<PAGE>   1
                                EXHIBIT (10.1)(a)

                   ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM

                          SOLICITATION, OFFER AND AWARD

Contract No:                    RFP No: YH6-0012      Date Issued: APRIL 1, 1996

Issued by:  AHCCCSA                             Subject of Solicitation:
            Contracts and Purchasing
            701 E. Jefferson Ave.                  LONG-TERM CARE SERVICES
            Phoenix, AZ  85034                     FOR CY 97 (10/1/96 - 9/30/97)
================================================================================
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
June 14, 1996. For information call:

Mark Renshaw, Contracts and Purchasing             Phone:  (602) 417-4577
================================================================================

                                TABLE OF CONTENTS

A. SOLICITATION, OFFER AND AWARD FORM .........................                1
B. RATES ......................................................                2
C. DEFINITIONS ................................................              3-7
D. PROGRAM REQUIREMENTS .......................................             8-38
E. CONTRACT CLAUSES ...........................................            39-47
F. LIST OF ATTACHMENTS ........................................               48
G. REPRESENTATIONS & CERTIFICATIONS ...........................            49-57
H. INSTRUCTIONS TO OFFERORS ...................................            58-66
I. EVALUATION FACTORS .........................................            67-69
INDEX .........................................................            70-71

================================================================================
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: Ventana Health Systems, Inc     PHONE:  (602) 943-5660

ADDRESS:         2510 W. Dunlap Avenue, Suite #300

CITY/STATE:      Phoenix, Arizona       Zip: 85021


NAME OF PERSON AUTHORIZED
TO SIGN OFFER:   James A. Burns            TITLE:    Chief Executive Officer

OFFEROR'S SIGNATURE:      James A. Burns    DATE:    6-14-96
================================================================================
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:_____________________

SIGNATURE OF AHCCCSA CONTRACTING OFFICER:_______________________________________

================================================================================


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                          SECTION B - CAPITATION RATES


The Program Contractor shall provide services as described in this solicitation.
In consideration for these services, the Program Contractor will be paid as
shown below. (The Offeror must enter below its proposed monthly capitation rates
for each county bid.)


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


                            PROPOSED CAPITATION RATES
                             (Per member per month)



COUNTY:            PROPOSED RATE (PMPM):

Apache                 $1,672.41
Cochise*               $
Coconino               $
Gila                   $2,050.14
Graham                 $
Greenlee               $2,153.03
La Paz                 $1,901.53
Maricopa**             $
Mojave                 $1,778.26
Navajo                 $1,812.29
Pima**                 $
Pinal*                 $
Santa Cruz             $1,957.35
Yavapai*               $
Yuma                   $



*      By statute, this county has the right of first refusal to act as sole
       program contractor for the county. It has indicated its intention to
       continue functioning in this capacity for Contract Year 96-97 and no
       competing offers will be considered at this time.

**     By statute, this county is required to act as sole program contractor for
       the county. No competing offers will be considered at this time.

                             SECTION C - DEFINITIONS


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ABUSE (OF MEMBER)                  Intentional infliction of physical, emotional
                                   or mental harm, caused by negligent acts or
                                   omissions, unreasonable confinement, sexual
                                   abuse or sexual assault. (See ARS
                                   Section 46-451.)

ABUSE  (BY PROVIDER)               Provider practices that are inconsistent with
                                   sound fiscal, business or medical practices,
                                   and result in an unnecessary cost to the
                                   AHCCCS program, or in reimbursement for
                                   services that are not medically necessary or
                                   that fail to meet professionally recognized
                                   standards for health care. It also includes
                                   recipient practices that result in
                                   unnecessary cost to the AHCCCS program. (See
                                   42 CFR 455.2)

ADHS                               Arizona Department of Health Services.

ADULT CARE HOME                    An ALTCS HCBS approved alternative
                                   residential setting that is licensed by the
                                   Arizona Department of Health Services to
                                   provide room, board, supervision, personal
                                   care and/or custodial care services for up to
                                   10 adults. (AHCCCS Medical Policy Manual,
                                   Section 1230)

ADULT DAY HEALTH                   A program that provides planned care and
                                   supervision, recreation and socialization,
                                   personal care, personal living skills
                                   training, group meals, health monitoring and
                                   various preventive, therapeutic and
                                   restorative health care services.

ADULT FOSTER CARE                  An ALTCS HCBS approved alternative
                                   residential setting which is certified by the
                                   ADHS to provide room, board, supervision and
                                   coordination of necessary ALTCS HCBS services
                                   within a family type environment for up to
                                   four adult residents. (AHCCCS Medical Policy
                                   Manual, Section 12030)

AGENT                              Any person who has been delegated the
                                   authority to obligate or act on behalf of
                                   another person or entity.

AHCCCS                             Arizona Health Care Cost Containment System
                                   as defined by ARS 36-2901, et seq.

AHCCCSA                            Arizona Health Care Cost Containment System
                                   Administration

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 36-2931 et seq.

AMPM                               AHCCCS Medical Policy Manual

ATTENDANT CARE                     A service wherein a certified trained
                                   attendant provides assistance with
                                   homemaking, personal care, general
                                   supervision and companionship.

BEHAVIORAL HEALTH,                 A behavioral health service agency licensed
LEVEL I                            by ADHS to provide a structured
                                   treatment setting with 24-hour supervision,
                                   on-site medical services and an intensive
                                   behavioral health treatment program. These
                                   facilities are the highest level of inpatient
                                   behavioral health services (other than
                                   psychiatric hospitalization) and when
                                   considered an alternative residential setting
                                   may provide mental health crisis
                                   stabilization and/or substance abuse
                                   detoxification.

BEHAVIORAL HEALTH,                 A behavioral health service agency licensed
                                   by ADHS to provide a


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LEVEL II                           structured residential setting with 24-hour
                                   supervision and counseling or other
                                   therapeutic activities for individuals who do
                                   not require the intensity of treatment
                                   services or on-site medical services found in
                                   a Level I behavioral health facility.

BIDDERS' LIBRARY                   A repository of manuals, statutes, rules and
                                   other reference material referred to in this
                                   RFP, located at AHCCCS Contracts and
                                   Purchasing, 701 E. Jefferson, Phoenix, AZ.

CAPITATION                         Payment to contractor by AHCCCSA of a fixed
                                   monthly payment per person in advance for
                                   which the contractor provides a full range of
                                   covered services.

CATEGORICALLY ELIGIBLE             A member eligible for Medicaid under ARS
MEMBER                              36-2901(4)(b) and 36-2931(5).

CONTINUING OFFEROR                 An existing ALTCS program contractor who
                                   submits a response to this solicitation.

CONTRACT YEAR  (CY)                Corresponds to federal fiscal year (Oct. 1
                                   through Sept. 30). For example, Contract Year
                                   97 is 10/1/96 - 9/30/97.

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.

COST AVOIDANCE                     The process of identifying and utilizing all
                                   sources of third-party benefits BEFORE
                                   SERVICES ARE RENDERED by the Program
                                   Contractor or before payment is made by the
                                   Program Contractor. (This assumes the Program
                                   Contractor can avoid costs by not paying
                                   until the third party has paid what it covers
                                   first, or having the third party contracted
                                   provider render the service so that the
                                   Program Contractor is only liable for
                                   coinsurance and/or deductibles.)

COVERED SERVICES                   ALTCS services to be delivered by the Program
                                   Contractor which are so designated in Section
                                   D of this contract and the Arizona
                                   Administrative Code R9-28-201 et seq.

CRS                                Children's Rehabilitative Services

DAYS                               Calendar days unless otherwise specified.

DME                                Durable medical equipment; an item that can
                                   withstand repeated use such as hospital beds,
                                   wheelchairs, crutches.

DUAL ELIGIBLE QUALIFIED            A person, eligible under ARS 36-2971(4), who
MEDICARE BENEFICIARY               is entitled to Medicare Part A insurance,
                                   meets certain income, resource and residency
                                   requirements of the Qualified Medicare
                                   Beneficiary program, and who has been
                                   determined categorically eligible for full
                                   AHCCCS acute, behavioral health and/or
                                   long-term care benefits.

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 program contractor on
                                   the date of service. It includes all services
                                   for which the program contractor incurred any
                                   financial liability.

ENROLLMENT                         The process by which a person who has been
                                   determined eligible becomes a member with a
                                   program contractor subject to the limitations
                                   specified in the


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                                   AHCCCS Rules.

EPSDT                              Early and Periodic Screening, Diagnosis and
                                   Treatment services for persons under 21 years
                                   of age as described in AHCCCS Rules R9-22-101
                                   and R9-22-213.

FEE-FOR-SERVICE (FFS)              A method of payment to registered providers
                                   on an amount-per-service basis.

FFP                                Federal financial participation (FFP) refers
                                   to the contribution that the federal
                                   government makes to the Title XIX program
                                   portion of AHCCCS as described in AHCCCS Rule
                                   R9-28-101 (26).

FISCAL YEAR (STATE)                July 1 through June 30.

FISCAL YEAR (FEDERAL)              October 1 through September 30.

FRAUD                              An intentional deception or misrepresentation
                                   made by a person with the knowledge that the
                                   deception could result in some unauthorized
                                   benefit to himself or some other person. It
                                   includes any act that constitutes fraud under
                                   applicable state or federal law. (42 CFR
                                   455.2)

HCBS                               Home and community-based services. (See
                                   Section D.)

HCFA                               Health Care Financing Administration, an
                                   organization within the U.S. Department of
                                   Health and Human Services which administers
                                   the Medicare and Medicaid programs.

HEALTH MAINTENANCE                 Various forms of plan organization, including
ORGANIZATION (HMO)                 staff and 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.

HOME DELIVERED MEALS               A service that provides a nutritious meal
                                   containing at least one-third of the federal
                                   recommended daily allowance for the member,
                                   delivered to the member's place of residence.

HOMEMAKER SERVICE                  Assistance in the performance of routine
                                   household activities such as shopping,
                                   cooking, running errands, etc.

HOSPICE                            A program that provides care to terminally
                                   ill patients who have six months or less to
                                   live. A participating Hospice must meet
                                   Medicare requirements and have a written
                                   provider contract with the Program
                                   Contractor.

IBNR                               Incurred But Not Reported liabilities for
                                   services rendered for which claims have not
                                   been received.

IHS                                Indian Health Service; 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.

MANAGEMENT SERVICES                A person or organization who agrees to
SUBCONTRACTOR                      perform any administrative service for the
                                   Program Contractor related to securing or
                                   fulfilling the Program 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. the absence of
                                   which could lead to erroneous conclusions
                                   following reasonable review of such report,
                                   contract, etc.


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MEDICAID                           A federal/ state program authorized by Title
                                   XIX of the Social Security Act, as amended,
                                   which provides federal matching funds for a
                                   medical assistance program for recipients of
                                   federally aided public assistance and SSI
                                   benefits and other specified groups. Certain
                                   minimum populations and services must be
                                   included to receive FFP; however, a state
                                   may, at its option, include additional
                                   populations and services at state expense 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 ALTCS who is enrolled with a
                                   program contractor.

OFFEROR                            The organization, entity or person which
                                   submits a proposal in response to this AHCCCS
                                   Request for Proposal. An offeror who is
                                   awarded a contract becomes a program
                                   contractor.

PAS                                Pre-admission screen; diagnostic tool
                                   administered by an AHCCCS DMS social worker
                                   or nurse to assess, or refer to a physician
                                   for assessment, the functional, medical,
                                   nursing and social needs of the member.

PASARR                             Preadmission Screening and Annual Resident
                                   Review. Assessment required prior to
                                   admission to a nursing facility. Level I is
                                   the identification of members who are
                                   suspected of having mental illness or mental
                                   retardation. Level II determines whether
                                   nursing facility or specialized services are
                                   needed.

PAY AND CHASE                      Recovery method used by the Program
                                   Contractor to collect from legally liable
                                   third parties AFTER the Program Contractor
                                   pays the member's medical bills. The service
                                   may be provided by a contracted or
                                   noncontracted provider. Regardless of who
                                   provides the service, pay and chase assumes
                                   that the Program Contractor will pay the
                                   provider, then seek reimbursement from the
                                   third party.

PERSONAL CARE                      A service that provides assistance with
                                   personal physical needs such as washing hair,
                                   bathing and dressing.

PRIMARY CARE PROVIDER/             An individual responsible for the management
PRACTITIONER (PCP)                 of the member's health care that includes,
                                   but is not limited to, a physician who is 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.

REINSURANCE                        A risk-sharing program provided by AHCCCSA to
                                   program contractors for the reimbursement of
                                   certain contract service costs incurred by a
                                   member beyond a certain monetary threshold.

RELATED PARTY                      A party that has, or may have, the ability to
                                   control or significantly influence a program
                                   contractor, or a party that is, or may be,
                                   controlled or significantly influenced by a
                                   program 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


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                                   managed by any such entities or persons.

RESPITE CARE                       A service that provides short-term care
                                   and supervision to relieve primary
                                   caregivers. It is available 24-hours per day
                                   and is limited to 30 days per year.

RFP                                Request For Proposal; document prepared by
                                   AHCCCSA which describes the services required
                                   and which instructs prospective offerors how
                                   to prepare a response (proposal).

STATE PLAN                         The written agreement between the State of
                                   Arizona and HCFA which describes how the
                                   AHCCCS program meets HCFA requirements for
                                   participation in the Medicaid program.

SUBCONTRACT                        An agreement entered into by a program
                                   contractor with a provider of health care
                                   services who agrees to furnish covered
                                   services to members, or with any other
                                   organization or person who agrees to perform
                                   any administrative function or service for a
                                   program contractor specifically related to
                                   fulfilling the program contractor's
                                   obligations to AHCCCSA under the terms of
                                   this contract.

SUBCONTRACTOR                      (1) A person, agency or organization to
                                   which a program 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.

SUPPORTIVE RESIDENTIAL             Supportive Residential Living Center -- An
LIVING CENTER                      ALTCS HCBS approved alternative residential
                                   setting composed of individual apartments
                                   licensed by ADHS to provide room, board and
                                   general supervision, as well as coordinate
                                   supportive living services to members on a
                                   24-hour basis. (AHCCCS Medical Policy Manual,
                                   Section 1230)

THIRD PARTY                        A person, program 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 member.

THIRD PARTY LIABILITY              Resources available from person, program 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 member.

TRAUMATIC BRAIN INJURY             An ALTCS HCBS approved alternative
TREATMENT FACILITY                 residential setting which is licensed by the
                                   ADHS as an Unclassified Health Care Facility
                                   and whose purpose is to provide services for
                                   the treatment of people with traumatic brain
                                   injuries.

VENTILATOR DEPENDENT               An ALTCS member who is dependent on a
                                   ventilator for respiratory support at least
                                   six hours per day for at least 30 consecutive
                                   days.


                               [END OF SECTION C]
                        SECTION D - PROGRAM REQUIREMENTS
                                TABLE OF CONTENTS


1.  Covered Services..........................................................13

2.  Behavioral Health Services................................................13

3.  Therapeutic Leave And Bed Hold............................................13

4.  Dental Services...........................................................14

5.  Family Planning...........................................................14


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6.  Emergency Services........................................................14

7.  Children's Rehabilitative Services (Crs)..................................14

8.  Altcs Transitional Program................................................15

9.  Case Management...........................................................15

10  Pre-Admission Screening And Annual Resident Review   (Pasarr).............17

11. Quality Management/ Utilization Management................................17

12. Quality Management/ Utilization Management Reports........................18

13. Denials Of Services Requiring Prior Authorization.........................18

14. Member Handbook And Member Communications.................................19

15. Enrollment And Disenrollment..............................................20

16. Request For Change In Enrollment..........................................20

17. Reporting Changes In Members' Circumstances...............................20

18. Out-Of-State Placement And Medical Services...............................21

19. Advance Directives........................................................21

20. Staff Requirements And Support Services...................................21

21. Medical Director..........................................................22

22. Written Policies, Procedures And Job Descriptions.........................23

23. Provider Manual...........................................................23

24. Network Development.......................................................24

25. Network Management........................................................24

26. Provider Registration.....................................................25

27. Network Deficiencies......................................................25

28. Appointment Standards.....................................................25

29. Fraud And Abuse...........................................................25

30. On-Site Reviews...........................................................26

31. Operational And Financial Readiness Reviews...............................27

32. Patient Trust Account Monitoring..........................................27

33. Financial Management......................................................27

34. Required Financial Reports................................................28

35. Performance Bond Or Bond Substitute.......................................28

37. Financial Viability Criteria And Performance Measures.....................29

38. Advances, Distributions And Loans.........................................29

39. Accumulated Fund Deficit..................................................30

40. Hcbs Assumed Mix And Recoupment...........................................30

41. Hospital Reimbursement....................................................30

42. Ventilator Dependent Reimbursement Rates..................................31

43. Reinsurance...............................................................31

44. Coordination Of Benefits/  Third Party Liability..........................32

45. Medicare Services And Cost Sharing........................................34

46. Member  Share Of Cost.....................................................34

47. Management Services And Distribution Of Funds.............................35

48. Management Services Subcontractor Audits..................................35

49. Merger, Reorganization And Change Of Ownership............................35

50. Related Party Transactions................................................36

51. Requests For Information..................................................36

52. Data Management...........................................................36

53. Data Exchange Requirement.................................................36

54. Encounter Data Reporting..................................................36

55. Specialty Contracts.......................................................37

56. Sanctions.................................................................37

57. Term Of Contract  And  Option To Renew....................................38

58. Grievance Process And Standards...........................................38

59. Quarterly Grievance Report................................................38

60. Legislative Issues........................................................38


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                        SECTION D - PROGRAM REQUIREMENTS


BACKGROUND AND INTRODUCTION


1982 - ARIZONA JOINS MEDICAID

In 1982 Arizona introduced its Medicaid program by establishing the Arizona
Health Care Cost Containment System (AHCCCS), a demonstration program based on
principles of managed care. In 1987, the State passed legislation to add
long-term care services to the AHCCCS program by establishing the Arizona Long
Term Care System (ALTCS). Before the ALTCS program was introduced, nursing
facility care for the elderly and physically disabled was provided primarily
through the state's various county governments while the Arizona Department of
Economic Security, in coordination with the Area Agencies on Aging, provided
home and community based services and case management.

ALTCS officially began accepting developmentally disabled members in December
1988; the Department of Economic Security is, by law, the program contractor for
this population. The program for the elderly and physically disabled (EPD)
population was added January 1, 1989. The ALTCS program now administers acute,
long term and behavioral health services in both institutional and home and
community based settings, and provides case management services.

AHCCCSA'S MISSION

The AHCCCS Administration's mission is to administer innovative managed care
programs effectively and efficiently, and to continually improve the
accessibility and delivery of quality health care to members. To do this,
AHCCCSA annually evaluates the performance of its program contractors in the
following areas:

           Executive management              Case management
           Medical direction                 Provider services
           Network management                Member services
           Behavioral health services        Quality management
           Utilization management            Grievance and appeals
           Accounting systems                Claims and encounter systems

In the future, performance will be measured against clinical quality management
indicators once baselines are established by the Administration.

WHO'S ELIGIBLE FOR ALTCS? First,the person must be financially eligible.

Anyone may apply for ALTCS at any of the 15 AHCCCS eligibility offices located
throughout the state. The applicant must either be age 65 or older, disabled,
under 18, or pregnant. The applicant must be an Arizona resident, a U.S. citizen
or legal alien, and have countable income and resources below certain
thresholds. Chapter 1600 of the ALTCS Eligibility Policy and Procedures Manual
provides a detailed discussion of all eligibility criteria.

Second, the person must be medically eligible.

Once a person's financial eligibility has been established, a preadmission
screen (PAS) is conducted by an AHCCCS registered nurse, social worker or, by
referral, a physician to evaluate the person's medical status. The PAS is also
used initially to determine whether the person should be placed, or is at risk
of being placed,


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in a nursing facility or an intermediate care facility for the mentally
retarded. In most cases, AHCCCS will reevaluate each ALTCS member annually.

THE GROWTH OF THE ALTCS PROGRAM

ALTCS services are provided in the 15 counties by program contractors under
contract with AHCCCS. Program contractors coordinate, manage and provide
long-term care services to ALTCS members. Unlike the acute care program,
however, there is currently only one ALTCS program contractor in each county.

The ALTCS population has grown from a total of 9,989 in its first full year to
21,356 as of February 1996, a 114% increase. Of this population, 64% are EPD and
less than 1% of these are ventilator dependent members. The yearly growth of the
EPD population is as follows:

          STATE
          FISCAL YEAR          NUMBER    INCREASE    % INCREASE

          1990                  6,142
          1991                  7,971    1,829       +29.8%
          1992                  8,954      983       +12.3%
          1993                 10,145    1,191       +13.3%
          1994                 10,984      839       + 8.3%
          1995                 12,084    1,100       +10.0%
          1996 (as of 2/96)    13,751    1,667       +13.8%

THE GROWTH OF Home and Community Based Services (HCBS)

ALTCS members are considered to be "at risk" of institutionalization.
Alternative residential settings have recently been developed, however, in which
some of these members can be safely cared for in a less restrictive setting.
These HCBS alternative residential settings allow placement options other than
the traditional nursing home when the member can no longer safely live at home.
(See Section D, Paragraph 1, for a listing of the alternative settings available
through the ALTCS program.) At first, because of its concern about an
unmanageable surge in demand, HCFA limited the amount Arizona could spend on
HCBS services to 5% of the total ALTCS budget. This limit was later changed from
a cap on spending to a limitation on member months. HCFA has since allowed ALTCS
to increase the HCBS cap by approximately 5% per year so that the cap is now at
40% for HCBS placements. As of December 1995, HCBS members comprised
approximately 35% of the ALTCS EPD population.

HCBS:  THE FUTURE OF ALTCS

AHCCCS has supported and encouraged the growth of HCBS in the ALTCS program
through the Supportive Residential Living and Adult Care Home pilot programs.
The growth of HCBS has given members a variety of residential options to choose
from beyond the traditional nursing home. To encourage further growth and
expansion in this area, AHCCCS has established HCBS percentages and a
reimbursement method that rewards those program contractors who excel in the
development and expansion of these settings. In addition, AHCCCSA has requested
federal approval for removing the percentage cap entirely on HCBS placements.

1.    COVERED SERVICES


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The Program Contractor shall, at a minimum, be responsible for providing the
following acute, long term and behavioral health services in accordance with the
AHCCCS Medical Policy Manual:

ACUTE CARE SERVICES  (REF. AHCCCS RULE R9-22-202)

      Inpatient and outpatient hospital

      Emergency room

      Physician

      Outpatient, including those AHCCCS covered services that may be provided
            in a rural health clinic or Federally Qualified Health Center

      Laboratory, x-ray and medical imaging

      Prescription drugs, including psychotropic medications

      Medical supplies, durable medical equipment and prosthetic devices

      Emergency transportation

      Medically necessary transportation

      Family Planning, including drugs, supplies, devices and surgical
            procedures provided to delay or prevent pregnancy

      Medically Necessary Abortions, when the pregnancy would endanger the life
            of the mother if the fetus were carried to term, or if the pregnancy
            is a result of rape or incest

      Therapies (physical, occupational, respiratory, audiologic, speech)

      Podiatry

      Private Duty Nursing for ventilator dependent members

      Early and periodic screening, diagnosis and treatment services for members
            under the age of 21. These services include all medically necessary
            Title XIX services.

      Organ transplants deemed medically necessary are limited to the following
            services: kidney, cornea, bone, heart, lung, heart/lung, liver,
            autologous and allogeneic bone marrow with related chemotherapy or
            radiotherapy

      Eyeglasses and contact lenses for members 21 years and older as the sole
            prosthetic device after a cataract extraction

      Emergency dental care, extractions and medically necessary dentures for
            members 21 years and older.

ACUTE CARE SERVICES - BEHAVIORAL HEALTH (REF. AHCCCS RULE R9-28-1104)

      Inpatient hospital

      Inpatient Psychiatric Facility for members under 21 years

      Institution for mental diseases for members 65 years and older

      Individual therapy and counseling

      Group and family therapy and counseling

      Partial care (Basic and Intensive)

      Emergency crisis mental health care

      Behavior management

      Evaluation

      Psychotropic medications, including adjustment and monitoring

LONG  TERM CARE SERVICES (REF. AHCCCS RULE R9-28-202)

      Nursing Facility, including Christian Science sanitoria and nursing

      Hospice

      Adult Day Health

      Home Delivered Meals

      Home Health Agency, including nursing services and home health aide

      Homemaker


                                       11
<PAGE>   12
      Personal Care

      Respite Care

      Group Respite as an alternative to Adult Day Health

      Attendant Care

      Environmental modifications

LONG TERM CARE - INSTITUTIONAL SETTINGS

      Nursing facility

      Institution for Mental Disease (for age 65 and over)

      Inpatient Psychiatric Residential Treatment Center (under age 21)

LONG TERM CARE - HCBS ALTERNATIVE  RESIDENTIAL SETTINGS

      Adult Care Home

      Adult Foster Care

      Behavioral health, Level I and Level II (Residential Treatment Center;
            licensed by ADHS; under age 21)

      Supportive Residential Living centers (certified by ADHS - Maricopa County
            pilot program)

      Traumatic Brain Injury treatment facility

Other services and settings, if approved by HCFA and/or the Director of AHCCCSA,
may be added as appropriate. Exclusions and limitations of ALTCS covered
services are discussed in AHCCCS and ALTCS Rules and the AHCCCS Medical Policy
Manual.

2.      BEHAVIORAL HEALTH SERVICES


The Program Contractor shall provide medically necessary Title XIX (Medicaid)
behavioral health services to all members in accordance with the AHCCCS Medical
Policy Manual.

Referral for behavioral health services may be made by the Primary Care
Provider, case manager, nursing facility staff, family, guardian, the member, or
by any health care professional in coordination with the case manager assigned
to the member.

The Program Contractor shall develop, monitor and continually evaluate its
processes for timely referral, screening, evaluation and treatment planning for
behavioral health services. The Program Contractor is responsible for training
case managers and providers to identify and screen for members' behavioral
health needs. The initial behavioral health screen for HCBS members must be
performed within seven days of referral. There shall be procedures in place for
ensuring that members' behavioral health services are appropriately provided,
coordinated and tracked by the case manager, PCP and behavioral health providers
and included in the member's individual service plan. Quality management for
behavioral health services must be included in the Program Contractor's Quality
Management Plan and shall meet the quality management requirements of AHCCCSA.
Behavioral health utilization reports shall be submitted quarterly in a format
to be determined by AHCCCSA.


3.    THERAPEUTIC LEAVE AND BED HOLD

For therapeutic leave and bed hold policies, refer to the AHCCCS Medical Policy
Manual, Section 1620-21.

4.      DENTAL SERVICES

The Program Contractor shall ensure that members under age 21 have direct access
to dental providers. Members may also be referred by their PCPs. Members over
age three and under 21 shall be screened annually by a dentist who will perform
an evaluation and report findings and treatment to the member's PCP or the
Program


                                       12
<PAGE>   13
Contractor. Members under age three shall be screened by their PCP and referred
to a dentist when medically necessary. Dental standards may be found in the
AHCCCS Medical Policy Manual, Section 310.


5.      FAMILY PLANNING

The Program Contractor shall provide Family Planning services in accordance with
the AHCCCS Medical Policy Manual, Section 420, to members who choose to delay or
prevent pregnancy. The Program Contractor is responsible for annually notifying
members of reproductive age (12-55 years) of the availability of Family Planning
services.


6.    EMERGENCY SERVICES

The Program Contractor shall provide the following at a minimum:

a. A designated emergency services facility providing care on a 24-hour-a-day,
7-day-a-week basis, accessible to members in each contracted service area. One
or more physicians and one nurse shall be on call or on duty at such facility at
all times.

b. An emergency services system employing at least one physician, registered
nurse, physician's assistant or nurse practitioner, accessible to members by
telephone 24-hours-a-day, 7-days-a-week, for information in the event of any
emergency and to providers who need verification of patient membership and
treatment authorization.

c. An emergency services telephone log containing member's name, address,
telephone number, date of call, time of call, nature of complaint or problem,
and instructions given to the caller.

d. A written procedure for the communication of emergency services information
to the member's primary care physician and other appropriate network elements.


7.      CHILDREN'S REHABILITATIVE SERVICES  (CRS)


CRS, a program administered by the Arizona Department of Health Services (DHS),
is designed to provide specialty medical and surgical care of a comprehensive
and rehabilitative nature to children who meet CRS financial and medical
eligibility criteria. CRS is not an emergency services program. While attempts
will be made by CRS administrators to accommodate emergency referrals, the
Program Contractor remains ultimately responsible for the provision of all
covered services to its members.

Since CRS is not an entitlement program and eligibility is based on medical
judgment, there is no guarantee that CRS administrators will accept
responsibility for treatment. The Program Contractor shall refer potentially
eligible children to CRS administrators. The referral process is discussed in
the CRS Policy and Procedures Manual, a copy of which may be obtained through
the Contracts and Purchasing Office. The CRS program provides a comprehensive
multi-disciplinary approach to management of CRS-covered conditions, but does
not provide primary care. Eligibility criteria for these services include:

      a. Child has a CRS-covered condition as defined in the CRS Policy and
      Procedures Manual.

      b. Child requires comprehensive multi-disciplinary care.

      c. Child has a reasonable potential for rehabilitation.


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<PAGE>   14
CRS-covered services will ordinarily include the planned management of the
covered condition, including inpatient care, surgery, therapy, limited DME and
home health care, and social and educational services, as well as periodic
follow-up. Emergency services are not ordinarily covered by CRS, nor is initial
care of newborn infants.


8.      ALTCS TRANSITIONAL PROGRAM

The ALTCS Transitional Program is available for members (both institutional and
HCBS) who, at the time of medical reassessment, have improved either medically,
functionally or both to the extent that they no longer need institutional care,
but who still need significant long term care services. For those members who
are living in a medical institution when determined eligible for the ALTCS
Transitional program, the Program Contractor shall arrange for home and
community based placement as soon as possible, but not later than 90 days after
the effective date of eligibility.

ALTCS Transitional members are entitled to all ALTCS covered services except for
institutional care* which is not covered unless it's medically necessary. In
such situations, the period of institutionalization may not exceed 90 days. If
institutional care is expected to exceed 90 days, the Program Contractor shall
request a medical eligibility reassessment (PAS). ALTCS Transitional members
determined by the PAS to be at risk of institutionalization will be transferred
from the ALTCS Transitional Program to the regular ALTCS program effective the
first of the month following the PAS reassessment decision date.

EPD institutionalized members will continue to be considered institutional
placement until the member is placed in an HCBS setting or expiration of the 90
day period, whichever occurs first. HCBS members will continue to be HCBS
placed. For ALTCS Transitional members who remain institutionalized after the 90
day period, member months will be considered as HCBS member months for the HCBS
recoupment process. (See Section D, Paragraph 40, HCBS Assumed Mix and
Recoupment, for a discussion of the HCBS recoupment process.) Program Contractor
compliance with this program will be monitored through the AHCCCS Office of
Managed Care and the Office of the Medical Director.


9.    CASE MANAGEMENT

The Program Contractor shall ensure adequate staffing to meet case management
requirements. The case management caseload size for HCBS and mixed has been
revised and caseload limits have been established for acute care only,
ventilator dependent and hospice. The case management caseload sizes effective
October 1, 1996 are as follows:


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

* I.e., nursing facility, institution for mental diseases for persons age 65 or
older, inpatient psychiatric facility for persons under the age of 21 or
intermediate care facility for the mentally retarded.

     HCBS or Acute                 1:48           CM visit every 90 days
     Nursing Facility (NF)         1:120          CM visit every 180 days
     Vent. Dep. and/or Hospice     1:16           CM visit every 30 days

Over a 180 day time period, one case manager could perform 96 HCBS or acute care
visits, 120 NF visits, or 96 ventilator dependent or hospice visits.

The formula for the mixed caseload assumes the following:


                                       14
<PAGE>   15
1. 96 HCBS or Acute visits (48 members) = 120 NF visits (120 members) = 96 VD or
Hospice visits (16 members)

2. The equivalency of the factors used in the mixed caseload formula are:

                  HCBS or Acute:  96 /  48 = 2
                  NF:             96 / 120 = .8
                  VD or Hospice:  96 /  16 = 6

In order to calculate a mixed case load the following formula is used:

  (# of HCBS and Acute clients x 2) + (# of NF clients x .8) + (# of VD and
Hospice clients x 6) = 96 or less

As an example of the formula above:

    (30 HCBS x 2)  +  (22 NF x .8)  +  (3 VD x 6)  =   95.6
          60       +       17.6     +       18     =   95.6

Case management ratios will be reviewed annually to determine if adjustment is
warranted.

"Case manager" means a person who is either a degreed social worker, licensed
registered nurse, or one with a minimum of two years experience in providing
case management services to EPD or DD persons. Case managers shall not provide
direct care services to members and shall not spend more than 15 % of their time
on Title XIX activities other than case management. Staffing must be sufficient
to cover case manager absenteeism, turnover and out-of-county members.

The case manager shall make initial contact with the member within five days of
enrollment, initial on-site contact with the member within 10 days of
enrollment, and ensure initiation of necessary services and placement within an
appropriate setting within 30 days of enrollment. The case manager shall also
conduct periodic placement and service reviews every 30 days for ventilator
dependent members (on-site), every 30 days for Adult Care Home, and every 90
days for HCBS (on-site) or acute care only members (telephone or on-site), and
180 days for members in an institutional setting (on-site). The case manager
shall be responsible for determining placement based on member acuity with input
from the member (or member's representative), the Primary Care Provider, the
Program Contractor's Medical Director and/or the PAS. The case manager shall
also develop and maintain the member's placement history, a cost-effective
individualized service plan, and help resolve problems in the delivery of needed
services.

The case manager shall be responsible for the transition of and discharge
planning for members transferred to another Program Contractor or disenrolled
from the ALTCS program.

Case management of ventilator dependent members shall be performed by a team
consisting of a licensed registered nurse and a social worker. Case management
of members requiring behavioral health services shall be performed by a
behavioral health professional unless the case manager obtains an initial and
quarterly consultation with a qualified behavioral health professional.

The Program Contractor shall ensure complete, correct and timely entry of data
related to placement history, cost effectiveness studies and service plans into
the Client Assessment and Tracking System (CATS). "Timely" shall mean within 14
days of the event which gave rise to the transaction (e.g., service approval by
the case manager, placement change). Unless the Program Contractor is currently
transmitting data to CATS by tape, all data entry shall be on-line. If the
Program Contractor is not currently on-line, it must have a systems interface in
place so it


                                       15
<PAGE>   16
can update the case management information no less than twice per month. The
acceptable reject rate of data is 5% for each submission. All rejects must be
corrected prior to the next submission of data to CATS.

The Program Contractor shall provide AHCCCSA a description of the internal
monitoring of its case management program and shall include the results of this
monitoring covering the previous 12 months. The Program Contractor shall include
those findings where improvement was indicated and the steps it has taken to
resolve deficiencies. Both the internal monitoring process and results will be
evaluated by AHCCCSA during on-site reviews.

AHCCCSA will generate a late placement report and send it to the Program
Contractor on a quarterly basis. This report will list members enrolled with the
Program Contractor who, according to the AHCCCSA CATS System, have not been
placed within 30 days of enrollment with the Program Contractor. The Program
Contractor will be requested to provide a written explanation of the reason the
client has not been placed. If the reason for the non-placement is deemed valid,
no action will be taken. If there is insufficient reason, or no long-term care
services were provided, the Program Contractor will be paid for acute care
services, case management services and administration only for each unplaced
member retroactive to the date of enrollment. If late placement or initiation of
service becomes a persistent problem with the Program Contractor, AHCCCSA
reserves the right to impose sanctions for non-compliance.

Even though the Program Contractor has up to 30 days to initiate services and
place a new member, AHCCCSA's performance standard is two weeks. For future
awards and contract renewals, AHCCCSA will evaluate the Program Contractor
against the two-week standard. For details on Case Management requirements, see
the AHCCCS Medical Policy Manual, Chapters 1200, 1500, 1600 and Appendix F.


10.     PRE-ADMISSION SCREENING AND ANNUAL RESIDENT REVIEW   (PASARR)

The Program Contractor shall ensure members have the Preadmission Screening and
Annual Resident Review (PASARR) Level I and, if needed, Level II screenings
prior to admission to a nursing facility. Level I is the identification of
members who are suspected of having mental illness or mental retardation. Level
II determines whether nursing facility or specialized services are needed.
Failure to have the proper PASARR screening prior to placement of members in a
nursing facility may result in federal financial participation (FFP) being
withheld from AHCCCSA. Should withholding of FFP occur, AHCCCSA will recoup the
withheld amount from the Program Contractor's next capitation payment. The
Program Contractor may, at its option, recoup the withholding from the nursing
facility which admitted the member without the proper PASARR.


11.   QUALITY MANAGEMENT/ UTILIZATION MANAGEMENT

The Program Contractor shall maintain an AHCCCSA-approved internal quality
management/ utilization management system and plan in accordance with ALTCS
Rules, the AHCCCS Medical Policy Manual and federal regulations found at 42 CFR
434.34 and Part 456; this RFP document does not contain all the QM/UM
requirements. The Program Contractor shall respond to quality of care issues in
accordance with the time limits specified in AHCCCSA correspondence concerning
the individual issues.

The Program Contractor shall ensure all EPSDT eligible children receive services
in accordance with the AHCCCS Medical Policy Manual, Chapter 400, including the
required EPSDT screens.

The Program Contractor shall participate in any annual study requested by
AHCCCSA and shall cooperate in the collection of quality indicator data as
needed, including chart reviews. AHCCCSA reserves the right to add required
clinical indicators and set standards for compliance. The current ALTCS quality
indicators are:


                                       16
<PAGE>   17
            Influenza immunization among nursing facilities

            Sacral/ Coccygeal pressure ulcers

            Psychotherapeutic agents

            Hospitalization and emergency room utilization

            Activities of daily living

            Fractures related to falls

The Program Contractor shall monitor activities related to the performance of
the provider network. These activities shall include, but not be limited to,
provider profiling in the areas of emergency room, hospital and pharmacy
utilization. The Program Contractor shall share provider profiling and
utilization information on a regular basis with individual providers. The
Program Contractor shall comply with all other medical audit provisions as
required by AHCCCS Rule R9-28-513.


12.   QUALITY MANAGEMENT/ UTILIZATION MANAGEMENT REPORTS

The Program Contractor shall submit the following periodic reports:

REPORT:                                 DUE DATE:

QM/ UM Plan                             45 days after contract effective date

QM/ UM Plan Evaluation                  November 15, each year

Quarterly Inpatient Showing Reports     15 days after the end of each quarter

Submission of Plan of Correction        30 days after receipt of notice to
                                        correct

AIDS/ HIV Notification                  Telephone as each case is identified or
                                        report all cases 30 days after the end
                                        of each quarter

EPSDT Progress Report                   First day of each quarter

Maternity Care Plan                     November 1, each year

EPSDT Participation Plan                November 1, each year

Pregnancy Termination Report            End of the month following pregnancy
                                        termination

Behavioral Health Utilization Report    30 days after the end of each quarter

Provider Affiliation Tape               30 days after the end of each quarter


13.   DENIALS OF SERVICES REQUIRING PRIOR AUTHORIZATION

When a service requiring prior authorization is denied, the Program Contractor
shall ensure the member is notified of the reasons for the denial. This
notification must be given to the member verbally or mailed to the member within
three working days from the date the decision to deny is made. Chapter 300 of
the AHCCCS Medical Policy Manual contains further detail on notification
requirements. AHCCCSA reserves the right to change the notification requirements
at any time during the term of this contract.

14.   MEMBER HANDBOOK AND MEMBER COMMUNICATIONS

All member informational materials (e.g. member handbooks, newsletters,
brochures) prepared by the Program Contractor shall be approved by AHCCCSA prior
to distribution to members. Information shall be provided in English and a
second language when 200 members or 5% of the Program Contractor's enrolled
population, whichever is greater, speak the same non-English language. The
Program Contractor is solely responsible for determining the necessity of this
second-language requirement. All written communications shall be written at the
fourth grade level. Suggested reference material to determine whether this
requirement is being met are:

      Fry Readability Index


                                       17
<PAGE>   18
      PROSE, the Readability Analyst (Software developed by Education

      Activities, Inc.)

      Gunning FOG Index

      McLaughlin SMOG Index.

When there are program or service changes, the Program Contractor will provide
notification to the affected members at least 14 days before the change goes
into effect.

The Program Contractor shall produce and provide a Member Handbook to each
member within 10 days of enrollment. The Member Handbook shall be prepared in
accordance with AHCCCSA rules for printed information and shall explain, at a
minimum, the following:

a.    A table of contents

b.    Covered and non-covered services

c.    Operations of the Program Contractor

d.    How to contact Member Services and a description of its function

e.    How to contact the case manager

f.    How to select and change PCPs

g.    Appointment procedures

h.    What to do in case of an emergency including names, addresses and
      telephone numbers for members to call for instructions. 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.

i.    Out-of-county and out-of-state moves

j.    Grievance process and procedures

k.    Advance directives

l.    Contributions the member can make towards his or her own health

m.    How to obtain emergency transportation and medically necessary
      transportation.

n.    EPSDT services

o.    Maternity and family planning services

p.    Behavioral health services

q.    Coordination with Medicare and other potentially liable third parties

r.    For members with Medicare coverage: indicate Medicare additional covered
      services, services not generally covered by Medicare, reference to the
      Medicare handbook "Other Things You Should Know About Medicare" which
      describes dual coverage (Medicare/Medicaid, QMB's, etc.)

s.    Member's share of cost

Regardless of the format chosen by the Program Contractor, the member handbook
must be written in a type-style and size that can be easily read by members of
varying degrees of visual impairment. At a minimum, the member handbook shall
also contain the following questions and answers, along with the two paragraphs
that follow. These items are required by HCFA:


      Q.    What if I have questions, problems, or complaints about [Program
            Contractor ]?

      A.    If you have a question or problem, please call ___________. If you
            have a specific complaint about your medical care, the Case Manager
            will help you.

      Q.    What if I am not happy with the help given to me by the Case
            Manager?

      A.    If you do not agree with the answer you receive, you may tell the
            Case Manager you want to file a written or oral grievance. The
            grievance must be filed no later than 35 days after the date of the
            action, decision, or incident.

      [Program Contractor name] will make a final decision within 45 days of
      getting your written grievance. A letter will be mailed to you stating our
      decision and the reason for the decision. The


                                       18
<PAGE>   19
      letter will tell you how you can appeal the decision if you are still
      unsatisfied. You must let us know you want to appeal within 15 days of
      being notified of our decision.

      If you decide to appeal, we will send your request for appeal to AHCCCS.
      You will receive information from AHCCCS on how your appeal will be
      handled. AHCCCS will then decide if our decision was correct under the
      circumstances.

15.   ENROLLMENT AND DISENROLLMENT

AHCCCSA is responsible for enrolling and disenrolling ALTCS members and for
providing notification of same to the Program Contractor. The effective date of
enrollments and disenrollments with the Program Contractor is two days after the
date the Program Contractor receives notification. Exceptions to the
disenrollment policy are discussed in ALTCS Eligibility Policy and Procedures
Manual, Chapter 1600.


16.   REQUEST FOR CHANGE IN ENROLLMENT

If a member moves out of the current Program Contractor's service area, the
current Program Contractor may request a program contractor change by submitting
a Program Contractor Change Request Form (DE-621) to the program contractor
responsible for the member's new county of residence and request that the new
program contractor agree to accept the member. If the new program contractor
agrees to accept the member, the DE-621 will be sent to AHCCCSA for processing.
If the new program contractor does not agree to accept the ALTCS member, the
current program contractor may request AHCCCSA to review the request. AHCCCSA
will make the final decision. The Program Contractor shall comply with all
timelines as required in AHCCCS policy. For more detailed information, refer to
the ALTCS Eligibility Policy and Procedures Manual, chapter 1600.


17.   REPORTING CHANGES IN MEMBERS' CIRCUMSTANCES

The ALTCS Member Change Report Form (7240T) provides the Program Contractor with
a method for notifying the ALTCS eligibility offices and AHCCCSA of changes or
corrections to the member's circumstances. This includes but is not limited to
changes in residence, living arrangements, third party payers, share of cost,
income or resources; a medical condition which could affect eligibility, or the
member's death. See the ALTCS Eligibility Policy and Procedures Manual, chapter
1600.




18.   OUT-OF-STATE PLACEMENT AND MEDICAL SERVICES

The Program Contractor shall obtain prior written approval from AHCCCSA before
placing a member in an institutional setting outside the state and notify
AHCCCSA once placement has been completed. ALTCS members who are temporarily
absent from Arizona are eligible for acute emergency services only. The Program
Contractor shall report temporary absences from the state to the ALTCS
eligibility office for a determination of continued eligibility.


19.   ADVANCE DIRECTIVES


                                       19
<PAGE>   20
The Program Contractor shall specify in its contracts or agreements with each
hospital, nursing facility, home health agency and hospice program that each
provider comply with federal and state law on advance directives for adult
members. At a minimum, the identified providers shall:

a.    Maintain written policies and provide written information for adult
      members regarding their ability to make decisions about medical care,
      including the right to accept or refuse medical care and the right to
      execute an advance directive

b.    Document whether or not the adult member has executed an advance directive

c.    Not condition the provision of care or discriminate against a member
      because of the member's decision to execute or not execute an advance
      directive

d.    Provide education for staff on issues concerning advance directives


20.   STAFF REQUIREMENTS AND SUPPORT SERVICES

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

a.    A full-time ADMINISTRATOR to oversee the entire operation of the Program
      Contractor

b.    A MEDICAL DIRECTOR who is an Arizona-licensed physician. The Medical
      Director shall be actively involved in all major clinical program
      components of the Program Contractor. The Medical Director shall devote
      sufficient time to the Program Contractor's operations to ensure timely
      medical decisions, including after-hours consultation as needed

c.    A full-time FINANCIAL OFFICER to oversee the budget and accounting systems
      implemented by the Program Contractor

d.    A QUALITY MANAGEMENT/ UTILIZATION MANAGEMENT COORDINATOR who is an
      Arizona-licensed registered nurse, physician or physician's assistant

e.    A BEHAVIORAL HEALTH COORDINATOR who has a combination of a minimum of a
      bachelors degree in a behavioral health related field as well as a minimum
      of two years training and experience in actual behavioral health services
      delivery

f.    PRIOR AUTHORIZATION STAFF to authorize medical care 24 hours per day, 7
      days per week. This staff shall be directly supervised by an
      Arizona-licensed registered nurse, physician or physician's assistant

g.    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.

h.    CASE MANAGEMENT COORDINATOR (OR MANAGER) or CASE MANAGERS to coordinate
      the provision of services to members in HCBS and institutional settings

i.    PROVIDER SERVICE STAFF to coordinate communications between the Program
      Contractor and its subcontractors. There shall be sufficient Provider
      Services staff to enable providers to receive prompt resolution to their
      problems or inquiries.

j.    CLAIMS ADMINISTRATOR and CLAIMS PROCESSORS to ensure the timely and
      accurate processing of original claims, claims correction letters,
      resubmissions and overall adjudication of claims

k.    ENCOUNTER PROCESSORS to ensure the timely and accurate processing and
      submission to AHCCCSA of encounter data and reports

l.    A GRIEVANCE COORDINATOR who will manage and adjudicate member and provider
      grievances

m.    CLERICAL AND SUPPORT STAFF as necessary to ensure proper functioning of
      the Program Contractor's operation.

The Program Contractor shall inform AHCCCSA, Office of Managed Care, in writing
within seven days of learning of an intended resignation in any of the following
key positions. In addition, AHCCCSA may require the Program Contractor to
provide a written plan for filling the vacant position, including expected
timelines.


                                       20
<PAGE>   21
    -     Administrator

    -     Medical Director

    -     Financial Officer

    -     Quality Management Coordinator

    -     Case Management Coordinator

    -     Claims Administrator

    -     Behavioral Health Coordinator

    -     Grievance Coordinator

The Program Contractor shall ensure that all staff have appropriate training,
education and experience to fulfill the requirements of the position.


21.  MEDICAL DIRECTOR

The Program Contractor shall have on staff a Medical Director who is currently
licensed in Arizona as a Medical Doctor or Doctor of Osteopathic Medicine. The
Medical Director shall be responsible for:

a.    The development, implementation and medical interpretation of medical
      policies and procedures to guide and support the provision of medical care
      to members. This includes, among others, policies pertaining to prior
      authorization, concurrent review, claims review, discharge planning,
      credentialling and referral management.

b.    Oversight of provider recruitment activities

c.    Reviewing all providers' applications and submit recommendations to those
      with contracting authority regarding credentialling and reappointment of
      all physicians prior to the physician's contracting (or renewal of
      contract) with the Program Contractor

d.    Oversight of provider profiling, including utilization management
      activities. Administration of all medical activities of the Program
      Contractor

f.    Continuous assessment and improvement of the quality of care provided to
      members (e.g. quality of care issues, quality indicators, annual medical
      study)

g.    The development and implementation of the quality management plan and
      serving as Chairperson of Quality Management Committee

h.    Oversight of provider education, inservice training and orientation

i.    Assuring that adequate staff and resources are available for the provision
      of proper medical care to members

j.    Attending quarterly ALTCS Medical Director meetings.

During periods when the Medical Director is not available, the Program
Contractor shall have adequate back-up physician staff to provide competent
medical direction.


22.      WRITTEN POLICIES, PROCEDURES AND JOB DESCRIPTIONS

The Program 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 Program Contractor shall maintain written guidelines for
developing, reviewing and approving all policies, procedures and job
descriptions, as appropriate, in order to ensure all contract requirements are
being met.

All policies and procedures shall be reviewed at least annually to ensure that
the Program Contractor's current practices reflect written policies. Review
dates shall be documented on the policy. Reviewed policies shall be dated and
signed by the Program 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.


                                       21
<PAGE>   22
Job descriptions shall be reviewed at least annually to ensure that current
duties performed by the employee reflect written requirements. Review dates
shall be documented on the job descriptions.


23.      PROVIDER MANUAL

The Program Contractor shall develop, distribute and maintain a provider manual.
The Program Contractor shall document the approval of the provider manual by its
Administrator and Medical Director and shall maintain documentation which
verifies that the provider manual is reviewed at least annually. The Program
Contractor shall ensure that each provider (individual or group that submits
claim and encounter data) is issued a copy of the provider manual. At a minimum,
the provider manual must contain information on the following:

a.    A table of contents

b.    Introduction to the Program Contractor which explains its organization and
      administrative structure

c.    Provider responsibilities and the Program Contractor's expectation of the
      provider such as gatekeeping activities, etc.

d.    Overview of the Program Contractor's Provider Services department and
      function

e.    Listing and description of covered and non-covered services, requirements
      and limitations

f.    Emergency room utilization (appropriate and non-appropriate use of the
      emergency room)

g.    Behavioral health services

h.    The Program Contractor's policy regarding PCP assignments

i.    Referrals to specialists and other providers

j.    Grievance process and procedures

k.    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 Program Contractor. A completed sample of each
            form shall be included

l.    Program Contractor's written policies and procedures which affect the
      provider(s) and/or the provider network

m.    Claims re-submission policy and procedure

n.    Reimbursement rate

o.    Explanation of remittance advice

p.    Prior authorization procedures

q.    Claims medical review

24.   NETWORK DEVELOPMENT

The Program Contractor shall develop and maintain a provider network that is
sufficient to provide all covered services to ALTCS 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 all covered services, including
emergency medical care on a 24-hour-a-day, 7-day-a-week basis. The proposed
network shall be sufficient to provide covered services within designated time
and distance limits.

If a service or setting is not available or is inadequate, the Offeror must
submit with its proposal an action plan for the creation, recruitment or other
activities designed to establish the service or setting.

The Program Contractor shall develop and submit with the proposal its plan for
the further development and expansion of Home and Community Based Services. This
plan must address all HCBS services and settings as described in Section D,
Paragraph 1, Covered Services and must be updated annually and submitted to
AHCCCSA, Office of Managed Care no later than Oct. 31 each year.


                                       22
<PAGE>   23
25.  NETWORK MANAGEMENT

The Program Contractor shall have policies and procedures in place that pertain
to all service specifications described in the AHCCCS Medical Policy Manual,
Chapter 1200. These include, but are not limited to, policies on how the Program
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 Program 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.    Provide respite care

g.    Ensure service accessibility, including monitoring appointment procedures
      standards, appointment waiting times, and service provision standards

h.    Recruit, select, credential, re-credential and contract with providers in
      a manner that incorporates quality management, utilization, office audits
      and provider profiling

i.    Manage or share risk with providers

j.    Provide training for its providers and maintain records of such training

k.    Provide eligibility information and prior authorization 24 hours per day,
      7 days per week.

The Program Contractor shall comply with the provider network and staffing
requirements described in the AHCCCS Medical Policy Manual, Chapter 600.

The Program Contractor shall comply with medical policy and standards related to
care coordination described in the AHCCCS Medical Policy Manual, Chapter 500.

The Program Contractor shall submit monthly to AHCCCSA, Office of Managed Care,
a report noting additions and deletions to the provider network.

26.  PROVIDER REGISTRATION

The Program Contractor shall ensure that all its subcontractors have registered
with AHCCCSA as approved service providers and have received AHCCCS Provider ID
Numbers. A Provider Participation Agreement must be signed with each provider
who does not also participate as an AHCCCS FFS provider and retained in
Contractor's files. The provider registration process must be completed in order
for the Program Contractor to report services a subcontractor renders to
enrolled members and for Contractor to be paid reinsurance.


27.  NETWORK DEFICIENCIES

The Program Contractor shall develop and maintain throughout the term of this
contract a provider network sufficient to provide all ALTCS covered services and
approved settings to members. In the event any network deficiency should occur,
i.e. a covered service or setting becomes unavailable, the Program Contractor
shall take immediate action to correct it. If the Program Contractor is unable
to contract with a provider to remedy the deficiency within 30 days from the
date the covered service or setting becomes unavailable, it shall promptly
notify the ALTCS Manager, Office of Managed Care, of the circumstances making it
unable to correct the network deficiency. Refer to Attachment B, Service Area
Minimum Network Standards.


                                       23
<PAGE>   24
28.   APPOINTMENT STANDARDS

The Program Contractor shall have procedures in place that ensure:

a.    Emergency appointments the same day or within 24 hours of the member's
      phone call or other notification, or as medically appropriate

b.    Urgent care appointments within two days

c.    Routine care appointments within 21 days

d.    Routine dental appointments within 30 days

For SPECIALTY REFERRALS, the Program 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 BEHAVIORAL HEALTH SERVICES, the Program Contractor shall be able to provide
appointments as follows:

a.    Emergency appointments within 24 hours of request

b.    Non-emergency appointments within 7 days of request

If the Program Contractor needs to provide medically-necessary transportation to
a member, the Program Contractor shall require its transportation provider to
schedule the transportation so that the member arrives no sooner than one hour
before the appointment and does not have to wait more than one hour after making
the call to be picked up after the appointment.


29.   FRAUD AND ABUSE

The Program Contractor is responsible for reporting all cases of suspected fraud
and abuse or inappropriate practices by subcontractors, members or employees.
The Program Contractor shall provide written notification of such incidents to
AHCCCSA, Internal Audit and Program Investigation Unit. The Program Contractor
shall develop programs to detect and prevent fraud and abuse and shall cooperate
with AHCCCSA as requested to investigate fraud and abuse cases. For a full
description of the Program Contractor's responsibilities, see the AHCCCS Health
Plans and Program Contractors - Policy for Prevention, Detection and Reporting
of Fraud and Abuse which is available in the Bidders' Library and incorporated
herein by reference.

The AHCCCS policy on fraud and abuse is currently under review and will likely
be revised to include more specific requirements regarding the prevention and
detection of fraud and abuse. Upon contract award the Program Contractor shall
participate in a fraud and abuse workgroup which will consist of representatives
from acute care health plans, program contractors, AHCCCSA, the Attorney
General's office, and the Health Care Financing Administration. The purpose of
the workgroup is to explore ways to minimize the occurrence of fraud and abuse
within the AHCCCS system and to recommend updates and revisions to the policy.

The population served in the long-term care program is very vulnerable,
particularly in the area of abuse. The Program Contractor shall develop specific
controls to prevent and detect member abuse.


30.   ON-SITE REVIEWS

In accordance with AHCCCS Rule R9-28-513, AHCCCSA will conduct operational
reviews at least once every three years for the purpose of, but not limited to,
ensuring program compliance. The type and duration of the


                                       24
<PAGE>   25
review will be solely at the discretion of AHCCCSA. The reviews will identify
areas where improvements can be made and make recommendations accordingly,
monitor the Program Contractor's progress towards implementing mandated programs
and provide the Program Contractor with technical assistance if necessary.
Except in cases where advance notice is not possible or advance notice may
render the review less useful, AHCCCSA will give the Program Contractor at least
two weeks advance notice of the date of the on-site review. AHCCCSA may conduct
a review in the event the Program Contractor undergoes a merger, reorganization,
changes ownership or makes changes in three or more key staff positions within a
12-month period.

In preparation for the reviews, the Program Contractor shall cooperate fully
with AHCCCSA and the AHCCCSA Review Team by forwarding in advance such policies,
procedures, job descriptions, contracts, records, logs and other material that
AHCCCSA may request. Any documents not requested in advance by AHCCCSA shall be
made available upon request of the Review Team during the course of the review.
Program 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 Program 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 Program Contractor obtains NCQA accreditation. The Program
Contractor must submit the entire NCQA report to AHCCCSA for such waiver
consideration.

The operations review is conducted by an AHCCCS review team comprised of staff
from the Office of Managed Care, the Office of the Medical Director and
Grievance and Appeals. The team will evaluate the Program Contractor's
performance and compliance with AHCCCS policies, rules and the terms of this
contract. The review will look at all aspects of operations including, but not
limited to:

                  Case management            Quality management
                  Utilization management     Medical direction
                  Grievance process          Claims processing
                  Encounter reporting        Provider and member services
                  Network management         Executive and financial management

Performance will be evaluated by reviewing case files, quality and utilization
management plans, meeting minutes, policies, manuals, reports, handbooks and
other relevant material. The Program Contractor will be furnished a draft copy
of the Review Report and given an opportunity to comment on any review findings
prior to AHCCCSA finalizing the report. Where there are outstanding
deficiencies, the Program Contractor may be required to submit a corrective
action plan without the opportunity to comment on the draft report.

Recommendations made by the Review Team to bring the Program Contractor into
compliance with federal, state, AHCCCS, and/or RFP requirements, must be
implemented by the Program Contractor. AHCCCSA may conduct a follow-up review or
require a corrective action plan to determine the Program Contractor's progress
in implementing recommendations and achieving program compliance. Follow-up
reviews may be conducted at any time after the initial review.

The Program Contractor shall submit a corrective action plan to improve areas of
non-compliance identified in the review. Once the corrective action plan is
approved by AHCCCSA, it shall be implemented by the Program Contractor.
Modifications to the corrective action plan must be agreed to by both parties.
Review findings may be used in the scoring of subsequent bid proposals submitted
by that Program Contractor.


31.    OPERATIONAL AND FINANCIAL READINESS REVIEWS


                                       25
<PAGE>   26
AHCCCSA may conduct Operational and Financial Readiness Reviews on any or all
offerors, either before award as part of the proposal evaluation, or after award
to assess the new Program Contractor's readiness to provide contract services. A
new Program Contractor will be permitted to commence operations only if the
Readiness Review factors are met to AHCCCSA's satisfaction.


32.   PATIENT TRUST ACCOUNT MONITORING

The Program Contractor shall monitor trust fund accounts for institutionalized
members to ensure that expenditures from a member's trust fund comply with
federal and state regulations. Suspected incidents of fraud involving the
management of these accounts must be reported in accordance with Section D,
Paragraph 29, Fraud and Abuse.


33.   FINANCIAL MANAGEMENT

Both AHCCCSA and HCFA require specific financial management and reporting
standards to protect the financial integrity of spending under the ALTCS
program. In addition, financial information must be available for the Program
Contractor to manage the program, to assess its own financial risk and to
determine if members are receiving necessary services. At a minimum, the Program
Contractor's system shall:

a.    Gather and report data on critical financial indicators (e.g., Incurred
      But Not Reported Claims)

b.    Establish and maintain a financial information base to support current
      operations

c.    Provide information regarding financial status, including all reporting
      mandated by law and accounting of HCBS expenditures, to internal
      management and AHCCCSA on a regular basis

d.    Make records available for independent audit

e.    Ensure that subcontractors are reimbursed promptly and correctly

f.    Monitor nursing facilities and other institutional patient trust accounts

g.    Monitor records in accordance with 42 CFR 483.10

In addition, the Program Contractor's financial management systems must meet
specific standards established by HCFA. These are specified in 45 CFR, Part 74,
which is incorporated herein by reference.


34.   REQUIRED FINANCIAL REPORTS

The Program Contractor shall comply with all financial reporting requirements
contained in the Reporting Guide for Long-Term Care Program Contractors with the
Arizona Health Care Cost Containment System. The Guide, which may be found in
the Bidders' Library, contains a complete listing of all monthly, quarterly and
annual reporting requirements including due dates for each report.


35.   PERFORMANCE BOND OR BOND SUBSTITUTE

The Program 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 to AHCCCSA for as long
as the Program Contractor has AHCCCS-related liabilities of $50,000 or more
outstanding, or 15 months following the termination date of this contract,
whichever is later, to guarantee: (1) payment of the Program Contractor's
obligations to providers, and (2) performance by the Program Contractor of its
obligations under this contract. The performance bond shall be in a form
acceptable to


                                       26
<PAGE>   27
AHCCCSA and payable to the Arizona Health Care Cost Containment System
Administration, an agency of the State of Arizona. In the case of an irrevocable
letter of credit the letter shall be issued by:

a.    A bank doing business in this state and insured by the Federal Deposit
      Insurance Corporation, or

b.    A savings and loan association doing business in this state and insured by
      the Federal Savings and Loan Insurance Corporation, or

c.    A credit union doing business in this state and insured by the National
      Credit Union Administration.

In the event of a default by the Program 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, contracted or otherwise,
      because of a breach of the Program Contractor's obligations under this
      contract,

b.    Reimbursing AHCCCSA for any payments made by AHCCCSA on behalf of the
      Program Contractor, and

c.    Reimbursing AHCCCSA for any extraordinary administrative expenses incurred
      by reason of a breach of the Program 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 Program
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 Program Contractor
acknowledges that it has granted AHCCCSA a security interest in such substitute
security to secure performance of its obligations under this contract. The
Program Contractor is solely responsible for establishing the credit-worthiness
of all forms of substitute security. AHCCCSA may, after written notice to the
Program Contractor, withdraw its permission for substitute security, in which
case the Program Contractor shall provide AHCCCSA with a form of security
described above.


36.   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 November or as determined
by AHCCCSA. This requirement must be satisfied by the Program Contractor no
later than 15 days after notification by AHCCCSA of the amount required.
Thereafter, AHCCCSA shall evaluate the enrollment statistics of the Program
Contractor on a monthly basis. If there is an increase in capitation payment
that exceeds 10% of the initial performance bond amount, AHCCCSA may require an
increase in the amount of the performance bond. The Program 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 the lesser of (a) the bond amount on the last day of the
contract; or (b) the total amount of AHCCCS-related liabilities outstanding.


37.   FINANCIAL VIABILITY CRITERIA AND PERFORMANCE MEASURES


                                       27
<PAGE>   28
AHCCCSA has established the following financial viability criteria and
performance measures that the Program Contractor shall adhere to. These
standards are subject to change as AHCCCSA deems appropriate:

a.    CURRENT RATIO                               Standard:  At least 1.00
      (Current assets divided by current
      liabilities)

b.    EQUITY PER MEMBER                           Standard:  At least $2,000
      (Equity, less on-balance sheet
      performance bond, divided by the number
      of members at the end of the period.)

c.    GROSS MEDICAL EXPENSES PERCENTAGE           Standard: No more than 90%
      (Gross medical expenses divided by
      total revenue)

d.    TOTAL ADMINISTRATIVE COST PERCENTAGE        Standard: No more than 8%
      (Total administrative expenses,
      excluding income taxes, divided by
      total revenue.)

e.    RECEIVED BUT UNPAID CLAIMS DAYS OUTSTANDING Standard: No more than 30 days
      (Received but unpaid claims divided by
      the average daily medical expenses for
      the period, net of sub-capitation
      expense)

f.    TOTAL MEDICAL CLAIMS DAYS OUTSTANDING       Standard: No more than 90 days
      (Total medical claims liability divided
      by the average daily medical expenses
      for the period, net of sub-capitation
      expense)

38.     ADVANCES, DISTRIBUTIONS AND LOANS

The Program Contractor shall not, without the prior written approval of AHCCCSA,
make any advances to a related party, or any distribution, loan or loan
guarantee to any entity, including another fund or line of business within its
organization. Requests for prior approval shall be submitted to the Office of
Managed Care.

39.     ACCUMULATED FUND DEFICIT

The Program Contractor and its owners shall fund any accumulated fund deficit
through capital contributions in a form acceptable to AHCCCSA within 60 days
after receipt by AHCCCSA of the final audited financial statement. The amount of
any accumulated fund deficit will be determined in accordance with the Program
Contractor's annual audited financial statements.


40.     HCBS ASSUMED MIX AND RECOUPMENT

The Program Contractor's capitation rate is based in part on the assumed ratio
("mix") of HCBS member months to the total number of member months (i.e. HCBS +
institutional). At the end of the contract year, AHCCCSA will compare the actual
HCBS member months to the assumed HCBS percentage that was used to calculate the
capitation rate for that year. If the Program Contractor's actual HCBS
percentage is greater than the assumed percentage, AHCCCSA will recoup (or
reimburse) the difference between the institutional capitation rate and the HCBS
capitation rate for the number of member months which exceeded (or was less
than) the assumed percentage. This reconciliation will be made in accordance
with the following schedule:

   Percent in excess of assumed percentage:        Amount to be recouped:

           0 - .5 percentage points             0% of capitation overpayment


                                       28
<PAGE>   29
       .51 - 1.99 percentage points             20% of capitation overpayment
        2 or more percentage points             30% of capitation overpayment

If the Program Contractor's actual HCBS percentage is less than the assumed
percentage, AHCCCSA will reimburse a portion of the difference between the
institutional rate and the HCBS capitation rate for the number of member months
lower than the assumed percentage. This reimbursement will be made in accordance
with the following schedule:

    Percent lower than assumed percentage:      Amount to be reimbursed:

           0 - .5 percentage points              0% of capitation underpayment
       .51 - 1.99 percentage points             20% of capitation underpayment
        2 or more percentage points             30% of capitation underpayment

The Program Contractor shall not exceed the statewide cap established by HCFA
and shall not implement an HCBS waiting list without prior written approval from
AHCCCSA.


41.     HOSPITAL REIMBURSEMENT

The Program Contractor shall reimburse hospitals for member care based on one of
the following rate methods:

a.    AHCCCS Fee for Service Hospital Reimbursement Rate

             Inpatient: AHCCCS hospital-specific tiered per diem rates
             Outpatient: AHCCCS hospital-specific cost-to-charge ratio
               multiplied by allowed charges,

                                       OR:

b.    Subcontracted rate (The aggregate of subcontracted rates must not exceed
      what would have been paid had the AHCCCS Fee for Service Hospital
      Reimbursement rate been used.)

Within seven days of subcontracting with a hospital, the Program Contractor
shall submit a copy of the subcontract, including all rates, terms and
conditions, to AHCCCSA, Office of Managed Care. This submittal shall include
documentation that the negotiated rate will, when considered in the aggregate,
be the same or less than what would have been paid under Paragraph a above. To
aid in making this determination, the Program Contractor shall require their
independent auditor to evaluate the reasonableness of their assumptions as part
of the annual audit.

The Program Contractor shall reimburse out of state hospitals at the lowest of
the following rates for inpatient and outpatient services:

a.    Negotiated discounted rate, or

b.    Arizona average cost-to-charge ratio multiplied by allowed charges, or

c.    Medicaid rate in effect in the state in which the hospital is located at
      the time services are provided.

The Program Contractor may conduct prepayment and postpayment medical reviews of
all hospital claims. Inpatient tiered per diem rates and outpatient
cost-to-charge ratios will be adjusted in accordance with ARS 36-2903.01 (J).

For a more complete description of the guidelines for hospital reimbursement,
refer to applicable statutes and rules, copies of which may be found in the
Bidders' Library.


                                       29
<PAGE>   30
42.     VENTILATOR DEPENDENT REIMBURSEMENT RATES

The Program Contractor will be paid on a capitated basis for
ventilator-dependent (VD) members. Two different capitation rates will be paid,
one for members who are placed in Home and Community Based Services, the other
for members who are placed in approved ALTCS institutional settings. These rates
are set by AHCCCSA and are included on the capitation bid disk. In addition,
each ventilator-dependent member shall have an annual evaluation by a
pulmonologist to assess the prospects of weaning the member from dependency on
the ventilator. A copy of this evaluation shall be promptly forwarded to
AHCCCSA's ventilator-dependent coordinator.

AHCCCSA will make capitation payments to the Program Contractor monthly in
advance of the performance of services. The capitation rate paid each month will
be the capitation rate for ventilator dependent members placed in Home and
Community Based Services. On a quarterly basis, AHCCCSA will reimburse the
Program Contractor the difference in capitation rates for those ventilator
dependent members who were placed in institutions. For example:

        HCBS VD capitation rate:                                      $  5,000
        Institutional VD capitation rate:                             $ 12,000
        Institutional VD member months for quarter:                         35
        Additional capitation due Program Contractor:
                               35 x ($12,000 - $5,000)       =        $245,000


43.     REINSURANCE

Reinsurance is a stop-loss program provided by AHCCCSA to the Program Contractor
for the partial reimbursement of covered inpatient facility medical services
incurred for a member beyond an annual deductible. AHCCCSA is self-insured for
the reinsurance program which has an initial deductible level and a subsequent
coinsurance percentage. For dates of service after 10/1/96 (under regular
reinsurance), the Program Contractor will be reimbursed at 75% of allowable
charges over the following deductibles:

        Urban county, with Medicare Part A             $12,000
        Urban county, without Medicare                 $20,000
        Rural county, with Medicare Part A             $ 5,000
        Rural county, without Medicare                 $ 9,000
        Behavioral Health/Traumatic Brain Injury     [To be determined]

Regular reinsurance covers acute inpatient hospitalizations (i.e. anything
billed on a UB92). Effective 10/1/96, members considered by the AHCCCS Office of
the Medical Director (OMD) to be high-cost behavioral health or Traumatic Brain
Injured will be covered under regular reinsurance. Services for these members
must be approved in advance by OMD for the Program Contractor to qualify for
reinsurance reimbursement. Services to members identified as being
catastrophically eligible in accordance with OMD policies will be covered under
a special catastrophic program instead of the regular reinsurance program.

Catastrophic reinsurance coverage for transplants is limited to 85% of the
AHCCCS contract amount for the transplant services rendered, or 85% of the
Contractor-paid amount, whichever is lower. Catastrophic reinsurance for
hemophiliacs is covered at 85% of the Contractor-paid amount. The AHCCCS
contracted transplantation rates are available in the Bidders' Library.

AHCCCSA uses inpatient encounter data to determine regular reinsurance benefits.
Reimbursement for regular reinsurance benefits will be made to the Program
Contractor monthly. AHCCCSA will also provide for a


                                       30
<PAGE>   31
reconciliation of reinsurance payments in the case where encounters used in the
calculation of reinsurance benefits are subsequently adjusted or voided.

Encounter data will not be used to determine catastrophic reinsurance benefits.
However, this does not relieve the Program Contractor of the responsibility for
submitting encounters for catastrophic reinsurance services. The Program
Contractor must submit catastrophic reinsurance claims in accordance with the
AHCCCS Reinsurance Policy/Procedure Manual. All catastrophic reinsurance claims
shall be subject to medical review by AHCCCSA or its designee.

Medical review on regular reinsurance cases will be determined based on
statistically valid random sampling. The AHCCCS Office of the Medical Director
will generate the sampling and will notify the Program Contractor of
documentation needed for the retrospective medical review process to occur at
the Program Contractor's offices. The results of the medical review sampling
will be extrapolated to the Program Contractor's entire regular reinsurance
reimbursement population. A partial recoupment of reinsurance reimbursements
made to the Program Contractor may occur based on the results of the medical
review sampling.


44.   COORDINATION OF BENEFITS/THIRD PARTY LIABILITY

COST AVOIDANCE - The Program 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 the third-party insurer requires the member to pay any co-payments or
deductibles, the Program Contractor is responsible for making these payments,
even if the services are provided outside of the Program Contractor's network.
(The Program 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 Program Contractor may also
choose to provide the service within its network.) If the Program Contractor
knows that the third party insurer will neither pay for nor provide the covered
service, and the service is medically necessary, the Program Contractor shall
not deny the service nor require a written denial letter. If the Program
Contractor does not know whether a particular service is covered by the third
party, and the service is medically necessary, the Program Contractor shall
contact the third party and determine whether or not such service is covered
rather than requiring the member to do so.

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

COST RECOVERIES - If the Program Contractor was not aware of third-party
coverage at the time services were rendered or paid for, or was unable to cost
avoid, the Program Contractor shall proceed as follows:

The Program Contractor shall identify all potentially liable third parties and
pursue reimbursement from them except in the following circumstances (unless
referred to the Program Contractor by AHCCCS or AHCCCSA's authorized
representative):

<TABLE>
<S>                                               <C>
    Uninsured/underinsured motorist insurance     First and third-party liability insurance
    Tortfeasors                                   Adoption recovery
    Estate recovery                               Worker's Compensation
</TABLE>


                                       31
<PAGE>   32
The Program Contractor shall, however, report any cases involving the above
circumstances to AHCCCSA's authorized representative should the Program
Contractor identify such a situation. See AHCCCS Rule R9-28-902, C and D.

The Program Contractor shall cooperate with AHCCCSA's authorized representative
in all collection efforts and is encouraged to contract with this representative
to better facilitate overall third-party collections. As part of its efforts,
the Program Contractor is responsible for performing all research and
investigation and payment of lien-filing related costs for total plan cases.

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

      1.    Total collections received do not exceed the total amount of the
            Program Contractor's financial liability for the member (total
            expenditures minus any member share of cost).

      2.    There are no payments made by AHCCCS related to fee-for-service,
            reinsurance or administrative costs (i.e. lien filing, etc.).

      3.    Such recovery is not prohibited by state or federal law

REPORTING - The Program Contractor may be required to report case level detail
of third-party collections and cost avoidance. The Program 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 Program Contractor shall communicate
any known change in health insurance information, including Medicare, to the
ALTCS local office not later than 10 days from the date of discovery using the
form designated in the ALTCS Eligibility Policy and Procedures Manual, Chapter
1600.

45. MEDICARE SERVICES and COST SHARING

AHCCCS has members enrolled who are eligible for both Medicare and Medicaid
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 psychiatric services

      Psychological services

      Inpatient and outpatient occupational coverage

      Respite services

      Any new services which are added to the Medicare program and which are not
      covered by AHCCCS

For all dual eligible persons, the Program 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 Program Contractor's network.

For QMB eligible persons, the Program Contractor shall be responsible for paying
the Medicare coinsurance and deductibles for Medicare services not covered by
AHCCCS described above which are provided on a fee-for-service basis.

Since Medicaid 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.


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<PAGE>   33
If a dual eligible is enrolled with a Medicare TEFRA Risk HMO, Medicare will not
reimburse the Program Contractor for Medicare covered services provided by the
Program Contractor. Therefore, the Program 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 Program Contractor shall be
responsible for any Medicaid covered services not provided by the Medicare TEFRA
Risk HMO.


46.   MEMBER SHARE OF COST


ALTCS members are required to contribute toward the cost of their care based on
their income. Some members, either because of their limited income or the
methodology used to determine the share of cost, do not have to pay a share of
cost. Generally, only institutionalized ALTCS members currently have a share of
cost.

Effective 10/1/96, subject to adoption of administrative rule, the share of cost
for members in an HCBS alternative residential setting will allow for a Personal
Needs Allowance (PNA). This PNA will be the same as for institutional members.
This will allow for a PNA equal to the institutional rate of 15% of the SSI
maximum for an individual ($70.50 as of 1/96). This is a reduction from the
current PNA rate of 300% of the SSI maximum ($1410 as of 1/96) for members
residing in Alternative Residential Settings. A room and board amount as
charged, not to exceed $800 per month, and all other share of cost deductions
described in ARS 36-2932 (O) will be allowed.

The Program Contractor receives monthly capitation payments which incorporate an
assumed deduction for the share of cost which members contribute to the cost of
care. The Program Contractor is responsible for collecting their members' share
of cost. The Program Contractor has the option of collecting the share of cost
or delegating this responsibility to the provider. The Program Contractor may
transfer this responsibility to nursing facilities, Institutions for Mental
Disease for those 65 years of age and older, or Inpatient Psychiatric Facilities
for those under 21 years of age, and compensate these facilities net of the
share of cost amount. If the Program Contractor delegates this responsibility to
the provider, the provider contract must spell out complete details of both
parties' obligations in share of cost collection. The Program Contractor must
establish a process for collecting the share of cost from HCBS members.

At the end of the contract year, AHCCCSA will compare actual Share of Cost
assignment to the Share of Cost assignment assumed in the calculation of the
capitation rate. Assumed Share of Cost will be fully reconciled to actual Share
of Cost Assignment, and AHCCCSA will either recoup or refund the total
difference, as applicable. This share of cost reconciliation may, at AHCCCSA's
sole discretion, be performed more frequently than once per year.

47.   MANAGEMENT SERVICES AND DISTRIBUTION OF FUNDS

All proposed management services subcontracts, MIS subcontracts, corporate cost
allocation plans, proposals to adjust management fees, and proposals for the
distribution of funds which may affect plan equity must be approved in advance
by AHCCCSA, Office of Managed Care. 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 are determined to be unjustified or excessive,
amounts may be subject to repayment to the Program Contractor. In addition, the
Program Contractor may be placed on monthly financial reporting and financial
sanctions may be imposed.


48.   MANAGEMENT SERVICES SUBCONTRACTOR AUDITS


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All management services subcontractors 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 after the subcontractor's fiscal year end.


49.  MERGER, REORGANIZATION AND CHANGE OF OWNERSHIP

A proposed merger, reorganization or change in ownership of the Program
Contractor shall require prior approval of AHCCCSA and a subsequent contract
amendment. The Program Contractor must submit a detailed merger, reorganization
and/or transition plan to AHCCCSA, Office of Managed Care, for AHCCCSA review.
The purpose of the plan review is to ensure uninterrupted services to members,
evaluate the new entity's ability to perform the contract requirements, 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.


50.  RELATED PARTY TRANSACTIONS

Any proposed subcontract involving a related party or entity requires prior
approval from AHCCCSA, Office of Managed Care. The minimum information required
on ownership and control in related party transactions is set by federal law (42
CFR 455.100 through 455.106) and the Program Contractor shall disclose all
required information, justify all related party transactions reported, and
certify the accuracy and completeness of the disclosures made. The Program
Contractor shall demonstrate that transactions occurring between the provider
and a related party-in-interest are reasonable, will not adversely affect the
fiscal soundness of the Program Contractor, and do not present a conflict of
interest.


51.  REQUESTS FOR INFORMATION

AHCCCSA may, at any time during the term of this contract, request financial or
other information from the Program Contractor. Upon receipt of such requests for
information, the Program 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.


52.  DATA MANAGEMENT

The Program Contractor shall have the capability for all required technical
interfaces with AHCCCSA. Refer to the AHCCCS Technical Interface Guidelines in
the Bidder's Library for further information. A copy of these guidelines will be
provided to the Program Contractor upon contract award.


53.  DATA EXCHANGE REQUIREMENT

The Program Contractor shall exchange data with AHCCCSA in accordance with the
AHCCCS Technical Interface Guidelines. The Program Contractor is responsible for
any incorrect data, delayed encounter data submission and any penalty applied
due to error, omission, deletion, or erroneous insert caused by data it
submitted. Any data that does not meet the standards required by AHCCCSA shall
not be accepted by AHCCCSA. The Program Contractor is responsible for
identifying any inconsistencies immediately upon receipt of data from AHCCCSA.
If any unreported inconsistencies are subsequently discovered, the Program
Contractor shall correct its records at its own expense.


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<PAGE>   35
AHCCCSA may require the Program Contractor to provide to AHCCCSA original
evidence of service rendered and PCP assignments in a form appropriate for
electronic data exchange. The Program Contractor shall be provided with a
security code for use in all data transmissions. The Program Contractor agrees
that by using its security code, it certifies that any data transmitted is
accurate and truthful, to the best of its knowledge.


54.  ENCOUNTER DATA REPORTING

The accurate and timely reporting of encounter data is crucial to the success of
the ALTCS program. AHCCCSA uses encounter data to:

                       Pay reinsurance benefits

                       Set fee-for-service and capitation rates

                       Determine disproportionate share payments to hospitals

                       Evaluate quality of care through quality indicators
                       developed with encounter data

The Program Contractor shall submit encounter data to AHCCCSA whenever a
contract service has been performed and must be provided by electronic media.
This requirement is a condition of the HCFA grant award.

Formatting and specific requirements for encounter data are described in AHCCCS
Encounter Reporting User Manual and AHCCCS Technical Interface Guidelines,
copies of which may be found in the Bidders' Library. Data must be organized
into the PMMIS AHCCCSA-supplied formats. The Encounter Record Submission
Standards are included herein as Attachment C.

Service codes have been established for all six alternative residential (HCBS)
settings. The Program Contractor will be required to use these codes in CATS and
with their Encounter reporting effective October 1, 1996. These six settings
(and therefore the service codes) are considered to include Title XIX services
as follows:

Adult Care Home:                         Personal care and homemaker services.

Supportive Residential Living:           Personal care, homemaker and nursing
                                         services

Adult Foster Care:                       Personal care and homemaker services;
                                         may include nursing services if the
                                         Adult Foster Care sponsor is a
                                         registered nurse.

Level I Behavioral Health Facility:      Personal care, homemaker, behavior
                                         management and nursing services.

Level II Behavioral Health Facility:     Personal care, homemaker and behavior
                                         management services.

Unclassified Health Care Facility for    Personal care, homemaker and nursing
the Treatment of Brain Injured:          services.


55.  SPECIALTY CONTRACTS

The Director of AHCCCSA may at any time negotiate or contract on behalf of the
Program Contractor and AHCCCSA for specialized hospital and medical services
such as organ transplants. If the Director has contracted for such specialized
services, the Program Contractor may be required to include such services within
its delivery networks and make contractual modifications necessary to carry out
this section. Specialty contracts shall take precedence over all other
contractual arrangements between the Program Contractor and its providers. If
the Program Contractor's specialty contracts are less costly than those of
AHCCCSA, AHCCCSA may allow the Program Contractor to continue using its
specialty contractors.


                                       35
<PAGE>   36
56.  SANCTIONS


If the Program Contractor violates any provision stated in law, AHCCCS Rules,
AHCCCS policies and procedures, or this contract, AHCCCSA may suspend, refuse to
renew, or terminate this contract or any related subcontracts in accordance with
the terms of this contract and applicable law and regulations, including AHCCCS
Rule R9-28-607. AHCCCSA may, in addition to these remedies, impose sanctions in
accordance with the provisions of this contract, applicable law and regulations.
Written notice will be provided to the Program Contractor specifying the
sanction to be imposed, the grounds for such sanction and either the length of
suspension or the amount of payment to be withheld.


57.  TERM OF CONTRACT  and  OPTION TO RENEW

The term of this contract shall be 10/1/96 through 9/30/97. In addition, AHCCCSA
reserves the sole option to extend the term of the contract, not to exceed a
total contracting period of three years. The terms and conditions of any such
contract extension shall remain the same as the original contract, as amended.
Any contract extension shall be through contract amendment. During the term of
this contract, the total contracting period may be increased through legislative
action from three to five years.

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


58.  GRIEVANCE PROCESS AND STANDARDS

The Program Contractor shall have in place a written grievance policy for
members and providers which defines their rights regarding any adverse action by
the Program Contractor. This written policy shall be in accordance with
applicable federal and state law and AHCCCS Rules and policies including, but
not limited to, ALTCS Rules R9-28-802 through 804. Details of the AHCCCS
grievance policy requirements and the Alternative Resolution Process are
included herein as Attachment H. The Program Contractor shall maintain a
complaint log pertaining to its program, services and provision of care.


59.  QUARTERLY GRIEVANCE REPORT

A Quarterly Grievance Report shall be submitted to AHCCCSA, Office of Grievance
and Appeals and must be received no later than 45 days after the end of each
quarter.


60.  LEGISLATIVE ISSUES

The Arizona Legislature will be considering several bills which will have an
impact on AHCCCSA and Program Contractors. AHCCCSA reserves the right to
incorporate additional services or programs prior to the award of this contract
(through RFP amendment) or subsequent to the awarding of this contract (through
contract amendment or a separate RFP). The proposed 1996 AHCCCS Omnibus Bill
includes the following provisions:


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<PAGE>   37
a. INPATIENT HOSPITAL REIMBURSEMENT - Currently, AHCCCS health plans and program
contractors may negotiate inpatient hospital reimbursement rates or default to
the AHCCCS tiered per diem rate. Since AHCCCS wants to encourage more
competitive rates, the default option will be removed in Maricopa and Pima
counties and health plans and program contractors operating in those two
counties will be required to negotiate inpatient hospital rates directly with at
least one hospital in Maricopa or Pima county, as appropriate.

b. ALTCS PREADMISSION SCREENING PROCESS - This would explicitly allow a
physician to review ALTCS eligibility cases and make a final decision based on
medical judgment.

c. LUNG AND HEART/LUNG TRANSPLANTS - Various technical amendments to the October
1995 legislation which authorized these transplants and an extended eligibility
process will be enacted.

d. SUBMITTAL DATE FOR DISPROPORTIONATE SHARE (DSH) PAYMENT DATA - Currently, DSH
payments are based on data received from the health plans and hospitals as of
July 1, 1995. AHCCCSA is requesting that this date be changed to December 31 to
allow the health plans and hospitals additional time to submit accurate and
complete data. 

e. MEMBER FRAUD - Current AHCCCS statutes on member fraud will be amended to 
include criminal and civil penalties for anyone who aids and abets fraudulent 
activities.

f. CONTRACT STATUTES - Maximum terms for ALTCS and acute care contracts would be
extended to five years from the present four years (for acute) and three years
(for ALTCS). Also, the term "Invitation For Bid" would be replaced by the more
appropriate "Request For Proposal".

g. EXTEND RULE-MAKING EXEMPTION - In 1994, the Legislature authorized a one-year
exemption from rule-making so that AHCCCS could implement a Medicare/Medicaid
dual eligible waiver and an on-reservation managed care pilot program waiver.
Since HCFA has not approved these waivers, AHCCCS will request that the
rule-making exemption be extended to June 30, 1997.

h. EFFECTIVE DATE OF ENROLLMENT - Effective date of Program Contractor
responsibility would be the date it received notification of the new member from
AHCCCSA. Current effective date is two days after the date of notification.

Other AHCCCS-related issues which may be introduced by interested parties will:

      -     Use tobacco tax money for various reasons. Provide temporary
            financial assistance to Gila, Cochise, Pinal, and Santa Cruz
            counties and set up a legislative committee to explore permanent
            relief.

      -     Authorize Supported Residential Living Centers as permanent settings
            under ALTCS.

      -     Select two AHCCCS health plans in Maricopa County to provide
            Title XIX and general behavioral health and substance abuse 
            services to AHCCCS eligible persons.


                               [END OF SECTION D]


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<PAGE>   38
                          SECTION E - CONTRACT CLAUSES

                                TABLE OF CONTENTS

                         [TO BE REVISED FOR FINAL DRAFT]



Advertising And Promotion Of Contract ....................................    36

Americans With Disabilities Act ..........................................    40

Applicable  Law ..........................................................    34

Assignment And Delegation ................................................    35

Audit ....................................................................    38

Authority ................................................................    34

Changes ..................................................................    39

Compliance With Applicable  Laws, Rules And Regulations ..................    35

Conflict Of Interest .....................................................    40

Contract Interpretation And Amendment ....................................    34

Covenant Against Contingent Fees .........................................    39

Disclosure Of Confidential Information ...................................    41

Disputes .................................................................    39

Effective Date ...........................................................    38

General Indemnification ..................................................    35

Gratuities ...............................................................    36

Incorporation By Reference ...............................................    39

Indemnification -- Patent And Copyright ..................................    35

Insurance ................................................................    38

No Guaranteed Quantities .................................................    40

Non-Discrimination .......................................................    38

Non-Exclusive Remedies ...................................................    38

Payments .................................................................    35

Property Of The State ....................................................    36

Records ..................................................................    34

Relationship Of Parties ..................................................    35

Right Of Offset ..........................................................    37

Right To Assurance .......................................................    36

Right To Inspect Plant Or Place Of Business ..............................    39

Severability .............................................................    34

Subcontracts .............................................................    35

Suspension Or Debarment ..................................................    37

Termination - Availability Of Funds ......................................    37

Termination For Conflict Of Interest .....................................    36

Termination For Convenience ..............................................    37

Termination For Default ..................................................    37

Third Party Antitrust Violations .........................................    36

Transition Activities ....................................................    40

Type Of Contract .........................................................    40


                                       38
<PAGE>   39
                          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 Program 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 Program Contractor shall not be entitled to any
claim under this contract based on those changes.


3.    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.


4.    RECORDS

Under ARS Section 35-214 and Section 35-215 the Program Contractor shall retain,
and shall contractually require each subcontractor to retain all data and other
records relating to the acquisition and performance of the contract for a period
of five years after the completion of the contract. All records shall be subject
to inspection and audit by the State at reasonable times. Upon request, the
Program Contractor shall produce a copy of any or all such records.


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.

6.    RELATIONSHIP OF PARTIES


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<PAGE>   40
The Program 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 Program 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 Program 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 Program
Contractor, its agents, employees, and subcontractors or anyone for whom the
Program Contractor may be responsible. The obligations, indemnities and
liabilities assumed by the Program Contractor under this paragraph shall not
extend to any liability caused by the negligence of the State or its employees.
The Program 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 Program Contractor of any claim for which it may be liable under this
paragraph.


9.    INDEMNIFICATION -- PATENT AND COPYRIGHT

The Program 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 Program Contractor of any claim for which it may be
liable under this paragraph.


10.   SUBCONTRACTS

All subcontracts entered into by the Program 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. 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 renegotiation.

f.    The specific duties of the subcontractor relating to coordination of
      benefits and determination of third-party liability.

g.    A description of the subcontractor's patient, medical and cost record
      keeping system.

h.    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.


                                       40
<PAGE>   41
i.    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/ Program
      Contractor.

j.    A provision stating that a merger, reorganization or change in ownership
      of a subcontractor that is related to or affiliated with the Contractor/
      Program 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.

11.   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 Program Contractor shall
maintain all applicable licenses and permits.


12.   PAYMENTS

The Program Contractor shall be paid as specified in the contract. Payment must
comply with requirements of ARS Title 35. AHCCCSA reserves the option to make
payments to the Program Contractor by wire or NACHA transfer and will provide
the Program Contractor at least 30 days notice prior to the effective date of
any such change.


13.   ADVERTISING AND PROMOTION OF CONTRACT

The Program Contractor shall not advertise or publish information for commercial
benefit concerning this contract without the prior written approval of the
Contracting Officer.


14.   PROPERTY OF THE STATE

Any materials, including reports, computer programs and other deliverables,
created under this contract are the sole property of AHCCCSA. The Program
Contractor is not entitled to a patent or copyright on those materials and may
not transfer the patent or copyright to anyone else. The Program Contractor
shall not use or release these materials without the prior written consent of
AHCCCSA.


15.   THIRD PARTY ANTITRUST VIOLATIONS

The Program 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 Program Contractor toward
fulfillment of this contract.

16.   RIGHT TO ASSURANCE


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<PAGE>   42
If AHCCCSA, in good faith, has reason to believe that the Program Contractor
does not intend to perform or continue performing this contract, the procurement
officer may demand in writing that the Program Contractor give a written
assurance of intent to perform. The demand shall be sent to the Program
Contractor by certified mail, return receipt required. Failure by the Program
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.


17.   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 Program
Contractor receives written notice of the cancellation unless the notice
specifies a later time.


18.   GRATUITIES

AHCCCSA may, by written notice to the Program Contractor, immediately terminate
this contract if it determines that employment or a gratuity was offered or made
by the Program Contractor or a representative of the Program 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 Program
Contractor.


19.   SUSPENSION OR DEBARMENT

AHCCCSA may, by written notice to the Program Contractor, immediately terminate
this contract if it determines that the Program Contractor has been debarred,
suspended or otherwise lawfully prohibited from participating in any public
procurement activity.


20.   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 Program Contractor of the termination at least 90 days before
the effective date of the termination. Upon receipt of the written notice, the
Program Contractor shall stop all work and immediately notify all subcontractors
to do the same. In the event of termination under this paragraph, all documents,
data and reports prepared by the Program Contractor under the contract shall
become the property of and be delivered to AHCCCSA. The Program 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.


21.   TERMINATION FOR DEFAULT

AHCCCSA reserves the right to terminate the contract in whole or in part due to
the failure of the Program Contractor to comply with any term or condition of
the contract or to make satisfactory progress in performing the


                                       42
<PAGE>   43
contract. The Contracting Officer shall mail written notice of the termination
and the reason(s) for it to the Program Contractor by certified mail, return
receipt requested.

Upon termination under this paragraph, all documents, data, and reports prepared
by the Program 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 Program Contractor shall be liable for any excess costs
incurred by AHCCCSA in re-procuring the materials or services.


22.   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.


23.   RIGHT OF OFFSET

AHCCCSA shall be entitled to offset against any amounts due the Program
Contractor any expenses or costs incurred by AHCCCSA concerning the Program
Contractor's non-conforming performance or failure to perform the contract.


24.   NON-EXCLUSIVE REMEDIES

The rights and the remedies of AHCCCSA under this contract are not exclusive.


25.   AUDIT

At any time during the term of this contract, the Program 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.


26.   NON-DISCRIMINATION

The Program 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 Program
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.


27.   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.


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28.   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 Program
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 Program Contractor.

c. Workers Compensation: Provides coverage to employees of the Program
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
Program Contractor's agent or broker must fill in the pertinent policy
information and ensure the required special conditions are included in the
Program 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 Program 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.


29.   DISPUTES

The exclusive manner for the Program 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 Program 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.


30.   RIGHT TO INSPECT PLANT OR PLACE OF BUSINESS


                                       44
<PAGE>   45
AHCCCSA may, at reasonable times, inspect the part of the plant or place of
business of the Program Contractor or subcontractor which is related to the
performance of this contract, in accordance with ARS Section 41-2547.


31.   INCORPORATION BY REFERENCE

This solicitation and all attachments and amendments, the Program Contractor's
proposal, best and final offer accepted by AHCCCSA, and any approved
subcontracts are hereby incorporated by reference into the contract.


32.   COVENANT AGAINST CONTINGENT FEES

The Program 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.


33.   CHANGES

AHCCCSA may at any time, by written notice to the Program 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 Program Contractor may assert its
right to an adjustment in compensation paid under this contract. The Program
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 Paragraph 29 (this
Section), and be administered accordingly.


34.   TYPE OF CONTRACT

Firm Fixed-Price


35.   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 (602) 417-4577.


36.     WARRANTY OF SERVICES

The Program Contractor warrants that all services provided under this contract
will conform to the requirements stated herein. AHCCCSA's acceptance of services
provided by the Program Contractor shall not relieve the Program Contractor from
its obligations under this warranty. In addition to its other remedies, AHCCCSA
may, at the Program Contractor's expense, require prompt correction of any
services failing to meet the Program Contractor's warranty herein. Services
corrected by the Program 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.


37.   NO GUARANTEED QUANTITIES

AHCCCSA does not guarantee the Program Contractor any minimum or maximum
quantity of services or goods to be provided under this contract.


                                       45
<PAGE>   46
38.     TRANSITION ACTIVITIES

Upon the expiration of this contract, AHCCCSA anticipates a continued need for
the services described herein. In the event the new contract is awarded to a
different program contractor, the outgoing Program Contractor shall work closely
with the incoming program contractor's personnel and AHCCCSA staff to ensure an
efficient transfer of duties and responsibilities. All transition activities
will be coordinated by AHCCCSA and a transition plan will be developed to
facilitate the transfer. AHCCCSA reserves the right to determine which, if any,
unfinished projects will remain with the outgoing Program Contractor for
completion.


39.     CONFLICT OF INTEREST

The Program 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 Program Contractor shall
fully and completely disclose any situation which may present a conflict of
interest. If the Program Contractor is now performing or elects to perform
during the term of this contract any services for any AHCCCS health plan,
provider or Program Contractor or an entity owning or controlling same, the
Program Contractor shall disclose this relationship prior to accepting any
assignment involving such party


40.   DISCLOSURE OF CONFIDENTIAL INFORMATION

The Program 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 Program Contractor by AHCCCSA.




                               [END OF SECTION E]


                                       46
<PAGE>   47
                         SECTION F - LIST OF ATTACHMENTS


Attachment A - Subcontract provisions

Attachment B - Service area minimum network standards

Attachment C - Encounter record submission standards

Attachment D - Management services subcontractor statement

Attachment E - Sample letter of intent

Attachment F - Instructions for preparing capitation disk

Attachment G - Instructions for preparing nursing home network disk

Attachment H - Grievance process and standards

Attachment I - Service area maps

Attachment J - Offeror's checklist


                                       47
<PAGE>   48
                 SECTION G - REPRESENTATIONS AND CERTIFICATIONS


1.       CERTIFICATION OF ACCURACY OF INFORMATION PROVIDED

By signing this offer the Offeror certifies, under penalty of law, that the
information provided herein is true, correct and complete to the best of
Offeror's knowledge and belief. Offeror also acknowledges that should
investigation at any time disclose any misrepresentation or falsification, any
subsequent contract may be terminated by AHCCCSA without penalty to or further
obligation by AHCCCSA.


2.       CERTIFICATION OF NON-COERCION

By signing this offer the Offeror certifies, under penalty of law, that it has
not made to any provider any requests or inducements not to contract with
another potential program contractor in relation to this solicitation.


3.        CERTIFICATION OF COMPLIANCE - ANTI-KICKBACK / LABORATORY TESTING

By signing this offer, the Offeror certifies that it has not engaged and will
not engage in any violation of the Medicare Anti-Kickback or the "Stark I" and
"Stark II" laws governing related-entity and compensation therefrom. If the
Offeror provides laboratory testing, it certifies that it has complied with and
has sent to AHCCCSA simultaneous copies of the information required to be sent
to the Health Care Financing Administration. (See 42 USC Sections 1320a-7b, PL
101-239, PL 101-432, and 42 CFR Section 411.361.)


4.       AUTHORIZED SIGNATORY

Authorized Signatory for  ______________________________________________________
                                [OFFEROR'S Name]

______________________________________,     ____________________________________
          [INDIVIDUAL'S Name]                              [Title]

is the person authorized to sign this contract on behalf of Offeror.


5.     OFFEROR'S MAILING ADDRESS

AHCCCSA should address all notices relative to this offer to the attention of:

________________________________________________________________________
Name                                         Title

________________________________________________________________________
Address                                      Telephone Number

________________________________________________________________________
City                               State            ZIP

6.       ORGANIZATION STRUCTURE


                                       48
<PAGE>   49
The Offeror must complete and return this questionnaire on organization
structure. Include all items requested in this section. Make sure that each
questionnaire item is completed and that full disclosure is made. When making
attachments to this section, please refer to the question number and the item
heading.

a. ORGANIZATION CHART Attach a copy of the Offeror's staff organization chart,
setting forth lines of authority, responsibility and communication which will
pertain to this proposal. Provide an overall organizational chart and separate
organizational charts for each functional area which includes the number of
current or proposed full-time employees in each area.

b. IF OTHER THAN A GOVERNMENT AGENCY, WHEN WAS YOUR ORGANIZATION FORMED?
___________________


c. LICENSE/CERTIFICATION Attach a list of all licenses and certifications (e.g.
federal HMO status or State certifications) your organization maintains. Use a
separate sheet of paper listing the license requirements and the renewal dates.

Have any licenses in accordance with ARS Section 20-1065 et. seq., been denied,
revoked or suspended within the past 10 years? Yes _____ No _____ If yes, please
explain on a separate sheet.

d. CIVIL RIGHTS COMPLIANCE DATA Has any federal or state agency ever made a
finding of noncompliance with any civil rights requirements with respect to your
program? Yes _____ No_____ If yes, please explain on a separate sheet.

e. HANDICAPPED ASSURANCE Does your organization provide assurance that no
qualified handicapped person will be denied benefits of or excluded from
participation in a program or activity because the Offeror's facilities
(including subcontractors) are inaccessible to or unusable by handicapped
persons? (Note: Check local zoning ordinances for handicapped requirements).
Yes____ No____ If yes, describe on a separate sheet how such assurance is
provided. If no, describe how your organization is taking affirmative steps to
provide assurance.

f. PRIOR CONVICTIONS List on a separate sheet all felony convictions within the
past 15 years of any key personnel (i.e., Administrator, financial officers,
major stockholders or those with controlling interest, etc.). Failure to make
full and complete disclosure shall result in the rejection of your proposal.

g. FEDERAL GOVERNMENT SUSPENSION/EXCLUSION Has Offeror been suspended or
excluded from any federal government programs for any reason? Yes_____ No_____
If yes, please explain on a separate sheet.


7.       FINANCIAL PLANNING

a. ORGANIZATIONAL STRUCTURE - The Offeror must describe the entity that is
requesting to contract with AHCCCSA. An entity is defined as any unit, existing
or to be formed, for which financial statements could be prepared in accordance
with generally accepted accounting principles. Offeror's description of the
entity shall include, at a minimum, the following:

      The date the entity was or will be formed and its legal status as an
      entity (i.e., Individual, Partnership, Corporation). Offeror's description
      should clearly identify the entity's relationship to any other
      organization.

      The name of accounting firm or individual who performed the audit, if
      entity is currently audited. Attach a copy of the most recent audited
      financial statements. If entity has not been audited within the last two
      years, or has never been audited, please attach a copy of the most recent
      annual unaudited financial statements.


                                       49
<PAGE>   50
      Explanation of how the initial capitalization and performance bond
      requirements, as described in Section D of this solicitation, will be met.

      Description of the principal allocation techniques used or proposed to be
      used for allocating indirect costs (including administrative costs)
      reflected in the entity's financial statements.

      A list of the types of liability insurance covering your entity. Include
      the amount of coverage and the name and address of the carrier.

      A description of any suits, judgments, tax deficiencies, claims or any
      other contingencies pending against the Offeror. Indicate the assessed and
      expected financial impact for each item.

      The date and type of each bankruptcy if the Offeror or its owner(s) has
      ever filed bankruptcy

b. RECEIVED BUT UNPAID CLAIMS (RBUCS) AND INCURRED BUT NOT RECEIVED (IBNRS)

Describe the method to be used for evaluating the claims liability for claims
received by the Offeror but not yet adjudicated. These claims are more commonly
referred to by AHCCCSA as Received But Unpaid Claims (RBUCs).

Describe the method to be used for evaluating the claims liability for IBNR
claims. This description should address the frequency that projections are
performed and major data sources used in the IBNR calculation. The description
should also include how the Offeror will validate the accuracy of the IBNR
amounts.

The Offeror shall provide a copy of their IBNR procedures and a summary of their
IBNR practices. These procedures and practices must adequately support Offeror's
response to the above IBNR descriptions.

c. CLAIMS PROCESSING SYSTEM - Describe in detail how you will assure encounter
data is submitted to AHCCCSA within the standards established in Attachment C.
Describe your claims processing system. Offeror's description shall include a
description of:

      -     Security and access controls to the processing system, both physical
            and software

      -     Claim processor edit overrides available and the reporting and
            monitoring of the use of the overrides, including authorization
            procedures and procedures for the review of the reported over-rides.

      -     Use of prior authorizations including authority to make changes to
            prior authorizations

      -     Audit trails produced for claims adjustments.

      -     Timelines for claims payments

      -     Post-payment review of processed claims

      -     Medical claims review

      -     Remittance advice

d. FINANCIAL PROJECTIONS - Offeror must submit prospective financial statements
for each of the three years ending September 30, 1997, 1998, and 1999.
Additionally, current program contractors responding to this solicitation must
also submit prospective financial statements for the year ending September 30,
1996. The prospective financial statements shall include all applicable
information on the Balance Sheet, the Statement of Revenue and Expenses and
Changes in Plan Equity.

Fields that are not completed on the financial projections will be assumed to be
zero. The financial projections must be consistent with the service areas the
Offeror has requested and the capitation rates bid by the Offeror for the
requested areas. Assumptions used in preparing the financial projections should
be clearly stated.

e. WAS AN ACTUARIAL FIRM USED TO ASSIST IN DEVELOPING CAPITATION RATES? Yes_____
No_____


                                       50
<PAGE>   51
If yes, what is name of actuary and actuarial
firm?__________________________________________

f. DID A FIRM OR ORGANIZATION PROVIDE THE OFFEROR WITH ANY ASSISTANCE IN MAKING
THIS OFFER (TO INCLUDE DEVELOPING CAPITATION RATES OR PROVIDING ANY OTHER
TECHNICAL ASSISTANCE)? Yes_____ No_____ If yes, what is the name of this firm or
organization?

________________________________________________________________________________
Name

________________________________________________________________________________
Address                            City                          State

g. HAS THE OFFEROR CONTRACTED OR ARRANGED FOR MANAGEMENT INFORMATION SYSTEMS,
SOFTWARE OR HARDWARE, FOR THE TERM OF THE CONTRACT? Yes_____ No_____ If yes, is
the Management Information System being obtained from a vendor? Yes _____
No_____ If yes, please provide on a separate sheet the vendor's name, the
vendor's background with AHCCCSA, the vendor's background with other HMOs, and
the vendor's background with other Medicaid programs.


8.  FINANCIAL DISCLOSURE STATEMENT

Offeror must provide the following information as required by 42 CFR 455.103.
This Financial Disclosure Statement shall be prepared as of 3/31/96. However,
continuing offerors who have filed the required Financial Disclosure Statement
within the last 12 months need not complete this section if no significant
changes have occurred since the last filing.

LIST THE NAME AND ADDRESS OF EACH PERSON WITH AN OWNERSHIP OR CONTROLLING
INTEREST, AS DEFINED BY 42 CFR 455.101, IN THE ENTITY SUBMITTING THIS OFFER:

                                                                Percent of
Name                       Address                          Ownership or Control

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

LIST THE NAME AND ADDRESS OF EACH PERSON WITH AN OWNERSHIP OR CONTROL INTEREST
IN ANY SUBCONTRACTOR IN WHICH THE DISCLOSING ENTITY HAS DIRECT OR INDIRECT
OWNERSHIP OF 5% OR MORE:

                                                                Percent of
Name                       Address                          Ownership or Control

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Names of above persons who are related to one another as spouse, parent, child
or sibling:

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________


                                       51
<PAGE>   52
LIST THE NAME OF ANY OTHER DISCLOSING ENTITY IN WHICH A PERSON WITH AN OWNERSHIP
OR CONTROL INTEREST IN THE DISCLOSING ENTITY ALSO HAS AN OWNERSHIP OR CONTROL
INTEREST:

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________


LIST THE OWNERSHIP OF ANY SUBCONTRACTOR WITH WHOM THE OFFEROR HAS HAD BUSINESS
TRANSACTIONS TOTALING MORE THAN $25,000 DURING THE 12-MONTH PERIOD ENDING ON THE
DATE OF THE REQUEST:

Describe Ownership    Type of Business             Dollar Amount
of Subcontractors     Transaction with Provider    of Transaction

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

LIST ANY SIGNIFICANT BUSINESS TRANSACTIONS, AS DEFINED IN 42 CFR 455.101,
BETWEEN THE OFFEROR AND ANY WHOLLY-OWNED SUPPLIER OR BETWEEN THE OFFEROR AND ANY
SUBCONTRACTOR DURING THE FIVE-YEAR PERIOD ENDING ON THE DATE OF THE OFFER:

Describe Ownership    Type of Business             Dollar Amount
of Subcontractors     Transaction with Provider    of Transaction

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

LIST THE NAME OF ANY PERSON WHO HAS OWNERSHIP OR CONTROL INTEREST IN THE
OFFEROR, OR IS AN AGENT OR MANAGING EMPLOYEE OF THE OFFEROR AND HAS BEEN
CONVICTED OF A CRIMINAL OFFENSE RELATED TO THAT PERSON'S INVOLVEMENT IN ANY
PROGRAM UNDER MEDICARE, MEDICAID OR THE TITLE XX SERVICES PROGRAM SINCE THE
INCEPTION OF THOSE PROGRAMS:

Name                       Address                          Title

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
LIST NAME AND ADDRESS OF EACH CREDITOR WHOSE LOANS OR MORTGAGES EXCEED 5% OF
TOTAL OFFEROR EQUITY AND ARE SECURED BY ASSETS OF THE OFFEROR'S COMPANY.

                                               Description             Amount
 Name                      Address               of Debt             of Security

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________


                                       52
<PAGE>   53
9.  RELATED PARTY TRANSACTIONS                                              OMC]

LIST THE NAMES AND ADDRESSES OF THE BOARD OF DIRECTORS OF THE OFFEROR.

Name/Title                      Address

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________


LIST NAMES AND TITLES OF THE 10 HIGHEST COMPENSATED MANAGEMENT PERSONNEL
INCLUDING BUT NOT LIMITED TO THE CHIEF EXECUTIVE OFFICER, THE CHIEF FINANCIAL
OFFICER, BOARD CHAIRMAN, BOARD SECRETARY, AND BOARD TREASURER:

Name                                                       Title

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________


DESCRIBE TRANSACTIONS BETWEEN THE OFFEROR AND ANY RELATED PARTY IN WHICH A
TRANSACTION OR SERIES OF TRANSACTIONS DURING ANY ONE FISCAL YEAR EXCEEDS THE
LESSER OF $10,000 OR 2% OF THE TOTAL OPERATING EXPENSES OF THE DISCLOSING
ENTITY. LIST PROPERTY, GOODS, SERVICES AND FACILITIES IN DETAIL NOTING THE
DOLLAR AMOUNTS OR OTHER CONSIDERATION FOR EACH TRANSACTION AND THE DATE THEREOF.
INCLUDE A JUSTIFICATION AS TO (1) THE REASONABLENESS OF THE TRANSACTION, (2) ITS
POTENTIAL ADVERSE IMPACT ON THE FISCAL SOUNDNESS OF THE DISCLOSING ENTITY, AND
(3) THAT THE TRANSACTION IS WITHOUT CONFLICT OF INTEREST:

a)  THE SALE, EXCHANGE OR LEASING OF ANY PROPERTY:

Description of    Name of Related Party               Dollar Amount for
Transaction         and Relationship                  Reporting Period

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

Justification:


                                       53
<PAGE>   54
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________


b)  THE FURNISHING OF GOODS, SERVICES OR FACILITIES FOR CONSIDERATION:

Description of    Name of Related Party                   Dollar Amount for
Transaction          and Relationship                      Reporting Period

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

Justification:

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________


c) DESCRIBE ALL TRANSACTIONS BETWEEN OFFEROR AND ANY RELATED PARTY WHICH
INCLUDES THE LENDING OF MONEY, EXTENSIONS OF CREDIT OR ANY INVESTMENT IN A
RELATED PARTY. THIS TYPE OF TRANSACTION REQUIRES REVIEW AND APPROVAL IN ADVANCE
BY THE OFFICE OF THE DIRECTOR:

Description of    Name of Related Party                  Dollar Amount for
Transaction         and Relationship                      Reporting Period

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

Justification:

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________


d) LIST THE NAME AND ADDRESS OF ANY INDIVIDUAL WHO OWNS OR CONTROLS MORE THAN
10% OF STOCK OR THAT HAS A CONTROLLING INTEREST (I.E.FORMULATES, DETERMINES OR
VETOES BUSINESS POLICY DECISIONS):

                                                   Has Controlling
                                    Owner Or           Interest?


                                       54
<PAGE>   55
Name      Address                       Controller          Yes / No

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________


10.      OFFEROR'S ADMINISTRATIVE FUNCTIONS SUBCONTRACTORS

Offeror must identify any organizational or administrative functions (e.g.
claims processing, marketing, automated data processing, accounting) or key
personnel (e.g. administrator, medical director, chief financial officer, etc.)
which are subcontracted.


Subcontractor's Name:___________________________________________________________
Address:________________________________________________________________________
Method Of Payment:______________________________________________________________
Function Performed:_____________________________________________________________

Estimated Value Of Contract:          10/1/96 - 9/30/97     $___________________
                                      10/1/97 - 9/30/98     $___________________
                                      10/1/98 - 9/30/99     $___________________


Subcontractor's Name:___________________________________________________________
Address:________________________________________________________________________
Method Of Payment:______________________________________________________________
Function Performed:_____________________________________________________________

Estimated Value Of Contract:          10/1/96 - 9/30/97     $___________________
                                      10/1/97 - 9/30/98     $___________________
                                      10/1/98 - 9/30/99     $___________________



Subcontractor's Name:___________________________________________________________
Address:________________________________________________________________________
Method Of Payment:______________________________________________________________
Function Performed:_____________________________________________________________

Estimated Value Of Contract:         10/1/96 - 9/30/97     $____________________
                                     10/1/97 - 9/30/98     $____________________
                                     10/1/98 - 9/30/99     $____________________

Subcontractor's Name:___________________________________________________________
Address:________________________________________________________________________
Method Of Payment:______________________________________________________________
Function Performed:_____________________________________________________________


                                       55
<PAGE>   56
Estimated Value Of Contract:        10/1/96 - 9/30/97     $_____________________
                                    10/1/97 - 9/30/98     $_____________________
                                    10/1/98 - 9/30/99     $_____________________


11. OFFEROR'S KEY PERSONNEL

Indicate the names of the persons filling the following positions and the date
(month/year) they began, or will begin, their staff assignment. In addition, the
Offeror must attach detailed professional resumes for all key personnel to
include, at a minimum, the following:

Position:                      Name:            Starting Date:       # of AHCCCS
                                                                     hours per
                                                                     week

Administrator

Medical Director

Financial Officer

Quality Mgt. Coordinator

Case Management Coordinator

Claims Administrator

Behavioral Health Coordinator

Grievance Coordinator





                               [END OF SECTION G]


                                       56
<PAGE>   57
                      SECTION H - INSTRUCTIONS TO OFFERORS

                                TABLE OF CONTENTS



1.   Proposal Content and Format..............................................59

2.   AHCCCSA Bidders' Library.................................................59

3.   Proprietary Information..................................................60

4.   Prospective Offerors' Inquiries..........................................60

5.   Prospective Offerors' Conference.........................................60

6.   Federal Deadline for Signing Contract....................................61

7.   Withdrawal of Proposal...................................................61

8.   Amendments to RFP........................................................61

9.   General Matters..........................................................61

10.  Provider Network and Network Management..................................61

11.  Capitation Rate................................ERROR! BOOKMARK NOT DEFINED.

12.  Program Operations.......................................................63

13.  Organization.............................................................64

14.  Certificate of Insurance.................................................65

15.  Data Management..........................................................65

16.  Amendments...............................................................65

17.  Submission of Initial Proposal On Most Favorable Terms...................66

18.  Proposal Opening.........................................................66

19.  Proposal Discussions.....................................................66

20.  Best and Final Offers....................................................66

21.  Award of Contract........................................................66

22.  RFP Milestone Dates......................................................67


                                       57
<PAGE>   58
SECTION H - INSTRUCTIONS TO OFFERORS


      Note: This RFP document does not describe the entire ALTCS program in
      complete detail. The Offeror, therefore, is encouraged to make use of the
      Bidders' Library and review the material incorporated by reference
      throughout the document. See Paragraph 2 below.



CONTINUING OFFERORS ONLY: For items below followed by an asterisk [*], a
continuing ALTCS offeror must submit its proposal for that item only if its most
recent operational/ financial review revealed deficiencies and the offeror's
subsequent corrective action plan was not approved by AHCCCSA. The continuing
offeror must also submit its proposal for that item if there have been
significant changes since the last operational/ financial review.

If the continuing offeror is deferring to its most recent operational/financial
review to meet a requirement shown with an asterisk, it must be indicated by
entering "PER REVIEW" in the "Offeror's Page #" column of the Offeror's
Checklist. If the continuing offeror is proposing to expand into a new service
area, it must submit the asterisked items for the new service area.


1.   PROPOSAL CONTENT AND FORMAT

The Offeror's proposal should present a detailed approach and plan for
addressing each element identified and described in this RFP. The information
must be presented in the order prescribed in Paragraphs 9 through 15 and again
in the Offerors' Checklist (Attachment J). Proposals that merely paraphrase
elements of this RFP or use such phrases as "will comply" or "standard
techniques will be employed" may be deemed unresponsive. AHCCCSA will not
provide any reimbursement for the cost of developing or submitting a proposal in
response to this RFP. One original and five copies of each proposal shall be
submitted in the format outlined below. Proposals received after the time and
date indicated on the front page of this solicitation will not be considered.

All proposals shall be organized as outlined in the checklist, forms and
computer disks provided in this solicitation. The checklist will serve as the
table of contents and the notes at the beginning of the checklist (Attachment J)
give specific instructions for new and continuing offerors. The Offeror must
indicate on the checklist the specific page numbers where material may be found
on the individual items. All pages of the Offeror's proposal must be numbered
consecutively, including attachments, appendices, exhibits, etc. The proposal
must be submitted in three-ring loose-leaf binders with the "spine" of each
binder clearly labeled to identify the Offeror, the contents of the binder, the
inclusive page numbers of that binder, and the number of the binder within the
series (e.g. "Vol. 2 of 4"). The binder containing the capitation and provider
network computer disks must be clearly identified on the outside of the binder.
Sealed proposals must be received at AHCCCSA no later than 3:00 pm, June 14,
1996.

Erasures, interlineations or other modifications in the proposal shall be
initialed in ink by the person authorized to sign the offer. AHCCCSA shall not
reimburse the Offeror the cost of proposal preparation.


2.    AHCCCSA BIDDERS' LIBRARY

The Bidders' Library contains reference material on AHCCCS and ALTCS policies
and performance requirements to assist the Offeror in preparing a thorough and
realistic response to this solicitation. References are made throughout this
solicitation to materials in the Bidders' Library and all such materials are


                                       58
<PAGE>   59
incorporated into the contract by reference. The Bidders' Library is located at
701 E. Jefferson, Phoenix, AZ. Please contact Mark Renshaw at (602) 417-4577 for
further information and appointment times. The following documents are available
for viewing or copying in the Bidders' Library:

            ALTCS Eligibility Policy and Procedure Manual

            AHCCCS Medical Policy Manual

            AHCCCS Encounter Reporting User Manual

            ALTCS Uniform Accounting and Reporting System and Guide for Audits
                  of ALTCS Contractors and Providers

            AHCCCS Technical Interface Guidelines

            Statement of Requirements for ALTCS Quality Management Program 

            Code of Federal Regulations (CFR), Titles 42 and 45 Arizona Revised
                  Statutes
           
            ALTCS Rules

            AHCCCS Rules

            AHCCCS Fee-for-Service Capped Fee Schedule

            AHCCCS Policy for Prevention, Detection and Reporting of Fraud and 
                  Abuse

            AHCCCS Reinsurance Manual
        
            HCBS Cap Report 

            Long-Term Care Placement Report 

            Enrollment Report (last two years)

            Transplantation rates


3.    PROPRIETARY INFORMATION

All proposals shall become the property of AHCCCSA. The Offeror may designate
certain information to be proprietary in nature by printing the word
"proprietary" on top of each page for which nondisclosure is requested. Final
determinations of nondisclosure rest with AHCCCSA; however, all portions of the
Offeror's proposal, including those which are proprietary, may be provided to
the HCFA and its evaluation contractor.


4.    PROSPECTIVE OFFERORS' INQUIRIES

Any questions related to this solicitation must be directed to Mark Renshaw,
AHCCCS Contracts and Purchasing, 701 E. Jefferson, Phoenix, AZ 85034 All
questions submitted in writing to AHCCCSA, Contracts and Purchasing, by April
19, 1996 will be combined and answered in a single RFP amendment shortly
thereafter. The Offeror shall not contact or ask questions of other AHCCCSA
staff unless authorized to do so by the Contracting Officer. Cite page, section
and paragraph number when submitting questions


5.    PROSPECTIVE OFFERORS' CONFERENCE

A Prospective Offerors' Conference will be held on Monday, April 15, 1996 from
1-3 p.m. at the 701 E. Jefferson, 3rd Floor Gold Room. The purpose of this
conference will be to clarify the contents of this solicitation, answer
questions from prospective offerors, and offer general guidance on the required
format of all proposals. Any doubt regarding the contents or requirements of
this solicitation or any apparent omission or discrepancy should be presented at
or before this conference. AHCCCSA will then determine the appropriate action
necessary and issue a written amendment to the solicitation, if appropriate.

6.    FEDERAL DEADLINE FOR SIGNING CONTRACT


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The federal Health Care Financing Administration (HCFA) has imposed strict
deadlines for finalization of contracts in order to qualify for federal
financial participation. This contract, completed and signed by both parties,
must be available for submission to HCFA prior to the beginning date of the
contract term (Oct. 1, 1996), but in no case later than November 1, 1996. All
public entity offerors must ensure that the approval of this contract is placed
on appropriate agendas well in advance to ensure compliance with this deadline.
Any withholding of federal funds caused by the Offeror's failure to comply with
this requirement shall be borne in full by the Offeror.


7.    WITHDRAWAL OF PROPOSAL

At any time prior to the proposal due date and time, the Offeror (or designated
representative) may withdraw its proposal. Telegraphic or mailgram withdrawals
will not be considered.


8.    AMENDMENTS TO RFP

Amendments may be issued subsequent to the issue date of this solicitation.
Receipt of solicitation amendments must be acknowledged by signing and returning
the signature page of the amendment to AHCCCSA.


[PARAGRAPHS 9 THROUGH 15 PERTAIN TO THE PROPOSAL REQUIREMENTS AS THEY APPEAR IN
ATTACHMENT J, OFFEROR'S CHECKLIST:]

9.     GENERAL MATTERS

Complete and submit the Offeror's signature page (cover page of this document).
Complete and submit the Offeror's Checklist.
Review and understand the Certification of Non-coercion.


10.    NETWORK

Provider Network - The Offeror shall have in place an adequate network of
providers capable of meeting all contract requirements. Attachment B lists the
minimum network requirements by service area. The Offeror shall provide in its
proposal information concerning its entire provider network for all service
areas whether the proposal is for a continuing service area or an expansion of
service areas. Submit both the nursing facility network disk and hard copy. A
hard copy roster of the acute care, HCBS and behavioral health providers shall
be submitted in the format listed below. Signed letters of intent or contract
signature pages must accompany the provider listings as evidence of an agreement
between the Offeror and provider. Attachment E, Sample Letter of Intent, is the
only acceptable format for these letters. AHCCCSA may verify any or all
submitted letters of intent or contracts.

Nursing Facility Network - The nursing facility network disk screens contain the
names of the nursing facilities listed alphabetically by county. See Attachment
G and the network disk for detailed instructions.

Acute care, HCBS and Behavioral Health - The Offeror shall submit a roster by
county of acute care, HCBS and behavioral health providers for Contract Year
96-97. In addition to the roster, signed letters of intent or contract signature
pages must be submitted in the same order as the names listed on the provider
roster. The roster shall appear in the same order and use the same headings as
the Sample Letter of Intent provider listing (Attachment E). For example, start
with Acute Care Hospital which is #2 on the listed provider types in the Sample
Letter of Intent and list all the hospitals for which letters of intent or
contracts have been obtained. This should be followed by


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Psychiatric Hospital which is #3 on the listed provider types in the Sample
Letter of Intent. Continue the provider listing through Hospice Service
Providers. Include the following information in the roster listing: provider
name, address including street, city, state, and zip code and telephone number.

Network Maps (Maricopa And Pima Counties Only) - The Offeror must demonstrate
the ability to provide Primary Care Provider (PCP) and pharmacy services in
metropolitan Phoenix and Tucson according to certain maximum travel distances.
Attachment I to this solicitation consists of two maps (Phoenix and Tucson) each
of which shows a geographical boundary. The Offeror's network must be such that
a member residing within the boundary area would not have to travel more than
five miles to see a PCP or pharmacy. A member residing outside the boundary area
(but within the total area shown on the map) must not have to travel more than
10 miles to see such providers. (See Mapping Instructions which follow.)

Mapping Instructions: The Offeror must use the maps provided (Attachment I) to
indicate the location of each PCP and pharmacy in its proposed network for
metropolitan Phoenix and Tucson. The Offeror should use color coded dots, red
for PCP's and green for pharmacies. The Offeror may place one red dot in the zip
code with a number indicating the number of proposed subcontracts for PCP's
within that zip code. Similarly, the Offeror may place a green dot in the
particular zip code with a number indicating the number of pharmacies proposed
for that zip code area. Since the color on dots is not distinguishable when
photocopied, the Offeror should place colored dots on not only the original but
also on all five required copies, or supply colored copies.

Network Development - The Program Contractor must develop and maintain an
adequate provider network to provide all covered services. Where there is a
deficiency in the provider network, identify the deficiency and submit your plan
for correcting it. Submit a description of your current Home and Community Based
Services program, as well as your plan for further developing these services.
Address, at a minimum, the following areas:

          Attendant Care

          Personal Care

          Homemaker

          Adult Day Health

          Home Health Agency Services, including nursing and home health aide
          Group Respite as an alternative to Adult Day Health

          Environmental modifications

          Home-delivered meals

Submit a separate description of your proposals for providing alternative
residential settings to include, at a minimum:

          Adult Foster Care

          Adult Care Homes (pilot program)

          Supportive Residential Living (pilot program)

          Traumatic Brain Injury facilities

          Behavioral Health levels I and II

Network Management - Submit a narrative description, or copies of your policies
and procedures, indicating how you will meet the network management requirements
specified in Section D, Paragraphs 24 through 28. The description must describe
in detail the internal monitoring process pertaining to frequency, problem
identification, corrective action plan, follow-up, sanctions and cause for
provider termination.

Provider manual - Submit one manual in a separate binder labeled "Provider
Manual".


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11.    CAPITATION RATE

Capitation is a fixed per member monthly payment to the Program Contractor for
the provision of covered services to members. It is an actuarially sound amount
to cover expected utilization and costs in a risk-sharing managed care
environment. In addition, AHCCCSA offers reinsurance programs to protect the
Program Contractor from unusual and unforeseen expenses.

The Offeror must demonstrate that the capitation rates proposed are actuarially
sound. That is, the Offeror, if awarded a contract, should be able to keep
utilization at or below its proposed levels and to subcontract for unit costs
that average at or below the amounts shown on its Capitation Rate Calculation
Sheet disk. The Offeror may require assistance from an actuary to develop some
of the fundamental assumptions for meeting the criteria defined above.

To facilitate the preparation of its capitation proposals, AHCCCSA will provide
the offeror with a copy of the Data Supplement Book, to be available April 15 or
shortly thereafter. This book should not be used as the sole source of
information in preparing the capitation proposal. The Offeror is solely
responsible for research, preparation and documentation of its capitation
proposal.

The Offeror must submit its capitation proposal using the AHCCCSA capitation bid
disk. Attachment F to this RFP contains detailed instructions for using the
computer disk program.


12.    PROGRAM OPERATIONS

Medical Director - Submit the position description or a copy of the contract.

Case Management Structure Plan - A new offeror, or a continuing offeror bidding
on a new service area, must describe how it will meet ALTCS case management
requirements. (See Section D, Paragraph 9, Case Management.) A continuing
offeror must submit this case management plan if the 1994-96 case management
services review indicated deficiencies and the subsequent corrective action plan
was not approved by AHCCCSA. A continuing offeror must also submit its case
management plan if there have been significant management or organizational
changes since the last services review or plan submittal.

The description shall include the number of case managers, how case management
assignments are made and how protocols are communicated. Describe the monitoring
process to ensure compliance with protocols of case management ratios, data
entry, member contact timelines, member record content, placement decisions
(including any preference for particular procedures), how case managers will
coordinate with primary care physicians and prior authorization staff, how
out-of-county clients will be managed and member transition to AHCCCS acute care
health plans.

Quality Management/ Utilization Management - A new offeror, or a continuing
offeror bidding on a new service area, must submit a quality management plan
addressing the requirements specified in the AHCCCS Medical Policy Manual. (Also
see Section D, Paragraph 11, Quality Management/ Utilization Management.) This
plan should include the Offeror's utilization management plan. Attach
utilization management policies and procedures for (1) prior authorization and
referral requirements, (2) clinical standards used, (3) restrictions on settings
for care, and (4) the qualifications of individuals performing utilization
management activities.

A continuing offeror must submit the quality management plan if the 1994-96 case
management services review indicated deficiencies and the subsequent corrective
action plan was not approved by AHCCCSA. A continuing offeror must also submit
its quality management plan if there have been significant management or
organizational changes since the last services review or plan submittal.


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Grievance and Appeals - The Offeror must submit specific information describing
how it will meet the requirements outlined in Attachment H, Grievance Process
and Standards.

Member Transition and Program Contractor Changes policy - Submit relevant
policies and procedures.

Member Handbook and Communications - Submit a copy of the current or proposed
member handbook.

Behavioral Health Services - Submit the behavioral health services plan that
includes, but is not limited to, referral process, treatment planning and
coordination, staff and provider training in the identification of and screening
for behavioral health needs, quality and utilization management.


13.    ORGANIZATION

Section G - Complete all questionnaire items and submit all materials required
in Section G, including authorized signatory, functional organization chart,
resumes of key personnel (submit position description if vacant), licenses,
certifications, description of organizational entity, description of claims
processing, RBUC/ IBNR method, financial projections, financial disclosure
statements, administrative functions/ management/ MIS subcontractor statements
and related party transactions.

Financial Viability Standards - Calculate and submit the financial viability and
performance measures based on your financial projections.

Performance Bond or Bond Substitute - Submit your plan for meeting this
requirement including the type of bond to be posted, source of funding and
timeline for meeting the requirement.

Patient Trust Account Policy and Procedure - Submit a copy of your policy for
monitoring these accounts.

TPL/ COB Procedures - Submit a copy of your policy that addresses third party
liability requirements.

Share of Cost Collection Policy - Submit copy of policy that describes the
collection of the member's share of cost.

Fraud and Abuse - Submit a copy of your policy pertaining to the prevention and
detection of fraud and abuse.

Model Subcontracts - Submit copies of the following model subcontracts:

            a.    Contracts between related parties

            b.    Subcontracts for full or partial risk, or withholds

            c.    Contracts for management information systems or data
                  management firms

            d.    Primary care physicians

            e.    Attendant Care and Home Health agencies

            f.    Behavioral health providers

            g.    Nursing facilities

            h.    Alternative residential care facilities (described in Section
                  D, Paragraph 1, Covered Services)

            i.    Dental services

14.   CERTIFICATE OF INSURANCE

The Offeror shall submit a properly completed Certificate of Insurance in
accordance with the requirements of Section E, Paragraph 28, Insurance.


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15.   DATA MANAGEMENT

The Offeror shall submit a description of how it will meet the data management
requirements specified in Section D, Paragraph 52, Data Management. If not
currently able to meet requirements, submit an appropriate timeline for
start-up.


16.   AMENDMENTS

The Offeror shall sign and submit with its offer all amendments to this
solicitation.


17.   SUBMISSION OF INITIAL PROPOSAL ON MOST FAVORABLE TERMS

AHCCCSA reserves the right to award a contract without negotiation based solely
on the price and terms of the proposal as initially submitted. The Offeror is
therefore advised to submit its best offer initially.


18.   PROPOSAL OPENING

Proposals will be opened publicly immediately following the proposal due date
and time. The name of each offeror will be read publicly and recorded, but no
other information contained in the proposals will be disclosed. Proposals will
not be available for public inspection until after contract award.


19.   PROPOSAL DISCUSSIONS

Discussions may be conducted with a responsible offeror who submits a proposal
determined to be reasonably susceptible of contract award. As used here,
"responsible offeror" means an offeror that has the capability to perform the
contract requirements and also the integrity and reliability to assure good
faith performance. In conducting discussions, there will be no disclosure of any
information derived from competing proposals. AHCCCSA will have sole discretion
in selecting proposal discussion items and such discussions may include
interviews or be in writing. At the end of discussions, the offeror may be
permitted the opportunity to revise its proposal for the purpose of obtaining
its best and final offer.


20.   BEST AND FINAL OFFERS

If in the best interest of the State, AHCCCSA will issue a written request for a
Best and Final Offer (BFO) setting forth the date, time and place for its
submission. The purpose of the request for a BFO is to allow the Offeror an
opportunity to resubmit bids for rate components not previously accepted by
AHCCCSA. In addition, AHCCCSA will disclose to the Offeror which of its bid rate
components are acceptable (within or below the actuarial rate range), and which
are not acceptable (above the actuarial rate range).

The BFO must be submitted on the computer disk provided by AHCCCSA. The Offeror
whose final bid rate components fall below the bottom of the actuarial rate
range will have its rates increased to the bottom of the component rate range.
The Offeror whose final bid rate components are above the actuarial rate range
will be offered a rate in the bottom half of the component rate range. If the
Offeror does not submit a notice of withdrawal or a BFO, its immediate previous
offer will be considered its best and final offer. The Offeror will not be
allowed to adjust upward a previously accepted component rate bid.


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21.     AWARD OF CONTRACT

Award will be made to the offeror whose proposal is determined to be the most
advantageous to AHCCCSA based on the evaluation factors set forth in Section I
of this RFP. Final capitation rates are subject to approval by HCFA.
Notwithstanding any other provision of this solicitation, AHCCCSA expressly
reserves the right to:

a.    Waive any immaterial mistake or informality;

b.    Reject any or all proposals, or portions thereof; and/or

c.    Reissue a Request for Proposals

A response to this RFP is an offer to contract with AHCCCSA based upon the
terms, conditions, scope of work and specifications of the RFP. Proposals do not
become contracts unless and until they are accepted by the contracting officer.
A contract is formed when the AHCCCSA Contracting Officer provides written
notice of award to the successful offeror(s). The final contract consists of the
terms and conditions of the RFP, amendments to the RFP, the Offeror's last BFO,
and subsequent contract modifications, if any.


22.   RFP MILESTONE DATES

The following is the anticipated schedule of events regarding the solicitation
process:

      Activity                                    Date

Solicitation issued                               4/1/96

Offerors' Conference                              4/8/96

RFP-related questions due (if any)                4/19/96

Technical Assistance Conference                   5/6/96

Proposals due                                     6/14/96

Awards made                                       7/15/96

Contract term begins                              10/1/96





                               [END OF SECTION H]


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    SECTION I - EVALUATION FACTORS  SELECTION PROCESS

AHCCCSA has developed a scoring process which is designed to evaluate fairly an
offeror's ability to provide cost-effective, high quality contract services in a
managed care setting. The following factors, weighted as shown, will be
evaluated.

      Provider Network and Management        30%
      Program                                30%
      Capitation                             25%
      Organization                           15%

Provider Network and Capitation will be scored by county. Organization and
Program will be scored in the aggregate for all counties bid by the Offeror.
Contracts will be awarded to qualified Offerors whose proposals are deemed to be
most advantageous to the State in accordance with [Section H, Paragraph 21.]

AHCCCSA will consider its experience with continuing ALTCS Offerors and
contracted health plans in evaluating their proposals in the areas of Provider
Network, Program and Organization. The results of the most recent Operational
and Financial Reviews performed by AHCCCSA through April 1996 will be used in
the evaluation process. AHCCCSA may also conduct New Offeror Reviews.

AHCCCSA reserves the right to waive immaterial defects or omissions in this
solicitation or submitted proposals.


ALL OF THE COMPONENTS LISTED BELOW WILL BE EVALUATED AGAINST CORRESPONDING
STATUTES, AHCCCSA RULES, REGULATIONS, POLICIES AND THE REQUIREMENTS CONTAINED IN
THIS RFP. THE OFFEROR'S CHECKLIST (ATTACHMENT J) CONTAINS RFP REFERENCES FOR
EACH OF THESE ITEMS:

PROVIDER NETWORK DEVELOPMENT AND MANAGEMENT

The provider network will be evaluated and scored with reference to the
Offeror's network development and network management. "Network development" is
defined as the process of negotiating contractual relationships with a
sufficient number of providers able to competently perform defined covered
services within a given area in accordance with AHCCCS standards (e.g.
appointment times).

1.    Nursing facility network

AHCCCSA will use the automated Nursing Facility Network Program to evaluate and
score the nursing facility network. Within the program, the Offeror must
indicate the nursing facilities for which it has signed letters of intent or
contracts for Contract Year 96-97. The Offeror must submit the signed letters of
intent and/or the contract signature pages for Contract Year 96-97 as part of
its proposal.

Extra consideration will be given for letters of intent or contracts that
specify payment rates, share of cost collection agreements, and certain types of
risk relationships. The share of cost collection agreement will be evaluated
based on delineation of responsibility of both parties in the collection of the
members' share of cost. Mere delegation of this responsibility to the provider
will not result in any extra credit or consideration in the scoring process. The
agreement must demonstrate due diligence on the part of both parties. The
Offeror will receive extra consideration for entering risk-sharing agreements
with its nursing homes. To receive extra consideration, the risk agreement must
align the incentives of the Offeror and the nursing home in placing the member
at the appropriate level of care, including moving the member to an HCBS setting
if appropriate. The risk agreements must not encourage underutilization or
violate any federal or state regulations.


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2.    Acute, HCBS, behavioral health network

3.    HCBS development plan

4.    Provider network deficiency plan - The Offeror's plan will be evaluated to
      determine if the Offeror has identified network deficiencies and has
      established an action plan to address the deficiencies.

5.    Network management policies and procedures

6.    Provider Manual

CAPITATION RATE

The Offeror must submit its capitation rate bid by county. The components of
this rate bid that will be evaluated and scored are:

1.    Nursing facility

2.    HCBS

3.    Acute care

3.    Administration

4.    Risk, contingencies and profit

The components will be weighted for scoring based upon their relative importance
to the overall program. The lowest bid for each component will receive the
maximum allowable points. However, if a bid is below the actuarial rate range,
the bid will be evaluated as if it is at the bottom of the acruarial rate range.
No additional points will be given for bids below the actuarial rate range.
Conversely, the highest bid (within or above the actuarial rate range) for each
component will receive the least number of points.


PROGRAM OPERATIONS

1.    The Medical Director's job description and/or contract

2.    Case management plan, policies and procedures

3.    Quality Management/Utilization Management plans and policies

4.    Grievance policies

5.    Member transition policy which includes program contractor changes

6.    Member handbook and communications policies and procedures

7.    Behavioral health services plan and policies


ORGANIZATION

1.    Functional organization chart and resumes of key personnel

2.    Claims and encounter processing system

3.    RBUC/ IBNR methods

4.    Financial projections

5.    Financial viability standards based on the financial projections

6.    Performance bond or bond substitute

7.    Administrative cost allocation

8.    Patient Trust Account policy and procedure - Evaluation will consider
      whether the Offeror has an active role in monitoring patient trust
      accounts.

9.    TPL/COB policies and procedures - Evaluation will consider the Offeror's
      cost avoidance and cost recovery methods.


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10.   Share of Cost collection policy - Evaluation will consider whether the
      Offeror's and provider's responsibility in the collection of the member
      share of cost is clearly specified.

11.   Fraud and abuse policy

12.   Model subcontracts







                               [END OF SECTION I]


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