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CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS DOCUMENT.
PORTIONS FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ARE DENOTED BY "[*]".
CONFIDENTIAL INFORMATION OMITTED HAS BEEN FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.

                                                                    EXHIBIT 10.5

                           MEMORANDUM OF UNDERSTANDING

     This MEMORANDUM OF UNDERSTANDING is made by and between the Utah Department
of Health (DEPARTMENT) and Molina Healthcare of Utah, Inc. (MHU), effective July
1, 2002.

                                    RECITALS

A.   MHU currently provides services to Medicaid beneficiaries through its
     Medicaid HMO Contract with the DEPARTMENT.

B.   The DEPARTMENT desires to increase the number of Medicaid beneficiaries
     that receive services through MHU's Medicaid HMO Contract.

C.   Following the Utah Legislature's reduction of MHU's rate increase, the
     DEPARTMENT desires to ensure MHU's financial viability in its role as a
     Medicaid Managed Care Contractor.

D.   The DEPARTMENT requires additional time to draft a formal amendment to the
     MHU Medicaid HMO Contract, the parties agree to use their best efforts to
     develop and execute a formal amendment by August 30, 2002.

     NOW THEREFORE, the parties enter into this Memorandum of Understanding to
set forth their intent and understanding until a formal amendment is developed
and executed. Terms not otherwise defined herein shall have the meaning ascribed
to them in the MHU Medicaid HMO Contract.

I.   MEDICAID HMO

     1.   MHU will continue to provide necessary covered HMO benefits to those
          Medicaid beneficiaries enrolled under its Medicaid HMO Contract.
     2.   The DEPARTMENT agrees to provide a no-loss guarantee to MHU by
          underwriting any financial losses sustained by MHU for period of
          twelve (12) months, beginning July 1, 2002. The parties will conduct a
          financial review, following the first nine (9) months, to determine
          whether the no-loss guarantee needs to remain in effect beyond the
          twelve-(12) month period.
     3.   MHU's Administrative Costs shall not exceed  [*] , of Total Medical
          Costs associated with its Medicaid HMO Contract.
     4.   If MHU's costs are less than the Total Revenues received from the
          DEPARTMENT for its Medicaid HMO Contract, including but not limited to
          Premiums, MHU may retain up to 5% of its profits. Any additional
          profits above 5%, will be shared with the DEPARTMENT on a 50-50 basis.
     5.   Pharmacy Management Incentive. The State will establish a "target" for
          pharmacy costs for FY 2003. The target will be the historical average
          cost per member per month for clients enrolled in HMOs for FY 2002.
          The average cost will be

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          determined for each rate cell. An overall weight average PMPM pharmacy
          cost will be established based on MHU's enrollment for FY 2003. The
          pharmacy history will be adjusted for the estimate shift for pharmacy
          supplies for diabetes. FY 2002 history will be inflated forward by
          inflation indices published by the US Department of Labor. If actual
          pharmacy costs are below the target for the year, the savings will be
          shared 50 - 50.
     6.   Retroactive Reimbursement. The State will retroactively reimburse
          actual Medical Costs incurred by Molina for FY 2003 within 60 days of
          the date of service, nine percent (9%) of Medical Costs incurred will
          be added to the payment to cover patient management and administrative
          services. The State will make payment each month based on a summary of
          paid claims data. An interim payment will be made for the month of
          July 2002 based on estimated claims expense. After 120 days, the
          interim payment may be returned at the request of State based on the
          objective of establishing a 60-day delay between the date of service
          and the date of payment. A Final Settlement between the parties of
          Total Revenues shall be reconciled within six months of the completion
          of this agreement.

II.  MEDICAID PPO

     1.   Once enrollment under the HMO contract reaches 40,000 any additional
          Medicaid beneficiaries enrolled in the MHU Medicaid HMO Contract will
          be designated as Medicaid PPO members, governed by the provisions of
          this section II. If HMO membership falls below 40,000, any new
          Medicaid enrollees assigned to MHU will be enrolled as HMO enrollees.
          Once the 40,000 membership level is reached, new Medicaid enrollees
          assigned to MHU will be enrolled as PPO enrollees.
     2.   MHU will arrange for the provision of healthcare services, through its
          HMO contract, for those Medicaid beneficiaries enrolled on a Medicaid
          PPO basis. The healthcare services will be the same as the Covered
          Services set forth in MHU's Medicaid HMO Contract.
     3.   MHU will provide all Administrative Services to its Medicaid PPO
          enrollees as currently provided under its Medicaid HMO product line,
          including but not limited to:
               .Utilization and case management
               .Claims processing
               .Member orientations, education and customer services
               .Provider network development and maintenance.
     4.   MHU does not assume any financial risk associated with healthcare
          services provided to its Medicaid PPO enrollees.
     5.   The DEPARTMENT shall reimburse MHU, all Medical Costs provided to
          those beneficiaries enrolled in MHU's Medicaid PPO product.
     6.   The DEPARTMENT will compensate MHU an amount equal to $ [*] per PPO
          member per month for Administrative Services.

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     7.   Pharmacy Management Incentive. The State will establish a "target" for
          pharmacy costs for FY 2003. The target will be the historical average
          cost per member per month for clients enrolled in HMOs for FY 2002.
          The average cost will be determined for each rate cell. An overall
          weight average PMPM pharmacy cost will be established based on MHU's
          enrollment for FY 2003. The pharmacy history will be adjusted for the
          estimate shift for pharmacy supplies for diabetes. FY 2002 history
          will be inflated forward by inflation indices published by the US
          Department of Labor. If actual pharmacy costs are below the target for
          the year, the savings will be shared 50 - 50.


IN WITNESS WHEREOF, the parties sign this Memorandum of Understanding.

/s/                                      /s/
---------------------------              ---------------------------------------
Rod Betit                                G. Kirk Olsen
Executive Director                       CEO
Utah Department of Health                Molina Healthcare of Utah
30 July 2002                             30 July 2002

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