<PAGE>   1


                                                                   EXHIBIT 10.07

                              EMPLOYMENT AGREEMENT


        This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as
of June 26, 1998, by and between PACIFICARE HEALTH SYSTEMS, INC., a Delaware
corporation (the "Company"), with its principal place of business located at
3120 Lake Center Drive, Santa Ana, California 92704 and Richard Badger
("Executive"), residing at 18 Cypress Place, Sausalito, California 94965.


                                     RECITAL


        WHEREAS, the Company desires to employ Executive in the capacity of
Regional Vice President, Desert Region and President, PacifiCare of Arizona,
Inc.

        WHEREAS, the Company and Executive are entering into this Agreement to
establish the terms and conditions of the desired employment relationship.

        NOW, THEREFORE, in consideration of the following covenants, conditions
and promises contained herein, and other good and valuable consideration, the
Company and Executive hereby agree as follows:

1.      EMPLOYMENT

        1.1 Executive's General Duties. The Company hereby employs Executive and
Executive hereby agrees to serve the Company in the capacity of Regional Vice
President, Desert Region and President, PacifiCare of Arizona, Inc., having such
usual and customary duties and authority as an officer of similar capacity in a
corporation of comparable size, holdings, and business as that of the Company.

        Executive shall do and perform all services, acts, or things necessary
or advisable to manage and conduct the business of the Company and shall preside
over such other areas of corporate activity as specified from time to time by
the Board of Directors of the Company. During the term of this Agreement,
Executive shall perform such additional or different duties, and accept the
election or appointment to such other offices or positions as are mutually
agreed upon by Executive and the Company.

        1.2 Devotion of Executive. During the term of this Agreement, Executive
shall devote his entire productive time, ability, and attention to the business
of the Company. Executive shall use his best efforts, skills, and abilities to
promote the general welfare and interests of the Company and to preserve,
maintain, and foster the Company's business and business relationships with all
persons and entities associated therewith, including, without limitation,
employer groups, medical service providers, shareholders, affiliates, officers,



                                      -1-
<PAGE>   2

employees, and banks and other financial institutions. The Company shall give
Executive a reasonable opportunity to perform his duties and shall neither
expect Executive to devote more time, nor assign more duties or functions to
Executive, than are customary and reasonable for an executive in Executive's
position.

2.      TERM AND TERMINATION

        2.1 Term. The term of Executive's employment under this Agreement shall
commence on June 26, 1998, and shall continue unless terminated as provided in
Section 2.2.

        2.2 Termination. This Agreement shall be terminated upon the occurrence
of any one of the following events:

            a. The death of the Executive.

            b. Executive becomes incapacitated or disabled, which incapacity or
        disability prevents Executive from fully performing his duties to the
        Company for a period in excess of 90 days and, after such 90-day period,
        the Company and a physician, duly licensed and qualified in the
        specialty of Executive's incapacity, decide in their reasonable
        judgments, that such incapacity will be permanent or of such continued
        duration as to prevent Executive from resuming the rendition of services
        to the Company for at least an additional six-month period. For purposes
        of this Agreement, Executive shall be deemed permanently disabled, and
        this Agreement terminated upon the date Executive receives written
        notice from the Company that such determination has been made.

            c. Executive habitually neglects his duties to the Company or
        engages in gross misconduct during the term of this Agreement. For the
        purposes of this Agreement, "gross misconduct" shall mean Executive's
        misappropriation of funds; securities fraud; insider trading;
        unauthorized possession of corporate property; the sale, distribution,
        possession or use of a controlled substance; or conviction of any
        criminal offense (whether or not such criminal offense is committed in
        connection with Executive's duties hereunder or in the course of his
        employment with the Company). In such event, Executive's termination
        shall be effective immediately upon receipt of written notice from the
        Company.

            d. Either party hereto may terminate this Agreement, with or without
        cause, upon 90 days prior written notice to the other party. Except for
        the circumstances described in Section 2.2(c) above, Executive's
        termination shall be effective 90 days after receipt of such written
        notice. Any termination of this Agreement in accordance with this
        Section 2.2(d) shall not limit, restrict, or reduce, in any manner,
        Executive's rights to the compensation and benefits available under
        Section 3.1(b) and Section 4 below.



                                      -2-
<PAGE>   3

        2.3 Effect of Termination. No termination of this Agreement shall affect
or impair any rights or obligations of the parties respecting certain
compensation accruing prior thereto or continuing thereafter in accordance with
the terms set forth in Section 3.2 and Section 4.


3.      COMPENSATION

        3.1    Compensation During the Term of this Agreement

            a. As long as Executive satisfactorily performs all of his
        obligations hereunder, the Company shall pay Executive an annual base
        salary, as determined by the Compensation Committee of the Board of
        Directors, payable in equal installments on the Company's regular
        payroll dates. As of this date Executive's annual base salary has been
        set at $265,000. On an annual basis, the Company's compensation
        committee shall review Executive's salary, but shall be under no
        obligation to increase Executive's salary. Executive authorizes the
        Company to take such deductions and withholdings from his salary as are
        required by law, directed by Executive, or as reasonably directed by the
        Company for its employees, which deductions shall include, without
        limitation, withholding for federal and state income taxes and social
        security.

            b. Executive shall also receive a $30,000 sign-on bonus (the
        "Sign-on Bonus"). If Executive voluntarily leaves the Company or
        Executive is terminated pursuant to the provisions of 2.2(c) hereof
        prior to June 26, 1999, Executive shall be required to repay an amount
        equal to the Sign-on Bonus divided by a fraction the numerator of which
        is the number of months remaining till June 26, 1999 and the denominator
        is 12. The Sign-On Bonus is subject to usual and customary deductions
        and withholdings.

            c. Executive shall be entitled to fully participate in all of the
        employee benefit plans and programs available to other high-level
        executives of the Company, including, without limitation, health,
        dental, and life insurance benefits for Executive and Executive's
        dependents, pension and profit sharing programs, and vacation and sick
        leave benefits. However, the terms of this Agreement shall not restrict
        the Company's right to change, amend, modify, or terminate any existing
        benefit plan or program, or to change any insurance company or modify
        any insurance policy adopted incident to such existing benefit plan and
        program.

            d. The Company shall provide Executive with a $750.00 per month
        automobile allowance. The Company shall furnish Executive's automobile
        with a cellular car telephone. Executive shall provide and maintain
        automobile insurance for Executive's car including collision,
        comprehensive liability, personal and property damage, and uninsured and
        underinsured motorist coverage in amounts customarily obtained to cover



                                      -3-
<PAGE>   4

        such contingencies in the State of California. Executive shall provide
        proof of such coverage to the Company upon the Company's request.

            e. The Company shall pay for or reimburse Executive for all other
        reasonable travel, entertainment, and other business expenses incurred
        or paid for by Executive in connection with the performance of his
        services under this Agreement. The Company shall not be obligated to
        make any such reimbursement unless Executive presents corresponding
        expense statements or vouchers and such other supporting information as
        the Company may from time to time reasonably request. The Company
        reserves the right to place subsequent limitations or restrictions on
        business expenses to be incurred or reimbursed.

            f. Executive shall be entitled to participate fully in the Company's
        1996 Management Incentive Compensation Plan (the "MICP"), as may be
        amended, modified, or replaced, in accordance with the terms and
        conditions set forth herein and therein.

            g. Executive shall be entitled to participate in the 1996 Stock
        Option Plan for Officers and Key Employees of PacifiCare Health Systems,
        Inc. (the "1996 Stock Option Plan"), as such plan from time to time may
        be amended, modified or replaced, in accordance with the terms and
        conditions set forth herein and therein.

            h. During the term of this Agreement, the Company shall insure
        Executive under its general liability insurance for all conduct
        committed in good faith while acting in the capacity of Regional Vice
        President, Desert Region and President, PacifiCare of Arizona, Inc. or
        in any other capacity to which Executive may be appointed or elected.

            i. In the event Executive is involuntarily terminated, without
        cause, except in the case of death or incapacity or disability, the
        Company shall provide outplacement services to Executive to assist
        Executive in securing a position comparable to the one from which he was
        terminated. The Company shall be obligated to provide those outplacement
        services as customarily provided by companies of similar size and
        holdings as those of the Company to executives with comparable
        responsibility and longevity as Executive and for reasonable cost as
        approved by the Company. The Company's provision of such outplacement
        services shall not limit, restrict, or reduce, in any manner, any and
        all other compensation to which Executive is entitled hereunder.

            j. As part of the compensation for services rendered under this
        Agreement, Executive shall be entitled to participate in the Amended and
        Restated PacifiCare Health Systems, Inc. Savings and Profit-Sharing
        Plan, and the trust agreement implemented pursuant thereto, adopted as
        of February 1998, as from time to time may be amended modified, or
        replaced, in accordance with the terms and conditions set forth therein.



                                      -4-
<PAGE>   5

            k. Executive shall be entitled to the benefits provided under the
        Company's Statutory Restoration Plan, as such plan from time to time may
        be amended, modified or replaced, in accordance with the terms set forth
        herein and therein.

            l. Executive will receive a relocation package to assist him to move
        from California to Arizona as set forth in the 3-page relocation
        assistance document signed by Executive on June 27, 1998.

        3.2 Compensation Following Termination

            a. In the event that this Agreement is terminated by reason of
        Executive's death, Executive's estate or legal representative shall be
        entitled to receive the following:

               1. Payment of benefits under the life insurance policy purchased
            by the Company on Executive's behalf, if any,

               2. Payments of benefits under the MICP set forth in Section
            3.1(f), which will be deemed to have accrued as of the date of
            Executive's death; and

               3. Executive's legal representative shall be permitted to
            exercise any vested and unexercised options under the 1996 Stock
            Option Plan set forth in Section 3.1(f) and shall be permitted to
            exercise any other vested and unexercised options granted under any
            other stock option plans of the Company (the "Existing Stock Option
            Plans") in accordance with their terms for a period of one year
            following Executive's death. The 1996 Stock Option Plan and the
            Existing Stock Option Plans shall together be referred to herein as
            the "Stock Option Plans."

            b. In the event that Executive is terminated because of an
        incapacity or disability, the Company shall provide Executive with the
        following:

               1. Payment of benefits under the disability insurance policy
            maintained by the Company on Executive's behalf, if any;

               2. Payment of benefits under the MICP set forth in Section
            3.1(f), which will be deemed to have accrued as of the effective
            date of such termination;

               3. The right to exercise any vested and unexercised options under
            the Stock Option Plans in accordance with the terms stated therein;
            and

               4. Payment of the automobile allowance as provided under Section
            3.1(d) for a period of 12 months following the effective date of
            such termination.



                                      -5-
<PAGE>   6

            c. In the event this Agreement is terminated because of Executive's
        habitual neglect or gross misconduct pursuant to Section 2.2(c) or
        because of Executive's voluntary termination, the Company shall be
        relieved from any and all further or future obligations to compensate
        Executive; provided, however, that Executive shall be able to exercise
        any vested and unexercised awards under the Stock Option Plans in
        accordance with the terms set forth therein.

            d. In the event that the Company terminates Executive, for any
        reason other than Executive's incapacity or disability or habitual
        neglect or gross misconduct as described in Sections 2.2(b) and 2.2(c),
        respectively, Executive shall be entitled to the following severance
        compensation, on the condition that Executive executes a severance
        agreement including a general release of the Company, including its
        owners, partners, stockholders, directors, officers, employees,
        independent contractors, agents, attorneys, representatives,
        predecessors, successors and assigns, parents, subsidiaries, affiliated
        entities and related entities:

               1. Executive's then current annual salary under Section 3.1(a)
            for a period of 12 months following the effective date of such
            termination;

               2. Payment of benefits under the MICP set forth in Section
            3.1(f), which will be deemed to have accrued as of the effective
            date of such termination;

               3. The right to exercise any vested and unexercised options under
            the Stock Option Plans in accordance with their terms within one
            year of the effective date of such termination;

               4. Notwithstanding the foregoing, in the event Executive engages
            in employment with a competitor of the Company during the 12 month
            period in which Executive's salary continues pursuant to Section
            3.2(d)(1), the severance compensation available to Executive under
            this Section 3.2(d) shall be reduced by the amount of any and all
            gross earnings Executive earns while engaged in employment with any
            such competitor or competitors. For the purposes of this Section
            3.2(d)(4), a "competitor of the Company" shall include, without
            limitation, managed care organizations, including a health
            maintenance organization, competitive medical plan, preferred
            provider organization, provider sponsored organization ("PSO"), or
            health or life insurance company which owns a managed care
            organization, plan or program. Executive agrees to provide immediate
            notice to Company upon receipt of any gross earnings received by
            Executive from a competitor of Company;

               5. Payment of the automobile allowance as provided in Section
            3.1(d) for a period of 12 months following the effective date of
            such termination; and



                                      -6-
<PAGE>   7

               6. The Company shall provide to Executive the outplacement
            services described in Section 3.1(i).

            e. Notwithstanding anything which may be expressed in, or inferred
        from the provisions of this Section 3.2 or Section 4.1, this Agreement
        should not be construed to limit, restrict, or deny Executive any
        benefits to which he otherwise may be entitled to under the MICP, the
        Stock Option Plans, the Company's profit-sharing plan, non-qualified
        deferred compensation plans or otherwise which arise from circumstances
        not addressed in this Agreement.

4.      TERMINATION AS A RESULT OF A CHANGE OF CONTROL OR
        FOR GOOD CAUSE

        4.1 Executive's Rights. In the event that, during the term of this
Agreement, the Company undergoes a "change of ownership or control," as that
term is defined in Section 4.3, and if within 24 months after the consummation
of such change either (1) Executive is involuntarily terminated, except as
provided in Section 4.2, or (2) Executive voluntarily terminates his employment
for "good cause" as defined in Section 4.4, then Executive shall be entitled to
the following compensation:

            a. Executive's then current annual salary under Section 3.1(a) for a
        period of 12 months following the effective date of such termination;

            b. Payment of health insurance premiums under the Consolidated
        Omnibus Budget Reconciliation Act of 1985, as amended, for Executive and
        Executive's dependents for a period of 18 months following the effective
        date of such termination;

            c. Annual payment of benefits under the MICP set forth in Section
        3.1(f), for a period of 12 months following the effective date of such
        termination;

            d. The right to exercise any and all granted and unexercised stock
        options, under the Stock Option Plans in accordance with their terms
        (whether or not such options are actually vested), as if all such
        unexercised stock options were fully vested, within one year of the
        effective date of such termination;

            e. Payment of the automobile allowance as provided under Section
        3.1(d) for a period of 12 months following the effective date of such
        termination; and

            f. The Company shall provide to Executive the outplacement services
        described in Section 3.1(i).



                                      -7-
<PAGE>   8

        4.2 Limitation of Benefits. In the event that Executive is terminated
within 12 months after a change of ownership or control of the Company, and such
termination results from either Executive's incapacity or disability or habitual
neglect or gross misconduct, then, notwithstanding anything in this Section 4 to
the contrary, Executive shall receive only that compensation, if any, to which
he is entitled to under Sections 3.2(b) and 3.2(c), respectively.

        In no event shall the aggregate amount of all compensation which
Executive may receive pursuant to the provisions of this Section 4, including
without limitation, any salary, bonuses, stock options, employee benefits and
all other cash and in-kind compensation, exceed an amount (the "Maximum
Compensation Amount") which would give rise to an "excess parachute payment" as
determined by Section 280G of the Internal Revenue Code of 1986, as amended, and
any regulations promulgated thereunder. In the event that this Section 4 would
entitle Executive to sums in excess of the Maximum Compensation Amount, the
Company shall use its sound discretion, in good faith, to furnish Executive with
a post-termination compensation package which is substantially equal to the
Maximum Compensation Amount.

        4.3 Change of Control. As used in this Section 4, the term "change of
ownership or control" means and refers to:

            a. any merger, consolidation, or sale of the Company such that any
        individual, entity or group (within the meaning of Section 13(d)(3) or
        14(d)(2) of the Securities Exchange Act of 1934, as amended (the
        "Exchange Act")) acquires beneficial ownership, within the meaning of
        Rule 13d-3 of the Exchange Act, of 20 percent or more of the voting
        common stock of the Company and the ownership interest of the voting
        common stock owned by UniHealth is less than or equal to the ownership
        interest of the voting common stock of such individual, entity or group;

            b. any transaction in which the Company sells substantially all of
        its material assets;

            c. a dissolution or liquidation of the Company; or

            d. the Company becomes a non-publicly held company.

        4.4 Good Cause. As used in this Section 4, "good cause" for Executive to
terminate his employment shall be deemed to exist if Executive voluntarily
terminates his employment for any of the following reasons:

            a. Without Executive's express prior written consent, Executive:

               1. is assigned duties materially inconsistent with Executive's
            position, duties, responsibilities, or status with the Company which
            substantially varies from that which existed immediately prior to
            such change of ownership or control;



                                      -8-
<PAGE>   9

               2. experiences a change in his reporting level, titles, or
            business location (to a point that is more than 50 miles outside of
            Phoenix, Arizona or more than 50 miles outside of Orange County,
            California) which substantially varies from that which existed
            immediately prior to the change of ownership or control; or

               3. with respect to any position held immediately prior to the
            change of ownership or control, is removed or fails to obtain
            reelection, which removal or failure to reelect is not directly
            related to Executive's incapacity or disability, habitual neglect,
            gross misconduct or death;

            b. Without Executive's express prior written consent, Executive's
        salary is reduced below that which existed immediately prior to the
        change of ownership or control and such change is not otherwise applied
        to others in the Company with at least Executive's position or title;

            c. Without Executive's express prior written consent, any employee
        benefit, business expense reimbursement or allotment, incentive bonus
        program, or any other manner or form of compensation available to
        Executive immediately prior to the change of ownership or control is
        reduced or eliminated and such change is not otherwise applied to others
        in the Company with at least Executive's position or title;

            d. The Company fails to obtain from any successor, before the
        succession takes place, a written commitment obligating the successor to
        perform this Agreement in accordance with all of its terms and
        conditions; or

            e. The Company or any successor thereto purports to terminate
        Executive without first giving Executive prior written notice thereof
        that specifies: (i) the exact provision of Section 2.2 relied upon; and
        (ii) the facts and circumstances, in reasonable detail, serving as the
        basis for Executive's termination.



                                      -9-
<PAGE>   10

5.      NOTICES

        All notices or other communications required or permitted to be made
hereunder shall be given in writing and sent by either personal delivery,
overnight delivery, or United States registered or certified mail, return
receipt requested, all of which shall be properly addressed with postal or
delivery charges prepaid, to the parties at their respective addresses set forth
below, or to such other addresses as either party may designate to the other in
accordance with this Section 5:

        If to the Company:          PacifiCare Health Systems, Inc.
                                    3120 Lake Center Drive
                                    Santa Ana, California 92704
                                    Attn:   President and
                                            Chief Executive Officer

        If to Executive:            Richard Badger
                                    18 Cypress Place
                                    Sausalito, California 94965

All notices sent by personal delivery shall be deemed given when actually
received. All notices sent by overnight delivery shall be deemed given on the
next business day. All other notices sent via United States mail shall be deemed
given no later than two business days after mailing. Any notice given by any
method not expressly authorized herein, shall nevertheless be effective if
actually received, and shall be deemed given upon actual receipt.

6.      GENERAL PROVISIONS

        6.1 Assignability. This Agreement shall inure to the benefit of, and
shall be binding upon the heirs, executors, administrators, successors, and
legal representatives of Executive and shall inure to the benefit of, and be
binding upon the Company and its successors and assigns. Executive shall not
assign, delegate, subdelegate, transfer, pledge, encumber, hypothecate, or
otherwise dispose of this Agreement, or any rights, obligations, or duties
hereunder, and any such attempted delegation or disposition shall be null and
void and without any force or effect; provided, however, that nothing contained
herein shall prevent Executive from designating beneficiaries for insurance,
death or retirement benefits.

        6.2 Entire Agreement. This Agreement is a fully integrated document and
contains any and all promises, covenants, and agreements between the parties
hereto with respect to Executive's employment. This Agreement supersedes any and
all other, prior or contemporaneous, discussions, negotiations, representations,
warranties, covenants, conditions, and agreements, whether written or oral,
between the parties hereto. Except as expressed herein,



                                      -10-
<PAGE>   11

the parties have not exchanged any other representations, warranties,
inducements, promises, or agreements respecting Executive's employment with the
Company.

        6.3 Severability. In the event any one or more of the provisions of this
Agreement shall be rendered by a court of competent jurisdiction to be invalid,
illegal, or unenforceable, in any respect, such invalidity, illegality, or
unenforceability shall not affect or impair the remainder of this Agreement
which shall remain in full force and effect and enforced accordingly, unless a
party demonstrates by a preponderance of the evidence that the invalidated
provision was an essential economic term of this Agreement.

        6.4 Amendment. This Agreement shall not be changed, amended, or
modified, nor shall any performance or condition hereunder be waived, in whole
or in part, except by written instrument signed by the party against whom
enforcement or waiver is sought. The waiver of any breach of any term or
condition of this Agreement shall not be deemed to constitute the waiver of any
other or subsequent breach of the same or any other term or condition of this
Agreement.

        6.5 Governing Law. This Agreement shall be governed by, enforced under,
and construed in accordance with the laws of the State of California.

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.



The Company:                                PACIFICARE HEALTH SYSTEMS, INC.,
                                            a Delaware corporation


                                            /s/ Alan R. Hoops
                                            ------------------------------------
                                            By:    Alan R. Hoops
                                            Title: President and
                                                   Chief Executive Officer





Executive:                                  /s/ Richard Badger
                                            ------------------------------------
                                            Richard Badger



                                      -11-