<PAGE>

                                                                     EXHIBIT 2.1
================================================================================






                             AMENDED AND RESTATED


                      OPERATIONS AND SETTLEMENT AGREEMENT



                              Dated June 16, 1999





================================================================================
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

                                                                  Page
                                                                  ----


1.   DEFINITIONS AND CONSTRUCTION                                   3

     1.1   Definitions                                              3

     1.2   Accounting Terms                                        11

     1.3   Construction                                            11

     1.4   Schedules and Exhibits                                  11

2.   SPECIAL MONITOR ROLE                                          12

     2.1   Role of Special Monitor-Examiner on Amended Agreement
           Date.                                                   12

     2.2   Role of Special Monitor-Examiner on Effective Date      13

     2.3   Application of DOC Regulations Pertaining to Tangible
           Net Equity Requirements                                 14

     2.4   Payment of Expenses Incurred by or on Behalf of the
           Conservator, the Special Monitor, the Special
           Monitor-Examiner, the DOC or the Agency.                14

3.   THE TRANSITION PLAN; FUNDING                                  15

     3.1   The Transition Plan                                     15

     3.2   Management Agreement                                    15

     3.3   Payments to Managed Physician Practices                 15

     3.4   Disposition of the California Operations                16

     3.5   Payment of Claims                                       16

     3.6   Letter of Credit                                        20

     3.7   Negative Assurances                                     20

     3.8   Procedures for Provider Claims                          21

     3.9   Relinquishment of License of MPN                        22

4.   REPRESENTATIONS AND WARRANTIES OF MEDPARTNERS                 22

     4.1   Organization                                            22

     4.2   Due Authorization; No Conflict                          22

     4.3   Letters from Experts                                    23

5.   REPRESENTATIONS AND WARRANTIES OF MPN                         23

     5.1   Organization                                            23

     5.2   Due Authorization; No Conflict                          23

6.   REPRESENTATIONS AND WARRANTIES OF THE STATE                   24

     6.1   Organization                                            24

     6.2   Due Authorization                                       24

                                       i
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

                                  (continued)
                                                                 Page
                                                                 ----

7.   AFFIRMATIVE COVENANTS                                         24

     7.1   Affirmative Covenants of MedPartners                    24

     7.2   Affirmative Covenants of the State/Special
           Monitor-Examiner.                                       25

8.   NEGATIVE COVENANTS                                            26

     8.1   Negative Covenants of MedPartners                       26

     8.2   Negative Covenants of the State                         26

9.   MUTUAL COVENANTS                                              26

     9.1   State Court Actions                                     26

     9.2   Bankruptcy Court                                        27

     9.3   Cooperation in Implementation of the Transition Plan    27

     9.4   Agreement to Defend                                     27

10.  DEFAULT BY MEDPARTNERS.                                       28

     10.1  Default.                                                28

     10.2  Notice of Default                                       28

     10.3  Application to State Court                              28

     10.4  Remedies                                                29

11.  DEFAULT BY THE STATE.                                         29

     11.1  Default.                                                29

     11.2  Notice of Default.                                      29

     11.3  Application to State Court.                             29

     11.4  Remedies.                                               30

12.  ALTERNATIVE DISPUTE RESOLUTION.                               30

     12.1  Disputes                                                30

     12.2  Initiation of Arbitration                               30

     12.3  Arbitrator                                              30

     12.4  Costs of Arbitration; Attorneys' Fees                   31

     12.5  Timing                                                  31

     12.6  Determination of Arbitrable Issues                      31

     12.7  Sanctions                                               31

     12.8  Judgments                                               31

     12.9  Failure to Appear                                       31

                                       ii
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

                                  (continued)
                                                                 Page
                                                                 ----

13.  EFFECTIVE DATE; CONDITIONS PRECEDENT AND TERMINATION          31

     13.1   Effective Date                                         31

     13.2   Failure of Conditions Precedent                        32

     13.3   Termination.                                           33

14.  NOTICES                                                       33

15.  GENERAL PROVISIONS                                            35

     15.1   Time of the Essence                                    35

     15.2   Choice of Law                                          35

     15.3   Successors and Assigns                                 35

     15.4   Section Headings                                       35

     15.5   Severability of Provisions                             35

     15.6   Amendments in Writing                                  35

     15.7   Counterparts; Telefacsimile Execution                  35

     15.8   Integration                                            36

     15.9   Confidentiality                                        36

     15.10  Press Releases.                                        37

     15.11  Actions by the State.                                  37

     15.12  Consent to Jurisdiction                                37

     15.13  Plan and Provider Stipulation                          37

     15.14  Third Party Beneficiaries                              38

     15.15  Exhibits or Schedules                                  39

     15.16  Attorneys' Fees                                        39

     15.17  Related Agreements                                     39

     15.18  Representation by Counsel; Drafts; Interpretation.     44

     15.19  Waiver of Defenses                                     45

     15.20  Further Assurances                                     45

16.  RELEASE                                                       45

     16.1   Release                                                45

     16.2   Waiver                                                 45

                                      iii
<PAGE>

                             AMENDED AND RESTATED
                             --------------------

                      OPERATIONS AND SETTLEMENT AGREEMENT
                      -----------------------------------


     THIS OPERATIONS AND SETTLEMENT AGREEMENT entered into as of June 9, 1999 is
amended and restated as the Amended and Restated Operations and Settlement
Agreement entered into as of June 16, 1999 (this "Agreement"), among the
Commissioner of the Department of Corporations of the State of California (the
"Commissioner") and Department of Corporations of the State of California
(collectively, the "DOC" or the "State"), J. Mark Abernathy, as Special Monitor-
Examiner, MedPartners, Inc., a Delaware corporation, and its successors and
assigns ("MedPartners") and MedPartners Provider Network, Inc., a California
corporation ("MPN"), as a debtor and debtor in possession in the Bankruptcy
Case.  Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in Article I of this Agreement.

                                   RECITALS
                                   --------

     WHEREAS on March 11, 1999, the Commissioner issued a Demand for and Order
Taking Possession of Property and Business Pursuant to Health & Safety Code
(S) 1393(b) and a Demand for and Order Appointing Conservator Pursuant to
Health & Safety Code (S) 1393(c) (as amended on April 19, 1999, the
"Conservatorship Order") regarding MPN;

     WHEREAS on March 11, 1999, the Conservator appointed pursuant to the
Conservatorship Order filed a petition for and on behalf of MPN under chapter 11
of the United States Bankruptcy Code;

     WHEREAS, on March 17, 1999, MedPartners commenced an action styled
MedPartners, Inc. v. William Kenefick, in his capacity as Acting Commissioner of
the Department of Corporations of the State of California; the Commissioner of
the Department of Corporations for the State of California; and Eugene Froelich
as an agent of the Commissioner of the Department of Corporations for the State
of California; case number BC207250, by filing with the Los Angeles Superior
Court a Complaint for Injunctive Relief (CCP (S) 526); Complaint for Declaratory
Relief (CCP (S) 1060) and Application for Order to Show Cause (HSC (S) 1393);

     WHEREAS, on March 17, 1999, MedPartners filed in the Bankruptcy Case its
Emergency Motion To Dismiss Or For Turnover, Or Alternatively For Authority To
Use Cash Under (S) 363 And To Expedite Assumption/Rejection Of The Management
Agreement (the "Motion To Dismiss");

     WHEREAS, on March 18, 1999, the Commissioner in the exercise of his
regulatory power commenced an action styled In the Matter of The Commissioner of
Corporations of the State of California v. MedPartners Provider Network, Inc.;
case number BS056226, by filing with the Los Angeles Superior Court a Petition
to Confirm the Commissioner's Order Appointing Conservator;

     WHEREAS, on May 10, 1999, Commissioner in the exercise of his regulatory
power issued a Stay of the Conservatorship Order (the "Stay");

                                       1
<PAGE>

     WHEREAS, on May 10, 1999, at the request of the DOC, in the exercise of its
regulatory power, the Los Angeles Superior Court issued an order in the
MedPartners Action and the DOC Action appointing a special monitor of MPN
pursuant to Health & Safety Code section 1392(a)(3) empowered with special
rights, powers, privileges and instructions described in the order (the "Special
Monitor Order");

     WHEREAS, on June 9, 1999 the parties determined that it was in their best
interests to amend the Operations and Settlement Agreement entered into as of
June 9, 1999;

     WHEREAS, the parties have a mutual interest in the following objectives and
believe that this Agreement can:

     1.   Provide a mechanism for uninterrupted provision of patient care by
          physicians in the MPN network and other providers during the
          implementation of the Transition Plan;

     2.   Provide for the resolution and satisfaction of MedPartners' and MPN's
          valid obligations relating to their California physician practice
          management operations, including satisfaction of all valid liabilities
          and valid claims for Health Care Services against California-based
          entities operated or managed by MedPartners or MPN as part of their
          California Operations, and allow MedPartners to complete its planned
          exit from its California physician practice management operations on a
          timely basis;

     3.   Provide for the orderly disposition of the existing operations of MPN
          and the MedPartners California physician practices assets, including
          transfer of such assets to viable purchasers thereof; and

     4.   Provide for a satisfactory resolution of the current situation
          enlisting the full cooperation of many constituents including the
          Special Monitor-Examiner, the State, MPN, MedPartners, key health care
          service plans and hospitals and other providers including physicians
          contracting with medical groups operated under management services
          agreements with MedPartners.

     WHEREAS, no party is admitting the validity of the positions of any other
party in the State Court Actions or the Motion to Dismiss; and

     WHEREAS, the parties have determined to settle the State Court Actions as
provided herein.

     NOW THEREFORE, in consideration of the mutual covenants contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:

                                       2
<PAGE>

                                   AGREEMENT
                                   ---------

1.  DEFINITIONS AND CONSTRUCTION.

     1.1 Definitions. As used in this Agreement, the following terms shall have
the following definitions:

     "Affiliate" has the meaning set forth in Section 101(2) of the Bankruptcy
      ---------
Code.

     "Agency" means the Business, Transportation and Housing Agency of the State
      ------
of California.

     "Agreement" means the Amended and Restated Agreement dated June 16, 1999.
      ---------

     "Agreement Date" means June 9, 1999.
      --------------

     "Allowed MPN Claim" means a Claim against MPN:
      -----------------

          (a) To the extent that a proof of the Claim (1) is deemed filed under
applicable law and no objection to the Claim is filed within the time fixed by
the Bankruptcy Court for such objections; or (2) was timely filed and no
objection to the Claim is filed within the time fixed by the Bankruptcy Court
for such objections; or (3) is allowed pursuant to subparagraph (b) of this
paragraph;

          (b) If MPN or another party in interest files an objection to a proof
of Claim within the time fixed by the Bankruptcy Court, the Claim shall be
deemed allowed to the extent of any amount (1) of such Claim to which MPN or the
other party did not object; or (2) otherwise authorized by Final Order or
pursuant to a confirmed and effective plan of reorganization for MPN.

     "Amended Agreement Date" means June 16, 1999, the date on which the Amended
      ----------------------
and Restate Operations and Settlement Agreement is executed.

     "Bankruptcy Case" means chapter 11 case number LA 99-19256-BR, pending in
      ---------------
the Bankruptcy Court or any successor case under another chapter of the
Bankruptcy Code.

     "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C.
      ---------------
(S) 101 et seq.), as amended, and any successor statute.
        -- ----

     "Bankruptcy Court" means the United States Bankruptcy Court for the Central
      ----------------
District of California, Los Angeles Division.

     "Beneficiary" has the meaning set forth in Section 15.14.
      -----------

     "Business Day" means any day that is not a Saturday, Sunday, or other day
      ------------
on which national banks are authorized or required to close.

     "Calculation Date" means the first to occur of (i) the one hundred
      ----------------
eightieth day after a liquidated money judgment has been entered as a remedy
under Section 10.4 of this Agreement

                                       3
<PAGE>

against MedPartners if MedPartners is not then funding the MedPartners Funding
Commitment in accordance with this Agreement; (ii) the earliest date after such
one hundred eightieth day that MedPartners is not funding the MedPartners
Funding Commitment in accordance with this Agreement; and (iii) a case under the
Bankruptcy Code has been filed by or against MedPartners.

     "California Accounts" means:  (i) as to MPN, the deposit account of MPN,
      -------------------
which shall be a debtor-in-possession account, in conformity with the guidelines
of the United States Trustee's Office, located in the State of California into
which the Net Cash Proceeds of the sales of the California Operations allocable
to MPN will be deposited in accordance with the terms of this Agreement and into
which all payments of the MedPartners Funding Commitment allocable to MPN will
be deposited; and (ii) as to MedPartners, the deposit account of MedPartners, in
a bank which qualifies under the guidelines of the United States Trustee's
Office where the Bankruptcy Case is pending, located in the State of California
into which the balance of the Net Cash Proceeds of the sales of the California
Operations will be deposited in accordance with the terms of this Agreement and
into which all remaining payments of the MedPartners Funding Commitment will be
deposited in accordance with the terms of this Agreement.

     "California Operations" means, collectively, the interests, assets and
      ---------------------
operations of MPN and the interests, assets and operations of MedPartners and
its direct or indirect subsidiaries (other than MPN) to the extent related to
Managed Physician Practices in California.

     "Cap Deducts" means those amounts withheld from capitation payments owed by
      -----------
the Plans to MPN or the Managed Physician Practices.

     "Claim" means (i) right to payment, whether or not such right is reduced to
      -----
judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured, or (ii) right to
an equitable remedy for breach of performance if such breach gives rise to a
right to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured,
or unsecured.

     "Claims Monitor" means a nationally recognized accounting or financial
      --------------
advisory firm acceptable to the parties, which shall be PricewaterhouseCoopers
LLP subject to the receipt of an engagement letter confirming their independence
satisfactory to the parties.

     "Commissioner" has the meaning set forth in the preamble hereto.
      ------------

     "Confidential Information" has the meaning set forth in Section 15.9(a).
      ------------------------

     "Consenting MPP" means a Managed Physician Practice who accepts the
      --------------
benefits of this Agreement by executing a Supplemental Plan Agreement.

     "Consenting Plan" means a Plan who accepts the benefits of this Agreement
      ---------------
by executing a Supplemental Plan Agreement.

     "Consenting Provider" means a Provider who accepts the benefits of this
      -------------------
Agreement by executing an MPN Provider Release or an MPPP Release, as
applicable.

                                       4
<PAGE>

     "Conservator" means the Conservator appointed by the DOC pursuant to the
      -----------
Conservatorship Order issued by the Commissioner, in his capacity as an agent of
the DOC.

     "Conservatorship Order" has the meaning set forth in the Recitals.
      ---------------------

     "Credit Agreement" shall mean the Amended and Restated Credit Agreement
      ----------------
dated as of June 9, 1998, as amended and otherwise modified, among MedPartners,
the Lenders party thereto, NationsBank, N.A., as the Initial Issuing Bank and
the Swing Line Bank thereunder, Credit Lyonnais New York Branch, The First
National Bank of Chicago and Morgan Guaranty Trust Company of New York, as the
Syndication Agents therefor, NationsBank Montgomery Securities LLC, as the
Arranger therefor, and NationsBank, N.A., as the Administrative Agent for the
Lender Parties thereunder.

     "Creditors Committee" means the Official Committee of Creditors Holding
      -------------------
Unsecured Claims in the Bankruptcy Case.

     "Default" has the meaning set forth in Section 10.1 and Section 11.1.
      -------

     "DOC" has the meaning set forth in the preamble hereto.
      ---

     "DOC Action" means the action commenced by the Commissioner on March 18,
      ----------
1999 styled In the Matter of The Commissioner of Corporations of the State of
California v. MedPartners Provider Network, Inc.; case number BS056226, by
filing with the Los Angeles Superior Court a Petition to Confirm the
Commissioner's Order Appointing Conservator.

     "Effective Date" has the meaning set forth in Section 13.1.
      --------------

     "Examiner Order" means the Order of the Bankruptcy Court, in substantially
      --------------
the form attached as Schedule 2.2, approving the Stipulation.

     "Final Order" means an order or judgment of the Bankruptcy Court, or other
      -----------
court of competent jurisdiction over the Bankruptcy Case, as entered on the
docket in the Bankruptcy Case, that has not been reversed, stayed, modified or
amended, and as to which the time to appeal or seek certiorari has expired and
no appeal or petition for certiorari has been timely taken, or as to which any
appeal that has been or may be taken or any petition for certiorari that has
been or may be filed has been resolved by the highest court to which the order
or judgment was appealed or from which certiorari was sought.

     "GAAP" means generally accepted accounting principles as in effect from
      ----
time to time in the United States, consistently applied.

     "Governing Documents" means the certificate or articles of incorporation,
      -------------------
by-laws, or other organizational or governing documents of any Person.

     "Governmental Authority" means any federal, state, local, or other
      ----------------------
governmental or administrative body, instrumentality, department, or agency or
any court, tribunal, administrative hearing body, arbitration panel, commission,
or other similar dispute-resolving panel or body.

                                       5
<PAGE>

     "Health Care Services" means any service rendered and medical devices,
      --------------------
supplies or products provided to or for the benefit of an enrollee in a Plan
that is provided for, covered or arranged for under an agreement for which MPN
or a Managed Physician Practice is obligated to pay pursuant to an agreement or
course of dealing with the applicable provider.

     "Health Care Services Agreement" means an agreement for the provision of
      ------------------------------
Health Care Services between a Plan and MPN or a Managed Physician Practice.

     "Knox-Keene Act" means the Knox-Keene Health Care Service Plan Act of 1975
      --------------
(California Health and Safety Code (S) 1340, et seq.), as amended.
                                             -- ----

     "Letter of Credit" means the irrevocable letter of credit delivered
      ----------------
pursuant to Section 3.6.

     "Managed Physician Practices" means Southern California Medical
      ---------------------------
Corporation, a California professional corporation; Talbert Medical Group, a
California professional corporation; Mullikin Practice Group, A Medical
Corporation, a California professional corporation; Pacific Physician Services
Medical Group, Inc., a California professional corporation; and other capitated
providers in the MPN network in the State of California (excluding MPN) whose
non-medical operations are or were managed by MedPartners or an Affiliate of
MedPartners.

     "Managed Physician Practice Preserved Claims" means Claims arising in favor
      -------------------------------------------
of a Managed Physician Practice against a Plan (i) under a Health Care Services
Agreement in the ordinary course of business, (ii) in the ordinary custom and
practice between the Managed Physician Practice and the Plan, (iii) that the
Managed Physician Practice would customarily receive payment for or seek to
recover from an entity or person that contracts for the provision of Health Care
Services, or (iv) that a Managed Physician Practice would, in the custom of the
industry, be expected to receive payment for or to recover from an entity or
person that contracts for the provision of Health Care Services, with respect to
claims that infrequently arise and do not otherwise fall within (i), (ii) or
(iii) above.

     "Managed Physician Practice Provider Claims" means Claims against the
      ------------------------------------------
Managed Physician Practices for Health Care Services rendered prior to the
closing of the asset sale pertaining to that Managed Physician Practice, whether
held by Providers or asserted by Plans as reimbursement for payments made by
Plans on account of such Claims.

     "Management Agreement" means the Amended and Restated MedPartners Provider
      --------------------
Network, Inc. Management Agreement, dated December 31, 1997, between MPN and
MedPartners.

     "Material Adverse Change" means a material adverse change in the business,
      -----------------------
operations, results of operations, assets, liabilities or financial condition of
MedPartners.

     "MedPartners" has the meaning set forth in the preamble hereto.
      -----------

     "MedPartners Action" means the action commenced by MedPartners on March 17,
      ------------------
1999, styled MedPartners, Inc. v. William Kenefick, in his capacity as Acting
Commissioner of the Department of Corporations of the State of California; the
Commissioner of the Department of

                                       6
<PAGE>

Corporations for the State of California; and Eugene Froelich as an agent of the
Commissioner of the Department of Corporations for the State of California; case
number BC207250, by filing with the Los Angeles Superior Court a Complaint for
Injunctive Relief (CCP (S) 526); Complaint for Declaratory Relief (CCP (S) 1060)
and Application for Order to Show Cause (HSC (S) 1393).

     "MedPartners Funding Commitment" has the meaning set forth in Section
      ------------------------------
3.5(a).

     "Motion To Dismiss" has the meaning set forth in the Recitals hereto.
      -----------------

     "MPN" has the meaning set forth in the preamble hereto.
      ---

     "MPN Plan Subordinated Claims" means all Claims of a Plan against MPN other
      ----------------------------
than Plan Preserved Claims and Provider Claims.

     "MPN Preserved Claims" means Claims arising in favor of MPN against a Plan
      --------------------
(i) under a Health Care Services Agreement in the ordinary course of business,
(ii) in the ordinary custom and practice between MPN and the Plan, (iii) that
MPN would customarily receive payment for or seek to recover from an entity or
person that contracts for the provision of Health Care Services, or (iv) that
MPN would, in the custom of the industry, be expected to receive payment for or
to recover from an entity or person that contracts for the provision of Health
Care Services, with respect to claims that infrequently arise and do not
otherwise fall within (i), (ii) or (iii) above.

     "MPN Provider Claims" means Claims against MPN for Health Care Services,
      -------------------
whether held by Providers or asserted by Plans as reimbursement for payments
made by Plans on account of such Claims.

     "MPN Provider Release" means a release by a Provider in form and substance
      --------------------
acceptable to the parties and the Creditors Committee (whose approval shall not
be unreasonably or untimely withheld), whereby a Consenting MPN Provider agrees
to release MedPartners, and the Consenting Plans as follows:

          (a) such release to be effective as a subordination of all Claims
other than MPN Provider Claims to, and only to MPN Provider Claims and Preserved
Plan Claims which become Allowed MPN Claims.  Any distribution on account of
such subordinated Claims shall be assigned for the benefit of Consenting
Providers and Consenting Plans on account of their MPN Provider Claims and
Preserved Plan Claims which become Allowed MPN Claims in such amount as is
necessary to fulfill the MedPartners Funding Commitment on account of such
Allowed MPN Claims and, as to any excess, to the MedPartners California Account;

          (b) such release to be effective as a release as to each MPN Provider
Claim in favor of MedPartners upon the receipt by such Consenting Provider of
payment in full on account of the Allowed MPN Claim based upon such MPN Provider
Claim;

          (c) upon satisfaction in full of the MedPartners Funding Commitment
with respect to all of the Provider's MPN Provider Claims, such release to be a
general release of all Claims in favor of MedPartners with respect to the
interests, assets and operations of MPN, conditioned upon the receipt of a
reciprocal release from MedPartners of similar scope;

                                       7
<PAGE>

          (d) such release to include an agreement by such Consenting Provider
in favor of Consenting Plans whereby such Consenting Provider (1) agrees not to
bill or otherwise seek payment on account of any Provider Claims from Consenting
Plan enrollees for whom MPN previously provided or arranged for Health Care
Services; (2) agrees to refrain from seeking payment from any Consenting Plan
related to any Provider Claims until the Calculation Date; (3) agrees that (i)
to the extent it has received or there has been set aside for its benefit as of
the Calculation Date, in the aggregate, not less than 75% of the amount of its
MPN Provider Claims and its finally adjudicated Managed Physician Practice
Provider Claims (plus the amount, if any, estimated by the Bankruptcy Court or
pursuant to Section 3.5(c), as applicable, for any Provider Claims not yet fully
resolved) for services rendered prior to April 30, 1999, from sources other than
the Letter of Credit, and (ii) if it agrees to provide the Consenting Plans who
provide said Provider with a release as described in subsection (d)(4) hereof
with a release of all Claims for Health Care Services provided to enrollees
pursuant to Health Care Services Agreements, which release shall be in a form to
be appended to the Plan of Reorganization (with the understanding that the
proceeds of a draw under the Letter of Credit shall not be disbursed to holders
of allowed MPN Claims until the Calculation Date) then it shall receive its
ratable share of the proceeds from a draw under the Letter of Credit; and (4)
agrees to release the Consenting Plans from the Provider's Claims for Health
Care Services provided to enrollees pursuant to Health Care Services Agreements
prior to June 1, 1999 upon (i) the satisfaction in full of the MedPartners
Funding Commitment, and (ii) the Consenting Plan's execution of a limited
release in favor of a Provider for the Plan's claims to recover an overpayment
on account of the provision of Health Care Services prior to June 1, 1999
arranged by MPN or a Managed Physician Practice, except to the extent that the
Plan receives an assignment of Claims from MPN, MedPartners or the Managed
Physician Practice as provided in Section 15.17.  Nothing herein shall be
effective to release a Provider from any Claim other than a Claim for
overpayment for Health Care Services arranged for by MPN or a Managed Physician
Practice pursuant to a Health Care Services Agreement; and

          (e) such release to include an agreement whereby each Consenting
Provider agrees not to initiate an action against MedPartners with respect to
the interests, assets and operations of MPN, on account of such Provider Claims,
while MedPartners is not in Default under this Agreement.

     "MPP Plan Subordinated Claims" means all Claims of a Plan against a Managed
      ----------------------------
Physician Practice other than MPP Plan Preserved Claims, Provider Claims and
claims expressly not waived by reason of Section 15.17.

     "MPPP Release" means a release by a Provider in form and substance
      -------------
acceptable to the parties and the Creditors Committee (whose approval shall not
be unreasonably or untimely withheld), whereby a Consenting Managed Physician
Practice Provider agrees to release MedPartners, the Consenting Plans and the
applicable Managed Physician Practice, as follows:

          (b) such release to be effective as a release as to each Managed
Physician Practice Provider Claim in favor of MedPartners upon the receipt by
such Provider of payment in full on account of such Claim; and

          (c) upon payment in full of all of such Provider's Managed Physician

                                       8
<PAGE>

Provider Claims, such release to be a general release of all Claims in favor of
MedPartners and such Managed Physician Practices with respect to Claims relating
to such Managed Physician Practices, conditioned upon the receipt from
MedPartners of a reciprocal release of similar scope.

          (d) such release to include an agreement by such Consenting Provider
in favor of the Consenting Plans whereby such Consenting Provider (1) agrees not
to bill or otherwise seek payment on account of any Provider Claims from
Consenting Plan enrollees for whom the applicable Managed Physician Practice
previously provided or arranged for Health Care Services; (2) agrees to refrain
from seeking payment from any Consenting Plan related to any Provider Claims
until the Calculation Date; (3) agrees that (i) to the extent it has received or
there has been set aside for its benefit as of the Calculation Date, in the
aggregate, not less than 75% of the amount of its MPN Provider Claims and its
finally adjudicated Managed Physician Practice Provider Claims (plus the amount,
if any, estimated by the Bankruptcy Court or pursuant to Section 3.5(c) of this
Agreement, as applicable for any Provider Claims not yet fully resolved) for
services rendered prior to April 30, 1999, from sources other than the Letter of
Credit, (ii) to receive its ratable share of the proceeds from a draw under the
Letter of Credit if it agrees to provide the Consenting Plans with a release of
all Claims for Health Care Services provided to enrollees pursuant to Health
Care Services Agreements, with the understanding that the proceeds of a draw
under the Letter of Credit shall not be disbursed to holders of allowed MPN
Claims until the Calculation Date; and (4) agrees to release the Consenting
Plans upon satisfaction in full of the MedPartners Funding Commitment for all
Claims for Health Care Services provided to enrollees pursuant to Health Care
Services Agreements.

          (e) such release to include an agreement whereby each Consenting
Provider agrees not to initiate an action against either MedPartners or the
applicable Managed Physician Practice with respect to the interests, assets and
operations of the applicable Managed Physician Practice, on account of such
Provider Claims, while MedPartners is not in Default under this Agreement.

     "Net Cash Proceeds" means cash proceeds from the sale of the California
      -----------------
Operations less sale expenses actually paid to non-Affiliate third parties by
MedPartners in connection therewith.  Cash proceeds shall include proceeds
received from promissory notes executed by the purchasers as consideration for
the sale of the California Operations.

     "Person" means and includes natural persons, corporations, limited
      ------
liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.

     "Petition Date" means, with respect to MPN, March 11, 1999.
      -------------

     "Plan" means a health care services plan with which MPN or a Managed
      ----
Physician Practice had a valid and enforceable Health Care Services Agreement on
the Petition Date.

     "Plan of Reorganization" has the meaning set forth in Section 7.1(h).
      ----------------------

                                       9
<PAGE>

     "Plan Preserved Claims" means Claims arising in favor of a Plan (i) under a
      ---------------------
Health Care Services Agreement in the ordinary course of business; (ii) in the
ordinary custom and practice between the Plan and MPN or a Managed Physician
Practice; (iii) that the Plan would customarily charge back or seek to recover
from an entity or person that provides or arranges for the provision of Health
Care Services to enrollees of the Plan; or (iv) that a Plan would in the custom
of the industry be expected to charge back or seek to recover from an entity or
person that provides or arranges for the provision of Health Care Services to
enrollees of a Plan, with respect to claims that infrequently arise and do not
otherwise fall within (i), (ii) or (iii) above.

     "Plan Stipulation" means that certain Stipulation re:  (a) Payment of
      ----------------
Capitation to and by Debtor and (b) Adequate Protection attached to the Order
Granting Motion for Approval of Stipulation; (1) Payment of Capitation to and by
Debtor and (2) Adequate Protection entered by the Bankruptcy Court on April 29,
1999 as subsequently modified by the Court to add additional Plan signatories.

     "Providers" means hospitals, hospital groups, physicians, physician groups,
      ---------
medical service providers, laboratories, specialists and sub-specialists,
ancillary providers and other persons, groups and organizations that provide
Health Care Services.

     "Provider Claims" means MPN Provider Claims and Managed Physician Practice
      ---------------
Provider Claims.

     "Provider Stipulation" means that certain [Amended] Stipulation with
      --------------------
Certain Providers attached to the Order Granting Motion for Approval of
Stipulation with Certain Providers and Approving Amended Stipulation; Notice of
Entry entered by the Bankruptcy Court on April 29, 1999.

     "Records" has the meaning set forth in Section 2.1(b)(iii) of this
      -------
Agreement.

     "Representatives" has the meaning set forth in Section 15.9(a) of this
      ---------------
Agreement.

     "Requirement of Law" means, as to any Person:  (a) all (i) statutes and
      ------------------
regulations and (ii) court orders and injunctions, arbitrators' decisions,
and/or similar rulings, in each instance by any Governmental Authority or other
body that has jurisdiction over such Person, any property of such Person, or of
any other Person for whose conduct such Person would be responsible; and (b)
that Person's organizational documents, by-laws and/or other instruments that
deal with corporate or similar governance, as applicable.

     "SAP" means, where required by the DOC regulations as applicable to MPN,
      ---
statutory accounting principles.

     "Special Monitor" means the special monitor appointed by an order of the
      ---------------
Los Angeles Superior Court pursuant to the Special Monitor Order, in his or her
capacity as an agent of the DOC.

     "Special Monitor-Examiner" means the examiner appointed by the Examiner
      ------------------------
Order, or any successor Special Monitor-Examiner or superseding official.

                                       10
<PAGE>

     "Special Monitor Order" has the meaning set forth in the Recitals.
      ---------------------

     "State" has the meaning set forth in the preamble hereto.
      -----

     "State Court Actions" means, collectively, the MedPartners Action and the
      -------------------
DOC Action.

     "Stay" has the meaning set forth in the Recitals.
      ----

     "Stipulation" means the Stipulation in substantially the form attached as
      -----------
Schedule 9.2.

     "Subsidiary" of a Person means a corporation, partnership, limited
      ----------
liability company, or other entity in which that Person directly or indirectly
owns or controls the equity ownership interests having ordinary voting power to
elect a majority of the board of directors (or appoint other comparable
managers) of such corporation, partnership, limited liability company, or other
entity.

     "Supplemental Plan Agreement" has the meaning set forth in Section 15.17.
      ---------------------------

     "Supplemental Plan Agreement Party" has the meaning set forth in Section
      ---------------------------------
15.17.

     "Term" means the term commencing on the Agreement Date and ending in
      ----
accordance with Section 13.3.

     "Transition Plan" means the transition plan set forth in this Agreement
      ---------------
providing certain terms for the wind down of the California Operations.

      1.2 Accounting Terms. All accounting terms not specifically defined herein
shall be construed in accordance with GAAP or, where required by the DOC
regulations applicable to MPN, SAP. When used herein, the term "financial
statements" shall include the notes and schedules thereto. Whenever the term
"MedPartners" is used in respect of a financial term, it shall be understood to
mean MedPartners on a consolidated basis unless the context clearly requires
otherwise.

     1.3 Construction. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the term "including" is not limiting, and the term
"or" has, except where otherwise indicated, the inclusive meaning represented by
the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Section, subsection, clause,
schedule, and exhibit references are to this Agreement unless otherwise
specified. Any reference in this Agreement shall include all alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions, and supplements, hereto and hereof, as applicable.

     1.4 Schedules and Exhibits. All of the schedules and exhibits attached to
this Agreement shall be deemed incorporated herein by reference.

                                       11
<PAGE>

2.  SPECIAL MONITOR ROLE.

     2.1  Role of Special Monitor-Examiner on Amended Agreement Date.

          (a) As provided in the Examiner Order attached hereto as Schedule 2.2,
commencing on the Amended Agreement Date and continuing through the Effective
Date, J. Mark Abernathy (or his successor as and when ordered by the Bankruptcy
Court) shall: (i) serve as the Special Monitor-Examiner of MPN and the
California Operations, (ii) perform the functions described in Section B of the
Stipulation and the Examiner Order with respect to MPN and the California
Operations, (iii) have supervisory oversight authority over MPN, and (iv) have
oversight authority over MedPartners' compliance with its obligations under this
Agreement with respect to MPN and the California Operations, as set forth in the
Stipulation, the Examiner Order and in this Agreement.

          (b) Without limiting the foregoing, the responsibilities and authority
of the Special Monitor-Examiner, during the period covered by this Section 2.1,
which MPN and MedPartners acknowledge, are as follows:

                 (i) The Special Monitor-Examiner shall have the authority to
employ such employees, including a secretary, and professionals (subject to
Bankruptcy Court approval), as reasonably necessary to perform his duties
hereunder. Reasonable expenses incurred in connection therewith shall be paid
upon presentation to MPN of a written request and itemization of services
rendered and costs incurred (subject to Bankruptcy Court approval, if required);

                 (ii) MPN shall provide the Special Monitor-Examiner and his or
her staff with office space (similar in size and amenities to that of senior
officers of MPN) located at 5000 Airport Plaza Drive, Long Beach, California
90815, reasonably equipped with a facsimile machine, computers, telephones and
such other equipment, in good working order, reasonably required by the Special
Monitor-Examiner, so as to permit the Special Monitor-Examiner to perform his
supervisory oversight duties;

                 (iii) The Special Monitor-Examiner shall have full and complete
access (including the right to copy) during normal business hours to all books
of account, accounting and financial records, reports and all other records
relating to MPN's business and the California Operations ("Records") wherever
located. MPN and MedPartners shall cooperate with the Special Monitor-Examiner
and promptly provide him or her with such Records as he or she reasonably
requests. The Special Monitor-Examiner and his employees shall have full and
complete access to and cooperation by the officers, directors and employees of
MPN and MedPartners and its Affiliates who perform services for MPN;

                 (iv) In addition to the access to Records and personnel as
provided herein, MPN shall provide to the Special Monitor-Examiner, not later
than three Business Days in advance of any asset transfer or payment by MPN
(whether by check, wire transfer or other method), a schedule listing as to each
payment, the name of the payee, the amount and the reason for such payment, or
provide such other information as the Special Monitor-Examiner deems
appropriate. Not later than three Business Days after receipt of such schedule,
the Special Monitor-Examiner or his staff shall either approve or disapprove
such payment or transfer and

                                       12
<PAGE>

shall state in writing a reason for such disapproval. If the Special Monitor-
Examiner shall not have approved or disapproved of such payment or transfer
within three Business Days, MPN shall be entitled to assume the Special Monitor-
Examiner has approved of such payment or transfer. If the Special Monitor-
Examiner shall have disapproved of any payment or transfer, the payment or
transfer shall not be made. MPN shall be entitled thereafter to make any such
payment or transfer disapproved by the Special Monitor-Examiner only after
obtaining an order of the Bankruptcy Court authorizing or approving such payment
or transfer; and

                 (v) MedPartners and MPN will provide to the Special Monitor-
Examiner (A) no later than the first Business Day following the first and
fifteenth day of each month, semi-monthly reports in arrears for such semi-
monthly period in narrative form that will provide an update on asset sale
progress, Provider and Plan receivables (if applicable), and the overall status
of claims adjudication and payment pursuant to Section 3.5(b) and (B) no later
than the tenth Business Day following each month, a monthly report in arrears
for such month that will compare the actual cash flow (both sources and uses)
for such month against the cash flow plan set forth in Schedule 3.1, together
with an explanation for any material variance from such plan, and a revised cash
flow plan, if required.

          (c) Effective as of the Agreement Date and subject to Section 2.2, the
Undertaking of MPN, dated November 17, 1997, is hereby modified to the extent
necessary to be consistent with this Agreement.

     2.2  Role of Special Monitor-Examiner on Effective Date.

          (a) From the Effective Date and continuing during the Term of this
Agreement, J. Mark Abernathy (or his successor as and when ordered by the
Bankruptcy Court) shall: (i) continue to serve as the Special Monitor-Examiner
of MPN and the California Operations, (ii) perform the functions described in
Section C of the Stipulation and the Examiner Order with respect to MPN, (iii)
have supervisory oversight authority over MPN, and (iv) have oversight authority
over MedPartners' compliance with its obligations under this Agreement with
respect to MPN and the California Operations, as set forth in the Stipulation,
the Examiner Order and in this Agreement.

          (b) Without limiting the foregoing, the responsibilities and authority
of the Special Monitor, during the period covered by this Section 2.2, which MPN
and MedPartners acknowledge, are as follows:

                 (i) The Special Monitor-Examiner shall have the authority to
employ such employees, including a secretary, and professionals (subject to
Bankruptcy Court approval), as reasonably necessary to perform his duties
hereunder. Reasonable expenses incurred in connection therewith shall be paid
upon presentation to MPN of a written request and itemization of services
rendered and costs incurred (subject to Bankruptcy Court approval, if required);

                 (ii) MPN shall provide the Special Monitor-Examiner and his or
her staff with office space (similar in size and amenities to that of senior
officers of MPN) located at 5000 Airport Plaza Drive, Long Beach, California
90815, reasonably equipped with a facsimile machine, computers, telephones and
such other equipment, in good working order, reasonably

                                       13
<PAGE>

required by the Special Monitor-Examiner, so as to permit the Special Monitor-
Examiner to perform his or her supervisory oversight duties;

                 (iii) The Special Monitor-Examiner shall have full and complete
access (including the right to copy) during normal business hours to all Records
wherever located. MPN shall cooperate with the Special Monitor-Examiner and
promptly provide him or her with such Records as he or she reasonably requests.
The Special Monitor-Examiner and his or her employees shall have full and
complete access to and cooperation by the officers, directors and employees of
MPN and MedPartners and its Affiliates who perform services for MPN;

                 (iv) MedPartners and MPN will provide to the Special Monitor-
Examiner (A) no later than the first Business Day following the first and
fifteenth day of each month, semi-monthly reports in arrears for such semi-
monthly period in narrative form that will provide an update on asset sale
progress, Provider and Plan receivables (if applicable), and the overall status
of claims adjudication and payment pursuant to Section 3.5(b) hereof, and (B) no
later than the tenth Business Day following each month, a monthly report in
arrears for such month that will compare the actual cash flow (both sources and
uses) for such month against the cash flow plan set forth in Schedule 3.1,
together with an explanation for any material variance from such plan, and a
revised cash flow plan, if required.

     2.3  Application of DOC Regulations Pertaining to Tangible Net Equity
Requirements.  The DOC acknowledges that MPN's operations will be discontinued
in accordance with the Transition Plan.  During the Term, unless necessary to
safeguard the delivery or provision of health care services as required by the
Knox-Keene Act to MPN or Plan enrollees, the State shall take no action with
respect to the enforcement against MPN for a violation of the tangible net
equity requirements of 10 C.C.R. (S) 1300.76.

     2.4  Payment of Expenses Incurred by or on Behalf of the Conservator, the
Special Monitor, the Special Monitor-Examiner, the DOC or the Agency.

          (a) After submission of invoices and review and approval of such
amounts by the State and the Agency, MPN shall pay the reasonable fees and
expenses of Eugene Froelich for the period during which he served as Conservator
under the Conservatorship Order, subject to the approval of such fees by the
Bankruptcy Court, if required. Such fees and expenses shall be paid as soon as
practicable after Bankruptcy Court approval, if required. MPN shall also pay the
reasonable fees and expenses of Pryor Cashman Sherman & Flynn LLP for the period
from the Petition Date through April 11, 1999, and the reasonable fees and
expenses of Danning, Gill, Diamond & Kollitz LLP, when and in the amounts
ordered by the Bankruptcy Court upon the application of such persons for
compensation and reimbursement of expenses.

          (b) MPN shall pay the reasonable fees and expenses of J. Mark
Abernathy or any replacement Special Monitor-Examiner (including any fees and
expenses of J. Mark Abernathy in his role as Conservator under the
Conservatorship Order and as Special Monitor under the Special Monitor Order),
including any staff required by the Special Monitor-Examiner, subject to the
approval of the Bankruptcy Court, if required. Such fees and expenses shall be
paid as soon as practicable after Bankruptcy Court approval, if required.

                                       14
<PAGE>

          (c) Unless previously sought, following the Agreement Date, MPN may
seek authority from the Bankruptcy Court to employ Milbank, Tweed, Hadley &
McCloy LLP ("MTHM") as MPN's bankruptcy counsel, in accordance with applicable
Bankruptcy Court procedures. MPN shall pay the reasonable fees and expenses of
MTHM (or such other law firm which may subsequently be employed by MPN), if
their employment is approved by the Bankruptcy Court, when and in the amounts
ordered by the Bankruptcy Court upon the application of such persons for
compensation and reimbursement of expenses.

          (d) MPN shall pay the reasonable fees and expenses of the Creditors
Committee, including the reasonable fees and expenses of Latham & Watkins and
Crossroads Capital Partners, LLP, in accordance with applicable Bankruptcy Court
procedures, when and in the amounts ordered by the Bankruptcy Court upon the
application of such persons for compensation and reimbursement of expenses.

          (e) MedPartners shall pay promptly the reasonable fees and expenses of
Deloitte & Touche and Bear, Stearns & Co. Inc. in advising the State with
respect to the Transition Plan and the negotiation of this Agreement including
any term sheet relating thereto.

          (f) MedPartners shall reimburse promptly the State and the Agency for
all reasonable fees and expenses of Manatt, Phelps & Phillips, LLP, special
counsel to the State and the Special Monitor-Examiner (and prior to the entry of
the Examiner Order, the Special Monitor under the Special Monitor Order, and
prior to the entry of the Special Monitor Order, the Conservator under the
Conservatorship Order), and incurred in connection with: (i) the Transition
Plan; (ii) the preparation, execution and consummation of this Agreement; (iii)
the State Court Actions; and (iv) the Bankruptcy Case.

          (g) MedPartners shall cause to be funded the expenses of MPN set forth
in Sections 2.4(b)-(d) hereof; provided, however, that MedPartners shall not
cause to be funded any claims under Section 503(b)(3) or (4) of the Bankruptcy
Code.

          (h) Except as set forth in Section 2.4, Section 12.4 and Section 15.16
of this Agreement, MedPartners shall not be liable for any fees or expenses of
the State or the Agency.

3.  THE TRANSITION PLAN; FUNDING.

     3.1 The Transition Plan. MedPartners shall oversee and manage the sale and
wind down of the California Operations pursuant to the Transition Plan subject
to the supervisory oversight of the Special Monitor-Examiner and as to MPN's
interest in the California Operations, subject to the provisions of the
Bankruptcy Code and the jurisdiction of the Bankruptcy Court. Set forth on
Schedule 3.1 are key elements of the Transition Plan to the extent not otherwise
addressed in this Agreement.

     3.2 Management Agreement. The Management Agreement shall be amended,
effective as of March 12, 1999, substantially in the form set forth on Schedule
3.2. Nothing in this Section or in the amendment to the Management Agreement
shall be construed to be an assumption of the Management Agreement by MPN; and
MPN expressly reserves the right to assume or reject the Management Agreement
and any and all rights it may have in connection with any such assumption or
rejection.

                                       15
<PAGE>

     3.3 Payments to Managed Physician Practices. MPN shall pay capitation
amounts owed to the Managed Physician Practices on the first Business Day of the
month for which the capitation payment applies, or the first Business Day after
MPN has sufficient funds to make such payment, but otherwise in accordance with
the terms of the underlying capitation agreements with the Managed Physician
Practices.

     3.4  Disposition of the California Operations.

          (a) Schedule 3.4(a) identifies as of the Agreement Date the portion of
the California Operations that are the subject of pending sale agreements, the
subject of letters of intent and the anticipated closing date of such sales, and
identifies the remainder of the California Operations to be sold under the
Transition Plan.

          (b) The Net Cash Proceeds of the sale of the California Operations
shall be deposited in the California Accounts on the date each sale closes and
the dates on which such Proceeds are received in accordance with the agreement
of the parties to the sale. The Net Cash Proceeds from the sales shall be
allocated in accordance with the determination of a valuation consultant,
reasonably satisfactory to MedPartners and the Creditors Committee employed by
MedPartners, between the California Accounts and with respect to the allocation
to MPN, as ordered by the Bankruptcy Court.

     3.5  Payment of Claims.

          (a) MedPartners Funding Commitment. Subject to the terms and
              ------------------------------
conditions of this Agreement, MedPartners shall be responsible for the
satisfaction of (e.g., by payment, offset, or by causing to be paid) the
following Provider Claims with respect to MPN and the Managed Physician
Practices, respectively:

                 (i) As to MPN, (A) the total amount of all MPN Provider Claims
that become Allowed MPN Claims, after giving effect to all valid offsets and
recoupments, in accordance with Section 3.5(b) for all MPN Providers who have
executed an MPN Provider Release, and (B) the total amount of all Plan Preserved
Claims with respect to MPN that become Allowed MPN Claims, after giving effect
to all valid offsets and recoupments, in accordance with Section 3.5(b) for all
Consenting Plans who have executed an MPN Plan Release; and

                 (ii) As to the Managed Physician Practices, (A) the total
amount of all Managed Physician Practice Provider Claims that are submitted
timely in accordance with the provisions of Section 3.8(c), in such amounts as
are finally determined to be valid and liquidated, after giving effect to all
valid offsets and recoupments, in accordance with Section 3.5(b) for all Managed
Physician Practice Providers who have executed a MPPP Release, and (B) the total
amount of all Plan Preserved Claims with respect to the Managed Physician
Practices that are submitted timely in accordance with the provisions of Section
3.8(c), in such amounts as are finally determined to be valid and liquidated,
after giving effect to all valid offsets and recoupments, in accordance with
Section 3.5(b) for all Consenting Plans who have executed a Managed Physician
Practice Plan Release;

in each case, to the extent that:

                                       16
<PAGE>

                 (xi) The cash assets of MPN and the Managed Physician
practices, respectively, as of the Agreement Date;

                 (xii) Revenues received by MPN and the Managed Physician
Practices, respectively, following the Agreement Date including, without
limitation, capitation revenues and return of capitation deductions; and

                 (xiii) Net Cash Proceeds received by MPN and the Managed
Physician Practices, respectively, following the Agreement Date ((xi), (xii) and
(xiii) collectively, the "Funding Sources") less Permitted Expenses (as defined
below) are, in the aggregate, inadequate to satisfy such Provider Claims,
assuming that the entire amount of the Funding Sources for MPN and the Managed
Physician Practices, respectively, is applied to the satisfaction of such
Provider Claims. "Permitted Expenses" shall include:

                 (xxi) As to MPN, ordinary and necessary operating expenses
necessary to support the liquidation and winding down of MPN and the
administration of the Bankruptcy Case; provided, however, that the fees and
expenses of professional persons employed at the expense of the MPN estate shall
qualify as ordinary and necessary operating expenses only as set forth in
Section 2.4(g); and

                 (xxii) As to the Managed Physician Practices, ordinary and
necessary operating expenses of the Managed Physician Practices until such time
as its related practice assets are sold or its operations liquidated and wound
down.

          (b) Timing of Payments. Pursuant to the MedPartners Funding
              ------------------
Commitment, MedPartners shall cause Provider Claims to be timely adjudicated
and, to the extent determined to be valid, timely paid. For purposes of this
Section, timely adjudication and timely payment shall mean (provided, for the
first thirty days of the Agreement, the timely standard will be deemed to be
complied with if the MedPartners has implemented a procedure acceptable to the
Special Monitor or Special Monitor-Examiner, as the case may be, for payments to
become current):

                     (1) with respect to a Managed Physician Practice Provider
Claim, such Claim shall be adjudicated and, to the extent determined to be valid
and after giving effect to any offset or recoupment, paid in accordance with
applicable law, including California Health and Safety Code (S)1371, upon
receipt by MedPartners and the applicable Managed Physician Practice of the MPPP
Release; provided, however, that MedPartners shall have mailed or otherwise
transmitted the MPPP Release to each holder of a Managed Physician Practice
Provider Claim within ten Business Days following the Amended Agreement Date;

                     (2) with respect to a pre-petition MPN Provider Claim, such
Claim shall be adjudicated and, to the extent determined to be an Allowed MPN
Claim and after giving effect to any offset or recoupment, timely paid, in a
manner that is consistent with the Bankruptcy Code if the Bankruptcy Case is
then pending, upon receipt by MedPartners and MPN of the MPN Provider Release;
provided, however, that MedPartners or MPN shall have mailed or otherwise
transmitted the MPN Provider Release to each holder of a pre-petition MPN
Provider Claim concurrently with the solicitation of acceptance of a plan of
reorganization; and

                                       17
<PAGE>

                     (3) with respect to a post-petition MPN Provider Claim,
such Claim shall be adjudicated and, to the extent determined to be an Allowed
MPN Claim after giving effect to any offset or recoupment, timely paid, in a
manner that is consistent with the Bankruptcy Code if the Bankruptcy Case is
then pending, and if such Claim is being paid pursuant to the MedPartners
Funding Commitment, upon receipt by MedPartners and MPN of the MPN Provider
Release; provided, however, that MedPartners or MPN shall have mailed or
otherwise transmitted the MPN Provider Release to each holder of a post-petition
MPN Provider Claim to the extent such Provider Claim is being satisfied or paid
pursuant to the MedPartners Funding Commitment.

The rights of each holder of a Managed Physician Practice Provider Claim or an
MPN Provider Claim with respect to the MedPartners Funding Commitment shall
constitute an unsecured Claim against MedPartners under this Agreement if such
holder is a Consenting Provider.

          (c) Funding. Pursuant to the MedPartners Funding Commitment, within
              -------
five Business Days after January 31, 2000, MedPartners shall deposit into each
of the California Accounts an amount of cash equal to the estimated amount
necessary to satisfy the MedPartners Funding Commitment with respect to MPN and
the Managed Physician Practices, respectively, as of December 31, 1999, as
determined by an actuary or financial consultant reasonably satisfactory to MPN,
MedPartners and the Creditors Committee, and with respect to the allocation to
MPN only, as approved by the Bankruptcy Court after notice and a hearing, less,
the amount of any MPN Preserved Claims and Managed Physician Practice Preserved
Claims, respectively, which are estimated by such actuary or financial
consultant to be valid, and which the Special Monitor-Examiner finds are being
asserted by MPN, or MedPartners, but which are contested by the applicable Plan;
provided, that within three Business Days of the resolution of the dispute with
respect to such Claims, by settlement or conclusion of arbitration, MedPartners
shall deposit into the applicable California Account the amount deducted from
the initial deposit under this Section by reason of such dispute. The funds
deposited into the California Account pursuant to this Section shall be used to
pay Provider Claims as they become payable. In the event the actual amount of
applicable Provider Claims payable under the MedPartners Funding Commitment with
respect to MPN and the Managed Physician Practices, respectively, exceeds the
amount deposited hereunder, MedPartners shall fulfill the MedPartners Funding
Commitment with respect to such Provider Claims in accordance with Section
3.5(b) above.

     (d)  Excess Funds.
          ------------

                 (1) In the event the amount deposited into the applicable
California Account hereunder materially exceeds the funds, as determined by an
actuary or financial consultant satisfactory to the parties hereto or as
otherwise agreed by the parties hereto, necessary to fulfill the MedPartners
Funding Commitment, the excess funds will be returned to MedPartners promptly
upon the occurrence of the following:

                     (A) as to the MPN California Account, at any time after
March 31, 2000, when the Bankruptcy Court, upon notice and hearing, has
confirmed the determination of excess funds; and

                                       18
<PAGE>

                     (B) as to the MedPartners California Account, when the
Special Monitor-Examiner, upon five Business Days written notice of such
determination to the Creditors Committee, has determined the amount of excess
funds.

                 (2) In the event the MedPartners Funding Commitment has been
satisfied with respect to the MPN Provider Claims or the Managed Physician
Practice Provider Claims, and there are excess funds in the California Account
with respect to which the Commitment has been satisfied, such excess shall not
be subject to withdrawal as excess funds and shall be used to satisfy Provider
Claims otherwise payable from the other California Account.

                 (3) All funds remaining in either California Account will be
returned promptly to MedPartners upon the occurrence of the following:

                     (A) as to the MPN California Account, when the MedPartners
Funding Commitment with respect to MPN Provider Claims has been fully satisfied
and there are adequate funds in the MedPartners California Account to fulfill
the MedPartners Funding Commitment; and

                     (B) as to the MedPartners California Account, when the
MedPartners Funding Commitment with respect to the Managed Physician Practice
Provider Claims has been fully satisfied.

                 (4)  For purposes of this Section 3.5(d):

                     (A) The MedPartners Funding Commitment with respect to MPN
Provider Claims shall be deemed fully satisfied when an order of the Bankruptcy
Court has been entered making such finding, following notice and hearing; and

                     (B) The MedPartners Funding Commitment with respect to the
Managed Physician Practice Provider Claims shall be deemed satisfied upon the
expiration of five Business Days after the Special Monitor-Examiner gives the
Creditors Committee written notice thereof.

          (e) Certain Event. In the event that MedPartners shall not have
              -------------
executed by July 1, 1999 agreements to sell the practice assets related to
Southern California Medical Corporation, a California professional corporation,
Talbert Medical Group, a California professional corporation, or Mullikin
Practice Group, a Medical Corporation, or any such sale shall not have been
consummated on or before July 31, 1999, MedPartners shall notify the State of
such event on or after July 1, 1999, and MedPartners may begin an orderly
termination of such operations provided that such operations shall continue for
a minimum of 60 days from such notice. In such event, any Claims arising after
giving such notice, shall not be considered to be Provider Claims and shall not
be subject to the MedPartners Funding Commitment. In the event MedPartners gives
a notice with respect to a practice asset under this Section, the State has
consented to the Plans promptly moving their members to unaffiliated networks.
Notwithstanding anything to the contrary in this Agreement, to the extent any
Plan moves any enrollees based on the closure of any Managed Physician Practice,
the Plans shall use their best efforts to move their enrollees to unaffiliated
networks with capacity sufficient to provide uninterrupted Health

                                       19
<PAGE>

Care Services to their enrollees. In addition, the Plans shall acknowledge their
obligations under the Knox-Keene Act to provide, and shall agree to provide,
available and accessible health care services to their members consistent with
the requirement of continuity of care under the Knox-Keene Act when the
enrollees have been moved to the unaffiliated networks. Without limiting the
generality of the foregoing, the movement of members may be undertaken without
regulatory filings or approvals, provided that the Plans shall simultaneously
send a letter to the State advising the State of such actions. As soon as
reasonably practicable thereafter, the Plans will file appropriate regulatory
documents. Further, if MedPartners gives notice under this Section concerning
termination of operations, MedPartners, the Managed Physician Practices and
their respective affiliates shall take reasonable steps to (i) assist the Plans
in the transfer of enrollees to unaffiliated providers in accordance with the
Health Care Services Agreements and applicable law, and (ii) carry out the
orderly termination of such operations so as not to unreasonably increase the
Plans and their enrollees' damages associated with termination of operations,
and any such expenses incurred by MedPartners pursuant to this Section shall not
reduce the MedPartners Funding Commitment.

     3.6 Letter of Credit. To support the MedPartners Funding Commitment, within
one Business Day after the Effective Date, MedPartners shall cause NationsBank,
N.A. to issue an irrevocable letter of credit in the amount of $25 million in
favor of the Special Monitor-Examiner, which shall be substantially in the form
attached as Schedule 3.6.

     3.7  Negative Assurances.

          (a) No Liens. Nothing herein is intended, or shall be construed, to
              --------
grant to the State or any other Person any security interest, encumbrance,
assignment, deposit arrangement, lien (statutory or other) or preference,
priority, or other security or similar agreement, or preferential arrangement of
any kind or nature whatsoever, in respect of any assets of MedPartners, MPN or
any other subsidiary of MedPartners, or any agreement to give or grant any of
the foregoing. This Agreement shall not constitute a bond, note, debenture or
similar instrument for the payment of money, and the obligations of MedPartners
and MPN hereunder are not debt for borrowed money.

          (b) No Occurrences. Nothing is intended, or shall be construed to
              --------------
constitute the occurrence of any of the following events: (i) the entry of a
judgment, decree or order by a court having jurisdiction in the premises
granting relief under the Bankruptcy Code, adjudicating MedPartners to be
insolvent, or approving as properly filed a petition seeking reorganization or
liquidation of MedPartners under the Bankruptcy Code or any similar applicable
Federal or State law; (ii) the entry of a judgment, decree or order by a court
having jurisdiction in the premises for the appointment of a receiver or
liquidator or trustee or assignee in bankruptcy or insolvency of MedPartners or
of its property, or for the winding up or liquidation of its affairs; or (iii)
the filing by MedPartners of a petition for relief under the Bankruptcy Code;
the consent by MedPartners to the filing of a bankruptcy proceeding against it;
the filing by MedPartners of a petition or answer or consent seeking
reorganization or liquidation under the Bankruptcy Code or any similar
applicable Federal or State Law, or the consent by MedPartners to the filing of
any such petition; or the consent by MedPartners to the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it
or of its property; or the making by

                                       20
<PAGE>

MedPartners of an assignment for the benefit of creditors; or an admission by
MedPartners of its inability to pay its debts generally as they become due.

     3.8  Procedures for Provider Claims.

          (a) Independent Claims Oversight. MedPartners shall appoint the Claims
              ----------------------------
Monitor, subject to the supervisory oversight of the Special Monitor-Examiner,
to assist MedPartners and the holders of Provider Claims to (i) determine the
amounts of the Provider Claims and advances by MPN to such holders and (ii)
resolve disputes related thereto. The Special Monitor-Examiner shall oversee the
activities of the Claims Monitor and MPN with respect to the Provider Claims. In
connection with the dispute resolution process with respect to the MPN Provider
Claims, MPN may exercise its rights under the Bankruptcy Code. Any Managed
Physician Practice Provider Claims not fully resolved in accordance with this
procedure shall be resolved through the ordinary course of adjudication under
the applicable agreements.

          (b) MPN Bar Date. As soon as reasonably practicable after the
              ------------
Agreement Date, MPN shall file a motion with the Bankruptcy Court seeking to
establish a bar date of July 31, 1999 (or the first date thereafter as may be
ordered by the Bankruptcy Court) for the filing of all pre-petition Claims. All
objections to such pre-petition Claims shall be filed by October 31, 1999. As
soon as practicable, MPN shall file a motion with the Bankruptcy Court seeking
to establish a bar date of October 31, 1999 for all post-petition Claims with
dates of service before August 1, 1999 other than administrative expense
priority claims of professional persons against MPN. The Special Monitor-
Examiner may file a pleading in support of such motion. The parties shall agree
on the establishment of a subsequent bar date for services performed or goods
provided after August 1, 1999. Unless the Bankruptcy Order orders otherwise for
cause shown, the subsequent bar date shall be no later than November 30, 1999.

          (c) Managed Physician Practice Bar Date. As soon as reasonably
              -----------------------------------
practicable after the Agreement Date, MedPartners shall provide a notice to all
parties (including, without limitation, the Plans) known to MedPartners to have,
or who might reasonably assert, Managed Physician Practice Provider Claims to
establish a bar date of October 31, 1999 for the filing of all Claims against
the Managed Physician Practices and informing such holders that failure to file
Claims prior to such bar date will preclude satisfaction of such Claims pursuant
to the terms of this Agreement.

          (d) Special Monitor-Examiner Supervision. The Special Monitor-Examiner
              ------------------------------------
shall supervise MPN and MedPartners' compliance with their obligations under
Section 3.5(b) to adjudicate timely and pay timely Provider Claims, and shall
supervise the Claims Monitor in the performance of its duties. Among his other
duties, the Special Monitor-Examiner shall review compliance with Section 3.5(b)
not less frequently than biweekly. In the event the Special Monitor-Examiner
determines that MPN and MedPartners are not in compliance with the obligations
to adjudicate timely and pay timely Provider Claims, he or she shall give prompt
written notice of that determination to MPN, MedPartners, the DOC and the
Creditors Committee. Upon receipt of such notice, MPN, with respect to MPN
Provider Claims, and MedPartners, with respect to Managed Physician Practice
Provider Claims, shall have five Business Days to initiate procedures to cure
any alleged failure to comply with its obligation to

                                       21
<PAGE>

adjudicate timely, and three Business Days to cure any alleged failure to comply
with its obligation to pay timely. If, at the conclusion of the applicable
period, the Special Monitor-Examiner determines that MPN or MedPartners, as the
case may be, has not adequately commenced to cure the alleged failure, the
Special Monitor-Examiner, as his or her sole remedy, may initiate final and
binding arbitration pursuant to the provisions of Section 12, regarding such
alleged failure. If a Representative of one or more eligible Beneficiaries under
Section 15.14 makes written demand upon the Special Monitor-Examiner to make a
determination of non-compliance pursuant to this Section 3.8(d), and the Special
Monitor-Examiner fails to make such a determination within ten Business Days
following receipt of such notice or determines that there is compliance, then
such Representative may give written notice of such Beneficiaries' assertion of
an alleged failure to comply to MPN, MedPartners, the State and the Creditors
Committee. If, at the conclusion of the same five and three Business Day periods
following receipt of such notice to address such alleged non-compliance that
would apply following written notice by the Special Monitor-Examiner, such
Beneficiaries determine that MPN or MedPartners, as the case may be, has not
adequately commenced to cure the alleged failure, the Representative, as his,
her or its sole remedy, may initiate final and binding arbitration pursuant to
the provisions of Section 12 regarding such alleged failure.

     3.9  Relinquishment of License of MPN. As soon as reasonably practicable
and subject to applicable provisions of the Bankruptcy Code and California
Health and Safety Code (S) 1399, MPN's health care service plan license shall be
surrendered when MPN no longer has institutional risk and when approved by DOC
and the Bankruptcy Court.

4.  REPRESENTATIONS AND WARRANTIES OF MEDPARTNERS.

     MedPartners represents and warrants as follows:

     4.1  Organization.  MedPartners is duly organized and existing and in good
standing under the laws of the jurisdiction of its incorporation and qualified
and licensed to do business in, and in good standing in, all states except where
the failure to be so licensed or qualified reasonably could be expected to
constitute a Material Adverse Change.

     4.2  Due Authorization; No Conflict.

          (a)  The execution, delivery and performance by MedPartners of this
Agreement has been duly authorized by all necessary corporate action.

          (b)  The execution, delivery and performance by MedPartners of this
Agreement does not (i) violate any provision of federal, state or local law or
regulation applicable to MedPartners, the Governing Documents of MedPartners, or
any order, judgment or decree of any court or other Governmental Authority
binding on MedPartners; (ii) conflict with, result in a breach of, or constitute
(with due notice or lapse of time or both) a default under any material
contractual obligation of MedPartners, or (iii) require any approval of
stockholders or any approval or consent of any Person under any material
contractual obligation of MedPartners, other than the consent of MedPartners'
lenders.

          (c)  Other than the consent of MedPartners' lenders, the execution,
delivery and performance by MedPartners of this Agreement does not require any
registration with,

                                       22
<PAGE>

consent or approval of, or notice to, or other action with or by, any federal,
state, foreign, or other Governmental Authority or other Person.

          (d)  This Agreement is the legally valid and binding obligation of
MedPartners, enforceable against MedPartners in accordance with its terms,
except as enforcement may be limited by equitable principles or by bankruptcy,
insolvency, reorganization, moratorium, or similar laws relating to or limiting
creditors' rights generally.

     4.3  Letters from Experts. Attached hereto as Schedule 4.3 are true and
correct copies of the following:

          (a)  Letter, dated March 31, 1999, from Merrill Lynch with respect to
the valuation of MedPartners.

          (b)  Actuarial opinion, dated March 27, 1999, from David J. Bohmfalk,
F.S.A., M.A.A.A., consulting actuary with Ernst & Young, L.L.P.

5.  REPRESENTATIONS AND WARRANTIES OF MPN.

     MPN represents and warrants as follows:

     5.1  Organization.  MPN is duly organized and existing and in good standing
under the laws of the State of California and is qualified to do business in the
State of California and in no other state.

     5.2  Due Authorization; No Conflict.

          (a)  The execution, delivery and performance by MPN of this Agreement
has been duly authorized by all necessary corporate action.

          (b)  The execution, delivery and performance by MPN of this Agreement
does not (i) violate any provision of federal, state or local law or regulation
applicable to MPN, the Governing Documents of MPN, or any order, judgment or
decree of any court or other Governmental Authority binding on MPN; (ii)
conflict with, result in a breach of, or constitute (with due notice or lapse of
time or both) a default under any material contractual obligation of MPN, or
(iii) require any approval of stockholders or any approval or consent of any
Person under any material contractual obligation of MPN.

          (c)  Other than the consent of, and the approval of the Bankruptcy
Court and the approval of the court in the DOC Action, the execution, delivery
and performance by MPN of this Agreement does not require any registration with,
consent or approval of, or notice to, or other action with or by, any federal,
state, foreign, or other Governmental Authority or other Person.

          (d)  This Agreement is the legally valid and binding obligation of
MPN, enforceable against MPN, in accordance with its terms, except as
enforcement may be limited by equitable principles or by bankruptcy, insolvency,
reorganization, moratorium, or similar laws relating to or limiting creditors'
rights generally.

                                       23
<PAGE>

6.  REPRESENTATIONS AND WARRANTIES OF THE STATE.

     The DOC represents and warrants as follows:

     6.1  Organization.  The DOC is a department of the Agency.  The DOC is duly
formed and validly existing under the laws of the State of California.  The
Commissioner is the duly appointed and acting interim commissioner of the DOC.

     6.2 Due Authorization. The execution, delivery and performance by the DOC
has been duly authorized by all necessary action.

7.  AFFIRMATIVE COVENANTS.

     7.1  Affirmative Covenants of MedPartners.  MedPartners shall do all of the
following:

          (a)  Financial Statements, Reports. Deliver to the Special Monitor-
               -----------------------------
Examiner or make available on EDGAR, promptly after they are filed with the
Securities and Exchange Commission, MedPartners' Form 10-Q Quarterly Reports,
Form 10-K Annual Reports, and Form 8-K Current Reports, and any other public
filings made by MedPartners with the Securities and Exchange Commission.

          (b)  Notice of Certain Events.  Promptly notify the Special Monitor-
               ------------------------
Examiner of any event or circumstance that MedPartners reasonably believes will
result in a material adverse change for the California Operations after taking
into account the events contemplated in the Transition Plan.

          (c)  Asset Sales.  Take such actions as are reasonably necessary
               -----------
(subject to the business judgment rule) to sell the California Operations in the
time periods contemplated hereby, including MPN applying for and obtaining
approval by the Bankruptcy Court to the extent of its interests therein;
provided, however, that the failure of a sale to close within such time periods
shall not constitute a Default by MedPartners hereunder if such failure to close
is the result of the purchasers' actions or the failure of the Bankruptcy Court
to approve such sale. MedPartners shall timely consult with the Plans concerning
the purchaser including the adequacy of the purchasers' capitalization,
administrative capacity and business planning to allow such purchasers to
achieve profitability, provided that MedPartners shall retain ultimate
discretion with respect to decisions regarding the purchaser for, and
consummation of, any transaction. Any asset sale shall address the claims
processing procedure and Provider access for enrollees.

          (d)  Access to Information Regarding Claims Payments.  Upon the
               -----------------------------------------------
reasonable request of the Plans, MedPartners and MPN shall provide reasonable
on-site access to the information required by the contracts with the Plans to
enable the Plans to substantiate compliance with claims payment obligations and
to resolve Cap Deducts.

          (e)  Dismissal.  Within three Business Days after the Effective Date,
               ---------
MedPartners shall file with the Bankruptcy Court a withdrawal, in accordance
with the Local Rules of the United States Bankruptcy Court for the Central
District of California, of MedPartner's Motion to Dismiss.

                                       24
<PAGE>

     (f)  Examiner Oversight.  Reasonably cooperate with the Special Monitor-
          ------------------
Examiner in the performance of his duties under this Agreement.

     (g)  Reports.  Deliver to the Creditors Committee copies of the reports
          -------
delivered pursuant to Sections 2.1(b)(v), 2.2(b)(iv), 7.1(a) and 7.1(b) and
copies of notices of Default delivered pursuant to Section 11.2 and notices,
pleadings and other filings delivered pursuant to Sections 11.3 and 11.4.

     (h)  Plan of Reorganization.  Cause MPN to file in the Bankruptcy Case a
          ----------------------
plan of reorganization (the "Plan of Reorganization") and disclosure statement
consistent with this Agreement, except as provided in Section 15.14(e)(ii),
within ten Business Days after the later to occur of (i) the Effective Date and
(ii) the first pre-petition Claim bar date established pursuant to Section
3.8(b).

     7.2  Affirmative Covenants of the State/Special Monitor-Examiner.

          (a)  Notice of Certain Events.  The State shall notify MedPartners of
               ------------------------
any event or circumstances that the State reasonably believes would require it
to take action under any relevant provision of the Knox-Keene Act, Health and
Safety Code or the rules and regulations applicable to MPN.

          (b)  Asset Sales.  The State shall, in good faith, cooperate with
               -----------
MedPartners, MPN, and the Managed Physician Practices to facilitate the timely
consummation of the sales of the California Operations in the time periods and
in the manner contemplated hereby and in accordance with the requirements of
applicable law.

     (c)  Monitoring of Plans.  In accordance with its authority under the Knox-
          -------------------
Keene Act, the State shall monitor the actions of the Plans with respect to the
matters addressed herein and in any separate agreement among the Plans in
connection herewith.

     (d)  Letter of Credit.  The Special Monitor-Examiner shall use any proceeds
          ----------------
received pursuant to an irrevocable letter of credit solely to fund payment of
finally adjudicated and valid Provider Claims and Allowed MPN Claims of
Consenting Providers. In the event of a draw under the Letter of Credit, the
proceeds of such draw shall be made available to holders of such Claims in
accordance with subparagraph (c) of the MPN Provider Release and the MPPP
Release even if the draw was triggered by nonpayment of an arbitration award.
All proceeds of any draw shall be allocated between holders of MPN Provider
Claims and Managed Physician Practice Provider Claims on the basis of the
Special Monitor-Examiner's determination of the respective estimated amount
remaining under the MedPartners Funding Commitment. The portion of the draw
allocated to MPN Provider Claims shall be deposited into the MPN California
Account. If all Provider Claims of MPN Providers or Managed Physician Practice
Providers are paid in full, any funds from such draw for such Providers shall be
reallocated to be held for the other group of Providers. Any amounts that are
drawn under the Letter of Credit by the Special Monitor-Examiner that are not
used to make payments on account of the MedPartners Funding Commitment shall be
returned to MedPartners after MedPartners Funding Commitment has been finally
satisfied in full. Any funds drawn under the Letter of Credit

                                       25
<PAGE>

allocated to the Claims shall be held by the Special Monitor-Examiner in trust
until used as provided herein.

          (e)  Intentionally Left Blank.

          (f)  Reports.  The State shall deliver to the Creditors Committee
               -------
copies of the reports delivered pursuant to Section 7.2(a) and copies of notices
of Default delivered pursuant to Section 10.2 and notices, pleadings and other
filings delivered pursuant to Sections 10.3 and 10.4; provided, however, that
the failure of the State to provide such reports or notices, as the case may be,
shall not constitute a Default by the State hereunder and the Creditors
Committee shall have no recourse against the State therefor.

          (g)  Reports.  The State shall deliver to the administrative agent
               -------
for the lenders under the Credit Agreement in accordance with Section 14 copies
of the reports delivered pursuant to Section 7.2(a) and copies of notices of
Default delivered pursuant to Section 10.2 and notices, pleadings and other
filings delivered pursuant to Sections 10.3 and 10.4; provided, however, that
the failure of the State to provide such reports or notices, as the case may be,
shall not constitute a Default by the State hereunder and such lenders shall
have no recourse against the State therefor.

          (h)  State Release of Health and Safety Code Section 1371 for
               --------------------------------------------------------
Consenting Plans.  The State hereby agrees that with respect to Consenting
----------------
Plans, the State shall not seek to take or threaten to take any action against
such Plans as a result of the failure by MPN, the Managed Physician Practices,
their affiliates, management entities and management personnel to pay or
adjudicate claims in accordance with the Knox-Keene Act or other law or
regulation. The State's agreement to this provision shall (i) survive any breach
of this Agreement, provided the applicable Consenting Plan performs as
contemplated by this Agreement, and (ii) have no precedential effect in any
other case and is expressly limited to the facts and circumstances of this case.

8.  NEGATIVE COVENANTS.

     8.1  Negative Covenants of MedPartners.  During the Term, except as
otherwise provided in this Agreement, MedPartners shall not file any litigation
against the Special Monitor-Examiner or the State with respect to the California
Operations without fifteen Business Days prior notice to the Special Monitor-
Examiner and the State.

     8.2  Negative Covenants of the State.  During the Term, except to the
extent necessary to safeguard the delivery or provision of health care services
as required by the Knox-Keene Act to MPN or Plan enrollees, and provided that
there is no Default by MPN or MedPartners under the Agreement, the State shall
not exercise or seek to exercise authority over any assets of MPN, except as
otherwise provided by this Agreement.

9.  MUTUAL COVENANTS.

     9.1  State Court Actions.  On or before June 16, 1999, MedPartners shall
file a Dismissal without Prejudice, of the MedPartners' Action, and the State
shall file a Dismissal

                                       26
<PAGE>

without Prejudice, of the DOC Action, and the State shall issue a Stay of the
Conservatorship Order, in the form attached hereto as Schedule 9.1.

     9.2  Bankruptcy Court

          (a)  Examiner Order.  On or before June 16, 1999, the Creditors
               --------------
Committee shall make an Emergency Application for approval of the Stipulation
and appointment in the Bankruptcy Case of the Special Monitor-Examiner as an
examiner pursuant to Section 1104 of the Bankruptcy Code pursuant to which the
Special Monitor-Examiner shall be authorized to perform the functions of the
Special Monitor-Examiner set forth in the Stipulation and the Examiner Order
with respect to MPN and in this Agreement with respect to MPN and the California
Operations. The State will consent to the Emergency Application for approval of
the Stipulation and appointment of the Special Monitor-Examiner. Nothing in the
Examiner Order is intended, or shall be construed to constitute the occurrence
of any of the following events: (i) the entry of a judgment, decree or order by
a court having jurisdiction in the premises granting relief under the Bankruptcy
Code adjudicating MedPartners to be insolvent, or approving as properly filed a
petition seeking reorganization or liquidation of MedPartners under the
Bankruptcy Code or any similar applicable Federal or State law; (ii) the entry
of a judgment, decree or order by a court having jurisdiction in the premise for
the appointment of a receiver or liquidator or trustee or assignee in bankruptcy
or insolvency of MedPartners or of its property, or for the winding up or
liquidation of its affairs; or (iii) the filing by MedPartners of a petition for
relief under the Bankruptcy Code; the consent by MedPartners to the filing of a
bankruptcy proceeding against it; the filing by MedPartners of a petition or
answer or consent seeking reorganization or liquidation under the Bankruptcy
Code or any similar applicable Federal or State Law, or the consent by
MedPartners to the filing of any such petition; or the consent by MedPartners to
the appointment of a receiver or liquidator or trustee or assignee in bankruptcy
or insolvency of it or of its property; or the making by MedPartners of an
assignment for the benefit of creditors; or an admission by MedPartners of its
inability to pay its debts generally as they become due.

          (b)  Within three Business Days of the Amended Agreement Date, MPN
shall file a motion to approve the Agreement with the Bankruptcy Court. The
Special Monitor-Examiner shall file an appropriate pleading in support of such
motion.

     9.3  Cooperation in Implementation of the Transition Plan.  Subject to the
terms and conditions hereof, each of the parties will use all reasonable best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable to implement this Agreement.

     9.4  Agreement to Defend.  In the event any claim, action, suit, proceeding
or investigation by any Person is commenced that questions the validity or
legality of this Agreement after the Effective Date or the transactions
contemplated hereby, the Special Monitor-Examiner, MPN and MedPartners will
notify the other and cooperate and use their reasonable best efforts to defend
against such claims, actions, suits, proceedings or investigations.

                                       27
<PAGE>

10.  DEFAULT BY MEDPARTNERS.

     10.1 Default.  Each of the following shall constitute a default (a
"Default") by MedPartners under this Agreement:

          (a)  Except as set forth in Section 10.1(b) or (c) below, the failure
of MedPartners to perform, in any material respect, the obligations required to
be performed by it under this Agreement; provided, however, that a determination
by the Special Monitor-Examiner under Section 3.8(d), or the initiation of any
arbitration by any Representative under Section 12, shall not constitute the
failure by MedPartners to perform its obligations hereunder, in any material
respect, but MedPartners' failure to pay the amount of any arbitration award
under Section 12 (including an award obtained pursuant to the procedure set
forth in Section 15.14) by reason of such determination or arbitration within
five Business Days of such award shall constitute a Default hereunder.

          (b)  The failure by MedPartners or MPN to comply with the provisions
of Sections 3.4(b) or the failure by MedPartners or MPN to permit the Special
Monitor-Examiner to exercise his or her authority under Section 2.1 or Section
2.2 above; or

          (c)  The use of Net Cash Proceeds from the sales of the California
Operations for any purpose other than to satisfy obligations in accordance with
this Agreement.

          (d)  For purposes of this Section 10, MedPartners shall not be deemed
to have failed to make a payment or to have satisfied any obligations, where
such failure would constitute a Default, during the period that MedPartners or
MPN, as applicable, is adjudicating in good faith the nature or amount of the
payment or obligation, provided that MedPartners shall fulfill the MedPartners
Funding Commitment in connection with any portion of any Provider Claim that is
not contested or subject to a setoff or recoupment asserted in good faith;
provided, however, to the extent any obligation of MedPartners under this
Agreement is contingent upon performance by any third party, including
satisfaction of any condition precedent to the effectiveness of this Agreement,
it shall not be a Default hereunder if MedPartners fails to complete such
obligation despite good faith efforts to do so, by reason of such third party's
non-performance.

     10.2  Notice of Default.  If the Special Monitor-Examiner or the State
believes that MedPartners is in Default, the Special Monitor-Examiner or the
State shall provide MedPartners with written notice of the alleged violation,
specifying the section of this Agreement that MedPartners has allegedly
violated, and specifically identifying the act, omission, event, occurrence,
incident, circumstance or other conduct of MedPartners that the Special Monitor-
Examiner or the State believe constitutes the Default. MedPartners shall have 20
Business Days in the case of a Default of the type set forth in Section 10.1(a)
and three Business Days in the case of a Default of the type set forth in
Section 10.1(b) or 10.1(c) to cure such Default. In the event the Default is not
cured after such period, the State may exercise the remedies set forth in
Section 10.3.

     10.3  Application to State Court.  In the event MedPartners does not cure
any alleged Default within the time period set forth in Section 10.2, either the
Special Monitor-Examiner or

                                       28
<PAGE>

the State may file a motion with the Los Angeles Superior Court seeking a
judicial determination by the judge assigned to the case or the referee, if any,
assigned to the case as to whether a Default has occurred and remains uncured.
The expedited procedures pursuant to California Code of Civil Procedure Section
664.6 shall apply to such motion. Such motion may be brought on an ex parte
basis under and pursuant to the Los Angeles Superior Court Local Rules then in
effect provided that the moving party shall provide MedPartners three Business
Days' advance notice. The Court's ruling on such motion shall not be executable
as a money judgment until such time as the Court enters the stipulated judgment
provided for in Section 10.4, at which time the Court will be deemed to have
entered the final judgment in the action that is subject to the right of appeal
pursuant to Code of Civil Procedure, Section 904.1. Either party may appeal the
judicial determination provided that a bond, in the amount equal to two times
the amount in dispute, is posted.

     10.4  Remedies.  Upon a determination by the Los Angeles Superior Court
that a Default has occurred, the State may file the stipulated judgment in the
form attached hereto as Schedule 10.4 and may exercise all remedies relating
thereto, including but not limited to, authorizing the Special Monitor-Examiner
on behalf of the State to carry out the terms of this Agreement, exercising the
remedies available to a judgment creditor with respect to MedPartners' assets,
and pursuing any other remedies provided by law or equity.

11.  DEFAULT BY THE STATE.

     11.1  Default.  The failure of the State to perform, in any material
respect, the obligations required to be performed by it under this Agreement
after twenty days written notice and opportunity to cure shall constitute a
default by the State ("Default"); provided, however, to the extent any
obligation of the State under this Agreement is contingent upon performance by
any third party, including satisfaction of any condition precedent to the
effectiveness of this Agreement, it shall not be a Default hereunder if the
State fails to complete such obligation despite good faith efforts to do so, by
reason of such third party's non-performance.

     11.2  Notice of Default.  If MedPartners or MPN believes that the State or
the Special Monitor-Examiner is in Default, MedPartners or MPN shall provide the
State and the Special Monitor-Examiner with written notice of the alleged
violation, specifying the section of this Agreement that the State or Special
Monitor-Examiner has allegedly violated, and specifically identifying the act,
omission, event, occurrence, incident, circumstance or other conduct of the
State or the Special Monitor-Examiner that MedPartners or MPN believes
constitutes the Default. In the event the Default is not cured after the cure
period, MedPartners or MPN may exercise the remedies set forth in Section 11.3.

     11.3  Application to State Court.  In the event the State or the Special
Monitor-Examiner does not cure any alleged Default within the time period set
forth in Section 11.2, MedPartners or MPN may file a motion with the Los Angeles
Superior Court seeking a judicial determination by the judge assigned to the
case or the referee, if any, assigned to the case as to whether a Default has
occurred and remains uncured.  The expedited procedures pursuant to California
Code of Civil Procedure Section 664.6 shall apply to such motion.  Such motion
may be brought on an ex parte basis under and pursuant to the Los Angeles
Superior Court local rules then in effect provided that the moving party shall
provide the State and the Special Monitor-

                                       29
<PAGE>

Examiner three Business Days' advance notice. Any party may appeal the judicial
determination provided that a bond, in the amount equal to two times the amount
in dispute, is posted.

     11.4  Remedies.  Upon determination by the Los Angeles Superior Court that
a Default has occurred, MedPartners and MPN may exercise all remedies that they
may have at law or equity. Additionally, if the Default is a seizure of assets
of MPN or MedPartners with respect to the California Operations which is
determined to be either unlawful or is a Default under this Agreement, the
MedPartners Funding Commitment shall be reduced by an amount as determined by
the court equal to the impairment in MedPartners' ability to fulfill the
MedPartners Funding Commitment and all assets improperly seized shall be
returned to MedPartners or MPN, as the case may be.

12.  ALTERNATIVE DISPUTE RESOLUTION.

     12.1 Disputes.  Any controversy, dispute, or claim in connection with, or
in relation to the interpretation or performance of Section 3.5(b) of the
Agreement shall be resolved by final and binding arbitration at the request of
any party, conducted in Los Angeles, California. Such arbitration shall be the
sole and exclusive remedy for adjudicating such controversy, dispute or claim.
The arbitrator shall determine the procedures to be followed in any arbitration
under this Agreement, which procedures shall be governed by the rules of the
American Arbitration Association unless inconsistent with this Section 12. The
arbitrator shall notice hearings at least five days in advance, shall permit
parties to brief issues, introduce documents, present oral testimony of
witnesses, cross-examine witnesses, and present opening and closing argument. To
the extent not otherwise provided in this Agreement, or by law, all other
matters relating to the governance of the arbitration shall be within the
arbitrator's discretion. As used in this Section 12, "party" means party to the
controversy, dispute, or claim.

     12.2  Initiation of Arbitration.  Any party may initiate arbitration by
giving the other party a written demand for arbitration pursuant to the notice
requirements of Section 14; provided, however, that the arbitration shall be
initiated within a reasonable time after the claim or dispute has arisen. Within
five Business Days of receipt of a demand for arbitration, the other party shall
serve a written response on the demanding party in accordance with Section 14.
The demand for arbitration shall contain a statement of the demanding party's
position as to the matter or matters in dispute, the amount of the claim, and
the remedy sought. The response shall contain a statement of the responding
party's positions as to the matter or matters in dispute, and any defenses the
responding party intends to assert in response to the demanding party's claim.
Additionally, the response shall state any cross-complaint the respondent
intends to assert in the arbitration against the initiating party, the cross-
complainant's position as to the matter or matters in dispute, the amount of the
claim, and the remedy sought. The party initiating the arbitration shall have
five Business Days to respond to the cross-claims.

     12.3  Arbitrator.  The arbitration shall be conducted and determined by a
sole arbitrator. The arbitrator shall be Justice Campbell Lucas, or if he is
unavailable, an individual selected by Justice Lucas, or if no individual is
selected by Justice Lucas within five Business Days, the arbitrator shall be
selected by agreement of the parties; if the parties cannot so agree within five
Business Days, then the arbitrator shall be selected by the Presiding Judge of
the Los Angeles Superior Court. Any party may request such judge to designate
the arbitrator.

                                       30
<PAGE>

     12.4  Costs of Arbitration; Attorneys' Fees.  The costs of the arbitration
shall be shared equally by the parties. The prevailing party in the arbitration
proceeding and in any legal proceedings relating to the arbitration shall be
entitled to recover reasonable attorneys' fees and costs.

     12.5  Timing.

          (a)  The parties desire a speedy resolution of any disputes that may
arise. To that end, the arbitrator will, on his or her appointment, consult with
the parties to discuss a reasonable hearing schedule.

          (b)  The arbitrator will use his or her best efforts to ensure that
the first day of hearing takes place within ten Business Days of the last
response served under Section 12.2. The arbitrator will schedule further
hearings as necessary and appropriate within the arbitrator's discretion.

          (c)  The arbitrator will use his or her best efforts to conclude the
hearings and render a written opinion and an award within 20 Business Days of
commencement of the first arbitration hearing. In no event will the arbitrator
render an award later than ten Business Days from the conclusion of the hearing,
unless otherwise agreed by the parties.

     12.6  Determination of Arbitrable Issues.  In the event of a dispute over
whether particular issues are arbitrable under this Agreement, the arbitrator,
and not the court, shall determine whether or not the arbitrator has
jurisdiction over such issues.  The arbitrator's decision as to the arbitrator's
jurisdiction over issues is final and binding.

     12.7  Sanctions.  The arbitrator is empowered to grant sanctions for
dilatory conduct with respect to arbitration under this Agreement.

     12.8  Judgments.  Judgment on the award rendered by the arbitrator may be
entered in any State or Federal court, within California, having jurisdiction.

     12.9  Failure to Appear.  If a party fails or refuses to appear or
participate in the arbitration, or in any portion of the arbitration, after
having been given notice and opportunity to participate as provided in this
Agreement, the arbitration shall proceed. The arbitrator may render a final
award on the basis of the evidence presented by the participating party. An
award rendered under such circumstances is valid and enforceable as if all
parties had participated fully.

13.  EFFECTIVE DATE; CONDITIONS PRECEDENT AND TERMINATION.

     13.1 Effective Date.  Except as otherwise provided herein, the Agreement
shall become effective (the "Effective Date") on the first day following the
satisfaction or waiver in writing by each of the parties of all of the following
conditions:

          (a)  Approval of the Agreement and the transactions contemplated
thereby by the requisite lenders under the Credit Agreement.

                                       31
<PAGE>

          (b)  Execution by such of the following Plans of renegotiated
contracts as contemplated by the Transition Plan effective January 1, 1999 and
incorporating such Plans' agreements to pay retroactive premium adjustments due
thereunder to MPN in the aggregate amount of not less than Ten million dollars:
Aetna U.S. Healthcare, Foundation Health Systems, Inc. (including Health Net and
Foundation Health), Prudential Health Care Plans, Inc., United HealthCare of
California, Inc. and Wellpoint Health Networks (including Blue Cross of
California and California Care).

          (c)  Assumption by Plans constituting 95% of capitation amounts
payable to MPN for the month of May 1999 of institutional risk effective by
July 1, 1999. For purposes of this Agreement, the parties agree not to
characterize the legal implications of such assumption, other than the
assumption of institutional risk; provided, however, that (i) such assumption
shall not affect any Claim a Plan may have against MPN concerning damages
related to such assumption of institutional risk, and (ii) any obligations to
pay institutional capitation to MPN under the Plan Agreements or the Plan
Stipulation subsequent to the applicable date of assumption of institutional
risk shall have been terminated by order of the Bankruptcy Court prior to the
due date and the making of such payment.

          (d)  Authorization and approval by the Bankruptcy Court of MPN's
execution and performance of the Agreement. As used in this Section 13.1(d), the
date on which "Authorization and Approval by the Bankruptcy Court" occurs shall
mean the date on which the order of the Bankruptcy Court approving this
Agreement as it relates to MPN becomes a Final Order, unless the requirement of
finality is waived by the Special Monitor-Examiner, MPN, MedPartners, and the
Creditors Committee, in which case such date shall be the eleventh day following
the date on which the Bankruptcy Court enters an order approving this Agreement,
unless that order is subject to a stay pending appeal, in which case upon such
waiver of the date, shall be no earlier than the first Business Day after the
expiration of the stay.

          (e)  The Bankruptcy Court order approving this Agreement shall provide
that the parties hereto (and any parties claiming thereto) shall be prohibited
from using any funds deposited in the MPN California Account otherwise than in
accordance with the terms of this Agreement.

     13.2  Failure of Conditions Precedent.  This Agreement shall terminate and
the Stipulation for Stay shall be vacated if any of the following occur:

          (a)  Failure of the conditions precedent set forth in
     Section 13.1(b)-(e) to have been satisfied or waived within 45 days from
     the Amended Agreement Date; or

          (b)  Failure of the condition precedent set forth in Section 13.1(a)
     to have been satisfied or waived by all parties within ten Business Days of
     the Amended Agreement Date.

In the event this Agreement terminates pursuant to this Section 13.2, the
parties acknowledge that any and all of their positions existing prior to the
Agreement Date against each other shall be revived, including without limitation
all remedies of the State and all rights and defenses of MedPartners and MPN.

                                       32
<PAGE>

     13.3  Termination.  This Agreement shall terminate at such time MedPartners
shall have satisfied MedPartners Funding Commitment.

14.  NOTICES.

     Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by registered or
certified mail (postage prepaid, return receipt requested), overnight courier,
or telefacsimile to the applicable party at the address set forth below:

          If to MedPartners:          MEDPARTNERS, INC.
                                      3000 Galleria Tower, Suite 1000
                                      Birmingham, Alabama  35244
                                      Attn:  Chief Executive Officer
                                      Fax No.:  (205) 985-0636
                                      and
                                      Attn:  General Counsel
                                      Fax No.:  (205) 982-4423

          with copies to:             JONES, DAY, REAVIS & POGUE
                                      555 West Fifth Street, Suite 4600
                                      Los Angeles, California  90013
                                      Attn:  Ross Stromberg, Esq.
                                      Fax No.:  (213) 243-2539

          If to MPN:                  MEDPARTNERS NETWORK, INC.
                                      5000 Airport Plaza Drive
                                      Long Beach, California  90815
                                      Attn:  Bradley Karro
                                      Fax No.:  (562) 497-4050

          If to the Special Monitor-  OFFICE OF THE SPECIAL MONITOR-
          Examiner                    EXAMINER
                                      5000 Airport Plaza Drive
                                      Long Beach, California  90815
                                      Attn:  Mark Abernathy
                                      Fax No.:  (562) 497-4050

          with copies to:             MILBANK, TWEED, HADLEY & MCCLOY LLP
                                      601 South Figueroa Street, 30th Floor
                                      Los Angeles, California  90017
                                      Attn:  Robert J. Moore, Esq.
                                      Fax No.:  (213) 892-4701

                                       33
<PAGE>

          with copies (until the      DANNING, GILL, DIAMOND
          later of Effective Date     & KOLLITZ, a limited liability partnership
          or the retention by MPN     2029 Century Park East, Third Floor
          of replacement counsel      Los Angeles, California  90067-2904
          in accordance with the      Attn:  Richard K. Diamond, Esq.
          approval of the             Fax No.:  (310) 277-5735

          Bankruptcy Court):

          If to the Commissioner:     COMMISSIONER OF THE DEPARTMENT OF
                                      CORPORATIONS
                                      980 9th Street, Suite 500
                                      Sacramento, California  95814-2725
                                      Attn:  William Kenefick, Esq.
                                      Acting Commissioner
                                      Fax No.:  (916) 322-5875

          If to the DOC:              DEPARTMENT OF CORPORATIONS
                                      980 9th Street, Suite 500
                                      Sacramento, California  95814-2725
                                      Attn:  Christopher Nuechterlein, Esq.
                                      Fax No.:  (916) 322-5875

          with copies to:             BUSINESS, TRANSPORTATION AND
                                      HOUSING AGENCY
                                      980 9th Street, Suite 2450
                                      Sacramento, California  95814-2725
                                      Attn:  Donna May Campbell, Esq.
                                      Fax No.:  (916) 323-5440

                                      MANATT, PHELPS & PHILLIPS, LLP
                                      11355 West Olympic Boulevard
                                      Los Angeles, California  90064
                                      Attn:  Nancy H. Wojtas, Esq.
                                      Fax No.:  (310) 312-4224

                                      OFFICIAL COMMITTEE OF CREDITORS
                                      HOLDING UNSECURED
                                      CLAIMS IN THE BANKRUPTCY CASE
                                      c/o LATHAM & WATKINS
                                      633 West Fifth Street, Suite 4000
                                      Los Angeles, California  90071
                                      Attn:  Michael S. Lurey, Esq.
                                      Fax No.:  (213) 891-8763

                                       34
<PAGE>

          If to Lenders:              NATIONSBANK, N.A.
                                      Independence Center
                                      101 North Tryon Street, 15th Floor
                                      Charlotte, North Carolina  28255
                                      Attn:  Corporate Credit Services -
                                      MedPartners
                                      Fax No.:  (704) 386-9923

          with copies to:             SHEARMAN & STERLING
                                      599 Lexington Avenue
                                      New York, New York  10022
                                      Attn:  William E. Hirschberg, Esq.

          The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.  All notices or demands sent in accordance with this Section 14, shall be
deemed received on the earlier of the date of actual receipt or three days after
the deposit thereof in the mail.

15.  GENERAL PROVISIONS.

     15.1 Time of the Essence.  Time is of the essence with respect to the
performance of each of the parties' obligations hereunder.

     15.2  Choice of Law.  The validity of this agreement, the construction,
interpretation, and enforcement hereof and the rights of the parties hereto with
respect to all matters arising hereunder or related hereto shall be determined
under, governed by and construed in accordance with the laws of the State of
California.

     15.3  Successors and Assigns.  This Agreement shall bind and inure to the
benefit of the respective successors and assigns of each of the parties.

     15.4 Section Headings. Headings and numbers have been set forth herein for
convenience only. Unless the contrary is compelled by the context, everything
contained in each section applies equally to this entire Agreement.

     15.5 Severability of Provisions. Each provision of this Agreement shall be
severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.

     15.6 Amendments in Writing. This Agreement can only be amended by a writing
signed by all of the parties, subject to Section 15.11.

     15.7 Counterparts; Telefacsimile Execution. This Agreement may be executed
in any number of counterparts and by different parties on separate counterparts,
each of which, when executed and delivered, shall be deemed to be an original,
and all of which, when taken together, shall constitute but one and the same
Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this

                                       35
<PAGE>

Agreement by telefacsimile also shall deliver an original executed counterpart
of this Agreement but the failure to deliver an original executed counterpart
shall not affect the validity, enforceability, and binding effect of this
Agreement.

     15.8 Integration. This Agreement reflects the entire understanding of the
parties with respect to the transactions contemplated hereby and shall not be
contradicted or qualified by any other agreement, oral or written, before the
date hereof.

     15.9  Confidentiality.

          (a) Confidential Information. As used in this Agreement, the term
              ------------------------
"Confidential Information" means and includes any and all confidential
information regarding MedPartners, its Affiliates other than MPN, or the Managed
Physician Practices that has been or may hereafter be provided or shown to the
State or any of its Representatives (as hereinafter defined) by MedPartners, any
of its Subsidiaries, Affiliates or the Managed Physician Practices or any of
their respective Representatives or is otherwise obtained from a review of
documents from MedPartners or any of its Subsidiaries, Affiliates or the Managed
Physician Practices irrespective of the form of the communication, and also
includes all notes, analysis, compilations, studies, summaries, and other
material prepared by MedPartners or its Representatives containing or based, in
whole or in part, on any information included in the foregoing. For purposes of
this Section 15.9, "Representatives" means directors, officers, employees,
agents, consultants, advisors, conservators, special monitors, examiners or
other representatives, including legal counsel, accountants and financial
advisors of a party.

          (b) Nondisclosure. Confidential Information (a) will be kept
              -------------
confidential by the State and the State shall use reasonable best efforts to
ensure that its Representatives comply with this Section 15.9 and (b) without
limiting the foregoing, will not be disclosed by the State or its
Representatives to any person except with the specific prior written consent of
MedPartners or except as expressly otherwise permitted by the terms of this
Agreement. The State may disclose Confidential Information to only those
Representatives who (i) reasonably require such material in connection with the
obligations under this Agreement, and (ii) are informed by the State of the
confidential nature of the Confidential Information and the obligations of this
Agreement. Neither the State nor its Representatives will use any of the
Confidential Information for any reason or purpose other than in connection with
this Agreement.

          (c) Notification. If the State or its Representatives are requested to
              ------------
disclose any Confidential Information the State will promptly notify the party
furnishing such Confidential Information to permit it to seek a protective order
or take other appropriate action. Each party will reasonably cooperate in such
party's efforts to obtain a protective order or other reasonable assurance that
confidential treatment will be accorded such Confidential Information. If, in
the absence of a protective order, the party or Representatives are, in the
written opinion of its legal counsel, compelled as a matter of law to disclose
any such Confidential Information to a third party, such party may disclose to
the third party compelling disclosure only the part of such Information as is
required by law to be disclosed (in which case, prior to such disclosure, each
party will use reasonable efforts to advise and consult with the party
furnishing such Confidential Information and its counsel as to such disclosure
and the nature and wording of such disclosure) and each party will each use
reasonable efforts to obtain confidential treatment therefor.

                                       36
<PAGE>

          (d) Exceptions. None of the foregoing obligations and restrictions
apply to that part of the Confidential Information that the State demonstrates
(i) is or becomes generally available to the public other than as a result of a
disclosure by the State or its Representatives, provided that the source of such
information was not known by the State or its Representatives to be bound by a
confidentiality agreement with MedPartners or MPN, with respect to such
Confidential Information, or (ii) is available, or becomes available, to the
State on a non-confidential basis, including as a result of MedPartners, its
Affiliates, the Managed Physician Practices or MPN's filing of such information
with the Bankruptcy Court or Los Angeles Superior Court (other than under seal
or subject to similar protections), or submission of such information to the
Office of the United States Trustee.

     Notwithstanding Section 15.9(d)(i) above, the State shall not continue to
disclose Confidential Information learned from a third party if MedPartners or
MPN notifies the State in writing that such information is the subject of a
Confidentiality Agreement between MedPartners or MPN and the party originally
disclosing such information to the State, or its Representatives.

     Nothing herein shall in any way limit any right to obtain such Confidential
Information in any pending or future litigation, administrative, or other
adversarial proceeding (including arbitration or mediation).

     15.10 Press Releases. Neither MedPartners, MPN nor the State or the Special
Monitor-Examiner shall issue any press release or other public statement with
respect to the execution of this Agreement and the contents hereof without
consulting with the other. MedPartners, MPN and the State will cooperate with
each other prior to issuing any press release or other public statements
regarding this Agreement or the transactions contemplated hereby; provided,
however, MedPartners shall not be required to provide the State with advance
copies or drafts of any documents it files with the Securities and Exchange
Commission or pursuant to applicable stock exchange rules or any press release
or public statement that MedPartners is required, based upon the advice of
counsel, to release under applicable law or stock exchange policy.

     15.11 Actions by the State. Each of the Commissioner and the DOC shall act
collectively hereunder through the Commissioner. No exercise of remedies or
other actions hereunder shall be effective unless exercised by the Commissioner.
MedPartners and MPN may rely upon the actions of the Commissioner with respect
to any action of the State hereunder.

     15.12 Consent to Jurisdiction. Any suit, including insolvency and
bankruptcy proceedings or other enforcement action relating to MPN or
MedPartners and this Agreement shall be tried and litigated in the state or
federal courts located in the county of Los Angeles, State of California;
provided, however, the Bankruptcy Court also shall have jurisdiction over any
action relating to MPN. Each party waives, to the extent permitted under
applicable law, any right it may have to assert the doctrine of forum non
conveniens or to object to venue to the extent any proceeding is brought in
accordance with this Section.

     15.13 Plan and Provider Stipulations. This Agreement shall not in any
manner modify or amend or affect the Provider Stipulation or Plan Stipulation.

                                       37
<PAGE>

     15.14  Third Party Beneficiaries.

          (a) Scope of Rights. This Agreement is for the benefit of the
following entities to the extent provided herein and subject to the limitations
and requirements of this Section:

                 (1) Holders of MPN Provider Claims to the extent of seeking to
enforce adjudication and payment of their Claims under Section 3.5(b);

                 (2) Holders of Managed Physician Practice Provider Claims to
the extent of seeking to enforce adjudication and payment of their Claims under
Section 3.5(b);

                 (3) The Plans to seek an order requiring a party to
specifically perform its obligations under this Agreement; and

                 (4) The Creditors Committee to seek an order requiring a party
to specifically perform its obligations under this Agreement (each individually,
a "Beneficiary," and collectively, the "Beneficiaries").

          (b) Jurisdiction and Representative. Any action under this Section
              -------------------------------
15.14 against MedPartners may only be brought on behalf of one or more
Beneficiaries by a representative of such Beneficiary or group of Beneficiaries
in the Los Angeles Superior Court, or, with respect to MPN, the Bankruptcy
Court; provided, however, that in the event any Beneficiary asserts that
MedPartners or MPN has violated Section 3.5(b), its sole remedy shall be
arbitration pursuant to Section 12. The representative in any such action can be
any of the following: (i) the Special Monitor-Examiner, (ii) one or more MPN
Provider Claim Beneficiaries as designated by the group, (iii) one or more
Managed Physician Practice Provider Claim Beneficiaries as designated by the
group, (iv) with respect to Beneficiaries holding Managed Physician Practice
Provider Claims, a subcommittee of the Creditors Committee representing such
Beneficiaries, (v) with respect to Beneficiaries holding MPN Provider Claims, a
subcommittee of the Creditors Committee representing such Beneficiaries, (vi)
the Creditors Committee, or (vii) a Plan with respect to its rights under
Section 15.14(a)(3) (each, a "Representative").

          (c) Threshold for Enforcement. An action to enforce any right granted
              -------------------------
to a Representative in the following circumstances: (i) physician claimants who
are eligible Beneficiaries holding in aggregate not less than $600,000 of non-
adjudicated Managed Physician Practice Provider Claims; (ii) physician claimants
who are eligible Beneficiaries holding in aggregate not less than $300,000 of
finally adjudicated Managed Physician Practice Provider Claims; (iii) non-
physician claimants who are eligible Beneficiaries holding in aggregate not less
than $5 million in non-adjudicated Provider Claims; (iv) non-physician claimants
who are eligible Beneficiaries holding an aggregate not less than $5 million in,
with respect to the Managed Physician Practices, finally adjudicated and
liquidated Managed Physician Practice Provider Claims and, with respect to MPN,
MPN Provider Claims that have become Allowed MPN Claims; (v) three or more Plans
with respect to their rights under Section 15.14(a)(3). Notwithstanding the
foregoing, with respect to eligible Beneficiaries who hold pre-petition MPN
Provider Claims, no such

                                       38
<PAGE>

enforcement action may be commenced or maintained until the earlier to occur of:
(i) the effective date of a confirmed plan of reorganization for MPN in the
Bankruptcy Case, or (ii) November 30, 1999.

          (d) Notice. Prior to bringing an action, the Representative shall give
              ------
notice of intent to sue to MedPartners, MPN, the Creditors Committee and the
Special Monitor-Examiner. Such notice shall provide the name of each eligible
Beneficiary within the group and the amount of each such Beneficiary's Provider
Claim or the provision of the Agreement that such Representative is seeking to
enforce. MedPartners and/or MPN, as the case may be, shall have ten Business
Days after receipt of such notice to cause such Provider Claims to be paid or to
comply with the Agreement. If payment or other cure is not made during such cure
period, the Representative may proceed with filing the action or initiating the
arbitration, as the case may be.

          (e) Limitation on Rights. The benefits conferred to Beneficiaries
              --------------------
pursuant to this Section 15.14 shall be subject to the following provisions:

                 (i) Notwithstanding any other provision of this Agreement to
the contrary, any Plan that has made a loan to MedPartners or any purchaser of
the assets of any of MedPartners Managed Physician Practices shall not have any
third party beneficiary rights under this Agreement to pursue any claim relating
to such loan .

                 (ii) With respect to the rights and benefits conferred to the
holders of MPN Provider Claims pursuant to this Section 15.14, such rights and
benefits may be modified, waived, terminated or released pursuant to a confirmed
and effective plan of reorganization for MPN in the Bankruptcy Case under which
(1) the holders of MPN Provider Claims are placed in a separate class, and (2)
such class votes to accept the Plan by the required majorities in number and
amount in Section 1126 of the Bankruptcy Code, in which event the rights of the
holders of MPN Provider Claims with respect to Allowed MPN Claims shall be as
set forth in such plan and the order confirming such plan.

                 (iii) Neither the expedited procedures provided for in Section
10.3 hereof nor the provision for stipulated judgment shall apply to any action
brought by or on behalf of one or more Beneficiaries under this Section 15.14
unless the Beneficiary is acting as the assignee or designee of the State.

     15.15 Exhibits or Schedules. If and to the extent that any provisions of
any document or agreement incorporated herein shall conflict with any of the
express terms and provisions of this Agreement, the terms and provisions of this
Agreement shall control the rights and obligations of the parties hereto.

     15.16 Attorneys' Fees. In the event of any dispute between the parties
arising out of this Agreement, the prevailing party shall be entitled to recover
its attorneys' fees and costs.

     15.17 Related Agreements. Additional documents implementing this Agreement
are necessary, including in the case of MPN the Plan of Reorganization, and in
the case of MPN and the Managed Physician Practices an additional agreement (the
"Supplemental Plan Agreement") that shall govern certain rights and obligations
of MPN, MedPartners, those Managed Physician Practices that elect to receive the
benefits of this Agreement by executing the Supplemental Plan

                                       39
<PAGE>

Agreement (each such Managed Physician Practice, a "Consenting MPP"), the direct
and indirect subsidiaries of MedPartners which provide management of the non-
medical operations of the Managed Physician Practices, and those Plans that
elect to receive the benefits of this Agreement by executing the Supplemental
Plan Agreement (each such Plan, a "Consenting Plan"; together with MPN,
MedPartners, the Consenting MPPs and such subsidiaries, the "Supplemental Plan
Agreement Parties"). MedPartners and such subsidiaries, as appropriate, will use
their best efforts to cause the Managed Physician Practices to become Consenting
MPPs. The Supplemental Plan Agreement shall be limited to the California
Operations and shall include as covenants each of the provisions set forth below
in this Section 15.17 regarding certain aspects of the Plan of Reorganization,
certain waivers, releases and subordinations affecting Claims of the
Supplemental Plan Agreement Parties, and certain other matters, all of which are
deemed to be material to the performance by MPN and MedPartners of their
obligations under this Agreement, and each of which shall be deemed material to
the agreement by any Supplemental Plan Agreement Party to grant such waivers,
releases or subordinations.

          (a) Each Consenting Plan shall support confirmation and implementation
of the Plan of Reorganization; provided, however, that:

                 (i) The obligations of a Consenting Plan which is a member of
the Creditors Committee regarding this Section 15.17(a) shall be subject to such
Plan's fiduciary duties as such a member, exercised reasonably and in good
faith, and such Consenting Plans' obligation to support the Plan of
Reorganization shall be effective when the Creditors Committee votes by a
requisite majority vote not to object to the Plan of Reorganization;

                 (ii) No Consenting Plan shall be required to support a plan of
reorganization that contains terms which are materially adverse to the
Consenting Plans other than as set forth in this Agreement, the Supplemental
Plan Agreement, or as otherwise agreed to by a Consenting Plan;

                 (iii) The Consenting Plans' obligations to support the Plan of
Reorganization are contingent upon confirmation of such Plan of Reorganization
by January 31, 2000 (provided further, however, that a failure to confirm the
Plan of Reorganization by such date shall not excuse compliance with this
provision if the delay is attributable to the Consenting Plans).

                 (iv) The Consenting Plans, the Creditors Committee, the Special
Monitor-Examiner, MPN and MedPartners shall meet and confer in an effort to
agree upon and propose an appropriate minimum number of Providers and Plans who
must become Consenting Providers and Consenting Plans for the waiver, release,
subordination and other provisions of the Supplemental Plan Agreement to be
enforceable, such thresholds to be set at levels that assure that Consenting
Providers and Consenting Plans, as well as the parties to this Agreement,
receive, to the greatest extent practicable, the reasonable benefit of their
bargain.

          (b) Except with respect to a Consenting Provider concerning its
Provider Claim, each Consenting Provider, each Consenting Plan, each Consenting
MPP, MedPartners and MPN shall agree (i) not to pursue any Claims which,
pursuant to the terms of this Agreement, the Plan of Reorganization or the
Supplemental Plan Agreement are waived,

                                       40
<PAGE>

released or subordinated, until (x) the effectiveness of such waiver, release or
subordination, or (y) a Default under this Agreement, the Plan of Reorganization
or the Supplemental Plan Agreement, as applicable; and (ii) to toll all
applicable statutes of limitations as to any Claims which, pursuant to this
Agreement, the Plan of Reorganization, or the Supplemental Plan Agreement, are
subject to waiver, release or subordination in accordance with the terms thereof
until ninety days after the termination of the standstill referred to in (i)
above. Notwithstanding anything to the contrary, nothing herein shall stay or
restrain the holder of a Claim against a Managed Physician Practice from
pursuing such Claim against the Managed Physician Practice.

          (c) The Plan of Reorganization, in the case of MPN, and the
Supplemental Plan Agreement, in the case of MPN and the Managed Physician
Practices, shall provide that to receive the benefits of this Agreement, each
holder of a Provider Claim other than a Plan shall be required to sign a MPN
Provider Release or a MPPP Release, or both Releases, as applicable. In the case
of a Plan, the Plan shall sign a release with respect to a Provider Claim held
by a Plan in such form as is agreed upon in the Supplemental Plan Agreement.

          (d) In connection with the Plan of Reorganization, each Consenting
Plan shall subordinate its MPN Plan Subordinated Claims to, and only to, the MPN
Provider Claims held by Consenting MPN Providers and the Plan Preserved Claims
against MPN held by Consenting Plans. Any distribution on account of the MPN
Plan Subordinated Claims shall be assigned for the benefit of Consenting
Providers on account of their MPN Provider Claims which become Allowed MPN
Claims in such amount as is necessary to fulfill the MedPartners Funding
Commitment on account of such Allowed MPN Claims and, as to any excess, to the
MedPartners California Account. The MPN Plan Subordinated Claims include, by way
of example and not limitation: (u) all Claims asserted by a Consenting Plan
against MPN for prospective damages (including lost profits and costs incurred
in recontracting with other Providers) arising as a consequence of (i) the
failure to perform for the full remaining term under a Health Care Services
Agreement between MPN and such Plan as a consequence of the sale of practice
assets of a Managed Physician Practice or closure of a Managed Physician
Practice or clinic thereof (including pre-Petition Date and post-Petition Date
sales or closures), (ii) the failure by MPN to assume in the Bankruptcy Case any
lease or executory contract relating to the post-Petition Date sale or closure
of a Managed Physician Practice or clinic thereof, (iii) increased capitation or
fee for service expenses incurred by a Consenting Plan as a result of a pre-
Petition Date or post-Petition Date clinic closure through the remaining term of
the Health Care Services Agreement, or (iv) the transfer of institutional risk
to such Consenting Plan, (v) all Claims relating to a Health Care Services
Agreement arising from the failure by MedPartners to sell the practice assets of
Mullikin Practice Group or Southern California Medical Corporation or resulting
from a closure thereof; (w) all Claims resulting from MPN's rejection and the
Managed Physician Practice's termination of a Consenting Plan's Health Care
Services Agreements; (x) all Claims for damages under a Health Care Services
Agreement (including consequential, damage to reputation, special, incidental or
indirect damages, loss of profits or income, exemplary or punitive) by a
Consenting Plan against MPN or the Managed Physician Practices that did not
result in actual pecuniary losses to such Consenting Plan; (y) Claims incurred
as a result of a Consenting Plan moving members from a Managed Physician
Practice or MPN; and (z) all Claims arising from the tortious acts or omissions
of MPN or the Managed Physician Practices. Notwithstanding the foregoing, such
subordinated Claims shall not include Claims which are Plan Preserved Claims
arising from Health Care Services arranged for by MPN and rendered

                                       41
<PAGE>

prior to the sale, closure or transfer, and the out-of-pocket expenses relating
to processing of such Claims.

       (e) Effective upon the satisfaction of the MedPartners Funding
Commitment, each Consenting Plan shall waive and release all Claims against
MedPartners, any affiliate of MedPartners (other than MPN) and the Consenting
MPPs related to the California Operations: (w) which are alleged to exist solely
on the basis that MedPartners or an affiliate of MedPartners (other than MPN) is
liable on account of alter ego, piercing the corporate veil, respondeat
superior, principal-agent, substantive consolidation or similar theories of
vicarious, nonconsensual liability by, through or on account of MPN's or a
Managed Physician Practice's liability to the Consenting Plan; (x) Claims for
damages (including consequential, damage to reputation, special, incidental or
indirect damages, loss of profits or income, exemplary or punitive) that did not
result in actual pecuniary losses to such Consenting Plan; and (y) sounding in
tort. Notwithstanding the foregoing, such waiver and release shall not apply to
any Claims arising under a direct contract, excluding a Health Care Services
Agreement, but including, without limitation (i) any lease, surety arrangement
or guaranty, and (ii) any guaranty of a Health Care Services Agreement to which
MedPartners or an affiliate of MedPartners (other than MPN) or a Managed
Physician Practice is a party.

          (f) In connection with the Plan of Reorganization, and otherwise with
respect to the Managed Physician Practices, MPN and the Consenting MPPs shall
each waive and release all Claims against Consenting Plans except for MPN
Preserved Claims and Managed Physician Practice Preserved Claims; provided,
however, that any Claims waived and released pursuant to this section shall be
waived and released for purposes of (i) seeking affirmative relief, or (ii)
defense of or setoff against MPN Plan Preserved Claims and Managed Physician
Practice Plan Preserved Claims, as applicable, and shall only be preserved for
purposes of defense of or setoff against the MPN Plan Subordinated Claims and
the Managed Physician Practice Plan Subordinated Claims, as applicable. Claims
waived by MPN or a Managed Physician Practice include, by way of example and not
limitation: (w) Claims related to the recovery of capitation fees or other
amounts that would be due after the dates of the sale of the practice assets of
a Managed Physician Practice or the rejection of an agreement by MPN; (x) Claims
related to the sale or closure of a Managed Physician Practice or in connection
with the movement of members from a Managed Physician Practice; (y) Claims for
damages (including consequential, damage to reputation, special, incidental or
indirect damages, loss of profits or income, exemplary or punitive) against a
Consenting Plan that did not result in actual pecuniary losses to MPN or an MPP;
and (z) Claims arising from the tortious acts or omissions of the Consenting
Plans.

          (g) At such time as a Consenting Plan waives and releases all Claims
identified in Section 15.17(e), MedPartners and its affiliates (other than MPN)
and the Consenting MPPs shall waive and release all Claims against each
Consenting Plan related to the California Operations: (y) Claims for damages
(including consequential, damage to reputation, special, incidental or indirect
damages, loss of profits or income, exemplary or punitive) that did not result
in actual pecuniary losses to MedPartners or its affiliates (other than MPN);
and (z) sounding in tort. Notwithstanding the foregoing, such waiver and release
shall not apply to any Claims arising under a direct contract, excluding a
Health Care Services Agreement, but

                                       42
<PAGE>

including, without limitation (i) any lease, surety arrangement or guaranty, and
(ii) any guaranty of a Health Care Services Agreement to which a Consenting Plan
is a party.

          (h) MPN shall agree that with respect to the Claims against a
Consenting Plan for allegedly improper, excessive or wrongful capitation
deductions taken by such Plan that allegedly arose out of an improper, excessive
or wrongful payment to a Provider, it shall first object to the Claim of any
Provider holding a Provider Claim and assert the offset in defense to that
portion of an MPN Provider Claim that becomes an Allowed MPN Claim to the
fullest extent available as an offset, and prosecute the objection to a final
resolution or compromise. In the event of a compromise with an MPN Provider,
however, the balance of the setoff not recovered or set off against the Provider
may not be recovered from a Consenting Plan. MedPartners or a Consenting MPP
shall agree that with respect to the Claims against a Consenting Plan for
allegedly improper, excessive or wrongful capitation deductions taken by such
Plan that allegedly arose out of an improper, excessive or wrongful payment to a
Provider, it shall contest the claim of any Provider holding a Provider Claim to
the fullest extent available as an offset through the conclusion of the final
adjudication or compromise thereof. In the event of a compromise with a Managed
Physician Practice Provider, however, the balance of the set off not revived or
set off against such Provider may not be recovered from a Consenting Plan. Any
amount so collected from Providers by offset or otherwise shall be deposited in
the MPN California Account or the MedPartners California Account, as the case
may be. To the extent such Consenting Provider has repaid such overpayments to a
Consenting Plan or such offset is not otherwise obtained from the Consenting
Provider, then MPN and the affected Managed Physician Practice may pursue such
Claims against the Consenting Plan and, in that case, MPN or the affected
Managed Physician Practice, as the case may be, and the Consenting Plan shall
cooperate in good faith to promptly settle and satisfy such Claim; and, if it
cannot be settled, the parties to the dispute agree to resolve such dispute by
arbitration pursuant to a process to be set forth in the Plan of Reorganization
and the Supplemental Plan Agreement. As a part of such settlement or
arbitration, MPN or the affected Managed Physician Practice, as the case may be,
shall assign to the Consenting Plan any Claims against the Consenting Provider
on whose account the capitation payment was made.

          (i) No waiver or subordination of any Claim by any Consenting Plan,
Consenting Provider, MPN, Consenting MPP, MedPartners or any affiliate, nor such
entity's participation in this Agreement, will impair the ability to recover on
account of any Claim by any of the foregoing entities against any other of the
foregoing entities that is not waived, released or subordinated pursuant to the
terms of this Agreement or the Supplemental Plan Agreement.

          (j) Each Consenting Provider shall have offered each Consenting Plan
the opportunity to assume institutional risk pursuant to this Agreement through
the earlier of (i) December 31, 1999 or (ii) the expiration of the applicable
Consenting Provider's contract with MPN, pursuant to economic terms no less
favorable than MPN received from such applicable Consenting Provider immediately
prior to the transfer of such institutional risk to the Consenting Plan.

          (k) Each entity that purchases or acquires, directly or indirectly, an
interest in the practice assets of a Managed Physician Practice shall have
offered (or shall have used its best efforts to see that a Managed Physician
Practice shall offer) to each Consenting Plan the

                                       43
<PAGE>

opportunity to obtain covered services under a Health Care Services Agreement
through the earlier of (i) December 31, 1999 or (ii) the expiration of the
applicable Provider Contract with MPN, pursuant to economic terms that are no
less favorable than MPN received from such Managed Physician Practice
immediately prior to the sale of its practice assets by MedPartners.

          (l) Prior to the consummation of a sale or transfer of the practice
assets of a Managed Physician Practice, or the issuance of a notice of intent to
close (pursuant to Section 3.5(e)) a Managed Physician Practice, each Consenting
Plan shall satisfy those terms set forth in Section 13 of the Plan Stipulation
concerning moving of Plan enrollees, subject to the satisfaction of those terms
and conditions set forth in Sections 8, 9, 18 and 20 of the Plan Stipulation in
the form approved by the Court as of May 2, 1999, without reference to any
subsequent amendments or modifications thereto.

          (m) MedPartners, the Consenting MPPs and their affiliates shall
subordinate to, and only to, the MPN Provider Claims held by Consenting
Providers, all of their Claims against the bankruptcy estate of MPN including,
without limitation, any Claims MedPartners may have to receive any amounts due
under the Management Agreement on or prior to the Petition Date by reason of the
rejection in the Bankruptcy Case of the Management Agreement or otherwise.

          (n) The Plan of Reorganization for MPN shall provide that upon the
full and final satisfaction of the MedPartners Funding Commitment, MPN releases
MedPartners and its affiliates from any and all claims, liabilities, actions and
causes of action arising prior to the satisfaction of the MedPartners Funding
Commitment.

          (o) Each Supplemental Plan Agreement Party reserves all rights with
respect to counterclaims, cross-complaints, setoffs, recoupments and other
defenses not otherwise waived, released or subordinated as to and up to the
amount of any Claim of such Supplemental Plan Agreement Party not waived by
reason of this Section 15.17. In addition, notwithstanding anything herein to
the contrary, each Supplemental Plan Agreement Party shall reserve as a defense
to recovery of any Claim not waived pursuant to the terms hereof, that the acts
of the Plans, or the acts of MedPartners, MPN, the Managed Physician Practices
or the affiliates thereof, as the case may be, were reasonable responses to
breaches of the applicable agreements by the other party or parties, and the
other party or parties to the agreement may dispute the validity of the defense,
but not the right to assert the defense.

          (p) The Plan of Reorganization and the Supplemental Plan Agreement
shall contain other appropriate terms and conditions, including appropriate
remedies of the parties thereto, such as specific performance. Any breach of or
default under the Supplemental Plan Agreement shall not be a cross default of
this Agreement.


     15.18 Representation by Counsel; Drafts; Interpretation. The parties each
acknowledge that each party to this Agreement has been represented by counsel in
connection with this Agreement and the transactions contemplated by this
Agreement. Accordingly, any rule of law, including, but not limited to, Section
1654 of the California Civil Code, or any legal decision that would require
interpretation of any claimed ambiguities in this Agreement against the party
that drafted it has no application and is expressly waived. In addition, the
parties

                                       44
<PAGE>

acknowledge that there have been a number of drafts of this Agreement. The
presence, absence, inclusion or deletion of any provision in any prior draft
shall not be evidence of the intent of the parties. The provisions of this
Agreement shall be interpreted in a reasonable manner to effect the intent of
the parties.

     15.19  Waiver of Defenses.

     MedPartners hereby waives and agrees not to assert or take advantage of:
(a) any defense to its obligations hereunder by reason of the modification of
the time, manner or terms of payment of any Provider Claim, pursuant to or by
reason of the terms of this Agreement or with the consent of MPN or the Managed
Physician Practices or (b) any other forbearance by any Provider as applicable,
provided each Provider Claim is otherwise eligible for payment under the
MedPartners Funding Commitment and Section 3.5.

     15.20 Further Assurances. Each of the parties and the Beneficiaries agree
to cooperate with each, take such acts, and negotiate and execute any additional
agreements, including, without limitation any amendments to this Agreement,
which are reasonably necessary to carry out and effectuate the transactions and
agreements contemplated in this Agreement.

16.  RELEASE.

     16.1 Release. Upon the full and final satisfaction of the obligations set
forth in this Agreement by MPN and MedPartners, MPN and MedPartners and their
assigns (and all past, present and future successors, beneficiaries,
representatives, its businesses, companies, corporations, partners, business
associates, affiliated businesses, parent businesses, associated businesses, co-
owned businesses, stockholders, directors, employees, agents, heirs, legatees,
executors, administrators, legal counsel and insurers) on the one hand and the
State or its representatives (including, but not limited to, all past, present
and future administrators, officials, directors, officers, employees, agents,
consultants, advisors, conservators, special monitors, examiners, legal counsel,
accountants, financial advisors, whether retained directly or indirectly on
behalf of the State or its representatives) and their assigns, heirs, legatees,
or executors, on the other hand, do hereby fully and forever release and
discharge the other for and from all manner of action or causes of action in law
or in equity, suits, liabilities, liens, contracts, agreements, promises,
demands, affirmative relief or offset, debts, claims, damages, expenses, costs,
causes or demands of every nature, kind and descriptions whatsoever, or anything
whatsoever, known or unknown, fixed or contingent, which they now have or may
now have against each other, or which they may hereafter have by reason of any
matter whatsoever arising prior to the Agreement Date or arising out of or
related to the State Actions. Notwithstanding the above, this Section shall not
act as a release between MPN and MedPartners and their assigns on the one hand,
and any Beneficiary or its representatives and assigns, on the other hand.

     16.2 Waiver. The parties hereto acknowledge that they have been advised by
legal counsel and are familiar with the provisions of California Civil Code
(S) 1542, which provides:

          A general release does not extend to claims which the creditor does
          not know or expect to exist in his favor at the time of the executing

                                       45
<PAGE>

          of the release, which if known by him, must have materially affected
          his settlement with the debtor.

          Each party hereto hereby expressly waives all rights each of them may
have under Civil Code (S) 1542, as well as under any other statute or common law
principles of similar effect relating to the claims released


     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in Los Angeles, California.

                         MEDPARTNERS, INC.,
                         a Delaware corporation


                         By /s/ E. Mac Crawford
                            ---------------------------------
                                E. Mac Crawford

                         Title: Chief Executive Officer


                         MEDPARTNERS PROVIDER NETWORK, INC.,
                         a California corporation


                         By /s/ Bradley S. Karro
                            ---------------------------------
                                Bradley S. Karro

                         Title: President

                         COMMISSIONER OF THE
                         DEPARTMENT OF CORPORATIONS



                         By: /s/ William Kenefick
                             ---------------------------------
                                 William Kenefick

                         Title:  Acting Commissioner of the
                                 Department of Corporations

                                       46
<PAGE>

                         DEPARTMENT OF CORPORATIONS



                         By:  /s/ William Kenefick
                              William Kenefick

                         Title:  Acting Commissioner of the
                                 Department of Corporations


                         J. MARK ABERNATHY,
                         as Special Monitor-Examiner and not individually


                         By: /s/ J. Mark Abernathy

                         Title:  J. Mark Abernathy,
                                 as Special Monitor-Examiner



                                       47
<PAGE>

                                 Schedule 3.1
                                 ------------

            Elements of Transition Plan Not Addressed in Agreement

<PAGE>

                                 Schedule 3.2
                                 ------------

                   Form of Amendment to Management Agreement

<PAGE>

                                Schedule 3.4(a)
                                ---------------

                   Disposition of the California Operations

<PAGE>

                                 Schedule 3.6
                                 ------------

                               Letter of Credit

<PAGE>

                                 Schedule 4.3
                                 ------------

                             Letters from Experts

<PAGE>

                                 Schedule 9.1
                                 ------------

                             Stipulation for Stay

<PAGE>

                                 Schedule 9.2
                                 ------------

                                  Stipulation

<PAGE>

                                 Schedule 10.4
                                 -------------

                              Stipulated Judgment