<PAGE>

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

                                    FORM 10-Q

          [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1997
                                       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 0-19393


                          MANAGED CARE SOLUTIONS, INC.
             (Exact name of registrant as specified in its charter)


            DELAWARE                                        36-3338328
(State or other jurisdiction of incorporation or  organization) (I.R.S. Employer
Identification No.)


                             7600 NORTH 16TH STREET
                                    SUITE 150
                             PHOENIX, ARIZONA 85020
                    (Address of principal executive offices)
                                   (Zip Code)

                                  602-331-5100
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No _______

There were 4,594,000 shares of common stock outstanding as of January 9, 1998.
<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE

Part I      FINANCIAL INFORMATION


     Item 1.Financial Statements


           Consolidated Balance Sheets.......................................3


           Consolidated Statements of Operations.............................4


           Consolidated Statements of Cash Flows.............................5


           Notes to Unaudited Consolidated Financial Statements..............6


     Item 2.Management's Discussion and Analysis of Financial Condition
           and Results of Operations......................................7-10


Part II     OTHER INFORMATION


     Item 6.Exhibits and Reports on Form 8-K................................10

                                       2

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                             MANAGED CARE SOLUTIONS, INC.
                             CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                         NOVEMBER 30,      MAY 31,
                                                            1997            1997
                                                       ------------    ------------
                                                        (UNAUDITED)
<S>                                                    <C>             <C>
ASSETS

Current Assets:
  Cash and cash equivalents, including restricted
  cash of $6,676,000 and $5,304,000                    $  9,367,000    $  7,212,000
  Short-term investments                                  1,502,000       1,503,000
  Accounts and notes receivable and unbilled
   services, net                                          2,736,000       3,998,000
  Related party accounts and notes receivable                16,000          26,000
  Prepaid expenses and other current assets                 370,000       1,735,000
  Deferred income taxes, net                              1,140,000         971,000
                                                       ------------    ------------
     Total current assets                                15,131,000      15,445,000

Notes receivable                                                  -         315,000
Related party notes receivable                              676,000         941,000
Property and equipment, net                               4,221,000       3,723,000
Performance bonds                                         3,791,000       3,737,000
Goodwill, net                                             3,009,000       3,191,000
Other assets                                                818,000         665,000
                                                       ------------    ------------
                                                       $ 27,646,000    $ 28,017,000
                                                       ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
  Accounts payable                                     $    211,000    $    350,000
  Accrued medical claims                                  6,659,000       7,080,000
  Risk pool payable                                       1,326,000       2,035,000
  Related party risk pool payable                           208,000         301,000
  Accrued expenses                                        3,251,000       2,668,000
  Current portion of long-term debt                         167,000         200,000
                                                       ------------    ------------
     Total current liabilities                           11,822,000      12,634,000

Long-term debt                                                    -          67,000
Related party long-term debt                              3,796,000       3,643,000
Deferred income taxes, net                                  203,000         203,000
                                                       ------------    ------------
     Total liabilities                                   15,821,000      16,547,000
                                                       ------------    ------------

Commitments                                                       -               -

Stockholders' Equity:
  Voting preferred stock, $1,000 par value
   Authorized, issued and outstanding - 6.85 shares           7,000           7,000
  Common stock, $0.01 par value
   Authorized - 10,000,000 shares
   Issued and outstanding - 4,394,000 and 4,394,000
   shares                                                    44,000          44,000
  Capital in excess of par value                         14,497,000      14,497,000
  Accumulated deficit                                    (2,723,000)     (3,078,000)
                                                       ------------    ------------
     Total stockholders' equity                          11,825,000      11,470,000
                                                       ------------    ------------
                                                       $ 27,646,000    $ 28,017,000
                                                       ============    ============
</TABLE>                                               
                                         
                                         3

          The accompanying notes are an integral part of these statements.
<PAGE>

                                MANAGED CARE SOLUTIONS, INC.
                            CONSOLIDATED STATEMENTS OF OPERATIONS
                                         (UNAUDITED)
<TABLE>
<CAPTION>

                                           THREE MONTHS ENDED          SIX MONTHS ENDED
                                        -------------------------  -------------------------
                                        NOVEMBER 30, NOVEMBER 30,  NOVEMBER 30, NOVEMBER 30,
                                            1997         1996          1997         1996
                                        ------------ ------------  ------------ ------------
<S>                                     <C>          <C>           <C>          <C>
Revenues                                $ 16,103,000 $ 17,566,000  $ 30,845,000 $ 35,101,000
                                        ------------ ------------  ------------ ------------


Direct cost of operations                 12,867,000   14,621,000    24,647,000   28,699,000
Marketing, sales and administrative        3,120,000    3,431,000     5,877,000    7,963,000 
                                        ------------ ------------  ------------ ------------

  Total costs and expenses                15,987,000   18,052,000    30,524,000   36,662,000
                                        ------------ ------------  ------------ ------------

Operating income (loss)                      116,000     (486,000)      321,000   (1,561,000)
                                        ------------ ------------  ------------ ------------

Interest income                              213,000      166,000       404,000      235,000
Interest expense                            (102,000)     (95,000)     (193,000)    (131,000)
                                        ------------ ------------  ------------ ------------

  Net interest income                        111,000       71,000       211,000      104,000
                                        ------------ ------------  ------------ ------------

Income (loss) before income taxes            227,000     (415,000)      532,000   (1,457,000)

Provision (benefit) for income taxes          60,000            -       177,000      (50,000)
                                        ------------ ------------  ------------ ------------

Net income (loss)                       $    167,000 $   (415,000) $    355,000 $ (1,407,000)
                                        ============ ============  ============ ============

Net Income (loss) per share             $       0.04 $       (.09) $        .08 $      (0.32)
                                        ============ ============  ============ ============

Weighted Average Common and Common
  Equivalent Shares Outstanding            4,457,000    4,368,000     4,479,000    4,368,000
                                        ============ ============  ============ ============
</TABLE>

                                             4

              The accompanying notes are an integral part of these statements.
<PAGE>

                          MANAGED CARE SOLUTIONS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                         SIX MONTHS ENDED
                                                    ---------------------------
                                                    NOVEMBER 30,   NOVEMBER 30,
                                                        1997           1996
                                                   -------------  ------------
<S>                                                 <C>            <C>
Cash flows from operating activities:
  Net income (loss)                                 $   355,000    $(1,407,000)
  Adjustments to reconcile net income (loss)
    to net cash provided by operating activities:
   Bad debt expense                                      23,000        764,000
   Depreciation and amortization                        887,000        893,000
   Loss on sale of property and equipment                18,000              -
   Deferred income taxes                               (169,000)             -
   Changes in assets and liabilities:
     Accounts receivable and unbilled services        1,309,000     (1,856,000)
     Prepaid expenses and other current assets        1,365,000       (731,000)
     Accounts payable                                  (139,000)       431,000
     Accrued medical claims                            (421,000)     1,869,000
     Risk pool payable                                 (709,000)       785,000
Related party risk pool payable                         (93,000)        45,000
     Accrued expenses                                   583,000        462,000
     Loss contract reserve                                    -       (510,000)
     Other assets                                      (153,000)             -
                                                    -----------    -----------
Net cash provided by operating activities             2,856,000        745,000
                                                    -----------    -----------

Cash flows from investing activities:
  Purchase of property and equipment                 (1,225,000)    (1,285,000)
  Proceeds from sale of property and equipment            4,000              -
  Purchase of short-term investments                          -     (1,210,000)
  Proceeds from maturity/sale of short-term 
    investments                                           1,000      1,919,000
  Proceeds from related party notes receivable          275,000      1,782,000
  Proceeds from notes receivable                        245,000              -
  Increases in assets securing performance bond         (54,000)      (114,000)
                                                    -----------    -----------
Net cash provided by (used in)investing activities     (754,000)     1,092,000
                                                    -----------    -----------

Cash flows from financing activities:
  Due to Medicus Systems Corporation                          -       (453,000)
  Net increase in long-term debt                         53,000      1,539,000
  Issuance of stock warrants                                  -        230,000
                                                    -----------    -----------
Net cash provided by financing activities                53,000      1,316,000
                                                    -----------    -----------

Net increase in cash and cash equivalents             2,155,000      3,153,000
Cash and cash equivalents, beginning of period        7,212,000      3,804,000
                                                    -----------    -----------
Cash and cash equivalents, end of period            $ 9,367,000    $ 6,957,000
                                                    ===========    ===========
</TABLE>

                                       5

        The accompanying notes are an integral part of these statements.
<PAGE>

                          MANAGED CARE SOLUTIONS, INC.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF BUSINESS

In management's  opinion,  the  accompanying  unaudited  consolidated  financial
statements  contain  all  adjustments   (consisting  of  only  normal  recurring
adjustments)  considered  necessary for a fair  statement of the results for the
interim  periods  presented.  The  results of  operations  for the period  ended
November 30, 1997 are not  necessarily  indicative of the results to be expected
for the full year. The interim consolidated  financial statements should be read
in  conjunction   with  Managed  Care  Solutions,   Inc.  ("MCS"  or  "Company")
consolidated  financial  statements and notes thereto  included in the Company's
Form 10-K for the year ended May 31, 1997.

NOTE 2 - NET INCOME PER SHARE

Net income  (loss) per common  share has been  computed by  dividing  net income
(loss) by the weighted average common equivalent shares  outstanding  during the
period.  Common stock  equivalents  include  shares  issuable on the exercise of
stock options and warrants when  dilutive,  using the treasury stock method from
date of grant.

The following is the  computation  of the  reconciliation  of the numerators and
denominators  of net income per  common  share and net income per common  share,
assuming dilution in accordance with Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 was issued in February 1997
and is effective for financial  statements  for both interim and annual  periods
ending after December 15, 1997.

Supplemental earnings per share:
<TABLE>
<CAPTION>

                                                                    THREE MONTHS ENDED
                                    ----------------------------------------------------------------------------------
                                               NOVEMBER 30, 1997                          NOVEMBER 30, 1996
                                    ---------------------------------------    ---------------------------------------
<S>                                 <C>           <C>             <C>          <C>           <C>             <C>
                                      Income         Shares       Per Share      Income         Shares       Per Share
                                    (NUMERATOR)   (DENOMINATOR)     AMOUNT     (NUMERATOR)   (DENOMINATOR)     AMOUNT
                                                                  
Net income (loss) per common share:
  Income available to common         $167,000       4,394,000       $0.04       $(415,000)     4,368,000       $(0.09)
  stockholders

Effect of dilutive securities:
  Stock options and warrants                -          63,000                           -              -
                                     --------       ---------                    --------      ---------

Net income (loss) per common 
  share, assuming dilution:
  
  Income (loss) available to
    common stockholders and
    assumed conversions              $167,000       4,457,000       $0.04       $(415,000)     4,368,000       $(0.09)
                                     ========       =========       =====       =========      =========       ======



                                                          6

                           The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                     SIX MONTHS ENDED
                                    ----------------------------------------------------------------------------------
                                               NOVEMBER 30, 1997                          NOVEMBER 30, 1996
                                    ---------------------------------------    ---------------------------------------
<S>                                 <C>           <C>             <C>          <C>           <C>             <C>
                                      Income         Shares       Per Share      Income         Shares       Per Share
                                    (NUMERATOR)   (DENOMINATOR)     AMOUNT     (NUMERATOR)   (DENOMINATOR)     AMOUNT
                                                                  
Net income (loss) per common share:
  Income available to common         $355,000       4,394,000       $0.08     $(1,407,000)     4,368,000       $(0.32)
  stockholders

Effect of dilutive securities:
  Stock options and warrants                -          89,000                           -              -
                                     --------       ---------                 -----------      ---------

Net income (loss) per common 
  share, assuming dilution:
  
  Income (loss) available to
    common stockholders and
    assumed conversions              $355,000       4,483,000       $0.08     $(1,407,000)     4,368,000       $(0.32)
                                     ========       =========       =====     ===========      =========       ======

</TABLE>
NOTE 3 - RESTRICTIONS ON FUND TRANSFERS

Certain  of  the  Company's   operating   subsidiaries   are  subject  to  state
regulations,  which  require  compliance  with  certain  net worth,  reserve and
deposit requirements.  To the extent the operating subsidiaries must comply with
these regulations, they may not have the financial flexibility to transfer funds
to the parent organization, MCS. Net assets of subsidiaries (after inter-company
eliminations)  which,  at November 30, 1997,  may not be  transferred  to MCS by
subsidiaries  in the form of  loans,  advances  or cash  dividends  without  the
consent of a third  party are  referred to as  "Restricted  Net  Assets".  Total
Restricted  Net  Assets  of these  operating  subsidiaries  were  $8,784,000  at
November 30, 1997,  with deposit and reserve  requirements  (performance  bonds)
representing $3,791,000 of the Restricted Net Assets and net worth requirements,
in excess of  deposit  and  reserve  requirements,  representing  the  remaining
$4,993,000.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

INTRODUCTION

Managed Care  Solutions,  Inc. ("MCS" or the "Company") is involved in a variety
of health care programs,  many of which serve indigent and Medicaid populations.
The  Company's   operations  include  a  long-term  care  Arizona  based  health
maintenance organization ("HMO") subsidiary, Ventana Health Systems ("Ventana");
an Arizona based primary and acute care HMO subsidiary,  Arizona Health Concepts
("AHC");   management  contracts  pursuant  to  which  the  Company  administers
privately owned HMOs located in Hawaii,  Michigan,  New Mexico,  and Texas;  the
management of healthcare  services for an indigent  population for the County of
San Diego; a contractual  arrangement with the State of Indiana Medicaid Agency;
a subsidiary providing home healthcare and community worker services to Ventana;
and an Ancillary Services Division which manages arrangements in which hospitals
deliver clinical services on-site at nursing homes.

                                       7
<PAGE>

RESULTS OF OPERATIONS

Revenues decreased $1,463,000 and $4,256,000 for the three and six-month periods
ended  November  30,  1997,   respectively,   to  $16,103,000  and  $30,845,000,
respectively,  as compared to the same periods of the prior year.  For the three
and six month  periods  ended  November 30,  1997,  $6,211,000  and  $11,646,000
related  to fees  received  for  management  of  health  plans  not owned by the
Company.  Management  fee  revenue  increased  13% for the  three  months  ended
November 30, 1997 as compared to the same period of the prior year.  For the six
months ended  November 30, 1997,  management  fee revenue  increased 8% over the
comparable  period of the prior year.  The increase in management fee revenue is
primarily  due to the Lovelace  Health Plan located in New Mexico  transitioning
from the pre-operational phase to the member acceptance phase on October 1, 1997
and increased membership in the AlohaCare health plan located in Hawaii.

Capitation  revenue  received by both Ventana and AHC decreased  $2,177,000  and
$5,122,000  for the  three  and  six-month  periods  ended  November  30,  1997,
respectively, to $9,892,000 and $19,199,000,  respectively.  The majority of the
decline is the result of a decrease in AHC revenues of $2,292,000 and $4,931,000
for the three and six-month periods ended November 30, 1997,  respectively,  due
to the  transition  of  members  in  Maricopa  County  to  a  different  plan on
December 1, 1996.

Direct costs of operations  decreased to  $12,867,000  and  $24,647,000  for the
three  and  six-month  periods  ended  November  30,  1997,  respectively,  from
$14,621,000   and  $28,699,000  for  the  three  and   six-month  periods  ended
November 30, 1996,  respectively.  For  the  three and six  month periods  ended
November 30, 1997,  direct  costs of  operations  consisted  of  $4,278,000  and
$8,216,000, respectively, related to fees  generated  from  management of health
plans not owned by the Company and $8,589,000 and $16,431,000, respectively,from
combined operating expenses of Ventana and AHC. The direct cost of operations to
manage plans as a percentage of revenue decreased to 69% from 92% for the three-
month periods ended November 30, 1997 and 1996, respectively. The reason for the
significant  decrease  is  primarily  due to  the  termination  of  unprofitable
contracts  during the  second  quarter of fiscal  year 1997 and a  reduction  in
workforce in July 1996.  For the six month period ended November 30, 1997 direct
costs of  operations  to manage plans as a percentage  of revenue was 71% versus
63% in the  comparable  period of the prior year.  The increase is the result of
increased costs related to the pre-operational phase of the STAR+PLUS program in
Houston, which begins accepting members January 1, 1998.

The direct costs of  operations  as a percentage of revenue was 84% for both the
three and six month periods ended November 30, 1997 for Ventana, and 92% and 89%
during the respective periods for AHC.

Marketing,  sales and  administrative  expenses  decreased  from  $3,431,000 and
$7,963,000 for the three and six months ended  November 30, 1996,  respectively,
to $3,120,000   and  $5,877,000  for  the  three  and  six-month  periods  ended
November 30, 1997, respectively. The decrease is primarily due to termination of
unprofitable  contracts  during the  second  quarter  of fiscal  year 1997,  the
workforce  reduction  plan  implemented  in July  1996  and  efforts  to  reduce
operating costs.

The  effective  income  tax  rate  was  33%  for   the  six-month  period  ended
November 30, 1997 versus 3% for the comparable period of the prior fiscal  year.
The lower rate in fiscal year 1997 reflects  nondeductible goodwill amortization
and the valuation allowances for the net operating losses of the subsidiaries.

Net interest income for the three and six-month  periods ended November 30, 1997
was $111,000 and  $211,000,  respectively,  versus  $71,000 and $104,000 for the
comparable  periods of the prior year. Net interest income is primarily  related
to investments held by Ventana and AHC,  partially offset by interest expense on
outstanding convertible debt.

                                       8
<PAGE>

Net income was $167,000 and $355,000 for the three and  six-month  periods ended
November  30,  1997,  respectively,  compared  to net  losses  of  $415,000  and
$1,407,000 for the same periods of the prior year.  The primary  reasons for the
change in profitability are the costs included in the prior year periods related
to terminated contracts in Colorado,  Illinois and Missouri and costs related to
severance  agreements  with  employees  terminated  as  part  of  the  workforce
reduction effort in July 1996.

In December  1997, the Company was notified that it was selected by the State of
Indiana,  Department  of  Administration  to continue to provide  administrative
services under the State's Medicaid Managed Care Program.  The contract renewal,
which is in excess of $11 million,  extends  through  December 1999 and includes
the possibility of two one-year extensions.

In December 1997, the Company was also notified that the number of  Houston-area
eligible  beneficiaries  voluntarily  enrolling with Rio Grande HMO, Inc. in the
STAR+PLUS  program exceeded the Company's  initial  estimate.  As a result,  the
Company expects the financial  results of the Company for the next four quarters
to exceed the prior year's  comparable  quarters.  The Company will begin a full
service  management  contract on January 1, 1998  pursuant to an agreement  with
Blue Cross and Blue  Shield of Texas.  Under this  contract,  the  Company  will
provide  administrative  services to Rio Grande HMO,  Inc., a subsidiary of Blue
Cross and Blue Shield of Texas, in the STAR+PLUS program.  The STAR+PLUS program
will provide  comprehensive managed health care services to approximately 60,000
aged,  blind and disabled  Medicaid  beneficiaries.  The  percentage  of initial
voluntary  enrollment  will  determine  the  percentage  of members that did not
enroll  in the  voluntary  stage to be  assigned  to the Rio  Grande  HMO in the
auto-assignment  phase  of  the  enrollment.  The  auto-assignment  phase begins
March 1, 1998.  Any changes in the method of allocating members, or increases in
the costs  of  providing  administrative services,  could  cause  the  Company's
expectations not to be realized.

LIQUIDITY AND CAPITAL RESOURCES

During the six-month period ended November 30, 1997, the Company's cash and cash
equivalents increased by $2,155,000 to $9,367,000. Operating activities provided
$2,856,000  for the  six-month  period  ended  November  30, 1997 as compared to
$745,000 for the same period of the previous  year.  The primary  causes for the
increase  were a decrease in accounts  receivable  and prepaid  expenses  and an
increase in accrued  expenses offset by a decrease in accrued  medical  expenses
and risk pools payable.

Investing   activities   used  $754,000  of cash  during  the six  months  ended
November 30, 1997 versus providing  $1,092,000 during the same six months of the
previous  year.  Sources  of cash for the six months  ended  November  30,  1997
consisted  primarily of proceeds received in payment of notes receivable.  These
proceeds were offset by $1,225,000 in purchases of fixed assets.

Financing activities provided $53,000 for the six months ended November 30, 1997
as compared to $1,316,000 for the same period of the prior year. Sources of cash
for the six months  ended  November  30, 1996  consisted  of  proceeds  from the
issuance of long term debt and warrants to BCBSTX and to a trust  controlled  by
William Brown offset by payments to Medicus.

                                       9
<PAGE>

Certain  of  the  Company's   operating   subsidiaries   are  subject  to  state
regulations,  which  require  compliance  with  certain  net worth,  reserve and
deposit requirements.  To the extent the operating subsidiaries must comply with
these regulations, they may not have the financial flexibility to transfer funds
to MCS. Net assets of subsidiaries (after inter-company  eliminations) which, at
November 30, 1997, may not be transferred to MCS by  subsidiaries in the form of
loans,  advances  or cash  dividends  without  the  consent of a third party are
referred to as " Restricted  Net Assets".  Total  Restricted Net Assets of these
operating  subsidiaries  were  $8,784,000 at November 30, 1997, with deposit and
reserve  requirements   (performance  bonds)  representing   $3,791,000  of  the
Restricted  Net Assets  and net worth  requirements,  in excess of  deposit  and
reserve  requirements,  representing the remaining  $4,993,000.  The outstanding
balance  on funds  provided  by Ventana  to MCS under  loan  agreements  totaled
$665,000 at November 30, 1997.  VHS provided these loans in the normal course of
operations.  All such agreements were pre-approved as required by Arizona Health
Care Cost Containment System Administration.

During January 1998, Beverly Enterprises, Inc., a long-term health care company,
invested $1,000,000 in the Company by purchasing 200,000 shares of the Company's
common  stock  at $5  per  share.  Based  on  current  projections  of  existing
contracts,  the Company  believes that its cash and capital  resources should be
sufficient to meet its financial requirements in fiscal 1998.

FORWARD-LOOKING INFORMATION

This report contains statements that may be considered forward-looking,  such as
the discussion of the Company's  strategic  goals,  new contracts and cash flow.
These statements speak of the Company's plans,  goals or expectations,  refer to
estimates, or use similar terms. Actual results could differ materially from the
results  indicated by these statements  because the realization of those results
is subject to many uncertainties.

PART II - OTHER INFORMATION

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibits
              (10.1) Administrative  Services  Agreement  between the registrant
                     and the County of San Diego, California.
              (10.2) Administrative  contract  between Arizona Health  Concepts,
                     Inc. and Arizona Health Care Cost Containment System.
              (27)   Financial data schedule.

          (b)  Reports on Form 8-K

               None

                                       10
<PAGE>

SIGNATURES


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


                        MANAGED CARE SOLUTIONS, INC.

                        By:     /s/ James A. Burns
                                ------------------------------------------------
                                James A. Burns, President and Chief Executive
                                Officer

                        By:     /s/ Michael J. Kennedy
                                ------------------------------------------------
                                Michael J. Kennedy, Chief Financial Officer

                        Dated:  January 9, 1998
                                ---------------


<PAGE>

                                                                    EXHIBIT 10.1

                                                    COUNTY CONTRACT NUMBER 43817

                                    AGREEMENT

AGREEMENT between the COUNTY OF SAN DIEGO hereinafter called COUNTY and

Managed Care Solutions, Inc. (MCS)
8840 Complex Drive, Suite 300
San Diego, CA 92123
(619) 492-4422

hereinafter  referred to  as  CONTRACTOR for County of San Diego,  Department of
Health Services, County Indigent Health Services.
--------------------------------------------------------------------------------
                                   WITNESSETH:

WHEREAS   CONTRACTOR  is  specially   trained  and  possesses   certain  skills,
experience,  education and competency to perform certain special  services,  and
COUNTY  desires to engage  CONTRACTOR  for such special  services upon the terms
provided and,

WHEREAS,  pursuant to the provisions of the California  Government  Code Section
26227,  The Board of Supervisors of COUNTY is authorized to enter a contract for
such services.

WHEREAS, the County, by action of the Board of Supervisors, on February 18, 1997
(#6) authorized the Director of Purchasing and Contracting,  pursuant to Article
XXIII, Section 401 of the Administrative Code, to award a contract for

Administrative Services Organization (ASO) for County Indigent Health Services

NOW THEREFORE the parties  hereto do mutually  agree to the terms and conditions
as attached and set forth in:
      SECTION             TITLE
        A            Special Terms and Conditions
        B            Direct Service Contract Standard Terms and Conditions
        C-1          Statement of Work,  County  Indigent  Health  Services
                     and Comprehensive AIDS
        D            Contract Budget
        E            MCS Proposal, as Amended, Dated April 30, 1997

IN WITNESS  THEREOF  COUNTY AND  CONTRACTOR  have executed this  AGREEMENT to be
effective:
                                 October 1, 1997
                                 ---------------

CONTRACTOR:                            COUNTY:

BY: /s/ Michael Tweedell Date: 10/9/97 BY: /s/ William L. Napier Date: 11/3/97
    --------------------       -------     ---------------------       -------

NAME:  Michael Tweedell                NAME:  William L. Napier
       ---------------------------            ------------------------------

TITLE:  Senior Vice President          TITLE:Purchasing and Contracting Director
        --------------------------           -----------------------------------
        Managed Care Solutions, Inc.
        8840 Complex Drive, Suite 300
        San Diego, CA 92123

County Counsel Approval:  N/A          Auditor-Controller Approval:  N/A
            
<PAGE>

               COUNTY OF SAN DIEGO, DEPARTMENT OF HEALTH SERVICES
                      ADMINISTRATIVE SERVICES ORGANIZATION
                    SECTION A - SPECIAL TERMS AND CONDITIONS


CONTRACT  ADMINISTRATION.  The Purchasing and Contracting Director is designated
as the  Contracting  Officer and is the only County  official authorized to make
any changes in this agreement.

      .1    The County has designated  the following  individual as the County's
            Administrator  and Contracting  Officer's  Technical  Representative
            (COTRs):

            Section C-1 - County Indigent Health Services
                          Victoria Mizel, Administrator County Indigent Health
                           Services
                          P.O. Box 85222 (O577A)
                          San Diego, CA 92186-5222
                          (619) 565-3140

      .2    County's COTR or designee will chair  Contractor  progress  meetings
            (per B-2.4) and will  coordinate  County's  contract  administrative
            functions. The COTR or designee is designated to receive and approve
            Contractor invoices for payment, audit and inspect records,  inspect
            Contractor  services,   and  provide  other  technical  guidance  as
            required. The COTR or designee is NOT authorized to change the terms
            and  conditions  of the  Contract.  Changes  to the scope of work or
            total price will be made only by the  Contracting  Officer issuing a
            properly executed contract amendment.

            1.2.1 The COTR is  authorized  to make  administrative  adjustments,
                  such as  adjustments  to  service  requirements  which  do not
                  change the  purpose or intent of the  Statement  of Work,  the
                  Terms and  Conditions of the Contract,  or the total  contract
                  price. These administrative adjustments will be in the form of
                  an amendment to the contract, signed by the Contractor and the
                  COTR. The Contracting  Director will refer all inquiries about
                  such adjustments to the COTR.

      .3    The Contract Program Monitor (CPR) for Section C-1 will be the COTR.

      .4    Contractor's  Project Director shall be in charge of performing this
            Agreement  and  shall   administer   this  Agreement  on  behalf  of
            Contractor.

2     TERMS OF  AGREEMENT.  The term of this  Agreement  shall  commence  on the
      effective date October 1, 1997, and continue throughout and including June
      30, 2000, during which time Contractor shall perform the services provided
      herein. County reserves the option to exercise two additional option years
      not to exceed June 30, 2002.

3     COMPENSATION

      .1    For  Section  C-1,  County  agrees to pay  Contractor  a fixed  rate
            prorated in monthly payments for services to be performed during the
            term of this  Agreement.  In addition,  County shall also  reimburse
            Contractor  for certain pass through  costs that are approved by the
            County prior to the Contractor incurring the expense.

            3.1.1 The total amount of the  contract,  effective  from October 1,
                  1997 through June 30, 2000, is
                  $9, 169,464.

      3.2   Contractor and County may adjust the fixed price contract should the
            following circumstances occur during the term of the agreement:

            3.2.1 Total budgeted FTE's, as agreed to in Section D, are decreased
                  by two or more  FTE's for 30 days or more.  Any  extension  of
                  time to this requirement  must be pre-approved,  in writing by
                  the  County.  The  Contractor  has a duty to inform the County
                  about any decreases in total FTE's of two or more for a period
                  of 30 days.

                                       1

<PAGE>
                  3.2.1.1 Contractor is required to collaborate  with the Mental
                          Health Administrative  Services Organization.  Section
                          A-3.2.  applies  to  savings  that  result  from  this
                          collaboration effort.

                  3.2.1.2 The  County  may  consider  structural  changes in the
                          program,  such as block  granting  of certain  program
                          funds,  which could produce additional program savings
                          in accordance with this section.

            3.2.2 The County has designated the following key positions as vital
                  to the performance of this contract: Project Director, Medical
                  Director, MIS Manager and Finance Manager.  Vacancies in these
                  key  positions  for 60 days  or  more  may  result  in  budget
                  adjustments  if COTR  determines  that the  Contractor  is not
                  making  a  reasonable  effort  to  fill  the  vacancies.   The
                  Contractor  has a duty to  inform  the  County  about  any key
                  vacancies when a key position is vacated.

                  3.2.2.1 The Contractor was selected,  in part,  based upon the
                          qualifications   of  individuals   filling  these  key
                          positions.  Any  replacements  for these key positions
                          must be  pre-approved,  in  writing,  by the County in
                          accordance with B-1.12.

                          3.2.2.1.1The  County  and  Contractor  shall  mutually
                                   select  any   replacement   of  the   Medical
                                   Director during the term of this agreement.

      3.3   After the County  notifies the  Contractor to proceed with close out
            services,  the County requires the Contractor to smoothly transition
            services to the  successor  of this  agreement  in  accordance  with
            Section  C-1-6.12.  During the close out  period,  the County  shall
            withhold 20% of the Contractor's monthly fixed payment each month up
            to three months. Upon successful  completion of the close out tasks,
            all of the withheld  funds will be paid to the  Contractor in a lump
            sum  payment  within 30 days.  This  section  shall not apply in the
            event of the termination  for cause because of the payment  withhold
            and set off provisions contained in Section B-6.4.1.

            3.3.1 The County's  notice to Contractor  to commence  transition or
                  close out services shall satisfy any and all  requirements the
                  County  may  have  to  notify   Contractor  and   Contractor's
                  employees   regarding  the  imminent  close  out  of  contract
                  services or resulting employee layoffs.  The County shall make
                  all reasonable  efforts to allow the Contractor at least sixty
                  (60) days to perform close out services.

4     METHOD OF  PAYMENT.  Contractor  shall  submit  monthly  invoices to COTR.
      Monthly  invoices  shall be  submitted  per  Contract  Agreement.  Monthly
      invoices shall be accompanied by Contractor's  documentation  described in
      Section C-1.

5     NOTICE.  Any notice or notices  required or permitted to be given pursuant
      to this Agreement may be personally served on the other party by the party
      giving such notice,  or may be served by certified mail,  postage prepaid,
      return receipt requested, to the Officials cited in Paragraph 1 above, for
      Contractor at the address cited on the P&C 600 form, and for County at the
      address shown in Paragraph 1 above.

6     NOTICE OF DELAY.  Contractor shall,  within five (5) days of the beginning
      of any delay in the  performance  of this  Agreement,  notify the County's
      Administrator in writing of said delay,  causes, and remedial action to be
      taken by Contractor.

                                       2
<PAGE>

7     COUNTY CONTRACTOR'S MANUAL Not applicable.

8     DEFINITIONS.

      .1    "COTR" shall mean Contracting Officer's Technical Representative.

      .2    "County"  shall  mean  The  County  of  San  Diego,  California.  In
            Statements of Work "County" is also used for County's  Administrator
            also called COTR.

      .3    "Offeror" or "Proposer" shall mean any person, firm, partnership, or
            corporation  submitting a proposal to the County in response to this
            solicitation.

      .4    "Contractor"  shall mean the offeror  whose  proposal is accepted by
            the County and who has  entered  into an  agreement  with  County to
            provide the equipment and services described herein.

      .5    "Vendor" shall mean the same as Contractor.

      .6    "Provision" shall mean the same as Terms and Conditions.

      .7    "County  Staff" shall mean persons  designated  by COTR for specific
            liaison functions and/or to receive Contractor reports.

      .8    Additional  definitions  are provided in Section A, Attachment 2 for
            the County  Indigent Health  Services  Program.  (Attachment 1- this
            number not used.)

      See Section A, Attachment 2 for additional  definitions which apply to any
      resulting  contracts.  These  Attachments are printed on separate pages so
      that they may be removed to facilitate use with the applicable  Section C,
      Statements of Work.

                                       3
<PAGE>

              COUNTY OF SAN DIEGO, DEPARTMENT OF HEALTH SERVICES
                     ADMINISTRATIVE SERVICES ORGANIZATION
       SECTION B - DIRECT SERVICE CONTRACT STANDARD TERMS AND CONDITIONS


                               TABLE OF CONTENTS
SECTION TITLE                                                         PARAGRAPH
-------------                                                         ---------

INDEPENDENT CONTRACTOR                                                    1

CONTRACTOR'S INTERESTS                                                    2

COMPLIANCE WITH LAW, REGULATION AND BOARD POLICY                          3

RECORDS,  REPORTS AND STUDIES                                             4

CONTRACT TYPE,  INVOICES AND PAYMENT                                      5

AVAILABILITY OF FUNDS, CHANGES, TERMINATION AND EXTENSIONS                6

1   INDEPENDENT CONTRACTOR

    1.1   INDEPENDENT CONTRACTOR.  The  Contractor is, for all purposes  arising
    out of this contract, an independent  Contractor and shall not be deemed  an
    employee of the County.  It is  expressly  understood  and agreed  that  the
    Contractor shall in no event, as a result of this Contract, be  entitled  to
    any benefits to which County  employees are  entitled,  including,  but  not
    limited  to   overtime,  any   retirement  benefits,  worker's  compensation
    benefits, and injury leave or other leave benefits.

    1.2   HOLD HARMLESS.

          1.2.1   The Contractor agrees, during the term  of this  agreement, to
          indemnify, defend and hold harmless the  County  against any claims or
          liabilities for which the Contractor is responsible, which  may  arise
          as a result of the  Contractor's  acts or omissions in  the  provision
          of services by the  Contractor  under this  agreement,  or  which  may
          otherwise  arise in connection  with  the  use and  maintenance of any
          property, facility or equipment by or under  the direction or  control
          of the  Contractor or the  performance of  any activities  by or under
          the  direction or control of the  Contractor  in  the  performance  of
          this agreement.  The Contractor's  obligation to defend  is limited to
          the defense of the County in connection with  alleged  Contractor acts
          and  omissions.  The County  shall  be  responsible  to defend  itself
          against any allegations of County's acts and omissions.

          1.2.2   The County  agrees,  with  regard to the  termination  of  the
          County Indigent Health Services Program, to indemnify, defend and hold
          harmless  the Contractor  against  any claims or  liabilities  arising
          from the action  to  terminate  the County  Indigent  Health  Services
          Program which are the  responsibility  of  the  County which may arise
          as a result of the County's acts and omissions in  the  performance of
          this agreement.  The County's  obligation to defend is limited  to the
          defense of  the Contractor in connection  with  alleged  County's acts
          and omissions.  The Contractor shall be  responsible to  defend itself
          against any allegations of Contractor's acts and omissions.

    1.3   LIMITATION ON FUTURE CONTRACTS.

          1.3.1   It  is  agreed  by  the  parties  to  the  contract  that  the
          Contractor  will be restricted  in  its  future contracting  with  the
          County to   the   manner  described  below.   Except  as  specifically
          provided in this  clause, this Contractor shall be free to compete for
          business on an  equal basis  with other companies.

                                       B-1
<PAGE>

          1.3.2   If the Contractor, under the terms of the contract, or through
          the  performance of  tasks pursuant  to  this contract, is required to
          develop specifications  of statements  of work and such specifications
          or  statements  of work are to be incorporated  into  a  solicitation,
          the  Contractor  shall be ineligible to perform  the  work   described
          within that solicitation as a prime or subcontractor under an ensuring
          County contract.  Such  restrictions  shall remain in effect for three
          years  following the date of the initial  solicitation.  It is further
          agreed that the  County  will  not UNILATERALLY require the contractor
          to  prepare  such  specifications  or  statements  of  work under this
          contract.

          1.3.3   To  the  extent  that  the  work under this contract  requires
          access to  proprietary,  business  confidential  or  financial data of
          other companies, and as  long  as  such  data  remains proprietary  or
          confidential,   the   Contractor   shall   protect  such   data   from
          unauthorized use and disclosure and agrees not  to  use it  to compete
          with such companies.

          1.3.4   The restrictions of Paragraph 1.3.2 above may be waived by the
          Contracting  Officer  if  the Contracting Officer determines that such
          restrictions would be detrimental to County programs.

    1.4   CONDUCT OF CONTRACTOR.  The Contractor  agrees to inform the County of
    all the  Contractor's  interests,  if   any,   which   are  or   which   the
    Contractor believes to be  incompatible  with  any interests of  the County.

          1.4.1   INFLUENCE. The Contractor shall not, under circumstances which
          might  reasonably  be  interpreted  as  an  attempt  to  influence the
          recipient in the conduct of his duties, accept any gratuity or special
          favor from individuals or organizations  with  whom  the Contractor is
          doing business or proposing to do business, in accomplishing  the work
          under the Contract.

          1.4.2   PERSONAL GAIN.  The Contractor shall not use for personal gain
          or make other improper use of privileged information which is acquired
          in  connection  with his  employment.  In  this  connection,  the term
          "privileged   information"   includes,   but   is   not   limited  to,
          unpublished  information  relating  to   technological  and scientific
          development; medical, personnel, or  security  records of individuals;
          anticipated material  requirements or  pricing  actions; and knowledge
          of  selections  of  contractors   or  subcontractors  in   advance  of
          official announcement.

          1.4.3   GIFTS AND GRATUITIES. The Contractor shall not offer, directly
          or indirectly, gifts, gratuity, favors, entertainment or other item of
          monetary value to an employee of the County.

          1.4.4   REFERRALS. Contractor further covenants  that no  referrals of
          clients through Contractor's intake or referral process shall be  made
          to the private practice of any person(s) employed by the Contractor.

    1.5   COVENANT AGAINST  CONTINGENT  FEES.  The  Contractor  warrants that no
    person or selling agency has been employed or retained to solicit or  secure
    this  contract   upon  an  agreement  or  understanding  for  a  commission,
    percentage, brokerage, or contingent fee, excepting bona fide  employees  or
    bona  fide  established  commercial  or  selling agencies  maintained by the
    Contractor  for the purpose of securing business. For breach or violation of
    this warranty, the County shall have  the  right to terminate  this contract
    without  liability or in its discretion,  to  deduct from the contract price
    or  consideration,  or  to  otherwise  recover,  the  full  amount  of  such
    commission, percentage, brokerage or contingent fee.

    1.6   CONTRACTOR'S   EMPLOYEES   AND   EQUIPMENT.   Contractor  agrees  that
    Contractor has secured or shall  secure  at  Contractor's  own  expense  all
    persons,  employees  and   equipment  required   to  perform   the  services
    required under this  Agreement and that all such services shall be performed
    by Contractor, or under Contractor's supervision, by  persons  authorized by
    law  to  perform  such  services.   If  any   arrangement  is  made  whereby
    employees of County are  used  by Contractor and are subject to Contractor's
    supervision  and  control, they  shall,  while  engaged  in  such   work  be
    considered  for all purposes,  as employees,  servants,  or  agents  of  the
    Contractor and not the County, irrespective of party paying them.

                                      B-2
<PAGE>

    1.7   RESPONSIBILITY FOR EQUIPMENT. County shall not  be responsible  nor be
    held  liable for any damage to persons or property consequent  upon the use,
    misuse, or failure  of  any  equipment  used by Contractor,  or Contractor's
    employee,  even though such equipment may be furnished, rented or loaned  to
    Contractor by County.  The  acceptance  or  use  of  any  such  equipment by
    Contractor  or  Contractor's  employees shall  be  construed  to  mean  that
    Contractor  accepts  full  responsibility  for  and  agrees  to   exonerate,
    indemnify and hold harmless County from and against  any  and all claims for
    any damage whatsoever  resulting from the use, misuse,  or failure  of  such
    equipment, whether such damage be to the employee or property of Contractor,
    other  contractors, County or other persons.  Equipment includes, but is not
    limited to, material,  tools, or other  things.  Contractor shall  repair or
    replace, at Contractor's expense, all County equipment or fixed assets  that
    are damaged or lost as a result of contractor negligence.

    1.8   NONEXPENDABLE  PROPERTY  ACQUISITION.  County  retains  title  to  all
    nonexpendable  property which  Contractor may  acquire with funds from  this
    Agreement,  including  property  acquired   by   lease  purchase  agreement.
    Contractor may not expend funds under this Agreement for the  acquisition of
    nonexpendable  property  having a  unit cost  of $1,000 or more and a normal
    life  expectancy  of more than one year without the prior  written  approval
    of the COTR.  Contractor  shall comply with the  inventory  of nonexpendable
    equipment provisions contained in the County Contractors Manual.

    1.9   RIGHT TO ACQUIRE  EQUIPMENT AND SERVICES.  Nothing  in  this agreement
    shall  prohibit  the  County  from  acquiring  the  same  type or equivalent
    equipment  and/or  service  from other  sources,  when  deemed by the County
    to be in its best interest.

    1.10   INSURANCE.

           1.10.1   Before commencement of the  work,  contractor  shall  submit
           insurance policies or  Certificate(s) of  Insurance  and  appropriate
           separate endorsements evidencing that contractor has obtained for the
           period  of  the  contract,  from  insurance companies which have been
           approved to do business in  the  State  of  California by  the  State
           Department of Insurance,  and which  hold  a current policy  holder's
           alphabetic and financial size category  rating  of not  less  than A,
           VII according to the current Best's Key Rating Guide, or a company of
           equal financial  stability  that is  approved  in writing by County's
           Risk  Manager,  insurance  in  the following forms  of  coverage  and
           minimum amounts specified:

                    1.10.1.1   A  policy of  statutory   worker's   Compensation
                    insurance   covering   all   employees  of  contractor   and
                    Employer's Liability coverage for  no less than one  million
                    dollars  ($1,000,000)  per  occurrence  for all employees of
                    Contractor.

                    1.10.1.2   Comprehensive  General  Liability  or  Commercial
                    General  Liability  Insurance  in an amount of not less than
                    $5,000,000  combined single limit per occurrence, for bodily
                    injury,  including  death, and property damage.

                    1.10.1.3   Medical  Malpractice or  Professional Liability -
                    covering all licensed  medical personnel providing  services
                    under this contract:

                               a.   $5,000,000 Per Occurrence
                               b.   $10,000,000 in the Aggregate

                                      B-3
<PAGE>

                    1.10.1.4   Commercial Automobile Liability

                               a.   $1,000,000  Bodily  Injury (including death)
                                    and Property Damage Per Occurrence
                               b.   This  insurance shall  be applicable to  all
                                    owned,  non-owned  and  hired  vehicles  and
                                    shall include Contractual Liability.

                    1.10.1.5   Employee Dishonesty or Fidelity  coverage for all
                    employees  of  Contractor  of not less  than  Four   Million
                    Dollars  ($4,000,000) with  a  deductible  of  not more than
                    Twenty-Five Thousand Dollars.

           1.10.2   The Comprehensive General  or  Commercial  Liability  policy
           shall name the County of San Diego as  additional insured by separate
           endorsement.

           1.10.3   Each  policy  of  insurance  shall   contain  the  following
           clauses:

                    1.10.3.1   "It is agreed that  these  policies  shall not be
                    canceled  nor the  coverage  reduced  until thirty (30) days
                    after  the COTR shall  have  received written notice of such
                    cancellation  or  reduction.   The  notice  shall be  deemed
                    effective  the date delivered to said COTR,  as evidenced by
                    properly validated return receipt."

                    1.10.3.2   "The  insured waives  any  right  of  subrogation
                    against  County of San Diego  which might arise by reason of
                    payment under these policies."

    1.11   THIS NUMBER NOT USED

    1.12   PERSONNEL ASSIGNMENT AND REASSIGNMENT.

           1.12.1   Resumes of key personnel who will be assigned to the project
           shall be furnished.   All such  personnel  shall  be  assigned to the
           project.

           1.12.2   A Project Director shall be  assigned,  and on site (if more
           than one  individual  is  assigned) as the individual responsible for
           the overall  performance  of any  resulting  contract  and  shall  be
           directly responsible  for  responding to the COTR at all times during
           the term of this contract.

           1.12.3   No  reassignments  of key personnel shall be allowed without
           full  resume  submittal, justification  therefore and approval by the
           COTR.

    1.13   FINANCIAL INDEPENDENCE

           1.13.1   Contractor and  subcontractors for  Administrative  Services
           shall  have  no   financial   interests  in   any  service   provider
           delivering physical health services to be administered by the ASO and
           funded by the  County of San Diego,  during the term of any resulting
           contract.  Proposers shall disclose  all financial interests  between
           the proposer and  services  providers.  The County  believes that the
           potential for conflict of interest, real or apparent,  is significant
           in the ASO undertaking.  The mere  presence of apparent  conflicts of
           interest  raise major concerns with public policy decision making and
           can limit the  effectiveness  of  an  organization  in  accomplishing
           system change.

                                      B-4
<PAGE>

           1.13.2   "Financial  interest" as prohibited  by  Paragraph 1.13.1 is
           defined as a  relationship  between  the ASO and any  physical health
           care service  provider  entity where any one or more of the following
           conditions exist:

                    1.13.2.1   Either   entity  has   a   direct   or   indirect
                    investment in the other entity worth more than $ 1,000.

                    1.13.2.2   Either  entity  has a direct or indirect interest
                    in real property owned by  the other  entity worth more than
                    $1,000.

                    1.13.2.3   Either entity receives income equal to or greater
                    than $250 or is  promised  to  receive  within the preceding
                    12 month period  income equal to  or greater than  $250 from
                    the other entity.

                    1.13.2.4   Any individual  associated  with either entity is
                    employed  by or holds any  position  as  director,  officer,
                    partner,  trustee,  employer,  or  holds  any  position   of
                    management in the other entity.

2   CONTRACTOR'S INTEREST

    2.1   ASSIGNMENT OF CLAIMS.  The Contractor shall not assign any interest in
    this agreement,  and shall not transfer any interest in the same, whether by
    assignment or novation, without the prior written consent of the County 
    thereto; provided,  however, that claims for money due or to become due to 
    Contractor  from County under this agreement may be assigned without such 
    approval.  Notice of any such assignment or transfer shall be furnished 
    promptly to the County.

    2.2   INTEREST OF CONTRACTOR.  Contractor covenants that it presently has no
    interest and shall not acquire any  interest direct or indirect, which would
    conflict in any manner of degree with  the performance of services  required
    to  be  performed under this  Agreement.   The Contractor  further covenants
    that  in  the  performance  of this Agreement no person having such interest
    shall be employed.

    2.3   SUBCONTRACT  FOR WORK OR SERVICES.  No  contract shall be made by  the
    Contractor with any other party for  furnishing  any of the work or services
    herein contained  without the  prior written approval of  the COTR  but this
    provision  shall not require the approval of contracts of employment between
    the Contractor and personnel assigned for services thereunder.

          2.3.1   Contractor   shall   provide  the  COTR  with  copies  of  all
          subcontracts relating to this  Agreement  entered  into  by Contractor
          within  30  days   after  the   beginning  of   the subcontract.  Such
          subcontracts  of  Contractor  shall   be  notified   of   Contractor's
          relationship to County.

          2.3.2   "Subcontractor"  means any  entity,  other than  County,  that
          furnishes  to  Contractor  services  or  supplies,  relevant  to  this
          Agreement  other than  standard  commercial  supplies,  office  space,
          printing services or maintenance services.

    2.4   CONTRACT  PROGRESS  MEETINGS.   The  Contracting  Officer's  Technical
    Representative(s) (COTR) and  other  County personnel, as  appropriate, will
    meet periodically  with the  Contractor to review the contract  performance.
    At these meetings the  COTR will apprise the  Contractor of how  the  County
    views the Contractor's  performance  and  the Contractor  will  apprise  the
    County of  problems,  if any,  being experienced.  The Contractor  will also
    notify the Contracting Officer (in  writing)  of any work  being  performed,
    if  any,  that  the  Contractor  considers   to  be   over  and   above  the
    requirements  of the contract.  Appropriate action shall be taken to resolve
    outstanding issues.

                                      B-5
<PAGE>

          2.4.1   The minutes of these  meetings  will be reduced to writing and
          signed by  the  COTR and the  Contractor.  Should  the Contractor  not
          concur with the minutes,  the Contractor  shall set out in writing any
          area of disagreement.  Appropriate action will be taken to resolve any
          areas of disagreement.

3   COMPLIANCE WITH LAW, REGULATION AND BOARD POLICY

    3.1   AFFIRMATIVE  ACTION.   Each  Vendor,  where the  cumulative  total  of
    County of San Diego  purchases are $10,000 or  more  during a calendar year,
    shall comply with the Affirmative Action Program for Vendors as set forth in
    Article  IIIk  (commencing   at   Section 84)  of   the  San   Diego  County
    Administrative  Code,  which  program is  incorporated  herein by reference.
    A copy of this Affirmative  Action Program may be obtained by contacting:

                          OFFICE OF CONTRACT COMPLIANCE
                            COUNTY OPERATIONS CENTER
                              5555 OVERLAND AVENUE
                               SAN DIEGO, CA 92123

          3.1.1   The County of San Diego, as a matter of policy, encourages the
          participation of small, minority, and women-owned businesses.

     3.2   EQUAL OPPORTUNITY.  Contractor  will  not discriminate  against   any
     employee, or against any  applicant for such  employment, because  of  age,
     race,  color,  religion,   sex,  sexual   orientation,  physical  handicap,
     ancestry or  national origin.  This  provision  shall  include  but  not be
     limited  to  the  following: employment, upgrading, demotion, or  transfer;
     recruitment or recruitment  advertising;  layoff  or termination;  rates of
     pay or other forms of  compensation;  and selection for training, including
     apprenticeship.

     3.3   NONDISCRIMINATION.   Contractor   shall  ensure  that   services  and
     benefits are provided without regard to race, color, religion,  sex, age or
     national  origin in  accordance  with  Title  VI of the Civil Rights Act of
     1964. Contractor shall comply with Section 504 of the Rehabilitation Act of
     1973, as amended, pertaining to  the prohibition of discrimination  against
     qualified  handicapped   persons  under  any  program  or  activity   which
     receives or benefits from Federal financial assistance.

           3.3.1   Contractor shall ensure that no person shall, on the basis of
           ethnic group  identification, religion,  age, sex, color, or physical
           or mental  disability,  be  unlawfully  denied  the benefits  of,  or
           be unlawfully  subjected  to  discrimination under,  any  program  or
           activity  that is funded  directly  by  the  state  or  receives  any
           financial assistance from the state.  Section 11135 of the California
           Government Code is incorporated herein by reference.

     3.4   AIDS  DISCRIMINATION.  Contractor  shall not deny any person the full
     and equal  enjoyment  of,  or impose  less  advantageous terms, or restrict
     the  availability  of, the use of any County facility  or participation  in
     any County funded or supported  service or program on the grounds that such
     person  has   Acquired  Immune  Deficiency  Syndrome  (AIDS),  AIDS-related
     complex (ARC), or AIDS-related status (ARS), as those terms  are defined in
     Chapter 1, section 32.1203, San Diego County Code of Regulatory Ordinances,
     a copy of which can be obtained from the Clerk of the Board of Supervisors,
     1600 Pacific Highway, San Diego, CA 92101.

                                      B-6
<PAGE>

     3.5   AMERICANS  WITH  DISABILITIES  ACT OF  1990 (ADA).  Contractor  shall
     comply with the ADA, pertaining to discrimination  against qualified people
     with disabilities in  employment,  public  services, transportation, public
     accommodations and telecommunications services.

     3.6   POLITICAL  ACTIVITIES  PROHIBITED.   None  of   the  funds,  provided
     directly  or indirectly,  under  this  Agreement  shall   be  used  for any
     political  activities   or  to  further  the  election  or  defeat  of  any
     candidate for public office. Contractor shall not utilize or allow its name
     to be utilized in any  endorsement  of any  candidate  for elected  office.
     Neither  the   contract  nor  any   funds   provided  thereunder  shall  be
     utilized in  support of any  partisan  political activities, or  activities
     for or against the election of a candidate for an elected office.

     3.7   ALCOHOL AND DRUG USE PROHIBITED.  In compliance with the requirements
     of San Diego County Drug and Alcohol  Abuse Policy C-25,  Contractor agrees
     that the Contractor and Contractor employees, while performing  service for
     the  County,  on County  property,  or while using County equipment,  shall
     not be in any way impaired because of  being under the influence of alcohol
     or a  drug; shall  not  possess  an  open  container of  alcohol or consume
     alcohol or possess or be under the influence of  an illegal drug; shall not
     sell,  offer, or provide alcohol or a drug to another  person,  unless  the
     Contractor  or  Contractor employee  prescribes  or  administers  medically
     prescribed drugs as part of  the  performance  of  normal  job  duties  and
     responsibilities.  The  Contractor  shall  inform  all  employees  who  are
     performing  services  for the  County  on County  property  or using County
     equipment, of the County objective of a safe, healthful and productive work
     place and the  prohibition of  drug or alcohol  use or impairment from same
     while performing such service for the County.

     3.8   ZERO TOLERANCE IN COACHING  UNDOCUMENTED  IMMIGRANTS:  The  County of
     San Diego, in  recognitions  of  it's unique geographical location, and the
     utilization of Welfare and Medi-Cal system by foreign nationals who are not
     legal residents of this  County or Country, has  adopted  a Zero  Tolerance
     policy and shall aggressively prosecute employees and contractors who coach
     undocumented immigrants.

           3.8.1   As a material  condition  of this  Agreement, the  Contractor
           agrees  that  the Contractor  and  the  Contractor  employees,  while
           performing  service for the  County,  on County  property,  or  while
           using County equipment:

                   3.8.1.1   Shall not in any way coach, instruct, advise, or
                   guide any Medi-Cal or Welfare  clients or prospective clients
                   who are undocumented immigrants on ways to  obtain or qualify
                   for Medi-Cal assistance.

                   3.8.1.2   Shall  not   support  or   provide  funds  to   any
                   organization  engaged  directly  of  indirectly  in  advising
                   undocumented  immigrants  on  ways  to  obtain or qualify for
                   Medi-Cal assistance.

           3.8.2   The Contractor shall inform all employees that are performing
           service for the County on County property or using  County equipment,
           of the County's Zero Tolerance policy.

           3.8.3   The County may Terminate for Default or Breach this Agreement
           and any other Agreement the Contractor  has  with  the County, if the
           Contractor, or Contractor employees are determined by the Contracting
           Officer not to be in compliance with the conditions listed herein.

     3.9   ZERO  TOLERANCE FOR  FRAUDULENT  CONDUCT IN COUNTY  SERVICES.  County
     Board  of  Supervisor's Policy  A-120  is that any type of fraud or similar
     abuse will not be tolerated in County  government  by  County employees, by
     Contractors or by Contractor's employees.

                                      B-7
<PAGE>
           3.9.1   DEFINITION.  Fraud is defined as an intentional perversion of
           truth, false representation, misleading allegation, or concealment of
           information for the purpose of deceiving another, whether by words or
           conduct.

           3.9.2   FINANCIAL EFFECT. No County employee, contractor or employees
           of the contractor shall participate in or influence the making of any
           governmental  decision,  which he or she has reason to know will have
           a foreseeable personal or organizational financial effect.

           3.9.3   CONTRACT REQUIREMENTS.  Every  County  Contract  for services
           shall:

                   3.9.3.1   Prohibit   activities   which  conflict  with   the
                   performance of services required under this agreement;

                   3.9.3.2   Require disclosure to  the  County (Purchasing  and
                   Contracting   Director,   Contracting   Officer's   Technical
                   Representative  (COTR)  or  Contract  Administrator)  of  all
                   incompatible Contractor interests;

                   3.9.3.3   Prohibit actions to influence county employees with
                   gratuities; and

                   3.9.3.4   Prohibit use for  personal   gain  and   privileged
                   information  acquired in connection  with their service  with
                   the County.

           3.9.4   NOTICE TO EMPLOYEES.  Contractor shall inform all  Contractor
                   employees  and  sub-contractors  performing  services for the
                   County of the County's Zero Tolerance policy.

    3.10   CONTRACTOR PAYMENT FOR COUNTY STAFF TRAVEL OR OTHER EXPENSES.

           3.10.1  In  accordance  with County Administrative  Manual  10-8,  no
           County  official or employee  shall  accept  travel,  lodging, meals,
           or related expenses from private  persons or entities doing  business
           with the County or seeking to do business with the County unless such
           expenses  are  provided  pursuant  to  a County contract for goods or
           services.

           3.10.2   When travel (and related expenses) have been approved by the
           County in Accordance  with  Board  of  Supervisor's  Policy D-7,  the
           Contractor  shall  arrange for  the travel.  Contractor  shall  claim
           reimbursement   for   travel  (and   related   expenses)  which   are
           specifically identified  in  the  contract Statement of  Work and are
           included in the contract  budget,  or are approved in advance  by the
           COTR who will  prepare a contract  amendment to include the  specific
           travel  in the  Statement  of Work and Budget.

           3.10.3   All travel costs shall be  limited  to amounts  and kinds of
           reimbursement which is authorized  under Article  XXVIa, Section 470,
           or  the County  Administrative  Code,  "Out-of-County  and  In-County
           Business  Authority  to   Conduct  Official   Business  Outside   the
           Geographic  Boundaries of  San Diego  County (Out-of-County Business)
           and  within San  Diego County (in-County business)".

    3.11   CITIZENS  COMPLAINTS.   Contractor  shall  establish  procedures  for
    documenting and timely responding  to citizens complaints  and grievances in
    compliance  with County  Administrative  Manual Item Number 0040-5, "Citizen
    Complaint  Handling Policy and Procedure," and  County  Department of Health
    Services   Policy   C-1,   "Citizen   Comments,  Suggestions  & Complaints,"
    incorporated herein by reference.

                                      B-8
<PAGE>

    3.12   LICENSING.  Contractor shall comply with the provisions  of Chapter 9
    of Division 3 of the Business and Professions  Code  concerning the icensing
    of  contractors.   All  offerors  and  contractors  shall  be  licensed,  if
    required, in accordance  with  the laws  of this state  and any  offeror  or
    contractor not so licensed is subject to the penalties imposed by such laws.

    3.13   PERMITS,   NOTICES,   FEES  AND  LAWS.   The  contractor   shall,  at
    contractor's  expense, obtain all  necessary  permits and licenses, give all
    necessary notices, pay all  fees  required by law, and comply with all laws,
    ordinances,  rules and regulations  relating to work and to the preservation
    of the public health and safety.

    3.14   ORAL  REPRESENTATION.  This document  and its Sections and references
    incorporated  herein  fully  express   all  understanding  of  the   parties
    concerning the matters covered herein.  No addition to or alteration  of the
    terms of this  Agreement and  no verbal  understanding  of the parties,  and
    officers,  agents or employees,  shall be valid unless made in the form of a
    written amendment to this Agreement.

    3.15   SEVERABILITY.  Should  any  part  of   this  agreement  be held to be
    invalid by a court of competent jurisdiction, the remainder of the agreement
    shall be considered as the whole agreement and be binding on the contracting
    parties.

    3.16   CALIFORNIA  LAW.  This Agreement  shall be construed and  interpreted
    according to the laws and regulations of the State of California.

4   RECORDS, REPORTS AND STUDIES

    4.1   OWNERSHIP,  PUBLICATION,  REPRODUCTION   AND  USE  OF  MATERIAL.   All
    reports,  studies,  information,  data, statistics,  forms, designs,  plans,
    procedures,  systems,  and any other materials or properties produced  under
    this  Agreement  shall be the  sole  and  exclusive  property of the County.
    No such materials  or  properties  produced in whole or in part  under  this
    Agreement  shall be subject to private use,  copyright or patent without the
    express written consent  of  the County.   County  shall  have  unrestricted
    authority  to  publish, disclose,  distribute  and otherwise  use, copyright
    or patent, in whole or in part, any such reports, studies, data, statistics,
    forms or other materials or properties produced under this contract.

          4.1.1   The  Contractor  shall  notify the County of any  requests for
          material  or data and shall not release to third  parties any material
          or data without  prior  written  approval  from the County.

    4.2   AUDIT AND  INSPECTION.  Contractor  agrees  to  maintain  and/or  make
    available  within San Diego  County  accurate  books and  accounting records
    relative to all its activities.   Authorized   County Representatives  shall
    have the right to  monitor,  assess,  and evaluate Contractor's  performance
    pursuant to this Agreement,  said monitoring,  assessments, and  evaluations
    to  include  but  not limited  to  audits,  inspection of premises, reports,
    patient records (subject to applicable legal  limitation), and interviews of
    Contractor's staff. At any time during normal business hours and as often as
    County  may  deem  necessary, upon  reasonable   advance  notice, Contractor
    shall make  available  to County for  examination  all of  its  records with
    respect to all matters  covered by this Agreement and will permit  County to
    audit, examine, copy and make excerpts or transcripts  from  such  data  and
    records, and to make audits of all invoices, materials, payrolls, records of
    personnel,  information regarding  patients  receiving services (subject  to
    applicable  legal  limitations), and  other  data relating  to  all  matters
    covered by this Agreement.  However,  any such activities  shall  be carried
    out in a manner so  as  to  not  unreasonably  interfere  with  Contractor's
    ongoing business operations and  patient services.   The aforementioned data
    and records shall include  patient records.  Contractor shall  maintain such
    data and records  for as  long as  may  be required by  applicable  laws and
    regulations.  The  State of California  or  any  Federal  agency  having  an
    interest in  the  subject of  this  Agreement  shall  have the  same  rights
    conferred upon County by this paragraph.

                                      B-9
<PAGE>

    4.3   SINGLE AUDIT ACT - SUBRECIPIENTS OF  FEDERAL FUNDS.  Contractor  shall
    annually engage a licensed Certified Public  Accountant  to conduct an audit
    which will comply with Public Law 98-502, commonly known as the Single Audit
    Act of  1984 (Act) as  implemented  in  California by the State  Controllers
    Office (SCO).

          4.3.1   COMPLIANCE WITH AUDIT  REQUIREMENTS.  Contractor  shall ensure
          that the audit complies with the  requirements for independent program
          or single-source  audits,  according to the number of federally funded
          programs  and the total  amount of  federal funding,  as delineated in
          Office of Management and Budget (OMB)  Circulars  A-128  (governmental
          agencies) and A-133 (non-profit agencies).

          4.3.2   SINGLE AND AGENCY-WIDE AUDIT. The Act specifies that audits of
          subrecipients  of  federal  funds be  conducted  on a  single, agency-
          wide basis.

          4.3.3   MINIMUM FUNDING  REQUIREMENT.  Nonprofit agencies that receive
          two hundred and fifty thousand  dollars  ($250,000) or more in federal
          funds shall have an audit completed in  accordance  with OMB  Circular
          A-133.

                  4.3.3.1   EXEMPTED    AGENCIES   AND   RECORDS   AVAILABILITY.
                  Nonprofit agencies  receiving  less than $250,000 per  year of
                  federally funds are exempt from  Act  requirements.   However,
                  applicable   records   shall  be   available  for  review   by
                  appropriate  officials of the federal  grantor agency  or  the
                  County of San Diego.

          4.3.4   DEADLINES.   OMB  Circular   A-128   specifies   audit  report
          submission  deadlines.  All audits are to be completed  within one (1)
          year after the fiscal  year of the  audit  and  the reports  submitted
          within thirty (30) days after completion of the  audit.  Audits  shall
          be submitted  by  March 1, of the following fiscal year if a claim for
          cost is submitted.

          4.3.5   ALLOWABLE  COST.  The cost of  obtaining a single  audit is an
          allowable  cost.  OMB Circular A-128 states:  "Generally, the costs of
          audit services charged  to  federal  programs  should  not exceed  the
          percentage  of federal  program costs  to total funds expended by  the
          recipient  during the fiscal  year.  However,  this percentage may  be
          exceeded with the maintenance of  proper  documentation to support the
          additional cost."

          4.3.6   SUBMISSION OF AUDIT. Contractor shall submit two (2) copies of
          each audit  report to the  awarding  agency COTR no later than  thirty
          (30) days after receiving it from the auditor.

          4.3.7   GOVERNMENTAL  ACCESS TO WORKING  DOCUMENTS.  Contractor  shall
          include a clause,  in any contract or  agreement the Contractor enters
          into with an audit firm  doing a single  audit,  to provide  access by
          the County,  State or Federal  government to the working papers of the
          independent auditor who prepares the single audit for the Contractor.

          4.3.8   APPLICABLE DOCUMENTS.  Copies of the OMB Circulars and a  copy
          of the compliance supplement are available from  the Superintendent of
          Documents,  U.S.  Government Printing Office, Washington,  D.C. 20402,
          Telephone (202) 783-3238.

                                      B-10
<PAGE>

    4.4   AUDITS - FOR-PROFIT AGENCIES.   For-profit  Contractor  agencies shall
    adhere to the purpose and intent of the Single  Audit Act and shall meet all
    requirements and standards as  can  be reasonably  applied  to  a for-profit
    agency.

    4.5   INSPECTION OF SERVICES.   All  performance  (which includes  services,
    material, supplies and equipment furnished or utilized in the performance of
    services) shall be subject to inspection and test by the County at all times
    during  the  term of the  contract.  The Contractor  shall  provide adequate
    cooperation to any inspector assigned  by the County to permit the inspector
    to determine the Contractor's  conformity with these  specifications and the
    adequacy of the services being contractually provided. All inspection by the
    County  shall be  made in  such  a manner  as not to  unduly  interfere with
    Contractor performance.

    4.6   CONFIDENTIALITY  OF  FINDINGS.  Contractor  agrees  that  any reports,
    information, data, etc., given to or prepared or assembled by the Contractor
    under this Agreement which the  County  requests to be kept as  confidential
    shall  not  be  made  available  to  any  individual or organization by  the
    Contractor without the prior written approval of the County.

    4.7   CONFIDENTIALITY  OF PATIENT  RECORDS.  Contractor shall  maintain  the
    confidentiality of its  patient records  in accordance  with  all applicable
    State and  Federal  laws  relating  to  confidentiality.   Contractor agrees
    that all patient information and records obtained in the course of providing
    services to  County  participants  in  the  program  shall  be  subject   to
    confidentiality and disclosure provisions of  applicable  Federal  and State
    statutes and regulations adopted pursuant thereto. Contractor agrees that it
    has a duty and responsibility to make available to the  COTR  or  designated
    representatives,  including  the  Auditor  and  Controller  of  this County,
    the contents  of  records  pertaining  to any  County participant which  are
    maintained in connection with the  performance of  Contractor's  duties  and
    responsibilities  under  this  Agreement, subject to the  provisions  of the
    heretofore mentioned Federal and State statutes and regulations.  The County
    acknowledges  its duties  and responsibilities  regarding such records under
    such statutes and regulations.

    4.8   MAINTENANCE  OF RECORDS AND  REPORTS.  In  order to  assure that funds
    provided in this Agreement are  used  by Contractor in accordance with  such
    Agreement, Contractor shall maintain:

          4.8.1   ACCOUNTING RECORDS. Contractor shall maintain within San Diego
          County  accounting  records that clearly  reflect the cost of services
          for which claims against County are made pursuant to this Agreement in
          accordance  with  generally  accepted accounting   principles  and  as
          further specified  in  the Contractor's  Manual.   Such  records shall
          include, but not be limited  to, accounting ledgers, statistical data,
          and  supporting  documents  such  as purchase  requisitions,  purchase
          orders,   vouchers,   time  sheets,  payrolls,  analyses  of   capital
          equipment costs, and schedules for allocating costs.

          4.8.2   PERSONNEL RECORDS.  Contractor shall maintain within San Diego
          County adequate personnel record,  payroll records,  personnel  files,
          and personnel  policies and procedures.  Employee time and  attendance
          records shall show the hours and dates worked and shall  be signed and
          approved by both the employee and  his  or her  immediate  supervisor.
          Payroll and personnel records shall reflect  employee's  date of hire,
          job title,  authorized salary or rate of pay, payroll  deduction data,
          and leave time earned and taken. Contractor shall develop and maintain
          written policies  governing  employment  practices,  job descriptions,
          compensation,  paid  leave,  promotion,  termination  procedures,  and
          performance evaluations.

          4.8.3   CLIENT AND PATIENT  RECORDS.  Contractor shall maintain within
          San  Diego  County  adequate  records for  all services  provided  and
          clients/patients served pursuant to  this  Agreement.  Pertinent  data
          shall be kept in  sufficient  detail so as to allow for the evaluation
          of  the  services  rendered  under this Agreement.  County,  will take
          custody of the  client/patient records upon contract termination.

                                      B-11
<PAGE>

    4.9   EVALUATION  STUDIES.   Contractor  shall   participate  as  reasonably
    requested by the County in research and evaluative  studies designed to show
    the effectiveness  and/or efficiency of the County Indigent Health  Services
    program, or to provide information about Contractor's  services,  subject to
    nominal  material  costs  being  incurred  by  Contractor related  to  these
    studies.

5   CONTRACT TYPE,  INVOICES AND PAYMENT

    5.1   CONTRACT TYPE.

          5.1.1   The  contract  type for the County  Indigent  Health  Services
          program shall be a Firm Fixed Price Subject to Re-Determination.   All
          other  costs  (EXCEPT  AGREED UPON PASS THROUGH  COSTS) such as labor,
          material,  rents  and  leases, consultant services, etc. for providing
          the specified  services  shall  be  reimbursed  at  a firm fixed price
          prorated for monthly payments at one twelfth of the annual rate.

    5.2   INVOICES AND PAYMENT.

          5.2.1   An original invoice referencing contract number and describing
          services  provided in accordance  with Section C-1 - Statement of Work
          shall be submitted to: Contracting Officer's Technical  Representative
          (COTR), identified in Section A.

          5.2.2   The invoice shall specify services provided in accordance with
          the Statement of Work.  Payment shall be NET 30 days from  receipt and
          approval of invoice unless otherwise stated.

    5.3   PAYMENTS.  The Contractor shall be paid upon the submission  of proper
    invoices or  vouchers,  the prices stipulated  herein for supplies delivered
    and accepted or services rendered and  accepted,  less deduction, if any, as
    herein provided.

    5.4   EXTRAS.  Except as otherwise provided  in the contract, no payment for
    extras shall be made unless  such extras and  the price therefore  have been
    authorized in writing by the Contracting Officer.

    5.5   DISCOUNTS.  In connection  with any discount  offered,  time  will  be
    computed from date of delivery of the  supplies  to carrier  when acceptance
    is at point  of  origin,  or from  date of  delivery  at destination or port
    of embarkation  when delivery and acceptance are at either of  these points,
    or from the date the correct  invoice  or voucher is received in  the office
    specified  by the County,  if the latter  is  later than  date  of delivery.
    Payment is deemed to be made for the purpose of earning the  discount on the
    date of mailing of the County check.

    5.6   DISALLOWANCE.  In  the event  Contractor  claims  and receives payment
    from County for  a service,  reimbursement for which is later disallowed  by
    the  County,  Contractor  shall  promptly  refund  the disallowed amount  to
    County on request, or at its option, County may offset the amount disallowed
    from any payment due or to become due to Contractor under any contract  with
    the County.

    5.7   FEDERAL, STATE, AND LOCAL TAXES.  The County  generally is required to
    pay California  Sales  or Use  Tax,  and it  should  be  shown as a separate
    item on  invoices  as part of the firm  fixed  price.   The County is exempt
    from payment of Federal  Excise Tax.   It shall not be included in invoices.
    Exemption certificates will be furnished,  if requested.

                                      B-12
<PAGE>

6   AVAILABILITY OF FUNDS, CHANGES, TERMINATION AND EXTENSIONS

    6.1   AVAILABILITY  OF FUNDS.  The County's  obligation for  payment  of any
    contract  beyond  the  current fiscal  year  end  is  contingent  upon   the
    availability of funds from which payment can be made.  No legal liability on
    the  part  of  the  County shall arise for payments  beyond June 30  of  the
    calendar  year unless funds are made  available  for such performance.

    6.2   CHANGES.

          6.2.1   COTR or  designee  may at any time,  by a written  order,  and
          without  notice to the  sureties,  make  changes,  within  the general
          scope of this  contract.  If  any  such  change  causes an increase or
          decrease in the cost of, or the time required for, the  performance of
          any part of  the  work  under  this contract, whether  changed  or not
          changed by an such order, an equitable adjustment shall be made in the
          contract  price or  delivery schedule, or both, and the contract shall
          be  modified accordingly.  Any claim by the Contractor for  adjustment
          under this clause  must be asserted  within 30 days  from the date  of
          receipt  by the  Contractor of the  notification of change.  Where the
          cost of property  made obsolete or excess as  a result  of a change is
          included  in  the  Contractor's  claim  for  adjustment, the  COTR  or
          designee shall have the right to  prescribe  the manner of disposition
          of such property.

          6.2.2   Failure  to  agree  to  any  adjustment  shall  be  a  dispute
          concerning a question of fact within the meaning of the clause of this
          contract  entitled "Disputes".  However, nothing in this clause  shall
          excuse the Contractor  from  proceeding  with the contract as changed.

    6.3   DISPUTES.

          6.3.1   Except as  otherwise  provided in this  contract,  any dispute
          concerning  a question  of fact  arising  under this contract which is
          not disposed of by agreement  shall  be  decided  by  the  Contracting
          Officer  who  shall  reduce  the  decision  to  writing  and  mail  or
          otherwise furnish a copy thereof to the Contractor.    The decision of
          the  Contracting  Officer  shall   be  final  and  conclusive   unless
          determined  by  a  court  of  competent  jurisdiction  to   have  been
          fraudulent or capricious, or  arbitrary, or  so  grossly  erroneous as
          necessarily   to  imply  bad  faith.   The  Contractor  shall  proceed
          diligently   with   the  performance  of  the  contract  pending   the
          Contracting Officer's decision.

          6.3.2   This "Disputes" clause does not preclude  consideration of law
          questions  in  connection  with  decisions provided  for  in Paragraph
          6.3.1 above:That nothing in this contract shall be construed as making
          final the decision of any  administrative official, representative, or
          board on a question of law.

    6.4   TERMINATION FOR CAUSE.

          6.4.1   If through any cause,  the Contractor shall fail to fulfill in
          timely and proper manner its  obligations under  this Agreement, or if
          the  Contractor  shall  violate  any  of the  covenants, agreements or
          stipulations of this Agreement, the  County  shall thereupon  have the
          right to terminate  this  Agreement  by giving written  notice  to the
          Contractor  of  such  termination  and  specifying the  effective date
          thereof,  at least ten (10) days before  the  effective  date of  such
          termination.  Prior  to issuing  such  notice,  the  County agrees  to
          provide   Contractor   with   written  notification   of   contractual
          deficiencies,  and shall give the Contractor  forty-five (45) days to
          remedy,  to the County's satisfaction,  the contractual  deficiencies.
          In the  event  of termination for cause, all  finished  or  unfinished
          documents,    data,   studies,   surveys,  drawings,   maps,   models,
          photographs, and  reports  prepared  by  the Contractor shall, at  the
          option of  the  County,  become  County  property  and  the Contractor
          shall be  entitled to receive just and  equitable compensation for any
          satisfactory  work  completed  on such documents, and other materials.

                                      B-13
<PAGE>
          Notwithstanding the  above, the  Contractor  shall  not be relieved of
          liability  to the County for damages sustained by the County by virtue
          of any breach of the Agreement by the  Contractor,  and the County may
          withhold any  payments  to the  Contractor for the  purpose of set off
          until such time as the exact amount of damages due the County from the
          Contractor  is  determined.  The  Contractor  hereby expressly  waives
          any and all claims for damages  for  compensation  arising  under this
          Agreement  except  as  set  forth  in  this  section  in event of such
          termination.

                  6.4.1.1   If  after  notice  of  termination  of this contract
                  under the provisions of this clause,  it is determined for any
                  reason  that  the  Contractor  was  not  in  default under the
                  provisions of this clause, or that the  default  was excusable
                  under  the  provisions  of  this   clause,   the  rights   and
                  obligations  of the  parties  shall,  if the contract contains
                  a clause  providing for  termination  for convenience  of  the
                  County,  be  the  same  as if  the termination has been issued
                  pursuant to such clause.

    6.5   TERMINATION FOR CONVENIENCE OF COUNTY.  The County  may terminate this
    Agreement at any time by giving  written  notice  to  the Contractor of such
    termination and specifying  the  effective date  thereof at least sixty (60)
    days before the effective  date of such  termination.  In  that  event,  all
    finished  or  unfinished  documents  and  othe  materials  as  described  in
    Paragraph  6.4.1 above,  shall  at the option  of the County,  become County
    property.  If the Agreement is terminated by the County as provided  herein,
    the Contractor shall be entitled to receive just and equitable  compensation
    for any satisfactory work completed on such  documents and other  materials.
    The  Contractor hereby expressly  waives any and all claims for  damages  or
    compensation  arising  under  this  agreement  except as  set forth  in this
    paragraph in the event of such termination.

          6.5.1   Upon  notification of contract  termination,  Contractor shall
          demonstrate  a "good faith  effort" to  terminate  or transfer leases,
          subcontracts, software and maintenance agreements in sixty (60)days or
          less.  This  provision  also  applies  to Sections B-6.4 and B-6.6.

    6.6   TERMINATION  OR REDUCTION  DUE  TO CESSATION  OR REDUCTION OF FEDERAL,
    STATE OR  COUNTY FUNDING.  County shall  have the right to issue a notice to
    proceed with close out  services  in  accordance  with Section C-1-6.12  and
    Section  A-3.3 in the event  that  Federal, State or County funding for this
    Agreement  ceases prior to the ordinary term of  this Agreement.  The County
    and Contractor shall meet within ten (10) days of notice  to  proceed   with
    close  out  services  to renegotiate  this Agreement based upon the modified
    level of funding.   In  this  case,  if  no  agreement  is  reached  between
    County  and Contractor  within ten (10) days of the first  meeting, a notice
    of  termination  shall  be  issued  and either party shall have the right to
    terminate this Agreement within sixty (60) days.

          6.6.1   In event there is a reduction  of funds made  available by the
          County to Contractor under this or subsequent Agreements,  the  County
          of  San  Diego  and  its  Departments,   officers  and employees shall
          incur no liability to Contractor and shall be held  harmless from  any
          and all claims,  demands,  losses, damages,  injuries,  or liabilities
          arising  directly or from such action.

    6.7   OPTION TO EXTEND SERVICES.

          6.7.1   ONE  TO  SIX  MONTHS-END  OF  CONTRACT  PERIOD.  The  services
          described in Section C (Statement  of Work) may be extended in  one or
          more increments for a total of no  less than  one (1) and no more than
          SIX (6)  calendar  months at  the  discretion of the County Purchasing
          Director.  Each  extension  shall  be  effected  by  written  contract
          modification delivered to the Contractor no less than thirty (30) days
          prior to  expiration  of the contract.   The  rates  set forth  in the
          pricing  section  (or  budget)  shall  apply  to  any  extension  made
          pursuant to this option  clause  unless   provision   for  appropriate
          price adjustment  has been  made  elsewhere  in  this  contract.   All
          payments are subject  to General Terms and  Conditions,  Clause titled
          "Availability of Funding".

                                      B-14
<PAGE>

          6.7.2   TWO ADDITIONAL ONE  YEAR  OPTION  PERIODS -  END  OF  CONTRACT
          PERIOD.  The  County  shall  have its option to extend  this Agreement
          for  two (2)  years at  the  prices  negotiated  for each  year.   The
          additional  contract   periods   shall  be  from  July 1, 2000 and end
          June  30,  2002,  and  in  the  event  of  extension,  the  Contractor
          agrees to grant the above one to  six  (1-6)  month  extension  of the
          price  quoted in  the pricing section, providing the County provides a
          thirty (30) day written notice of its intent  to exercise the  option.
          All  payments  are  subject to  Standard Terms and Conditions,  Clause
          titled "Availability of Funding"

    6.8   ANNUAL ADJUSTMENT.

          6.8.1   The  Contracting  Officer shall enter into  negotiation  on or
          after April 1 of  each  option  year (FY  2000-2001 and FY 2001-2002).
          The purpose of  which is  to adjust the contract for  changes  in  the
          coming  year  appropriations.  Contract amendments will  be  effective
          when signed by the Purchasing and Contracting Director after signature
          by  the  Contractor  and  the  funding  is  approved  by  the Board of
          Supervisors.

          6.8.2   In the event that agreement can not be reached, the County may
          require the Contractor to provide the current level of services  for a
          period  up to 180 days at the  current  years rates.  In addition, the
          Contractor  will be  ineligible  to provide  the services for the next
          three years.   This  ineligibility  requirement  may be waived  by the
          Contracting Officer if it is determined to be  in  the  County's  best
          interest.

<PAGE>

COUNTY OF SAN DIEGO, DEPARTMENT OF HEALTH SERVICES
                      ADMINISTRATIVE SERVICES ORGANIZATION
         SECTION C-1 STATEMENT OF WORK, COUNTY INDIGENT HEALTH SERVICES

1.   GENERAL REQUIREMENTS

     1.1   The County of San Diego through the Department of  Health Services is
     responsible for maintaining and protecting the health of the  residents  of
     San Diego  County by carrying  out statutes  and regulations of the Federal
     and State governments, as well as ordinances and policies of the  Board  of
     Supervisors.    This   is   accomplished   through    the   administration,
     implementation   and evaluation of contracts with private sector  providers
     of health care.  Participating  providers serve eligible medically indigent
     residents  of San  Diego,  who do not  qualify  for other forms of publicly
     subsidized health care.

     1.2   This  contract is for an  Administrative  Services Organization (ASO)
     tasked with the day-to-day administration of specific services  related  in
     County  Indigent  Health  Services.   The County  Indigent  Health Services
     program will provide primary and preventive care and emergency and urgently
     needed health care to eligible  adults.   In  addition,  the  ASO  shall be
     responsible  for programs funded through the California Healthcare Indigent
     (CHIP),  the  Physician   Emergency  Services  (PES)   Program,   and   the
     Comprehensive  AIDS  Resources Emergency (CARE) Act.

           1.2.1   Scope of  Services.   The  ASO  shall  manag   the   provider
           reimbursement  pools  and document  service  delivery and utilization
           while  insuring  that  the  outcome  of   access to  quality care  is
           achieved. The scope of services to be provided by the  administrative
           contractor  shall  include,  but  not   be  limited  to:   day-to-day
           administration, MIS design and operation, enrollment and  eligibility
           verification, utilization management and care coordination,   quality
           management,   claims  processing  and  financial  management, network
           development and management of complaints,  grievances and appeals.

     1.3   Attachments 1 and 2, which describe  different elements of the County
           Indigent Health Services program,  are incorporated herein as part of
           Section C.  Additional  materials, listed in Section C-29 References,
           are contained in the Technical Resource Center (TRC).

           1.3.1   Attachment  C-1.1:  Description  of  County  Indigent  Health
                   Services (Paragraph 3.1)

           1.3.2   Attachment  C-1.2:  List of Computer Equipmen and Furnishings
                   (Paragraph 3.3 &  6.3.2.1.1)

2.   COUNTY INDIGENT HEALTH SERVICES PROGRAM GOALS

     2.1   The ASO  shall adhere to the County's established  goals for physical
     health  services.  These goals  focus upon  the  provision  of an organized
     system of health care delivery for  eligible, medically indigent residents.
     The County's  goals  are  intended  to  establish  criteria  for successful
     program operation.

     2.2   Obligation to Poor and  Working  Poor.  The ASO shall meet the County
     of San  Diego's  goals and  obligation to provide  physical health services
     to   medically  indigent  adult  residents  of  the  County, including  the
     following:

           2.2.1   Operate a coordinated and organized  system of care comprised
           of physicians,  hospitals,   community clinics and  ancillary service
           providers

           2.2.2   Incorporate  care  within  the  private sector, as a  public/
           private partnership

                                     C-1-1
<PAGE>

           2.2.3   Assure  reasonable  accessibility  through management of  the
           provider network

           2.2.4   Assure  a  price  that  is  competitive  and   cost effective

           2.2.5   Embrace a community  standard  for quality  of care

           2.2.6   Network with county and  community  health care  agencies and
           providers to maximize efficiencies  in the  delivery of  health  care
           services.

3.   SYSTEM OVERVIEW.

     3.1   The County Indigent  Health Services  program is  the  integration of
     several existing programs, including County Medical Services, Primary  Care
     Services,   and  County  Patient  Support Services.  Attachment  C-1.1 is a
     description  of the County  Indigent  Health Services.

           3.1.1   For  the  past  eight  years,  the  County  Medical  Services
           program has been managed by an Administrative  Contractor. The County
           Indigent  Health  Service  will  use  the  existing  County   Medical
           Services   operating   systems,   including   existing  policies  and
           procedures, except as modified by the County. Policies and procedures
           contain certain performance  standards that  the  Contractor shall be
           expected to meet. Copies of these documents  shall be maintained  and
           updated by the  Contractor during the term of the contract.

           3.1.2   Currently, the Administrative  Contractor is  co-located with
           with the County staff  responsible for the management of the program.

                   3.1.2.1   The  Contractor  shall negotiate  sufficient  lease
                   space for both Contractor and County.   If exercised,  County
                   shall reimburse the Contractor for the  County's  portion  of
                   the  lease  costs, including early termination costs.

                   3.1.2.2   The Contractor shall negotiate a lease for upgraded
                   telephone  equipment   for   both  the Contractor and County.
                   The County shall reimburse  the  Contractor  for  the  lease/
                   equipment early termination costs.

     3.2   The intent of  integrating  the three services is  to ensure that the
     the County's health  care  obligation  to the  working  poor  and medically
     indigent County  residents  is  met  in   the  most  cost effective  manner
     possible.  Integration should result  in  lower administrative costs, while
     maintaining access and quality of care.

     3.3   The County has furnishings, computer equipment and software which has
     been  designated for this contract in addition  to the budgeted allocation.
     Specifications are found in Attachment C-1.2.

     3.4   The County Indigent Health Services  program  utilizes the same local
     provider network for the delivery of services,  which provided services for
     the County  Medical  Services and Primary Care Services programs.

           3.4.1   Hospital Network.  The  County currently  contracts  with  12
           licensed  acute-care  facilities   in  San  Diego,  which  meet   the
           conditions of  participation  as  set  forth  in  the  standards  and
           provisions of the  Hospital  Contract,  and  are  considered eligible
           for  participation  in the County  Indigent  Health Services hospital
           provider network.  The current hospital network is subject to  change
           during  the  term  of  this agreement.  Hospitals provide  urgent and
           emergent   inpatient  and   outpatient  services   to  the   eligible
           population.

                                     C-1-2
<PAGE>
                   3.4.1.1   University of California, San Diego Medical Center.
                   The County has contracted with the University of  California,
                   San Diego  Medical Center through January 1,  2004 to provide
                   health care  services to the medically indigent in accordance
                   with Section  17000  through  17410 of the California Welfare
                   and Institutions Code.

           3.4.2   Community  Clinic  Network.  Primary  care,  preventive   and
           urgent services  are provided to  the  eligible  population through a
           network of Community  Clinics and other  private providers  currently
           under  contract  with  the  County.   The  current  Community  Clinic
           network is subject to change during the term of  this  agreement.  In
           an  expanded  and more formal role, the  Contractor shall collaborate
           with  the  County  and  Community  Clinics to  develop  a  model  for
           Community Clinics to serve as  gatekeepers for referrals to Specialty
           Physicians and Ancillary Services.

                   3.4.2.1   Contractor shall provide education and  training to
                   new  clinics  joining  the contractual provider network.

                   3.4.2.2   Contractor   is   prohibited   from  offering   any
                   Contractors, directly or indirectly, gifts, gratuity,  favors
                   or special  conditions  that would result in a monetary gain.

                   3.4.2.3   Special  contracting  and/or  referral arrangements
                   due to patient needs must be prior authorized by the County.

           3.4.3   Specialty and Ancillary Services Network. Specialty Physician
           and non-physician services are provided to  eligible patients through
           a  network  of contracting  providers.  The Specialty  and  Ancillary
           Network of providers  is subject to change   during  the term of this
           agreement.  Specialty  Physicians   who  participate  in  the  County
           Indigent  Health Services shall receive referrals  from  providers at
           contracted Community  Clinics.  Ancillary service providers,  such as
           pharmacies,  Durable  Medical  Equipment  vendors, lab and radiology,
           contract with the  County   Indigent   Health  Services  program  for
           reimbursement for services delivered to  eligible   patients.  County
           Indigent  Health   Services  eligible   patients  must   have   prior
           authorization  for  the  use of ancillary  services,  which  must  be
           delivered  by  a County Indigent Health Services contracted provider.

4.   FUND ALLOCATION.

     The Contractor shall manage these funds:

     4.1   STATE REALIGNMENT FUNDS.  The basis of funding of the County Indigent
     Health Services is the annual allocation of  State Realignment funds to the
     County of  San  Diego.  No  County  General  Funds  are  envisioned  to  be
     appropriated to this program. State Realignment funds are used to reimburse
     Hospitals, Community Clinics,  Specialty  Physicians and Ancillary  Service
     providers  for  primary,  preventive,  urgent  and  emergent  inpatient and
     outpatient care.
                                     C-1-3
<PAGE>

     4.2   CALIFORNIA HEALTHCARE INDIGENT PROGRAM (CHIP).  The basis of  funding
     for the California  Healthcare Indigent Program services are State  tobacco
     tax  funds.  California  Healthcare  Indigent  Program  funds  are  used to
     reimburse  hospitals  for  uncompensated  emergency  care and to supplement
     payments for  County  Indigent  Health  Services  hospital  and   specialty
     providers.  Funding  levels are determined annually by the State based upon
     Medically  Indigent Care Reporting System (MICRS) data.

     4.3   PHYSICIAN  EMERGENCY  SERVICES  (PES) ACT.  The basis for funding the
     Physician  Emergency  Services   program  is   established   through  State
     legislation utilizing moving traffic violations fees and State  tobacco tax
     funds.  Physician  Emergency   Services   funds  reimburse  physicians  for
     emergency   services   that  would   otherwise  be uncompensated.

     4.4   COMPREHENSIVE   AIDS   RESOURCES  EMERGENCY  (CARE)  ACT.   The  1990
     Comprehensive AIDS Resources Emergency, also  known as  the Ryan White Act,
     was enacted by the  federal  government  to provide  grants to  improve the
     quality and  availability  of care for individuals  and families with Human
     Immunodeficiency Virus (HIV).  A  separate account established  with  funds
     from  the  Comprehensive   AIDS  Resources Emergency, Title I grant is used
     for primary and preventive  clinic services for HIV+ patients.

     4.5   COUNTY  PATIENT  SUPPORT  SERVICES.   Funds   to  reimburse  services
     provided  under a contract  between  the  County  and  the  University   of
     California  at San  Diego  Medical  Center  (UCSD-MC),  known as the Fourth
     Operating Agreement are part of the Hospital Reimbursement Pool but managed
     separately  to  ensure  that funds  are  available  to  meet  the  County's
     Welfare and  Institution's  Code  Section  17000 obligation.

     4.6   ACCRUED  INTEREST.  Accumulated interest on program funds, associated
     with the timing  of receipts  and disbursements,  will also  be managed and
     accounted for by the Contractor.

     4.7   OTHER  FUNDING  SOURCES.  Other  funding  sources  allocated  to  the
     program, such as grant proceeds or  third  party  recoveries, will  also be
     managed and accounted for by the Contractor.

5.   PROVIDER PAYMENTS.

     The Contractor shall perform provider  reimbursement in accordance with the
     County approved process, based on the following payment mechanisms:

     5.1   STATE  REALIGNMENT  FUNDS.  State  Realignment  funds  are  allocated
     by the  County  to three  separate  reimbursement  pools:  Community Clinic
     Pool,  Hospital Pool and Specialty  Pool.  Allocations to the reimbursement
     pools are capped at the  beginning of each year.  The Community Clinic  and
     Hospital  Pools  are fully dispersed to participating  providers at the end
     of each fiscal year.  The distribution of the reimbursement  pools has been
     to 1) fund primary care  services  to  provide  access  to health  care for
     medically indigent  patients  eligible for  County support, and  reduce the
     impact of patients seeking primary care services through hospital emergency
     rooms; 2) maintain  a  physician  network  for  specialty  care;  3) reduce
     inappropriate  hospital  utilization  by  refocusing patients to outpatient
     settings;  4) provide emergency services for patients requiring acute care.

                                     C-1-4
<PAGE>

           5.1.1   COMMUNITY CLINICS POOL. Community Clinics shall be reimbursed
           by the Contractor from the Clinic Pool (s) for services  to  eligible
           patients.  The  amount of the  monthly  payment  shall  be  based  on
           utilization of services by County Indigent  Health Services patients.
           Payments are paid to Community Clinics on a monthly basis.  Community
           Clinics  shall  submit  encounter  based  claims  data  for  services
           rendered.  The Contractor shall perform a quarterly reconciliation to
           ensure that the minimum units of service  represented by the payments
           have been provided.  To ensure that Community  Clinics  are providing
           the appropriate level of urgent care,  Maintenance of Efforts  levels
           will  be  established  by  the  Contractor  and  the  County for each
           participating  Community  Clinic based on  the historic  provision of
           County Medical Services and Primary Care Services.

                   5.1.1.1   The Community Clinic Pool  utilization  and funding
                   level shall be  evaluated  quarterly.  A final reconciliation
                   and  distribution  at the  end of  each fiscal  year shall be
                   based upon  Maintenance  of Effort performance.

                   5.1.1.2   Claims shall be  reimbursed  by the Contractor from
                   the Community Clinic Pool or other designated funding sources
                   based upon  utilization  as approved by the County.

                             5.1.1.2.1   Contractor  shall work  with the County
                             and  Community  Clinics  to  implement  an  optimal
                             disbursement   methodology   for   the    Community
                             Clinics,  e.g. the integration of Primary Care  and
                             County Medical Services funding or block granting a
                             base line of funding.

                   5.1.1.3   The Contractor shall facilitate improved electronic
                   data interchange with participating providers.

           5.1.2   HOSPITAL  POOL.   Hospitals  shall   be  reimbursed  by   the
           Contractor from the Hospital Pool for urgent  and  emergent inpatient
           care to eligible  adults.  The amount of the monthly payment shall be
           based on  utilization  of services by County Indigent Health Services
           patients.  Hospitals submit encounter data for services  that will be
           credited  against the Hospital Pool.  The Contractor shall  perform a
           quarterly reconciliation to ensure that the  minimum units of service
           represented by payments have been provided. Future annual allocations
           from the  Hospital  Pool  shall  be  based upon the  previous  year's
           service levels.

                   5.1.2.1   The  Contractor  shall  work  with  the County  and
                   hospitals to  implement an  optimal disbursement methodology,
                   e.g. block grant or firm fixed price.

                   5.1.2.2   The  Contractor   shall  manage   and  account  for
                   payments to the University of  California,  San Diego Medical
                   Center under the Fourth Operating Agreement.

           5.1.3   SPECIALTY  POOL. Specialty physicians and  ancillary services
           shall be reimbursed by the Contractor from  the Specialty  Pool based
           on approved claims submitted by the provider for services to eligible
           clients.  Claims for payment from  the  Specialty Pool  shall require
           prior authorization.

                   5.1.3.1   The  Contractor  shall monitor and report quarterly
                   utilization   of  the   Specialty   pool  by providers.

                                     C-1-5
<PAGE>

     5.2   CALIFORNIA  HEALTHCARE  FOR   INDIGENT  PROGRAM  (CHIP).   California
     Healthcare  Indigent  Program   services  are   reimbursed  through   three
     separate interest bearing accounts: Hospital, Physicians, and Other  Health
     Services.   Within  the  Hospital  account,  there  are  two  sub-accounts,
     which  shall  be  separately  managed:  1)  Hospital formula-driven  funds,
     which are to be distributed to hospitals for uncompensated  care  utilizing
     Medically   Indigent  Care  Reporting  System  (MICRS)  data;  2)  Hospital
     discretionary funds which shall be distributed to participating  hospitals.

           5.2.1   HOSPITAL FORMULA ACCOUNT.  The  Contractor  shall  distribute
           funding to participating hospitals as allocated by state  guidelines,
           and in accordance with contract provisions as outlined in  California
           Healthcare Indigent  Program Hospital Agreement.  Payments  shall  be
           made within ten (10) working days of receipt by the Contractor.

           5.2.2   HOSPITAL DISCRETIONARY ACCOUNT.  The Contractor shall utilize
           funding  under this  account for the County Indigent Health  Services
           Hospital Pool in accordance with  contracting provisions  as outlined
           in both California  Healthcare Indigent  Program  Hospital  Agreement
           and the County  Medical  Services Hospital Contract.

           5.2.3   UNALLOCATED ACCOUNT.  The Contractor shall  utilize available
           Unallocated   California   Healthcare  Indigent   Program  funds   as
           identified  by  the  County  to  supplement  County  Indigent  Health
           Services Reimbursement Pools.

           5.2.4   PHYSICIAN  EMERGENCY  SERVICES (PES) PROGRAM.  The  Physician
           Emergency   Services   is  funded  by California  Healthcare Indigent
           Program  and   SB  12/612  funds  which  shall  be   distributed  for
           uncompensated  emergency  services.  Claims processing  and  criteria
           used will be in accordance with  Physician  Emergency  Services  Fund
           Billing   Requirements.  Payments  shall be  made twice  annually  to
           physicians who have submitted authorized claims.

                   5.2.4.1   PHYSICIAN  NEW  CONTRACTS ACCOUNT.  The  Contractor
                   shall utilize funding  under  this  account  for  the  County
                   Indigent Health Services  Specialty Pool in  accordance  with
                   contract   provisions  as  outlined  in   the  County Medical
                   Services Physician Contract.

     5.3   COMPREHENSIVE AIDS RESOURCES EMERGENCY  (CARE)  ACT.  The  Contractor
     shall administer the Comprehensive AIDS  Resources  Emergency  Supplemental
     Pool in a manner similar to County Indigent  Health Services  Reimbursement
     Pools.  Funds from the Supplemental Pool shall be used for the  payment  of
     services  for  eligible   and   registered  Comprehensive  AIDS   Resources
     Emergency patients seen  at the clinics.  Community  Clinic  visits include
     primary  care  medical  visits,  ancillary  services,  pharmacy  and dental
     services.

     5.4   OTHER FUNDING  SOURCES.  The Contractor shall  administer and account
     for the disbursement of other CIHS program funding.

6.   PROGRAM REQUIREMENTS

     The County of San Diego, in  conjunction  with  an  Administrative Services
     Organization,  shall  administer  the   County  Indigent  Health   Services
     Program.  The expected outcomes,  tasks,  Reports and  Deliverables of  the
     Contractor  and  the County's  responsibility  for  program  management are
     identified below.

                                     C-1-6
<PAGE>

     6.1   ANNUAL OUTCOMES.  The  Contractor  shall  ensure  that  the following
     outcomes are achieved annually:

           6.1.1   Services in the County Indigent Health Services program shall
           become  more  cost  efficient,  without  affecting  the   quality  of
           services.

           6.1.2   The viability of the County Indigent Health Services provider
           network shall be ensured.

           6.1.3   Funding shall be managed in such a way as to ensure access to
           services resulting in maximum service capacity.

                   6.1.3.1   The Contractor shall maximize the recovery of Medi-
                   Cal  or other third party payments.

           6.1.4   A  patient  satisfaction  survey and  a provider satisfaction
           survey shall be measured  annually  prior to May 1st of each year.

                   6.1.4.1   The Contractor and County shall review  and develop
                   recommendations based upon participant surveys.

     6.2   ADMINISTRATION

           6.2.1   The  Contractor  shall  implement  a  system that manages the
           eligible  population's  care,  utilization  of  services, and program
           funds  while  ensuring  that the outcome of access to quality care is
           achieved.

                   6.2.1.1   The Contractor  shall  advise  the County regarding
                   the  operation  of  the  program  and  inform  the  County of
                   problems identified in the structure and/or administration of
                   the  program,  and  opportunities  for  improvement  in   the
                   program's administration.

                   6.2.1.2   The  Contractor  must  submit  all subcontracts for
                   County review and approval prior to implementation.

           6.2.2   Tasks shall include:

                   6.2.2.1   UPDATE  AND  MAINTAIN  POLICY AND PROCEDURE  MANUAL
                   The  Contractor   shall   update  and   modify  the  existing
                   County Medical  Services  Policy  and   Procedure Manual   as
                   necessary  to reflect the integration  of services  into  the
                   County Indigent  Health  Services program.

                   6.2.2.2   PREPARE ANNUAL  BUDGET   The  annual  budget  shall
                   reflect programmatic  changes  approved  by  the   County and
                   continue to reflect  economic efficiencies.

                   6.2.2.3   RECOMMEND   CHANGES   IN   PROGRAM   DESIGN     The
                   Contractor shall identify  opportunities  for  improvement in
                   the  program  and  recommend  changes in  the  program design
                   based   on   programmatic   experience,   including   service
                   utilization trend analysis, patient focus groups and  patient
                   satisfaction surveys.

                                     C-1-7
<PAGE>

                   6.2.2.4   REPRESENTATION AT  MEETINGS  The  Contractor  shall
                   provide appropriate  representation to meetings scheduled  by
                   the County.

                   6.2.2.5   PREPARE INFORMATION  AND  MAKE   PRESENTATIONS  The
                   Contractor  shall  prepare   program   information  and  make
                   presentations as scheduled by the County.

                   6.2.2.6   TRAIN STAFF ON COUNTY POLICIES The Contractor shall
                   train its  staff  to  update  them  on  County  policies  and
                   procedures.

                   6.2.2.7   MAINTAIN REGULAR OFFICE HOURS  The Contractor shall
                   maintain  office hours and answer telephone calls  based upon
                   a schedule  approved by the County. In general  terms,  these
                   hours are 8 am to 5 pm, Monday through Friday.

                             6.2.2.7.1   The Contractor shall provide a flexible
                             work schedule for evening and weekend as negotiated
                             by the County.

           6.2.3   Reports and Deliverables

                   6.2.3.1   The Contractor shall  provide reports  that contain
                   information  on   the  level  of   service  activity,  client
                   demographics, provider status and other information  required
                   by the County. These reports shall include  quantitative  and
                   qualitative  documentation of the  Contractor's  performance,
                   as measured against the goals  and  outcomes of the  program.
                   At  minimum  the reports include:

                             6.2.3.1.1   Program Activity Report

                                         6.3.2.1.1.1   The    Program   Activity
                                         Report  shall   contain  a   one   page
                                         Executive    Summary   of   the    most
                                         significant results.

                             6.2.3.1.2   Annual Report

                                         6.2.3.1.2.1   The  Annual  Report shall
                                         contain an  Executive  Summary  of  the
                                         most significant results.

                                         6.3.2.1.2.2   The  Annual  Report shall
                                         include  recommended changes in program
                                         design per Section 6.2.2.3 above.

                   6.2.3.2   Deliverables

                             6.2.3.2.1   Revised Policy and Procedure Manual

                                     C-1-8
<PAGE>
           6.2.4   Unless waived by the County, the County will:

                   6.2.4.1   Represent the CIHS program at the local,  State and
                   federal  level.  Provide  overall direction  and oversight to
                   the  County  Indigent  Health   Services  Program  and   make
                   necessary  policy  recommendations and annual budget requests
                   to the Board of Supervisors, as appropriate.

                   6.2.4.2   Monitor state legislative  activity relevant to the
                   program   and   engage  in  legislative   and  administrative
                   advocacy.  

                   6.2.4.3   Make  decisions  about  interjurisdictional issues,
                   e.g.,  claims  from  other counties.

                   6.2.4.4   Monitor  and  evaluate  the   performance  of   the
                   Administrative  Services  Organization, as  measured  by  the
                   goals and  outcomes of  the County Indigent  Health  Services
                   Program.

     6.3   MIS DESIGN AND OPERATIONS

           6.3.1   The Contractor shall maintain a  centralized  data collection
           and  analysis  system  that  will  serve  as  the  basis  for program
           management and strategic planning.

           6.3.2   Tasks shall include:

                   6.3.2.1   MAINTAIN  A  MANAGEMENT   INFORMATION  SYSTEM (MIS)
                   The Contractor shall maintain a management information system
                   to assist the County and service providers  with the  payment
                   of claims,  management  of  benefits,  network management and
                   coordination of care.

                             6.3.2.1.1   The Contractor shall assure all changes
                             to  the  existing  MIS  are compatible   with   the
                             County's year 2000 equirements.

                                         6.3.2.1.2.1   Contractor shall complete
                                         the IDX Version 8.0  upgrade or greater
                                         in  FY 98-99 to comply  with year  2000
                                         requirements.

                             6.3.2.1.3   The  Contractor   shall   utilize   the
                             County's  existing  IDX  system.  Attachment  C-1.3
                             contains  a   list   of   the   County's   computer
                             equipment.   Significant changes to the MIS  system
                             must be submitted for  approval by the County prior
                             to implementation.

                   6.3.2.2   ENSURE  ADEQUATE   REPORTING  BY   PROVIDERS    The
                   Contractor shall  work with hospitals,  Community Clinics and
                   other  providers to ensure that there  is  an adequate system
                   for  reporting  data  on all  eligible  patients   served and
                   that providers submit all required reports.

                                     C-1-9
<PAGE>

                             6.3.2.2.1   The  Contractor shall recommend  to the
                             County  what   information   is  required   to   be
                             submitted   by   providers  that   is  not  already
                             contained  within   the   Medically  Indigent  Care
                             Reporting System (MICRS).

                             6.3.2.2.2   The   Contractor   shall  analyze   and
                             implement where  feasible  the  linkage of IDX with
                             the   Medically  Indigent   Care  Reporting  System
                             (MICRS),  the   Healthy  San  Diego   MIS,   Common
                             Application  Transaction  System  (CATS)  or  other
                             information  systems  utilized  by  the County.

                                         6.3.2.2.2.1   The    Contractor   shall
                                         collaborate    with    and   facilitate
                                         linkage  with  the County Mental Health
                                         MIS subject to available funding.

                   6.3.2.3   PREPARE    QUARTERLY   PROJECTIONS  OF   INDICATORS
                   RELATING TO PROGRAM UTILIZATION, COST, AND PROGRAM NEEDS  The
                   Contractor shall utilize data collected and analyzed  through
                   the MIS to provide  the County with information on the status
                   of the  County  Indigent  Health  Services program.

                   6.3.2.4   IDENTIFY PATIENTS  AND  SERVICES  BY FUNDING SOURCE
                   The  Contractor shall maintain  a  distinct  indicator within
                   the MIS to register, track, process and  report  on  patients
                   and  services by funding  source,  such as the  Comprehensive
                   AIDS Resources Emergency Act.

                             6.3.2.4.1   The  MIS  shall include  enrollment and
                             eligibility data as described in Section 6.4 below.

                             6.3.2.4.2   The  MIS  shall  be  designed to assure
                             that   services   are   provided   to   the  target
                             population.

                             6.3.2.4.3   The MIS shall  screen  for clients that
                             receive benefits from more than one  funding source
                             or pool.

                                         6.3.2.4.3.1   The   Contractor    shall
                                         report the results of this screening to
                                         the County on a monthly basis.

                             6.3.2.4.4   The  MIS  will  screen for  individuals
                             receiving Medi-Cal.

                             6.3.2.4.5   The MIS will assist the County with its
                             initiatives to stop fraud.

                   6.3.2.5   PREPARE SPECIAL STUDIES, REPORTS, GRAPHS AND CHARTS
                   AS REQUESTED   At the County's request,  the Contractor shall
                   regularly prepare  special  reports  and  studies   utilizing
                   the  current   data   available    through   the   Management
                   Information System.

                             6.3.2.5.1   The  Contractor shall generate  patient
                             listings as required.

                   6.3.2.6   COLLECT  AND  SUBMIT  TO  THE  COUNTY THE MEDICALLY
                   INDIGENT  CARE  REPORTING  SYSTEM  (MICRS)  DATA  FOR  COUNTY
                   TRANSMITTAL TO THE STATE QUARTERLY, ANNUALLY AND AS REQUIRED.
                   State funding for California Healthcare  Indigent Program and
                   Physician Emergency Services requires  annual  submission  of
                   Medically  Indigent  Care   Reporting  System  (MICRS)  data.
                   Hospital, Community Clinic and  County  Patient Support  data
                   will be collected monthly. The Contractor shall input data as
                   necessary such as Patient Data Records (PDR's)  and shall  be
                   responsible for  data collection, transfer and reconciliation
                   of all required MICRS data  for the CIHS program.  This  task
                   includes correcting erroneous records  and  other  actions as
                   necessary for assuring accurate transmittal of information to
                   the State.

                                     C-1-10
<PAGE>

                             6.3.2.6.1   The   Contractor  shall   analyze   the
                             Medically    Indigent   Care    Reporting    System
                             (MICRS) and shall  implement,  where  feasible, the
                             utilization  of  this  data  for  the  purpose   of
                             monitoring the performance of providers.

                             6.3.2.6.2   The  Contractor   shall   maintain  the
                             Master Recipient Index (MRI) data base.

                             6.3.2.6.3   The  Contractor  shall  coordinate work
                             with the County's Information System Division.

                             6.3.2.6.4   The  Contractor shall  prepare for  the
                             County responses to MICRS inquiries from the  State
                             pertaining to  the  CIHS  program  and CARE Act  on
                             behalf of the County.

                   6.3.2.7   ENSURE   CONFIDENTIALITY   OF  ADMINISTRATIVE   AND
                   PATIENT DATA   The  Contractor  shall   maintain  appropriate
                   network security  procedures  to ensure that local, state and
                   federal confidentiality regulations are met.

                             6.3.2.7.1   The Contractor shall ensure  compliance
                             with all laws, regulations, policies and procedures
                             regarding the confidentiality rights of individuals
                             and protection  of individuals from system's abuse.

                                         6.3.2.7.1.1   The   County   and    the
                                         Contractor  share   the   mission   and
                                         philosophy that only patients who  meet
                                         the eligibility  criteria as determined
                                         by  the  County  will receive benefits.
                                         The  Contractor  has  adopted  and will
                                         maintain a policy prohibiting  Medi-Cal
                                         and  CIHS  fraud  consistent  with  the
                                         policy  adopted  by the  County  of San
                                         Diego Board of Supervisors.  Subject to
                                         State   and   Federal   law   and   the
                                         Contractor's personnel policies regard-
                                         ing  confidentiality,  the   Contractor
                                         will  disclose  outcomes  of investiga-
                                         tions of alleged improprieties  by  the
                                         Contractor's staff to COTR or designee.

                                     C-1-11
<PAGE>

                   6.3.2.8   MANAGE   FORMULARY   AND  PHARMACY   BENEFIT    The
                   Contractor shall manage the County  Indigent  Health Services
                   formulary and control pharmaceutical costs through a pharmacy
                   management program.

                             6.3.2.8.1   All rebates or other financial benefits
                             derived from the pharmacy management program  shall
                             be  fully  disclosed  by the Contractor,  with  the
                             proceeds belonging to  the County  unless otherwise
                             agreed upon in writing.

                   6.3.2.9   COLLECT AND ANALYZE UTILIZATION DATA The Contractor
                   shall  collect  and  analyze  utilization  of  the population
                   served.  As  a  minimum  this  information  should   include:
                   identification  of trends  in  unduplicated  users, trends in
                   service use per unduplicated user; trends in the  demographic
                   characteristics  of the  population served,  including income
                   and employment status;  trends in  health  status  of clients
                   served,  admissions and length of stay by diagnostic category
                   by hospital;  and, trends in  characteristics and patterns of
                   UTILIZATION for the most expensive clients.

                   6.3.2.10   Collect, input and report in a format approved  by
                   the  County, General  Relief Employability  Evaluation (GREE)
                   information submitted by the clinics or other  providers.  

                              6.3.2.10.1   Analyze   GREE  data  and reports and
                              make   recommendations    for   improved    system
                              efficiencies to  the County. 

           6.3.3   Reports and  Deliverables 

                   6.3.3.1   The  Contractor shall provide report  that  contain
                   information on trends in service  utilization,  management of
                   benefits, claims  payment,  coordination  of  care  and other
                   information  required  by  the County.   At  a  minimum,  the
                   following  reports  shall  be  prepared.   Each report  shall
                   include a one page Executive Summary of the  most significant
                   results. 

                                     C-1-12
<PAGE>

                             6.3.3.1.1   Utilization  Review  Report  

                                         6.3.3.1.1.1   The   Utilization  Review
                                         Report  shall include quantitative  and
                                         qualitative  measurements regarding the
                                         performance of program providers. 

                             6.3.3.1.2   Financial Report 

                             6.3.3.1.3   Medically   Indigent   Care   Reporting
                             System (MICRS) Report

                             6.3.3.1.4   General Relief Employability Evaluation
                             (GREE) Report

           6.3.4   Unless waived by the County, the County will:

                   6.3.4.1   Liaison  and   collaborate   with   major  provider
                   organizations   (e.g.,  Hospital  Council, San  Diego  County
                   Medical  Society,  Council   of   Community  Clinics,  Health
                   Services  Advisory  Board,  etc.,) on  various aspects of the
                   County Indigent Health Services Program.

                   6.3.4.2   Establish  data  collection  and analysis standards
                   for the Contractor and request and approve reports.

                   6.3.4.3   Review  projections  which  could impact budgets or
                   policies during future contract periods.

           6.3.5   County Management Information System (MIS) Responsibilities

                   6.3.5.1   The   County  acknowledges  and   agrees  that  the
                   Contractor will be using  the  application software operating
                   on the  County's  computer  system in the  performance of its
                   duties under the County  Indigent Health  Services Agreement,
                   and that therefore  the  maintenance of  the  system  and the
                   performance of the County's other duties with respect thereto
                   (including  without limitation  the obligation  to  regularly
                   back up system data) is essential to the Contractor's ability
                   to effectively, efficiently and  economically  discharge  its
                   duties under the County Indigent Health Services Agreement.

                   6.3.5.2   The County, at its own cost and expense, shall keep
                   the system in  good repair, condition, and  working order and
                   shall  furnish  any  and  all  parts,  mechanisms and devices
                   required to keep the system in good  mechanical working order
                   and in compliance with  all laws, ordinances and  regulations
                   relating to  the  possession,  use  and  maintenance  of  the
                   system.  The County's obligations hereunder shall include, 
                   without limitation:

                             6.3.5.2.1   All  maintenance  and  repair  of   the
                             system in accordance with manufacturer's specifica-
                             tions and good industry practice;

                                     C-1-13
<PAGE>

                             6.3.5.2.2   All  maintenance and repair  of any and
                             all   networks,  communication  devices  and  other
                             peripherals  and  other  system used  in connection
                             with,  but not included as part  of,  the system in
                             accordance  with manufacturer's specifications  and
                             good industry practice;

                             6.3.5.2.3   All   operational   support   for   the
                             computer system (County  hardware  and software) of
                             which the system is a part; and

                             6.3.5.2.4   All regular, recommended and  necessary
                             system   data  back  up.  In  connection therewith,
                             the   County  shall  establish  a  policy  for  the
                             regular,  recommended  and  necessary  system  data
                             back up prior to all  upgrade  installations of the
                             IDX software  on  the system.  Such  policy  as  it
                             pertains  to  back  up  of  the  IDX  software  and
                             databases  shall be  provided to the Contractor for
                             approval, and the County shall  make  any modifica-
                             tions   thereto   reasonably   requested   by   the
                             Contractor.

                   6.3.5.3   The parties  acknowledge  that the  County will  be
                   using  the  system  for   other  software  applications   not
                   connected  with  the  Contractor's  duties  under  the County
                   Indigent  Health  Services  agreement.  The  County shall not
                   utilize  the   system  in  any  way  tha  will  intentionally
                   interfere with the performance of the County Indigent  Health
                   Services  agreement by the Contractor. In planning such other
                   applications,   the  County   shall  take  into  account  the
                   requirements of the software and the  applications being made
                   of the system by the Contractor under the terms of the County
                   Indigent   Health   Services  agreement,  particularly   with
                   respect   to  system  capacity,  storage and peripheral  use.
                   County agrees  to  notify the  Contractor  about  new  system
                   utilization  that   may  interfere   with  the   Contractor's
                   performance of duties under this agreement.

                   6.3.5.4   If, as a result of the  failure  of  the  County to
                   discharge  its maintenance   obligations  (including  without
                   limitation  the  obligation  to regularly back up  the system
                   data),  the   Contractor  shall  be   excused   from   timely
                   performance   of  any  of  its  other duties under the County
                   Indigent  Health  Services  agreement  that   are  prevented,
                   delayed or hindered  by any such  failure  by the County, but
                   only to  the  extent caused  by such failure,  hindrance,  or
                   delay. In addition,  if  any  such maintenance failure causes
                   increased   costs   or   expenses  to   the   Contractor  not
                   contemplated  by the  payments  otherwise  to be made to  the
                   Contractor  under the  terms of  the  County Indigent  Health
                   Services  agreement, then  the  County  shall  reimburse  the
                   Contractor for increased costs and expenses actually incurred
                   by the Contractor, subject to approval by the County prior to
                   incurring the additional costs or expenses.

                   6.3.5.5   The system  will be used in a live  environment for
                   the  processing  of  actual   data  in  connection  with  the
                   Contractor's  responsibilities  under  the  County   Indigent
                   Health Services agreement.  In the event the system is deemed
                   to be  inoperable  or  is  projected to be inoperable  for  a
                   period in excess of  three (3) working  days, the  Contractor
                   reserves the right to reinstitute a  timesharing  arrangement
                   with IDX, or obtain  other  appropriate  operating solutions,
                   subject  to  prior  approval  of   the  County.   The  County
                   agrees to reimburse  the Contractor for any costs incurred in
                   instituting and operating under any such arrangement, subject
                   to prior approval of any such costs by the County.

                                    C-1-14
<PAGE>


                   6.3.5.6   The  Contractor  is  entitled  to use and  to  make
                   available  to  the  County the IDX  software  pursuant  to  a
                   revocable  license  granted in the IDX agreement.  The County
                   acknowledges  receipt  and   review  of  a copy  of  the  IDX
                   agreement.  The County and the Contractor  agree that neither
                   they nor any of their employees,  agents or contractors shall
                   in any way use or disclose the IDX software in  violation  of
                   any of the terms or  provisions  of the  IDX  agreement.  The
                   County agrees to indemnify, protect, defend and hold harmless
                   the Contractor and its officers, directors, agents, employees
                   and independent contractors from  and  against  any  and  all
                   claims, costs, suits,  damages,  judgments  or other expenses
                   and liability  (including  attorney's fees and costs) arising
                   in anyway from acts of negligence on the part  of  the County
                   or its employees  that results directly or indirectly in  any
                   violation of the IDX agreement.

                   6.3.5.7   The  Contractor  shall transfer the IDX software to
                   the County upon written notice from the County.

                   6.3.5.8   The  County  recognizes  that  Contractor  is   not
                   responsible  for internal  management of  IDX,  therefore, in
                   the  event  of  IDX  default,  the  Contractor  shall  notify
                   the  County  and  develop  a  plan  for  County  approval  to
                   mitigate  and  correct  the  program  problems  caused by the
                   failure of IDX to perform in accordance with their agreement,
                   and   Contractor  and   the  County  shall   renegotiate  MIS
                   responsibilities and timelines.

     6.4   ENROLLMENT AND ELIGIBILITY CERTIFICATION

           6.4.1   The Contractor shall maintain a  centralized on-line  patient
           registration system to verify patient certification for providers and
           to ensure accurate claims payment.

                   6.4.1.1   The  Contractor  shall  assist  Community  Clinics,
                   hospitals and other providers in the  development of  on-line
                   capability for verification of patient eligibility.

           6.4.2   Tasks shall include:

                   6.4.2.1  ENTRY    OF   PATIENT    ELIGIBILITY    STATUS   AND
                   CERTIFICATION PERIOD  Patient eligibility for County Indigent
                   Health Services is the  responsibility  of  the  County.  The
                   Contractor  shall  be  responsible  for  the  development and
                   maintenance of a  patient  registration  system that reflects
                   the current eligibility status of patients.

                   6.4.2.2   PROCESS EMERGENCY ROOM EPISODES Emergency Treat and
                   Release episodes are processed separately from other hospital
                   claims. The Contractor's system must  track and process these
                   episodes to assure reimbursement in a timely manner.

                                     C-1-15
<PAGE>

                   6.4.2.3   ENSURE ACCURATE IDENTIFICATION OF ELIGIBLE PATIENTS
                   The   Contractor   shall  ensure  that   provider   hospitals
                   accurately  identify  and  refer  potential  County  Indigent
                   Health  Services  patients   to  the  appropriate eligibility
                   resource.

                   6.4.2.4   COORDINATION   OF   ELIGIBILITY   INFORMATION   The
                   Contractor shall coordinate eligibility information from  all
                   sources to ensure  accurate  claims  payment.  The Contractor
                   shall  provide   reports  as  necessary  to providers and the
                   County.

                             6.4.2.4.1   The   Contractor  shall   analyze   and
                             implement,  where  feasible,  linkages  with  other
                             eligibility systems, such as Healthy San Diego.

           6.4.3   Reports and Deliverables

                   6.4.3.1   The  Contractor shall provide reports  that contain
                   information  on   patient  eligibility   status   and   other
                   information as required  by  the  County.  At a minimum,  the
                   following   reports  shall  be  prepared.  Each  repor  shall
                   include a one page Executive Summary  of the most significant
                   results.

                             6.4.3.1.1   Eligibility    Report   including    an
                             unduplicated CIHS patient count.

           6.4.4   Unless waived by the County, the County will:

                   6.4.4.1   Perform all  eligibility  determinations using  the
                   Department of Social Services (DSS)  Medi-Cal  Program Guide.
                   Eligibility certifications are currently performed by  County
                   staff.

                   6.4.4.2   Ensure    eligibility    coordination,    including
                   establishing  and  promulgating  eligibility  standards   and
                   guidelines,  providing  Contractor  with  eligibility  status
                   information.

     6.5   UTILIZATION MANAGEMENT AND CARE COORDINATION

           6.5.1   The Contractor shall maintain a system for  the management of
           patient care that ensures  the  timely  referral  to the  appropriate
           level of care and reduces  barriers to care, with the goal of serving
           people at the most appropriate  level of care.

           6.5.2   The Contractor shall implement a Utilization Review system to
           ensure the appropriate, cost effective use of  County Indigent Health
           Services funds to eligible patients.

                   6.5.2.1   The  Contractor  shall  notify  the  County  of any
                   significant trends  or patterns of unusual or abnormal claims
                   by any of the providers.

                                     C-1-16
<PAGE>

           6.5.3   Tasks shall include:

                   6.5.3.1   DEVELOP,  AND  MANAGE  THE  IMPLEMENTATION   OF   A
                   DISEASE  MANAGEMENT  PROGRAM   The  intent  of  the   Disease
                   Management  Program,  which  will  be   implemented  by   the
                   Community Clinics, will focus on the primary  and  preventive
                   services for  specific  diseases  commonly  found  in  County
                   Indigent  Health  Services   patients.   The Contractor shall
                   work  with  the  Community  Clinics  in   the  development of
                   standardized  treatment  protocols which can  have a positive
                   impact on  patient care  and programmatic costs.

                             6.5.3.1.1   DEVELOP CASE  RATES FOR SPECIFIED CASES
                             INCLUDED IN  THE DISEASE  MANAGEMENT  PROGRAM   The
                             Contractor shall work with the Community Clinics in
                             the  development  of   case  rates  based  upon the
                             implementation of standardized treatment protocols.

                   6.5.3.2   DEVELOP  A  PLAN  FOR  A TARGETED  CASE  MANAGEMENT
                   PROGRAM  The  plan  must  include   the  program's  scope  of
                   services,   referral,   discharge,  reporting   and   payment
                   requirements.  It must also  specify a  transition  plan from
                   the  existing  Care  Coordination  function  manage   by  the
                   Contractor  to Targeted  Case Management  program  managed by
                   providers.

                   6.5.3.3   DEVELOP,  NEGOTIATE  AND  MANAGE THE  TARGETED CASE
                   MANAGEMENT CONTRACT  After  County  approval,  the  resulting
                   contract must reflect the scope of services contained  in the
                   Targeted Case Management  plan,  with documented cost savings
                   to the County.

                   6.5.3.4   COORDINATE  DISCHARGE   ACTIVITIES  WITH   HOSPITAL
                   DISCHARGE  PLANNERS   The  Contractor coordinates  with  dis-
                   charge  planners  to  ensure  appropriate   referrals between
                   levels of care for County  Indigent  Health Services patients
                   occurs between clinics and hospitals.

                             6.5.3.4.1   The  Contractor  shall  coordinate dis-
                             charge  for  patients  requiring  Durable   Medical
                             Equipment  and/or  placement  in  a  Board and Care
                             facility.

                   6.5.3.5   MANAGE,  COLLECT  AND  REPORT   DATA   ON  SPECIFIC
                   CONTRACTS   Under  the general direction  of  the County, the
                   Contractor  shall   manage  the  contractors  and   reimburse
                   providers  for:  1)   the   provision  of  emergency   dental
                   services   for    Probation     Department     inmates;    2)
                   communicable    disease    screening    of    newly   arrived
                   refugees;   and   3)   the   evaluation   of  General  Relief
                   recipients    for    participation    in    General    Relief
                   Employability   Evaluations;   and   4)  other   supplemental
                   County  Indigent  Health  Services  programs  such  as breast
                   cancer treatment.

                   6.5.3.6   GRANT  PRIOR  AUTHORIZATION  OF   ALL  NON-EMERGENT
                   INPATIENT ADMISSIONS  A system must be  in  place  to  review
                   and  process  requests  for non-emergent hospital admissions.
                   The system must include a procedure for  notifying   patients
                   when  requests  for  non-emergent  inpatient  admissions  are
                   denied,  including the reason for the denial.

                   6.5.3.7   CONDUCT   CONCURRENT   REVIEW   OF   ALL  INPATIENT
                   ADMISSIONS   Concurrent  reviews  of  hospital admissions are
                   intended to ensure that patients are  discharged  to  a lower
                   level  of  care  as  soon  as  it  is  medically appropriate.

                                     C-1-17
<PAGE>

                   6.5.3.8   DESIGN  AND  IMPLEMENT  A  TREATMENT  AUTHORIZATION
                   REQUEST  SYSTEM    The   Contractor  shall   work   with  the
                   Community  Clinics   to  develop  a  system  for   ambulatory
                   specialty  care  that   include   the    Community   Clinic's
                   gatekeeper role.

                   6.5.3.9   ASSIST     HOSPITALS    IN   ACCESSING    ANCILLARY
                   SERVICES   THROUGH  THE    COUNTY  INDIGENT  HEALTH  SERVICES
                   PROGRAM   The    Contractor  shall    work    with   hospital
                   discharge  planners  to  ensure  that  County Indigent Health
                   Services contracted  providers are  used  upon discharge from
                   the hospital for  ancillary  services, including pharmacy and
                   lab.

                             6.5.3.9.1   The   Contractor   shal    monitor  and
                             control the costs of ancillary services.

                   6.5.3.10   UPDATE   AND   MAINTAIN   EXISTING  PHARMACEUTICAL
                   FORMULARY  The  Medi-Cal  formulary  shall   be  used  as the
                   basis   for  updating  and  maintaining  the County  Indigent
                   Health  Services  formulary,  with  the  exception   of   the
                   Comprehensive  AIDS   Resources  Emergency (CARE)  Act  which
                   maintains  a   separate  formulary.  All  changes  to  either
                   formulary must be pre-approved by the County.

           6.5.4   Reports and Deliverables

                   6.5.4.1   The Contractor shall  provide reports that contain,
                   information   on    the   Treatment   Authorization   System,
                   management of  the  pharmaceutical  program, use of ancillary
                   services and other information as required by the County.  At
                   a  minimum,  the  following reports shall be prepared.   Each
                   report shall include a one page Executive Summary of the most
                   significant results.

                             6.5.4.1.1   Disease Management Report

                             6.5.4.1.2   Specialt    and    Ancillary    Service
                             Utilization Report

                   6.5.4.2   Deliverables

                             6.5.4.2.1   Quarterly   Targeted  Case   Management
                             Report

                             6.5.4.2.2   Targeted Case Management Plan

                             6.5.4.2.3   Disease Management Program Protocol

                             6.5.4.2.4   Disease Management Program Case Rates

                             6.5.4.2.5   Treatment Authorization Request System

                                     C-1-18
<PAGE>

           6.5.5   Unless waived by the County, the County will:

                   6.5.5.1   Liaison  with  other  systems  serving the indigent
                   population,   e.g.,   mental   health,   drug   and   alcohol
                   treatment providers, social service  providers  and ancillary
                   providers.

                   6.5.5.2   Meet at least quarterly with the representatives of
                   the major provider groups (e.g. Council of Community Clinics,
                   Hospital  Council,   etc.)  to  discuss  issues   related  to
                   patient care, program management and reimbursement.

                   6.5.5.3   Review and approve the plan,  protocols  and  rates
                   for the Disease Management Program.

                   6.5.5.4   Review and approve discharge planning standards

                   6.5.5.5   Review   and   approve  expenditure   of   "Special
                   Discharge Needs", at the request of the Contractor.

                   6.5.5.6   Establish  reimbursement  pool  levels   based   on
                   anticipated revenue  and  utilization for each fiscal year by
                   April 30.

                   6.5.5.7   Review and approve provider reimbursement plans and
                   pool close-out.

    6.6   QUALITY MANAGEMENT

          6.6.1   The  Contractor  shall  develop   and   implement  a   quality
          assurance  program that ensures that  patients  have access to and are
          receiving the appropriate levels of patient care.  This  program shall
          include  a  fair  and  impartial  grievance  process,  which  has been
          approved by the County.

          6.6.2   In  cooperation  with and approved by the County,  tasks shall
          include:

                  6.6.2.1   CONDUCT   PATIENT   FOCUS   GROUPS   AND    PROVIDER
                  SATISFACTION     SURVEYS    Focus   groups     and    provider
                  satisfaction  surveys  will  be   conducted  annually,  unless
                  otherwise indicated.

                  6.6.2.2   IMPLEMENT RECOMMENDED CHANGES THAT ARE THE RESULT OF
                  FOCUS  GROUPS AND  SATISFACTION  SURVEYS  The Contractor shall
                  report  the  results  of  the  focus  groups and  satisfaction
                  surveys to the County,  and implement changes  recommended  by
                  the  County as a result of this report.

                  6.6.2.3   ASSIST  AND   PARTICIPATE   IN   PROGRAMMATIC/FISCAL
                  AUDITS OF COMMUNITY  CLINICS The  Contractor  shall  work with
                  the County  and  Community  Clinics in the design, implementa-
                  tion and  reporting  of  Community  Clinic programmatic/fiscal
                  audits.

                  6.6.2.4   MAINTAIN   PROVIDER   CREDENTIALLING   SYSTEM    The
                  Contractor shall develop, maintain  and  implement  a provider
                  credentialling  system  to  ensure  that  all  County Indigent
                  Health    Services   contracted    providers    meet   program
                  participation standards.

                  6.6.2.5   IDENTIFICATION OF  ANNUAL QUALITY  IMPROVEMENT GOALS
                  The Contractor, with County participation, shall review County
                  Indigent Health Services  utilization data and  other  program
                  activities  in  order  to  identify  opportunities for quality
                  improvement  in    County  Indigent   Health   Services.   The
                  Contractor  shall  prepare these recommendations   for  County
                  approval  and  work  with providers to meet the goals.

                                     C-1-19
<PAGE>

                            6.6.2.5.1   The Contractor shall develop methodology
                            to ensure access  of  required  health  services  to
                            eligible patients.

          6.6.3   Reports and Deliverables

                  6.6.3.1   The Contractor shall  provide  reports  that contain
                  information   on   access   to  care,  patient   and  provider
                  satisfaction,  complaints and grievances and other information
                  required by the County. At a minimum,  the  following  reports
                  shall  be  prepared.  Each  report  shall include a  one  page
                  Executive  Summary of the most significant results.

                            6.6.3.1.1   Patient and Provider Satisfaction Survey
                            Results

                            6.6.3.1.2   Patient Complaint Status Report

          6.6.4   Unless waived by the County, the County will:

                  6.6.4.1   Review  and  approve  the  quality assurance program
                  operated  by  the  Contractor  and  annual quality improvement
                  goals.

                  6.6.4.2   Liaison with providers to assist  with resolution of
                  identified problems.

    6.7   CLAIMS PROCESSING AND FINANCIAL MANAGEMENT

          6.7.1   The Contractor shall manage the distribution  of funds for the
          County  Indigent  Health  Services  program  to  ensure  the   maximum
          utilization  of  available  funds  and will  maximize  revenue through
          revenue maximization and recovery activities.

          6.7.2   Tasks shall include:

                  6.7.2.1   PROCESS CLAIMS AND ENCOUNTER DATA,  INCLUDING CLAIMS
                  SUBMITTED FOR PAYMENT UNDER THE FOURTH OPERATING AGREEMENT All
                  claims and invoice  processing  and review activities  by  the
                  Contractor  shall  be  capable of  safeguarding  public funds,
                  ensuring  appropriate  controls  over expenditures  of  public
                  funds and ensuring a proper audit trail for  documentation  of
                  expenditures.

                  6.7.2.2   MANAGE  COMMUNITY  CLINIC,  HOSPITAL  AND  SPECIALTY
                  REIMBURSEMENT POOLS AND RECALCULATE PROSPECTIVE PAYMENTS BASED
                  ON POOL UPDATES  The Contractor  shall assure that reconcilia-
                  tion  of   payments to  services  provided  will  occur  on  a
                  quarterly basis.

                  6.7.2.3   MANAGE  THE  CALIFORNIA HEALTHCARE INDIGENT  PROGRAM
                  HOSPITAL ACCOUNT The Contractor shall track and administer the
                  hospital account and be able to account by a  patient specific
                  claim  the  payments  from each subaccount of hospital funds.

                                     C-1-20
<PAGE>
                  6.7.2.4   DISBURSE  CALIFORNIA  HEALTHCARE  INDIGENT   PROGRAM
                  (CALIFORNIA    HEALTHCARE    INDIGENT   PROGRAM),    PHYSICIAN
                  EMERGENCY  SERVICES  (PHYSICIAN  EMERGENCY  SERVICES)  PROGRAM
                  FUNDS  The Contractor shall ensure that California  Healthcare
                  Indigent Program and  Physician Emergency  Services  funds are
                  distributed  according to contractual guidelines.

                  6.7.2.5   ESTABLISH  AND MAINTAIN COMPREHENSIVE AIDS RESOURCES
                  EMERGENCY  FUND   REIMBURSEMENT  POOL   The  Contractor  shall
                  calculate  initial   and    subsequent   payments   from   the
                  Comprehensive  AIDS Resources  Emergency  (CARE)   Act   pool,
                  request   required   funding  from  the  County  and   process
                  prospective  and  applicable  fee  for   service  payments  to
                  participating providers.

                  6.7.2.6   PROVIDE   EXPLANATION   OF   BENEFITS   (EOBS)   The
                  Contractor   shall   provide    patient-specific    EOBs    to
                  participating   Comprehensive   AIDS    Resources   Emergency,
                  California   Healthcare   Indigent   Program   and   Physician
                  Emergency   Services   providers,   and   other  providers  as
                  requested.

                  6.7.2.7   ISSUE PROVIDER PAYMENTS  The  Contractor shall  make
                  payments to  providers according to different program require-
                  ments and deadlines,  and maintain  a separate  accounting for
                  each account and for interest accrued by each account.

                            6.7.2.7.1   The Contractor shall provide the County,
                            on a quarterly basis, a copy of detailed bank state-
                            ments for each account

                                        6.7.2.7.1.1   All     program    funding
                                        (principal,  interest  and funding  from
                                        Medi-Cal   recovery  or   third    party
                                        recovery)  must  be  properly  accounted
                                        for.

                                        6.7.2.7.1.2   All disbursement  of funds
                                        must  be  approved  by  the  County   in
                                        accordance with procedure.

                  6.7.2.8   MANAGE   ANNUAL   SETTLEMENT   AND  DISTRIBUTION  OF
                  COMMUNITY CLINIC AND  HOSPITAL  POOLS   The  Contractor  shall
                  manage  the   close-out   of    the   Community   Clinic   and
                  Hospital Pools in accordance  with  established  policies  and
                  procedures.

                  6.7.2.9   OPERATE A REVENUE  RECOVERY  PROJECT INVOLVING MEDI-
                  CAL AND THIRD PARTY  REIMBURSEMENTS   The   Contractor   shall
                  administer  a  revenue  recovery   function   that  meet   all
                  applicable  requirements  for health care collection agencies.

                                     C-1-21
<PAGE>
                            6.7.2.9.1   The Contractor's staff who work on Medi-
                            Cal recovery are funded solely from the Contractor's
                            share (25%) of recovered funds.

                            6.7.2.9.2   The  Contractor  shall not  receive  any
                            revenues  or  interest generated  from  other  third
                            party  recoveries;  nor   interest   from   Medi-Cal
                            recoveries.

                  6.7.2.10   MAINTAIN ACCOUNTING  RECORDS  BY  SEPARATE  FUNDING
                  SOURCES  AND   SUB-ACCOUNTS    The   County  Indigent   Health
                  Services program is funded  through  several  funding sources,
                  as described in Section 5, Provider Payments, of the Statement
                  of Work.  The  Contractor shall ensure that  the accounting of
                  each  funding  source  meets contractual requirements.

                  6.7.2.11   DEVELOP  A  MECHANISM  FOR  REIMBURSEMENT  BASED ON
                  UTILIZATION  AND  DATA  REPORTING   The  Contractor  shall  be
                  responsible  for ensuring that payments to providers are based
                  on approved reimbursement methodology and accurate utilization
                  data.

                  6.7.2.12   DEVELOP STANDARDIZED INCOME SCHEDULES WITH  A SHARE
                  SHARE OF COST SLIDING  SCALE  The  Contractor  shall work with
                  Community  Clinics  to  implement  a  sliding  fee   scale for
                  patients  accessing care at  Community  Clinics.   The sliding
                  fee scale  will be based  upon  Federal  Poverty Guidelines as
                  published annually.

                  6.7.2.13   DEVELOP  A  PROVIDER  REIMBURSEMENT  RATE  SCHEDULE
                  WHICH  REFLECTS  THE  COLLECTION  OF  A  SHARE  OF  COST   The
                  Contractor,  in conjunction with the Community  Clinics, shall
                  develop a provider reimbursement rate schedule which  reflects
                  the  collection  of  a  Share of Cost based on Federal Poverty
                  Guidelines.

                  6.7.2.14   ESTABLISH   MAINTENANCE   OF  EFFORT   LEVELS   FOR
                  COMMUNITY  CLINICS   The  Contractor  shall   work  with   the
                  Community  Clinics to  determine Maintenance  of Effort levels
                  to ensure a continuing  level of primary care and urgent  care
                  services.   These   Maintenance  of  Effort  levels,  will be
                  based  on the  historic  provision  of services  by   the 
                  Community Clinics.

                  6.7.2.15   DEVELOP A PLAN FOR THE SPECIALTY POOL THAT INCLUDES
                  ASSUMPTION  OF  SOME LEVEL OF RISK  BY  THE COMMUNITY  CLINICS
                  The  Contractor,  in  conjunction  with  the  County  and  the
                  Community  Clinics will  develop a Specialty  Pool  Management
                  Plan, which includes the assumption of  some level of risk  by
                  the  Community  Clinics.   The   Plan  shall  incorporate  the
                  Community Clinic's role as gatekeeper to specialty services.

                  6.7.2.16   DISBURSE COUNTY PATIENT SUPPORT SERVICES FUNDS  The
                  Contractor  shall   pay   claims   submitted   for    services
                  provided  by  UCSD  under  the  terms  of the Fourth Operating
                  Agreement.

                  6.7.2.17   DEVELOP  A  FINANCIAL  INCENTIVE PLAN FOR PROVIDERS
                  The Contractor  shall work with  the County  and  providers to
                  design and implement a Financial Incentive  Plan to improve or
                  expand services.

                                     C-1-22
<PAGE>

          6.7.3   Reports and Deliverables

                  6.7.3.1   The  Contractor  shall  provide reports that contain
                  information  on  the  management  and  distribution  of funds,
                  revenue  and   recovery   activities,  and  other  information
                  required by the County.  At a minimum,  the following  reports
                  shall  be  prepared.  Each  report  shall include a  one  page
                  Executive  Summary  of  the  most significant results.

                            6.7.3.1.1   Reimbursement Report

                            6.7.3.1.2   Physician  Emergency Services Fund Claim
                            and Payments Report
   
                            6.7.3.1.3   California  Healthcare  Indigent Program
                            Trust Fund Report

                            6.7.3.1.4   Comprehensive  AIDS  Resources Emergency
                            (CARE) Act  Utilization  and  Provider Reimbursement
                            Report

                            6.7.3.1.5   County     Patient    Support   Services
                            Reimbursement Report

                  6.7.3.2   Deliverables

                            6.7.3.2.1   Recommendations    for     Reimbursement
                            Methodology Improvements

                            6.7.3.2.2   Standardized Income Schedule

                            6.7.3.2.3   Provider Reimbursement Rate Schedule

                            6.7.3.2.4   Specialty Pool Management Plan

                            6.7.3.2.5   Financial Incentive Plan

          6.7.4   Unless waived by the County, the County will:

                  6.7.4.1   Approve guidelines, payment standards and mechanisms
                  for claims processing and provider payments.

                  6.7.4.2   Establish  funding  limits for each component of the
                  County Indigent Health Services Program.

                  6.7.4.3   Approve provider reimbursement methodology

                  6.7.4.4   Approve Financial Incentive Plan and payments

    6.8   NETWORK DEVELOPMENT AND MANAGEMENT

          6.8.1   The Contractor  shall  maintain a provider  network that
                  ensures reasonable access to services by recruiting  providers
                  for  ambulatory,  specialty  and  inpatient  care for eligible
                  patients.

                                     C-1-23
<PAGE>

          6.8.2   Tasks shall include:

                  6.8.2.1   Upon transfer,  operate  the 1-800 number  currently
                  managed by the County.  Direct  line  costs  are the financial
                  responsibility of the County. This 1-800 number is utilized to
                  schedule  appointments with the County's eligibility  workers,
                  therefore,  the operation  will  require  close  collaboration
                  with the County.

                            6.8.2.1.1   Contractor   shall   implement   current
                            County procedures  including follow-up  with clients
                            for confirmation of  appointments,  and  shall  make
                            recommendations   to  improve  efficiency  of   this
                            operation  and related  program tasks.

                  6.8.2.2   Provide  administrative   support  during   contract
                  negotiations,  prepare and monitor  provider  contracts.   The
                  Contractor  shall manage  contracts with  the  County Indigent
                  Health   Services   provider  network,  including   hospitals,
                  Community   Clinics,  Specialty   Physicians   and   ancillary
                  providers and develop  methodology to monitor contracts.

                            6.8.2.2.1   Contractor  shall   draft,  for   County
                            approval, all provider contracts or amendments.

                            6.8.2.2.2   Contractor shall  prepare  for signature
                            all   provider  contracts   or   amendments  to   be
                            distributed by the County.

                            6.8.2.2.3   Contractor shall perform site visits and
                            perform  fiscal  and  programmatic  reviews  of  the
                            Community Clinics at least annually.

                                        6.8.2.2.3.1   The   County   shall  pre-
                                        approve the site review methodology.

                            6.8.2.2.4   Contractor shall perform fiscal and pro-
                            grammatic reviews of  other contractors and  program
                            providers.

                                        6.8.2.2.4.1   The   County   shall  pre-
                                        approve the review methodology.

                  6.8.2.3   Develop  and  implement  a  plan for  re-contracting
                  Specialty   Physicians/Ancillary  Providers.   The  Contractor
                  shall evaluate the existing  network of Specialty  Physicians/
                  Ancillary  Providers  and  propose  an   alternate  model  for
                  maintaining   the   Specialty  Physician/Ancillary   Providers
                  network.

          6.8.3   Reports and Deliverables

                  6.8.3.1   The Contractor shall  provide reports  that  contain
                  information  on  provider  utilization  and other  information
                  required by the County.  At a minimum,  the following  reports
                  shall  be  prepared.  Each  report shall  include  a  one page
                  Executive Summary of the most significant results.

                                     C-1-24
<PAGE>

                            6.8.3.1.1   Provider Status Report

                                        6.8.3.1.1.1   The Provider Status Report
                                        shall  update  listings of the  provider
                                        network when changes occur.

                  6.8.3.2   Deliverables

                            6.8.3.2.1   Specialty Physician/Ancillary  Providers
                            Re-Contracting Plan

          6.8.4   Unless waived by the County, the County will:

                  6.8.4.1   Proactively address equity and  access issues in the
                  County Indigent Health Services system.

                  6.8.4.2   Routinely   monitor  the   accessibility   and
                  availability of services.

                  6.8.4.3   Serve  as  the  final  appeal  stage  for   provider
                  complaints regarding claims payment and other issues.

                  6.8.4.4   Approve   contracts  with   providers  and   perform
                  random audits to  ensure contract compliance  of providers and
                  the Contractor.

                  6.8.4.5   Determine the percentages within each  reimbursement
                  pool and the  method of  distribution  of  funds  within  each
                  pool  with  the  assistance  of the Contractor.


    6.9   COMPLAINTS, GRIEVANCES AND APPEALS

          6.9.1   The Contractor shall operate a patient  grievance  system that
          allows for the impartial review and resolution of patient complaints.

                  6.9.1.1   In cooperation with the County, the Contractor shall
                  collaborate  with   the  Office  of  Consumer  Education   and
                  Advocacy.

          6.9.2   Tasks shall include:

                  6.9.2.1   REVISE  EXISTING  GRIEVANCE SYSTEM   The  Contractor
                  shall propose  changes in the existing grievance system, based
                  upon  an  analysis  of  the operation of  the current  system.
                  The  grievance  system shall resolve  grievances in  a  timely
                  manner and include distinct levels of appeal.

                  6.9.2.2   OPERATE A TOLL-FREE NUMBER FOR PATIENT INQUIRIES AND
                  COMPLAINTS The Contractor  shall operate a toll-free  line for
                  patient  inquiries and  complaints and maintain  documentation
                  regarding the number,  nature and outcome of calls.

                                     C-1-25
<PAGE>

                  6.9.2.3   MONITOR   AND   REPORT   PATIENT   COMPLAINTS    AND
                  GRIEVANCES  The Contractor shall maintain a log of all patient
                  and provider  complaints  and  grievances  which documents the
                  nature and  resolution  of  the  grievance.  This log shall be
                  the basis  for the  monthly  Grievance Report.

                  6.9.2.4   PREPARE AND  PRODUCE PATIENT INFORMATION,  INCLUDING
                  A  PATIENT   HANDBOOK  The  Contractor  shall prepare,  modify
                  or maintain  patient information  that reflects the integrated
                  County Indigent Health Services program.

          6.9.3   Reports and Deliverables

                  6.9.3.1   The  Contractor shall  provide reports  that include
                  level  of  complaint and grievance activity and other informa-
                  tion  required  by  the  County.  At a minimum, the  following
                  reports  shall  be  prepared.  Each report shall include a one
                  page  Executive Summary of the most significant results.

                            6.9.3.1.1   Grievance   Status   Report   Complaints
                            Status Report

                  6.9.3.2   Deliverables

                            6.9.3.2.1   Revised Grievance System

                            6.9.3.2.2   Revised Patient Handbook

          6.9.4   Unless waived by the County, the County will:

                  6.9.4.1   Monitor  the   patient   complaint  and    grievance
                  system, and act as a final appeal  in the  grievance system

                  6.9.4.2   Monitor  the   accessibility  and  availability   of
                  services  to   patients,   including  regular  meetings   with
                  established consumer advocacy groups

                  6.9.4.3   Review   annual  patient  satisfaction  surveys  and
                  initiate remedial action as indicated.

                  6.9.4.4   Approve  revised   grievance  system   and   Patient
                  Handbook.

   6.10   TECHNICAL RESOURCE CENTER

          6.10.1   Contractor  shall  assume  control of, maintain,  and up-date
          material  contained in  the  Technical  Resource Center (TRC) for  the
          County Indigent Health Services during the term of  the contract.  New
          material shall be added at request of the COTR.  TRC material shall be
          available  for  Contractor  staff  or  County personnel  during normal
          work hours. At time of re-solicitation, Contractor shall provide staff
          and copy service to make TRC available to potential proposers.

                                     C-1-26
<PAGE>

   6.11   CONTRACTOR COLLABORATION  WITH MENTAL  HEALTH SERVICES' ADMINISTRATIVE
   SERVICES ORGANIZATION (MHS - ASO)

          6.11.1   The Contractor  shall work  collaboratively  with  the Mental
          Health Services Administrative Services Organization  during  the term
          of  this  agreement.  The  County  believes   that  collaboration  can
          produce  more efficient  service  delivery in the areas of  management
          information   systems,   eligibility,   claims   processing,   records
          management and customer service.

          6.11.2   The County requires the two administrative  service organiza-
          tions to mutually  plan  and  implement   combined   operations, where
          those  combined operations,  in the opinion of the County,  will
          generate  economies of scale or improved services to  the public.  The
          two Administrative Services  Organizations shall reach  consensual and
          reasonable  agreement on collaboration  plans and implementation time-
          line with the approval of the County.

          6.11.3   Collaboration Deliverables Based on Projected Timetable

                   6.11.3.1   By April 1, 1998, the Contractor shall  work  with
                   the  MHS-ASO  to  complete   a  draft  plan  of   action  and
                   proposed time line for combining administrative functions for
                   both programs.

                   6.11.3.2   From  April 1, 1998  through  June 30,  1998,  the
                   Contractor  shall  work  with   the  County  (County Indigent
                   Health  Services  and  County  Mental  Health  Services)  and
                   the Mental  Health ASO to finalize the collaboration  plan of
                   action and timeline.

                   6.11.3.3   From  July 1, 1998   through  June 30,  1999,  the
                   Contractor, after County approval, shall implement  plans  to
                   combine administrative functions.

                   6.11.3.4   From  July 1, 1999  through  contract   close out,
                   after   the   implementation   phase    is   completed,   the
                   Contractor(s)  shall produce quarterly  reports that document
                   the  results  of  the combined operations, in a report format
                   approved by the County.

   6.12   CONTRACTOR CLOSE OUT SERVICES

          6.12.1   When   given   notice  by   the   County   to   proceed,  the
          Contractor shall assure a smooth  transition of services to the County
          or designated successor of this agreement.  Tasks shall include:

                   6.12.1.1   Transition Plan

                   Contractor  shall train the  successor  to this agreement  in
                   all  phases  of  the   operation  to  assure  that  the   new
                   organization  can perform the tasks  contained in this State-
                   ment of Work without the ongoing assistance of the 
                   Contractor.

                                     C-1-27
<PAGE>

                              6.12.1.1.1   The  Contractor's  Project   Director
                              shall meet with the County and management from the
                              new   organization  at  least  weekly  during  the
                              transition  period  to  facilitate  a  smooth  and
                              timely transition.

                                           6.12.1.1.1.1   The   Contractor shall
                                           make reasonable efforts to remedy any
                                           problems identified  in  these weekly
                                           transition  meetings by the following
                                           week.

                   6.12.1.2   Develop for  County  approval a plan of action and
                   timeline to complete the  transition  of  all  administrative
                   functions  contained  within  this  agreement, to include the
                   following deliverables:

                              6.12.1.2.1   Close out of all reimbursement  pools
                              and final payments to providers;

                              6.12.1.2.2   Final  accounting  of  all  pools and
                              payments to  providers, including  all accumulated
                              interest;

                              6.12.1.2.3   Detailed  transition plan for the IDX
                              system  and  other  components  of the MIS system,
                              preparation  of  all  required reports,  including
                              MICRS reporting;

                              6.12.1.2.4   Final  inventory  and turnover of all
                              County  funded  equipment,  computer hardware  and
                              software;

                              6.12.1.2.5   Transfer of program records including
                              patient records and active case files;

                              6.12.1.2.6   Compliance  with  Technical  Resource
                              Center update and close out requirements;

                              6.12.1.2.7   Assignment of  any  active  leases or
                              sub-contracts  that are assignable and approved by
                              the County for assignment;

                              6.12.1.2.8   Appropriate  close  out  of  CARE Act
                              services  with the Office of AIDS Coordination;

                              6.12.1.2.9   Other  close  out services, including
                              sub-programs,  directed  by the County.

                                     C-1-28
<PAGE>

IMPLEMENTATION SCHEDULE

The County Indigent Health Services  Administrative  Services Organization (ASO)
contract  is  scheduled  to begin in  October  1997.  At  implementation  of the
contract the Contractor  shall assume  operation of the systems that the current
County  Indigent  Health Services  Administrative  Contractor has in place.  The
following  implementation  schedule  indicates  that  tasks  that are new to the
County Indigent  Health Services  program and for which the current ASO does not
have operating systems in place.

                                     C-1-29
<PAGE>

                                            1997                 1998

TASK                                 SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL

Contract Implementation                   X

Provider 1-800 Operation Assumed              X

Data Conversion Transition Plan                       X
Implemented

Provider Reimbursement Method
Developed (Pending)

Provider Reimbursement Method
Implemented (Pending)

Contract Monitoring Initiated                 X

Standardized Income Schedule                                  X
Reviewed & Implemented

Disease Management Program Developed
and Coordinated with CHIP (Pending)

Treatment Authorization Request                       X
(TAR) System Assessed

Disease Management Case Rates                                             X
Developed

Specialty Pool Assessment                                X

Specialty Physician/Ancillary                                     X
Providers Re-Contracting
Plan Developed

Grievance System Revised & Approved                   X

Targeted Case Management Plan                         X
Developed

Revised Grievance System Implemented                      X

Annual Budget Submitted                                       X

Disease Management Program (Pending)

Disease Management Case Rates                                             X
Implemented

Revised TAR System Implemented                                                X

Revised Policy and Procedure Manual                           X
Specialty Pool Plan Implemented                                   X

Specialty Physician/Ancillary                                     X
Providers Re-Contracting
      Plan Implemented

Financial Incentive Plan Developed                            X

Targeted Case Management Contract                                             X
Negotiated

                                     C-1-30
<PAGE>

8. REPORTS AND DELIVERABLES TIMELINE

                                       MONTHLY    QUARTERLY    YEARLY    DATE


REPORTS

Specialty & Ancillary Service                                    X         X
Utilization Report

Annual Report                                                              X

California Healthcare Indigent                                   X         X
Program Trust Fund Report

Comprehensive AIDS Resources                                     X         X
Emergency Utilization & Provider
Reimbursement Report

County Patient Support Services                      X                     X
Report

Contract Site Reviews                                                      X
                                    
Disease Management Report                                        X         X

Eligibility Report                                               X         X

Financial Report - PES, CHIP, Other                  X           X         X

General Relief Employability Evaluation              X                     X
(GREE) Report                                                              

Grievance Status Report                              X                     X

Medically Indigent Care Reporting                                X         X
System (MICRS) Data Submission

Patient/Provider Survey Results                                            X

Patient Complaint Status Report                      X                     X

Physician Emergency Services Fund                                          X

Program Activity Report                              X                     X

Provider Status Report                                           X         X

Reimbursement Report                                             X         X

Utilization Review Report                            X           X         X

                                     C-1-31
<PAGE>

DELIVERABLES

Disease Management Case Rates                                      06/01/98

Disease Management Protocol                                        Pending

Financial Incentive Plan                                           03/15/98

Provider Reimbursement Rate Schedule                               Pending

Recommendations for Reimbursement                                  Pending
Methodology Improvements

Revised Policy and Procedure Manual                                03/15/98

Standardized Income Schedule                                       03/01/98
                                                                   (Reviewed)

Specialty Physician/Ancillary Providers                            04/15/98
Re-Contracting Plan

Specialty Pool Management Plan                                     04/15/98

Targeted Case Management Plan                                      01/15/98

Treatment Authorization Request System                             01/15/98
    (Continued next page)

DELIVERABLES
--------------------------------------

MHS ASO Collaboration*
  Draft Plan Timeline                                              04/01/98

  Final Plan and Timeline                                          06/30/98

  Implementation                                                   07/01/98-
                                                                   06/30/99

  Reporting                                                        07/01/99-
                                                                   06/30/00
  * Tentative timeline and mutually
    agreed upon

     8.1   Proposers may review  copies of existing reports which are located in
     the County  Indigent  Health  Services  Technical  Review Center.

                                     C-1-32
<PAGE>

9.   REFERENCES

     The following  references are applicable to  work  requirements and will be
     available for review by  prospective  proposers in  the Technical  Resource
     Center.

     9.1   System Documentation

           9.1.1   County Medical Services Policy and Procedures Manual - 
           Finance/Revenue Recovery

           9.1.2   County Medical Services Policy and Procedures Manual -
           Eligibility

           9.1.3   County Medical Services Policy and Procedures Manual -
           Pharmacy Benefits

           9.1.4   County Medical Services Policy and Procedures Manual -
           Consumer Advocacy

           9.1.5   County Medical Services Policy and Procedures Manual - Data
           Collection and Reporting

           9.1.6   County Medical Services Policy and Procedures Manual - Claims

           9.1.7   County Medical Services Policy and Procedures Manual -
           Management of Care

           9.1.8   County Medical Services Policy and Procedures Manual -
           Utilization Review

           9.1.9   County Medical Services Medical and Protocols Policy Manual

           9.1.10   Provider Manuals

     9.2   Contracts

           9.2.1   Primary Care Service Community Clinic Contract

           9.2.2   County Medical Services Hospital Contract

           9.2.3   County Medical Services Community Clinic Contract

           9.2.4   County Medical Services Physician Contract

           9.2.5   California Healthcare Indigent Program (CHIP) Hospital
           Agreement

           9.2.6   Physician Emergency Services (PES) Act Fund Billing 
           Requirements

           9.2.7   Comprehensive AIDS Resources Emergency (CARE) Act Primary
           Care Clinic Contract

           9.2.8   Fourth Operating Agreement with University of California,
           San Diego Medical Center

           9.2.9   Sample Ancillary Agreement

                                     C-1-33
<PAGE>

                                                                    EXHIBIT 10.2

                     ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM

                         SOLICITATION, OFFER AND AWARD

Contract No:                   RFP No: YH8-0001  Date Issued:  February 10, 1997
                                                 Revised:      April 14, 1997
Issued by:  AHCCCSA
            Contracts and Purchasing              Subject of Solicitation:
            701 E. Jefferson Ave.               ACUTE CARE SERVICES - CYE 98
            Phoenix, AZ 85034              (TERM OF CONTRACT:  10/1/97- 9/30/98)

===============================================================================
 I.   SOLICITATION

Sealed  offers  (original  and 5 copies) for  providing  the services  described
herein will be received at the issuing office (above) until 3:00 p.m. local time
May 12, 1997. For information call:

Mark Renshaw, Contracts and Purchasing                    Phone:  (602) 417-4577
===============================================================================
                              TABLE OF CONTENTS
A.  SOLICITATION, OFFER AND              F.  LIST OF ATTACHMENTS.............62
    AWARD FORM......................1    G.  REPRESENTATIONS & 
B.  RATES ..........................2        CERTIFICATIONS...............63-70
C.  DEFINITIONS...................3-7    H.  INSTRUCTIONS TO OFFERORS.....71-83
D.  PROGRAM REQUIREMENTS.........8-51    I.  EVALUATION FACTORS...........84-86
E.  CONTRACT CLAUSES............52-61        ATTACHMENTS
===============================================================================
II. OFFER   (Must be fully completed by Offeror)

The undersigned Offeror hereby agrees, if this offer is accepted within 120 days
of bid  opening  to  provide  all  services  in  accordance  with the  terms and
requirements  stated  herein,   including  all  attachments,   amendments,   and
best-and-final offer (if any).

NAME OF OFFEROR: Arizona Health Concepts, Inc.    PHONE: (602) 331-5100
                 -----------------------------           --------------

ADDRESS:  7600 North 16th Street, Suite 150
          ---------------------------------

CITY/STATE: Phoenix, Arizona   Zip: 85020
            ----------------        -----

NAME OF PERSON AUTHORIZED
TO SIGN OFFER: James A. Burns   TITLE: President/CEO
               --------------          -------------

OFFEROR'S
SIGNATURE: /s/ James A. Burns   DATE: May 12, 1997
           ------------------         ------------

===============================================================================
III. AWARD   (To be completed by AHCCCSA)

The offer,  including all attachments,  amendments and best-and-final  offer (if
any), contained herein, is accepted.

NAME OF AHCCCSA CONTRACTING OFFICER:  Michael Veit  DATE: June 24, 1997
                                      ------------        -------------

SIGNATURE OF AHCCCSA CONTRACTING OFFICER:  /s/ Michael Veit
                                           ---------------------------
===============================================================================


<PAGE>

                         SECTION B: CAPITATION RATES

1. The Contractor shall provide services as described in this solicitation.
2. Attachment B, Service Area  Minimum  Network  Standards,  describes  location
   requirements by Geographic Service Area (GSA).
3. The  following  capitation  rate  table,  shown  for  example  only,  will be
   generated by the capitation rate computer program, described in Attachment E.
   The Offeror  must  complete one such rate table for each  Geographic  Service
   Area (see  Section H,  Paragraph  9, Award of  Contract)  it is bidding.  The
   Offeror   should  insert  between  this  page  and  the  following  page  the
   computer-generated printout of all such proposed rate tables.
4. In preparing capitation rate bids, offerors,  especially continuing offerors,
   should note the program changes described in the following paragraphs:

               Section D, Paragraph 39, Reinsurance
               Section  D,  Paragraphs  1 and  6,  regarding  Family  Planning
                    Extension Program
               Section D,  Paragraph 6,  regarding  Health Plan Choice and
                    Prior Period Coverage                           
               Section H, Paragraph 9, regarding bidding by Geographic Service
                    Areas

5. Offerors are encouraged to negotiate discounts for inpatient,  outpatient and
   other medical  services to  provide for  the  most cost-effective  capitation
   rates.

--------------------------------------------------------------------------------


                                 SAMPLE ONLY:

PROPOSED CAPITATION RATES:

(1)  GEOGRAPHIC SERVICE AREA:

RATE CODE AND AGE/SEX     CAPITATION RATE PER             SUPPLEMENTAL PAYMENT
CLASSIFICATION            MEMBER PER MONTH:               PER SOBRA BIRTH:

TANF AND CCP AGE/ SEX:
         1  year  M  +  F      $ _____________________   
         1-13  years  M  +  F    _____________________
         14-44 years F           _____________________
         14-44 years M           _____________________
         45+ years M + F         _____________________
SSI WITH MEDICARE                _____________________
SSI WITHOUT MEDICARE             _____________________
MN/MI *                          _____________________
SOBRA FAMILY PLANNING            _____________________
SOBRA SUPPLEMENTAL                                     $ ____________________

*    All MN/MI's  (i.e.,  with and without  Medicare)  are grouped  together for
     capitation purposes.

                                       3
<PAGE>

                            SECTION C: DEFINITIONS

AAC                   See "Arizona Administrative Code".
AGENT                 Any  person  who  has  been  delegated  the  authority  to
                      obligate or act on behalf of a provider.
AID TO FAMILIES WITH  A  federal assistance  program  under  Title  IV-A  of the
DEPENDENT CHILDREN    Social Security Act.  Replaced by the Temporary Assistance
(AFDC)                to Needy Families (TANF) program.
AHCCCS                Arizona Health Care Cost Containment System as defined by
                      ARS 36-2901.
AHCCCSA               Arizona    Health    Care    Cost    Containment    System
                      Administration.
AHCCCS BENEFITS       See "COVERED SERVICES".
AHCCCS MEMBER         See "MEMBER".
ALTCS                 The Arizona Long Term Care System (ALTCS), a program under
                      AHCCCSA  that  delivers  long term,  acute and  behavioral
                      health care services to eligible members, as authorized by
                      ARS ss. 36-2931 et seq.
AMBULATORY            CARE   Preventive,   diagnostic  and  treatment   services
                      provided  on an  outpatient  basis  by  physicians,  nurse
                      practitioners, physician assistants and other primary care
                      providers.
AMPM                  The AHCCCS MEDICAL POLICY MANUAL.
ARIZONA               State   regulations  established   pursuant   to  relevant
ADMINISTRATIVE CODE   statutes.  For purposes of this solicitation, the relevant
(AAC)                 sections  of  the AAC  are  referred  to  throughout  this
                      document as "AHCCCS Rules".
ARS                   Arizona Revised Statutes.
AT                    RISK  Refers  to the  period  of  time  that a  member  is
                      enrolled   with  a   contractor   during  which  time  the
                      Contractor  is   responsible  to  provide  AHCCCS  covered
                      services under capitation.
BIDDERS               LIBRARY  As  referred  to in this  RFP,  a  repository  of
                      manuals,  statutes,  rules  and other  reference  material
                      located at the AHCCCS office in Phoenix.
BOARD                 CERTIFIED An individual who has successfully completed all
                      prerequisites  of  the  respective   specialty  board  and
                      successfully   passed   the   required   examination   for
                      certification.
CAPITATION            A method by  which a contractor is paid to deliver covered
                      services for  the  duration of a contract to members based
                      on a fixed rate per  member notwithstanding (a) the actual
                      number of members who  receive  care  from the contractor,
                      and (b) the amount of health care services provided to any
                      member;  a  cost  containment  alternative   to   fee-for-
                      service payments.
CATEGORICALLY         A member who is eligible for Medicaid. 
ELIGIBLE MEMBER 
COMPETITIVE BID       A state  procurement  system used to select contractors to
PROCESS               provide covered services on a geographic basis.
CONTINUING            OFFEROR An AHCCCS  contractor during CYE 97 that submits a
                      proposal pursuant to this solicitation.
CONTRACT SERVICES     See "COVERED SERVICES".
CONTRACT YEAR (CY)    Corresponds to federal  fiscal  year (Oct. 1 through Sept.
                      30).  For example, Contract Year 98 is  10/1/97 - 9/30/98.

                                       4
<PAGE>

CONTRACTOR            A person, organization or entity agreeing through a direct
                      contracting relationship with AHCCCSA to provide the goods
                      and  services  specified by this  contract in  conformance
                      with the stated contract requirements,  AHCCCS statute and
                      rules and federal law and regulations.
CONVICTED             A judgment of  conviction  has been  entered by a federal,
                      state or local court, regardless of whether an appeal from
                      that judgment is pending.
CO-PAYMENT            An amount  which the member pays  directly to a contractor
                      or provider at the time covered services are rendered.
COUNTY CONTRIBUTION   Amount of funds  contributed  to  the AHCCCSA fund by each
                      Arizona county based on  funding  formulas established  by
                      law.
COVERED SERVICES      Health care services to be delivered by a contractor which
                      are so  designated  in Section D of this contract and also
                      AHCCCS Rules R9-22-202 et seq.
CRS                   Children's   Rehabilitative   Services   (See  Section  D,
                      Paragraph 1, Covered Services).
CY                    See "CONTRACT YEAR".
CYE                   Contract Year Ended;  same as "CONTRACT YEAR".
DAYS                  Calendar days unless otherwise specified.
DHS                   Arizona Department of Health Services.
DIRECTOR              The Director of AHCCCSA.
DISCLOSING ENTITY     An AHCCCS provider or a fiscal agent.
DME                   Durable Medical Equipment;  sturdy, long-lasting items and
                      appliances  that can withstand  repeated use, are designed
                      to serve a medical  purpose,  and are not generally useful
                      to a person in the absence of a medical condition, illness
                      or injury.
DUAL  ELIGIBLE        A member who is eligible  for both  Medicare and Medicaid.
DUAL ELIGIBLE         A person who is entitled to Medicare  Part A insurance and
QUALIFIED MEDICARE    who  meets   certain   income,   resource   and  residency
BENEFICIARY           requirements   of  the   Qualified   Medicare  Beneficiary
                      program, and is categorically  eligible  for  full  AHCCCS
                      benefits.
EAC                   Eligible Assistance Child as defined in ARS 36-2905.03(B);
                      an  AHCCCS  state  program  for  children   under  age  14
                      receiving food stamps.
ELIC                  Eligible  Low-Income Child as defined in ARS 36-2905.05(C)
                      and (D); an AHCCCS state program for children under age 14
                      whose  household  income  exceeds the income limit for the
                      MN/MI program but is less than 100% of the federal poverty
                      level.
ELIGIBLE              PERSON A person who meets all eligibility requirements for
                      the  AHCCCS  acute care  program  but who has not yet been
                      enrolled with an AHCCCS acute care contractor.
ELIGIBILITY           A process of determining, through a  written  application,
DETERMINATION         including  required  documentation, whether  an  applicant
                      meets the qualifications for  federal (categorical) and/or
                      state only eligibility.
ENCOUNTER             An  encounter is a record of a medically  related  service
                      rendered  by  a  provider  or  providers  registered  with
                      AHCCCSA to a member who is enrolled  with a contractor  on
                      the date of service.  It includes  all  services for which
                      the contractor incurred any financial liability.
ENROLLMENT            The  process  by  which a person  who has been  determined
                      eligible becomes a member with a contractor subject to the
                      limitations specified in AHCCCS Rule R9-22-333.

                                       5
<PAGE>

EPSDT                 Early and Periodic  Screening,  Diagnosis  and  Treatment;
                      these  services  provide  comprehensive  health  care,  as
                      defined in Rule  R9-22-213,  through  primary  prevention,
                      early  intervention,  diagnosis  and  medically  necessary
                      treatment of physical and behavioral  health  problems for
                      AHCCCS members under 21 years of age.
FEE-FOR-SERVICE       (FFS) A method of payment to  registered  providers  on an
                      amount-per service basis.
FEDERALLY QUALIFIED   An entity  which meets  the  requirements and  receives  a
HEALTH CENTER (FQHC)  grant and funding pursuant to  Section 330  of  the Public
                      Health Service Act. An FQHC includes an outpatient  health
                      program  or  facility   operated  by  a  tribe  or  tribal
                      organization under the Indian  Self-Determination  Act (PL
                      93-638) or an urban Indian  organization  receiving  funds
                      under Title V of the Indian Health Care Improvement Act.
FFP                   Federal  financial   participation  (FFP)  refers  to  the
                      federal matching rate that the Federal government makes to
                      the Title XIX program portion of AHCCCS.
FISCAL                YEAR (FY) The budget year - Federal Fiscal Year: October 1
                      through  September  30; State fiscal year:  July 1 through
                      June 30.
FULL-TIME             EMPLOYEE  One who is available at all times to fulfill the
                      requirements of the position.
GATEKEEPER            Primary care provider who is primarily responsible for all
                      medical  treatment  rendered  and who makes  referrals  as
                      necessary and monitors the member's treatment.
GEOGRAPHIC SERVICE    A specific county or defined grouping of counties that are
AREA (GSA)            available for contract award.  An offeror may  bid on  any
                      or  all  GSA's.   See  Section H,  Paragraph 9,  Award  of
                      Contract.
GROUP                 OF  PROVIDERS  Two or more health care  professionals  who
                      practice their profession at a common location (whether or
                      not  they   share   facilities,   supporting   staff,   or
                      equipment).
HCFA                  Health  Care  Financing  Administration,  an  organization
                      within  the  Department  of Health and Human  Services,  a
                      federal agency.
HEALTH  MAINTENANCE   Various forms of plan  organization,  including  staff and
ORGANIZATION (HMO)    group models, that meet the HMO licensing requirements  of
                      the federal and/or state government and offer a full array
                      of health care services to members on a capitated basis.
HEALTH PLAN           See "CONTRACTOR".
IBNR                  Incurred  But Not Reported  claims which is the  liability
                      for  services  rendered  for  which  claims  have not been
                      received.
IHS                   Indian Health Service (IHS) is  a  division  of  the  U.S.
                      Public  Health   Service.   It  administers  a  system  of
                      hospitals and health centers providing health services  to
                      Native Americans and Native Alaskans.
LIEN                  A legal claim filed with the County  Recorder's  office in
                      which a member  resides  and in the  county an injury  was
                      sustained for the purpose of ensuring that AHCCCS receives
                      reimbursement  for  medical  services  paid.  The  lien is
                      attached  to any  settlement  the member may  receive as a
                      result of an injury.
MANAGED CARE          Systems that  integrate  the  financing  and  delivery  of
                      health care services to  covered  individuals by means  of
                      arrangements   with   selected    providers   to   furnish
                      comprehensive services to members;  explicit criteria  for
                      the  selection  of   health  care  providers;  significant
                      financial incentives for  members  to  use  providers  and
                      procedures associated with the  plan; and  formal programs
                      for quality assurance and utilization review.

                                       6
<PAGE>

MANAGING EMPLOYEE     A  general  manager,  business   manager,   administrator,
                      director, or other individual who exercises operational or
                      managerial  control  over, or  who directly or  indirectly
                      conducts  the  day-to-day  operation  of,  an institution,
                      organization or agency.
MANAGEMENT SERVICES   A  person  or  organization  who  agrees  to  perform  any
SUBCONTRACTOR         administrative function  or  service  for  the  Contractor
                      specifically   related  to  securing  or  fulfilling   the
                      Contractor's obligations to AHCCCSA under the terms of the
                      contract.
MATERIAL OMISSION     A fact, data or other information excluded from a  report,
                      contract,  etc.  which could lead to erroneous conclusions
                      following reasonable review of such report, contract, etc.
MEDICAID              A Federal/State program  authorized by  Title XIX  of  the
                      Social Security Act, as  amended,  which provides  Federal
                      matching funds for  a  state-operated  medical  assistance
                      program  for  specified  populations.   Certain  mandatory
                      populations and services must be included to  receive FFP;
                      however, states  may add  additional optional  populations
                      and services with HCFA approval and also receive FFP.
MEDICARE              A Federal program  authorized by Title XVIII of the Social
                      Security Act, as amended.
MEMBER                For purposes of this  solicitation,  a person eligible for
                      AHCCCS who is enrolled with a Contractor.
MN/MI                 Medically  Needy/  Medically  Indigent;  state program for
                      individuals  not  eligible  for  Medicaid but who meet the
                      eligibility requirements for the state program.
NEW OFFEROR           The  organization,  entity  or   person  which  submits  a
                      proposal in response  to this  solicitation  and which has
                      not been an AHCCCS contractor during CYE 97.
NON-CONTRACTING       A provider who has a  contract or  subcontract within  the
PROVIDER              AHCCCS system and renders covered services to  an eligible
                      person  or   member   to   whom  such  provider  bears  no
                      contractual obligation.
OFFEROR               The  organization,   entity  or  person  which  submits  a
                      proposal in response to the AHCCCS  Request for  Proposal.
                      An offeror who is awarded a contract becomes a Contractor.
PERFORMANCE           MEASURES  A set of  standardized  indicators  designed  to
                      assist AHCCCS in  evaluating,  comparing and improving the
                      performance of its contractors.  Specific  descriptions of
                      health services  measurement goals are found in Section D,
                      Paragraph 16, Performance Measures.
PMMIS                 Pre-paid Medicaid Management Information System.
PRIMARY CARE          An  individual  responsible  for  the  management  of  the
PROVIDER (PCP)        member's health care  that  includes  a  physician who  is
                      generally  a family  practitioner,  general  practitioner,
                      pediatrician,     general     internist,     obstetrician,
                      gynecologist,  certified nurse  practitioner or, under the
                      supervision of a physician, a physician's  assistant.  The
                      PCP must be an  individual,  not a group or association of
                      persons, such as a clinic.
PROVIDER              A  person  or  entity  who   contracts   with  AHCCCSA  or
                      subcontracts  with an AHCCCS health plan to provide AHCCCS
                      covered services to members.
QUALIFIED  MEDICARE   A  Medicare   cost-sharing   program  established  by  the
BENEFICIARY (QMB)     Medicare  Catastrophic  Coverage   Act  of 1988  in  which
                      Medicaid  pays  the  Medicare  premiums,  coinsurance  and
                      deductibles  for  Medicare   recipients  meeting  specific
                      eligibility requirements.
RATE                  CODE  Eligibility  classification  for capitation  payment
                      purposes.
REINSURANCE           A risk-sharing  program provided by AHCCCSA to contractors
                      for the  reimbursement  of certain  contract service costs
                      incurred by a member beyond a certain monetary  threshold.

                                       7
<PAGE>

RELATED PARTY         A party that has, or may have, the ability  to control  or
                      significantly influence a contractor, or a party  that is,
                      or may  be, controlled or  significantly influenced  by  a
                      contractor.   "Related   parties"  include,  but  are  not
                      limited to, agents,  managing  employees, persons with  an
                      ownership  or  controlling  interest  in  the   disclosing
                      entity,  and  their  immediate  families,  subcontractors,
                      wholly-owned subsidiaries or suppliers, parent  companies,
                      sister  companies, holding  companies, and other  entities
                      controlled  or  managed  by  any such entities or persons.
RFP                   Request For Proposal  document  prepared by AHCCCSA  which
                      describes  the  services   required  and  which  instructs
                      prospective offerors how to prepare a response (proposal).
SCOPE OF SERVICES     See "COVERED SERVICES".
SERIOUSLY MENTALLY    An adult whose emotional or  behavioral  functioning is so
ILL (SMI)             impaired as  to interfere  with  his (or her) capacity  to
                      remain in the community  without  supportive  treatment or
                      services of a long-term or indefinite duration. The mental
                      disability  is severe and  persistent  and may result in a
                      long-term   limitation  of  his   capacities  for  primary
                      activities of daily living,  interpersonal  relationships,
                      home-making, self-care, employment or recreation.
SOBRA                 Refers  to   a  federal  law  (Sixth  Omnibus  Budget  and
                      Reconciliation  Act)  passed   in  1986  and  subsequently
                      amended,  which establishes eligibility for pregnant women
                      and children based on a percentage of  the federal poverty
                      level (FPL).  Currently,  AHCCCS covers pregnant women and
                      infants up to  age  one  with  income up  to 140% of  FPL,
                      children from 1 through 5 years with income up  to 133% of
                      FPL and children born on or after September 30, 1983  with
                      income up to 100% of FPL.
STATE                 The State of Arizona.
STATE PLAN            The  written   agreement   between  the  State  and   HCFA
                      which   describes  how  the  AHCCCS   program  meets  HCFA
                      requirements for participation in the Medicaid program.
SUBCONTRACT           An agreement entered into by Contractor with a provider of
                      health   care  services  who  agrees  to  furnish  covered
                      services to members, or with a  marketing organization, or
                      with  any  other  organization or  person  who  agrees  to
                      perform  any   administrative   function  or  service  for
                      Contractor specifically related to fulfilling Contractor's
                      obligations to AHCCCSA under the terms of this contract.
SUBCONTRACTOR         (1) A person, agency or organization to which a contractor
                      has  contracted  or  delegated  some  of  its   management
                      functions or responsibilities to  provide covered services
                      to its  members; or  (2) A  person, agency or organization
                      with which a  fiscal agent  has  entered into  a contract,
                      agreement, purchase  order  or  lease (or  leases  of real
                      property) to obtain space, supplies, equipment or services
                      provided  under the AHCCCS agreement.
SUPPLEMENTAL SECURITY A federal assistance program under Title XVI of the Social
INCOME (SSI)          Security Act. 
TEFRA RISK HMO        A   Health  Maintenance  Organization   or   Comprehensive
                      Medical Plan which provides  Medicare services to Medicare
                      beneficiaries  pursuant to a Medicare  risk  contract with
                      HCFA under ss.1876 of the Social Security Act.
THIRD PARTY           An  individual,  entity  or  program  that  is or  may  be
                      liable to pay all or part of the  medical  cost of injury,
                      disease or  disability  of an AHCCCS  applicant or member.
                      Filing of liens is a method of securing reimbursement from
                      third parties.

                                       8
<PAGE>

THIRD                 PARTY  LIABILITY The resources  available from a person or
                      entity that is, or may be, by agreement,  circumstance  or
                      otherwise.  liable  to pay  all  or  part  of the  medical
                      expenses  incurred  by an  AHCCCS  applicant  or  eligible
                      person.
YEAR                  See "Contract Year".

                                       9
<PAGE>
                         SECTION D: PROGRAM REQUIREMENTS
                                Table of Contents

1.   Scope of Services.......................................................9
2.   Behavioral Health Services.............................................14
3.   AHCCCS Medical Policy Manual...........................................15
4.   Vaccine for Children Program...........................................15
5.   Denials or Reductions of Services......................................15
6.   Enrollment And Disenrollment...........................................16
7.   Mainstreaming of AHCCCS Members........................................18
8.   Member Information.....................................................18
9.   Member Surveys.........................................................20
10.  Marketing Plans........................................................20
11.  Open Enrollment........................................................20
12.  Transition of Members..................................................20
13.  Staff Requirements and Support Services................................22
14.  Written Policies, Procedures and Job Descriptions......................23
15.  Advance Directives.....................................................23
16.  Performance Measures...................................................23
17.  Quality Management and Utilization Management (QM/UM)..................25
18.  Physician Incentives...................................................25
19.  Appointment Standards..................................................25
20.  Referral Procedures and Standards......................................26
21.  Provider Manual........................................................27
22.  Primary Care Provider Standards........................................27
23.  Other Provider Standards...............................................28
24.  Network Development....................................................29
25.  Network Management.....................................................29
26.  Federally Qualified Health Centers (FQHC)..............................30
27.  Provider Registration..................................................31
28.  Provider Affiliation Tape..............................................31
29.  Periodic Report Requirements...........................................31
30.  Dissemination of Information...........................................32
31.  Requests for Information...............................................32
32.  Operational and Financial Readiness Reviews............................32
33.  Operational and Financial Reviews......................................32
34.  Claims Payment System..................................................33
35.  Hospital Reimbursement.................................................33
36.  Nursing Facility Reimbursement.........................................34
37.  Compensation...........................................................34
38.  Capitation Adjustments.................................................36
39.  Reinsurance............................................................36
40.  Coordination of Benefits/ Third Party Liability........................38
41.  Medicare Services and Cost Sharing ....................................39
42.  Copayments.............................................................41
43   Records Retention......................................................41
44 . Medical Records........................................................41
45.  Advances, Distributions, Loans and Investments.........................42
46.  Accumulated Fund Deficit...............................................42
47.  Data Exchange Requirement..............................................42
48.  Encounter Data Reporting...............................................43
49.  Monthly Roster Reconciliation..........................................44
50.  Term Of Contract and Option To Renew...................................44
51.  Subcontracts...........................................................45
52.  Specialty Contracts....................................................46
53.  Management Services Subcontractors.....................................46
54.  Management Services Subcontractor Audits...............................47
55 . Minimum Capitalization Requirements....................................47
56.  Performance Bond or Bond Substitute....................................48
57.  Amount of Performance Bond.............................................48
58.  Financial Viability Criteria/ Performance Measures.....................48
59.  Merger, Reorganization and Change of Ownership.........................49
60.  Sanctions..............................................................49
61.  Auto-Assignment Algorithm..............................................50
62.  Grievance Process and Standards........................................50
63.  Quarterly Grievance Report.............................................50
64.  Pending Legislative Issues.............................................50



<PAGE>
                       SECTION D: PROGRAM REQUIREMENTS

-------------------------------------------------------------------------------
  NOTE TO PROSPECTIVE OFFERORS:  ATTACHMENT L, OFFEROR'S CHECKLIST, HAS BEEN
  ADDED TO THIS RFP AS A  CONVENIENCE  TO  OFFERORS.  IT IS BELIEVED TO BE A
  COMPLETE  LISTING OF ALL  SUBMISSION  REQUIREMENTS  PURSUANT  TO THIS RFP.
  HOWEVER,  IF A REQUIREMENT IS STATED ANYWHERE IN THE RFP TEXT YET DOES NOT
  APPEAR IN THE OFFEROR'S  CHECKLIST,  THE TEXT STATEMENT  TAKES  PRECEDENCE
  OVER THE OMISSION OF THAT REQUIREMENT IN THE OFFEROR'S CHECKLIST.
-------------------------------------------------------------------------------

1.    SCOPE OF SERVICES

The Contractor  shall provide  covered  services to AHCCCS members in accordance
with all  applicable  federal,  State and local  laws,  rules,  regulations  and
policies,  including  services  listed in this document,  listed by reference in
attachments,  and AHCCCS policies referenced in this document.  The services are
described in detail in AHCCCS Rules R9-22-202 et seq., the AHCCCS MEDICAL POLICY
MANUAL,  the AHCCCS BEHAVIORAL  HEALTH POLICY MANUAL,  and the document entitled
"AHCCCS  Health  Plan  Performance  Indicators",  all of which are  incorporated
herein  by  reference  and may be found in the  Bidder's  Library.  The  covered
services  are  briefly  described  below.  Covered  services  must be  medically
necessary and provided by, or coordinated with, a primary care provider,  except
for behavioral health and children's  preventive dental services.  Services must
be rendered by providers that are appropriately licensed, operating within their
scope of practice,  and registered as an AHCCCS  provider.  The Contractor shall
provide the same  standard of care for all members  regardless  of the  member's
eligibility  category.  In  situations  where a medical  policy  will not become
effective  until 10/1/97 but will affect the bidding or  negotiation  processes,
relevant  information  regarding  the policy will be  available  in the Bidder's
Library.

The  Contractor  shall ensure that its providers are not restricted or inhibited
in any way from communicating  freely with members regarding the members' health
care, medical needs and treatment options.

AMBULATORY  SURGERY AND  ANESTHESIOLOGY:  The Contractor  shall provide surgical
services  for either  emergency  or  scheduled  surgeries  when  provided  in an
ambulatory or outpatient  setting such as a  free-standing  surgical center or a
hospital based outpatient surgical setting.

AUDIOLOGY:  The  Contractor  shall provide  audiology  services to EPSDT members
including the  identification  and evaluation of hearing loss and rehabilitation
of the hearing loss through other than medical or surgical  means (i.e.  hearing
aids).  Only the  identification  and evaluation of hearing loss are covered for
members 21 years of age and older  unless the hearing loss is due to an accident
or injury-related emergent condition.

BEHAVIORAL  HEALTH:  The Contractor shall provide  behavioral health services as
described  in  Section  D,  Paragraph  2,  Behavioral   Health   Services.   For
non-categorical  members  (MN/MI,  EAC,  ELIC)  behavioral  health  services are
limited  to  up  to  the  first  72  hours  per  episode  of  emergency/  crisis
stabilization,  not to exceed 12 days per  contract  year.  See also the  AHCCCS
MEDICAL POLICY MANUAL and the AHCCCS BEHAVIORAL HEALTH POLICY MANUAL for details
on covered behavioral health services.

CHILDREN'S REHABILITATIVE SERVICES (CRS): The program for CRS-covered conditions
is administered by the Arizona Department of Health Services (ADHS) for children
who meet CRS eligibility  criteria.  The Contractor is responsible for referring
children to the CRS program who are  potentially  eligible  for these  services.
Eligibility  criteria and the referral  process are  described in the CRS Policy
and Procedures Manual available in the Bidder's Library . The Contractor is also
responsible for providing primary medical care, including emergency services and
initial care of newborn infants,  for members who are also CRS eligible,  and to
require the member's  Primary Care Provider (PCP) to coordinate  their care with
the CRS program.  All services provided must be included in the member's medical
record maintained by the PCP.

<PAGE>

DENTAL:  The  Contractor  shall provide  EPSDT  members all medically  necessary
dental  services  including  emergency  dental  services;  dental  screening and
preventive  services  in  accordance  with  the  AHCCCS  periodicity   schedule;
therapeutic dental services;  dentures; and pre-transplantation dental services.
The Contractor shall monitor compliance with the EPSDT periodicity  schedule for
dental screening services and ensure that dental service reports are included in
the member's medical record maintained by the PCP. The Contractor is required to
meet  specific  utilization  rates for EPSDT  members  described  in  Section D,
Paragraph  16,  Performance  Measures.  The  Contractor  shall ensure that EPSDT
members are notified when dental  screenings  are due if the member has not been
scheduled for a visit. If no response is received, a second notice must be sent.
EPSDT members may request dental  services  without  referral from their PCP and
may choose a dental provider from the Contractor's provider network.  Members 21
years of age and older are eligible for  emergency  dental  services,  medically
necessary  dentures  and   pre-transplantation   dental  services  only.  Dental
standards may be found in the AHCCCS MEDICAL POLICY MANUAL which is incorporated
herein by reference and which may be found in the Bidder's Library.

DIALYSIS:  The Contractor shall provide medically necessary dialysis,  supplies,
diagnostic   testing  and   medication   for  all  members   when   provided  by
Medicare-certified  hospitals  or  Medicare-certified  end stage  renal  disease
(ESRD)  providers.  Services may be provided on an  outpatient  basis,  or on an
inpatient  basis if the  hospital  admission  is not solely to  provide  chronic
dialysis services.

EARLY AND PERIODIC  SCREENING,  DIAGNOSIS AND TREATMENT (EPSDT):  The Contractor
shall provide  comprehensive  health care services  through primary  prevention,
early  intervention,  diagnosis  and medically  necessary  treatment for members
under age 21. The Contractor  shall ensure that EPSDT members  receive  required
health  screenings in compliance  with the AHCCCS  periodicity  schedule to take
effect  10/1/97  (included  herein as  Attachment K) and to submit to the AHCCCS
Office of the Medical Director/Acute Care Unit, all EPSDT reports as required by
AHCCCS   medical   policy.   The   Contractor   is  required  to  meet  specific
participation/  utilization  rates for EPSDT  members;  these are  described  in
Section D, Paragraph 16, Performance Measures.

EMERGENCY SERVICES:  The Contractor shall have and/or provide the following as a
minimum:  a.  Emergency  services  facilities  adequately  staffed by  qualified
medical   professionals   to   provide   pre-hospital,   emergency   care  on  a
24-hour-a-day,  7-day-a-week basis, for the sudden onset of a medically emergent
condition as defined by AHCCCS Rule  R9-22-101.  The Contractor is encouraged to
contract  with  emergency  service  facilities  for the  provision  of emergency
services.  The  Contractor is encouraged to contract with or employ the services
of  non-emergency  facilities  (e.g.  urgent  care  centers)  to address  member
non-emergency  care issues  occurring after regular office hours or on weekends.
The  Contractor  shall  be  responsible  for  educating  members  and  providers
regarding  appropriate  utilization of emergency  room services.  The Contractor
shall monitor emergency  services  utilization (by both provider and member) and
shall have  guidelines  for  implementing  corrective  action for  inappropriate
utilization.  b.  All  medical  services  necessary  to  rule  out an  emergency
condition  c.  Emergency  transportation  d.  Member  access by  telephone  to a
physician,  registered  nurse,  physician  assistant or nurse  practitioner  for
advice in emergent or urgent situations, 24 hours per day, 7 days per week.

EYE  EXAMINATIONS/   OPTOMETRY:  The  Contractor  shall  provide  all  medically
necessary  emergency eye care, vision  examinations,  prescriptive  lenses,  and
treatments for  conditions of the eye for EPSDT members.  For members who are 21
years of age and older,  the  Contractor  shall provide  emergency  care for eye
conditions which meet the definition of an emergency medical condition, cataract
removal,  and/or medically necessary vision examinations and prescriptive lenses
if required  following cataract removal and other eye conditions as specified in
the AHCCCS MEDICAL POLICY MANUAL (AMPM).

<PAGE>

FAMILY PLANNING:  The Contractor shall provide family planning  services for all
members who choose to delay or prevent pregnancy,  including medical,  surgical,
pharmacological  and  laboratory  services,  as well as  contraceptive  devices,
information  and  counseling  necessary  to allow the  members to make  informed
decisions  regarding family planning methods. If the Contractor does not provide
family planning  services,  it must contract for these services  through another
health care delivery  system which allows members freedom of choice in selecting
a provider.  A prospective offeror may discuss  arrangements for family planning
services  only with other  prospective  offerors  during the RFP process for the
purpose of making arrangements for the provision of family planning services. In
addition,  the  Contractor  shall  provide  services to members  enrolled in the
Family Planning Services  Extension Program, a program that provides only family
planning  services  for a maximum of 24 months to women whose SOBRA  eligibility
has  terminated.  The  Data  Book  contains  cost-related  information  for this
population and is available in the Bidder's Library.

HEALTH RISK  ASSESSMENT  AND  SCREENING:  The  Contractor  shall  provide  these
services for non-hospitalized  members 21 years of age and older. These services
include,   but  are  not  limited  to,  screening  for  hypertension,   elevated
cholesterol,  colon  cancer,  sexually-transmitted  diseases,  tuberculosis  and
HIV/AIDS;  mammographies  and prostate  screenings;  physical  examinations  and
diagnostic  work-ups;  and immunizations.  Assessment and screening services for
members under age 21 are based on the AHCCCS EPSDT periodicity schedule.

HOME HEALTH:  The Contractor  shall provide these services when members  require
part-time or intermittent  care but do not require hospital care under the daily
direction of a physician to prevent  re-hospitalization or  institutionalization
and may  include  skilled  nursing,  therapies,  supplies  and home  health aide
services.

HOSPITAL:  Inpatient  services include  semi-private  accommodations for routine
care,  intensive  and  coronary  care,  surgical  care,  obstetrics  and newborn
nurseries,  and  behavioral  health  emergency/  crisis  stabilization.  If  the
member's medical condition requires isolation,  private inpatient accommodations
are covered.  Nursing services,  dietary services and ancillary services such as
laboratory,  radiology,  pharmaceuticals,  medical  supplies,  blood  and  blood
derivatives, etc. are also covered. Outpatient services include any of the above
services  which may be  provided  on an  outpatient  or  ambulatory  basis (i.e.
laboratory,   radiology,   therapies,  ambulatory  surgery,  etc.).  Observation
services may be provided on an outpatient basis for up to 24 hours if determined
reasonable  and  necessary to decide  whether the member  should be admitted for
inpatient  care.  Observation  services  include  the use of a bed and  periodic
monitoring by hospital  nursing staff and/or other staff to evaluate,  stabilize
or treat  medical  conditions  of a  significant  degree of  instability  and/or
disability.

IMMUNIZATIONS:  The Contractor shall provide  immunizations for adults (21 years
of age  and  older)  to  include  diphtheria-tetanus,  influenza,  pneumococcus,
rubella,  measles  and  hepatitis-B.  EPSDT  immunization  requirements  include
diptheria, tetanus, pertussis vaccine (DPT), oral polio vaccine, measles, mumps,
rubella vaccine (MMR), H. influenza, type B (HIB), hepatitis B (Hep B), combined
3-antigen  rate (4 DPT, 3 OPV, 1 MMR) and varicella  vaccine.  The Contractor is
required  to meet  specific  immunization  rates  for  EPSDT  members  which are
described in Section D, Paragraph 16, Performance Measures.

LABORATORY:   Laboratory  services  for  diagnostic,  screening  and  monitoring
purposes are covered when ordered by the member's PCP, other attending physician
or  dentist,  and  provided  by a CLIA  (Clinical  Laboratory  Improvement  Act)
approved  hospital,  clinic,  physician  office or other  health  care  facility
laboratory.

<PAGE>
MATERNITY:  The Contractor shall provide  pre-conception  counseling,  pregnancy
identification,  prenatal care, treatment of pregnancy related conditions, labor
and delivery services, and postpartum care for members. Services may be provided
by  physicians,   physician  assistants  or  nurse  practitioners  certified  in
midwifery.  Members  may  select  or  be  assigned  to  a  PCP  specializing  in
obstetrics. Circumcisions are covered if performed during the newborn's hospital
stay after  birth,  or on an  outpatient  basis within one month of the infant's
hospital discharge. Members anticipated to have a low-risk delivery may elect to
receive labor and delivery services in their home from their maternity  provider
if this setting is included in allowable  settings for the  Contractor,  and the
Contractor  has  providers  in its  network  that offer home labor and  delivery
services.  Members  anticipated to have a low-risk  prenatal course and delivery
may elect to receive maternity services of prenatal care, labor and delivery and
postpartum  care provided by licensed  midwives if they are in the  Contractor's
provider  network.  All licensed  midwife  labor and delivery  services  must be
provided in the  member's  home since  licensed  midwives do not have  admitting
privileges in hospitals or AHCCCS  registered  free-standing  birthing  centers.
Members  receiving  maternity  services  from a  licensed  midwife  must also be
assigned to a PCP for other health care and medical services.

MEDICALLY-NECESSARY  ABORTIONS:  These  services are covered when the  pregnancy
would  endanger  the life of the  mother if the fetus were to be carried to term
or, for Title XIX  members,  if the  pregnancy  is the result of rape or incest.
Providers  must document and submit to the  Contractor a Certificate  of Medical
Necessity for Pregnancy  Termination and prior authorization is required. If the
procedure is performed on an emergency basis, documentation must be submitted to
the Contractor within two working days.  Additional  documentation,  outlined in
the AMPM,  is  required  for  members  under 18 years of age who seek  medically
necessary abortion due to rape or incest.

MEDICAL  SUPPLIES,  DURABLE  MEDICAL  EQUIPMENT  (DME),  ORTHOTIC AND PROSTHETIC
DEVICES:  These services are covered when  prescribed by the member's PCP, other
attending physician or practitioner,  or by a dentist.  Medical equipment may be
rented or purchased  only if other sources are not  available  which provide the
items at no cost.  The total  cost of the rental  must not  exceed the  purchase
price of the item.  Reasonable repairs or adjustments of purchased equipment are
covered to make the  equipment  serviceable  and/or when the repair cost is less
than renting or purchasing another unit.

NURSING  FACILITY:  The Contractor shall provide nursing  facility  services for
members  who  require  short-term  convalescent  care not to  exceed 90 days per
contract  year.  Services  must  be  provided  in a  dually-certified  Medicare/
Medicaid facility which includes in the per-diem rate:  nursing services,  basic
patient care equipment and sickroom supplies,  dietary services,  administrative
physician  visits,  non-customized  DME,  necessary  maintenance  rehabilitation
therapies,  over-the-counter  medications,  social,  recreational  and spiritual
activities,  and administrative,  operational  medical direction  services.  The
Contractor shall continue medically  necessary nursing facility services for any
member who has not been determined ALTCS eligible but is currently residing in a
nursing facility and is eligible for services  provided under this contract.  If
the  member  becomes  ALTCS  eligible  and is  enrolled  with an  ALTCS  Program
Contractor  before the end of the maximum 90 days of nursing facility  coverage,
the Contractor is only responsible for nursing facility coverage during the time
the member is enrolled with the Contractor.

NUTRITION:  The Contractor shall provide nutritional  assessment and nutritional
supplements   including  oral  supplements  for  EPSDT  members  when  medically
necessary.  Total parenteral  nutrition (TPN) is covered for all members when it
is the sole source of nutrition due to severe pathology of the alimentary tract.
TPN may also be used to supplement  nutrition  for EPSDT members when  medically
necessary but need not be the member's sole source of nutrition.

PHYSICIAN:  The Contractor shall provide  physician  services to include medical
assessment,  treatments and surgical services provided by licensed allopathic or
osteopathic physicians.

PODIATRY:   The   Contractor   shall  provide   podiatry   services  to  include
bunionectomies,  casting  for  the  purpose  of  constructing  or  accommodating
orthotics,  medically necessary  orthopedic shoes that are an integral part of a
brace,  and  medically  necessary  routine foot care for patients  with a severe
systemic disease which prohibits care by a nonprofessional person.

<PAGE>

PRESCRIPTION  MEDICATIONS AND PHARMACY:  Medications ordered by a PCP, attending
physician or dentist and dispensed under the direction of a licensed  pharmacist
are covered  subject to  limitations  related to  prescription  supply  amounts,
Contractor  formularies  and  prior  authorization  requirements,   as  well  as
restrictions  for  immunosuppressant  drugs addressed in AHCCCS medical policies
for transplantations.

PRIMARY  CARE  PROVIDER  (PCP):  PCP  services  are covered  when  provided by a
physician,  physician  assistant or nurse practitioner  selected by, or assigned
to, the member. The PCP provides primary health care and serves as a gate-keeper
and  coordinator  in  referring  the  member  for  specialty  medical  services,
behavioral  health and dental  services.  The PCP is responsible for maintaining
the member's  primary medical record which contains  documentation of all health
risk  assessments and health care services,  including those provided by the PCP
and through referral.

RADIOLOGY AND MEDICAL  IMAGING:  These  services are covered when ordered by the
member's  PCP,  attending  physician or dentist and are provided for  diagnosis,
prevention,  treatment  or  assessment  of a  medical  condition.  Services  are
generally  provided in hospitals,  clinics,  physician  offices and other health
care facilities.

REHABILITATION THERAPY: The Contractor shall provide occupational,  physical and
speech therapies.  Therapies must be prescribed by the member's PCP or attending
physician  for an acute  condition  and the member must have the  potential  for
improvement due to the  rehabilitation.  Occupational  and speech  therapies are
only covered on an inpatient basis for those 21 and over;  physical  therapy for
all members and  occupational and speech therapies for EPSDT members are covered
on both an inpatient and outpatient basis if not used as a maintenance regimen.

RESPIRATORY THERAPY: This therapy is covered on an inpatient or outpatient basis
when  prescribed by the member's PCP or attending  physician and is necessary to
restore, maintain or improve respiratory functioning.

TRANSPLANTATION OF ORGANS AND TISSUE, AND RELATED IMMUNOSUPPRESSANT DRUGS: These
services include bone marrow, heart, lung, heart-lung,  kidney, liver and cornea
transplantations  (all  with  related  immunosuppressant  medications),  and are
covered  within  limitations  defined  in the  AMPM,  Chapter  300  for  members
diagnosed with specified medical  conditions.  Such limitations  include whether
the stage of the disease is such that the transplant can affect the outcome; the
member has no other  conditions  which  substantially  reduce the  potential for
successful  transplantation;  and whether the member will be able to comply with
necessary and required regimens of treatment. Bone grafts are also covered under
this  service.   Services  include:   pre-transplant   inpatient  or  outpatient
evaluation;  donor search;  organ/tissue harvesting or procurement;  preparation
and transplantation  services;  and convalescent care. In addition,  if a member
receives a transplant covered by a source other than AHCCCS, medically necessary
non-experimental  services are provided within  limitations  after the discharge
from  the  acute  care  hospitalization  for  the  transplantation.  AHCCCS  has
contracted  with  transplantation  providers  for  the  Contractor's  use or the
Contractor may select its own transplantation provider.  However, the quality of
services must be equal to or exceed those from the AHCCCS  provider and the rate
paid can not exceed the AHCCCS provider's negotiated rate.  Transplantations for
the MN/MI population are subject to available funding.

TRANSPORTATION:  These services include  emergency and  non-emergency  medically
necessary  transportation.  Emergency  transportation,  including transportation
initiated  by an  emergency  response  system  such as 911,  may be  provided by
ground,  air or water ambulance to manage an AHCCCS member's  emergency  medical
condition  at an  emergency  scene  and  transport  the  member  to the  nearest
appropriate medical facility. In an emergency,  the member shall be taken to the
nearest appropriate  emergency facility.  Non-emergency  transportation shall be
provided  for members  who are unable to provide  their own  transportation  for
medically necessary services.

TRIAGE/  SCREENING AND EVALUATION:  These are covered  services when provided by
acute care  hospitals,  IHS  facilities  and urgent  care  centers to  determine
whether or not an emergency exists,  assess the severity of the member's medical
condition  and  determine  services  necessary to  alleviate  or  stabilize  the
emergent  condition.  The provider must notify the Contractor within 12 hours of
the member's  registration with the facility for emergency services.  Supporting
documentation for services rendered must be provided when reporting or billing a
service.  Triage/screening services must be reasonable,  cost effective and meet
the criteria for severity of illness and intensity of service.

<PAGE>

2.    BEHAVIORAL HEALTH SERVICES

The Contractor is responsible for the provision of Title XIX covered  behavioral
health services to members as described below:

CATEGORICAL MEMBERS:

UNDER  AGE  18;  AGE 21 AND  OVER;  SMI:  On and  after  the  effective  date of
enrollment,  the  Contractor  is  responsible  for up to 72 hours  of  emergency
behavioral  health  services  provided to categorical  members not enrolled with
ADHS. The Contractor is also  responsible for referring  categorically  eligible
members under the age of 18, age 21 and older, and SMI members of any age to the
Regional  Behavioral Health  Authorities  (RBHAs) for the provision of Title XIX
covered behavioral health services. (The RBHAs may, in turn, contract with local
providers.)  The Contractor is responsible for ensuring that a medical record is
established by the PCP when  information  is received  about an assigned  member
even if the PCP has not yet seen the assigned member.  The Contractor shall also
communicate  information  pertaining to ADHS enrolled  members to the ADHS RBHAs
including,  but  not  limited  to,  current  diagnosis,   medication,  pertinent
laboratory results, last PCP visit, and last  hospitalization.  For prior period
coverage,  the Contractor is responsible for payment of all claims for medically
necessary  covered  behavioral  health services to eligible persons not enrolled
with ADHS.

NON-SMI,  AGE 18, 19 AND 20: The Contractor is responsible  for providing  Title
XIX covered behavioral health services to categorically eligible non-SMI members
age 18, 19 and 20 in  accordance  with  AHCCCS  Rule  R9-22-1204  and the AHCCCS
BEHAVIORAL HEALTH POLICY MANUAL.  Covered services include:  inpatient hospital,
inpatient  psychiatric  facility for individuals under the age of 21, individual
therapy and counseling, group and/or family therapy and counseling, psychotropic
medication  adjustment and monitoring,  partial care, emergency crisis services,
behavior  management,  psychosocial  rehabilitation,  screening,  evaluation and
diagnosis, case management,  psychotropic  medications,  and medically necessary
transportation.

     REFERRALS: Categorically eligible members age 18, 19 and 20 may be referred
     directly for the provision of behavioral health services by the PCP, family
     members,  self-referrals,  schools, other service providers, and members of
     the community and State  agencies as well as the  Contractor's  staff.  The
     same referral procedures which are applicable to other health care services
     apply to behavioral health services.

     SERVICE PLAN: The  Contractor is responsible  for developing a Service Plan
     for  each  categorically  eligible  member  age  18,  19 and  20  requiring
     behavioral  health  services.  Service Plans shall be developed  within two
     weeks of assessment and services shall be authorized and provided within 30
     days from  completion of the screening.  The Service Plan is to be included
     as part of the member's medical record.

     CASE  MANAGEMENT,  CASE  COORDINATION:  The Contractor is  responsible  for
     providing  case  management  services,   when  medically  necessary.   Case
     management  services  may vary in scope  and  frequency,  depending  on the
     eligible person's intensity of need. Case management  services consist of a
     set of services and activities through which appropriate and cost-effective
     Title XIX covered services are identified, planned, coordinated,  obtained,
     monitored and  continuously  evaluated.  Case  coordination  is provided to
     categorically  eligible  members  age  18,  19 and 20 who  are in  need  of
     behavioral health services but who do not require case management  services
     which are more  intensive.  Case  coordination  is limited to Service  Plan
     development,  identification of service providers,  monitoring, updates and
     follow-up, when necessary.

<PAGE>

     QUALITY MANAGEMENT/  UTILIZATION  MANAGEMENT (QM/UM) REQUIREMENTS:  Quality
     management QM/UM for behavioral health services must be integrated into the
     Contractor's QM/UM plans and must meet the QM/UM  requirements  established
     by AHCCCSA.

     PROVIDER  NETWORK:  The  Contractor is  responsible  for  contracting  with
     behavioral  health providers who meet ADHS licensure  and/or  certification
     standards  and who are  registered  as a behavioral  health  provider  with
     AHCCCSA.  The Contractor  may, at its option,  contract with ADHS RBHAs for
     the provision of behavioral  health  services.  The Contractor  must ensure
     that a sufficient  number of qualified  behavioral  health providers are in
     their  provider  network and that  providers  comply  with  subcontracting,
     appointment  standards  and other  provider  related  requirements  in this
     document.

     NOTIFICATION  REQUIREMENTS:  The  Contractor is  responsible  for notifying
     AHCCCSA  monthly of 18-, 19- and 20-year-old  categorical,  non-SMI members
     referred and receiving behavioral health services. The information is to be
     submitted to the AHCCCS Office of Managed Care using the  reporting  format
     developed by AHCCCSA and available in the Bidder's Library.

MN/MI, EAC, ELIC MEMBERS:

For  non-categorical  members (MN/MI,  EAC, ELIC) behavioral health services are
limited to up to 72 hours per episode of emergency/ crisis stabilization, not to
exceed 12 days per contract year.

3.    AHCCCS MEDICAL POLICY MANUAL  (AMPM)

The AHCCCS MEDICAL POLICY MANUAL (AMPM) is hereby incorporated by reference into
this  contract.  AHCCCSA will provide three copies of the AMPM to the Contractor
(for use by the CEO, Medical Director and Quality Management staff).  Updates to
medical  policies will be distributed  quarterly.  The Contractor is responsible
for  maintaining  the  AMPM  with  these  updates  and for  complying  with  the
requirements set forth therein.

4.    VACCINE FOR CHILDREN PROGRAM

Federal  legislation  passed in 1993 (OBRA 93)  amended  Title XIX of the Social
Security Act and created the Vaccine for  Children  (VFC)  program  which became
effective 10/1/94.  Through this program the federal government  purchases,  and
makes available to the states free of charge, vaccines for children under age 19
who are Title XIX  eligible  (or  Native  American)  and not  insured,  or whose
insurance does not cover  immunizations.  Any provider  licensed by the State to
administer  immunizations may register with ADHS as a "VFC provider" and receive
free  vaccines.  State money to purchase  vaccines  is not  available  since the
program is 100% funded by the federal  government.  The Contractor  shall comply
with all VFC requirements and monitor its providers to ensure that, if providing
immunizations  to AHCCCS  EPSDT  members,  the  providers  are  registered  with
ADHS/VFC.

5.    DENIALS OR REDUCTIONS OF SERVICES

When  a  covered  service is  denied,  reduced,  suspended  or  terminated,  the
Contractor   shall  comply   with   the  notice  and  continuation  of  benefits
requirements  specified  in 42 CFR 431.200 et  seq. and  further  prescribed  in
PERRY V. CHEN, now referred to as PERRY V. KELLY.

<PAGE>

6.    ENROLLMENT AND DISENROLLMENT

AHCCCSA  has the  exclusive  authority  to enroll  and  disenroll  members.  The
Contractor  shall not disenroll any member for any reason unless  directed to do
so by AHCCCSA.  Eligibility for the various AHCCCS coverage groups is determined
by one of the following agencies:

SOCIAL SECURITY                 SSA determines eligibility for the Supplementary
ADMINISTRATION (SSA)            Security Income (SSI) cash  program.   SSI  Cash
                                recipients are automatically eligible for AHCCCS
                                coverage.

DEPARTMENT OF ECONOMIC          DES  determines  eligibility  for  the Temporary
SECURITY (DES)                  Assistance  to  Needy  Families  (TANF)  program
                                (formerly   Aid   to  Families  with   Dependent
                                Children),  TANF Medical  Assistance  Only (MAO)
                                groups (including SOBRA women and children), the
                                Eligible Assistance Children state program (EAC)
                                and the Federal Emergency Services program (FES)
                                related to the TANF or SOBRA programs.

AHCCCSA                         AHCCCSA  determines  eligibility for the SSI/MAO
                                groups, including the FES program related to the
                                SSI-Cash program (aged,  disabled,  blind),  the
                                Arizona  Long-Term Care System (ALTCS),  and the
                                Qualified Medicare Beneficiary program.

ARIZONA'S 15 COUNTIES           Each  county  determines   eligibility  for  the
                                Medically   Needy/Medically   Indigent  (MN/MI),
                                Eligible Low  Income  Children  (ELIC), and  the
                                State Emergency Services state programs.

AHCCCS acute care eligible members are enrolled  with contractors in  accordance
with  the   rules  set  forth  in  R9-22-333,  R9-22-334,  R9-22-335, R9-22-337,
R9-22-339, R9-22-340, R9-22-342 and R9-22-707.

HEALTH PLAN CHOICE

All members  except for those  eligible under the MN/MI program have a choice of
available  health  plans.  AHCCCSA  anticipates  that a listing of the available
health plans and their telephone  numbers will be given to each member applicant
during  the  application   process  for  AHCCCS  benefits.   Also  included  are
instructions  to  member  applicants  to call the  health  plans  directly  with
specific questions  concerning the health plan. If there is only one health plan
available  for the member  applicant's  Geographical  Service Area, no choice is
offered.  Members who do not choose prior to AHCCCSA's  being  notified of their
eligibility are anticipated to be automatically  assigned to a health plan based
on family continuity or the auto-assignment algorithm.

AHCCCSA  assigns  MN/MI  eligible  members to an available  health plan based on
family continuity or through AHCCCSA's auto-assignment  algorithm. These members
do not get a choice of available  contractors  until the annual open  enrollment
period.

Exceptions to the above enrollment  policies  include:  Previously  eligible and
enrolled  members  who  have  been  disenrolled  for less  than 90 days  will be
automatically  enrolled  with the same  contractor  if that  contractor is still
available.  Also,  women whose SOBRA  eligibility has terminated and have become
enrolled in the Family Planning Services  Extension  Program will  automatically
remain assigned to the same health plan. The Family Planning Services  Extension
Program provides a maximum of 24 months of family planning services.

The  effective  date of  enrollment  of a new member  with the  Contractor  will
generally be the day prior to the date the Contractor receives notification from
AHCCCSA via the daily roster. However, the Contractor is responsible for payment
of medically  necessary covered services  retroactive to the member's  beginning
date of eligibility.

<PAGE>

PRIOR PERIOD COVERAGE: AHCCCS provides prior period coverage for categorical and
non-categorical  members. For categorical members,  prior period coverage starts
from the first day of the month of  application,  or first eligible  month.  The
Contractor  is  responsible  for payment of all claims for  medically  necessary
covered services  provided to categorical  members during prior period coverage.
For  non-categorical  members  (MN/MI,  ELIC) prior period coverage is generally
limited  to the  two  days  prior  to the  date of  AHCCCSA  being  notified  of
eligibility.  However, prior period coverage could include additional days prior
to the date of  enrollment.  The  Contractor is  responsible  for payment of all
claims for medically  necessary  covered services provided on an emergency basis
to non-categorical  members pursuant to ARS ss.36-2908 for the first two days of
the  prior  period   coverage.   Any  additional   prior  period   coverage  for
non-categorical  members will include all claims for medically necessary covered
services.  This may include services provided prior to 10/1/97.  (See Section D,
Paragraph 37, Compensation,  for a description of the Contractor's reimbursement
from AHCCCSA for this eligibility time period.)

NEWBORNS: Newborns born to AHCCCS-eligible mothers who were enrolled at the time
of the child's birth and whose newborn notification was received by AHCCCSA will
be enrolled with the mother's  contractor.  The  Contractor is  responsible  for
notifying  AHCCCSA of a child's birth to an enrolled  member and, for capitation
purposes,  the effective  date of the  newborn's  enrollment is the date AHCCCSA
receives such notification.  Note that AHCCCSA is currently available to receive
these  calls  Monday  through  Friday from 8 am to 5 pm. The  effective  date of
enrollment  will be the date  notification is received and capitation will begin
on that  date.  Categorically  eligible  mothers of  newborns  are sent a letter
advising them of their right to choose a different  contractor  for their child;
otherwise the child will remain with the mother's contractor.  The Contractor is
responsible  for all covered  services to the newborn whether or not AHCCCSA has
received  notification  of the  child's  birth.  Newborns  of MN/MI  mothers are
enrolled with the mother's  contractor  for a minimum of 30 days up to a maximum
of 60 days.

AHCCCS Rules R9-22-342 and R9-22-707 contain additional  information  concerning
newborn enrollment and payment.

ENROLLMENT  GUARANTEES:  Upon initial  capitated  enrollment as a  categorically
eligible  member,  or as an  Eligible  Assistance  Child  (EAC),  the  member is
guaranteed a minimum of five full months of  continuous  enrollment.  Enrollment
guarantees  do not apply to Native  Americans who choose to obtain their covered
services  through Indian Health Services (IHS) on a  fee-for-service  basis. The
enrollment  guarantee  applies a maximum of one time per member as a categorical
member and one time as an EAC member. If a member changes from one contractor to
another within the enrollment  guarantee period,  the remainder of the guarantee
period  applies  to the new  contractor.  The  enrollment  guarantee  may not be
granted or may be terminated if the member is incarcerated or, if a minor child,
is  adopted.  AHCCCS  Rule  R9-22-337  describes  other  reasons  for  which the
enrollment guarantee may not apply.

NATIVE AMERICANS:  Native Americans eligible under any coverage group other than
MN/MI, on or  off-reservation,  have a choice of Indian Health Services (IHS) or
any available contractor. If choice is not made within the specified time limit,
Native American members living on-reservation will be assigned to IHS and Native
American  members  living  off-reservation  will  be  assigned  to an  available
contractor  using  AHCCCSA's  family  continuity   policy  and   auto-assignment
algorithm.  Native  American  members  eligible  under the MN/MI  coverage group
living on-reservation will be assigned to Indian Health Services (IHS) and those
living  off-reservation  will be assigned to a contractor  using  regular  MN/MI
enrollment policy.  Native Americans may change from IHS to a contractor or from
a contractor to IHS at any time.

<PAGE>

7.    MAINSTREAMING OF AHCCCS MEMBERS

To ensure mainstreaming of AHCCCS members, the Contractor shall take affirmative
action so that members are provided  covered  services  without  regard to payer
source,  race, color,  creed,  sex,  religion,  age, national origin,  ancestry,
marital status, sexual preference,  or physical or mental handicap, except where
medically  indicated.  Examples of  prohibited  practices  include,  but are not
limited to, the following:

a.  Denying  or not  providing  a member any  covered  service or  access  to an
    available facility.
b.  Providing  to  a member  any  covered  service  which is  different,  or  is
    provided in a different  manner or at a different time from that provided to
    other  members,  other  public or  private  patients  or the public at large
    except where medically necessary.
c.  Subjecting  a member to  segregation  or  separate  treatment  in any manner
    related to the receipt of any covered  service;  restricting a member in any
    way in his or her enjoyment of any advantage or privilege  enjoyed by others
    receiving any covered service.
d.  The assignment of times or places for the provision of services on the basis
    of the race, color, creed,  religion,  age, sex, national origin,  ancestry,
    marital status,  sexual preference,  income status,  AHCCCS  membership,  or
    physical or mental handicap of the participants to be served.

If the  Contractor  knowingly  executes a  subcontract  with a provider with the
intent of allowing or permitting the subcontractor to implement barriers to care
(i.e. the terms of the  subcontract  act to discourage  the full  utilization of
services by some members), the Contractor will be in default of its contract.

If the Contractor  identifies a problem  involving  discrimination by one of its
providers,  it shall promptly  intervene and implement a corrective action plan.
Failure to take prompt  corrective  measures may place the Contractor in default
of its contract.

8.    MEMBER INFORMATION

All  informational  materials  prepared by the  Contractor  shall be approved by
AHCCCSA  prior to  distribution  to members.  Information  shall be submitted on
disk,  saved as a text file (.txt) along with a hard copy printout.  Information
shall be provided in English and a second language when 200 members or 5% of the
Contractor's   enrolled  population,   whichever  is  greater,  are  non-English
speaking.  (AHCCCSA  will  advise the  Contractor  when and if this  requirement
applies.)  When there are program or service site changes  notification  will be
provided to the  affected  members at least 14 days before  implementation.  The
Contractor shall review and update the Member Handbook at least once a year. The
Handbook  must be  submitted  to AHCCCSA  Office of Managed Care for approval by
Sept. 1 of each  contract  year,  or within four weeks of  receiving  the annual
renewal amendment, whichever is later.

The Contractor  shall make every effort to ensure that all information  prepared
for distribution to members is written at a 4th grade level.

<PAGE>

The Contractor  shall produce and provide the following  printed  information to
each  member  or  family  within  10  days of  receipt  of  notification  of the
enrollment date:

I.  A MEMBER HANDBOOK which, at a minimum, shall include:
a.  A table of contents
b.  A general description of how managed care works,  particularly in regards to
    member  responsibilities,  appropriate utilization of services and the PCP's
    role as gatekeeper of services
c.  A description  of all available  covered  services and an explanation of any
    service  limitations  or exclusions  from coverage and a notice stating that
    the  Contractor  will be liable only for those  services  authorized  by the
    Contractor.  The  description  should  include  a brief  explanation  of the
    Contractor's approval and denial process.
d.  Information on what to do when family size changes
e.  How to obtain a PCP
f.  How to change PCPs
g.  How to make, change and cancel appointments with a PCP
h.  List of applicable  copayments  (including a statement that care will not be
    denied due to lack of  copayment).  The member  handbook  must clearly state
    that members cannot be billed for covered  services  (other than  applicable
    copayments)  and  under  what  circumstances  a  member  may be  billed  for
    non-covered services.
i.  Dual eligibility (i.e. Medicare and Medicaid);  services received in and out
    of  the  Contractor's  network;  copayments.  See  Section D,  Paragraph 41,
    Medicare Services and Cost Sharing.
j.  The process of referral to specialists and other providers, including access
    to behavioral health  services provided by  the ADHS RBHA system for members
    under age 18, 21 and  older,  and SMI  members of any age.  
k.  How to  contact  Member Services and a description of its function 
l.  What  to  do  in  case of an emergency and instructions for receiving advice
    on getting care in case of an emergency.  In a  life-threatening  situation,
    the member  handbook should  instruct  members to use the emergency  medical
    services (EMS)  available  and/or  activate EMS by dialing  9-1-1.  Handbook
    should contain information on proper emergency service utilization.
m.  How  to   obtain   emergency   transportation    and   medically   necessary
    transportation. 
n.  EPSDT  services.   Screenings  include  a  comprehensive  and  developmental
    history, comprehensive  unclothed  physical examination, appropriate  vision
    testing,   hearing   testing,   laboratory   tests,  dental   screening  and
    immunizations. 
o.  Maternity and family planning  services 
p.  Listing of covered behavioral health services 
q.  Listing  of  all  covered dental  services for  members under 21 and  how to
    access  these  services 
r.  Out of county/ out of state moves
s.  Grievance procedures, including a clear explanation of the member's right to
    file a grievance and to appeal  any  decision   that  affects  the  member's
    receipt of covered services.
t.  Contributions  the  member  can make  towards  his/her  own  health,  member
    responsibilities, appropriate and inappropriate   behavior,  and  any  other
    information deemed essential by the Contractor or AHCCCS. This shall include
    a statement that the member is responsible for protecting his or her ID card
    and  that misuse of  the  card, including loaning, selling or  giving  it to
    others could result in loss of the member's eligibility and/or legal action.
u.  How to access after-hours care (urgent care). 
v.  Advance directives for adults 
w.  Use of other sources of insurance. See Section D, Paragraph 40, Coordination
    of Benefits. 
x.  The last revision date

<PAGE>

Regardless of the format chosen by the  Contractor,  the member handbook must be
printed  in a  type-style  and size  which can  easily be read by  members  with
varying degrees of visual  impairment.  At a minimum,  the member handbook shall
also contain the following language regarding questions, problems and grievances
(Ref. AHCCCS Rule 9-22-518):

Q.  What if  I have  any questions,  problems or complaints about  [Contractor's
    name] ?
A.  If you have a question or  problem,  please  call ________  and ask  to talk
    to a Member Representative.  They are there to help you.
A.  If you have  a  specific  complaint  about  your  medical  care,  the Member
    Representative will help you.
Q.  What  if  I'm   not  happy  with   the  help  given  to  me  by  the  Member
    Representative?
A.  If you  are unhappy  with the answer you  receive,  you  can tell the Member
    Representative  you want to file a written or oral grievance.  The grievance
    must be filed not later than 35 days after the date of the action, decision,
    or incident.
A.  [Contractor's name] will make a final decision for grievances within 30 days
    of receiving your written or oral grievance.  A letter will be mailed to you
    stating the health  plan's  decision  and the reason for the  decision.  The
    letter  will  tell you how you can  appeal  the  decision  if you are  still
    unhappy.  You must let the health plan know you want to appeal the  decision
    letter.
A.  If you are appealing the health plan's  decision,  [Contractor's  name] will
    send your  request for appeal to the AHCCCSA.  You will receive  information
    from AHCCCSA on how your appeal will be handled. AHCCCSA will then decide if
    the health plan's decision was correct under the circumstances.

II. A LIST OF THE NAMES,  TELEPHONE  NUMBERS AND SERVICE SITE  ADDRESSES OF PCPs
available  for  selection  by the  member  and a  description  of the  selection
process.

9.    MEMBER SURVEYS

AHCCCSA  may  periodically  conduct a survey of a  representative  sample of the
Contractor's   membership.   AHCCCSA  will  design  a  questionnaire  to  assess
accessibility,  availability  and  continuity  of care with PCPs;  communication
between members and the  Contractor;  and general member  satisfaction  with the
AHCCCS program. To ensure comparability of results, the questions to the members
will be the same for all contractors. AHCCCSA will consider suggestions from the
Contractor  for  questions to be included in this  survey.  The results of these
surveys will become public  information and available to all interested  parties
upon request.  In addition,  the Contractor shall perform its own annual general
or focused  member  survey.  All such  contractor  surveys  must be  approved in
advance by AHCCCSA.

10.   MARKETING PLANS

The  Contractor  shall  submit all  proposed  marketing  plans and  materials to
AHCCCSA for prior  approval in accordance  with the AHCCCS HEALTH PLAN MARKETING
POLICY,  a copy of which is available in the Bidder's  Library.  The  Contractor
must have signed contracts with hospitals (in Maricopa and Pima counties), PCPs,
specialists  and  pharmacies  in order  for  them to be  included  in  marketing
materials.

11.   OPEN ENROLLMENT

AHCCCSA conducts an open enrollment for members once per contract year,  usually
in August or  September.  AHCCCSA  may hold  additional  open  enrollments  on a
limited basis as deemed  necessary.  During open  enrollment  members may change
contractors  subject to the availability of other contractors within their area.
Members are mailed a printed  enrollment form and may choose a new contractor by
contacting  AHCCCSA to complete the enrollment  process.  If the member does not
participate in open enrollment, no change of contractor will be made (except for
approved  changes  under the Change of Plan  policy) for the new  contract  year
provided the  Contractor's  contract is renewed and the member continues to live
in the Contractor's service area. The Contractor shall comply with the OFFICE OF
MANAGED CARE MEMBER TRANSITION FOR OPEN ENROLLMENT policy.

<PAGE>

12.   TRANSITION OF MEMBERS

The  Contractor  shall  comply with the AMPM  standards  for member  transitions
between health plans or GSA's, to or from an ALTCS program contractor,  and upon
termination  or  expiration  of a contract.  The  Contractor  shall  develop and
implement  policies and  procedures  which comply with AHCCCS  medical policy to
address transition of:

1.  Members with significant medical conditions such as a high-risk pregnancy or
    pregnancy   within  the  last  30  days,  the  need  for   organ  or  tissue
    transplantation, chronic illness  resulting in  hospitalization  or  nursing
    facility  placement, etc.; 
2.  Members who are receiving  ongoing services such as behavioral  health,
    dialysis,  home  health, chemotherapy  and/or radiation  therapy or who  are
    hospitalized  at the time of  transition;  
3.  Members  who  have   received  prior  authorization  for  services  such  as
    scheduled   surgeries,   out-of-area   specialty   services,  nursing   home
    admission; 
4.  Prescriptions,  DME and medically necessary transportation  ordered for  the
    transitioning  member  by  the  relinquishing contractor;  and 
5.  Medical  records of  the  transitioning  member (the cost of reproducing and
    forwarding  medical records shall be the responsibility of the relinquishing
    contractor).

When   relinquishing   members,   the  Contractor  is  responsible   for  timely
notification of the receiving contractor regarding pertinent information related
to any special needs of transitioning members. The Contractor,  when receiving a
transitioning  member with special needs, is responsible to coordinate care with
the relinquishing contractor in order that services not be interrupted,  and for
providing  the new member with health  plan and service  information,  emergency
numbers and instructions of how to obtain services.  The Contractor shall comply
with the AHCCCS  Behavioral  Health Policy  Manual for  transition of members in
need of behavioral health services to be provided through the ADHS RBHA system.

In the event the contract, or any portion thereof, is terminated for any reason,
or expires, the Contractor shall assist AHCCCSA in the transition of its members
to other  contractors,  and shall abide by  standards  and  protocols  set forth
above.  In  addition,  AHCCCSA  reserves  the  right to  extend  the term of the
contract on a month-to-month  basis to assist in any transition of members.  The
Contractor shall make provision for continuing all management and administrative
services  until  the  transition  of all  members  is  completed  and all  other
requirements of this contract are satisfied. The Contractor shall be responsible
for  providing  all reports set forth in this  contract  and  necessary  for the
transition process and shall be responsible for the following:

a.  Notification of subcontractors and members.
b.  Payment  of  all  outstanding  obligations  for  medical  care  rendered  to
    members.
c.  Until  AHCCCSA  is  satisfied  that   the  Contractor  has  paid  all   such
    obligations, the Contractor shall provide the following  reports to AHCCCSA:
    1) A  monthly  claims  aging  report  by  provider/creditor  including  IBNR
       amounts;
    2) A monthly summary of cash disbursements;  
    3) Copies of all bank statements received by the  Contractor.  Such  reports
       shall be due on  the fifth  day of each  succeeding month  for the  prior
       month.
d.  In the event of termination  or suspension of the contract by AHCCCSA,  such
    termination  or suspension shall not affect the obligation of the Contractor
    to  indemnify  AHCCCSA for any claim by any third party against the State or
    AHCCCSA  arising from the  Contractor's performance of this contract and for
    which the Contractor would otherwise be liable under this contract.
e.  Any dispute by the  Contractor with respect to  termination or suspension of
    this contract by AHCCCSA shall be exclusively  governed by the provisions of
    Section E, Paragraph 26, Disputes.
f.  Any funds  advanced  to the  Contractor  for coverage of members for periods
    after the date of termination shall be returned to AHCCCSA within 30 days of
    termination of the contract.

<PAGE>

HOSPITAL  REIMBURSEMENT PILOT PROGRAM - MARICOPA AND PIMA COUNTIES ONLY: Members
transferred from non-contracting  hospitals shall be done in accordance with the
AHCCCS Medical Policy pertaining to member transfers dated 10/1/94.

13.   STAFF REQUIREMENTS AND SUPPORT SERVICES

The   Contractor   shall  have  in  place  the   organization,   management  and
administrative  systems  capable of fulfilling all contract  requirements.  At a
minimum, the following staff are required.

a.  A full-time  ADMINISTRATOR  who  is  available  at all times to fulfill  the
    responsibilities of the position and to oversee the entire  operation of the
    health plan.
b.  A  MEDICAL  DIRECTOR  who  shall  be  an  Arizona-licensed  physician.   The
    Medical Director shall be actively  involved in all major clinical  programs
    and QM/UM components of the  Contractor's  health plan. The Medical Director
    shall devote  sufficient time to  Contractor's  health plan to ensure timely
    medical decisions, including after-hours consultation as needed.
c.  A full-time CHIEF FINANCIAL OFFICER who is available at all times to fulfill
    the  responsibilities  of  the  position  and  to  oversee  the  budget  and
    accounting systems implemented by the Contractor.
d.  A  QUALITY  MANAGEMENT/   UTILIZATION   MANAGEMENT  COORDINATOR  who  is  an
    Arizona-licensed registered nurse, physician or physician's assistant.
e.  A  MATERNAL  HEALTH/  EPSDT  COORDINATOR  who  shall be an  Arizona-licensed
    registered  nurse,  physician or physician's  assistant;  or have a Master's
    degree in health services,  public health or health care  administration  or
    other related field.
f.  A  BEHAVIORAL   HEALTH   COORDINATOR  who  shall  be  a  behavioral   health
    professional as described in Health Services Rule R9-20-306.B.
g.  PRIOR AUTHORIZATION STAFF to authorize medical care 24 hours per day, 7 days
    per week.  This staff shall include an  Arizona-licensed  registered  nurse,
    physician or physician's assistant.
h.  CONCURRENT REVIEW STAFF to conduct inpatient  concurrent review.  This staff
    shall  consist  of  an   Arizona-licensed   registered   nurse,   physician,
    physician's assistant or an Arizona-licensed  practical nurse experienced in
    concurrent  review and under the direct  supervision of a registered  nurse,
    physician or physician's assistant.
i.  MEMBER SERVICES MANAGER AND STAFF to coordinate  communications with members
    and act as member advocates.  There shall be sufficient Member Service staff
    to enable members to receive prompt resolution to their problems.
j.  PROVIDER SERVICES MANAGER AND STAFF to coordinate communications between the
    Contractor  and its  subcontractors.  There  shall  be  sufficient  Provider
    Services  staff to enable  providers to receive  prompt  resolution to their
    problems or inquiries.
k.  A CLAIMS  ADMINISTRATOR  and  CLAIMS  PROCESSORS  to ensure  the  timely and
    accurate   processing  of  original  claims,   claims  correction   letters,
    re-submissions and overall adjudication of claims.
l.  ENCOUNTER  PROCESSORS  to ensure  the  timely and  accurate  processing  and
    submission to AHCCCSA of encounter data and reports.
m.  A GRIEVANCE  COORDINATOR who will manage and adjudicate  member and provider
    grievances.  
n.  CLERICAL  AND  SUPPORT STAFF  to  ensure  appropriate  functioning  of   the
    Contractor's operation.

<PAGE>

The Contractor  shall inform AHCCCSA,  Office of Managed Care, in writing within
seven days of staffing changes in the following key positions:

 Administrator                         Member Services Manager
 Medical Director                      Provider Services Manager
 Chief Financial Officer               Claims Administrator
 Maternal Health/EPSDT Coordinator     Quality Management/Utilization Management
                                         Coordinator
 Grievance Coordinator                 Behavioral Health Coordinator

The Contractor shall ensure that all staff have appropriate training, education,
experience and orientation to fulfill the requirements of the position.  See the
AMPM, Chapter 600 for specific position requirements.

14.   WRITTEN POLICIES, PROCEDURES AND JOB DESCRIPTIONS

The Contractor shall develop and maintain written  policies,  procedures and job
descriptions  for each functional area of its health plan,  consistent in format
and style.  The Contractor  shall maintain  written  guidelines for  developing,
reviewing  and  approving all policies,  procedures  and job  descriptions.  All
policies and  procedures  shall be reviewed at least annually to ensure that the
Contractor's written policies reflect current practices. Reviewed policies shall
be dated  and  signed  by the  Contractor's  appropriate  manager,  coordinator,
director or administrator.  All medical and quality management  policies must be
approved and signed by the Contractor's Medical Director. Job descriptions shall
be reviewed at least  annually to ensure that  current  duties  performed by the
employee reflect written requirements.

15.   ADVANCE DIRECTIVES

The  Contractor  shall specify in the contract or agreement  with each hospital,
nursing  facility,  provider  of home  health  care,  hospice or  personal  care
services  that the  provider  must comply with  federal and State law  regarding
advance directives for adult members.  At a minimum,  the providers  (hospitals,
nursing  facilities,  home health care, hospice and personal services) shall: 
a.  Maintain written policies for adult members receiving care through their
    organization  regarding the member's right to make  decisions  about medical
    care,  including the right to accept or refuse medical care and the right to
    execute an advance directive. The information must contain an explanation of
    any  conscientious  objection  the  provider  may have in  carrying  out the
    advance  directive.  (The  Contractor  is not  prohibited  from  making such
    objection when made pursuant to ARS 36-3205 (C.1)
b.  Provide  written  information  to adult  members  regarding an  individual's
    rights  under State law to make  decisions  regarding  medical  care and the
    provider's written policies concerning advance directives.
c.  Require documentation in the member's medical record as to whether the adult
    member has executed an advance directive.
d.  Not condition the provision of care or discriminate against a member because
    of his or her decision to execute or not execute an advance directive.
e.  Provide  education  for staff on issues  concerning  advance  directives.  
f.  Ensure  compliance  with  requirements  of federal  and  State law regarding
    advance directives.

The Contractor shall also maintain policies and procedures on advance directives
with respect to all adult members.  These  policies and procedures  must contain
the same information described immediately above.

16.   PERFORMANCE MEASURES

EPSDT  PARTICIPATION:  The Contractor shall take  affirmative  steps to increase
member  participation in the EPSDT program to at least 80% of all enrolled EPSDT
members  during CYE 98.  "Participation"  is defined as at least one initial and
periodic  screening or one preventive or treatment  visit.  AHCCCSA will measure
participation  levels through  encounter data and will not use information  from
prior period  coverage (see Paragraph D.6, PRIOR PERIOD  COVERAGE) in evaluating
the Contractor's performance.

If the Contractor has not achieved at least the statewide average participation/
utilization  rates  for  EPSDT  services  by the end of the  contract  year,  as
indicated  through  notification  from AHCCCSA,  the  Contractor  shall submit a
corrective action plan to AHCCCSA. The plan shall be submitted within 30 days of
the Contractor's  receipt of  participation/  utilization rate notification from
AHCCCSA. In addition,  AHCCCSA may conduct one or more follow-up on-site reviews
to verify compliance with the corrective action plan.

<PAGE>

If the  Contractor's  rate is  higher  than  the  statewide  average  for  EPSDT
participation,  but lower than 80%, AHCCCSA may require the Contractor to submit
a corrective action plan within specified time lines. EPSDT  IMMUNIZATIONS:  The
Contractor shall ensure EPSDT members receive  age-appropriate  immunizations as
specified in the AHCCCS Medical Policy Manual. The AHCCCSA long range goal is to
reach or exceed the Healthy People Year 2000 goal of 90 %  immunization  for two
year old  members.  During  CYE98,  the  Contractor  shall  meet or  exceed  the
following:
                                               Percentage of           Number of
      Immunization                             Members Immunized       Doses

Diptheria, Tetanus, Pertussis vaccine (DPT)         80%                   4
Oral Polio Vaccine                                  85%                   3
Measles, Mumps, Rubella Vaccine (MMR)               90%                   1
H. Influenza, Type B (HIB)                          90%                   1
Hepatitis B (Hep B)                                 85%                   3
Combined 3-Antigen Rate (4DPT, 3 OPV, 1MMR)         80%                  N/A
Combined All Antigens                               70%                  N/A
Varicella Vaccine                                   N/A                  N/A

The  Contractor  shall  conduct  an annual  immunization  audit  based on random
sampling  to assess  and verify  the  immunization  status of two year old EPSDT
members. AHCCCSA will provide the Contractor,  within two weeks after the end of
the contract year, the selected sample, specifications for conducting the audit,
the AHCCCSA reporting  requirements,  and technical  assistance.  The Contractor
shall identify the children's PCP, conduct the assessment, and report to AHCCCSA
in the  required  format all  immunization  rates for the  sampled  two-year-old
children  no later  than  December  15 after the end of the  contract  year.  If
medical records are missing for more than 5% of the sample group, the Contractor
is subject to sanctions by AHCCCSA.  Health Services  Advisory Group (HSAG) will
conduct a study to validate the Contractor's reported rates.

AHCCCSA will provide the statewide average immunization rates to the Contractor.
If the Contractor has not achieved at least these statewide  averages by the end
of the contract year, the  Contractor  shall submit a corrective  action plan to
AHCCCSA.  The plan shall be submitted within 60 days of the Contractor's receipt
of utilization rate notification from AHCCCSA. In addition,  AHCCCSA may conduct
one or more follow-up  on-site reviews to verify  compliance with the corrective
action plan. .

If the Contractor's immunization rates are higher than the statewide average for
immunizations,  but lower  than the  stated  goals  set forth in this  contract,
AHCCCSA may require the  Contractor  to submit a  corrective  action plan within
specified time lines.

PERFORMANCE INDICATORS: The AHCCCS goal for quality of care is to meet or exceed
the Healthy People Year 2000 national  goals.  For CYE 98, the Contractor  shall
comply with AHCCCS quality management  requirements to improve performance of at
least the  following  established  performance  indicators:  low  birth  weight;
mammography screening; and cervical cancer screening.

If the  Contractor  has not  achieved  at least the  statewide  average for each
performance  indicator  by the end of the  contract  year,  it shall  submit  to
AHCCCS,  Office of the Medical Director,  Acute Care Unit, a quality improvement
plan. The plan shall be submitted within 60 days after the Contractor's  receipt
of performance measurement notification from AHCCCSA.

A quality  improvement  plan may be required for each  performance  indicator in
which the Contractor's  performance rate is above the statewide  average for all
contractors  but  below the  midpoint  between  the  statewide  average  and the
best-performing health plan.

EPSDT DENTAL SERVICES:  The Contractor shall take affirmative  steps to increase
utilization of dental  services for EPSDT members.  At least 50% of all enrolled
members under age 21 shall have at least one dental visit during CYE98.  AHCCCSA
will monitor utilization through reported encounter data.

If the  Contractor  has not  achieved at least the  statewide  average  rate for
utilization  of dental  services by the end of the contract  year,  as indicated
through  notification  from AHCCCSA,  the  Contractor  shall submit a corrective
action  plan to  AHCCCSA.  The plan  shall be  submitted  within  30 days of the
Contractor's receipt of utilization rate notification from AHCCCSA. In addition,
AHCCCSA may conduct one or more follow-up  on-site reviews to verify  compliance
with the  corrective  action plan. If the  Contractor's  rate is higher than the
statewide  average for EPSDT dental  services,  but lower than 50%,  AHCCCSA may
require the Contractor to submit a corrective  action plan within specified time
lines.

<PAGE>

17.   QUALITY MANAGEMENT AND UTILIZATION MANAGEMENT (QM/UM)

The Contractor shall provide to members quality medical care as described in the
AHCCCS  MEDICAL  POLICY  MANUAL,  Chapter  900,  regardless  of payer  source or
eligibility category.  The Contractor shall institute processes to assess, plan,
implement and evaluate  quality  improvement  activities.  The Contractor  shall
conduct two clinical  studies each  contract  year as required in Chapter 900 of
the AHCCCS MEDICAL POLICY MANUAL.  AHCCCSA will determine the subject matter and
study  methodology for one of the annual studies and the Contractor shall submit
to AHCCCSA by November 15 of each contract year its proposed  subject matter and
methodology  for the other.  The results of the studies  shall be  submitted  to
AHCCCS,  Office of the  Medical  Director,  within 90 days after the end of each
contract year.

The  Contractor  must  maintain a written  QM/UM plan  which  details  plans for
compliance  with  the  AHCCCS  MEDICAL  POLICY  MANUAL.   The  Contractor  shall
incorporate in its QM/UM plan an action plan for improving the performance rates
for those indicators with established baselines.

18.   PHYSICIAN INCENTIVES

The Contractor must comply with all applicable physician incentive  requirements
and conditions defined in 42 CFR 417.479.  These regulations  prohibit physician
incentive plans that directly or indirectly make payments to a doctor or a group
as an inducement to limit or refuse  medically  necessary  services to a member.
The  Contractor  is required to disclose all physician  incentive  agreements to
AHCCCSA and to AHCCCS members who request them.

The  Contractor  shall  not  enter  into  contractual  arrangements  that  place
providers  at  significant  financial  risk as  defined  in CFR  417.479  unless
specifically  approved  in advance by the Office of Managed  Care.  AHCCCSA  has
accumulated all available  information from HCFA regarding physician  incentives
in a binder marked "Physician Incentive Guidelines" in the Bidder's Library. Due
to recent verbal  communication with HCFA  representatives  regarding  physician
incentives,  AHCCCSA is  postponing  its  development  of the "AHCCCS  Physician
Incentive Guidelines"; therefore, offerors are instructed to use the information
described above.

19.   APPOINTMENT STANDARDS

For  purposes  of  this  section,  "urgent"  is  defined  as an  acute  but  not
necessarily  severe  disorder  which,  if not attended  to,  could  endanger the
patient's health.  The Contractor shall have procedures in place that ensure the
following  standards are met: 

a.  Emergency PCP appointments - same day 
b.  Urgent care PCP  appointments - within two days 
c.  Routine care PCP  appointments - within 21 days

<PAGE>

For  specialty  referrals and dental appointments,  the Contractor shall be able
to provide:
a.  Emergency appointments - within 24 hours of referral
b.  Urgent care appointments - within 3 days of referral
c.  Routine care appointments - within 30 days of referral

For maternity care, the Contractor  shall  be able  to provide initial  prenatal
care appointments for enrolled pregnant members as follows:
a.  First trimester - within 14 days of request
b.  Second trimester - within 7 days of request
c.  Third trimester - within 3 days of request
d.  High risk pregnancies - within 3 days of identification of high risk by  the
                            Contractor or maternity care provider or immediately
                            if an emergency exists

For  behavioral  health  services to members  18-20 years of age,  non-seriously
mentally ill, the Contractor  shall be able to provide  appointments as follows:
a.  Emergency  screening and evaluation - within 24 hours of referral or request
for services b. Behavioral  health  screening - within seven days of referral c.
Non-emergency  appointments  - within 30 days of referral or  behavioral  health
screening

If a member  needs  medically-necessary  transportation,  the  Contractor  shall
require its  transportation  provider to schedule the transportation so that the
member arrives no sooner than one hour before the appointment;  does not have to
wait more than one hour after  making the call to be picked up; nor have to wait
for more than one hour after  conclusion of the appointment  for  transportation
home.

The  Contractor  shall  monitor the adequacy of its  appointment  processes  and
reduce the unnecessary use of alternative methods such as emergency room visits.
The  Contractor  shall  monitor  and ensure that a member's  waiting  time for a
scheduled  appointment  at the PCP's or  specialist's  office is no more than 45
minutes, except when the provider is unavailable due to an emergency.

The Contractor  shall have written  policies and procedures  about educating its
provider network about appointment time requirements. The Contractor must assign
a specific staff member or unit within its  organization  to monitor  compliance
with  appointment  standards  and shall  require a  corrective  action plan when
appointment standards are not met.

20.   REFERRAL PROCEDURES AND STANDARDS

The Contractor shall have adequate  written  procedures  regarding  referrals to
specialists to include, as a minimum, the following:

a.  Use of referral forms clearly identifying the Contractor 
b.  A system for resolving disputes regarding the referrals 
c.  Having  a  process  in  place  that ensures the  member's PCP  receives  all
    specialist and consulting reports and a process to ensure  PCP follow-up  of
    all referrals including EPSDT referrals for behavioral health services
d.  A referral  plan for any member who is about to lose  eligibility  and who
    requests information on low-cost or no-cost health care services
e.  Referral to Medicare HMO including payment of copayments

<PAGE>

21.   PROVIDER MANUAL

The Contractor  shall develop,  distribute and maintain a provider  manual.  The
Contractor  shall ensure that each  contracted  provider is issued a copy of the
provider  manual  and is  encouraged  to  distribute  a  provider  manual to any
individual  or group that  submits  claim and  encounter  data.  The  Contractor
remains liable for ensuring that all providers,  whether contracted or not, meet
the applicable AHCCCS requirements such as covered services,  billing, etc. At a
minimum,  the  Contractor's  provider  manual must  contain  information  on the
following: 

a.  Introduction to  the Contractor which explains the Contractor's organization
    and administrative structure
b.  Provider  responsibility and the Contractor's  expectation of the provider 
c.  Overview of the Contractor's Provider Service department and function 
d.  Listing and description of  covered and  non-covered  services, requirements
    and limitations 
e.  Emergency  room  utilization  (appropriate and  non-appropriate use  of  the
    emergency  room) 
f.  EPSDT Services  - screenings  include  a  comprehensive   and  developmental
    history, comprehensive unclothed  physical  examination, appropriate  vision
    testing,   hearing   testing,   laboratory   tests,  dental  screenings  and
    immunizations 
g.  Dental services 
h.  Maternity/  Family Planning services 
i.  Listing of behavioral  health services 
j.  The Contractor's  policy regarding PCP assignments 
k.  Referrals to specialists and other providers, including access to behavioral
    health  services  provided by the ADHS RBHA system for members under age 18,
    21 and older,  and SMI members of any age 
l.  Grievance and appeal rights
m.  Billing and encounter submission information
    - indicate which form, UB92, HCFA 1500, or Form C is to be used for services
    - indicate  which  fields  are  required  for  a  claim  to   be  considered
      acceptable by the Contractor.  A completed  sample of each form  shall  be
      included
n.  Contractor's  written  policies and procedures  which affect the provider(s)
    and/or the  provider  network 
o.  Claims  re-submission  policy and  procedure 
p.  Reimbursement,  including  reimbursement  for dual eligibles (i.e.  Medicare
    and Medicaid) or members with other insurance 
q.  Explanation of remittance advice 
r.  Prior authorization requirement 
s.  Claims medical review 
t.  Concurrent review 
u.  Fraud and Abuse 
v.  Formularies  (with  updates  and changes provided in  advance  to providers,
    including pharmacies) 
w.  AHCCCS appointment standards

22.   PRIMARY CARE PROVIDER STANDARDS

The Contractor shall include in its provider network a sufficient number of PCPs
to meet the requirements of this contract.  Health care providers  designated by
the Contractor as PCPs shall be licensed in Arizona as allopathic or osteopathic
physicians  who generally  specialize  in family  practice,  internal  medicine,
obstetrics or  pediatrics;  certified  nurse  practitioners  or certified  nurse
midwifes; or physician's assistants.

<PAGE>

At a minimum,  the Contractor's number of full-time  equivalent PCPs to enrolled
members  shall not exceed a ratio of 1:1800  for adults and 1:1200 for  children
who are 12 or younger.  If the PCP  contracts  with more than one AHCCCS  health
plan,  the ratio shall be adjusted by the  Contractor to ensure the total number
of AHCCCS  members  does not  exceed  the above  ratio.  The  Contractor  should
consider  the PCP's  total  patient  panel  size  (i.e.  AHCCCS  and  non-AHCCCS
patients) when assessing the PCP's ability to meet AHCCCS' appointment and other
standards.  In addition,  AHCCCS  members shall not comprise the majority of the
PCP's panel of patients.  The Contractor shall also reduce the number of members
assigned to its network  PCPs as  necessary  to meet the  appointment  standards
specified in Section D, Paragraph 19,  Appointment  Standards.  Any variation to
the above standards must be submitted to AHCCCSA, Office of the Medical Director
for  prior  approval.  PCPs  with  assigned  members  diagnosed  with AIDS or as
HIV-positive  shall meet  criteria  and  standards  set forth in AHCCCS  Medical
Policy and AHCCCS AIDS Advisory Committee Guidelines.

The  Contractor  shall  have a system in place to monitor  and ensure  that each
member is assigned to an individual PCP and that the Contractor's data regarding
PCP assignments is current.  The Contractor is encouraged to assign members with
complex  medical  conditions  who  are  age 12 and  younger  to  Board-certified
pediatricians.

To the extent  required by this  contract,  the  Contractor  shall offer members
freedom of choice in selecting a PCP. When a new member has been assigned to the
Contractor,  the Contractor shall inform the member in writing of his enrollment
and of his  PCP  assignment  within  10  days  of the  Contractor's  receipt  of
notification  of assignment by AHCCCSA.  The  Contractor  shall include with the
enrollment  notification a list of all the  Contractor's  available PCPs and the
process for changing the PCP assignment,  should the member desire to do so. The
Contractor  shall  confirm any PCP change in writing to the member.  Members may
make both their  initial PCP  selection and any  subsequent  PCP changes  either
verbally or in writing.

At a minimum,  the Contractor  shall hold the PCP  responsible for the following
gatekeeping  activities:  a. Supervision,  coordination and provision of care to
each  assigned  member  b.  Initiation  of  referrals  for  medically  necessary
specialty  care c.  Maintaining  continuity of care for each assigned  member d.
Maintaining the member's medical record, including documentation of all services
provided  to the  member  by the  PCP,  as well  as any  specialty  or  referral
services.

The Contractor shall establish and implement  policies and procedures to monitor
PCP gatekeeping  activities and to ensure that PCPs are adequately  notified of,
and receive documentation regarding, specialty and referral services provided to
assigned  members  by  specialty  physicians,  dentists  and other  health  care
professionals.  Contractor  policies and procedures shall be subject to approval
by AHCCCSA,  Office of the Medical  Director.  PCPs and  specialists who provide
inpatient  services  to  the  Contractor's  members  shall  have  admitting  and
treatment  privileges  in a minimum of one general  acute care  hospital that is
located within the Contractor's service area.

23.   OTHER PROVIDER STANDARDS

The Contractor shall develop and implement policies and procedures to:
a.  Recruit   sufficient    specialty    physicians,   dentists,   health   care
    professionals, health care institutions and support  services  to  meet  the
    medical needs of its members.
b.  Monitor the adequacy, accessibility and availability of its provider network
    to meet the needs of its members.

<PAGE>

Contractor  policies  shall be subject  to  approval  by  AHCCCS,  Office of the
Medical  Director and shall be  monitored  through  operational  audits at least
annually.

For specialty services,  the Contractor shall ensure that: 

a.  PCP referral shall be required for specialty physician services.  
b.  Specialty physicians shall not begin a course of  treatment  for  a  medical
    condition  other  than  that  for  which  the  member  was referred,  unless
    approved by the member's PCP. 
c.  The  specialty  physicians  shall  provide  to  the  member's  PCP  complete
    documentation  of all diagnostic  services  including copies of test results
    if applicable,  treatment services  provided and the  resulting  outcome for
    each.  

The  Contractor  shall ensure that a maternity care  provider  is designated for
each pregnant member for the duration of her pregnancy and postpartum  care  and
that  maternity  services  are  provided   in  accordance  with  the  AMPM.  The
Contractor  may  include  in its  provider  network the following maternity care
providers:

a.  Arizona licensed allopathic  and/or  osteopathic  physicians who are general
    practitioners  or specialize in family practice or obstetrics 
b.  Certified nurse midwives 
c.  Licensed midwives.

Members may choose, or be assigned, a PCP who provides obstetric care (physician
or certified  nurse  midwife).  Such  assignment  shall be  consistent  with the
freedom of choice  requirements  for selecting health care  professionals  while
ensuring that the continuity of care is not  compromised.  Members who choose to
receive  maternity  services from a licensed midwife shall also be assigned to a
PCP for medical  care as primary  care is not within the scope of  practice  for
licensed midwives.

All physicians and certified nurse midwives who perform deliveries shall have OB
hospital  privileges.  Licensed midwives perform deliveries only in the member's
home.  Labor and delivery  services may also be provided in the member's home by
physicians and certified  nurse  practitioners  and certified nurse midwives who
include such services within their practice.

24.   NETWORK DEVELOPMENT

The Contractor  shall develop and maintain a provider network that is sufficient
to provide  all covered  services to AHCCCS  members.  It shall  ensure  covered
services  are  provided  promptly  and are  reasonably  accessible  in  terms of
location and hours of  operation.  There shall be  sufficient  professional  and
paramedical personnel for the provision of covered services, including emergency
medical care on a 24-hour-a-day, 7-days-a-week basis. The proposed network shall
be sufficient to provide covered  services  within  designated time and distance
limits.

25.   NETWORK MANAGEMENT

The  Contractor  shall have policies and procedures in place that pertain to all
service specifications  described in the AHCCCS MEDICAL POLICY MANUAL,  Chapters
300, 600 and 900. In addition,  the  Contractor  shall have  policies on how the
Contractor will: 
a.  Communicate with the network regarding  contractual  and/or  program changes
    and requirements 
b.  Monitor and control network  compliance with policies  and  rules of AHCCCSA
    and the  Contractor  
c.  Evaluate  the quality of services delivered by the network 
d.  Provide or  arrange  for medically  necessary  covered  services should  the
    network become temporarily  insufficient  within the contracted service area
e.  Monitor  network  capacity to ensure that there are sufficient  providers to
    handle  the  volume  of  members  
f.  Ensure  service accessibility, including  monitoring  appointment procedures
    standards, appointment waiting times, and service provision standards

<PAGE>
All material  changes in the  Contractor's  provider network must be approved in
advance by AHCCCSA,  Office of Managed Care. A material change is defined as one
which affects, or can reasonably be foreseen to affect, the Contractor's ability
to meet the performance and network standards as described in this solicitation.
The Office of Managed Care must be notified of planned  material  changes in the
provider network before the change process has begun, for example before issuing
a 60-day termination notice to a provider. The notification shall be made within
one  working  day if the change is  unexpected.  AHCCCSA  will  assess  proposed
changes in the  Contractor's  provider  network for potential impact on members'
health care and provide a written  response to the Contractor  within 14 days of
receipt of request. For emergency situations, AHCCCSA will expedite the approval
process.

The Contractor shall notify AHCCCSA,  Office of Managed Care, within one working
day of any  unexpected  changes  that would impair its  provider  network.  This
notification  shall include (1) information about how the change will affect the
delivery of covered services, and (2) the Contractor's plans for maintaining the
quality of member  care if the  provider  network  change is likely to result in
deficient delivery of covered services.

26.   FEDERALLY QUALIFIED HEALTH CENTERS (FQHC)

The Contractor is encouraged to use FQHCs in Arizona to provide covered services
and  must  comply  with  the  federal  mandates  in OBRA 89 and  OBRA  90.  This
legislation  gives  FQHCs the  option to  require  state  Medicaid  programs  to
reimburse  the FQHC at 100% of  reasonable  costs  for the  services  delivered.
AHCCCSA and its contractors are required to comply with this legislation.

At the time of  contracting,  the  Contractor  must offer the FQHC the option to
elect reasonable cost  reimbursement  for categorically  eligible members.  This
provision should be within the contract between the FQHC and the Contractor.  If
the FQHC does not elect  reasonable  cost  reimbursement,  the FQHC  waives  the
opportunity to receive  reasonable cost  reimbursement for that contract period.
No retroactive elections shall be permitted.

If the FQHC elects reasonable cost reimbursement, the Contractor must notify the
AHCCCSA Office of Managed Care within seven days of the subcontract  signing. If
the FQHC  elects  reasonable  cost  reimbursement,  the  Contractor  may, at its
discretion, pay reasonable cost reimbursement, or pay using some other method of
payment,  such as capitation,  since the  requirement  to pay  reasonable  costs
applies to the State Medicaid Agency, not to the Contractor.

For example,  the Contractor  contracts with an FQHC that elects reasonable cost
reimbursement.  The method of payment  throughout  the contract  period could be
capitation.  Throughout  the year,  the  Contractor  would be required to file a
quarterly  cost  report  with  AHCCCS.  (The  instructions  for the health  plan
quarterly  reports can be obtained from the Office of Managed  Care.) At the end
of the year, the FQHC must complete certain reporting  requirements  outlined in
the ARIZONA HEALTH CARE COST CONTAINMENT  SYSTEM  REASONABLE COST  REIMBURSEMENT
COST REPORT & INSTRUCTIONS.  These two reporting packages will enable AHCCCSA to
determine  reasonable  costs,  in  comparison to actual  capitation  paid by the
Contractor.  AHCCCSA would  reimburse the FQHC if the  capitation  payments were
less than reasonable costs. Likewise, AHCCCSA would recoup payments in excess of
reasonable costs.

In  determining  the  reasonableness  of the  capitation  payments  made  by the
Contractor to the FQHC,  AHCCCSA will value the per member per month  capitation
payment  at a rate  which  approximates  the  average  rate  being  paid  by the
Contractor in the community to other  similar  providers.  If there are no other
providers  from which to develop an average  rate,  other  means will be used to
determine  the average for the area. If the actual  capitation  rate paid by the
Contractor  to the  FQHC  is  less  than  the  average  rate  being  paid by the
Contractor to other  providers,  the Contractor must reimburse the FQHC for this
difference.  AHCCCSA would reimburse the difference  between reasonable cost and
the average capitation rate.

<PAGE>

The Contractor  shall adhere to the AHCCCS  FEDERALLY  QUALIFIED  HEALTH CENTERS
COST REPORT  INSTRUCTIONS-GENERAL  INSTRUCTIONS  which  describes  the reporting
requirements applicable to the Contractor's  contracting with a FQHC that elects
cost  reimbursement.  A copy of these  requirements is available in the Bidder's
Library.  Included  among  the  FQHCs  currently  recognized  by  HCFA  are  the
following:
               Clinica  Adelante  
               West Pinal Family Health Center 
               Valley Health
               Center United Community  Health Center 
               Mariposa Community Health Center 
               Lake Powell Medical Center  
               Mountain Park Health Center 
               El Rio Santa Cruz Neighborhood Health Center 
               Native American Health Care Center
               Traditional  Indian  Alliance  
               Native  Americans for Community Action, Inc.

27.   PROVIDER REGISTRATION

The  Contractor  shall  ensure  that each of its  subcontractors  register  with
AHCCCSA as an  approved  service  provider  and  receive an AHCCCS  Provider  ID
Number. A Provider Participation Agreement must be signed with each provider who
does not  already  have a  current  AHCCCS  ID  number.  The  original  shall be
forwarded to AHCCCSA.  This provider  registration  process must be completed in
order for the Contractor to report services a subcontractor  renders to enrolled
members and for the Contractor to be paid reinsurance.

28.   PROVIDER AFFILIATION TAPE

The  Contractor  shall  submit  information  quarterly  regarding  its  provider
network.  This  information  shall be submitted  in the format  described in the
PROVIDER  AFFILIATION  TAPE USER MANUAL on October 15, January 15, April 15, and
July 15 of each contract year. The MANUAL may be found in the Bidder's Library.

29.   PERIODIC REPORT REQUIREMENTS

AHCCCSA,  under the terms  and  conditions  of its HCFA  grant  award,  requires
periodic reports, encounter data, and other information from the Contractor. The
submission of late, inaccurate, or otherwise incomplete reports shall constitute
failure to report subject to the penalty provisions  described in this contract.
Standards applied for determining adequacy of required reports are as follows:

a.  TIMELINESS:   Reports or other required data shall be  received on or before
                  scheduled due dates.
b.  ACCURACY:     Reports or other  required  data shall  be  prepared in strict
                  conformity  with  appropriate  authoritative  sources   and/or
                  AHCCCS defined standards.
c.  COMPLETENESS: All  required   information  shall  be fully  disclosed  in  a
                  manner that is both responsive and pertinent to report  intent
                  with no material omissions.

AHCCCS  requirements   regarding  reports,   report  content  and  frequency  of
submission  of reports  are subject to change at any time during the term of the
contract. The Contractor shall comply with all changes specified by AHCCCSA.

The Contractor  shall be responsible for continued  reporting beyond the term of
the contract.  For example,  processing claims and reporting encounter data will
likely  continue  beyond the term of the contract  because of lag time in filing
source  documents  by  subcontractors.  The  Contractor  shall  comply  with all
financial  reporting  requirements  contained in the  REPORTING  GUIDE FOR ACUTE
HEALTH CARE CONTRACTORS WITH THE ARIZONA HEALTH CARE COST CONTAINMENT  SYSTEM, a
copy of which may be found in the Bidder's Library. The required reports,  which
are subject to change during the contract  term, are summarized in Attachment F,
Periodic Report Requirements.

<PAGE>

30.   DISSEMINATION OF INFORMATION

Upon  request,  the  Contractor  shall assist  AHCCCSA in the  dissemination  of
information prepared by AHCCCSA, or the federal government,  to its members. The
cost of such dissemination shall be borne by the Contractor. All advertisements,
publications  and printed  materials  which are produced by the  Contractor  and
refer to covered  services  shall  state  that such  services  are funded  under
contract with AHCCCSA .

31.   REQUESTS FOR INFORMATION

AHCCCSA may, at any time during the term of this contract,  request financial or
other  information  from the  Contractor.  Upon  receipt  of such  requests  for
information,  the Contractor shall provide complete  information as requested no
later than 30 days after the receipt of the request unless  otherwise  specified
in the request itself.

32.   OPERATIONAL AND FINANCIAL READINESS REVIEWS

AHCCCSA  may  conduct   Operational  and  Financial  Readiness  Reviews  on  all
successful offerors and will, subject to the availability of resources,  provide
technical  assistance as  appropriate.  The Readiness  Reviews will be conducted
prior to the start of business  for the contract  year  beginning  10/1/97.  The
purpose of Readiness Reviews is to assess new contractors' readiness and ability
to provide contract services to members at the start of the contract year. A new
contractor will be permitted to commence operations only if the Readiness Review
factors are met to AHCCCSA's satisfaction.

33.   OPERATIONAL AND FINANCIAL REVIEWS

In accordance with HCFA requirements,  AHCCCSA will conduct regular  Operational
and  Financial  Reviews  for  the  purpose  of (but  not  limited  to)  ensuring
operational and financial  program  compliance.  The Reviews will identify areas
where improvements can be made and make recommendations accordingly, monitor the
Contractor's  progress towards  implementing  mandated  programs and provide the
Contractor with technical  assistance if necessary.  The Contractor shall comply
with all other medical audit provisions as required by AHCCCS Rule R9-22-521.

The type and duration of the Operational and Financial  Review will be solely at
the discretion of AHCCCSA.  Except in cases where advance notice is not possible
or advance  notice may render the  review  less  useful,  AHCCCSA  will give the
Contractor  at least  three  weeks  advance  notice  of the date of the  on-site
review. In preparation for the on-site  Operational and Financial  Reviews,  the
Contractor  shall  cooperate  fully with AHCCCSA and the AHCCCSA  Review Team by
forwarding in advance such policies,  procedures,  job descriptions,  contracts,
logs and other  information that AHCCCSA may request.  The Contractor shall have
all requested medical records on-site. Any documents not requested in advance by
AHCCCSA  shall be made  available  upon  request of the Review  Team  during the
course of the review. The Contractor personnel as identified in advance shall be
available  to the  Review  Team  at all  times  during  AHCCCSA  on-site  review
activities.  While on-site,  the  Contractor  shall provide the Review Team with
work  space,  access  to  a  telephone,   electrical  outlets  and  privacy  for
conferences.  Certain documentation submission requirements may be waived at the
discretion of AHCCCSA if the Contractor has obtained  accreditation from NCQA or
any other nationally recognized accrediting body. The Contractor must submit the
entire NCQA report to AHCCCSA for such waiver consideration.

The Contractor will be furnished a copy of the Operational and Financial  Review
Report and given an  opportunity  to comment  on any  review  findings  prior to
AHCCCSA  publishing the final report.  Operational and Financial Review findings
may be used in the  scoring of  subsequent  bid  proposals  by that  Contractor.
Recommendations  made by the Review Team to bring the Contractor into compliance
with federal,  State, AHCCCS, and/or RFP requirements must be implemented by the
Contractor.  AHCCCSA may conduct a follow-up Operational and Financial Review to
determine  the  Contractor's   progress  in  implementing   recommendations  and
achieving  program  compliance.  Follow-up  reviews may be conducted at any time
after the initial Operational and Financial Review.

<PAGE>

AHCCCSA  may  conduct  an  Operational  and  Financial  Review  in the event the
Contractor  undergoes a merger,  reorganization,  change in  ownership  or makes
changes in three or more key staff positions within a 12-month period.

34.   CLAIMS PAYMENT SYSTEM

The  Contractor  shall develop and maintain a claims  payment  system capable of
processing,  cost-avoiding  and paying  claims in  accordance  with  AHCCCS Rule
R9-22-705,  a copy of which may be found in the Bidder's Library. In the absence
of a subcontract provision to the contrary, claims submission deadlines shall be
calculated  from  the  date of  service  or the  effective  date of  enrollment,
whichever is later. Remittance advices accompanying the Contractor's payments to
providers must contain, at a minimum,  adequate  descriptions of all denials and
adjustments,  the reasons for such denials and  adjustments,  the amount billed,
the amount paid, and grievance rights.  The Contractor's  claims payment system,
as well as its prior authorization and concurrent review process,  must minimize
the likelihood of having to recoup already-paid claims. Any recoupment in excess
of $50,000 per  provider  within a contract  year must be approved in advance by
AHCCCSA, Office of Managed Care.

During the term of this contract, AHCCCSA anticipates requiring all health plans
to use a standardized electronic format for electronic claims processing between
the plan and its providers. AHCCCSA plans to require the formats outlined in the
Technical  Interface  Guidelines  under CLAIMS  Processing,  which is the format
adopted  by  FFS  providers   and  their   billing   agents  who  submit  claims
electronically  to AHCCCS.  The form UB-92 and 1500 layouts will be supplemented
by a Form C  layout.  All  formats  are  subject  to  changes  initiated  by the
Kennedy-Kassebaum  legislation.  Reasonable  implementation  timeframes  will be
negotiated with each plan.

35.   HOSPITAL REIMBURSEMENT

MARICOPA AND PIMA COUNTIES ONLY: The Arizona Laws of 1996 Chapter 288 Section 20
sets forth the Hospital  Reimbursement Pilot Program (Pilot), which is effective
from October 1, 1997, through September 30, 2000. The Pilot as defined by AHCCCS
Rule R9-22-718  requires hospital  subcontracts to be negotiated  between health
plans in Maricopa  and Pima  counties and  hospitals to establish  reimbursement
levels, terms and conditions. Subcontracts shall be negotiated by the Contractor
and  hospitals  to cover  operational  concerns,  such as  timeliness  of claims
submission  and payment,  payment of discounts or penalties,  legal  resolution,
which may, as an option,  include  establishing  arbitration  procedures.  These
negotiated  subcontracts  shall remain under close scrutiny by AHCCCSA to insure
availability of quality  services within specific service  districts,  equity of
related  party  interests,  reasonableness  of  rates,  and  only  marketing  of
contracted organizations. The general provisions of this program encompass acute
care  hospital  services  and  outpatient  hospital  services  that result in an
admission.  The  Contractor  shall  submit  all  hospital  subcontracts  and any
amendments  to  AHCCCSA,  Office  of  Managed  Care,  for  prior  approval.  For
non-emergency patient-days, the Contractor shall ensure that at least 85% of its
members use contracted  hospitals.  AHCCCSA  reserves the right to  subsequently
adjust  the 85%  standard.  Further,  if in  AHCCCSA's  judgment  the  number of
emergency  days at a particular  non-contracted  hospital  becomes  significant,
AHCCCSA  may  require a  subcontract  at that  hospital.  Hospitals  and  health
plans/program contractors outside of Maricopa and Pima counties are not included
in this  Pilot.  Offerors  should  refer to the  "Hospital  Reimbursement  Pilot
Program Packet" for additional information and requirements.

<PAGE>

ALL GSA'S EXCEPT MARICOPA AND PIMA: The Contractor shall reimburse hospitals for
member  care in  accordance  with  AHCCCS  Rule  R9-22-705.  The  Contractor  is
encouraged to obtain contracts with hospitals in all other GSA's and must submit
copies of these  contracts to AHCCCSA,  Office of Managed  Care,  at least seven
days prior to the effective dates thereof.

FOR  OUT-OF-STATE  HOSPITALS:   The  Contractor   shall  reimburse  out-of-state
hospitals in accordance with AHCCCS Rule R9-22-705.

The Contractor may conduct  prepayment and  postpayment  medical  reviews of all
hospital claims including outlier claims. Erroneously paid claims are subject to
recoupment.  If the  Contractor  fails to  identify  LACK OF  MEDICAL  NECESSITY
through  concurrent  review and/or  prepayment  medical review,  lack of medical
necessity  identified during  postpayment  medical review shall not constitute a
basis for recoupment by the Contractor. See also Section D, Paragraph 34, Claims
Payment System.  For a more complete  description of the guidelines for hospital
reimbursement,  please consult the Bidder's Library for applicable  statutes and
rules.

36.   NURSING FACILITY REIMBURSEMENT

The Contractor shall not deny nursing facility  services if the nursing facility
is  unable  to  obtain  prior  authorization  in  situations  where  acute  care
eligibility  and ALTCS  eligibility  overlap and the member is enrolled  with an
AHCCCS acute care contractor.  In such  situations,  the Contractor shall impose
reasonable authorization  requirements.  The Contractor's payment responsibility
described  above applies only in situations  where the nursing  facility has not
been  notified in advance of the member's  enrollment  with an AHCCCS acute care
contractor. To further illustrate,  when ALTCS eligibility overlaps AHCCCS acute
care enrollment, the acute care enrollment takes precedence. Although the member
could be ALTCS eligible for this time period,  there is no ALTCS enrollment that
occurs  on  the  same  days  as  AHCCCS  acute  enrollment.  The  Contractor  is
responsible  for  payment  of  services  while the member is  enrolled  with the
Contractor.  The Contractor is not  responsible  for the full 90 days of nursing
facility coverage if ALTCS enrollment occurs before the 90 days has ended.

37.    COMPENSATION

The  method of  compensation  under  this  contract  will be  capitation,  SOBRA
supplement,  HIV-AIDS  supplement,  reinsurance,  and third party liability,  as
described and defined within this contract and appropriate laws,  regulations or
policies.

Subject  to the  availability  of funds,  AHCCCSA  shall  make  payments  to the
Contractor  in  accordance  with the terms of this  contract  provided  that the
Contractor's  performance is in compliance with the terms and conditions of this
contract.  Payment  must  comply  with  requirements  of ARS Title  36.  AHCCCSA
reserves the option to make payments to the Contractor by wire or NACHA transfer
and will provide the  Contractor  at least 30 days notice prior to the effective
date of any such change.

Where  payments are made by  electronic  funds  transfer,  AHCCCSA  shall not be
liable for any error or delay in transfer nor indirect or consequential  damages
arising from the use of the electronic  funds transfer  process.  Any charges or
expenses  imposed by the bank for transfers or related actions shall be borne by
the Contractor.  Except for adjustments  made to correct errors in payment,  any
savings  remaining to the Contractor as a result of favorable claims  experience
and efficiencies in service delivery at the end of the contract term may be kept
by the Contractor.

<PAGE>

All funds  received by Contractor  pursuant to this contract shall be separately
accounted for in accordance with generally accepted accounting principles.

Except for funds  received  from the  collection  of  permitted  copayments  and
third-party  liabilities,  the only  source of  payment  to  Contractor  for the
services provided  hereunder is the Arizona Health Care Cost Containment  System
Fund, as described in ARS ss.36-2913.  An error  discovered by the State with or
without  an audit in the  amount of fees paid to  Contractor  will be subject to
adjustment  or  repayment by  Contractor  making a  corresponding  decrease in a
current  Contractor's  payment or by making an additional  payment by AHCCCSA to
the Contractor.

No payment due the Contractor by AHCCCSA may be assigned by the Contractor. This
section shall not prohibit  AHCCCSA at its sole option from making  payment to a
fiscal agent hired by Contractor.

The Contractor or its  subcontractors  shall collect any required copayment from
members  but  service  will not be denied for  inability  to pay the  copayment.
Except for permitted copayments,  the Contractor or its subcontractors shall not
bill or attempt to collect any fee from,  or for, a member for the  provision of
covered  services.  Any  required  copayments  collected  shall  belong  to  the
Contractor or its subcontractors.

CAPITATION:  The Contractor will be paid  capitation for all prospective  member
months,  including partial member months.  This capitation  includes the cost of
providing  medically  necessary  covered services to members during prior period
coverage.  AHCCCSA will make monthly  capitation  payments to the Contractor for
each member enrolled with the Contractor on the first of the month as payment in
full for any and all covered services  provided to the member including  covered
services  provided  during prior period  coverage.  (See Section D, Paragraph 6,
Enrollment  and  Disenrollment,  for  clarification  of prior period  coverage.)
Payment shall be made no later than the fifth working day of the month for which
payment is due.  For  members  enrolled at any time after the  beginning  of the
month's  payment cycle,  capitation  will be prorated from the effective date of
enrollment through the remainder of the month of enrollment. These payments will
be made by AHCCCS to Contractor on a weekly basis.

SOBRA  SUPPLEMENT:  When the Contractor has an enrolled SOBRA woman who delivers
during an enrollment period, the Contractor will be entitled to a SOBRA payment.
AHCCCSA  reserves  the right at any time  during  the term of this  contract  to
adjust the  amount of this  SOBRA  payment  for women who  deliver at home.  The
Contractor  is  responsible  for meeting the newborn  notification  requirements
defined  in  AHCCCS  Rule  R9-22-342  before  this  payment  will be made to the
Contractor.

HIV-AIDS  SUPPLEMENT:  In addition to the capitation  payment described above, a
separate and  additional  payment will be made to the  Contractor to help defray
costs for members receiving approved protease inhibitors and associated lab work
related to their treatment for HIV/AIDS.  The list of AHCCCSA-approved  protease
inhibitors is available in the Bidder's Library.

On a quarterly basis, the Contractor shall submit to AHCCCSA,  Office of Managed
Care,  an  unduplicated  monthly count of members,  by rate code,  who are using
approved  protease  inhibitors.  The report shall be  submitted,  along with the
quarterly  financial  reporting  package,  within 60 days  after the end of each
quarter. (A sample of this reporting form may be found in the Bidder's Library.)

The rate of  reimbursement  for this separate  payment will be $634.50 per month
and is subject to review during the term of the  contract.  Payment will be made
quarterly  to the  Contractor  based on the  reported  eligible  members for the
preceding  quarter.  AHCCCSA  will  review this  HIV/AIDS-related  data at least
annually as part of its Operational and Financial  Review and reserves the right
to recoup any amounts paid for  ineligible  members as  determined  through this
review as well as an associated penalty for incorrect reporting.

<PAGE>

38.        CAPITATION ADJUSTMENTS

Except for changes made specifically in accordance with this contract, the rates
set forth in Section B shall not be subject to  re-negotiation  or  modification
during the contract period.  AHCCCSA may, at its option,  review the effect of a
program  change and  determine if a capitation  adjustment  is needed.  In these
instances the adjustment will be prospective with assumptions discussed with the
Contractor  prior to modifying  capitation  rates.  The Contractor may request a
review of a program  change if it believes the program change was not equitable;
AHCCCSA will not unreasonably withhold such a review.

If the  Contractor  is in any  manner  in  default  in  the  performance  of any
obligation  under this  contract,  AHCCCSA may, at its option and in addition to
other  available  remedies,   adjust  the  amount  of  payment  until  there  is
satisfactory  resolution of the default.  The Contractor shall reimburse AHCCCSA
and/or  AHCCCSA may deduct from future  monthly  capitation for any portion of a
month during which the Contractor was not at risk due to, for example:

   a.  death of a member
   b.  member's  incarceration  (not eligible for AHCCCS  benefits) 
   c.  duplicate capitation to the same contractor

If a member is enrolled twice with the same contractor,  recoupment will be made
as soon as the double  capitation is identified.  AHCCCSA  reserves the right to
modify its policy on capitation  recoupments at any time during the term of this
contract.

39.    REINSURANCE

REGULAR  ACUTE  REINSURANCE:  Reinsurance  is a  stop-loss  program  provided by
AHCCCSA to the Contractor  for the partial  reimbursement  of covered  inpatient
facility medical services  incurred for a member with an acute medical condition
beyond an annual  deductible  (AHCCCS Rule  R9-22-503).  Per diem rates paid for
nursing  facility  services,  including  room  and  board,  provided  in lieu of
hospitalization  for up to 90 days in any  contract  year shall be eligible  for
reinsurance  coverage  (see  AHCCCS Rule  R9-22-203  subsection  B for  excluded
services). Reinsurance for the Hospital Reimbursement Pilot Program (See Section
D, Paragraph 35, Hospital Reimbursement), will be paid in accordance with AHCCCS
Rule R9-22-503.

AHCCCSA  is   self-insured   for  the  reinsurance   program.   The  program  is
characterized  by an  initial  deductible  level  and a  subsequent  coinsurance
percentage.  The coinsurance percent is the rate at which AHCCCSA will reimburse
the Contractor for inpatient  covered  services  incurred above the  deductible.
Reinsurance  coverage  applies to both  prospective  and prior  period  coverage
periods.  The  deductible  level the  Contractor is eligible for is based on the
Contractor's  statewide  AHCCCS  acute care  enrollment  as of October  1st each
contract year for all rate codes and counties,  as shown in the following table.
These deductible levels are subject to change by AHCCCSA during the term of this
contract.

REGULAR REINSURANCE:
      ------------------------------------------------------------------------
      STATEWIDE PLAN         DEDUCTIBLE -      DEDUCTIBLE -   COINSURANCE %
      ENROLLMENT                 MN/MI            OTHERS

                0 - 19,999      $15,000          $20,000            75%
           20,000 - 49,999      $15,000          $35,000            75%
           50,000 and over      $15,000          $50,000            75%
      ------------------------------------------------------------------------

If a Contractor's  actual  non-MN/MI  deductible is $35,000 or $50,000,  AHCCCSA
will increase the  Contractor's  capitation  rate awarded by defined amounts for
each capitation risk group. These specific capitation  adjustments are available
in the Bidder's  Library.  A Contractor  whose  enrollment  qualifies it for the
$35,000 or $50,000  non-NM/MI  deductible  level may,  prior to the start of the
contract period, elect one of the lower deductible levels indicated in the above
table.

AHCCCSA  will use  inpatient  encounter  data to determine  regular  reinsurance
benefits.  Reimbursement  for regular  reinsurance  benefits will be made to the
Contractor  each  month.  AHCCCSA  will also  provide  for a  reconciliation  of
reinsurance  payments in the case where  encounters  used in the  calculation of
reinsurance benefits are subsequently adjusted or voided.

<PAGE>

The Contractor  shall be subject to utilization  and other reviews by AHCCCSA of
care provided to a member which results in a reinsurance  claim as referenced in
R9-22-503 (G.3).

Medical  review  on  regular  reinsurance  cases  will be  determined  based  on
statistically  valid random sampling.  AHCCCSA,  Office of the Medical Director,
will  generate  the  sampling and will notify the  Contractor  of  documentation
needed for the retrospective medical review process to occur at the Contractor's
offices.  The results of the medical review sampling will be extrapolated to the
entire  regular  reinsurance  reimbursement  population  of  the  Contractor.  A
recoupment of reinsurance  reimbursements made to the Contractor may occur based
on the results of the medical review sampling.  AHCCCSA will give the Contractor
at least 45 days advance notice of any on-site review. The Contractor shall have
all requested medical records on-site. Any documents not requested in advance by
AHCCCSA  shall be made  available  upon  request of the Review  Team  during the
course of the review.  The Contractor  representative  shall be available to the
Review  Team at all  times  during  AHCCCSA  on-site  review  activities.  While
on-site, the Contractor shall provide the Review Team with work space, access to
a telephone, electrical outlets and privacy for conferences. The Contractor will
be furnished a copy of the Regular  Acute  Reinsurance  Review  Report within 60
days of the  onsite  review  and given an  opportunity  to comment on any review
findings.

CATASTROPHIC  REINSURANCE:  The  reinsurance  program  also  includes  a special
Catastrophic  Reinsurance  program.  This program  encompasses members diagnosed
with hemophilia and members who receive covered organ and tissue transplantation
including  bone marrow,  heart and other organ  transplantation.  For additional
detail and restrictions  see AHCCCS Rule R9-222-202.  There is no deductible for
catastrophic  reinsurance  cases and AHCCCS will reimburse the Contractor at 85%
of the Contractor's  covered costs.  All catastrophic  claims will be subject to
medical review by AHCCCSA.

HEMOPHILIA:  When an eligible  member is  identified  as being  catastrophically
eligible by AHCCCSA  due to a specific  diagnosis  of  hemophilia  (ICD9  286.0,
286.1,  286.2 and 286.4),  all medically  necessary  covered  services  provided
during the  contract  year shall be  eligible  for  reimbursement  at 85% of the
Contract's paid amount.  Catastrophic  reinsurance coverage is available for all
members  diagnosed with von  Willebrand's  Disease who are non-DDA VP responders
that are dependent on Plasma Factor VIII.  The Contractor  must promptly  notify
AHCCCS  Office  of  the  Medical  Director  Reinsurance  Unit  after  diagnosis.
Catastrophic  reinsurance will be paid for a maximum 30-day  retroactive  period
from the date of notification to AHCCCSA.

TRANSPLANTS:  Bone grafts,  kidney and cornea  transplantation  services are not
eligible  for  catastrophic  reinsurance  coverage  but are  eligible  under the
regular   (non-catastrophic)   reinsurance  program.   Catastrophic  reinsurance
coverage for transplants is limited to 85% of the AHCCCS contract amount for the
transplantation   services  rendered,  or  85%  of  the  Contractor-paid  amount
whichever is lower. The AHCCCS contracted  transplantation rates may be found in
the Bidder's Library.

<PAGE>

Encounter data will not be used to determine catastrophic  reinsurance benefits.
However,  this  does  not  relieve  the  Contractor  of the  responsibility  for
submitting encounters for catastrophic  reinsurance services. The initial claims
for reimbursement  under the catastrophic  reinsurance  program must be filed no
later  than June 30th of the year  following  the  contract  year.  Catastrophic
reinsurance  claims that are submitted  within this time limit and are denied or
adjusted,  may be  corrected  until  September  30th of the year  following  the
contract  year.  All  catastrophic  reinsurance  claims  must  be  submitted  in
accordance with the AHCCCS REINSURANCE POLICY/PROCEDURE MANUAL.

40.   COORDINATION OF BENEFITS/ THIRD PARTY LIABILITY

By law, AHCCCSA is the payer of last resort. This means AHCCCSA shall be used as
a source of payment for covered services only after all other sources of payment
have been  exhausted.  The two methods used in the  coordination of benefits are
cost avoidance and postpayment  recovery.  See Section D, Paragraph 41, Medicare
Services and Cost Sharing.

COST AVOIDANCE:  The Contractor shall cost-avoid all claims or services that are
subject to  third-party  payment  and may deny a service to a member if it knows
that a third party (i.e. other insurer) will provide the service.  However, if a
third-party  insurer  (other  than  Medicare)  requires  the  member  to pay any
copayment,  coinsurance or deductible,  the Contractor is responsible for making
these payments,  even if the services are provided  outside of the  Contractor's
network.  The Contractor's  liability for coinsurance and deductibles is limited
to what the  Contractor  would have paid for the entire  service  pursuant  to a
written contract with the provider or the AHCCCS  fee-for-service rate, less any
amount paid by the third party.  (The  Contractor must decide whether it is more
cost-effective  to provide the service within its network or pay coinsurance and
deductibles  for a service  outside its network.  For  continuity  of care,  the
Contractor  may also choose to provide the service  within its  network.) If the
Contractor  refers the member for services to a third-party  insurer (other than
Medicare),  and the  insurer  requires  payment in  advance  of all  copayments,
coinsurance and deductibles, the Contractor must make such payments in advance.

If the  Contractor  knows that the third party  insurer will neither pay for nor
provide  the  covered  service,  and the  service is  medically  necessary,  the
Contractor  shall not deny the service nor require a written denial  letter.  If
the  Contractor  does not know  whether a  particular  service is covered by the
third  party,  and the service is  medically  necessary,  the  Contractor  shall
contact the third  party and  determine  whether or not such  service is covered
rather than  requiring  the member to do so. (See also Section D,  Paragraph 41,
Medicare Services and Cost Sharing.)

The  requirement  to  cost-avoid  applies to all AHCCCS  covered  services.  For
pre-natal  care and  preventive  pediatric  services,  AHCCCS  may  require  the
Contractor  to  provide  such  service  and  then  coordinate  payment  with the
potentially liable third party ("pay and chase"). In emergencies, the Contractor
shall  provide the  necessary  services  and then  coordinate  payment  with the
third-party  payer.  The  Contractor  shall  also  provide  medically  necessary
transportation so the member can receive  third-party  benefits.  Further,  if a
service is  medically  necessary,  the  Contractor  shall  ensure  that its cost
avoidance  efforts do not prevent a member from  receiving such service and that
the member shall not be required to pay any  coinsurance or deductibles  for use
of the other insurer's providers.

POSTPAYMENT  RECOVERIES:  Postpayment  recovery is  necessary in cases where the
Contractor  was not aware of  third-party  coverage  at the time  services  were
rendered or paid for, or was unable to cost avoid. The Contractor shall identify
all potentially  liable third parties and pursue  reimbursement from them except
in the circumstances below. The Contractor shall not pursue reimbursement in the
following  circumstances  unless the case has been referred to the Contractor by
AHCCCSA or AHCCCSA's authorized representative:

Uninsured/ underinsured motorist insurance          Adoption recovery
First and third-party liability insurance           Worker's Compensation
Tortfeasors                                         Estate recovery

<PAGE>

The  Contractor  shall report any cases  involving  the above  circumstances  to
AHCCCSA's  authorized  representative  should  the  Contractor  identify  such a
situation.  See AHCCCS Rule  R9-22-1002.  The  Contractor  shall  cooperate with
AHCCCSA's  authorized  representative in all collection  efforts. In joint cases
involving  both  AHCCCS  fee-for-service  or  reinsurance  and  the  Contractor,
AHCCCSA's authorized  representative is responsible for performing all research,
investigation   and  payment  of  lien-related   costs.   AHCCCSA's   authorized
representative  is also  responsible  for  negotiating  and  acting  in the best
interest of all parties to obtain a reasonable settlement in joint cases and may
compromise a settlement in order to maximize overall reimbursement, net of legal
and  other  costs.  For  total  plan  cases  involving  only  payments  from the
Contractor,   the  Contractor  is  responsible   for  performing  all  research,
investigation and payment of lien-related costs.

The  Contractor may retain up to 100% of its  third-party  collections if all of
the following conditions exist:

a.  Total  collections  received  do  not  exceed   the   total  amount  of  the
    Contractor's financial liability for the member
b.  There  are  no  payments  made   by   AHCCCS  related  to   fee-for-service,
    reinsurance or administrative costs (i.e. lien filing, etc.)
c.  Such recovery is not prohibited by state or federal law

REPORTING:  The  Contractor  may be  required  to report  case  level  detail of
third-party  collections  and  cost  avoidance.   The  Contractor  shall  notify
AHCCCSA's   authorized   representative   within  five   working   days  of  the
identification  of a third-party  liability case with known  reinsurance  (often
referred to as joint  liability  cases).  The Contractor  shall  communicate any
known change in health  insurance  information,  including  Medicare,  to AHCCCS
Administration,  Division  of Member  Services,  not later than 10 days from the
date of  discovery  using the  AHCCCS  Third-Party  Coverage  Form  found in the
Bidder's Library.

Approximately  every four months,  AHCCCSA will  provide the  Contractor  with a
complete file of all third-party  coverage information (other than Medicare) for
the purpose of updating the  Contractor's  files.  The  Contractor  shall notify
AHCCCSA  of any known  changes  in  coverage  within  deadlines  and in a format
prescribed by AHCCCSA.

41.   MEDICARE SERVICES AND COST SHARING

AHCCCS has  members  enrolled  who are  eligible  for both  Medicare  and AHCCCS
services.  These members are referred to as "dual eligibles" and include persons
who are Qualified Medicare Beneficiaries (QMB) and non-QMB eligible persons. QMB
eligible persons are entitled to all covered Medicaid services and, in addition,
may receive the following  Medicare  services which are not covered by AHCCCS or
differ in scope or limitation:
      Chiropractic services
      Inpatient and outpatient occupational therapy coverage   
      Inpatient psychiatric services  
      Psychological services 
      Respite services 
      Any services covered by or added to the Medicare program which are not
        covered by AHCCCS
For all dual eligible persons, the Contractor shall be responsible for providing
all AHCCCS covered services and pay all Medicare coinsurance and deductibles for
Medicare  services which are covered by AHCCCS and provided on a fee-for-service
basis within the Contractor's  network.  The Contractor's  network is defined as
any contracted  provider,  or provider used more than 12 times during the course
of the  contract  year , even if no written  contract  exists.  For QMB eligible
persons, the Contractor shall be responsible for paying the Medicare coinsurance
and deductibles for Medicare  services not covered by AHCCCS  (described  above)
which are provided by a Medicare provider on a fee-for-service basis, regardless
of  whether  the  service is  provided  in or out of the  Contractor's  network.
Members shall not be required to pay any coinsurance or deductibles for Medicare
services.

<PAGE>

Based  on  an  agreement   between  AHCCCS  and  HCFA,   Medicare  cost  sharing
requirements for Medicare services provided on a fee-for-service basis (FFS) and
those  services  provided by a Medicare HMO are  different.  Please refer to the
table below:


               CONTRACTOR LIABILITY FOR MEDICARE BENEFICIARIES

                   ----------------------------------------------------------
                      COST SHARING FOR MEMBERS WITH      COST SHARING FOR
                        FEE-FOR-SERVICE MEDICARE           MEMBERS WITH
                                                           MEDICARE HMO
                   ----------------------------------------------------------
                   Full amount  of     Full amount of      Medicare co-
                   the co-insurance    the  co-insurance   payments, deductibles
    CONTRACTOR     and deductibles     and deductibles     or premiums assessed
 RESPONSIBILITY:   for Medicare        for Medicare        by Medicare HMO for
                   services provided   services not        dual eligbles.
                   by a Medicare       covered by AHCCCS   
                   provider on a FFS   and provided by a
                   basis in the        Medicare provider
                   Contractor's net-   on a FFS basis (in
                   work.               or out-of-network)
                                 
-----------------------------------------------------------------------------
QMB - DUALS
Persons   who  are
eligible       for        YES               YES                 NO
Medicaid,      who
meet  QMB   income
and       resource
requirements   and
who have  Medicare
Part  A  and  Part
B.   AHCCCS   pays
the     Part     B
premium.
-----------------------------------------------------------------------------
NON-QMBS
Persons   who  are
eligible       for        YES               NO                  NO
Medicaid,  who  do
not  meet  the QMB
income         and
resource
requirements   and
who have  Medicare
Part   A.   AHCCCS
pays  the  Part  B
premium         in
certain instances.
-----------------------------------------------------------------------------
MN/MI WITH
MEDICARE                  YES               NO                  NO
-----------------------------------------------------------------------------


The  Contractor  shall not deny  payment  of  coinsurance  and  deductibles  for
Medicare  services  provided  in  network  or  Medicare-only  services  provided
out-of-network  if the reason for such denial is the failure of the  provider to
obtain prior authorization for payment of coinsurance and deductibles.

Since AHCCCSA is the payer of last resort,  all Medicare  covered services which
are provided to dual eligibles who are not enrolled in a Medicare TEFRA Risk HMO
shall be billed to Medicare or any other third party liability source.

<PAGE>

If a dual eligible is enrolled with a Medicare TEFRA Risk HMO, Medicare will not
reimburse  the  Contractor  for  Medicare  covered  services   provided  by  the
Contractor.  Therefore,  the  Contractor  shall refer the member to the Medicare
TEFRA Risk HMO for all Medicare  covered  services and shall not be  responsible
for the payment of any Medicare copayments,  deductibles or premiums assessed by
the Medicare TEFRA Risk HMO. The Contractor  shall be responsible for any AHCCCS
covered  services  not  provided by the  Medicare  TEFRA Risk HMO. As of July 1,
1996, persons who are eligible for Medicare and who can receive Medicare covered
services  through a Medicare HMO will  generally not be approved or  re-approved
for the MN/MI program. The following individuals are not eligible to enroll in a
Medicare  HMO:  (1) those who are taking  immunosuppressant  drugs  following  a
transplant, (2) those who have end-stage renal disease, or (3) those who receive
Medicare hospice services.  Persons who are not enrolled with Medicare Part B or
a Medicare HMO at the time of application  or  re-determination  for MN/MI,  may
receive  MN/MI  benefits  until  they can  enroll  in  Medicare  Part B and/or a
Medicare HMO.

42.   COPAYMENTS

The Contractor is responsible  for the collection of copayments  from members in
accordance with AHCCCS Rule R9-22-711.

43.   RECORDS RETENTION

The Contractor shall maintain books and records relating to covered services and
expenditures  including  reports  to  AHCCCSA  and  working  papers  used in the
preparation  of  reports  to  AHCCCSA.  The  Contractor  shall  comply  with all
specifications for record keeping established by AHCCCSA.  All books and records
shall be maintained to the extent and in such detail as required by AHCCCS Rules
and policies.  Records shall include but not be limited to financial statements,
records relating to the quality of care, medical records, prescription files and
other records specified by AHCCCSA.

The Contractor  agrees to make  available at its office at all reasonable  times
during the term of this  contract and the period set forth in  paragraphs a. and
b.  below  any of its  records  for  inspection,  audit or  reproduction  by any
authorized representative of AHCCCSA, State or federal government.

The  Contractor  shall preserve and make available all  records  for a period of
five  years  from the date of  final  payment  under  this  contract  except  as
provided in paragraphs a. and b. below:

a.  If this contract is completely or partially terminated, the records relating
    to the work terminated shall be preserved and made available for a period of
    five years from the date of any such termination.
b.  Records which relate to grievances,  disputes,  litigation or the settlement
    of claims  arising out of the  performance  of this  contract,  or costs and
    expenses  of this  contract  to which  exception  has been taken by AHCCCSA,
    shall be  retained  by the  Contractor  for a period of five years after the
    date of final disposition or resolution thereof.

44.   MEDICAL RECORDS

The member's  medical  record is the property of the provider who  generates the
record. Each member is entitled to one copy of his or her medical record free of
charge.  The Contractor  shall have written  policies and procedures to maintain
the confidentiality of all medical records.  AHCCCSA shall be afforded access to
all members' medical records whether  electronic or paper within 20 working days
of receipt of request. The Contractor is responsible for ensuring that a medical
record is established  when  information is received about a member.  If the PCP
has not yet seen the member,  such  information  may be kept  temporarily  in an
appropriately  labeled file, in lieu of actually  establishing a medical record,
but  must be  associated  with the  member's  medical  record  as soon as one is
established.

The Contractor shall have written policies and procedures for the maintenance of
medical records so that those records are documented  accurately and in a timely
manner, are readily  accessible,  and permit prompt and systematic  retrieval of
information.

<PAGE>

The Contractor  shall have written  standards for  documentation  on the medical
record for  legibility,  accuracy  and plan of care which comply with the AHCCCS
MEDICAL POLICY MANUAL, a copy of which may be found in the Bidder's Library.

The  Contractor  shall have written plans for providing  training and evaluating
providers'  compliance with the Contractor's medical records standards.  Medical
records  shall be  maintained  in a  detailed  and  comprehensive  manner  which
conforms to good professional medical practice,  permits effective  professional
medical review and medical audit  processes,  and which  facilitates an adequate
system for  follow-up  treatment.  Medical  records must be legible,  signed and
dated.

When a member  changes  PCPs,  his or her  medical  records or copies of medical
records  must be forwarded to the new PCP within 10 working days from receipt of
the request for transfer of the medical records.

AHCCCSA  is not  required  to  obtain  written  approval  from a  member  before
requesting  the member's  medical  record from the PCP or any other agency.  The
Contractor  may  obtain a copy of a member's  medical  records  without  written
approval of the member if the reason for such request is directly related to the
administration of the AHCCCS program.

Information  related to fraud  and  abuse may be released  so long as  protected
HIV-related information is not disclosed. (ARS ss.36-664I)

45.   ADVANCES, DISTRIBUTIONS, LOANS AND INVESTMENTS

The  Contractor  shall not,  without the prior  approval  of  AHCCCSA,  make any
advances to a related party or subcontractor.  The Contractor shall not, without
similar prior  approval,  make any  distribution,  loan or loan guarantee to any
entity, including another fund or line of business within its organization.  All
investments,   other  than   investments  in  U.S.   Government   securities  or
Certificates of Deposit, also require AHCCCSA prior approval. (See the REPORTING
GUIDE FOR ACUTE CARE  CONTRACTORS  for  alternatives  to the prior  approval  of
individual  investments.) All requests for prior approval are to be submitted to
the Office of Managed Care.

46.   ACCUMULATED FUND DEFICIT

The Contractor and its owners shall fund any  accumulated  fund deficit  through
capital  contributions  in a form  acceptable  to  AHCCCSA  within 30 days after
receipt by AHCCCSA of the final audited  financial  statements,  or as otherwise
requested by AHCCCSA.  AHCCCSA may, at its option, impose enrollment caps in any
or all GSA's as a result of an accumulated deficit, even if unaudited.

47.   DATA EXCHANGE REQUIREMENT

The  Contractor  is  authorized  to exchange  data with AHCCCSA  relating to the
information  requirements  of this  contract and as required to support the data
elements to be provided  AHCCCSA in the format specified in the AHCCCS TECHNICAL
INTERFACE GUIDELINES which is available in the Bidder's Library. The information
so recorded and submitted to AHCCCSA shall be in accordance with all procedures,
policies,  rules, or statutes in effect during the term of this contract. If any
of these procedures,  policies,  rules,  regulations or statutes are hereinafter
changed both parties  agree to conform to these  changes  following  appropriate
notification  to both parties by AHCCCSA.  The Contractor is responsible for any
incorrect  data,  delayed  submission  or  payment  (to  the  Contractor  or its
subcontractors), and/or penalty applied due to any error, omission, deletion, or
erroneous  insert caused by  Contractor-submitted  data.  Any data that does not
meet the standards required by AHCCCSA shall not be accepted by AHCCCSA.

<PAGE>

The Contractor is responsible for identifying  any  inconsistencies  immediately
upon  receipt  of data  from  AHCCCSA.  If any  unreported  inconsistencies  are
subsequently  discovered,  the Contractor shall be responsible for the necessary
adjustments to correct its records at its own expense.

The Contractor  shall accept from AHCCCSA  original  evidence of eligibility and
enrollment in a form  appropriate for electronic data exchange.  Upon request by
AHCCCSA,  the Contractor  shall provide to AHCCCSA  updated  date-sensitive  PCP
assignments in a form appropriate for electronic data exchange.

The Contractor  shall be provided with a  Contractor-specific  security code for
use in all data  transmissions  made in accordance  with contract  requirements.
Each data transmission by the Contractor shall include the Contractor's security
code. The Contractor  agrees that by use of its security code, it certifies that
any data  transmitted is accurate and truthful,  to the best of the Contractor's
knowledge.  The  Contractor  further  agrees to indemnify  and hold harmless the
State of Arizona and AHCCCSA from any and all claims or  liabilities,  including
but not limited to consequential  damages,  reimbursements or erroneous billings
and  reimbursements  of attorney fees  incurred as a  consequence  of any error,
omission, deletion or erroneous insert caused by the Contractor in the submitted
input data.  Neither the State of Arizona nor AHCCCSA shall be  responsible  for
any incorrect or delayed payment to the Contractor's  AHCCCS services  providers
(subcontractors)  resulting from such error,  omission,  deletion,  or erroneous
input data caused by the Contractor in the submission of AHCCCS claims.

The publication  AHCCCS  CONTRACTED HEALTH PLAN TECHNICAL  INTERFACE  GUIDELINES
describes the specific  technical and  procedural  requirements  for  interfaces
between  AHCCCS and the  Contractor  and its  subcontractors.  The Contractor is
responsible  for  complying  with all technical  requirements  as stated in this
manual as well as any subsequent  changes to the manual.  A copy may be found in
the Bidder's Library.

The costs of software changes are included in  administrative  costs paid to the
Contractor.  There is no separate payment for software changes.  A PMMIS systems
contact will be assigned after contract award. AHCCCSA will work with the health
plans as they evaluate Electronic Data Interchange options.

ELECTRONIC DATA INTERCHANGE  (EDI): In addition to the requirements  outlined in
Section D, Paragraph 34, Claims Payment System,  the Contractor will be required
to  comply  with all EDI  standards  which  result  from  the  Kennedy-Kassebaum
legislation.  This law requires the  Department of Health and Human  Services to
provide national  electronic  submission  standards for health care data and may
include compliance with National Provider Identifier requirements. The Secretary
has 18 months to  develop  these  standards.  As the  standards  are  finalized,
AHCCCSA  will phase in the  implementation.  Electronic  standards  which may be
implemented  include,  but  are  not  limited  to,  encounters,  enrollment  and
capitation payments.

48.   ENCOUNTER DATA REPORTING

The accurate and timely reporting of encounter data is crucial to the success of
the AHCCCS program. AHCCCSA uses encounter data to pay reinsurance benefits, set
fee-for-service and capitation rates, determine  disproportionate share payments
to  hospitals,  and to  determine  compliance  with  performance  measures.  The
Contractor  shall submit  encounter data to AHCCCSA for all covered services for
which the Contractor incurred a financial liability, including services provided
during prior period coverage.  This requirement is a condition of the HCFA grant
award.

Encounter  data must be  provided  to  AHCCCSA by  electronic  media and must be
submitted  in  the  PMMIS  AHCCCSA-supplied  formats.  Formatting  and  specific
requirements for encounter data are described in the AHCCCS ENCOUNTER  REPORTING
USER MANUAL and the AHCCCS TECHNICAL INTERFACE  GUIDELINES,  copies of which may
be found in the Bidder's  Library.  The ENCOUNTER  SUBMISSION  REQUIREMENTS  are
included herein as Attachment I.

<PAGE>

49.   MONTHLY ROSTER RECONCILIATION

AHCCCSA  produces  daily roster updates  identifying  new members and changes to
members' demographic, eligibility and enrollment data which the Contractor shall
use to update its member  records.  The daily  roster  which is run prior to the
monthly roster is referred to as the "last daily" and will contain all rate code
changes  made for the  prospective  month,  as well as any new  enrollments  and
disenrollments.

The monthly roster is generally produced two days before the end of every month.
The roster will identify the total active  population  for the  Contractor as of
the first day of the next month.  This roster contains the  information  used by
AHCCCSA to produce  the  monthly  capitation  payment  for the next  month.  The
Contractor  will reconcile  their member files with the AHCCCS  monthly  roster.
After reconciling the monthly roster information, the Contractor resumes posting
daily roster updates beginning with the last two days of the month. The last two
daily  rosters are  different  from the regular  daily  rosters in that they pay
and/or recoup capitation into the next month.

Refer to the  AHCCCS  CONTRACTED  HEALTH  PLAN  TECHNICAL  INTERFACE  GUIDELINES
available in the Bidder's Library for additional information.

50.   TERM OF CONTRACT AND OPTION TO RENEW

The term of this contract shall be 10/1/97 through 9/30/98. In addition, AHCCCSA
reserves  the sole  option to extend the term of the  contract,  not to exceed a
total  contracting  period of five years.  The terms and  conditions of any such
contract extension shall remain the same as the original  contract,  as amended.
Any contract extension, however, shall not affect the maximum contracting period
of five years. All contract extensions shall be through contract amendment.  If,
in  conjunction  with a  contract  extension,  AHCCCSA  elects to  increase  the
capitation  rate for any rate code  category,  such increase will not exceed the
inflation rate recognized by the Arizona Legislature.

If the  Contractor  has been awarded a contract in more than one GSA,  each such
contract  will  be  considered  separately  renewable.  AHCCCSA  may  renew  the
Contractor's  contract  in one GSA  but  not in  another.  In  addition,  if the
Contractor has had  significant  problems of  non-compliance  in one GSA, it may
result in the  capping  of the  Contractor's  enrollment  in  another.  Further,
AHCCCSA may require a contractor to renew all GSA's, or may terminate  remaining
GSA's if the Contractor does not agree to renew all GSA's.

When AHCCCSA issues an amendment to extend the contract,  the provisions of such
extension will be deemed to have been accepted 60 days after the date of mailing
by  AHCCCSA,  even  if the  extension  amendment  has  not  been  signed  by the
Contractor,  unless within that time the Contractor  notifies AHCCCSA in writing
that it refuses to sign the extension amendment. If the Contractor provides such
notification, AHCCCSA will initiate contract termination proceedings.

CONTRACTOR'S  NOTICE OF INTENT NOT TO RENEW - If the  Contractor  chooses not to
renew this contract,  the Contractor may be liable for certain costs  associated
with the transition of its members to a different health plan. If the Contractor
provides  AHCCCSA  written  notice of its intent not to renew this  contract  at
least 120 days before its expiration, this liability for transition costs may be
waived by AHCCCSA.

<PAGE>

51.   SUBCONTRACTS

The Contractor shall be legally responsible for contract  performance whether or
not subcontracts  are used. No subcontract  shall operate to terminate the legal
responsibility  of the Contractor to assure that all  activities  carried out by
the  subcontractor  conform to the provisions of this contract.  Subject to such
conditions,  any function required to be provided by the Contractor  pursuant to
this contract may be subcontracted  to a qualified  person or organization.  All
such  subcontracts  must be in  writing.  See  policy  on claims  processing  by
subcontracted providers in the Bidder's Library.

All subcontracts  entered into by the Contractor are subject to prior review and
approval  by  AHCCCSA,  Contracts  and  Purchasing,  and  shall  incorporate  by
reference the terms and conditions of this contract.  The following subcontracts
shall be submitted to AHCCCSA  Contracting Office for prior approval at least 30
days prior to the beginning date of the subcontract:

a.  Automated data processing
b.  Third-party administrators
c.  Management  Services  (See also  Section  D,  Paragraphs  53 & 54) 
d.  Model subcontracts 
e.  Capitated or other risk  subcontracts  requiring  claims  processing by  the
    subcontractor must be submitted to AHCCCSA, Office of Managed Care.

See also Section D, Paragraph 35,  Hospital  Reimbursement,  regarding  required
submission of hospital subcontracts.

The  Contractor  shall maintain a fully  executed  original of all  subcontracts
which  shall be  accessible  to AHCCCSA  within two  working  days of request by
AHCCCSA.  A  subcontract  is voidable and subject to immediate  cancellation  by
AHCCCSA  in the event any  subcontract  pertinent  to "a"  through  "e" above is
implemented  without the prior  written  approval of AHCCCSA.  All  subcontracts
shall  comply  with  the  applicable  provisions  of  federal  and  State  laws,
regulations and policies.

The Contractor  shall not include  covenant-not-to-compete  requirements  in its
provider  agreements.  Specifically,  the  Contractor  shall not contract with a
provider and require that the provider not provide services for any other AHCCCS
contractor.

The  Contractor  must  enter  into a written  agreement  with any  provider  the
Contractor reasonably  anticipates will be providing services on its behalf more
than 25 times during the contract year.  Exceptions to this requirement  include
the following:

a.  If a provider who provides  services  more than 25 times during the contract
    year  refuses to enter into a written  agreement  with the  Contractor,  the
    Contractor  shall submit  documentation  of such refusal to AHCCCS Office of
    Managed Care within seven days of its final attempt to gain such agreement.
b.  If a  provider  performs  emergency  services  such  as  an  emergency  room
    physician or an ambulance company, a written agreement is not required.

<PAGE>

These and any other  exceptions to this  requirement  must be approved by AHCCCS
Office  of  Managed  Care.  Each  subcontract  must  contain  verbatim  all  the
provisions of Attachment A, Minimum Subcontract  Provisions.  In addition,  each
subcontract must contain the following:

a.  Full   disclosure  of  the  method  and  amount  of  compensation  or  other
    consideration to be received by the subcontractor.
b.  Identification of the name and address of the subcontractor. 
c.  Identification of the population, to include patient capacity, to be covered
    by the subcontractor.
d.  The amount,  duration and scope of medical  services to be provided, and for
    which compensation will be paid.
e.  The term of the subcontract including beginning and ending dates, methods of
    extension, termination and re-negotiation.
f.  The  specific  duties  of  the  subcontractor relating  to  coordination  of
    benefits and determination of third-party liability.
g.  A provision  that the  subcontractor  agrees to identify Medicare  and other
    third-party  liability coverage  and to seek such  Medicare  or  third-party
    liability payment before submitting claims to the Contractor/ Contractor.
h.  A  description  of  the  subcontractor's  patient,  medical  and cost record
    keeping system.
i.  Specification  that the subcontractor shall cooperate with quality assurance
    programs and comply  with the  utilization  control  and  review  procedures
    specified in 42 C.F.R. Part 456, as implemented by AHCCCSA.
j.  A provision stating that a merger, reorganization or change in ownership  of
    a subcontractor  that is related to or affiliated  with the Contractor shall
    require a contract amendment and prior approval of AHCCCSA.
k.  Procedures for enrollment or  re-enrollment of the covered  population.  
l.  A provision that the subcontractor shall be  fully responsible for  all  tax
    obligations,  Worker's  Compensation  Insurance,  and  all other  applicable
    insurance  coverage  obligations  which  arise  under  this subcontract, for
    itself and its employees, and that AHCCCSA  shall have no responsibility  or
    liability for any such taxes or insurance coverage.
m.  A provision that the subcontractor  must obtain any necessary  authorization
    from the  Contractor or AHCCCSA for  services  provided  to eligible  and/or
    enrolled members.
n.  A provision that the subcontractor  must comply with encounter reporting and
    claims submission requirements as described in the subcontract.

52.   SPECIALTY CONTRACTS

AHCCCSA may at any time  negotiate or contract on behalf of the  Contractor  and
AHCCCSA for  specialized  hospital and medical  services.  AHCCCSA will consider
existing  Contractor  resources in the  development  and  execution of specialty
contracts.  AHCCCSA may require the Contractor to modify its delivery network to
accommodate  the provisions of specialty  contracts.  Specialty  contracts shall
take precedence over and supersede existing and future subcontracts for services
that are subject to  specialty  contracts.  AHCCCSA may  consider  waiving  this
requirement  in particular  situations if such action is determined to be in the
best  interest  of the  State;  however,  in no  case  shall  reimbursement  for
transplant  surgery  exceed that payable  under the relevant  AHCCCSA  specialty
contract.

During  the term of  specialty  contracts,  AHCCCSA  may act as an  intermediary
between  the   Contractor   and  specialty   contractors  to  enhance  the  cost
effectiveness  of service  delivery.  AHCCCSA  reserves the right to make direct
payments to specialty  contractors on behalf of the Contractor.  Adjudication of
claims related to such payments provided under specialty  contracts shall remain
the responsibility of the Contractor.  AHCCCSA may provide technical  assistance
prior to the implementation of any specialty contracts.

AHCCCSA shall provide at least 60 days advance  written notice to the Contractor
prior to the implementation of any specialty contract.

<PAGE>

53.   MANAGEMENT SERVICES SUBCONTRACTORS

All proposed management  services  subcontracts and/or corporate cost allocation
plans must be approved in advance by AHCCCSA  Contracting Office as described in
Section D, Paragraph 51,  Subcontracts.  Cost allocation plans must be submitted
with the  proposed  management  fee  agreement.  AHCCCSA  reserves  the right to
perform a thorough  review of actual  management  fees charged and/or  corporate
allocations made. If the fees or allocations actually paid out are determined to
be  unjustified  or  excessive,  amounts  may be  subject  to  repayment  to the
Contractor, the Contractor may be placed on monthly financial reporting,  and/or
financial sanctions may be imposed.

54.   MANAGEMENT SERVICES SUBCONTRACTOR AUDITS

All management services subcontractors that have oversight  responsibilities for
the Contractor's  program  operations (such as third-party  administrators)  are
required  to have an  annual  financial  audit.  A copy of this  audit  shall be
submitted  to  AHCCCSA,   Office  of  Managed  Care,  within  120  days  of  the
subcontractor's  fiscal year end. If services  billed by a consultant or actuary
are less than $50,000,  AHCCCSA will waive the  requirement for an audit of that
consultant or actuary.

55.   MINIMUM CAPITALIZATION REQUIREMENTS

In order to be considered  for contract  award,  the Offeror must meet a minimum
capitalization  requirement for each GSA bid. The capitalization requirement for
both new and  continuing  offerors  must be met  within 15 days  after  contract
award. Minimum capitalization requirements by GSA are as follows:


             ---------------------------------------------

             GEOGRAPHIC SERVICE          CAPITALIZATION
             AREA                          REQUIREMENT

             1.  Yuma                      $ 1,400,000
             2.  Mohave, La Paz              1,150,000
             3.  Yavapai, Coconino           1,250,000
             4.  Pinal, Gila                 1,450,000
             5.  Pima                        1,250,000
             6.  Maricopa                    2,500,000
             7.  Graham, Greenlee              350,000
             8.  Apache, Navajo                650,000
             9.  Cochise, Santa Cruz         1,450,000
             

             ---------------------------------------------

NEW OFFERORS:  To be considered  for a contract award in a given GSA or group of
GSAs, a new offeror  must meet the minimum  capitalization  requirements  listed
above.  The  capitalization  requirement  is  subject  to a  $5,000,000  ceiling
regardless of the number of GSAs awarded. This requirement is in addition to the
Performance Bond requirements  defined in Paragraphs 56 and 57 below and must be
met with cash with no  encumbrances,  such as a loan subject to  repayment.  The
capitalization  requirements may be applied toward meeting the equity per member
requirement (see Section D, Paragraph 58, Financial  Viability  Criteria) and is
intended for use in operations of the Contractor.

CONTINUING  OFFERORS:  Continuing offerors that are bidding a county or GSA that
they are  currently  servicing  must meet the equity per  member  standard  (see
Section  D,  Paragraph  58,  Financial  Viability  Criteria)  for their  current
membership.  Continuing  offerors that do not meet the equity standard must fund
through  capital  contribution  the necessary  amount to meet this  requirement.
Continuing  offerors  that are  bidding a new GSA must  provide  the  additional
capitalization for the new GSA they are bidding.  (See the table of requirements
by GSA above).  Continuing  offerors will not be required to provide  additional
capitalization  if they currently meet the equity per member standard with their
existing  membership and their excess equity is sufficient to cover the proposed
additional members, or they have at least $5,000,000 in equity.

<PAGE>

56.  PERFORMANCE BOND OR BOND SUBSTITUTE

The  Contractor  shall be  required  to provide a  performance  bond of standard
commercial  scope issued by a surety  company doing  business in this State,  an
irrevocable letter of credit, or a cash deposit  ("Performance Bond") to AHCCCSA
for as long as the Contractor has AHCCCS-related  liabilities of $50,000 or more
outstanding,  or 15  months  following  the  effective  date of  this  contract,
whichever is later, to guarantee: (1) payment of the Contractor's obligations to
providers,  non-contracting providers, and non-providers; and (2) performance by
the Contractor of its  obligations  under this contract.  The  Performance  Bond
shall be in a form  acceptable  to  AHCCCSA as  described  in  PERFORMANCE  BOND
GUIDELINES - OFFICE OF MANAGED CARE.

In the event of a default by the  Contractor,  AHCCCSA shall, in addition to any
other  remedies  it may have  under  this  contract,  obtain  payment  under the
Performance  Bond or substitute  security for the purposes of the following: 
a.  Paying any damages  sustained  by  providers,  non-contracting providers and
    nonproviders by reason of a breach  of  the Contractor's  obligations  under
    this contract,
b.  Reimbursing  AHCCCSA  for any  payments  made by  AHCCCSA on behalf  of  the
    Contractor, and 
c.  Reimbursing AHCCCSA for any extraordinary  administrative  expenses incurred
    by reason of a breach of the Contractor's  obligations  under this contract,
    including,  but not limited to, expenses  incurred after termination of this
    contract for reasons other than the convenience of the State by AHCCCSA.

In the  event  AHCCCSA  agrees  to  accept  substitute  security  in lieu of the
Performance Bond,  irrevocable letter of credit or cash deposit,  the Contractor
agrees to execute any and all documents  and perform any and all acts  necessary
to secure and enforce AHCCCSA's  security  interest in such substitute  security
including,  but not limited to,  security  agreements  and necessary UCC filings
pursuant to the Arizona  Uniform  Commercial  Code. In the event such substitute
security is agreed to and accepted by AHCCCSA, the Contractor  acknowledges that
it has granted AHCCCSA a security interest in such substitute security to secure
performance of its  obligations  under this  contract.  The Contractor is solely
responsible for  establishing the  credit-worthiness  of all forms of substitute
security.  AHCCCSA may,  after written  notice to the  Contractor,  withdraw its
permission for substitute  security,  in which case the Contractor shall provide
AHCCCSA with a form of security described above.

57.   AMOUNT OF PERFORMANCE BOND

The initial amount of the  Performance  Bond shall be equal to 110% of the total
capitation  payment  expected  to be paid in the month of October,  1997,  or as
determined  by  AHCCCSA.   The  total  capitation  amount  shall  include  SOBRA
supplemental payments.  This requirement must be satisfied by the Contractor not
later  than 15 days  after  notification  by  AHCCCSA  of the  amount  required.
Thereafter,  AHCCCSA shall evaluate the enrollment  statistics of the Contractor
on a monthly basis.  If there is an increase in capitation  payment that exceeds
10% of the  performance  bond  amount,  AHCCCSA  may  require an increase in the
amount of the  Performance  Bond.  The  Contractor  shall have 15 days following
notification  by AHCCCSA to increase  the amount of the  Performance  Bond.  The
Performance Bond amount that must be maintained after the contract term shall be
sufficient  to cover  all  outstanding  liabilities  and will be  determined  by
AHCCCSA.

<PAGE>

58.   FINANCIAL VIABILITY CRITERIA/ PERFORMANCE MEASURES

AHCCCSA has established the following financial viability criteria/  performance
goals:

CURRENT                 RATIO  Current  assets  divided by current  liabilities.
                        "Current assets" includes any long-term investments that
                        can  be  converted  to  cash  within  24  hours  without
                        significant penalty (i.e., greater than 20%).
                        STANDARD: AT LEAST 1.00

EQUITY PER MEMBER       Equity  divided  by  the  number  of   non-SOBRA  Family
                        Planning  Extension  Services  members  enrolled  at the
                        end of the period.
                        STANDARD: AT LEAST $150
                        (Failure  to  meet   this  standard  may  result  in  an
                        enrollment  cap  being imposed  in any or all contracted
                        GSA's.)
                        NOTE:  EQUITY  MUST BE  UNENCUMBERED  WITH  NO  LIENS OR
                        OBLIGATIONS AGAINST IT.

MEDICAL EXPENSE RATIO   Total medical expenses  divided  by  total  capitation +
                        SOBRA + TPL + reinsurance
                        STANDARD:  85-90%

ADMINISTRATIVE COST     Total administrative expenses (excluding  income taxes),
PERCENTAGE              divided  by total capitation + SOBRA + TPL + reinsurance
                        STANDARD: NO MORE THAN 10%

RECEIVED BUT UNPAID     Received but unpaid claims divided  by the average daily
CLAIMS                  medical expenses for the  period, net of  sub-capitation
(DAYS OUTSTANDING)      expense
                        STANDARD: NO MORE THAN 45 DAYS

59.   MERGER, REORGANIZATION AND CHANGE OF OWNERSHIP

A proposed  merger,  reorganization  or change in  ownership  of the  Contractor
health plan shall  require prior  approval of AHCCCSA and a subsequent  contract
amendment.  The Contractor must submit a detailed merger,  reorganization and/or
transition plan to AHCCCSA Contracting Office for AHCCCSA review. The purpose of
the plan review is to ensure uninterrupted services to members, evaluate the new
entity's  ability to support  the  provider  network,  ensure  that  services to
members are not diminished  and that major  components of the  organization  and
AHCCCS  programs are not adversely  affected by such merger,  reorganization  or
change in ownership.

60.   SANCTIONS

AHCCCSA may suspend,  deny,  refuse to renew,  or terminate this contract or any
related  subcontracts  in accordance with AHCCCS Rule R9-22-405 and the terms of
this contract and  applicable law and  regulations.  AHCCCSA may, in addition to
these  remedies,  impose  monetary  sanctions  if the  Contractor  violates  any
provision  stated  in law or  this  contract  in  accordance  with  AHCCCS  Rule
R9-22-406 and the provisions of this contract,  applicable law and  regulations.
Written notice will be provided to the Contractor  specifying the sanction to be
imposed,  the grounds for such  sanction and either the length of  suspension or
the amount of capitation  prepayment to be withheld.  The  Contractor may appeal
the decision to impose a sanction in accordance with AHCCCS Rule R9-22-804.

In addition to the above remedies, AHCCCSA may, at its option, impose partial or
full enrollment caps on the Contractor.  Among the contract  violations that may
result in an enrollment cap are, but are not limited to, the following:

   a.   Marketing violations
   b.   Failure  to  meet  AHCCCS  financial   viability  standards  
   c.   Material deficiency  in the  Contractor's  provider  network  
   d.   Quality  of care and quality management issues

CURE NOTICE PROCESS - Prior to the imposition of a sanction for  non-compliance,
AHCCCSA  may  provide a written  cure  notice to the  Contractor  regarding  the
details of the  non-compliance.  The cure notice will specify the period of time
during which the Contractor must bring its performance back into compliance with
contract  requirements.  If,  at the  end  of the  specified  time  period,  the
Contractor has complied with the cure notice requirements,  AHCCCSA will take no
further  action.  If,  however,  the  Contractor  has not complied with the cure
notice requirements, AHCCCSA will proceed with the imposition of sanctions.

<PAGE>

61.    AUTO-ASSIGNMENT ALGORITHM

Members who do not have the right to choose a contractor or members who have the
right to choose but do not  exercise  this right,  are  assigned to  contractors
through an auto-assignment  algorithm.  The algorithm is a mathematical  formula
used to  distribute  members  to the  various  contractors  in a manner  that is
predictable  and  consistent  with AHCCCSA  goals.  The  algorithm  favors those
contractors  with lower  capitation  rates.  For  further  details on the AHCCCS
Auto-Assignment  Algorithm,  refer to  Attachment  G.  AHCCCSA  may  change  the
algorithm at any time during the term of the contract and frequently  does so in
response to contractor-specific  issues of non-compliance (e.g. imposition of an
enrollment  cap). The Contractor  should consider this in preparing its response
to this RFP.  AHCCCSA is not obligated to adjust for any financial  impacts this
may have on the Contractor.

62.   GRIEVANCE PROCESS AND STANDARDS

The Contractor  shall have in place a written  grievance  policy for members and
providers  which  defines  their  rights  regarding  any  adverse  action by the
Contractor.  This written policy shall be in accordance with applicable  federal
and State law and AHCCCS Rules and policy including,  but not limited to, AHCCCS
Rules R9-22-512;  R9-22-518(A);  R9-22-802; and R9-22-804. The grievance process
may not be  delegated  or  subcontracted  outside of the health  plan.  Refer to
Attachment H for a complete description of grievance process requirements.

63.   QUARTERLY GRIEVANCE REPORT

The Contractor shall submit a Quarterly  Grievance Report to AHCCCSA,  Office of
Grievance and Appeals,  using the Quarterly  Grievance  Report Format on file in
the Bidder's  Library.  The Quarterly  Grievance  Report must be received by the
AHCCCSA,  Office of Grievance and Appeals, no later than 45 days from the end of
the quarter.

64.   PENDING LEGISLATIVE ISSUES

In  addition  to the  requirements  described  in this RFP,  there  are  several
legislative  issues  that  could  have an impact  on  services  provided  by the
Contractor on or after October 1, 1997. The following is a brief  description of
the issues that AHCCCS is aware of at the time of the issuance of this RFP:

ELIGIBILITY  BASED  ON  100% OF THE  FEDERAL  POVERTY  LEVEL  (FPL):  Through  a
successful initiative effort,  eligibility for AHCCCS has been expanded to allow
persons  with income up to 100% of the FPL to become  eligible  for the Medicaid
program.  Legislative  action will be required to implement this new eligibility
guideline  and HCFA must  approve the  expansion.  If HCFA  approval is granted,
there will be a  significant  number of new persons who will be eligible for the
program and enrolled with the health plans at some future date.

<PAGE>

MANDATORY 48 HOUR MATERNITY STAY:  Effective  January 1, 1998, a new federal law
requires all group health  insurers to allow women and their newborns to receive
48 hours of inpatient hospital care after a normal vaginal delivery and up to 96
hours of inpatient  care after a cesarean  delivery.  The attending  health care
provider,  in consultation with the mother,  may discharge the mother or newborn
prior to the minimum  length of stay.  HCFA has advised that the mandatory  stay
provisions will apply to Medicaid. In preparing their capitation rate proposals,
offerors must assume any additional  costs associated with this new requirement.
AHCCCSA will not compensate for additional costs effective January 1, 1998.

PREMIUM SHARING:  The Arizona legislature passed legislation  (Chapter 368, Laws
of  1996)  which   authorizes   a  6-member   legislative   committee   to  make
recommendations  for a  three-year  premium  sharing  demonstration  program for
persons  whose  income  does not exceed  300% of FPL.  If  enacted,  the premium
sharing program would add additional  people to the AHCCCS program.  The program
is  scheduled to begin  October 1, 1997 but will be repealed if the  legislature
does not implement a program by December 31, 1997.

WELFARE REFORM:  The Personal  Responsibility  and Work  Opportunity Act of 1996
replaces  the  AFDC  entitlement  program  with  Temporary  Assistance  to Needy
Families block grants to the states. In addition, states were given an option to
provide full Medicaid  services or only emergency  services to several groups of
legal immigrants who were in the United States on or before August 22, 1996. The
legislature  will be considering the various options and making  decisions about
the  level  of  service  to  legal  immigrants.  Depending  on  the  outcome  of
legislative deliberations, there may be changes to AHCCCS eligibility.

GRADUATE  MEDICAL  EDUCATION (GME): The legislature may be making changes to the
funding  formula  for GME.  Currently,  GME is funded as an add-on to the AHCCCS
tiered per diem inpatient hospital rates. There is legislation to remove the GME
component  from the  hospital  rates and  establish  a  separate  GME fund.  For
purposes  of your  response  to the  RFP,  please  assume  that  GME will not be
included in the AHCCCS tiered per diem rates .



                              [END OF SECTION D]

<PAGE>


                           SECTION E: CONTRACT CLAUSES
                                Table of Contents

1.   Applicable  Law........................................................53
2.   Authority..............................................................53
3.   Order of Precedence....................................................53
4.   Contract Interpretation and Amendment..................................53
5.   Severability...........................................................53
6.   Relationship of Parties................................................54
7.   Assignment and Delegation..............................................54
8.   General Indemnification................................................54
9.   Indemnification -- Patent and Copyright................................54
10.  Compliance with Applicable  Laws, Rules and Regulations................54
11.  Advertising and Promotion of Contract..................................54
12.  Property of the State..................................................54
13.  Third Party Antitrust Violations.......................................55
14.  Right to Assurance.....................................................55
15.  Termination for Conflict of Interest...................................55
16.  Gratuities.............................................................55
17.  Suspension or Debarment................................................55
18.  Termination for Convenience............................................55
19.  Termination for Default................................................56
20.  Termination - Availability of Funds....................................56
21.  Right of Offset........................................................56
22.  Non-Exclusive Remedies.................................................56
23.  Non-Discrimination.....................................................56
24.  Effective Date.........................................................56
25.  Insurance..............................................................57
26.  Disputes...............................................................57
27.  Right to Inspect Plant or Place of Business............................58
28.  Incorporation by Reference.............................................58
29.  Covenant against Contingent Fees.......................................58
30.  Changes................................................................58
31.  Type of Contract.......................................................58
32.  Americans with Disabilities Act........................................58
33.  Warranty of Services...................................................58
34.  No Guaranteed Quantities...............................................59
35.  Conflict of Interest...................................................59
36.  Disclosure of Confidential Information.................................59
37.  Cooperation with Other Contractors.....................................59
38.  Assignment of Contract and Bankruptcy..................................59
39.  Ownership of Information and Data......................................59
40.  AHCCCSA Right to Operate Contractor....................................60
41.  Audits and Inspections.................................................60
42.  Fraud and Abuse........................................................60
43.  Lobbying...............................................................61

<PAGE>

                         SECTION E:   CONTRACT CLAUSES


1.    APPLICABLE  LAW

Arizona  Law - The law of Arizona  applies  to this  contract  including,  where
applicable, the Uniform Commercial Code, as adopted in the State of Arizona.

Implied  Contract Terms - Each provision of law and any terms required by law to
be in this contract are a part of this contract as if fully stated in it.

2.    AUTHORITY

This  contract is issued  under the  authority  of the  Contracting  Officer who
signed this contract. Changes to the contract, including the addition of work or
materials,  the  revision  of  payment  terms,  or the  substitution  of work or
materials,  directed by an unauthorized  state employee or made  unilaterally by
the  Contractor  are  violations  of the contract and of  applicable  law.  Such
changes,  including unauthorized written contract amendments,  shall be void and
without effect, and the Contractor shall not be entitled to any claim under this
contract based on those changes.

3. ORDER OF PRECEDENCE

The  parties  to this  contract  shall  be  bound by all  terms  and  conditions
contained  herein.  For  interpreting  such terms and  conditions  the following
sources shall have precedence in descending  order: The Constitution and laws of
the United States and applicable federal regulations; the terms of the HCFA 1115
waiver for the State of  Arizona;  the  Constitution  and laws of  Arizona,  and
applicable  State rules;  the terms of this contract,  including all attachments
and executed amendments and modifications; AHCCCSA policies and procedures.

4.    CONTRACT INTERPRETATION AND AMENDMENT

NO PAROL  EVIDENCE - This  contract  is  intended  by the parties as a final and
complete expression of their agreement.  No course of prior dealings between the
parties and no usage of the trade shall  supplement  or explain any term used in
this contract.

NO WAIVER - Either party's  failure to insist on strict  performance of any term
or  condition  of the  contract  shall  not be  deemed a waiver  of that term or
condition  even if the party  accepting  or  acquiescing  in the  non-conforming
performance knows of the nature of the performance and fails to object to it.

WRITTEN  CONTRACT  AMENDMENTS  - The contract  shall be modified  only through a
written  contract  amendment  within  the  scope of the  contract  signed by the
procurement officer on behalf of the State.

5.    SEVERABILITY

The  provisions  of this contract are severable to the extent that any provision
or  application  held to be  invalid  shall not affect  any other  provision  or
application  of the  contract  which may remain in effect  without  the  invalid
provision or application.

<PAGE>

6.    RELATIONSHIP OF PARTIES

The Contractor under this contract is an independent  contractor.  Neither party
to this contract  shall be deemed to be the employee or agent of the other party
to the contract.

7.    ASSIGNMENT AND DELEGATION

The  Contractor  shall not  assign  any right nor  delegate  any duty under this
contract without prior written approval of the Contracting Officer, who will not
unreasonably withhold such approval.

8.    GENERAL INDEMNIFICATION

The  Contractor  shall  defend,  indemnify  and hold harmless the State from any
claim, demand, suit, liability,  judgment and expense (including attorney's fees
and other costs of litigation) arising out of or relating to injury, disease, or
death  of  persons  or  damage  to or  loss  of  property  resulting  from or in
connection  with the negligent  performance of this contract by the  Contractor,
its agents,  employees, and subcontractors or anyone for whom the Contractor may
be responsible.  The  obligations,  indemnities  and liabilities  assumed by the
Contractor  under this paragraph shall not extend to any liability caused by the
negligence of the State or its employees.  The Contractor's  liability shall not
be limited by any  provisions or limits of insurance set forth in this contract.
The State shall  reasonably  notify the Contractor of any claim for which it may
be liable under this paragraph.

9.    INDEMNIFICATION -- PATENT AND COPYRIGHT

The Contractor  shall defend,  indemnify and hold harmless the State against any
liability including costs and expenses for infringement of any patent, trademark
or  copyright  arising  out of  contract  performance  or use  by the  State  of
materials  furnished  or work  performed  under this  contract.  The State shall
reasonably  notify the  Contractor of any claim for which it may be liable under
this paragraph.

10.   COMPLIANCE WITH APPLICABLE  LAWS, RULES AND REGULATIONS

The materials and services  supplied  under this contract  shall comply with all
applicable federal,  state and local laws, and the Contractor shall maintain all
applicable licenses and permits.

11.   ADVERTISING AND PROMOTION OF CONTRACT

The Contractor shall not advertise or publish information for commercial benefit
concerning this contract  without the prior written  approval of the Contracting
Officer.

12.   PROPERTY OF THE STATE

Any materials,  including  reports,  computer  programs and other  deliverables,
created under this contract are the sole property of AHCCCSA.  The Contractor is
not entitled to a patent or copyright  on those  materials  and may not transfer
the patent or copyright to anyone else. The Contractor  shall not use or release
these materials without the prior written consent of AHCCCSA.

<PAGE>

13.   THIRD PARTY ANTITRUST VIOLATIONS

The  Contractor  assigns to the State any claim for  overcharges  resulting from
antitrust  violations to the extent that those violations  concern  materials or
services supplied by third parties to the Contractor toward  fulfillment of this
contract.

14.   RIGHT TO ASSURANCE

If AHCCCSA,  in good faith,  has reason to believe that the Contractor  does not
intend to perform or continue performing this contract,  the procurement officer
may demand in writing that the Contractor give a written  assurance of intent to
perform.  The demand shall be sent to the Contractor by certified  mail,  return
receipt required.  Failure by the Contractor to provide written assurance within
the number of days  specified in the demand may, at the State's  option,  be the
basis for terminating the contract.

15.   TERMINATION FOR CONFLICT OF INTEREST

AHCCCSA may cancel this contract  without  penalty or further  obligation if any
person significantly involved in initiating,  negotiating, securing, drafting or
creating  the contract on behalf of AHCCCSA is, or becomes at any time while the
contract or any  extension  of the  contract is in effect,  an employee of, or a
consultant  to, any other  party to this  contract  with  respect to the subject
matter of the contract.  The cancellation shall be effective when the Contractor
receives written notice of the cancellation  unless the notice specifies a later
time.

16.   GRATUITIES

AHCCCSA may, by written  notice to the  Contractor,  immediately  terminate this
contract if it determines  that  employment or a gratuity was offered or made by
the Contractor or a representative  of the Contractor to any officer or employee
of the State for the purpose of  influencing  the outcome of the  procurement or
securing the  contract,  an amendment to the  contract,  or favorable  treatment
concerning the contract,  including the making of any  determination or decision
about  contract  performance.  AHCCCSA,  in  addition  to any  other  rights  or
remedies,  shall be entitled to recover exemplary damages in the amount of three
times the value of the gratuity offered by the Contractor.

17.   SUSPENSION OR DEBARMENT

AHCCCSA may, by written  notice to the  Contractor,  immediately  terminate this
contract if it determines  that the Contractor  has been debarred,  suspended or
otherwise  lawfully  prohibited  from  participating  in any public  procurement
activity.

18.   TERMINATION FOR CONVENIENCE

AHCCCSA  reserves the right to terminate the contract in whole or in part at any
time  for  the  convenience  of the  State  without  penalty  or  recourse.  The
Contracting  Officer shall give written notice by certified mail, return receipt
requested,  to the  Contractor  of the  termination  at least 90 days before the
effective  date of the  termination.  In the  event of  termination  under  this
paragraph, all documents,  data and reports prepared by the Contractor under the
contract  shall  become  the  property  of  and be  delivered  to  AHCCCSA.  The
Contractor shall be entitled to receive just and equitable compensation for work
in progress,  work completed and materials accepted before the effective date of
the termination. 19. TERMINATION FOR DEFAULT

<PAGE>

AHCCCSA reserves the right to terminate this contract in whole or in part due to
the  failure  of the  Contractor  to comply  with any term or  condition  of the
contract or failure to take  corrective  action as required by AHCCCSA to comply
with the terms of the contract.  If the  Contractor is providing  services under
more than one contract with AHCCCSA, AHCCCSA may deem unsatisfactory performance
under one contract to be cause to require the Contractor to provide assurance of
performance  under  any and all other  contracts.  In such  situations,  AHCCCSA
reserves the right to seek remedies under both actual and anticipatory  breaches
of  contract  if  adequate  assurance  of  performance  is  not  received.   The
Contracting  Officer  shall  mail  written  notice  of the  termination  and the
reason(s) for it to the Contractor by certified mail, return receipt requested.

Upon termination under this paragraph, all documents, data, and reports prepared
by the  Contractor  under the  contract  shall  become  the  property  of and be
delivered to AHCCCSA on demand.

AHCCCSA may, upon  termination  of this contract,  procure,  on terms and in the
manner that it deems  appropriate,  materials or services to replace those under
this contract.  The Contractor  shall be liable for any excess costs incurred by
AHCCCSA in re-procuring the materials or services.

20.   TERMINATION - AVAILABILITY OF FUNDS

Funds are not presently available for performance under this contract beyond the
current  fiscal year. No legal  liability on the part of AHCCCSA for any payment
may arise under this contract until funds are made available for  performance of
this contract.

21.   RIGHT OF OFFSET

AHCCCSA shall be entitled to offset  against any amounts due the  Contractor any
expenses or costs incurred by AHCCCSA concerning the Contractor's non-conforming
performance or failure to perform the contract.

22.   NON-EXCLUSIVE REMEDIES

The rights and the remedies of AHCCCSA under this contract are not exclusive.

23.   NON-DISCRIMINATION

The Contractor  shall comply with State Executive Order No. 75-5, which mandates
that all persons,  regardless of race, color, religion,  sex, national origin or
political affiliation, shall have equal access to employment opportunities,  and
all other applicable  federal and state laws,  rules and regulations,  including
the Americans with  Disabilities  Act. The Contractor shall take positive action
to ensure that  applicants  for  employment,  employees,  and persons to whom it
provides  service  are not  discriminated  against  due to race,  creed,  color,
religion, sex, national origin or disability.

<PAGE>

24.   EFFECTIVE DATE

The  effective  date of this  contract  shall be the date  that the  Contracting
Officer signs the award page (page 1) of this contract.

25.   INSURANCE

A  certificate  of  insurance  naming  the State of Arizona  and  AHCCCSA as the
"additional insured" must be submitted to AHCCCSA within 10 days of notification
of contract award and prior to commencement of any services under this contract.
This insurance shall be provided by carriers rated as "A+" or higher by the A.M.
Best Rating Service.  The following  types and levels of insurance  coverage are
required for this contract:

a.  Commercial  General  Liability: Provides coverage of at least $1,000,000 for
    each occurrence for bodily injury and property  damage to others as a result
    of accidents on the premises of  or  as  the  result  of  operations of  the
    Contractor.

b.  Commercial Automobile Liability: Provides coverage  of  at  least $1,000,000
    for  each  occurrence  for  bodily  injury  and property  damage  to  others
    resulting from accidents caused by vehicles operated by the Contractor.

c.  Workers  Compensation: Provides  coverage to employees of the Contractor for
    injuries  sustained in the course of their  employment.  Coverage  must meet
    the obligations  imposed  by  federal  and  state  statutes  and  must  also
    include Employer's  Liability  minimum  coverage  of  $100,000.  Evidence of
    qualified self-insured status will also be considered.

d.  Professional  Liability  (if  applicable):  Provides  coverage  for  alleged
    professional misconduct or lack of ordinary skills in the  performance  of a
    professional act of service.  THE ABOVE COVERAGES MAY BE EVIDENCED BY EITHER
    ONE OF THE FOLLOWING:

a.  The  State of  Arizona  Certificate  of  Insurance: This is a form  with the
    special conditions required by the contract already pre-printed on the form.
    The  Contractor's  agent  or  broker  must  fill in   the  pertinent  policy
    information and ensure the required special conditions are  included  in the
    Contractor's policy.

b.  The Acord form: This standard  insurance  industry  certificate of insurance
    does not  contain  the  pre-printed  special  conditions  required  by  this
    contract. These  conditions  must be entered on the certificate by the agent
    or broker and read as follows:

    The State of Arizona and Arizona  Health  Care Cost  Containment  System are
    hereby  added  as  additional   insureds.   Coverages  afforded  under  this
    Certificate  shall be primary and any insurance  carried by the State or any
    of its agencies,  boards,  departments or commissions  shall be in excess of
    that provided by the insured Contractor. No policy shall expire, be canceled
    or  materially  changed  without 30 days written  notice to the State.  This
    Certificate   is  not   valid   unless   countersigned   by  an   authorized
    representative of the insurance company.

<PAGE>

26.   DISPUTES

The exclusive manner for the Contractor to assert any claim, grievance,  dispute
or demand against AHCCCSA shall be in accordance with AHCCCS Rule  R9-28-804(C).
Pending the final  resolution  of any  disputes  involving  this  contract,  the
Contractor  shall proceed with  performance of this contract in accordance  with
AHCCCSA's  instructions,  unless  AHCCCSA  specifically,  in  writing,  requests
termination or a temporary suspension of performance.

27.   RIGHT TO INSPECT PLANT OR PLACE OF BUSINESS

AHCCCSA  may,  at  reasonable  times,  inspect the part of the plant or place of
business of the Contractor or subcontractor  which is related to the performance
of this contract, in accordance with ARS ss.41-2547.

28.   INCORPORATION BY REFERENCE

This solicitation and all attachments and amendments, the Contractor's proposal,
best and final offer  accepted by AHCCCSA,  and any  approved  subcontracts  are
hereby incorporated by reference into the contract.

29.   COVENANT AGAINST CONTINGENT FEES

The  Contractor  warrants that no person or agency has been employed or retained
to solicit or secure this  contract  upon an  agreement or  understanding  for a
commission,  percentage,  brokerage or  contingent  fee.  For  violation of this
warranty, AHCCCSA shall have the right to annul this contract without liability.

30.   CHANGES

AHCCCSA  may at any time,  by written  notice to the  Contractor,  make  changes
within the general scope of this contract. If any such change causes an increase
or decrease in the cost of, or the time required for, performance of any part of
the work  under  this  contract,  the  Contractor  may  assert  its  right to an
adjustment in compensation paid under this contract.  The Contractor must assert
its right to such  adjustment  within 30 days  from the date of  receipt  of the
change  notice.  Any  dispute  or  disagreement  caused  by  such  notice  shall
constitute a dispute  within the meaning of Section E,  Paragraph 26,  Disputes,
and be administered accordingly.

When AHCCCSA issues an amendment to modify the contract,  the provisions of such
amendment will be deemed to have been accepted 60 days after the date of mailing
by AHCCCSA, even if the amendment has not been signed by the Contractor,  unless
within that time the Contractor  notifies  AHCCCSA in writing that it refuses to
sign the amendment.  If the Contractor provides such notification,  AHCCCSA will
initiate termination proceedings.

31.   TYPE OF CONTRACT

Firm Fixed-Price

32.   AMERICANS WITH DISABILITIES ACT

People  with   disabilities   may  request   special   accommodations   such  as
interpreters,  alternative  formats or assistance  with physical  accessibility.
Requests for special  accommodations must be made with at least three days prior
notice by calling Mark Renshaw at (602) 417-4577.

33.   WARRANTY OF SERVICES

The  Contractor  warrants  that all services  provided  under this contract will
conform to the  requirements  stated  herein.  AHCCCSA's  acceptance of services
provided by the Contractor shall not relieve the Contractor from its obligations
under this  warranty.  In addition to its other  remedies,  AHCCCSA  may, at the
Contractor's expense,  require prompt correction of any services failing to meet
the Contractor's warranty herein.  Services corrected by the Contractor shall be
subject to all of the  provisions of this contract in the manner and to the same
extent as the services originally furnished.

<PAGE>

34.   NO GUARANTEED QUANTITIES

AHCCCSA does not guarantee  the  Contractor  any minimum or maximum  quantity of
services or goods to be provided under this contract.

35.   CONFLICT OF INTEREST

The Contractor shall not undertake any work that represents a potential conflict
of  interest,  or which is not in the best  interest  of  AHCCCSA  or the  State
without  prior  written  approval by  AHCCCSA.  The  Contractor  shall fully and
completely  disclose any situation which may present a conflict of interest.  If
the  Contractor is now  performing or elects to perform  during the term of this
contract any services for any AHCCCS  health plan,  provider or Contractor or an
entity  owning  or  controlling   same,  the  Contractor   shall  disclose  this
relationship prior to accepting any assignment involving such party.

36.   DISCLOSURE OF CONFIDENTIAL INFORMATION

The Contractor shall not,  without prior written  approval from AHCCCSA,  either
during or after the performance of the services required by this contract,  use,
other than for such  performance,  or disclose to any person  other than AHCCCSA
personnel  with a need to know, any  information,  data,  material,  or exhibits
created,  developed,  produced,  or otherwise  obtained during the course of the
work  required  by this  contract.  This  nondisclosure  requirement  shall also
pertain to any  information  contained in reports,  documents,  or other records
furnished to the Contractor by AHCCCSA.

37.    COOPERATION WITH OTHER CONTRACTORS

AHCCCSA may award other  contracts for additional  work related to this contract
and Contractor  shall fully  cooperate with such other  contractors  and AHCCCSA
employees or  designated  agents,  and  carefully fit its own work to such other
contractors'  work.  Contractor  shall not  commit or permit  any act which will
interfere  with the  performance  of work by any other  contractor or by AHCCCSA
employees.

38.    ASSIGNMENT OF CONTRACT AND BANKRUPTCY

This contract is voidable and subject to immediate  cancellation by AHCCCSA upon
Contractor   becoming   insolvent  or  filing   proceedings   in  bankruptcy  or
reorganization  under the United States Code, or assigning rights or obligations
under this contract without the prior written consent of AHCCCSA.

39.    OWNERSHIP OF INFORMATION AND DATA

Any data or  information  system,  including  all  software,  documentation  and
manuals,  developed by Contractor pursuant to this contract,  shall be deemed to
be  owned  by  AHCCCSA.   The  federal   government   reserves  a  royalty-free,
nonexclusive,  and irrevocable  license to reproduce,  publish, or otherwise use
and to authorize  others to use for federal  government  purposes,  such data or
information system,  software,  documentation and manuals.  Proprietary software
which is provided at established  catalog or market prices and sold or leased to
the general public shall not be subject to the ownership or licensing provisions
of this section.

<PAGE>

Data,  information and reports collected or prepared by Contractor in the course
of performing its duties and obligations  under this contract shall be deemed to
be owned by AHCCCSA. The ownership provision is in consideration of Contractor's
use of public  funds in  collecting  or  preparing  such data,  information  and
reports. These items shall not be used by Contractor for any independent project
of Contractor or publicized by Contractor  without the prior written  permission
of  AHCCCSA.  Subject to  applicable  state and  federal  laws and  regulations,
AHCCCSA shall have full and complete  rights to reproduce,  duplicate,  disclose
and  otherwise use all such  information.  At the  termination  of the contract,
Contractor  shall  make  available  all  such  data to  AHCCCSA  within  30 days
following  termination  of the  contract  or such  longer  period as approved by
AHCCCSA,  Office of the  Director.  For  purposes of this  subsection,  the term
"data" shall not include member medical records.

Except as otherwise provided in this section, if any copyrightable or patentable
material  is  developed  by  Contractor  in the  course of  performance  of this
contract, the federal government,  AHCCCSA and the State of Arizona shall have a
royalty-free,  nonexclusive,  and irrevocable  right to reproduce,  publish,  or
otherwise  use,  and to  authorize  others to use, the work for state or federal
government purposes.  Contractor shall additionally be subject to the applicable
provisions of 45 CFR Part 74 and 45 CFR Parts 6 and 8.

40.    AHCCCSA RIGHT TO OPERATE CONTRACTOR

If, in the judgment of AHCCCSA,  Contractor's  performance is in material breach
of the  contract  or  Contractor  is  insolvent,  AHCCCSA may  directly  operate
Contractor to assure delivery of care to members  enrolled with Contractor until
cure by Contractor of its breach,  by demonstrated  financial  solvency or until
the successful transition of those members to other contractors.

41.    AUDITS AND INSPECTIONS

The Contractor shall comply with all provisions  specified in applicable  AHCCCS
Rule R9-22-519, -520 and -521 and AHCCCS policies and procedures relating to the
audit of  Contractor's  records and the inspection of  Contractor's  facilities.
Contractor  shall fully  cooperate with AHCCCSA staff and allow them  reasonable
access to Contractor's staff, subcontractors, members, and records.

At  any  time  during  the  term  of  this  contract,  the  Contractor's  or any
subcontractor's  books and  records  shall be subject  to audit by AHCCCSA  and,
where  applicable,  the  federal  government,  to the extent  that the books and
records relate to the performance of the contract or subcontracts.

AHCCCSA and the federal  government may evaluate  through on-site  inspection or
other means, the quality,  appropriateness  and timeliness of services performed
under this contract.

42.    FRAUD AND ABUSE

It  shall  be the  responsibility  of the  Contractor  to  report  all  cases of
suspected  fraud  and  abuse  by  subcontractors,   members  or  employees.  The
Contractor shall provide written  notification of all such incidents to AHCCCSA.
The Contractor shall comply with the AHCCCS HEALTH PLANS AND PROGRAM CONTRACTORS
POLICY FOR  PREVENTION,  DETECTION  AND  REPORTING  OF FRAUD AND ABUSE  which is
available in the Bidder's Library and incorporated herein by reference.

As stated in ARS ss. 13-2310,  incorporated herein by reference,  any person who
knowingly  obtains  any  benefit  by means of  false  or  fraudulent  pretenses,
representations, promises or material omissions is guilty of a class 2 felony.

<PAGE>

43.    LOBBYING

No funds paid to the Contractor by AHCCCSA, or interest earned thereon, shall be
used for the purpose of  influencing  or  attempting  to influence an officer or
employee of any federal or State agency,  a member of the United States Congress
or State  Legislature,  an officer or employee of a member of the United  States
Congress or State  Legislature  in  connection  with  awarding of any federal or
State  contract,  the making of any  federal or State  grant,  the making of any
federal or State loan, the entering into of any cooperative  agreement,  and the
extension,  continuation,  renewal,  amendment or modification of any federal or
State contract,  grant,  loan, or cooperative  agreement.  The Contractor  shall
disclose if any funds other than those paid to the  Contractor  by AHCCCSA  have
been used or will be used to influence the persons and entities  indicated above
and will assist AHCCCSA in making such disclosures to HCFA.






                              [END OF SECTION E]


<PAGE>
                        SECTION F: LIST OF ATTACHMENTS



Attachment A:   Minimum Subcontract Provisions
Attachment B:   Geographic Service Area Minimum Network Requirements
Attachment C:   Management Services Subcontractor Statement
Attachment D:   Sample Letter of Intent; Network Summary Form
Attachment E:   Instructions for Preparing Capitation Proposal on Computer Disk.
Attachment F:   Periodic Report Requirements
Attachment G:   Auto-Assignment Algorithm
Attachment H:   Grievance Process and Standards
Attachment I:   Encounter Submission Requirements
Attachment J:   New Offeror Review Guide
Attachment K:   EPSDT Periodicity Schedule
Attachment L:   Offeror's Checklist

<PAGE>