company's reserves and state minimums. The Actuarial Opinion shall meet the requirements as set forth in the NAIC's Actuarial Opinion and Memorandum Regulation. The Opinion shall be signed by the Company's "Appointed Actuary." ARTICLE IV PREMIUMS AND RESERVES -------- --- -------- 4.1 Premiums. Premiums with respect to Health Insurance Contracts shall be -------- allocated to the Company and the Reinsurer in accordance with the applicable percentages set 14 forth in Section 2.1 and Schedule A, and the portion of the Premiums allocated to the Reinsurer shall constitute the consideration in respect of the Reinsurer's acceptance of risk under this Agreement. The portion of Premiums allocated to the Reinsurer shall be paid over to the Reinsurer in accordance with the settlements required by Section 7.3 of this Agreement. 4.2 Reinsurer's Capital and Surplus. The Reinsurer agrees that it shall ------------------------------- maintain capital and surplus in an amount of assets or letters of credit in accordance with, and to the extent permitted by, the insurance laws of Bermuda with respect to the Reinsurer's share of Written Premiums allocated to the Reinsurer under Section 4.1 above with respect to all Health Insurance Contracts in force that are reinsured under this Agreement. 4.3 Reserves. The Company shall establish and maintain Reserves with -------- respect to the Health Insurance Contracts reinsured hereunder. The Company will fund 50% of such Reserves on behalf of the Reinsurer by deducting the appropriate amount from the Quarterly Settlements due the Reinsurer, as set forth in Section 7.3, to the extent that such Quarterly Settlements are sufficient for such purpose. To the extent that the Quarterly Settlements are not sufficient for such purpose, Reinsurer will, within 45 calendar days of a request by Company, pay to Company the amount necessary to fund 50% of such Reserves. The Company will credit interest on the Reserve funds held on behalf of the Reinsurer at a rate equal to the Investment Rate set forth in Schedule D. ARTICLE V EXPENSE ALLOWANCE ------- --------- 5.1 Administrative Expenses. Each party shall be entitled to reimbursement ----------------------- for its Administrative Expenses (not including pre-marketing expenses), identified in Schedule B, for 15 each Accounting Period. Such Administrative Expenses, plus any Insurance Taxes and Commissions, paid by such party with respect to the Health Insurance Contracts during the Accounting Period, shall be considered reimbursable expenses. 5.2 Payment. The Company and the Reinsurer shall be reimbursed for the ------- amounts shown as Company Expenses or Reinsurer Expenses, as set forth in Section 7.3 below. A portion of the reinsurer's expenses shall be allotted and similarly paid to PHS New York for claims payment expenses. ARTICLE VI CLAIMS 6.1 Payment of Claims. PHS New York shall act as the agent of the Company ----------------- and shall pay claims under the Health Insurance Contracts, subject to mutually agreed upon claims standards. The Company shall reimburse PHS New York as specified under Section 7.3. The Reinsurer shall reimburse the Company as specified under Section 7.3. 6.2 Notice of Claim. Upon receipt of any claim on any Health Insurance ------ -- ----- Contract, which claim is reasonably anticipated to exceed fifty thousand dollars ($50,000), PHS New York shall promptly notify the Company of such claim. Copies of notification, claim papers, and proofs shall be furnished by the Reinsurer to the Company upon request. 6.3 Determination of Claims by the Company The Reinsurer will accept the ---------------- --------------------- decision of the Company with respect to the liability for a claim under a Health Insurance Contract; provided, however, that the Company shall promptly advise the Reinsurer of the Company's intention to contest a claim under a Health Insurance Contract, and the Reinsurer shall have 16 the right to advise and assist the Company in its determination of liability and in the best procedure to follow with respect to any such claim of doubtful validity. The Company and the Reinsurer shall share, in accordance with the applicable percentages set forth in Section 2.1 and Schedule A, all expenses incurred in connection with contesting, compromising or settling claims under Health Insurance Contracts, subject to the limitations of Section 3.11. Such expenses may include, but are not limited to, all costs and expenses of investigation, settlement of claims, litigation costs and judgments. If, however, the Reinsurer has advised the Company that a contested claim should be paid, and elects to assume liability for its applicable percentages set forth in Section 2.1 and Schedule A of the claim as originally presented, the Reinsurer shall not share in any additional costs or expenses associated with such claim. 17 ARTICLE VII ACCOUNTING AND REPORTING ---------- --- --------- 7.1 Reinsurance Accounting. The Company shall maintain separate books or ---------------------- details of account with respect to the Health Insurance Contracts reinsured hereunder, setting forth the data required in Schedules C, E and F. 7.2 Quarterly Accounting Reports. Following the end of each Accounting ---------------------------- Period, the Company shall supply the Reinsurer with a Quarterly Accounting Report providing the data required in Schedules C, E and F. The Quarterly Accounting Report shall be submitted within forty-five (45) calendar days following the close of each calendar quarter. 7.3 Settlements. Settlement of amounts payable between the Company, the ----------- Reinsurer and PHS New York shall be made in a reasonably expeditious manner once the amounts or estimates are known or determined. All settlement payments shall be made by wire transfer with same or next day availability unless otherwise agreed. (a) Weekly Settlements. The Company shall make reimbursement payments to ------------------ PHS New York for estimated weekly cash claims paid by PHS New York. Such estimates are to be mutually determined, and appropriately adjusted from time to time, to reasonably approximate the timing and amounts of cash claim expenditures made by PHS New York and to minimize the quarterly settlement amounts with respect to claims. Such payments are due weekly based upon a mutually agreed upon schedule. 18 (b) Monthly Settlements. The Company shall make reimbursement payments to ------------------- the Reinsurer and PHS New York monthly for any actual or estimated monthly administrative expenses or assessments incurred by them. Such payments are due within 20 Business Days after the end of each month in which they were incurred. The Company's actual or estimated administrative expenses, premium taxes, fees, assessments or commission expenses incurred are also deemed payable at that time. By mutual agreement, certain expenses may be added to or deleted from this monthly reimbursement. PHS New York shall be reimbursed for any amounts owed, net of any reimbursements made as specified in Sections 5.2 and 6.1. Such amounts are subject to the settlement process described herein and shall be included in Schedules C and E as part of the Quarterly Accounting Reports. (c) Quarterly Settlements. Based upon the Quarterly Accounting Reports, --------------------- including Schedules C, E and F, settlement payment shall be made to the Company or Reinsurer, as the case may be, within 45 calendar days from the end of such quarter. If such reports or schedules are not finalized within this time frame, a reasonable estimated payment shall be made followed by an adjustment payment. The Quarterly Settlement payment shall represent settlement, net of any interim reimbursements or other related settlement payments, of all amounts due during that quarter and any mutually agreed upon adjustments to prior periods. The quarterly calculation of this payment shall be substantially in the form of Schedule E with any positive amounts listed on Line 24 of such Schedule being payable from the Company to the Reinsurer and any negative amounts being payable from the Reinsurer to the Company. For the purpose of calculating interest on delayed payments relating to this quarterly settlement 19 payment, the parties agree that the due date is the 15th day of the middle month of the settlement quarter unless otherwise mutually agreed. (d) Other Settlements. Other settlement payments between the Company, the ----------------- Reinsurer, and PHS New York such as payment adjustments, preliminary quarterly settlements, withhold payout reimbursements or interest compensation may be made separately or along with other settlement payments upon mutual agreement. For the purpose of calculating interest on delayed payments relating to these payments, due dates are to be mutually agreed upon if not otherwise specified in this Agreement. 7.4 Reconciliation. Each party shall have the right to review all -------------- individual components of transactions entered into each Quarterly Accounting Report, such as Premiums received, Commissions and Insurance Taxes, claims incurred or paid, and similar items. The parties shall have a reasonable period from the day the Quarterly Accounting Report is submitted to report any deficiency in such report and to request an adjustment of any payment made to or received by either party. Any amount due either party in connection with such reconciliation shall be paid within forty-five (45) calendar days of the receipt of notice that additional amounts are due. 7.5 Best Efforts to Supply Actual Data. In preparing all reports required ---------------------------------- in this Agreement, the Reinsurer and the Company shall make their best efforts to supply the actual data. If the actual data cannot be supplied with the appropriate report, the Reinsurer or the 20 Company shall produce best estimates, and shall provide amended reports based on actual data no more than forty-five (45) calendar days after such report was originally due. 7.6 Interest Delayed Payments. Should any payment in connection with the ------------------------- Quarterly Settlements due the Company, the Reinsurer, of PHS New York as set forth in Section 7.3 above be delayed beyond its due date as defined or determined, such delayed payment shall accrue interest during such period of delay at the Interest Compensation Rate as defined on Schedule D. Interest is to be calculated based upon an actual/365 day basis. Any such interest accrued or paid shall not be included in Schedule C as a jointly shared income or expense item, but rather be paid directly to the deficient party either separately or as a separate item added to the Schedule E settlement. The application of this calculation shall also apply to any over payments, with interest accruing back to the deficient party. 7.7 Interest on Cash Reserves. The Company shall pay the Reinsurer at the ------------------------- Investment Rate as defined in Schedule D for any net cumulative cash reserve balances held by the Company for the benefit of the Reinsurer after adjusting for any settlement payments. Interest will be calculated quarterly based upon an actual/36S day basis and is due and payable at the time of the Quarterly Settlement. Any such interest accrued or paid shall not be included in Schedule C as a jointly shared income or expense item, but will be paid directly to the Reinsurer either separately or as a separate item added to the Schedule E settlement. Such interest shall be calculated and reported as set forth in Schedule F. ARTICLE VIII DURATION AND TERMINATION ------------------------ 21 8.1 Duration. Except as otherwise provided herein, this Agreement shall be -------- unlimited in duration. 8.2 Commencement of Liability. The liability of the Reinsurer on ------------------------ reinsurance ceded hereunder shall commence on the later of the Effective Date and the date the liability of the Company commences under a Health Insurance Contract reinsured hereunder. 8.3 Termination of Liability. Except as provided in the next sentence of ------------------------ this Section 8.3, the liability of the Reinsurer with respect to any Health Insurance Contract shall terminate on the date the liability of the Company on such Health Insurance Contract is terminated. If this Agreement is terminated as provided in this Article VIII, the Reinsurer's liability with respect to Health Insurance Contracts that remain in force shall terminate on the day that all Direct Paid Claims incurred prior to the date of such termination are satisfied. 8.4 Termination of Agreement. Either party shall have the right to ------------------------ terminate this Agreement without cause upon the giving of one hundred eighty (180) days advance written notice to the other party; provided, however, that, the liability of the Reinsurer with respect to Health Insurance Contracts that remain in force will terminate on the day that all Direct Paid Claims incurred prior to the date of such termination are satisfied. The Contract Termination Date under this Section 8.4 shall be the 180th day following the giving of the notice required by this Section 8.4. 8.5 Automatic Termination. If, at the end of an Accounting Period, none of --------------------- the Health Insurance Contracts is in force, this Agreement shall automatically terminate; provided, however, that if the parties intend to continue to perform their marketing activities under the Marketing and Services Agreement, the automatic termination shall be deemed to be waived. 22 In the event of termination pursuant to this Section 8.5, the last day of such Accounting Period shall be the Contract Termination Date. 8.6 Termination Subsequent to a Change In Control. In the event of a --------------------------------------------- Change In Control of the Company or the Reinsurer (or PHS), the party not undergoing the Change of Control may elect to terminate this Agreement. In the event that this Agreement is terminated as a result of a Change of Control: (i) without any further action required of either party, the Marketing and Services Agreement shall be deemed to be terminated as of the effective date of the Change of Control except with respect to the provisions regarding the administration of the Health Insurance Contracts continued under this Section 8.6 which provisions shall be deemed to survive such termination for the period set forth in clause (ii) of this sentence; and (ii) the party not undergoing the Change of Control may elect to continue the reinsurance arrangements provided in this Agreement solely with respect to the reinsurance of any case that was originally written as a Health Insurance Contract and that was in force on the Contract Termination Date, until the tenth (10th) succeeding Renewal Date applicable to such Health Insurance Contract, or continuation health insurance contract issued by the Company; (collectively "Continuation Plans"), following the Contract Termination Date. The Contract Termination Date under this Section 8.6 shall be the effective date of the Change of Control. 8.7 Termination for Cause. (a) In the event that either party shall --------------------- default in the performance of the duties and obligations imposed on it pursuant to the terms of this Agreement or the Marketing and Services Agreement, or breach any of the provisions contained herein or therein, including the failure to pay any amount when due, or the failure of either party to maintain a level of services under the Marketing and Services Agreement that is 23 reasonably satisfactory to the other party, the defaulting party shall be allowed thirty (30) days calendar from receipt of written notice of such default or breach to present to the nondefaulting party a plan to cure such default or breach that is reasonably satisfactory to the non-defaulting party. If a reasonably satisfactory plan to cure the default or breach is not submitted within that time, or if the plan is not carried out according to its terms, the non-defaulting party shall have the right to terminate this Agreement upon delivery of written notice of such termination to the defaulting party, which shall be effective on receipt, without prejudice to any other rights or remedies available to the non-defaulting party by reason of such default or breach. (b) In the event that either party shall engage in fraudulent, illegal or grossly negligent conduct with respect to its duties and obligations under this Agreement or the Marketing and Services Agreement, the other party shall have the right to terminate this Agreement upon delivery of written notice of such termination to the defaulting party, which shall be effective upon receipt, without prejudice to any other rights or remedies available to the non- defaulting party by reason of the other party's conduct. (c) The Contract Termination Date under this Section 8.7 shall be the date of receipt of the notice of termination. 8.8 Termination of Agreement Upon the Occurrence of Certain Events. This -------------------------------------------------------------- Agreement may be terminated at the election of the other party pursuant to written notice upon the occurrence of either of the following events: 24 (a) one of the parties to this Agreement fails to remain in good standing under the laws of its state of domicile, or fails for any reason to remain qualified to engage in the transaction contemplated by this Agreement under applicable laws, ordinances, rules or regulations; or (b) a voluntary or involuntary proceeding is commenced in any state by or against one of the parties to this Agreement for the purpose of supervising, conserving, rehabilitating or liquidating such party. The Contract Termination Date under this Section 8.8 will be the day of receipt of the notice of termination. In the event that the Company shall be subject to (a) or (b) above, the Reinsurer, or a properly licensed Affiliate of the Reinsurer, shall have the exclusive right (subject to appropriate regulatory approvals) to acquire the Health Insurance Contracts or to require the Company to assign the Health Insurance Contracts to a designated entity authorized to issue health insurance contracts in the geographic areas in which the Company operates. 8.9 Termination for Material Change in PHS Network. In the event that the ---------------------------------------------- PHS Network (as that term is defined in the Marketing and Services Agreement) undergoes a material change within the meaning of Section 6.3 of the Marketing and Services Agreement, the Reinsurer and PHS New York shall be allowed thirty (30) calendar days to present to Company a plan to cure such Material Change that is reasonably satisfactory to Company. If a reasonably satisfactory plan to cure the Material Change is not submitted within that time, or if the plan is not carried out according to its terms, Company shall have the right to terminate this Agreement upon delivery of written notice of such termination to Reinsurer, which shall 25 be effective upon receipt (the date of receipt being the Contract Termination Date under this Section 8.9), without prejudice to any other rights or remedies available to Company. ARTICLE IX PAYMENTS UPON TERMINATION OF AGREEMENT -------------------------------------- 9.1 Payments on Termination. (a) In the event that this Agreement shall be ----------------------- terminated pursuant to Article VIII, a net accounting and settlement as to any balance due under this Agreement shall be undertaken by the parties to this Agreement (the "Terminal Accounting and Settlement"), which calculations shall be performed as of the day that is one (1) year from the date that the liability of the Reinsurer shall have terminated (the "Terminal Accounting Date"). During the period between the termination of this Agreement and the Terminal Accounting Date, Direct Paid Claims that accrued prior to the termination of this Agreement shall continue to be paid, and Reserves shall continue to be held, in accordance with the terms set forth herein. (b) The Company shall supply the Reinsurer with final Schedules C, E and F which shall show the Terminal Accounting and Settlement. If the Terminal Accounting and Settlement shows that the Company owes the Reinsurer, then the Company shall pay the amount owing to the Reinsurer. If the Terminal Accounting and Settlement shows that the Reinsurer owes the Company, then the Reinsurer shall pay the amount owing to the Company. Such Schedules shall be supplied by the Company within the period agreed by the parties. (c) Any payment required under the Terminal Accounting and Settlement by the Company shall be paid by the Company no later than the day on which the final Schedules C, 26 E and F, as required by Section 9.1(b), are due. The Reinsurer shall make any payment required to be made by the Reinsurer hereunder within ten (10) calendar days of receipt of such final schedules. In the event that the calculation for the payment required under the Terminal Accounting and Settlement cannot be accurately calculated by such date, then an estimate shall be paid, with a supplemental accounting being made when the accurate information shall become available. 9.2 Supplemental Accounting In the event that, subsequent to the Terminal ----------------------- Accounting and Settlement, an adjustment is made with respect to any amount taken into account in the Terminal Accounting and Settlement, or in the event that the Company pays a Direct Paid Claim that accrued prior to the date hereof, a supplemental accounting shall be made. Any net amount owed to the Reinsurer or the Company by reason of such supplemental accounting, plus any interest due pursuant to Section 7.7, shall be paid promptly upon the completion of such supplemental accounting. ARTICLE X CALCULATION OF PROFIT AND LOSS ------------------------------ 10.1 Determination and Allocation of Profit or Loss. The Company shall ---------------------------------------------- calculate Profit or Loss with respect to the Health Insurance Contracts, and the Reinsurer or the Company, as appropriate, shall make settlements as required by Section 7.3 or Section 9.1, as appropriate, according to the calculations as shown on Schedules C, E and F and shall be made part of each Quarterly Accounting Report. 27 ARTICLE XI CONDITION PRECEDENT ------------------- 11.1 Condition Precedent. When, under insurance, public health or other ------------------- applicable laws or regulations, approval of arrangements of the type contemplated by this Agreement by one or more foreign, federal, state or local governmental or regulatory authorities is required, the receipt by the Company and the Reinsurer (or PHS, as applicable) of any and all such approvals shall be a condition precedent to the other party's liability under this Agreement. Subject to Section 11.2, if this condition precedent is not met by the Company or the Reinsurer by the Effective Date, this Agreement shall be void as of the Effective Date. 11.2 Extension of Time. In the event that the necessary approvals set ----------------- forth in Section 11.1 have not been obtained by the Company or the Reinsurer as of the Effective Date, the parties may mutually agree to modify the Effective Date of this Agreement. 11.3 Cooperation of the Parties. The Reinsurer and the Company shall each -------------------------- use its best efforts to cooperate with and assist the other party in obtaining the necessary approvals referred to in Section 11.1. 11.4 Guarantee of Reinsurer. As a further condition precedent to the ---------------------- obligation of the Company to cede reinsurance under this Agreement, on or before the Effective Date hereof, the Reinsurer shall deliver to the Company an agreement by PHS to guarantee the solvency of the Reinsurer. Such agreement shall be in form and content acceptable to the Company in its sole discretion, and shall be effective for as long as the Company seeks performance by the Reinsurer under this Agreement. Any termination or substantial 28 amendment of PHS' agreement to guarantee the obligations of the Reinsurer shall be cause for termination by the Company under Section 8.7 above. ARTICLE XII INSOLVENCY OF THE COMPANY ---------- -- --- ------- 12.1 Payments by the Reinsurer. In the event of the insolvency of the ------------------------- Company, payments due the Company on all reinsurance made, ceded, renewed or otherwise becoming effective under this Agreement shall, subject to Section 12.2, be payable by the Reinsurer directly to the Company or to its liquidator, receiver, or statutory successor on the basis of the liability of the Company under the Health Insurance Contracts reinsured hereunder without diminution because of the insolvency of the Company. 12.2 Claims. In the event of the insolvency of the Company, the Reinsurer ------ shall be given written notice of the pendency of a claim against the insolvent Company on a Health Insurance Contract reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceeding. During the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the Company or its liquidator or receiver or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more assuming reinsurers are involved in the same claim and a majority in interest elect to interpose 29 defenses to such claim, the expense shall be apportioned in accordance with the terms of this Agreement as though such expense had been incurred by the Company. ARTICLE XIII ARBITRATION ----------- 13.1 Appointment of Arbitrators. In the event of any disputes or -------------- ----------- differences arising hereafter between the contracting parties with respect to any transaction, matter or issue arising from or relating in any way to this Agreement on which agreement between the parties hereto cannot be reached, the same shall be decided by arbitration. Three arbitrators will decide any dispute or difference. The arbitrators must be disinterested officers or retired officers of health maintenance organizations or managed health care companies, or insurance companies with experience in managed health care, other than the two parties to this Agreement or their Affiliates. Each of the contracting companies agrees to appoint one of the arbitrators with the third, the "Umpire," to be chosen by the other arbitrators. In the event that either party should fail to choose an arbitrator within 30 days following a written request by the other party to do so, the requesting party may choose an Umpire before entering upon arbitration. In the event that the two arbitrators shall not be able to agree on the choice of the Umpire within 30 days following their appointment, each arbitrator shall nominate five candidates within 10 days thereafter, four of whom the other arbitrator shall decline, and the Umpire shall be chosen from the two remaining nominees by the President of the American Arbitration Association. 13.2 Decision of Arbitrators: Expenses. The arbitrators shall consider ----------- --------------------- customary and standard practices in the managed health care insurance businesses. They shall decide by a 30 majority vote of the arbitrators. There shall be no appeal from their written decision. Judgment may be entered on the decision of the arbitrators by any court having jurisdiction. Each party shall bear the expense of its own arbitrator and outside attorney fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator. 13.3 Applicable Law: Survival. Any arbitration instituted pursuant to this ------------------------ Article XIII shall be held in New York, New York and the laws of the State of New York and, to the extent applicable, the Federal Arbitration Act shall apply. This Article XIII shall survive termination of this Agreement. 13.4 Other Actions. Submission of a matter to arbitration shall be a ------------ condition precedent to any right to institute a proceeding at law or in equity concerning such matter, except for injunctive or other provisional relief pending the arbitration of a matter subject to arbitration pursuant to this Agreement. 31 ARTICLE XIV REPRESENTATIONS AND WARRANTIES ------------------- ---------- 14.1 Representations and Warranties of the Company. The Company hereby --------------------------------- ----------- represents and warrants to the Reinsurer as follows: The Company is a mutual life insurance company organized and existing under the laws, including the insurance laws, of the State of New York and is in good standing under these laws. The Company further represents and warrants that it is duly licensed and admitted as an insurer under the laws of those jurisdictions in which the Health Insurance Contracts reinsured hereunder have been issued. In addition, the Company covenants that, so long as this Agreement is in effect, it shall take all actions reasonably necessary to remain duly licensed under the laws of those jurisdictions wherein the Health Insurance Contracts have been issued. The Company shall notify the Reinsurer immediately in the event that its license shall be revoked or suspended in any jurisdiction hereunder. The Company has full corporate power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to carry out all of its obligations hereunder. The execution and delivery by the Company of this Agreement and the other agreements and documents contemplated hereby, the consummation by the Company of the transactions as herein contemplated and the carrying out by the Company of its obligations contemplated hereby have been duly and validly authorized by all necessary corporate action. 14.2 Representations and Warranties of the Reinsurer. The Reinsurer hereby ------------------- ------------- ------------- represents and warrants to the Company as follows: 32 The Reinsurer is a corporation organized and existing under the laws, including the insurance laws, of Bermuda and is in good standing under these laws. The Reinsurer covenants that, so long as this Agreement is in effect, that it shall take all reasonable actions necessary to remain duly licensed within the purview of this Agreement under the insurance laws of Bermuda. The Reinsurer shall notify the Company immediately in the event that its license shall be revoked or suspended in any jurisdiction hereunder. The Reinsurer has full corporate power and authority to execute and deliver this Agreement and the other agreements and documents contemplated hereby and to carry out all of its obligations hereunder. The execution and delivery by the Reinsurer of this Agreement and the other agreements and documents contemplated hereby, the consummation by the Reinsurer of the transactions as herein contemplated and the carrying out by the Reinsurer of its obligations contemplated hereby have been duly and validly authorized by all necessary corporate action. ARTICLE XV CONFIDENTIALITY --------------- 15.1 Obligations of the Parties. Each party agrees that all information -------------- ----------- concerning the business affairs of the Company or the Reinsurer (or PHS or its Affiliates), as the case may be, which is not generally available to the public, including but not limited to, lists of physicians and other health care providers, lists of brokers and other information of a proprietary nature relating to methods of doing business heretofore or hereinafter received by it from the other party shall be kept and maintained as confidential and in complete secrecy. Neither party shall, without the prior written consent of the other party, disclose at any time, 33 either orally, or in writing, or otherwise, in any manner, directly or indirectly, to any person or entity, except to other employees or agents of the non-disclosing party, any such proprietary information. Any breach of confidentiality shall give the non-breaching party the right of injunctive relief in addition to any other remedy permitted by law. 15.2 Survival of Article XV. This Article XV shall survive termination of ----------- ---------- this Agreement. ARTICLE XVI MISCELLANEOUS PROVISIONS ------------------------ 16.1 Notices. All notices required pursuant to this Agreement shall be in ------- writing and shall become effective when received. Each written notice shall be sent by certified or registered mail, return receipt requested, or a nationally recognized overnight delivery service (providing for delivery receipt) or delivered by hand. All notices under this Agreement shall be addressed as follows: If to the Company: The Guardian Life Insurance Company of America 201 Park Avenue South New York, New York 10003 ATTENTION: Edward K. Kane, Esq. Senior Vice President & General Counsel If to the Reinsurer: Physicians Health Services (Bermuda) Ltd. 120 Hawley Lane Trumbull, Connecticut 06611 ATTENTION: Regina M. Campbell, Esq. Senior Vice President & Chief Administrative Officer 34 If to PHS: Physicians Health Services, Inc. 12O Hawley Lane Trumbull, Connecticut 06611 ATTENTION: Regina M. Campbell Senior Vice President & Chief Administrative Officer 16.2 Successors and Assigns. Except as provided in Section 3.17(b), this ---------------------- Agreement cannot be assigned by the Company or the Reinsurer without the prior written approval of the other party. The provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective permitted successors and assigns. 16.3 Counterparts. This Agreement may be executed simultaneously in any ------------ number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same agreement. 16.4 Currency. All payments and accounts shall be made in United States -------- Dollars, and all fractional amounts shall be rounded to the nearest whole dollar. 16.5 Amendment. This Agreement shall be amended only by written --------- agreement signed by a duly authorized officer of each of the Company and the Reinsurer, and any change to this Agreement shall be null and void unless made by such amendment; provided, however, that where, under insurance, public health or other applicable laws or regulations, the approval of any such amendment to this Agreement by one or more Federal, state or Bermuda local governmental or regulatory authorities is required, the amendment shall not take effect unless and until all such necessary approvals have been received by the Company. In the event that 35 such an approval is required, the Company, the Reinsurer and PHS shall each be obligated to take all necessary actions in order to obtain such approval. 16.6 Entire Agreement: Headings. This Agreement and the Schedules and -------------------------- Exhibits attached hereto, together with the Marketing and Services Agreement, supersede all prior discussions and written and oral agreements between the parties with respect to the subject matter of this Agreement, and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof. Headings are not part of this Agreement, and shall not affect the terms hereof. 16.7 Binding Effect. This Agreement is binding upon and will inure to the -------------- benefit of the parties and their respective successors and permitted assigns. 16.8 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of New York, without giving effect to its provisions relating to conflicts of law. 16.9 Severability. In the event any section or provision of this Agreement ------------ or related documents is found to be void and unenforceable by a court of competent jurisdiction, the remaining sections and provisions of this Agreement or related documents shall nevertheless be binding upon the parties with the same force and effect as though the void or unenforceable part had not been severed or deleted. 16.10 Waivers and Remedies. The waiver by any of the parties of any other -------------------- party's prompt and complete performance, or breach or violation, of any provisions of this Agreement and related documents shall not operate nor be construed as a waiver of any subsequent breach or violation, and the waiver by any of the parties to exercise any right or remedy which it may 36 possess hereunder shall not operate nor be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent breach or violation. 16.11 Regulatory Review. The parties acknowledge and agree that this ----------------- Agreement is subject to the review and approval of the New York State Department of Insurance. The parties expressly agree that any revisions to this Agreement required by the New York State Department of Insurance will be addressed in an amendment to, or restatement of, the Agreement. 37 EXECUTION --------- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. PHYSICIANS HEALTH SERVICES (BERMUDA) LTD. By /s/Regina M. Campbell --------------------- Name REGINA M. CAMPBELL Title THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA By /s/Joseph D. Sargent ----------------------------- Name Joseph D. Sargent Title President and CEO 38 NY (OUT) SCHEDULE A ---------- CONTRACTS AND RISKS REINSURED ----------------------------- - -------------------------------------------------------------------------------- CONTRACT RISKS REINSURED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - - Out-of-Network Portion - The Reinsurer AGREES to accept 50% of the risks of POS Contracts under such Contracts. - -------------------------------------------------------------------------------- A-1 NY (OUT) Schedule B Contract Allowances. Administrative Service Fee ----------------------------------------------- I. Guardian's Administrative Services Fee (as a percentage of premium) - -- ------------------------------------------------------------------ POS (Out) -------- Marketing 0.63% Sales 1.38% Administration 1.30% Claims N/A Billing/Collections 1.69% Advertising 0.15% Total 5.15% II. PHS' Administrative Services Fee (as a percentage of premium) - --- ------------------------------------------------------------ POS (Out) -------- Health Services, UR 1.67% Net Mgt, MDD, QA 2.43% Operations 3.58% Acct Svc., Cust Srv. 1.44% Marketing 0.63% Sales 0.15% Administration 1.30% Advertising 0.15% Total 11.35% 12/11/96
Schedule C Year To Date Accounting Quarter Ending: NY POS-OUT ------- I. Profits/Losses From Underwriting A. Earned Premium -------------- 1 Cash Received 2 Change in D/U 3 Change in UPR 4 Change in Advance Premium 5 Gross Earned Premium (A1+A2+A3+A4) 6 CSEHRP & Other Reins. Pool Premium Ceded 7 Net Earned Premium (A5+A6) B. Incurred Claims --------------- 1 Cash Claims (including Capitations) Paid 2 Cash Withholds + PCP Bonuses Paid 3 Cash Rein. PI., COB, Subrog. Recov. 4 Nurse Line Expenses 5 Total Cash Claims (B1+B2+B3+B4) 6 Change in IBNR 7 Change in Withholds + PCP Bonuses Payable 8 Change in Rein. PI., COB, Subrog. Recov. 9 Total Change in Reserves (B6+B7+B8) 10 Total Incurred Claims (B5+B9) C. Expenses -------- 1 Commissions a. Cash b. Change in Liability c. Total Incurred (C1a+C1b) 2 Px Taxes, Licenses & Fees (if applicable) a. Cash b. Change in Liability c. Total Incurred (C2a+C2b) 3 Assessments (if applicable) a. Cash b. Change in Liability c. Total Incurred (C3a+C3b) 4 Field Expenses a. Cash b. Change in Liability c. Total Incurred (C4a+C4b) 5 Guardian Admin. Exp. 6 PHS Admin. Exp. 7 Total Incurred Expenses (C1c+C2c+C3c+C4c+C5+C6) II. Profit (Loss) (A7-B10-C7) D. Guardian Profit (50%) E. PHS Profit (50%)
SCHEDULE D ---------- INTEREST RATES -------------- The Interest Compensation Rate applicable for any given fiscal quarter is -------------------------- defined as the annual rate of interest equal to the closing yield on 3-month LIBOR as of the last trading day of the prior fiscal quarter plus 1.00%. Such rate shall remain in effect for that entire quarter regardless of any interim fluctuations or changes in 3-month LIBOR yields. The Investment Rate applicable for any given fiscal quarter is defined as the --------------- annual rate of interest equal to the closing yield on the then current 2-year Treasury Note as of the last trading day of the prior fiscal quarter plus 1.00%. Such rate shall remain in effect for that entire quarter regardless of any interim fluctuations or changes in 2-year Treasury Note yields. The above interest rates may be changed or modified as appropriate upon mutual agreement between the Company and the Reinsurer.
Schedule E NY Cash Flow and Funds Reconciliation Quarter Ending: POS-OUT ------- (All numbers reflect year to date totals.) Underwriting Cash Flows 1 Cash Premiums Received (Sched C: A1) 2 Reins. Pool Premiums Ceded (Sched C: A6) 3 Cash Claims (Total) (Sched C: B4) 4 Commissions Incurred (Sched C: C1c) 5 Premium Tx, Licenses, Fees Incurred (Sched C: C2c) 6 HRA Assessment Incurred (Sched C: C3c) 7 Field Expenses (Sched C: C4c) 8 Guardian Admin. Expenses (Sched C: C5) 9 PHS Admin. Expenses (Sched C: C6) 10 Total Cash Out (2+3+4+5+6+7+8+9) 11 Net Cash Generated for Period (1-10) Distribution of Cash Flows 12 Cash Flow to PHS (3+9+Sched C: E) 13 Cash Flow to Guardian (1-3-9-Sched C: E) 14 Marketing Expenses Reimbursable from Guardian 15 Marketing Expenses Reimbursable from PHS 16 Interest on Delayed Payments Owed from Guardian 17 Interest on Delayed Payments Owed from PHS 18 Interest on Cash Reserves held Owed from Guardian 19 Interest on Cash Reserves held Owed from PHS 20 Other amounts Owed from Guardian 21 Other amounts Owed from PHS 22 Gross Amount Due to PHS (12+14-15+16-17+18+-19+20-21) 23 Less Related YTD Payments Made 24 Net Amount Due to (from) PHS (22-23)
SCHEDULE F CALCULATION OF INTEREST ON CASH RESERVES HELD --------------------------------------------- A. Beginning of the calendar quarter's cash reserve balance held for the benefit of the Reinsurer* $____ Plus 50% of the net cash generated for the quarter (from Schedule E Line 11**) $____ Minus Reinsurer's Quarterly Profit (Loss) (from Schedule C Line E**) $____ B. Equals End of Quarter's cash reserve balance held for the benefit of the Reinsurer $ ==== C. Interest on Cash Reserve = ((A + B)/2) x (Investment Rate from Schedule E) x (Number of days in the quarter/365) $ ==== * The Beginning of the calendar quarter's cash reserve balance is defined as the prior quarter's cash reserve balance (prior quarter's Schedule F line B). ** Schedules C and E are annual exhibits; however, the above calculation will use quarterly values. The quarterly values are defined as the current quarter's year to date values less the current year's prior quarter year to date values, if applicable. EX-10.(T) 11 GBIPA SERVICE AGREEMENT Exhibit 10 (t) GBIPA SERVICE AGREEMENT This GBIPA Service Agreement is made and entered into as of this 1st day of January, 1997 by and between PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC., a Connecticut corporation ("PHS") and Greater Bridgeport Individual Practice Association ("GBIPA"); WHEREAS, PHS is a health maintenance organization licensed under the laws of the State of Connecticut, which provides or arranges for the provision of Covered Services (as defined below) to Members (as defined below); WHEREAS, GBIPA is an individual practice association which has entered into contracts with physicians and other health care providers to arrange for and facilitate the provision and delivery of Covered Services (as defined below) to Members; WHEREAS, PHS and GBIPA are currently parties to an IPA Service Agreement dated January 1, 1996 which expires December 31, 1996; WHEREAS, PHS and GBIPA desire to continue the provision of Covered Services (as defined below) to Members (as defined below) pursuant to this GBIPA Service Agreement as of the Effective Date (as defined below); WHEREAS, PHS and GBIPA mutually desire to preserve and enhance patient dignity; NOW, THEREFORE, in consideration of the premises and other mutual covenants herein contained and other good and valuable considerations, it is mutually agreed as follows: ARTICLE 1. DEFINITIONS ----------------------- 1.1 "Advisory Committee" means a committee comprised of representatives of GBIPA, and such other individual practice associations, physician hospital organizations or directly contracted physicians with which PHS contracts for the provision of Covered Services, which elect to have representation on the Advisory Committee. 1.2 "Contracted Services" means those Covered Services listed in Exhibit A, and such other services agreed upon from time to time by the parties to be included as Contracted Services. 1.3 "Contracted Services Provider" means those third party vendors which assume the obligation to provide Contracted Services. 1.4 "Consultant Physician" means a physician (other than a Non-GBIPA Participating Physician) to whom a Member has been referred in writing by a Participating Physician. 1.5 "Copayment" means the fee specified in Programs, payable by a Member at the time Covered Services are rendered. 1.6 "Covered Services" means those Medically Necessary health care services and benefits that Members are entitled to receive pursuant to a Program and as described in a Subscriber Agreement or pursuant to a Summary Plan Description, including, without limitation, those services required by the Health Maintenance Organization Act of 1973, and any amendments thereto, and applicable state laws. Unless otherwise stated, as used herein, Covered Services excludes Contracted Services. 1 1.7 "Effective Date" means January 1, 1997. 1.8 "Eligible Participating Physician" means a Participating Physician who is a Primary Care Physician and who participates in a gatekeeper model Program, who satisfies eligibility requirements for distribution of a bonus pool, as determined by PHS and GBIPA and as described in Section 3.10 of this Agreement. 1.9 "Emergency" means a sudden unexpected serious occurrence requiring immediate medical attention or a life-threatening situation. The determination of whether Emergency services are Covered Services rests exclusively with the Medical Director. 1.10 "Excess Payment" means in any Health Care Year, payments made by PHS on behalf of GBIPA pursuant to Section 5.3 that exceed the capitation payments allocated to GBIPA in accordance with Section 5.2. For purposes of this calculation, amounts paid pursuant to Section 5.10 shall be added to the payments made pursuant to Section 5.3 for such Health Care Year. 1.11 "GBIPA Member" means Members for whom the subscriber has chosen a Participating Physician as a Primary Care Physician. 1.12 "Health Care Year" means the 12 month period commencing January 1, 1996 and ending on December 31, 1996 and any successive 12 month periods thereafter if this Agreement is extended beyond its initial term, as set forth in Section 9.1. 1.13 "Medical Director" means one or more physicians or other persons appointed by PHS to be responsible for, among other things, administering PHS's medical affairs and for serving as medical liaison to Participating Physicians. 1.14 "Medically Necessary" means services or supplies which are necessary and appropriate for the treatment of a Member's illness or injury or for the preventive care of a Member, according to accepted standards of medical practice. 1.15 "Member" means (i) any person who has entered into a contract with PHS, Physicians Health Services of New York or Physicians Health Services of New Jersey, or another payor with whom PHS has a joint marketing arrangement, for the provision of medical and hospital services, and his or her eligible dependents; (ii) any person and his or her eligible dependents, who is offered health care services through a plan sponsored by his or her employer that is administered by PHS, Physicians Health Services of New York or Physicians Health Services of New Jersey; and (iii) any person who participates in a Program for a government sponsored plan of health insurance. 1.16 "Non-GBIPA Participating Physician" means a duly licensed medical doctor, osteopathic physician or oral surgeon who (i) is a Member of an individual practice association or physician hospital organization (other than GBIPA) with which PHS contracts for Covered Services; or (ii) with whom PHS directly contracts for the provision of Covered Services. 1.17 "Office Manual" shall mean the PHS Office Manual describing, among other things, GBIPA's rules, regulations, protocols and procedures; GBIPA's reimbursement guidelines; PHS's billing procedures, referrals and authorization policies, termination protocols and appeals procedures (the current termination appeal protocols and procedures are attached hereto and made a part hereof); and PHS's utilization review and quality assessment guidelines, coding guidelines and benefit summaries, as such Office Manual is revised from time to time; provided, however, that no amendments or modifications to the Office Manual shall be made without GBIPA's consent which will have the effect of (i) adversely affecting any rights or remedies of GBIPA as against PHS or any Participating Physician; (ii) adding to, increasing or adversely affecting (as to GBIPA) any 2 obligations of GBIPA to PHS or any Participating Physician; or (iii) amending or modifying any sanctions, penalties or termination protocols of PHS as against any Participating Physician or GBIPA's process for sanctioning, penalizing or terminating any Participating Physician or appealing decisions with respect thereto. The Office Manual as in effect on the date hereof is incorporated herein by reference. As used herein, "Office Manual" means both the PHS and GBIPA sections of the Office Manual. 1.18 "Participating Physician" means a duly licensed medical doctor, osteopathic physician or oral surgeon who has entered into a currently effective Physician Agreement with GBIPA. 1.19 "Performance Standards" means standards used by PHS to measure performance of Participating Physicians, including without limitation, quality of care and service, compliance with utilization and referral protocols, billing procedures, claims adjudication, record keeping requirements and such other criteria reasonably believed by PHS to be appropriate, as such Performance Standards may be modified from time to time. Without limiting the foregoing, the measurement instrument currently in force is the Physician Practice Profile. 1.20 "Physician Agreement" means an agreement between GBIPA and Participating Physicians in the form of Exhibit B hereto, as such Exhibit B may be amended or modified from time to time. 1.21 "Primary Care Physician" means a Participating Physician chosen by a GBIPA Member to provide primary care services, including without limitation, physical examinations, preventive health services and continuity of care in the overall management of a Member's health care. 1.22 "Programs" means all programs of health insurance established, administered and/or maintained by PHS, Physicians Health Services of New York, Inc., or Physicians Health Services of New Jersey, Inc., or any company that owns or is owned by PHS, or is established, administered and/or maintained jointly by PHS and another payer now or at any time during the term of this Agreement, including, without limitation, fully funded plans, administrative services only plans, network access plans, small group plans, governmental plans (other than Medicare and Medicaid plans), gatekeeper model plans and exclusive provider organization plans. Programs does not include Medicare, Medicaid, dental or workers' compensation plans. 1.23 "Service Area" means the City of Bridgeport and the towns of Ansonia, Beacon Falls, Derby, Easton, Fairfield, Milford, Monroe, Oxford, Seymour, Shelton, Stratford, and Trumbull in the State of Connecticut. 1.24 "Subscriber Agreement" means an agreement between a Member and PHS pursuant to which a Member is entitled to receive Covered Services or reimbursement for Covered Services. 1.25 "Summary Plan Description" means a description of a plan for health benefits pursuant to an employer-sponsored benefits plan. 1.26 "Termination Date" is December 31, 1997 or such later date as provided in Section 9.1 of this Agreement. ARTICLE II - PHS RESPONSIBILITIES --------------------------------- 2.1 PHS Functions. PHS will perform, as requested by GBIPA, all ------------- administrative, marketing, enrollment, financial, utilization review, accounting, claims processing and payment, management information systems, quality assessment and other functions necessary or appropriate for the proper administration of the Programs and all services necessary or appropriate to Members, other than clinical services. Subject to Section 6.2 of this Agreement, GBIPA shall be responsible for tax accounting and accounting relating to GBIPA's internal functions. PHS will monitor the 3 performance of Participating Physicians and may take action based upon performance of a Participating Physician or refer such Participating Physician to GBIPA for disciplinary action. 2.2 Credentials. PHS shall be responsible for all credentialing and ----------- recredentialing of all Participating Physicians in accordance with PHS and GBIPA credentialing guidelines. PHS shall promptly notify GBIPA of any Participating Physicians known by PHS to have (i) retired or relocated from the Service Area; (ii) terminated participation in all PHS Programs; or (iii) terminated their status as a Participating Physician. PHS may terminate any Participating Physician from participation in all its Programs in accordance with the due process protocols set forth in the Office Manual. PHS shall develop and maintain grievance procedures for Members and Participating Physicians. 2.3 Office Manual. PHS shall maintain the Office Manual for the benefit of ------------- PHS, GBIPA and Participating Physicians, which shall set forth the programs, procedures, rules, regulations and protocols of GBIPA and PHS, relating to the delivery of Covered Services by Participating Physicians and participation of Participating Physicians as members of GBIPA. PHS shall furnish an Office Manual to GBIPA and each Participating Physician and shall send supplements or revisions to the Office Manual to GBIPA and Participating Physicians prior to the effective date thereof. PHS shall develop Performance Standards which it shall use to monitor performance of Participating Physicians. PHS shall promptly advise GBIPA (or the Advisory Committee if such Committee is assigned responsibility by GBIPA for performance reviews of Participating Physicians) if a Participating Physician fails to satisfy such Performance Standards. 2.4 PHS Programs. PHS shall develop and administer programs to enhance the ------------ delivery of Covered Services to Members, including programs to achieve more effective quality controls, cost and utilization efficiencies. PHS shall consult with the Advisory Committee in the development and implementation of programs and performance standards that would materially affect the manner in which participating Physicians deliver Covered Services to Members and shall use its best efforts to incorporate such recommendations of the Advisory Committee that would not adversely affect the administration of such programs, or PHS's financial condition or business operations. 2.5 Access to Information. PHS shall provide GBIPA, or its designees, computer --------------------- access at GBIPA's offices to information maintained by PHS relating to all collected utilization, unit cost, per member per month medical expense and related data associated with GBIPA Membership and the membership associated with GBIPA's pricing region (currently Western Connecticut). PHS agrees to work with GBIPA (or its designee) in the evaluation of this data in order to address trends in utilization, unit costs, and/or per member per month medical expenses. PHS will make such information available to GBIPA on a "CPT-4" code basis, and other basis as determined reasonably by GBIPA and PHS. PHS will provide GBIPA access to the data at no cost to GBIPA; provided, however, that PHS shall not be required to provide GBIPA such computer access if access to data would result in disclosure of information that is proprietary to PHS, information that relates to vendors other than GBIPA, or confidential information, the disclosure of which may result in a breach of a confidentiality agreement between PHS and another party. Special reports will be provided to GBIPA without charge if the parties agree that such reports will assist GBIPA in lowering its health care costs, or the utilization of Participating Physicians. 2.6 Advisory Committee. GBIPA shall participate in the Advisory Committee and ------------------ such other IPA committees, composed of representatives of IPAs, PHOs or individual physicians contracting with PHS in the State of Connecticut, that have been formed or may be formed for reasons of establishing reimbursement schedules, performing utilization review and other issues relating to the PHS network. The Advisory Committee and such other committees shall have proportional representation among all IPAs, PHOs or individual physicians represented therein in accordance with commercial membership, inclusive of fully insured and administrative services only members, by IPA in relation to PHS commercial membership in the State of Connecticut. The President of GBIPA shall serve as an ex officio member of ---------- the Advisory Committee and such 4 other Committees, which appointment shall not be considered part of the proportional representation described in the preceding sentence. The Advisory Committee may not be dissolved without the consent of all entities that have representatives on such Committee. ARTICLE III - GBIPA RESPONSIBILITIES ------------------------------------ 3.1 GBIPA Services. PHS hereby retains GBIPA to render Covered Services from -------------- the Effective Date to the Termination Date to Members through Participating Physicians and where appropriate, Consultant Physicians. Participating Physicians, and not GBIPA, shall be solely responsible for all medical advice provided to and treatment rendered by Participating Physicians and Consultant Physicians. GBIPA represents that it is authorized to act as the agent for each Participating Physician for purposes of entering into this Agreement. GBIPA shall not be responsible for the provision of Covered Services that are (i) Contracted Services; (ii) inpatient hospital services by employees or staff of a hospital; (iii) Covered Services rendered to Members by non-GBIPA participating Physicians. All Covered Services rendered by Participating Physicians shall be subject to the terms and conditions of this Agreement and the Physician Agreement. 3.2 Quality of Medical Care. GBIPA shall use its best efforts to ensure that ----------------------- Covered Services provided to Members by Participating Physicians are of a quality of medical care that is in conformity with accepted medical care and surgical practices of the American Medical Association and the practice prevailing in the Service Area. 3.3 Availability of Services. GBIPA shall provide for the availability of ------------------------ Covered Services within the Service Area at such times and in such locations as shall be required to satisfy the needs of GBIPA Members and as shall be necessary to enable GBIPA to discharge its obligations hereunder. PHS will consult with the Advisory Committee with respect to future actions to be taken to permit compliance as set forth in the preceding sentence. 3.4 Medical Advice. GBIPA and Participating Physicians shall be solely -------------- responsible for all medical advice and treatment rendered to Members receiving medical care from Participating Physicians and for the performance of Covered Services. 3.5 Training Each Participating Physician will have the training and ---------- experience in the field in which they perform Covered Services. GBIPA agrees that each Participating Physician shall enter into a Physician Agreement with GBIPA and GBIPA will take such further acts as necessary or desirable to amend the Physician Agreement upon reasonable request of PHS. 3.6 PHS Rules. GBIPA shall comply with PHS programs, rules and protocols --------- (collectively, "Rules") adopted by PHS in furtherance of Article II hereof; provided, however, that no amendments or modifications to the Rules shall be made without GBIPA's consent that will have the effect of (i) adversely affecting any rights or remedies of GBIPA as against PHS or any Participating Physician; (ii) adding to, increasing or adversely affecting (as to GBIPA) any obligations of GBIPA to PHS to any Participating Physician; or (iii) amending or modifying any sanctions, penalties or termination protocols of PHS or against any Participating Physician or the process for sanctioning, penalizing or terminating any Participating Physician from PHS Programs or appealing decisions or terminating any Participating Physician from PHS Programs or appealing the decisions with respect thereto. GBIPA shall use its best efforts to ensure that Participating Physicians comply with all policies and procedures as set forth in the Office Manual and all applicable law. 3.7 Adequacy of Network. GBIPA shall at all times maintain a sufficient number ------------------- of Participating Physicians to provide Covered Services hereunder. If PHS believes at any time that the number of Participating Physicians, taken as a whole or within any specialty, including without limitation, 5 primary care, is insufficient, it shall consult with GBIPA and PHS and GBIPA shall jointly develop a plan to correct such insufficiency as expeditiously as possible. Notwithstanding the foregoing, in the event that PHS reasonably and in good faith determines that there is an unmet need and/or insufficient delivery system capacity for a specific physician service and has identified one or more physicians that satisfy its credentialing criteria, PHS may contract directly with such physician if GBIPA does not agree, after notice from PHS, to admit the physician as a Participating Physician. 3.8 Hold Harmless. GBIPA agrees that it shall look solely to PHS for payment ------------- for Covered Services provided to Members by Participating Physicians under the Plans. GBIPA further agrees that in no event, including but not limited to non-payment by PHS or GBIPA, PHS or GBIPA insolvency, or breach of this Agreement shall GBIPA or Participating Physicians or Consultant Physicians charge, collect a deposit from, seek compensation, remuneration or reimbursement from or have any recourse against a Member, other than PHS acting on a Member's behalf, for Covered Services rendered pursuant to this Agreement. This provision shall not prohibit collection by Participating Physicians of copayments or supplemental charges made in accordance with Programs. This Section 3.8 shall survive termination of this Agreement regardless of the cause giving rise to termination and shall be construed to be for the benefit of Members. 3.9 Delegation. GBIPA and PHS agree that GBIPA may delegate to PHS the ---------- performance of such of its responsibilities as GBIPA may determine from time to time. 3.10 Bonus Pool. PHS shall establish a bonus pool in connection with its ---------- gatekeeper model plan equal to 15% of the annual aggregate capitation payments to Participating Physicians who receive capitation payments in respect of IPA Members who have selected a Participating Physician as their Primary Care Physician in such Program. Interest earnings on amounts held in the bonus pool shall be the property of PHS and neither GBIPA nor Participating Physicians shall assert any claims to such amounts. Amounts in the bonus pool shall be distributed by PHS to Eligible Participating Physicians no more than 75 days following the end of each Health Care Year. If PHS fails to distribute the bonus pool within 15 days following written notice by GBIPA that PHS is in default of the distribution provisions of the preceding sentence. PHS shall pay interest for each day elapsed thereafter on amounts owed as bonus pool distributions at a rate equal to the Citibank prime rate. 3.11 Administrative Services. GBIPA shall be liable for its administrative ----------------------- costs, including the costs of all insurance deemed necessary or advisable to it; provided, however, that PHS shall provide to GBIPA, upon GBIPA's request and without additional charge, administrative support generally provided as of the date hereof and administrative support similar in scope to the administrative support given by PHS to other provider organizations with which PHS contracts for health care services. Additional support services shall be provided by PHS upon GBIPA's request. GBIPA shall pay PHS the reasonable out of pocket cost of providing such services and no services shall be performed without GBIPA's prior approval of the compensation arrangements. ARTICLE IV - PROGRAMS --------------------- 4.1 Program Design and Introduction. PHS shall have sole authority over ------------------------------- matters relating to Program design, participation of a Participating Physician in PHS Programs, introduction of new Programs and modification or elimination of existing Programs, including without limitation, utilization, referral, quality assessment, reimbursement and reimbursement protocols relating to such Programs. PHS shall consult with the Advisory Committee in the material design features of Programs and shall use its best efforts to incorporate the recommendations of the Advisory Committee into final Program design as are reasonably necessary or desirable in the Advisory Committee's view and that do not adversely affect the administration, financial or operational aspects of such Program. 6 4.2 Participation in Programs. Except (i) as waived by PHS, which waiver PHS ------------------------- shall not unreasonably withhold or delay and (ii) for Participating Physicians who did not elect to participate in the Passport Program at the time of its inception, Participating Physicians are required to participate in all Programs and PHS may not exclude any Participating Physician except as set forth below. GBIPA agrees to sanction or terminate in accordance with the Physician Agreement, Office Manual, or otherwise, any Participating Physician who notifies GBIPA or PHS that he or she will not participate in a Program or who does not accept Members enrolled in one or more Programs. Notwithstanding the foregoing, PHS may select, after consultation with GBIPA, a subset of Participating Providers for governmental Programs if, in its reasonable discretion, PHS believes that fewer than all Participating Providers should be permitted to participate in a such governmental Program, or upon GBIPA's consent, which consent shall not be reasonably withheld for all other Programs, if PHS is requested to reduce the size of its panel of participating Providers for an employer group of 1,000 or more eligible Members. Notwithstanding the foregoing, PHS may terminate a Participating Physician from participation in all Programs in accordance with the due process protocols set forth in the Office Manual. ARTICLE V - COMPENSATION ------------------------ 5.1 Capitation System. Except as set forth in Section 5.6 hereof or except as ----------------- specifically provided and agreed to by GBIPA in connection with certain Programs, PHS shall allocate to GBIPA a monthly capitation from which GBIPA shall compensate Participating Physicians, Consultants (in case of Covered Services rendered to GBIPA Members), and also, in cases of Medical Emergency or upon prior approval by PHS, non-Participating Physicians and providers, for Covered Services which are rendered to GBIPA Members except (i) Covered Services pursuant to Programs which are paid directly by the employer; and (ii) Covered Services pursuant to Programs for which PHS pays participating Physicians directly (through capitation, fee for service or any other payment methodology). GBIPA agrees that, together with PHS, and upon PHS's request, it will consider special promotional capitation arrangements for employer groups of 1,000 or more eligible members. Except as otherwise provided herein, it is understood and agreed that GBIPA shall be solely responsible for compensating the foregoing health care providers from the capitation payments allocated to it for such Covered Services, and GBIPA shall not look to PHS for any additional compensation. The capitation payments payable hereunder are set forth in Exhibit C. (a) GBIPA shall not be liable for the costs of rendering Contracted Services or for Covered Services for which PHS pays Participating Physicians directly, which Services shall be paid by the Contracted Service providers or PHS, as the case may be, directly and not charged against capitation payments held in the risk sharing fund. 5.2 Payments Administered by PHS. The amount allocated as the monthly ---------------------------- capitation for Covered Services pursuant to Section 5.1 shall be held and administered by PHS for the purpose of enabling GBIPA to discharge its payment obligations as set forth in Section 5.1. PHS shall act as GBIPA's agent for purposes of making all payments and distributions to participating Physician and Consultant Physicians (in cases of Covered Services rendered to GBIPA Members). GBIPA agrees that the payments made by PHS as GBIPA's agent hereunder shall be deducted from amounts allocated to GBIPA as capitation payments. Payments shall be made irrespective of whether actual payments made pursuant to this paragraph exceed the amounts allocated to GBIPA as capitation payments. Subject to Section 5.4, payments shall be made in accordance with the following: (a) Compensation for Participating Physicians and Consultants shall be calculated on the basis of the lesser of (i) the Physician's or Consultant Physician's billed charges, and (ii) the reimbursement schedules agreed to by PHS and GBIPA (through the reimbursement committee) from time to time or an actuarially determined capitation amount. The 7 administrative guidelines for reimbursement of fees shall be maintained by PHS. GBIPA agrees that the aggregate fees for 1996 shall not exceed the aggregate fees that were payable in 1995. (b) Participating Physicians shall be paid within two (2) months of the receipt by PHS of a properly submitted bill for Covered Services, except for claim payments subject to claims recovery through coordination of benefits (C.O.B.). Participating Physicians shall only be paid for bills for Covered Services received by PHS within ninety (90) days of the date of service, unless such bills have been subject to claims recovery through C.O.B., basic reparation of benefits under an automobile no-fault policy, worker's compensation or subrogation activity. For Covered Services involving C.O.B., GBIPA shall be liable to pay Participating Physicians only for bills received within twelve (12) months of the date of service. Participating Physicians may not bill Members for bills for Covered Services which are not submitted in accordance with this clause (b). 5.3 Withhold and Reserve Provision. PHS may establish a withhold provision for ------------------------------ a percentage of the compensation payable to GBIPA pursuant to Section 5.1 on behalf of Participating Physicians for Covered Services, to be held in a risk fund, it being understood and agreed that the amounts retained shall be applied to offset the amounts by which the actual costs of Covered Services rendered to GBIPA Members exceed budgeted amounts for such Health Care Year. PHS may not change the withhold amounts without GBIPA's consent; provided, however, that if overutilization is projected to result in deficit balances in the withhold account at the end of the Health Care Year, GBIPA and PHS shall adjust the withhold amounts to correct the anticipated deficit in the withhold amount. Actual withhold amounts may vary according to category of services provided, Program and Participating Physician, as determined by GBIPA; provided, however, that the withhold may not be reduced below 15%. The withhold amount shall be initially established at 20%, but may be reduced to no less than 15% upon request of GBIPA. PHS and GBIPA shall, at regular intervals, review the utilization and costs of such services. Amounts withheld or reserved in the risk funds shall be allocated and distributed at the end of each Health Care Year or earlier as reasonably agreed to by the parties. Amounts that remain in the risk sharing fund due to the withhold provision at the end of each Health Care Year shall be made available to GBIPA not more than 75 days following the end of each Health Care Year for distribution to Participating Physicians. If PHS fails to distribute the withhold amount within 15 days following written notice by GBIPA that PHS is in default of the distribution provisions of the preceding sentence, PHS shall pay interest for each day elapsed thereafter on amounts owed as withhold distributions at a rate equal to the Citibank prime rate. Amounts remaining in the withhold fund at the end of a Health Care Year shall be distributed in accordance with GBIPA's instructions, potentially including a variable risk return in 1996. Amounts earned on funds held in the withhold account shall be the property of PHS and neither GBIPA nor Participating Physicians shall assert any claims to such amounts. Amounts payable to Participating Physicians pursuant to Section 5.6 (Self Funded Payers, Direct Payments) shall not be subject to this Section 5.4. Commencing on January 1, 1997, PHS shall, at GBIPA's request, implement a variable withhold for payments made to individual Participating Physicians pursuant to Section 5.3. The percent level of withhold for specific programs and the methodology for a variable withhold program shall be subject to GBIPA's consent. 5.4 Excess Payment. If PHS makes Excess Payments, GBIPA shall be liable to PHS -------------- for the percent of such Excess Payments as set forth on Exhibit C and shall repay such amounts within 30 days after notice from PHS of the extent of the Excess Payment. GBIPA has the right to increase the percentage of compensation withheld to such levels GBIPA may deem necessary to preserve GBIPA's fiscal integrity. 5.5 Intra-Network Payments. PHS shall make payments as GBIPA's agent from ---------------------- capitation amounts allocated to GBIPA for Covered Services rendered to GBIPA Members by Non-GBIPA Participating 8 Physicians, Consultant Physicians and other providers in PHS's network of providers. PHS will pay Participating Physicians for Covered Services rendered to Members who are not GBIPA Members in accordance with Section 5.2; such payments on behalf of Members who are not GBIPA Members shall not be charged against the capitation amount allocated to GBIPA. All payments made hereunder will be subject to the withhold provisions set forth in Section 5.3. 5.6 Self Funded Payers; Direct Payments. For Programs with respect to which an ----------------------------------- employer group self-funds its claims expense or Programs in which PHS elects to pay Participating Physicians on a fee for service basis without regard to capitation, PHS shall compensate Participating Physicians in accordance with the fee schedule then in effect. For Programs in which Participating Physicians are capitated directly, PHS shall compensate such Participating Physicians in accordance with Exhibit C. 5.7 Forms; Cooperation. ------------------ (a) GBIPA shall arrange for Participating Physicians to bill PHS for Covered Services provided to Members on forms specified by PHS. These forms shall specify the Covered Services provided and shall include all of the statistical and descriptive medical, diagnostic and patient data together with identifying information required by PHS. (b) GBIPA shall arrange for Participating Physicians to cooperate with and participate in PHS programs for coordination of benefits with other health care plans or any other permitted methods of third party recovery. Such programs include, but are not limited to, the following: (i) Assisting Members with required forms. (ii) Where duplicate coverage exists and the Program appears to be secondary coverage, notifying PHS and for ninety (90) days seeking payment from the other health care plan, before seeking payment from PHS or self funded payer. (iii) Where other plan(s) must pay their benefits before the benefits of the applicable Program, accepting as PHS's payment, the lesser of the payment determined in accordance with Section 5.2 (a) and the amount equal to the provider's usual charges for Covered Services, reduced by amounts paid by other plan(s) (or to be paid in the case of Medicare, Worker's Compensation Law, occupational disease or any similar law). 5.8 Coverage Questions. PHS shall make timely payment to Participating ------------------ Physicians as provided in Section 5.3 unless prior to the expiration of the period set forth therein PHS notifies the Participating Physician in writing that additional information is required or that a coverage question (including without limitation, a question relating to coordination of benefits or pre-existing conditions) exists. Such notice shall specify any additional information required and shall describe the nature of the coverage question. PHS shall endeavor in good faith to promptly resolve coverage questions, and shall make payment, if appropriate, promptly after coverage questions are resolved but in no case later than ninety (90) days after a submission of all required information. In the case of requests for additional information, the claims shall be paid within the thirty (30) days of receipt of all requested information. 5.9 Subrogation. In the event a Member is injured by an act or omission of a ----------- participating Physician in connection with the rendering of Covered Services hereunder, PHS may elect to pursue its subrogation rights, if any, against the potentially responsible participating Physician. PHS shall make payment to the Physician in accordance with this Agreement while pursuing those rights. 9 5.10 Administrative Fee. PHS shall pay GBIPA an annual administrative fee, ------------------ payable out of the payments made pursuant to Section 5.1 hereof, in monthly installments due no later than the fifth working day of each month. GBIPA shall endeavor to establish the annual administrative fee prior to the commencement of a Health Care Year, and shall notify PHS of the amounts of each monthly payment; provided, however, that the fees may be established and/or changed in the GBIPA Board of Directors' sole discretion no less than 30 days prior to the effective date of the change. The annual administrative fee shall be such amount as determined by GBIPA to be reasonable compensation for its administrative services. ARTICLE VI - RECORDS --------------------- 6.1. PHS Members. PHS shall maintain such records and establish and adhere to ----------- such procedures as shall be reasonably required to ascertain the number and identity of Members, which information shall be provided to GBIPA upon its request. GBIPA shall cooperate with PHS in connection with such records and procedures to the end of enabling the parties to accomplish with maximum efficiency and minimum administrative cost, determinations of eligibility for coverage and the amount of compensation payable to GBIPA. 6.2. Accounting. PHS shall maintain, in accordance with generally accepted ---------- accounting practices, such financial and accounting records as shall be necessary, appropriate or convenient for the proper administration of this Agreement. 6.3. Statistical Records. PHS and GBIPA shall jointly maintain such statistical ------------------- records with respect to Covered Services, including the utilization thereof, as shall be necessary, appropriate, or convenient for the proper administration of this Agreement. 6.4. Compliance With Law. GBIPA and PHS agree to maintain their records in ------------------- accordance with applicable federal and state laws and regulations and further agree to participate as necessary in required regulatory examinations. 6.5. Medical Records. GBIPA shall arrange for Participating Physicians to --------------- maintain adequate medical records for Members. GBIPA and PHS shall make reasonably available the medical records, subject to all applicable state and federal privacy and confidentiality requirements, to each other upon request without cost in order to determine that the content of such report and the quality of care rendered are acceptable, as well as for peer review, grievance review recredentialing or any other reasonably necessary purposes. 6.6. Confidentiality. PHS and GBIPA shall ensure confidentiality of Members' --------------- health and medical records. GBIPA and PHS each agree that all records, reports, data, data formats, financial information and other documents or information pertaining to the other or any related company which are provided, made available, or otherwise disclosed to the other pursuant to this Agreement or the relationship between PHS and GBIPA, are confidential, and may not be disclosed to any person or entity for any reason at any time during or subsequent to the term of this Agreement, except for their attorneys, accountants, or other representatives and except as required by law. Anything to the contrary contained in the foregoing notwithstanding, any information which has entered the public domain, except solely by a party's violation of this provision, shall not be deemed to be confidential hereunder. ARTICLE VII - LEGAL RELATIONSHIP BETWEEN PHS AND GBIPA ------------------------------------------------------ Independent Contractors. The relationship of the parties is that of independent - ----------------------- contractors. None of the provisions of this Agreement are intended to create nor shall be construed to create a partnership, or joint venture relationship between the parties. Except as to payment procedures for which PHS shall act as GBIPA's 10 agent hereunder, neither party hereto nor any of their respective officers, members, employees or physicians shall be deemed to be the agent, employee, or representative of the other party. ARTICLE VIII - INDEMNIFICATION AND INSURANCE -------------------------------------------- 8.1. Physician Insurance. GBIPA shall require all of its Participating ------------------- Physicians and all Consultant Physicians to whom a Member is referred by a Participating Physicians to maintain professional liability insurance acceptable to PHS in an amount not less than $1,000,000 per incident and $3,000,000 aggregate to cover all demands, claims and expenses of all kinds that may result or arise out of any alleged malpractice or neglect caused or alleged to have been caused by such individuals or any of their agents, employees, or representatives in the performance or omissions of any act relating to this Agreement. 8.2. Cooperative Defense. The parties recognize that, during the term of this ------------------- Agreement and for some period thereafter, certain risk management issues, legal issues, claims or actions may arise that involve or could potentially involve the parties and their respective employees and agents. The parties further recognize the importance of cooperating with each other in good faith when such issues, claims or actions arise to the extent that such cooperation does not violate any applicable laws, cause breach of any duties created by any policies of insurance, or otherwise compromise the confidentiality of communications of information regarding the issues, claims or actions. The parties shall cooperate in good faith, using their best efforts, to address such risk management and claims handling issues in a manner that strongly encourages full cooperation between the parties. Nothing in this Section 8.2 shall affect any cross or counter-claims that may be available to the parties hereto. ARTICLE IX- TERM OF AGREEMENT ----------------------------- 9.1. Term. The term of this Agreement shall be for a period of one year ---- commencing on January 1, 1996, and shall continue until and through December 31, 1997. The term shall automatically be extended for subsequent twelve month periods unless at least 120 days and not more than 150 days in advance of the Termination Date or such subsequent anniversary date, either party hereto shall notify the other party of its intention to modify or terminate the Agreement; provided, however, that such action shall not release GBIPA of its obligations imposed with respect to Members then receiving treatment. ARTICLE X - MISCELLANEOUS ------------------------- 10.1. Successors. This Agreement shall be binding upon and inure to the ---------- benefit of the parties hereto, their respective heirs, successors and assigns, but may not be assigned by either party without the prior written consent of the other party, provided, however that a succession to all of the assets or equity interests of any party shall not be deemed to be an assignment in violation hereof. 10.2. Delegation. Neither GBIPA nor PHS shall, in a manner inconsistent with ---------- this Agreement, subcontract or otherwise delegate its duties under this Agreement unless the other party so approves by written consent. All contracts by GBIPA with subcontractors shall be approved in writing by PHS prior to execution thereof and copies shall be available to PHS upon its request. 10.3. Headings. The headings of the various Sections of the Agreement are -------- inserted merely for the purpose of convenience and do not, expressly or by implication, limit or define or extend the specific terms of the Sections so designated. 10.4. Arbitration. In the event any dispute shall arise with regard to the ----------- performance or interpretations of any of the terms of this Agreement, all matters in controversy shall be submitted to a Board of Arbitrators consisting of three (3) persons, under the rules and regulations of the American Arbitration Association in Bridgeport, Connecticut. Both parties expressly covenant and agree to be 11 bound by the decision of the arbitrators and accept any decision by a majority of the arbitrators as a final determination of the matter in dispute. 10.5. Enforceability. The validity, enforceability and interpretation of any -------------- of the clauses of this Agreement shall be determined and governed by the laws of the State of Connecticut and 42 U.S.C. 300e, et seq., and any -- --- amendments thereto. 10.6. Medical Ethics. GBIPA and PHS agree that the administration of PHS's -------------- program and this Agreement shall at all times be compatible with sound principles of medical ethics. 10.7. Entire Agreement. This Agreement contains all the terms and conditions ---------------- agreed upon by the parties hereto, and on or after the Effective Date, supersedes all other agreements, oral and otherwise, regarding the subject matter of the parties hereto. 10.8. Amendment. This Agreement may be amended at any time by mutual agreement --------- of the parties, provided that before any amendment shall be operative and valid, it shall be writing and signed by PHS and GBIPA. 10.9. Interference with Contract. If GBIPA gives written notice to PHS within -------------------------- three months prior to the termination of this Agreement that GBIPA does not intend to renew this Agreement after its expiration, then GBIPA may enter into another contract with any health maintenance organization, preferred provider organization or similar health care service plan or insurance program, which contract shall be effective no earlier than the expiration date for this Agreement. In such case, all existing rights and obligations of the parties hereto with respect to this Agreement through and including the expiration date hereof shall remain in effect. 10.10. Notices. Any notice required to be given pursuant to the terms and ------- provisions hereto shall be in writing and shall be sent by certified mail, return receipt requested, prepaid, to PHS at: PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC. 120 Hawley Lane Trumbull, Connecticut 06611-5313 GBIPA at: GREATER BRIDGEPORT INDIVIDUAL PRACTICE ASSOCIATION, INC. 3180 Main Street Bridgeport, CT 06606 10.11 Exclusivity. ----------- (a) Except as provided in Sections 10.11(b) and (c) below and in Section 3.8 hereof, (i) GBIPA agrees that neither it, not any subsidiary of GBIPA, shall contract with any other health maintenance organization or preferred provider organization or any other entity that competes or intends to compete with PHS in the Service Area, and (ii) PHS agrees that neither it, nor any subsidiary of PHS shall contract with any individual Participating Physician or any individual practice association (other than GBIPA), physician hospital organization, medical service organization or other organization providing physician services for Covered Services in the Service Area relating to commercial managed care products, including administrative services only and point of service products, or other non- governmental managed care products. Notwithstanding the foregoing, either party may contract with another party during the 120 day period immediately preceding the Termination Date, unless the parties have entered into a new agreement for a subsequent term. 12 (b) GBIPA shall terminate any Participating Physicians whose principal office is located outside the Service Area upon PHS's request and in PHS's sole discretion. (c) PHS may contract directly or indirectly with (i) health care providers whose principal office is outside the Service Area; and (ii) health care providers and entities who have satellite offices in the Service Area but whose principal office is outside the Service Area, including without limitation, networks that have a geographic presence both inside and outside the Service Area, but whose presence is substantially outside the Service Area. 10.12 Compliance with Law; Policy Changes. During the term of this Agreement, ----------------------------------- PHS and GBIPA agree to incorporate any changes required by law, regulation or policy of NCQA. To the extent additional national accreditation bodies (such as JCAH) develop their own accreditation requirements, and these requirements have a material impact on the ability of PHS to pursue new business or retain current business, GBIPA and PHS agree to work together in developing additional policy changes. GBIPA shall take all acts or actions necessary to permit compliance by PHS with applicable law as well as accreditation programs conducted by the NCQA, or another entity performing similar functions. PHS will consult with the Advisory Committee with respect to future actions to be taken to permit compliance as set forth in the preceding sentence. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the month and year above set forth. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC. By: ___________________ GREATER BRIDGEPORT INDIVIDUAL PRACTICE ASSOCIATION, INC. By: ___________________ 13 EXHIBIT A --------- 1. The following shall be considered as Contracted Services: Audiology All Rehabilitative Services Immunizations and Injectables Drug and Alcohol Rehabilitative Services General Laboratory procedures and Cytology Durable Medical Equipment Oxygen Prosthetic Devices Ambulance Podiatry Chiropractic Services Optometric Services Prescription Drugs 14 EX-10.(U) 12 IPA SERVICE AGREEMENT - FAIRFIELD INDIVIDUAL Exhibit 10 (u) IPA SERVICE AGREEMENT This IPA Service Agreement is made and entered into as of this 1st day of January, 1997 by and between PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC., a Connecticut corporation, and PHS INSURANCE OF CONNECTICUT, INC., a Connecticut corporation, (together, "PHS"), on the one hand, and FAIRFIELD INDIVIDUAL PRACTICE ASSOCIATION, INC. ("IPA"), on the other hand; WHEREAS, PHS arranges for the provision of Covered Services (as defined below) to Members (as defined below); WHEREAS, IPA is an individual practice association which has entered into contracts with physicians and other health care providers to arrange for and facilitate the provision and delivery of Covered Services (as defined below) to Members; WHEREAS, PHS and IPA mutually desire to preserve and enhance patient dignity; NOW, THEREFORE, in consideration of the premises and other mutual covenants herein contained and other good and valuable considerations, it is mutually agreed as follows: ARTICLE 1. DEFINITIONS ----------------------- 1.1 "Affiliate" means any company controlling, controlled by or under common control with PHS. 1.2 "Consultant" means a physician (other than a Participating Physician and a Non-IPA Participating Physician) (i) to whom a Member has been referred or who has been asked to provide Covered Services on behalf of a Member by a Participating Physician or (ii) who provides Covered Services to IPA members pursuant to the out of network benefits of a Program. 1.3 "Corridor" means the amount equal to 5% greater or less than budgeted amounts established pursuant to Section 5.1 hereof. 1.4 "Covered Services" means those Medically Necessary services and benefits that Members are entitled to receive under a Program. As used herein, Covered Services excludes PHS Responsible Services. 1.5 "Emergency" means the accidental injury or the unexpected onset of a serious illness, which has the potential for causing immediate disability or death or requiring immediate alleviation of pain and discomfort. The determination of whether Emergency services are Covered Services rests exclusively with the Medical Director. 1.6 "Excess Payment" means amounts by which actual payments made by PHS on behalf of IPA pursuant to Section 5.3 exceed the amounts budgeted therefor in accordance with Section 5.1 hereof (after giving effect to any applicable Corridors). 1.7 "Funds" means each of the funds established pursuant to Section 5.2 hereof. 1.8 "IPA Member" means Members who have selected or who have been assigned a Participating Physician as their Primary Care Physician. 1 1.9 "IPA Advisory Committee" means a committee comprised of representatives of IPA, and such other individual practice associations or physician hospital organizations with which PHS contracts for the provision of Covered Services, which elect to have representation on the IPA Advisory Committee. 1.10 "Medical Director" means one or more physicians or other persons appointed by PHS to be responsible for, among other things, administering PHS's medical affairs and for serving as medical liaison to Participating Physicians. 1.11 "Medically Necessary" means services or supplies which are necessary and appropriate for the treatment of a Member's illness or injury or for the preventive care of a Member, according to accepted standards of medical practice prevailing at the time of treatment. 1.12 "Member" means (i) any person who has entered into a contract with PHS, or any Affiliate, for the provision of Covered Services, and his or her eligible dependents; (ii) any person and his or her eligible dependents, who is offered health care services through a plan sponsored by his or her employer that is administered by PHS, or any Affiliate; and (iii) any person who participates in a Program for a government sponsored plan of health insurance. 1.13 "Non-IPA Participating Providers" means a health care provider with whom PHS directly or indirectly contracts for the provision of Covered Services (other than through IPA). 1.14 "Office Manual" shall mean the PHS/IPA Office Manual describing, among other things, IPA's rules, regulations, protocols and procedures; reimbursement schedules; termination protocols and appeals procedures; and PHS's billing procedures, referrals and authorization policies, utilization review and quality assessment guidelines, coding guidelines and benefit summaries, as such Office Manual is revised from time to time; provided, however, that no amendments or modifications to the Office Manual shall be made without IPA's consent which will have the effect of (i) adversely affecting any rights or remedies of IPA as against PHS or any Participating Physician; (ii) adding to, increasing or adversely affecting (as to IPA) any obligations of IPA to PHS or any Participating Physician; or (iii) amending or modifying any sanctions, penalties or termination protocols of PHS as against any Participating Physician or IPA's process for sanctioning, penalizing or terminating any Participating Physician or appealing decisions with respect thereto. The Office Manual as in effect on the date hereof is incorporated herein by reference. As used herein, "Office Manual" means both the PHS and IPA sections of the Office Manual. 1.15 "Participating Physician" means a duly licensed medical doctor, osteopathic physician or oral surgeon who has entered into a currently effective Physician Agreement with IPA. 1.16 "Performance Standards" means standards used by PHS to measure performance of Participating Physicians, including without limitation, quality of care and service, compliance with utilization and referral protocols, billing procedures, claims adjudication, record keeping requirements and such other criteria reasonably believed by PHS to be appropriate, as such Performance Standards may be modified from time to time. 1.17 "PHS Responsible Services" means other Covered Services listed in Exhibit A for which PHS assumes responsibility for payment, as such Exhibit A may be modified from time to time in accordance with Section 10.8 hereof. 2 1.18 "Physician Agreement" means an agreement between IPA and Participating Physicians in the form of Exhibit B hereto, as such Exhibit B may be amended or modified from time to time in accordance with Section 10.8 hereof. 1.19 "Primary Care Physician" means a Participating Physician who provides primary care services to Members, initiates referrals for non-primary care services and is responsible for maintaining its continuity of care provided to a Member. A Primary Care Physician may be a family practitioner, internist or pediatrician. 1.20 "Programs" means all programs of health insurance established, administered and/or maintained by PHS, or any Affiliate, or established, administered and/or maintained jointly by PHS, or any Affiliate, and another payer now or at any time during the term of this Agreement, including, without limitation, fully funded plans, administrative services only plans, point of service plans, network access plans, Medicare cost plans, small group plans, governmental plans (other than Medicare risk and Medicaid), gatekeeper model plans and exclusive provider organization plans, as such Programs are modified from time to time in PHS's sole discretion. For purposes of this Agreement, Programs includes all Programs marketed jointly by PHS and The Guardian Life Insurance Company of America. 1.24 "Referral" means written authorization issued by the Primary Care Physician prior to the Member's use of a specialist. 1.25 "Surplus Amounts" means amounts by which actual payments made by PHS on behalf of IPA pursuant to Section 5.3 are less than amounts budgeted therefor in accordance with Section 5.1 (after giving effect to any applicable Corridors). ARTICLE II - PHS RESPONSIBILITIES --------------------------------- 2.1 Administrative Function. PHS will perform, as requested by IPA, all ----------------------- administrative, marketing, enrollment, financial, utilization review, accounting, claims processing and payment, management information systems, member grievance, quality assessment and other functions necessary or appropriate for the proper administration of the Programs and the provision of Covered Services necessary or appropriate to Members, other than clinical services. 2.2 Credentialing. PHS shall be responsible for all credentialing and ------------- recredentialing of all Participating Physicians. Credentialing shall be coordinated with appropriate IPA committees. 2.3 Office Manual. PHS shall maintain an Office Manual for the benefit of PHS, ------------- IPA and Participating Physicians, which shall set forth the programs, procedures, rules, regulations and protocols of IPA and PHS, relating to the delivery of Covered Services by Participating Physicians and participation of Participating Physicians as members of IPA. PHS shall furnish an Office Manual to each Participating Physician and shall send supplements or revisions to the Office Manual to Participating Physicians prior to the effective date thereof. PHS shall develop Performance Standards which it shall use to monitor performance of Participating Physicians. PHS shall promptly advise IPA (or the IPA Advisory Committee if such Committee is assigned responsibility by IPA for performance reviews of Participating Physicians) if a Participating Physician fails to satisfy such Performance Standards. If any provisions in the Office Manual with respect to Participating Physicians conflicts with any provisions of the Physician Agreement, then the provisions of the Physician Agreement shall control. 2.4 Performance Standards. PHS shall develop Performance Standards which it --------------------- shall use to monitor performance of Participating Physicians. PHS shall promptly advise IPA (or the IPA Advisory 3 Committee if such Committee is assigned responsibility by IPA for performance reviews of Participating Physicians) if a Participating Physician fails to satisfy such Performance Standards. 2.5 Data Reporting. PHS shall provide IPA with quarterly utilization reports. -------------- The utilization review performed by PHS shall be consistent with utilization reviews performed for all other health care providers participating in PHS's network of providers. 2.6 Eligibility Verification. PHS shall make available to the Participating ------------------------ Providers electronic eligibility verification of current Members enrolled in PHS. PHS shall use its best efforts to assure that its information is current; provided, however, that in the event a Member has ceased to be eligible for benefits under a PHS Program at the time services are rendered by a Participating Physician, neither IPA nor PHS shall be liable for payment in respect of such services. 2.7 IPA Advisory Committee. PHS shall develop and administer programs to ---------------------- enhance the delivery of Covered Services to Members, including programs to achieve more effective quality controls, cost and utilization efficiencies. PHS shall consult with the IPA Advisory Committee in the development and implementation of programs that would materially affect the manner in which Participating Physicians deliver Covered Services to Members and shall use its best efforts to incorporate such recommendations of the IPA Advisory Committee that would not adversely affect the administration of such programs, or PHS's financial condition or business operations. ARTICLE III - IPA RESPONSIBILITIES ---------------------------------- 3.1 Services. PHS hereby retains IPA to arrange for the provision of Medically -------- Necessary Covered Services to Members through Participating Physicians and where appropriate, Consultants and other health care professionals, in accordance with PHS's Programs and applicable law. Participating Physicians shall be responsible for determining Member eligibility and benefit verification prior to performing Covered Services, and in the case of a Program for which a Referral or other authorization is required prior to performing Covered Services, for obtaining such Referral or other authorization or, in the event that the Member elects not to obtain such Referral or authorization, for informing the Member that failure to obtain such Referral or authorization may result in co-payments, deductibles, or in certain instances, denial of such services as Covered Services under the benefit provisions of the Member's Program. Failure to inform the Member, or the Member's representatives, that certain services are beyond the scope or duration of Covered Services, and obtain a written waiver, will result in IPA and Participating Physician being unable to bill the Member or PHS. All Covered Services rendered by Participating Physicians shall be subject to the terms and conditions of this Agreement and the Physician Agreement. 3.2 Standards of Care. The Physician Agreement shall require Participating ----------------- Providers to render all Covered Services to Members consistent with the quality of medical care that is in conformity with accepted medical care and surgical practices of the American Medical Association and the practice prevailing in IPA's service area. Each Participating Physician will have the training and experience in the field in which they perform Covered Services. 3.3 Further Acts. IPA shall take all acts or actions necessary within the ------------ scope of this Agreement to permit compliance by PHS with applicable law as well as accreditation programs conducted by the NCQA, or another entity performing similar functions. 3.4 Medical Advice. IPA and Participating Physicians shall be solely -------------- responsible for all medical advice and treatment rendered to Members receiving medical care from Participating Providers and for the performance of Covered Services. 4 3.5 Physician Agreements. IPA agrees that each Participating Physician shall -------------------- enter into a Physician Agreement with IPA and IPA will take such further acts as necessary or desirable to amend the Physician Agreement upon reasonable request of PHS. A Participating Physician may not participate in Programs through any other entity other than IPA or through direct contract with PHS. 3.6 Compliance with PHS Rules. IPA shall comply with PHS programs rules and ------------------------- protocols (collectively, "Rules") adopted by PHS in furtherance of Article II hereof; provided, however, that no amendments or modifications to the Rules shall be made without IPA's consent which will have the effect of (i) adversely affecting any rights or remedies of IPA as against PHS or any Participating Physician; (ii) adding to, increasing or adversely affecting (as to IPA) any obligations of IPA to PHS or to any Participating Physician; or (iii) amending or modifying any sanctions, penalties or termination protocols of PHS or against any Participating Physician or the process for sanctioning, penalizing or terminating any Participating Physician or appealing decisions or terminating any Participating Physician or appealing the decisions with respect thereto. IPA shall use its best efforts to ensure that Participating Physicians comply with all policies and procedures as set forth in the Office Manual and all applicable law. 3.7 Notice of Disciplinary Action. IPA shall notify PHS within five calendar ----------------------------- days should any disciplinary or other action be formally initiated against a Participating Physician or any of a Participating Physician's employees or others performing Covered Services hereunder under a Participating Physician's supervision, which could result in (i) the suspension or loss of any license or certification; (ii) the impairment for any other reason of such Participating Provider's ability to render the Covered Services required under this Agreement; (iii) the imposition of any sanctions against such Participating Physician; (iv) any malpractice claim filed against a Participating Physician; (v) any compromise, settlement, or judgment of such a claim and the terms and conditions thereof; (vi) any revocation, suspension, modification, restriction or other change in status of a Participating Physician's medical staff privileges at any hospital or other health care facility; or (vii) any investigation of a Participating Physician by any governmental agency or board or any medical association relating to a disciplinary cause or reason. 3.8 Disclosure of Information and Records. Subject to applicable laws ------------------------------------- regarding confidentiality, IPA hereby authorizes PHS to release to any party any and all information, records, summaries of records and statistical reports specific to the IPA and/or any Participating Physicians, including but not limited to, utilization profiles, encounter data, treatment plans, outcome data and other information pertinent to a Participating Physician's performance of Covered Services, professional qualifications and credentialing information, without receiving prior written consent. 3.9 Authority to Act. IPA represents that it is authorized to act as the agent ---------------- for each Participating Physician for purposes of entering into this Agreement. 3.10 Hold Harmless. IPA agrees that it shall look solely to PHS for payment for ------------- Covered Services provided to Members by Participating Physicians under the Plans. IPA further agrees that in no event, including but not limited to non-payment by PHS or IPA, PHS or IPA insolvency, or breach of this Agreement shall IPA or Participating Physicians or Consultants (as defined in Section 1.3(i)) charge, collect a deposit from, seek compensation, remuneration or reimbursement from or have any recourse against a Member, other than PHS acting on a Member's behalf, for Covered Services rendered pursuant to this Agreement. This provision shall not prohibit collection by Participating Physicians of copayments or supplemental charges made in accordance with Programs. This Section 3.10 shall survive termination of this Agreement regardless of the cause giving rise to termination and shall be construed to be for the benefit of Members. 3.11 Delegation. IPA and PHS agree that IPA may delegate to PHS the ---------- performance such of its responsibilities as IPA may determine from time to time. 5 3.12 Non-Discrimination. Except as otherwise provided herein, Participating ------------------ Physicians shall provide Covered Services to all Members in a manner similar to the manner in which Participating Physicians provide services to other patients and shall not discriminate in the acceptance of Members as patients or treatment of Members on the basis of race, color, national origin, ancestry, religion, sex, marital status, sexual orientation or age. ARTICLE IV - PROGRAMS --------------------- 4.1 Program Design and Introduction. PHS shall have sole authority over ------------------------------- matters relating to Program design, introduction of new Programs and modification or elimination of existing Programs, including without limitation, utilization, referral, quality assessment, reimbursement and reimbursement protocols relating to such Programs. PHS shall consult with the IPA Advisory Committee in the material design features of Programs and shall use its best efforts to incorporate the reasonable recommendations of the IPA Advisory Committee into final Program design that do not adversely affect the administration, financial or operational aspects of such Program. 4.2 Participation in Programs. Except as waived by PHS, which waiver PHS shall ------------------------- not unreasonably withhold or delay, Participating Physicians are required to participate in all Programs and PHS may not exclude any Participating Physician except as set forth below. IPA agrees to sanction or terminate in accordance with the Physician Agreement, Office Manual, or otherwise, any Participating Physician who notifies IPA or PHS that he or she will not participate in a Program or who does not accept Members enrolled in one or more Programs. Notwithstanding the foregoing, PHS may select, after consultation with IPA, a subset of Participating Providers, if PHS is requested to reduce the size of its panel of Participating Physicians for an employer group of 1,000 or more eligible Members. ARTICLE V - COMPENSATION ------------------------ 5.1 Health Care Service Budgets. The budget for Covered Services for IPA --------------------------- Members shall be established by mutual consent and shall be deemed to be incorporated herein by reference. 5.2 Capitation System. ----------------- PHS shall allocate to IPA a monthly capitation in accordance with Exhibit C from which IPA shall compensate Participating Physicians, Consultants, Non- IPA Participating Providers and also, in cases of Medical Emergency or upon prior approval by PHS, other health care providers, for Covered Services rendered to IPA Members except (i) Covered Services pursuant to self-funded Programs which are paid directly by the employer; (ii) Covered Services pursuant to Programs for which PHS pays Participating Physicians directly; (iii) as specifically provided and agreed to by IPA in connection with certain Programs. PHS shall allocate amounts from the capitation payment hereunder to each of the following three funds: an in-patient hospital fund; an out-patient hospital fund and a physician and other capitated services fund. The risk sharing arrangements between PHS and IPA are as set forth below: (i) The In-Patient Hospital Fund. In the event that payments in respect ---------------------------- of hospital in-patient Covered Services rendered to IPA Members exceed amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the deficit over the Corridor shall be deemed to be Excess Payments hereunder. In the event that payments in respect of hospital in-patient Covered Services rendered to IPA Members are less than amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the surplus under the Corridor shall be deemed to be Surplus Amounts hereunder. 6 (ii) The Out-Patient Hospital Fund. In the event that payments in respect ----------------------------- of hospital out-patient Covered Services rendered to IPA Members exceed amounts budgeted therefor in accordance with Section 5.1 hereof, one hundred percent (100%) of the deficit shall be deemed to be Excess Payments hereunder. In the event that payments in respect of hospital out-patient Covered Services rendered to IPA Members are less than amounts budgeted therefor in accordance with Section 5.1 hereof, one hundred percent (100%) of the surplus shall be deemed to be Surplus Amounts hereunder. (iii) The Physician and Other Fund. In the event that payments in respect ---------------------------- of Covered Services rendered to IPA Members other than the Covered Services described in clauses (i), (ii) and (iv) of this Section 5.2, exceed amounts budgeted therefor in accordance with Section 5.1 hereof, one hundred percent (100%) of the deficit shall be deemed to be Excess Payments hereunder. In the event that payments in respect of Covered Services (except as provided in clauses (i), (ii) and (iv), rendered to IPA Members are less than amounts budgeted therefor in accordance with Section 5.1 hereof, one hundred percent (100%) of the surplus shall be deemed Surplus Amounts hereunder. (iv) The Pharmaceutical Fund. In the event that payments in respect of ----------------------- pharmaceutical related Covered Services rendered to IPA Members exceed amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the deficit shall be deemed to be Excess Payments hereunder. In the event that payments in respect of pharmaceutical related Covered Services rendered to IPA Members are less than amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the surplus shall be deemed to be Surplus Amounts hereunder. 5.3. Payments Administered by PHS. The amount allocated as the monthly ---------------------------- capitation for Covered Services pursuant to Section 5.2 shall be held and administered by PHS for the purpose of enabling IPA to discharge its payment obligations as set forth in Section 5.2. PHS shall act as IPA's agent for purposes of making all payments and distributions to Participating Physicians, Consultants, Non-IPA Participating Physicians and other health care providers as set forth in Section 5.2 (in cases of Covered Services rendered to IPA Members). IPA agrees that the payments made by PHS as IPA's agent hereunder shall be deducted from amounts allocated to IPA as capitation payments. Payments shall be made irrespective of whether actual payments made pursuant to this paragraph exceed the amounts allocated to IPA as capitation payments. Subject to Section 5.5, payments shall be made in accordance with the following: (a) Compensation for Participating Physicians, Consultants and Non-IPA Participating Providers shall be calculated on the basis of the lesser of the Physician's, Consultant's or Non-IPA Participating Provider's billed charges, and (i) in the case of Participating Physicians, the reimbursement schedules agreed to by PHS and IPA from time to time or an actuarially determined capitation amount, and (ii) in the case of Consultants, Non-IPA Participating Physicians, and other health care providers, the PHS reimbursement schedule in effect from time to time. The administrative guidelines for reimbursement of fees shall be maintained by PHS. (b) Participating Physicians shall be paid within two (2) months of the receipt by PHS of a properly submitted bill for Covered Services, except for claim payments subject to claims recovery through coordination of benefits (C.O.B.). Participating Physicians shall only be paid for bills for Covered Services received by PHS within 90 days of the date of service, unless such bills have been subject to claims recovery through C.O.B., basic reparation of benefits under an automobile no-fault policy, worker's compensation or subrogation activity. For Covered Services involving C.O.B., IPA shall be liable to pay Participating Physicians only for bills received within 18 months of the date of service. Participating 7 Physicians may not bill Members for bills for Covered Services which are not submitted in accordance with this Section 5.3 (b). 5.4. Withhold and Reserve Provision. PHS may establish a withhold provision for ------------------------------ a percentage of the compensation payable to IPA pursuant to Section 5.2 on behalf of Participating Physicians for Covered Services, to be held in a risk fund, it being understood and agreed that the amounts retained shall be applied to offset the amounts by which the actual costs of Covered Services rendered to IPA Members exceed budgeted amounts for the year. Actual withhold amounts may vary according to Program and Participating Physician. The percent level of withhold for specific programs and the methodology for a variable withhold program shall be subject to IPA consent. PHS and IPA shall, at regular intervals, review the utilization and costs of such services. PHS has the right to increase the percentage of compensation withheld to such levels as PHS may deem necessary to preserve IPA's fiscal integrity; provided, however that any increase is subject to IPA's consent, which consent shall not be unreasonably withheld. Amounts earned on funds held in the withhold account shall be the property of PHS and neither IPA nor Participating physicians shall assert any claims to such amounts. 5.5 Excess Payments and Surplus Amounts. If PHS makes Excess Payments, IPA ----------------------------------- shall be liable to PHS for such Excess Payments and shall repay such amounts within 30 days after notice from PHS of the extent of the Excess Payment. If there are Surplus Amounts, PHS shall allocate such Surplus Amounts to Participating Physicians in accordance with instructions from IPA and shall pay such Surplus Amounts to Participating Physicians not more than 75 days following the end of the year; provided, however, that prior to making any payments from surplus Amounts, Surplus Amounts shall be applied first to reduce or eliminate Excess Payments, if any, in one or more Funds and shall only be payable as provided in this Section 5.5 if there are no Excess Payments outstanding in any Fund. 5.5 Intra-Network Payments. PHS shall make payments as IPA's agent from ---------------------- capitation amounts allocated to IPA for Covered Services rendered to IPA Members by Non-IPA Participating Physicians, Consultants or health care providers. PHS will pay Participating Physicians for Covered Services rendered to Members who are not IPA Members in accordance with Section 5.3; such payments on behalf of Members who are not IPA Members shall not be charged against the capitation amount allocated to IPA. All payments made hereunder will be subject to the withhold provisions set forth in Section 5.4. 5.6 Self Funded Payers; Direct Payments. For Programs with respect to which an ----------------------------------- employer group self-funds its claims expense or Programs in which PHS elects to pay Participating Physicians on a fee for service basis without regard to capitation, PHS shall compensate Participating Physicians in accordance with the PHS fee schedule then in effect. 5.7 Forms; Cooperation. ------------------ (a) IPA shall arrange for Participating Physicians to bill PHS for Covered Services provided to Members on forms as reasonably specified by PHS. These forms shall specify the Covered Services provided and shall include all of the statistical and descriptive medical, diagnostic and patient data together with identifying information required by PHS. (b) IPA shall arrange for Participating Physicians to cooperate with and participate in PHS programs for coordination of benefits with other health care plans or any other permitted methods of third party recovery. Such programs include, but are not limited to, the following: (i) Assisting Members with required forms. 8 (ii) Where duplicate coverage exists and the Program appears to be secondary coverage, notifying PHS and for ninety (90) days seeking payment from the other health care plan, before seeking payment from PHS or self funded payer. (iii) Where other plan(s) must pay their benefits before the benefits of the applicable Program, accepting as PHS's payment, the lesser of the payment determined in accordance with Section 5.3 (a) and the amount equal to the provider's usual charges for Covered Services, reduced by amounts paid by other plan(s) (or to be paid in the case of Medicare, Worker's Compensation Law, occupational disease or any similar law). 5.8 Coverage Questions. PHS shall make timely payment to Participating ------------------ Physicians as provided in Section 5.3 unless, prior to the expiration of the period set forth therein, PHS notifies the Participating Physician in writing that additional information is required or that a coverage question (including without limitation, a question relating to coordination of benefits or pre-existing conditions) exists. Such notice shall specify any additional information required and shall describe the nature of the coverage question. PHS shall endeavor in good faith to promptly resolve coverage questions, and shall make payment, if appropriate, promptly after coverage questions are resolved but in no case later than ninety (90) days after a submission of all required information. In the case of requests for additional information, the claims shall be paid within 30 days of receipt of all requested information. 5.9 Subrogation. In the event a Member is injured by an act or omission of a ----------- Participating Physician in connection with the rendering of Covered Services hereunder, PHS may elect to pursue its subrogation rights, if any, against the potentially responsible Participating Physician. PHS shall make payment to the Physician in accordance with this Agreement while pursuing those rights. ARTICLE VI - RECORDS --------------------- 6.1. PHS Members. PHS shall maintain such records and establish and adhere to ----------- such procedures as shall be reasonably required to ascertain the number and identity of Members, which information shall be provided to IPA upon its request. IPA shall cooperate with PHS in connection with such records and procedures to the end of enabling the parties to accomplish with maximum efficiency and minimum administrative cost, determinations of eligibility for coverage and the amount of compensation payable to IPA. 6.2. Accounting. PHS shall maintain, in accordance with generally accepted ---------- accounting practices, such financial and accounting records as shall be necessary, appropriate or convenient for the proper administration of this Agreement. 6.3. Statistical Records. PHS and IPA shall jointly maintain such statistical ------------------- records with respect to Covered Services, including the utilization thereof, as shall be necessary, appropriate, or convenient for the proper administration of this Agreement. 6.4. Compliance With Law. IPA and PHS agree to maintain their records in ------------------- accordance with applicable federal and state laws and regulations and further agree to participate as necessary in required regulatory examinations. 6.5. Medical Records. IPA shall arrange for Participating Physicians to --------------- maintain adequate medical records for Members in accordance with applicable law. IPA and PHS shall make reasonably available the medical records, subject to all applicable state and federal privacy and confidentiality requirements, to each other upon request without cost in order to determine that the content of such report and the quality of care rendered are acceptable, as well as for peer review, grievance review, recredentialing or any other reasonably necessary purposes. 9 6.6. Confidentiality. PHS and IPA shall ensure confidentiality of Members' --------------- health and medical records. IPA and PHS each agree that all records, reports, data, data formats, financial information and other documents or information pertaining to the other or any related company which are provided, made available, or otherwise disclosed to the other pursuant to this Agreement or the relationship between PHS and IPA, are confidential, and may not be disclosed to any person or entity for any reason at any time during or subsequent to the term of this Agreement, except for their attorneys, accountants, or other representatives and except as required by law. Anything to the contrary contained in the foregoing notwithstanding, any information which has entered the public domain, except solely by a party's violation of this provision, shall not be deemed to be confidential hereunder. ARTICLE VII - LEGAL RELATIONSHIP BETWEEN PHS AND IPA ---------------------------------------------------- Independent Contractors. The relationship of the parties is that of independent - ----------------------- contractors. None of the provisions of this Agreement are intended to create nor shall be construed to create a partnership, or joint venture relationship between the parties. Except as to payment procedures for which PHS shall act as IPA's agent hereunder, neither party hereto nor any of their respective officers, members, employees or physicians shall be deemed to be the agent, employee, or representative of the other party. ARTICLE VIII - INDEMNIFICATION AND INSURANCE -------------------------------------------- 8.1. Physician Insurance. IPA shall require all of its Participating Physicians ------------------- and all Consultants to whom a Member is referred by a Participating Physician to maintain professional liability insurance acceptable to PHS in an amount not less than $1,000,000 per incident and $3,000,000 aggregate to cover all demands, claims and expenses of all kinds that may result or arise out of any alleged malpractice or neglect caused or alleged to have been caused by such individuals or any of their agents, employees, or representatives in the performance or omissions of any act relating to this Agreement. 8.2. Cooperative Defense. The parties recognize that, during the term of this ------------------- Agreement and for some period thereafter, certain risk management issues, legal issues, claims or actions may arise that involve or could potentially involve the parties and their respective employees and agents. The parties further recognize the importance of cooperating with each other in good faith when such issues, claims or actions arise to the extent that such cooperation does not violate any applicable laws, cause breach of any duties created by any policies of insurance, or otherwise compromise the confidentiality of communications of information regarding the issues, claims or actions. The parties shall cooperate in good faith, using their best efforts, to address such risk management and claims handling issues in a manner that strongly encourages full cooperation between the parties. Nothing in this Section 8.2 shall affect any cross or counter-claims that may be available to the parties hereto. 8.3 Liability. Each party shall be responsible for its own actions and --------- omissions as they may relate to or arise from its duties and obligations under this Agreement. ARTICLE IX- TERM OF AGREEMENT ----------------------------- 9.1 Term. The term of this Agreement shall be for a period of one year ---- commencing on January 1, 1997, and shall terminate on December 31, 1997. This Agreement may be terminated by either party prior to the expiration of its term in the event of the insolvency of the other party, appointment of a trustee or receiver for any substantial part of the assets of the other party, or assignment by the other party for the benefit of its creditors or the commencement of any proceedings under the bankruptcy or insolvency law by or against such other party. This Agreement may also be terminated upon 60 days prior written notice, by either party upon the other party's material breach of any of the terms of this Agreement and failure to cure such breach within such 60 day period. 10 9.2 Termination of Participating Physicians. A Participating Physician --------------------------------------- terminating his relationship with IPA will also terminate his participation in the Programs. A termination by a Participating Physician shall not be deemed a termination of this Agreement, which may only be terminated pursuant to Section 9.1. PHS may terminate a Participating Physician in all Programs subject to the due process protocols set forth in the Office Manual. Termination of a Participating Physician's participation in Programs shall not be deemed a termination of the Physician Agreement without further action on the part of IPA. 9.3 Effect of Termination. --------------------- (a) Upon the effective termination of this Agreement, all rights and obligations of the parties under this Agreement shall immediately cease; provided, however, that IPA shall remain responsible for providing Covered Services under the terms of this Agreement to Members who are under the care of Participating Physicians at the time of such termination through the period for which premiums have been paid (but in no event more than 90 days, except that if a Member is hospitalized at the time of termination, until the Member is discharged), unless PHS makes reasonable and medically appropriate provision for the assumption of such services by another provider. PHS shall compensate Participating Physicians for those Covered Services, for which premium was received, rendered prior to and following the termination date (as provided in this Section 9.3(a)) pursuant to the PHS/IPA fee schedule in effect at such time. In the event this Agreement is terminated due to the last sentence of Section 9.1, the non-defaulting party shall be entitled to pursue all legally available remedies consistent with Section 10.4 herein, and damages arising out of such breach. (b) Upon termination, PHS is authorized to notify Members, prospective Members and Participating Physicians, and other persons and entities whom it deems to have an interest herein of such termination. ARTICLE X - MISCELLANEOUS ------------------------- 10.1.Successors. This Agreement shall be binding upon and inure to the ---------- benefit of the parties hereto, their respective heirs, successors and assigns, but may not be assigned by either party without the prior written consent of the other party, provided, however that a succession to all or substantially all of the assets or equity interests of any party shall not be deemed to be an assignment in violation hereof. 10.2.Delegation. IPA shall not, in a manner inconsistent with this ---------- Agreement, subcontract or otherwise delegate its duties under this Agreement unless the other party so approves by written consent. All contracts by IPA with subcontractors shall be approved in writing by PHS prior to execution thereof and copies shall be available to PHS upon its request. 10.3.Headings. The headings of the various Sections of the Agreement -------- are inserted merely for the purpose of convenience and do not, expressly or by implication, limit or define or extend the specific terms of the Sections so designated. 10.4.Arbitration. In the event any dispute shall arise with regard to ----------- the performance or interpretations of any of the terms of this Agreement, all matters in controversy shall be submitted to a Board of Arbitrators in accordance with the commercial arbitration rules and regulations of the American Arbitration Association, and a judgment upon the award entered in any court having jurisdiction thereof. Arbitration shall be initiated by written notice by the party requesting arbitration to the other party. Both parties expressly covenant and agree to be bound by the decision of the arbitrators and accept any decision by a majority of the arbitrators as a final determination of the matter in dispute. 10.5.Governing Law. The validity, enforceability and interpretation of ------------- any of the clauses of this Agreement shall be determined and governed by the laws of the State of Connecticut. 11 10.6. Medical Ethics. IPA and PHS agree that the administration of PHS's -------------- program and this Agreement shall at all times be compatible with sound principles of medical ethics . 10.7. Entire Agreement. This Agreement contains all the terms and conditions ---------------- agreed upon by the parties hereto, supersedes all other agreements, oral and otherwise, regarding the subject matter of the parties hereto. 10.8. Amendment. This Agreement may be amended at any time by mutual --------- agreement of the parties, provided that before any amendment shall be operative and valid, it shall be in writing and signed by PHS and IPA. The parties agree that, in the event of changes in federal or state law that necessitate an amendment to this Agreement, they shall endeavor in good faith to reach agreement on such amendment that is consistent with and in furtherance of the scope and intent of this Agreement. 10.9 Notices. All notices expressly required to be given pursuant to the terms ------- of this Agreement shall be in writing and shall be deemed effectively given (i) on the date of receipt if personally delivered or telecopied to the party to whom the same is directed; or (ii) on the third day after mailing if mailed to such party, postage prepaid, addressed to the following addresses, or to such other addresses as the parties may hereafter designate by like notice: to PHS at: Physicians Health Services of Connecticut, Inc. 120 Hawley Lane Trumbull, CT 06611 ATTN: Executive Director and to IPA at: c/o Physicians Health Services, Inc. 120 Hawley Lane Trumbull, CT 06611 PHS's obligation to notify IPA hereunder for all matters other than termination of this Agreement may be fulfilled by PHS's mailing to IPA in the manner set forth above in a letter describing the matters subject to such notification. Notice of termination shall be by certified mail. 10.10 Third Party Beneficiaries. Nothing in this Agreement, express or ------------------------- implied, is intended or shall be construed to confer upon any person, firm or corporation other than the parties hereto and their respective successors or assigns, any remedy or claim under or by reason of this Agreement and any term, covenant or condition hereof, as third party beneficiaries or otherwise, and all of the terms, covenants and conditions hereof shall be for the sole and exclusive benefit of the parties hereto and their successors and assigns. 10.11 Policy Changes. To the extent additional national accreditation bodies -------------- develop their own accreditation requirements, and these requirements have a material impact on the ability of PHS to pursue new business or retain current business, PHS and the IPA agree to work together in developing additional policy changes. 10.12 Unenforceability. If any provision of this Agreement is determined to be ---------------- unenforceable, the rest of the Agreement shall remain in full force and effect. 10.13 Staff Service. PHS shall provide to IPA, at its expense, PHS staff ------------- services reasonably necessary or advisable to carry out the terms of this Agreement. 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement the month and year above set forth. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC. By: ___________________ FAIRFIELD INDIVIDUAL PRACTICE ASSOCIATION By: ___________________ 13 EXHIBIT A --------- PHS RESPONSIBLE SERVICES ------------------------ The following are PHS Responsible Services: General Laboratory procedures and Cytology for which PHS has contracted with a third-party to provide, including all laboratory procedures as defined by the CPT code range 80002-89399 but excluding procedures defined by the CPT code ranges 88104-88199 and 88000-88099 and 88300-88399. Dental services Hospital stop- loss insurance for inpatient services Radiology (other than radiotherapy) Audiology Rehabilitative services Immunizations and Injectables Drug and alcohol component of behavioral health services Durable medical equipment Oxygen and prosthetics Ambulance Podiatry services Chiropractic services Optometry services 14 EX-10.(V) 13 IPA SERVICE AGREEMENT - HERITAGE INDIVIDUAL Exhibit 10(v) IPA SERVICE AGREEMENT This IPA Service Agreement is made and entered into as of this 1st day of January, 1997 by and between PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC., a Connecticut corporation, and PHS INSURANCE OF CONNECTICUT, INC., a Connecticut corporation, (together, "PHS"), on the one hand, and HERITAGE INDIVIDUAL PRACTICE ASSOCIATION, INC. ("IPA"), on the other hand; WHEREAS, PHS arranges for the provision of Covered Services (as defined below) to Members (as defined below); WHEREAS, IPA is an individual practice association which has entered into contracts with physicians and other health care providers to arrange for and facilitate the provision and delivery of Covered Services (as defined below) to Members; WHEREAS, PHS and IPA mutually desire to preserve and enhance patient dignity; NOW, THEREFORE, in consideration of the premises and other mutual covenants herein contained and other good and valuable considerations, it is mutually agreed as follows: ARTICLE 1. DEFINITIONS ----------------------- 1.1 "Affiliate" means any company controlling, controlled by or under common control with PHS. 1.2 "Consultant" means a physician (other than a Participating Physician and a Non-IPA Participating Physician) (i) to whom a Member has been referred or who has been asked to provide Covered Services on behalf of a Member by a Participating Physician or (ii) who provides Covered Services to IPA members pursuant to the out of network benefits of a Program. 1.3 "Corridor" means the amount equal to 5% greater or less than budgeted amounts established pursuant to Section 5.1 hereof. 1.4 "Covered Services" means those Medically Necessary services and benefits that Members are entitled to receive under a Program. As used herein, Covered Services excludes PHS Responsible Services. 1.5 "Emergency" means the accidental injury or the unexpected onset of a serious illness, which has the potential for causing immediate disability or death or requiring immediate alleviation of pain and discomfort. The determination of whether Emergency services are Covered Services rests exclusively with the Medical Director. 1.6 "Excess Payment" means amounts by which payments made by PHS on behalf of IPA pursuant to Section 5.3 hereof exceed amounts budgeted therefor in accordance with Section 5.1 hereof (after giving effect to any applicable Corridor. 1.7 "Fund" means each of the funds established pursuant to Section 5.2 1 1.8 "IPA Member" means Members who have selected or who have been assigned a Participating Physician as their Primary Care Physician. 1.9 "IPA Advisory Committee" means a committee comprised of representatives of IPA, and such other individual practice associations or physician hospital organizations with which PHS contracts for the provision of Covered Services, which elect to have representation on the IPA Advisory Committee. 1.10 "Medical Director" means one or more physicians or other persons appointed by PHS to be responsible for, among other things, administering PHS's medical affairs and for serving as medical liaison to Participating Physicians. 1.11 "Medically Necessary" means services or supplies which are necessary and appropriate for the treatment of a Member's illness or injury or for the preventive care of a Member, according to accepted standards of medical practice prevailing at the time of treatment. 1.12 "Member" means (i) any person who has entered into a contract with PHS, or any Affiliate, for the provision of Covered Services, and his or her eligible dependents; (ii) any person and his or her eligible dependents, who is offered health care services through a plan sponsored by his or her employer that is administered by PHS, or any Affiliate ; and (iii) any person who participates in a Program for a government sponsored plan of health insurance. 1.13 "Non-IPA Participating Providers" means a health care provider with whom PHS directly or indirectly contracts for the provision of Covered Services (other than through IPA). 1.14 "Office Manual" shall mean the PHS/IPA Office Manual describing, among other things, HIPA's rules, regulations, protocols and procedures; reimbursement schedules; termination protocols and appeals procedures; and PHS's billing procedures, referrals and authorization policies, utilization review and quality assessment guidelines, coding guidelines and benefit summaries, as such Office Manual is revised from time to time. The Office Manual as in effect on the date hereof is incorporated herein by reference. As used herein, "Office Manual" means both the PHS and IPA sections of the Office Manual. 1.15 "Participating Physician" means a duly licensed medical doctor, osteopathic physician or oral surgeon who has entered into a currently effective Physician Agreement with IPA. 1.16 "Performance Standards" means standards used by PHS to measure performance of Participating Physicians, including without limitation, quality of care and service, compliance with utilization and referral protocols, billing procedures, claims adjudication, record keeping requirements and such other criteria reasonably believed by PHS to be appropriate, as such Performance Standards may be modified from time to time. 1.17 "PHS Responsible Services" means other Covered Services listed in Exhibit A for which PHS assumes responsibility for payment, as such Exhibit A may be modified from time to time in accordance with Section 10.8 hereof. 1.18 "Physician Agreement" means an agreement between IPA and Participating Physicians in the form of Exhibit B hereto, as such Exhibit B may be amended or modified from time to time in accordance with Section 10.8 hereof. 1.19 "Programs" means all programs of health insurance established, administered and/or maintained by PHS, or any Affiliate, or established, administered and/or maintained jointly by PHS, or any Affiliate, and another payer now or at any time during the term of this Agreement, including, 2 without limitation, fully funded plans, administrative services only plans, point of service plans, network access plans, Medicare cost plans, small group plans, governmental plans (other than Medicare risk and Medicaid), gatekeeper model plans and exclusive provider organization plans, as such Programs are modified from time to time in PHS's sole discretion. For purposes of this Agreement, Programs includes all Programs marketed jointly by PHS and The Guardian Life Insurance Company of America. 1.20 "Primary Care Physician" means a Participating Physician who provides primary care services to Members, initiates referrals for non-primary care services and is responsible for maintaining the continuity of care provided to a Member. A Primary Care Physician may be a family practitioner, internist or pediatrician. 1.21 "Referral" means written authorization issued by the Primary Care Physician prior to the Member's use of a specialist. 1.22 "Surplus Amounts" means the amounts by which actual payments made by PHS on behalf of IPA pursuant to Section 5.3 hereof are less than amounts budgeted therefore in accordance with Section 5.1 hereof (after giving effect to any applicable Corridors). 1.23 "Service Area" means the towns in each case listed in Schedule I in the State of Connecticut and within such towns, the service areas of the hospitals in each case as listed in Schedule I. ARTICLE II - PHS RESPONSIBILITIES --------------------------------- 2.1 Administrative Function. PHS will perform, as requested by IPA, all ----------------------- administrative, marketing, enrollment, financial, utilization review, accounting, claims processing and payment, management information systems, member grievance, quality assessment and other functions necessary or appropriate for the proper administration of the Programs and the provision of Covered Services necessary or appropriate to Members, other than clinical services. Utilization review shall be coordinated with appropriate IPA committees, upon IPA's reasonable request. 2.2 Credentialing. PHS shall be responsible for all credentialing and ------------- recredentialing of all Participating Physicians. Credentialing shall be coordinated with appropriate IPA committees. 2.3 Office Manual. PHS shall maintain the Office Manual for the benefit of ------------- PHS, IPA and Participating Physicians, which shall set forth the programs, procedures, rules, regulations and protocols of IPA and PHS, relating to the delivery of Covered Services by Participating Physicians and participation of Participating Physicians as members of IPA. PHS shall furnish an Office Manual to each Participating Physician and shall send supplements or revisions to the Office Manual to Participating Physicians prior to the effective date thereof. PHS shall develop Performance Standards which it shall use to monitor performance of Participating Physicians. PHS shall promptly advise IPA (or the IPA Advisory Committee if such Committee is assigned responsibility by IPA for performance reviews of Participating Physicians) if a Participating Physician fails to satisfy such Performance Standards. 2.4 Performance Standards. PHS shall develop Performance Standards which it --------------------- shall use to monitor performance of Participating Physicians. PHS shall promptly advise IPA (or the IPA Advisory Committee if such Committee is assigned responsibility by IPA for performance reviews of Participating Physicians) if a Participating Physician fails to satisfy such Performance Standards. 2.5 Data Reporting. PHS shall provide IPA with quarterly utilization reports. -------------- The utilization review performed by PHS shall be consistent with utilization reviews performed for all other health care providers participating in PHS's network of providers. 3 2.6 Eligibility Verification. PHS shall make available to the Participating ------------------------ Providers electronic eligibility verification of current Members enrolled in PHS. PHS shall use its best efforts to assure that its information is current; provided, however, that in the event a Member has ceased to be eligible for benefits under a PHS Program at the time services are rendered by a Participating Physician, neither IPA nor PHS shall be liable for payment in respect of such services. 2.7 IPA Advisory Committee. PHS shall develop and administer programs to ---------------------- enhance the delivery of Covered Services to Members, including programs to achieve more effective quality controls, cost and utilization efficiencies. PHS shall consult with the IPA Advisory Committee in the development and implementation of programs that would materially affect the manner in which Participating Physicians deliver Covered Services to Members and shall use its best efforts to incorporate such recommendations of the IPA Advisory Committee that would not adversely affect the administration of such programs, or PHS's financial condition or business operations. 2.8 Service Area. Except as provided in Section 3.10, PHS shall not enter into ------------ another agreement for physician related Covered Services to be provided within the Service Area. Subject to the foregoing, the composition of PHS's network of other health care providers within the Service Area shall be solely within the discretion of PHS. ARTICLE III - IPA RESPONSIBILITIES ---------------------------------- 3.1 Services. PHS hereby retains IPA to arrange for the provision of Medically -------- Necessary Covered Services to Members through Participating Physicians and where appropriate, Consultants and other health care professionals, in accordance with PHS's Programs and applicable law. Participating Physicians shall be responsible for determining Member eligibility and benefit verification prior to performing Covered Services, and in the case of a Program for which a Referral or other authorization is required prior to performing Covered Services, for obtaining such Referral or other authorization or, in the event that the Member elects not to obtain such Referral or authorization, for informing the Member that failure to obtain such Referral or authorization may result in co-payments, deductibles, or in certain instances, denial of such services as Covered Services under the benefit provisions of the Member's Program. Failure to inform the Member, or the Member's representatives, that certain services are beyond the scope or duration of Covered Services, and obtain a written waiver, will result in IPA and Participating Physician being unable to bill the Member or PHS. All Covered Services rendered by Participating Physicians shall be subject to the terms and conditions of this Agreement and the Physician Agreement. 3.2 Standards of Care. The Physician Agreement shall require Participating ----------------- Providers to render all Covered Services to Members consistent with the quality of medical care that is in conformity with accepted medical care and surgical practices of the American Medical Association and the practice prevailing in IPA's service area. Each Participating Physician will have the training and experience in the field in which they perform Covered Services. 3.3 Further Acts. IPA shall take all acts or actions necessary within the ------------ scope of this Agreement to permit compliance by PHS with applicable law as well as accreditation programs conducted by the NCQA, or another entity performing similar functions. 3.4 Medical Advice. IPA and Participating Physicians shall be solely -------------- responsible for all medical advice and treatment rendered to Members receiving medical care from Participating Providers and for the performance of Covered Services. 3.5 Physician Agreements. IPA agrees that each Participating Physician shall -------------------- enter into a Physician Agreement with IPA and IPA will take such further acts as necessary or desirable to amend the 4 Physician Agreement upon reasonable request of PHS. A Participating Physician may not participate in Programs through any other entity other than IPA or through direct contract with PHS. IPA warrants that all Participating Physicians shall have an unrestricted license to practice medicine in the State of Connecticut. 3.6 Compliance with PHS Rules. IPA shall comply with all programs, rules and ------------------------- protocols adopted by PHS in furtherance of Article II hereof. IPA shall use its best efforts to ensure that Participating Physicians comply with all policies and procedures as set forth in the Office Manual and all applicable law. 3.7 Notice of Disciplinary Action. IPA shall notify PHS within five calendar ----------------------------- days should any disciplinary or other action be formally initiated against a Participating Physician or any of a Participating Physician's employees or others performing Covered Services hereunder under a Participating Physician's supervision, which could result in (i) the suspension or loss of any license or certification; (ii) the impairment for any other reason of such Participating Provider's ability to render the Covered Services required under this Agreement; (iii) the imposition of any sanctions against such Participating Physician; (iv) any malpractice claim filed against a Participating Physician; (v) any compromise, settlement, or judgment of such a claim and the terms and conditions thereof; (vi) any revocation, suspension, modification, restriction or other change in status of a Participating Physician's medical staff privileges at any hospital or other health care facility; or (vii) any investigation of a Participating Physician by any governmental agency or board or any medical association relating to a disciplinary cause or reason. 3.8 Disclosure of Information and Records. Subject to applicable laws ------------------------------------- regarding confidentiality, IPA hereby authorizes PHS to release to any party any and all information, records, summaries of records and statistical reports specific to the IPA and/or any Participating Physicians, including but not limited to, utilization profiles, encounter data, treatment plans, outcome data and other information pertinent to a Participating Physician's performance of Covered Services, professional qualifications and credentialing information, without receiving prior written consent. 3.9 Authority to Act. IPA represents that it is authorized to act as the agent ---------------- for each Participating Physician for purposes of entering into this Agreement. 3.10 Adequacy of Services. IPA shall provide for the availability of Covered -------------------- Services within the service area at such times and in such locations as shall be required to satisfy the needs of IPA Members and as shall be necessary to enable IPA to discharge its obligations hereunder. IPA shall at the times maintain a sufficient number of Participating Physicians to provide Covered Services hereunder. If PHS believes at any time that the number of Participating Physicians, taken as a whole or within any specialty, is insufficient it shall consult with IPA and PHS and IPA shall jointly develop a plan to correct such insufficiency as expeditiously as possible. 3.11 Hold Harmless. IPA agrees that it shall look solely to PHS for payment for ------------- Covered Services provided to Members by Participating Physicians under the Plans. IPA further agrees that in no event, including but not limited to non-payment by PHS or IPA, PHS or IPA insolvency, or breach of this Agreement shall IPA or Participating Physicians or Consultants (as defined in Section 1.3(i)) charge, collect a deposit from, seek compensation, remuneration or reimbursement from or have any recourse against a Member, other than PHS acting on a Member's behalf, for Covered Services rendered pursuant to this Agreement. This provision shall not prohibit collection by Participating Physicians of copayments or supplemental charges made in accordance with Programs. This Section 3.11 shall survive termination of this Agreement regardless of the cause giving rise to termination and shall be construed to be for the benefit of Members. 3.12 Delegation. IPA and PHS agree that IPA may delegate to PHS the performance ---------- such of its responsibilities as it may determine from time to time. 5 3.13 Non-Discrimination. Except as otherwise provided herein, Participating ------------------ Physicians shall provide Covered Services to all Members in a manner similar to the manner in which Participating Physicians provide services to other patients and shall not discriminate in the acceptance of Members as patients or treatment of Members on the basis of race, color, national origin, ancestry, religion, sex, marital status, sexual orientation or age. ARTICLE IV - PROGRAMS --------------------- 4.1 Program Design and Introduction. PHS shall have sole authority over ------------------------------- matters relating to Program design, introduction of new Programs and modification or elimination of existing Programs, including without limitation, utilization, referral, quality assessment, reimbursement and reimbursement protocols relating to such Programs. PHS shall consult with the IPA Advisory Committee in the material design features of Programs and shall use its best efforts to incorporate the reasonable recommendations of the IPA Advisory Committee into final Program design that do not adversely affect the administration, financial or operational aspects of such Program. 4.2 Participation in Programs. Except as waived by PHS, which waiver PHS shall ------------------------- not unreasonably withhold or delay, Participating Physicians are required to participate in all Programs and PHS may not exclude any Participating Physician except as set forth below. IPA agrees to immediately terminate any Participating Physician who notifies IPA or PHS that he or she will not participate in a Program or who does not accept Members enrolled in one or more Programs. Notwithstanding the foregoing, PHS may select a subset of Participating Providers, upon consent of IPA, which consent shall not be unreasonably withheld, if PHS is requested to reduce the size of its panel of Participating Physicians for an employer group of 1,000 or more eligible Members. ARTICLE V - COMPENSATION ------------------------ 5.1 Health Care Service Budgets. This budget for Covered Services for IPA --------------------------- Members shall be established by mutual consent and shall be deemed to be incorporated herein by reference. 5.2 Capitation System. ----------------- PHS shall allocate to IPA a monthly capitation in accordance with Exhibit C from which IPA shall compensate Participating Physicians, Consultants, Non- IPA Participating Providers and also, in cases of Medical Emergency or upon prior approval by PHS, other health care providers, for Covered Services rendered to IPA Members, except (i) Covered Services pursuant to self- funded Programs which are paid directly by the employer; (ii) Covered Services pursuant to Programs for which PHS pays Participating Physicians directly; (iii) as specifically provided and agreed to by IPA in connection with certain Programs. PHS shall allocate amounts from the capitation payment hereunder to each of the following three funds in accordance with Exhibit C: an in-patient hospital fund; and out-patient hospital fund and a physician and other capitated services fund. The risk sharing arrangements between PHS and IPA are as set forth below: (i) The In-Patient Fund. In the event that payments in respect of ------------------- hospital in-patient Covered Services rendered to IPA Members exceed amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the deficit over the Corridor shall be deemed to be Excess Payments hereunder. In the event that payments in respect of hospital in-patient Covered Services rendered to IPA Members are less than amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the surplus under the Corridor shall be deemed to be Surplus Amounts hereunder. 6 (ii) The Out-Patient Hospital Fund. In the event that payments in ----------------------------- respect of hospital out-patient Covered Services rendered to IPA Members exceed amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the deficit shall be deemed to be Excess Payments hereunder. In the event that payments in respect of hospital out-patient Covered Services rendered to IPA Members are less than amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the surplus shall be deemed to be Surplus Amounts hereunder. (iii) The Physician and other Fund. In the event that payments in respect ---------------------------- of Covered Services rendered to IPA Members other than the Covered Services described in clauses (i), (ii) and (iv) of this Section 5.2, exceed amounts budgeted therefor in accordance with Section 5.1 hereof, one hundred percent (100%) of the deficit shall be deemed to be Excess Payments hereunder. In the event that payments in respect of Covered Services (except as provided in clauses (i), (ii) and (iv) rendered to IPA Members are less than amounts budgeted therefor in accordance with Section 5.1 hereof, one hundred percent (100%) of the surplus shall be deemed Surplus Amounts hereunder. (iv) The Pharmaceutical Fund. In the event that payments in respect of ----------------------- pharmaceutical related Covered Services rendered to IPA Members exceed amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the deficit shall be deemed to be Excess Payments hereunder. In the event that payments in respect of pharmaceutical related Covered Services rendered to IPA Members are less than amounts budgeted therefor in accordance with Section 5.1 hereof, fifty percent (50%) of the surplus shall be deemed to be Surplus Amounts hereunder. 5.3. Payments Administered by PHS. The amount allocated as the monthly ---------------------------- capitation for Covered Services pursuant to Section 5.2 shall be held and administered by PHS for the purpose of enabling IPA to discharge its payment obligations as set forth in Section 5.2. PHS shall act as IPA's agent for purposes of making all payments and distributions to Participating Physicians, Consultants, Non-IPA Participating Physicians and other health care providers as set forth in Section 5.2 (in cases of Covered Services rendered to IPA Members). IPA agrees that the payments made by PHS as IPA's agent hereunder shall be deducted from amounts allocated to IPA as capitation payments. Payments shall be made irrespective of whether actual payments made pursuant to this paragraph exceed the amounts allocated to IPA as capitation payments. Subject to Section 5.5, payments shall be made in accordance with the following: (a) Compensation for Participating Physicians, Consultants and Non-IPA Participating Providers shall be calculated on the basis of the lesser of the Physician's, Consultant's or Non-IPA Participating Provider's billed charges, and (i) in the case of Participating Physicians,respect the reimbursement schedules agreed to by PHS and IPA from time to time or an actuarially determined capitation amount, and (ii) in the case of Consultants, Non-IPA Participating Physicians, and other health care providers, the PHS reimbursement schedule in effect from time to time. The administrative guidelines for reimbursement of fees shall be maintained by PHS. (b) Participating Physicians shall be paid within two (2) months of the receipt by PHS of a properly submitted bill for Covered Services, except for claim payments subject to claims recovery through coordination of benefits (C.O.B.). Participating Physicians shall only be paid for bills for Covered Services received by PHS within 90 days of the date of service, unless such bills have been subject to claims recovery through C.O.B., basic reparation of benefits under an automobile no-fault policy, worker's compensation or subrogation activity. For Covered Services involving C.O.B., IPA shall be liable to pay Participating Physicians only for bills received within 18 months of the date of service. Participating 7 Physicians may not bill Members for bills for Covered Services which are not submitted in accordance with this Section 5.3 (b). 5.4. Withhold and Reserve Provision. PHS may establish a withhold provision for ------------------------------ a percentage of the compensation payable to IPA pursuant to Section 5.2 on behalf of Participating Physicians for Covered Services, to be held in a risk fund, it being understood and agreed that the amounts retained shall be applied to offset the amounts by which the actual costs of Covered Services rendered to IPA Members exceed budgeted amounts for such year. Actual withhold amounts may vary according to Program and Participating Physician. The percent level of withhold for specific programs and the methodology for a variable withhold program shall be subject to IPA consent, which consent shall not be unreasonably withheld. PHS and IPA shall, at regular intervals, review the utilization and costs of such services. PHS has the right to increase the percentage of compensation withheld to such levels PHS may deem necessary to preserve IPA's fiscal integrity; provided, however that any increase is subject to IPA's consent, which consent shall not be unreasonably withheld. Amounts earned on funds held in the withhold account shall be the property of PHS and neither IPA nor Participating Physicians shall assert any claims to such amounts. 5.5 Excess Payments and Surplus Amounts. If PHS makes Excess Payments, IPA ----------------------------------- shall be liable to PHS for such Excess Payments and shall repay such amounts promptly upon demand by PHS. If there are Surplus Amounts, PHS shall allocate such Surplus Amounts to Participating Physicians in accordance with instructions from IPA and shall pay such Surplus Amounts to Participating Physicians not more than 75 days following the end of the year; provided, however, that prior to making any payments from Surplus Amounts, Surplus Amounts shall be applied first to reduce or eliminate Excess Payments, if any, and shall be payable as provided in this Section 5.5 only if there are no Excess Payments outstanding in any Fund. 5.6 Intra-Network Payments. PHS shall make payments as IPA's agent from ---------------------- capitation amounts allocated to IPA for Covered Services rendered to IPA Members by Non-IPA Participating Physicians, Consultants or health care providers. PHS will pay Participating Physicians for Covered Services rendered to Members who are not IPA Members in accordance with Section 5.3; such payments on behalf of Members who are not IPA Members shall not be charged against the capitation amount allocated to IPA. All payments made hereunder will be subject to the withhold provisions set forth in Section 5.4. 5.7 Self Funded Payers; Direct Payments. For Programs with respect to which an ----------------------------------- employer group self-funds its claims expense or Programs in which PHS elects to pay Participating Physicians on a fee for service basis without regard to capitation, PHS shall compensate Participating Physicians in accordance with the PHS fee schedule then in effect. 5.8 Forms; Cooperation. ------------------ (a) IPA shall arrange for Participating Physicians to bill PHS for Covered Services provided to Members on forms as reasonably specified by PHS. These forms shall specify the Covered Services provided and shall include all of the statistical and descriptive medical, diagnostic and patient data together with identifying information required by PHS. (b) IPA shall arrange for Participating Physicians to cooperate with and participate in PHS programs for coordination of benefits with other health care plans or any other permitted methods of third party recovery. Such programs include, but are not limited to, the following: (i) Assisting Members with required forms. 8 (ii) Where duplicate coverage exists and the Program appears to be secondary coverage, notifying PHS and for ninety (90) days seeking payment from the other health care plan, before seeking payment from PHS or self funded payer. (iii) Where other plan(s) must pay their benefits before the benefits of the applicable Program, accepting as PHS's payment, the lesser of the payment determined in accordance with Section 5.3 (a) and the amount equal to the provider's usual charges for Covered Services, reduced by amounts paid by other plan(s) (or to be paid in the case of Medicare, Worker's Compensation Law, occupational disease or any similar law). 5.9 Coverage Questions. PHS shall make timely payment to Participating ------------------ Physicians as provided in Section 5.3 unless, prior to the expiration of the period set forth therein, PHS notifies the Participating Physician in writing that additional information is required or that a coverage question (including without limitation, a question relating to coordination of benefits or pre-existing conditions) exists. Such notice shall specify any additional information required and shall describe the nature of the coverage question. PHS shall endeavor in good faith to promptly resolve coverage questions, and shall make payment, if appropriate, promptly after coverage questions are resolved but in no case later than 90 days after a submission of all required information. In the case of requests for additional information, the claims shall be paid within 30 days of receipt of all requested information. 5.10 Subrogation. In the event a Member is injured by an act or omission of a ----------- Participating Physician in connection with the rendering of Covered Services hereunder, PHS may elect to pursue its subrogation rights, if any, against the potentially responsible Participating Physician. PHS shall make payment to the Physician in accordance with this Agreement while pursuing those rights. ARTICLE VI - RECORDS --------------------- 6.1. PHS Members. PHS shall maintain such records and establish and adhere to ----------- such procedures as shall be reasonably required to ascertain the number and identity of Members, which information shall be provided to IPA upon its request. IPA shall cooperate with PHS in connection with such records and procedures to the end of enabling the parties to accomplish with maximum efficiency and minimum administrative cost, determinations of eligibility for coverage and the amount of compensation payable to IPA. 6.2. Accounting. PHS shall maintain, in accordance with generally accepted ---------- accounting practices, such financial and accounting records as shall be necessary, appropriate or convenient for the proper administration of this Agreement. 6.3. Statistical Records. PHS and IPA shall jointly maintain such statistical ------------------- records with respect to Covered Services, including the utilization thereof, as shall be necessary, appropriate, or convenient for the proper administration of this Agreement. 6.4. Compliance With Law. IPA and PHS agree to maintain their records in accordance with applicable federal and state laws and regulations and further agree to participate as necessary in required regulatory examinations. 6.5. Medical Records. IPA shall arrange for Participating Physicians to --------------- maintain adequate medical records for Members in accordance with applicable law. IPA and PHS shall make reasonably available the medical records, subject to all applicable state and federal privacy and confidentiality requirements, to each other upon request without cost in order to determine that the content of such report and the quality of care rendered are acceptable, as well as for peer review, grievance review, recredentialing or any other reasonably necessary purposes. 9 6.6. Confidentiality. PHS and IPA shall ensure confidentiality of Members' --------------- health and medical records. IPA and PHS each agree that all records, reports, data, data formats, financial information and other documents or information pertaining to the other or any related company which are provided, made available, or otherwise disclosed to the other pursuant to this Agreement or the relationship between PHS and IPA, are confidential, and may not be disclosed to any person or entity for any reason at any time during or subsequent to the term of this Agreement, except for their attorneys, accountants, or other representatives and except as required by law. Anything to the contrary contained in the foregoing notwithstanding, any information which has entered the public domain, except solely by a party's violation of this provision, shall not be deemed to be confidential hereunder. ARTICLE VII - LEGAL RELATIONSHIP BETWEEN PHS AND IPA ---------------------------------------------------- Independent Contractors. The relationship of the parties is that of independent - ----------------------- contractors. None of the provisions of this Agreement are intended to create nor shall be construed to create a partnership, or joint venture relationship between the parties. Except as to payment procedures for which PHS shall act as IPA's agent hereunder, neither party hereto nor any of their respective officers, members, employees or physicians shall be deemed to be the agent, employee, or representative of the other party. ARTICLE VIII - INDEMNIFICATION AND INSURANCE -------------------------------------------- 8.1. Physician Insurance. IPA shall require all of its Participating Physicians ------------------- and all Consultants to whom a Member is referred by a Participating Physician to maintain professional liability insurance acceptable to PHS in an amount not less than $1,000,000 per incident and $3,000,000 aggregate to cover all demands, claims and expenses of all kinds that may result or arise out of any alleged malpractice or neglect caused or alleged to have been caused by such individuals or any of their agents, employees, or representatives in the performance or omissions of any act relating to this Agreement. 8.2. Cooperative Defense. The parties recognize that, during the term of this ------------------- Agreement and for some period thereafter, certain risk management issues, legal issues, claims or actions may arise that involve or could potentially involve the parties and their respective employees and agents. The parties further recognize the importance of cooperating with each other in good faith when such issues, claims or actions arise to the extent that such cooperation does not violate any applicable laws, cause breach of any duties created by any policies of insurance, or otherwise compromise the confidentiality of communications of information regarding the issues, claims or actions. The parties shall cooperate in good faith, using their best efforts, to address such risk management and claims handling issues in a manner that strongly encourages full cooperation between the parties. Nothing in this Section 8.2 shall affect any cross or counter-claims that may be available to the parties hereto. 8.3 Liability. Each party shall be responsible for its own actions and --------- omissions as they may relate to or arise from its duties and obligations under this Agreement. ARTICLE IX- TERM OF AGREEMENT ----------------------------- 9.1 Term. The term of this Agreement shall commence on January 1, 1997 and ---- terminate on December 31, 1997. This Agreement may be terminated by either party prior to the expiration of its term in the event of the insolvency of the other party, appointment of a trustee or receiver for any substantial part of the assets of the other party, or assignment by the other party for the benefit of its creditors or the commencement of any proceedings under the bankruptcy or insolvency law by or against such other party. This Agreement may also be terminated upon 60 days prior written notice, by either party upon the other party's material breach of any of the terms of this Agreement and failure to cure such breach within such 60 day period. 10 9.2 Termination of Participating Physicians. A Participating Physician --------------------------------------- terminating his relationship with IPA will also terminate his participation in the Programs. A termination by a Participating Physician shall not be deemed a termination of this Agreement, which may only be terminated pursuant to Section 9.1. PHS may terminate a Participating Physician in all PHS Programs subject to the due process protocols set forth in the Office Manual. Termination of a Participating Physician's participation in Programs shall not be deemed a termination of the Physician Agreement without further action on the part of IPA. 9.3 Effect of Termination. --------------------- (a) Upon the effective termination of this Agreement, all rights and obligations of the parties under this Agreement shall immediately cease; provided, however, that IPA shall remain responsible for providing Covered Services under the terms of this Agreement to Members who are under the care of Participating Physicians at the time of such termination through the period for which premiums have been paid (but in no event more than 90 days, except that if a Member is hospitalized at the time of termination, until the Member is discharged), unless PHS makes reasonable and medically appropriate provision for the assumption of such services by another provider. PHS shall compensate Participating Physicians for those Covered Services, for which premium was received, rendered prior to and following the termination date (as provided in this Section 9.3(a)) pursuant to the PHS/IPA fee schedule in effect at such time. In the event this Agreement is terminated due to the last sentence of Section 9.1, the non-defaulting party shall be entitled to pursue all legally available remedies consistent with Section 10.4 herein, and damages arising out of such breach. (b) Upon termination, PHS is authorized to notify Members, prospective Members and Participating Physicians, and other persons and entities whom it deems to have an interest herein of such termination. ARTICLE X - MISCELLANEOUS ------------------------- 10.1. Successors. This Agreement shall be binding upon and inure to the benefit ---------- of the parties hereto, their respective heirs, successors and assigns, but may not be assigned by either party without the prior written consent of the other party, provided, however that a succession to all or substantially all of the assets or equity interests of any party shall not be deemed to be an assignment in violation hereof. 10.2. Delegation. IPA shall not, in a manner inconsistent with this Agreement, ---------- subcontract or otherwise delegate its duties under this Agreement unless the other party so approves by written consent. All contracts by IPA with subcontractors shall be approved in writing by PHS prior to execution thereof and copies shall be available to PHS upon its request. 10.3. Headings. The headings of the various Sections of the Agreement -------- are inserted merely for the purpose of convenience and do not, expressly or by implication, limit or define or extend the specific terms of the Sections so designated. 10.4. Arbitration. In the event any dispute shall arise with regard to ----------- the performance or interpretations of any of the terms of this Agreement, all matters in controversy shall be submitted to a Board of Arbitrators in accordance with the commercial arbitration rules and regulations of the American Arbitration Association, and a judgment upon the award entered in any court having jurisdiction thereof. Arbitration shall be initiated by written notice by the party requesting arbitration to the other party. Both parties expressly covenant and agree to be bound by the decision of the arbitrators and accept any decision by a majority of the arbitrators as a final determination of the matter in dispute. 10.5. Governing Law. The validity, enforceability and interpretation of ------------- any of the clauses of this Agreement shall be determined and governed by the laws of the State of Connecticut. 11 10.6. Medical Ethics. IPA and PHS agree that the administration of PHS's -------------- program and this Agreement shall at all times be compatible with sound principles of medical ethics. 10.7. Entire Agreement. This Agreement contains all the terms and ---------------- conditions agreed upon by the parties hereto, supersedes all other agreements, oral and otherwise, regarding the subject matter of the parties hereto. 10.8. Amendment. This Agreement may be amended at any time by mutual --------- agreement of the parties, provided that before any amendment shall be operative and valid, it shall be in writing and signed by PHS and IPA. The parties agree that, in the event of changes in federal or state law that necessitate an amendment to this Agreement, they shall endeavor in good faith to reach agreement on such amendment that is consistent with and in furtherance of the scope and intent of this Agreement. 10.9 Notices. All notices expressly required to be given pursuant to ------- the terms of this Agreement shall be in writing and shall be deemed effectively given (i) on the date of receipt if personally delivered or telecopied to the party to whom the same is directed; or (ii) on the third day after mailing if mailed to such party, postage prepaid, addressed to the following addresses, or to such other addresses as the parties may hereafter designate by like notice: to PHS at: Physicians Health Services of Connecticut, Inc. 120 Hawley Lane Trumbull, CT 06611 ATTN: Executive Director and to IPA at: c/o Physicians Health Services 120 Hawley Lane Trumbull, CT 06611 PHS's obligation to notify IPA hereunder for all matters other than termination of this Agreement may be fulfilled by PHS's mailing to IPA in the manner set forth above in a letter describing the matters subject to such notification. Notice of termination shall be by certified mail. 10.10 Third Party Beneficiaries. Nothing in this Agreement, express or ------------------------- implied, is intended or shall be construed to confer upon any person, firm or corporation other than the parties hereto and their respective successors or assigns, any remedy or claim under or by reason of this Agreement and any term, covenant or condition hereof, as third party beneficiaries or otherwise, and all of the terms, covenants and conditions hereof shall be for the sole and exclusive benefit of the parties hereto and their successors and assigns. 10.11 Policy Changes. To the extent additional national accreditation bodies -------------- develop their own accreditation requirements, and these requirements have a material impact on the ability of PHS to pursue new business or retain current business, PHS and the IPA agree to work together in developing additional policy changes. 10.12 Unenforceability. If any provision of this Agreement is determined to be ---------------- unenforceable, the rest of the Agreement shall remain in full force and effect. 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement the month and year above set forth. PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC. By: ___________________ HERITAGE INDIVIDUAL PRACTICE ASSOCIATION By: ___________________ 13 SCHEDULE 1 ---------- IPA - --- Barkhamsted Bethel Bethlehem Bridgewater Brookfield Canaan Colebrook Cornwall Danbury Goshen Hartland Harwinton Kent Litchfield Monroe Morris New Fairfield New Hartford New Milford Newtown Norfolk North Canaan Redding Roxbury Salisbury Sharon Sherman Southbury Thomaston Torrington Warren Washington Winchester Woodbury 14 EXHIBIT A --------- PHS RESPONSIBLE SERVICES ------------------------ The following are PHS Responsible Services: General Laboratory procedures and Cytology for which PHS has contracted with a third-party to provide, including all laboratory procedures as defined by the CPT code range 80002-89399 but excluding procedures defined by the CPT code ranges 88104-88199 and 88000-88099 and 88300-88399. Dental services Hospital stop- loss insurance for inpatient services Radiology (other than radiotherapy) Audiology Rehabilitative services Immunizations and Injectables Drug and alcohol component of behavioral health services Durable medical equipment Oxygen and prosthetics Ambulance Podiatry services Chiropractic services Optometry services respect 15 EX-21 14 SUBSIDIARIES OF THE COMPANY
Exhibit 21 SUBSIDIARIES OF PHYSICIANS HEALTH SERVICES, INC. ------------------------------------------------ NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION ------------------ ----------------------------- Physicians Health Services of Connecticut, Inc. Connecticut Physicians Health Services of New York, Inc. New York Physicians Health Services of New Jersey, Inc. New Jersey Physicians Health Services (Bermuda), Ltd. Bermuda PHS Insurance of Connecticut, Inc. Connecticut Physicians Health Insurance Services, Inc. Connecticut PHS Investments, Inc. Delaware Physicians Health Services Insurance of New York, Inc. New York PHS Real Estate, Inc. Delaware PHS Real Estate II, Inc. Delaware
EX-23 15 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-74486) pertaining to the Physicians Health Services, Inc. 1992 Stock Option Plan, in the Registration Statement (Form S-8, No. 33-81196) pertaining to the Physicians Health Services, Inc. Pension Plan, and in the Registration Statement (Form S-8, No. 33-81142) pertaining to the Physicians Health Services, Inc. 401(k) Profit Sharing Plan of our report dated March 14, 1997, with respect to the consolidated financial statements and schedules of Physicians Health Services, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Stamford, Connecticut March 27, 1997 EX-27 16 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1996 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 39,213 59,115 39,809 1,781 0 157,606 82,319 15,273 238,310 140,862 0 0 0 94 96,192 238,310 481,534 488,108 426,040 426,040 85,919 0 388 (24,239) 11,275 (12,964) 0 0 0 (12,964) (1.39) (1.39)
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