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                                                                   Exhibit 10.42

                [TEXAS HEALTH AND HUMAN SERVICES COMMISSION LOGO]

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

                              CONTRACT FOR SERVICES

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

                                     between
                   Texas Health and Human Services Commission
                                       and
                             AMERIGROUP TEXAS, INC.

                              Contract #529-04-296
                                     in the
                          Travis Service Delivery Area

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TABLE OF CONTENTS

<TABLE>
<S>                                                                                                             <C>
ARTICLE 1     PARTIES AND AUTHORITY TO CONTRACT...............................................................    7
ARTICLE 2     DEFINITIONS ....................................................................................    8
ARTICLE 3     PLAN ADMINISTRATIVE AND HUMAN RESOURCE REQUIREMENTS ............................................   21
3.1   ORGANIZATION AND ADMINISTRATION.........................................................................   21
3.2   NON-PROVIDER SUBCONTRACTS...............................................................................   22
3.3   MEDICAL DIRECTOR........................................................................................   25
3.4   PLAN MATERIALS AND DISTRIBUTION OF PLAN MATERIALS ......................................................   25
3.5 RECORDS REQUIREMENTS AND RECORDS RETENTION................................................................   27
3.6   HMO REVIEW OF HHSC MATERIALS............................................................................   28
3.7 HMO TELEPHONE ACCESS REQUIREMENTS ........................................................................   29
ARTICLE 4     FISCAL, FINANCIAL, CLAIMS AND INSURANCE REQUIREMENTS............................................   30
4.1   FISCAL SOLVENCY.........................................................................................   30
4.2 MINIMUM NET WORTH.........................................................................................   31
4.3   PERFORMANCE BOND .......................................................................................   31
4.4   INSURANCE ..............................................................................................   31
4.5   FRANCHISE TAX...........................................................................................   32
4.6   AUDIT...................................................................................................   32
4.7   PENDING OR THREATENED LITIGATION........................................................................   32
4.8   MISREPRESENTATION AND FRAUD IN RESPONSE TO RFA AND IN HMO OPERATIONS ...................................   33
4.9   THIRD PARTY RECOVERY ...................................................................................   33
4.10 CLAIMS PROCESSING REQUIREMENTS...........................................................................   34
4.11 INDEMNIFICATION .........................................................................................   36
ARTICLE 5 STATUTORY AND REGULATORY COMPLIANCE REQUIREMENTS ...................................................   37
5.1   COMPLIANCE WITH FEDERAL, STATE, AND LOCAL LAWS..........................................................   37
5.2   PROGRAM INTEGRITY ......................................................................................   38
5.3   FRAUD AND ABUSE COMPLIANCE PLAN.........................................................................   38
5.4   SAFEGUARDING INFORMATION ...............................................................................   40
5.5   NON-DISCRIMINATION......................................................................................   41
5.6   HISTORICALLY UNDERUTILIZED BUSINESSES (HUBS)............................................................   41
5.7   BUY TEXAS...............................................................................................   42
5.8   CHILD SUPPORT ..........................................................................................   42
5.9   REQUESTS FOR PUBLIC INFORMATION ........................................................................   43
5.10 NOTICE AND APPEAL........................................................................................   44
5.11 DATA CERTIFICATION.......................................................................................   44
ARTICLE 6     SCOPE OF SERVICES...............................................................................   44
6.1   SCOPE OF SERVICES.......................................................................................   44
6.2   PRE-EXISTING CONDITIONS.................................................................................   47
6.3   SPAN OF ELIGIBILITY ....................................................................................   47
6.4   CONTINUITY OF CARE AND OUT-OF-NETWORK PROVIDERS ........................................................   48
6.5   EMERGENCY SERVICES .....................................................................................   50
6.6   BEHAVIORAL HEALTH CARE SERVICES - SPECIFIC REQUIREMENTS.................................................   52
6.7   FAMILY PLANNING - SPECIFIC REQUIREMENTS ................................................................   54
6.8   TEXAS HEALTH STEPS (EPSDT)..............................................................................   56
6.9   PERINATAL SERVICES .....................................................................................   58
6.10 EARLY CHILDHOOD INTERVENTION (ECI)........................................... ...........................   60
6.11 SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS, AND
      CHILDREN (WIC) - SPECIFIC REQUIREMENTS .................................................................   61
6.12 TUBERCULOSIS (TB)........................................................................................   62
6.13 PEOPLE WITH DISABILITIES OR CHRONIC OR COMPLEX CONDITIONS................................................   63
6.14 HEALTH EDUCATION AND WELLNESS AND PREVENTION PLANS.......................................................   66
6.15 SEXUALLY TRANSMITTED DISEASES (STDS) AND HUMAN IMMUNODEFICIENCY VIRUS
      (HIV)...................................................................................................   67
6.16 BLIND AND DISABLED MEMBERS ..............................................................................   68
</TABLE>

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<TABLE>
<S>                                                                                                             <C>
ARTICLE 7     PROVIDER NETWORK REQUIREMENTS ..................................................................   69
7.1   PROVIDER ACCESSIBILITY..................................................................................   69
7.2   PROVIDER CONTRACTS .....................................................................................   70
7.3   PHYSICIAN INCENTIVE PLANS...............................................................................   75
7.4 PROVIDER MANUAL AND PROVIDER TRAINING.....................................................................   76
7.5   MEMBER PANEL REPORTS ...................................................................................   77
7.6 PROVIDER COMPLAINT AND APPEAL PROCEDURES..................................................................   78
7.7.  PROVIDER QUALIFICATIONS.................................................................................   78
7.8   PRIMARY CARE PROVIDERS .................................................................................   82
7.9   OB/GYN PROVIDERS........................................................................................   86
7.10 SPECIALTY CARE PROVIDERS.................................................................................   87
7.11 SPECIAL HOSPITALS AND SPECIALTY CARE FACILITIES..........................................................   87
7.12 BEHAVIORAL HEALTH - LOCAL MENTAL HEALTH AUTHORITY (LMHA).................................................   88
7.13 SIGNIFICANT TRADITIONAL PROVIDERS (STPS) ................................................................   90
7.14 RURAL HEALTH PROVIDERS...................................................................................   90
7.15 FEDERALLY QUALIFIED HEALTH CENTERS (FQHCS) AND RURAL HEALTH CLINICS
      (RHCS)..................................................................................................   91
7.16 COORDINATION WITH PUBLIC HEALTH .........................................................................   92
7.17 COORDINATION WITH TEXAS DEPARTMENT OF PROTECTIVE AND REGULATORY
      SERVICES................................................................................................   95
7.18 DELEGATED NETWORKS (IPAs, LIMITED PROVIDER NETWORKS AND ANHCs) ..........................................   96
ARTICLE 8     MEMBER SERVICES REQUIREMENTS ...................................................................   98
8.1   MEMBER EDUCATION........................................................................................   98
8.2 MEMBER HANDBOOK...........................................................................................   98
8.3   ADVANCE DIRECTIVES .....................................................................................   99
8.4   MEMBER ID CARDS ........................................................................................  100
8.5   MEMBER COMPLAINT AND APPEAL SYSTEM .....................................................................  101
8.6   [THIS SECTION IS INTENTIONALLY LEFT BLANK] .............................................................  109
8.7   MEMBER ADVOCATES........................................................................................  109
8.8   MEMBER CULTURAL AND LINGUISTIC SERVICES.................................................................  110
8.9   CERTIFICATION DATE .....................................................................................  112
ARTICLE 9     MARKETING AND PROHIBITED PRACTICES..............................................................  112
9.1   MARKETING MATERIAL MEDIA AND DISTRIBUTION ..............................................................  112
9.2   MARKETING ORIENTATION AND TRAINING .....................................................................  112
9.3   PROHIBITED MARKETING PRACTICES .........................................................................  113
9.4   NETWORK PROVIDER DIRECTORY..............................................................................  113
ARTICLE 10 MIS SYSTEM REQUIREMENTS ...........................................................................  114
10.1 MODEL MIS REQUIREMENTS ..................................................................................  114
10.2 SYSTEM-WIDE FUNCTIONS ...................................................................................  117
10.4 PROVIDER SUBSYSTEM.......................................................................................  119
10.5 ENCOUNTER/CLAIMS PROCESSING SUBSYSTEM ...................................................................  120
10.6 FINANCIAL SUBSYSTEM .....................................................................................  121
10.7 UTILIZATION/QUALITY IMPROVEMENT SUBSYSTEM................................................................  122
10.8 REPORT SUBSYSTEM ........................................................................................  123
10.9 DATA INTERFACE SUBSYSTEM.................................................................................  124
10.10 TPR SUBSYSTEM ..........................................................................................  126
10.12 HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT (HIPAA) COMPLIANCE..................................  126
ARTICLE 11 QUALITY ASSURANCE AND QUALITY IMPROVEMENT PROGRAM .................................................  127
11.1 QUALITY ASSESSMENT AND PERFORMANCE IMPROVEMENT PROGRAM ..................................................  127
11.2 WRITTEN QIP PLAN ........................................................................................  127
11.3 QIP SUBCONTRACTING ......................................................................................  127
11.4 ACCREDITATION............................................................................................  127
11.5 BEHAVIORAL HEALTH INTEGRATION INTO QIP...................................................................  128
11.6 QIP REPORTING REQUIREMENTS...............................................................................  128
</TABLE>

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<TABLE>
<S>                                                                                                             <C>
  11.7  PRACTICE GUIDELINES ..................................................................................  128
ARTICLE 12 REPORTING REQUIREMENTS ............................................................................  128
  12.1 FINANCIAL REPORTS .....................................................................................  128
  12.2 STATISTICAL REPORTS ...................................................................................  131
  12.3 ARBITRATION/LITIGATION CLAIMS REPORT...................................................................  132
  12.4 SUMMARY REPORT OF PROVIDER COMPLAINTS..................................................................  132
  12.5 PROVIDER NETWORK REPORTS...............................................................................  132
  12.6 MEMBER COMPLAINTS & APPEALS ...........................................................................  133
  12.7 FRAUDULENT PRACTICES ..................................................................................  133
  12.8 UTILIZATION MANAGEMENT REPORTS.........................................................................  133
  12.10 QUALITY IMPROVEMENT REPORTS...........................................................................  134
  12.11 HUB REPORTS ..........................................................................................  135
  12.12 THSTEPS REPORTS.......................................................................................  135
  12.14 MEMBER HOTLINE PERFORMANCE REPORT.....................................................................  135
  12.15 SUBMISSION OF STAR DELIVERABLES/REPORTS...............................................................  135
ARTICLE 13 PAYMENT PROVISIONS.................................................................................  137
  13.1 CAPITATION AMOUNTS ....................................................................................  137
  13.2 EXPERIENCE REBATE TO STATE.............................................................................  139
  13.3 PERFORMANCE OBJECTIVES ................................................................................  141
  13.4 ADJUSTMENTS TO PREMIUM.................................................................................  141
  13.5 NEWBORN AND PREGNANT WOMEN PAYMENT PROVISIONS .........................................................  142
ARTICLE 14 ELIGIBILITY, ENROLLMENT, AND DISENROLLMENT.........................................................  143
  14.1 ELIGIBILITY DETERMINATION..............................................................................  143
  14.2 ENROLLMENT.............................................................................................  145
  14.3 NEWBORN ENROLLMENT.....................................................................................  146
  14.4 DISENROLLMENT..........................................................................................  147
  14.5 AUTOMATIC RE-ENROLLMENT................................................................................  148
  14.6 ENROLLMENT REPORTS.....................................................................................  148
ARTICLE 15 GENERAL PROVISIONS.................................................................................  148
  15.1 INDEPENDENT CONTRACTOR ................................................................................  148
  15.2 AMENDMENT AND CHANGE REQUEST PROCESS...................................................................  149
  15.3 LAW, JURISDICTION AND VENUE............................................................................  150
  15.4 NON-WAIVER ............................................................................................  151
  15.5       SEVERABILITY ....................................................................................  151
  15.6 ASSIGNMENT ............................................................................................  151
  15.7 MAJOR CHANGE IN CONTRACTING ...........................................................................  151
  15.8 NON-EXCLUSIVE..........................................................................................  152
  15.9 DISPUTE RESOLUTION.....................................................................................  152
  15.10 DOCUMENTS CONSTITUTING CONTRACT.......................................................................  152
  15.11 FORCE MAJEURE.........................................................................................  152
  15.12 NOTICES ..............................................................................................  152
  15.13 SURVIVAL..............................................................................................  153
  15.14 GLOBAL DRAFTING CONVENTIONS...........................................................................  153
ARTICLE 16 DEFAULT AND REMEDIES ..............................................................................  153
  16.1 DEFAULT BY HHSC........................................................................................  153
  16.2 REMEDIES AVAILABLE TO HMO FOR HHSC'S DEFAULT...........................................................  154
  16.3 DEFAULT BY HMO.........................................................................................  154
ARTICLE 17 NOTICE OF DEFAULT AND CURE OF DEFAULT .............................................................  163
ARTICLE 18 EXPLANATION OF REMEDIES ...........................................................................  164
  18.1 TERMINATION ...........................................................................................  164
  18.2 DUTIES OF CONTRACTING PARTIES UPON TERMINATION.........................................................  166
  18.3 SUSPENSION OF NEW ENROLLMENT...........................................................................  167
  18.4 LIQUIDATED MONEY DAMAGES...............................................................................  167
  18.5 APPOINTMENT OF TEMPORARY MANAGEMENT....................................................................  169
  18.6 HHSC-INITIATED DISENROLLMENT OF A MEMBER OR MEMBERS WITHOUT CAUSE .....................................  170
</TABLE>

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<TABLE>
<S>                                                                                                             <C>
  18.7 RECOMMENDATION TO CMS THAT SANCTIONS BE TAKEN AGAINST HMO .............................................  170
  18.8 CIVIL MONETARY PENALTIES...............................................................................  170
  18.9 FORFEITURE OF ALL OR A PART OF THE TDI PERFORMANCE BOND................................................  171
  18.10 REVIEW OF REMEDY OR REMEDIES TO BE IMPOSED............................................................  171
ARTICLE 19 TERM...............................................................................................  172
</TABLE>

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APPENDICES

APPENDIX A ...........................Standards For Quality Improvement Programs
APPENDIX A-A ..........................Performance Improvement Program Worksheet
APPENDIX B ......................................HUB Progress Assessment Reports
APPENDIX C .................................................Value-added Services
APPENDIX D ...........................................Required Critical Elements
APPENDIX E ................................................Transplant Facilities
APPENDIX F ....................................................Trauma Facilities
APPENDIX G ............................Hemophilia Treatment Centers And Programs
APPENDIX H - Not Applicable
APPENDIX I ............................Managed Care Financial-Statistical Report
APPENDIX J -- Not Applicable
APPENDIX K .............................Preventive Health Performance Objectives
APPENDIX L ..........................Cost Principles For Administrative Expenses
APPENDIX M ........................................Arbitration/Litigation Report

APPENDIX O ........................................Standards for Medical Records

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                              CONTRACT FOR SERVICES
                                   BETWEEN THE
                   TEXAS HEALTH AND HUMAN SERVICES COMMISSION
                                     AND HMO

This contract is entered into between the Texas Health and Human Services
Commission (HHSC) and Amerigroup Texas, Inc. (HMO or Contractor). The purpose of
this contract is to set forth the terms and conditions for HMO's participation
as a managed care organization in the HHSC STAR Program (STAR or STAR Program).
Under the terms of this contract HMO will provide comprehensive health care
services to qualified and Medicaid-eligible recipients through a managed care
delivery system. This is a risk-based contract. HMO was selected to provide
services under this contract under Texas Health and Safety Code, Title 2,
Section 12.011 and Section 12.021, and Texas Government Code Section 533.001 et
seq.

ARTICLE 1 PARTIES AND AUTHORITY TO CONTRACT

1.1   The Texas Legislature has designated the Texas Health and Human Services
      Commission (HHSC) as the single State agency to administer the Medicaid
      program in the State of Texas. HHSC has authority to contract with HMO to
      carry out the duties and functions of the Medicaid managed care program
      under Texas Health and Safety Code, Title 2, Section 12.011 and Section
      12.021 and Texas Government Code Section 533.001 et seq.

1.2   HMO is a corporation with authority to conduct business in the State of
      Texas and has a certificate of authority from the Texas Department of
      Insurance (TDI) to operate as a Health Maintenance Organization (HMO)
      under Chapter 843, Texas Insurance Code. HMO is in compliance with all TDI
      rules and laws that apply to HMOs. HMO has been authorized to enter into
      this contract by its Board of Directors or other governing body. HMO is an
      authorized vendor with HHSC and has received a Vendor Identification
      number from the Texas Comptroller of Public Accounts.

1.3   This contract is subject to the approval and on-going monitoring of the
      federal Centers for Medicare and Medicaid Services (CMS).

1.4   Renewal Review. At its sole discretion, HHSC may choose to conduct a
      renewal review of HMO's performance and compliance with this contract as a
      condition for retention and renewal.

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      1.4.1 Renewal Review may include a review of HMO's past performance and
            compliance with the requirements of this contract and on-site
            inspection of any or all of HMO's systems or processes.

      1.4.2 HHSC will provide HMO with at least 30 days written notice prior to
            conducting an HMO renewal review. A report of the results of the
            renewal review findings will be provided to HMO within 10 weeks from
            the completion of the renewal review. The renewal review report will
            include any deficiencies that must be corrected and the timeline
            within which the deficiencies must be corrected.

      1.4.3 HHSC reserves the right to conduct on-site inspections of any or all
            of HMO's systems and processes as often as necessary to ensure
            compliance with contract requirements. HHSC may conduct at least one
            complete on-site inspection of all systems and processes every three
            years. HHSC will provide six weeks advance notice to HMO of the
            three-year on-site inspection, unless HHSC enters into an MOU with
            the TDI to accept the TDI report in lieu of a HHSC on-site
            inspection. HHSC will notify HMO prior to conducting an onsite visit
            related to a regularly scheduled review specifically described in
            this contract. Even in the case of a regularly scheduled visit, HHSC
            reserves the right to conduct an onsite review without advance
            notice if HHSC believes there may be potentially serious or
            life-threatening deficiencies.

1.5   AUTHORITY OF HMO TO ACT ON BEHALF OF HHSC. HMO is given express, limited
      authority to exercise the State's right of recovery as provided in Article
      4.9, and to enforce provisions of this contract that require providers or
      subcontractors to produce records, reports, encounter data, public health
      data, and other documents to comply with this contract and that HHSC has
      authority to require under State or federal laws.

ARTICLE 2 DEFINITIONS

Terms used throughout this Contract have the following meaning, unless the
context clearly indicates otherwise:

ABUSE means provider practices that are inconsistent with sound fiscal,
business, or medical practices and result in an unnecessary cost to the Medicaid
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 Member practices that result in unnecessary cost to the Medicaid
program.

ACTION means the denial or limited authorization of a requested service,
including the type or level of service; the reduction, suspension, or
termination of a previously authorized service; the

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denial in whole or in part of payment for service; failure to provide services
in a timely manner, the failure of an HMO to act within the timeframes set forth
in this agreement and 42 C.F.R. Section 438.408(b); or for a resident of a rural
area with only one HMO, the denial of a Medicaid Members' request to obtain
services outside of the network.

ADJUDICATE means to deny or pay a clean claim.

ADVERSE DETERMINATION means a determination by a utilization review agent that
the health care services furnished, or proposed to be furnished to a patient,
are not medically necessary or not appropriate.

AFFILIATE means any individual or entity owning or holding more than a five
percent (5%) interest in HMO; in which HMO owns or holds more than a five
percent (5%) interest; any parent entity; or subsidiary entity of HMO,
regardless of the organizational structure of the entity.

ALLOWABLE EXPENSES means all expenses related to the Contract for Services
between HHSC and HMO that are incurred during the term of the contract that are
not reimbursable or recovered from another source.

ALLOWABLE REVENUE means all Medicaid managed care revenue received by HMO for
the contract period, including retroactive adjustments made by HHSC.

APPEAL means the formal process by which a Member or his or her representative
request a review of an HMO's action, as defined above.

AUXILIARY AIDS AND SERVICES includes qualified interpreters or other effective
methods of making aurally delivered materials understood by persons with hearing
impairments; and, taped texts, large print, Braille, or other effective methods
to ensure visually delivered materials are available to individuals with visual
impairments. Auxiliary aids and services also includes effective methods to
ensure that materials (delivered both aurally and visually) are available to
those with cognitive or other disabilities affecting communication.

BEHAVIORAL HEALTH CARE SERVICES means covered services for the treatment of
mental or emotional disorders and treatment of chemical dependency disorders.

BENCHMARK means a target or standard based on historical data or an
objective/goal.

CALL COVERAGE means arrangements made by a facility or an attending physician
with an appropriate level of health care provider who agrees to be available on
an as-needed basis to provide medically appropriate services for routine/high
risk/or emergency medical conditions or emergency Behavioral Health condition
that present without being scheduled at the facility or when the attending
physician is unavailable.

CAPITATION means a method of payment in which HMO or a health care provider
receives a fixed amount of money each month for each enrolled Member, regardless
of the amount of covered services used by the enrolled Member.

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CHEMICAL DEPENDENCY TREATMENT FACILITY means a facility licensed by the Texas
Commission on Alcohol and Drug Abuse (TCADA) under Sec. 464.002 of the Texas
Health and Safety Code to provide chemical dependency treatment.

CHEMICAL DEPENDENCY TREATMENT means treatment provided for a chemical dependency
condition by a Chemical Dependency Treatment Facility, Chemical Dependency
Counselor or Hospital.

CHEMICAL DEPENDENCY CONDITION means a condition that meets at least three of the
diagnostic criteria for psychoactive substance dependence in the American
Psychiatric Association's Diagnostic and Statistical Manual of Mental Disorders
(DSM IV).

CHEMICAL DEPENDENCY COUNSELOR means an individual licensed by TCADA under
Chapter 504, Texas Occupations Code to provide chemical dependency treatment or
a master's level therapist (LMSW-ACP, LMFT or LPC) or a masters level therapist
(LMSW-ACP, LMFT or LPC) with a minimum of two years of post licensure experience
in chemical dependency treatment.

CHIP means Children's Health Insurance Program established by Title XXI of the
Social Security Act to assist state efforts to initiate and expand child health
assistance to uninsured, low-income children.

CHRONIC OR COMPLEX CONDITION means a physical, behavioral, or developmental
condition that may have no known cure and/or is progressive and/or can be
debilitating or fatal if left untreated or under-treated.

CLEAN CLAIM means a claim submitted by a physician or provider for medical care
or health care services rendered to an enrollee, with documentation reasonably
necessary for the HMO or subcontracted claims processor to process the claim, as
set forth in Title 28, Chapter 21, Subchapter T of the Texas Administrative Code
and to the extent that these rules are not in conflict with the provisions of
this contract.

CLIA means the federal legislation commonly known as the Clinical Laboratories
Improvement Act of 1988 as found at Section 353 of the federal Public Health
Services Act, and regulations adopted to implement the Act.

CMS means the Centers for Medicare and Medicaid Services, formerly known as the
Health Care Financing Administration (HCFA), which is the federal agency
responsible for administering Medicare and overseeing state administration of
Medicaid.

COLD CALL MARKETING means any unsolicited personal contact by the HMO with a
potential Member for the purpose of marketing.

COMMUNITY MANAGEMENT TEAM (CMT) means interagency groups responsible for
developing and implementing the Texas Children's Mental Health Plan (TCMHP) at
the local level. A CMT

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consists of a parent representative and local representatives from the following
entities or their successors: TXMHMR, the Mental Health Association of Texas,
Texas Commission on Alcohol and Drug Abuse, Texas Department of Protective and
Regulatory Services, Texas Department of Human Services, Texas Health and Human
Services Commission, Juvenile Probation Commission, Texas Youth Commission,
Texas Rehabilitation Commission, Texas Education Agency, Council on Early
Childhood Intervention. This organizational structure is also replicated in the
State Management Team that sets overall policy direction for the TCMHP.

COMMUNITY RESOURCE COORDINATION GROUPS (CRCGS) means a statewide system of local
interagency groups, including both public and private providers, that coordinate
services for "multi-need" children and youth. CRCGs develop individual service
plans for children and adolescents whose needs can be met only through
interagency cooperation. CRCGs address complex needs in a model that promotes
local decision-making and ensures that children receive the integrated
combination of social, medical and other services needed to address their
individual problems.

COMPLAINANT means a Member or a treating provider or other individual designated
to act on behalf of the Member who files the complaint.

COMPREHENSIVE CARE PROGRAM: see definition for Texas Health Steps.

CONTINUITY OF CARE means care provided to a Member by the same primary care
provider or specialty provider to the greatest degree possible, so that the
delivery of care to the Member remains stable, and services are consistent and
unduplicated.

CONTRACT means this contract between HHSC and HMO and documents included by
reference and any of its written amendments, corrections or modifications.

CONTRACT ADMINISTRATOR means an entity contracting with HHSC to carry out
specific administrative functions under the State's Medicaid managed care
program.

CONTRACT ANNIVERSARY DATE means September 1 of each year after the first year of
this contract, regardless of the date of execution or effective date of the
contract.

CONTRACT PERIOD means the period of time starting with effective date of the
contract and ending on the termination date of the contract.

COURT-ORDERED COMMITMENT means a commitment of a STAR Member to a psychiatric
facility for treatment that is ordered by a court of law pursuant to the Texas
Health and Safety Code, Title VII Subtitle C, or a placement in a state-operated
facility as a condition of probation, as authorized by the Texas Family Code.

COVERED SERVICES means health care services HMO must arrange to provide to
Members, including all services required by this contract and state and federal
law for this contract, and all Value-added Services described in Appendix C.

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CULTURAL COMPETENCY means the ability of individuals and systems to provide
services effectively to people of various cultures, races, ethnic backgrounds,
and religions in a manner that recognizes, values, affirms, and respects the
worth of the individuals and protects and preserves their dignity.

DAY means calendar day unless specified otherwise.

DENIED CLAIM means a clean claim or a portion of a clean claim for which a
determination is made that the claim cannot be paid.

DISABILITY means a physical or mental impairment that substantially limits one
or more of the major life activities of an individual.

DISABILITY-RELATED ACCESS means that facilities are readily accessible to and
usable by individuals with disabilities, and that auxiliary aids and services
are provided to ensure effective communication, in compliance with Title III of
the Americans with Disabilities Act.

DSM-IV means the Diagnostic and Statistical Manual of Mental Disorders, Fourth
Edition, which is the American Psychiatric Association's official classification
of behavioral health disorders.

ECI means Early Childhood Intervention, which is a federally mandated program
for infants and children under the age of three with or at risk for development
delays and/or disabilities. The federal ECI regulations are found at 34 C.F.R.
Part 303. The State ECI rules are found at 25 TAC Chapter 621.21.

EFFECTIVE DATE means the date on which HHSC signs the contract following
signature of the contract by HMO. For purposes of this Agreement, the term
"Effective Date" will include any period under which work is performed in
accordance with a properly executed Letter of Intent between HHSC and HMO.

EMERGENCY BEHAVIORAL HEALTH CONDITION means any condition, without regard to the
nature or cause of the condition, that in the opinion of a prudent layperson
possessing an average knowledge of health and medicine requires immediate
intervention and/or medical attention without which Members would present an
immediate danger to themselves or others or that renders Members incapable of
controlling, knowing or understanding the consequences of their actions.

EMERGENCY SERVICES means covered inpatient and outpatient services that are
furnished by a provider that is qualified to furnish such services under this
contract and are needed to evaluate or stabilize an emergency medical condition
and/or an emergency behavioral health condition.

EMERGENCY MEDICAL CONDITION, means a medical condition manifesting itself by
acute symptoms of recent onset and sufficient severity (including severe pain),
such that a prudent layperson, who

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possesses an average knowledge of health and medicine, could reasonably expect
the absence of immediate medical care could result in:

      (a)   placing the patient's health in serious jeopardy;

      (b)   serious impairment to bodily functions;

      (c)   serious dysfunction of any bodily organ or part;

      (d)   serious disfigurement; or

      (e)   in the case of a pregnant women, serious jeopardy to the health of a
            woman or her unborn child.

ENCOUNTER means a covered service or group of services delivered by a provider
to a Member during a visit between the Member and provider. This also includes
value-added services.

ENCOUNTER DATA means data elements from fee-for-service claims or capitated
services proxy claims that are submitted to HHSC by HMO in accordance with
HHSC's "HMO Encounter Data Claims Submission Manual".

ENROLLMENT BROKER means an entity contracting with HHSC to carry out specific
functions related to Member services (i.e., enrollment/disenrollment,
complaints, etc.) under HHSC's Medicaid managed care program.

ENROLLMENT REPORT/ENROLLMENT FILE means the daily or monthly list of Medicaid
recipients who are enrolled with an HMO as Members on the day or for the month
the report is issued.

EPSDT means the federally mandated Early and Periodic Screening, Diagnosis and
Treatment program contained at 42 USC 1396d(r) (see definition for Texas Health
Steps). The name has been changed to Texas Health Steps (THSteps) in the State
of Texas.

EXPERIENCE REBATE means the portion of the HMO's net income before taxes
(financial Statistical Report, Part 1, Line 14) that is returned to the state in
accordance with Section 13.2 of this agreement.

EXPEDITED APPEAL means an appeal to the HMO in which the decision is required
quickly based on the Member's health status and taking the time for a standard
appeal could jeopardize the Member's life or health or ability to attain,
maintain, or regain maximum function.

EXPERIENCE REBATE PERIOD means each period within the Contract Period related to
the calculations and settlements of Experience Rebates to HHSC described in
Section 13.2. Because the effective date of this Agreement is June 1, 2004, the
first Experience Rebate Period applicable to this Agreement will be from June 1,
2004 to August 31, 2004.

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FAIR HEARING means the process adopted and implemented by the Texas Health and
Human Services Commission, 1 TAC Chapter 357, in compliance with federal
regulations and state rules relating to Medicaid Fair Hearings.

FQHC means a Federally Qualified Health Center that has been certified by CMS to
meet the requirements of Section 1861(aa)(3) of the Social Security Act as a
federally qualified health center and is enrolled as a provider in the Texas
Medicaid program.

FRAUD means 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 federal or state law.

HEALTH CARE SERVICES means medically necessary physical medicine, behavioral
health care and health-related services that an enrolled population might
reasonably require in order to be maintained in good health, including, as a
minimum, emergency care and inpatient and outpatient services.

HEALTH-RELATED MATERIALS are materials that are developed by the HMO or obtained
from a third party relating to the diagnosis or treatment of medical conditions.

HHSC means the Texas Health and Human Services Commission or its designees.

HPO means the Health Plan Operations Division of the Texas Health and Human
Services Commission.

IMPLEMENTATION DATE means the first date that Medicaid managed care services are
delivered to Members in a service area.

INPATIENT STAY means at least a 24-hour stay in a facility licensed to provide
hospital care.

JCAHO means Joint Commission on Accreditation of Health Care Organizations.

JOINT INTERFACE PLAN (JIP) means a document used to communicate basic system
interface information of the Texas Medicaid Administrative System (TMAS) among
and across State TMAS Contractors and Partners so that all entities are aware of
the interfaces that affect their business. This information includes: file
structure, data elements, frequency, media, type of file, receiver and sender of
the file, and file I.D. The JIP must include each of the HMO's interfaces
required to conduct State TMAS business. The JIP must address the coordination
with each of the Contractor's interface partners to ensure the development and
maintenance of the interface; and the timely transfer of required data elements
between contractors and partners.

LINGUISTIC ACCESS means translation and interpreter services, for written and
spoken language to ensure effective communication. Linguistic access includes
sign language interpretation, and the provision of other auxiliary aids and
services to persons with disabilities.

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LOCAL HEALTH DEPARTMENT means a local health department established pursuant to
the Local Public Health Reorganization Act (Texas Health and Safety Code, Title
2, Chapter 121).

LOCAL MENTAL HEALTH AUTHORITY (LMHA) means an entity to which the TXMHMR board
or its successor delegates its authority and responsibility within a specified
region for planning, policy development, coordination, and resource development
and allocation and for supervising and ensuring the provision of mental health
care services to persons with mental illness in one or more local service areas.

MAJOR LIFE ACTIVITIES means functions such as caring for oneself, performing
manual tasks, walking, seeing, hearing, speaking, breathing, learning, and
working.

MAJOR POPULATION GROUP means any population that represents at least 10% of the
Medicaid population in any of the counties in the service area served by the
HMO.

MARKETING means any communication from an HMO to a Medicaid recipient who is not
enrolled with the HMO that can reasonably be interpreted as intended to
influence the recipient to enroll in that particular HMO's Medicaid product, or
either to not enroll in, or to disenroll from another HMO's Medicaid product.

MARKETING MATERIALS means materials that are produced in any medium by or on
behalf of an HMO and can reasonably be interpreted as intended to market to
potential enrollees.

MEDICAL HOME means a primary or specialty care provider who has accepted the
responsibility for providing accessible, continuous, comprehensive and
coordinated care to Members participating in HHSC's Medicaid managed care
program.

MEDICALLY NECESSARY BEHAVIORAL HEALTH CARE SERVICES means those behavioral
health care services that:

      (a)   are reasonable and necessary for the diagnosis or treatment of a
            mental health or chemical dependency disorder or to improve or to
            maintain or to prevent deterioration of functioning resulting from
            such a disorder;

      (b)   are in accordance with professionally accepted clinical guidelines
            and standards of practice in behavioral health care;

      (c)   are furnished in the most appropriate and least restrictive setting
            in which services can be safely provided;

      (d)   are the most appropriate level or supply of service that can safely
            be provided; and

      (e)   could not be omitted without adversely affecting the Member's mental
            and/or physical health or the quality of care rendered. (a)

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MEDICALLY NECESSARY HEALTH CARE SERVICES means health care services, other than
behavioral health care services that are:

      (a)   reasonable and necessary to prevent illnesses or medical conditions,
            or provide early screening, interventions, and/or treatments for
            conditions that cause suffering or pain, cause physical deformity or
            limitations in function, threaten to cause or worsen a handicap,
            cause illness or infirmity of a Member, or endanger life;

      (b)   provided at appropriate facilities and at the appropriate levels of
            care for the treatment of a Member's health conditions;

      (c)   consistent with health care practice guidelines and standards that
            are endorsed by professionally recognized health care organizations
            or governmental agencies;

      (d)   consistent with the diagnoses of the conditions; and

      (e)   no more intrusive or restrictive than necessary to provide a proper
            balance of safety, effectiveness, and efficiency.

MEMBER OR ENROLLEE means a person who: is entitled to benefits under Title XIX
of the Social Security Act and the Texas Medical Assistance Program (Medicaid),
is in a Medicaid eligibility category included in the STAR Program, and is
enrolled in the STAR Program.

MEMBER COMPLAINT OR GRIEVANCE means an expression of dissatisfaction about any
matter other than an action, as defined above. As provided by 42 C.F.R. Section
438.400, possible subjects for complaints or grievances include, but are not
limited to, the quality of care of services provided, and aspects of
interpersonal relationships such as rudeness of a provider or employee, or
failure to respect the Member's rights.

MEMBER MONTH means one Member enrolled with an HMO during any given month. The
total Member months for each month of a year comprise the annual Member months.

MENTAL HEALTH PRIORITY POPULATION means those individuals served by TXMHMR or
its successor agency who meet the definition of the priority population. The
priority population for mental health care services is defined as:

      (a)   Children and adolescents under the age of 18 who have a diagnosis of
            mental illness who exhibit severe emotional or social disabilities
            that are life-threatening or require prolonged intervention; or

      (b)   Adults who have severe and persistent mental illnesses such as
            schizophrenia, major depression, manic depressive disorder, or other
            severely disabling mental

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            disorders that require crisis resolution or ongoing and long-term
            support and treatment.

MIS means management information system.

NON-PROVIDER SUBCONTRACTS means contracts between HMO and a third party that
performs a function, excluding delivery of health care services that HMO is
required to perform under its contract with HHSC.

PENDED CLAIM means a claim for payment that requires additional information
before the claim can be adjudicated as a clean claim.

PERFORMANCE PREMIUM means an amount that may be paid to a managed care
organization as a bonus for accomplishing a portion or all of the performance
objectives contained in this contract.

POST-STABILIZATION CARE SERVICES means covered services, related to an emergency
medical condition that are provided after an Member is stabilized in order to
maintain the stabilized condition, or, under the circumstances described in 42
C.F.R. Section 438.114(b)&(e) and 42 C.F.R. Section 422.113(c)(2)(iii) to
improve or resolve the Member's condition.

PREMIUM means the amount paid by HHSC to a managed care organization on a
monthly basis and is determined by multiplying the Member months by the
capitation amount for each enrolled Member.

PRIMARY CARE PHYSICIAN OR PRIMARY CARE PROVIDER (PCP) means a physician or
provider who has agreed with HMO to provide a medical home to Members and who is
responsible for providing initial and primary care to patients, maintaining the
continuity of patient care, and initiating referral for care (also see Medical
home).

PROVIDER means an individual or entity and its employees and subcontractors that
directly provide health care services to HMO's Members under HHSC's Medicaid
managed care program.

PROVIDER CONTRACT means an agreement entered into by a direct provider of health
care services and HMO or an intermediary entity.

PROXY CLAIM FORM means a form submitted by providers to document services
delivered to Medicaid Members under a capitated arrangement. It is not a claim
for payment.

PUBLIC INFORMATION means information that is collected, assembled, or maintained
under a law or ordinance or in connection with the transaction of official
business by a governmental body or for a governmental body and the governmental
body owns the information or has a right of access.

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REAL TIME CAPTIONING (also known as CART, Communication Access Real-Time
Translation) means a process by which a trained individual uses a shorthand
machine, a computer, and real-time translation software to type and
simultaneously translate spoken language into text on a computer screen. Real
Time Captioning is provided for individuals who are deaf, have hearing
impairments, or have unintelligible speech; and it is usually used to interpret
spoken English into text English but may be used to translate other spoken
languages into text.

RENEWAL REVIEW means a review process conducted by HHSC or its agent(s) to
assess HMO's capacity and capability to perform the duties and responsibilities
required under the Contract. This process is required by Texas Government Code
Section 533.007.

RISK means the potential for loss as a result of expenses and costs of HMO
exceeding payments made by HHSC under this contract.

RURAL HEALTH CLINIC (RHC) means an entity that meets all of the requirements for
designation as a rural health clinic under Section 1861(aa)(1) of the Social
Security Act and approved for participation in the Texas Medicaid Program.

SED means severe emotional disturbance as determined by a local mental health
authority.

SERVICE AREA means the counties included in a site selected for the STAR
Program, within which a participating HMO must provide services.

SPMI means severe and persistent mental illness as determined by the Local
Mental Health Authority.

SIGNIFICANT TRADITIONAL PROVIDER (STP) means all hospitals receiving
disproportionate share hospital funds (DSH) in FY >95 and all other providers in
a county that, when listed by provider type in descending order by the number of
recipient encounters, provided the top 80 percent of recipient encounters for
each provider type in FY >95.

SPECIAL HEALTH CARE NEEDS means Member with an increased prevalence of risk of
disability, including but not limited to: chronic physical or developmental
condition; severe and persistent mental illness; behavioral or emotional
condition that accompanies the Member's physical or developmental condition.

SPECIAL HOSPITAL means an establishment that:

      (a) offers services, facilities, and beds for use for more than 24 hours
            for two or more unrelated individuals who are regularly admitted,
            treated, and discharged and who require services more intensive than
            room, board, personal services, and general nursing care;

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      (b)   has clinical laboratory facilities, diagnostic x-ray facilities,
            treatment facilities, or other definitive medical treatment;

      (c)   has a medical staff in regular attendance; and

      (d)   maintains records of the clinical work performed for each patient.

STABILIZE means to provide such medical care as to assure within reasonable
medical probability that no deterioration of the condition is likely to result
from, or occur from, or occur during discharge, transfer, or admission of the
Member.

STAR PROGRAM is the name of the State of Texas Medicaid managed care program.
"STAR" stands for the State of Texas Access Reform.

STATE FISCAL YEAR means the 12-month period beginning on September 1 and ending
on August 31 of the next year.

SUBCONTRACT means any written agreement between HMO and other party to fulfill
the requirements of this contract. All subcontracts are required to be in
writing.

SUBCONTRACTOR means any individual or entity that has entered into a subcontract
with HMO.

TAC means Texas Administrative Code.

TANF means Temporary Assistance to Needy Families.

TCADA means Texas Commission on Alcohol and Drug Abuse or its successor agency,
which is the State agency responsible for licensing chemical dependency
treatment facilities. TCADA also contracts with providers to deliver chemical
dependency treatment services.

TEXAS CHILDREN'S MENTAL HEALTH PLAN (TCMHP) means the interagency, State-funded
initiative that plans, coordinates, provides and evaluates service systems for
children and adolescents with behavioral health needs. The Plan is operated at a
state and local level by Community Management Teams representing the major
child-serving state agencies.

TEXMEDNET means Texas Medical Network, which is the State's information system
that processes claims and encounters. TexMedNet's functions include, but are not
limited to eligibility verification, claims and encounters submissions, e-mail
communications, and electronic funds transfers.

TDD means telecommunication device for the deaf. It is interchangeable with the
term Teletype machine or TTY.

TDHS means the Texas Department of Human Services or its successor agency.

                                 Page 19 of 173

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TDI means the Texas Department of Insurance or its successor agency.

TDMHMR means the Texas Department of Mental Health and Mental Retardation or its
successor agency, which is the State agency responsible for developing mental
health policy for public and private sector providers.

TEMPORARY ASSISTANCE TO NEEDY FAMILIES (TANF) means the federally funded program
that provides assistance to single-parent families with children who meet the
categorical requirements for aid. This program was formerly known as, Aid to
Families with Dependent Children (AFDC) program.

TEXAS HEALTH STEPS (THSTEPS) is the name adopted by the State of Texas for the
federally mandated Early and Periodic Screening, Diagnosis and Treatment (EPSDT)
program. It includes the State's Comprehensive Care Program extension to EPSDT,
which adds benefits to the federal EPSDT requirements contained in 42 United
States Code Section 1396d(r), and defined and codified at 42 C.F.R. Section
440.40 and Sections 441.56-62. HHSC's rules are contained in 25 TAC Chapter 33
(relating to Early and Periodic Screening, Diagnosis and Treatment).

TEXAS MEDICAID PROVIDER PROCEDURES MANUAL means the policy and procedures manual
published by or on behalf of HHSC, which contains policies and procedures
required of all health care providers who participate in the Texas Medicaid
program. The manual is published annually and is updated bi-monthly by the
Medicaid Bulletin.

TEXAS MEDICAID SERVICE DELIVERY GUIDE means an attachment to the Texas Medicaid
Provider Procedures Manual.

HHSC means the Texas Health and Human Services Commission.

THIRD PARTY LIABILITY (TPL) means the legal responsibility of another individual
or entity to pay for all or part of the services provided to Members under this
contract (see 1 TAC Chapter 354, Subchapter J, relating to Third Party
Resources).

THIRD PARTY RECOVERY (TPR) means the recovery of payments made on behalf of a
Member by HHSC or HMO from an individual or entity with the legal responsibility
to pay for the services.

TP 40 means Type Program 40, which is a TDHS Medicaid program eligibility type
assigned to pregnant women under 185% of the federal poverty level (FPL).

TP 45 means Type Program 45, which is a TDHS Medicaid program eligibility code
assigned to newborns (under 12 months) who are born to mothers who are Medicaid
eligible at the time of the child's birth.

TXMHMR means Texas Mental Health and Mental Retardation system, which includes
the state agency, Texas Department of MHMR or its successor agency, and the
Local Mental Health and Mental Retardation Authorities.

                                 Page 20 of 173

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UNCLEAN CLAIM means a claim that does not contain accurate and complete data in
all claim fields that are required by HMO and HHSC and other HMO-published
requirements for adjudication, such as medical records, as appropriate (see
definition of Clean Claim).

URGENT BEHAVIORAL HEALTH SITUATIONS means conditions that require attention and
assessment within 24 hours but that do not place the Member in immediate danger
to themselves or others and the Member is able to cooperate with treatment.

URGENT CONDITION means a health condition, including an urgent behavioral health
situation, that is not an emergency but is severe or painful enough to cause a
prudent layperson, possessing the average knowledge of medicine, to believe that
his or her condition requires medical treatment evaluation or treatment within
24 hours by the Member's PCP or PCP designee to prevent serious deterioration of
the Member's condition or health.

VALUE-ADDED SERVICES means a service that the state has approved to be included
in this contract for which HMO does not receive capitation.

ARTICLE 3 PLAN ADMINISTRATIVE AND HUMAN RESOURCE REQUIREMENTS

3.1      ORGANIZATION AND ADMINISTRATION

         3.1.1    HMO must maintain the organizational and administrative
                  capacity and capabilities to carry out all duties and
                  responsibilities under this contract.

         3.1.2    HMO must maintain assigned staff with the capacity and
                  capability to provide all services to all Members under this
                  contract.

         3.1.3    HMO must maintain an administrative office in the service area
                  (local office). The local office must comply with the American
                  with Disabilities Act (ADA) requirements for public buildings.
                  Member Advocates for the service area must be located in this
                  office (see Section 8.8).

         3.1.4    HMO must provide training and development programs to all
                  assigned staff to ensure they know and understand the service
                  requirements under this contract including the reporting
                  requirements, the policies and procedures, cultural and
                  linguistic requirements and the scope of services to be
                  provided.

         3.1.5    HMO must notify HHSC no later than 30 days after the effective
                  date of this contract of any changes in its organizational
                  chart as previously submitted to HHSC.

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                  3.1.5.1  HMO must notify HHSC within fifteen (15) working days
                           of any change in key managers or behavioral health
                           subcontractors. This information must be updated
                           whenever there is a significant change in
                           organizational structure or personnel.

         3.1.6    Participation in Regional Advisory Committee. HMO must
                  participate on a Regional Advisory Committee established in
                  the service area in compliance with the Texas Government Code,
                  Chapter 533, Subchapter B. The Regional Advisory Committee in
                  each managed care service area must include representatives
                  from at least the following entities: hospitals; managed care
                  organizations; primary care providers; state agencies;
                  consumer advocates; Medicaid recipients; rural providers;
                  long-term care providers; specialty care providers, including
                  pediatric providers; and political subdivisions with a
                  constitutional or statutory obligation to provide health care
                  to indigent patients. HHSC will determine the composition of
                  each Regional Advisory Committee.

                  3.1.6.1  The Regional Advisory Committee is required to meet
                           at least quarterly for the first year after
                           appointment of the committee and at least annually in
                           subsequent years. The actual frequency may vary
                           depending on the needs and requirements of the
                           committee.

3.2      NON-PROVIDER SUBCONTRACTS

         3.2.1    HMO must enter into written contracts with all subcontractors
                  and maintain copies of the subcontracts in HMO's
                  administrative office. HMO must submit two copies of all
                  non-provider subcontracts to HHSC for approval no later than
                  60 days after the effective date of this contract, unless the
                  subcontract has already been submitted to and approved by
                  HHSC. Subcontracts entered into after the effective date of
                  this contract must be submitted no later than 30 days prior to
                  the date of execution of the subcontract. HMO must also make
                  non-provider subcontracts available to HHSC upon request, at
                  the time and location requested by HHSC.

                  3.2.1.1  HHSC has 15 working days to review the subcontract
                           and recommend any suggestions or required changes. If
                           HHSC has not responded to HMO by the fifteenth day,
                           HMO may execute the subcontract. HHSC reserves the
                           right to request HMO to modify any subcontract that
                           has been deemed approved.

                  3.2.1.2  HMO must notify HHSC no later than 90 days prior to
                           terminating any subcontract affecting a major
                           performance function of this contract. All major
                           subcontractor terminations or substitutions require
                           HHSC approval (see Section 15.7). HHSC may require
                           HMO to provide a transition plan

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                           describing how the subcontracted function will
                           continue to be provided. All subcontracts are subject
                           to the terms and conditions of this contract and must
                           contain the provisions of Article 5, Statutory and
                           Regulatory Compliance, and the provisions contained
                           in Section 3.2.4.

         3.2.2    Subcontracts that are requested by any agency with authority
                  to investigate and prosecute fraud and abuse must be produced
                  at the time and in the manner requested by the requesting
                  Agency. Subcontracts requested in response to a Public
                  Information request must be produced within 3 working days
                  from HHSC's notification to HMO of the request. All requested
                  records must be provided free-of-charge.

         3.2.3    The form and substance of all subcontracts including
                  subsequent amendments are subject to approval by HHSC. HHSC
                  retains the authority to reject or require changes to any
                  provisions of the subcontract that do not comply with the
                  requirements or duties and responsibilities of this contract
                  or create significant barriers for HHSC in carrying out its
                  duty to monitor compliance with the contract. HMO REMAINS
                  RESPONSIBLE FOR PERFORMING ALL DUTIES, RESPONSIBILITIES AND
                  SERVICES UNDER THIS CONTRACT REGARDLESS OF WHETHER THE DUTY,
                  RESPONSIBILITY OR SERVICE IS SUBCONTRACTED TO ANOTHER.

         3.2.4    HMO and all intermediary entities must include the following
                  standard language in each subcontract and ensure that this
                  language is included in all subcontracts down to the actual
                  provider of the services. The following standard language is
                  not the only language that will be considered acceptable by
                  HHSC.

                  3.2.4.1  [Contractor] understands that services provided under
                           this contract are funded by state and federal funds
                           under the Texas Medical Assistance Program
                           (Medicaid). [Contractor] is subject to all state and
                           federal laws, rules and regulations that apply to
                           persons or entities receiving state and federal
                           funds. [Contractor] understands that any violation by
                           [Contractor] of a state or federal law relating to
                           the delivery of services under this contract, or any
                           violation of the HHSC/HMO contract could result in
                           liability for contract money damages, and/or civil
                           and criminal penalties and sanctions under state and
                           federal law.

                  3.2.4.2  [Contractor] understands and agrees that HMO has the
                           sole responsibility for payment of services rendered
                           by the [Contractor] under this contract. In the event
                           of HMO insolvency or cessation of operations,
                           [Contractor's] sole recourse is against HMO through
                           the bankruptcy or receivership estate of HMO.

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                  3.2.4.3  [Contractor] understands and agrees that neither
                           HHSC, nor the HMO's Medicaid Members, are liable or
                           responsible for payment for any services authorized
                           and provided under this contract.

                  3.2.4.4  [Contractor] agrees that any modification, addition,
                           or deletion of the provisions of this agreement will
                           become effective no earlier than 30 days after HMO
                           notifies HHSC of the change. If HHSC does not provide
                           written approval within 30 days from receipt of
                           notification from HMO, changes may be considered
                           provisionally approved.

                  3.2.4.5  This contract is subject to state and federal fraud
                           and abuse statutes. [Contractor] will be required to
                           cooperate in the investigation and prosecution of any
                           suspected fraud or abuse, and must provide any and
                           all requested originals and copies of records and
                           information, free-of-charge on request, to any state
                           or federal agency with authority to investigate fraud
                           and abuse in the Medicaid program.

                  3.2.4.6  [Contractor] understands that the acceptance of funds
                           under this Contract acts as acceptance of the
                           authority of the State Auditor's Office ("SAO"), or
                           any successor agency, to conduct an investigation in
                           connection with those funds. [Contractor] further
                           agrees to cooperate fully with the SAO or its
                           successor in the conduct of the audit or
                           investigation, including providing all records
                           requested.

         3.2.5    The Texas Medicaid Fraud Control Unit must be allowed to
                  conduct private interviews of HMO personnel, subcontractors
                  and their personnel, witnesses, and patients. Requests for
                  information are to be complied with, in the form and the
                  language requested. HMO employees and Contractors and
                  subcontractors and their employees and Contractors must
                  cooperate fully in making themselves available in person for
                  interviews, consultation, grand jury proceedings, pretrial
                  conference, hearings, trial and in any other process,
                  including investigations. Compliance with this Article is at
                  HMO's and subcontractors' own expense.

         3.2.6    In accordance with 42 C.F.R. Section 438.230(b)(3), all
                  subcontractors must be subject to a written monitoring plan,
                  for any subcontractor carrying out a major function of the
                  HMO's responsibility under this contract. For all
                  subcontractors carrying out a major function of the HMO's
                  contract responsibility, the HMO must prepare a formal
                  monitoring process at least annually. HHSC may request copies
                  of written monitoring plans and the results of the HMO's
                  formal monitoring process.

         3.2.7    In accordance with 42 C.F.R. Section 438.210(e), HMO may not
                  structure compensation to utilization management
                  subcontractors or entities to provide

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                  incentives to deny, limit, reduce, or discontinue medically
                  necessary services to any Member."

3.3      MEDICAL DIRECTOR

         3.3.1    HMO must have the equivalent of a full-time Medical Director
                  licensed under the Texas State Board of Medical Examiners
                  (M.D. or D.O.). HMO must have a written job description
                  describing the Medical Director's authority, duties and
                  responsibilities as follows:

                  3.3.1.1  Ensure that medical necessity decisions, including
                           prior authorization protocols, are rendered by
                           qualified medical personnel and are based on HHSC's
                           definition of medical necessity, and is in compliance
                           with the Utilization Review Act and Article 21.58a,
                           Texas Insurance Code.

                  3.3.1.2  Oversight responsibility of network providers to
                           ensure that all care provided complies with the
                           generally accepted health standards of the community.

                  3.3.1.3  Oversight of HMO's quality improvement process,
                           including establishing and actively participating in
                           HMO's quality improvement committee, monitoring
                           Member health status, HMO utilization review policies
                           and standards and patient outcome measures.

                  3.3.1.4  Identify problems and develop and implement
                           corrective actions to quality improvement process.

                  3.3.1.5  Develop, implement and maintain responsibility for
                           HMO's medical policy.

                  3.3.1.6  Oversight responsibility for medically related
                           complaints.

                  3.3.1.7  Participate and provide witnesses and testimony on
                           behalf of HMO in the HHSC Fair Hearing process.

         3.3.2    The Medical Director must exercise independent medical
                  judgment in all medical necessity decisions. HMO must ensure
                  that medical necessity decisions are not adversely influenced
                  by fiscal management decisions. HHSC may conduct reviews of
                  medical necessity decisions by HMO Medical Director at any
                  time.

3.4      PLAN MATERIALS AND DISTRIBUTION OF PLAN MATERIALS

         3.4.1    Prior to distribution to (1) Members, (2) prospective Members,
                  (3) providers within HMO's network, or (4) potential providers
                  who HMO intends to recruit

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                  as network providers, and with the exception of Health-related
                  Materials, HMO must receive written approval from HHSC for all
                  written materials produced or authorized by HMO containing
                  information about the STAR Program. Health - related Materials
                  do not need to be submitted for review and approval. Per HHSC
                  request, and on an adhoc basis, HMOs will be required to
                  submit a listing of Health-related Materials currently being
                  used, or used previously; HHSC may request the review of
                  selected materials from that list. HHSC will provide HMO a
                  reasonable amount of time to respond to such requests,
                  generally no less than 10 business days.

         3.4.2    Member materials must meet cultural and linguistic
                  requirements as stated in Article 8. Unless otherwise
                  required, Member materials must be written at a 4th - 6th
                  grade reading comprehension level, and translated into the
                  language of any major population group, except when HHSC
                  requires HMO to use statutory language (i.e., advance
                  directives, medical necessity, etc.).

         3.4.3    With the exception of Health-related Materials, all plan
                  materials regarding the STAR Program, including Member
                  education materials, must be submitted to HHSC for approval
                  prior to distribution. HHSC has fifteen (15) working days to
                  review the materials and recommend any suggestions or required
                  changes. If HHSC has not responded to HMO by the fifteenth
                  (15th) day, HMO may print and distribute these materials. HHSC
                  reserves the right to request HMO to modify plan materials
                  that are deemed approved and have been printed or distributed.
                  These modifications can be made at the next printing unless
                  substantial non-compliance exists, as determined by HHSC. An
                  exception to the fifteen (15) working day timeframe may be
                  requested in writing by HMO for written provider materials
                  that require a quick turn-around time (e.g., letters). HHSC
                  will review such request within a reasonable amount of time,
                  generally within five (5) working days. HHSC reserves the
                  right to require revisions to materials if inaccuracies are
                  discovered or if changes are required by changes in policy or
                  law. These changes can be made at the next printing unless
                  substantial non-compliance exists, as determined by HHSC.

         3.4.4    With the exception of Health-related Materials, HMO must send
                  HHSC-approved English versions of HMO's Member Handbook,
                  Member Provider Directory, newsletters, individual Member
                  letters, and any written information that applies to
                  Medicaid-specific services to TDHS for TDHS to translate into
                  Spanish. TDHS must provide the written and approved
                  translation into Spanish to HMO no later than 15 working days
                  after receipt of the English version by HHSC. HMO must
                  incorporate the approved translation into their materials. If
                  TDHS has not responded to HMO by the fifteenth day, HMO may
                  print and distribute these materials. HHSC reserves the right
                  to require revisions to materials if inaccuracies are
                  discovered or if changes are required by changes in policy or
                  law. These changes can be made at the next printing

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                  unless substantial non-compliance exists, as determined by
                  HHSC. HMO has the option of using the TDHS translation unit or
                  their own translators for health education materials that do
                  not contain Medicaid-specific information and for other
                  marketing materials such as billboards, radio spots, and
                  television and newspaper advertisements.

         3.4.5    HMO must reproduce all written instructional, educational, and
                  procedural documents required under this contract and
                  distribute them to its providers and Members. HMO must
                  reproduce and distribute instructions and forms to all network
                  providers who have reporting and audit requirements under this
                  contract.

         3.4.6    HMO must provide HHSC with at least three paper copies and one
                  electronic copy of their Member Handbook, Provider Manual and
                  Member Provider Directory. If an electronic format is not
                  available, five paper copies are required.

         3.4.7    Changes to the Required Critical Elements for the Member
                  Handbook, Provider Manual, and Provider Directory may be
                  handled as inserts until the next printing of these documents.

3.5      RECORDS REQUIREMENTS AND RECORDS RETENTION

         3.5.1    HMO must keep all records required to be created and retained
                  under this Agreement in accordance with the standards set
                  forth herein. Records related to Members served in the HMO's
                  service area(s) must be made available in HMO's local office
                  when requested by HHSC.

                  Original records, except paper claims, must be kept in the
                  form they were created in the regular course of business for a
                  minimum of three (3) years following the expiration of the
                  contract period, including any extensions. Paper claims may be
                  digitally copied from the time of initial receipt, if the HMO:
                  1) receives HHSC prior written approval; 2) certifies that an
                  unaltered copy of the original claim received can be produced
                  upon request; 3) the retention system is reliable and
                  supported by a retrieval system that allows reasonable
                  accurate records. HHSC may require the HMO to retain the
                  records for an additional period if an audit, litigation or
                  administrative action involving the records exists.

         3.5.2    Availability and Accessibility. All records, documents and
                  data required to be created under this contract are subject to
                  audit, inspection and production. If an audit, inspection or
                  production is requested by HHSC, HHSC's designee or HHSC
                  acting on behalf of any agency with regulatory or statutory
                  authority over Medicaid Managed Care, the requested records
                  must be made available

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                  at the time and at the place the records are requested. Copies
                  of requested records must be produced or provided
                  free-of-charge to the requesting agency. Records requested
                  after the second year following the end of contract term that
                  have been stored or archived must be accessible and made
                  available within 10 calendar days from the date of a request
                  by HHSC or the requesting agency or at a time and place
                  specified by the requesting entity.

         3.5.3    Accounting Records. HMO must create and keep accurate and
                  complete accounting records in compliance with Generally
                  Accepted Accounting Principles (GAAP). Records must be created
                  and kept for all claims payments, refunds and adjustment
                  payments to providers, premium or capitation payments,
                  interest income and payments for administrative services or
                  functions. Separate records must be maintained for medical and
                  administrative fees, charges, and payments.

         3.5.4    General Business Records. HMO must create and keep complete
                  and accurate general business records to reflect the
                  performance of duties and responsibilities, and compliance
                  with the provisions of this contract.

         3.5.5    Medical Records. HMO must require, through contractual
                  provisions or provider manual, providers to create and keep
                  medical records in compliance with the medical records
                  standards contained in Appendix O, Standards for Medical
                  Records. All medical records must be kept for at least five
                  (5) years, except for records of rural health clinics, which
                  must be kept for a period of six (6) years from the date of
                  service.

         3.5.6    Matters in Litigation. HMO must keep records related to
                  matters in litigation for five (5) years following the
                  termination or resolution of the litigation.

         3.5.7    On-line Retention of Claims History. HMO must keep automated
                  claims payment histories for a minimum of 18 months from date
                  of adjudication in an on-line inquiry system. HMO must also
                  keep sufficient history on-line to ensure all claim/encounter
                  service information is submitted to and accepted by HHSC for
                  processing.

         3.5.8    The use of Medicaid funds for abortion is prohibited unless
                  the pregnancy is the result of a rape, incest, or continuation
                  of the pregnancy endangers the life of the woman. A physician
                  must certify in writing that based on his/her professional
                  judgment, the life of the mother would be endangered if the
                  fetus were carried to term. HMO must maintain a copy of the
                  certification for at least three years.

3.6      HMO REVIEW OF HHSC MATERIALS

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                  HHSC will submit all studies or audits that relate or refer to
                  HMO for review and comment to HMO 10 working days prior to
                  releasing the report to the public or to Members.

3.7      HMO TELEPHONE ACCESS REQUIREMENTS

         3.7.1    For all HMO telephone access (including Behavioral Health
                  telephone services), HMO must ensure adequately-staffed
                  telephone lines. Telephone personnel must receive customer
                  service telephone training. HMO must ensure that telephone
                  staffing is adequate to fulfill the standards of promptness
                  and quality listed below:

                               1.    80% of all telephone calls must be answered
                                     within an average of 30 seconds;

                               2.    The lost (abandonment) rate must not exceed
                                     10%;

                               3.    HMO cannot impose maximum call duration
                                     limits but must allow calls to be of
                                     sufficient length to ensure adequate
                                     information is provided to the Member or
                                     Provider; and

                               4.    Telephone services must meet cultural
                                     competency requirements (see Section 8.8)
                                     and provide "linguistic access" to all
                                     members as defined in Article 2. This would
                                     include the provision of interpretive
                                     services required for effective
                                     communication for Members and providers.

         3.7.2    Member Helpline: The HMO must furnish a toll-free phone line
                  that members may call 24 hours a day, 7 days a week. An
                  answering service or other similar mechanism that allows
                  callers to obtain information from a live person, may be used
                  for after-hours and weekend coverage.

                  3.7.2.1  HMO must provide coverage for the following services
                           at least during HMO's regular business hours (a
                           minimum of 9 hours a day, between 8 a.m. and 6 p.m.),
                           Monday through Friday:

                               1.    Member ID information;

                               2.    PCP Change;

                               3.    Benefit understanding;

                               4.    PCP verification;

                               5.    Access issues (including referrals to
                                     specialists);

                               6.    Unavailability of PCP;

                               7.    Member eligibility;

                               8.    Complaints;

                               9.    Service area issues (including when member
                                     is temporarily out-of-service area); and

                               10.   Other services covered by member services.

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                  3.7.2.2  HMO must provide HHSC with policies and procedures
                           indicating how the HMO will meet the needs of members
                           who are unable to contact HMO during regular business
                           hours.

         3.7.3    HMO must ensure that PCPs are available 24 hours a day, 7 days
                  a week (see Section 7.8). This includes PCP telephone coverage
                  (see 28 TAC Section 11.2001(a)(1)(A)).

         3.7.4    Behavioral Health Hotline Services. HMO must have emergency
                  and crisis Behavioral Health hotline services available 24
                  hours a day, 7 days a week, toll-free throughout the service
                  area. Crisis hotline staff must include or have access to
                  qualified behavioral health professionals to assess behavioral
                  health emergencies. Emergency and crisis behavioral health
                  services may be arranged through mobile crisis teams. It is
                  not acceptable for an emergency intake line to be answered by
                  an answering machine. Hotline services must meet the
                  requirements described in Section 3.7.1

ARTICLE 4 FISCAL, FINANCIAL, CLAIMS AND INSURANCE REQUIREMENTS

4.1      FISCAL SOLVENCY

         4.1.1    HMO must be and remain in full compliance with all state and
                  federal solvency requirements for HMOs, including but not
                  limited to all reserve requirements, net worth standards,
                  debt-to-equity ratios, or other debt limitations.

         4.1.2    If HMO becomes aware of any impending changes to its financial
                  or business structure that could adversely impact its
                  compliance with these requirements or its ability to pay its
                  debts as they come due, HMO must notify HHSC immediately in
                  writing. If HMO becomes aware of a take-over or assignment
                  that would require the approval of TDI or HHSC, HMO must
                  notify HHSC immediately in writing.

         4.1.3    HMO must not have been placed under state conservatorship or
                  receivership or filed for protection under federal bankruptcy
                  laws. None of HMO's property, plant or equipment must have
                  been subject to foreclosure or repossession within the
                  preceding 10-year period. HMO must not have any debt declared
                  in default and accelerated to maturity within the preceding
                  10-year period. HMO represents that these statements are true
                  as of the contract effective date. HMO must inform HHSC within
                  24 hours of a change in any of the preceding representations.

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4.2      MINIMUM NET WORTH

         4.2.1    HMO has minimum net worth to the greater of (a) $1,500,000;
                  (b) an amount equal to the sum of twenty-five dollars ($25)
                  times the number of all enrollees including Medicaid Members;
                  or (c) an amount that complies with standards adopted by TDI.
                  Minimum net worth means the excess total admitted assets over
                  total liabilities, excluding liability for subordinated debt
                  issued in compliance with Article 1.39 of the Texas Insurance
                  Code.

         4.2.2    The minimum equity must be maintained during the entire
                  contract period.

4.3      PERFORMANCE BOND

4.3      HMO has furnished HHSC with a performance bond in the form prescribed
         by HHSC and approved by TDI, naming HHSC as Obligee, securing HMO's
         faithful performance of the terms and conditions of this Agreement. The
         performance bond must be issued in the amount of $100,000 for the
         Contract Period, plus an additional 12 months after the expiration of
         the Contract Period. If the Contract Period is renewed or extended
         pursuant to Article 15, the HMO must replace the performance bond with
         a separate bond covering performance during the renewal or extension
         period, plus an additional 12 months. The bond must be issued by a
         surety licensed by TDI, and specify cash payment as the sole remedy.
         HMO must deliver the bond to HHSC at the same time the signed HMO
         contract, renewal or extension is delivered to HHSC.

4.4      INSURANCE

         4.4.1    HMO must maintain, or cause to be maintained, general
                  liability insurance in the amounts of at least $1,000,000 per
                  occurrence and $5,000,000 in the aggregate.

         4.4.2    HMO must maintain or require professional liability insurance
                  on each of the providers in its network in the amount of
                  $100,000 per occurrence and $300,000 in the aggregate, or the
                  limits required by the hospital at which the network provider
                  has admitting privileges.

         4.4.3    HMO must maintain an umbrella professional liability insurance
                  policy for the greater of $3,000,000 or an amount (rounded to
                  the next $100,000) that represents the number of STAR Members
                  enrolled in HMO in the first month of the contract year
                  multiplied by $150, not to exceed $10,000,000.

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         4.4.4    Any exceptions to the requirements of this Article must be
                  approved in writing by HHSC prior to the effective date of
                  this contract. HMOs and providers who qualify as either state
                  or federal units of government are exempt from the insurance
                  requirements of this Article and are not required to obtain
                  exemptions from these provisions prior to the effective date
                  of this contract. State and federal units of government are
                  required to comply with and are subject to the provisions of
                  the Texas or Federal Tort Claims Act.

4.5      FRANCHISE TAX

         HMO certifies that its payment of franchise taxes is current or that it
         is not subject to the State of Texas franchise tax.

4.6      AUDIT

         4.6.1    HHSC, TDI, or their designee have the right from time to time
                  to examine and audit books and records of HMO, or its
                  subcontractors, relating to: (1) HMO's capacity to bear the
                  risk of potential financial losses; (2) services performed or
                  determination of amounts payable under this contract; (3)
                  detection of fraud and abuse; and (4) other purposes HHSC
                  deems to be necessary to perform its regulatory function
                  and/or to enforce the provisions of this contract.

         4.6.2    HHSC or its designee will conduct an audit of HMO at least
                  once every two years. HMO is responsible for paying the costs
                  of an audit conducted under this Article. The costs of the
                  audit paid by HMO are allowable costs under this Agreement.

4.7      PENDING OR THREATENED LITIGATION

         HMO must require disclosure from subcontractors and network providers
         of all pending or potential litigation or administrative actions
         against the subcontractor or network provider and must disclose this
         information to HHSC, in writing, prior to the execution of this
         contract. HMO must make reasonable investigation and inquiry that there
         is not pending or potential litigation or administrative action against
         the providers or subcontractors in HMO's provider network. HMO must
         notify HHSC of any litigation that is initiated or threatened after the
         effective date of this contract within seven days of receiving service
         or becoming aware of the threatened litigation.

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4.8      MISREPRESENTATION AND FRAUD IN HMO OPERATIONS

         4.8.1    INTENTIONALLY LEFT BLANK.

         4.8.2    This contract was awarded in part based upon HMO's
                  representation of its current equity and financial ability to
                  bear the risks under this contract. HHSC will consider any
                  misrepresentations of HMO's equity, HMO's ability to bear
                  financial risks of this contract or inflating the equity of
                  HMO, solely for the purpose of being awarded this contract, a
                  material misrepresentation and fraud under this contract.

         4.8.3    Discovery of any material misrepresentation or fraud on the
                  part of HMO in HMO's day-to-day activities and operations may
                  cause this contract to terminate and may result in legal
                  action being taken against HMO under this contract, and state
                  and federal civil and criminal laws.

4.9      THIRD PARTY RECOVERY

         4.9.1    Third Party Recovery. All Members are required to assign their
                  rights to any benefits to the State and agree to cooperate
                  with the State in identifying third parties who may be liable
                  for all or part of the costs for providing services to the
                  Member, as a condition for participation in the Medicaid
                  program. HMO is authorized to act as the State's agent in
                  enforcing the State's rights to third party recovery under
                  this contract.

         4.9.2    Identification. HMO must develop and implement systems and
                  procedures to identify potential third parties who may be
                  liable for payment of all or part of the costs for providing
                  medical services to Members under this contract. Potential
                  third parties must include any of the sources identified in 42
                  C.F.R. 433.138, relating to identifying third parties, except
                  workers' compensation, uninsured and underinsured motorist
                  insurance, first and third party liability insurance and
                  tortfeasors. HMO must coordinate with HHSC to obtain
                  information from other state and federal agencies and HMO must
                  cooperate with HHSC in obtaining information from commercial
                  third party resources. HMO must require all providers to
                  comply with the provisions of 1 TAC Chapter 354, Subchapter J,
                  relating to Third Party Recovery in the Medicaid program.

         4.9.3    Exchange of Identified Resources. HMO must forward identified
                  resources of uninsured and underinsured motorist insurance,
                  first and third party liability insurance and tortfeasors
                  ("excepted resources") to HHSC for HHSC to pursue collection
                  and recovery from these resources. HHSC will forward
                  information on all third party resources identified by HHSC to
                  HMO. HMO must coordinate with HHSC to obtain information from
                  other state and federal agencies, including CMS for Medicare
                  and the Child Support Enforcement Division of the Office of
                  the Attorney General for medical support. HMO

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                  must cooperate with HHSC in obtaining and exchanging
                  information from commercial third party resources.

         4.9.4    Recovery. HMO must actively pursue and collect from third
                  party resources that have been identified, except when the
                  cost of pursuing recovery reasonably exceeds the amount that
                  may be recovered by HMO. HMO is not required to, but may
                  pursue recovery and collection from the excepted resources
                  listed in Section 4.9.3. HMO must report the identity of these
                  resources to HHSC, even if HMO will pursue collection and
                  recovery from the excepted resources.

                  4.9.4.1  HMO must provide third party resource information to
                           network providers to whom individual Members have
                           been assigned or who provide services to Members. HMO
                           must require providers to seek recovery from
                           potential third party resources prior to seeking
                           payment from HMO. If network providers are paid
                           capitation, HMO must either seek recovery from third
                           party resources or account to HHSC for all amounts
                           received by network providers from third party
                           resources.

                  4.9.4.2  HMO must prohibit network providers from interfering
                           with or placing liens upon the State's right or HMO's
                           right, acting as the State's agent, to recovery from
                           third party resources. HMO must prohibit network
                           providers from seeking recovery in excess of the
                           Medicaid payable amount or otherwise violating state
                           and federal laws.

         4.9.5    Retention. HMO may retain as income all amounts recovered from
                  third party sources as long as recoveries are obtained in
                  compliance with the contract and state and federal laws.

         4.9.6    Accountability. HMO must report all third party recovery
                  efforts and amounts recovered as required in Section 12.1.12.
                  If HMO fails to pursue and recover from third parties no later
                  than 180 days after the date of service, HHSC may pursue third
                  party recoveries and retain all amounts recovered without
                  accounting to HMO for the amounts recovered. Amounts recovered
                  by HHSC will be added to expected third party recoveries to
                  reduce future capitation rates, except recoveries from those
                  excepted third party resources listed in Section 4.9.3.

4.10     CLAIMS PROCESSING REQUIREMENTS

         4.10.1   HMO and claims processing subcontractors must comply with 28
                  TAC Chapter 21, Subchapter T regarding "Submission of Clean
                  Claims", to the extent these rules are not in conflict with
                  provisions of this contract.

         4.10.2   HMO must use a HHSC approved or identified claim format that
                  contains all data fields for final adjudication of the claim.
                  The required data fields must be

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                  complete and accurate. The HHSC required data fields are
                  identified in HHSC's "HMO Encounter Data Claims Submission
                  Manual."

         4.10.3   HMO and claims processing subcontractors must comply with
                  HHSC's Texas Medicaid Managed Care Claims Manual (Claims
                  Manual), as amended or modified. The Claims Manual is
                  incorporated herein by reference and contains HHSC's claims
                  processing and reporting requirements. HHSC will provide the
                  HMO reasonable notice of changes to the Claims Manual. For
                  purposes of this section only, "reasonable notice" will
                  generally mean 60 days advance written notice of system
                  changes and 30 days advance written notice of other changes,
                  unless in HHSC's sole discretion, changes in federal or state
                  laws, rules, regulations, or policies warrant a shorter time
                  period for notice.

         4.10.4   HMO must forward claims submitted to HMO in error to either:
                  1) the correct HMO if the correct HMO can be determined from
                  the claim or is otherwise known to HMO; 2) the State's claims
                  administrator; or 3) the provider who submitted the claim in
                  error, along with an explanation of why the claim is being
                  returned.

         4.10.5   HMO must not pay any claim submitted by a provider who has
                  been excluded or suspended from the Medicare or Medicaid
                  programs for fraud and abuse when HMO has knowledge of the
                  exclusion or suspension.

         4.10.6   All provider clean claims must be adjudicated (finalized as
                  paid or denied adjudicated) within 30 days from the date the
                  claim is received by HMO. HMO must pay providers interest on a
                  claim that is not adjudicated within 30 days from either: (1)
                  the date the HMO receives the clean claim, or (2) the date the
                  claim becomes clean. HMO must pay providers interest at an 18%
                  annual rate, calculated daily for the full period in which the
                  clean claim remains unadjudicated beyond the 30-day claims
                  processing deadline. HMO must comply with the Texas Medicaid
                  Managed Care Claims Manual to determine the principal amount
                  for the interest payment computation. HMO will be held to a
                  minimum performance level of 90% of all clean claims paid or
                  denied within 30 days of receipt and 99% of all clean claims
                  paid or denied within 90 days of receipt. Failure to meet
                  these performance levels is a default under this contract and
                  could lead to damages or sanctions as outlined in Article 17.
                  The performance levels are subject to changes if required to
                  comply with federal and state laws or regulations.

                  4.10.6.1 All claims and appeals submitted to HMO and claims
                           processing subcontractors must be paid-adjudicated
                           (clean claims), denied-adjudicated (clean claims), or
                           denied for additional information (unclean claims) to
                           providers within 30 days from the date the claim is
                           received by HMO. Providers must be sent a written
                           notice for each claim that is denied for additional
                           information (unclean claims) identifying the claim,
                           all reasons why the claim is being denied, the date
                           the claim was received by HMO, all information
                           required from the provider in order for HMO to
                           adjudicate the

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                           claim, and the date by which the requested
                           information must be received from the provider.

                  4.10.6.2 Claims that are suspended (pended internally) must be
                           subsequently paid-adjudicated, denied-adjudicated, or
                           denied for additional information (pended externally)
                           within 30 days from date of receipt. No claim can be
                           suspended for a period exceeding 30 days from date of
                           receipt of the claim.

                  4.10.6.3 HMO must identify each data field of each claim form
                           that is required from the provider in order for HMO
                           to adjudicate the claim. HMO must inform all network
                           providers about the required fields no later than 30
                           days prior to the effective date of the contract or
                           as a provision within HMO/provider contract.
                           Out-of-network providers must be informed of all
                           required fields if the claim is denied for additional
                           information. The required fields must include those
                           required by HMO and HHSC.

         4.10.7   HMO is subject to Article 16, Default and Remedies, for claims
                  that are not processed on a timely basis as required by this
                  contract and the Claims Manual. Notwithstanding the provisions
                  of Section 4.10.4, HMO's failure to adjudicate (paid, denied,
                  or external pended) at least ninety percent (90%) of all
                  claims within thirty (30) days of receipt and ninety-nine
                  percent (99%) within ninety (90) days of receipt for the
                  contract year to date is a default under Article 16 of this
                  contract.

         4.10.8   HMO must comply with the standards adopted by the U.S.
                  Department of Health and Human Services under the Health
                  Insurance Portability and Accountability Act of 1996 (HIPAA),
                  Public Law 104-191, regarding submitting and receiving claims
                  information through electronic data interchange (EDI) that
                  allows for automated processing and adjudication of claims
                  within the federally mandated timeframes (see 45 C.F.R. parts
                  160 through 164).

         4.10.9   For claims requirements regarding retroactive PCP changes for
                  mandatory Members, see Section 7.8.12.2.

4.11     INDEMNIFICATION

         4.11.1   HMO/HHSC: HMO must agree to indemnify HHSC and its agents for
                  any and all claims, costs, damages and expenses, including
                  court costs and reasonable attorney's fees that are related to
                  or arise out of:

                  4.11.1.1 Any failure, inability, or refusal of HMO or any of
                           its network providers or other subcontractors to
                           provide covered services;

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                  4.11.1.2 Claims arising from HMO's, HMO's network provider's
                           or other subcontractor's negligent or intentional
                           conduct in not providing covered services; and

                  4.11.1.3 Failure, inability, or refusal of HMO to pay any of
                           its network providers or subcontractors for covered
                           services.

         4.11.2   HMO/Provider: HMO is prohibited from requiring providers to
                  indemnify HMO for HMO's own acts or omissions that result in
                  damages or sanctions being assessed against HMO either under
                  this contract or under state or federal law.

ARTICLE 5 STATUTORY AND REGULATORY COMPLIANCE REQUIREMENTS

5.1      COMPLIANCE WITH FEDERAL, STATE, AND LOCAL LAWS

         5.1.1    HMO must know, understand and comply with all state and
                  federal laws and regulations relating to the Texas Medicaid
                  Program that have not been waived by CMS. HMO must comply with
                  all rules relating to the Medicaid managed care program
                  adopted by HHSC, TDI, MHMR and any other state agency
                  delegated authority to operate or administer Medicaid or
                  Medicaid managed care programs.

         5.1.2    HMO must require, through contract provisions, that all
                  network providers or subcontractors comply with all state and
                  federal laws and regulations relating to the Texas Medicaid
                  Program and all rules relating to the Medicaid managed care
                  program adopted by HHSC, TDI, MHMR and any other state agency
                  delegated authority to operate Medicaid or Medicaid Managed
                  Care programs.

         5.1.3    HMO must comply with the provisions of the Clean Air Act and
                  the Federal Water Pollution Control Act, as amended, found at
                  42 U.S.C. Section 7401, et seq. and 33 U.S.C. Section 1251, et
                  seq., respectively.

         5.1.4    In accordance with Texas Government Code Section 2262.003, HMO
                  understands that acceptance of funds under this contract acts
                  as acceptance of the authority of the State Auditor's Office,
                  or any successor agency, to conduct an audit or investigation
                  in connection with those funds. HMO further agrees to
                  cooperate fully with the State Auditor's Office or its
                  successor in the conduct of the audit or investigation,
                  including providing all records requested. HMO will ensure
                  that this clause concerning the authority to audit funds
                  received indirectly by subcontractors through HMO and the
                  requirement to cooperate is included in any subcontract it
                  awards.

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5.2      PROGRAM INTEGRITY

         5.2.1    HMO has not been excluded, debarred, or suspended from
                  participation in any program under Title XVIII or Title XIX
                  under any of the provisions of Section 1128(a) or (b) of the
                  Social Security Act (42 USC Section 1320a-7), or Executive
                  Orders 12549 and 12689. HMO must notify HHSC within 3 days of
                  the time it receives notice that any action is being taken
                  against HMO or any person defined under the provisions of
                  Section 1128(a) or (b) or any subcontractor, which could
                  result in exclusion, debarment, or suspension of HMO or a
                  subcontractor from the Medicaid program, or any program listed
                  in Executive Order 12549 and 12689.

         5.2.2    HMO must comply with the provisions of, and file the
                  certification of compliance required by the Byrd Anti-Lobbying
                  Amendment, found at 31 U.S.C.  Section 1352, relating to use
                  of federal funds for lobbying for or obtaining federal
                  contracts.

5.3      FRAUD AND ABUSE COMPLIANCE PLAN

         5.3.1    This contract is subject to all state and federal laws and
                  regulations relating to fraud and abuse in health care and the
                  Medicaid program. HMO must cooperate and assist HHSC and any
                  other state or federal agency charged with the duty of
                  identifying, investigating, sanctioning or prosecuting
                  suspected fraud and abuse. HMO must provide originals and/or
                  copies of all records and information requested and allow
                  access to premises and provide records to HHSC or its
                  authorized agent(s), HHSC, CMS, the U.S. Department of Health
                  and Human Services, FBI, TDI, and the Texas Attorney General's
                  Medicaid Fraud Control Unit. All copies of records must be
                  provided free of charge.

         5.3.2    Compliance Plan. HMO must submit to HHSC for approval a
                  written fraud and abuse compliance plan that is based on the
                  Model Compliance Plan issued by the U.S. Department of Health
                  and Human Services, the Office of Inspector General (OIG), no
                  later than 30 days after the effective date of the contract.
                  HMO must designate an officer or director in its organization
                  who has the responsibility and authority for carrying out the
                  provisions of its compliance plan. HMO must submit any updates
                  or modifications in its compliance plan to HHSC for approval
                  at least 30 days prior to the modifications going into effect.
                  HMO's fraud and abuse compliance plan must:

                  5.3.2.1  ensure that all officers, directors, managers and
                           employees know and understand the provisions of HMO's
                           fraud and abuse compliance plan.

                  5.3.2.2  contain procedures designed to prevent and detect
                           potential or suspected abuse and fraud in the
                           administration and delivery of services under this
                           contract.

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                  5.3.2.3  contain provisions for the confidential reporting of
                           plan violations to the designated person in HMO.

                  5.3.2.4  contain provisions for the investigation and
                           follow-up of any compliance plan reports.

                  5.3.2.5  ensure that the identity of individuals reporting
                           violations of the plan is protected.

                  5.3.2.6  contain specific and detailed internal procedures for
                           officers, directors, managers and employees for
                           detecting, reporting, and investigating fraud and
                           abuse compliance plan violations.

                  5.3.2.7  require any confirmed or suspected fraud and abuse
                           under state or federal law be reported to HHSC, the
                           Medicaid Program Integrity section of the Office of
                           Investigations and Enforcement of the Texas Health
                           and Human Services Commission, and/or the Medicaid
                           Fraud Control Unit of the Texas Attorney General.

                  5.3.2.8  ensure that no individual who reports plan violations
                           or suspected fraud and abuse is retaliated against.

         5.3.3    Training. HMO must designate executive and essential personnel
                  to attend mandatory training in fraud and abuse detection,
                  prevention and reporting. The training will be conducted by
                  the Office of Investigation and Enforcement, HHSC, and will be
                  provided free of charge. HMO must schedule and complete
                  training no later than 90 days after the effective date of any
                  updates or modification of the written Model Compliance Plan.

                  5.3.3.1  If HMO's personnel have attended OIE training prior
                           to the effective date of this contract, they are not
                           required to attend additional OIE training unless new
                           training is required due to changes in federal and/or
                           state law or regulations. If additional OIE training
                           is required, HHSC will notify HMO to schedule this
                           additional training.

                  5.3.3.2  If HMO updates or modifies its written fraud and
                           abuse compliance plan, HMO must train its executive
                           and essential personnel on these updates or
                           modifications no later than 90 days after the
                           effective date of the updates or modifications.

                  5.3.3.3  If HMO's executive and essential personnel change or
                           if HMO employs additional executive and essential
                           personnel, the new or additional personnel must
                           attend OIE training within 90 days of employment by
                           HMO.

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         5.3.4    HMO's failure to report potential or suspected fraud or abuse
                  may result in sanctions, contract cancellation, or exclusion
                  from participation in the Medicaid program.

         5.3.5    HMO must allow the Texas Medicaid Fraud Control Unit and
                  HHSC's Office of Investigations and Enforcement, to conduct
                  private interviews of HMO's employees, subcontractors and
                  their employees, witnesses, and patients. Requests for
                  information must be complied with in the form and the language
                  requested. HMO's employees and its subcontractors and their
                  employees must cooperate fully and be available in person for
                  interviews, consultation, grand jury proceedings, pre-trial
                  conference, hearings, trial and in any other process.

         5.3.6    Subcontractors. HMO must submit the documentation described in
                  Sections 5.3.6.1 through 5.3.6.3, in compliance with Texas
                  Government Code Section 533.012, regarding any subcontractor
                  providing health care services under this contract. HMO must
                  submit information in a format as specified by HHSC.
                  Documentation must be submitted no later than 120 days after
                  the effective date of this contract. Subcontracts entered into
                  after the effective date of this contract must be submitted no
                  later than 90 days after the effective date of the
                  subcontract. The required documentation required under this
                  provision is not subject to disclosure under Chapter 552,
                  Texas Government Code.

                  5.3.6.1  a description of any financial or other business
                           relationship between HMO and its subcontractor;

                  5.3.6.2  a copy of each type of contract between HMO and its
                           subcontractor;

                  5.3.6.3  a description of the fraud control program used by
                           any subcontractor.

5.4      SAFEGUARDING INFORMATION

         5.4.1    The use and disclosure of all Member information, records, and
                  data (Member Information) collected or provided to HMO by HHSC
                  or another state agency is protected by state and federal law
                  and regulations, including, but not limited to, the Health
                  Insurance Portability and Accountability Act of 1996 (HIPAA)
                  (42 U.S.C. Sections 1320d-1320d-8), Public law 104-191, and 45
                  CFR parts 160 through 164. HMO agrees to ensure that any of
                  its agents, including subcontractors, to whom HMO discloses
                  Member information, agrees to the same restrictions and
                  conditions that apply to HMO with respect to Member
                  Information.

         5.4.2    HMO is responsible for informing Members and providers
                  regarding the provisions of 42 C.F.R. 431, Subpart F, relating
                  to Safeguarding Information on Applicants and Recipients, and
                  HMO must ensure that confidential information is protected
                  from disclosure except for authorized purposes.

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         5.4.3    HMO must assist network PCPs in developing and implementing
                  policies for protecting the confidentiality of AIDS and
                  HIV-related medical information and an anti-discrimination
                  policy for employees and Members with communicable diseases.
                  Also see Texas Health and Safety Code, Chapter 85, Subchapter
                  E, relating to the Duties of State Agencies and State
                  Contractors.

         5.4.4    HMO must require that subcontractors have mechanisms in place
                  to ensure Member's (including minor's) confidentiality for
                  family planning services.

5.5      NON-DISCRIMINATION

         HMO agrees to comply with and to include in all subcontracts a
         provision that the subcontractor will comply with each of the following
         requirements:

         5.5.1    Title VI of the Civil Rights Act of 1964, Executive Order
                  11246 (Public Law 88-352); Section 504 of the Rehabilitation
                  Act of 1973 (Public Law 93-112); the Americans with
                  Disabilities Act of 1990 (Public Law 101-336), and all
                  amendments to each Act, and all requirements imposed by the
                  regulations issued pursuant to these Acts. In addition, HMO
                  agrees to comply with Title 40, Chapter 73 of the Texas
                  Administrative Code, "Civil Rights," to the extent applicable
                  to this Agreement. These laws provide in part that no persons
                  in the United States must, on the grounds of race, color,
                  national origin, sex, age, disability, political beliefs, or
                  religion, be excluded from participation in, or denied, any
                  aid, care, service or other benefits provided by Federal or
                  State funding, or otherwise be subjected to any
                  discrimination.

         5.5.2    Texas Health and Safety Code Section 85.113 (relating to
                  workplace and confidentiality guidelines regarding AIDS and
                  HIV).

         5.5.3    The provisions of Executive Order 11246, as amended by 11375,
                  relating to Equal Employment Opportunity.

         5.5.4    HMO shall not discriminate with respect to participation,
                  reimbursement, or indemnification as to any provider who is
                  acting within the scope of the provider's license or
                  certification under applicable State law, solely on the basis
                  of such license or certification. This requirement shall not
                  be construed to prohibit HMO from including providers only to
                  the extent necessary to meet the needs of HMO's Members or
                  from establishing any measure designed to maintain quality and
                  control costs consistent with HMO's responsibilities.

5.6      HISTORICALLY UNDERUTILIZED BUSINESSES (HUBS)

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         5.6.1    In accordance with Texas Government Code Chapter 2161, 1 TAC
                  Chapter 111, Subchapter B, and 1 TAC Chapter 392, Subchapter
                  J, state agencies are required to make a good faith effort to
                  assist Historically Underutilized Businesses (HUBs) in
                  receiving contract awards issued by the State. The goal of
                  this program is to promote full and equal business opportunity
                  for all businesses in contracting with the state. It is HHSC's
                  intent that all contractors make a good faith effort to
                  subcontract with HUBs during the performance of their
                  contracts.

                  Important Note: The Health and Human Services Commission has
                  concluded that HUB subcontracting opportunities may exist in
                  connection with this contract. See Appendix B to the Agreement
                  for the following instructions and form: "Grant/Subcontract
                  Applications Client Services HUB Subcontracting Plan
                  Instructions" (C-IGA) and "Determination of Good Faith Effort
                  for Grant Contracts" (C-DGFE). If an approved HUB
                  Subcontracting Plan is not already on file with HHSC, the HMO
                  shall submit a completed C-DGFE with the signed contract or
                  renewal.

         5.6.2    In accordance with Article 12.11, HMO is required to submit
                  HUB monthly reports, in the format set forth in Appendix B of
                  this contract.

                  If HMO decides after the award to subcontract any part of the
                  contracted work, the HMO shall notify the HHSC Health Plan
                  Manager prior to entering into any subcontract. The HMO shall
                  comply with the good faith effort requirements relating to
                  developing and submitting a modified HUB Subcontracting Plan.

         5.6.3    HHSC will assist HMO in meeting the contracting and reporting
                  requirements of this Article.

5.7      BUY TEXAS

         HMO agrees to "Buy Texas" products and materials when they are
         available at a comparable price and in a comparable period of time, as
         required by Texas Government Code Section 2155.4441.

5.8      CHILD SUPPORT

         5.8.1    The Texas Family Code Section 231.006 requires HHSC to
                  withhold contract payments from any for-profit entity or
                  individual who is at least 30 days delinquent in child support
                  obligations. It is HMO's responsibility to determine and
                  verify that no owner, partner, or shareholder who has at least
                  at 25% ownership interest is delinquent in child support
                  obligations. HMO must attach a list of the names and Social
                  Security numbers of all shareholders, partners or owners who
                  have at least a 25% ownership interest in HMO.

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         5.8.2    Under Section 231.006 of the Family Code, the contractor
                  certifies that the contractor is not ineligible to receive the
                  specified grant, loan, or payment and acknowledges that this
                  contract may be terminated and payment may be withheld if this
                  certification is inaccurate. A child support obligor who is
                  more than 30 days delinquent in paying child support or a
                  business entity in which the obligor is a sole proprietor,
                  partner, shareholder, or owner with an ownership interest of
                  at least 25% is not eligible to receive the specified grant,
                  loan or payment.

         5.8.3    If HHSC is informed and verifies that a child support obligor
                  who is more than 30 days delinquent is a partner, shareholder,
                  or owner with at least a 25% ownership interest, it will
                  withhold any payments due under this contract until it has
                  received satisfactory evidence that the obligation has been
                  satisfied or that the obligor has entered into a written
                  repayment request.

5.9      REQUESTS FOR PUBLIC INFORMATION

         5.9.1    This contract and all network provider and subcontractor
                  contracts are subject to public disclosure under the Public
                  Information Act (Texas Government Code, Chapter 552). HHSC may
                  receive Public Information requests related to this contract
                  and information submitted as part of the compliance of the
                  contract. HHSC agrees that it will promptly deliver a copy of
                  any request for Public Information to HMO.

         5.9.2    HHSC may, in its sole discretion, request a decision from the
                  Office of the Attorney General (AG opinion) regarding whether
                  the information requested is excepted from required public
                  disclosure. HHSC may rely on HMO's written representations in
                  preparing any AG opinion request, in accordance with Texas
                  Government Code Section 552.305. HHSC is not liable for
                  failing to request an AG opinion or for releasing information
                  that is not deemed confidential by law, if HMO fails to
                  provide HHSC with specific reasons why the requested
                  information is exempt from the required public disclosure.
                  HHSC or the Office of the Attorney General will notify all
                  interested parties if an AG opinion is requested.

         5.9.3    If HMO believes that the requested information qualifies as a
                  trade secret or as commercial or financial information, HMO
                  may request that HHSC submit the request for public
                  information to the Attorney General for an Open Records
                  Opinion. HMO must submit this request to HHSC by the date
                  specified in HHSC's notice of the public information request.
                  The HMO will be responsible for presenting all exceptions to
                  public disclosure to the Attorney General if an opinion is
                  requested.

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5.10     NOTICE AND APPEAL

5.10     HMO must comply with the notice requirements contained in 1 TAC
         Section 354.2211, and the maintaining benefits and services contained
         in 1 TAC Section 354.2213, whenever HMO intends to take an action
         affecting the Member benefits and services under this contract. Also
         see the Member appeal requirements contained in Section 8.5 of this
         Agreement.

5.11     DATA CERTIFICATION

         5.11.1   In accordance with 42 C.F.R. Part 438, Subpart H, HMO must
                  certify in writing:

                  (a)      encounter data;

                  (b)      delivery supplemental data and other data submitted
                           pursuant to this agreement or State or Federal law or
                           regulation relating to payment for services.

         5.11.2   The certification must be submitted to HHSC concurrently with
                  the certified data or other documents.

         5.11.3   The certification must:

                  (a)      be signed by the HMO's Chief Executive Officer; Chief
                           Financial Officer; or an individual with delegated
                           authority to sign for, and who reports directly to,
                           either the Chief Executive Officer or Chief Financial
                           Officer; and

                  (b)      contain a statement that to the best knowledge,
                           information and belief of the signatory, the HMO's
                           certified data or information are accurate, complete,
                           and truthful.

ARTICLE 6 SCOPE OF SERVICES

6.1      SCOPE OF SERVICES

         HMO is paid capitation for all services included in the State of Texas
         Title XIX State Plan and the 1915(b) waiver application for the SDA
         currently filed and approved by CMS, except those services that are
         specifically excluded and listed in Section 6.1.8 (non-capitated
         services).

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         6.1.1    HMO must pay for or reimburse for all covered services
                  provided to mandatory-enrolled Members for whom HMO is paid
                  capitation.

         6.1.2    HHSC must pay for or reimburse for all covered services
                  provided to SSI voluntary Members who enroll with HMO on a
                  voluntary basis. It is at HMO's discretion whether to provide
                  value-added services to voluntary Members.

         6.1.3    HMO must provide covered services described in the 2004 Texas
                  Medicaid Provider Procedures Manual (Provider Procedures
                  Manual), subsequent editions of the Provider Procedures Manual
                  also in effect during the contract period, and all Texas
                  Medicaid Bulletins that update the 2004 Provider Procedures
                  Manual and subsequent editions of the Provider Procedures
                  Manual published during the contract period.

         6.1.4    Covered services are subject to change due to changes in
                  federal law, changes in Texas Medicaid policy, and/or
                  responses to changes in Medicine, Clinical protocols, or
                  technology.

         6.1.5    The STAR Program has obtained a waiver to the State Plan to
                  include three enhanced benefits to all voluntary and mandatory
                  STAR Members. Two of these enhanced benefits removed
                  restrictions that previously applied to Medicaid eligible
                  individuals 21 years and older: the three-prescriptions per
                  month limit; and, the 30-day spell of illness limit. The
                  remaining expanded benefit expands the covered benefits to add
                  an annual adult well check.

         6.1.6    VALUE-ADDED SERVICES. Value-added services that are approved
                  by HHSC during the contracting process are included in the
                  Scope of Services under this contract. Value-added services
                  are listed in Appendix C.

                  6.1.6.1  The approval request must include:

                           6.1.6.1.1 A detailed description of the service to be
                                     offered;

                           6.1.6.1.2 Identification of the category or group of
                                     Members eligible to receive the service if
                                     it is a type of service that is not
                                     appropriate for all Members. (HMO has the
                                     discretion to determine if voluntary
                                     Members are eligible for the value-added
                                     services);

                           6.1.6.1.3 Any limits or restrictions that apply to
                                     the service; and

                           6.1.6.1.4 A description of how a Member may obtain or
                                     access the service.

                  6.1.6.2  Value-added services can only be added or removed by
                           written amendment of this contract. HMO cannot
                           include a value-added service in any material

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                           distributed to Members or prospective Members until
                           this contract has been amended to include that
                           value-added service or HMO has received written
                           approval from HHSC pending finalization of the
                           contract amendment.

                           6.1.6.2.1 If a value-added service is deleted by
                                     amendment, HMO must notify each Member that
                                     the service is no longer available through
                                     HMO, and HMO must revise all materials
                                     distributed to prospective Members to
                                     reflect the change in covered services.

                  6.1.6.3  Value-added services must be offered to all mandatory
                           HMO Members, as indicated in Section 6.1.6.1.2,
                           unless the contract is amended or the contract
                           terminates.

         6.1.7    HMO may offer additional benefits that are outside the scope
                  of services of this contract to individual Members on a
                  case-by-case basis, based on medical necessity,
                  cost-effectiveness, and satisfaction and improved
                  health/behavioral health status of the Member/Member family.

         6.1.8    Non-Capitated Services. The following Texas Medicaid program
                  services have been excluded from the services included in the
                  calculation of HMO capitation rate:

                        -     THSteps Dental (including Orthodontia);

                        -     Early Childhood Intervention Case
                              Management/Service Coordination;

                        -     MHMR Targeted Case Management;

                        -     Mental Health Rehabilitation;

                        -     Pregnant Women and Infants Case Management;

                        -     THSteps Medical Case Management;

                        -     Texas School Health and Related Services;

                        -     Texas Commission for the Blind Case Management;

                        -     Tuberculosis Services Provided by HHSC-approved
                              providers (Directly Observed Therapy and Contact
                              Investigation);

                        -     Vendor Drugs (out-of-office drugs);

                        -     Medical Transportation; and

                        -     TDHS Hospice Services.

                  Refer to relevant chapters in the Provider Procedures Manual
                  and the Texas Medicaid Bulletins for more information.

                  Although HMO is not responsible for paying or reimbursing for
                  these noncapitated services, HMO remains responsible for
                  providing appropriate referrals for Members to obtain or
                  access these services.

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                  6.1.8.1  HMO is responsible for informing providers that all
                           non-capitated services must be submitted to HHSC for
                           payment or reimbursement.

         6.1.9    In accordance with 42 C.F.R. Section 438.102, HMO may file an
                  objection to provide, reimburse for, or provide coverage of,
                  counseling or referral service for a covered benefit, based on
                  moral or religious grounds.

                  6.1.9.1  HMO must work with HHSC to develop a work plan to
                           complete the necessary tasks to be completed and
                           determine an appropriate date for implementation of
                           the requested changes to the requirements related to
                           covered services. The work plan will include
                           timeframes for completing the necessary contract and
                           waiver amendments, adjustments to capitation rates,
                           identification of HMO and enrollment materials
                           needing revision, and notifications to Members.

                  6.1.9.2  In order to meet the requirements of Section 6.1.9.1,
                           HMO must notify HHSC of grounds for and provide
                           detail concerning its moral or religious objections
                           and the specific services covered under the
                           objection, no less than 120 days prior to the
                           proposed effective date of the policy change.

                  6.1.9.3  HMO must notify all current Members of the intent to
                           change covered services at least 30 days prior to the
                           effective date of the change in accordance with 42
                           C.F.R. Section 438.102(b)(1)(ii)(B).

                  6.1.9.4  HHSC will provide information to all current Members
                           on how and where to obtain the service that has been
                           discontinued by the HMO in accordance with 42 C.F.R.
                           Section 438.102(c).

6.2      PRE-EXISTING CONDITIONS

         HMO is responsible for providing all covered services to each eligible
         Member beginning on the effective date of the contract or the Member's
         date of enrollment under the contract regardless of pre-existing
         conditions, prior diagnosis and/or receipt of any prior health care
         services.

6.3      SPAN OF ELIGIBILITY

6.3      The following outlines HMO's responsibilities for payment of hospital
         and freestanding psychiatric facility (facility) admissions:

         6.3.1    The payor responsible for the hospital/facility charges at the
                  start of an inpatient stay remains responsible for
                  hospital/facility charges until the time of discharge, or
                  until such time that there is a loss of Medicaid eligibility.

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         6.3.2    HMO is responsible for professional charges during every month
                  for which the payor receives a full capitation payment.

         6.3.3    HMO is not responsible for any services after effective date
                  of loss of Medicaid eligibility

         6.3.4    Plan Change. A Member cannot change from one STAR health plan
                  to another STAR health plan during an inpatient hospital stay.

         6.3.5    Hospital/Facility Transfer. Discharge from one acute care
                  hospital/facility and readmission to another acute care
                  hospital/facility within 24 hours for continued treatment is
                  not a discharge under this contract.

         6.3.6    HMO insolvency or receivership. HMO is responsible for payment
                  of all services provided to a person who was a Member on the
                  date of insolvency or receivership to the same extent they
                  would otherwise be responsible under this Section 6.3.

         6.3.7    For purposes of this Section 6.3, a Member "loses Medicaid
                  eligibility" when:

                  6.3.7.1  Medicaid eligibility is terminated and never regained
                           under one Medicaid Type Program with no subsequent
                           transfer of eligibility to another Medicaid Type
                           Program; or

                  6.3.7.2  Medicaid eligibility is terminated and there is a
                           lapse of at least one month in regular Medicaid
                           coverage. The term "regular Medicaid coverage" refers
                           to either traditional fee-for-service Medicaid or
                           Medicaid managed care coverage; or

                  6.3.7.3  A client re-applies for Medicaid eligibility and is
                           certified for prior Medicaid coverage, as defined by
                           TDHS, for any month(s) prior to the month of
                           application. The term "prior Medicaid coverage"
                           refers to Applicants who are eligible for Medicaid
                           coverage during the three-month period before the
                           month they apply for TANF or Medical Programs. Prior
                           Medicaid coverage may be continuous or there may be
                           interrupted periods of eligibility involving all or
                           some of the certified Members.

                           Administrative process limitations within the State's
                           application and recertification process do not
                           constitute a "loss of Medicaid eligibility".

6.4      CONTINUITY OF CARE AND OUT-OF-NETWORK PROVIDERS

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         6.4.1    HMO must ensure that the care of newly enrolled Members is not
                  disrupted or interrupted. HMO must take special care to
                  provide continuity in the care of newly enrolled Members whose
                  health or behavioral health condition has been treated by
                  specialty care providers or whose health could be placed in
                  jeopardy if care is disrupted or interrupted.

         6.4.2    Pregnant Members with 12 weeks or less remaining before the
                  expected delivery date must be allowed to remain under the
                  care of the Member's current OB/GYN through the Member's
                  postpartum checkup, even if the provider is out-of-network. If
                  Member wants to change her OB/GYN to one who is in the plan,
                  she must be allowed to do so if the provider to whom she
                  wishes to transfer agrees to accept her in the last trimester.

         6.4.3    HMO must pay a Member's existing out-of-network providers for
                  covered services until the Member's records, clinical
                  information and care can be transferred to a network provider.
                  Payment must be made within the time period required for
                  network providers. This Article does not extend the obligation
                  of HMO to reimburse the Member's existing out-of-network
                  providers for on-going care for more than 90 days after Member
                  enrolls in HMO or for more than nine months in the case of a
                  Member who at the time of enrollment in HMO has been diagnosed
                  with and is receiving treatment for a terminal illness. The
                  obligation of HMO to reimburse the Member's existing
                  out-of-network provider for services provided to a pregnant
                  Member with 12 weeks or less remaining before the expected
                  delivery date extends through delivery of the child, immediate
                  postpartum care, and the follow-up checkup within the first
                  six weeks of delivery.

                  6.4.3.1  [THIS SECTION IS INTENTIONALLY LEFT BLANK.]

                  6.4.3.2  For all out-of-network provider claims, HMO must pay
                           providers a reasonable and customary amount
                           consistent with a methodology approved by HHSC. HMO
                           will submit its proposed out-of-network payment
                           methodology for the Travis Service Delivery Area to
                           HHSC no later than March 1, 2004. HMO must forward
                           any complaints by out-of-network providers to HHSC,
                           which will review all complaints. If HHSC determines
                           that payment is not consistent with the HMO's
                           approved methodology, the HMO must pay the provider a
                           rate, using the approved reasonable and customary
                           methodology, as determined by HHSC. Failure to comply
                           with this provision constitutes a default under
                           Article 16, Default and Remedies.

         6.4.4    HMO must provide or pay out-of-network providers who provide
                  covered services to Members who move out of the service area
                  through the end of the period for which capitation has been
                  paid for the Member.

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         6.4.5    HMO must provide assistance to providers requiring PCP
                  verification 24 hours a day, 7 days a week.

                  6.4.5.1  HMO must provide HHSC with policies and procedures
                           indicating how the HMO will provide PCP verification
                           as indicated in Section 6.4.5. HMOs providing PCP
                           verification via a telephone must meet the
                           requirements of Section 3.7.1.

         6.4.6    HMO must provide Members with timely and adequate access to
                  network services for as long as those services are necessary
                  and covered benefits not available within the network, in
                  accordance with 42 C.F.R. Section 438.206(b)(4). HMO will not
                  be obligated to provide a Member with access to out-of-network
                  services if such services become available from a network
                  provider.

         6.4.7    HMO must require through contract provisions or the Provider
                  Manual that each Member have access to a second opinion
                  regarding the use of any health care service. A Member must be
                  allowed access to a second opinion from a network provider or
                  out-of-network provider if a network provider is not
                  available, at no additional cost to the Member, in accordance
                  with 42 C.F.R. Section 438.206(b)(3).

6.5      EMERGENCY SERVICES

         6.5.1    HMO policy and procedures, covered benefits, claims
                  adjudication methodology, and reimbursement performance for
                  emergency services must comply with all applicable state and
                  federal laws and regulations including 42 C.F.R. Section
                  438.114, whether the provider is in network or out of network.

         6.5.2    HMO must pay for the professional, facility, and ancillary
                  services that are medically necessary to perform the medical
                  screening examination and stabilization of HMO Member
                  presenting as an emergency medical condition or an emergency
                  behavioral health condition to the hospital emergency
                  department, 24 hours a day, 7 days a week, rendered by either
                  HMO's in-network or out-of-network providers.

                  6.5.2.1  For all out-of-network emergency services providers,
                           HMO will pay a reasonable and customary amount for
                           emergency services. HMO policies and procedures must
                           be consistent with this agreement's prudent layperson
                           definition of an emergency medical condition and
                           claims adjudication processes required under Section
                           4.10 of this agreement and 42 C.F.R. Section 438.114.

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                  6.5.2.2  For all out-of-network emergency services provider
                           claims, HMO must pay providers a reasonable and
                           customary amount consistent with a methodology
                           approved by HHSC. HMO will submit its proposed
                           out-of-network emergency services payment methodology
                           for the Travis Service Delivery Area to HHSC no later
                           than March 1, 2004. HMO must forward any complaints
                           by out-of-network emergency services providers to
                           HHSC, which will review all complaints. If HHSC
                           determines that payment is not consistent with the
                           HMO's approved methodology, the HMO must pay the
                           emergency services provider a rate, using the
                           approved reasonable and customary methodology, as
                           determined by HHSC. Failure to comply with this
                           provision constitutes a default under Article 16,
                           Default and Remedies.

         6.5.3    HMO must ensure that its network primary care providers (PCPs)
                  have after-hours telephone availability that is consistent
                  with Section 7.8.10 of this contract. This telephone access
                  must be available 24 hours a day, 7 days a week throughout the
                  service area.

         6.5.4    HMO cannot require prior authorization as a condition for
                  payment for an emergency medical condition, an emergency
                  behavioral health condition, or labor and delivery. HMO cannot
                  limit what constitutes an emergency medical condition on the
                  basis of lists of diagnoses or symptoms. HMO cannot refuse to
                  cover emergency services based on the emergency room provider,
                  hospital, or fiscal agent not notifying the Member's primary
                  care provider or HMO of the Member's screening and treatment
                  within 10 calendar days of presentation for emergency
                  services. HMO may not hold the Member who has an emergency
                  medical condition liable for payment of subsequent screening
                  and treatment needed to diagnose the specific condition or
                  stabilize the patient. HMO must accept the emergency physician
                  or provider's determination of when the Member is sufficiently
                  stabilized for transfer or discharge.

         6.5.5    Medical Screening Examination for emergency services. A
                  medical screening examination needed to diagnose an emergency
                  medical condition shall be provided in a hospital based
                  emergency department that meets the requirements of the
                  Emergency Medical Treatment and Active Labor Act (EMTALA) 42
                  C.F.R. Section 489.20, Section 489.24 and Section 438.114. HMO
                  must pay for the emergency medical screening examination, as
                  required by 42 U.S.C. Section 1395dd. HMOs must reimburse for
                  both the physician's services and the hospital's emergency
                  services, including the emergency room and its ancillary
                  services.

         6.5.6    Stabilization Services. When the medical screening examination
                  determines that an emergency medical condition exists, HMO
                  must pay for emergency services performed to stabilize the
                  Member. The emergency physician must document these services
                  in the Member's medical record. HMOs must

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                  reimburse for both the physician's and hospital's emergency
                  stabilization services including the emergency room and its
                  ancillary services.

         6.5.7    Post-stabilization Care Services. HMO must cover and pay for
                  post-stabilization care services in the amount, duration, and
                  scope necessary to comply with 42 C.F.R. Section 438.114 and
                  42 C.F.R. 422.113(c). The HMO is financially responsible for
                  post-stabilization care services obtained within or outside
                  the network that are not pre-approved by a plan provider or
                  other HMO representative, but administered to maintain,
                  improve, or resolve the Member's stabilized condition if:

                  (a)      the HMO does not respond to a request for
                           pre-approval within 1 hour;

                  (b)      the HMO cannot be contacted;

                  (c)      or the HMO representative and the treating physician
                           cannot reach an agreement concerning the Member's
                           care and a plan physician is not available for
                           consultation. In this situation, the HMO must give
                           the treating physician the opportunity to consult
                           with a plan physician and the treating physician may
                           continue with care of the patient until an HMO
                           physician is reached or the HMO's financial
                           responsibility ends as follows: the HMO physician
                           with privileges at the treating hospital assumes
                           responsibility for the Member's care; the HMO
                           physician assumes responsibility for the Member's
                           care through transfer; the HMO representative and the
                           treating physician reach an agreement concerning the
                           Member's care; or the Member is discharged.

         6.5.8    HMO must provide access to the HHSC-designated Level I and
                  Level II trauma centers within the State or hospitals meeting
                  the equivalent level of trauma care. HMOs may make
                  out-of-network reimbursement arrangements with the
                  HHSC-designated Level I and Level II trauma centers to satisfy
                  this access requirement.

6.6      BEHAVIORAL HEALTH CARE SERVICES - SPECIFIC REQUIREMENTS

         6.6.1    HMO must provide or arrange to have provided to Members all
                  behavioral health care services included as covered services.
                  These services are described in detail in the Texas Medicaid
                  Provider Procedures Manual (Provider Procedures Manual) and
                  the Texas Medicaid Bulletins, which is the bimonthly update to
                  the Provider Procedures Manual. Clinical information regarding
                  covered services is published by the Texas Medicaid program in
                  the Texas Medicaid Service Delivery Guide.

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         6.6.2    HMO must maintain a behavioral health provider network that
                  includes psychiatrists, psychologists and other behavioral
                  health providers. HMO must provide or arrange to have provided
                  behavioral health benefits described as covered services.
                  These services are indicated in the Provider Procedures Manual
                  and the Texas Medicaid Bulletins, which is the bi-monthly
                  update to the Provider Procedures Manual. Clinical information
                  regarding covered services is published by the Texas Medicaid
                  Program in the Texas Medicaid Service Delivery Guide. The
                  network must include providers with experience in serving
                  children and adolescents to ensure accessibility and
                  availability of qualified providers to all eligible children
                  and adolescents in the service area. The list of providers
                  including names, addresses and phone numbers must be available
                  to HHSC upon request.

         6.6.3    HMO must maintain a Member education process to help Members
                  know where and how to obtain behavioral health care services.

         6.6.4    HMO must implement policies and procedures to ensure that
                  Members who require routine or regular laboratory and
                  ancillary medical tests or procedures to monitor behavioral
                  health conditions are provided the services by the provider
                  ordering the procedure or at a lab located at or near the
                  provider's office.

         6.6.5    When assessing Members for behavioral health care services,
                  HMO and network behavioral health providers must use the
                  DSM-IV multi-axial classification. HHSC may require use of
                  other assessment instrument/outcome measures in addition to
                  the DSM-IV. Providers must document DSM-IV and
                  assessment/outcome information in the Member's medical record.

         6.6.6    HMO must permit Members to self refer to any in-network
                  behavioral health care provider without a referral from the
                  Member's PCP. HMO must permit Members to participate in the
                  selection or assignment of the appropriate behavioral health
                  individual practitioner(s) who will serve them. HMO previously
                  submitted a written copy of its policies and procedures for
                  self-referral to HHSC. Changes or amendments to those policies
                  and procedures must be submitted to HHSC for approval at least
                  60 days prior to their effective date.

         6.6.7    HMO must require, through contract provisions, that PCPs have
                  screening and evaluation procedures for detection and
                  treatment of, or referral for, any known or suspected
                  behavioral health problems and disorders. PCPs may provide any
                  clinically appropriate behavioral health care services within
                  the scope of their practice. This requirement must be included
                  in all Provider Manuals.

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         6.6.8    HMO must require that behavioral health providers refer
                  Members with known or suspected physical health problems or
                  disorders to their PCP for examination and treatment.
                  Behavioral health providers may only provide physical health
                  care services if they are licensed to do so. This requirement
                  must be included in all Provider Manuals.

         6.6.9    HMO must require that behavioral health providers send initial
                  and quarterly (or more frequently if clinically indicated)
                  summary reports of Members' behavioral health status to PCP.
                  This requirement must be included in all Provider Manuals.

         6.6.10   HMO must require, through contract provisions, that all
                  Members receiving inpatient psychiatric services are scheduled
                  for outpatient follow-up and/or continuing treatment prior to
                  discharge. The outpatient treatment must occur within 7 days
                  from the date of discharge. HMO must ensure that behavioral
                  health providers contact Members who have missed appointments
                  within 24 hours to reschedule appointments.

         6.6.11   HMO must provide inpatient psychiatric Covered Services to
                  Members under the age of 21 who have been ordered to receive
                  the services by a court of competent jurisdiction under the
                  provisions of Title VII, Subtitle C of the Texas Health and
                  Safety Code, relating to court-ordered commitments to
                  psychiatric facilities, or a placement in a state-operated
                  facility as a condition of probation, as authorized by the
                  Texas Family Code.

                  6.6.11.2 A Member who has been ordered to receive treatment
                           under the provisions of Chapter 573 or 574 of the
                           Texas Health and Safety Code cannot appeal the
                           commitment through HMO's complaint or appeals
                           process.

         6.6.12   HMO must comply with 28 TAC Chapter 3, Subchapter HH,
                  regarding utilization review of chemical dependency treatment.

         6.6.13   Chemical dependency treatment must conform to the standards
                  set forth in the Texas Administrative Code, Title 28, Chapter
                  3, Subchapter HH.

6.7      FAMILY PLANNING - SPECIFIC REQUIREMENTS

         6.7.1    Counseling and Education. HMO must require, through contract
                  provisions, that Members requesting contraceptive services or
                  family planning services are also provided counseling and
                  education about family planning and family planning services
                  available to Members. HMO must develop outreach programs to
                  increase community support for family planning and encourage
                  Members to use available family planning services. HMO is
                  encouraged to include a representative cross-section of
                  Members and family planning

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                  providers who practice in the community in developing,
                  planning and implementing family planning outreach programs.

         6.7.2    Freedom of Choice. HMO must ensure that Members have the right
                  to choose any Medicaid participating family planning provider,
                  whether the provider chosen by the Member is in or outside HMO
                  provider network. HMO must provide Members access to
                  information about the providers of family planning services
                  available and the Member's right to choose any Medicaid family
                  planning provider. HMO must provide access to confidential
                  family planning services.

         6.7.3    Provider Standards and Payment. HMO must require all
                  subcontractors who are family planning agencies to deliver
                  family planning services according to the HHSC Family Planning
                  Service Delivery Standards. HMO must provide, at minimum, the
                  full scope of services available under the Texas Medicaid
                  program for family planning services. HMO will reimburse
                  family planning agencies and out-of-network family planning
                  providers the Medicaid fee-for service amounts for family
                  planning services, including medically necessary medications,
                  contraceptives, and supplies.

         6.7.4    HMO must provide medically-approved methods of contraception
                  to Members. Contraceptive methods must be accompanied by
                  verbal and written instructions on their correct use. HMO must
                  establish mechanisms to ensure all medically approved methods
                  of contraception are made available to the Member, either
                  directly or by referral to a subcontractor. The following
                  initial Member education content may vary according to the
                  educator's assessment of the Member's current knowledge:

                  6.7.4.1  general benefits of family planning services and
                           contraception;

                  6.7.4.2  information on male and female basic reproductive
                           anatomy and physiology;

                  6.7.4.3  information regarding particular benefits and
                           potential side effects and complications of all
                           available contraceptive methods;

                  6.7.4.4  information concerning all of the health care
                           provider's available services, the purpose and
                           sequence of health care provider procedures, and the
                           routine schedule of return visits;

                  6.7.4.5  information regarding medical emergencies and where
                           to obtain emergency care on a 24-hour basis;

                  6.7.4.6  breast self-examination rationales and instructions
                           unless provided during physical exam (for females);
                           and

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                  6.7.4.7  information on HIV/STD infection and prevention and
                           safer sex discussion.

         6.7.5    HMO must require, through contractual provisions, that
                  subcontractors have mechanisms in place to ensure Member's
                  (including minor's) confidentiality for family planning
                  services.

         6.7.6    HMO must develop, implement, monitor, and maintain standards,
                  policies and procedures for providing information regarding
                  family planning to providers and Members, specifically
                  regarding State and federal laws governing Member
                  confidentiality (including minors). Providers and family
                  planning agencies cannot require parental consent for minors
                  to receive family planning services.

         6.7.7    HMO must report encounter data on family planning services in
                  accordance with Section 12.2.

6.8      TEXAS HEALTH STEPS (EPSDT)

         6.8.1    THSteps Services. HMO must develop effective methods to ensure
                  that children under the age of 21 receive THSteps services
                  when due and according to the recommendations established by
                  the American Academy of Pediatrics and the THSteps periodicity
                  schedule for children. HMO must arrange for THSteps services
                  to be provided to all eligible Members except when a Member
                  knowingly and voluntarily declines or refuses services after
                  the Member has been provided information upon which to make an
                  informed decision.

         6.8.2    Member Education and Information. HMO must ensure that Members
                  are provided information and educational materials about the
                  services available through the THSteps program, and how and
                  when they can obtain the services. The information should tell
                  the Member how they can obtain dental benefits, transportation
                  services through the TDH Medical Transportation program, and
                  advocacy assistance from HMO.

         6.8.3    Provider Education and Training. HMO must provide appropriate
                  training to all network providers and provider staff in the
                  providers' area of practice regarding the scope of benefits
                  available and the THSteps program. Training must include
                  THSteps benefits, the periodicity schedule for THSteps
                  checkups and immunizations, the required elements of a THSteps
                  medical screen, providing or arranging for all required lab
                  screening tests (including lead screening), and Comprehensive
                  Care Program (CCP) services available under the THSteps
                  program to Members under age 21 years. Providers must also be
                  educated and trained regarding the requirements imposed upon
                  the department and contracting HMOs under the Consent Decree
                  entered in Frew v.

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                  McKinney, et. al., Civil Action No. 3:93CV65, in the United
                  States District Court for the Eastern District of Texas, Paris
                  Division. Providers should be educated and trained to treat
                  each THSteps visit as an opportunity for a comprehensive
                  assessment of the Member. HMO must report provider education
                  and training regarding THSteps in accordance with Section
                  7.4.4.

         6.8.4    Member Outreach. HMO must provide an outreach unit that works
                  with Members to ensure they receive prompt services and are
                  effectively informed about available THSteps services. Each
                  month HMO must retrieve a list of Members who are due and
                  overdue THSteps services from the TexMedCentral HMO Library.
                  Using these lists and their own internally generated lists,
                  HMOs will contact Members and encourage Members who are
                  periodically due or overdue a THSteps service to obtain the
                  service as soon as possible. HMO outreach staff must
                  coordinate with TDH THSteps outreach staff to ensure that
                  Members have access to the Medical Transportation Program, and
                  that any coordination with other agencies is maintained.

         6.8.5    Initial Checkups Upon Enrollment. HMO must have mechanisms in
                  place to ensure that all newly enrolled Members receive a
                  THSteps checkup within 90 days from enrollment, if one is due
                  according to the American Academy of Pediatrics periodicity
                  schedule, or if there is uncertainty regarding whether one is
                  due. HMO should make THSteps checkups a priority to all newly
                  enrolled Members.

         6.8.6    Accelerated Services to Migrant Populations. HMO must
                  cooperate and coordinate with the department, outreach
                  programs and THSteps regional program staff and agents to
                  ensure prompt delivery of services to children of migrant farm
                  workers and other migrant populations who may transition into
                  and out of HMOs program more rapidly and/or unpredictably than
                  the general population.

         6.8.7    Newborn Checkups. HMO must have mechanisms in place to ensure
                  that all newborn Members have an initial newborn checkup
                  before discharge from the hospital and again within two weeks
                  from the time of birth. HMO must require providers to send all
                  THSteps newborn screens to the TDH Bureau of Laboratories or a
                  TDH certified laboratory. Providers must include detailed
                  identifying information for all screened newborn Members and
                  the Member's mother to allow HHSC to link the screens
                  performed at the hospital with screens performed at the
                  two-week follow-up.

                  6.8.7.1  Laboratory Tests: All laboratory specimens collected
                           as a required component of a THSteps checkup (see
                           Medicaid Provider Procedures Manual for age-specific
                           requirements) must be submitted to the HHSC
                           Laboratory for analysis. HMO must educate providers
                           about THSteps program requirements for submitting
                           laboratory tests to the HHSC Bureau of Laboratories.

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         6.8.8    Coordination and Cooperation. HMO must make an effort to
                  coordinate and cooperate with existing community and
                  school-based health and education programs that offer services
                  to school-aged children in a location that is both familiar
                  and convenient to the Members. HMO must make a good faith
                  effort to comply with Head Start's requirement that Members
                  participating in Head Start receive their THSteps checkup no
                  later than 45 days after enrolling into either program.

         6.8.9    Immunizations. HMO must educate providers on the Immunization
                  Standard Requirements set forth in Chapter 161, Texas Health
                  and Safety Code; the standards in the ACIP Immunization
                  Schedule; and the AAP Periodicity Schedule.

                  6.8.9.1  ImmTrac Compliance. HMO must educate providers about
                           and require providers to comply with the requirements
                           of Chapter 161, Texas Health and Safety Code,
                           relating to the Texas Immunization Registry
                           (ImmTrac), to include parental consent on the Vaccine
                           Information Statement.

         6.8.10   Claim Forms. HMO must require all THSteps providers to submit
                  claims for services paid (either on a capitated or fee-for
                  service basis) on the HCFA 1500 claim form and use the unique
                  procedure coding required by HHSC.

         6.8.11   Compliance with THSteps Performance Benchmark. HHSC will
                  establish performance benchmarks against which HMO's full
                  compliance with the THSteps periodicity schedule will be
                  measured. The performance benchmarks will establish minimum
                  compliance measures, which will increase over time. HMO must
                  meet all performance benchmarks required for THSteps services.

         6.8.12   Validation of Encounter Data. Encounter data will be validated
                  by chart review of a random sample of THSteps eligible
                  enrollees against monthly encounter data reported by HMO.
                  Chart reviews will be conducted by HHSC to validate that all
                  screens are performed when due and as reported, and that
                  reported data is accurate and timely. Substantial deviation
                  between reported and charted encounter data could result in
                  HMO and/or network providers being investigated for potential
                  fraud and abuse without notice to HMO or the provider.

6.9      PERINATAL SERVICES

         6.9.1    HMO's perinatal health care services must ensure appropriate
                  care is provided to women and infants who are Members of HMO,
                  from the preconception period through the infant's first year
                  of life. HMO's perinatal health care system must comply with
                  the requirements of the Maternal and Infant Health

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                  Improvement Act (Texas Health and Safety Code, Chapter 32) and
                  25 TAC Chapter 37, Subchapter M.

         6.9.2    HMO must have a perinatal health care system in place that, at
                  a minimum, provides the following services:

                  6.9.2.1  pregnancy planning and perinatal health promotion and
                           education for reproductive- age women;

                  6.9.2.2  perinatal risk assessment of nonpregnant women,
                           pregnant and postpartum women, and infants up to one
                           year of age;

                  6.9.2.3  access to appropriate levels of care based on risk
                           assessment, including emergency care;

                  6.9.2.4  transfer and care of pregnant women, newborns, and
                           infants to tertiary care facilities when necessary;

                  6.9.2.5  availability and accessibility of
                           obstetricians/gynecologists, anesthesiologists, and
                           neonatologists capable of dealing with complicated
                           perinatal problems;

                  6.9.2.6  availability and accessibility of appropriate
                           outpatient and inpatient facilities capable of
                           dealing with complicated perinatal problems; and

                  6.9.2.7  compiles, analyzes and reports process and outcome
                           data of Members to HHSC.

         6.9.3    HMO must have a process to expedite scheduling a prenatal
                  appointment for an obstetrical exam for a TP40 Member no later
                  than two weeks after receiving the daily enrollment file
                  verifying enrollment of the Member into the HMO.

         6.9.4    HMO must have procedures in place to contact and assist a
                  pregnant/delivering Member in selecting a PCP for her baby
                  either before the birth or as soon as the baby is born.

         6.9.5    HMO must provide inpatient care and professional services
                  related to labor and delivery for its pregnant/delivering
                  Members and neonatal care for its newborn Members (see Section
                  14.3.1) at the time of delivery and for up to 48 hours
                  following an uncomplicated vaginal delivery and 96 hours
                  following an uncomplicated Caesarian delivery.

                  6.9.5.1  HMO must reimburse in-network providers,
                           out-of-network providers, and specialty physicians
                           who are providing call coverage, routine, and/or
                           specialty consultation services for the period of
                           time covered in Section 6.9.5.

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                           6.9.5.1.1 HMO must adjudicate provider claims for
                                     services provided to a newborn Member in
                                     accordance with HHSC's claims processing
                                     requirements using the proxy ID number or
                                     State-issued Medicaid ID number (see
                                     Section 4.10). HMO cannot deny claims based
                                     on provider non-use of State-issued
                                     Medicaid ID number for a newborn Member.
                                     HMO must accept provider claims for newborn
                                     services based on mother's name and/or
                                     Medicaid ID number with accommodations for
                                     multiple births, as specified by the HMO.

                  6.9.5.2  HMO cannot require prior authorization or PCP
                           assignment to adjudicate newborn claims for the
                           period of time covered by Section 6.9.5

         6.9.6    HMO may require prior authorization requests for hospital or
                  professional services provided beyond the time limits in
                  Section 6.9.5. HMO must respond to these prior authorization
                  requests within the requirements of 28 TAC 19.1710 - 19.1712
                  and Article 21.58A of the Texas Insurance Code.

                  6.9.6.1  HMO must notify providers involved in the care of
                           pregnant/delivering women and newborns (including
                           out-of-network providers and hospitals) regarding the
                           HMO's prior authorization requirements.

                  6.9.6.2  HMO cannot require a prior authorization for services
                           provided to a pregnant/delivering Member or newborn
                           Member for a medical condition that requires
                           emergency services, regardless of when the emergency
                           condition arises (see Section 6.5.4).

6.10     EARLY CHILDHOOD INTERVENTION (ECI)

         6.10.1   ECI Services. HMO must provide all federally mandated services
                  contained at 34 C.F.R. Part 303., and 25 TAC Chapter 621,
                  relating to identification, referral and delivery of health
                  care services contained in the Member's Individual Family
                  Service Plan (IFSP). An IFSP is the written plan that
                  identifies a Member's disability or chronic or complex
                  condition(s) or developmental delay, and describes the course
                  of action developed to meet those needs, and identifies the
                  person or persons responsible for each action in the plan. The
                  plan is a mutual agreement of the Member's Primary Care
                  Physician (PCP), Case Manager, and the Member/family, and is
                  part of the Member's medical record.

         6.10.2   ECI Providers. HMO must contract with qualified providers to
                  provide ECI services to Members under age 3 with developmental
                  delays. HMO may contract with local ECI programs or non-ECI
                  providers who meet qualifications for participation by the
                  Texas Interagency Council on Early Childhood Intervention to
                  provide ECI services.

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         6.10.3   Identification and Referral. HMO must ensure that network
                  providers are educated regarding the identification of Members
                  under age 3 who have or are at risk for having disabilities
                  and/or developmental delays. HMO must use written education
                  material developed or approved by the Texas Interagency
                  Council on Early Childhood Intervention. HMO must ensure that
                  all providers refer identified Members to ECI service
                  providers within two working days from the day the Member is
                  identified. Eligibility for ECI services is determined by the
                  local ECI program using the criteria contained in 25 TAC
                  Chapter 621.

         6.10.4   Coordination. HMO must coordinate and cooperate with local ECI
                  programs that perform assessment in the development of the
                  Individual Family Service Plan (IFSP), including on-going case
                  management and other non-capitated services required by the
                  Member's IFSP. Cooperation includes conducting medical
                  diagnostic procedures and providing medical records required
                  to perform developmental assessments and develop the IFSP
                  within the time lines established at 34 C.F.R. Part 303. ECI
                  case management is not an HMO capitated service.

         6.10.5   Intervention. HMO must require, through contract provisions,
                  that all medically necessary health and behavioral health care
                  services contained in the Member's IFSP are provided to the
                  Member in amount, duration and scope established by the IFSP.
                  Medical necessity for health and behavioral health care
                  services is determined by the interdisciplinary team as
                  approved by the Member's PCP. HMO cannot modify the plan of
                  care or alter the amount, duration and scope of services
                  required by the Member's IFSP. HMO cannot create unnecessary
                  barriers for the Member to obtain IFSP services, including
                  requiring prior authorization for the ECI assessment and
                  insufficient authorization periods for prior authorized
                  services.

6.11     SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS, AND CHILDREN
         (WIC) - SPECIFIC REQUIREMENTS

         6.11.1   HMO must coordinate with WIC to provide certain medical
                  information that is necessary to determine WIC eligibility,
                  such as height, weight, hematocrit or hemoglobin (see Section
                  7.16.3.2).

         6.11.2   HMO must direct all eligible Members to the WIC program
                  (Medicaid recipients are automatically income-eligible for
                  WIC).

         6.11.3   HMO must coordinate with existing WIC providers to ensure
                  Members have access to the Special Supplemental Nutrition
                  Program for Women, Infants and Children; or HMO must provide
                  these services.

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         6.11.4   HMO may use the nutrition education provided by WIC to satisfy
                  health education requirements described in this contract.

6.12     TUBERCULOSIS (TB)

         6.12.1   Education, Screening, Diagnosis and Treatment. HMO must
                  provide Members and providers with education on the
                  prevention, detection and effective treatment of tuberculosis
                  (TB). HMO must establish mechanisms to ensure all procedures
                  required to screen at-risk Members and to form the basis for a
                  diagnosis and proper prophylaxis and management of TB are
                  available to all Members, except services referenced in
                  Section 6.1.8 as non-capitated services. HMO must develop
                  policies and procedures to ensure that Members who may be or
                  are at risk for exposure to TB are screened for TB. An at-risk
                  Member refers to a person who is susceptible to TB because of
                  the association with certain risk factors, behaviors, drug
                  resistance, or environmental conditions. HMO must consult with
                  the local TB control program to ensure that all services and
                  treatments provided by HMO are in compliance with the
                  guidelines recommended by the American Thoracic Society (ATS),
                  the Centers for Disease Control and Prevention (CDC), and HHSC
                  policies and standards.

         6.12.2   Reporting and Referral. HMO must implement policies and
                  procedures requiring providers to report all confirmed or
                  suspected cases of TB to the local TB control program within
                  one working day of identification of a suspected case, using
                  the forms and procedures for reporting TB adopted by HHSC (25
                  TAC Chapter 97). HMO must require that in-state labs report
                  mycobacteriology culture results positive for M. Tuberculosis
                  and M. Tuberculosis antibiotic susceptibility to HHSC as
                  required for in-state labs by 25 TAC Chapter 97, Subchapter F.
                  Referral to state-operated hospitals specializing in the
                  treatment of tuberculosis should only be made for TB-related
                  treatment.

         6.12.3   Medical Records. HMO must provide access to Member medical
                  records to HHSC and the local TB control program for all
                  confirmed and suspected TB cases upon request.

         6.12.4   Coordination and Cooperation with the Local TB Control
                  Program. HMO must coordinate with the local TB control program
                  to ensure that all Members with confirmed or suspected TB have
                  a contact investigation and receive Directly Observed Therapy
                  (DOT). HMO must require, through contract provisions, that
                  providers report any Member who is non-compliant, drug
                  resistant, or who is or may be posing a public health threat
                  to HHSC or the local TB control program. HMO must cooperate
                  with the local TB control

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                  program in enforcing the control measures and quarantine
                  procedures contained in Chapter 81 of the Texas Health and
                  Safety Code.

                  6.12.4.1 HMO must have a mechanism for coordinating a
                           post-discharge plan for follow-up DOT with the local
                           TB program.

                  6.12.4.2 HMO must coordinate with the HHSC South Texas
                           Hospital and Texas Center for Infectious Disease for
                           voluntary and court-ordered admission, discharge
                           plans, treatment objectives and projected length of
                           stay for Members with multi-drug resistant TB.

                  6.12.4.3 HMO may contract with the local TB control programs
                           to perform any of the capitated services required in
                           Section 6.12.

6.13     PEOPLE WITH DISABILITIES OR CHRONIC OR COMPLEX CONDITIONS

         6.13.1   HMO shall provide the following services to persons with
                  disabilities, special health care needs, or chronic or complex
                  conditions. These services are in addition to the covered
                  services described in detail in the Texas Medicaid Provider
                  Procedures Manual (Provider Procedures Manual) and the Texas
                  Medicaid Bulletin, which is the bi-monthly update to the
                  Provider Procedures Manual. Clinical information regarding
                  covered services is published by the Texas Medicaid program in
                  the Texas Medicaid Service Delivery Guide.

         6.13.2   HMO must develop and maintain a system and procedures for
                  identifying Members who have disabilities, special health care
                  needs or chronic or complex medical and behavioral health
                  conditions. Once identified, HMO must have effective health
                  delivery systems to provide the covered services to meet the
                  special preventive, primary acute, and specialty health care
                  needs appropriate for treatment of the individual's condition.
                  The guidelines and standards established by the American
                  Academy of Pediatrics, the American College of
                  Obstetrics/Gynecologists, the U.S. Public Health Service, and
                  other medical and professional health organizations and
                  associations' practice guidelines whose standards are
                  recognized by HHSC must be used in determining the medically
                  necessary services, assessment and plan of care for each
                  individual.

                  6.13.2.1 In accordance with 42 C.F.R. 438.208(b)(3), HMO shall
                           provide information that identifies Members who the
                           HMO has assessed as special health care needs Members
                           to the State's enrollment broker. The information
                           will be provided in a format to be specified by HHSC
                           and updated by the 10th day of each month. In the
                           event that a special health care needs Member changes
                           health plans, HMO will work with receiving HMO to
                           provide information

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                           concerning the results of the HMO's identification
                           and assessment of that Member's needs, to prevent
                           duplication of those activities.

         6.13.3   HMO must require that the PCP for all persons with
                  disabilities, special health care needs or chronic or complex
                  conditions develop a plan of care to meet the needs of the
                  Member. The plan of care must be based on health needs,
                  specialist(s) recommendations, and periodic reassessment of
                  the Member's developmental and functional status and service
                  delivery needs. HMO must require providers to maintain record
                  keeping systems to ensure that each Member who has been
                  identified with a disability or chronic or complex condition
                  has an initial plan of care in the primary care provider's
                  medical records, that Member agrees to that plan of care, and
                  that the plan is updated as often as the Member's needs
                  change, but at least annually.

         6.13.4   HMO must provide a primary care and specialty care provider
                  network for persons with disabilities, special health care
                  needs, or chronic or complex conditions. Specialty and
                  subspecialty providers serving all Members must be Board
                  Certified/Board Eligible in their specialty. HMO may request
                  exceptions from HHSC for approval of traditional providers who
                  are not board-certified or board-eligible but who otherwise
                  meet HMO's credentialing requirements.

         6.13.5   HMO must have in its network PCPs and specialty care providers
                  that have documented experience in treating people with
                  disabilities, special health care needs, or chronic or complex
                  conditions, including children. For services to children with
                  disabilities, special health care needs, or chronic or complex
                  conditions, HMO must have in its network PCPs and specialty
                  care providers that have demonstrated experience with children
                  with disabilities, special health care needs, or chronic or
                  complex conditions in pediatric specialty centers such as
                  children's hospitals, medical schools, teaching hospitals and
                  tertiary center levels.

         6.13.6   HMO must provide information, education and training programs
                  to Members, families, PCPs, specialty physicians, and
                  community agencies about the care and treatment available in
                  HMO's plan for Members with disabilities, special health care
                  needs, or chronic or complex conditions.

                  HMO must ensure Members with disabilities, special health care
                  needs, or chronic or complex conditions have direct access to
                  a specialist.

         6.13.7   HMO must coordinate care and establish linkages, as
                  appropriate for a particular Member, with existing
                  community-based entities and services, including but not
                  limited to: Maternal and Child Health, Children with Special
                  Health Care Needs (CSHCN), the Medically Dependent Children
                  Program (MDCP), Community Resource Coordination Groups
                  (CRCGs), Interagency Council on Early Childhood Intervention
                  (ECI), Home and Community-based

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                  Services (HCS), Community Living Assistance and Support
                  Services (CLASS), Community Based Alternatives (CBA), In Home
                  Family Support, Primary Home Care, Day Activity and Health
                  Services (DAHS), Deaf/Blind Multiple Disabled waiver program
                  and Medical Transportation Program (MTP).

         6.13.8   HMO must include TDH approved pediatric transplant centers,
                  TDH designated trauma centers, and TDH designated hemophilia
                  centers in its provider network (see Appendices E, F, and G
                  for a listing of these facilities).

         6.13.9   HMO must ensure Members with disabilities or chronic or
                  complex conditions have access to treatment by a
                  multidisciplinary team when determined by the Member's PCP to
                  be medically necessary for effective treatment, or to avoid
                  separate and fragmented evaluations and service plans. The
                  teams must include both physician and non-physician providers
                  determined to be necessary by the Member's PCP for the
                  comprehensive treatment of the Member. The team must:

                  6.13.9.1 Participate in hospital discharge planning;

                  6.13.9.2 Participate in pre-admission hospital planning for
                           non-emergency hospitalizations;

                  6.13.9.3 Develop specialty care and support service
                           recommendations to be incorporated into the primary
                           care provider's plan of care;

                  6.13.9.4 Provide information to the Member and the Member's
                           family concerning the specialty care recommendations;
                           and

                  6.13.9.5 HMO must develop and implement training programs for
                           primary care providers, community agencies, ancillary
                           care providers, and families concerning the care and
                           treatment of a Member with a disability or chronic or
                           complex conditions.

                  6.13.10  HMO must identify coordinators of medical care to
                           assist providers who serve Members with disabilities
                           and chronic or complex conditions and the Members and
                           their families in locating and accessing appropriate
                           providers inside and outside HMO's network.

         6.13.11  HMO must assist, through information and referral, eligible
                  Members in accessing providers of non-capitated Medicaid
                  services listed in Section 6.1.8, as applicable.

         6.13.12  HMO must ensure that Members who require routine or regular
                  laboratory and ancillary medical tests or procedures to
                  monitor disabilities, special health

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                  care needs, or chronic or complex conditions are allowed by
                  HMO to receive the services from the provider in the
                  provider's office or at a contracted lab located at or near
                  the provider's office.

6.14     HEALTH EDUCATION AND WELLNESS AND PREVENTION PLANS

         6.14.1   Health Education Plan. HMO must develop and implement a Health
                  Education plan. The health education plan must tell Members
                  how HMO system operates, how to obtain services, including
                  emergency care and out-of-plan services. The plan must
                  emphasize the value of screening and preventive care and must
                  contain disease-specific information and educational
                  materials.

         6.14.2   Wellness Promotion Programs. HMO must conduct wellness
                  promotion programs to improve the health status of its
                  Members. HMO may cooperatively conduct Health Education
                  classes for all enrolled STAR Members with one or more HMOs
                  also contracting with HHSC in the service area to provide
                  services to Medicaid recipients in all counties of the service
                  area. Providers and HMO staff must integrate health education,
                  wellness and prevention training into the care of each Member.
                  HMO must provide a range of health promotion and wellness
                  information and activities for Members in formats that meet
                  the needs of all Members. HMO must:

                        1.    develop, maintain and distribute health education
                              services standards, policies and procedures to
                              providers;

                        2.    monitor provider performance to ensure the
                              standards for health education services are
                              complied with;

                        3.    inform providers in writing about any
                              non-compliance with the plan standards, policies
                              or procedures;

                        4.    establish systems and procedures that ensure that
                              provider's medical instruction and education on
                              preventive services provided to the Member are
                              documented in the Member's medical record; and

                        5.    establish mechanisms for promoting preventive care
                              services to Members who do not access care, e.g.
                              newsletters, reminder cards, and mail-outs.

         6.14.3   Health Education Activities Report. HMO must submit, upon
                  request, a Health Education Activities Schedule to HHSC or its
                  designee listing the time and location of classes, health
                  fairs or other events conducted during the time period of the
                  request.

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6.15     SEXUALLY TRANSMITTED DISEASES (STDS) AND HUMAN IMMUNODEFICIENCY VIRUS
         (HIV)

         HMO must provide STD services that include STD/HIV prevention,
         screening, counseling, diagnosis, and treatment. HMO is responsible for
         implementing procedures to ensure that Members have prompt access to
         appropriate services for STDs, including HIV.

         6.15.1   HMO must allow Members access to STD services and HIV
                  diagnosis services without prior authorization or referral by
                  PCP. HMO must comply with Texas Family Code Section 32.003,
                  relating to consent to treatment by a child.

         6.15.2   HMO must provide all covered services required to form the
                  basis for a diagnosis and treatment plan for STD/HIV by the
                  provider.

         6.15.3   HMO must consult with TDH regional public health authority to
                  ensure that Members receiving clinical care of STDs, including
                  HIV, are managed according to a protocol that has been
                  approved by HHSC (see Section 7.16 relating to cooperative
                  agreements with public health authorities).

         6.15.4   HMO must make education available to providers and Members on
                  the prevention, detection and effective treatment of STDs,
                  including HIV.

         6.15.5   HMO must require providers to report all confirmed cases of
                  STDs, including HIV, to the local or regional health authority
                  according to 25 TAC Chapter 97, Subchapter F, using the
                  required forms and procedures for reporting STDs.

         6.15.6   HMO must coordinate with the HHSC regional health authority to
                  ensure that Members with confirmed cases of syphilis,
                  chancroid, gonorrhea, chlamydia and HIV receive risk reduction
                  and partner elicitation/notification counseling. Coordination
                  must be included in the subcontract required by Section
                  7.16.1. HMO may contract with local or regional health
                  authorities to perform any of the covered services required in
                  Section 6.15.

         6.15.7   HMO's PCPs may enter into contracts or agreements with
                  traditional HIV service providers in the service area to
                  provide services such as case management, psychosocial support
                  and other services. If the service provided is a covered
                  service under this contract, the contract or agreement must
                  include payment provisions.

         6.15.8   The subcontract with the respective HHSC regional offices and
                  city and county health departments, as described in Section
                  7.16.1, must include, but not be limited to, the following
                  topics:

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                  6.15.8.1 Access for Case Investigation. Procedures must be
                           established to make Member records available to
                           public health agencies with authority to conduct
                           disease investigation, receive confidential Member
                           information, and follow up.

                  6.15.8.2 Medical Records and Confidentiality. HMO must require
                           that providers have procedures in place to protect
                           the confidentiality of Members provided STD/HIV
                           services. These procedures must include, but are not
                           limited to, the manner in which medical records are
                           to be safeguarded; how employees are to protect
                           medical information; and under what conditions
                           information can be shared. HMO must inform and
                           require its providers who provide STD/HIV services to
                           comply with all state laws relating to communicable
                           disease reporting requirements. HMO must implement
                           policies and procedures to monitor provider
                           compliance with confidentiality requirements.

                  6.15.8.3 Partner Referral and Treatment. Members who are named
                           as contacts to an STD, including HIV, should be
                           evaluated and treated according to HMO's protocol.
                           All protocols must be approved by HHSC. HMO's
                           providers must coordinate referral of non-Member
                           partners to local and regional health department STD
                           staff.

                  6.15.8.4 Informed Consent and Counseling. HMO must have
                           policies and procedures in place regarding obtaining
                           informed consent and counseling Members. The
                           subcontracts with providers who treat HIV patients
                           must include provisions requiring the provider to
                           refer Members with HIV infection to public health
                           agencies for in-depth prevention counseling, on-going
                           partner elicitation and notification services and
                           other prevention support services. The subcontracts
                           must also include provisions that require the
                           provider to direct-counsel or refer an HIV-infected
                           Member about the need to inform and refer all sex
                           and/or needle-sharing partners that might have been
                           exposed to the infection for prevention counseling
                           and antibody testing.

6.16     BLIND AND DISABLED MEMBERS

         6.16.1   Blind and disabled Members' SSI status is effective the date
                  of State's eligibility system, SAVERR, identifies the Member
                  as Type Program 13 (TP13). On this effective date, the Member
                  becomes a voluntary STAR enrollee.

                  The State is responsible for updating the State's eligibility
                  system within 45 days of official notice of the Members'
                  federal SSI eligibility by the Social Security Administration
                  (SSA).

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         6.16.2   HMO must perform the same administrative services and
                  functions as are performed for mandatory Members under this
                  contract. These administrative services and functions include,
                  but are not limited to:

                  6.16.2.1 Prior authorization of services;

                  6.16.2.2 All customer services functions offered Members in
                           mandatory participation categories, including the
                           complaint process, enrollment services, and hotline
                           services;

                  6.16.2.3 Linguistic services, including providing Member
                           materials in alternative formats for the blind and
                           disabled;

                  6.16.2.4 Health education;

                  6.16.2.5 Utilization management using HHSC Claims
                           Administrator encounter data to provide appropriate
                           interventions for Members through administrative case
                           management;

                  6.16.2.6 Quality assurance activities as needed and Focused
                           Studies as required by HHSC; and

                  6.16.2.7 Coordination to link Blind and Disabled Members with
                           applicable community resources and targeted case
                           management programs (see Non-Capitated Services in
                           Section 6.1.8).

         6.16.3   HMO must require network providers to submit claims for health
                  and health-related services to HHSC's Claims Administrator for
                  claims adjudication and payment.

         6.16.4   HMO must provide services to Blind and Disabled Members within
                  HMO's network unless necessary services are unavailable within
                  network. HMO must also allow referrals to out-of-network
                  providers if necessary services are not available within HMO's
                  network. Records must be forwarded to Member's PCP following a
                  referral visit.

ARTICLE 7 PROVIDER NETWORK REQUIREMENTS

7.1      PROVIDER ACCESSIBILITY

         7.1.1    HMO must enter into written contracts with properly
                  credentialed health care service providers. The names of all
                  providers must be submitted to HHSC as part of HMO
                  subcontracting process. HMO must have its own credentialing

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                  process to review, approve and periodically recertify the
                  credentials of all participating providers in compliance with
                  28 TAC Section 11.1902, relating to credentialing of providers
                  in HMOs.

         7.1.2    HMO must require tax I.D. numbers from all providers. HMO is
                  required to do backup withholding from all payments to
                  providers who fail to give tax I.D. numbers or who give
                  incorrect numbers.

         7.1.3    Timeframes for Access Requirements. HMO must have sufficient
                  network providers and establish procedures to ensure Members
                  have access to routine, urgent, and emergency services;
                  telephone appointments; advice and Member service lines. These
                  services must be accessible to Members within the following
                  timeframes:

                  7.1.3.1  Urgent Care within 24 hours of request;

                  7.1.3.2  Routine care within 2 weeks of request;

                  7.1.3.3  Physical/Wellness Exams for adults must be provided
                           within 8 to 10 weeks of the request;

                  7.1.3.4  HMO must establish policies and procedures to ensure
                           that THSteps Checkups be provided within 90 days of
                           new enrollment, except newborn Members should be seen
                           within 2 weeks of enrollment, and in all cases for
                           all Members be consistent with the American Academy
                           of Pediatrics and THSteps periodicity schedule that
                           is based on the American Academy of Pediatrics
                           schedule and delineated in the Texas Medicaid
                           Provider Procedures Manual and the Medicaid
                           bi-monthly bulletins (see Section 6.1, Scope of
                           Services). If the Member does not request a checkup,
                           HMO must establish a procedure for contacting the
                           Member to schedule the checkup.

                  7.1.3.5  Prenatal Care within 2 weeks of request.

         7.1.4    HMO is prohibited from requiring a provider or provider group
                  to enter into an exclusive contracting arrangement with HMO as
                  a condition for participation in its provider network.

7.2      PROVIDER CONTRACTS

         7.2.1    All providers must have a written contract, either with an
                  intermediary entity or an HMO, to participate in the Medicaid
                  program (provider contract). HMO must make all contracts
                  available to HHSC upon request, at the time and location
                  requested by HHSC.

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                  All standard formats of provider contracts must be submitted
                  to HHSC for approval no later than 60 days prior to the
                  effective date of this contract, unless previously filed with
                  HHSC. HMO must submit one paper copy and one electronic copy
                  in a form specified by HHSC. Any change to the standard format
                  must be submitted to HHSC for approval no later than 30 days
                  prior to the implementation of the new standard format. All
                  provider contracts are subject to the terms and conditions of
                  this contract and must contain the provisions of Article 5,
                  Statutory and Regulatory Compliance, and the provisions
                  contained in Section 3.2.4.

                  7.2.1.1  HHSC has 15 working days to review the materials and
                           recommend any suggestions or required changes. If
                           HHSC has not responded to HMO by the fifteenth day,
                           HMO may execute the contract. HHSC reserves the right
                           to request HMO to modify any contract that has been
                           deemed approved.

         7.2.2    Primary Care Provider (PCP) contracts and specialty care
                  contracts must contain provisions relating to the requirements
                  of the provider types found in this contract. For example, PCP
                  contracts must contain the requirements of Section 7.8
                  relating to Primary Care Providers.

         7.2.3    Provider contracts that are requested by any agency with
                  authority to investigate and prosecute fraud and abuse must be
                  produced at the time and place required by HHSC or the
                  requesting agency. Provider contracts requested in response to
                  a Public Information request must be produced within 48 hours
                  of the request. Requested contracts and all related records
                  must be provided free-of-charge to the requesting agency.

         7.2.4    The form and substance of all provider contracts are subject
                  to approval by HHSC. HHSC retains the authority to reject or
                  require changes to any contract that does not comply with the
                  requirements or duties and responsibilities of this contract.
                  HMO REMAINS RESPONSIBLE FOR PERFORMING AND FOR ANY FAILURE TO
                  PERFORM ALL DUTIES, RESPONSIBILITIES AND SERVICES UNDER THIS
                  CONTRACT REGARDLESS OF WHETHER THE DUTY, RESPONSIBILITY OR
                  SERVICE IS CONTRACTED TO ANOTHER FOR ACTUAL PERFORMANCE.

         7.2.5    HHSC reserves the right and retains the authority to make
                  reasonable inquiry and conduct investigations into provider
                  and Member complaints against HMO or any intermediary entity
                  with whom HMO contracts to deliver health care services under
                  this contract. HHSC may impose appropriate sanctions and
                  contract remedies to ensure HMO compliance with the provisions
                  of this contract.

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         7.2.6    HMO must not restrict a provider's ability to provide opinions
                  or counsel to a Member with respect to benefits, treatment
                  options, and provider's change in network status.

         7.2.7    To the extent feasible within HMO's existing claims processing
                  systems, HMO should have a single or central address to which
                  providers must submit claims. If a central processing center
                  is not possible within HMO's existing claims processing
                  system, HMO must provide each network provider a complete list
                  of all entities to whom the providers must submit claims for
                  processing and/or adjudication. The list must include the name
                  of the entity, the address to which claims must be sent,
                  explanation for determination of the correct claims payer
                  based on services rendered, and a phone number the provider
                  may call to make claims inquiries. HMO must notify providers
                  in writing of any changes in the claims filing list at least
                  30 days prior to effective date of change. If HMO is unable to
                  provide 30 days notice, providers must be given a 30-day
                  extension on their claims filing deadline to ensure claims are
                  routed to correct processing center.

         7.2.8    HMO, all IPAs, and other intermediary entities must include
                  contract language that substantially complies with the
                  following standard contract provisions in each Medicaid
                  provider contract. This language must be included in each
                  contract with an actual provider of services, whether through
                  a direct contract or through intermediary provider contracts:

                  7.2.8.1  [Provider] is being contracted to deliver Medicaid
                           managed care under the HHSC STAR program. HMO must
                           provide copies of the HHSC/HMO Contract to the
                           [Provider] upon request. [Provider] understands that
                           services provided under this contract are funded by
                           State and federal funds under the Medicaid program.
                           [Provider] is subject to all state and federal laws,
                           rules and regulations that apply to all persons or
                           entities receiving state and federal funds.
                           [Provider] understands that any violation by a
                           provider of a State or federal law relating to the
                           delivery of services by the provider under this
                           HMO/Provider contract, or any violation of the
                           HHSC/HMO contract could result in liability for money
                           damages, and/or civil or criminal penalties and
                           sanctions under state and/or federal law.

                  7.2.8.2  [Provider] understands and agrees that HMO has the
                           sole responsibility for payment of covered services
                           rendered by the provider under HMO/Provider contract.
                           In the event of HMO insolvency or cessation of
                           operations, [Provider's] sole recourse is against HMO
                           through the bankruptcy, conservatorship, or
                           receivership estate of HMO.

                           7.2.8.2.1 [Provider] understands and agrees that the
                                     HMO's Medicaid enrollees are not to be held
                                     liable for the HMO's debts in the event of
                                     the entity's insolvency in accordance with
                                     42 C.F.R. Section 438.106(a).

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                  7.2.8.3  [Provider] understands and agrees HHSC is not liable
                           or responsible for payment for any Medicaid covered
                           services provided to mandatory Members under
                           HMO/Provider contract. Federal and State laws provide
                           severe penalties for any provider who attempts to
                           collect any payment from or bill a Medicaid recipient
                           for a covered service.

                  7.2.8.4  [Provider] agrees that any modification, addition, or
                           deletion of the provisions of this contract will
                           become effective no earlier than 30 days after HMO
                           notifies HHSC of the change in writing. If HHSC does
                           not provide written approval within 30 days from
                           receipt of notification from HMO, changes can be
                           considered provisionally approved, and will become
                           effective. Modifications, additions or deletions that
                           are required by HHSC or by changes in state or
                           federal law are effective immediately.

                  7.2.8.5  This contract is subject to all state and federal
                           laws and regulations relating to fraud and abuse in
                           health care and the Medicaid program. [Provider] must
                           cooperate and assist HHSC and any state or federal
                           agency that is charged with the duty of identifying,
                           investigating, sanctioning or prosecuting suspected
                           fraud and abuse. [Provider] must provide originals
                           and/or copies of any and all information, allow
                           access to premises and provide records to HHSC or its
                           authorized agent(s), HHSC, CMS, the U.S. Department
                           of Health and Human Services, FBI, TDI, and the Texas
                           Attorney General's Medicaid Fraud Control Unit, upon
                           request, and free-of-charge. [Provider] must report
                           any suspected fraud or abuse including any suspected
                           fraud and abuse committed by HMO or a Medicaid
                           recipient to HHSC for referral to HHSC.

                  7.2.8.6  [Provider] is required to submit proxy claims forms
                           to HMO for services provided to all STAR Members that
                           are capitated by HMO in accordance with the encounter
                           data submissions requirements established by HMO and
                           HHSC.

                  7.2.8.7  HMO is prohibited from imposing restrictions upon the
                           [Provider's] free communication with Members about a
                           Member's medical conditions, treatment options, HMO
                           referral policies, and other HMO policies, including
                           financial incentives or arrangements and all STAR
                           managed care plans with whom [Provider] contracts.

                  7.2.8.8  The Texas Medicaid Fraud Control Unit must be allowed
                           to conduct private interviews of [Providers] and the
                           [Providers'] employees, contractors, and patients.
                           Requests for information must be complied with, in
                           the form and language requested. [Providers] and
                           their employees and contractors must cooperate fully
                           in making themselves available in person for
                           interviews, consultation, grand jury proceedings,
                           pre-trial conference, hearings, trial and in any
                           other process, including investigations. Compliance
                           with this Article is at HMO's and [Provider's] own
                           expense.

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                  7.2.8.9  HMO must include the method of payment and payment
                           amounts in all provider contracts.

                  7.2.8.10 All provider clean claims must be adjudicated
                           (finalized as paid or denied adjudicated) within 30
                           days from the date the claim is received by HMO. HMO
                           must agree to pay providers interest in accordance
                           with Article 4.10.6 for clean claims that are not
                           adjudicated within 30 days.

                  7.2.8.11 HMO must prohibit network providers from interfering
                           with or placing liens upon the state's right or HMO's
                           right, acting as the state's agent, to recovery from
                           third party resources. HMO must prohibit network
                           providers from seeking recovery in excess of the
                           Medicaid payable amount or otherwise violating state
                           and federal laws.

                  7.2.8.12 [Provider] understands that the acceptance of funds
                           under this Contract acts as acceptance of the
                           authority of the State Auditor's Office ("SAO"), or
                           any successor agency, to conduct an investigation in
                           connection with those funds. [Provider] further
                           agrees to cooperate fully with the SAO or its
                           successor in the conduct of the audit or
                           investigation, including providing all records
                           requested.

         7.2.9    HMO must follow the procedures outlined in Section 843.306 of
                  the Texas Insurance Code if terminating a contract with a
                  provider, including an STP. At least 30 days before the
                  effective date of the proposed termination of the provider's
                  contract, HMO must provide a written explanation to the
                  provider of the reasons for termination. HMO may immediately
                  terminate a provider contract if the provider presents
                  imminent harm to patient health, actions against a license or
                  practice, fraud or malfeasance.

                  7.2.9.1  Within 60 days of the termination notice date, a
                           provider may request a review of HMO's proposed
                           termination by an advisory review panel, except in a
                           case in which there is imminent harm to patient
                           health, an action against a private license, fraud or
                           malfeasance. The advisory review panel must be
                           composed of physicians and providers, as those terms
                           are defined in Section 843.306 of the Texas Insurance
                           Code, including at least one representative in the
                           provider's specialty or a similar specialty, if
                           available, appointed to serve on the standing quality
                           assurance committee or utilization review committee
                           of HMO. The decision of the advisory review panel
                           must be considered by HMO but is not binding on HMO.
                           HMO must provide to the affected provider, on
                           request, a copy of the recommendation of the advisory
                           review panel and HMO's determination.

                  7.2.9.2  A provider who is terminated is entitled to an
                           expedited review process by HMO on request by the
                           provider. HMO must make a good faith effort to

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                           provide written notice of the provider's termination
                           to HMO's Members receiving primary care from, or who
                           were seen on a regular basis by, the terminated
                           provider within 15 days after receipt or issuance of
                           the termination notice, in accordance with 42 C.F.R.
                           Section 438.10(f)(5). If a provider is terminated for
                           reasons related to imminent harm to patient health,
                           HMO must notify its Members immediately of the
                           provider's termination.

         7.2.10   HMO must notify HHSC no later than 90 days prior to
                  terminating any subcontract affecting a major performance
                  function of this contract. If HMO seeks to terminate a
                  provider's contract for imminent harm to patient health,
                  actions against a license or practice, or fraud, contract
                  termination may be immediate. HHSC will require assurances
                  that any contract termination will not result in an
                  interruption of an essential service or major contract
                  function.

         7.2.11   HMO must include a complaint and appeals process that complies
                  with the requirements of Chapter 843, Subchapter G of the
                  Texas Insurance Code relating to Complaint Systems in all
                  provider contracts. HMO's complaint and appeals process must
                  be the same for all providers.

         7.2.12   Notice to Rejected Providers. In accordance with 42 C.F.R.
                  Section 438.129(a)(2), if an HMO declines to include
                  individual or groups of providers in its network, it must give
                  the affected providers written notice of the reason for its
                  decision.

7.3      PHYSICIAN INCENTIVE PLANS

         7.3.1    HMO may operate a physician incentive plan only if: (1) no
                  specific payment may be made directly or indirectly under a
                  physician incentive plan to a physician or physician group as
                  an inducement to reduce or limit medically necessary services
                  furnished to a Member; and (2) the stop-loss protection,
                  enrollee surveys and disclosure requirements of this Article
                  are met.

         7.3.2    HMO must disclose to HHSC information required by federal
                  regulations found at 42 C.F.R. Section 417.479. The
                  information must be disclosed in sufficient detail to
                  determine whether the incentive plan complies with the
                  requirements at 42 C.F.R. Section 417.479. The disclosure must
                  contain the following information:

                  7.3.2.1  Whether services not furnished by a physician or
                           physician group (referral services) are covered by
                           the incentive plan. If only services furnished by the
                           physician or physician group are covered by the
                           incentive plan, disclosure of other aspects of the
                           incentive plan are not required to be disclosed.

                  7.3.2.2  The type of incentive arrangement (e.g. withhold,
                           bonus, capitation).

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                  7.3.2.3  The percent of the withhold or bonus, if the
                           incentive plan involves a withhold bonus.

                  7.3.2.4  Whether the physician or physician group has evidence
                           of a stop-loss protection, including the amount and
                           type of stop-loss protection.

                  7.3.2.5  The panel size and the method used for pooling
                           patients, if patients are pooled.

                  7.3.2.6  The results of Member and disenrollee surveys, if HMO
                           is required under 42 C.F.R. Section 417.479 to
                           conduct Member and disenrollee surveys.

         7.3.3    HMO must submit the information required in Sections 7.3.2.1 -
                  7.3.2.5 to HHSC by the effective date of this contract and
                  each anniversary date of the contract.

         7.3.4    HMO must submit the information required in Section 7.3.2.6
                  one year after the effective date of initial contract or
                  effective date of renewal contract, and annually each
                  subsequent year under the contract. HMO's who put physicians
                  or physician groups at substantial financial risk must conduct
                  a survey of all Members who have voluntarily disenrolled in
                  the previous year. A list of voluntary disenrollees may be
                  obtained from the Enrollment Broker.

         7.3.5    HMO must provide Members with information regarding Physician
                  Incentive Plans upon request. The information must include the
                  following:

                  7.3.5.1  whether HMO uses a physician incentive plan that
                           covers referral services;

                  7.3.5.2  the type of incentive arrangement (i.e., withhold,
                           bonus, capitation);

                  7.3.5.3  whether stop-loss protection is provided; and

                  7.3.5.4  results of enrollee and disenrollee surveys, if
                           required under 42 C.F.R. Section 417.479.

                  7.3.5.5  HMO must ensure that IPAs and ANHCs with whom HMO
                           contracts comply with the requirements above. HMO is
                           required to meet the requirements above for all
                           levels of subcontracting.

7.4      PROVIDER MANUAL AND PROVIDER TRAINING

         7.4.1    HMO must prepare and issue a Provider Manual(s), including any
                  necessary specialty manuals (e.g. behavioral health) to the
                  providers in the HMO network and to newly contracted providers
                  in the HMO network within five

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                  (5) working days from inclusion of the provider into the
                  network. The Provider Manual must contain sections relating to
                  special requirements of the STAR Program as required under
                  this contract. See Appendix D, Required Critical Elements, for
                  specific details regarding content requirements.

                  Provider Manual and any revisions must be approved by HHSC
                  prior to publication and distribution to providers (see
                  Section 3.4.1 regarding the process for plan materials
                  review).

         7.4.2    HMO must provide training to all network providers and their
                  staff regarding the requirements of the HHSC/HMO contract and
                  special needs of STAR Members.

                  7.4.2.1  HMO training for all providers must be completed no
                           later than 30 days after placing a newly contracted
                           provider on active status. HMO must provide on-going
                           training to new and existing providers as required by
                           HMO or HHSC to comply with this contract.

                  7.4.2.2  HMO must include in all PCP training how to screen
                           for and identify behavioral health disorders, HMO's
                           referral process to behavioral health care services
                           and clinical coordination requirements for behavioral
                           health. HMO must include in all training for
                           behavioral health providers how to identify physical
                           health disorders, HMO's referral process to primary
                           care and clinical coordination requirements between
                           physical medicine and behavioral health providers.
                           HMO must include training on coordination and quality
                           of care such as behavioral health screening
                           techniques for PCPs and new models of behavioral
                           health interventions.

         7.4.3    HMO must provide primary care and behavioral health providers
                  with screening tools and instruments approved by HHSC.

         7.4.4    HMO must maintain and make available upon request enrollment
                  or attendance rosters dated and signed by each attendee or
                  other written evidence of training of each network provider
                  and their staff.

         7.4.5    HMO must have its written policies and procedures for the
                  screening, assessment and referral processes between
                  behavioral health providers and physical medicine providers
                  available for HHSC review prior to the effective date of the
                  contract.

7.5      MEMBER PANEL REPORTS

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                  HMO must furnish each PCP with a current list of enrolled
                  Members enrolled or assigned to that Provider no later than 5
                  working days after HMO receives the Enrollment File from the
                  Enrollment Broker each month.

7.6      PROVIDER COMPLAINT AND APPEAL PROCEDURES

         7.6.1    HMO must develop, implement and maintain a provider complaint
                  system. The complaint and appeal procedures must be in
                  compliance with all applicable state and federal laws or
                  regulations. All Member complaints and/or appeals of an
                  adverse determination requested by the enrollee, or any person
                  acting on behalf of the enrollee, or a physician or provider
                  acting on behalf of the enrollee must comply with the
                  provisions of this Article. Modifications and amendments to
                  the complaint system must be submitted to HHSC no later than
                  30 days prior to the implementation of the modification or
                  amendment.

         7.6.2    HMO must include the provider complaint and appeal procedure
                  in all network provider contracts or in the provider manual.

         7.6.3    HMO's complaint and appeal process cannot contain provisions
                  requiring a provider to submit a complaint or appeal to HHSC
                  for resolution in lieu of the HMO's process.

         7.6.4    HMO must establish mechanisms to ensure that network providers
                  have access to a person who can assist providers in resolving
                  issues relating to claims payment, plan administration,
                  education and training, and complaint procedures.

7.7.     PROVIDER QUALIFICATIONS

         7.7.1    PROVIDER QUALIFICATIONS- GENERAL

                  The providers in HMO network must meet the following
                  qualifications:

<TABLE>
<CAPTION>
PROVIDER                   QUALIFICATION
<S>                        <C>
FQHC                       A Federally Qualified Health Center meets the standards established by federal rules
                           and procedures. The FQHC must also be an eligible provider enrolled in the Medicaid
                           program.

Physician                  An individual who is licensed to practice medicine as an M.D. or a D.O. in the State
                           of Texas either as a primary care provider or in the area of specialization under
                           which they will provide medical services under contract with HMO; who is a
</TABLE>

                                 Page 78 of 173

<PAGE>

<TABLE>
<CAPTION>
PROVIDER                   QUALIFICATION
<S>                        <C>
                           provider enrolled in the Medicaid program; and who has a valid Drug Enforcement Agency
                           registration number and a Texas Controlled Substance Certificate, if either is
                           required in their practice.

Hospital                   An institution licensed as a general or special hospital by the State of Texas under
                           Chapter 241 of the Texas Health and Safety Code that is enrolled as a provider in
                           the Texas Medicaid Program. HMO will require that all facilities in the network
                           used for acute inpatient specialty care for people under age 21 with disabilities,
                           special health care needs, or chronic or complex conditions will have a designated
                           pediatric unit; 24 hour laboratory and blood bank availability; pediatric radiological
                           capability; meet JCAHO standards; and have discharge planning and social service
                           units. HMO may request exceptions to this requirement for specific hospitals within
                           their networks, from HHSC.

Non-Physician              An individual holding a license issued by the applicable licensing agency
Practitioner               of the State of Texas who is enrolled in the Texas Medicaid Program.
Provider

Clinical                   An entity having a current certificate issued under the Federal Clinical Laboratory
Laboratory                 Improvement Act (CLIA), and enrolled in the Texas Medicaid Program.

Rural Health               An institution that meets all of the criteria for designation as a rural health clinic,
Clinic (RHC)               and enrolled in the Texas Medicaid Program.

Local Health               A local health department established pursuant to the Local Public Health
Department                 Reorganization Act (Texas Health and Safety Code, Title 2, Chapter 121).

Non-Hospital               A provider of health care services that is licensed and credentialed to provide
Facility Provider          services, and enrolled in the Texas Medicaid Program.

School Based               Clinics located at school campuses that provide on-site primary and preventive care
Health Clinic              to children and adolescents.
(SBHC)

Chemical                   A facility licensed by the Texas Commission on Alcohol and Drug Abuse (TCADA)
Dependency                 under Section 464.002 of the Texas Health and Safety Code to provide chemical
Treatment Facility         dependency treatment.

Chemical                   An individual licensed by TCADA under Chapter 504, Texas Occupations Code, to
Dependency                 provide chemical dependency treatment or a master's level therapist (LMSW-ACP,
Counselor                  LMFT or LPC) with a minimum of two years of post-licensure experience in
                           chemical dependency treatment.
</TABLE>

         7.7.2    PROVIDER CREDENTIALING AND RECREDENTIALING

                  In accordance with 42 C.F.R. Section 438.214, HMO's standard
                  credentialing and recredentialing process must include the
                  following provisions to determine whether physicians and other
                  health care professionals, who are licensed by the State and
                  who are under contract with HMO, are qualified to perform the
                  services.

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                  7.7.2.1  Written Policies and Procedures. HMO has written
                           policies and procedures for the credentialing process
                           that includes HMO's initial credentialing of
                           practitioners as well as its subsequent
                           recredentialing, recertifying and/or reappointment of
                           practitioners.

                  7.7.2.2  Oversight by Governing Body. The Governing Body, or
                           the group or individual to which the Governing Body
                           has formally delegated the credentialing function,
                           has reviewed and approved the credentialing policies
                           and procedures.

                  7.7.2.3  Credentialing Entity. The plan designates a
                           credentialing committee or other peer review body,
                           which makes recommendations regarding credentialing
                           decisions.

                  7.7.2.4  Scope. The plan identifies those practitioners who
                           fall under its scope of authority and action. This
                           shall include, at a minimum, all physicians,
                           dentists, and other licensed health practitioners
                           included in the review organization's literature for
                           Members, as an indication of those practitioners
                           whose service to Members is contracted or
                           anticipated.

                  7.7.2.5  Process. The initial credentialing process obtains
                           and reviews verification of the following
                           information, at a minimum:

                           a)       The practitioner holds a current valid
                                    license to practice;

                           b)       Valid Drug Enforcement Agency (DEA) or
                                    Controlled Substance Registration (CSR)
                                    certificate, as applicable;

                           c)       Graduation from medical school and
                                    completion of a residency or other
                                    post-graduate training, as applicable;

                           d)       Work history;

                           e)       Professional liability claims history;

                           f)       The practitioner holds current, adequate
                                    malpractice insurance according to the
                                    plan's policy;

                           g)       Any revocation or suspension of a state
                                    license or DEA/Bureau of Narcotics and
                                    Dangerous Drugs (BNDD) number;

                           h)       Any curtailment or suspension of medical
                                    staff privileges (other than for incomplete
                                    medical records);

                           i)       Any sanctions imposed by Medicaid and/or
                                    Medicare; a)

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                           j)       Any censure by the State or County Medical
                                    Association;

                           k)       HMO requests information on the practitioner
                                    from the National Practitioner Data Bank and
                                    the State Board of Medical Examiners;

                           l)       The application process includes a statement
                                    by the Applicant regarding: (This
                                    information should be used to evaluate the
                                    practitioner's current ability to practice.)

                                    1)       Any physical or mental health
                                             problems that may affect current
                                             ability to provide health care;

                                    2)       Any history of chemical
                                             dependency/substance abuse;

                                    3)       History of loss of license and/or
                                             felony convictions;

                                    4)       History of loss or limitation of
                                             privileges or disciplinary
                                             activity; and

                                    5)       An attestation to
                                             correctness/completeness of the
                                             application.

                  7.7.2.6  There is an initial visit to each potential primary
                           care practitioner's office, including documentation
                           of a structured review of the site and medical record
                           keeping practices to ensure conformance with HMO's
                           standards.

                  7.7.2.7  Recredentialing. A process for the periodic
                           reverification of clinical credentials
                           (recredentialing, reappointment, or recertification)
                           is described in HMO's policies and procedures.

                           7.7.2.7.1 There is evidence that the procedure is
                                     implemented at least every three years.

                           7.7.2.7.2 HMO conducts periodic review of information
                                     from the National Practitioner Data Bank,
                                     along with performance data on all
                                     physicians, to decide whether to renew the
                                     participating physician agreement. At a
                                     minimum, the recredentialing,
                                     recertification or reappointment process is
                                     organized to verify current standing on
                                     items listed in "7.7.2.5(a)" through
                                     "7.7.2.5(f)" and item "7.7.2.5(l)" above.

                           7.7.2.7.3 The recredentialing, recertification or
                                     reappointment process also includes review
                                     of data from: a) Member complaints and b)
                                     results of quality reviews.

                  7.7.2.8  Delegation of Credentialing Activities. If HMO
                           delegates credentialing (and recredentialing,
                           recertification, or reappointment) activities, there
                           is a written description of the delegated activities,
                           and the delegate's accountability for

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                           these activities. There is also evidence that the
                           delegate accomplished the credentialing activities.
                           HMO monitors the effectiveness of the delegate's
                           credentialing and reappointment or recertification
                           process.

                  7.7.2.9  Retention of Credentialing Authority. HMO retains the
                           right to approve new providers and sites and to
                           terminate or suspend individual providers. HMO has
                           policies and procedures for the suspension, reduction
                           or termination of practitioner privileges.

                  7.7.2.10 Reporting Requirement. There is a mechanism for, and
                           evidence of implementation of, the reporting of
                           serious quality deficiencies resulting in suspension
                           or termination of a practitioner, to the appropriate
                           authorities. HMO will implement and maintain policies
                           and procedures for disciplinary actions including
                           reducing, suspending, or terminating a practitioner's
                           privileges.

                  7.7.2.11 Appeals Process. There is a provider appellate
                           process for instances where HMO chooses to reduce,
                           suspend or terminate a practitioner's privileges with
                           the organization.

7.8      PRIMARY CARE PROVIDERS

         7.8.1    HMO must have a system for monitoring Member enrollment into
                  its plan to allow HMO to effectively plan for future needs and
                  recruit network providers as necessary to ensure adequate
                  access to primary care and specialty care. The Member
                  enrollment monitoring system must include the length of time
                  required for Members to access care within the network. The
                  monitoring system must also include monitoring after-hours
                  availability and accessibility of PCPs.

                  7.8.1.1  HMO must provide supporting documentation, as
                           required by 42 C.F.R. Section 438.207(b), as
                           specified and requested by the State, to verify that
                           their provider network meets the requirements of this
                           contract at the time the HMO enters into a contract
                           and at the time of a significant change as required
                           by 42 C.F.R. Section 438.207(c). A significant change
                           can be, but is not limited to, change in ownership
                           (purchase, merger, acquisition), new start-up,
                           bankruptcy, and/or a major subcontractor change
                           directly affecting a provider network such as (IPA's,
                           BHO, medical groups, etc.).

         7.8.2    HMO must maintain a primary care provider network in
                  sufficient numbers and geographic distribution to serve a
                  minimum of forty-five percent (45%) of the mandatory STAR
                  eligibles in each county of the service area. HMO is required
                  to increase the capacity of the network as necessary to
                  accommodate enrollment growth beyond the forty-fifth
                  percentile (45%).

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         7.8.3    HMO must maintain a provider network that includes
                  pediatricians and physicians with pediatric experience in
                  sufficient numbers and geographic distribution to serve
                  eligible children and adolescents in the service area and
                  provide timely access to the full scope of benefits,
                  especially THSteps checkups and immunizations.

         7.8.4    HMO must comply with the access requirements as established by
                  the Texas Department of Insurance for all HMOs doing business
                  in Texas, except as otherwise required by this contract.

         7.8.5    HMO must have physicians with board eligibility/certification
                  in pediatrics available for referral for Members under the age
                  of 21.

                  7.8.5.1  Individual PCPs may serve more than 2,000 Members.
                           However, if HHSC determines that a PCP's Member
                           enrollment exceeds the PCP's ability to provide
                           accessible, quality care, HHSC may prohibit the PCP
                           from receiving further enrollments. HHSC may direct
                           HMOs to assign or reassign Members to another PCP's
                           panel.

         7.8.6    HMO must have PCPs available throughout the service area to
                  ensure that no Member must travel more than 30 miles to access
                  the PCP, unless an exception to this distance requirement is
                  made by HHSC.

         7.8.7    HMO's primary care provider network may include providers from
                  any of the following practice areas: General Practitioners;
                  Family Practitioners; Internists; Pediatricians;
                  Obstetricians/Gynecologists (OB/GYN); Pediatric and Family
                  Advanced Practice Nurses (APNs) and Certified Nurse Midwives
                  Women Health (CNMs) practicing under the supervision of a
                  physician; Physician Assistants (PAs) practicing under the
                  supervision of a physician specializing in Family Practice,
                  Internal Medicine, Pediatrics or Obstetrics/Gynecology who
                  also qualifies as a PCP under this contract; or Federally
                  Qualified Health Centers (FQHCs), Rural Health Clinics (RHCs)
                  and similar community clinics; and specialists who are willing
                  to provide medical homes to selected Members with special
                  needs and conditions (see Section 7.10).

         7.8.8    The PCP for a Member with disabilities, special health care
                  needs, or chronic or complex conditions may be a specialist
                  who agrees to provide PCP services to the Member. The
                  specialty provider must agree to perform all PCP duties
                  required in the contract and PCP duties must be within the
                  scope of the specialist's license. Any interested person may
                  initiate the request for a specialist to serve as a PCP for a
                  Member with disabilities, special health care needs, or
                  chronic or complex conditions

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         7.8.9    PCPs must either have admitting privileges at a hospital that
                  is part of HMO network of providers, or make referral
                  arrangements with an HMO provider who has admitting privileges
                  to a network hospital.

         7.8.10   HMO must require, through contract provisions, that PCPs are
                  accessible to Members 24 hours a day, 7 days a week. The
                  following are acceptable and unacceptable phone arrangements
                  for contacting PCPs after normal business hours.

                  Acceptable:

                  1.       Office phone is answered after-hours by an answering
                           service that meets language requirements of the major
                           population groups and that can contact the PCP or
                           another designated medical practitioner. All calls
                           answered by an answering service must be returned
                           within 30 minutes.

                  2.       Office phone is answered after normal business hours
                           by a recording in the language of each of the major
                           population groups served directing the patient to
                           call another number to reach the PCP or another
                           provider designated by the PCP. Someone must be
                           available to answer the designated provider's phone.
                           Another recording is not acceptable.

                  3.       Office phone is transferred after office hours to
                           another location where someone will answer the phone
                           and be able to contact the PCP or another designated
                           medical practitioner, who can return the call within
                           30 minutes.

                  Unacceptable:

                  1.       Office phone is only answered during office hours.

                  2.       Office phone is answered after-hours by a recording
                           that tells patients to leave a message.

                  3.       Office phone is answered after-hours by a recording
                           that directs patients to go to an Emergency Room for
                           any services needed.

                  4.       Returning after-hours calls outside of 30 minutes.

         7.8.11   HMO must require PCPs, through contract provisions or provider
                  manual, to provide primary care services and continuity of
                  care to Members who are enrolled with or assigned to the PCP.
                  Primary care services are all services required by a Member
                  for the prevention, detection, treatment and cure of

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                  illness, trauma, disease or disorder, which are covered and/or
                  required services under this contract. All services must be
                  provided in compliance with generally accepted medical and
                  behavioral health standards for the community in which
                  services are rendered. HMO must require PCPs, through contract
                  provisions or provider manual, to provide children under the
                  age of 21 services in accordance with the American Academy of
                  Pediatric recommendations and the THSteps periodicity schedule
                  and provide adults services in accordance with the U.S.
                  Preventive Services Task Force's publication "Put Prevention
                  Into Practice".

                  7.8.11.1 HMO must require PCPs, through contract provisions or
                           provider manual, to assess the medical needs of
                           Members for referral to specialty care providers and
                           provide referrals as needed. PCP must coordinate care
                           with specialty care providers after referral.

                  7.8.11.2 HMO must require PCPs, through contract provisions or
                           provider manual, to make necessary arrangements with
                           home and community support services to integrate the
                           Member's needs. This integration may be delivered by
                           coordinating the care of Members with other programs,
                           public health agencies and community resources that
                           provide medical, nutritional, behavioral, educational
                           and outreach services available to Members.

                  7.8.11.3 HMO must require, through contract provisions or
                           provider manual, that the Member's PCP or HMO
                           provider through whom PCP has made arrangements, be
                           the admitting or attending physician for inpatient
                           hospital care, except for emergency medical or
                           behavioral health conditions or when the admission is
                           made by a specialist to whom the Member has been
                           referred by the PCP. HMO must require, through
                           contract provisions or provider manual, that PCP
                           assess the advisability and availability of
                           outpatient treatment alternatives to inpatient
                           admissions. HMO must require, through contract
                           provisions or provider manual, that PCP provide or
                           arrange for pre-admission planning for non-emergency
                           inpatient admissions, and discharge planning for
                           Members. PCP must call the emergency room with
                           relevant information about the Member. PCP must
                           provide or arrange for follow-up care after emergency
                           or inpatient care.

                  7.8.11.4 HMO must require PCPs for children under the age of
                           21 to provide or arrange to have provided all
                           services required under Section 6.8 relating to Texas
                           Health Steps, Section 6.9 relating to Perinatal
                           Services, Section 6.10 relating to Early Childhood
                           Intervention, Section 6.11 relating to WIC, Section
                           6.13 relating to People With Disabilities, special
                           health care needs, or chronic or complex conditions,
                           and Section 6.14 relating to Health Education and
                           Wellness and Prevention Plans. PCP must cooperate and
                           coordinate with HMO to provide Member and the
                           Member's family with knowledge of and access to
                           available services.

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         7.8.12   PCP Selection and Changes. All Medicaid recipients who are
                  eligible for participation in the STAR program have the right
                  to select their PCP and HMO. Medicaid recipients who are
                  mandatory STAR participants who do not select a PCP and/or HMO
                  during the time period allowed will be assigned to a PCP
                  and/or HMO using the HHSC default process. Members may change
                  PCPs at any time, but these changes are limited to four (4)
                  times per year.

                  7.8.12.1 Voluntary SSI Members. PCP changes cannot be
                           performed retroactively for voluntary SSI Members. If
                           an SSI Member requests a PCP change on or before the
                           15th of the month, the change will be effective the
                           first day of the next month. If an SSI Member
                           requests a PCP change after the 15th of the month,
                           the change will be effective the first day of the
                           second month that follows. Exceptions to this policy
                           will be allowed for reasons of medical necessity or
                           other extenuating circumstances.

                  7.8.12.2 Mandatory Members. Retroactive changes to a Member's
                           PCP should only be made if it is medically necessary
                           or there are other circumstances that necessitate a
                           retroactive change. HMO must pay claims for services
                           provided by the original PCP. If the original PCP is
                           paid on a capitated basis and services were provided
                           during the period for which capitation was paid, HMO
                           cannot recoup the capitation.

7.9      OB/GYN PROVIDERS

         HMO must allow a female Member to select an OB/GYN within its provider
         network or within a limited provider network in addition to a PCP, to
         provide health care services within the scope of the professional
         specialty practice of a properly credentialed OB/GYN. See Article
         21.53D of the Texas Insurance Code and 28 TAC Sections 11.506, 11.1600
         and 11.1608. A Member who selects an OB/GYN must be allowed direct
         access to the health care services of the OB/GYN without a referral by
         the woman's PCP or a prior authorization or precertification from HMO.
         HMO must allow Members to change OB/GYNs up to four times per year.
         Health care services must include, but not be limited to:

         7.9.1    One well-woman examination per year;

         7.9.2    Care related to pregnancy;

         7.9.3    Care for all active gynecological conditions; and

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         7.9.4    Diagnosis, treatment, and referral for any disease or
                  condition within the scope of the professional practice of a
                  properly credentialed obstetrician or gynecologist.

         7.9.5    HMOs that allow its Members to directly access any OB/GYN
                  provider within its network, must ensure that the provisions
                  of Section 7.9 continue to be met.

         7.9.6    OB/GYN providers must comply with HMO's procedures contained
                  in HMO's provider manual or provider contract for OB/GYN
                  providers, including but not limited to prior authorization
                  procedures.

7.10     SPECIALTY CARE PROVIDERS

         7.10.1   HMO must maintain specialty providers, actively serving within
                  that specialty, including pediatric specialty providers and
                  chemical dependency specialty providers, within the network in
                  sufficient numbers and areas of practice to meet the needs of
                  all Members requiring specialty care services.

         7.10.2   HMO must require, through contract provisions or provider
                  manual, that specialty providers send a record of consultation
                  and recommendations to a Member's PCP for inclusion in
                  Member's medical record and report encounters to the PCP
                  and/or HMO.

         7.10.3   HMO must ensure availability and accessibility to appropriate
                  specialists.

         7.10.4   HMO must ensure that no Member is required to travel in excess
                  of 75 miles to secure initial contact with referral
                  specialists; special hospitals, psychiatric hospitals;
                  diagnostic and therapeutic services; and single service health
                  care physicians, dentists or providers. Exceptions to this
                  requirement may be allowed when an HMO has established,
                  through utilization data provided to HHSC, that a normal
                  pattern for securing health care services within an area
                  exists or HMO is providing care of a higher skill level or
                  specialty than the level that is available within the service
                  area such as, but not limited to, treatment of cancer, burns,
                  and cardiac diseases.

7.11     SPECIAL HOSPITALS AND SPECIALTY CARE FACILITIES

         7.11.1   HMO must include all medically necessary specialty services
                  through its network specialists, sub-specialists and specialty
                  care facilities (e.g., children's hospitals, licensed chemical
                  dependency treatment facilities and tertiary care hospitals).

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         7.11.2   HMO must include requirements for pre-admission and discharge
                  planning in its contracts with network hospitals. Discharge
                  plans for a Member must be provided by HMO or the hospital to
                  the Member/family, the PCP and specialty care physicians.

         7.11.3   HMO must have appropriate multidisciplinary teams for people
                  with disabilities or chronic or complex medical conditions.
                  These teams must include the PCP and any individuals or
                  providers involved in the day-to-day or on-going care of the
                  Member.

         7.11.4   HMO must include in its provider network a HHSC-designated
                  perinatal care facility, as established by the Maternal and
                  Infant Health Improvement Act (Texas Health and Safety Code,
                  Chapter 32) once the designated system is finalized and
                  perinatal care facilities have been approved for the service
                  area (see Section 6.9).

7.12     BEHAVIORAL HEALTH - LOCAL MENTAL HEALTH AUTHORITY (LMHA)

         7.12.1   Assessment to determine eligibility for rehabilitative and
                  targeted MHMR case management services is a function of the
                  LMHA. HMO must provide all covered services described in
                  detail in the Texas Medicaid Provider Procedures Manual
                  (Provider Procedures Manual) and the Texas Medicaid Bulletin,
                  which is the bi-monthly update to the Provider Procedures
                  Manual. Clinical information regarding covered services are
                  published by the Texas Medicaid program in the Texas Medicaid
                  Service Delivery Guide. Covered services must be provided to
                  Members with SPMI and SED, when medically necessary, whether
                  or not they are also receiving targeted case management or
                  rehabilitation services through the LMHA.

         7.12.2   HMO will coordinate with the LMHA and state psychiatric
                  facility regarding admission and discharge planning, treatment
                  objectives and projected length of stay for Members committed
                  by a court of law to the state psychiatric facility.

         7.12.3   HMO must enter into written agreements with all LMHAs in the
                  service area that describes the process(es) that HMO and LMHA
                  will use to coordinate services for STAR Members with SPMI or
                  SED. The agreement will contain the following provisions:

                  7.12.3.1 Describe the behavioral health covered services
                           indicated in detail in the Provider Procedures Manual
                           and the Texas Medicaid Bulletin, which is the
                           bimonthly update to the Provider Procedures Manual.
                           Clinical information


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                           regarding covered services are published by the Texas
                           Medicaid Program in the Texas Medicaid Service
                           Delivery Guide. Also include the amount, duration,
                           and scope of basic and value-added services, and
                           HMO's responsibility to provide these services;

                  7.12.3.2 Describe criteria, protocols, procedures and
                           instrumentation for referral of STAR Members from and
                           to HMO and LMHA;

                  7.12.3.3 Describe processes and procedures for referring
                           Members with SPMI or SED to LMHA for assessment and
                           determination of eligibility for rehabilitation or
                           targeted case management services;

                  7.12.3.4 Describe how the LMHA and HMO will coordinate
                           providing behavioral health care services to Members
                           with SPMI or SED;

                  7.12.3.5 Establish clinical consultation procedures between
                           HMO and LMHA including consultation to effect
                           referrals and on-going consultation regarding the
                           Member's progress;

                  7.12.3.6 Establish procedures to authorize release and
                           exchange of clinical treatment records;

                  7.12.3.7 Establish procedures for coordination of assessment,
                           intake/triage, utilization review/utilization
                           management and care for persons with SPMI or SED;

                  7.12.3.8 Establish procedures for coordination of inpatient
                           psychiatric services (including court ordered
                           commitment of Members under 21) in state psychiatric
                           facilities within the LMHA's catchment area;

                  7.12.3.9 Establish procedures for coordination of emergency
                           and urgent services to Members; and

                  7.12.3.10 Establish procedures for coordination of care and
                            transition of care for new HMO Members who are
                            receiving treatment through the LMHA.

         7.12.4   HMO must offer licensed practitioners of the healing arts, who
                  are part of the Member's treatment team for rehabilitation
                  services, the opportunity to participate in HMO's network. The
                  practitioner must agree to accept the standard provider
                  reimbursement rate, meet the credentialing requirements,
                  comply with all the terms and conditions of the standard
                  provider contract of HMO.

         7.12.5   Members receiving rehabilitation services must be allowed to
                  choose the licensed practitioners of the healing arts who are
                  currently a part of the Member's treatment team for
                  rehabilitation services. If the Member chooses

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                  to receive these services from licensed practitioners of the
                  healing arts who are part of the Member's rehabilitation
                  services treatment team, HMO must reimburse the LMHA at
                  current Medicaid fee-for-service amounts.

7.13     SIGNIFICANT TRADITIONAL PROVIDERS (STPS)

         HMO must seek participation in its provider network from:

         7.13.1   Each health care provider in the service area who has
                  traditionally provided care to Medicaid recipients;

         7.13.2   Each hospital in the service area that has been designated as
                  a disproportionate share hospital under Medicaid; and

         7.13.3   Each specialized pediatric laboratory in the service area,
                  including those laboratories located in children's hospitals.

7.14     RURAL HEALTH PROVIDERS

         7.14.1   In rural areas of the service area, HMO must seek the
                  participation in its provider network of rural hospitals,
                  physicians, home and community support service agencies, and
                  other rural health care providers who:

                  7.14.1.1 are the only providers located in the service area;
                           and

                  7.14.1.2 are Significant Traditional Providers.

         7.14.2   In order to contract with HMO, rural health providers must:

                  7.14.2.1 agree to accept the prevailing provider contract rate
                           of HMO based on provider type; and

                  7.14.2.2 have the credentials required by HMO, provided that
                           lack of board certification or accreditation by JCAHO
                           may not be the only grounds for exclusion from the
                           provider network.

         7.14.3   HMO must reimburse rural hospitals with 100 or fewer licensed
                  beds in counties with fewer than 50,000 persons for acute care
                  services at a rate calculated using the higher of the
                  prospective payment system rate or the cost reimbursed
                  methodology authorized under the Tax Equity and Fiscal
                  Responsibility Act of 1982 (TEFRA). Hospitals reimbursed under
                  TEFRA cost principles shall be paid without the imposition of
                  the TEFRA cap.

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         7.14.4   HMO must reimburse physicians who practice in rural counties
                  with fewer than 50,000 persons at a rate using the current
                  Medicaid fee schedule, including negotiated fee-for-service.

7.15     FEDERALLY QUALIFIED HEALTH CENTERS (FQHCS) AND RURAL HEALTH CLINICS
         (RHCS)

         7.15.1   HMO must make reasonable efforts to include FQHCs and RHCs
                  (Freestanding and hospital-based) in its provider network.

         7.15.2   FQHCs or RHCs will receive a cost settlement from HHSC and
                  must agree to accept initial payments from HMO in an amount
                  that is equal to or greater than HMO's payment terms for other
                  providers providing the same or similar services.

                  7.15.2.1 HMO must submit monthly FQHC and RHC encounter and
                           payment reports to all contracted FQHCs and RHCs, and
                           FQHCs and RHCs with whom there have been encounters,
                           not later than 21 days from the end of the month for
                           which the report is submitted. The format will be
                           developed by HHSC. The FQHC and RHC must validate the
                           encounter and payment information contained in the
                           report(s). HMO and the FQHC/RHC must both sign the
                           report(s) after each party agrees that it accurately
                           reflects encounters and payments for the month
                           reported. HMO must submit the signed FQHC and RHC
                           encounter and payment reports to HHSC not later than
                           45 days from the end of the month for which the
                           report is submitted.

                  7.15.2.2 For FQHCs, HHSC will determine the amount of the
                           interim settlement based on the difference between:
                           an amount equal to the number of Medicaid allowable
                           encounters multiplied by the rate per encounter from
                           the latest settled FQHC fiscal year cost report, and
                           the amount paid by HMO to the FQHC for the quarter.
                           For RHCs, HHSC will determine the amount of the
                           interim settlement based on the difference between a
                           reasonable cost amount methodology provided by HHSC
                           and the amount paid by HMO to the RHC for the
                           quarter. HHSC will pay the FQHC or the RHC the amount
                           of the interim settlement, if any, as determined by
                           HHSC or collect and retain the quarterly recoupment
                           amount, if any.

                  7.15.2.3 HHSC will cost settle with each FQHC and RHC
                           annually, based on the FQHC or the RHC fiscal year
                           cost report and the methodology described in Section
                           7.15.2. HHSC will make additional payments or recoup
                           payments from the FQHC or the RHC based on reasonable
                           costs less prior interim payment settlements.

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                  7.15.2.4 Cost settlements for RHCs, and HMO's obligation to
                           provide RHC reporting described in Section 7.15.

7.16     COORDINATION WITH PUBLIC HEALTH

         7.16.1   REIMBURSED ARRANGEMENTS. HMO must make a good faith effort to
                  enter into a subcontract for the covered health care services
                  as specified below with HHSC Public Health Regions, city
                  and/or county health departments or districts in each county
                  of the service area that will be providing these services to
                  the Members (Public Health Entities), who will be paid for
                  services by HMO, including any or all of the following
                  services or any covered service that the public health
                  department and HMO have agreed to provide:

                  7.16.1.1 Sexually Transmitted Diseases (STDs) Services (see
                           Section 6.15);

                  7.16.1.2 Confidential HIV Testing (see Section 6.15);

                  7.16.1.3 Immunizations;

                  7.16.1.4 Tuberculosis (TB) Care (see Section 6.12);

                  7.16.1.5 Family Planning Services (see Section 6.7);

                  7.16.1.6 THSteps checkups (see Section 6.8); and

                  7.16.1.7 Prenatal services (see Section 6.9).

         7.16.2   HMO must make a good faith effort to enter into subcontracts
                  with public health entities in the service area. The
                  subcontracts must be available for review by HHSC or its
                  designated agent(s) on the same basis as all other
                  subcontracts. If any changes are made to the contract, it must
                  be resubmitted to HHSC. If an HMO is unable to enter into a
                  contract with public health entities, HMO must document
                  current and past efforts to HHSC. Documentation must be
                  submitted no later than 120 days after the execution of this
                  contract. Public health subcontracts must include the
                  following areas:

                  7.16.2.1 The general relationship between HMO and the Public
                           Health entity. The subcontracts must specify the
                           scope and responsibilities of both parties, the
                           methodology and agreements regarding billing and
                           reimbursements, reporting responsibilities, Member
                           and provider educational responsibilities, and the
                           methodology and agreements regarding sharing of
                           confidential medical record information between the
                           public health entity and the PCP.

                  7.16.2.2 Public Health Entity responsibilities:

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                           (1)      Public health providers must inform Members
                                    that confidential health care information
                                    will be provided to the PCP.

                           (2)      Public health providers must refer Members
                                    back to PCP for any follow-up diagnostic,
                                    treatment, or referral services.

                           (3)      Public health providers must educate Members
                                    about the importance of having a PCP and
                                    accessing PCP services during office hours
                                    rather than seeking care from Emergency
                                    Departments, Public Health Clinics, or other
                                    Primary Care Providers or Specialists.

                           (4)      Public health entities must identify a staff
                                    person to act as liaison to HMO to
                                    coordinate Member needs, Member referral,
                                    Member and provider education, and the
                                    transfer of confidential medical record
                                    information.

                  7.16.2.3 HMO Responsibilities:

                           (1)      HMO must identify care coordinators who will
                                    be available to assist public health
                                    providers and PCPs in getting efficient
                                    referrals of Members to the public health
                                    providers, specialists, and health-related
                                    service providers either within or outside
                                    HMO's network.

                           (2)      HMO must inform Members that confidential
                                    healthcare information will be provided to
                                    the PCP.

                           (3)      HMO must educate Members on how to better
                                    utilize their PCPs, public health providers,
                                    emergency departments, specialists, and
                                    health-related service providers.

                  7.16.2.4 Existing contracts must include the provisions in
                           Sections 7.16.2.1 through 7.16.2.3.

         7.16.3   NON-REIMBURSED ARRANGEMENTS WITH PUBLIC HEALTH ENTITIES.

                  7.16.3.1 Coordination with Public Health Entities. HMOs must
                           make a good faith effort to enter into a Memorandum
                           of Understanding (MOU) with Public Health Entities in
                           the service area regarding the provision of services
                           for essential public health care services. These MOUs
                           must be entered into in each service area and are
                           subject to HHSC approval. If any changes are made to
                           the MOU, it must be resubmitted to HHSC. If an HMO is
                           unable to enter into an MOU with a public health
                           entity, HMO must document current and past efforts to
                           HHSC. Documentation must be submitted no later than
                           120

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                           days after the execution of this contract. MOUs must
                           contain the roles and responsibilities of HMO and the
                           public health department for the following services:

                           (1)      Public health reporting requirements
                                    regarding communicable diseases and/or
                                    diseases that are preventable by
                                    immunization as defined by state law;

                           (2)      Notification of and referral to the local
                                    Public Health Entity, as defined by state
                                    law, of communicable disease outbreaks
                                    involving Members;

                           (3)      Referral to the local Public Health Entity
                                    for TB contact investigation and evaluation
                                    and preventive treatment of persons whom the
                                    Member has come into contact;

                           (4)      Referral to the local Public Health Entity
                                    for STD/HIV contact investigation and
                                    evaluation and preventive treatment of
                                    persons whom the Member has come into
                                    contact; and,

                           (5)      Referral for WIC services and information
                                    sharing;

                           (6)      Coordination and follow-up of suspected or
                                    confirmed cases of childhood lead exposure.

                  7.16.3.2 Coordination with Other Health and Human Services
                           (HHS) Programs. HMOs must make a good faith effort to
                           enter into a Memorandum of Understanding (MOU) with
                           other HHSC programs regarding the provision of
                           services for essential public health care services.
                           These MOUs must be entered into in each service area
                           and are subject to HHSC approval. If any changes are
                           made to the MOU, it must be resubmitted to HHSC. If
                           an HMO is unable to enter into an MOU with other HHSC
                           programs, HMO must document current and past efforts
                           to HHSC. Documentation must be submitted no later
                           than 120 days after the execution of this contract.
                           MOUs must delineate the roles and responsibilities of
                           HMO and the HHSC programs for the following services:

                           (1)      Use of the TDH laboratory for THSteps
                                    newborn screens; lead testing; and
                                    hemoglobin/hematocrit tests;

                           (2)      Availability of vaccines through the
                                    Vaccines for Children Program;

                           (3)      Reporting of immunizations provided to the
                                    statewide ImmTrac Registry including
                                    parental consent to share data;

                           (4)      Referral for WIC services and information
                                    sharing; (1)

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                           (5)      Pregnant, Women and Infant (PWI) Targeted
                                    Case Management;

                           (6)      THSteps outreach, informing and Medical Case
                                    Management;

                           (7)      Participation in the community-based
                                    coalitions with the Medicaid-funded case
                                    management programs in MHMR, ECI, TCB, and
                                    TDH (PWI, CIDC and THSteps Medical Case
                                    Management);

                           (8)      Referral to the TDH Medical Transportation
                                    Program;

                           (9)      Cooperation with activities required of
                                    public health authorities to conduct the
                                    annual population and community based needs
                                    assessment; and

                           (10)     Coordination and follow-up of suspected or
                                    confirmed cases of childhood lead exposure.

         7.16.4   All public health contracts must contain provider network
                  requirements in Article 7, as applicable.

7.17     COORDINATION WITH TEXAS DEPARTMENT OF PROTECTIVE AND REGULATORY
         SERVICES

         7.17.1   HMO must cooperate and coordinate with the Texas Department of
                  Protective and Regulatory Services (TDPRS) for the care of a
                  child who is receiving services from or has been placed in the
                  conservatorship of TDPRS.

         7.17.2   HMO must comply with all provisions of a Court Order or TDPRS
                  Service Plan with respect to a child in the conservatorship of
                  TDPRS (Order) entered by a Court of Continuing Jurisdiction
                  placing a child under the protective custody of TDPRS or a
                  Service Plan voluntarily entered into by the parents or person
                  having legal custody of a minor and TDPRS that relates to the
                  health and behavioral health care services required to be
                  provided to the Member.

         7.17.3   HMO cannot deny, reduce, or controvert the medical necessity
                  of any health or behavioral health care services included in
                  an Order entered by a court. HMO may participate in the
                  preparation of the medical and behavioral care plan prior to
                  TDPRS submitting the health care plan to the Court. Any
                  modification or termination of court ordered services must be
                  presented and approved by the court with jurisdiction over the
                  matter.

         7.17.4   A Member or the parent or guardian whose rights are subject to
                  an Order or Service Plan cannot appeal the necessity of the
                  services ordered through HMO's complaint or appeal processes,
                  or to HHSC for a Fair Hearing.

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         7.17.5   HMO must include information in its provider training and
                  manuals regarding:

                  7.17.5.1 providing medical records;

                  7.17.5.2 scheduling medical and behavioral health appointments
                           within 14 days unless requested earlier by TDPRS; and

                  7.17.5.3 recognition of abuse and neglect and appropriate
                           referral to TDPRS.

         7.17.6   HMO must continue to provide all covered services to a Member
                  receiving services from or in the protective custody of TDPRS
                  until the Member has been disenrolled from HMO as a result of
                  loss of eligibility in Medicaid managed care or placement into
                  foster care.

7.18     DELEGATED NETWORKS (IPAS, LIMITED PROVIDER NETWORKS AND ANHCS)

         7.18.1   All HMO contracts with any of the entities described in Texas
                  Insurance Code Section 843.002(30) and a group of providers
                  who are licensed to provide the same health care services or
                  an entity that is wholly-owned or controlled by one or more
                  hospitals and physicians including a physician-hospital
                  organization (delegated network contracts) must:

                  7.18.1.1 contain the mandatory contract provisions for all
                           subcontractors in Sections 3.2 and 7.2 of this
                           contract;

                  7.18.1.2 comply with the requirements, duties and
                           responsibilities of this contract;

                  7.18.1.3 not create a barrier for full participation to
                           significant traditional providers;

                  7.18.1.4 not interfere with HHSC's oversight and audit
                           responsibilities including collection and validation
                           of encounter data; or

                  7.18.1.5 be consistent with the federal requirement for
                           simplicity in the administration of the Medicaid
                           program.

         7.18.2   In addition to the mandatory provisions for all subcontracts
                  under Sections 3.2. and 7.2, all HMO/delegated network
                  contracts must include the following mandatory standard
                  provisions:

                  7.18.2.1 HMO is required to include subcontract provisions in
                           its delegated network contracts that require the UM
                           protocol used by a delegated network to produce

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                           substantially similar outcomes, as approved by HHSC,
                           as the UM protocol employed by the contracting HMO.
                           The responsibilities of an HMO in delegating UM
                           functions to a delegated network will be governed by
                           Section 16.3.12 of this contract.

                  7.18.2.2 Delegated networks that are delegated claims payment
                           responsibilities by HMO must also have the
                           responsibility to submit encounter, utilization,
                           quality, and financial data to HMO. HMO remains
                           responsible for integrating all delegated network
                           data reports into HMO's reports required under this
                           contract. If HMO is not able to collect and report
                           all delegated network data for HMO reports required
                           by this contract, HMO must not delegate claims
                           processing to the delegated network.

                  7.18.2.3 The delegated network must comply with the same
                           records retention and production requirements,
                           including Open Records requirements, as the HMO under
                           this contract.

                  7.18.2.4 The delegated network is subject to the same
                           marketing restrictions and requirements as the HMO
                           under this contract.

                  7.18.2.5 HMO is responsible for ensuring that delegated
                           network contracts comply with the requirements and
                           provisions of the HHSC/HMO contract. HHSC will impose
                           appropriate sanctions and remedies upon HMO for any
                           default under the HHSC/HMO contract that is caused
                           directly or indirectly by the acts or omissions of
                           the delegated network.

         7.18.3   HMO cannot enter into contracts with delegated networks to
                  provide services under this contract that require the
                  delegated network to enter into exclusive contracts with HMO
                  as a condition for participation with HMO.

                  7.18.3.1 Section 17.18.3 does not apply to providers who are
                           employees or participants in limited provider
                           networks.

         7.18.4   All delegated networks that limit Member access to those
                  providers contracted with the delegated network (closed or
                  limited panel networks) with whom HMO contracts must either
                  independently meet the access provisions of 28 Texas
                  Administrative Code Section 11.1607, relating to access
                  requirements for those Members enrolled or assigned to the
                  delegated network, or HMO must provide for access through
                  other network providers outside the closed panel delegated
                  network.

         7.18.5   HMO cannot delegate to a delegated network the enrollment,
                  re-enrollment, assignment or reassignment of a Member.

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         7.18.6   In addition to the above provision HMO and approved Non-Profit
                  Health Corporations must comply with all of the requirements
                  contained in 28 TAC Section 11.1604, relating to Requirements
                  of Certain Contracts between Primary HMOs and ANHCs and
                  Primary HMOs and Provider HMOs.

         7.18.7   HMO remains responsible for performing all duties,
                  responsibilities and services under this contract regardless
                  of whether the duty, responsibility or service is contracted
                  or delegated to another. HMO must provide a copy of the
                  contract provisions that set out HMO's duties,
                  responsibilities, and services to any provider network or
                  group with whom HMO contracts to provide health care services
                  on a risk sharing or capitated basis or to provide health care
                  services.

ARTICLE 8 MEMBER SERVICES REQUIREMENTS

8.1      MEMBER EDUCATION

         HMO must provide the Member education requirements as contained in
         Article 6 at 6.5 through 6.14, and this Article of the contract.

8.2      MEMBER HANDBOOK

         8.2.1    HMO must mail each newly enrolled Member a Member Handbook no
                  later than 5 working days after HMO receives the Enrollment
                  File. The Member Handbook must be written at a 4th - 6th grade
                  reading comprehension level. The Member Handbook must contain
                  all critical elements specified by HHSC. See Appendix D,
                  Required Critical Elements, for specific details regarding
                  content requirements. HMO must submit a Member Handbook to
                  HHSC for approval prior to the effective date of the contract
                  unless previously approved (see Section 3.4 regarding the
                  process for plan materials review).

         8.2.2    Member Handbook Updates. HMO must provide updates to the
                  Handbook to all Members as changes are made to the Required
                  Critical Elements in Appendix D. HMO must make the Member
                  Handbook available in the languages of the major population
                  groups and the visually impaired served by HMO.

         8.2.3    THE MEMBER HANDBOOK AND ANY REVISIONS OR CHANGES MUST BE
                  APPROVED BY HHSC PRIOR TO PUBLICATION AND DISTRIBUTION TO
                  MEMBERS (see Section 3.4 regarding the process for plan
                  materials review).

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         8.2.4    In accordance with 42 C.F.R. Section 438.100, HMO must
                  maintain written policies and procedures for informing Members
                  of their rights and responsibilities. HMO must notify its
                  Members of their right to request a copy of these rights and
                  responsibilities.

8.3      ADVANCE DIRECTIVES

         8.3.1    Federal and state law require HMOs and providers to maintain
                  written policies and procedures for informing and providing
                  written information to all adult Members 18 years of age and
                  older about their rights under state and federal law, in
                  advance of their receiving care (Social Security Act Section
                  1902(a)(57) and Section 1903(m)(1)(A)). The written policies
                  and procedures must contain procedures for providing written
                  information regarding the Member's right to refuse, withhold
                  or withdraw medical treatment and mental health treatment
                  advance directives. HMO's policies and procedures must comply
                  with provisions contained in 42 CFR Section 438.6(i) and 42
                  CFR Part 489, Subpart I, relating to advance directives for
                  all hospitals, critical access hospitals, skilled nursing
                  facilities, home health agencies, providers of home health
                  care, providers of personal care services and hospices, as
                  well as the following state laws and rules:

                  8.3.1.1  a Member's right to self-determination in making
                           health care decisions; and

                  8.3.1.2  the Advance Directives Act, Chapter 166, Texas Health
                           and Safety Code, which includes:

                           8.3.1.2.1  a Member's right to execute an advance
                                      written directive to physicians and family
                                      or surrogates, or to make a non-written
                                      directive to administer, withhold or
                                      withdraw life-sustaining treatment in the
                                      event of a terminal or irreversible
                                      condition;

                           8.3.1.2.2  a Member's right to make written and
                                      non-written Out-of-Hospital
                                      Do-Not-Resuscitate Orders; and

                           8.3.1.2.3  a Member's right to execute a Medical
                                      Power of Attorney to appoint an agent to
                                      make health care decisions on the Member's
                                      behalf if the Member becomes incompetent;
                                      and

                  8.3.1.3  the Declaration for Mental Health Treatment, Chapter
                           137, Texas Civil Practice and Remedies Code, which
                           includes: a Member's right to execute a Declaration
                           for Mental Health Treatment in a document making a
                           declaration of preferences or instructions regarding
                           mental health treatment.

                                 Page 99 of 173

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         8.3.2    HMO must maintain written policies for implementing a Member's
                  advance directive. Those policies must include a clear and
                  precise statement of limitation if HMO or a participating
                  provider cannot or will not implement a Member's advance
                  directive.

                  8.3.2.1  A statement of limitation on implementing a Member's
                           advance directive should include at least the
                           following information:

                           8.3.2.1.1  a clarification of any differences between
                                      HMO's conscience objections and those that
                                      may be raised by the Member's PCP or other
                                      providers;

                           8.3.2.1.2  identification of the state legal
                                      authority permitting HMO's conscience
                                      objections to carrying out an advance
                                      directive; and

                           8.3.2.1.3  a description of the medical and mental
                                      health conditions or procedures affected
                                      by the conscience objection.

         8.3.3    HMO cannot require a Member to execute or issue an advance
                  directive as a condition for receiving health care services.

         8.3.4    HMO cannot discriminate against a Member based on whether or
                  not the Member has executed or issued an advance directive.

         8.3.5    HMO's policies and procedures must require HMO and
                  subcontractor to comply with the requirements of state and
                  federal law relating to advance directives. HMO must provide
                  education and training to employees, Members, and the
                  community on issues concerning advance directives.

         8.3.6    All materials provided to Members regarding advance directives
                  must be written at a 7th - 8th grade reading comprehension
                  level, except where a provision is required by state or
                  federal law and the provision cannot be reduced or modified to
                  a 7th- 8th grade reading level because it is a reference to
                  the law or is required to be included "as written" in the
                  state or federal law. HMO must submit to HHSC any revisions to
                  existing approved advance directive materials.

         8.3.7    HMO must notify Members of any changes in state or federal
                  laws relating to advance directives within 90 days from the
                  effective date of the change, unless the law or regulation
                  contains a specific time requirement for notification.

8.4      MEMBER ID CARDS

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         8.4.1    A Medicaid Identification Form (Form 3087) is issued monthly
                  by the TDHS. The form includes the "STAR" Program logo and the
                  name and toll free number of the Member's health plan. A
                  Member may have a temporary Medicaid Identification (Form
                  1027-A), which will include a STAR indicator.

         8.4.2    HMO must issue a Member Identification Card (ID) to the Member
                  within five (5) working days from the date the HMO receives
                  the monthly Enrollment File from the Enrollment Broker. The ID
                  Card must include, at a minimum, the following: Member's name;
                  Member's Medicaid number; either the issue date of the card or
                  effective date of the PCP assignment; PCP's name, address, and
                  telephone number; name of HMO; name of IPA to which the
                  Member's PCP belongs, if applicable; the 24-hour, seven (7)
                  day a week toll-free telephone number operated by HMO; the
                  toll-free number for behavioral health care services; and
                  directions for what to do in an emergency. The ID Card must be
                  reissued if the Member reports a lost card, there is a Member
                  name change, if Member requests a new PCP, or for any other
                  reason that results in a change to the information disclosed
                  on the ID Card.

8.5      MEMBER COMPLAINT AND APPEAL SYSTEM

         HMO must develop, implement and maintain a Member complaint and appeal
         system that complies with the requirements in applicable federal and
         state laws and regulations, including 42 C.F.R. Section 431.200 and 42
         C.F.R. Part 483, Subpart F, "Grievance System;" and the provisions of 1
         T.A.C. Chapter 357 relating to managed care organizations. The
         complaint and appeal system must include a complaint process, an appeal
         process, and access to HHSC's Fair Hearing System. The procedures must
         be reviewed and approved in writing by HHSC. Modifications and
         amendments to the Member complaint and appeal system must be submitted
         to HHSC at least 30 days prior to the implementation of the
         modification or amendment.

         For purposes of Section 8.5., an "authorized representative" is any
         person or entity acting on behalf of the Member and with the Member's
         written consent. A provider may be an "authorized representative."

         8.5.1    MEMBER COMPLAINT PROCESS

                  8.5.1.1  HMO must have written policies and procedures for
                           receiving, tracking, responding to, reviewing,
                           reporting and resolving complaints by Members or
                           their authorized representatives.

                  8.5.1.2  HMO must resolve complaints within 30 days from the
                           date that the complaint was received. The complaint
                           procedure must be the same for all Members

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                           under this contract. The Member or Member's
                           authorized representative may file a complaint either
                           orally or in writing. HMO must also inform Members
                           how to file a complaint directly with HHSC.

                  8.5.1.3  HMO must designate an officer of HMO who has primary
                           responsibility for ensuring that complaints are
                           resolved in compliance with written policy and within
                           the time required. An "officer" of HMO means a
                           president, vice president, secretary, treasurer, or
                           chairperson of the board for a corporation, the sole
                           proprietor, the managing general partner of a
                           partnership, or a person having similar executive
                           authority in the organization.

                  8.5.1.4  HMO must have a routine process to detect patterns of
                           complaints. The process must involve management,
                           supervisory, and quality improvement staff in the
                           development of policy and procedural improvements to
                           address the complaints.

                  8.5.1.5  HMO's complaint procedures must be provided to
                           Members in writing and through oral interpretive
                           services. A written description of HMO's complaint
                           procedures must be available in prevalent non-English
                           languages identified by HHSC, at a 4th to 6th grade
                           reading level. HMO must include a written description
                           of the complaint process in the Member Handbook. HMO
                           must maintain and publish in the Member Handbook, at
                           least one local and one toll-free telephone number
                           with TeleTypewriter/Telecommunications Device for the
                           Deaf (TTY/TTD) and interpreter capabilities for
                           making complaints.

                  8.5.1.6  HMO's process must require that every complaint
                           received in person, by telephone or in writing must
                           be acknowledged and recorded in a written record and
                           logged with the following details: date;
                           identification of the individual filing the
                           complaint; identification of the individual recording
                           the complaint; nature of the complaint; disposition
                           of the complaint (i.e., how the HMO resolved the
                           complaint); corrective action required; and date
                           resolved.

                  8.5.1.7  HMO is prohibited from discriminating or taking
                           punitive action against a Member or his or her
                           representative for making a complaint.

                  8.5.1.8  If the Member makes a request for disenrollment, the
                           HMO shall give the Member information on the
                           disenrollment process and direct the Member to the
                           Enrollment Broker. If the request for disenrollment
                           includes a complaint by the Member, the complaint
                           will be processed separately from the disenrollment
                           request, through the complaint process.

                  8.5.1.9  HMO will cooperate with the Enrollment Broker, HHSC,
                           and HHSC's Member resolution service contractors to
                           resolve all Member complaints. Such cooperation may
                           include, but is not limited to, providing information
                           or assistance to internal complaint committees.

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                  8.5.1.10 HMO must provide designated staff to assist Members
                           in understanding and using HMO's complaint system.
                           HMO's designated staff must assist Members in writing
                           or filing a complaint and monitoring the complaint
                           through the HMO's complaint process until the issue
                           is resolved.

         8.5.2    STANDARD MEMBER APPEAL PROCESS

                  8.5.2.1  HMO must develop, implement and maintain an appeal
                           procedure that complies with the requirements in
                           federal laws and regulations, including 42 C.F.R.
                           Section 431.200 and 42 C.F.R. Part 438, Subpart F,
                           "Grievance System." An appeal is a disagreement with
                           an "action" as defined in Article 2 of the Contract.
                           The appeal procedure must be the same for all
                           Members. When a Member or his or her authorized
                           representative expresses orally or in writing any
                           dissatisfaction or disagreement with an action, the
                           HMO must regard the expression of dissatisfaction as
                           a request to appeal an action.

                  8.5.2.2  A Member must file a request for an internal appeal
                           within 30 days from receipt of the notice of the
                           action. To ensure continuation of currently
                           authorized services, however, the Member must file
                           the appeal on or before the later of: 10 days
                           following the HMO's mailing of the notice of the
                           action or the intended effective date of the proposed
                           action.

                  8.5.2.3  HMO must designate an officer who has primary
                           responsibility for ensuring that appeals are resolved
                           in compliance with written policy and within the time
                           required. An "officer" of HMO means a president, vice
                           president, secretary, treasurer, or chairperson of
                           the board for a corporation, the sole proprietor, the
                           managing general partner of a partnership, or a
                           person having similar executive authority in the
                           organization.

                  8.5.2.4  The provisions of Article 21.58A, Texas Insurance
                           Code, relating to a Member's right to appeal an
                           adverse determination made by HMO or a utilization
                           review agent by an independent review organization,
                           do not apply to a Medicaid recipient. Federal fair
                           hearing requirements (Social Security Act Section
                           1902a(3), codified at 42 C.F.R. Section 431.200 et
                           seq.) require the agency to make a final decision
                           after a fair hearing, which conflicts with the State
                           requirement that the IRO make a final decision.
                           Therefore, Article 21.58A is pre-empted by the
                           federal requirement.

                  8.5.2.5  HMO must have policies and procedures in place
                           outlining the role of HMO's Medical Director for an
                           appeal of an action. The Medical Director must have a
                           significant role in monitoring, investigating and
                           hearing appeals. In accordance with 42 C.F.R. Section
                           438.406, the HMO's policies and procedures must
                           require that individuals who make decisions on
                           appeals were not

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                           involved in any previous level of review or
                           decision-making, and, are health care professionals
                           who have the appropriate clinical expertise, as
                           determined by HHSC, in treating the Member's
                           condition or disease.

                  8.5.2.6  HMO must provide designated staff to assist Members
                           in understanding and using HMO's appeal process.
                           HMO's designated staff must assist Members in writing
                           or filing an appeal and monitoring the appeal through
                           the HMO's appeal process until the issue is resolved.

                  8.5.2.7  HMO must have a routine process to detect patterns of
                           appeals. The process must involve management,
                           supervisory, and quality improvement staff in the
                           development of policy and procedural improvements to
                           address the appeals.

                  8.5.2.8  HMO's appeal procedures must be provided to Members
                           in writing and through oral interpretive services. A
                           written description of HMO's appeal procedures must
                           be available in prevalent non-English languages
                           identified by HHSC, at a 4th to 6th grade reading
                           level. HMO must include a written description in the
                           Member Handbook. HMO must maintain and publish in the
                           Member Handbook at least one local and one toll-free
                           telephone number with TTY/TTD and interpreter
                           capabilities for requesting an appeal of an action.

                  8.5.2.9  HMO's process must require that every oral appeal
                           received must be confirmed by a written, signed
                           appeal by the Member or his or her representative,
                           unless the Member or his or her representative
                           requests an expedited resolution. All appeals must be
                           recorded in a written record and logged with the
                           following details: date notice is sent; effective
                           date of the action; date the Member or his or her
                           representative requested the appeal; date the appeal
                           was followed up in writing; identification of the
                           individual filing; nature of the appeal; disposition
                           of the appeal; notice of disposition to Member.

                  8.5.2.10 HMO must send a letter to the Member within 5
                           business days acknowledging receipt of the appeal
                           request. Except as provided in Section 8.5.3.2, HMO
                           must complete the entire appeal process within 30
                           calendar days after receipt of the initial written or
                           oral request for appeal. The timeframe may be
                           extended up to 14 calendar days if the Member
                           requests an extension; or the HMO shows that there is
                           a need for additional information and how the delay
                           is in the Member's interest. If the timeframe is
                           extended, the HMO must give the Member written notice
                           of the reason for delay if the Member had not
                           requested the delay.

                  8.5.2.11 During the appeal process, HMO must provide the
                           Member a reasonable opportunity to present evidence,
                           any allegations of fact or law, in person as well as
                           in writing. The HMO must inform the Member of the
                           time available

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                           for providing this information, and in the case of an
                           expedited resolution, that limited time will be
                           available (see Section 8.5.3.2).

                  8.5.2.12 HMO must provide the Member and his or her
                           representative opportunity, before and during the
                           appeals process, to examine the Member's case file,
                           including medical records and any other documents
                           considered during the appeal process. HMO must
                           include, as parties to the appeal, the Member and his
                           or her representative or the legal representative of
                           a deceased Member's estate.

                  8.5.2.13 In accordance with 42.C.F.R. Section 438.420, HMO
                           must continue the Member's benefits currently being
                           received by the Member, including the benefit that is
                           the subject of the appeal, if all of the following
                           criteria are met: 1) the Member or his or her
                           representative files the appeal timely (as defined in
                           Section 8.5.2.2); 2) the appeal involves the
                           termination, suspension, or reduction of a previously
                           authorized course of treatment; 3) the services were
                           ordered by an authorized provider; 4) the original
                           period covered by the original authorization has not
                           expired; and 5) the Member requests an extension of
                           the benefits. If, at the Member's request, the HMO
                           continues or reinstates the Member's benefits while
                           the appeal is pending, the benefits must be continued
                           until one of the following occurs: the Member
                           withdraws the appeal; 10 days pass after the HMO
                           mails the notice, providing the resolution of the
                           appeal against the Member, unless the Member, within
                           the 10-day timeframe, has requested a State fair
                           hearing with continuation of benefits until a State
                           fair hearing decision can be reached; a state fair
                           hearing office issues a hearing decision adverse to
                           the Member; the time period or service limits of a
                           previously authorized service has been met.

                  8.5.2.14 In accordance with 42 C.F.R. Section 438.420(d), if
                           the final resolution of the appeal is adverse to the
                           Member, and upholds the HMO's action, then to the
                           extent that the services were furnished to comply
                           with Section 8.5.2.13, the HMO may recover such costs
                           from the Member.

                  8.5.2.15 If the HMO or state fair hearing officer reverses a
                           decision to deny, limit, or delay services that were
                           not furnished while the appeal was pending, the HMO
                           must authorize or provide the disputed services
                           promptly, and as expeditiously as the Member's health
                           condition requires.

                  8.5.2.16 If the HMO or state fair hearing officer reverses a
                           decision to deny authorization of services and the
                           Member received the disputed services while the
                           appeal was pending, the HMO will be responsible for
                           the payment of services.

                  8.5.2.17 HMO is prohibited from discriminating against a
                           Member or his or her representative for making an
                           appeal.

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         8.5.3    EXPEDITED HMO APPEALS

                  8.5.3.1  In accordance with 42 C.F.R. Section 438.410, HMO
                           must establish and maintain an expedited review
                           process for appeals, when the HMO determines (for a
                           request from a Member) or the provider indicates (in
                           making the request on the Member's behalf or
                           supporting the Member's request) that taking the time
                           for a standard resolution could seriously jeopardize
                           the Member's life or health. HMO must follow all
                           appeal requirements for standard Member appeals, as
                           set forth in Section 8.5.2, except where differences
                           are specifically noted. Requests for expedited
                           appeals must be accepted orally or in writing.

                  8.5.3.2  HMO must complete investigation and resolution of an
                           appeal relating to an ongoing emergency or denial of
                           continued hospitalization: (1) in accordance with the
                           medical or dental immediacy of the case; and (2) not
                           later than one business day after the complainant's
                           request for appeal is received.

                  8.5.3.3  Members must exhaust the HMO's expedited appeal
                           process before making a request for an expedited
                           state fair hearing. After HMO receives the request
                           for an expedited appeal, it must hear an approved
                           requests for a Member to have an expedited appeal and
                           notify the Member of the outcome of the appeal within
                           3 business days, except as stated in 8.5.3.2. This
                           timeframe may be extended up to 14 calendar days if
                           the Member requests an extension; or the HMO shows
                           (to the satisfaction of HHSC, upon HHSC's request)
                           that there is a need for additional information and
                           how the delay is in the Member's interest. If the
                           timeframe is extended, the HMO must give the Member
                           written notice of the reason for delay if the Member
                           had not requested the delay.

                  8.5.3.4  If the decision is adverse to the Member, procedures
                           relating to the notice in Section 8.5.5 must be
                           followed. The HMO is responsible for notifying the
                           Member of their rights to access an expedited state
                           fair hearing. HMO will be responsible for providing
                           documentation to the State and the Member, indicating
                           how the decision was made, prior to state's expedited
                           fair hearing.

                  8.5.3.5  The HMO must ensure that punitive action is neither
                           taken against a provider who requests an expedited
                           resolution or supports a Member's request.

                  8.5.3.6  If the HMO denies a request for expedited resolution
                           of an appeal, it must: (1) transfer the appeal to the
                           timeframe for standard resolution set forth in
                           Section 8.5.2, and (2) make a reasonable effort to
                           give the Member prompt oral notice of the denial, and
                           follow up within two calendar days with a written
                           notice.

         8.5.4    ACCESS TO STATE FAIR HEARING

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                  8.5.4.1  HMO must inform Members that they generally have the
                           right to access the state fair hearing process in
                           lieu of the internal appeal system provided by HMO
                           procedures set forth in Sections 8.5.2 and 8.5.3. The
                           notice must comply with the requirements of 1 T.A.C.
                           Chapter 357. In the case of an expedited State Fair
                           Hearing Process, the HMO must inform the Member that
                           he or she must first exhaust the HMO's internal
                           expedited appeal process.

                  8.5.4.2  HMO must notify Members that they may be represented
                           by an authorized representative in the state fair
                           hearing process.

         8.5.5    NOTICES OF ACTION AND DISPOSITION OF APPEALS

                  8.5.5.1  NOTICE OF ACTION.

                           HMO must notify the Member, in accordance with 1
                           T.A.C. Chapter 357, whenever HMO takes an action as
                           defined in Article 2 of this contract. The notice
                           must contain the following information:

                           (a)   the action the HMO or its contractor has taken
                                 or intends to take; (b) the reasons for the
                                 action;

                           (c)   the Member's right to access the HMO internal
                                 appeal process, as set forth in Sections 8.5.2
                                 and 8.5.3, and/or to access to the State Fair
                                 Hearing Process as provided in Section 8.5.4;

                           (d)   the procedures by which Member may appeal HMO's
                                 action;

                           (e)   the circumstances under which expedited
                                 resolution is available and how to request it;

                           (f)   the circumstances under which a Member can
                                 continue to receive benefits pending resolution
                                 of the appeal (see Section 8.5.2.13), how to
                                 request that benefits be continued, and the
                                 circumstances under which the Member may be
                                 required to pay the costs of these services;

                           (g)   the date the action will be taken;

                           (h)   a reference to the HMO policies and procedures
                                 supporting the HMO's action;

                           (i)   an address where written requests may be sent
                                 and a toll-free number that the Member can call
                                 to request the assistance of a Member
                                 representative, file an appeal, or request a
                                 Fair Hearing;

                           (j)   an explanation that Members may represent
                                 themselves, or be represented by a provider, a
                                 friend, a relative, legal counsel or another
                                 spokesperson;

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                           (k)   a statement that if the Member wants a HHSC
                                 Fair Hearing on the action, Member must make,
                                 in writing, the request for a Fair Hearing
                                 within 90 days of the date on the notice or the
                                 right to request a hearing is waived;

                           (l)   a statement explaining that HMO must make its
                                 decision within 30 days from the date the
                                 appeal is received by HMO, or 3 business days
                                 in the case of an expedited appeal; and a
                                 statement explaining that the hearing officer
                                 must make a final decision within 90 days from
                                 the date a Fair Hearing is requested; and

                           (m)   any other information required by 1 T.A.C.
                                 Chapter 357 that relates to a managed care
                                 organization's notice of action.

                  8.5.5.2  TIMEFRAME FOR NOTICE OF ACTION

                           In accordance with 42 C.F.R. Section 438.404(c), the
                           HMO must mail a notice of action within the following
                           timeframes:

                           (1)   For termination, suspension, or reduction of
                                 previously authorized Medicaid-covered
                                 services, within the timeframes specified in 42
                                 C.F.R.Sections 431.211, 431.213, and 431.214.

                           (2)   For denial of payment, at the time of any
                                 action affecting the claim.

                           (3)   For standard service authorization decisions
                                 that deny or limit services, within the
                                 timeframe specified in 42 C.F.R. Section
                                 438.210(d)(1).

                           (4)   If the HMO extends the timeframe in accordance
                                 with 42 C.F.R. Section 438.210(d)(1), it must--

                                 (a)   Give the Member written notice of the
                                       reason for the decision to extend the
                                       timeframe and inform the Member of the
                                       right to file a grievance if he or she
                                       disagrees with that decision; and

                                 (b)   Issue and carry out its determination as
                                       expeditiously as the Member's health
                                       condition requires and no later than the
                                       date the extension expires.

                                 (5)   For service authorization decisions not
                                       reached within the timeframes specified
                                       in 42 C.F.R. Section 438.210(d) (which
                                       constitutes a denial and is thus an
                                       adverse action), on the date that the
                                       timeframes expire.

                                 (6)   For expedited service authorization
                                       decisions, within the timeframes
                                       specified in 42 C.F.R. Section
                                       438.210(d).

                  8.5.5.3. NOTICE OF DISPOSITION OF APPEAL. In accordance with
                           42 C.F.R. Section 438.408(e), HMO must provide
                           written notice of disposition of all appeals
                           including expedited appeals. The written resolution
                           notice must include the results and date of the
                           appeal resolution. For decisions not wholly in the
                           Members favor, the notice must contain:

                           (a)   the right to request a fair hearing,

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                           (b)   how to request a state fair hearing,

                           (c)   the circumstances under which the Member can
                                 continue to receive benefits pending a hearing
                                 (see Section 8.5.2.13),

                           (d)   how to request the continuation of benefits,

                           (e)   if the HMO's action is upheld in a hearing, the
                                 Member may be liable for the cost of any
                                 services furnished to the Member while the
                                 appeal is pending; and

                           (f)   any other information required by 1 T.A.C.
                                 Chapter 357 that relates to a managed care
                                 organization's notice of disposition of an
                                 appeal."

                  8.5.5.4  TIMEFRAME FOR NOTICE OF RESOLUTION OF APPEALS. In
                           accordance with 42 C.F.R. Section 438.408, HMO must
                           provide written notice of resolution of appeals,
                           including expedited appeals, as expeditiously as the
                           Member's health condition requires, but the notice
                           must not exceed the timelines as provided in 8.5.2 or
                           8.5.3. For expedited resolution of appeals, HMO must
                           make reasonable efforts to give the Member prompt
                           oral notice of resolution of the appeal, and follow
                           up with a written notice within the timeframes set
                           forth in Section 8.5.3. If the HMO denies a request
                           for expedited resolution of an appeal, HMO must
                           transfer the appeal to the timeframe for standard
                           resolution as provided in Section 8.5.2. and make
                           reasonable efforts to give the Member prompt oral
                           notice of the denial, and follow up within two
                           calendar days with a written notice."

8.6      [THIS SECTION IS INTENTIONALLY LEFT BLANK]

8.7      MEMBER ADVOCATES

         8.7.1    HMO must provide Member Advocates to assist Members. Member
                  Advocates must be physically located within the service area.
                  Member Advocates must inform Members of their rights and
                  responsibilities, the complaint process, the health education
                  and the services available to them, including preventive
                  services.

         8.7.2    Member Advocates must assist Members in writing complaints and
                  are responsible for monitoring the complaint through HMO's
                  complaint process until the Member's issues are resolved or a
                  HHSC Fair Hearing requested (see Sections 8.5.4).

         8.7.3    Member Advocates are responsible for making recommendations to
                  management on any changes needed to improve either the care
                  provided or the way care is delivered. Member Advocates are
                  also responsible for helping or referring Members to community
                  resources available to meet Member needs that are not
                  available from HMO as Medicaid covered services.

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         8.7.4    Member Advocates must provide outreach to Members and
                  participate in HHSC-sponsored enrollment activities.

8.8      MEMBER CULTURAL AND LINGUISTIC SERVICES

         8.8.1    Cultural Competency Plan. HMO must have a comprehensive
                  written Cultural Competency Plan describing how HMO will
                  ensure culturally competent services, and provide linguistic
                  and disability-related access. The Plan must describe how the
                  individuals and systems within HMO will effectively provide
                  services to people of all cultures, races, ethnic backgrounds,
                  and religions as well as those with disabilities in a manner
                  that recognizes, values, affirms, and respects the worth of
                  the individuals and protects and preserves the dignity of
                  each. HMO must submit a written plan to HHSC prior to the
                  effective date of this contract unless previously submitted.
                  Modifications and amendments to the written plan must be
                  submitted to HHSC no later than 30 days prior to
                  implementation of the modification or amendment. The Plan must
                  also be made available to HMO's network of providers.

         8.8.2    The Cultural Competency Plan must include the following:

                  8.8.2.1  HMO's written policies and procedures for ensuring
                           effective communication through the provision of
                           linguistic services following Title VI of the Civil
                           Rights Act regarding guidelines and the provision of
                           auxiliary aids and services, in compliance with the
                           Americans with Disabilities Act, Title III, and
                           Department of Justice Regulation 36.303. HMO must
                           disseminate these policies and procedures to ensure
                           that both Staff and subcontractors are aware of their
                           responsibilities under this provision of the
                           contract.

                  8.8.2.2  A description of how HMO will educate and train its
                           staff and subcontractors on culturally competent
                           service delivery, and the provision of linguistic
                           and/or disability-related access as related to the
                           characteristics of its Members;

                  8.8.2.3  A description of how HMO will implement the plan in
                           its organization, identifying a person in the
                           organization who will serve as the contact with HHSC
                           on the Cultural Competency Plan;

                  8.8.2.4  A description of how HMO will develop standards and
                           performance requirements for the delivery of
                           culturally competent care and linguistic access, and
                           monitor adherence with those standards and
                           requirements;

                  8.8.2.5  A description of how HMO will provide outreach and
                           health education to Members, including racial and
                           ethnic minorities, non-English speakers or
                           limited-English speakers, and those with
                           disabilities; and

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                  8.8.2.6  A description of how HMO will help Members access
                           culturally and linguistically appropriate community
                           health or social service resources;

         8.8.3    Linguistic, Interpreter Services, and Provision of Auxiliary
                  Aids and Services. HMO must provide experienced, professional
                  interpreters when technical, medical, or treatment information
                  is to be discussed. See Title VI of the Civil Rights Act of
                  1964, 42 U.S.C. Section 2000d, et seq. HMO must ensure the
                  provision of auxiliary aids and services necessary for
                  effective communication, as per the Americans with
                  Disabilities Act, Title III, Department of Justice Regulations
                  36.303.

                  8.8.3.1  HMO must adhere to and provide to Members the Member
                           Bill of Rights and Responsibilities as adopted by the
                           Texas Health and Human Services Commission and
                           contained at 1 TAC Chapter 353, Subchapter C. The
                           Member Bill of Rights and Responsibilities assures
                           Members the right "to have interpreters, if needed,
                           during appointments with their providers and when
                           talking to their health plan. Interpreters include
                           people who can speak in their native language, assist
                           with a disability, or help them understand the
                           information."

                  8.8.3.2  HMO must have in place policies and procedures that
                           outline how Members can access face-to-face
                           interpreter services in a provider's office if
                           necessary to ensure the availability of effective
                           communication regarding treatment, medical history or
                           health education for a Member. HMOs must inform its
                           providers on how to obtain an updated list of
                           participating, qualified interpreters.

                  8.8.3.3  A competent interpreter is defined as someone who is:

                  8.8.3.4  proficient in both English and the other language;

                  8.8.3.5  has had orientation or training in the ethics of
                           interpreting; and

                  8.8.3.6  has the ability to interpret accurately and
                           impartially.

                  8.8.3.7  HMO must provide 24-hour access to interpreter
                           services for Members to access emergency medical
                           services within HMO's network.

                  8.8.3.8  Family Members, especially minor children, should not
                           be used as interpreters in assessments, therapy or
                           other medical situations in which impartiality and
                           confidentiality are critical, unless specifically
                           requested by the Member. However, a family member or
                           friend may be used as an interpreter if they can be
                           relied upon to provide a complete and accurate
                           translation of the information being provided to the
                           Member; provided that the Member is

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                           advised that a free interpreter is available; and the
                           Member expresses a preference to rely on the family
                           member or friend.

         8.8.4    All Member orientation presentations education classes and
                  materials must be presented in the languages of the major
                  population groups making up 10 percent or more of the Medicaid
                  population in the service area, as specified by HHSC. HMO must
                  provide auxiliary aids and services, as needed, including
                  materials in alternative formats (i.e., large print, tape or
                  Braille), and interpreters or real-time captioning to
                  accommodate the needs of persons with disabilities that affect
                  communication.

         8.8.5    HMO must provide or arrange access to TDD to Members who are
                  deaf or hearing impaired.

8.9      CERTIFICATION DATE

         8.9.1    On the date of the new Member's enrollment, HHSC will provide
                  HMOs with the Member's Medicaid certification date.

ARTICLE 9 MARKETING AND PROHIBITED PRACTICES

9.1      MARKETING MATERIAL MEDIA AND DISTRIBUTION

         HMOs may present their marketing materials to eligible Medicaid
         recipients through any method or media determined to be acceptable by
         HHSC. The media may include but are not limited to: written materials,
         such as brochures, posters, or fliers that can be mailed directly to
         the Member or left at Texas Department of Human Services eligibility
         offices; HHSC-sponsored community enrollment events; and paid or public
         service announcements on radio. All marketing materials must be
         approved by HHSC prior to distribution (see Section 3.4).

         9.1.1    HMO may not make any assertion or statement (orally or in
                  writing) that it is endorsed by the CMS, a Federal or State
                  government or agency, or similar entity.

9.2      MARKETING ORIENTATION AND TRAINING

         9.2.1    HMO must require that all HMO staff having direct marketing
                  contact with Members as part of their job duties and their
                  supervisors satisfactorily complete HHSC's marketing
                  orientation and training program, conducted by HHSC or health
                  plan staff trained by HHSC, prior to engaging in marketing

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                  activities on behalf of HMO. HHSC will notify HMO of scheduled
                  orientations.

         9.2.2    Marketing Policies and Procedures. HMO must adhere to the
                  Marketing Policies and Procedures as set forth by the Health
                  and Human Services Commission.

9.3      PROHIBITED MARKETING PRACTICES

         9.3.1    HMO and its agents, subcontractors and providers are
                  prohibited from engaging in the following marketing practices:

                  9.3.1.1  conducting any direct-contact marketing to
                           prospective Members except through HHSC-sponsored
                           enrollment events;

                  9.3.1.2  making any written or oral statement containing
                           material misrepresentations of fact or law relating
                           to HMO's plan or the STAR program;

                  9.3.1.3  making false, misleading or inaccurate statements
                           relating to services or benefits of HMO or the STAR
                           program;

                  9.3.1.4  offering prospective Members anything of material or
                           financial value as an incentive to enroll with a
                           particular PCP or HMO; and

                  9.3.1.5  discriminating against an eligible Member because of
                           race, creed, age, color, sex, religion, national
                           origin, ancestry, marital status, sexual orientation,
                           physical or mental handicap, health status, or
                           requirements for health care services.

         9.3.2    HMO may offer nominal gifts with a retail value of no more
                  than $10 and/or free health screens to potential Members, as
                  long as these gifts and free health screenings are offered
                  whether or not the potential Member enrolls in their HMO. Free
                  health screenings cannot be used to discourage less healthy
                  potential Members from joining HMO. All gifts must be approved
                  by HHSC prior to distribution to Members. The results of free
                  screenings must be shared with the Member's PCP if the Member
                  enrolls with HMO providing the screen.

         9.3.3    Marketing representatives may not conduct or participate in
                  marketing activities for more than one HMO.

9.4      NETWORK PROVIDER DIRECTORY

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         9.4.1    The provider directory and any revisions must be approved by
                  HHSC prior to publication and distribution to prospective
                  Members (see Section 3.4.1 regarding the process for plan
                  materials review). The directory must contain all critical
                  elements specified by HHSC. See Appendix D, Required Critical
                  Elements, for specific details regarding content requirements.

         9.4.2    If HMO contracts with limited provider networks, the provider
                  directory must comply with the requirements of 28 TAC
                  11.1600(b)(11), relating to the disclosure and notice of
                  limited provider networks.

         9.4.3    Except as provided in Section 9.4.4, updates to the provider
                  directory must be provided to the Enrollment Broker at the
                  beginning of each State fiscal year quarter. This includes the
                  months of September, December, March and June. HMO is
                  responsible for submitting draft updates to HHSC only if
                  changes other than PCP information are incorporated. HMO is
                  responsible for sending three final paper copies and one
                  electronic copy of the updated provider directory to HHSC each
                  quarter. If an electronic format is not available, five paper
                  copies must be sent. HHSC will forward two updated provider
                  directories, along with its approval notice, to the Enrollment
                  Broker to facilitate the distribution of the directories.

         9.4.4    Beginning May 1, 2004, the HMO may update the provider
                  directories on a monthly basis to provide distribution of the
                  most accurate network to potential members. Such monthly
                  reprints will continue for no more than a total of four
                  months. During this time, HMO is responsible for submitting
                  draft updates to HHSC only if changes other than PCP
                  information are incorporated. HMO is responsible for sending
                  three final paper copies and one electronic copy of each
                  update to HHSC. If an electronic format is not available, five
                  paper copies must be sent. HHSC will forward two updated
                  provider directories, along with its approval notice, to the
                  Enrollment Broker to facilitate the distribution of the
                  directories.

ARTICLE 10 MANAGEMENT INFORMATION SYSTEM (MIS ) REQUIREMENTS

10.1     MODEL MIS (MMIS) REQUIREMENTS

         10.1.1   HMO must maintain an MIS that will provide support for all
                  functions of HMO's processes and procedures related to the
                  flow and use of data within HMO. The MIS must enable HMO to
                  meet the requirements of this contract. The MIS must have the
                  capacity and capability of capturing and utilizing various
                  data elements to develop information for HMO administration.

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         10.1.2   HMO must maintain a claim retrieval service processing system
                  that can identify date of receipt, action taken on all
                  provider claims or encounters (i.e., paid, denied, other), and
                  when any action was taken in real time.

         10.1.3   HMO must have a system that can be adapted to the change in
                  Business Practices/Policies within the timeframe negotiated
                  between HHSC and the HMO.

                  10.1.3.1. HMO must notify and advise Health and Human Services
                            Commission Information Technology (HHSC-IT) of major
                            systems changes and implementations. HMO is required
                            to provide an implementation plan and schedule of
                            proposed system change at the time of this
                            notification.

                  10.1.3.2. HHSC-IT conducts a Systems Readiness test to
                            validate the contractor's ability to meet the MMIS
                            requirements. This is done through systems
                            demonstration and performance of specific MMIS and
                            subsystem functions. The System Readiness test may
                            include a desk review or an onsite review and is
                            conducted for the following events:

                           -     A new plan is brought into the program;

                           -     An existing plan begins business in a new SDA;

                           -     An existing plan changes location; and

                           -     An existing plan changes their processing
                                 system.

                  10.1.3.3. Desk Review. HHSC will conduct an expedited
                            readiness desk review for the purposes of this
                            contract. HMO must complete and pass systems desk
                            review prior to onsite systems testing conducted by
                            HMO.

                  10.1.3.4. Onsite Review. HMO is required to provide a detailed
                            and comprehensive Disaster and Recovery Plan, and,
                            if onsite systems testing is requested by HHSC,
                            complete and pass an onsite Systems Facility Review
                            during the State's onsite systems testing.

                  10.1.3.5. HMO is required to provide a Corrective Action Plan
                            in response to HHSC Systems Readiness Testing
                            Deficiencies no later than 10 working days after
                            notification of deficiencies by HHSC.

                  10.1.3.6  HMO is required to provide representation to attend
                            and participate in the HHSC Systems Workgroup as a
                            part of the Systems Scan Call.

         10.1.4   HMO is required to submit and receive data as specified in
                  this contract and HMO Encounter Data Submissions Manual. HMO
                  must provide complete encounter data of all capitated services
                  within the scope of services of the contract between HMO and
                  HHSC. Encounter data must follow the format,

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                  data elements and method of transmission specified in the
                  contract and HMO Encounter Data Submissions Manual. HMO must
                  submit encounter data, including adjustments to encounter
                  data. The Encounter transmission will include all encounter
                  data and encounter data adjustments processed by HMO for the
                  previous month. Data quality validation will incorporate
                  assessment standards developed jointly by HMO and HHSC.
                  Original records will be made available for inspection by HHSC
                  for validation purposes. Data that do not meet quality
                  standards must be corrected and returned within a time period
                  specified by HHSC.

         10.1.5   HMO must use the procedure codes, diagnosis codes, and other
                  codes used for reporting encounters and fee-for-service claims
                  in the most recent edition of the Medicaid Provider Procedures
                  Manual or as otherwise directed by HHSC. Any exceptions will
                  be considered on a code-by-code basis after HHSC receives
                  written notice from HMO requesting an exception. HMO must also
                  use the provider numbers as directed by HHSC for both
                  encounter and fee-for-service claims submissions.

         10.1.6   HMO must have hardware, software, network and communications
                  system with the capability and capacity to handle and operate
                  all MIS subsystems.

         10.1.7   HMO must notify HHSC of any changes to HMO's MIS department
                  dedicated to or supporting this contract by Phase I of Renewal
                  Review. Any updates to the organizational chart and the
                  description of responsibilities must be provided to HHSC at
                  least 30 days prior to the effective date of the change.
                  Official points of contact must be provided to HHSC on an
                  on-going basis. An Internet E-mail address must be provided
                  for each point of contact.

         10.1.8   HMO must operate and maintain a MIS that meets or exceeds the
                  requirements outlined in the Model MIS Guidelines that follow:

                  10.1.8.1  The Contractor's system must be able to meet all
                            eight MIS Model Guidelines as listed below. The
                            eight subsystems are used in the Model MIS
                            Requirements to identify specific functions or
                            features required by HMO's MIS. These subsystems
                            focus on the individual systems functions or
                            capabilities to support the following operational
                            and administrative areas:

                           1.       Enrollment/Eligibility Subsystem;

                           2.       Provider Subsystem;

                           3.       Encounter/Claims Processing Subsystem;

                           4.       Financial Subsystem;

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                           5.       Utilization/Quality Improvement Subsystem;

                           6.       Reporting Subsystem;

                           7.       Interface Subsystem; and

                           8.       TPR Subsystem.

         10.1.9   HMO must submit a joint interface plan (JIP) in a format
                  specified by HHSC. The JIP will include required information
                  on all contractor interfaces that support the Medicaid
                  Information Systems. The submission of the JIP will be in
                  accordance with the HMO's Readiness Review and submitted prior
                  to any major system changes thereafter.

10.2     SYSTEM-WIDE FUNCTIONS

         HMO MIS system must include functions and/or features that must apply
         across all subsystems as follows:

         1.       Ability to update and edit data;

         2.       Maintain a history of changes and adjustments and audit trails
                  for current and retroactive data. Audit trails will capture
                  date, time, and reasons for the change, as well as who made
                  the change;

         3.       Allow input mechanisms through manual and electronic
                  transmissions;

         4.       Have procedures and processes for accumulating, archiving, and
                  restoring data in the event of a system or subsystem failure;

         5.       Maintain automated or manual linkages between and among all
                  MIS subsystems and interfaces;

         6.       Ability to relate Member and provider data with utilization,
                  service, accounting data, and reporting functions;

         7.       Ability to relate and extract data elements into summary and
                  reporting formats attached as Appendices to contract;

         8.       Must have written process and procedures manuals that document
                  and describe all manual and automated system procedures and
                  processes for all the above functions and features, and the
                  various subsystem components; and

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         9.       Maintain and cross-reference all Member-related information
                  with the most current Medicaid number.

10.3     ENROLLMENT/ELIGIBILITY SUBSYSTEM

         The Enrollment/Eligibility Subsystem is the central processing point
         for the entire MIS. It must be constructed and programmed to secure all
         functions that require Membership data. It must have functions and/or
         features, that support requirements as follows:

         1.       Identify other health coverage available or third party
                  liability (TPL), including type of coverage and effective
                  dates;

         2.       Maintain historical data (files) as required by HHSC;

         3.       Maintain data on enrollments/disenrollments and complaint
                  activities. The data must include reason or type of
                  disenrollment, complaint, and resolution by incident;

         4.       Receive, translate, edit and update files in accordance with
                  HHSC requirements prior to inclusion in HMO's MIS. Updates
                  will be received from HHSC's agent and processed within two
                  working days after receipt;

         5.       Provide error reports and a reconciliation process between new
                  data and data existing in MIS;

         6.       Identify enrollee changes in primary care provider and the
                  reason(s) for those changes and effective dates;

         7.       Monitor PCP capacity and limitations prior to connecting the
                  enrollee to PCP in the system, and provide a kick-out report
                  when capacity and limitations are exceeded'

         8.       Verify enrollee eligibility for medical services rendered or
                  for other enrollee inquiries;

         9.       Generate and track referrals, e.g., Hospitals/Specialists;

         10.      Search records by a variety of fields (e.g., name, unique
                  identification numbers, date of birth, SSN, etc.) for
                  eligibility verification; and

         11.      Send PCP assignment updates to HHSC or its designee, in the
                  format as specified by HHSC or its designee. Updates can be
                  sent as often as daily but must be sent at least weekly.

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10.4     PROVIDER SUBSYSTEM

         The provider subsystem must accept, process, store and retrieve current
         and historical data on providers, including services, payment
         methodology, license information, service capacity, and facility
         linkages.

         Functions and Features:

         1.       Identify specialty(s), admission privileges, enrollee linkage,
                  capacity, facility linkages, emergency arrangements or
                  contact, and other limitations, affiliations, or restrictions;

         2.       Maintain provider history files to include audit trails and
                  effective dates of information;

         3.       Maintain provider fee schedules/remuneration agreements to
                  permit accurate payment for services based on the financial
                  agreement in effect on the date of service;

         4.       Support HMO credentialing, recredentialing, and credential
                  tracking processes; incorporates or links information to
                  provider record;

         5.       Support monitoring activity for physician to enrollee ratios
                  (actual to maximum) and total provider enrollment to physician
                  and HMO capacity;

         6.       Flag and identify providers with restrictive conditions (e.g.,
                  limits to capacity, type of patient, age restrictions, and
                  other services if approved out- of-network);

         7.       Support national provider number format (UPIN, NPIN, CLIA,
                  TPI, etc., as required by HHSC);

         8.       Provide Provider Network and Affiliation files 90 days prior
                  to implementation and updates monthly. Format will be provided
                  by HHSC to contracted entities;

         9.       Support the national CLIA certification numbers for clinical
                  laboratories; and

         10.      Exclude providers from participation that have been identified
                  by HHSC as ineligible or excluded. Files must be updated to
                  reflect period and reason for exclusion.

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10.5     ENCOUNTER/CLAIMS PROCESSING SUBSYSTEM

         The encounter/claims processing subsystem must collect, process, and
         store data on all health care services delivered for which HMO is
         responsible. The functions of these subsystems are claims/encounter
         processing and capturing health service utilization data. The subsystem
         must capture all health care services, including medical supplies,
         using standard codes (e.g. CPT-4, HCPCS, ICD9-CM, UB92 Revenue Codes),
         rendered by health-care providers to an eligible enrollee regardless of
         payment arrangement (e.g. capitation or fee-for-service). It approves,
         prepares for payment, or may reject or deny claims submitted. This
         subsystem may integrate manual and automated systems to validate and
         adjudicate claims and encounters. HMO must use encounter data
         validation methodologies prescribed by HHSC.

         Functions and Features:

         1.       Accommodate multiple input methods: electronic submission,
                  tape, claim document, and media;

         2.       Support entry and capture of a minimum of all required data
                  elements specified in the Encounter Data Submission Manual;

         3.       Edit and audit to ensure allowed services are provided by
                  eligible providers for Members;

         4.       Interface with Member and provider subsystems;

         5.       Capture and report TPL potential, reimbursement or denial;

         6.       Edit for utilization and service criteria, medical policy, fee
                  schedules, multiple contracts, contract periods and
                  conditions;

         7.       Submit data to HHSC through electronic transmission using
                  specified formats;

         8.       Support multiple fee schedule benefit packages and capitation
                  rates for all contract periods for individual providers,
                  groups, services, etc. A claim encounter must be initially
                  adjudicated and all adjustments must use the fee applicable to
                  the date of service;

         9.       Provide timely, accurate, and complete data for monitoring
                  claims processing performance; 1.

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         10.      Provide timely, accurate, and complete data for reporting
                  medical service utilization;

         11.      Maintain and apply prepayment edits to verify accuracy and
                  validity of claims data for proper adjudication;

         12.      Maintain and apply edits and audits to verify timely,
                  accurate, and complete encounter data reporting;

         13.      Submit reimbursement to non-contracted providers for emergency
                  care rendered to enrollees in a timely and accurate fashion;

         14.      Validate approval and denials of precertification and prior
                  authorization requests during adjudication of
                  claims/encounters;

         15.      Track and report the exact date a service was performed. Use
                  of date ranges must have State approval;

         16.      Receive and capture claim and encounter data from HHSC;

         17.      Receive and capture value-added services codes; and

         18.      Capability of identifying adjustments and linking them to the
                  original claims/encounters.

10.6     FINANCIAL SUBSYSTEM

         The financial subsystem must provide the necessary data for 100% of all
         accounting functions including cost accounting, inventory, fixed
         assets, payroll, general ledger, accounts receivable, accounts payable,
         financial statement presentation, and any additional data required by
         HHSC. The financial subsystem must provide management with information
         that can demonstrate that the proposed or existing HMO is meeting,
         exceeding, or falling short of fiscal goals. The information must also
         provide management with the necessary data to spot the early signs of
         fiscal distress, far enough in advance to allow management to take
         corrective action where appropriate.

         Functions and Features:

         1.       Provide information on HMO's economic resources, assets, and
                  liabilities and present accurate historical data and
                  projections based on historical performance and current assets
                  and liabilities;

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         2.       Produce financial statements in conformity with Generally
                  Accepted Accounting Principles (GAAP) and in the format
                  prescribed by HHSC;

         3.       Provide information on potential third party payers;
                  information specific to the Member; claims made against third
                  party payers; collection amounts and dates; denials, and
                  reasons for denials;

         4.       Track and report savings by category as a result of cost
                  avoidance activities;

         5.       Track payments per Member made to network providers compared
                  to utilization of the provider's services;

         6.       Generate Remittance and Status Reports;

         7.       Make claim and capitation payments to providers or groups; and

         8.       Reduce/increase accounts payable/receivable based on
                  adjustments to claims or recoveries from third party
                  resources.

10.7     UTILIZATION/QUALITY IMPROVEMENT SUBSYSTEM

         The quality management/quality improvement/utilization review subsystem
         combines data from other subsystems, and/or external systems, to
         produce reports for analysis that focus on the review and assessment of
         quality of care given, detection of over and under utilization, and the
         development of user defined reporting criteria and standards. This
         system profiles utilization of providers and enrollees and compares
         them against experience and norms for comparable individuals. This
         system also supports the quality assessment function.

         The subsystem tracks utilization control function(s) and monitoring
         inpatient admissions, emergency room use, ancillary, and out-of-area
         services. It provides provider profiles, occurrence reporting, and
         monitoring and evaluation studies. The subsystem may integrate HMO's
         manual and automated processes or incorporate other software reporting
         and/or analysis programs.

         The subsystem incorporates and summarizes information from enrollee
         surveys, provider and enrollee complaints, and appeal processes.

         Functions and Features:

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         1        Supports provider credentialing and recredentialing
                  activities;

         2.       Supports HMO processes to monitor and identify deviations in
                  patterns of treatment from established standards or norms.
                  Provides feedback information for monitoring progress toward
                  goals, identifying optimal practices, and promoting continuous
                  improvement;

         3.       Supports development of cost and utilization data by provider
                  and service;

         4.       Provides aggregate performance and outcome measures using
                  standardized quality indicators similar to HEDIS or as
                  specified by HHSC;

         5.       [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         6.       Supports the management of referral/utilization control
                  processes and procedures, including prior authorization and
                  precertifications and denials of services;

         7.       Monitors primary care provider referral patterns;

         8.       Supports functions of reviewing access, use and coordination
                  of services (i.e. actions of Peer Review and alert/flag for
                  review and/or follow-up; laboratory, x-ray and other ancillary
                  service utilization per visit);

         9.       [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         10.      Provides fraud and abuse detection, monitoring and reporting;

         11.      Meets minimum report/data collection/analysis functions of
                  Article 11 and Appendix A - Standards For Quality Improvement
                  Programs; and

         12.      Monitors and tracks provider and enrollee complaints and
                  appeals from receipt to disposition or resolution by provider.

10.8     REPORT SUBSYSTEM

         The reporting subsystem supports reporting requirements of all HMO
         operations to HMO management and HHSC. It allows HMO to develop various
         reports to enable HMO management and HHSC to make decisions regarding
         HMO activity.

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         Functions and Capabilities:

         1.       Produces standard, HHSC-required reports and ad hoc reports
                  from the data available in all MIS subsystems. All reports
                  will be submitted as a paper copy or electronically in a
                  format approved by HHSC;

         2.       Have system flexibility to permit the development of reports
                  at irregular periods as needed;

         3.       Generate reports that provide unduplicated counts of
                  enrollees, providers, payments and units of service unless
                  otherwise specified;

         4.       Generate an alphabetic Member listing;

         5.       Generate a numeric Member listing;

         6.       Generate a Member eligibility listing by PCP (panel report);

         7.       Report on PCP change by reason code;

         8.       Report on TPL (COB) information to HHSC;

         9.       Report on provider capacity and assignment from date of
                  service to date received;

         10.      Generate or produce an aged outstanding liability report;

         11.      Produce a Member ID Card; and

         12.      Produce Member/provider mailing labels.

10.9     DATA INTERFACE SUBSYSTEM

         10.9.1   The interface subsystem supports incoming and outgoing data
                  from and to other organizations. It allows HMO to maintain
                  enrollee, benefit package, eligibility,
                  disenrollment/enrollment status, and medical services received
                  outside of capitated services and associated cost. All
                  interfaces must follow the specifications frequencies and
                  formats listed in the Interface Manual.

         10.9.2   HMO must obtain access to the TexMedNet site. Some file
                  transfers and E-mail will be handled through this mechanism.

         10.9.3   Provider Network and Affiliation Files. The HMO will supply
                  network provider data to the Enrollment Broker and Claims
                  Administrator. This data will consist of a Provider Network
                  File and a Provider Affiliation File. The

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                  HMO will submit the Provider Network File to the Enrollment
                  Broker and the Provider Affiliation File to the Claims
                  Administrator. Both files shall accomplish the following
                  objectives:

                  1.       Provide identifying information for all managed care
                           providers (e.g. name, address, etc.);

                  2.       Maintain history on provider
                           enrollment/disenrollment;

                  3.       Identify PCP capacity;

                  4.       Identify any restrictions (e.g., age, sex, etc.);

                  5.       Identify number and types of specialty providers
                           available to Members; and

                  6.       Provide other Master Provider File information
                           identified by HHSC.

         10.9.4   Eligibility/Enrollment Interface. The enrollment interface
                  must provide eligibility data between HHSC and HMOs.

                  1.       Provides benefit package data to HMOs in accordance
                           with capitated services;

                  2.       Provides PCP assignments;

                  3.       Provides Member eligibility status data;

                  4.       Provides Member demographics data; and

                  5.       Provides HMOs with cross-reference data to identify
                           duplicate Members.

         10.9.5   Encounter/Claim Data Interface. The encounter/claim interface
                  must transfer paid fee-for-service claims data to HMOs and
                  capitated services/encounters from HMO, including adjustments.
                  This file will include all service types, such as inpatient,
                  outpatient, and medical services. HHSC's agent will process
                  claims for non-capitated services.

         10.9.6   Capitation Interface. The capitation interface must transfer
                  premium and Member information to HMO. This interface's basic
                  purpose is to balance HMO's Members and premium amount.

         10.9.7   TPR Interface. HHSC will provide a data file that contains
                  information on enrollees that have other insurance. Because
                  Medicaid is the payer of last

                                 Page 125 of 173

<PAGE>

                  resort, all services and encounters should be billed to the
                  other insurance companies for recovery. HHSC will also provide
                  an insurance company data file that contains the name and
                  address of each insurance company.

         10.9.8   HHSC will provide a diagnosis file that will give the code and
                  description of each diagnosis permitted by HHSC.

         10.9.9   HHSC will provide a procedure file that contains the
                  procedures that must be used on all claims and encounters.
                  This file contains HCPCS, revenue, and ICD9-CM surgical
                  procedure codes.

         10.9.10  HHSC will provide a provider file that contains the Medicaid
                  provider numbers, and the provider's names and addresses. The
                  provider number authorized by HHSC must be submitted on all
                  claims, encounters, and network provider submissions.

10.10    TPR SUBSYSTEM

         HMO's third party recovery (TPR) system must have the following
         capabilities and capacities:

         1.       Identify, store, and use other health coverage available to
                  eligible Members or third party liability (TPL) including type
                  of coverage and effective dates;

         2.       Provide changes in information to HHSC as specified by HHSC;
                  and

         3.       Receive TPL data from HHSC to be used in claim and encounter
                  processing.

10.11    YEAR 2000 (Y2K) COMPLIANC[THIS SECTION IS INTENTIONALLY LEFT BLANK]

10.12    HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT (HIPAA) COMPLIANCE

         10.12.1  HMO must provide its Members with a privacy notice as required
                  by HIPAA. The 4th to 6th grade reading level has been waived
                  for the notices and are allowable at a 12th grade reading
                  level. The HMO is not required to send the notice out in
                  Spanish but must reference on their English notice, in
                  Spanish, where to call to obtain a copy. HMO must provide HHSC
                  with a copy of their privacy notice for filing, but does not
                  need to have HHSC approval.

                                 Page 126 of 173

<PAGE>

10.12    Health Insurance Portability and Accountability Act (HIPAA) Compliance.
         HMO's system must comply with applicable certificate of coverage and
         data specification and reporting requirements promulgated pursuant to
         the Health Insurance Portability and Accountability Act (HIPAA) of
         1996, P.L. 104-191 (August 21, 1996), as amended or modified.

ARTICLE 11 QUALITY ASSURANCE AND QUALITY IMPROVEMENT PROGRAM

11.1     QUALITY ASSESSMENT AND PERFORMANCE IMPROVEMENT PROGRAM

         HMO must develop, maintain, and operate a quality assessment and
         performance improvement program consistent with the requirements of 42
         C.F.R. Section 438.240 and Sections 10.7, 12.10 and Appendix A of this
         agreement.

11.2     WRITTEN QIP PLAN

         HMO must have on file with HHSC an approved plan describing its Quality
         Improvement Plan (QIP), including how HMO will accomplish the
         activities pertaining to each Standard (I-XVI) in Appendix A.
         Modifications and amendments must be submitted to HHSC no later than 60
         days prior to the implementation of the modification or amendment.

11.3     QIP SUBCONTRACTING

         If HMO subcontracts any of the essential functions or reporting
         requirements of QIP to another entity, HMO must maintain a file of the
         subcontractors. The file must be available for review by HHSC or its
         designee upon request. HMO must notify HHSC no later than 90 days prior
         to terminating any subcontract affecting a major performance function
         of this contract (see Section 3.2.1.2).

11.4     ACCREDITATION

         If HMO is accredited by an external accrediting agency, documentation
         of accreditation must be provided to HHSC. HMO must provide HHSC with
         their accreditation status upon request.

                                 Page 127 of 173

<PAGE>

11.5     BEHAVIORAL HEALTH INTEGRATION INTO QIP.

         Behavioral Health Integration into QIP. If an HMO provides behavioral
         health services, it must integrate behavioral health into its quality
         assessment and performance improvement program and include a systematic
         and on-going process for monitoring, evaluating, and improving the
         quality and appropriateness of behavioral health care services provided
         to Members. HMO must collect data, monitor and evaluate for
         improvements to physical health outcomes resulting from behavioral
         health integration into the overall care of the Member.

11.6     QIP REPORTING REQUIREMENTS

         HMO must meet all of the QIP Reporting Requirements contained in
         Article 12.

11.7     PRACTICE GUIDELINES

         In accordance with 42 C.F.R. Section 438.236, HMO must adopt practice
         guidelines, that are based on valid and reliable clinical evidence or a
         consensus of health care professionals in the particular field;
         consider the needs of the HMO's Members; are adopted in consultation
         with contracting health care professionals; and are reviewed and
         updated periodically as appropriate. The HMO must disseminate the
         guidelines to all affected providers and, upon request to Members and
         potential Members. The HMO's decisions regarding utilization
         management, member education, coverage of services, and other areas
         included in the guidelines, must be consistent with the HMO's
         guidelines.

ARTICLE 12 REPORTING REQUIREMENTS

12.1     FINANCIAL REPORTS

         12.1.1   MCFS Report. HMO must submit the Managed Care Financial
                  Statistical Report (MCFS) included in Appendix I. The report
                  must be submitted to HHSC no later than 30 days after the end
                  of each state fiscal year quarter (i.e., June 30, Sept. 30)
                  and must include complete and updated financial and
                  statistical information for each month of the state fiscal
                  year-to-date reporting period. The MCFS Report must be
                  submitted for each claims processing subcontractor in
                  accordance with this Article. HMO must incorporate financial
                  and statistical data received by its delegated networks (IPAs,

                                 Page 128 of 173

<PAGE>

                  ANHCs, Limited Provider Networks) in its MCFS Report. For
                  purposes of completing the MCFS, HMO may report allowable
                  administrative expenses, as defined by HHSC's "Cost Principles
                  for Administrative Expenses," incurred on or after February
                  12, 2004, the date of the Parties' original Letter of Intent.

         12.1.2   [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         12.1.3   [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         12.1.4   Final MCFS Reports. HMO must file two final MCFS Reports. The
                  first final report must reflect expenses incurred during the
                  contract period and paid through the 90th day after the end of
                  the contract period. The first final report must be filed on
                  or before the 120th day after the end of the contract period.
                  The second final report must reflect expenses incurred during
                  the contract period and paid through the 334th day after the
                  end of the contract period. The second final report must be
                  filed on or before the 365th day after the end of the contract
                  period.

         12.1.5   Administrative expenses reported in the monthly and Final MCFS
                  Reports must be reported in accordance with Appendix L, Cost
                  Principles for Administrative Expenses. Indirect
                  administrative expenses must be based on an allocation
                  methodology for Medicaid managed care activities and services
                  that is developed or approved by HHSC.

         12.1.6   Affiliate Report. HMO must submit an Affiliate Report to HHSC
                  if this information has changed since the last report was
                  submitted. The report must contain the following information:

                  12.1.6.1  A listing of all Affiliates; and

                  12.1.6.2  A schedule of all transactions with Affiliates that,
                            under the provisions of this Contract, will be
                            allowable as expenses in Part 1 of the MCFS Report
                            for services provided to HMO by the Affiliates for
                            the prior approval of HHSC. Include financial terms,
                            a detailed description of the services to be
                            provided, and an estimated amount that will be
                            incurred by HMO for such services during the
                            Contract period.

         12.1.7   [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         12.1.8   Form HCFA-1513. HMO must file an updated Form HCFA-1513
                  regarding control, ownership, or affiliation of HMO 30 days
                  prior to the end of the contract year. An updated Form
                  HCFA1513 must also be filed no later than 30

                                 Page 129 of 173

<PAGE>

                  days after any change in control, ownership, or affiliation of
                  HMO. Forms may be obtained from HHSC.

         12.1.9   Section 1318 Financial Disclosure Report. HMO must file an
                  updated CMS Public Health Service (PHS) "Section 1318
                  Financial Disclosure Report" no later than 30 days after the
                  end of the contract year and no later than 30 days after
                  entering into, renewing, or terminating a relationship with an
                  affiliated party. These forms may be obtained from HHSC.

         12.1.10  [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         12.1.11  IBNR Plan. HMO must furnish a written IBNR Plan to manage
                  incurred-but-not-reported (IBNR) expenses, and a description
                  of the method of insuring against insolvency, including
                  information on all existing or proposed insurance policies.
                  The Plan must include the methodology for estimating IBNR. The
                  plan and description must be submitted to HHSC no later than
                  60 days after the effective date of this contract. Changes to
                  the IBNR plan and description must be submitted to HHSC no
                  later than 30 days before changes to the plan are implemented
                  by HMO.

         12.1.12  Third Party Recovery (TPR) Reports. HMO must file quarterly
                  Third Party Recovery (TPR) Reports in accordance with the
                  format developed by HHSC. TPR reports must include total
                  dollars recovered from third party payers for services to
                  HMO's Members for each month and the total dollars recovered
                  through coordination of benefits, subrogation, and worker's
                  compensation.

         12.1.13  Each report required under this Article must be mailed to:
                  Medicaid HMO Contract Deliverables Manager, HPO Division,
                  Texas Health and Human Services Commission, P.O. Box 13247,
                  Austin, Texas 78711-3247 (Exception: The MCFS Report may be
                  submitted to HHSC via E-mail to deliver@hhsc.state.tx.us).

         12.1.14  Bonus and/or Incentive Payment Plan. The HMO must furnish a
                  written Bonus and/or Incentive Payments Plan to HHSC to
                  determine whether such payments are allowable administrative
                  expenses in accordance with Appendix L, "Cost Principles for
                  Administrative Expenses, 11. Compensation for Personnel
                  Services, i. Bonuses and Incentive Payments." The written plan
                  must include a description of the plan's criteria for
                  establishing bonus and/or incentive payments, the methodology
                  to calculate bonus and/or incentive payments, and the timing
                  as to when these bonus and/or incentive payments are to be
                  paid. The plan and description must be submitted to HHSC for
                  approval no later than 30 days after the execution of the
                  contract and any contract renewal. If the HMO revises the
                  Bonus and/or Incentive Payment Plan, the HMO must submit the
                  revised plan to HHSC for approval prior to implementing the
                  plan.

                                 Page 130 of 173

<PAGE>

12.2     STATISTICAL REPORTS

         12.2.1   HMO must electronically file the following monthly reports:
                  (1) encounter; (2) encounter detail; (3) institutional; (4)
                  institutional detail; and (5) claims detail for
                  cost-reimbursed services filed, if any, with HMO. Encounter
                  data must include the data elements, follow the format, and
                  use the transmission method specified by HHSC in the Encounter
                  Data Submission Manual. Encounters must be submitted by HMO to
                  HHSC no later than 45 days after the date of adjudication
                  (finalization) of the claims.

         12.2.2   Monthly reports must include current month encounter data and
                  encounter data adjustments to the previous month's data.

         12.2.3   Data quality standards will be developed jointly by HMO and
                  HHSC. Encounter data must meet or exceed data quality
                  standards. Data that does not meet quality standards must be
                  corrected and returned within the period specified by HHSC.
                  Original records must be made available to validate all
                  encounter data.

         12.2.4   HMO cannot submit newborn encounters to HHSC until the
                  State-issued Medicaid ID number is received for a newborn. HMO
                  must match the proxy ID number issued by the HMO with the
                  State-issued Medicaid ID number prior to submission of
                  encounters to HHSC and submit the encounter in accordance to
                  the HMO Encounter Data Submission Manual. The encounter must
                  include the State-issued Medicaid ID number. Exceptions to the
                  45-day deadline will be granted in cases in which the Medicaid
                  ID number is not available for a newborn Member.

         12.2.5   HMO must require providers to submit claims and encounter data
                  to HMO no later than 95 days after the date services are
                  provided.

         12.2.6   HMO must use the procedure codes, diagnosis codes and other
                  codes contained in the most recent edition of the Texas
                  Medicaid Provider Procedures Manual and as otherwise provided
                  by HHSC. Exceptions or additional codes must be submitted for
                  approval before HMO uses the codes.

         12.2.7   HMO must use its HHSC-specified identification numbers on all
                  encounter data submissions. Please refer to the HHSC Encounter
                  Data Submission Manual for further specifications.

         12.2.8   HMO must validate all encounter data using the encounter data
                  validation methodology prescribed by HHSC prior to submission
                  of encounter data to HHSC.

                                 Page 131 of 173

<PAGE>

         12.2.9   Claims Reports. HMO must comply with Claims Reports submission
                  requirements specified in HHSC's Texas Managed Care Claims
                  Manual. The reports must be submitted to HHSC in a format
                  specified within the Texas Medicaid Managed Care Claims Manual
                  and/or report templates provided by HHSC.

         12.2.10  Medicaid Disproportionate Share Hospital (DSH) Reports. HMO
                  must file preliminary and final Medicaid Disproportionate
                  Share Hospital (DSH) reports, required by HHSC to identify and
                  reimburse hospitals that qualify for Medicaid DSH funds. The
                  preliminary and final DSH reports must include the data
                  elements and be submitted in the form and format specified by
                  HHSC. The preliminary DSH reports are due on or before June 1
                  of the year following the state fiscal year for which data is
                  being reported. The final DSH reports are due no later than
                  July 15 of the year following the state fiscal year for which
                  data is being reported.

12.3     ARBITRATION/LITIGATION CLAIMS REPORT

         HMO must submit an Arbitration/Litigation Claims Report in a format
         provided by HHSC (see Appendix M) identifying all provider or HMO
         requests for arbitration or matters in litigation. The report must be
         submitted within 30 days from the date the matter is referred to
         arbitration or suit is filed, or whenever there is a change of status
         in a matter referred to arbitration or litigation.

12.4     SUMMARY REPORT OF PROVIDER COMPLAINTS

12.4     HMO must submit a Summary Report of Provider Complaints. HMO must also
         reports complaints submitted to its subcontracted risk groups (e.g.,
         IPAs). The complaint report format must be submitted not later than 45
         days following the end of the state fiscal quarter in a format
         specified by HHSC.

12.5     PROVIDER NETWORK REPORTS

         12.5.1   Provider Network Report. HMO must submit to the Enrollment
                  Broker an electronic file summarizing changes in HMO's
                  provider network including PCPs, specialists, ancillary
                  providers and hospitals. The file must indicate if the PCPs
                  and specialists participate in a closed network and the name
                  of the delegated network. The electronic file must be
                  submitted in the format specified by HHSC and can be submitted
                  as often as daily but must be submitted at least weekly.

                                 Page 132 of 173

<PAGE>

         12.5.2   Provider Termination Report. HMO must submit a monthly report
                  that identifies any providers who cease to participate in
                  HMO's provider network, either voluntarily or involuntarily.
                  The report must be submitted to HHSC in the format specified
                  by HHSC. HMO will submit the report no later than thirty (30)
                  days after the end of the reporting month. The information
                  must include the provider's name, Medicaid number, the reason
                  for the provider's termination, and whether the termination
                  was voluntary or involuntary.

         12.5.3.  PCP Error Report. HMO must submit to the Enrollment Broker an
                  electronic file summarizing changes in PCP assignments. The
                  file must be submitted in a format specified by HHSC and can
                  be submitted as often as daily but must be submitted at least
                  weekly. When HMO receives a PCP assignment Error Report/File,
                  HMO must send corrections to HHSC or its designee within five
                  working days.

12.6     MEMBER COMPLAINTS & APPEALS

         HMO must submit a quarterly summary report of Member complaints and
         appeals. HMO must also report complaints and appeals submitted to its
         subcontracted risk groups (e.g., IPAs). The complaint and appeals
         report must be submitted not later than 45 days following the end of
         the state fiscal quarter in a format specified by HHSC.

12.7     FRAUDULENT PRACTICES

         HMO must report all fraud and abuse enforcement actions or
         investigations taken against HMO and/or any of its subcontractors or
         providers by any state or federal agency for fraud or abuse under Title
         XVIII or Title XIX of the Social Security Act or any State law or
         regulation and any basis upon which an action for fraud or abuse may be
         brought by a State or federal agency as soon as such information comes
         to the attention of HMO.

12.8     UTILIZATION MANAGEMENT REPORTS

         12.8.1   Written Program Description. MCO has a written utilization
                  management program description that includes, at a minimum,
                  procedures to evaluate medical necessity, criteria used,
                  information sources and the process used to review and approve
                  the provision of medical services.

                                 Page 133 of 173

<PAGE>

         12.8.2   Scope. The program has mechanisms to detect underutilization
                  as well as overutilization, including but not limited to
                  generation of provider profiles.

         12.8.3   Preauthorization and Concurrent Review Requirements. For MCOs
                  with preauthorization or concurrent review program:

                  12.8.3.1  Qualified medical professionals supervise
                            preauthorization and concurrent review decisions.

                  12.8.3.2  Efforts are made to obtain all necessary
                            information, including pertinent clinical
                            information, and consult with the treating physician
                            as appropriate.

12.9     [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

12.10    QUALITY IMPROVEMENT REPORTS

         12.10.1  [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         12.10.2  [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         12.10.3  [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         12.10.4  Provider Medical Record Audit and Report. HMO is required to
                  conform to commonly accepted medical record standards such as
                  those used by, NCQA, JCAHO, or those used for credentialing
                  review such as the Texas Environment of Care Assessment
                  Program (TECAP), and have documentation on file at HMO for
                  review by HHSC or its designee during an on-site review.

         12.10.5  Written Annual Report. HMO must file a written annual report
                  with HHSC describing the HMO's quality assessment and
                  performance improvement projects

         12.10.6  Encounter Data. In accordance with 42 C.F.R. 438.240(c)(2),
                  HMO must submit the encounter data identified in Section 10.5
                  of this agreement at least monthly to HHSC, so that HHSC may
                  complete a performance measurement report.

                                 Page 134 of 173

<PAGE>

12.11    HUB REPORTS

         HMO must submit monthly reports documenting HMO's HUB program efforts
         and accomplishments in a format provided by HHSC.

12.12    THSTEPS REPORTS

         Minimum reporting requirements. HMO must submit, at a minimum, 80% of
         all THSteps checkups on HCFA 1500 claim forms as part of the encounter
         file submission to the HHSC Claims Administrator no later than thirty
         (30) days after the date of final adjudication (finalization) of the
         claims. Failure to comply with these minimum reporting requirements
         will result in Article 18 sanctions and money damages.

12.14    MEMBER HOTLINE PERFORMANCE REPORT

         HMO must submit, on a monthly basis, a Member Hotline Performance
         Report that contains all required elements set out in Section 3.7 of
         this Agreement in a formant approved by HHSC. The report is due on the
         30th of the month following the end of each month.

12.15    SUBMISSION OF STAR DELIVERABLES/REPORTS

         12.15.1  Electronic Mail. STAR deliverables and reports should be
                  submitted to HHSC via electronic mail unless HHSC expressly
                  provides that they must be submitted in a different manner.
                  Reports and deliverables that may not be submitted
                  electronically include, but are not limited to: Encounter
                  Data, Supplemental Delivery Payment data, UDT data, and
                  certain Member Materials.

                  12.15.1.1 The e-mail address for deliverables submission is
                            deliver@hhsc.state.tx.us.

                  12.15.1.2 Electronic Mail Restrictions:

                           File Size: E-mail file size is limited to 2.5 MB.
                           Files larger than that will need to be compressed
                           (zip file) or split into multiple files for
                           submission.

                           Confidentiality: Routine STAR deliverables/reports
                           should not contain any member specific data that
                           would be considered confidential.

                                 Page 135 of 173

<PAGE>

         12.15.2  FQHC and RHC Deliverables. HMO may submit FQHC and RHC
                  deliverables by uploading the required information to the HMO
                  Deliverables Library on the TexMedCentral site. The uploaded
                  data must contain a unique 8-digit control number. HMO should
                  format the 8-digit control number as follows:

                           -     2 digit plan code identification number;

                           -     Julian date; and then

                           -     HMO's 3-digit report number (i.e., HMO's
                                 first report will be 001).

                  After uploading the data to the TexMedCentral, the HMO must
                  notify HHSC via e-mail that it has uploaded the data, and
                  include the name of the file and the TexMedCentral Library in
                  which the deliverable was placed. HMO must also mail signed
                  original report summaries, including the corresponding 8-digit
                  control number, to HHSC within three (3) business days after
                  uploading the data to the TexMedCentral.

         12.15.3  Special Submission Needs. In special cases where other
                  submission methods are necessary, HMO must contact the
                  assigned Health Plan Manager for authorization and
                  instructions.

         12.15.4  Deliverables due via Mail. HMO should mail reports and
                  deliverables that must be submitted by mail to the following
                  address:

                  Electronic Mail:
                  Deliverables@hhsc.state.tx.us

                  General Mail:
                  Texas Health & Human Services Commission
                  HPO Contract Deliverables - H320
                  1100 W. 49th Street
                  Austin, Texas 78751-3174

                  Overnight Mail:
                  Texas Health & Human Services Commission
                  HPO Contract Deliverables - H320
                  11209 Metric Blvd./Bldg. H
                  Austin, TX 78758

         12.15.5  Texas Department of Insurance (TDI). The submission of
                  deliverables/reports to HHSC does not relieve the Plan of any
                  reporting requirements/ responsibility with TDI. The Plan
                  should continue to report to TDI as they have in the past."

                                 Page 136 of 173

<PAGE>

ARTICLE 13 PAYMENT PROVISIONS

13.1     CAPITATION AMOUNTS

         13.1.1   HHSC will pay HMO monthly premiums calculated by multiplying
                  the number of Member months by Member risk group times the
                  monthly capitation amount by Member risk group. For additional
                  information regarding the actuarial basis and methodology used
                  to compute the capitation rates, please reference the waiver
                  under the document titled "Actuarial Methodology for
                  Determination of Maximum Monthly Capitation Amounts". HMO and
                  network providers are prohibited from billing or collecting
                  any amount from a Member, except as provided in Section
                  8.5.2.14, for health care services covered by this contract.
                  HMO and network providers must inform Member of costs for
                  non-covered services prior to rendering such services and must
                  obtain a signed Private Pay form from Member.

         13.1.2   The monthly capitation amounts and the Delivery Supplemental
                  Payment (DSP) amount, as of the Effective Date, are listed
                  below.

<TABLE>
<CAPTION>
                                              MONTHLY
          RISK GROUP                     CAPITATION AMOUNTS
-------------------------------          ------------------
<S>                                      <C>
TANF Children (> 1 year of Age)               $ 82.80

TANF Adults                                   $170.86

Pregnant Women                                $342.49

Newborns* ((up to 12 Months of Age)           $349.61

Expansion Children (> 12 Months of Age)       $ 82.18

Federal Mandate Children                      $ 68.23

Disabled/Blind Administration                 $ 14.00
</TABLE>

                  Delivery Supplemental Payment. A one-time per pregnancy
                  supplemental payment for each delivery shall be paid to HMO as
                  provided below in the following amount: $2,817.00

                  13.1.2.1  HMO will receive a DSP for each live or still birth.
                            The one-time payment is made regardless of whether
                            there is a single or multiple births at time of
                            delivery. A delivery is the birth of a liveborn
                            infant, regardless of the duration of the pregnancy,
                            or a stillborn (fetal death) infant of 20 weeks or
                            more

                                 Page 137 of 173

<PAGE>

                            gestation. A delivery does not include a spontaneous
                            or induced abortion, regardless of the duration of
                            the pregnancy.

                  13.1.2.2  For an HMO Member who is classified in the Pregnant
                            Women, TANF Adults, TANF Children >12 months,
                            Expansion Children >12 months, Federal Mandate
                            Children or CHIP risk group, HMO will be paid the
                            monthly capitation amount identified in Section
                            13.1.2 for each month of classification, plus the
                            DSP amount identified in Section 13.1.2.

                  13.1.2.3  HMO must submit a monthly DSP Report (report) that
                            includes the data elements specified by HHSC. HHSC
                            will consult with contracted HMOs prior to revising
                            the report data elements and requirements. The
                            reports must be submitted to HHSC in the format and
                            time specified by HHSC. The report must include only
                            unduplicated deliveries. The report must include
                            only deliveries for which HMO has made a payment for
                            the delivery, to either a hospital or other
                            provider. No DSP will be made for deliveries that
                            are not reported by HMO to HHSC within 210 days
                            after the date of delivery, or within 30 days from
                            the date of discharge from the hospital for the stay
                            related to the delivery, whichever is later.

                  13.1.2.4  HMO must maintain complete claims and adjudication
                            disposition documentation, including paid and denied
                            amounts for each delivery. HMO must submit the
                            documentation to HHSC within five (5) days from the
                            date of a HHSC request for documents.

                  13.1.2.5  The DSP will be made by HHSC to HMO within twenty
                            (20) state working days after receiving an accurate
                            report from HMO.

                  13.1.2.6  All infants of age equal to or less than twelve
                            months (Newborns) in the TANF Children, Expansion
                            Children, and Newborns risk groups will be capitated
                            at the Newborns classification capitation amount in
                            Section 13.1.2.

         13.1.3   [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK].

         13.1.4   The monthly premium payment to HMO is based on monthly
                  enrollments adjusted to reflect money damages set out in
                  Section 18.8 and adjustments to premiums in Section 13.4.

         13.1.5   The monthly premium payments will be made to HMO no later than
                  the 10th working day of the month for which premiums are paid.
                  HMO must accept payment for premiums by direct deposit into an
                  HMO account.

         13.1.6   Payment of monthly capitation amounts is subject to
                  availability of appropriations. If appropriations are not
                  available to pay the full monthly

                                 Page 138 of 173

<PAGE>

                  capitation amounts, HHSC will equitably adjust capitation
                  amounts for all participating HMOs, and reduce scope of
                  service requirements as appropriate.

         13.1.7   HMO rates include pass through funds for providers, as
                  appropriate by the 77th Texas Legislature. HMO must file
                  reports on pass through methodology expenditures as requested
                  by HHSC.

13.2     EXPERIENCE REBATE TO STATE

         13.2.1   HMO must pay to HHSC an experience rebate for each Experience
                  Rebate Period. Experience Rebate Period 1 will begin on June
                  1, 2004 and end on August 31, 2004, unless extended by
                  contract amendment. The Parties may also amend the contract to
                  include additional Experience Rebate Periods. HMO will
                  calculate the experience rebate in accordance with the tiered
                  rebate formula listed below based on Net Income Before Taxes
                  (excess of allowable revenues over allowable expenses) as set
                  forth in Appendix I. The HMO's calculations are subject to
                  HHSC approval, and HHSC reserves the right to have an
                  independent audit performed to verify the information provided
                  by HMO.

<TABLE>
<CAPTION>
                     GRADUATED REBATE FORMULA
------------------------------------------------------------------
  NET INCOME BEFORE
TAXES AS A PERCENTAGE
     OF REVENUES                    HMO SHARE           HHSC SHARE
------------------------------------------------------------------
<S>                                 <C>                 <C>
0% - 3%                                 100%                 0%
------------------------------------------------------------------
Over 3% - 7%                             75%                25%
------------------------------------------------------------------
Over 7% - 10%                            50%                50%
------------------------------------------------------------------
Over 10% - 15%                           25%                75%
------------------------------------------------------------------
Over 15%                                  0%               100%
------------------------------------------------------------------
</TABLE>

         13.2.2   Carry Forward of Prior Experience Rebate Period Losses: Losses
                  incurred for one Experience Rebate Period can only be carried
                  forward as an offset to Net Income before Taxes in the next
                  Experience Rebate Period.

         13.2.2.1 HMO shall calculate the experience rebate by applying the
                  experience rebate formula in Section 13.2.1.

                                 Page 139 of 173

<PAGE>

                  For SFY 2004 the experience rebate formula will be applied to
                  the sum of the Net Income Before Taxes for all CHIP, STAR
                  Medicaid, and STAR+PLUS Medicaid services areas contracted
                  between HHSC or TDHS and HMO.

         13.2.3   Experience rebate will be based on a pre-tax basis. Expenses
                  for value-added services are excluded from the determination
                  of Net Income Before Taxes reported in the Final MCFS Report;
                  however, HMO may subtract from Net Income Before Taxes,
                  expenses incurred for value added services for the experience
                  rebate calculations.

         13.2.4   [THIS SUBSECTION IS INTENTIONALLY LEFT BLANK]

         13.2.5   There will be two settlements for payment of the experience
                  rebate. The first settlement shall equal 100 percent of the
                  experience rebate as derived from Net Income Before Taxes
                  reduced by any value-added services expenses in the first
                  Final MCFS Report and shall be paid on the same day that the
                  first Final MCFS Report is submitted to HHSC. The second
                  settlement shall be an adjustment to the first settlement and
                  shall be paid on the same day that the second Final MCFS
                  Report is submitted to HHSC if the adjustment is a payment
                  from HMO to HHSC. If the adjustment is a payment from HHSC to
                  HMO, HHSC shall pay such adjustment to HMO within thirty (30)
                  days of receipt of the second Final MCFS Report. HHSC or its
                  agent may audit the MCFS Reports. If HHSC determines that
                  corrections to the MCFS Reports are required, based on an
                  audit of other documentation acceptable to HHSC, to determine
                  an adjustment to the amount of the second settlement, then
                  final adjustment shall be made within three (3) years from the
                  date that HMO submits the second Final MCFS Report. HMO must
                  pay the first and second settlements on the due dates for the
                  first and second Final MCFS Reports, respectively, as
                  identified in Section 12.1.4. HHSC may adjust the experience
                  rebate if HHSC determines HMO has paid (an) affiliate(s)
                  amounts for goods or services that are higher than the fair
                  market value of the goods and services in the service area.
                  Fair market value may be based on the amount HMO pays (a)
                  non-affiliate(s) or the amount another HMO pays for the same
                  or similar goods and services in the service area. HHSC has
                  final authority in auditing and determining the amount of the
                  experience rebate.

         13.2.6   Interest on any experience rebate owed to HHSC shall be
                  charged beginning on the date that the first and/or second
                  settlements are overdue to the date of the respective payment.
                  In addition, if any adjusted amount is owed to HHSC at the
                  final settlement date, then interest is charged on the
                  adjusted amount owed beginning on the second settlement date
                  to the date of the final settlement payment. Interest charged
                  shall be calculated on an annual and

                                 Page 140 of 173

<PAGE>

                  simple basis using the current Prime Rate(s) established by
                  the federal government.

13.3     PERFORMANCE OBJECTIVES

         13.3.1   Performance Objectives. Performance Objectives are contained
                  in Appendix K of this contract. HMO must meet the benchmarks
                  established by HHSC for each objective.

13.4     ADJUSTMENTS TO PREMIUM

         13.4.1   HHSC may recoup premiums paid to HMO in error. Error may be
                  either human or machine error on the part of HHSC or an agent
                  or contractor of HHSC. HHSC may recoup premiums paid to HMO if
                  a Member is enrolled into HMO in error, and HMO provided no
                  covered services to Member for the period of time for which
                  premium was paid. If services were provided to Member as a
                  result of the error, recoupment will not be made.

         13.4.2   HHSC may recoup premium paid to HMO if a Member for whom
                  premium is paid moves outside the United States, and HMO has
                  not provided covered services to the Member for the period of
                  time for which premium has been paid. HHSC will not recoup
                  premium if HMO has provided covered services to the Member
                  during the period of time for which premium has been paid.

                                 Page 141 of 173

<PAGE>

         13.4.3   HHSC may recoup premium paid to HMO if a Member for whom
                  premium is paid dies before the first day of the month for
                  which premium is paid.

         13.4.4   HHSC may recoup or adjust premium paid to HMO for a Member if
                  the Member's eligibility status or program type is changed,
                  corrected as a result of error, or is retroactively adjusted.

         13.4.5   Recoupment or adjustment of premium under Sections 13.4.1
                  through 13.4.4 may be appealed using the HHSC dispute
                  resolution process.

         13.4.6   HHSC may adjust premiums for all Members within an eligibility
                  status or program type if adjustment is required by reductions
                  in appropriations and/or if a benefit or category of benefits
                  is excluded or included as a covered service. Adjustment must
                  be made by amendment as required by Section 15.2. Adjustment
                  to premium under this subsection may not be appealed using the
                  HHSC dispute resolution process.

13.5     NEWBORN AND PREGNANT WOMEN PAYMENT PROVISIONS

         13.5.1   Newborns born to Medicaid eligible mothers who are enrolled in
                  HMO are enrolled into HMO for 90 days following the date of
                  birth.

                  13.5.1.1  The mother of the newborn Member may request that
                            the newborn's health plan coverage be changed to
                            another HMO during the first 90 days following the
                            date of birth, but may only do so through the
                            Medicaid managed care Enrollment Broker.

         13.5.2   ENROLLMENT BROKER will provide HMO with a daily enrollment
                  file that will list all newborns who have received
                  State-issued Medicaid ID numbers. This file will include the
                  Medicaid eligible mother's Medicaid ID number to allow the HMO
                  to link the newborn's State-issued Medicaid ID numbers with
                  the proxy ID number. HHSC will guarantee capitation payments
                  to HMO for all newborns who appear on the ENROLLMENT BROKER
                  daily enrollment file as HMO Members for each month the
                  newborn is enrolled in the HMO.

         13.5.3   All non-TP45 newborns whose mothers are HMO Members at the
                  time of the birth will be retroactively enrolled into the HMO
                  by TDHS Data Control except as outlined in Section 13.5.4.

                                 Page 142 of 173

<PAGE>

         13.5.4   Newborns who appear on the ENROLLMENT BROKER daily enrollment
                  file but do not appear on the ENROLLMENT BROKER monthly
                  enrollment or adjustment file before the end of the sixth
                  month following the date of birth will not be retroactively
                  enrolled into the HMO. HHSC will manually reconcile payment to
                  the HMO for services provided from the date of birth for TP45
                  and all other eligibility categories of newborns. Payment will
                  cover services rendered from the effective date of the proxy
                  ID number when first issued by the HMO regardless of plan
                  assignment at the time the State-issued Medicaid ID number is
                  received.

         13.5.5   The Enrollment Broker will provide a daily enrollment file
                  that will list all TP40 Members who received State-issued
                  Medicaid I.D. numbers, for each HMO. HHSC will guarantee
                  capitation payments to the HMOs for all TP40 Members who
                  appear on the capitation and capitation adjustment files. The
                  Enrollment Broker will provide a pregnant women exception
                  report to the HMOs that can be used to reconcile the pregnant
                  women daily enrollment file with the monthly enrollment,
                  capitation and capitation adjustment files.

         13.5.6   HMO is responsible for payment for all covered services
                  provided to TP40 members by in-network or out-of-network
                  providers from the date of enrollment in HMO, but prior to HMO
                  receiving TP40 Member on monthly capitation file. HMO must
                  waive requirement for prior authorization (or grant
                  retroactive prior authorization) for medically necessary
                  services provided from the date of enrollment in HMO, but
                  prior to HMO receiving TP40 member on monthly capitation file.

ARTICLE 14 ELIGIBILITY, ENROLLMENT, AND DISENROLLMENT

14.1     ELIGIBILITY DETERMINATION

         14.1.1   HHSC will identify Medicaid recipients who are eligible for
                  participation in the STAR program using the eligibility status
                  described below.

         14.1.2   Individuals in the following categories who reside in any part
                  of the Service Area must enroll in one of the health plans
                  providing services in the Service Areas:

         14.1.2.1 TANF ADULTS - Individuals age 21 and over who are eligible for
                  the TANF program. This category may also include some pregnant
                  women.

                                 Page 143 of 173

<PAGE>

                  14.1.2.2  TANF CHILDREN - Individuals under age 21 who are
                            eligible for the TANF program. This category may
                            also include some pregnant women and some children
                            less than one year of age.

                  14.1.2.3  PREGNANT WOMEN receiving Medical Assistance Only
                            (MAO) - Pregnant women whose families' income is
                            below 185% of the Federal Poverty Level (FPL).

                  14.1.2.4  NEWBORN (MAO) - Children under age one born to
                            Medicaid-eligible mothers.

                  14.1.2.5  EXPANSION CHILDREN (MAO) - Children under age 18,
                            ineligible for TANF because of the applied income of
                            their stepparents or grandparents.

                  14.1.2.6  EXPANSION CHILDREN (MAO) - Children under age 1
                            whose families' income is below 185% FPL.

                  14.1.2.7  EXPANSION CHILDREN (MAO) - Children age 1- 5 whose
                            families' income is at or below 133% of FPL.

                  14.1.2.8  FEDERAL MANDATE CHILDREN (MAO) - Children aged 6-18
                            whose families' income is below 100% Federal Poverty
                            Income Limit.

         14.1.3   The following individuals are eligible for the STAR Program
                  and are not required to enroll in a health plan but have the
                  option to enroll in a plan. HMO will be required to accept
                  enrollment of those Medicaid recipients from this group who
                  elect to enroll in HMO.

                  14.1.3.1  DISABLED AND BLIND INDIVIDUALS WITHOUT MEDICARE -
                            Recipients with Supplemental Security Income (SSI)
                            benefits who are not eligible for Medicare may elect
                            to participate in the STAR program on a voluntary
                            basis.

                  14.1.3.2  Certain blind or disabled individuals who lose SSI
                            eligibility because of Title II income and who are
                            not eligible for Medicare.

         14.1.4   During the period after which the Medicaid eligibility
                  determination has been made but prior to enrollment in HMO,
                  Members will be enrolled under the traditional Medicaid
                  program. All Medicaid-eligible recipients will remain in the
                  fee-for-service Medicaid program until enrolled in or assigned
                  to an HMO.

                                 Page 144 of 173

<PAGE>

14.2     ENROLLMENT

         14.2.1   HHSC has the right and responsibility to enroll and disenroll
                  eligible individuals into the STAR program. HHSC will conduct
                  continuous open enrollment for Medicaid recipients and HMO
                  must accept all persons who chose to enroll as Members in HMO
                  or who are assigned as Members in HMO by HHSC, without regard
                  to the Member's health status or any other factor.

         14.2.2   All enrollments are subject to the accessibility and
                  availability limitations and restrictions contained in the
                  Section 1915(b) waiver obtained by HHSC. HHSC has the
                  authority to limit enrollment into HMO if the number and
                  distance limitations are exceeded.

         14.2.3   HHSC makes no guarantees or representations to HMO regarding
                  the number of eligible Medicaid recipients who will ultimately
                  be enrolled as STAR Members of HMO.

         14.2.4   HMO must cooperate and participate in all HHSC sponsored and
                  announced enrollment activities. HMO must have a
                  representative at all HHSC enrollment activities unless an
                  exception is given by HHSC. The representative must comply
                  with HMO's cultural and linguistic competency plan (see
                  Cultural and Linguistic requirements in Section 8.9). HMO must
                  provide marketing materials, HMO pamphlets, Member Handbooks,
                  a list of network providers, HMO's linguistic and cultural
                  capabilities and other information requested or required by
                  HHSC or its Enrollment Broker to assist potential Members in
                  making informed choices.

         14.2.5   HHSC will provide HMO with at least 10 days written notice of
                  all HHSC planned activities. Failure to participate in, or
                  send a representative to a HHSC sponsored enrollment activity
                  is a default of the terms of the contract. Default may be
                  excused if HMO can show that HHSC failed to provide the
                  required notice, or if HMO's absence is excused by HHSC.

         14.2.6   HHSC will notify existing enrollees in the Travis Service
                  Delivery Area that, effective June 1, 2004, Amerigroup will be
                  available for choice as an HMO network provider through the
                  normal enrollment process. The notice will comply with CMS
                  requirements regarding such notification, and will include a
                  provider directory and comparison chart.

                  14.2.6.1  Beginning 90 days after HHSC mails the notice
                            described in Section 14.2.6, HHSC will conduct a
                            periodic evaluation to determine if HMO has been
                            assigned a disproportionate share of TP40 Members.

                                 Page 145 of 173

<PAGE>

                  In the event that HMO's TP40 Members make up 4.5% of the total
                  population of the Travis Service Delivery Area, HHSC will
                  suspend default enrollment of TP40 Members in the HMO until it
                  has had an opportunity to review and, if necessary, revise the
                  standard HHSC default methodology to ensure that the level of
                  TP40 Members HMO receives is based on a proportion of the
                  Travis Service Delivery Area norm.

         14.2.7   Effective June 1, 2004, new enrollees in the Travis Service
                  Delivery Area will be subject to HHSC's normal enrollment
                  processes and the default methodologies specified below:

                  14.2.7.1  Beginning June 1, 2004, HHSC will assign HMO 100% of
                            the default general membership until, for two
                            consecutive months, HMO's enrollment reaches a level
                            of 15,000 Members.

                  14.2.7.2  After HMO's enrollment reaches a level of 15,000
                            Members for two consecutive months, HHSC's standard
                            default methodologies will apply.

14.3     NEWBORN ENROLLMENT

         The HMO is responsible for newborns who are born to mothers who are
         enrolled in HMO on the date of birth as follows:

         14.3.1   Newborns are presumed Medicaid eligible and enrolled in the
                  mother's HMO for at least 90 days from the date of birth.

                  14.3.1.1  A mother of a newborn Member may request a plan
                            change for her newborn during the first 90 days by
                            contacting the Enrollment Broker. If a change is
                            approved, the Enrollment Broker will notify both
                            plans involved in the process. If no alternative to
                            the plan change can be reached, the Enrollment
                            Broker will notify the HMO of the newborn plan
                            change request received from the mother.

         14.3.2   HMO must establish and implement written policies and
                  procedures to require professional and facility providers to
                  notify HMOs of a birth of a newborn to a Member at the time of
                  delivery.

                  14.3.2.1  HMO must create a proxy ID number in the HMO's
                            Enrollment/Eligibility and claims processing
                            systems. HMO proxy ID number effective date is equal
                            to the date of birth of the newborn.

                  14.3.2.2  HMO must match the proxy ID number and the
                            State-issued Medicaid ID number once the
                            State-issued Medicaid ID number is received.

                                 Page 146 of 173

<PAGE>

                  14.3.2.3  HMO must submit a Form 7484A to TDHS Data Control
                            requesting TDHS Data Control to research TDHS's
                            files for a Medicaid ID number if HMO has not
                            received a State-issued Medicaid ID number for a
                            newborn within 30 days from the date of birth. If
                            TDHS finds that no Medicaid ID number has been
                            issued to the newborn, TDHS Data Control will issue
                            the Medicaid ID number using the information
                            provided on the Form 7484A.

         14.3.3   Newborns certified Medicaid eligible after the end of the
                  sixth month following the date of birth will not be
                  retroactively enrolled to an HMO, but will be enrolled in
                  Medicaid fee-for-service. HHSC will manually reconcile payment
                  to the HMO for services provided from the date of birth for
                  all Medicaid eligible newborns as described in Section 13.5.4.

14.4     DISENROLLMENT

         14.4.1   HMO has a limited right to request a Member be disenrolled
                  from HMO without the Member's consent. HHSC must approve any
                  HMO request for disenrollment of a Member for cause.
                  Disenrollment of a Member may be permitted under the following
                  circumstances:

                  14.4.1.1  Member misuses or loans Member's HMO membership card
                            to another person to obtain services.

                  14.4.1.2  Member is disruptive, unruly, threatening or
                            uncooperative to the extent that Member's membership
                            seriously impairs HMO's or provider's ability to
                            provide services to Member or to obtain new Members,
                            and Member's behavior is not caused by a physical or
                            behavioral health condition.

                  14.4.1.3  Member steadfastly refuses to comply with managed
                            care restrictions (e.g., repeatedly using emergency
                            room in combination with refusing to allow HMO to
                            treat the underlying medical condition).

                  14.4.2.1  HMO must take reasonable measures to correct Member
                            behavior prior to requesting disenrollment.
                            Reasonable measures may include providing education
                            and counseling regarding the offensive acts or
                            behaviors.

         14.4.3   HMO must notify the Member of HMO's decision to disenroll the
                  Member if all reasonable measures have failed to remedy the
                  problem.

                                 Page 147 of 173

<PAGE>

         14.4.4   If the Member disagrees with the decision to disenroll the
                  Member from HMO, HMO must notify the Member of the
                  availability of the complaint procedure and HHSC's Fair
                  Hearing process.

         14.4.5   HMO cannot request a disenrollment based on adverse change in
                  the member's health status or utilization of services that are
                  medically necessary for treatment of a member's condition.

14.5     AUTOMATIC RE-ENROLLMENT

         14.5.1   Members who are disenrolled because they are temporarily
                  ineligible for Medicaid will be automatically re-enrolled into
                  the same health plan. Temporary loss of eligibility is defined
                  as a period of 6 months or less.

         14.5.2   HMO must inform its Members of the automatic re-enrollment
                  procedure. Automatic re-enrollment must be included in the
                  Member Handbook (see Section 8.2.1).

14.6     ENROLLMENT REPORTS

         14.6.1   HHSC will provide HMO enrollment reports listing all STAR
                  Members who have enrolled in or were assigned to HMO during
                  the initial enrollment period.

         14.6.2   HHSC will provide monthly HMO Enrollment Reports to HMO on or
                  before the first of the month.

         14.6.3   HHSC will provide Member verification to HMO and network
                  providers through telephone verification or TexMedNet.

ARTICLE 15 GENERAL PROVISIONS

15.1     INDEPENDENT CONTRACTOR

         HMO, its agents, employees, network providers, and subcontractors are
         independent contractors and do not perform services under this contract
         as employees or agents of HHSC. HMO is given express, limited authority
         to exercise the State's right of recovery as provided in Section 4.9.

                                 Page 148 of 173

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15.2     AMENDMENT AND CHANGE REQUEST PROCESS

         15.2.1   HHSC and HMO may amend this contract if reductions in funding
                  or appropriations make full performance by either party
                  impracticable or impossible, and amendment could provide a
                  reasonable alternative to termination. If HMO does not agree
                  to the amendment, the contract may be terminated under Article
                  18.

         15.2.2   This contract must be amended if either party discovers a
                  material omission of a negotiated or required term that is
                  essential to the successful performance or maintaining
                  compliance with the terms of the contract. The party
                  discovering the omission must notify the other party of the
                  omission in writing as soon as possible after discovery. If
                  there is a disagreement regarding whether the omission was
                  intended to be a term of the contract, the parties must submit
                  the dispute to dispute resolution under Section 15.9.

         15.2.3   This contract may be amended at any time by mutual agreement.

         15.2.4   All amendments to this contract must be in writing and signed
                  by both parties.

         15.2.5   Any change in either party's obligations under this contract
                  ("Change") requires a written amendment to the contract that
                  is negotiated using the process outlined in Section 15.2.6.

         15.2.6   Change Request Process.

                  15.2.6.1  If federal or state laws, rules, regulations,
                            policies or guidelines are adopted, promulgated,
                            judicially interpreted or changed, or if contracts
                            are entered into or changed, the effect of which is
                            to alter the ability of either party to fulfill its
                            obligations under this contract, the parties will
                            promptly negotiate in good faith, using the process
                            outlined in Section 15.2.6, appropriate
                            modifications or alterations to the contract and any
                            appendix (appendices) or attachments(s) made a part
                            of this contract.

                  15.2.6.2  Change Order Approval Procedure

                             15.2.6.2.1 During the term of this contract, HHSC
                                        or HMO may propose changes in the
                                        services, deliverables, or other aspects
                                        of this contract ("Changes"), pursuant
                                        to the procedures set forth in this
                                        article.

                             15.2.6.2.2 If HHSC proposes a Change, it shall
                                        deliver to the HMO a written notice
                                        describing the proposed Change that
                                        includes the State's estimated fiscal
                                        impact on the HMO, if available ("Change
                                        Order

                                 Page 149 of 173

<PAGE>

                                        Request"). HMO must respond to such
                                        proposal within 30 calendar days of
                                        receipt by preparing and delivering to
                                        HHSC, at no additional cost to HHSC a
                                        written document (a "Change Order
                                        Response") that specifies:

                                        15.2.6.2.2.1  The financial impact, if
                                                      any, of the Change Order
                                                      Request on the HMO and the
                                                      manner in which such
                                                      impact was calculated;

                                        15.2.6.2.2.2  The effect, if any, of the
                                                      Change Order Request on
                                                      HMO's performance of its
                                                      obligations under this
                                                      contract, including the
                                                      effect on the services or
                                                      deliverables;

                                        15.2.6.2.2.3  The anticipated time
                                                      schedule for implementing
                                                      the Change Order Request;
                                                      and

                                        15.2.6.2.2.4  Any other information
                                                      requested in the Change
                                                      Order Request or that is
                                                      reasonably necessary for
                                                      HHSC to make an informed
                                                      decision regarding the
                                                      proposal.

                             15.2.6.2.3 If HMO proposes a Change, it must
                                        deliver a HMO Change Order Request to
                                        HHSC that includes the proposed Change
                                        and information described in Sections
                                        15.2.6.2.2.1 - 15.2.6.2.2.4 for a Change
                                        Order Response. HHSC must respond to HMO
                                        within 30 calendar days of receipt of
                                        this information.

                             15.2.6.2.4 Upon HHSC's receipt of a Change Order
                                        Request or a Change Order Response, the
                                        Parties shall negotiate a resolution of
                                        the requested Change in good faith. The
                                        parties will exchange information in
                                        good faith in an attempt to agree upon
                                        the requested Change.

                  15.2.6.3   No Change to the services or deliverables or any
                             other aspect of this contract will become effective
                             without the written approval and execution of a
                             mutually agreeable written amendment to this
                             contract by HHSC and the HMO. Under no
                             circumstances will the HMO be entitled to payment
                             for any work or services rendered under a Change
                             Order that has not been approved by HHSC in
                             accordance with the Change Order Procedures.

         15.2.7   The implementation of an amendment to this contract is subject
                  to the approval of the Centers for Medicare and Medicaid
                  Services (CMS, formerly called HCFA).

15.3     LAW, JURISDICTION AND VENUE

                                 Page 150 of 173

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         Venue and jurisdiction shall be in the state and federal district
         courts of Travis County, Texas. The laws of the State of Texas shall be
         applied in all matters of state law.

15.4     NON-WAIVER

         Failure to enforce any provision or breach shall not be taken by either
         party as a waiver of the right to enforce the provision or breach in
         the future.

15.5     SEVERABILITY

         Any part of this contract that is found to be unenforceable, invalid,
         void, or illegal shall be severed from the contract. The remainder of
         the contract shall be effective.

15.6     ASSIGNMENT

         This contract was awarded to HMO based on HMO's qualifications to
         perform personal and professional services. HMO cannot assign this
         contract without the written consent of HHSC. This provision does not
         prevent HMO from subcontracting duties and responsibilities to
         qualified subcontractors. If HHSC consents to an assignment of this
         contract, a transition period of 90 days will run from the date the
         assignment is approved by HHSC so that Members' services are not
         interrupted and, if necessary, the notice provided for in Section 15.7
         can be sent to Members. The assigning HMO must also submit a transition
         plan, as set out in Section 18.2.1, subject to HHSC's approval.

15.7     MAJOR CHANGE IN CONTRACTING

         HHSC may send notice to Members when a major change affecting HMO
         occurs. A "major change" includes, but is not limited to, a substantial
         change of subcontractors and assignment of this contract. The notice
         letter to Members may permit the Members to re-select their plan and
         PCP. HHSC will bear the cost of preparing and sending the notice letter
         in the event of an approved assignment of the contract. For any other
         major change in contracting, HMO will prepare the notice letter and
         submit it to HHSC for review and approval. After HHSC has approved the
         letter for distribution to Members, HMO will bear the cost of sending
         the notice letter.

                                 Page 151 of 173

<PAGE>

15.8     NON-EXCLUSIVE

         This contract is a non-exclusive agreement. Either party may contract
         with other entities for similar services in the same service area.

15.9     DISPUTE RESOLUTION

         The dispute resolution process adopted by HHSC in accordance with
         Chapter 2260, Texas Government Code, will be used to attempt to resolve
         all disputes arising under this contract. This process is located in 1
         TAC Chapter 382, Subchapter C. All disputes arising under this contract
         shall be resolved through HHSC's dispute resolution procedures, except
         where a remedy is provided for through HHSC's administrative rules or
         processes. All administrative remedies must be exhausted prior to other
         methods of dispute resolution.

15.10    DOCUMENTS CONSTITUTING CONTRACT

         This contract includes this document and all amendments and appendices
         to this document, the Request for Application, the Application
         submitted in response to the Request for Application, the Texas
         Medicaid Provider Procedures Manual and Texas Medicaid Bulletins
         addressed to HMOs, contract interpretation memoranda issued by HHSC for
         this contract, and the federal waiver granting HHSC authority to
         contract with HMO. If any conflict in provisions between these
         documents occurs, the terms of this contract and any amendments shall
         prevail. The documents listed above constitute the entire contract
         between the parties.

15.11    FORCE MAJEURE

         HHSC and HMO are excused from performing the duties and obligations
         under this contract for any period that they are prevented from
         performing their services as a result of a catastrophic occurrence, or
         natural disaster, clearly beyond the control of either party, including
         but not limited to an act of war, but excluding labor disputes.

15.12    NOTICES

         Notice may be given by registered mail, facsimile, and/or hand
         delivery. All notices to HHSC shall be addressed to: Medicaid HMO
         Contract Deliverables Manager, HPO Division, Texas Health and

                                 Page 152 of 173

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         Human Services Commission, P.O. Box 13247, Austin, Texas 78711-3247,
         with a copy to the Contract Administrator. Notices to HMO shall be
         addressed to President/CEO, Eric M. Yoder, M.D., AMERIGROUP Texas,
         Inc., 1200 E. Copeland Road, Suite 200, Arlington, TX 76011.

15.13    SURVIVAL

         The provisions of this contract that relate to the obligations of HMO
         to maintain records and reports shall survive the expiration or earlier
         termination of this contract for a period not to exceed six (6) years
         unless another period may be required by record retention policies of
         the State of Texas or CMS.

15.14    GLOBAL DRAFTING CONVENTIONS

         15.14.1  The terms "include," "includes," and "including" are terms of
                  inclusion, and where used in the Agreement, are deemed to be
                  followed by the words "without limitation.

         15.14.2  Any references to "Sections," "Exhibits," or "Attachments" are
                  deemed to be references to Sections, Exhibits, or Attachments
                  to the Agreement.

         15.14.3  Any references to agreements, contracts, statutes, or
                  administrative rules or regulations in the Agreement are
                  deemed references to these documents as amended, modified, or
                  supplemented from time to time during the term of the
                  Agreement.

ARTICLE 16 DEFAULT AND REMEDIES

16.1     DEFAULT BY HHSC

         16.1.1   FAILURE TO MAKE CAPITATION PAYMENTS

                  Failure by HHSC to make capitation payments when due is a
                  default under this contract.

         16.1.2   FAILURE TO PERFORM DUTIES AND RESPONSIBILITIES

                  Failure by HHSC to perform a material duty or responsibility
                  as set out in this contract is a default under this contract.

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16.2     REMEDIES AVAILABLE TO HMO FOR HHSC'S DEFAULT

         HMO may terminate this contract as set out in Section 18.1.5 of this
         contract if HHSC commits either of the events of default set out in
         Section 16.1.

16.3     DEFAULT BY HMO

         16.3.1   FAILURE TO PERFORM AN ADMINISTRATIVE FUNCTION Failure of HMO
                  to perform an administrative function is a default under this
                  contract. Administrative functions are any requirements under
                  this contract that are not direct delivery of health care
                  services, including claims payment; encounter data submission;
                  filing any report when due; cooperating in good faith with
                  HHSC, an entity acting on behalf of HHSC, or an agency
                  authorized by statute or law to require the cooperation of HMO
                  in carrying out an administrative, investigative, or
                  prosecutorial function of the Medicaid program; providing or
                  producing records upon request; or entering into contracts or
                  implementing procedures necessary to carry out contract
                  obligations.

                  16.3.1.1   Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For HMO's failure to perform an administrative
                           function under this contract, HHSC may:

                                    -     Terminate the contract if the
                                          applicable conditions set out in
                                          Section 18.1.1 are met;

                                    -     Suspend new enrollment as set out
                                          in Section 18.3;

                                    -     Assess liquidated money damages as
                                          set out in Section 18.4; and/or

                                    -     Require forfeiture of all or part
                                          of the TDI performance bond as set
                                          out in Section 18.9.

         16.3.2   ADVERSE ACTION AGAINST HMO BY TDI

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                  Termination or suspension of HMO's TDI Certificate of
                  Authority or any adverse action taken by TDI that HHSC
                  determines will affect the ability of HMO to provide health
                  care services to Members is a default under this contract.

                  16.3.2.1   Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For an adverse action against HMO by TDI, HHSC may:

                                    -     Terminate the contract if the
                                          applicable conditions set out in
                                          Section 18.1.1 are met;

                                    -     Suspend new enrollment as set out
                                          in Section 18.3; and/or

                                    -     Require forfeiture of all or part
                                          of the TDI performance bond as set
                                          out in Section 18.9.

         16.3.3   INSOLVENCY

                  Failure of HMO to comply with state and federal solvency
                  standards or incapacity of HMO to meet its financial
                  obligations as they come due is a default under this contract.

                  16.3.3.1   Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For HMO's insolvency, HHSC may:

                                    -     Terminate the contract if the
                                          applicable conditions set out in
                                          Section 18.1.1 are met;

                                    -     Suspend new enrollment as set out
                                          in Section 18.3; and/or

                                    -     Require forfeiture of all or part
                                          of the TDI performance bond as set
                                          out in Section 18.9.

         16.3.4   FAILURE TO COMPLY WITH FEDERAL LAWS AND REGULATIONS

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                  Failure of HMO to comply with the federal requirements for
                  Medicaid, including, but not limited to, federal law regarding
                  misrepresentation, fraud, or abuse; and, by incorporation,
                  Medicare standards, requirements, or prohibitions, is a
                  default under this contract.

                  The following events are defaults under this contract pursuant
                  to 42 U.S.C. Sections 1396b(m)(5), 1396u-2(e)(1)(A):

                  16.3.4.1   HMO's substantial failure to provide medically
                             necessary items and services that are required
                             under this contract to be provided to Members;

                  16.3.4.2   HMO's imposition of premiums or charges on Members
                             in excess of the premiums or charge permitted by
                             federal law;

                  16.3.4.3   HMO's acting to discriminate among Members on the
                             basis of their health status or requirements for
                             health care services, including expulsion or
                             refusal to enroll an individual, except as
                             permitted by federal law, or engaging in any
                             practice that would reasonably be expected to have
                             the effect of denying or discouraging enrollment
                             with HMO by eligible individuals whose medical
                             condition or history indicates a need for
                             substantial future medical services;

                  16.3.4.4   HMO's misrepresentation or falsification of
                             information that is furnished to CMS, HHSC, a
                             Member, a potential Member, or a health care
                             provider;

                  16.3.4.5   HMO's failure to comply with the physician
                             incentive requirements under 42
                             U.S.C. Section 1396b(m)(2)(A)(x); or

                  16.3.4.6   HMO's distribution, either directly or through any
                             agent or independent contractor, of marketing
                             materials that contain false or misleading
                             information, excluding materials prior approved by
                             HHSC.

                  16.3.4.7   HMO's failure to comply with requirements related
                             to Members with special health care needs in
                             Section 6.13 of this Contract, pursuant to 42
                             C.F.R. Section 438.208(c).

                  16.3.4.8   HMO's failure to comply with requirement in
                             Sections 7.2.6 and 7.2.8.7 of this Contract and 42
                             C.F.R. Section 438.102(a).

         16.3.5   REMEDIES AVAILABLE TO HHSC FOR THIS HMO DEFAULT

                                 Page 156 of 173

<PAGE>

                  All of the listed remedies are in addition to all other
                  remedies available to HHSC by law or in equity, are joint and
                  several, and may be exercised concurrently or consecutively.
                  If HMO repeatedly fails to meet the requirements of Sections
                  16.3.4.1 through and including 16.3.4.6, HHSC must, regardless
                  of what other sanctions are provided, appoint temporary
                  management and permit Members to disenroll without cause.
                  Exercise of any remedy in whole or in part does not limit HHSC
                  in exercising all or part of any remaining remedies.

                  For HMO's failure to comply with federal laws and regulations,
                  HHSC may:

                  -        Terminate the contract if the applicable conditions
                           set out in Section 18.1.1 are met;

                  -        Suspend new enrollment as set out in Section 18.3;

                  -        Appoint temporary management as set out in Section
                           18.5;

                  -        Initiate disenrollment of a Member of Members without
                           cause as set out in Section 18.6;

                  -        Suspend or default all enrollment of individuals;

                  -        Suspend payment to HMO;

                  -        Recommend to CMS that sanctions be taken against HMO
                           as set out in Section 18.7;

                  -        Assess civil monetary penalties as set out in Section
                           18.8; and/or

                  -        Require forfeiture of all or part of the TDI
                           performance bond as set out in Section 18.9.

         16.3.6   FAILURE TO COMPLY WITH APPLICABLE STATE LAW

                  HMO's failure to comply with Texas law applicable to Medicaid,
                  including, but not limited to, Section 32.039 of the Texas
                  Human Resources Code and state law regarding
                  misrepresentation, fraud, or abuse, is a default under this
                  contract.

                  16.3.6.1   Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For HMO's failure to comply with applicable state
                           law, HHSC may:

                           -        Terminate the contract if the applicable
                                    conditions set out in Section 18.1.1 are
                                    met;

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<PAGE>

                           -        Suspend new enrollment as set out in Section
                                    18.3;

                           -        Assess administrative penalties as set out
                                    in Section 32.039, Texas Human Resources
                                    Code, with the opportunity for notice and
                                    appeal as required by Section 32.039; and/or

                           -        Require forfeiture of all or part of the TDI
                                    performance bond as set out in Section 18.9.

         16.3.7   MISREPRESENTATION OR FRAUD UNDER SECTION 4.8

                  HMO's misrepresentation or fraud under Section 4.8 of this
                  contract is a default under this contract.

                  16.3.7.1   Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For HMO's misrepresentation or fraud under Section
                           4.8, HHSC may:

                           -        Terminate the contract if the applicable
                                    conditions set out in Section 18.1.1 are
                                    met;

                           -        Suspend new enrollment as set out in Section
                                    18.3; and/or

                           -        Require forfeiture of all or part of the TDI
                                    performance bond as set out in Section 18.9.

         16.3.8   EXCLUSION FROM PARTICIPATION IN MEDICARE OR MEDICAID

                  16.3.8.1   Exclusion of HMO or any of the managing employees
                             or persons with an ownership interest whose
                             disclosure is required by Section 1124 of the
                             Social Security Act (the Act) from the Medicaid or
                             Medicare program under the provisions of Section
                             1128(a) and/or (b) of the Act is a default under
                             this contract.

                  16.3.8.2   Exclusion of any provider or subcontractor or any
                             of the managing employees or persons with an
                             ownership interest of the provider or subcontractor
                             whose disclosure is required by Section 1124 of the
                             Social Security Act (the Act) from the Medicaid or
                             Medicare program under the provisions of Section
                             1128(a) and/or (b) of the Act is a default under
                             this contract if the exclusion will materially
                             affect HMO's performance under this contract.

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<PAGE>

                  16.3.8.3   Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For HMO's exclusion from Medicare or Medicaid, HHSC
                           may:

                           -        Terminate the contract if the applicable
                                    conditions set out in Section 18.1.1 are
                                    met;

                           -        Suspend new enrollment as set out in Section
                                    18.3; and/or

                           -        Require forfeiture of all or part of the TDI
                                    performance bond as set out in Section 18.9.

         16.3.9   FAILURE TO MAKE PAYMENTS TO NETWORK PROVIDERS AND
                  SUBCONTRACTORS

                  HMO's failure to make timely and appropriate payments to
                  network providers and subcontractors is a default under this
                  contract. Withholding or recouping capitation payments as
                  allowed or required under other articles of this contract is
                  not a default under this contract.

                  16.3.9.1   Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For HMO's failure to make timely and appropriate
                           payments to network providers and subcontractors,
                           HHSC may:

                           -        Terminate the contract if the applicable
                                    conditions set out in Section 18.1.1 are
                                    met;

                           -        Suspend new enrollment as set out in Section
                                    18.3;

                           -        Assess liquidated money damages as set out
                                    in Section 18.4; and/or

                           -        # Require forfeiture of all or part of the
                                    TDI performance bond as set out in Section
                                    18.9.

         16.3.10  FAILURE TO TIMELY ADJUDICATE CLAIMS

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<PAGE>

                  Failure of HMO to adjudicate (paid, denied, or external
                  pended) at least ninety (90%) of all claims within thirty (30)
                  days of receipt and ninety-nine percent (99%) of all claims
                  within ninety days of receipt for the contract year is a
                  default under this contract.

                  16.3.10.1  Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consequently. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For HMO's failure to timely adjudicate claims, HHSC
                           may:

                           -        Terminate the contract if the applicable
                                    conditions set out in Section 18.1.1 are
                                    met;

                           -        Suspend new enrollment as set out in Section
                                    18.3; and/or

                           -        Require forfeiture of all or part of the TDI
                                    performance bond as set out in Section 18.9.

         16.3.11  FAILURE TO DEMONSTRATE THE ABILITY TO PERFORM CONTRACT
                  FUNCTIONS

                  Failure to pass any of the mandatory system or delivery
                  functions of the Readiness Review required in Article 1 of
                  this contract is a default under the contract.

                  16.3.11.1  Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For HMO's failure to demonstrate the ability to
                           perform contract functions, HHSC may:

                           -        Terminate the contract if the applicable
                                    conditions set out in Section 18.1.1 are
                                    met;

                           -        Suspend new enrollment as set out in Section
                                    18.3; and/or

                           -        Require forfeiture of all or part of the TDI
                                    performance bond as set out in Section 18.9.

                                 Page 160 of 173

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         16.3.12  FAILURE TO MONITOR AND/OR SUPERVISE ACTIVITIES OF CONTRACTORS
                  OR NETWORK PROVIDERS

                  16.3.12.1  Failure of HMO to audit, monitor, supervise, or
                             enforce functions delegated by contract to another
                             entity that results in a default under this
                             contract or constitutes a violation of state or
                             federal laws, rules, or regulations is a default
                             under this contract.

                  16.3.12.2  Failure of HMO to properly credential its
                             providers, conduct reasonable utilization review,
                             or conduct quality monitoring is a default under
                             this contract.

                  16.3.12.3  Failure of HMO to require providers and contractors
                             to provide timely and accurate encounter,
                             financial, statistical, and utilization data is a
                             default under this contract.

                  16.3.12.4  Remedies Available to HHSC for this HMO Default All
                             of the listed remedies are in addition to all other
                             remedies available to HHSC by law or in equity, are
                             joint and several, and may be exercised
                             concurrently or consecutively. Exercise of any
                             remedy in whole or in part does not limit HHSC in
                             exercising all or part of any remaining remedies.

                           For HMO's failure to monitor and/or supervise
                           activities of contractors or network providers, HHSC
                           may:

                                    -     Terminate the contract if the
                                          applicable conditions set out in
                                          Section 18.1.1 are met;

                                    -     Suspend new enrollment as set out
                                          in Section 18.3; and/or

                                    -     Require forfeiture of all or part
                                          of the TDI performance bond as set
                                          out in Section 18.9.

         16.3.13  PLACING THE HEALTH AND SAFETY OF MEMBERS IN JEOPARDY

                  HMO's placing the health and safety of the Members in jeopardy
                  is a default under this contract.

                  16.3.13.1  Remedies Available to HHSC for this HMO Default

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

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                           For HMO's placing the health and safety of Members in
                           jeopardy, HHSC may:

                                    -     Terminate the contract if the
                                          applicable conditions set out in
                                          Section 18.1.1 are met;

                                    -     Suspend new enrollment as set out
                                          in Section 18.3; and/or

                                    -     Require forfeiture of all or part
                                          of the TDI performance bond as set
                                          out in Section 18.9.

         16.3.14  FAILURE TO MEET ESTABLISHED BENCHMARK

                  Failure of HMO to meet any benchmark established by HHSC under
                  this contract is a default under this contract.

                  16.3.14.1  Remedies Available To HHSC for this HMO Default All
                             of the listed remedies are in addition to all other
                             remedies available to HHSC by law or in equity, are
                             joint and several, and may be exercised
                             concurrently or consecutively. Exercise of any
                             remedy in whole or in part does not limit HHSC in
                             exercising all or part of any remaining remedies.

                           For HMO's failure to meet any benchmark established
                           by HHSC under this contract, or for failure to meet
                           improvement targets, as identified by HHSC, HHSC may:

                                    -     Remove all or part of the THSteps
                                          component from the capitation paid to
                                          HMO;

                                    -     Terminate the contract if the
                                          applicable conditions set out in
                                          Section 18.1.1 are met;

                                    -     Suspend new enrollment as set out
                                          in Section 18.3;

                                    -     Assess liquidated money damages as
                                          set out in Section 18.4; and/or

                                    -     Require forfeiture of all or part
                                          of the TDI performance bond as set
                                          out in Section 18.9.

         16.3.15  FAILURE TO PERFORM A MATERIAL DUTY OR RESPONSIBILITY

                  Failure of HMO to perform a material duty or responsibility as
                  set out in this contract is a default under this contract and
                  HHSC may impose one or more of the remedies contained within
                  it provisions and all other remedies available to HHSC by law
                  or in equity.

                  16.3.15.1  Remedies Available to HHSC for this HMO Default

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<PAGE>

                           All of the listed remedies are in addition to all
                           other remedies available to HHSC by law or in equity,
                           are joint and several, and may be exercised
                           concurrently or consecutively. Exercise of any remedy
                           in whole or in part does not limit HHSC in exercising
                           all or part of any remaining remedies.

                           For HMO's failure to perform an administrative
                           function under this contract, HHSC may:

                                    -     Terminate the contract if the
                                          applicable conditions set out in
                                          Section 18.1.1 are met;

                                    -     Suspend new enrollment as set out
                                          in Section 18.3;

                                    -     Assess liquidated money damages as
                                          set out in Section 18.4; and/or

                                    -     Require forfeiture of all or part
                                          of the TDI performance bond as set
                                          out in Section 18.9.

ARTICLE 17 NOTICE OF DEFAULT AND CURE OF DEFAULT

17.1     HHSC will provide HMO with written notice of default (Notice of
         Default) under this contract. The Notice of Default may be given by any
         means that provides verification of receipt. The Notice of Default must
         contain the following information:

         17.1.1   A clear and concise statement of the circumstances or
                  conditions that constitute a default under this contract;

         17.1.2   The contract provision(s) under which default is being
                  declared;

         17.1.3   A clear and concise statement of how and/or whether the
                  default may be cured;

         17.l.4   A clear and concise statement of the time period during which
                  HMO may cure the default if HMO is allowed to cure;

         17.1.5   The remedy or remedies HHSC is electing to pursue and when the
                  remedy or remedies will take effect;

         17.1.6   If HHSC is electing to impose money damages and/or civil
                  monetary penalties, the amount that HHSC intends to withhold
                  or impose and the factual basis on which HHSC is imposing the
                  chosen remedy or remedies;

         17.l.7   Whether any part of money damages or civil monetary penalties,
                  if HHSC elects to pursue one or both of those remedies, may be
                  passed

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<PAGE>

                  through to an individual or entity who is or may be
                  responsible for the act or omission for which default is
                  declared;

         17.1.8   Whether failure to cure the default within the given time
                  period, if any, will result in HHSC pursuing an additional
                  remedy or remedies, including, but not limited to, additional
                  damages or sanctions, referral for investigation or action by
                  another agency, and/or termination of the contract.

ARTICLE 18 EXPLANATION OF REMEDIES

18.1     TERMINATION

         18.1.1   TERMINATION BY HHSC

                  HHSC may terminate this contract if:

                  18.1.1.1   HMO substantially fails or refuses to provide
                             medically necessary services and items that are
                             required under this contract to be provided to
                             Members after notice and opportunity to cure;

                  18.1.1.2   HMO substantially fails or refuses to perform
                             administrative functions under this contract after
                             notice and opportunity to cure;

                  18.1.1.3   HMO materially defaults under any of the provisions
                             of Article 16;

                  18.1.1.4   Federal or state funds for the Medicaid program are
                             no longer available; or

                  18.1.1.5   HHSC has a reasonable belief that HMO has placed
                             the health or welfare of Members in jeopardy.

         18.1.2   HHSC must give HMO 90 days written notice of intent to
                  terminate this contract if termination is the result of HMO's
                  substantial failure or refusal to perform administrative
                  functions or a material default under any of the provisions of
                  Article 16. HHSC must give HMO reasonable notice under the
                  circumstances if termination is the result of federal or state
                  funds for the Medicaid program no longer being available. HHSC
                  must give the notice required under HHSC's formal hearing
                  procedures set out in 1 TAC Chapter 357 if termination is the
                  result of HMO's substantial failure or refusal to provide
                  medically necessary services and items that are required under
                  the contract to be provided to Members or HHSC's reasonable
                  belief that HMO has placed the health or welfare of Members in
                  jeopardy.

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<PAGE>

                  18.1.2.1   Notice may be given by any means that gives
                             verification of receipt.

                  18.1.2.2   Unless termination is the result of HMO's
                             substantial failure or refusal to provide medically
                             necessary services and items that are required
                             under this contract to be provided to Members or is
                             the result of HHSC's reasonable belief that HMO has
                             placed the health or welfare of Members in
                             jeopardy, the termination date is 90 days following
                             the date that HMO receives the notice of intent to
                             terminate. For HMO's substantial failure or refusal
                             to provide services and items, HMO is entitled to
                             request a pre-termination hearing under HHSC's
                             formal hearing procedures set out in 1 TAC Chapter
                             357.

         18.1.3   HHSC may, for termination for HMO's substantial failure or
                  refusal to provide medically necessary services and items,
                  notify HMO's Members of any hearing requested by HMO and
                  permit Members to disenroll immediately without cause.
                  Additionally, if HHSC terminates for this reason, HHSC may
                  enroll HMO's Members with another HMO or permit HMO's Members
                  to receive Medicaid-covered services other than from an HMO.

         18.1.4   HMO must continue to perform services under the transition
                  plan described in Section 18.2.1 until the last day of the
                  month following 90 days from the date of receipt of notice if
                  the termination is for any reason other than HHSC's reasonable
                  belief that HMO is placing the health and safety of the
                  Members in jeopardy. If termination is due to this reason,
                  HHSC may prohibit HMO's further performance of services under
                  the contract.

         18.1.5   If HHSC terminates this contract, HMO may appeal the
                  termination under Section 32.034, Texas Human Resources Code.

         18.1.6   TERMINATION BY HMO

                  HMO may terminate this contract if HHSC fails to pay HMO as
                  required under Article 13 of this contract or otherwise
                  materially defaults in its duties and responsibilities under
                  this contract, or by giving notice no later than 30 days after
                  receiving the capitation rates for the Contract Period.
                  Retaining premium, recoupment, sanctions, or penalties that
                  are allowed under this contract or that result from HMO's
                  failure to perform or HMO's default under the terms of this
                  contract is not cause for termination.

         18.1.7   HMO must give HHSC 90 days written notice of intent to
                  terminate this contract. Notice may be given by any means that
                  gives verification of receipt. The termination date will be
                  calculated as the

                                 Page 165 of 173

<PAGE>

                  last day of the month following 90 days from the date the
                  notice of intent to terminate is received by HHSC.

         18.1.8   HHSC must be given 30 days from the date HHSC receives HMO's
                  written notice of intent to terminate for failure to pay HMO
                  all amounts due. If HHSC pays all amounts then due within this
                  30-day period, HMO cannot terminate the contract under this
                  article for that reason.

         18.1.9   TERMINATION BY MUTUAL CONSENT

                  This contract may be terminated at any time by mutual consent
                  of both HMO and HHSC.

18.2     DUTIES OF CONTRACTING PARTIES UPON TERMINATION

         When termination of the contract occurs, HHSC and HMO must meet the
         following obligations:

         18.2.1   HHSC and HMO must prepare a transition plan that is acceptable
                  to and approved by HHSC, to ensure that Members are reassigned
                  to other plans without interruption of services. That
                  transition plan will be implemented during the 90-day period
                  between receipt of notice and the termination date unless
                  termination is the result of HHSC's reasonable belief that HMO
                  is placing the health or welfare of Members in jeopardy.

         18.2.2   If the contract is terminated by HHSC for any reason other
                  than federal or state funds for the Medicaid program no longer
                  being available or if HMO terminates the contract based on
                  lower capitation rates for the second contract year as set out
                  in Section 13.1.4.1:

                  18.2.2.1   HHSC is responsible for notifying all Members of
                             the date of termination and how Members can
                             continue to receive contract services;

                  18.2.2.2   HMO is responsible for all expenses related to
                             giving notice to Members; and

                  18.2.2.3   HMO is responsible for all expenses incurred by
                             HHSC in implementing the transition plan.

         18.2.3   If the contract is terminated by HMO for any reason other than
                  based on lower capitation rates for the second or third
                  contract years as set out in Section 13.1.3.1:

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                  18.2.3.1   HHSC is responsible for notifying all Members of
                             the date of termination and how Members can
                             continue to receive contract services;

                  18.2.3.2   HHSC is responsible for all expenses related to
                             giving notice to Members; and.

                  18.2.3.3   HHSC is responsible for all expenses it incurs in
                             implementing the transition plan.

         18.2.4   If the contract is terminated by mutual consent:

                  18.2.4.1   HHSC is responsible for notifying all Members of
                             the date of termination and how Members can
                             continue to receive contract services

                  18.2.4.2   HMO is responsible for all expenses related to
                             giving notice to Members; and

                  18.2.4.3   HHSC is responsible for all expenses it incurs in
                             implementing the transition plan.

18.3     SUSPENSION OF NEW ENROLLMENT

         18.3.1   HHSC must give HMO 30 days notice of intent to suspend new
                  enrollment in the Notice of Default other than for default for
                  fraud and abuse or imminent danger to the health or safety of
                  Members. The suspension date will be calculated as 30 days
                  following the date that HMO receives the Notice of Default.

         18.3.2   HHSC may immediately suspend new enrollment into HMO for a
                  default declared as a result of fraud and abuse or imminent
                  danger to the health and safety of Members.

         18.3.3   The suspension of new enrollment may be for any duration, up
                  to the termination date of the contract. HHSC will base the
                  duration of the suspension upon the type and severity of the
                  default and HMO's ability, if any, to cure the default.

18.4     LIQUIDATED MONEY DAMAGES

         18.4.1   The measure of damages in the event that HMO fails to perform
                  its obligations under this contract may be difficult or
                  impossible to calculate or quantify. Therefore, should HMO
                  fail to perform in

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                  accordance with the terms and conditions of this contract,
                  HHSC may require HMO to pay sums as specified below as
                  liquidated damages. The liquidated damages set out in this
                  Article are not intended to be in the nature of a penalty but
                  are intended to be reasonable estimates of HHSC's financial
                  loss and damage resulting from HMO's non-performance.

         18.4.2   If HHSC imposes money damages, HHSC may collect those damages
                  by reducing the amount of any monthly premium payments
                  otherwise due to HMO by the amount of the damages. Money
                  damages that are withheld from monthly premium payments are
                  forfeited and will not be subsequently paid to HMO upon
                  compliance or cure of default unless a determination is made
                  after appeal that the damages should not have been imposed.

         18.4.3   Failure to file or filing incomplete or inaccurate annual,
                  semi-annual or quarterly reports may result in money damages
                  of not more than $11,000.00 for every month from the month the
                  report is due until submitted in the form and format required
                  by HHSC. These money damages apply separately to each report.

         18.4.4   Failure to produce or provide records and information
                  requested by HHSC, an entity acting on behalf of HHSC, or an
                  agency authorized by statute or law to require production of
                  records at the time and place the records were required or
                  requested may result in money damages of not more than
                  $5,000.00 per day for each day the records are not produced as
                  required by the requesting entity or agency if the requesting
                  entity or agency is conducting an investigation or audit
                  relating to fraud or abuse, and not more than $1,000.00 per
                  day for each day records are not produced if the requesting
                  entity or agency is conducting routine audits or monitoring
                  activities.

         18.4.5   Failure to file or filing incomplete or inaccurate encounter
                  data may result in money damages of not more than $25,000 for
                  each month HMO fails to submit encounter data in the form and
                  format required by HHSC. HHSC will use the encounter data
                  validation methodology established by HHSC to determine the
                  number of encounter data and the number of months for which
                  damages will be assessed.

         18.4.6   Failing or refusing to cooperate with HHSC, an entity acting
                  on behalf of HHSC, or an agency authorized by statute or law
                  to require the cooperation of HMO in carrying out an
                  administrative, investigative, or prosecutorial function of
                  the Medicaid program may result in money damages of not more
                  than $8,000.00 per day for each day HMO fails to cooperate.

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         18.4.7   Failure to enter into a required or mandatory contract or
                  failure to contract for or arrange to have all services
                  required under this contract provided may result in money
                  damages of not more than $1,000.00 per day that HMO either
                  fails to negotiate in good faith to enter into the required
                  contract or fails to arrange to have required services
                  delivered.

         18.4.8   Failure to meet the benchmark for benchmarked services under
                  this contract may result in money damages of not more than
                  $25,000 for each month that HMO fails to meet the established
                  benchmark.

         18.4.9   HHSC may also impose money damages for a default under Section
                  16.3.9, Failure to Make Payments to Network Providers and
                  subcontractors, of this contract. These money damages are in
                  addition to the interest HMO is required to pay to providers
                  under the provisions of Sections 4.10.4 and 7.2.7.10 of this
                  contract.

                  18.4.9.1   If HHSC determines that HMO has failed to pay a
                             provider for a claim or claims for which the
                             provider should have been paid, HHSC may impose
                             money damages of $2 per day for each day the claim
                             is not paid from the date the claim should have
                             been paid (calculated as 30 days from the date a
                             clean claim was received by HMO) until the claim is
                             paid by HMO.

                  18.4.9.2   If HHSC determines that HMO has failed to pay a
                             capitation amount to a provider who has contracted
                             with HMO to provide services on a capitated basis,
                             HHSC may impose money damages of $10 per day, per
                             Member for whom the capitation is not paid, from
                             the date on which the payment was due until the
                             capitation amount is paid.

18.5     APPOINTMENT OF TEMPORARY MANAGEMENT

         18.5.1   HHSC may appoint temporary management to oversee the operation
                  of HMO upon a finding that there is continued egregious
                  behavior by HMO or there is a substantial risk to the health
                  of the Members.

         18.5.2   HHSC may appoint temporary management to assure the health of
                  HMO's Members if there is a need for temporary management
                  while:

                  18.5.2.1   there is an orderly termination or reorganization
                             of HMO; or

                  18.5.2.2   are made to remedy violations found under Section
                             16.3.4.

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         18.5.3   Temporary management will not be terminated until HHSC has
                  determined that HMO has the capability to ensure that the
                  violations that triggered appointment of temporary management
                  will not recur.

         18.5.4   HHSC is not required to appoint temporary management before
                  terminating this contract.

         18.5.5   No pre-termination hearing is required before appointing
                  temporary management.

         18.5.6   As with any other remedy provided under this contract, HHSC
                  will provide notice of default as is set out in Article 17 to
                  HMO. Additionally, as with any other remedy provided under
                  this contract, under Section 18.1 of this contract, HMO may
                  dispute the imposition of this remedy and seek review of the
                  proposed remedy.

18.6     HHSC-INITIATED DISENROLLMENT OF A MEMBER OR MEMBERS WITHOUT CAUSE

         HHSC must give HMO 30 days notice of intent to initiate disenrollment
         of a Member of Members in the Notice of Default. The HHSC-initiated
         disenrollment date will be calculated as 30 days following the date
         that HMO receives the Notice of Default.

18.7     RECOMMENDATION TO CMS THAT SANCTIONS BE TAKEN AGAINST HMO

         18.7.1   If CMS determines that HMO has violated federal law or
                  regulations and that federal payments will be withheld, HHSC
                  will deny and withhold payments for new enrollees of HMO.

         18.7.2   HMO must be given notice and opportunity to appeal a decision
                  of HHSC and CMS pursuant to 42 CFR Part 438, Subpart I.

18.8     CIVIL MONETARY PENALTIES

         18.8.1   For a default under Section 16.3.4.1, HHSC may assess not more
                  than $25,000 for each default;

         18.8.2   For a default under 16.3.4.2, for each default HHSC may assess
                  double the excess amount charged in the violation of the
                  federal requirements or $25,000, whichever is greater. HHSC
                  will deduct from the penalty the amount of the overcharge and
                  return it to the affected Member(s)

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         18.8.3   For a default under Section 16.3.4.3, HHSC may assess not more
                  than $100,000 for each default, including $15,000 for each
                  individual not enrolled as a result of the practice described
                  in Section 16.3.4.3.

         18.8.4   For a default under Section 16.3.4.4, HHSC may assess not more
                  than $100,000 for each default if the material was provided to
                  CMS or HHSC and not more than $25,000 for each default if the
                  material was provided to a Member, a potential Member, or a
                  health care provider.

         18.8.5   For a default under Section 16.3.4.5, HHSC may assess not more
                  than $25,000 for each default.

         18.8.6   For a default under Section 16.3.4.6, HHSC may assess not more
                  than $25,000 for each default.

         18.8.7   HMO may be subject to civil monetary penalties under the
                  provisions of 42 C.F.R. Part 1003 and 42 C.F.R. Part 438,
                  Subpart I in addition to or in place of withholding payments
                  for a default under Section 16.3.4.

18.9     FORFEITURE OF ALL OR A PART OF THE TDI PERFORMANCE BOND

         HHSC may require forfeiture of all or a portion of the face amount of
         the TDI performance bond if HHSC determines that an event of default
         has occurred. Partial payment of the face amount shall reduce the total
         bond amount available pro rata.

18.10    REVIEW OF REMEDY OR REMEDIES TO BE IMPOSED

         18.10.1  HMO may dispute the imposition of any sanction under this
                  contract. HMO notifies HHSC of its dispute by filing a written
                  response to the Notice of Default, clearly stating the reason
                  HMO disputes the proposed sanction. With the written response,
                  HMO must submit to HHSC any documentation that supports HMO's
                  position. HMO must file the review within 15 days from HMO's
                  receipt of the Notice of Default. Filing a dispute in a
                  written response to the Notice of Default suspends imposition
                  of the proposed sanction.

         18.10.2  HMO and HHSC must attempt to informally resolve a dispute. If
                  HMO and HHSC are unable to informally resolve a dispute, HMO
                  must notify the HPO Manager and Director of Medicaid/CHIP
                  Operations that HMO and HHSC cannot agree. The Director of
                  Medicaid/CHIP Operations will refer the dispute to the State

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                  Medicaid Director who will appoint a committee to review the
                  dispute under HHSC's dispute resolution procedures. The
                  decision of the dispute resolution committee will be HHSC's
                  final administrative decision.

ARTICLE 19 TERM

19.1     The effective date of this contract is June 1, 2004. This contract and
         all amendments thereto will terminate on August 31, 2004, unless
         extended or terminated earlier as provided for elsewhere in this
         contract.

19.2     This contract may be renewed for an additional one-year period by
         written amendment to the contract executed by the parties prior to the
         termination date of the present contract. HHSC will notify HMO no later
         than 90 days before the end of the contract period of its intent not to
         renew the contract.

19.3     If either party does not intend to renew the contract beyond its
         contract period, the party intending not to renew must submit a written
         notice of its intent not to renew to the other party no later than 90
         days before the termination date set out in Section 19.1.

19.4     If either party does not intend to renew the contract beyond its
         contract period and sends the notice required in Section 19.3, a
         transition period of 90 days will run from the date the notice of
         intent not to renew is received by the other party. By signing this
         contract, the parties agree that the terms of this contract shall
         automatically continue during any transition period.

19.5     The party that does not intend to renew the contract beyond its
         contract period and sends the notice required by Section 19.3 is
         responsible for sending notices to all Members on how the Member can
         continue to receive covered services. The expense of sending the
         notices will be paid by the non-renewing party. If HHSC does not intend
         to renew and sends the required notice, HHSC is responsible for any
         costs it incurs in ensuring that Members are reassigned to other plans
         without interruption of services. If HMO does not intend to renew and
         sends the required notice, HMO is responsible for any costs HHSC incurs
         in ensuring that Members are reassigned to other plans without
         interruption of services. If both parties do not intend to renew the
         contract beyond its contract period, HHSC will send the notices to
         Members and the parties will share equally in the cost of sending the
         notices and of implementing the transition plan.

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19.6     Non-renewal of this contract is not a contract termination for purposes
         of appeal rights under the Human Resources Code Section 32.034.

SIGNED:

__________________________________________   ___________________________________
Executive Commissioner                       AMERIGROUP Texas, Inc.
Texas Health and Human Services Commission   President and CEO

Date                                         Date

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