Exhibit 10.1

EXECUTION COPY

 

SECOND AMENDMENT TO

MASTER SERVICE AGREEMENT

Amendment dated as of March 11, 2003 (this “Amendment”) to the Master Service
Agreement dated as of August 5, 1997 (as originally in effect and as amended
from time to time prior to the date hereof the “Original Agreement”) by and
among Aetna Inc. (formerly know as Aetna U.S. Healthcare Inc.), on behalf of
itself and all of its affiliates (collectively, “Aetna”), Magellan Health
Services, Inc., on behalf of itself and all of its affiliates (collectively,
“Magellan”) and Human Affairs International, Incorporated (together with its
subsidiaries, “Contractor”), a Subsidiary of Magellan.  Aetna and Magellan are
hereinafter sometimes referred to collectively as “Parties” and individually as
a “Party”.  Unless otherwise specifically defined herein, each term used herein
which is defined in the Original Agreement has the meaning assigned to such term
in the Original Agreement.

W I T N E S S E T H :

WHEREAS, the Parties wish to amend the Original Agreement as provided in this
Amendment (as so amended, and as the same may be amended from time to time after
the date hereof, this “Agreement”; references to the Agreement include, for
periods prior to the date hereof, the Original Agreement as in effect from time
to time);

WHEREAS, Aetna, Magellan and Contractor mutually desire to enter into this
Amendment on the date hereof (the “Second Amendment Date”) whereby (i) Aetna and
Magellan will provide access to and coordinate the provision of behavioral heath
care services to Members with the objective of delivering cost-effective,
quality behavioral health care services and (ii) Aetna will have an option to
purchase, on the terms and conditions set forth herein, Magellan’s assets that
are dedicated to the provision of behavioral health care services to Members;

WHEREAS, as part of a restructuring, Magellan and each applicable affiliate
intends to file a petition for relief under Chapter 11 of Title 11 of the United
States Code (the “Chapter 11 Case”);

WHEREAS, Aetna and Magellan mutually desire that the United States Bankruptcy
Court for the Southern District of New York assigned to Magellan’s Chapter 11
Case (the “Court”) authorize Magellan to assume the Agreement, as amended by
this Amendment, and confirm the Plan of Reorganization having substantially the
terms set forth in Schedule 6 (the “Restructuring Term Sheet”).

 

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NOW, THEREFORE, in consideration of the mutual covenants and promises stated
herein and other good and valuable consideration, the parties hereby agree as
follows:

I.  Behavioral Healthcare Services

 

Section 1 of the Original Agreement (“Behavioral Healthcare Services”) shall, on
the date hereof, be amended and restated in its entirety as follows:

 

“1.          Behavioral Healthcare Services

A.                   Magellan provides, and manages the administration and
utilization of, behavioral healthcare benefits in multiple jurisdictions
throughout the United States.

                                Magellan shall provide the services described in
Exhibits A (“GENERIC HMO AGREEMENT”) and B (“NON-HMO AGREEMENT”) hereto
(collectively, the “Vendor Contracts”) in the markets described in Schedules A
(“HMO MARKETS”) and B (“NON-HMO MARKETS”), respectively, subject to the
qualifications set forth in paragraphs B through K below.  In the case of any
conflict between this Agreement and any Vendor Contract, this Agreement shall
govern.

B.                     Aetna and Magellan have entered into the Behavioral
Health Contractor Agreements substantially in the form attached hereto as
Exhibit A, and shall (a) in the case of the Bound Subsidiaries (as hereinafter
defined), execute documents confirming the agreements of such Bound Subsidiary
and (b) in the case of all other Magellan entities, execute promptly (and in no
event later than ten business days) after the Second Amendment Date, Amendments
to the Behavioral Health Contractor Agreements reflecting the terms on Exhibit
A-1 (such agreements as so amended, or such other confirmatory documents, the
“HMO Agreement”) in each event for each of the markets identified in Schedule A,
subject to any applicable regulatory approvals and licensing requirements.  It
is understood and agreed that the form of HMO Agreement attached hereto may need
to be modified in each market in a manner that is reasonably acceptable to Aetna
and Magellan to meet applicable regulatory requirements.  The parties to the HMO
Agreements shall be the applicable HMO subsidiary or affiliate of Aetna on the
one hand and Magellan or one of its affiliates on the other.

 

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C.                     Aetna and Magellan may, from time to time, mutually agree
to enter into HMO Agreements in other geographic markets not identified on
Schedule A.

D.                    Aetna and Magellan have entered into the Behavioral Health
Contractor Agreement substantially in the form attached hereto as Exhibit B, and
shall (a) in the case of the Bound Subsidiaries (as hereinafter defined),
execute documents confirming the agreements of such Bound Subsidiary and (b) in
the case of all other Magellan entities, execute promptly (and in no event later
than ten business days) after the Second Amendment Date, an Amendment to such
agreement reflecting the terms on Exhibit B-1 (such agreement as so amended, or
such other confirmatory documents, “Non-HMO Agreement”), in each event subject
to any applicable regulatory approvals.  The Non-HMO Agreement shall govern the
provision of services identified therein for Aetna throughout the United States.

E.                      In order to provide services pursuant to this Agreement,
Network Providers must have executed individual Participating Provider Addendum
attached to the applicable HMO Agreement or the “Aetna Addendum” as set forth as
Attachment 3 to Schedule 3.  Magellan and all Network Providers will act as
independent contractors of Aetna in providing Covered Services to Members. 
Except as otherwise set forth in this Agreement, Aetna shall not be liable for
any provider’s failure to properly perform health care services to any Member or
fulfill his/her/its obligations under the applicable provider contract.

F.                      To the extent permitted by law, Network Providers who
are HMO Network Providers shall be required to participate in all Plans covering
Members serviced by Magellan throughout the term of this Agreement, provided
they continue to meet Aetna’s participation criteria.

G.                     On an ongoing basis Magellan shall identify potential
Network Providers who have agreed to participate in the Aetna provider network
and shall encourage such providers not currently participating with Aetna to
apply for participation with Aetna.  Aetna agrees to accept for participation
any such provider that meets Aetna’s applicable participation criteria and
agrees to the terms and conditions required by this Agreement.  It is understood
by the parties, however, that, to the extent permitted by law, an HMO Network
Provider cannot provide services pursuant to this Agreement unless such provider
participates in all Plans.

 

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H.                    Magellan shall implement the programs and program
enhancements (the “Program Enhancements”) set forth on Schedule 1 on the dates
specified therein with respect to any particular item.

I.                         Magellan shall satisfy the obligations (the
“Reporting and Compliance Obligations”) set forth under the heading “Magellan
Reporting and Compliance Obligations” on Schedule 4 no later than the dates
specified therein with respect to any particular item).

                                Aetna shall have the oversight rights set forth
under the heading “Aetna Oversight Rights” on Schedule 4.

J.                        Magellan shall provide services hereunder at a level
of service that meets or exceeds the performance standards (the “Performance
Standards”) set forth on Schedule 2.  Aetna and Magellan shall have the rights
and obligations set forth on such Schedule 2.

K.                    Magellan shall comply with all applicable written Aetna
policies and service metrics in effect on the Second Amendment Date and
thereafter as may be modified (with notice provided in accordance with this
clause K), including but not limited to policies and metrics relating to Claim
Handling, Care Management, Network Management, Complaint Handling and Customer
Service, to the extent that such policies are not prohibited by Aetna’s
certificates of coverage or applicable law.  Notwithstanding the foregoing,
Aetna shall provide Magellan with 60 days written advance notice of any and all
proposed policy additions or changes (unless applicable law requires a shorter
period of implementation in which case the longest notice period it is possible
to give under such law shall be given).  The parties shall meet to discuss the
expressly proposed addition or change and shall work in good faith to resolve
any issues or disputes arising from such proposal (including, but not limited
to, any rate adjustment as set forth in Section 6 hereof).  The Committee (as
defined in Section 13) shall resolve any issues or disputes arising from Aetna’s
proposed policy change or addition.  To the extent that relevant Aetna policies
do not exist, then Aetna shall have right to approve any new policies affecting
Aetna’s members that are introduced by Magellan, with such approval not to be
unreasonably withheld.”

 

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II.  Network

Section 5 of the Original Agreement (“Provider Contracts/Network Rental
Arrangements”) shall, on the date hereof, be amended and restated in its
entirety as follows:

 

“5.          Recontracting of Providers / Network Rental Arrangement

A.                   Magellan will commence an effort to establish provider
contracts directly between Aetna and certain participating providers and will
take all of the actions described on Schedule 3 no later than the dates
specified therein with respect to any particular action.  As further provided in
Schedule 3, the Parties shall enter into a network rental arrangement (the
“Network Rental Agreement”) substantially in the form of Attachment 1 to
Schedule 3 on the terms and conditions set forth therein.”

III.  Rates; Payment Arrangements; Exclusivity

Section 6 of the Original Agreement (“Rates; Payment Arrangements”) shall, on
the later of the Plan Effective Date or January 1, 2004, be amended and restated
in its entirety as follows:

 

“6.          Rates; Payment Arrangements; Exclusivity

A.                   The rates for services provided under the HMO Agreements
and under the Non-HMO Agreement shall be as set forth in Schedule 5.

B.                     Current exclusivity arrangements between Aetna and
Magellan in New York, Texas, Florida and Maryland shall be maintained under this
Agreement.  Beginning on the later of the Plan Effective Date or January 1,
2004, Aetna shall offer exclusivity in each other state (each, an “Additional
Market”) in which Magellan provides services hereunder on the Second Amendment
Date, on the following basis:

(i)       Aetna’s PPO business in each Additional Market shall be provided to
Magellan on an exclusive basis; and

 

(ii)      Aetna shall provide Magellan with a percentage of Aetna’s HMO business
in each Additional Market (calculated on a member basis for behavioral
healthcare services in such state) that is at least equal to the percentage of
Aetna’s HMO business in such Additional Market that was serviced by Magellan on
the Second Amendment Date; provided, that if

 

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(a)     any customer of Aetna elects, after the Second Amendment Date, to have
someone other than Magellan provide behavioral healthcare services; and/or

 

(b)     Aetna, on or after the Second Amendment Date, enters into a global risk
arrangement with an integrated delivery system, or like entity, whereby such
entity arranges for the provision of behavioral health services to Aetna members
by a behavioral health vendor other than Magellan; and/or

 

(c)     Aetna, prior to the Second Amendment Date, entered into a global risk
arrangement with an integrated delivery system, or like entity, whereby such
entity arranges for the provision of behavioral health services to Aetna members
by a behavioral health vendor other than Magellan and there is an increase in
the number of members serviced under such arrangement at any time after the
Second Amendment Date, so long as such increase is associated with new Aetna
membership or results from a change in primary care physician affiliation to an
integrated delivery system, or like entity, for reasons other than solely and
intentionally transitioning business from Magellan; and/or

 

(d)     Aetna, prior to the Second Amendment Date, entered into contracts with
behavioral health vendors other than Magellan in certain states and the Aetna
members serviced by such behavioral health vendors in those states increases at
any time after the Second Amendment Date, so long as such increase is associated
with new Aetna membership or results from a change in primary care physician
affiliation to a behavioral health vendor other than Magellan for reasons other
than solely and intentionally transitioning business from Magellan; and/or

 

(e)     Aetna Government Health Plans, LLC, or any of its affiliates, enters
into a contract or subcontract with the U.S. Department of Defense TRICARE
Management Activity with respect to the TRICARE Next

 

 

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Generation Contracts for the management and delivery of health care services to
members;

 

then in each case such members, or such increase(s) in members, shall be
excluded from both the numerator and the denominator in the calculation of the
percentage of Aetna’s HMO business provided to Magellan as of any time after the
Second Amendment Date.

 

In the event that Aetna enters into a new global risk arrangement with an
integrated delivery system, or like entity, as set forth in subsection (b)
above, Aetna shall, during the negotiation of such global risk arrangement, and
where not otherwise prohibited by applicable law, take reasonable steps,
including, where reasonably appropriate, coordinating a meeting between
representatives of Magellan and the integrated delivery system in order to
encourage the integrated delivery system to consider the arrangement of the
provision of behavioral health services to Aetna members by Magellan.

 

Within 60 days of the Second Amendment Date, Aetna shall provide Magellan with
the following information:  (i) actual Aetna HMO membership counts by each
market as of the Second Amendment Date; (ii) a listing of global risk
arrangements entered into by Aetna prior to the Second Amendment Date whereby
behavioral health services are provided to Aetna members through an entity other
than Magellan; and (iii) a listing of contracts with behavioral health vendors
entered into by Aetna prior to the Second Amendment Date.

 

This Section 6.B will terminate in its entirety as set forth in
Section 9.C(iii).  The exclusivity arrangements in any state will terminate upon
the occurrence of a Network Retention Event in such state.  A “Network Retention
Event” with respect to any state shall mean that the number of any of (1) the
total outpatient providers (“Category I Providers”), (2) the total partial
hospital and intensive outpatient facility providers (“Category II Providers”)
or (3) the total inpatient facility providers (“Category III Providers”), in
each case contracted by Magellan to provide services to Aetna Members in such
state shall, at any time, be less than 90% of the number of total Category I
Providers, Category II Providers or Category III Providers, respectively, that
were contracted by Magellan to provide services to Aetna Members in such state
as of July 1, 2003.”

 

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IV.  Final Payment and Purchase Option.

Section 7 of the Original Agreement (“Contingent Payments”) shall, on the Plan
Effective Date, be amended and restated in its entirety as follows:

 

“7.                               Final Payment under Original Agreement; Note;
Warrants; Purchase Option; Security; Letter of Credit

A.                   $60 million payment; Note; Warrants.  Magellan agrees and
acknowledges that the $60,000,000 Tranche 1 and Tranche 2 payment for the fifth
Contract Year, as contemplated by the Original Agreement, has been fully earned
and is due and payable (Aetna agrees and acknowledges, however, that the
$60,000,000 Magellan owes to Aetna under the Original Agreement will not become
an administrative expense within the meaning of 11 U.S.C. Section 503, solely by
virtue of Magellan’s assumption of this Amendment under 11 U.S.C. Section 365). 
In settlement of the $60,000,000 payment owed to Aetna, Magellan Health
Services, Inc. shall, on the date of the effectiveness of Magellan’s Plan of
Reorganization (the “Plan Effective Date”), (x) pay to Aetna $15,000,000 in cash
and (y) deliver to Aetna a promissory note (the “Note”) in an amount and on the
terms and conditions (including provisions as to principal, interest, maturity,
repayment and prepayment) set forth on Exhibit F attached hereto.  In addition,
in consideration of the other agreements of Aetna under this Agreement, Magellan
Health Services, Inc. shall (i) issue to Aetna warrants (the “Warrants”) in an
amount and on the terms and conditions (including provisions as to strike price,
term, exercisability, antidilution and other exit rights) set forth on Exhibit G
attached hereto; provided, that if Magellan grants terms or conditions to any
other warrantholder that are more favorable to such warrantholder than the terms
and conditions set forth on Exhibit G, then the Warrants shall have such more
favorable terms and conditions; and (ii) grant Aetna one demand registration
right (that will not be underwritten) and unlimited piggyback registration
rights (collectively, the “Registration Rights”) with respect to the Magellan
Health Services, Inc. common stock received upon exercise of the Warrants for so
long as such common stock constitutes “Registrable Securities” (as defined in
the Restructuring Term Sheet).  The Registration Rights will be documented by a
registration rights agreement substantially identical to the registration rights
agreement to be entered into by Magellan Health Services, Inc. and the other
recipients of “New Common Stock” (as defined in the Restructuring Term Sheet).

 

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On or prior to the Plan Effective Date, Aetna shall pay Magellan an amount equal
to the net settlement amount due ($3,584,903.50 from Aetna to Magellan under the
letter agreement dated December 20, 2002 between Aetna and Magellan, plus
interest on that amount from December 20, 2002 through the date of such payment
at a rate of 3.85% per annum.

 

B.                     Purchase Option.  Subject to the immediately following
sentence, Aetna shall have an option (the “Purchase Option”), exercisable in its
sole discretion, to consummate the purchase of the Purchased Assets (as defined
in Exhibit D, such purchase to be on and subject to the terms and conditions
(including purchase price) set forth in such Exhibit) on any of the following
dates:  (x) December 31, 2005 (or on such earlier date on which Aetna’s right to
do so arises as provided in the Section 9(C)(ii) of this Agreement); or (y) in
the event Aetna chooses to extend this Agreement until December 31, 2006 , any
of March 31, 2006, June 30, 2006, September 30, 2006 or December 31, 2006 (or on
such earlier date on which Aetna’s right to do so arises as provided in the
Section 9(C)(ii) of this Agreement); provided that Aetna may, in its sole
discretion, elect to delay the date of consummation of the purchase under the
Purchase Option beyond the applicable date specified in clause (x) or (y) of
this sentence, as applicable, until the date that is three months after such
applicable date, in order to obtain any governmental approvals or other Required
Consents (as such term is defined in Exhibit D) so long as the terms and
conditions of this Agreement are extended for such additional three month
period.  Aetna must deliver written notice (the “Exercise Notice”) of any
exercise of the Purchase Option to Magellan at least six months prior to the
intended consummation of such purchase (which consummation may be extended for
any necessary regulatory approvals); provided that if an early purchase right is
triggered pursuant to Section 9(C)(ii) of this Agreement, then the consummation
of the purchase shall occur as soon as possible after delivery of the Exercise
Notice, and in any event no later than 90 days after delivery of the Exercise
Notice or two days following regulatory approval, if any.  The Exercise Notice
shall state whether (i) Aetna elects (which election may be made in its sole
discretion) to have the claims processing function conducted by Dedicated Staff
at the St. Louis facility of the Business be included within the scope of the
“Business” and “Purchased Assets” under the Asset Purchase Agreement and/or (ii)
Aetna elects (which election may be made in its sole discretion) to have a
license to the “Key Software”  as contemplated by Section 7.06(a) of the Asset
Purchase Agreement, for an increase in the “Purchase Price” as contemplated by
the Asset

 

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Purchase Agreement.  The exercise of the Purchase Option shall be documented by
an asset purchase agreement in the form set forth as Exhibit D hereto (the
“Asset Purchase Agreement”), which shall be executed by Aetna and Magellan
promptly after delivery of the Exercise Notice but in no event later than ten
business days after such delivery, with Aetna’s purchase in all cases to be on
the terms and subject to the conditions set forth in the Asset Purchase
Agreement.  “Business” means Magellan’s management and operation of the
behavioral healthcare services provided to Aetna’s Members by Magellan pursuant
to this Agreement.

C.                     Security Interest and Guarantees.  Magellan’s obligations
under this Section 7, under the Asset Purchase Agreement and under the Note,
will be guaranteed on a secured basis by each Magellan entity that is a
guarantor under the New Senior Secured Credit Agreement (the “Guarantees”) and
will be secured by a “silent second” security interest on all of the assets of
Magellan and its subsidiaries in which the lenders under the New Senior Secured
Credit Agreement have a security interest (the “Security Interest”), in each
case on the terms and conditions (including as to priority and subordination)
set forth in the Restructuring Term Sheet.

D.                    Letter of Credit.  On the Plan Effective Date Magellan
shall provide a letter of credit (the “Letter of Credit”) for the benefit of
Aetna, in an amount and on the terms and conditions set forth in the
Restructuring Term Sheet.

E.                      New Senior Secured Credit Agreement.  Subject to
Magellan’s compliance with the covenant set forth in Section 8.C(ii), Aetna
acknowledges and agrees that the terms of the New Senior Secured Credit
Agreement prohibit, for so long as any obligations of Magellan thereunder remain
outstanding, (i) the consummation by Magellan of the sale and purchase under the
Asset Purchase Agreement and (ii) the set-off by Magellan of amounts deemed paid
by Aetna to Magellan under the Asset Purchase Agreement against obligations of
Magellan to Aetna under the Note, in each case without the prior written consent
of the “Required Lenders” (as defined in the New Senior Secured Credit
Agreement) .

F.                      Additional Matters Related to Early Purchase Option.  In
the event that Aetna is entitled to exercise the Purchase Option at any time,
but is prevented from consummating such purchase, because of the terms of the
New Senior Secured Credit Agreement or any other agreement to which Magellan is
bound (a “Control Trigger”), then Aetna shall have the right (which right is
exercisable in its sole discretion) to

 

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appoint one or more individuals (who may be Aetna employees or third parties)
(the “Designated Individuals”) who will have responsibility and full
decision-making authority over the management and direction of all employees of
the Business and at each Aetna-Dedicated Facility, it being understood that at
all times all employees of Magellan shall remain employees of Magellan and Aetna
shall not be responsible for any Magellan obligations to such employees.  It is
understood that Aetna has no duty and shall have no duty of any kind to Magellan
or to any other party to exercise its right to appoint Designated Individuals
pursuant to this paragraph.  Subsequent to Aetna’s appointment of Designated
Individuals pursuant to this paragraph, Aetna shall indemnify Magellan for any
actions or omissions taken by Aetna personnel serving as Designated Individuals,
which actions or omissions are found by a court of competent jurisdiction, by
final and nonappealable order, to constitute gross negligence or willful
misconduct, in all events relating solely to the day to day operation of the
Business and the provision of behavioral healthcare services by Magellan and in
no event relating to, among other things, any debt for borrowed money or other
long-term indebtedness or obligations of Magellan.  Aetna shall, through the
Designated Individuals, conduct the Business (including the payment of claims)
in the ordinary course.  Notwithstanding any provision in this Agreement, from
and after a Control Trigger and the date of appointment of any Designated
Individual, all payment arrangements between Aetna and Magellan hereunder shall
be on a non-risk basis, and in lieu of the other fees arrangements between the
parties Aetna shall reimburse Magellan for services provided under this
Agreement at a rate of $0.81 per member per month for the HMO Business and at a
rate equal to 85% of the then-existing PPO rate for the PPO Business.  In the
event of a Control Trigger the parties will work together in good faith to come
up with a detailed plan to implement the foregoing arrangements.  The Designated
Individuals’ authority over the Business shall continue until Magellan is able
to deliver the assets necessary to consummate the purchase under the Purchase
Option.

G.                     Survival.  The provisions of this Section 7 shall survive
any termination of this Agreement until the consummation of the Purchase Option,
in the event that an Exercise Notice shall have been delivered on or prior to
the date of termination of this Agreement.”

 

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V. Migration and Employee Matters.

Section 8 of the Original Agreement (“Corporate Governance”) shall, on the date
hereof, be deleted and replaced in its entirety with the following provision:

 

“8.          Migration; Covenants; Employee Matters

A.                   Magellan shall take all actions required to complete the
migration of the following functions of the Business into Aetna-Dedicated
Facilities on or prior to December 31, 2004, in accordance with the time frames
outlined in Schedule 9 (the “Migration”):  (i) customer service; (ii) care
management; (iii) provider relations; (iv) claims processing; (v) quality
improvement; and (vi) the direct, on-site management of the foregoing
functions.  The parties acknowledge and agree that Schedule 9 is a tentative
schedule and that the integration activities and time frames shall be finalized
by the Integration Team (as defined below) within 60 days of the Second
Amendment Date; provided that the target dates set forth on Schedule 9 for the
beginning and the ending of integration activities are definitive (i.e., not
tentative) and may not be modified by the Integration Team.  The “Integration
Team” shall be comprised of an equal number of representatives from Magellan and
Aetna, which number shall be determined by mutual agreement of the parties. 
“Aetna-Dedicated Facilities” shall consist of the following facilities of the
Business maintained as of the Second Amendment Date in metropolitan:  (i) King
of Prussia, Pennsylvania, (ii) Sandy, Utah, (iii) El Segundo, California, in
each of clauses (i) through (iii), housing clinical management and customer
service personnel as well as two network management personnel per facility, and
(iv) St. Louis, Missouri, housing claims processing personnel.

B.                     From the Second Amendment Date until the earlier of the
date of execution of the Asset Purchase Agreement or the date that Aetna
indicates in writing to Magellan that Aetna shall not exercise the Purchase
Option, Magellan will provide the information and access to the Business
(including but not limited to facilities, personnel and systems) that is
reasonably necessary to allow Aetna to prepare for the potential acquisition of
the Business through the exercise of its Purchase Option. Aetna’s requests for
information and/or access pursuant to this paragraph shall be conducted in such
manner as not to interfere unreasonably with the conduct of the business of
Magellan.

 

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C.                     (i) Magellan covenants that the Business shall have all
personnel, property, assets, procedures and controls necessary to conduct the
Business as conducted on the Second Amendment Date and as required to be
conducted pursuant to this Agreement, and that all such property shall be
maintained properly and in good working order, updated on a reasonably current
basis in accordance with Magellan’s practices in its other business operations.

(ii)  Magellan shall not, and shall cause each of its affiliates not to, enter
into, renew, amend, modify, supplement or extend (or to agree or commit to do
any of the foregoing) any agreement, contract, arrangement or other transaction
(including, without limitation, the New Senior Secured Credit Agreement or any
other bank facility, or any refinancing of any of the foregoing) that would (A)
result in the imposition or continuance of any lien on any of the Purchased
Assets (as defined in the Asset Purchase Agreement) which would not be released
upon the sale of the Purchased Assets to Aetna, or (B) prevent, alter or delay
any of the transactions contemplated by this Agreement or the Asset Purchase
Agreement (including without limitation the repayment of the Note, the exercise
of the Purchase Option, the execution of the Asset Purchase Agreement or the
consummation of the purchase contemplated thereunder); provided that the New
Senior Secured Credit Agreement, together with any amendments thereto as may be
entered into from time to time after the date thereof, shall be excluded from
the foregoing covenant but only to the extent that the stated maturity of the
loans under such agreement (as it may be so amended) is not extended beyond
November 30, 2005.

D.                 (i)  From the Second Amendment Date until the date of
execution of the Asset Purchase Agreement, Magellan shall conduct the Business
in all material respects in accordance with this Agreement and, to the extent
not addressed in this Agreement, in the ordinary course consistent with
Magellan’s practices in its other business operations (including without
limitation as to practices relating to assets sales and employee compensation),
and shall use its good faith efforts to preserve intact the business
organizations and relationships with third parties and to keep available the
services of the present employees of the Business.

(ii)               From the Second Amendment Date until the date of execution of
the Asset Purchase Agreement, Magellan shall not in any material respect (x)
take or agree or commit to take any action that would make any representation or
warranty of Magellan under the Asset Purchase Agreement inaccurate in any
respect at, or as of any time prior to, the

 

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date of execution of the Asset Purchase Agreement or (y) omit or agree or commit
to omit to take any action necessary to prevent any such representation or
warranty from being inaccurate in any respect at any such time.  It is
understood and agreed that the obligations set forth in this paragraph shall be
effective as of the date hereof as if the Asset Purchase Agreement were in
effect as of the date hereof.

(iii)            From the date of delivery of the Exercise Notice until the date
of execution of the Asset Purchase Agreement, Magellan shall comply with the
covenants set forth in Section 5.01 of the Asset Purchase Agreement.

E.                      Magellan shall use commercially reasonable efforts to
negotiate leases (including any renewals or replacements) for the
Aetna-Dedicated Facilities and any other assets subject to the Purchase Option
that, at the time of the exercise of the Purchase Option, will be (i) on market
rates and terms, and (ii) freely assignable to Aetna.  True and complete copies
of each such lease and all amendments thereto shall be delivered to Aetna from
time to time promptly upon Aetna’s request.  Without the prior written consent
of Aetna, which consent shall not be unreasonably withhold or delayed, Magellan
will not terminate, amend, modify, renew or replace any leases relating to the
Aetna-Dedicated Facilities.

F.                      Magellan shall staff the Business with such employees as
shall be reasonably necessary to deliver the services required under this
Agreement (the “Dedicated Staff”).  Aetna shall have the right to approve (such
approval not to be unreasonably withheld) the one employee (including any new
hires), who is responsible for the overall management responsibility over the
Business, as a whole.  Aetna hereby approves Dennis P. Moody as an acceptable
choice for such employment position.  Magellan shall provide Aetna with
sufficient information concerning, and an opportunity to meet with and ask
questions of, such proposed employee so as to enable Aetna to reasonably
evaluate such proposed employee.  Aetna’s approval or disapproval must be
communicated to Magellan within five days of such provision of information and
meeting, or the candidate will be deemed acceptable to Aetna.

G.                     In the event Aetna perceives performance issues with a
Dedicated Staff member, Aetna shall have an opportunity to express its concerns
to Magellan for investigation and resolution.  Magellan shall consider Aetna’s
expression of concern and shall respond to such concerns in the same manner as
it would respond to concerns expressed by a senior manager of Magellan.  If
Aetna is dissatisfied with Magellan’s

 

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resolution of the employee concern, Aetna may submit the matter to the
Committee.

H.                    During the term of this Agreement, all Dedicated Staff
shall remain employees of Magellan and Aetna shall not be responsible for any
Magellan obligations to Dedicated Staff members or consultants to the Business,
including any severance or other payments related to the dismissal of any
Dedicated Staff member or consultant (except as otherwise provided herein). 
Magellan shall make no representations to any of its employees relating to
future employment opportunities with Aetna or the Business.

I.                         During the term of this Agreement, no Dedicated Staff
member or consultant to the Business who provides clinical management services
may receive any incentive compensation based upon utilization of healthcare
services.”

VI.  Term and Termination

Section 9 of the Original Agreement (“Term and Termination”) shall, on the date
hereof, be amended and restated in its entirety as follows:

 

“9.          Term and Termination

A.                   This Agreement shall be effective for (i) a term ending on
the close of business on December 31, 2005 (the “Initial Term”) and (ii) in the
event that Aetna delivers, in its sole discretion (subject to the next
paragraph), a notice of extension (an “Extension Notice”) on or prior to the end
of the Initial Term, for an additional one (1) year term ending on the close of
business on December 31, 2006 (the “Extension Term”).

Aetna shall be deemed to have delivered an Extension Notice, and the Agreement
shall thereby be extended automatically for the Extension Term, in the event
that Aetna does not deliver on or prior to June 30, 2005 an Exercise Notice to
consummate a purchase under the Purchase Option on December 31, 2005, as
contemplated by clause (x) of Section 7.B.

This Agreement shall terminate upon the consummation of the purchase of the
Purchased Assets on any of the dates specified in the first sentence of Section
7.B.  In the event that Aetna elects, in its sole discretion, to extend the date
of such consummation as set forth in the proviso to such sentence, then this
Agreement shall be effective for the additional three month term contemplated by
such proviso.

 

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This Agreement may not be terminated by any Party hereto except as expressly
stated in this Section 9.

B.                     An “Event of Default” shall be deemed to have occurred
under this Agreement with respect to any Party in the event that:

(i)                                     (A)  such Party fails to perform any
material obligation of such Party under this Agreement or breaches any
obligation of such Party under this Agreement having a material adverse effect
on the business of the other Party, including without limitation the health and
safety of Members, taken as a whole, or (B) such Party causes an event of
default under or a breach of the Non-HMO Agreement and the other Party
terminates the Non-HMO Agreement in accordance with the termination provisions
thereof;

(ii)                                  an entity that is a direct competitor of
Aetna (with respect to the businesses or practices prohibited by Section 11 of
this Agreement) shall have directly or indirectly acquired a controlling
interest in Magellan or Contractor;

(iii)                               Contractor shall have been suspended or
disbarred from participation in any Medicare or Medicaid program unless Magellan
or a subsidiary of Magellan that is reasonably acceptable to Aetna and has the
necessary license continues to provide the same services that Contractor can no
longer provide due to such suspension or disbarment;

(iv)                              such Party shall have commenced a proceeding
under Chapter 7 under the federal Bankruptcy Code or, in the case of Magellan or
Contractor, had its bankruptcy case converted to a case under Chapter 7 of the
federal Bankruptcy Code;

(v)                                 Magellan or Contractor shall have filed,
sponsored, approved, supported or failed to object to the filing of any plan of
reorganization in any bankruptcy proceeding not acceptable to Aetna in its sole
discretion;

(vi)                              the closing, termination or substantial
elimination by Magellan of any line of its behavioral healthcare business
required to service Aetna Members covered under the HMO Agreements or the
Non-HMO Agreement;

(vii)                           the termination by either party for reasons not
permitted by the applicable agreement or agreements of (A) this

 

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Agreement, (B) HMO Agreements covering more than 50% of the Members as of the
Second Amendment Date or (C) a Non-HMO Agreement;

(viii)                        Magellan fails to complete the Migration
activities set forth in Section 8 and Schedule 9 on or prior to December 31,
2004;

(ix)                                Magellan fails to comply with any three or
more of the critical performance measures (the “Critical Performance Measures”)
set forth on Schedule 10 for two consecutive quarters; or

(x)                                   a determination by the Committee that
Magellan’s financial situation is reasonably likely to lead to an Event of
Default under any of clauses (i) through (ix) under this Section 9(B);

                                provided, that if any event described in
subsections (i), (ii), (iii) or (vi) above is curable, no such event shall be
deemed to constitute an “Event of Default” unless the Party causing the event
shall fail to remedy such event within a period of ninety (90) days after the
other Party shall have given the Party causing the event a written notice of
default and provided further that if the nature of the event requires more than
ninety days to cure and the Party causing the event has substantially completed
such cure within the ninety day period and continues diligently to pursue such
cure, such cure period shall be extended for up to an additional 90 day period
to permit the breaching Party to complete such cure.  Aetna shall not have a
right to terminate this Agreement solely as a result of any suspension,
withdrawal, expiration, non-renewal or revocation of any state or local license,
certificate, approval or authorization of Contractor or the indictment, arrest,
charge or conviction of Contractor or any of its senior officers (in connection
with providing services on behalf of Contractor) for any felony related to moral
turpitude or professional practice related to this Agreement.  Each of the
Parties agrees to notify each other Party hereto within two business days after
the occurrence of any Event of Default hereunder.

C.                     Upon the occurrence of an Event of Default, the Parties
shall have the following remedies only:

(i)                    Upon the occurrence of an Event of Default covered under
subsections B(i) through and including (ix) above with respect to a Party (Aetna
on the one hand and Magellan or Contractor on the other hand), the other Party
shall be entitled to terminate this

 

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Agreement upon written notice to the Party causing the Event of Default;
provided that this Agreement will terminate automatically upon the occurrence of
an Event of Default described in subsections B(iv) or (v) above.  Further, the
non-breaching Party shall be entitled to pursue any remedy available at law or
in equity.

(ii)                 Upon the occurrence of an Event of Default covered under
subsections B(ii), (iii), (vi), (vii)(provided that termination was by Magellan
or Contractor), (viii) or (ix) above by Magellan or Contractor, in addition to
Aetna’s rights under paragraph C(i) above, Aetna shall be entitled at such time
to immediately exercise the Purchase Option as provided in Section 7 of this
Agreement.

(iii)              Upon the occurrence of an Event of Default covered under
subsection B(x) above, the Aetna Non-Competition Covenant and the exclusivity
obligations of Aetna set forth in Section 6 of this Agreement shall immediately
and automatically terminate.

D.                    If under either an HMO Agreement or the Non-HMO Agreement
a breach or an event of default occurs and such breach or event of default
applies to both Agreements, the non-breaching Party shall treat the breach or
event of default in the same manner under both Agreements.

E.                      The Parties hereto expressly waive any rights to set-off
any amount or payment due hereunder or any Vendor Contract that any Party may
have under law or equity, except as otherwise expressly permitted herein.

F.                      The provisions of Sections 7 and 11 of this Agreement
shall survive any termination of this Agreement which results in an exercise of
the Purchase Option, to the extent provided in such Sections.”

VII.  Restrictive Covenants

Section 11 of the Original Agreement (“Restrictive Covenants”) shall, on the
date hereof, be amended and restated in its entirety as follows:

 

“11.        Restrictive Covenants

Magellan and its wholly-owned subsidiaries agree that during the term of this
Agreement and, in the event the Purchase Option is exercised, during an
additional term ending one (1) year following the date of

 

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consummation of such Purchase, Magellan and its wholly-owned subsidiaries shall
not directly or indirectly enter into or engage in the ownership, management,
operation or control of any entity which is a managed care entity offering full
health care benefits. Notwithstanding anything to the contrary set forth in the
preceding sentence, Magellan and its wholly-owned subsidiaries may engage in and
own, manage, operate or control any entity engaged in activities, which are
integrated delivery system services, specialty/limited health service managed
care, third party administration of specialty/limited health care services,
disease management, pharmacy benefit management, utilization management, network
management, care management or specialty/limited health care
provision/administration for government agencies, HMOs or insurers.  Nothing in
this paragraph shall be construed to limit the right of Magellan to offer and
provide EAP services and non-behavioral health management services to customers
of Aetna.”

VIII.  Information

Section 12 of the Original Agreement (“Cooperation of the Parties”) shall, on
the date hereof, be amended and restated in its entirety as follows:

“12.        Cooperation of the Parties; Access to Information

A.                   Magellan and Aetna will maintain an effective liaison and
close cooperation with each other to (a) maximize the mutual benefits of their
relationship, (b) enhance the quality of behavioral health services provided to
Members and (c) foster working relationships with network behavioral health
providers.

B.                     Each Party will exchange such financial information,
Member demographics, encounter and clinical data necessary for the other Party
to perform its obligations under this Agreement, in each case retroactive to
January 1, 2003.  Such information will be exchanged electronically to the
extent feasible to both Parties. In addition, each Party agrees to provide the
other Party full access to the data (which, in the case of Magellan, consists of
data for the Members, subject to applicable law, including data of the type set
forth on Schedule 7), at no additional cost charged to the other Party, which
are necessary for the other Party to perform its obligations hereunder, subject
to the confidentiality obligations set forth in this Agreement.  Without
limiting the foregoing, Magellan will provide a weekly (or such other shorter
period as may be technologically and commercially reasonable) encounter feed,
retroactive to January 1, 2003, of at least the following:  utilization,
encounter data, actual unit cost data, in and out-of-network breaks, level of
care, utilization by co-pay and

 

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utilization by diagnosis.  Information will be provided in a format and under
terms mutually agreed upon by the Parties.

C.                     Magellan and Aetna shall each have the right to audit and
inspect at any time during normal business hours upon reasonable notice, (a)
documents or information pertaining to verification of membership, in the
possession of the other Party, covered under this Agreement and the Vendor
Contracts and (b) any documentation or information relevant to determinations
under Subsection 6(C) of this Agreement, in each case subject to a
confidentiality agreement to be entered into between the parties.”

IX.  Dispute Resolution

Section 13 of the Original Agreement (“Agreement Administration / Dispute
Resolution”) shall, on the date hereof, be amended and restated in its entirety
as follows:

“13.        Agreement Administration/Dispute Resolution

A.                   Operating/Integration Committee:  Formation.  The Parties
shall designate an Operating/Integration Committee (the “Committee”) to oversee
the operation of this Agreement and the related Vendor Contracts.  The Purpose,
Authority, Composition and Operation of the Committee is set forth on Schedule
8.  Notwithstanding anything to the contrary in Schedule 8, however, the
Committee shall not have any role whatsoever in adjudicating or determining any
of the damages described in Section XVIII.B.(i) and nothing in this Section
shall in any way limit Aetna’s right to pursue any and all available remedies to
recover such damages.  In addition, in performing the adjudicative function
described in Schedule 8, the Committee may not take into account that, except as
specifically set forth in Section XVIII of this Agreement, all amounts owed by
Magellan to Aetna under this Agreement shall be entitled to administrative
priority within the meaning of 11 U.S.C. § 507.”

 

X.  Private Labeling

Section 14 of the Original Agreement (“Use of Name”) shall, on the date hereof,
be amended by inserting the following new paragraph at the end thereof:

“B.               Aetna shall have the right, exercisable at its election, to
require that the services provided by Magellan under this Agreement be branded

 

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and conducted as “Aetna Behavioral Health”.  Magellan shall begin the branding
effort as soon as practicable after written notice from Aetna and shall complete
this project within 180 days from the date of such notice.”

XI.  Interference With Contractual Relations

Section 15 of the Original Agreement (“Interference With Contractual Relations”)
shall, on the date hereof, be amended and restated in its entirety as follows:

“15.        Interference with Contractual Relations

Magellan shall not:  (a) counsel or advise, directly or indirectly, payors,
sponsors or other entities currently under contract with Aetna or any affiliate
to cancel, modify, or not renew said contracts; (b) impede or otherwise
interfere with negotiations which Aetna or an affiliate is conducting for the
provision of Plans; or (c) use or disclose to any third party membership lists
acquired during the term of this Agreement for the purpose of directly or
indirectly soliciting individuals who were or are Members or otherwise to
compete with Aetna or any affiliate.  Nothing in this Section is intended or
shall be deemed to (i) restrict any communication between a Participating
Provider and a Member determined by the Participating Provider to be necessary
or appropriate for the diagnosis and care of the Member, (ii) prohibit Magellan
from conducting activities permitted under Section 11 or (iii) apply with
respect to any Aetna customers to the extent such customers send unsolicited
RFPs to Magellan.  This Section shall survive the termination of this Agreement
for a period of one year thereafter. In the event of a breach or a threatened
breach of this Section by Magellan, Aetna shall have the right of specific
performance and injunctive relief in addition to any and all other remedies and
rights at law or in equity, and such rights and remedies shall be cumulative.”

XII.  Indemnity

Section 16 of the Original Agreement (“Indemnity”) shall, on the date hereof, be
amended and restated in its entirety as follows:

“16.        Indemnification

                                Each Party agrees to indemnify and hold the
other Party harmless against any and all claims, losses, liabilities, expense
and costs (including reasonable attorneys’ fees) (collectively, “Damages”)
arising from any of the services (which, in the case of Magellan, shall

 

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include all of the services delegated from Aetna to Magellan under this
Agreement, any of the Vendor Contracts or any other agreement mutually entered
into, except (i) Damages resulting in whole or in part from negligence,
recklessness or willful misconduct on the part of Aetna and (ii) Damages based
upon a claim of damage to the Aetna brandname arising out of the private
labeling arrangements set forth in Section 14(B) of this Agreement unless
arising from Magellan’s gross negligence, recklessness or intentional
misconduct) performed by the indemnifying party under this Agreement or the
breach of any of the indemnifying party’s obligations under this Agreement or
any of the Vendor Contracts.”

XIII.  Intellectual Property; EAP Referral Fee

Section 18 of the Original Agreement (“Miscellaneous”) shall, on the date
hereof, be amended by inserting the following two paragraphs at the end thereof:

“L.                Intellectual Property.  The Parties agree that Aetna
intellectual property (e.g., proprietary disease management algorithms and data
once it is transmitted to the Aetna warehouse) will be Aetna-owned, with no
Magellan right to use, even where Magellan data is used or where Magellan
provides insubstantial input; provided that Magellan shall have rights to use
such data before it is transmitted to Aetna.  Notwithstanding the foregoing,
Magellan shall have the right to use data retained on its systems in order to
satisfy its obligations under this Agreement.  The Parties agree that, where
there is substantial development input from both Aetna and Magellan on methods,
protocols, algorithms and analytics, then such intellectual property will be
co-owned or co-licensed.  It is understood that the mere provision of data shall
not constitute “substantial development input”.

M.                 EAP Referral Fee.  Magellan will compensate Aetna at the rate
of 2% of the annual first year revenue, and 1% of the annual revenue for every
year thereafter, for all new work life product sales to Aetna employer groups
that result from an Aetna referral.  No commission will be paid to Aetna for
renewals of accounts existing on the Second Amendment Date, with the exception
that commissions will be payable for the revenue associated with a product
expansion to an existing client.  Commission payments will be made to Aetna and
Aetna will be responsible for compensation, if any, to referring sales
personnel.  Magellan will be responsible for the underwriting of all products. 
Magellan and Aetna will work together to develop a marketing plan to increase
the distribution and breadth of products available to Aetna employer groups.”

 

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XIV.  Amendment to Definitions

Section 19 of the Original Agreement (“Definitions”) shall, on the date hereof,
be amended by inserting the following at the end thereof:

 

“Aetna shall mean Aetna Inc. (formerly know as Aetna U.S. Healthcare Inc.), on
behalf of itself and all of its controlled affiliates.

 

Magellan shall mean Magellan Health Services, Inc., on behalf of itself and all
of its applicable controlled affiliates.

 

Amendment shall mean the Second Amendment hereto dated as of March 11, 2003.

 

Second Amendment Date shall mean March 11, 2003.

 

New Senior Secured Credit Agreement shall mean the credit agreement among
Magellan and its senior bank lenders that becomes effective as of the Plan
Effective Date in the manner described in, and with the terms and conditions set
forth in, the Restructuring Term Sheet (including without limitation a stated
final maturity of all loans and other obligations thereunder of no later
November 30, 2005), as such original agreement may thereafter be amended in
compliance with Magellan’s covenant to Aetna set forth in Section 8.C(ii).

 

Original Agreement shall mean this Agreement as originally in effect and as
amended from time to time prior to (but not including) the Second Amendment
Date.”

 

XV.  Amendment to Aetna Non-Competition Covenant

Aetna and Magellan hereby agree to amend the Non-Competition Covenant (the
“Aetna Covenant”) dated as of December 4, 1997 between Aetna and Magellan as
follows:

 

A.                   The words “the termination or expiration of the Master
Agreement” in the second line of Section 1.1(a) of the Aetna Covenant are hereby
replaced with the words:

“the earlier to occur of (x) December 3, 2003, (y) the termination (including as
a result of the exercise of the Purchase Option set forth therein) of the Master
Agreement as amended by the Second

 

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Amendment thereto dated March 11, 2003 (as so amended, the “Master Agreement”)
or (z) the occurrence of an “Event of Default” under Section 9.B(x) of the
Master Agreement”

 

B.                     Section 1.1(e) of the Aetna Covenant is hereby amended by
(1) deleting the “or” at the end of clause (viii) thereof, (2) replacing the “.”
with a “; or” at the end of clause (ix) thereof, and (3) inserting the following
thereafter:

“(x) any of the strategic activities contemplated by the Master Agreement
(including without limitation the performance enhancement, network recontracting
and migration activities set forth in Sections 1, 5 and 7 thereof);

 

(xi) the commencement and operation of a pilot program whereby AUSHC or one of
its affiliates provides case management services for its members covered under
both health and disability programs administered by AUSHC or one of its
affiliates; provided such pilot program shall not supersede or have any
jurisdiction over Purchaser’s management of behavioral healthcare services for
any of such members in such pilot program; or

 

(xii) any contingency measures that may be taken by AUSHC in anticipation of the
termination of the Master Agreement or the exercise of the Purchase Option as
defined therein.”

 

XVI.  Governing Law; Counterparts

This Amendment shall be governed by and construed in accordance with the laws of
the State of Delaware (except for Section XV hereof which shall be governed by
and construed in accordance with the laws of the State of New York).  This
Amendment may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were upon
the same instrument.

 

XVII.  Expenses and Indemnification

Magellan agrees to reimburse Aetna, on demand, for all reasonable fees and
expenses of Aetna’s counsel incurred on and after December 1, 2002 in connection
with the negotiation, administration and implementation of the Original
Agreement, this Agreement, the Chapter 11 Case and all of Aetna’s rights against
Magellan in connection with each of the foregoing (the “General Expense
Reimbursement”), provided, however, that the General Expense Reimbursement shall
not exceed $600,000, and provided further that if (x) none of the Termination
Events in Section XX hereof

 

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occur and (y) no party objects to the assumption of this Agreement in the
Chapter 11 Case or to Aetna’s treatment under the Plan of Reorganization, then
the General Expense Reimbursement shall not exceed $400,000.  In addition and
supplemental to the General Expense Reimbursement, Magellan and each of its
affiliates agree to reimburse Aetna, on demand, for all reasonable fees and
expenses of Aetna’s counsel incurred on and after March 10, 2003 in connection
with any claims, counterclaims, causes of action, or actions commenced or
overtly threatened to be commenced, orally or in writing, against Aetna in
connection with any of the Original Agreement, this Agreement, the Chapter 11
Case or Aetna’s rights against Magellan (the “Litigation Expense
Reimbursement”), provided that the Litigation Expense Reimbursement shall be
limited to 100% of the first $200,000 of such fees and expenses actually
incurred by Aetna and 50% of all fees and expenses above $200,000 incurred by
Aetna, and provided further that if a court of competent jurisdiction, by final
and nonappealable order, finds that Aetna committed gross negligence or willful
misconduct, then Aetna shall promptly reimburse Magellan for all sums previously
advanced under the Litigation Expense Reimbursement and Aetna shall have no
further rights to any Litigation Expense Reimbursement.

 

Magellan and each of its affiliates agree to indemnify Aetna from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses (including, without limitation, fees and
expenses of counsel) or disbursements of any kind or nature whatsoever that may
be imposed on, incurred by, or asserted against Aetna in any way relating to or
arising out of this Amendment, the Agreement or Magellan’s Chapter 11 Case;
provided, however, that neither Magellan nor any of its affiliates shall be
liable for any of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from
Aetna’s gross negligence or willful misconduct as found in a final,
non-appealable judgment by a court of competent jurisdiction.

 

XVIII.  Magellan’s Assumption of the Agreement

A.            The Parties agree and acknowledge that:

 

(i) Magellan induced Aetna to enter into this Agreement by promising to perform
all of its obligations under the Agreement and to continue such performance
throughout the duration of the Chapter 11 Case and thereafter;

 

(ii) this Agreement and the assumption thereof in the Chapter 11 Case and
performance hereunder confers an actual and necessary benefit upon Magellan that
is necessary to the preservation of Magellan’s business;

 

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(iii) Magellan shall in all respects fully and irrevocably assume this Agreement
and shall seek Court approval and authorization of such assumption, to be
obtained within 60 days of the Commencement Date;

 

(iv) the $60,000,000 Magellan owes to Aetna under the Original Agreement shall
not become an administrative expense solely by virtue of Magellan’s assumption
of this Agreement;

 

(v) with the exception of (x) the $60,000,000 million Magellan owes to Aetna
under the Original Agreement, and (y) as set forth in Section B immediately
below, all amounts owed by Magellan to Aetna pursuant to this Agreement shall be
entitled to administrative priority within the meaning of 11 U.S.C. § 507.

 

B.            The Parties agree and acknowledge that:

 

(i) all damages incurred by Aetna in connection with any breach of this
Agreement by Magellan, including but not limited to the replacement costs of
services or obligations owed or undertaken by Magellan under this Agreement,
shall be entitled to administrative priority in the Chapter 11 Case; provided,
however, that Aetna covenants and agrees that, for any breaches occurring during
the Chapter 11 Case, only damages attributable to the period within one year of
any breach by Magellan shall be entitled to administrative priority, with
damages for any period thereafter constituting a general unsecured claim in the
Chapter 11 Case; and

 

(ii) without prejudice to Aetna’s ability to recover damages under any other
Section of this Agreement, no money damages shall arise solely as a result of
the occurrence of an Automatic Termination Event as defined in Section XX.

 

XIX.  Further Assurances

Magellan shall use its reasonable best efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary or desirable
under applicable laws and regulations (i) to consummate its reorganization on
the terms set forth in the Restructuring Term Sheet and (ii) to ensure that the
events referred to in Section XX of this Amendment occur within the time periods
specified therein (i.e., that no Automatic Termination Event arises under such
Section).

 

XX.  Automatic Termination Events

The Amendment shall terminate automatically (subject to waiver of such
termination by Aetna in writing in its sole discretion) if any of the

 

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following automatic termination events (the “Automatic Termination Events”)
occur:

A.                   Magellan does not file a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code on or prior to March 15, 2003
(the date of such filing, the “Petition Date”);

B.                     Within 5 days after the Petition Date the Court has not
entered the following orders which shall be substantially in the form of Exhibit
E-1 attached hereto and which shall be in full force and effect and which shall
not be subject to any stay:

1.               an order: (i) authorizing use of Lenders’ Cash Collateral on an
interim basis; and (ii) granting adequate protection pursuant to Section 361 and
363 of the Bankruptcy Code;

2.               an order pursuant to Section 105(a) of the Bankruptcy Code for
authorization to pay claims of Providers and Physician Advisors;

3.               an order authorizing debtor to continue Customer Practices and
to satisfy prepetition obligations related thereto; and

4.               an order authorizing Magellan to pay prepetition wages,
compensation and employee benefits pursuant to Sections 105 and 363(b) of the
Bankruptcy Code;

C.                     Within 45 days after the Petition Date the Court has not
entered an order which shall be substantially in the form of Exhibit E-2 hereto
and which shall be in full force and effect and which shall not be subject to
any stay: (i) authorizing use of Lenders’ Cash Collateral for the duration of
Magellan’s Chapter 11 Case; and (ii) granting adequate protection pursuant to
Section 361 and 363 of the Bankruptcy Code;

D.                    Within 60 days after the Petition Date the Court has not
entered an order which shall be acceptable to Aetna in its sole discretion and
which shall be in full force and effect and which shall not be subject to any
stay approving and authorizing Magellan’s assumption of the Agreement, as
amended by this Amendment (including the Asset Purchase Agreement and all other
attachments thereto); within 60 days after the Petition Date any of the Non-HMO
Party or the HMO Parties has not assumed or otherwise had approved and ratified
by the Court, this Agreement or any of the amendments to the Vendor Contracts
contemplated by this Amendment;

 

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E.                      Within 180 days after the Petition Date the Court has
not entered an order which shall be acceptable in all material respects to Aetna
in its sole discretion and which shall be in full force and effect and which
shall not be subject to any stay approving a Disclosure Statement describing a
filed Plan of Reorganization (substantially on the terms set forth in the
Restructuring Term Sheet);

F.                      Within 270 days after the Petition Date: (i) the Court
has not entered an order which shall be acceptable to Aetna in its sole
discretion and which shall be in full force and effect and which shall not be
subject to any stay confirming a Plan of Reorganization (substantially on the
terms set forth in the Restructuring Term Sheet) including with respect to the
New Senior Secured Credit Agreement, the Warrants, the Note, the Security
Interest, the Guarantees and the Registration Rights; or (ii) consummation of
such Plan of Reorganization has not occurred;

G.                     Within 330 days after the Petition Date, the order
confirming the Plan of Reorganization has not become a final order as to which
the time to appeal, or move for a new trial, reargument or rehearing, or
petition for certiori, has expired and as to which no appeal, or other
proceeding for a new trial, reargument or rehearing, or petition for certiori,
is pending or, if an appeal, or other proceeding for a new trial, reargument or
rehearing, or petition for certiori, has been timely filed or taken, the order
or judgment of the Court has been affirmed (or such appeal or petition has been
dismissed) by the highest court (or other tribunal having appellate jurisdiction
over the order or judgment) to which the order was appealed, or motion for a new
trial, reargument or rehearing, or petition for certiori, has been denied, and
the time to take any further appeal or to move for a new trial, reargument or
rehearing, or petition for certiori, has expired;

H.                    At any time any order is entered or the Debtors, the
committee of unsecured creditors or the Agent for the prepetition lenders shall
have made a motion seeking any order approving the terms of the Note, the
Warrants, the Security Interest, the Guarantees or the Registration Rights where
(i) the proposed terms of the Note, Warrants, Security Interest, Guarantees or
Registration Rights, as the case may be, are inconsistent with the applicable
terms set forth in the Restructuring Term Sheet or (ii) any other terms of the
proposed Note, Warrants, Security Interest, Guarantees or Registration Rights,
as the case may be, are not reasonably satisfactory to Aetna;

 

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I.                         At any time if any order is entered or the Debtors,
the official committee of unsecured creditors or the Agent for the pre-petition
lenders shall have made a motion seeking any order:

1.             Dismissing Magellan’s Chapter 11 case or converting it to a case
under Chapter 7;

2.             Appointing a trustee, responsible person, receiver or an examiner
with expanded powers; or

3.             Seeking approval of bidding procedures or the approval of another
buyer for any assets subject to the Asset Purchase Agreement.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed as of the date first above written.

 

AETNA INC.

 

MAGELLAN HEALTH SERVICES, INC.

 

 

 

By:

 

By:

 

/s/ JOHN L. BRIDGE

 

/s/ Mark S. Demilio

Name: JOHN L. BRIDGE

 

Name: Mark S. Demilio

Title: VICE PRESIDENT - CORPORATE FINANCE

 

Title: Exec. Vice President, Chief Financial Officer

Date: 3/10/03

 

Date: March 11, 2003

 

 

 

 

 

HUMAN AFFAIRS INTERNATIONAL, INCORPORATED

 

 

 

 

 

By:

 

 

 

/s/ Mark S. Demilio

 

 

Name: Mark S. Demilio

 

 

Title: Vice President

 

 

Date: March 11, 2003

 

 

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To the extent that any of the undersigned are signatories to current contracts
with Aetna in connection with the Original Agreement (a “Bound Subsidiary”),
each of Magellan or any Subsidiary of Magellan that is a party to the Non-HMO
Agreement (the “Non-HMO Party”) and each of Magellan or any Subsidiary of
Magellan that is a party to any HMO Agreement (each, an “HMO Party”) hereby
acknowledges that it is bound by, and is hereby obligated to adhere to, the
provisions of this Agreement (including, in the case of each HMO Party, the
terms set forth on Exhibit A-1, and, in the case of the Non-HMO Party, the terms
set forth on Exhibit B-1), in each case which constitutes a valid and binding
agreement of such Bound Subsidiary and a valid and binding amendment to the
Vendor Contract to which such Bound Subsidiary is a party.  Each of Magellan
Heath Services, Inc. and each of such Bound Subsidiary agrees to execute any
further documentation that may be reasonably necessary in connection with the
foregoing.

 

 

 

Dated:

New York, New York

 

 

March 11, 2003

 

 

 

 

Respectfully submitted,

 

 

 

Magellan Health Services Inc.

 

 

 

 

By:

/s/ Mark S. Demilio

 

 

 

Name: Mark S. Demilio

 

 

 

Title: Exec. Vice President, Chief Financial Officer

 

 

 

 

 

 

Advantage Behavioral Systems, Inc.

 

AdvoCare of Tennessee, Inc.

 

AGCA New York, Inc.

 

AGCA, Inc.

 

Alliance Health Systems, Inc.

 

Allied Specialty Care Services, LLC

 

Care Management Resources, Inc.

 

Charter Alvarado Behavioral Health System, Inc.

 

Charter Bay Harbor Behavioral Health System, Inc.

 

Charter Behavioral Health System at Fair Oaks, Inc.

 

Charter Behavioral Health System at Hidden Brook, Inc.

 

Charter Behavioral Health System at Potomac Ridge, Inc.

 

Charter Behavioral Health System of Columbia, Inc.

 

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Charter Behavioral Health System of Dallas, Inc.

 

Charter Behavioral Health System of Delmarva, Inc.

 

Charter Behavioral Health System of Lake Charles, Inc.

 

Charter Behavioral Health System of Massachusetts, Inc.

 

Charter Behavioral Health System of Nashua, Inc.

 

Charter Behavioral Health System of New Mexico, Inc.

 

Charter Behavioral Health System of Northwest Indiana,  LLC

 

Charter Behavioral Health System of Paducah, Inc.

 

Charter Behavioral Health System of Toledo, Inc.

 

Charter Behavioral of Layafette, Inc.

 

Charter Centennial Peaks Behavioral Health System, Inc.

 

Charter Fairmount Behavioral Health System, Inc.

 

Charter Fenwick Hall Behavioral Health System, Inc.

 

Charter Forest Behavioral Health System, Inc.

 

Charter Grapevine Behavioral Health System, Inc.

 

Charter Hospital of Mobile, Inc.

 

Charter Hospital of Santa Teresa, Inc.

 

Charter Hospital of St. Louis, Inc.

 

Charter Lakeside Behavioral Health Systems, Inc.

 

Charter Linden Oaks Behavioral Health System, Inc.

 

Charter Medical — Clayton County, Inc.

 

Charter Medical — Long Beach, Inc.

 

Charter Medical of East Valley, Inc.

 

Charter Medical of Puerto Rico, Inc.

 

Charter Milwaukee Behavioral Health System, Inc.

 

Charter MOB of Charlottesville, Inc.

 

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Charter Northridge Behavioral Health System, LLC

 

CMCI, Inc.

 

CMFC, Inc.

 

CMG Health of New York, Inc.

 

CMG Health, Inc.

 

Continuum Behavioral Healthcare Corporation

 

Correctional Behavioral Solutions of Indiana, Inc.

 

Correctional Behavioral Solutions of New Jersey, Inc.

 

Florida Health Facilities, Inc.

 

GPA of Pennsylvania, Inc.

 

Green Spring Health Services, Inc.

 

Green Spring of Pennsylvania, Inc.

 

Group Plan Clinic, Inc.

 

Hawaii Biodyne, Inc.

 

Human Affairs International of Pennsylvania, Inc.

 

Ihealth Technologies, LLC

 

INROADS Behavioral Health Services of Texas, LP

 

Louisiana Biodyne, Inc.

 

Magellan Behavioral Health of Washington, Inc.

 

Magellan Behavioral Health Systems, LLC

 

Magellan Behavioral Health, Inc.

 

Magellan Behavioral of Michigan, Inc.

 

Magellan Capital, Inc.

 

Magellan CBHS Holdings, Inc.

 

Magellan HRSC, Inc.

 

Magellan Public Solutions, Inc.

 

Magellan Specialty Health, Inc.

 

Managed Care Services Mainstay of Central PA, Inc.

 

MBC Federal Programs, Inc.

 

MBC National Service Corporation

 

MBC of America, Inc.

 

MBC of New Mexico, Inc.

 

MBC of Tennessee, Inc.

 

MBC of Tennessee, LLC

 

MBH Capital, Inc.

 

MBH of Puerto Rico, Inc.

 

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Merit Behavioral Care Corporation

 

Merit Behavioral Care of Florida, Inc.

 

Merit Behavioral Care of Massachusetts, Inc.

 

Merit INROADS Behavioral Health Services of Illinois, LLC

 

Merit INROADS Behavioral Health Services, LLC

 

New GPA, Inc.

 

P.P.C Group, Inc.

 

P.P.C., Inc.

 

Personal Performance Consultants of New York, Inc.

 

Premier Holdings, Inc.

 

Vivra, Inc.

 

Westwood/Pembroke Health System Limited Partnership.

 

 

 

By:  Magellan Health Service, Inc., as agent and attorney-in-fact for

 

 

each of the foregoing entities

 

 

 

 

 

 

By:

/s/ Mark S. Demilio

 

 

 

Name: Mark S. Demilio

 

 

 

Title: Exec. Vice Pres., Chief Financial Officer

 

 

 

 

 

 

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EXHIBIT A-1

 

Form of Amendment to Standard form HMO Agreement

 

Each HMO Agreement will be amended consistent with the modifications set forth
in the Amendment, including with respect to rates and with respect to Section
1.K.

 

The following amendments will also be made:

 

•                  to provide for a uniform termination date of December 31.

•                  to delete the “Termination without Cause” provision.

•                  to provide that any Event of Default under the MSA giving a
right to terminate the MSA will also be an event of default under each HMO
Agreement, giving a right to terminate such HMO Agreement.

 

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EXHIBIT B-1

 

Form of Amendment to Standard form Non-HMO Agreement

 

Each Non-HMO Agreement will be amended consistent with the modifications set
forth in the Amendment, including with respect to rates and with respect to
Section 1.K.

 

The following amendments will also be made:

 

•                  to provide for a uniform termination date of December 31.

•                  to provide that any Event of Default under the MSA giving a
right to terminate the MSA will also be an event of default under each Non-HMO
Agreement, giving a right to terminate such Non-HMO Agreement.

 

 

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