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                                                                    EXHIBIT 10.5

                  CHILDREN'S HEALTH INSURANCE PROGRAM AGREEMENT
                FOR THE PROVISION OF HEALTH CARE SERVICES BETWEEN
               THE TEXAS HEALTH AND HUMAN SERVICES COMMISSION AND
                      AMERICAID TEXAS, INC. D/B/A AMERIKIDS

<TABLE>
<S>                                                                                                              <C>
ARTICLE 1. INTRODUCTION...........................................................................................1

ARTICLE 2. BACKGROUND, INDUCEMENTS AND OBJECTIVES.................................................................1

   SECTION 2.01 BACKGROUND........................................................................................1
   ------------
      (a)   Federal legislative authorization.....................................................................1
      (b)   State enabling legislation............................................................................1
      (c)   State child health plan...............................................................................1
      (d)   Participation of the private sector...................................................................1
      (e)   Procurement of comprehensive health plan coverage through health maintenance organizations (HMOs).....2
   SECTION 2.02 INDUCEMENTS.......................................................................................2
   ------------
   SECTION 2.03 MISSION OBJECTIVES................................................................................2
   ------------
   SECTION 2.04 DESIRED BENEFITS..................................................................................3
   ------------
   SECTION 2.05 CONSTRUCTION OF AGREEMENT.........................................................................3
   ------------
      (a)   Scope of Article......................................................................................3
      (b)   Severability..........................................................................................3
      (c)   Survival of terms.....................................................................................4
      (d)   Headings..............................................................................................4
      (e)   Global drafting conventions...........................................................................4
   SECTION 2.06 TIME OF THE ESSENCE...............................................................................4
   ------------
   SECTION 2.07 NO IMPLIED AUTHORITY..............................................................................4
   ------------
   SECTION 2.08 LEGAL AUTHORITY...................................................................................5
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ARTICLE 3. DEFINITIONS............................................................................................5

ARTICLE 4. GENERAL TERMS AND CONDITIONS...........................................................................9

   SECTION 4.01 TERM OF THE AGREEMENT.............................................................................9
   ------------
      (a)   General provisions....................................................................................9
      (b)   Initial Term.........................................................................................10
      (c)   Optional extension of Agreement......................................................................10
      (d)   Modifications upon extension or renewal of Agreement.................................................10
   SECTION 4.02 SCOPE OF WORK....................................................................................10
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   SECTION 4.03 AGREEMENT ELEMENTS...............................................................................10
   ------------
      (a)   Agreement documentation..............................................................................10
      (b)   Order of documents...................................................................................11
      (c)   Oral and written representations.....................................................................11
   SECTION 4.04 NOTICES..........................................................................................11
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   SECTION 4.05 FUNDING..........................................................................................12
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   SECTION 4.06 DELEGATION OF AUTHORITY..........................................................................12
   ------------
   SECTION 4.07 NO WAIVER OF SOVEREIGN IMMUNITY..................................................................12
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   SECTION 4.08 FORCE MAJEURE....................................................................................12
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   SECTION 4.09 HOLD HARMLESS....................................................................................12
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   SECTION 4.10 ASSIGNMENT.......................................................................................12
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   SECTION 4.11 EVIDENCE OF FINANCIAL SOLVENCY...................................................................13
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   SECTION 4.12 MINIMUM NET WORTH................................................................................13
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   SECTION 4.13 PERFORMANCE AND FIDELITY BONDS...................................................................13
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   SECTION 4.14 INSURANCE........................................................................................13
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   SECTION 4.15 REPROCUREMENT RIGHTS.............................................................................14
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</TABLE>


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<TABLE>
<S>                                                                                                             <C>
ARTICLE 5. CONTRACTOR PERSONNEL MANAGEMENT.......................................................................14

   SECTION 5.01 QUALIFICATIONS, RETENTION AND REPLACEMENT OF CONTRACTOR EMPLOYEES................................14
   ------------
   SECTION 5.02 KEY CONTRACTOR PERSONNEL.........................................................................14
   ------------
   SECTION 5.03 MEDICAL DIRECTOR.................................................................................15
   ------------
   SECTION 5.04 RESPONSIBILITY FOR CONTRACTOR PERSONNEL..........................................................15
   ------------
   SECTION 5.05 COOPERATION WITH HHSC OR STATE ADMINISTRATIVE AGENCIES...........................................15
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      (a)   Cooperation with HHSC contractors....................................................................15
      (b)   Cooperation with state and federal administrative agencies...........................................15

ARTICLE 6. GOVERNING LAW AND REGULATIONS.........................................................................16

   SECTION 6.01 GOVERNING LAW AND VENUE..........................................................................16
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   SECTION 6.02 LAW AND REGULATIONS GOVERNING ADMINISTRATION OF THE AGREEMENT....................................16
   ------------
   SECTION 6.03 CONTRACTOR RESPONSIBILITY FOR COMPLIANCE WITH LAWS AND REGULATIONS...............................16
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   SECTION 6.04 LAWS AND REGULATIONS GOVERNING PROCUREMENT OF THE SERVICES.......................................16
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   SECTION 6.05 IMMIGRATION REFORM AND CONTROL ACT OF 1986.......................................................17
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   SECTION 6.06 COMPLIANCE WITH STATE AND FEDERAL ANTI-DISCRIMINATION LAWS.......................................17
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   SECTION 6.07 ENVIRONMENTAL PROTECTION LAWS....................................................................17
   ------------
      (a)   Pro-Children Act of 1994.............................................................................17
      (b)   National Environmental Policy Act of 1969............................................................18
      (c)   Clean Air Act and Water Pollution Control Act regulations............................................18
      (d)   State Clean Air Implementation Plan..................................................................18
      (e)   Safe Drinking Water Act of 1974......................................................................18

ARTICLE 7. SERVICE LEVELS AND PERFORMANCE MEASUREMENT............................................................18

   SECTION 7.01 PERFORMANCE MEASUREMENT..........................................................................18
   ------------
   SECTION 7.02 MEASUREMENT AND MONITORING TOOLS.................................................................18
   ------------
   SECTION 7.03 CONTINUOUS IMPROVEMENT AND BEST PRACTICES........................................................19
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   SECTION 7.04 SYSTEMS DEVELOPMENT, MAINTENANCE AND OPERATION...................................................19
   ------------
      (a)   General responsibilities.............................................................................19
      (b)   General management information system functions......................................................19
         (1)   General data storage and handling requirements....................................................19
         (2)   Data override capability..........................................................................20
         (3)   HIPAA compliance..................................................................................21
         (4)   Data security and confidentiality.................................................................21
         (5)   Back-up...........................................................................................21
         (6)   Disaster recovery.................................................................................21
      (c)   System-wide functions................................................................................22
         (1)   Enrollment and Eligibility Subsystem..............................................................22
         (2)   Provider Subsystem................................................................................23
         (3)   Claims/Services Data Subsystem....................................................................24
         (4)   Financial Subsystem...............................................................................25
         (5)   Utilization/Quality Improvement Subsystem.........................................................26
         (6)   Report Subsystem..................................................................................27
         (7)   Data Interface Subsystem..........................................................................28
      (d)   Additions or changes to the requirements set out in this section.....................................29

ARTICLE 8. AMENDMENTS, MODIFICATIONS, AND CHANGE ORDERS..........................................................29

   SECTION 8.01 MODIFICATIONS....................................................................................29
   ------------
      (a)   Modifications resulting from changes in law or contract..............................................29
      (b)   Modifications resulting from imposition of remedies..................................................29
      (c)   Modifications upon renewal or extension of Agreement.................................................29
   SECTION 8.02 CHANGE ORDER PROCEDURES..........................................................................29
   ------------
      (a)   Expectations and understandings......................................................................30
      (b)   Change order approval procedure......................................................................30
      (c)   Written approval required............................................................................30
   SECTION 8.03 REQUIRED COMPLIANCE WITH MODIFICATION PROCEDURES.................................................30
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</TABLE>

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<TABLE>
<S>                                                                                                             <C>
ARTICLE 9. AUDIT AND FINANCIAL COMPLIANCE........................................................................31

   SECTION 9.01 FINANCIAL RECORD RETENTION AND AUDIT.............................................................31
   ------------
   SECTION 9.02 OPERATION/PERFORMANCE AUDITS.....................................................................31
   ------------
   SECTION 9.03 ACCESS TO RECORDS, BOOKS, AND DOCUMENTS..........................................................31
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ARTICLE 10. TERMS AND CONDITIONS OF PAYMENT......................................................................32

   SECTION 10.01 MONTHLY PREMIUM PAYMENTS........................................................................32
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   SECTION 10.02 TIME AND MANNER OF PREMIUM PAYMENT..............................................................32
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   SECTION 10.03 DELIVERY SUPPLEMENTAL PAYMENT (DSP).............................................................33
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   SECTION 10.04 PREMIUM RATES AFTER THE FIRST YEAR OF THE INITIAL TERM..........................................33
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      (a)   Second year..........................................................................................33
      (b)   Third year...........................................................................................34
   SECTION 10.05 ADJUSTMENTS TO PREMIUM PAYMENTS.................................................................34
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   SECTION 10.06 EXPERIENCE REBATE...............................................................................34
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   SECTION 10.07 RESTRICTION ON ASSIGNMENT OF FEES...............................................................35
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   SECTION 10.08 LIABILITY FOR TAXES.............................................................................35
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   SECTION 10.09 LIABILITY FOR EMPLOYMENT-RELATED CHARGES AND BENEFITS...........................................36
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   SECTION 10.10 LIABILITY FOR OVERTIME COMPENSATION.............................................................36
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ARTICLE 11. CHIP ELIGIBILITY, ENROLLMENT, DISENROLLMENT, AND COST-SHARING........................................36

   SECTION 11.01 CHIP ELIGIBILITY................................................................................36
   -------------
      (a)   Generally............................................................................................36
      (b)   Continuous coverage for first twelve months..........................................................36
      (c)   Pregnant Members and infants.........................................................................36
      (d)   Span of Coverage.....................................................................................37
   SECTION 11.02 ENROLLMENT......................................................................................37
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   SECTION 11.03 RE-ENROLLMENT...................................................................................38
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   SECTION 11.04 DISENROLLMENT DUE TO LOSS OF ELIGIBILITY........................................................38
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   SECTION 11.05 DISENROLLMENT BY CONTRACTOR.....................................................................38
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   SECTION 11.06 COST-SHARING....................................................................................39
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ARTICLE 12. SCOPE OF CHIP COVERED SERVICES.......................................................................40

   SECTION 12.01 BASIC REQUIRED COVERED SERVICES.................................................................40
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   SECTION 12.02 DRUG FORMULARIES................................................................................40
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   SECTION 12.03 VALUE-ADDED SERVICES............................................................................40
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   SECTION 12.04 DENTAL SERVICES.................................................................................41
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   SECTION 12.05 CASE MANAGEMENT SERVICES FOR CHILDREN WITH COMPLEX SPECIAL HEALTH CARE NEEDS....................41
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      (a)   Outreach and Informing...............................................................................41
      (b)   Enhanced Care Coordination...........................................................................41
      (c)   Community Referrals..................................................................................42
   SECTION 12.06 PRE-EXISTING CONDITIONS.........................................................................42
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   SECTION 12.07 COURT-ORDERED COMMITMENTS.......................................................................42
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   SECTION 12.08 EARLY CHILDHOOD INTERVENTION (ECI)..............................................................42
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      (a)   ECI Services.........................................................................................43
      (b)   Identification and Referral..........................................................................43
      (c)   Intervention.........................................................................................43

ARTICLE 13. MEMBER SERVICES......................................................................................43

   SECTION 13.01 MEMBER EDUCATION................................................................................43
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   SECTION 13.02 MEMBER MATERIALS................................................................................44
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      (a)   Member Handbook......................................................................................44
         (1)   Exceptions to Section 11.1600(b) requirements.....................................................44
         (2)   Additional requirements...........................................................................44
      (b)   Evidence of Coverage.................................................................................45
      (c)   Provider Directory...................................................................................45
</TABLE>

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<TABLE>
<S>                                                                                                             <C>
      (d)   HHSC review of Member material.......................................................................45
      (e)   Mailing of Member Material...........................................................................45
   SECTION 13.03 CHIP-SPECIFIC INTERNET WEBSITE..................................................................45
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   SECTION 13.04 MEMBER TELEPHONE HOTLINE........................................................................46
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   SECTION 13.05 NOTIFICATION OF PROVIDER TERMINATION............................................................46
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   SECTION 13.06 MEMBER COMPLAINT AND APPEALS PROCESS............................................................47
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   SECTION 13.07 MEMBER CULTURAL AND LINGUISTIC SERVICES.........................................................47
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      (a)   Cultural Competency Plan.............................................................................47
      (b)   Linguistic, Interpreter Services, and Provision of Auxiliary Aids and Services.......................48

ARTICLE 14. MARKETING............................................................................................48

   SECTION 14.01 AIM OF MARKETING................................................................................48
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   SECTION 14.02 MARKETING GUIDELINES............................................................................49
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   SECTION 14.03 DISENROLLMENTS..................................................................................49
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   SECTION 14.04 MARKETING SCHEDULE..............................................................................50
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   SECTION 14.05 GENERAL PROVISIONS..............................................................................50
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   SECTION 14.06 REGULATION......................................................................................50
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ARTICLE 15. PROVIDER NETWORK REQUIREMENTS........................................................................50

   SECTION 15.01 PROVIDER SUBCONTRACTS...........................................................................50
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      (a)   Generally............................................................................................51
      (b)   Subcontract  terms...................................................................................51
   SECTION 15.02 PROVIDER ACCESSIBILITY..........................................................................52
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   SECTION 15.03 PARTICULAR PROVIDERS............................................................................53
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      (a)   Significant Traditional Providers....................................................................53
      (b)   Tribal clinics.......................................................................................53
      (c)   Rural providers......................................................................................53
   SECTION 15.04 GOOD-FAITH EFFORT...............................................................................53
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   SECTION 15.05 PROVIDER TAX IDENTIFICATION NUMBERS.............................................................54
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   SECTION 15.06 PROVIDER HANDBOOK...............................................................................54
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   SECTION 15.07 CLAIMS SUBMISSION AND PAYMENT...................................................................54
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ARTICLE 16. CONTINUOUS QUALITY IMPROVEMENT.......................................................................55

   SECTION 16.01 COMMITMENT TO QUALITY...........................................................................55
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   SECTION 16.02 QUALITY IMPROVEMENT COMMITTEE...................................................................55
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   SECTION 16.03 QUALITY IMPROVEMENT PLAN (QIP)..................................................................55
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ARTICLE 17. REPORTING REQUIREMENTS...............................................................................55

   SECTION 17.01 GENERALLY.......................................................................................55
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   SECTION 17.02 FINANCIAL REPORTS...............................................................................55
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   SECTION 17.03 ENCOUNTER DATA SPECIFICATIONS REPORT............................................................56
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   SECTION 17.04 UTILIZATION MANAGEMENT REPORTS..................................................................56
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      (a)   HEDIS Reporting......................................................................................56
      (b)   Physical Health......................................................................................56
      (c)   Behavioral Health....................................................................................56
   SECTION 17.05 FOCUSED STUDIES REPORTS.........................................................................56
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   SECTION 17.06 ANNUAL QUALITY IMPROVEMENT PLAN (QIP) SUMMARY REPORT............................................56
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   SECTION 17.07 HUB REPORTS.....................................................................................56
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   SECTION 17.08 FRAUDULENT PRACTICES REPORT.....................................................................57
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   FRAUD AND ABUSE COMPLIANCE PLAN...............................................................................57
      Model Compliance Plan......................................................................................57
      Requirements for the CONTRACTOR's compliance plan..........................................................57
      Fraud and abuse training...................................................................................57
   SECTION 17.09 PROVIDER NETWORK REPORTS........................................................................58
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      (a)   PCPs and Specialists Report..........................................................................58
      (b)   Provider Network Change Report.......................................................................58
</TABLE>
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<TABLE>
<S>                                                                                                             <C>
      (c)   PCP Network and Capacity Report......................................................................58
   SECTION 17.10 THIRD PARTY RECOVERY (TPR) REPORTS..............................................................58
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   SECTION 17.11 ALL CLAIMS SUMMARY REPORT.......................................................................58
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   SECTION 17.12 SUMMARY REPORT OF PROVIDER AND MEMBER COMPLAINTS................................................58
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   SECTION 17.13 MONTHLY MEMBER HOTLINE STATUS REPORT............................................................58
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   SECTION 17.14 PROVIDER HOTLINE PERFORMANCE REPORT.............................................................58
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   SECTION 17.15 AD HOC REPORTS..................................................................................59
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ARTICLE 18. DISCLOSURE AND CONFIDENTIALITY OF INFORMATION........................................................59

   SECTION 18.01 CONFIDENTIALITY.................................................................................59
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   SECTION 18.02 REQUESTS FOR PUBLIC INFORMATION.................................................................59
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   SECTION 18.03 PUBLICITY.......................................................................................59
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   SECTION 18.04 MEMBER RECORDS..................................................................................60
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   SECTION 18.05 ACCESSIBILITY AND AVAILABILITY OF MEDICAL RECORDS...............................................60
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   SECTION 18.06 RECORDKEEPING...................................................................................60
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ARTICLE 19. NON-PROVIDER SUBCONTRACTING..........................................................................60

   SECTION 19.01 WRITTEN SUBCONTRACTS............................................................................61
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   SECTION 19.02 APPLICATION OF FEDERAL LAW TO NON-PROVIDER SUBCONTRACTORS.......................................61
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   SECTION 19.03 NO STATE LIABILITY FOR PAYMENT UNDER NON-PROVIDER SUBCONTRACTORS................................61
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   SECTION 19.04 TERMINATION OF NON-PROVIDER SUBCONTRACTS........................................................61
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   SECTION 19.05 FRAUD AND ABUSE INVESTIGATIONS..................................................................62
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ARTICLE 20. REMEDIES AND DISPUTES................................................................................62

   SECTION 20.01 UNDERSTANDING AND EXPECTATIONS..................................................................62
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   SECTION 20.02 ADMINISTRATIVE REMEDIES.........................................................................62
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      (a)   CONTRACTOR responsibility for improvement............................................................62
      (b)   Notification and interim response....................................................................62
      (c)   Notice and opportunity to cure.......................................................................63
      (d)   Particular Events of Default.........................................................................63
      (e)   Corrective Action Plan...............................................................................64
      (f)   Additional remedies..................................................................................64
      (g)   Informal review of administrative remedies...........................................................65
   SECTION 20.03 LIQUIDATED DAMAGES..............................................................................65
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      (a)   Failure to provide contracted services or support....................................................65
         (1)   Maximum damages...................................................................................65
         (2)   CONTRACTOR responsibility for associated costs....................................................65
   SECTION 20.04 METHOD OF COLLECTION............................................................................66
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   SECTION 20.05 MODIFICATION OF AGREEMENT IN THE EVENT OF REMEDIES..............................................66
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   SECTION 20.06 TERMINATION OF AGREEMENT........................................................................66
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   SECTION 20.07 TERMINATION BY MUTUAL AGREEMENT OF THE PARTIES..................................................66
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   SECTION 20.08 TERMINATION FOR CAUSE...........................................................................66
   -------------
      (a)   Assignment for the benefit of creditors, appointment of receiver, or inability to pay debts..........66
      (b)   Judgment and execution...............................................................................66
      (c)   Failure to adhere to laws, rules, ordinances, or orders..............................................67
      (d)   Breach of confidentiality............................................................................67
      (e)   Failure to maintain adequate personnel or resources..................................................67
      (f)   Termination for insolvency...........................................................................67
      (g)   Termination for gifts and gratuities.................................................................68
   SECTION 20.09 TERMINATION FOR NON-APPROPRIATION OF FUNDS......................................................68
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   SECTION 20.10 TERMINATION IN THE EVENT OF HHSC'S FAILURE TO PAY...............................................68
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   SECTION 20.11 TERMINATION FOR HHSC'S MATERIAL BREACH OF THIS AGREEMENT........................................69
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      (a)   Generally............................................................................................69
      (b)   Notice of default and opportunity to cure............................................................69
   SECTION 20.12 NOTICE OF TERMINATION...........................................................................69
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   SECTION 20.13 EXTENSION OF TERMINATION EFFECTIVE DATE.........................................................69
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</TABLE>

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<TABLE>
<S>                                                                                                             <C>
   SECTION 20.14 INJUNCTIVE RELIEF...............................................................................69
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   SECTION 20.15 PAYMENT AND OTHER PROVISIONS AT AGREEMENT TERMINATION...........................................69
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   SECTION 20.16 DISPUTE RESOLUTION..............................................................................71
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      (a)   General agreement of the Parties.....................................................................71
      (b)   Duty to negotiate in good faith......................................................................71
      (c)   Claims for breach of Agreement.......................................................................71
   SECTION 20.17 LIABILITY OF CONTRACTOR.........................................................................72
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ARTICLE 21. ASSURANCES AND CERTIFICATIONS........................................................................72

   SECTION 21.01 LOBBYING........................................................................................72
   -------------
   SECTION 21.02 DEBARMENT AND SUSPENSION........................................................................72
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   SECTION 21.03 CONFLICTS OF INTEREST...........................................................................73
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      (a)   Representation.......................................................................................73
      (b)   General duty regarding conflicts of interest.........................................................73
      (c)   Disclosure requirements..............................................................................73
   SECTION 21.04 CERTIFICATION REGARDING GOOD FAITH EFFORT.......................................................74
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   SECTION 21.05 CHILD SUPPORT CERTIFICATION.....................................................................74
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   SECTION 21.06 TEXAS CORPORATE FRANCHISE TAX CERTIFICATION.....................................................74
   -------------
   SECTION 21.07 CERTIFICATION REGARDING STATUS OF LICENSE, CERTIFICATE, OR PERMIT...............................74
   -------------
   SECTION 21.08 OUTSTANDING DEBTS AND JUDGMENTS.................................................................74
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   SECTION 21.09 UNAUTHORIZED ACTS...............................................................................75
   -------------
   SECTION 21.10 LEGAL ACTION....................................................................................75
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ARTICLE 22. REPRESENTATIONS AND WARRANTIES.......................................................................75

   SECTION 22.01 AUTHORIZATION...................................................................................75
   -------------
   SECTION 22.02 ABILITY TO PERFORM..............................................................................76
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   SECTION 22.03 WORKMANSHIP AND PERFORMANCE.....................................................................76
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   SECTION 22.04 COMPLIANCE WITH LAWS............................................................................76
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   SECTION 22.05 COMPLIANCE WITH AGREEMENT.......................................................................76
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   SECTION 22.06 CONTINGENT FEE ARRANGEMENTS.....................................................................76
   -------------
   SECTION 22.07 PROSELYTIZING...................................................................................76
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   SECTION 22.08 YEAR 2000 PERFORMANCE WARRANTY..................................................................76
   -------------
      (a)   Terms of Warranty....................................................................................77
      (b)   Duration of warranty.................................................................................77
      (c)   No limitation of rights or remedies..................................................................77
</TABLE>

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<PAGE>   7

                            ARTICLE 1. INTRODUCTION


     THIS SERVICES AGREEMENT (the "Agreement") is entered into this 19th day of
January, 2000, between the HEALTH AND HUMAN SERVICES COMMISSION ("HHSC"), an
administrative agency within the executive department of the State of Texas and
having its principal office at 4900 North Lamar Boulevard, 4th Floor, Austin
Texas 78751, and AMERICAID Texas, Inc. d/b/a AMERIKIDS ("CONTRACTOR"), a
corporation organized under the laws of the State of Texas, possessing a
certificate of authority issued by the Texas Department of Insurance to operate
as a health maintenance organization and having its principal office at 2730
North Stemmons Freeway, Suite 608, West Tower, Dallas, Texas 75207.


     The Parties agree that the following terms and conditions apply to the
services to be provided by CONTRACTOR under this Agreement in consideration of
certain payments to be made by HHSC.

               ARTICLE 2. BACKGROUND, INDUCEMENTS AND OBJECTIVES

     SECTION 2.01 BACKGROUND.

     (a) Federal legislative authorization.

     This Agreement is entered into in connection with the Texas Legislature's
decision to participate in the federally-authorized State Children's Health
Insurance Program ("CHIP"). CHIP is authorized under Title XXI of the federal
Social Security Act, 42 U.S.C. Sections 1397aa-1397jj. The CHIP program is an
optional joint state-federal program designed to provide affordable insurance to
low-income families with uninsured children.

     (b) State enabling legislation.

     Approximately 1.4 million children in Texas are uninsured. The costs, both
economic and social, to the State of Texas are immeasurable. In recognition of
this need, the 76th Texas Legislature authorized the state's participation in
the CHIP program. The enabling legislation, Senate Bill 445, is codified as
Chapter 62, Health & Safety Code. The principal objective of the state
legislation is to provide primary and preventative health care to low-income,
uninsured children of Texas, including children with special health care needs,
who are not served by or eligible for other state-assisted health insurance
programs.

     (c) State child health plan.

     Under chapter 62 of the Health and Safety Code, HHSC is directed to develop
and file with the federal government a state-designed health plan program that
ensures the state's eligibility for federal funding under Title XXI of the
Social Security Act. The federal government has approved the State's plan. HHSC
desires the participation of qualified organizations to assist with the
implementation of the plan in Texas.

     (d) Participation of the private sector.

     As expressed in section 62.055, Health & Safety Code, the Texas Legislature
intends that HHSC, in administering the state child health plan, maximize the
use of private resources, including nonprofit organizations. In fulfilling this
mandate, HHSC has solicited assistance with many aspects of the program,
including delivery of health plan coverage to CHIP-eligible children through
health maintenance organizations (HMOs).



                                  Page 1 of 77
<PAGE>   8

     (e) Procurement of comprehensive health plan coverage through health
         maintenance organizations (HMOs).

     HHSC solicited proposals for health care services to CHIP through a Request
for Proposals ("RFP") dated August 2, 1999. The procurement that is the subject
of this Agreement is undertaken as a "best value" procurement under to the terms
of Chapter 531, Texas Government Code, Chapter 62, Health & Safety Code, and
section 2155.144, Government Code. In response to the RFP, CONTRACTOR submitted
its Proposal, dated September 28, 1999 (the "Proposal"). Following review of
proposals, the evaluators appointed by HHSC recommended CONTRACTOR's Proposal as
a best value for the state in one or more of the coverage areas in the state.
HHSC desires to implement the terms of CONTRACTOR's Proposal, subject to the
terms and conditions of this Agreement.

     SECTION 2.02 INDUCEMENTS.

     In making the award of this Agreement, HHSC relies on CONTRACTOR's
assurances of the following:

         (1) CONTRACTOR is an established health maintenance organization that
         arranges for the provision of health care services;

         (2) CONTRACTOR has the skills, qualifications, expertise, financial
         resources and experience necessary to perform the services described
         in the Request For Proposals, CONTRACTOR's Proposal, and this
         Agreement in an efficient, cost-effective manner, with a high degree
         of quality and responsiveness, and has performed similar services for
         other public or private entities;

         (3) CONTRACTOR has thoroughly reviewed, analyzed and understood the
         Request for Proposals and has had the opportunity to review and
         understand the State's desire to create a new program to provide the
         health care services that are the subject of this Agreement to
         uninsured, low-income children, and the needs and requirements of the
         State as provided in the Agreement;

         (4) CONTRACTOR has had the opportunity to review and understand the
         State's stated objectives in entering into this Agreement and, based
         on such review and understanding, CONTRACTOR currently has the
         capability to perform in accordance with the terms and conditions of
         this Agreement;

         (5) CONTRACTOR also has reviewed and understands the risks associated
         with the CHIP program as described in the Request for Proposals,
         including the risk of non-appropriation of funds.

     Accordingly, on the basis of the terms and conditions of this Agreement,
HHSC desires to engage CONTRACTOR to perform the services described in this
Agreement under the terms and conditions set forth in this Agreement.

     SECTION 2.03 MISSION OBJECTIVES.

     CONTRACTOR acknowledges its understanding that HHSC's overall objective in
engaging CONTRACTOR pursuant to this Agreement is to arrange for the provision
of health care services to the CHIP-eligible population through qualified health
care providers. The health care services will be delivered in a highly efficient
and effective manner on behalf of HHSC, the state administrative agencies
operating portions of the CHIP program in Texas, and the members of the CHIP
program. In particular,



                                  Page 2 of 77
<PAGE>   9


CONTRACTOR acknowledges its understanding of HHSC's desire to achieve the
following primary Mission Objectives:

         (1) Provision of quality, accessible, and comprehensive health care
         services, as set out in the RFP, which are tailored to meet the health
         care needs of Texas children;

         (2) Responsiveness by CONTRACTOR to the special circumstances of
         children with special health care needs; and

         (3) Provision of health care services to all persons who are eligible
         for and enrolled in CHIP in an efficient, cost-effective manner.

     SECTION 2.04 DESIRED BENEFITS.

     CONTRACTOR understands that as a result of CONTRACTOR's arranging for the
delivery of health care services, HHSC anticipates and CONTRACTOR is committed
to assist HHSC achieve the following desired benefits for the State of Texas:

     (1) High-quality health care services as described in this Agreement
provided in a cost-effective, efficient manner;

     (2) Health insurance coverage for low-income children in the State of Texas
who are currently uninsured and who are not served by or eligible for other
state-assisted health insurance programs.

     (3) A flexible relationship between HHSC and CONTRACTOR under which
CONTRACTOR will be highly responsive to the needs and requests of HHSC and to
changes in methods and strategies for providing services; and

     (4) Continuous identification of methods to improve services and reduce
costs.

     SECTION 2.05 CONSTRUCTION OF AGREEMENT.

     (a) Scope of Article.

     The provisions of this article are intended to be a general introduction to
this Agreement and are not intended to expand the scope of the Parties'
obligations under this Agreement or to alter the plain meaning of the terms and
conditions of this Agreement. For purposes of this transaction, HHSC, the single
state agency designated to administer CHIP, is the contracting agency.
References in this Agreement to the State are interpreted, as appropriate, to
mean or include HHSC and other State agencies that may participate in the
administration of CHIP; provided, however, that no provision will be interpreted
to include any entity other than HHSC as the contracting agency.

     (b) Severability.

     If any provision of this Agreement is construed to be illegal or invalid,
such interpretation will not affect the legality or validity of any of its other
provisions. The illegal or invalid provision will be deemed stricken and deleted
to the same extent and effect as if never incorporated in this Agreement, but
all other provisions will remain in full force and effect.


                                  Page 3 of 77
<PAGE>   10



     (c) Survival of terms.

     Termination or expiration of this Agreement for any reason will not release
either Party from any liabilities or obligations set forth in this Agreement
that:

         (1) The Parties have expressly agreed shall survive any such
         termination or expiration; or

         (2) Remain to be performed or by their nature would be intended to be
         applicable following any such termination or expiration.

     (d) Headings.

     The article and section headings in this Agreement are for reference and
convenience only and may not be considered in the interpretation of this
Agreement.

     (e) Global drafting conventions.

         (1) The terms "include," "includes," and "including" are terms of
         inclusion, and where used in this Agreement, are deemed to be followed
         by the words "without limitation."

         (2) Any references to "sections," "appendices," or "attachments" are
         deemed to be references to sections, appendices, or attachments to this
         Agreement.

         (3) Any references to agreements, contracts, statutes, or
         administrative rules or regulations in this Agreement are deemed
         references to these documents as amended, modified, or supplemented
         from time to time during the term of this Agreement.

     SECTION 2.06 TIME OF THE ESSENCE.

     In consideration of the time limits for implementation of the CHIP, time is
of the essence in the performance of the Parties' obligations under this
Agreement.

     SECTION 2.07 NO IMPLIED AUTHORITY.

     The authority delegated to CONTRACTOR by HHSC is limited to the terms of
this Agreement. HHSC is the state agency designated by the Texas Legislature to
administer CHIP, and no other agency of the State grants CONTRACTOR any
authority related to CHIP unless directed through HHSC. CONTRACTOR may not rely
upon implied authority, and specifically is not delegated authority under this
Agreement to:

         (1) make public policy;

         (2) promulgate, amend or disregard administrative regulations or
         program policy decisions made by State and federal agencies responsible
         for administration of CHIP; or

         (3) unilaterally communicate or negotiate with any federal or state
         agency or the Texas Legislature on behalf of HHSC regarding the CHIP
         program.

     CONTRACTOR is required to reasonably cooperate to assist HHSC in
communications and negotiations with state and federal agencies as directed by
HHSC.


                                  Page 4 of 77
<PAGE>   11


     SECTION 2.08 LEGAL AUTHORITY.

     (a) HHSC is authorized to enter into this Agreement under sections of
Chapter 531, Texas Government Code, Chapter 62, Texas Health & Safety Code, and
section 2155.144, Texas Government Code. CONTRACTOR is authorized to enter into
this Agreement pursuant to the authorization of its governing board or
controlling owner or officer.

     (b) The person or persons signing and executing this Agreement on behalf of
HHSC, or representing themselves as signing and executing this Agreement on
behalf of HHSC, warrant and guarantee that he, she, or they have been duly
authorized by HHSC to execute this Agreement on behalf of HHSC and to validly
and legally bind HHSC to all of its terms, performances, and provisions.

ACCORDINGLY, UNLESS OTHERWISE SPECIFIED IN THIS AGREEMENT, CONTRACTOR ASSURES
COMPLIANCE WITH THE FOLLOWING TERMS AND CONDITIONS:

                            ARTICLE 3. DEFINITIONS.

     As used in this Agreement, the following terms and conditions shall have
the meanings assigned below:

     "ADMINISTRATIVE SERVICES CONTRACTOR" means the entity performing the
functions under a contract awarded pursuant to a procurement solicitation
instrument entitled "Children's Health Insurance Program, Administrative
Services Request for Proposals," issued by HHSC on July 7, 1999.

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

     "AGREEMENT" means this formal, written, and legally enforceable agreement
and amendments thereto between the Parties that is awarded pursuant to state law
and in accordance with the procurement solicitation instrument entitled "Texas
Children's Health Insurance Program, Health Maintenance Organization Request for
Proposals," issued by HHSC on August 2, 1999.

     "ANNIVERSARY DATE" means May 1 of each year after the first year of this
Agreement, regardless of the date of execution or effective date of the
Agreement.

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

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

     "CHANGE" means any alteration, adjustment, exchange, substitution, or
modification of the Services under this Agreement that are authorized in
accordance with Article 8 of this Agreement.

     "CHANGE ORDER" means an authorization to make a change in the Services or
Deliverables under this Agreement.


                                  Page 5 of 77
<PAGE>   12


     "CHILDREN'S HEALTH INSURANCE PROGRAM" or "CHIP" means the health insurance
program that is the subject of the services under this Agreement, authorized and
funded pursuant to Title XXI, Social Security Act (42 U.S.C. Sections
1397aa-1397jj) and administered by the Texas Health and Human Services
Commission.

     A "CHILD WITH COMPLEX SPECIAL HEALTH CARE NEEDS" or "CCSHCN" means a child
who:

          a. ranges in age from birth up to age 19 years;

          b. has a serious ongoing illness, a complex chronic condition, or a
          disability that has lasted or is anticipated to last at least twelve
          continuous months or more;

          c. has an illness, condition or disability that results (or without
          treatment would be expected to result) in limitation of function,
          activities, or social roles in comparison with accepted pediatric
          age-related milestones in the general areas of physical, cognitive,
          emotional, and/or social growth and/or development;

          d. requires regular, ongoing therapeutic intervention and evaluation
          by appropriately trained health care personnel; and

          e. has a need for health and/or health-related services at a level
          significantly above the usual for the child's age.

     "CHIP SERVICE AREA" means those areas originally designated and numbered by
HHSC in the RFP as available for coverage by a health maintenance organization.

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

     "COMPLAINT" means any dissatisfaction, expressed by a complainant orally or
in writing to CONTRACTOR, with any aspect of CONTRACTOR's operation, including,
but not limited to, dissatisfaction with plan administration, procedures related
to review or appeal of an adverse determination, as that term is defined in
Texas Insurance Code, article 20A.12; the denial, reduction, or termination of a
service for reasons not related to medical necessity; the way a service is
provided; or disenrollment decisions. The term does not include misinformation
that is resolved promptly by supplying the appropriate information or clearing
up the misunderstanding to the satisfaction of the Member.

     "CONFIDENTIAL INFORMATION" means any communication or record (whether oral,
written, electronically stored or transmitted, or in any other form) that
consists of:

         (a) Information relating to applicants or recipients of services or
         benefits under the CHIP Program;

         (b) All non-public budget, expense, payment, and other financial
         information;

         (c) Any information marked by HHSC as confidential or not subject to
         required public disclosure for purposes of Chapter 552, Texas
         Government Code; and

         (d) Unless previously publicly disclosed by HHSC or another state
         agency or authorized by HHSC, the substance and content of any CHIP
         program guidance or manual.


                                  Page 6 of 77
<PAGE>   13


     "CONTRACTOR" means AMERICAID Texas, Inc. d/b/a AMERIKIDS, a health
maintenance organization licensed by the State of Texas.

     "CONTRACTOR'S CSA" means all of the counties in the State of Texas in which
CONTRACTOR is providing Covered Services, specifically set out in Appendix C.

     "CSA #(INSERTED)" means a designated CHIP Service Area as specified in the
RFP.

     "CORRECTIVE ACTION PLAN" means the detailed written plan required by HHSC
to correct or resolve a deficiency or event causing the assessment of a
liquidated damage against CONTRACTOR.

     "COURT-ORDERED COMMITMENT" means a commitment of a Member to a psychiatric
facility for treatment that is ordered by a court of law pursuant to the Texas
Health and Safety Code, Title VII, Subtitle C.

     "COVERAGE YEAR" means twelve (12) months from the first date that a Member
is covered by a health plan or the appropriate period for pregnant Members in
accordance with section 11.01(c).

     "COVERED SERVICES" are those health care services that CONTRACTOR must
arrange to provide to Members, as set out in the RFP.

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

     "DATE OF DISENROLLMENT" means the last day of the last month for which
CONTRACTOR receives premium for a Member.

     "DELIVERABLE" means a written or recorded work product prepared, developed,
or procured by CONTRACTOR as part of the Services under this Agreement for the
use or benefit of HHSC or the State of Texas and identified in Article 17 of
this Agreement to be specified in a report matrix to be developed by the Parties
and attached to this Agreement as an amendment.

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

     "EFFECTIVE DATE" means January 19, 2000. For purposes of this Agreement,
the term includes any period under which work is performed in accordance with a
properly executed Letter of Intent between HHSC and CONTRACTOR.

     "EFFECTIVE DATE OF COVERAGE" means the first day of the month for which
CONTRACTOR has received premium for a Member.

     "EXPIRATION DATE" means April 30, 2003.

     "FORCE MAJEURE EVENT" means any failure or delay in performance of a duty
by a Party under this Agreement that is caused by fire, flood, hurricane,
tornadoes, earthquake, an act of God, an act of war, riot, civil disorder, or
any similar event beyond the reasonable control of such Party and without the
fault or negligence of such Party.

     "HEALTH AND HUMAN SERVICES COMMISSION" or "HHSC" means the administrative
agency within the executive department of Texas state government established
under chapter 531, Texas Government Code,


                                  Page 7 of 77
<PAGE>   14


and authorized to administer CHIP under chapter 62, Texas Health and Safety Code
or its designee, including, but not limited to, the Texas Department of Health.

     "HEALTH MAINTENANCE ORGANIZATION" or "HMO" means an entity defined in
article 20A.02(n), Texas Insurance Code.

     "IMPLEMENTATION DATE" means May 1, 2000.

     "INITIAL TERM" means the period between the Effective Date and the original
Expiration Date of this Agreement.

     "KEY CONTRACTOR PERSONNEL" means the critical management and technical
positions identified by CONTRACTOR in its Proposal and subject to the approval
and oversight of HHSC in accordance with section 5.02 of this Agreement.

     "MANAGEMENT SERVICES CONTRACTOR" means the entity contracted by HHSC to
manage CHIP service contracts.

     "MEMBER" means a person who has met CHIP eligibility criteria, and is
enrolled in a CHIP health plan.

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

     "PARTIES" means HHSC and CONTRACTOR, collectively.

     "PARTY" means either HHSC or CONTRACTOR, individually.

     "PROPOSAL" means the proposal submitted by CONTRACTOR in response to the
CHIP Health Maintenance Organization Request for Proposals.

     "PROVIDER SUBCONTRACT" means an agreement entered into by a direct provider
of health care services and CONTRACTOR or an intermediary entity.

     "PUBLIC INFORMATION" means information that:

         (1) Is collected, assembled, or maintained under a law or ordinance or
         in connection with the transaction of official business by a
         governmental body or for a governmental body; and

         (2) The governmental body owns or has a right of access to.

     "READINESS REVIEW" means the examination conducted by HHSC of CONTRACTOR's
ability, preparedness, and availability to fulfill its obligations under this
Agreement.

     "REQUEST FOR PROPOSALS" or "RFP" means the procurement solicitation
instrument entitled Children's Health Insurance Program, Health Maintenance
Organization Request for Proposals," issued by HHSC on August 2, 1999, and under
which this Agreement was awarded and is executed. The term includes all
modifications, amendments, revisions, and errata to the RFP published by HHSC.

     "SCOPE OF WORK" means the description of Services and Deliverables
specified in the RFP, CONTRACTOR's Proposal, and Articles 7 and 10 through and
including 19 of this Agreement.


                                  Page 8 of 77
<PAGE>   15


     "SERVICES" means the tasks, functions, and responsibilities assigned and
delegated to CONTRACTOR under this Agreement and described in Articles 7 and 10
through and including 19 of this Agreement, and any ancillary tasks, functions
or responsibilities not otherwise expressly described in this Agreement but
which are customary or required for the proper performance or delivery of the
Services.

     "SOFTWARE" means all operating system and applications software used by
CONTRACTOR to provide the Services under this Agreement.

     "STATE" means HHSC or an agency within the executive or legislative branch
of Texas state government other than HHSC, as appropriate.

     "SYSTEM" means the automated information system utilized by CONTRACTOR in
the performance of the Services under this Agreement.

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

     "SUBCONTRACTOR" means any individual or entity which has entered into a
subcontract with CONTRACTOR.

     "TDI" means the Texas Department of Insurance.

     "TRANSITION PLAN" means the written plan developed by CONTRACTOR, approved
by HHSC, and to be employed in the event of an early termination of this
Agreement. The Transition Plan describes CONTRACTOR's policies and procedures
that will assure:

                  (1) The least disruption in the delivery of health care
         services to those CHIP-eligible children who are enrolled with
         CONTRACTOR during the transition to a substitute health plan; and

                  (2) Cooperation with HHSC and the substitute health plan
         provider in transferring information to a substitute health plan , as
         well as notifying Members of the transition and of their option to
         select a new plan, as requested and in the form required or approved by
         HHSC.

     "VALUE-ADDED SERVICES" means those services, if any, that CONTRACTOR
offered to provide and described in its Proposal, which are required to be
offered and provided to Members. CONTRACTOR does not receive capitation for
these services. The cost of providing these Value-added Services is an allowable
expense for purposes of calculating the experience rebate described in section
10.06.

                    ARTICLE 4. GENERAL TERMS AND CONDITIONS

     SECTION 4.01 TERM OF THE AGREEMENT.

     (a) General provisions.

     This section will govern the period for performance of this Agreement. No
commitment of funds by HHSC is permitted prior to the Effective Date or
subsequent to the last regularly-scheduled payment date services provided during
the Initial Term, including retroactive adjustments, and any properly executed
extension of the Initial Term unless authorized under a properly executed Letter
of Intent between HHSC and CONTRACTOR. The term may be extended or shortened by
amendment.


                                  Page 9 of 77
<PAGE>   16


     (b) Initial Term.

     The Initial Term of this Agreement will commence on January 19, 2000, and
will terminate on April 30, 2003, unless terminated sooner or extended in
accordance with the terms of this Agreement. The Initial Term includes any
period during which work is performed under a Letter of Intent that is properly
executed between HHSC and CONTRACTOR.

     (c) Optional extension of Agreement.

     HHSC may offer to extend the term of this Agreement by written notice to
CONTRACTOR no less than 90 days before the Expiration Date. Upon mutual written
agreement of the parties, this Agreement may be extended for two one-year terms.
If HHSC decides to offer an extension of this Agreement for a second one-year
term, HHSC will provide written notice to CONTRACTOR no less than 90 days before
the originally-extended expiration date.

     (d) Modifications upon extension or renewal of Agreement.

         (1) If HHSC seeks modifications to the Agreement as a condition of any
         extension, HHSC's notice to CONTRACTOR will specify those
         modifications, the Agreement pricing terms, or other terms and
         conditions of the Agreement HHSC seeks.

         (2) Modifications proposed by HHSC may apply to operations under this
         Agreement in any Agreement year beginning after the date of written
         notice to CONTRACTOR. CONTRACTOR must respond to HHSC's proposed
         modification within 30 days of receipt. Upon receipt of CONTRACTOR's
         written response to the proposed modifications, HHSC may enter into
         negotiations with CONTRACTOR to arrive at mutually agreeable Agreement
         modifications. If HHSC determines that the Parties will be unable to
         reach agreement on mutually satisfactory Agreement modifications, then
         HHSC must provide written notice to CONTRACTOR of its intent not to
         extend the Agreement beyond the Agreement term then in effect, at
         least 90 days before the Agreement Expiration Date, inclusive of all
         extension options previously exercised.

     SECTION 4.02 SCOPE OF WORK.

     CONTRACTOR will arrange for the delivery of health care services set out in
the RFP and prepare and deliver the reports described in Article 17 and to be
more specifically described in an appendix that the Parties will develop and
attach as an appendix by amendment of this Agreement. CONTRACTOR will also
perform the other functions set out in Articles 7 and 10 through and including
19 of this Agreement, as well as the duties and responsibilities set out in the
RFP and CONTRACTOR's Proposal. The RFP and CONTRACTOR's Proposal are both
incorporated into this Agreement by reference for all purposes.

     SECTION 4.03 AGREEMENT ELEMENTS.

     (a) Agreement documentation.

     The agreement between the Parties will consist of this Agreement, the RFP,
and CONTRACTOR's Proposal.


                                 Page 10 of 77
<PAGE>   17


     (b) Order of documents.

     In the event of any conflict or contradiction between or among these
documents, the documents shall control in the following order of precedence:

         (1) The final executed Agreement;

         (2) CONTRACTOR's Proposal ; and

         (3) The RFP.

     (c) Oral and written representations.

     No oral or written representations of CONTRACTOR, including representations
made outside of its formal Proposal documentation, have been regarded by HHSC as
inducements to contract and are not expressly made a part of this Agreement.

     SECTION 4.04 NOTICES.

     (a) Any notice under this Agreement must be sent by registered or certified
mail, return receipt requested, or must be delivered in hand, and a receipt
provided.

     (b) Any notice under this Agreement to HHSC will be sufficient if
hand-delivered or mailed to:

                  Don A. Gilbert, M.B.A.
                  Commissioner
                  Health and Human Services Commission
                  P.O. Box 12347
                  4900 North Lamar Blvd.
                  Austin, Texas 78751

                  Copy to:
                  Jason Cooke
                  Health & Human Services Commission
                  P.O. Box 12347
                  4900 North Lamar Blvd.
                  Austin, Texas 78751

     (c) Any notice under this Agreement to CONTRACTOR will be sufficient if
hand-delivered or mailed to:

                  Name: James D. Donovan, Jr.
                  Title: President and Chief Executive Officer
                  Business name: AMERICAID Texas, Inc.
                  Address: 2730 N. Stemmons Freeway
                           Suite 608, West Tower
                           Dallas, Texas  75207

                  Copy to:
                  Name: Sharron Cox
                  Address: AMERICAID Community Care
                           6700 West Loop South, Suite 200



                                 Page 11 of 77
<PAGE>   18


                            Bellaire, Texas 77401


     (d) Either Party may change its designee or address upon five (5) days'
prior written notice to the other Party.

     SECTION 4.05 FUNDING.

     This Agreement is expressly conditioned on the availability of state and
federal appropriated funds. CONTRACTOR will have no right of action against HHSC
in the event that HHSC is unable to perform its obligations under this Agreement
as a result of the suspension, termination, withdrawal, or failure of funding to
HHSC or lack of sufficient funding of HHSC for any activities or functions
contained within the scope of this Agreement. If funds become unavailable, the
provisions of Article 20 (Remedies and Disputes) will apply. HHSC will use all
reasonable efforts to ensure that such funds are available. HHSC shall make best
efforts to provide reasonable written advance notice to CONTRACTOR upon learning
that funding for CHIP may be discontinued.

     SECTION 4.06 DELEGATION OF AUTHORITY.

     Whenever, by any provision of this Agreement, any right, power, or duty is
imposed or conferred on HHSC, the right, power, or duty so imposed or conferred
is possessed and exercised by the Commissioner unless any such right, power, or
duty is specifically delegated to the duly appointed agents or employees of
HHSC. The Commissioner will reduce any such delegation of authority to writing
and provide a copy to CONTRACTOR on request.

     SECTION 4.07 NO WAIVER OF SOVEREIGN IMMUNITY.

     The Parties expressly agree that no provision of this Agreement is in any
way intended to constitute a waiver by HHSC or the State of Texas of any
immunities from suit or from liability that HHSC or the State of Texas may have
by operation of law.

     SECTION 4.08 FORCE MAJEURE.

     Neither CONTRACTOR nor HHSC will be liable to the other for any delay in,
or failure of performance, of any requirement contained in the Agreement caused
by a force majeure event. The existence of such causes of delay or failure will
extend the period of performance in the exercise of reasonable diligence until
after the causes of delay or failure have been removed. Each Party must inform
the other in writing with proof of receipt within ten (10) business days of the
existence of a force majeure event or otherwise waive this right as a defense.

     SECTION 4.09 HOLD HARMLESS.

     CONTRACTOR agrees that it shall hold harmless HHSC and its Commissioner,
employees, agents, contractors, subcontractors, and independent consultants and
their subcontractors and consultants from any and all actions in bid or proposal
evaluation other than acts of willful misconduct and gross negligence.

     SECTION 4.10 ASSIGNMENT.


                                 Page 12 of 77
<PAGE>   19

     This Agreement was awarded to CONTRACTOR based on CONTRACTOR's
qualifications to perform the services described in the RFP. CONTRACTOR cannot
assign this Agreement without the written consent of TDI and HHSC. This
provision does not prevent CONTRACTOR from subcontracting duties and
responsibilities to qualified Subcontractors. If TDI and HHSC consent to an
assignment of this Agreement, a transition period of 90 days will run from the
date the assignment is approved by TDI and HHSC so that Members' services are
not interrupted. The assigning CONTRACTOR must also submit a transition plan, as
set out in section 20.15(d), subject to HHSC's approval.

     SECTION 4.11 EVIDENCE OF FINANCIAL SOLVENCY.

     CONTRACTOR must be and remain in full compliance with all applicable state
and federal solvency requirements for basic-service health maintenance
organizations, including but not limited to, all reserve requirements, net worth
standards, debt-to-equity ratios, or other debt limitations.

     If CONTRACTOR becomes aware of any impending changes to its financial or
business structure that could adversely impact its compliance with the
requirements of this Agreement or its ability to pay its debts as they come due,
CONTRACTOR must notify HHSC immediately in writing. CONTRACTOR has not filed for
protection under any state or federal bankruptcy laws.

     SECTION 4.12 MINIMUM NET WORTH.

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

     SECTION 4.13 PERFORMANCE AND FIDELITY BONDS.

     CONTRACTOR will furnish HHSC with a performance bond in the form prescribed
by HHSC and approved by TDI, naming HHSC as Obligee, securing CONTRACTOR's
faithful performance of the terms and conditions of this Agreement. The
performance bond has been issued in the amount of $100,000 for a three-year
period (the Initial Term). If the Agreement is renewed or extended under section
4.01(c), a separate bond will be required for each additional term of the
Agreement. The bond has been issued by a surety licensed by TDI, and specifies
cash payment as the sole remedy. Performance Bond requirements under this
article must comply with article 20A.30 of the Texas Insurance Code and 28
T.A.C. Section 11.1805, relating to Performance and Fidelity Bonds. The bond
must be delivered to HHSC at the same time this signed Agreement is delivered to
HHSC.

     SECTION 4.14 INSURANCE.

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

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


                                 Page 13 of 77
<PAGE>   20


     CONTRACTOR must maintain an umbrella professional liability insurance
policy for the greater of $3,000,000 or an amount (rounded to the next $100,000)
which represents the number of CONTRACTOR's Members in the first month of the
Agreement term multiplied by one hundred fifty dollars ($150), not to exceed
$10,000,000.

     Any exceptions to the requirements of this section must be approved in
writing by HHSC prior to the Implementation Date. Subcontractors and providers
who qualify as state or federal units of government and are prohibited by law
from purchasing liability insurance are exempt from the insurance requirements
of this section. State and federal units of government are required to comply
with and are subject to the provisions of the Texas or Federal Tort Claims Act.

     SECTION 4.15 REPROCUREMENT RIGHTS.

     Notwithstanding anything in this Agreement to the contrary, HHSC may at any
time issue requests for proposals to other potential contractors for performance
of any portion of the Services covered by this Agreement or services similar or
comparable to the Services performed by CONTRACTOR under this Agreement to
achieve choice in a CHIP Service Area or to replace an HMO who is no longer
providing Covered Services in a CHIP Service Area. HHSC will provide advance
written notice to CONTRACTOR if HHSC reprocures in CONTRACTOR's CSA.

                   ARTICLE 5. CONTRACTOR PERSONNEL MANAGEMENT

     SECTION 5.01 QUALIFICATIONS, RETENTION AND REPLACEMENT OF CONTRACTOR
     EMPLOYEES.

     CONTRACTOR agrees to maintain the organizational and administrative
capacity and capabilities to carry out all duties and responsibilities under
this Agreement. The personnel CONTRACTOR assigns to perform the duties and
responsibilities under this Agreement will be properly trained and qualified for
the functions they are to perform. CONTRACTOR does not warrant the quality of
training for which the State is responsible. Notwithstanding transfer or
turnover of personnel, CONTRACTOR remains obligated to perform all duties and
responsibilities under this Agreement without degradation and in accordance with
this Agreement.

     SECTION 5.02 KEY CONTRACTOR PERSONNEL.

     (a) CONTRACTOR's Proposal includes a list of designated key management and
technical personnel ("Key CONTRACTOR Personnel") who will be assigned to this
Agreement. For the purposes of this requirement, Key CONTRACTOR Personnel are
those with management responsibility or principal technical responsibility for
the following functional areas of this Agreement: Member Services; Management
Information Systems; Provider/Network Development and Maintenance; Benefit
Administration and Utilization; Financial Functions; and Reporting. CONTRACTOR's
Medical Director is also a Key CONTRACTOR Personnel.

     (b) CONTRACTOR shall maintain throughout the period of this Agreement with
HHSC the ability to support its Key CONTRACTOR Personnel with the required
resources necessary to meet contract requirements and comply with applicable
law. CONTRACTOR shall ensure project continuity by timely replacing Key
CONTRACTOR Personnel, if necessary, with a sufficient number of persons having
the requisite skills, experience and other qualifications. No later than thirty
(30) calendar days after any change in Key CONTRACTOR Personnel, CONTRACTOR
shall notify HHSC in writing with the names of any replacement staff and details
of their requisite skills, experience and other qualifications.


                                 Page 14 of 77
<PAGE>   21


     (c) If HHSC determines that a working relationship satisfactory to HHSC
cannot be established between a Key CONTRACTOR Personnel and HHSC and desires
that the Key CONTRACTOR Personnel not work with HHSC on CONTRACTOR's duties and
responsibilities under this Agreement, HHSC will notify CONTRACTOR in writing.
After receipt of HHSC's notice, HHSC and CONTRACTOR will attempt to resolve
HHSC's concerns on a mutually agreeable basis.

     (d) Regardless of specific personnel changes, CONTRACTOR must maintain the
overall level of expertise, experience, and skill reflected in the Key
Contractor Personnel resumes submitted. HHSC will continuously monitor the
overall level of expertise of CONTRACTOR's staff to ensure that CONTRACTOR is in
compliance with this requirement.

     SECTION 5.03 MEDICAL DIRECTOR

     CONTRACTOR must have the equivalent of a full-time Medical Director
licensed under the Texas State Board of Medical Examiners (M.D. or D.O.). The
Medical Director must comply with applicable federal and state statutes and
regulations.

     The Medical Director must exercise independent medical judgment in all
decisions relating to medical necessity. CONTRACTOR must ensure that its
decisions relating to medical necessity are not adversely influenced by fiscal
management decisions. HHSC may conduct reviews of decisions relating to medical
necessity upon reasonable notice.

     SECTION 5.04 RESPONSIBILITY FOR CONTRACTOR PERSONNEL.

     (a) CONTRACTOR's employees will not in any sense be considered employees of
HHSC or the State of Texas, but will be considered CONTRACTOR's employees for
all purposes.

     (b) Except as expressly provided in this Agreement, neither CONTRACTOR nor
any of CONTRACTOR's employees, subcontractors or agents may act in any sense as
agents or representatives of HHSC or the State of Texas.

     (c) CONTRACTOR's employees must be paid exclusively by CONTRACTOR for all
services performed. CONTRACTOR is responsible for and must comply with all
requirements and obligations related to such employees under local, state or
federal law, including minimum wage, social security, unemployment insurance,
state and federal income tax and workers' compensation obligations.

     SECTION 5.05 COOPERATION WITH HHSC OR STATE ADMINISTRATIVE AGENCIES.

     (a) Cooperation with HHSC contractors.

     CONTRACTOR agrees to reasonably cooperate with and work with the state's
contractors, subcontractors and third-party representatives as requested by
HHSC. To the extent permitted by HHSC's financial and personnel resources, HHSC
agrees to reasonably cooperate with CONTRACTOR and to use its best efforts to
ensure that HHSC's other CHIP contractors reasonably cooperate with CONTRACTOR.

     (b) Cooperation with state and federal administrative agencies.

     CONTRACTOR must ensure that CONTRACTOR personnel will cooperate with HHSC
or other state or federal administrative agency personnel at no charge to HHSC
for purposes relating to the administration of the CHIP program including, but
not limited to the following purposes:


                                 Page 15 of 77
<PAGE>   22


         (1) The investigation and prosecution of fraud, abuse, and waste in the
         Texas Title XIX Medical Assistance (Medicaid) Program or the CHIP
         program;

         (2) Audit, inspection, or other investigative purposes; and

         (3) Testimony in judicial or quasi-judicial proceedings relating to the
         Services under this Agreement or other delivery of information to HHSC
         or other agencies' investigators or legal staff.


                    ARTICLE 6. GOVERNING LAW AND REGULATIONS

     SECTION 6.01 GOVERNING LAW AND VENUE.

     This Agreement is governed by the laws of the State of Texas and
interpreted in accordance with Texas law. Proper venue for litigation arising
from this Agreement is the District Courts of Travis County, Texas.

     SECTION 6.02 LAW AND REGULATIONS GOVERNING ADMINISTRATION OF THE AGREEMENT.

     The administration of the Agreement shall be in accordance with the
following laws and regulations:

         (1) Title XXI of the Social Security Act, as amended, and any final
         regulations promulgated thereunder;

         (2) Chapter 62, Texas Health & Safety Code, as amended, and any
         administrative rules adopted under that chapter;

         (4) Chapter 531, Texas Government Code, as amended; and

         (5) Any other pertinent provisions of Federal law or Texas law.

     SECTION 6.03 CONTRACTOR RESPONSIBILITY FOR COMPLIANCE WITH LAWS AND
     REGULATIONS.

     CONTRACTOR is responsible for compliance with all laws, regulations, and
administrative rules that govern the performance of the Services including, but
not limited to, all state and federal tax laws, state and federal employment
laws, state and federal regulatory requirements, and licensing provisions.
CONTRACTOR is responsible for ensuring each of its personnel who provide
services under the Agreement are properly licensed, certified, and/or have
proper permits to perform any activity related to the Services.

     SECTION 6.04 LAWS AND REGULATIONS GOVERNING PROCUREMENT OF THE SERVICES.

     (a) It is the express intention of the Parties that this Agreement be a
procurement of health care services and meeting all applicable requirements of
the following:

         (1) Title 42, Code of Federal Regulations, Part 92;

         (2) Title 45, Code of Federal Regulations, Part 74;

         (3) Chapter 62, Texas Health & Safety Code;



                                 Page 16 of 77
<PAGE>   23

         (4) Section 2155.144, Texas Government Code.

     SECTION 6.05 IMMIGRATION REFORM AND CONTROL ACT OF 1986.

     CONTRACTOR shall comply with the requirements of the Immigration Reform and
Control Act of 1986 and the Immigration Act of 1990, 8 U.S.C. Sections 1101, et
seq., regarding employment verification and retention of verification forms for
any individual(s) hired on or after November 6, 1986, who will perform any labor
or services under this Agreement.

     SECTION 6.06 COMPLIANCE WITH STATE AND FEDERAL ANTI-DISCRIMINATION LAWS.

     (a) To the extent such provisions are applicable to CONTRACTOR, CONTRACTOR
agrees to fully comply with the following laws and regulations that implement
such laws:

         (1) Title VI of the Civil Rights Act of 1964, 28 U.S.C. Sections 2000d
         to 2000d-4 (P.L. 88-352);

         (2) Section 504 of the Rehabilitation Act of 1973, 29 U.S.C. Section
         794 (P.L.] 93-112);

         (3) The Americans with Disabilities Act of 1990, 29 U.S.C. Section
         706, 42 U.S.C. Sections 12101, et seq.;

         (4) 47 U.S.C. Sections 152, 221, 225, 611 (P.L. 101-336);

         (5) Title 45, Code of Federal Regulations, Part 80 (relating to race,
         color and national origin);

         (6) Title 45, Code of Federal Regulations, Part 84 (relating to
         handicap);

         (7) Title 45, Code of Federal Regulations, Part 86 (relating to sex);
         and

         (8) Title 45, Code of Federal Regulations, Part 91 (relating to age).

     Collectively, these authorities obligate HHSC to provide services without
discrimination on the basis of race, color, national origin, age, sex,
disability, or political or religious beliefs. CONTRACTOR agrees that in
carrying out the terms of this Agreement, it will do so in a manner that assists
HHSC to comply with such obligations.

     (b) CONTRACTOR agrees to comply with the applicable requirements of Texas
Labor Code, Chapter 21, which requires that certain employers not discriminate
on the basis of race, color, disability, religion, sex, national origin, or age.

     SECTION 6.07 ENVIRONMENTAL PROTECTION LAWS.

     CONTRACTOR agrees to comply with the applicable provisions of federal
environmental protection laws as described in this section:

     (a) Pro-Children Act of 1994.

     CONTRACTOR agrees to comply with the Pro-Children Act of 1994, as
applicable, 20 U.S.C. Sections 6081 - 6084 P.L. 103-227; 108 Stat. Section 104)
regarding the provision of a smoke-free workplace and promoting the non-use of
all tobacco products.



                                 Page 17 of 77
<PAGE>   24

     (b) National Environmental Policy Act of 1969.

     CONTRACTOR agrees to comply with any applicable provisions relating to the
institution of environmental quality control measures contained in the National
Environmental Policy Act of 1969, 42 U.S.C. Sections 4321-4332,) and Executive
Order 11514 ("Protection and Enhancement of Environmental Quality").

     (c) Clean Air Act and Water Pollution Control Act regulations.

     CONTRACTOR agrees to comply with any applicable provisions relating to
required notification of facilities violating the requirements of Executive
Order 11738 ("Providing for Administration of the Clean Air Act and the Federal
Water Pollution Control Act with Respect to Federal Contracts, Grants, or
Loans").

     (d) State Clean Air Implementation Plan.

     CONTRACTOR agrees to comply with any applicable provisions requiring
conformity of federal actions to State (Clean Air) Implementation Plans under
Section 176(c) of the Clean Air Act of 1955, as amended (42 U.S.C. Sections
740-7642).

     (e) Safe Drinking Water Act of 1974.

     CONTRACTOR agrees to comply with applicable provisions relating to the
protection of underground sources of drinking water under the Safe Drinking
Water Act of 1974, as amended (21 U.S.C. Section 349; 42 U.S.C. Sections 300f to
300j-9).


             ARTICLE 7. SERVICE LEVELS AND PERFORMANCE MEASUREMENT.

     SECTION 7.01 PERFORMANCE MEASUREMENT.

     Satisfactory performance of this Agreement will be measured by:

     (a) Adherence to this Agreement, including all representations and
warranties;

     (b) Compliance with project work plans, schedules, and milestones as
proposed by CONTRACTOR in its Proposal and as revised by CONTRACTOR and finally
approved by HHSC;

     (c) Delivery of the Services and Deliverables in accordance with the
service levels and availability proposed in its Proposal and as finally approved
or accepted by HHSC;

     (d) Results of audits performed by HHSC or its representatives in
accordance with Article 9;

     (e) Timeliness, completeness, and accuracy of required reports; and

     (f) Achievement of performance measures developed by CONTRACTOR and HHSC
and as modified from time to time by written agreement during the Initial Term
of this Agreement.

     SECTION 7.02 MEASUREMENT AND MONITORING TOOLS.


                                 Page 18 of 77
<PAGE>   25


     CONTRACTOR must implement all reasonably necessary measurement and
monitoring tools and procedures required to measure and report CONTRACTOR's
performance of the Services against the applicable service levels as such
service levels are specified in the Agreement. Such measurement and monitoring
must permit reporting at a level of detail sufficient to verify compliance with
the service levels specified in the Agreement and will be subject to audit by
HHSC. CONTRACTOR will provide HHSC with information and access to all applicable
information or work product produced by such tools and procedures upon request
for purposes of verification.

     SECTION 7.03 CONTINUOUS IMPROVEMENT AND BEST PRACTICES.

     CONTRACTOR must on an ongoing basis, as part of its total quality
management process, identify ways to improve performance of the Services and
identify and apply techniques and tools from other operations that would benefit
CHIP either operationally or financially.

     SECTION 7.04 SYSTEMS DEVELOPMENT, MAINTENANCE AND OPERATION.

     (a) General responsibilities.

     CONTRACTOR will develop, maintain, and operate or arrange for the
development, maintenance, and operation of the automated information system
described in CONTRACTOR's Proposal that will be utilized by CONTRACTOR in the
performance of the Services under this Agreement (the "System") and that
performs functions necessary and convenient to the delivery of the Services,
including, but not limited to, the following:


         (1) The general management information systems functions described in
         subsection (b) of this section; and

         (2) The specific system-wide functions described in subsection (c) of
         this section.

     (b) General management information system functions.

         (1) General data storage and handling requirements.


         (A) The System will manage, process, and securely store data in
         accordance with the requirements of this Agreement, the RFP, and
         CONTRACTOR's Proposal.

         (B) The System must process, store, manipulate, or manage information
         relating to CONTRACTOR's business operations and this Agreement,
         including, but not limited to:

             (i) Accounting and financial information, including, but not
             limited to:

                 a. Health care payment information--e.g., capitation
                 payments, claims payments, refunds;

                 b. Administrative financial information--e.g., payments to
                 subcontractors, suppliers, interest income

             (ii) Enrolled member information specified by HHSC; and

             (iii) Utilization data specified by HHSC.



                                 Page 19 of 77
<PAGE>   26


         (C) In addition to any other requirement specified in this article, the
         System implemented by CONTRACTOR must include the following system
         features or functionality:

             (i) The capability to access, update and edit all data in a
             manner approved by HHSC;

             (ii) The capability to maintain automated audit trails regarding
             data changes to enable verification and validation of data
             changes, including:

                    a. The date of a change;

                    b. The reason and authority for the change;

                    c. The chronological recording of the change (i.e., the
                    information before the change and after the change);

                    d. Whether the change was made by the system or by a person;
                    and

                    e. The identity, authority, login name, or machine ID of the
                    person, operator, or machine that made the change;


             (iii) The capability to allow data input, updating, and editing
             through manual and electronic transmissions;

             (iv) Procedures and processes for accumulating, archiving, and
             restoring data in the event of a system or subsystem failure;

             (v) Maintenance of automated or manual linkages between and
             among all management information systems subsystems and
             interfaces;

             (vi) The capability to relate member and provider data with
             utilization, service, accounting data, and reporting functions
             and other relationships deemed appropriate by HHSC within time
             frames specified by or on behalf of HHSC;

             (vii) The capability to relate and extract data elements into
             detail and summary reporting formats;

             (viii) Process and procedures manuals, available in written or
             electronic format, that:

                    a. Document and describe all manual and automated system
                    procedures and processes for all the functions and features
                    described in this section, and the various subsystem
                    components; and

                    b. Are reviewed and updated at least annually and updated
                    within

             (ix) The capability to maintain and cross-reference all
             member-related information with the most current CHIP member
             unique identifying number.

         (2) Data override capability.

     The System implemented by CONTRACTOR must include data override capability
sufficient to allow CONTRACTOR staff to manually or electronically correct
errors and, with appropriate permissions and security clearances, to mitigate
specific system-wide data problems.


                                 Page 20 of 77
<PAGE>   27


          (3) HIPAA compliance.

     The System implemented by CONTRACTOR must comply with applicable
certificate of coverage and data specification and reporting requirements
promulgated pursuant to the federal Health Insurance Portability and
Accountability Act of 1996, P.L. 104-91 (August 21, 1996), as amended.
CONTRACTOR will issue the Certificate of Creditable Coverage to disenrolled
Members.

          (4) Data security and confidentiality.

     The System implemented by CONTRACTOR must contain system security features
that include:

              (A) The ability to log and report all unauthorized attempts to
              access the system;

              (B) Dial-up access protection to permit systems access only from
              authorized locations and/or users;

              (C) A process for ensuring complete confidentiality of all
              passwords and IDs used by CONTRACTOR and HHSC employees;

              (D) Storage of all critical data files, when not in use, in a
              fireproof vault; and

              (E) Additional security requirements as agreed to by HHSC and
              CONTRACTOR.

          (5) Back-up.

              (A) CONTRACTOR will develop, equip, operate, and maintain or
              contract with a facility that will conduct back-up operations of
              all critical operational data (including all major data files,
              microfiche records, computer programs, system and operations, and
              documentation) received, generated, and maintained by the System
              in accordance with the representations in CONTRACTOR's Proposal
              or as specified by HHSC.

              (B) In fulfilling the requirements of this section, CONTRACTOR
              will implement a data back-up plan subject to HHSC approval.

              (C) The data back up operations described in this section will be
              for the purpose of restoring the System or data to fully
              operational status within timeframes specified by HHSC in
              cooperation with CONTRACTOR and will be conducted at a site other
              than the central facility established by CONTRACTOR for data
              center operations.

          (6) Disaster recovery.

          (A) CONTRACTOR must provide acceptable back-up hardware processing
          facilities for maintaining back-ups for all computer programs,
          microfiche originals, major files, system and operations, and user
          documentation (in magnetic and non-magnetic form) in the event of a
          disaster.

          (B) In the event of a failure of the data processing facilities and/or
          communications networks because of any disaster, mission critical
          administrative services normally furnished by CONTRACTOR must be fully
          available within five (5) working days following the disaster. The
          five-day period does not excuse CONTRACTOR from meeting the
          contractual performance criteria.


                                 Page 21 of 77
<PAGE>   28


         (C) CONTRACTOR must provide HHSC with an updated acceptable detailed
         back-up and disaster recovery plan on an annual basis. The plan, and
         any subsequent modifications, are subject to HHSC approval. CONTRACTOR
         must demonstrate the back-up facilities' capability to HHSC at least
         once a year.

         (D) Failure to comply with the requirements set out in subsections (A)
         through (C) may subject CONTRACTOR to imposition of liquidated damages
         under Article 20 of this Agreement.

         (E) CONTRACTOR will test the operability of the Disaster Recovery Plan
         and related systems no sooner than April 1, 2000.

         (F) CONTRACTOR will supply any data or information (including cost
         information) HHSC may require in order to secure a waiver under House
         Bill 1, 76th Texas Legislature (General Appropriations Act), Article
         IX, Section 9-6.23 ("West Texas Disaster Recovery and Data Operations
         Center") if such a waiver is or becomes necessary. CONTRACTOR will
         reasonably cooperate with HHSC to secure such waiver.

     (c) System-wide functions.

     The System utilized by CONTRACTOR will have the functionality of and
accomplish the requirements of the separate subsystems and tasks identified in
the RFP and in this section, including the following:

         (1) Enrollment and Eligibility Subsystem.

         (A) The System implemented by CONTRACTOR must include an enrollment
         and Eligibility Subsystem that has the capability to receive, store,
         and process in accordance with this paragraph (c)(1) this section.

         (B) The System implemented by CONTRACTOR must:

             (i) Receive CHIP member enrollment information that is
             electronically transmitted to CONTRACTOR by the CHIP
             Administrative Services Contractor on a monthly basis. CONTRACTOR
             must update its records and issue new or revised
             membership/identification cards on the basis of the updated CHIP
             member enrollment information.

             (ii) Maintain historical data (files) as required by HHSC;

             (iii) Maintain data on enrollment, disenrollment, complaint, and
             appeal activities, including, but not limited to the following:

                   a. The reason for or type of disenrollment; and

                   b. Complaint and appeal resolution, organized in accordance
                   with a format approved by HHSC;

             (iv) Receive, translate, edit and update files in accordance with
             requirements developed by the CHIP Administrative Services
             Contractor and HHSC prior to inclusion in the System, including
             processing updates received from the CHIP Administrative Services
             Contractor within 2 working days of CONTRACTOR's receipt of such
             updates;


                                 Page 22 of 77
<PAGE>   29


              (v) Provide error reports and a reconciliation process between
              new data and data existing in the System;

              (vi) Verify Member eligibility for medical services rendered, or
              for other Member inquiries; and

              (vii) Search records by a variety of fields (e.g., name, unique
              identification numbers, date of birth, social security number,
              etc.) for eligibility verification purposes.

          (2) Provider Subsystem.

          (A) The System implemented by CONTRACTOR must include a Provider
          Subsystem that accepts, processes, stores and retrieves current and
          historical data on health care providers in CONTRACTOR's network,
          including, but not limited to, the following data:

              (i) Services offered or provided;

              (ii) Payment methodology;

              (iii) License/credentialing information;

              (iv) Service capacity and facility linkages; and

              (v) If required by HHSC, information concerning excluded
                  providers.

          (B) The functions and/or features of the Provider Subsystem must
          achieve the following:

              (i) Identify network providers, specialty or specialties by:

                  a. The appropriate regulatory board
                  certification/eligibility;

                  b. Admission privileges;

                  c. Member linkage;

                  d. Capacity;

                  e. Facility linkages;

                  f. Emergency arrangements or contact; and

                  g. Other limitations, affiliations, or restrictions
                  specified by HHSC;

              (ii) Maintain provider history files to include audit trails and
              effective dates of information;

              (iii) Maintain provider fee schedules/remuneration agreements to
              permit accurate payment for services based on the financial
              agreement in effect on the date of service;

              (iv) Support CONTRACTOR's credentialing, re-credentialing, and
              credential-tracking processes;


                                 Page 23 of 77
<PAGE>   30

              (v) Incorporate or link appropriate billing, client, and other
              information to the provider record;

              (vi) Flag and identify providers with restrictive conditions
              (e.g. limits to capacity, type of patient, and other services if
              approved out of network, age restrictions, exclusion, etc.);

              (vii) Support national and state provider number formats (such as
              UPIN, NPI, CLIA, Medicaid, TPI, etc.) as required by HHSC;

              (viii) Identify providers excluded from participation by HHSC as
              ineligible or excluded and update Provider Subsystem and other
              files to reflect period and reason for exclusion;

              (ix) Capture provider complaints;

              (x) Provide geographical mapping of provider network and
              assessment of network's capabilities to meet client needs; and

              (xi) Update provider information (e.g. provider addresses).

          (3) Claims/Services Data Subsystem.

          (A) The System implemented by CONTRACTOR must include a
          Claims/services Data Subsystem that collects, processes, and stores
          data on all services delivered for which CONTRACTOR is financially
          responsible, primarily for the following purposes:

              (i) Processing claims and tracking service utilization data;

              (ii) Capturing all medically related services, including medical
              supplies and/or equipment (using standard codes as specified by
              HHSC, e.g. HCPCS, ICD9-CM), rendered by service providers to an
              eligible member;

              (iii) Approving, preparing for payment, or rejecting or denying
              claims submitted. This subsystem may integrate manual and
              automated systems to validate and adjudicate claims. Refer to
              Section VIII of the RFP for additional information.

          (B) Functions and features of this subsystem are:

              (i) Accommodate multiple input methods -- tape, claim document,
              magnetic media;

              (ii) Support entry and capture of a minimum of two diagnosis
              codes for each individual encounter for a provider on a specific
              date of service;

              (iii) Edit and audit to ensure allowed services are provided to
              eligible clients by eligible providers;

              (iv) Interface with the Enrollment and Eligibility Subsystem,
              Provider Subsystem, and/or other CHIP-related systems specified by
              HHSC;

              (v) Edit for utilization and service criteria, medical policy,
              fee schedules, multiple contract periods and conditions;

                                 Page 24 of 77
<PAGE>   31


             (vi) The ability to submit data to HHSC when requested through
             electronic transmission using specified formats and meeting
             specified edits;

             (vii) Support multiple fee schedule benefit packages and
             capitation rates for all contract periods for individual
             providers, groups, services, etc. A claim must be initially
             adjudicated and all adjustments must use the fee and policy
             applicable to the date of service;

             (viii) Provide timely, accurate, and complete data for monitoring
             claims processing performance;

             (ix) Provide claims editing capability for detecting CPT coding
             errors;

             (x) Provide timely, accurate, and complete data for reporting
             service utilization;

             (xi) Maintain and apply prepayment edits to verify accuracy and
             validity of claims data for proper adjudication;

             (xii) Maintain and apply edits and audits to verify timely,
             accurate, and complete data reporting;

             (xiii) Submit reimbursement to non-contracted providers for
             emergency services and medically necessary services not available
             in network but rendered to members in a timely and accurate
             manner.

             (xiv) Validate approval and denials of precertification, prior
             authorization, and referral requests during adjudication of
             claims;

             (xv) Track and report the exact date a service was performed
             using HHSC approved date ranges; and

             (xvi) Support all functions and report all required data
             elements.

                  (xvii) CONTRACTOR must comply with the standards adopted by
         the United States Department of Health and Human Services under the
         Health Insurance Portability and Accountability Act of 1996 (HIPAA) for
         submitting and receiving claims information through electronic data
         interchange that allows for automated processing and adjudication of
         claims within two or three years, as applicable, from the date the
         rules promulgated under HIPAA are adopted.

         (4) Financial Subsystem.

         (A) The System implemented by CONTRACTOR must include a Financial
         Subsystem that provides the necessary data for all accounting functions
         including:

             (i)   Cost accounting;

             (ii)  Inventory;

             (iii) Fixed assets;

             (iv)  Payroll;

                                 Page 25 of 77
<PAGE>   32


              (v) General ledger;

              (vi) Accounts receivable and payable; and

              (vii) Financial statement presentation.

          (B) The Financial Subsystem must be capable of providing CONTRACTOR's
          management staff with information that:

              (i) Demonstrates that CONTRACTOR is meeting, exceeding, or
              falling short of fiscal goals; and

              (ii) Provides CONTRACTOR management with the necessary data to
              identify signs of potential fiscal distress and to enable
              management to take appropriate mitigating or corrective action.

          (5) Utilization/Quality Improvement Subsystem.

          (A) The System implemented by CONTRACTOR must include a
          Utilization/Quality Improvement Subsystem that combines data from
          other subsystems, and/or external systems, to:

              (i) Produce reports for analysis which focus on:

                   a. The review and assessment of quality of care given;

                   b. Detection of overutilization and underutilization of
                      services; and

                   c. Development of user-defined reporting criteria and
                      standards.

              (ii) Profiles utilization of providers and members and compares
              them against experience and norms for comparable individuals;

              (iii) Support the quality assessment function;

              (iv) Track utilization control function(s) and monitor inpatient
              admissions, emergency room use, ancillary, and out-of-area
              services.

              (v) Produce health care provider profiles, occurrence reporting,
              monitoring and evaluation studies, and member satisfaction survey
              compilations;

              (vi) Integrate, at CONTRACTOR's discretion, with CONTRACTOR's
              manual and automated processes or incorporate other software
              reporting and/or analysis programs; and

              (vii) Incorporate and summarize information from member surveys,
              provider and member complaints, and appeal processes.

          (B) Functions and features of the Utilization/Quality Improvement
          Subsystem are:

              (i) Supports CONTRACTOR processes to monitor and identify
              deviations in patterns of treatment from recognized standards or
              norms or standards specified by HHSC;


                                 Page 26 of 77
<PAGE>   33


              (ii) Provides feedback information for monitoring progress toward
              goals, identifying optimal practices, and promoting continuous
              improvement;

              (iii) Supports development of cost and utilization data by
              provider and service;

              (iv) Provides aggregate performance and outcome measures using
              standardized quality indicators similar to HEDIS or as specified
              by HHSC.

              (v) Supports focused quality of care studies;

              (vi) Supports the management of referral/utilization control
              processes and procedures including prior authorization and
              precertifications and denials of services;

              (vii) Monitors primary care provider referral patterns;

              (ix) Supports functions of reviewing access, use and coordination
              of services (i.e. actions of Peer Review an alert/flag for review
              and/or follow-up; laboratory, x-ray and other ancillary service
              utilization per visit);

              (x) Stores and reports patient satisfaction data through use of
              member surveys;

              (xi) Supports fraud and abuse detection, monitoring and reporting,
              including support of state-operated fraud and abuse detection
              systems; and

              (xii) Otherwise satisfies the minimum reporting/data
              collection/analysis functions requirements of the RFP.

          (6) Report Subsystem.

          (A) The System implemented by CONTRACTOR must include a Reporting
          Subsystem that:

              (i) Supports reporting requirements of all CONTRACTOR operations
              to the CHIP Administrative Services Contractor and HHSC and
              enables recipients of reports to verify or validate the accuracy
              of the reports; and

              (ii) Allows CONTRACTOR to develop various reports to support
              contract management and evaluation and to facilitate HHSC
              oversight.

          (B) The minimum functions and capabilities of the Reporting Subsystem
          are:

              (i) Produces standard, HHSC-required reports (whether on a
              recurring or sporadic) and ad hoc reports from data available in
              all management information subsystems specified in the RFP or this
              section within the timeframes requested by HHSC;

              (ii) Has system flexibility to permit the development of reports
              at irregular periods as needed and according to any combination of
              data (including calculated data--i.e., age) and variety of formats
              (including paper, electronic, or web-based formats);

              (iii) Generates reports of unduplicated counts of members,
              providers, payments and units of service as requested by HHSC;

              (iv) Generates alphabetic and numeric member listings;


                                 Page 27 of 77
<PAGE>   34

             (v) Generates member eligibility listings by each PCP (panel
             report);

             (vi) Reports on third party liability information as required by
             HHSC;

             (vii) Generates claims lag reports, including dates of service,
             claims receipts, and claims paid or denied;

             (viii) Generates aged outstanding liability reports;

             (ix) Produces member ID Cards;

             (x) Produces client/provider mailing lists and labels; and

             (xi) Other appropriate functions specified by HHSC.

         (7) Data Interface Subsystem.

         (A) The System implemented by CONTRACTOR must include a Data Interface
         Subsystem that maintains secure electronic interfaces with the
         following entities:

             (i) CONTRACTOR's subcontractors, including, if required by HHSC,
             health care providers comprising CONTRACTOR's provider network;

             (ii) The CHIP Administrative Services Contractor;

             (ii) The CHIP Quality Monitor Contractor; and

             (iii) Any other entity specified by HHSC.

         (B) The electronic interfaces required for the Data Interface
         Subsystem must:

             (i) Maintain and update critical data, including, but not limited
             to:

                   a. Member enrollment data;

                   b. Primary care physician selection;

                   c. Enrollment/disenrollment status; and

                   d. Other relevant data identified by HHSC.

             (ii) Comply with frequency, file formatting and other relevant
             requirements established by the CHIP Administrative Services
             Contractor in conjunction with HHSC;

             (iii) Exchange data for the following functions:

                   a. Enrollment/disenrollment functions;

                   b. Premiums payable functions;

                   c. Provider capacity and availability functions;


                                 Page 28 of 77
<PAGE>   35


                    d. Confirmation of the status of Children with Complex
                    Special Health Care Needs;

                    e. Quality monitoring functions; and

                    f. CONTRACTOR, subcontractor, or health care provider
                    performance measurement.

     (d) Additions or changes to the requirements set out in this section.

     The Parties will negotiate in good faith to reach agreement on when
requested additions or changes to the requirements in this section will be made
by CONTRACTOR at no additional charge to HHSC and when requested additions or
changes should be handled through the Change Order Process set out in Article 8.

            ARTICLE 8. AMENDMENTS, MODIFICATIONS, AND CHANGE ORDERS

     SECTION 8.01 MODIFICATIONS.

     (a) Modifications resulting from changes in law or contract.

     If Federal or State laws, rules, regulations, policies or guidelines are
adopted, promulgated, judicially interpreted or changed, or if contracts are
entered or changed, the effect of which is to alter the ability of either Party
to fulfill its obligations under this Agreement, the Parties will promptly
negotiate in good faith appropriate modifications or alterations to the
Agreement and any schedule(s) or attachment(s) made a part of this Agreement.
Such modifications or alterations must equitably adjust the terms and conditions
of this Agreement and must be limited to those provisions of this Agreement
affected by the change.

     (b) Modifications resulting from imposition of remedies.

     This Agreement may be modified under the terms of Article 20 (relating to
Remedies and Disputes). This Agreement may not be amended or modified unless
such amendment or modification to the Scope of Work is in writing and signed by
individuals with authority to bind the parties.

     (c) Modifications upon renewal or extension of Agreement

         (1) If HHSC seeks modifications to the Agreement as a condition of any
         annual extension, HHSC's notice to CONTRACTOR will specify those
         modifications to the Scope of Work, the Agreement pricing terms, or
         other terms and conditions of the Agreement HHSC seeks.

         (2) Modifications proposed by HHSC may apply to the services under this
         Agreement in any Agreement year beginning after the date of notice to
         CONTRACTOR. CONTRACTOR must respond to HHSC's proposed modification
         within 30 days of receipt. Upon receipt of CONTRACTOR's response to the
         proposed modifications, HHSC may enter into negotiations with
         CONTRACTOR to arrive at mutually agreeable Agreement amendments. In the
         event that HHSC determines that the Parties will be unable to reach
         agreement on mutually satisfactory Agreement modifications, then HHSC
         must provide written notice to CONTRACTOR of its intent not to extend
         the Agreement beyond the Agreement term then in effect, at least 90
         days before the Expiration Date to provide for the approval and
         implementation of the transition plan as set out in section 20.15(d),
         inclusive of all extension options previously exercised.

     SECTION 8.02 CHANGE ORDER PROCEDURES


                                 Page 29 of 77
<PAGE>   36


     (a) Expectations and understandings.

     As specified in section 8.01 of this Agreement, the Agreement may be
amended by HHSC and CONTRACTOR by mutual agreement. Changes in contracted
Services or Deliverables shall be authorized in accordance with this article.

     (b) Change order approval procedure.

         (1) During the Initial Term of this Agreement HHSC or CONTRACTOR may
         propose changes in the Services, Deliverables, or other aspects of
         this Contract ("Changes"), including, but not limited to, issues that
         CONTRACTOR contends affects the actuarial soundness of CONTRACTOR's
         premium, and any such Changes will be implemented pursuant to the
         procedures set forth in this section 8.02.

         (2) If HHSC desires to propose a Change, it shall deliver a written
         notice to CONTRACTOR describing the proposed Change ("Change Order
         Request"). CONTRACTOR must respond to such proposal as promptly as
         reasonably possible by preparing, at no additional cost to HHSC for
         developing the response, and delivering to HHSC a written document (a
         "Change Order Response"), that specifies:

                     (A) The effect, if any, of the Change Order Request on the
                     amounts payable by HHSC under this Agreement and the
                     manner in which such effect was calculated;

                     (B) The effect, if any, of the Change Order Request on
                     CONTRACTOR's performance of its obligations under this
                     Agreement, including the effect on the Services or
                     Deliverables;

                     (C) The anticipated time schedule for implementing the
                     Change Order Request; and

                     (D) Any other information requested in the Change Order
                     Request or which is reasonably necessary for HHSC to make
                     an informed decision regarding the proposal.

         (3) If CONTRACTOR desires to propose a Change, it must deliver a
         CONTRACTOR Change Order Request to HHSC that includes the information
         described in section 8.02(b) for a Change Order and Change Order
         Response.

         (4) Upon HHSC's receipt of a Change Order and Change Order Response,
         the Parties shall negotiate a resolution of the requested Change in
         good faith. The Parties will exchange information in good faith in an
         attempt to resolve the requested Change.

     (c) Written approval required.

     No Change to the contracted Services or Deliverables or any other aspect of
this Agreement will become effective without the written approval and execution
of a mutually agreeable written amendment to this Agreement by HHSC and
CONTRACTOR. Under no circumstances will CONTRACTOR be entitled to payment for
any work or services rendered under a Change Order that has not been approved by
HHSC in accordance with the Change Order Procedures.

     SECTION 8.03 REQUIRED COMPLIANCE WITH MODIFICATION PROCEDURES.


                                 Page 30 of 77
<PAGE>   37


     No different or additional services, work, or products will be authorized
or performed except pursuant to an amendment or modification of this Agreement
that is executed in compliance with this article. No waiver of any term,
covenant, or condition of this Agreement will be valid unless executed in
compliance with this article. CONTRACTOR will not be entitled to payment for any
services, work or products that are not authorized by a properly executed
Agreement amendment or modification, or through the express authorization of
HHSC.

                   ARTICLE 9. AUDIT AND FINANCIAL COMPLIANCE.

     SECTION 9.01 FINANCIAL RECORD RETENTION AND AUDIT.

     CONTRACTOR agrees to maintain and retain financial records and supporting
documents relating to this Agreement for a period of three (3) years and ninety
(90) days after the date of final payment under this Agreement or until the
resolution of all litigation, claim, financial management review or audit
pertaining to this Agreement, whichever is longer. CONTRACTOR agrees to repay
any valid, undisputed audit exceptions taken by HHSC in any audit of this
Agreement.

     SECTION 9.02 OPERATION/PERFORMANCE AUDITS.

     CONTRACTOR agrees to make available at reasonable times and for reasonable
periods all books, records, and supporting documents kept current by CONTRACTOR
pertaining to this Agreement, wherever such books, records, and supporting
documentation are maintained, for purposes of inspecting, monitoring, auditing,
or evaluation by HHSC, the State Auditor of Texas, the Comptroller General of
the United States, the United States Department of Health and Human Services, a
State or Federal law enforcement agency, or their representatives upon request
or notification from HHSC.

     HHSC will provide a minimum of thirty (30) calendar days written notice
prior to initiating a comprehensive audit (intensive review of files and
documents, along with interviews with key staff) not resulting from a complaint.
HHSC will provide CONTRACTOR written notice at least ten (10) business days
prior to any site visit at CONTRACTOR's offices (a general inspection and
interviews with CONTRACTOR's staff) not resulting from a complaint. If an
on-site visit or audit is the result of a complaint against CONTRACTOR, HHSC
will send written notice to CONTRACTOR via facsimile at least 24 hours prior to
the hour that the visit or audit will begin. CONTRACTOR must cooperate with
HHSC's evaluation or audit process.

     SECTION 9.03 ACCESS TO RECORDS, BOOKS, AND DOCUMENTS.

     (a) CONTRACTOR must provide the officials and entities identified in
paragraph (b) of this section 9.03 with prompt, reasonable, and adequate access
to any records, books, documents, and papers that are directly pertinent to the
performance of the services under this Agreement. Such access must be provided
upon request of the officials or entities identified in paragraph (b) for the
purpose of examination, audit, investigation, contract administration, or the
making of excerpts or transcripts.

     (b) The access required under this section must be provided to the
following officials and/or entities:

               (1) The United States Department of Health and Human Services or
          its designee;

               (2) The Comptroller General of the United States or its designee;


                                 Page 31 of 77
<PAGE>   38


               (3) CHIP program personnel from HHSC or the Texas Department of
          Health;

               (4) The Office of Investigations and Enforcement of HHSC;

               (5) The CHIP program Management Services Contractor, when acting
          on behalf of HHSC;

               (6) The Office of the State Auditor of Texas or its designee; and

               (7) A special or general investigating committee of the Texas
          Legislature or its designee.


                  ARTICLE 10. TERMS AND CONDITIONS OF PAYMENT.


     SECTION 10.01 MONTHLY PREMIUM PAYMENTS.

     (a) CONTRACTOR agrees to provide the Services and Deliverables described in
this Agreement for monthly premium payments to be paid by HHSC to CONTRACTOR.

     (b) CONTRACTOR understands and expressly assumes the risks associated with
the performance of the duties and responsibilities under this Agreement,
including the failure, termination or suspension of funding to HHSC, delays or
denials of required approvals, and cost overruns not reasonably attributable to
HHSC. To the extent that funding or required approvals are not provided,
CONTRACTOR is not further obligated to provide Services or Deliverables beyond
any Service or Deliverable for which HHSC can provide acceptable assurances of
available funding.

     (c) CONTRACTOR further agrees that:

         (1) No additional charges, fees, or costs will be added to the monthly
         premium amount and the delivery supplemental payment described in
         section 10.03 or sought except for properly authorized and executed
         Change Orders; and

         (2) No other charges for tasks, functions, or activities that are
         incidental or ancillary to the delivery of the Services and
         Deliverables will be sought from HHSC or any other state agency, nor
         will the failure of HHSC or any other party to pay for such incidental
         or ancillary services entitle CONTRACTOR to withhold Services or
         Deliverables due under the Agreement.

     (d) A CONTRACTOR's monthly premium payment will not be reduced for a
family's failure to make its premium payment. There is no relationship between
the per member/per month amount owed to an CONTRACTOR for coverage provided
during a month and the family's payment of its premium obligation for that
month.

     SECTION 10.02 TIME AND MANNER OF PREMIUM PAYMENT.

     CONTRACTOR will be paid based on per member/per month premiums and new and
current enrollment figures (including disenrollment adjustments to previous
monthly enrollment totals). The Administrative Services Contractor will convey
premiums payable information to CONTRACTOR for data reconciliation and to the
Management Services Contractor. CONTRACTOR must reconcile the data and report
any errors to the Management Services Contractor by the cut-off date of the next
month. The Management Services Contractor will pay CONTRACTOR by the first
business day following the 14th day of each month.



                                 Page 32 of 77
<PAGE>   39



CONTRACTOR must accept payment for premiums by direct deposit into CONTRACTOR's
account. For the first year of the Initial Term, these premium rates are:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
        CSA #               Under Age 1            Ages 1-5             Ages 6-14            Ages 15-18
------------------------------------------------------------------------------------------------------------
<S>                        <C>                    <C>                   <C>                  <C>
        CSA #2                $424.00               $86.30                $56.51               $112.44
------------------------------------------------------------------------------------------------------------
        CSA #6                $484.57               $98.63                $64.63               $129.58
------------------------------------------------------------------------------------------------------------
</TABLE>

     CONTRACTOR does not bill HHSC, the Administrative Services Contractor,
other state agencies, or institutions for the monthly premium payment.

     SECTION 10.03 DELIVERY SUPPLEMENTAL PAYMENT (DSP).

     HHSC shall pay to CONTRACTOR a one-time-per-pregnancy Delivery Supplemental
Payment (DSP) in the amount of $3,000.00 for each live or still birth delivery.
The one-time payment is made regardless of whether there is a single birth or
multiple births at the time of delivery. For purposes of this section, a
"delivery" is the birth of a live-born infant, regardless of the duration of the
pregnancy, or a stillborn (fetal death) infant of 22 weeks or more gestation.

     CONTRACTOR should make its best effort to report all deliveries to the
Administrative Services Contractor within 10 days of the delivery and no later
than 45 days from the date of delivery. No DSP will be made for deliveries that
are not reported by CONTRACTOR to the Administrative Services Contractor within
120 days from the receipt of claim, or within 60 days from the date of discharge
from the hospital for the stay related to the delivery, whichever is later.

     HHSC reserves the right to audit the claims submitted for DSP to ensure the
accuracy of those claims. The DSP will be paid to CONTRACTOR as part of the
monthly premium payment after receiving an accurate report from CONTRACTOR.

     SECTION 10.04 PREMIUM RATES AFTER THE FIRST YEAR OF THE INITIAL TERM.

     (a) Second year.

     HHSC will review the methodology submitted by CONTRACTOR for determining
subsequent premium rate changes and re-examine the premium rates paid to
CONTRACTOR during the first year of the Initial Term to determine if a rate
change is needed for the second year of the Initial Term. HHSC will establish
the premium rates for each year. HHSC will provide any proposed revisions to the
premium rate changes for the second year of the Initial Term no later than 30
days before the first Anniversary Date. If CONTRACTOR disagrees with any
proposed revisions to the premium rates, the Parties will exchange actuarial
data supporting each of their positions as to what the premium rates for the
second year should be. HHSC and CONTRACTOR only will negotiate in good faith to
reach an agreement on the premium rates for the second year. Failing timely
agreement, CONTRACTOR and HHSC will select a neutral actuary who is agreeable to
both parties to review each of the Party's recommended premium rates and the
supporting actuarial data. The Parties will share the cost of the neutral
actuary equally. Full payment to the actuary may be made by CONTRACTOR, with
HHSC reimbursing CONTRACTOR for HHSC's share. The neutral actuary will make
non-binding recommendations for the premium rates for the second year after
reviewing each of the Party's data. HHSC will then determine the premium rates
for the second year.


                                 Page 33 of 77
<PAGE>   40


     (b) Third year.

     HHSC will review the methodology submitted by CONTRACTOR for determining
subsequent premium rate changes and re-examine the premium rates paid to
CONTRACTOR during the first and second years of the Initial Term to determine if
a rate change is needed for the third year of the Initial Term. HHSC will
establish the premium rates for each year. HHSC will provide any proposed
revisions to the premium rate changes for the third year of the Initial Term no
later than 30 days before the second Anniversary Date. If CONTRACTOR disagrees
with any proposed revisions to the premium rates, the Parties will exchange
actuarial data supporting each of their positions as to what the premium rates
for the third year should be. HHSC and CONTRACTOR only will negotiate in good
faith to reach an agreement on the premium rates for the third year. Failing
timely agreement, CONTRACTOR and HHSC will select a neutral actuary who is
agreeable to both parties to review each of the Party's recommended premium
rates and the supporting actuarial data. The Parties will share the cost of the
neutral actuary equally. Full payment to the actuary may be made by CONTRACTOR,
with HHSC reimbursing CONTRACTOR for HHSC's share. The neutral actuary will make
non-binding recommendations for the premium rates for the third year after
reviewing the Parties' data. HHSC will then determine the premium rates for the
third year.

     SECTION 10.05 ADJUSTMENTS TO PREMIUM PAYMENTS.

     As provided below, HHSC or the Administrative Services Contractor may
adjust or recoup premiums paid to CONTRACTOR in error, which may be either human
or machine error on the part of HHSC. HHSC may recoup or adjust premiums paid to
CONTRACTOR if a CHIP-eligible child is enrolled into CONTRACTOR in error and
CONTRACTOR provides no covered services to the child for the period of time for
which the monthly premium payment was made. If CONTRACTOR arranged for services
to be provided to the Member as a result of the error during the time period for
which the monthly premium payment was made, no recoupment will occur. Under no
circumstances may HHSC recoup premiums paid for a period greater than two (2)
months.

     HHSC or the Administrative Services Contractor may recoup monthly premium
payments paid to CONTRACTOR if an Member for whom the monthly premium payment is
made was deceased during any full month for which CONTRACTOR received a premium
payment for that Member.

     HHSC or the Administrative Services Contractor may adjust a monthly premium
or recoup a monthly premium payment made to CONTRACTOR for a Member if the
Member's eligibility status is changed, corrected, or retroactively adjusted as
a result of error. Adjustments to premium or recoupment may be appealed by
CONTRACTOR using the dispute resolution process outlined in section 20.16.

     SECTION 10.06 EXPERIENCE REBATE.

     For the Initial Term, CONTRACTOR must pay to HHSC an experience rebate
calculated in accordance with the tiered rebate method listed below based on the
excess of allowable CHIP HMO revenues over allowable CHIP HMO expenses as
measured by any positive amount on Line 7, Net Income Before Taxes, of "Part 1:
CHIP Financial Summary, All Coverage Groups Combined" of the annual
Financial-Statistical Report contained in Appendix D, as reviewed and confirmed
by HHSC.


                             GRADUATED REBATE METHOD


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
<S>                                             <C>                                   <C>
 Experience Rebate as a                         CONTRACTOR Share                       HHSC Share
 Percentage of Revenues
-----------------------------------------------------------------------------------------------------
</TABLE>


                                 Page 34 of 77
<PAGE>   41

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
<S>                                            <C>                                <C>
              0% - 3%                               100%                                  0%
-----------------------------------------------------------------------------------------------------
            Over 3% - 7%                             75%                                 25%
-----------------------------------------------------------------------------------------------------
           Over 7% - 10%                             50%                                 50%
-----------------------------------------------------------------------------------------------------
           Over 10% - 15%                            25%                                 75%
-----------------------------------------------------------------------------------------------------
              Over 15%                                0%                                100%
-----------------------------------------------------------------------------------------------------
</TABLE>


     The financial governance document for calculating the experience rebate is
the governance document used in the Texas Medicaid STAR program on the Effective
Date of this Agreement.

     Losses incurred for one contract year may be carried forward only to the
next contract year. If CONTRACTOR operates in multiple CHIP Service Areas,
losses in one CHIP Service Area cannot be used to offset net income before taxes
in another CHIP Service Area.

     CONTRACTOR may subtract from an experience rebate that is owed to HHSC any
expenses for population-based health initiatives that have been approved by
HHSC.

     A population-based initiative is a project or program designed to improve
some aspect of quality of care, quality of life, or health care knowledge for
children and/or their adult caretakers, as a whole.

     There will be two settlements for payment(s) of the state share of the
experience rebate. The first settlement shall equal 100% of the state share of
the experience rebate as derived from Line 7, Net Income Before Taxes, of "Part
1: CHIP Financial Summary, All Groups Combined" of the annual CHIP
Financial-Statistical (CFS) Report contained in Appendix D and shall be paid on
the same day the first annual CFS Report is submitted to the Administrative
Services Contractor or HHSC. The second settlement shall be an adjustment to the
first settlement and shall be paid to HHSC on the same day that the second
annual CFS Report is submitted to the Administrative Services Contractor or HHSC
if the adjustment is a payment from CONTRACTOR to HHSC. HHSC or its agent may
audit or review the CFS reports. If HHSC determines that corrections to the CFS
reports are required based on an HHSC audit/review or other documentation
acceptable to HHSC, to determine an adjustment to the amount of the second
settlement, then final adjustment shall be made within two years from the date
that CONTRACTOR submits the second annual CFS report. CONTRACTOR must pay the
first and second settlements on the due dates for the first and second CFS
reports respectively as identified in section 17.02. HHSC may adjust the
experience rebate if HHSC determines that CONTRACTOR has paid affiliates amounts
for goods or services that are higher than the fair market value of the goods
and services in that CHIP Service Area. Fair market value may be based on the
amount CONTRACTOR pays a non-affiliate(s) or the amount another health
maintenance organization pays for the same or similar service in that CHIP
Service Area. HHSC has final authority in auditing and determining the amount of
the experience rebate.

     SECTION 10.07 RESTRICTION ON ASSIGNMENT OF FEES.

     During the term of the Agreement CONTRACTOR may not, directly or
indirectly, assign to any third party any beneficial or legal interest of
CONTRACTOR in or to any payments to be made by HHSC pursuant to this Agreement.

     SECTION 10.08 LIABILITY FOR TAXES.


                                  Page 35 of 77
<PAGE>   42


     HHSC is not responsible in any way for the payment of any Federal, state or
local taxes related to or incurred in connection with the Services or
Deliverables or this Agreement. CONTRACTOR must pay and discharge any and all
such taxes, including any penalties and interest.

     SECTION 10.09 LIABILITY FOR EMPLOYMENT-RELATED CHARGES AND BENEFITS.

     CONTRACTOR will perform work under this Agreement as an independent
contractor and not as agent or representative of HHSC. CONTRACTOR is solely and
exclusively liable for all taxes and employment-related charges incurred in
connection with the performance of this Agreement. HHSC will not be liable for
any employment-related charges or benefits of CONTRACTOR, such as workers
compensation benefits, unemployment insurance and benefits, or fringe benefits.

     SECTION 10.10 LIABILITY FOR OVERTIME COMPENSATION.

     CONTRACTOR will be solely responsible for any obligations of overtime pay
due employees.

   ARTICLE 11. CHIP ELIGIBILITY, ENROLLMENT, DISENROLLMENT, AND COST-SHARING

     SECTION 11.01 CHIP ELIGIBILITY.

     (a) Generally.

     CHIP eligibility will be determined by the Administrative Services
Contractor. The Administrative Services Contractor will enroll and disenroll
eligible individuals into and out of CHIP. Parents or guardians will enroll
eligible individuals in a health plan.

     (b) Continuous coverage for first twelve months.

     A child who is CHIP-eligible will, for at least the first year of CHIP,
have twelve months of continuous coverage. That coverage begins on the first day
of the month following the child's enrollment into a health plan unless
enrollment occurs after the cut-off date, in which case coverage begins on the
first day of the next month.

     (c) Pregnant Members and infants.

     Becoming pregnant, in and of itself, does not make a Member ineligible for
CHIP. If, after becoming pregnant, a Member chooses to apply for Medicaid and is
determined to be Medicaid-eligible, she is no longer eligible for CHIP. The
Administrative Services Contractor will notify the Member about her potential
Medicaid eligibility and of her ability to apply for Medicaid and will provide
appropriate resource information.

     Infants are automatically enrolled in the mother's CHIP health plan at
birth with CHIP eligibility and re-enrollment following the same timeframe as
those of the mother.

     CONTRACTOR through electronic means or the providers through calls to the
provider hotline will notify the Administrative Services Contractor when a
pregnancy is diagnosed. The administrative contractor will suspend the pregnant
Member's eligibility expiration date after notification is received. The
Administrative Services Contractor will unsuspend the mother's eligibility
expiration date and set the mother's and baby's eligibility expiration dates at
the later of (1) the end of the second month following the


                                 Page 36 of 77
<PAGE>   43


month of the baby's birth or (2) the date when the mother's eligibility would
have expired if it had not been suspended during her pregnancy.

     To further ensure the reliability of the data, families also will be
encouraged to notify the Administrative Services Contractor by phone or in
writing when delivery of a baby to a CHIP-enrolled Member occurs.

     (d) Span of Coverage.

     If a Member's effective date of coverage occurs while the Member is
confined in a hospital, the CONTRACTOR is responsible for the Member's costs of
Covered Services beginning on the Effective Date of Coverage. For each day that
the Member is hospitalized beginning on the Effective Date of Coverage, HHSC
will pay to CONTRACTOR $700 for non-ICU care and $1400 for ICU care. If a Member
is disenrolled while the Member is confined in a hospital, CONTRACTOR's
responsibility for the Member's costs of Covered Services terminates on the Date
of Disenrollment. Six months after the Implementation Date, the Parties will
review CONTRACTOR's data, and if either party believes that these payments are
insufficient, either Party can instigate the Change Order process set out in
Article 8. The Parties agree to negotiate any requested Change Order in good
faith.

     SECTION 11.02 ENROLLMENT.

     To enroll in CONTRACTOR's health plan, the Member's permanent residence
must be located within CONTRACTOR's CSA.

     HHSC makes no guarantees or representations to CONTRACTOR regarding the
number of eligible Members who will ultimately be enrolled into CONTRACTOR's
health plan.

     The Administrative Services Contractor will electronically transmit to
CONTRACTOR new Member information, PCP selections, and change information
applicable to active Members five business days prior to the first day of each
month. This monthly transmittal date is defined as the "cut-off date." Twelve
months of continuous coverage begins on the first day of the month following
enrollment unless enrollment occurs after the cut-off date, in which case
coverage begins on the first day of the next month. CONTRACTOR must accept all
persons who reside within CONTRACTOR's CSA and chose to enroll in CONTRACTOR's
health plan without regard to the Member's health status or any other factor.

     A Member is enrolled in a health plan initially selected for twelve (12)
months from the date that the individual is first covered by that health plan or
the applicable time period if the Member is pregnant as is set out in section
11.01(c). However, CONTRACTOR must accommodate Member requests to change health
plans for exceptional reason or good cause including, but not limited to:

     (a) permanent relocation from a CHIP Service Area; or

     (b) permanent relocation within CONTRACTOR's CSA that necessitates a change
in the Member's Primary Care Provider that CONTRACTOR cannot accommodate within
the prescribed TDI access standards;

     Additional reasons that qualify as an exceptional reason or good cause will
be determined by HHSC on a case-by-case basis or by rule. Members may change
health plans the first day of the month following the month in which exceptional
reason or good cause situation occurred, in accordance with the same cut-off
processing timeframes applied to new Members. All changes must be handled
through the Administrative Services Contractor. If a Member changes health plans
while the Member is confined in a hospital, the health plan from which the
Member is moving is responsible for all charges until the Member is discharged.


                                  Page 37 of 77
<PAGE>   44


     There is no retroactive enrollment in CHIP.

     SECTION 11.03 RE-ENROLLMENT.

     At the beginning of the tenth month of coverage, the Administrative
Services Contractor will send a notice to the family outlining the next steps
for renewal or continuation of coverage. The Administrative Services Contractor
will also send a notice to CONTRACTOR regarding its Members and to a
community-based outreach organization providing follow-up assistance in the
Members' areas. To promote continuity of care for children eligible for
re-enrollment, CONTRACTOR may facilitate re-enrollment through reminders to
Members and other appropriate means. Failure of the family to respond to the
Administrative Services Contractor's renewal notice will result in disenrollment
from the plan and from CHIP.

     SECTION 11.04 DISENROLLMENT DUE TO LOSS OF ELIGIBILITY.

     For those Members who are disenrolled because they are no longer eligible
for CHIP, CONTRACTOR will receive from the Administrative Services Contractor
notice informing CONTRACTOR that the Members' coverage will end on a particular
date. Disenrollment due to loss of eligibility includes, but is not limited to:


          "Aging-out" when a child turns nineteen;

          Failure to re-enroll at the conclusion of the 12-month eligibility
          period;

          Change in health insurance status, such as a child enrolling in an
          employer-sponsored health plan;

          Failure to meet monthly cost-sharing obligation;

          Death of a child;

          The child permanently moves out of the state; and

          Data match with the Medicaid system indicates dual enrollment in
          Medicaid and CHIP.

     If a child is disenrolled from CHIP, the child loses his or her CHIP
eligibility and must re-apply for a determination of CHIP eligibility in the
future.

     Regardless of the reason for retroactive disenrollment, recoupment of
premium payments by HHSC shall be in accordance with section 10.05. Under no
circumstances may HHSC recoup premiums paid for a period greater than two (2)
months.

     SECTION 11.05 DISENROLLMENT BY CONTRACTOR.

     CONTRACTOR has a limited right to request a Member be disenrolled from
CONTRACTOR without the Member's consent. HHSC must approve any CONTRACTOR
request for disenrollment of a Member for cause within thirty (30) days from
date request is received. Disenrollment of a Member may be permitted for the
reasons set out in 11 T.A.C. Section 11.506(a)(3). Disenrollment of a Member at
the request of CONTRACTOR may not occur during an inpatient stay.

     CONTRACTOR must notify the Member of HHSC's approval of the disenrollment
of the Member. IF THE MEMBER DISAGREES WITH THE DECISION TO DISENROLL THE MEMBER
FROM CONTRACTOR,


                                 Page 38 of 77
<PAGE>   45


CONTRACTOR MUST NOTIFY THE MEMBER OF THE AVAILABILITY OF CONTRACTOR'S COMPLAINT
PROCEDURE.

     THE CONTRACTOR CANNOT REQUEST A DISENROLLMENT BASED ON ADVERSE CHANGE IN
THE MEMBER'S HEALTH STATUS OR UTILIZATION OF SERVICES THAT ARE MEDICALLY
NECESSARY FOR TREATMENT OF A MEMBER'S CONDITION.

     SECTION 11.06 COST-SHARING.

     Health care providers within CONTRACTOR's network are responsible for
collecting all Member copayments and deductibles at the time of service. No
co-payments apply, at any income level, to well-child or well-baby visits or
immunizations.

     No co-payments for families under 100% of the federal poverty level (FPL)

     Co-payments for families between 100% and 150% FPL are as follows:

              $2 per office visit
              $5 per emergency room visit
              $1 per prescription valued up to and including $15; $2 per
              prescription valued at more than $15 (based on retail value)
              An annual self-declared co-payment cap of $100 per family

     Co-payments for families above 150% FPL and up to and including 185% FPL
are as follows:

         $5 per office visit
         $25 per emergency room visit
         $5 per generic prescription and $10 per brand-name prescription

     Co-payments for families above 185% FPL are as follows:

         $10 per office visit
         $35 per emergency room visit
         $5 per generic prescription and $10 per brand-name prescription

     For families with incomes between 186% and 200% FPL, a per-family annual
deductible of $200 for inpatient hospital services and $50 for outpatient
hospital services will apply. This $50 deductible for outpatient hospital stays
does not include applicable pharmacy co-pays.

     Upon notification from the Administrative Services Contractor that a family
is approaching its cost-sharing limit for the Coverage Year, CONTRACTOR will
generate and mail to the Member a new Member ID card, showing that the Member's
cost-sharing obligation for that Coverage Year has been met. No cost-sharing may
be collected from these Members for the balance of their Coverage Year.

     Except for costs associated with unauthorized non-emergency services
provided to a Member by out-of-network providers and for non-covered services,
the co-payments and deductibles outlined in this section are the only amounts
that a provider may collect from a CHIP-eligible family.

     Federal law prohibits charging co-payments or deductibles to Members of
Native American Tribes. The Administrative Services Contractor will notify
CONTRACTOR of Members who are Native Americans and who are not subject to
cost-sharing requirements. CONTRACTOR is responsible for educating providers
about the cost-sharing waiver for this population.

                                 Page 39 of 77
<PAGE>   46


     A CONTRACTOR's monthly premium payment will not be reduced for a family's
failure to make its premium payment. There is no relationship between the per
member/per month amount owed to an CONTRACTOR for coverage provided during a
month and the family's payment of its premium obligation for that month.

                   ARTICLE 12. SCOPE OF CHIP COVERED SERVICES

     SECTION 12.01 BASIC REQUIRED COVERED SERVICES.

     CONTRACTOR is paid capitation for all services that are Covered Services as
described in the RFP. Unless the RFP specifies otherwise, CONTRACTOR may
determine if a covered service requires prior authorization, pre-certification,
or physician prescription. CONTRACTOR must pay for or reimburse for all
CHIP-covered services provided to Members for whom CONTRACTOR is paid
capitation.

     Out-of-network and emergency services also must be provided in accordance
with the Texas Insurance Code and TDI regulations as they apply to HMOs. Covered
services are subject to change due to changes in federal law, changes in CHIP
policy, and/or responses to changes in medicine, clinical protocols, or
technology. If covered services change, the change will be the subject of a
change order as provided in Article 8 of this Agreement. Any proposed change in
the scope of Covered Services, as set out in the RFP, will be made through a
Change Order under Article 8 of this Agreement.

     SECTION 12.02 DRUG FORMULARIES.

     If CONTRACTOR utilizes a prescription drug formulary for Members,
CONTRACTOR must fully disclose its use of the formulary in its marketing
materials. During the term of the Agreement, CONTRACTOR cannot create a new
formulary or significantly revise an existing formulary; however, minor
revisions to include new drugs, or to remove drugs in compliance with FDA
directives are allowed. HHSC will determine if a revision is significant.
CONTRACTOR may revise the formulary on a annual basis, subject to HHSC review
and approval.

     SECTION 12.03 VALUE-ADDED SERVICES.

     CONTRACTOR must also provide or arrange for the provision of the
Value-added services, offered by CONTRACTOR in its proposal. CONTRACTOR must
provide these Value-added Services at no additional cost to HHSC. CONTRACTOR
must not pass on the cost of the Value-added Services to providers. CONTRACTOR
must specify the conditions and specific parameters regarding the delivery of
the Value-added Services in CONTRACTOR's marketing materials and evidence of
coverage or member handbook. CONTRACTOR must clearly state to Members any
limitations or conditions specific to the Value-added Services.

     Value-added Services can be added or removed only by written amendment of
this Agreement. CONTRACTOR cannot include a Value-added Service in any material
distributed to Members or prospective Members until this Agreement has been
amended to include that Value-added Service or CONTRACTOR has received written
approval of the suggested Value-added Service from HHSC pending finalization of
the amendment.

     If a Value-added Service is deleted by amendment, CONTRACTOR must notify
each Member that the service is no longer available through CONTRACTOR.
CONTRACTOR must also revise all materials distributed to prospective Members to
reflect the change in Value-added Services.


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<PAGE>   47


     SECTION 12.04 DENTAL SERVICES.

     CONTRACTOR is not responsible for providing preventive and therapeutic
dental services to Members. However, hospital and related medical charges, such
as anesthesia, that are associated with dental care, are covered CHIP services.
CONTRACTOR must provide access to facilities and physician services that are
medically necessary to support the dentist who is providing CHIP dental services
under general anesthesia or intravenous (IV) sedation. Covered Services relating
to dental services are set forth in the RFP; this section does not expand the
scope of the Covered Services set out in the RFP.

     CONTRACTOR must inform network facilities, anesthesiologists, and PCPs what
authorization procedures are required, and how providers are to be reimbursed
for the preoperative evaluations by the PCP and/or anesthesiologist and for the
facility services. For dental-related medical emergency services, CONTRACTOR
must reimburse in-network and out-of-network providers in accordance with
federal and state statutes and regulations.

     SECTION 12.05 CASE MANAGEMENT SERVICES FOR CHILDREN WITH COMPLEX SPECIAL
     HEALTH CARE NEEDS

     CONTRACTOR must have a documented process for identifying and tracking the
services of CHIP-eligible children with complex special health care needs
(CCSHCN).

     A child, a child's family, a health care provider, the CHIP Administrative
Services Contractor, or CONTRACTOR may preliminarily identify a CCSHCN.
CONTRACTOR must confirm the designation of a CCSHCN utilizing the standardized
screening instrument provided by the State. That screening instrument will be
substantially in the form attached hereto as Appendix E. Procedures for
collecting and processing data for CCSHCN are being developed; however,
CONTRACTOR will be required to electronically transmit CCSHCN information to the
Administrative Services Contractor on a quarterly basis.

     CCSHCN are eligible for case management services beyond the scope normally
provided to other CHIP-eligible children. CONTRACTOR must provide the following
enhanced case management services to CCSHCN as appropriate:

     (a) Outreach and Informing

     Upon CCSHCN designation by CONTRACTOR, CONTRACTOR must contact the CCSHCN's
family to discuss covered services, including specialty services, the family's
right to select a specialist as a primary care provider, out-of-network services
applicable to the child's condition, if not available within network, the
availability of enhanced care coordination, and community referrals.

     (b) Enhanced Care Coordination

     Upon CCSHCN designation by CONTRACTOR, CCSHCNs, their families, or their
health providers may request enhanced care coordination from CONTRACTOR.
CONTRACTOR must furnish a care coordinator when requested. CONTRACTOR may also
recommend to the CCSHCN's family that a care coordinator be furnished if
CONTRACTOR determines that care coordination would benefit the child. Care
coordinators are responsible for working with CCSHCN, their families, and their
health care providers to develop a seamless package of care in which primary,
acute, and specialty service needs are met through a single plan that is
understandable to the family. A written plan of care must be developed and
updated at least annually. The care coordinator will coordinate all services
with the PCP and, as necessary, with the child's pediatric specialty care
physician. The care coordinator also makes referrals for other community
services.


                                 Page 41 of 77
<PAGE>   48



     (c) Community Referrals

     CONTRACTOR must make a best effort to implement a systematic process to
enlist the involvement of community organizations that may not be providing
CHIP-covered services but are otherwise important to the health and well being
of Members. CONTRACTOR also must make a best effort to establish relationships
with these community organizations in order to make referrals for CCSHCN and
other children who need community services. These organizations may include, but
are not limited to:

     Early Childhood Intervention Program (512/424-6745)

     Department of Mental Health and Mental Retardation (MHMR) ( 512/206-4830)

     Texas Department of Health (TDH) Title V Program (512/458-7321)

     Local School District (Special Education)

     Other state and local agencies and programs with jurisdiction over
children's services, including food stamps, Women, Infants, and Children's (WIC)
Program

     Texas Information and Referral Network

     Texas Commission for the Blind (TCB)

     Child-serving civic and religious organizations and consumer and advocacy
groups, such as United Cerebral Palsy, that also work on behalf of the CCSHCN
population

     SECTION 12.06 PRE-EXISTING CONDITIONS.

     CONTRACTOR may not impose any pre-existing condition limitations or
exclusions or require evidence of insurability to provide coverage to any
CHIP-eligible child.

     SECTION 12.07 COURT-ORDERED COMMITMENTS.

     CONTRACTOR must provide inpatient psychiatric services to Members under the
age of 19 who have been ordered to receive the services by a court of competent
jurisdiction under the provisions of Chapters 573 and 574 of the Texas Health
and Safety Code, relating to court-ordered commitments to psychiatric
facilities.

     Any modification or termination of services must be presented to the court
with jurisdiction over the matter for determination.

     A Member who has been ordered to receive treatment under the provisions of
Chapter 573 or 574 of the Texas Health and Safety Code cannot appeal the
commitment through CONTRACTOR's complaint or appeals process as described in
section 13.06 of this Agreement.

     CONTRACTOR must comply with 28 TAC Sections 3.8001, et seq. regarding
utilization review of chemical dependency treatment.

     SECTION 12.08 EARLY CHILDHOOD INTERVENTION (ECI).


                                 Page 42 of 77
<PAGE>   49

     (a) ECI Services.

     CONTRACTOR must provide all federally mandated services contained at 34
C.F.R. 303.1, et seq., and 25 TAC Section 621.21 et seq., relating to
identification and referral for health care services contained in the Member's
Individual Family Service Plan (IFSP). An IFSP is the written plan which: (1)
identifies a Member's disability or chronic or complex condition(s) or
developmental delay; (2) describes the course of action developed to meet those
needs; and (3) identifies the person or persons responsible for each action in
the plan. The plan is a mutual agreement of the Member's PCP, case manager, and
the Member/family, and is part of the Member's medical record.

     (b) Identification and Referral.

     CONTRACTOR must ensure that network providers are educated regarding the
identification of Members under age 3 who have or are at risk for having
disabilities and/or developmental delays. CONTRACTOR must use written education
material developed or approved by the Texas Interagency Council on Early
Childhood Intervention. CONTRACTOR must ensure that all providers refer
identified Members to ECI service providers within two business days from the
day the Member is identified. Eligibility for ECI services is determined by the
local ECI program using the criteria contained in 25 T.A.C. Section 621.21, et
seq.

     (c) Intervention.

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

                          ARTICLE 13. MEMBER SERVICES

     SECTION 13.01 MEMBER EDUCATION.

     CONTRACTOR must, at a minimum, develop and implement health education
initiatives that educate Members about:


         (a) How the HMO system operates;

         (b) How to obtain services, including:


               (1) Accessing OB/GYN and plan requirements concerning specialty
               care;

               (2) Emergency services;

               (3) Behavioral health care services;

               (4) Prenatal services and unique aspects of CHIP/Medicaid
               eligibility prior- and post-partum;


                                 Page 43 of 77
<PAGE>   50



             (5) Care and treatment, under CONTRACTOR's plan, for Members with
             disabilities and Children with Complex, Special Health Care Needs;
             and

             (6) Early Childhood Intervention (ECI) Services;

         (c) Covered Services, limitations and any Value-added Services
             offered by CONTRACTOR;

         (d) Member co-payments, if applicable; and

         (e) The value of screening and preventive care.

     CONTRACTOR also must provide child-oriented, disease specific-information
and educational materials to Members.

     In addition to the above requirements, CONTRACTOR must make any additional
educational initiatives outlined in its Proposal appropriately available to
Members.

     CONTRACTOR may respond to inquiries from pregnant Members or their families
regarding their potential Medicaid eligibility and making an informed choice.
CONTRACTOR's presentation should be balanced, presenting and explaining the
advantages and disadvantages to the Member of both CHIP and Medicaid as
appropriate in response to the Member's inquiries.

     SECTION 13.02 MEMBER MATERIALS.

     CONTRACTOR must design, print, and distribute Member identification (ID)
cards, provider directories, and evidence of coverage or Member handbooks
detailing Covered and any Value-added Services and the complaint and appeals
process as set out in section 13.06 of this Agreement.

     (a) Member Handbook.

     Except as noted below, CONTRACTOR must submit to HHSC a Member handbook
that complies with 28 T.A.C. Section 11.1600(b).

         (1) Exceptions to Section 11.1600(b) requirements.

         Readability. The Member handbook should have a 6th grade reading level
         as measured by the appropriate score on the Flesch reading ease test.

         Cost-sharing. The Member handbook section regarding cost-sharing
         should illustrate the variations in Member financial responsibility by
         income levels.

         Provider Directory. CONTRACTOR need not mail a provider directory
         along with the member handbook to individuals at the time of their
         enrollment with CONTRACTOR's health plan. The Texas Department of
         Insurance has approved this exception to 28 TAC Section 11.1600. The
         Administrative Services Contractor will send CONTRACTOR's provider
         directory to an individual after the individual's program application
         is approved. This section does not preclude CONTRACTOR from mailing a
         provider directory to CONTRACTOR's Members.

         (2) Additional requirements.



                                 Page 44 of 77
<PAGE>   51


         Cultural competency. The Member handbook must be available in a format
         accessible to the visually-impaired. The accessible format may include
         large print, Braille, and audio tapes.

         Languages other than English. The Member handbook must be available in
         English, Spanish, and the languages of other major population groups
         making up 10% or more of the enrolled CHIP population within the CHIP
         Service Area, as specified by HHSC. HHSC will provide CONTRACTOR with
         reasonable notice when the enrolled CHIP population reaches 10% within
         the CONTRACTOR's CSA.

     (b) Evidence of Coverage.

     CONTRACTOR's evidence of coverage must be approved by HHSC and TDI and
comply with applicable Texas insurance law and regulation.

     (c) Provider Directory.

     The font in the provider directory must be no more or less than 10 points
in height and lowercase unspaced alphabet length of no more or less than 120
points. The weight of the provider directory cannot exceed three (3) ounces. The
provider directory cannot measure larger than 8 1/2" by 11" and the content of
the directory is limited to:

     1. listing of all network providers, their locations, phone numbers and
office hours, with the exception of specialty providers, who may be listed by
name and location, which may be by county, and by a complete alphabetical list;
and

     2. two pages (1-page front and back) introducing the plan to the
prospective Member.

     The introduction of the plan to the prospective Member must be at a 6th
grade reading level, as measured by the appropriate score on the Flesch reading
ease test, and must be available in Spanish, English, and the languages of other
major population groups making up 10% or more of the enrolled CHIP population
within the CHIP Service Area, as specified by HHSC. HHSC will provide CONTRACTOR
with reasonable notice when the enrolled CHIP population reaches 10% within the
CONTRACTOR's CSA. The provider directory must be available in a format
accessible to the visually-impaired. The accessible format may include large
print, Braille, and audio tapes.

     (d) HHSC review of Member material.

     HHSC has 15 business days from the date the Member material is received to
review the submitted material and to recommend any suggestions or required
changes. If HHSC has not responded to CONTRACTOR by the fifteenth day,
CONTRACTOR may use the submitted material.

     (e) Mailing of Member Material.

     CONTRACTOR must mail a Member's ID card and evidence of coverage or Member
handbook to the Member's mailing address by the fourth business day of the month
following receipt of an enrollment file from the Administrative Services
Contractor. CONTRACTOR is responsible only for those Members for whom valid data
is contained in the enrollment file.

     SECTION 13.03 CHIP-SPECIFIC INTERNET WEBSITE


                                 Page 45 of 77
<PAGE>   52


     By May 1, 2000, CONTRACTOR must have operational and must maintain, a
website to provide general information about the plan, its provider network, its
Member services, and its complaints and appeals process as set out in section
13.06 of this Agreement. The site's content must be: written in English,
Spanish, and the languages of other major populations making up 10% or more of
the enrolled CHIP population within CONTRACTOR'S CSA, as specified by HHSC;
culturally appropriate; written for understanding at the 6th grade reading
level; and be geared to the health needs of children, including those with
special needs. CONTRACTOR's CHIP website must receive prior approval from HHSC.
HHSC has 15 business days from the date the website content and design is
received to review the submitted material and to recommend any suggestions or
required changes. If HHSC has not responded to CONTRACTOR by the fifteenth day,
CONTRACTOR may use the submitted material. CONTRACTOR may develop a CHIP page
within its existing website to meet the requirements of this section.

     CONTRACTOR's CHIP website cannot use tools or techniques that require
significant memory or disk resources or require special intervention on the
customer side to install plug-ins or additional software. CONTRACTOR cannot use
proprietary items that would require a specific browser in the CHIP website.

     SECTION 13.04 MEMBER TELEPHONE HOTLINE

     CONTRACTOR must maintain a Member telephone hotline. CONTRACTOR must ensure
that its Member service representatives treat all callers with dignity and
respect the callers' need for privacy. At a minimum, CONTRACTOR's Member service
representatives must be:

     (1) Able to give correct cost-sharing information relating to co-pays or
deductibles;

     (2) Able to answer non-technical questions pertaining to the role of the
primary care provider;

     (3) Able to answer administrative, non-clinical questions pertaining to
referrals or the process for receiving authorization for special procedures or
services;

     (4) Trained regarding cultural competency; and

     (5) Trained regarding the administrative process used to designate a child
as a child with complex special health care needs.

     Except for federal holidays, CONTRACTOR must staff the toll-free hotline
from 8:00 AM to 5:00 PM Monday through Friday (Central Time Zone or Mountain
Time Zone, as applicable). A voice mailbox must be available after hours with a
callback the next working day. All recordings must be in English and Spanish.

     If CONTRACTOR does not have a voice-activated menu system, CONTRACTOR must
have a menu system that will accommodate individuals who cannot access the
system through other physical means, such as pushing a button on the telephone.

     CONTRACTOR must appropriately handle calls from non-English speaking (and
particularly Spanish-speaking) callers, as well as calls from individuals who
are deaf or hard-of-hearing.

     During the Initial Term, CONTRACTOR must answer 80% of all telephone calls
within an average of 30 seconds, and the abandonment rate must not exceed 10%.

     SECTION 13.05 NOTIFICATION OF PROVIDER TERMINATION.


                                 Page 46 of 77
<PAGE>   53


     If CONTRACTOR terminates its contract with a health care provider,
CONTRACTOR must provide timely written notification, as defined by the Texas
Insurance Code and TDI regulations, to affected Members.

     SECTION 13.06 MEMBER COMPLAINT AND APPEALS PROCESS.

     CONTRACTOR must develop, implement and maintain a Member complaint system
that complies with the requirements of article 20A.12 of the Texas Insurance
Code. The complaint and appeals procedure must be the same for all Members and
must comply with Texas Insurance Code, article 20A.12.

     CONTRACTOR must implement and maintain a procedure to appeal adverse
determinations that complies with the requirements of article 21.58A of the
Texas Insurance Code. The appeal of an adverse determination procedure must be
the same for all Members and must comply with Texas Insurance Code, article
21.58A.

     The provisions of article 21.58A, Texas Insurance Code, relating to a
Member's right to appeal an adverse determination made by CONTRACTOR or a
utilization review agent to an independent review organization also apply to
Members .

     SECTION 13.07 MEMBER CULTURAL AND LINGUISTIC SERVICES.

     (a) Cultural Competency Plan.

     CONTRACTOR must have a comprehensive written Cultural Competency Plan
describing how it will ensure culturally competent services and provide
linguistic and disability-related access. The plan must describe how the
individuals and systems within CONTRACTOR will effectively provide services to
people of all cultures, races, ethnic backgrounds, and religions, as well as
those with disabilities, in a manner that recognizes, values, affirms, and
respects the worth of the individuals and protects and preserves their dignity.
CONTRACTOR must submit a written plan to HHSC at the time of the readiness
review. Modifications and amendments to the written plan must be submitted to
HHSC no later than 30 days prior to implementation of the modification or
amendment. The plan must also be made available to CONTRACTOR's network of
providers.

     The Cultural Competency Plan must include the following:

     CONTRACTOR's written policies and procedures for ensuring effective
communication through the provision of linguistic services following Title VI of
the Civil Rights Act guidelines and the provision of auxiliary aids and services
in compliance with the Americans with Disabilities Act, Title III, Department of
Justice Regulation 36.303. CONTRACTOR must disseminate these policies and
procedures to ensure that both staff and subcontractors are aware of their
responsibilities under this provision of the Agreement;

     A description of how CONTRACTOR will educate and train its staff and
subcontractors on culturally competent service delivery and the provision of
linguistic and/or disability-related access as related to the characteristics of
its Members;

     A description of how CONTRACTOR will implement the plan in its
organization, identifying a person in the organization who will serve as the
contact with HHSC regarding the plan;


                                 Page 47 of 77
<PAGE>   54


     A description of how CONTRACTOR will develop standards and performance
requirements for the delivery of culturally competent care and linguistic access
and monitor adherence with those standards and requirements;

     A description of how CONTRACTOR will provide outreach and health education
to Members, including racial and ethnic minorities, non-English speakers or
limited-English speakers, and those with disabilities; and

     A description of how CONTRACTOR will help Members access culturally and
linguistically appropriate community health or social service resources.

     (b) Linguistic, Interpreter Services, and Provision of Auxiliary Aids and
     Services.

     CONTRACTOR must provide experienced, professional interpreters when
technical, medical, or treatment information is to be discussed. See Title VI of
the Civil Rights Act of 1964, 42 U.S.C. Sections 2000d, et seq. CONTRACTOR must
ensure that auxiliary aids and services necessary for effective communication
are provided, as per the Americans with Disabilities Act, Title III, Department
of Justice Regulations 36.303.

     CONTRACTOR must have in place policies and procedures that outline how
Members can access face-to-face interpreter services in a provider's office if
necessary to ensure the availability of effective communication regarding
treatment, medical history or health education for a Member. CONTRACTOR must
inform its providers on how to obtain an updated list of participating,
qualified interpreters.

     A competent interpreter is defined as someone who is:

          (1) proficient in both English and the other language;

          (2) has had orientation or training in the ethics of interpreting; and

          (3) has the ability to interpret accurately and impartially.

     CONTRACTOR must provide 24-hour access to interpreter services for Members
to access emergency medical services within CONTRACTOR's network.

     Family Members, especially minor children, should not be used as
interpreters in assessments, therapy, or other medical situations in which
impartiality and confidentiality are critical, unless specifically requested by
the Member. However, a family member or friend may be used as an interpreter if
he or she can be relied upon to provide a complete and accurate translation of
the information being provided to the Member if (1) the Member is advised that a
free interpreter is available, and (2) the Member expresses a preference to rely
on the family member or friend.

     CONTRACTOR must provide or arrange access to TDD to Members who are deaf or
hearing impaired.

                             ARTICLE 14. MARKETING.

     SECTION 14.01 AIM OF MARKETING.

     CONTRACTOR may engage in marketing within the marketing guidelines set out
in this Agreement. CONTRACTOR's marketing activities must have the goal of
increasing the number of applications for health insurance and be consistent
with HHSC's outreach campaign.


                                 Page 48 of 77
<PAGE>   55



     SECTION 14.02 MARKETING GUIDELINES.

     1. CONTRACTOR may accept CHIP eligibility applications, with any applicable
supporting eligibility documentation, and mail to Administrator Contractor.

     2. CONTRACTOR is prohibited from engaging in door-to-door marketing or
solicitation.

     3. CONTRACTOR is prohibited from marketing to any person who is under the
age of eighteen (18) years.

     4. CONTRACTOR is prohibited from street marketing.

     5. CONTRACTOR may conduct telephone marketing during incoming calls from
prospective Members. CONTRACTOR may return telephone calls only when requested
to do so by the caller. CONTRACTOR is prohibited from initiating outbound
telemarketing calls.

     6. If CONTRACTOR approaches a person who is currently enrolled in Medicaid,
no marketing can take place; CONTRACTOR must refer the individual to the
Medicaid enrollment broker in areas where Medicaid managed care is present.

     7. CONTRACTOR's marketing representatives must wear ID badges with nametags
and photographs.

     8. CONTRACTOR may conduct face-to-face marketing during CBO, Administrative
Services Contractor, or health plan sponsored events.

     9. CONTRACTOR may provide health-related promotional giveaways under $10
("Giveaways") during events sponsored by a CBO, the Administrative Services
Contractor, or the health plans, to the extent permitted by applicable statutes
and TDI rules. Giveaways that include only CONTRACTOR's name or initials and its
phone number and do not refer to CHIP in any way do not require HHSC approval
before distribution.

     10. CONTRACTOR must seek and obtain permission from the appropriate person
or entity at the site where CONTRACTOR plans to market prior to engaging in CHIP
marketing activities. With permission, CONTRACTOR may market at small businesses
and factories, unemployment offices, Head Start, WIC, day care centers,
providers' offices, and schools. CONTRACTOR must not marketing in County Welfare
Agencies (CWA) or around the CWA office.

     11. Only the following marketing materials are allowed: billboards,
literature display racks, bus ads, flyers, newspaper advertisements, pamphlets,
brochures, radio advertisements, television advertisements, and CHIP material
provided by HHSC. All CONTRACTOR marketing materials must be approved by HHSC.
HHSC has 15 business days from the date the Member material is received to
review the submitted material and to recommend any suggestions or required
changes. If HHSC has not responded to CONTRACTOR by the fifteenth day,
CONTRACTOR may use the submitted material.

     12. CONTRACTOR may request that HHSC approve marketing materials other than
those listed in section 14.02(11). HHSC will approve or disapprove the submitted
marketing materials within fifteen (15) business days from the date HHSC
receives the materials. These materials will not be deemed approved.

     SECTION 14.03 DISENROLLMENTS.


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<PAGE>   56


     The Administrative Services Contractor must handle all disenrollments.
CONTRACTOR is not allowed to discuss, induce or accept disenrollment from a CHIP
Member except to refer to the CHIP Administrative Services Contractor. If
CONTRACTOR approaches or is approached by a person who states that he or she is
enrolled in another CHIP health plan, CONTRACTOR must end the conversation.

     SECTION 14.04 MARKETING SCHEDULE.

     CONTRACTOR must submit to HHSC for approval a marketing schedule at least
twenty (20) business days prior to beginning of any CHIP marketing activity.
CONTRACTOR must indicate the exact address of the site at which it will market
on the schedule. HHSC will respond to the submitted marketing schedule within
fifteen (15) business days from the date of receipt. CONTRACTOR must receive
HHSC's approval of the schedule prior to the marketing event, which approval
HHSC may not unreasonably withhold. If HHSC does not approve the schedule within
the allotted fifteen (15) business days, the schedule is deemed approved. If
HHSC expressly disapproves the marketing schedule, CONTRACTOR is prohibited from
engaging in the marketing activity set out on the schedule at the time
indicated. HHSC may require changes in the marketing schedule before it will
approve the schedule.

     SECTION 14.05 GENERAL PROVISIONS.

     CONTRACTOR must comply with all state insurance law and TDI regulations
regarding prohibitions on marketing.

     CONTRACTOR may conduct a plan-sponsored event without being required to
invite other health plans participating in CHIP.

     At no time during the application, enrollment, and re-enrollment processes
may CONTRACTOR use licensed insurance agents.

     SECTION 14.06 REGULATION.

     An industry group comprised of one representative from each health
maintenance organization participating in CHIP, as well as ex officio
representation from the State and consumers, will be charged with developing and
recommending to HHSC a sanctions schedule for marketing violations by CHIP
health maintenance organizations. The sanctions schedule is subject to approval
by HHSC. The industry group is responsible for reporting to HHSC possible
marketing violations that the group discovers or that are reported to the group.
HHSC is responsible for investigating possible marketing violations that are
reported to it by the industry group and is responsible for imposing sanctions
based on the sanctions schedule developed by the industry group. The industry
group must meet regularly, at least once a month. The first meeting will be
called by HHSC. At the end of the first year of the Initial Term, the State will
evaluate the effectiveness of this regulatory approach and will review options
for state enforcement if that approach is deemed by HHSC to be inadequate.

                   ARTICLE 15. PROVIDER NETWORK REQUIREMENTS

     SECTION 15.01 PROVIDER SUBCONTRACTS.


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     (a) Generally.

     CONTRACTOR must enter into written contracts with properly credentialed
health care service providers, licensed in Texas, either directly or through
intermediaries, such as Independent Practice Associations (IPAs). CONTRACTOR
must have its own credentialing process to review, approve, and periodically
re-certify the credentials of all participating providers in compliance with 28
T.A.C. Section 11.1902. CONTRACTOR may delegate credentialing in accordance with
TDI regulations.

     (b) Subcontract terms.

     CONTRACTOR must ensure that, as part of its contract with the provider, or
in its intermediary's contract with the actual provider of health services, in
addition to any requirements imposed by state insurance law or TDI regulation,
the following requirements are included:

         (1) A statement to the effect that the provider is subject to all state
         and federal laws, rules and regulations that apply to all persons or
         entities receiving state and federal funds, including provisions of the
         Clean Air Act and the Federal Water Pollution Control Act, as amended,
         found at 42 C.F.R. 7401, et seq. and 33 U.S.C. 1251, et seq.,
         respectively; the exclusion, debarment, and suspension provisions of
         Section 1128(a) or (b) of the Social Security Act (42 USC Section 1320
         a-7), or Executive Order 12549; the provisions of the Byrd
         Anti-Lobbying Amendment, found at 31 U.S.C. 1352, relating to use of
         federal funds for lobbying for or obtaining federal contracts; Health
         and Safety Code, Chapter 85, Subchapter E, relating to the Duties of
         State Agencies and State Contractors for the confidentiality of AIDS
         and HIV-related medical information and an anti-discrimination policy
         for employees and Members with communicable diseases; confidentiality
         provisions relating to Member information (cite); Title VI of the Civil
         Rights Act of 1964, Section 504 of the Rehabilitation Act of 1973, the
         Americans with Disabilities Act of 1990, and all requirements imposed
         by the regulations implementing these acts and all amendments to the
         laws and regulations; the provisions of Executive Order 11246, as
         amended by 11375, relating to Equal Employment Opportunity; Texas
         Government Code, Title 10, Subtitle D, Chapter 2161 and 1 TAC Section
         111.11(b) and 111.13(c)(7) relating to the good faith effort to use
         Historically Underutilized Businesses (HUBs); section 9-7.06 of article
         IX of the General Appropriations Act of 1999 regarding "Buy Texas";
         Texas Family Code Section 231.006 regarding child support payments; and
         chapter 552 of the Texas Government Code regarding the release of
         public information;

         (2) A statement that the provider understands and agrees that
         CONTRACTOR has the sole responsibility for payment of covered services
         rendered by the provider under CONTRACTOR/provider contract and a
         statement that in the event that CONTRACTOR becomes insolvent or ceases
         operations, the provider's sole recourse is against CONTRACTOR through
         CONTRACTOR's bankruptcy, conservatorship, or receivership estate;

         (3) A statement that CONTRACTOR will initiate and maintain any action
         necessary to stop a health care provider or employee, agent, assign,
         trustee, or successor-in-interest from maintaining an action against
         HHSC or any Member to collect payment from HHSC or any Members over and
         above allowable copayments or deductibles, excluding payment for
         services not covered under CHIP;

         (4) A statement that CONTRACTOR must defend, indemnify and hold
         harmless Members and HHSC against any and all claims, costs, damages,
         or expenses (including attorney's fees) of any type or nature arising
         from the failure, inability, or refusal of CONTRACTOR to pay health
         care providers for covered services or supplies;


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         (5) CONTRACTOR must ensure that each health care provider contract
         prohibits the provider from engaging in direct marketing to Members
         that is designed to increase enrollment in a particular health plan.
         This prohibition should not constrain providers from engaging in
         permissible marketing activities consistent with broad outreach
         objectives and application assistance;

         (6) A statement that the provider is subject to all state and federal
         laws and regulations relating to fraud and abuse in health care and
         CHIP. The provider must cooperate and assist HHSC and any state or
         federal agency that has the duty of identifying, investigating,
         sanctioning or prosecuting suspected fraud and abuse. The provider must
         provide originals and/or copies of all records and information
         requested and allow access to premises and provide records to HHSC or
         its authorized agent(s), HCFA, the U.S. Department of Health and Human
         Services (DHHS), FBI, TDI, or other unit of state government. The
         provider must provide all copies of records free of charge; and

         (7) A requirement that the provider is responsible for collecting at
         the time of the service any applicable CHIP copayments or deductibles
         given the limitations on those copayments and deductibles as set out in
         section 11.06 of this Agreement.

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

     THE CONTRACTOR REMAINS RESPONSIBLE FOR PERFORMING AND FOR ANY FAILURE TO
PERFORM ALL DUTIES, RESPONSIBILITIES AND SERVICES UNDER THIS AGREEMENT
REGARDLESS OF WHETHER THE DUTY, RESPONSIBILITY OR SERVICE IS CONTRACTED TO
ANOTHER FOR ACTUAL PERFORMANCE.

     SECTION 15.02 PROVIDER ACCESSIBILITY.

     CONTRACTOR is required to meet the TDI accessibility and availability
requirements and the TDI services requirements for HMOs (Title 28, Part I,
Chapter 11, Subchapters Q and U of the Texas Administrative Code).
Out-of-network and emergency services also must be provided in accordance with
the Texas Insurance Code and TDI regulations as they apply to HMOs.

     CONTRACTOR must have a sufficient number of providers (including pediatric
providers) to meet Members' needs in accordance with TDI accessibility and
availability requirements. PCPs and specialty care providers with experience in
treating children and adolescents must be available to all Members .

     CONTRACTOR must ensure that CCSHCN have access to treatment by a
multidisciplinary team when determined to be medically necessary for effective
treatment or to avoid separate and fragmented evaluations and service plans. The
teams must include both physician and non-physician providers determined to be
necessary by the Member's PCP.

     CONTRACTOR must assure access to Texas Department of Health
(TDH)-designated Level I and Level II trauma centers within the State or
hospitals meeting the equivalent level of trauma care, for emergency services
only. CONTRACTOR may make out-of-network reimbursement arrangements with the
TDH-designated Level I and Level II trauma centers.


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     CONTRACTOR must assure adequate access of all Members to children's
hospitals and pediatric health care centers with recognized special expertise in
the care of CCSHCN to meet the medically necessary referrals of a PCP as
documented in the Member's medical record. TDH-approved pediatric transplant
centers and federally qualified hemophilia centers are examples. CONTRACTOR may
make out-of-network reimbursement arrangements for treatment in these hospitals
or centers.

     SECTION 15.03 PARTICULAR PROVIDERS.

     (a) Significant Traditional Providers.

     CONTRACTOR must seek participation in its provider network from:

         (1) all hospitals receiving disproportionate share hospital funds in
         the Medicaid program in State Fiscal Year 1999; and

         (2) all other providers in a county that, when listed by provider type
         or by specialty code in descending order by the amount of recipient or
         Member billings, provided the top 80 percent of recipient or Member
         billings for either the Texas Medicaid Program in State Fiscal Year
         1998 as determined by the Texas Department of Health, or the Texas
         Healthy Kids Corporation program in State Fiscal Year 1999 as
         determined by the Texas Healthy Kids Corporation for each provider
         type or specialty code, or providers that were funded and in good
         standing with the Department of Mental Health and Mental Retardation
         or the Council on Alcohol and Drug Abuse in State Fiscal Year 1999.

     (b) Tribal clinics.

     CONTRACTOR must seek participation in its provider network from the tribal
health clinics located near El Paso, Eagle Pass, and Livingston.

     (c) Rural providers.

     In rural areas of the CONTRACTOR's CSA, CONTRACTOR must seek the
participation in its provider network of rural hospitals, physicians, home and
community support service agencies, and other rural health care providers who:

     1. are the only providers located in the CHIP Service Area; and

     2. are Significant Traditional Providers as defined in 1 T.A.C. Section
361.001.

     To contract with CONTRACTOR, rural health providers must:

     1. agree to accept the prevailing provider contract rate of CONTRACTOR
based on provider type; and

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

     SECTION 15.04 GOOD-FAITH EFFORT


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     CONTRACTOR must demonstrate a good faith effort to include STPs, tribal
clinics, and rural providers in its provider network. CONTRACTOR's compliance
with this requirement must be reported on a quarterly basis using report
requirements defined by HHSC.

     To be a network provider under this section, STPs, tribal clinics, and
rural providers must agree to the provider contract requirements set out in
section 15.01 of this Agreement unless exempted from a requirement by law or
rule. STPs, tribal clinics, and rural providers must also agree in the contract
that they will:

         (1) accept the standard reimbursement rate offered by CONTRACTOR to
         other providers for the same or similar services;

         (2) meet CONTRACTOR's credentialing requirements. CONTRACTOR must not
         require STPs to meet a different or higher credentialing standard than
         is required of other providers providing the same or similar services.
         CONTRACTOR also must not require STPs to contract with a subcontractor
         who requires a different or higher credentialing standard than
         CONTRACTOR's if the application of that higher standard results in a
         disproportionate number of STPs being excluded from the subcontractor;
         and

         (3) accept the same form of provider agreement that CONTRACTOR is
         using in its core CHIP business.

     Failure to demonstrate a good faith effort to include STPs, tribal clinics,
and rural providers in CONTRACTOR's provider network, or failure to report
efforts and compliance as required in this section are defaults under this
Agreement and may result in any or all of the remedies included in Article 20 of
this Agreement.

     SECTION 15.05 PROVIDER TAX IDENTIFICATION NUMBERS.

     CONTRACTOR must require tax identification numbers from all providers.
CONTRACTOR is required to do back-up withholding from all payments to providers
who fail to give tax identification numbers or who give incorrect numbers.

     SECTION 15.06 PROVIDER HANDBOOK.

     CONTRACTOR must submit to HHSC a provider handbook that complies with Texas
Department of Insurance provisions, including, but not limited to: 28 T.A.C.
Section 11.1606(e)(5) (regarding the requirements CONTRACTOR imposes upon
physicians and providers); 28 T.A.C. Section 11.1903(2)(F)(iv) (practice
guidelines); and 28 T.A.C. Section 11.900(b) (regarding the written criteria for
determining medical need for a Member to utilize a specialist as a primary care
physician).

     HHSC has 15 business days from the date the provider handbook is received
to review the submitted material and to recommend any suggestions or required
changes. If HHSC has not responded to CONTRACTOR by the fifteenth day,
CONTRACTOR may use the submitted handbook.

     SECTION 15.07 CLAIMS SUBMISSION AND PAYMENT.

     CONTRACTOR must comply with article 20A.18B of the Texas Insurance Code
regarding prompt payment of physicians and providers and any applicable
regulations. Providers are required to comply with chapter 146 of the Texas
Civil Practice and Remedies Code regarding timely billing.


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                  ARTICLE 16. CONTINUOUS QUALITY IMPROVEMENT.

     SECTION 16.01 COMMITMENT TO QUALITY.

     CONTRACTOR shall develop and maintain an ongoing quality improvement
program designed to objectively and systematically monitor and evaluate the
quality and appropriateness of care and service provided to Members, and to
pursue opportunities for improvement.

     SECTION 16.02 QUALITY IMPROVEMENT COMMITTEE.

     CONTRACTOR must have a formal quality improvement committee that meets the
requirements of 11 T.A.C. Section 11.1903.

     SECTION 16.03 QUALITY IMPROVEMENT PLAN (QIP).

     CONTRACTOR must provide to HHSC its annual written Quality Improvement Plan
(QIP) in accordance with federal and state requirements. The Quality Improvement
Plan shall meet all requirements of 28 TAC Section 11.1902 with regard to scope
and content.

                       ARTICLE 17. REPORTING REQUIREMENTS

     SECTION 17.01 GENERALLY.

     The Parties agree that they will collaborate and negotiate in good faith to
develop a report matrix that will be added through amendment to this Agreement.
The Parties intend the report matrix to supply reporting details that are not in
this Agreement, the Proposal, or the RFP.

     SECTION 17.02 FINANCIAL REPORTS.

     CONTRACTOR must submit to HHSC the following financial reports as they are
described in Appendix D:

         The Monthly or Quarterly CHIP Financial-Statistical Report in the
         format set out in Appendix D, as modified or amended by HHSC;

         The Annual CHIP Financial-Statistical Report in the format set out in
         Appendix D, as modified or amended by HHSC;

         The Affiliate Report;

         CONTRACTOR'S  Annual Audited Financial Report;

         Form HCFA-1513;

         Section 1318 Financial Disclosure Report;

         TDI Examination Report on CONTRACTOR; and


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         CONTRACTOR'S IBNR Plan.

     SECTION 17.03 ENCOUNTER DATA SPECIFICATIONS REPORT.

     The Parties agree that they will negotiate in good faith to develop the
specifications on the reporting and processing of encounter data that meet
federal and programmatic requirements. Any subsequent requirements leading to
actual data reporting will be handled through an amendment of this Agreement.

     SECTION 17.04 UTILIZATION MANAGEMENT REPORTS.

     (a) HEDIS Reporting.

     The Parties agree that they will negotiate in good faith to develop the
specifications on the reporting of HEDIS data that meets federal and
programmatic requirements. Any subsequent requirements leading to actual data
reporting will be handled through an amendment of this Agreement.

     (b) Physical Health

     Physical Health (PH) Utilization Management Reports are required on a
quarterly basis due to HHSC no later than 150 days following the end of the
reporting period. The form of the report and the instructions are contained in
Appendix G. The PH Utilization Management Report instructions may periodically
be updated by HHSC to facilitate clear communication to CONTRACTOR.

     (c) Behavioral Health

     Behavioral Health (BH) Utilization Management Reports are required on a
quarterly basis due to HHSC no later than 150 days following the end of the
reporting period. The form of the report and the instructions are contained in
Appendix H. The BH Utilization Report instructions may periodically be updated
by HHSC to facilitate clear communication to the health plan.

     SECTION 17.05 FOCUSED STUDIES REPORTS

     CONTRACTOR must conduct one (1) state-specified focused study and one (1)
study chosen by CONTRACTOR. The state-specified study will be developed through
collaboration among HHSC, TDH, the Administrative Services Contractor, and the
health plans and is conducted and submitted on an annual basis. This study must
be conducted and data collected using criteria and methods developed by HHSC and
TDH in collaboration with the health plans. The report format is set out in the
RFP.

     SECTION 17.06 ANNUAL QUALITY IMPROVEMENT PLAN (QIP) SUMMARY REPORT

     An annual Quality Improvement Plan (QIP) summary report must be conducted
yearly based on the state fiscal year. The annual QIP summary report must be
submitted by March 31 of each year. The information to be included is set out in
the RFP.

     SECTION 17.07 HUB REPORTS

     CONTRACTOR must submit quarterly reports documenting CONTRACTOR's
Historically Underutilized Business (HUB) program efforts and accomplishments.
The format for this report is contained in Appendix I.



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     SECTION 17.08 FRAUDULENT PRACTICES REPORT

     CONTRACTOR must report all fraud and abuse enforcement actions or
investigations taken against CONTRACTOR and/or any of its subcontractors or
providers by any state or federal agency for fraud or abuse under Title XVIII or
Title XIX of the Social Security Act or any State law or regulation and any
known or suspected act of fraud or abuse. The report must include information
concerning the detection and the disposition of any potential fraudulent or
abusive practices.

FRAUD AND ABUSE COMPLIANCE PLAN.

Model Compliance Plan

     CONTRACTOR must submit a written compliance plan to HHSC for approval no
later than the scheduled date for initiating readiness reviews. CONTRACTOR must
comply with the requirements of the Model Compliance Plan for HMOs when this
model plan is issued by the U.S. Department of Health and Human Services, the
Office of Inspector General, if the federal government mandates the Plan for
CHIP. In the meantime, HHSC will provide guidance in the form of a template for
use by plans in developing compliance plans that will be subject to HHSC
approval. That template is attached to this Agreement as Appendix J.

Requirements for the CONTRACTOR's compliance plan

     Additionally, the plan must ensure that all officers, directors, managers
and employees know and understand the provisions of the CONTRACTOR's fraud and
abuse compliance plan. The written plan must contain procedures designed to
prevent and detect potential or suspected abuse and fraud in the administration
and delivery of Services under this Agreement. The plan must contain provisions
for the confidential reporting of plan violations to the designated person,
ensure that the identity of an individual reporting violations of the plan is
protected and that no individual who reports plan violations or suspected fraud
and abuse is subject to retaliation. The plan provisions must provide for the
investigation and follow-up of any compliance plan reports and contain specific
and detailed internal procedures for officers, directors, managers and employees
for detecting, reporting, and investigating fraud and abuse compliance plan
violations. The compliance plan also must require that confirmed violations be
reported to HHSC. The plan must require any confirmed violations or confirmed or
suspected fraud and abuse under state or federal law is reported to HHSC or its
designated agents or other units of state government specified in the Agreement.

Fraud and abuse training.

     CONTRACTOR must designate executive and essential personnel to attend
mandatory training in fraud and abuse detection, prevention and reporting. The
training will be conducted by the Office of Investigation and Enforcement,
Health and Human Services Commission, and will be provided free of charge.
CONTRACTOR must schedule and complete training no later than 90 days after the
Implementation Date.

     The contractor must designate an officer or director in its organization
with responsibility and authority for carrying out the provisions of the
compliance plan. A contractor's failure to report potential or suspected fraud
or abuse may result in sanctions, cancellation of contract, or exclusion from
participation in CHIP. The contractor must allow the HHSC, its agents, or other
governmental units to conduct private interviews of the contractor's personnel,
Subcontractors and their personnel, witnesses, and patients with regard to a
confirmed violation. The contractor's personnel and it Subcontractors and their
personnel must cooperate fully by being available in person for interviews,
consultation, grand jury proceedings, pre-trial conferences, hearings, trials
and in any other process, including investigations, at the contractor's and
Subcontractors' own expense.


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     SECTION 17.09 PROVIDER NETWORK REPORTS

     (a) PCPs and Specialists Report

     CONTRACTOR must submit to HHSC by the date of the readiness review an
electronic listing of all PCPs participating in their network. The format for
this report is contained in Appendix K.

     CONTRACTOR must also submit to HHSC by the date of the readiness review an
electronic listing of all specialists participating in their network. The format
for this report is contained in Appendix L to the RFP.

     (b) Provider Network Change Report

     CONTRACTOR must submit a monthly report summarizing changes in CONTRACTOR's
provider network. The report must be submitted to HHSC in the format set out in
the RFP 30 days following the end of the reporting month.

     (c) PCP Network and Capacity Report

     CONTRACTOR must submit electronically to the Administrative Services
Contractor a weekly report that shows changes to the PCP network and PCP
capacity.

     SECTION 17.10 THIRD PARTY RECOVERY (TPR) REPORTS

     If CONTRACTOR chooses to engage in Third Party Recovery (TPR) activities,
it must file quarterly TPR Reports in accordance with the format developed by
the State. TPR reports must include total dollars recovered from third party
payers for services to Members for each month and the total dollars recovered.

     SECTION 17.11 ALL CLAIMS SUMMARY REPORT

     CONTRACTOR must submit the "All Claims Summary Report" as a contract
year-to-date report. The report must be submitted quarterly by the last day of
the month following the reporting period. The report must be submitted to HHSC
in a format specified by HHSC. This report format will be developed
collaboratively with the health plans.

     SECTION 17.12 SUMMARY REPORT OF PROVIDER AND MEMBER COMPLAINTS

     CONTRACTOR must submit Member and provider complaints reports. CONTRACTOR
must also report complaints submitted to its subcapitated groups (e.g., IPAs).
The complaint reports must be submitted in two paper copies and one electronic
copy on or before the 45 days following the end of the state fiscal quarter
using the TDI format.

     SECTION 17.13 MONTHLY MEMBER HOTLINE STATUS REPORT

     CONTRACTOR must submit, on a monthly basis, a Member hotline status report
that contains the elements set out in the RFP.

     SECTION 17.14 PROVIDER HOTLINE PERFORMANCE REPORT


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     CONTRACTOR must submit, on a monthly basis, a provider telephone status
report that contains the elements set out in the RFP.

     SECTION 17.15 AD HOC REPORTS.

     CONTRACTOR will provide ad hoc reports as requested by HHSC at no
additional charge if the information requested is currently available or easily
modified from existing data. If the requested information is not currently
available or easily modified from existing data, the change order process set
out in Article 8 will apply or the Parties may mutually agree on an alternative.

           ARTICLE 18. DISCLOSURE AND CONFIDENTIALITY OF INFORMATION.

     SECTION 18.01 CONFIDENTIALITY.

     (a) CONTRACTOR and all subcontractors under this Contact shall treat all
information which is obtained through performance under this Agreement as
confidential information to the extent that confidential treatment is provided
under law and regulations, and shall not use any information so obtained in any
manner except as necessary to the proper discharge of obligations and securing
of rights hereunder.

     (b) CONTRACTOR will have a system in effect to protect all records and all
other documents deemed confidential by law which are maintained in connection
with the activities funded under this Agreement. Any disclosure or transfer of
confidential information by CONTRACTOR, including information required by HHSC,
will be in accordance with applicable law.

     (c) In addition to the requirements expressly stated in this article,
CONTRACTOR will comply with any policy, rule, or reasonable requirement of HHSC
that relates to the safeguarding or disclosure of information relating to
Members, CONTRACTOR's operations, or the Services performed by CONTRACTOR under
this Agreement.

     SECTION 18.02 REQUESTS FOR PUBLIC INFORMATION.

     (a) HHSC agrees that it will promptly notify CONTRACTOR of a request for
disclosure of public information that relates to information or data to which
CONTRACTOR has a proprietary or commercial interest. HHSC will deliver a copy of
the request for public information to CONTRACTOR.

     (b) With respect to any confidential information that is the subject of a
request for disclosure, CONTRACTOR is required to provide a written explanation
of specific reasons why the requested information is confidential or otherwise
excepted from required public disclosure under law. HHSC shall, in its sole
discretion, determine the appropriate response to the request for information.

     SECTION 18.03 PUBLICITY.

     (a) CONTRACTOR may use the name of HHSC, the State of Texas, or any other
state agency, or the name of the Children's Health Insurance Program in a media
release, public announcement, or public disclosure relating to this Agreement or
its subject matter (other than in proposals submitted to the State of Texas, an
administrative agency of the State of Texas, or a governmental agency of another
state) only if, at least three (3) business days prior to distributing the
material, CONTRACTOR submits the information to HHSC for review and approval. If
HHSC has not responded within three (3) business days, CONTRACTOR



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may use the submitted information. If the information is to be used in
marketing, the provisions of Article 14 apply to the material.

     (b) CONTRACTOR may publish, at it sole expense, results of CONTRACTOR
performance under this Agreement with HHSC's prior review and approval, which
HHSC may not unreasonably withhold. Any publication (written, visual, or sound)
shall acknowledge the support received from HHSC and any federal agency, as
appropriate. CONTRACTOR will provide HHSC at least three (3) copies of any such
publication prior to public release. CONTRACTOR will provide additional copies
at the request of HHSC. If HHSC has not responded to the CONTRACTOR within
fifteen (15) business days from the date HHSC receives the information for
review, the information is deemed approved.

     (c) HHSC will submit all studies or audits that relate or refer to
CONTRACTOR for review and comment to CONTRACTOR fifteen (15) days prior to
releasing the report to the public or to Members.

     SECTION 18.04 MEMBER RECORDS.

     CONTRACTOR and any subcontractor shall not transfer an identifiable Member
record, including a patient record, to another entity or person without written
consent from the Member or someone authorized to act on his or her behalf;
however, HHSC may require CONTRACTOR, or any subcontractor, to transfer a Member
record to another agency or to HHSC if the transfer is necessary to protect
either the confidentiality of the record or the health and welfare of the
Member.

     If at any time during the Initial Term, this Agreement is terminated, HHSC
may require the transfer of Member records, upon written notice to CONTRACTOR,
to another entity that agrees to continue performance of the Agreement, as
consistent with federal and state laws and applicable releases.

     The term "Member Record" for this section means only those administrative,
enrollment, case management and other such records maintained by CONTRACTOR and
is not intended to include patient records maintained by participating network
providers.

     SECTION 18.05 ACCESSIBILITY AND AVAILABILITY OF MEDICAL RECORDS.

     CONTRACTOR must require, through contractual provisions, providers to
create and keep medical records in compliance with the medical records standards
contained in the Standards for Quality Improvement Programs in Appendix F. All
medical records must be kept for at least five (5) years, except for records of
rural health clinics, which must be kept for a period of six (6) years from the
date of service.

     SECTION 18.06 RECORDKEEPING.

     Medical records may be on paper or electronic. CONTRACTOR must require,
through contractual provisions or provider manual, providers to create and keep
medical records in compliance with the medical records standards contained in
the Standards for Quality Improvement Programs in Appendix F. All medical
records must be kept for at least five (5) years, except for records of rural
health clinics, which must be kept for a period of six (6) years from the date
of service. CONTRACTOR must take steps to promote maintenance of medical records
in a legible, current, detailed, organized and comprehensive manner that permits
effective patient care and quality review.

                    ARTICLE 19. NON-PROVIDER SUBCONTRACTING



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     SECTION 19.01 WRITTEN SUBCONTRACTS.

     CONTRACTOR must enter into written contracts with all Non-Provider
Subcontractors and maintain copies of the Subcontracts in CONTRACTOR's
administrative office. CONTRACTOR must submit two copies of all Non-Provider
Subcontracts to HHSC for approval no later than 60 days after the Effective Date
of this Agreement. Subcontracts entered into after the Effective Date of this
Agreement must be submitted no later than 30 days prior to the date of execution
of the Subcontract. CONTRACTOR must also make Non-Provider Subcontracts
available to HHSC upon request, at the time and location requested by HHSC.

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

     The form and substance of all Subcontracts, including subsequent
amendments, are subject to approval by HHSC. HHSC retains the authority to
reject or require changes to any provisions of the Subcontract that do not
comply with the requirements or duties and responsibilities of this Agreement or
create significant barriers for HHSC in carrying out its duty to monitor
compliance with the Agreement.

     Additionally, if CONTRACTOR desires to enter into a Non-Provider
Subcontract that has a value over $100,000, CONTRACTOR must obtain prior written
approval from HHSC. HHSC reserves the right to require the replacement of any
Non-Provider Subcontractor, which HHSC will not unreasonably require.

     SECTION 19.02 APPLICATION OF FEDERAL LAW TO NON-PROVIDER SUBCONTRACTORS.

     CONTRACTOR must ensure that Non-Provider Subcontractors are aware of their
obligations and responsibilities under 42 U.S.C. Section 1320a-7a and 42 U.S.C.
Section 1320a-7b. CONTRACTOR must also ensure that its Non-Provider
Subcontractors are required to cooperate in the investigation and prosecution of
any suspected fraud or abuse, and must provide any and all requested originals
and copies of records and information, free-of-charge on request, to any state
or federal agency with authority to investigate fraud and abuse in CHIP.

     SECTION 19.03 NO STATE LIABILITY FOR PAYMENT UNDER NON-PROVIDER
     SUBCONTRACTORS.

     CONTRACTOR must ensure that Non-Provider Subcontractors understand and
agree that CONTRACTOR is solely responsible for payment of services rendered by
the Non-Provider Subcontractor. CONTRACTOR must ensure that Non-Provider
Subcontractors understand and agree that if CONTRACTOR becomes insolvent or
ceases operations, the Subcontractor's sole recourse is against CONTRACTOR

     SECTION 19.04 TERMINATION OF NON-PROVIDER SUBCONTRACTS.

     CONTRACTOR must notify HHSC no later than 90 days prior to terminating any
Non-Provider Subcontract affecting a major performance function of this
Agreement. All major Non-Provider Subcontractor, defined as those Subcontracts
with a value over $100,000 or affecting a major function under this Agreement,
terminations or substitutions require HHSC approval. HHSC may require CONTRACTOR
to provide a transition plan describing how the subcontracted function will
continue to be provided. All Subcontracts are subject to the terms and
conditions of this Agreement.


                                 Page 61 of 77
<PAGE>   68


     SECTION 19.05 FRAUD AND ABUSE INVESTIGATIONS.

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

     THE CONTRACTOR REMAINS RESPONSIBLE FOR PERFORMING ALL DUTIES,
RESPONSIBILITIES AND SERVICES UNDER THIS CONTRACT REGARDLESS OF WHETHER THE
DUTY, RESPONSIBILITY OR SERVICE IS SUBCONTRACTED TO ANOTHER.


                       ARTICLE 20. REMEDIES AND DISPUTES.


     SECTION 20.01 UNDERSTANDING AND EXPECTATIONS.

     (a) CONTRACTOR agrees and understands that HHSC may pursue contractual
remedies for both programmatic and financial noncompliance. HHSC, in its
discretion, may impose or pursue one or more remedies for each item of
noncompliance and will determine sanctions on a case-by-case basis. HHSC's
pursuit or non-pursuit of a tailored administrative remedy shall not constitute
a waiver of any other remedy that HHSC may have at law or equity.

     (b) As described in the RFP, CHIP represents a comprehensive and aggressive
effort to provide adequate health care to uninsured children by providing
affordable insurance to their families. Section 2.04 of this Agreement also
describes HHSC's objective to establish a flexible and responsive relationship
with CONTRACTOR. Accordingly, the remedies described in this article are
directed to CONTRACTOR's timely and responsive performance of the Services and
production of Deliverables.

     SECTION 20.02 ADMINISTRATIVE REMEDIES.

     (a) CONTRACTOR responsibility for improvement.

     HHSC expects CONTRACTOR's performance to continuously meet or exceed
performance criteria over the term of this Agreement. Accordingly, CONTRACTOR
will be responsible for ensuring that performance for a particular activity or
result described in its Proposal or the RFP that falls below the expectations
identified in CONTRACTOR's Proposal, the RFP, or this Agreement must improve
within thirty (30) days of written notice from HHSC regarding the deficiency.

     (b) Notification and interim response.

     (1) HHSC will notify CONTRACTOR in writing of specific areas of CONTRACTOR
performance that fail to meet performance standards as set out in this
Agreement, but which, in the determination of HHSC, do not result in a material
delay in the implementation or operation of the CHIP health plan coverage
through HMOs. CONTRACTOR will, within five (5) business days of receipt of
written notice of a non-material deficiency, provide HHSC with a written
response that:

         (A) Explains the reasons for the deficiency, CONTRACTOR's plan to
         address or cure the deficiency, and the date and time by which the
         deficiency will be cured; or


                                 Page 62 of 77
<PAGE>   69


         (B) If CONTRACTOR disagrees with HHSC's findings, its reasons for
         disagreeing with HHSC's findings.


     (2) CONTRACTOR's proposed cure of a non-material deficiency is subject to
the approval of HHSC. CONTRACTOR's repeated commission of non-material
deficiencies or repeated failure to resolve any such deficiencies may be
regarded by HHSC as a material deficiency and entitle HHSC to pursue any other
remedy provided in this Agreement or any other appropriate remedy HHSC may have
at law or equity.

     (c) Notice and opportunity to cure.

     TDH will provide CONTRACTOR with written notice of default (Notice of
Default) under this Agreement. The Notice of Default may be given by any means
that provides verification of receipt. The Notice of Default must contain the
following information:

     1. A clear and concise statement of the circumstances or conditions that
constitute a default under this Agreement;

     2. The Agreement provision(s) under which HHSC is declaring a default;

     3. A clear and concise statement of whether CONTRACTOR may cure the
default and, if so, how;

     4. A clear and concise statement of the time period during which
CONTRACTOR may cure the default if CONTRACTOR is allowed to cure;

     5. The remedy or remedies HHSC is electing to pursue and when the remedy
or remedies will take effect;

     6. If HHSC is electing to impose liquidated damages, the amount that HHSC
intends to withhold or impose;

     7. If HHSC elects to pursue liquidated damages, whether any part of those
damages may be passed through to an individual or entity who is or may be
responsible for the act or omission for which HHSC declares a default;

     8. Whether failure of CONTRACTOR to cure the default within any specified
time period will result in HHSC pursuing an additional remedy or remedies,
including, but not limited to, additional damages and/or termination of the
Agreement.

     (d) Particular Events of Default.

     For convenience, specified events of default under this Agreement, which
are listed throughout this Agreement, are listed here. Those events, include,
but are not limited to:

         (1) Failure to demonstrate a good faith effort to include STPs, tribal
         clinics, and rural providers in the CONTRACTOR's provider network, or
         failure to report efforts and compliance as required in section 15.04;

         (2) CONTRACTOR's placing the health and safety of the Members in
         jeopardy;

         (3) Exclusion of the CONTRACTOR or any of the managing employees or
         persons with an ownership interest whose disclosure is required by
         Section 1124(a) of the Social Security Act from the


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<PAGE>   70


         Medicaid or Medicare program under the provisions of Section 1128(a)
         and/or (b) of the Social Security Act is a default under this
         contract;

         (4) Exclusion of any Subcontractor or any of the managing employees or
         persons with an ownership interest of the Subcontractor whose
         disclosure is required by Section 1124(a) of the Social Security Act
         from the Medicaid or Medicare program under the provisions of Section
         1128(a) and/or (b) of the Social Security if the exclusion will
         materially affect the CONTRACTOR's performance under this Agreement;
         and

         (5) A contractor's failure to report potential or suspected fraud or
         abuse.

     (e) Corrective Action Plan.

     (1) In the event HHSC assesses a liquidated damage as provided in this
article, HHSC may require CONTRACTOR to submit to HHSC a detailed written plan
(the "Corrective Action Plan") to correct or resolve the deficiency or event
causing the assessment of the liquidated damage. The Corrective Action Plan must
provide a detailed explanation of the reasons for the cited deficiency,
CONTRACTOR's assessment or diagnosis of the cause, and a specific proposal to
cure or resolve the deficiency. The Corrective Action Plan must be submitted
within ten (10) business days following the request for the plan by HHSC and is
subject to approval by HHSC, which approval will not unreasonably be withheld.

     (2) Notwithstanding the submission and acceptance of a Corrective Action
Plan, CONTRACTOR remains responsible for achieving all written performance
criteria. The acceptance of a Corrective Action Plan under this section will not
excuse prior substandard performance, relieve CONTRACTOR of its duty to comply
with performance standards, or prohibit HHSC from assessing additional
liquidated damages or pursuing other appropriate remedies for continued
substandard performance.

     (f) Additional remedies.

     HHSC at its own discretion may impose one or more the following remedies
for each item of noncompliance and will determine the scope and severity of the
remedy on a case-by-case basis. Both Parties agree that a state or federal
statute, rule, regulation or federal guideline will prevail over the provisions
of this section unless the statute, rule, regulation, or guidelines can be read
together with this section to give effect to both.

         (1) Assess liquidated damages in accordance with section 20.03 and
         deduct such damages against payments to CONTRACTOR as set-off in
         accordance with section 20.04;

         (2) Conduct accelerated monitoring of CONTRACTOR. Accelerated
         monitoring means more frequent or more extensive monitoring will be
         performed by HHSC than would routinely be accomplished;

         (3) Require additional, more detailed, financial and/or programmatic
         reports to be submitted by CONTRACTOR in accordance with Article 17 of
         this Agreement; or

         (4) Suspend new enrollment.

                  (a) HHSC must give the CONTRACTOR 30 days notice of intent to
                  suspend new enrollment other than for imminent danger to the
                  health or safety of Members. The suspension date will be
                  calculated as 30 days following the date that the CONTRACTOR
                  receives the notice of intent to suspend new enrollment.



                                 Page 64 of 77
<PAGE>   71


                  (b) HHSC may immediately suspend new enrollment into the
                  CONTRACTOR for a default declared as a result of imminent
                  danger to the health and safety of Members.

                  (c) The suspension of new enrollment may be for any duration,
                  up to the termination date of the Agreement. HHSC will base
                  the duration of the suspension upon the type and severity of
                  the default and upon the CONTRACTOR's ability, if any, to cure
                  the default.

         (5) Decline to renew this Agreement.

     HHSC will formally notify CONTRACTOR of the imposition of an administrative
remedy in writing in accordance with paragraph (b) of this section, with the
exception of accelerated monitoring, which may be unannounced. CONTRACTOR is
required to file a written response to in accordance with paragraph (b) of this
section.

     (g) Informal review of administrative remedies.

     CONTRACTOR may request an informal review of the imposition of the
foregoing remedies in accordance with section 20.16 within ten (10) business
days of receipt of written notification of the imposition of a remedy by HHSC.

     SECTION 20.03 LIQUIDATED DAMAGES.

     The liquidated damages prescribed in this section are not intended to be in
the nature of a penalty, but are intended to be reasonable estimates of HHSC's
projected financial loss and damage resulting from CONTRACTOR's non-performance,
including financial loss as a result of project delays.

     The Parties intend to negotiate liquidated damages specifically tailored
for particular events of non-performance, which schedule will be attached to
this Agreement through amendment. In the event that the Parties fail to reach
agreement on the liquidated damages to be assessed, the events on which they are
to be assessed, or the amount of the damages, the liquidated damages set out in
this section will apply.

     Accordingly, in the event CONTRACTOR fails to perform in accordance with
this Agreement, HHSC may assess liquidated damages as provided in this section.

     (a) Failure to provide contracted services or support.

     If CONTRACTOR fails to perform any of the Services described in this
Agreement, HHSC may assess a liquidated damage of $1,000.00 each business day
such Service is not provided.

         (1) Maximum damages.

     Liquidated damages assessed pursuant to this paragraph shall not, in any
single month, exceed 25% of the fee due CONTRACTOR for that month. However, if
CONTRACTOR fails to perform any Service or combination of Services, and such
failure represents a budgeted sum greater than 25% of the fee due CONTRACTOR for
that month, HHSC may terminate the Agreement in accordance with this article.

         (2) CONTRACTOR responsibility for associated costs.

     If HHSC terminates this Agreement pursuant to paragraph (a)(i) of this
section, CONTRACTOR will be responsible to HHSC for all costs incurred by HHSC,
the State of Texas or any of its administrative agencies to replace CONTRACTOR.
These costs include, but are not limited to, the costs of procuring a substitute


                                 Page 65 of 77
<PAGE>   72


vendor following termination of this Agreement and the cost of any claim or
litigation that is reasonably attributable to CONTRACTOR's failure to perform
any Service in accordance with the Agreement.

     SECTION 20.04 METHOD OF COLLECTION.

     HHSC may elect to assess a liquidated damage directly to CONTRACTOR, or it
may deduct amounts assessed as liquidated damages as set-off against payments
then due to CONTRACTOR for the Services or Deliverables or which become due at
any time thereafter.

     SECTION 20.05 MODIFICATION OF AGREEMENT IN THE EVENT OF REMEDIES.

     As provided in section 8.01(b) of this Agreement, HHSC may propose a
modification of this Agreement in response to the imposition of a remedy under
this article. Any modifications under this section must be reasonable, limited
to the matters causing the exercise of a remedy, and in writing. CONTRACTOR must
negotiate such proposed modifications in good faith.

     SECTION 20.06 TERMINATION OF AGREEMENT.

     In addition to other provisions of this article allowing termination, this
Agreement will terminate upon the Expiration Date unless extended in accordance
with Article 4 of this Agreement, or terminated sooner under the terms of
section 20.07 through section 20.09 of this Agreement. Prior to completion of
the Initial Term and any extensions or renewal thereof, all or a part of this
Agreement may be terminated for any of the following reasons:

     SECTION 20.07 TERMINATION BY MUTUAL AGREEMENT OF THE PARTIES.

     This Agreement may be terminated by mutual agreement of the Parties. Such
agreement must be in writing.

     SECTION 20.08 TERMINATION FOR CAUSE.

     HHSC reserves the right to terminate this Agreement, in whole or in part,
upon the following conditions:

     (a) Assignment for the benefit of creditors, appointment of receiver, or
     inability to pay debts.

     HHSC may terminate this Agreement if CONTRACTOR:

         (1) Makes an assignment for the benefit of its creditors;

         (2) Admits in writing its inability to pay its debts generally as they
         become due; or

         (3) Consents to the appointment of a receiver, trustee, or liquidator
         of CONTRACTOR or of all or any part of its property.

     (b) Judgment and execution.

     (1) HHSC may terminate this Agreement if judgment for the payment of money
in excess of $50,000.00 (fifty thousand dollars and zero cents) which is not
covered by insurance is rendered by any court or governmental body against
CONTRACTOR, and CONTRACTOR does not



                                 Page 66 of 77
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         (i) Discharge the judgment or provide for its discharge in accordance
         with the terms of the judgment;

         (ii) Procure a stay of execution thereof within 30 days from the date
         of entry thereof; or

         (iii) Perfect an appeal of such judgment and cause the execution of
         such judgment to be stayed during the appeal, providing such financial
         reserves as may be required under generally accepted accounting
         principles.

     (2) If a writ or warrant of attachment or any similar process is issued by
any court against all or any material portion of the property of CONTRACTOR, and
such writ or warrant of attachment or any similar process is not released or
bonded within 30 days after its entry, HHSC may terminate this Agreement in
accordance with this section.

     (c) Failure to adhere to laws, rules, ordinances, or orders.

    HHSC may terminate this Agreement if a court of competent jurisdiction
finds CONTRACTOR failed to adhere to any laws, ordinances, rules, regulations or
orders of any public authority having jurisdiction and such violation prevents
or substantially impairs performance of CONTRACTOR's duties under this
Agreement.

     (d) Breach of confidentiality.

     HHSC may terminate this Agreement if CONTRACTOR breaches confidentiality
laws with respect to the Services provided under this Agreement.

     (e) Failure to maintain adequate personnel or resources.

     HHSC may terminate this Agreement if, after providing notice and an
opportunity to correct in accordance with section 20.02 of this Agreement, HHSC
determines that CONTRACTOR has either failed to provide the personnel and
resources described in its Proposal or has failed to supply personnel or
resources and such failure results in CONTRACTOR's inability to fulfill its
duties under this Agreement and substantially compromises HHSC's ability to
comply with legislative mandates regarding the implementation or administration
of CHIP.

     (f) Termination for insolvency.

     (1) HHSC may, by giving written notice of termination to CONTRACTOR,
terminate this Agreement as of a date specified in such notice of termination if
CONTRACTOR:

         (A) files for bankruptcy;

         (B) becomes or is declared insolvent, or is the subject of any
         proceedings related to its liquidation, insolvency or the appointment
         of a receiver or similar officer for it;

         (C) makes an assignment for the benefit of all or substantially all of
         its creditors; or

         (D) enters into a contract for the composition, extension, or
         readjustment of substantially all of its obligations.


                                 Page 67 of 77
<PAGE>   74


     (2) CONTRACTOR agrees to pay for all reasonable expenses of HHSC including
the cost of counsel, incident to:


         (A) The enforcement of payment of all obligations of CONTRACTOR by any
         action or participation in, or in connection with a case or proceeding
         under chapters 7, 11, or 13 of the United States Bankruptcy Code, or
         any successor statute;

         (B) A case or proceeding involving a receiver or other similar officer
         duly appointed to handle CONTRACTOR's business; or

         (C) A case or proceeding in a State court initiated by HHSC when
         previous collection attempts have been unsuccessful.

     (g) Termination for gifts and gratuities.

     (1) HHSC may terminate this Agreement on one (1) days' notice to CONTRACTOR
following the determination by a competent judicial or quasi-judicial authority
and CONTRACTOR's exhaustion of all legal remedies that CONTRACTOR, its
employees, agents or representatives have either offered or given any thing of
value an officer or employee of HHSC or the State of Texas in violation of state
law.

     (2) CONTRACTOR must include a similar provision in each of its subcontracts
and shall enforce this provision against a subcontractor who has offered or
given any thing of value to any of the persons or entities described in this
section, whether or not the offer or gift was in CONTRACTOR's behalf.

     SECTION 20.09 TERMINATION FOR NON-APPROPRIATION OF FUNDS.

     (a) Notwithstanding any other provision of this Agreement, if funds for the
continued fulfillment of this Agreement by HHSC are at any time not forthcoming
or are insufficient, through failure of any entity to appropriate funds or
otherwise, then HHSC will have the right to terminate this Agreement at no
additional cost and with no penalty whatsoever by giving prior written notice
documenting the lack of funding.

     (b) In such instance, unless otherwise agreed to by the Parties, this
Agreement will terminate and become null and void on the last day of the fiscal
period for which appropriations were received. HHSC will use all reasonable
efforts to ensure appropriated funds are available.

     SECTION 20.10 TERMINATION IN THE EVENT OF HHSC'S FAILURE TO PAY.

     CONTRACTOR may terminate this Agreement if HHSC fails to pay the CONTRACTOR
undisputed charges when due as required under this Agreement. Retaining premium,
recoupment, sanctions, or penalties that are allowed under this Agreement or
that result from the CONTRACTOR's failure to perform or the CONTRACTOR's default
under the terms of this Agreement is not cause for termination. Termination for
failure to pay does not release HHSC from the obligation to pay undisputed
charges for services provided prior to the termination date.

     CONTRACTOR must give HHSC 90 days written notice of intent to terminate
this Agreement. The termination date will be calculated as the last day of the
month following 90 days from the date the notice of intent to terminate is
received by HHSC.

     HHSC must be given 30 days from the date HHSC receives the CONTRACTOR's
written notice of intent to terminate for failure to pay to pay the CONTRACTOR
all undisputed amounts due. If HHSC pays


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<PAGE>   75



all undisputed amounts then due within this 30-day period, the CONTRACTOR cannot
terminate the Agreement under this article for that reason.

     SECTION 20.11 TERMINATION FOR HHSC'S MATERIAL BREACH OF THIS AGREEMENT.

     (a) Generally.

     HHSC's failure to perform a material duty or responsibility as set out in
this Agreement is a default under this Agreement.

     (b) Notice of default and opportunity to cure.

     CONTRACTOR will provide HHSC with written notice of default (Notice of
Default) under this Agreement. The Notice of Default may be given by any means
that provides verification of receipt. The Notice of Default must contain the
following information:

     1. A clear and concise statement of the circumstances or conditions that
CONTRACTOR contends constitute a default under this Agreement;

     2. The Agreement provision(s) under which CONTRACTOR is declaring a
default; and

     3. A statement that HHSC has thirty (30) days from the date HHSC receives
the Notice of Default to cure the alleged breach.

     SECTION 20.12 NOTICE OF TERMINATION.

     Each Party will provide written notice of termination of this Agreement at
least 90 days prior to the intended date of termination unless the health or
safety of the Members is at issue, in which case HHSC may terminate immediately.

     SECTION 20.13 EXTENSION OF TERMINATION EFFECTIVE DATE.

     HHSC may extend the effective date of termination one or more times as it
elects, in its sole discretion, provided that the total of all such extensions
shall not exceed 90 calendar days following the original effective date of
termination, excluding termination under section 20.11.

     SECTION 20.14 INJUNCTIVE RELIEF.

     Each Party acknowledges and agrees that, in the event of a breach or
threatened breach of any of the provisions of this Agreement, such Party may
have no adequate remedy in damages. Accordingly, each Party will be entitled to
seek an injunction to prevent such breach or threatened breach. However, the
specification of a particular legal or equitable remedy will not be construed as
a waiver, prohibition, or limitation of any other legal or equitable remedies in
the event of a breach of this Agreement.

     SECTION 20.15 PAYMENT AND OTHER PROVISIONS AT AGREEMENT TERMINATION.

     (a) If HHSC terminates this Agreement, HHSC will pay CONTRACTOR on the
effective date of termination (or as soon as possible thereafter taking into
account appropriation and fund accounting



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requirements) any undisputed amounts due for all completed, approved, and
accepted Services or Deliverables.

     (b) HHSC further agrees to negotiate in good faith with CONTRACTOR to
equitably adjust and settle any accrued or outstanding liabilities for any
unaccepted Service or deliverable and Change Order that

         (1) Is due or delivered prior to or upon contract termination;

         (2) Is complete or substantially complete, or for which CONTRACTOR can
         document to the satisfaction of HHSC substantial progress; and

         (3) Benefits HHSC or the State of Texas, notwithstanding its
         unaccepted status.

     (c) CONTRACTOR must provide HHSC all reasonable access to records,
facilities, and documentation as is required to efficiently and expeditiously
close out the Services under this Agreement.

     (d) HHSC and the CONTRACTOR must prepare a transition plan, which is
acceptable to and approved by HHSC, to ensure that Members are reassigned to
other plans without interruption of services. That transition plan will be
implemented during the 90-day period between receipt of notice and the
termination date unless termination is the result of HHSC's reasonable belief
that the CONTRACTOR is placing the health or welfare of Members in jeopardy.

     CONTRACTOR must continue to perform Services under the transition plan
until the last day of the month following 90 days from the date of receipt of
notice if the termination is for any reason other than HHSC's reasonable belief
that the CONTRACTOR is placing the health and safety of the Members in jeopardy.
If termination is due to this reason, HHSC may prohibit the CONTRACTOR's further
performance of Services under this Agreement.

     (1) If HHSC terminates this Agreement for any reason other than
non-appropriation of funds under section 20.10:

         (a) HHSC is responsible for notifying all Members of the date of
         termination and how Members can continue to receive Covered Services;

         (b) CONTRACTOR is responsible for all expenses related to giving
         notice to Members; and

         (c) CONTRACTOR is responsible for all expenses incurred by HHSC in
         implementing the transition plan.

     (2) If the Agreement is terminated by the CONTRACTOR for any reason:

         (a) HHSC is responsible for notifying all Members of the date of
         termination and how Members can continue to receive Covered Services;

         (b) HHSC is responsible for all expenses related to giving notice to
         Members; and

         (c) HHSC is responsible for all expenses it incurs in implementing the
         transition plan.

     (3) If the Agreement is terminated by mutual agreement of the Parties
         under section 20.07:

         (a) HHSC is responsible for notifying all Members of the date of
         termination and how Members can continue to receive Covered Services;


                                 Page 70 of 77
<PAGE>   77


         (b) CONTRACTOR is responsible for all expenses related to giving
         notice to Members; and

         (c) HHSC is responsible for all expenses it incurs in implementing
         the transition plan.

     SECTION 20.16 DISPUTE RESOLUTION.

     (a) General agreement of the Parties.

     The Parties mutually agree that the interests of fairness, efficiency, and
good business practices are best served when the Parties employ all reasonable
and informal means to resolve any dispute under this Agreement. The Parties
express their mutual commitment to using all reasonable and informal means of
resolving disputes including, but not limited to, the informal review of
liquidated damage assessments under section 20.02 of this Agreement, prior to
invoking a remedy provided elsewhere in this section.

     (b) Duty to negotiate in good faith.

     Any dispute that in the judgment of any Party to this Agreement may
materially or substantially affect the performance of any Party will be reduced
to writing and delivered to the other Party. The Parties must then negotiate in
good faith and use every reasonable effort to resolve such dispute and the
Parties shall not resort to any formal proceedings unless they have reasonably
determined that a negotiated resolution is not possible. The resolution of any
dispute disposed of by agreement between the Parties shall be reduced to writing
and delivered to all Parties within ten (10) business days.

     (c) Claims for breach of Agreement.

     (1) General requirement. As required by Chapter 2260, Government Code,
CONTRACTOR's claim for breach of this Agreement must resolved in accordance with
the dispute resolution process established by HHSC in accordance with Chapter
2260, Government Code.

     (2) Negotiation of claims. A CONTRACTOR's claim for breach of this
Agreement that the Parties cannot resolve in the ordinary course of business or
through the use of all reasonable and informal means must be submitted to the
negotiation process provided in Chapter 2260, subchapter B, Government Code.

         (A) To initiate the process, CONTRACTOR must submit written notice in
         accordance with Section 4.04 of this Agreement that specifically states
         that CONTRACTOR invokes the provisions of Chapter 2260, subchapter B,
         Government Code.

         (B) Compliance by CONTRACTOR with Chapter 2260, subchapter B,
         Government Code, is a condition precedent to the filing of a contested
         case proceeding under Chapter 2260, subchapter C, of the Government
         Code.

     (3) Contested case proceedings. The contested case process provided in
Chapter 2260, subchapter C, Government Code, is CONTRACTOR's sole and exclusive
process for seeking a remedy for any and all alleged breaches of contract by
HHSC if the Parties are unable to resolve their disputes under subsection (d)(2)
of this section.

         (A) Compliance with the contested case process provided in Chapter
         2260, Subchapter C, Government Code, is a condition precedent to
         seeking consent to sue from the Texas Legislature under Chapter 107,
         Civil Practices & Remedies Code. Neither the execution of this
         Agreement by HHSC nor any other conduct of any representative of HHSC
         relating to this Agreement shall be considered a waiver of the State's
         sovereign immunity to suit.


                                 Page 71 of 77
<PAGE>   78


     (4) HHSC rules. The submission, processing and resolution of CONTRACTOR's
claim is governed by the rules to be adopted by HHSC pursuant to Chapter 2260,
Government Code.

         (A) CONTRACTOR expressly acknowledges that, as of the Effective Date of
         this Agreement, HHSC has not adopted rules to implement the
         requirements of Chapter 2260, Government Code. CONTRACTOR expressly
         waives any claim regarding the absence of any such rules at the
         Effective Date.

     (5) CONTRACTOR's duty to perform. Neither the occurrence of an event
constituting an alleged breach of contract nor the pending status of any claim
for breach of contract is grounds for the suspension of performance, in whole or
in part, by CONTRACTOR of any duty or obligation with respect to the Services
under this Agreement.

     SECTION 20.17 LIABILITY OF CONTRACTOR.

     CONTRACTOR will not be liable to HHSC for any loss, damages or liabilities
attributable to or arising from:

         (1) The failure of HHSC or any state agency or HHSC CONTRACTOR to
         perform a service or activity in connection with this Agreement; or

         (2) CONTRACTOR's prudent and diligent performance of the Services in
         compliance with instructions given by HHSC in accordance with section
         2.07 (relating to implied authority), section 4.04 (relating to
         notices), and section 4.06 (relating to delegation of authority) of
         this Agreement.

                   ARTICLE 21. ASSURANCES AND CERTIFICATIONS

     SECTION 21.01 LOBBYING.

     (a) In accordance with 3l U.S.C. Section 1352 (Section 1352 of Public Law
[P.L.] 101-121 effective December 22, 1989), CONTRACTOR is prohibited from using
funds granted under this Agreement for lobbying Congress or any Federal agency
in connection with a particular Agreement. CONTRACTOR agrees that none f the
funds provided under this Agreement will be so used.

     (b) In addition, if at any time a contract exceeds $100,000, the law
requires certification that none of the funds provided by HHSC to CONTRACTOR
have been used for payment to lobbyists. CONTRACTOR certifies that it has not
and will not use any funds provided under this Agreement for such prohibited
purposes.

     (c) Regardless of funding source, if a Contract Attachment exceeds
$100,000, CONTRACTOR will provide to HHSC a certification of the names of any
and all registered lobbyists with whom CONTRACTOR has an agreement. CONTRACTOR
agrees that it will provide this certification on a form provided by HHSC, along
with the names of any lobbyists, if applicable, within 90 days of receipt of the
executed Agreement.

     SECTION 21.02 DEBARMENT AND SUSPENSION.

     (a) CONTRACTOR certifies by execution of this Agreement that it is not now
ineligible for participation in Federal or State assistance programs under
Executive Order 12549, Debarment and Suspension.


                                 Page 72 of 77
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     (b) CONTRACTOR certifies by execution of this Agreement that neither it nor
its principals is presently debarred, suspended, proposed for debarment,
declared ineligible, or voluntarily excluded from participation in this
transaction by any Federal department or agency.

     (c) Where CONTRACTOR is unable to certify to any of the statements in this
certification, CONTRACTOR shall attach an explanation.

     (d) CONTRACTOR specifically warrants that it has not knowingly failed to
pay a single substantial debt or a number of outstanding debts to a Federal or
State agency and it is not subject to an outstanding judgment in a suit against
CONTRACTOR for collection of the balance. A false statement regarding
CONTRACTOR's status will be treated as a material breach of this Agreement and
may be grounds for termination at the option of HHSC.

     SECTION 21.03 CONFLICTS OF INTEREST.

     (a) Representation.

     CONTRACTOR agrees to comply with regulations regarding conflicts of
interest in the performance of its duties under this Agreement.

     (b) General duty regarding conflicts of interest.

     CONTRACTOR will establish safeguards to prohibit employees from using their
positions for a purpose that constitutes or presents the appearance of personal
or organizational conflict of interest, or personal gain. CONTRACTOR will
operate with complete independence and objectivity without actual, potential or
apparent conflict of interest with respect to the activities conducted under
this Agreement with the State of Texas.

     (c) Disclosure requirements.

         (1) CONTRACTOR must disclose any existing or potential conflicts of
         interest relative to the performance requirements of this Agreement and
         must comply with other disclosure requirements set out below, as
         applicable.

         (2) Any relationship that might be perceived or represented as a
         conflict must be disclosed by CONTRACTOR within 15 calendar days of its
         discovery by CONTRACTOR or by HHSC as a potential conflict. This
         disclosure requirement is a continuing obligation throughout the
         Initial Term of this Agreement and any extension of this Agreement.

         (3) By submitting a Proposal in response to the RFP, CONTRACTOR
         affirmed that it has neither given, nor intends to give, at any time
         hereafter, any economic opportunity, future employment, gift, loan,
         gratuity, special discount, trip, favor, or service to a public servant
         or any employee or representative of same, at any time during the
         procurement process or in connection with the procurement process
         except as allowed under relevant state and federal law.

         (4) In addition, it is the responsibility of CONTRACTOR to request, in
         writing, a determination by HHSC when there is a question as to whether
         a conflict exists. HHSC reserves the right to make a final
         determination regarding conflict of interest with respect to
         CONTRACTOR's relationship with other parties whether individual or
         corporate, public or private, and CONTRACTOR agrees to abide by HHSC's
         decision.

                                 Page 73 of 77
<PAGE>   80


         (5) A violation of the disclosure requirements applicable to this
         Agreement may constitute grounds for the immediate termination of this
         Agreement. Furthermore, such violation may be submitted to the Office
         of the Attorney General, Texas Ethics Commission, or appropriate State
         or Federal law enforcement officials for further action.

     SECTION 21.04 CERTIFICATION REGARDING GOOD FAITH EFFORT.

     HHSC is committed to making a good faith effort to assist Historically
Underutilized Businesses (HUBs) through the contract award process in a manner
consistent with rules prescribed by the General Services Commission (GSC) at 1
T.A.C. 111.11 et seq. The GSC has established a goal of a minimum 18.1 percent
(18.1%) HUB participation in non-professional services contracts, either through
direct contracting or through prime or general contractors' subcontracting
efforts. HHSC is required to establish that CONTRACTOR has complied with this
good faith effort. CONTRACTOR has completed or shall complete required
documentation of good faith effort on forms and in the manner prescribed by
HHSC. CONTRACTOR shall comply with continuing reporting requirements imposed by
HHSC or GSC.

     SECTION 21.05 CHILD SUPPORT CERTIFICATION.

     In accordance with Section 231.006, Family Code, CONTRACTOR certifies the
following:

         "Under Section 231.006, Family Code, the vendor or applicant certifies
         that the individual or business entity named in this Agreement, bid, or
         application is not ineligible to receive the specified grant, loan, or
         payment, and acknowledges that this Agreement may be terminated and
         payment withheld if this certification is inaccurate."

     SECTION 21.06 TEXAS CORPORATE FRANCHISE TAX CERTIFICATION.


     CONTRACTOR has certified that it is not delinquent in payments or
obligations due or owing for state franchise taxes by executing the form
entitled "Texas Corporate Franchise Tax Certification" contained in its
Proposal.

     SECTION 21.07 CERTIFICATION REGARDING STATUS OF LICENSE, CERTIFICATE, OR
     PERMIT.

     Article IX, Section 163 of the General Appropriations Act for the 1998/1999
state fiscal biennium prohibits an agency which receives an appropriation under
either Article II or V of the General Appropriations Act from awarding a
Agreement with the owner, operator, or administrator of a facility which has had
a license, certificate, or permit revoked by another Article II or V agency.
CONTRACTOR certifies it is not ineligible for an award under this provision.

     SECTION 21.08 OUTSTANDING DEBTS AND JUDGMENTS.

     CONTRACTOR certifies that it is not presently indebted to the State of
Texas, and that CONTRACTOR is not subject to an outstanding judgment in a suit
by the State of Texas against CONTRACTOR for collection of the balance. For
purposes of this section, an indebtedness is any amount sum of money that is due
and owing to the State of Texas and is not currently under dispute. A false
statement regarding CONTRACTOR's status will be treated as a material breach of
this Agreement and may be grounds for termination at the option of HHSC.


                                 Page 74 of 77
<PAGE>   81


     SECTION 21.09 UNAUTHORIZED ACTS.

     Each Party agrees to:

     (1) Notify the other Party promptly of any unauthorized possession, use, or
knowledge, or attempt thereof, of any Confidential Information by any person or
entity that may become known to it;

     (2) Promptly furnish to the other Party full details of the unauthorized
possession, use, or knowledge, or attempt thereof, and use reasonable efforts to
assist the other Party in investigating or preventing the reoccurrence of any
unauthorized possession, use, or knowledge, or attempt thereof, of Confidential
Information;

     (3) Cooperate with the other Party in any litigation and investigation
against third Parties deemed necessary by such Party to protect its proprietary
rights; and

     (4) Promptly prevent a reoccurrence of any such unauthorized possession,
use, or knowledge of Confidential Information.

     SECTION 21.10 LEGAL ACTION.

     Neither party may commence any legal action or proceeding in respect to any
unauthorized possession, use, or knowledge, or attempt thereof, of Confidential
Information by any person or entity which action or proceeding identifies the
other Party or its Confidential Information without such Party's consent.

                  ARTICLE 22. REPRESENTATIONS AND WARRANTIES.

EXCEPT AS SPECIFIED IN THIS ARTICLE AND ARTICLE 2, CONTRACTOR MAKES NO
WARRANTIES AND DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE IN
RESPECT TO THE SERVICES OR DELIVERABLES.

     SECTION 22.01 AUTHORIZATION.

     (a) CONTRACTOR is a corporation duly incorporated, validly existing and in
good standing under the laws of its state of incorporation and has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Agreement.

     (b) The execution, delivery and performance of this Agreement has been duly
authorized by CONTRACTOR and no approval, authorization or consent of any
governmental or regulatory agency is required to be obtained in order for
CONTRACTOR to enter into this Agreement and perform its obligations under this
Agreement.

     (c) CONTRACTOR is duly authorized to conduct business in and is in good
standing in each jurisdiction in which CONTRACTOR will conduct business in
connection with this Agreement.

     (d) CONTRACTOR has obtained all licenses, certifications, permits, and
authorizations necessary to perform the Services under this Agreement and
currently is in good standing with all regulatory agencies that regulate any or
all aspects of CONTRACTOR's performance of the Services. CONTRATOR will maintain
all required certifications, licenses, permits, and authorizations during the
term of this Agreement.



                                 Page 75 of 77
<PAGE>   82

     SECTION 22.02 ABILITY TO PERFORM.

     CONTRACTOR has the financial resources necessary to perform the functions
under this Agreement without advances from the State.

     CONTRACTOR represents that each non-provider subcontractor providing
services under this Agreement under a contract with a value greater than
$100,000 has the financial resources to carry out its duties under this
Agreement.

     SECTION 22.03 WORKMANSHIP AND PERFORMANCE.

     (a) All Services and Deliverables provided under this Agreement will be
provided in a manner consistent with the standards of quality and integrity as
outlined in this Agreement, the RFP, and CONTRACTOR's Proposal.

     (b) All Services and Deliverables must meet or exceed the levels of
performance specified in or pursuant to this Agreement.

     (c) CONTRACTOR will perform the Services in a workmanlike manner, in
accordance with best practices and high professional standards.

     SECTION 22.04 COMPLIANCE WITH LAWS.

     CONTRACTOR will comply with all applicable local, state and Federal laws
and regulations in providing the Services and must have and maintain all
applicable permits, rights and licenses to perform the Services.

     SECTION 22.05 COMPLIANCE WITH AGREEMENT.

     CONTRACTOR will not take any action substantially or materially
inconsistent with any of the terms and conditions set forth in this Agreement
without the express written approval of HHSC.

     SECTION 22.06 CONTINGENT FEE ARRANGEMENTS.

     CONTRACTOR warrants that no person or agency, other than a bona fide
regular employee or bona fide commercial agency has been employed or retained to
solicit or obtain this Agreement upon a contract or understanding for a
contingent fee.

     SECTION 22.07 PROSELYTIZING.

     CONTRACTOR and HHSC mutually agree that neither party will intentionally
solicit or recruit any employee of the State of Texas who is assigned to provide
assistance or services to the CHIP program in connection with this Agreement to
become an employee or agent of CONTRACTOR, and vice versa, during the term of
this Agreement and for one-year following the termination of this Agreement.

     SECTION 22.08 YEAR 2000 PERFORMANCE WARRANTY




                                 Page 76 of 77
<PAGE>   83


     (a) Terms of Warranty

     CONTRACTOR warrants that all Software records, stores, processes, and
presents calendar dates falling on or after January 1, 2000 at no added cost to
HHSC. CONTRACTOR must take all appropriate measures to ensure that the Software
used by CONTRACTOR in connection with CHIP will not lose, alter, or destroy
records containing dates falling on or after January 1, 2000. CONTRACTOR must
ensure that all Software will interface and operate with HHSC's data systems
that exchange data, including, but not limited to, historical and archived data.
CONTRACTOR warrants that the year 2000 leap year calculations will be
accommodated and will not result in software, hardware, or firmware failures.

     (b) Duration of warranty.

         (1) The duration of this warranty and the remedies available to HHSC or
         CONTRACTOR for breach of this warranty shall be as defined in, and
         subject to, the terms and conditions of CONTRACTOR's standard
         commercial warranty or warranties contained in this Agreement.

         (2) Despite any provision to the contrary in CONTRACTOR's standard
         commercial warranty or warranties, the remedies available to HHSC or
         CONTRACTOR under the warranty made under this section must include
         repair or replacement of any supplied product whose non-compliance is
         discovered and made known to CONTRACTOR in writing within ninety (90)
         days from the date that CONTRACTOR receives notice of the
         non-compliance

     (c) No limitation of rights or remedies.

     Nothing in the warranty made under this section will be considered to limit
any rights or remedies HHSC or CONTRACTOR may otherwise have under this
Agreement with respect to defects other than Year 2000 performance.

     IN WITNESS HEREOF, HHSC AND CONTRACTOR HAVE EACH CAUSED THIS AGREEMENT TO
BE SIGNED AND DELIVERED BY ITS DULY AUTHORIZED REPRESENTATIVE.


      AMERICAID TEXAS, INC. d/b/a               TEXAS HEALTH AND HUMAN
             AMERIKIDS                           SERVICES COMMISSION


     ---------------------------------      -------------------------------
     JAMES D. DONOVAN, JR.                  DON A. GILBERT
     PRESIDENT AND CEO                      COMMISSIONER







                                 Page 77 of 77

















<PAGE>   84

             AMENDMENT NO. 1 TO CHILDREN'S HEALTH INSURANCE PROGRAM
           AGREEMENT FOR THE PROVISION OF HEALTH CARE SERVICES BETWEEN
               THE TEXAS HEALTH AND HUMAN SERVICES COMMISSION AND
                     AMERICAID TEXAS, INC. d/b/a AMERIKIDS


                               ARTICLE 1. PURPOSE

      The Texas Health and Human Services Commission (HHSC) and AMERICAID
Texas, Inc. d/b/a AMERIKIDS (CONTRACTOR) amend the following sections of the
original Children's Health Insurance Program (CHIP) Agreement for the Provision
of Health Care Services (HHSC Contract No.___________).


      This amendment is executed pursuant to article 8 of the original contract.

      These amended terms become effective the day it is executed by HHSC
following execution by CONTRACTOR and terminate on April 30, 2003, unless
extended by mutual agreement of the parties or terminated sooner in accordance
with the provisions of the original contract, as such provisions are amended in
this Amendment No. 1


             ARTICLE 2. AMENDMENT TO THE OBLIGATIONS OF THE PARTIES

      The following numbered articles and sections are amended to read as
follows:

      SECTION 4.10 ASSIGNMENT.

      This Agreement was awarded to CONTRACTOR based on CONTRACTOR's
qualifications to perform the services described in the RFP. CONTRACTOR cannot
assign this Agreement without the written consent of TDI and HHSC. This
provision does not prevent CONTRACTOR from subcontracting duties and
responsibilities to qualified Subcontractors. If TDI and HHSC consent to an
assignment of this Agreement, a transition period of 90 days will run from the
date the assignment is approved by TDI and HHSC so that Members' services are
not interrupted. The assigning CONTRACTOR must also submit a transition plan, as
set out in section 20.18(d), subject to HHSC's approval.

      SECTION 7.02 MEASUREMENT AND MONITORING TOOLS.

      CONTRACTOR must implement all reasonably necessary measurement and
monitoring tools and procedures required to measure and report CONTRACTOR's
performance of the Services against the applicable service levels as such
service levels are specified in the Agreement. Such measurement and monitoring
must permit reporting at a level of detail sufficient to verify compliance with
the service levels specified in the Agreement and will be subject to audit by
HHSC. CONTRACTOR will provide HHSC with information and access to all applicable
information or work product produced by such tools and procedures upon request
for purposes of verification.


      SECTION 7.04(b)(3) HIPAA COMPLIANCE.


      The System implemented by CONTRACTOR must comply with applicable
certificate of coverage and data specification and reporting requirements
promulgated pursuant to the federal Health Insurance


                                  Page 1 of 21



<PAGE>   85


Portability and Accountability Act of 1996, P.L. 104-91 (August 21, 1996), as
amended. CONTRACTOR will issue the Certificate of Creditable Coverage to
disenrolled Members upon request by the Member.

      SECTION 7.04(d) ADDITIONS OR CHANGES TO THE REQUIREMENTS SET OUT IN THIS
SECTION.

      The Parties will negotiate in good faith to reach agreement on when
requested additions or changes to the general management information system
functions, data reporting requirements, or required system-wide functions will
be made by CONTRACTOR at no additional charge to HHSC and when requested
additions or changes should be handled through the Change Order Process set out
in Article 8.

      SECTION 8.01(c) MODIFICATIONS UPON RENEWAL OR EXTENSION OF AGREEMENT


            (1) If HHSC seeks modifications to the Agreement as a condition of
            any annual extension, HHSC's notice to CONTRACTOR will specify
            those modifications to the Scope of Work, the Agreement pricing
            terms, or other terms and conditions of the Agreement HHSC seeks.

            (2) Modifications proposed by HHSC may apply to the services under
            this Agreement in any Agreement year beginning after the date of
            notice to CONTRACTOR. CONTRACTOR must respond to HHSC's proposed
            modification within 30 days of receipt. Upon receipt of CONTRACTOR's
            response to the proposed modifications, HHSC may enter into
            negotiations with CONTRACTOR to arrive at mutually agreeable
            Agreement amendments. In the event that HHSC determines that the
            Parties will be unable to reach agreement on mutually satisfactory
            Agreement modifications, then HHSC must provide written notice to
            CONTRACTOR of its intent not to extend the Agreement beyond the
            Agreement term then in effect, at least 90 days before the
            Expiration Date to provide for the approval and implementation of
            the transition plan as set out in section 20.18(d), inclusive of all
            extension options previously exercised.


      SECTION 10.04. PAYMENT PREMIUM RATES AFTER THE FIRST YEAR OF THE INITIAL
TERM


            HHSC will review the methodology submitted by CONTRACTOR for
            determining the premium rate for any period subsequent to the first
            year of the contract ("the Subsequent Period") and reexamine the
            premium rates and other payments paid to CONTRACTOR during the
            initial year of the Initial Term to determine the appropriate
            premium rate for the Subsequent Period of the Initial Term.
            CONTRACTOR's financial data on the CHIP book of business will be
            considered by HHSC in determining rates for the Subsequent Period.
            HHSC will notify the CONTRACTOR in writing of the proposed premium
            rates and other payments for the Subsequent Period no later than
            August 1, 2001, to be effective October 1, 2001. A failure to
            deliver the rates on or before such date shall be a material breach
            of this Agreement and be cause to terminate the contract. CONTRACTOR
            shall notify HHSC in writing of any disagreement (Notice of
            Disagreement) with the proposed premium rates and other payments for
            the Subsequent Period no later than 30 days after the date of the
            HHSC notice of proposed premium rates and other payments. A
            failure to give notice of disagreement within 30 days shall waive
            Contractor's rights under this Section 10.04. In the absence of a
            notice of disagreement, the proposed rates and other payments will
            become effective for services provided beginning October 1, 2001.

            If there is a disagreement, the parties shall exchange actuarial and
            financial data relevant to determination of the CHIP premium or
            other payments. During the 30 days after delivery of the Notice of
            Disagreement (the Negotiation Period) HHSC and CONTRACTOR shall
            negotiate in good faith to reach an agreement on the premium rates
            and other payments for the Subsequent Period. In the event that the
            parties are unable to reach an agreement during this period the
            parties shall appoint a neutral actuary to review the premium rates
            and other payments. In the




                                            Page 2 of 21


<PAGE>   86




            event the parties cannot mutually agree on a neutral actuary within
            15 days after the expiration of the Negotiation Period, each party
            shall appoint an actuary. These two actuaries shall appoint a third
            actuary. In the event that the parties can agree on a neutral
            actuary or the neutral actuary is appointed by the actuaries
            representing both parties, he or she shall evaluate the information
            given him or her by the parties and make a recommendation as to the
            appropriate premium rates and other payments for the Subsequent
            Period.

            HHSC may adopt such recommendations for application during the
            Subsequent Period retroactive to October 1, 2001, in which case, the
            CONTRACTOR shall be bound by the recommendations and shall not be
            authorized to terminate this Agreement pursuant to this provision.
            However, if HHSC does not adopt the recommendations within 30 days
            of receiving notice of the recommendations, the CONTRACTOR may give
            notice of termination of this Agreement, by giving written notice
            within 30 days of the receipt of HHSC's failure to adopt the
            recommendations. If the CONTRACTOR fails to terminate the Agreement
            within such 30-day period, HHSC's rates and other payments as
            specified in the last written proposal of HHSC to CONTRACTOR shall
            govern the premium rates and other payments for the Subsequent
            Period.


            Both parties shall equally share the costs of any neutral actuary
            retained by the parties under this provision.


      SECTION 10.05 ADJUSTMENTS TO PREMIUM PAYMENTS.

      As provided below, HHSC or the Administrative Services Contractor may
adjust or recoup premiums paid to CONTRACTOR in error, which may be either human
or machine error on the part of HHSC. HHSC may recoup or adjust premiums paid to
CONTRACTOR if a CHIP-eligible child is enrolled into CONTRACTOR in error and
CONTRACTOR provides no covered services to the child for the period of time for
which the monthly premium payment was made. If CONTRACTOR arranged for services
to be provided to the Member as a result of the error during the time period for
which the monthly premium payment was made, no recoupment will occur. Under no
circumstances may HHSC recoup premiums paid for a period greater than two (2)
months.

      HHSC or the Administrative Services Contractor may recoup monthly premium
payments paid to CONTRACTOR if an Member for whom the monthly premium payment is
made was deceased during any full month for which CONTRACTOR received a premium
payment for that Member.

      HHSC or the Administrative Services Contractor may adjust a monthly
premium or recoup a monthly premium payment made to CONTRACTOR for a Member if
the Member's eligibility status is changed, corrected, or retroactively adjusted
as a result of error. Adjustments to premium or recoupment may be appealed by
CONTRACTOR using the dispute resolution process outlined in section 20.19.


      SECTION 11.01(b) CONTINUOUS COVERAGE FOR FIRST TWELVE MONTHS.

      A child who is CHIP-eligible will, for at least the first year of CHIP,
have twelve months of continuous coverage. That coverage begins on the first day
of the month following the child's enrollment into a health plan unless
enrollment occurs after the cut-off date, in which case coverage begins on the
first day of the next month. However, a child who is determined to be eligible
for coverage on a date after the beginning of the coverage of at least one
sibling, will have less than twelve months of continuous coverage. In this
situation, coverage will begin on the first day of the month following the
child's enrollment into a health plan unless enrollment occurs after the cut-off
date, in which case coverage begins on the first day of the next month. Coverage
for the later-enrolled child will end on the same day as the final day of
coverage of the sibling who


                                  Page 3 of 21






<PAGE>   87

has been enrolled in CHIP for the longest continuous period of time. This
section does not affect and is not affected by the continuous coverage period
for a pregnant member.

    SECTION 11.01(c) PREGNANT MEMBERS AND INFANTS.

    Becoming pregnant, in and of itself, does not make a Member ineligible for
CHIP. If, after becoming pregnant, a Member chooses to apply for Medicaid and is
determined to be Medicaid-eligible, she is no longer eligible for CHIP. The
Administrative Services Contractor will notify the Member about her potential
Medicaid eligibility and of her ability to apply for Medicaid and will provide
appropriate resource information.

    Infants are automatically enrolled in the mother's CHIP health plan at birth
with CHIP eligibility and reenrollment following the same time frame as those of
the mother.

    CONTRACTOR through electronic means or the providers through calls to the
provider hotline will notify the Administrative Services Contractor when a
pregnancy is diagnosed. The administrative services contractor will deem the
pregnant Member to be eligible for CHIP services under a new period of
continuous coverage. The coverage will extend from the date of notification of
the pregnancy through the later of: (1) the last day of the second month
following the month of the baby's birth, or (2) the date when the mother's
eligibility would have expired under the original twelve-month period of
continuous coverage.

    To further ensure the reliability of the data, families also will be
encouraged to notify the Administrative Services Contractor by phone or in
writing when delivery of a baby to a CHIP-enrolled Member occurs.


    SECTION 11.01(d) SPAN OF COVERAGE.

    If a Member's effective date of coverage occurs while the Member is confined
in a hospital, the CONTRACTOR is responsible for the Member's costs of Covered
Services beginning on the Effective Date of Coverage. For each day that the
Member is hospitalized beginning on the Effective Date of Coverage, HHSC will
pay to CONTRACTOR $700 for non-ICU care and $1400 for ICU care. If a Member is
disenrolled while the Member is confined in a hospital, CONTRACTOR's
responsibility for the Member's costs of Covered Services terminates on the Date
of Disenrollment. Six months after the Implementation Date, the Parties will
review CONTRACTOR's data, including, but not limited to, data relating to the
timing of discharge and re-admission of Members who are hospitalized at the time
of enrollment into CONTRACTOR for the same diagnosis, and if either party
believes that these payments are insufficient, either Party can instigate the
Change Order process set out in Article 8. The Parties agree to negotiate any
requested Change Order in good faith.


    SECTION 12.01 BASIC REQUIRED COVERED SERVICES.

    CONTRACTOR is paid premium for all services that are Covered Services as
described in Appendix C, Scope of Benefits, consisting of Appendix C and
Attachment A. Appendix C, dated July 12, 2000, supercedes and replaces Appendix
C that is referenced in and attached to the original Agreement.

    Unless Appendix C specifies otherwise, CONTRACTOR may determine if a covered
service requires prior authorization, pre-certification, or physician
prescription. CONTRACTOR must pay for or reimburse for all CHIP-covered services
provided to Members for whom CONTRACTOR is paid premium. Appendix G supercedes
and replaces Appendices G and H that are referenced in and attached to the
original Agreement.

                                  Page 4 of 21



<PAGE>   88


    Out-of-network and emergency services also must be provided in accordance
with the Texas Insurance Code and TDI regulations as they apply to CONTRACTOR.
Covered services are subject to change due to changes in federal law, changes in
CHIP policy, and/or responses to changes in medicine, clinical protocols, or
technology. If covered services change, the change will be the subject of a
change order as provided in Article 8 of this Agreement. Any proposed change in
the scope of Covered Services, as set out in Appendix C, will be made through a
Change Order under Article 8 of this Agreement.


    SECTION 12.02 DRUG FORMULARIES.

    If CONTRACTOR utilizes a prescription drug formulary for Members, CONTRACTOR
must fully disclose its use of the formulary in its marketing materials. During
the term of the Agreement, CONTRACTOR cannot create a new formulary or
significantly revise an existing formulary; however, minor revisions to include
new drugs, or to remove drugs are allowed. Other revisions to the formulary may
be approved by HHSC, including the CHIP Medical Director and other program
clinical staff, in consultation with CONTRACTOR's Quality Improvement Committee
(or other committee composed of physicians, pharmacists, and other
professionals). HHSC will determine if a revision is significant. Revisions to
the formulary in compliance with FDA directives are allowed without HHSC prior
approval. CONTRACTOR may revise the formulary on an annual basis, subject to
HHSC review and approval.

    CONTRACTOR will allow a Member to continue receiving a drug that has been
removed from the formulary at the contracted benefit level until the end of the
Member's eligibility year. This does not preclude a physician or other health
professional from prescribing another drug on CONTRACTOR's formulary that is
medically appropriate.

    CONTRACTOR must have a process for consideration of drugs outside the
formulary when medically necessary. If CONTRACTOR refuses to provide benefits
to a Member for a drug that is not included in a drug formulary, and that
Member's physician has determined that the drug is medically necessary, such
refusal constitutes an adverse determination for purposes of section 2, article
21.58A, Texas Insurance Code, and the Member may appeal the adverse
determination under Texas Insurance Code, article 21.58A, sections 6 and 6A.


    SECTION 14.04 MARKETING SCHEDULE.

    (a) Initial marketing schedule.

    CONTRACTOR must submit an initial marketing schedule to HHSC for approval no
later than March 3, 2000. For each particular marketing event listed on the
schedule, CONTRACTOR must indicate the exact address of the site at which it
will market. HHSC will respond to the initial marketing schedule by March 10,
2000. CONTRACTOR must receive HHSC's approval of the schedule prior to the first
marketing event, which approval HHSC may not unreasonably withhold. If HHSC
does not approve the schedule by March 10, 2000, the schedule is deemed
approved. If HHSC expressly disapproves the marketing schedule, CONTRACTOR is
prohibited from engaging in the marketing activity set out on the schedule at
the time indicated. HHSC may require changes in the marketing schedule before it
will approve the schedule. CONTRACTOR need not seek and obtain prior approval of
a change to the initial marketing schedule that deletes or adds a marketing
activity of the type which HHSC has approved in that schedule. CONTRACTOR must
inform HHSC of this deletion or addition within five (5) business days of the
deletion or addition.



                                       Page 5 of 21

<PAGE>   89




    (b) Subsequent annual marketing schedules.

    After submission of the initial marketing schedule, CONTRACTOR must submit
to HHSC for approval an annual marketing schedule at least twenty (20) business
days prior to each Anniversary Date. For each particular marketing event listed
on the schedule, CONTRACTOR must indicate the exact address of the site at which
it will market. HHSC will respond to the submitted marketing schedule within
fifteen (15) business days from the date of receipt. CONTRACTOR must receive
HHSC's approval of the schedule prior to the first listed marketing event, which
approval HHSC may not unreasonably withhold. If HHSC does not approve the
schedule within the allotted fifteen (15) business days, the schedule is deemed
approved. If HHSC expressly disapproves the marketing schedule, CONTRACTOR is
prohibited from engaging in the marketing activity set out on the schedule at
the time indicated. HHSC may require changes in the marketing schedule before it
will approve the schedule. CONTRACTOR need not seek and obtain prior approval of
a change to the annual marketing schedule that deletes or adds a marketing
activity of the type which HHSC has approved in that schedule. CONTRACTOR must
inform HHSC of this deletion or addition within five (5) business days of the
deletion or addition.


    SECTION 14.05 GENERAL PROVISIONS.

    CONTRACTOR must comply with all state insurance law and TDI regulations
regarding prohibitions on marketing.

    CONTRACTOR may conduct a plan-sponsored event without being required to
invite other health plans participating in CHIP.

    At no time during the application, enrollment, and re-enrollment processes
may CONTRACTOR use licensed insurance agents.


    SECTION 14.07 DIRECT MAIL MARKETING.

    (a) General guidelines and restrictions

    CHIP direct mail marketing is not permitted to a person who CONTRACTOR knows
is a Medicaid recipient or a CHIP Member already enrolled in another health
plan. Under no circumstances may CONTRACTOR use the State's CHIP Member database
or a provider's patient/customer database to identify and market its plan to
persons who may be eligible for CHIP. No Medicaid client or CHIP Member names,
addresses, telephone numbers, or Medicaid identification numbers shall be
obtained by CONTRACTOR under any circumstances. CONTRACTOR cannot violate
confidentiality by sharing or selling CHIP or Medicaid enrollee lists of
enrollee/beneficiary data with other persons or organizations for any purpose
other than performance of the CONTRACTOR's obligations under this Agreement.
General population lists such as census tracts, are permissible for direct mail
marketing after review and prior approval by the State.

    The marketing guidelines set out in section 14.02 apply to the content of
direct mail marketing material.

    CONTRACTOR is solely responsible for the cost of direct mail marketing.

    (b) State approval


     Any letters to be sent potential CHIP Members must be submitted to and
approved by State prior to their use. CONTRACTOR may not, under any
circumstances, use direct mail marketing materials that have not been approved
by the State.


                                       Page 6 of 21








<PAGE>   90
        (c) Supplement to Marketing Schedule

        CONTRACTOR must submit to the State for approval a supplement to its
initial marketing schedule. In the supplement, CONTRACTOR must indicate when
direct mail marketing material will be sent and which marketing material will be
sent along with copies of that material. Direct mail marketing must be included
as part of the subsequent annual marketing schedules.

        SECTION 15.01(b) SUBCONTRACT TERMS.

        CONTRACTOR must ensure that, as part of its contract with the provider,
or in its intermediary's contract with the actual provider of health services,
in addition to any requirements imposed by state insurance law or TDI
regulation, the following requirements are included:

                (1) A statement to the effect that the provider is subject to
                    all state and federal laws, rules and regulations that apply
                    to all persons or entities receiving state and federal
                    funds, including provisions of the Clean Air Act and the
                    Federal Water Pollution Control Act, as amended, found at 42
                    C.F.R. 7401, et seq. and 33 U.S.C. 1251, et seq.,
                    respectively; the exclusion, debarment, and suspension
                    provisions of Section 1128(a) or (b) of the Social Security
                    Act (42 USC Section 1320 a-7), or Executive Order 12549; the
                    provisions of the Byrd Anti-Lobbying Amendment, found at 31
                    U.S.C. 1352, relating to use of federal funds for lobbying
                    for or obtaining federal contracts; Health and Safety Code,
                    Chapter 85, Subchapter E, relating to the Duties of State
                    Agencies and State Contractors for the confidentiality of
                    AIDS and HIV-related medical information and an
                    anti-discrimination policy for employees and Members with
                    communicable diseases; confidentiality provisions relating
                    to Member information (cite); Title VI of the Civil Rights
                    Act of 1964, Section 504 of the Rehabilitation Act of 1973,
                    the Americans with Disabilities Act of 1990, and all
                    requirements imposed by the regulations implementing these
                    acts and all amendments to the laws and regulations; the
                    provisions of Executive Order 11246, as amended by 11375,
                    relating to Equal Employment Opportunity; section 9-7.06 of
                    article IX of the General Appropriations Act of 1999
                    regarding "Buy Texas"; Texas Family Code Section 231.006
                    regarding child support payments; and chapter 552 of the
                    Texas Government Code regarding the release of public
                    information;


        SECTION 17.03 ENCOUNTER DATA SPECIFICATIONS REPORT.

        CONTRACTOR will submit on a quarterly basis encounter data in the format
set out in Appendix G attached to this Amendment No. 1, which Appendix G
supercedes and replaces Appendices G and H that are referenced in and attached
to the original Agreement.

        SECTION 17.04 FOCUSED STUDIES REPORTS

        CONTRACTOR must conduct one (1) state-specified focused study and one
(1) study chosen by CONTRACTOR. The state-specified study will be developed
through collaboration among HHSC, TDH, the Administrative Services Contractor,
and the health plans and is conducted and submitted on an annual basis. This
study must be conducted and data collected using criteria and methods developed
by HHSC and TDH in collaboration with the health plans. The report format is
set out in the RFP.


        SECTION 17.05 ANNUAL QUALITY IMPROVEMENT PLAN (QIP) SUMMARY REPORT


                                  Page 7 of 21
<PAGE>   91


        An annual Quality Improvement Plan (QIP) summary report must be
conducted yearly based on the state fiscal year. The annual QIP summary report
must be submitted by March 31 of each year. The information to be included is
set out in the RFP.

        SECTION 17.06 HUB REPORTS

        CONTRACTOR must submit quarterly reports documenting CONTRACTOR's
Historically Underutilized Business (HUB) program efforts and accomplishments.
The format for this report is contained in Appendix I.

        SECTION 17.07 FRAUDULENT PRACTICES REPORT

        CONTRACTOR must report all fraud and abuse enforcement actions or
investigations taken against CONTRACTOR and/or any of its subcontractors or
providers by any state or federal agency for fraud or abuse under Title XVIII or
Title XIX of the Social Security Act or any State law or regulation and any
known or suspected act of fraud or abuse. The report must include information
concerning the detection and the disposition of any potential fraudulent or
abusive practices.

        SECTION 17.08 FRAUD AND ABUSE COMPLIANCE PLAN.

        (d) Model Compliance Plan

        CONTRACTOR must submit a written compliance plan to HHSC for approval no
later than August 15, 2000. CONTRACTOR must comply with the requirements of the
Model Compliance Plan for HMOs when this model plan is issued by the U.S.
Department of Health and Human Services, the Office of Inspector General, if the
federal government mandates the Plan for CHIP. In the meantime, HHSC will
provide guidance in the form of a template for use by plans in developing
compliance plans that will be subject to HHSC approval. That template is
attached to this Agreement as Appendix J.

        (e) Requirements for the CONTRACTOR's compliance plan

        Additionally, the plan must ensure that all officers, directors,
managers and employees know and understand the provisions of the CONTRACTOR's
fraud and abuse compliance plan. The written plan must contain procedures
designed to prevent and detect potential or suspected abuse and fraud in the
administration and delivery of Services under this Agreement. The plan must
contain provisions for the confidential reporting of plan violations to the
designated person, ensure that the identity of an individual reporting
violations of the plan is protected and that no individual who reports plan
violations or suspected fraud and abuse is subject to retaliation. The plan
provisions must provide for the investigation and follow-up of any compliance
plan reports and contain specific and detailed internal procedures for officers,
directors, managers and employees for detecting, reporting, and investigating
fraud and abuse compliance plan violations. The compliance plan also must
require that confirmed violations be reported to HHSC. The plan must require
any confirmed violations or confirmed or suspected fraud and abuse under state
or federal law is reported to HHSC or its designated agents or other units of
state government specified in the Agreement.

        (f) Fraud and abuse training.

        CONTRACTOR must designate executive and essential personnel to attend
mandatory training in fraud and abuse detection, prevention and reporting. The
training will be conducted by the Office of Investigation and Enforcement,
Health and Human Services Commission, and will be provided free of charge.
CONTRACTOR must schedule and complete training no later than 90 days after the
Implementation Date.


                                  Page 8 of 21

<PAGE>   92

        The CONTRACTOR must designate an officer or director in its organization
with responsibility and authority for carrying out the provisions of the
compliance plan. A CONTRACTOR'S failure to report potential or suspected fraud
or abuse may result in sanctions, cancellation of contract, or exclusion from
participation in CHIP. The CONTRACTOR must allow the HHSC, its agents, or other
governmental units to conduct private interviews of the CONTRACTOR's personnel,
Subcontractors and their personnel, witnesses, and patients with regard to a
confirmed violation. The CONTRACTOR's personnel and it Subcontractors and their
personnel must cooperate fully by being available in person for interviews,
consultation, grand jury proceedings, pre-trial conferences, hearings, trials
and in any other process, including investigations, at the CONTRACTOR's and
Subcontractors' own expense.


        SECTION 17.09 PROVIDER NETWORK REPORTS

        (g) PCPs and Specialists Report

        CONTRACTOR must submit to HHSC by the date of the readiness review an
electronic listing of all PCPs participating in their network. The format for
this report is contained in Appendix K.

        CONTRACTOR must also submit to HHSC by the date of the readiness
review an electronic listing of all specialists participating in their network.
The format for this report is contained in Appendix L to the Agreement.

        (h) Provider Network Change Report

        CONTRACTOR must submit a monthly report summarizing changes in
CONTRACTOR's provider network. The report must be submitted to HHSC in the
format set out in the RFP 30 days following the end of the reporting month.


        SECTION 17.10 THIRD PARTY RECOVERY (TPR) REPORTS

        If CONTRACTOR chooses to engage in Third Party Recovery (TPR)
activities, it must file quarterly TPR Reports in accordance with the format
developed by the State. TPR reports must include total dollars recovered from
third party payers for services to Members for each month and the total dollars
recovered.


        SECTION 17.11 INCURRED CLAIMS SUMMARY LAG REPORT

        CONTRACTOR must submit an Incurred Claims Summary Lag Report as a
contract year-to-date report. The report must be submitted quarterly by the last
day of the month following the reporting period. The report must be submitted to
HHSC in a format specified by HHSC, or in a format approved by HHSC. The report
must at a minimum disclose the amount of incurred claims each month and the
amount paid each month by inpatient, non-inpatient, and prescription drug
categories of service. The report must also include total claims incurred and
paid by month.


        SECTION 17.12 SUMMARY REPORT OF PROVIDER AND MEMBER COMPLAINTS

        CONTRACTOR must submit Member and provider complaints reports.
CONTRACTOR must also report complaints submitted to its subcapitated groups
(e.g., IPAs).  The complaint reports must be submitted in two paper copies and
one electronic copy on or before the 45 days following the end of the state
fiscal quarter using the TDI format.


                                  Page 9 of 21



<PAGE>   93


        SECTION 17.13 MONTHLY MEMBER HOTLINE STATUS REPORT

        CONTRACTOR must submit, on a monthly basis, a Member hotline status
report that contains the elements set out in the RFP.

        SECTION 17.14 PROVIDER HOTLINE PERFORMANCE REPORT

        CONTRACTOR must submit, on a monthly basis, a provider telephone status
report that contains the elements set out in the RFP.


        SECTION 17.15 AD HOC REPORTS.

        CONTRACTOR will provide ad hoc reports as requested by HHSC at no
additional charge if the information requested is currently available or easily
modified from existing data. If the requested information is not currently
available or easily modified from existing data, the change order process set
out in Article 8 will apply or the Parties may mutually agree on an alternative.

                       ARTICLE 20. REMEDIES AND DISPUTES.

        SECTION 20.01 UNDERSTANDING AND EXPECTATIONS.

        (a) CONTRACTOR agrees and understands that HHSC may pursue contractual
remedies for both programmatic and financial noncompliance. HHSC, in its
discretion, may impose or pursue one or more remedies for each item of
noncompliance and will determine sanctions on a case-by-case basis. HHSC's
pursuit or non-pursuit of a tailored administrative remedy shall not constitute
a waiver of any other remedy that HHSC may have at law or equity.

        (b) As described in the RFP, CHIP represents a comprehensive and
aggressive effort to provide adequate health care to uninsured children by
providing affordable insurance to their families. Section 2.04 of this Agreement
also describes HHSC's objective to establish a flexible and responsive
relationship with CONTRACTOR. Accordingly, the remedies described in this
article are directed to CONTRACTOR's timely and responsive performance of the
Services and production of Deliverables.


        SECTION 20.02 ADMINISTRATIVE REMEDIES.

        (a) CONTRACTOR responsibility for improvement.

        HHSC expects CONTRACTOR's performance to continuously meet or exceed
performance criteria over the term of this Agreement. Accordingly, CONTRACTOR
will be responsible for ensuring that performance for a particular activity or
result described in its Proposal or the RFP that falls below the expectations
identified in CONTRACTOR's Proposal, the RFP, or this Agreement must improve
within thirty (30) days of written notice from HHSC regarding the deficiency.

        (b) Notification and interim response.

        (1) HHSC will notify CONTRACTOR in writing of specific areas of
CONTRACTOR performance that fail to meet performance standards as set out in
this Agreement, but which, in the determination of HHSC, do not result in a
material delay in the implementation or operation of the CHIP health plan
coverage through HMOs. CONTRACTOR will, within five (5) business days of receipt
of written notice of a non-material deficiency, provide HHSC with a written
response that:


                                 Page 10 of 21


<PAGE>   94




                (A) Explains the reasons for the deficiency, CONTRACTOR's plan
                to address or cure the deficiency, and the date and time by
                which the deficiency will be cured; or

                (B) If CONTRACTOR disagrees with HHSC's findings, its reasons
                for disagreeing with HHSC's findings.

        (2) CONTRACTOR's proposed cure of a non-material deficiency is subject
to the approval of HHSC. CONTRACTOR's repeated commission of non-material
deficiencies or repeated failure to resolve any such deficiencies may be
regarded by HHSC as a material deficiency and entitle HHSC to pursue any other
remedy provided in this Agreement or any other appropriate remedy HHSC may have
at law or equity.

        (c) Corrective Action Plan.

        (1) In the event HHSC assesses a liquidated damage as provided in this
article, HHSC may require CONTRACTOR to submit to HHSC a detailed written plan
(the "Corrective Action Plan") to correct or resolve the deficiency or event
causing the assessment of the liquidated damage. The Corrective Action Plan must
provide a detailed explanation of the reasons for the cited deficiency,
CONTRACTOR's assessment or diagnosis of the cause, and a specific proposal to
cure or resolve the deficiency. The Corrective Action Plan must be submitted
within ten (10) business days following the request for the plan by HHSC and is
subject to approval by HHSC, which approval will not unreasonably be withheld.

        (2) Notwithstanding the submission and acceptance of a Corrective Action
Plan, CONTRACTOR remains responsible for achieving all written performance
criteria. The acceptance of a Corrective Action Plan under this section will not
excuse prior substandard performance, relieve CONTRACTOR of its duty to comply
with performance standards, or prohibit HHSC from assessing additional
liquidated damages or pursuing other appropriate remedies for continued
substandard performance.

        (d) Additional remedies.

        HHSC at its own discretion may impose one or more the following remedies
for each item of noncompliance and will determine the scope and severity of the
remedy on a case-by-case basis. Both Parties agree that a state or federal
statute, rule, regulation or federal guideline will prevail over the provisions
of this section unless the statute, rule, regulation, or guidelines can be read
together with this section to give effect to both.

                (1) Assess liquidated damages in accordance with section 20.05
                and deduct such damages against payments to CONTRACTOR as
                set-off in accordance with section 20.06;

                (2) Conduct accelerated monitoring of CONTRACTOR. Accelerated
                monitoring means more frequent or more extensive monitoring will
                be performed by HHSC than would routinely be accomplished;


                (3) Require additional, more detailed, financial and/or
                programmatic reports to be submitted by CONTRACTOR in accordance
                with Article 17 of this Agreement; or


                (4) Suspend new enrollment.

                        (a) HHSC must give the CONTRACTOR 30 days notice of
                        intent to suspend new enrollment other than for imminent
                        danger to the health or safety of Members. The
                        suspension date will be calculated as 30 days following
                        the date that the CONTRACTOR receives the notice of
                        intent to suspend new enrollment.



                                 Page 11 of 21


<PAGE>   95




                        (b) HHSC may immediately suspend new enrollment into the
                        CONTRACTOR for a default declared as a result of
                        imminent danger to the health and safety of Members.

                        (c) The suspension of new enrollment may be for any
                        duration, up to the termination date of the Agreement.
                        HHSC will base the duration of the suspension upon the
                        type and severity of the default and upon the
                        CONTRACTOR's ability, if any, to cure the default.

                (5) Decline to renew this Agreement.

        HHSC will formally notify CONTRACTOR of the proposed imposition of an
administrative remedy in writing in accordance with paragraph (b) of this
section, with the exception of accelerated monitoring, which may be unannounced.
HHSC may not impose an administrative remedy if CONTRACTOR cures the deficiency
within the timeframe and approved specifications set out in subsection (b)(1) of
this section. CONTRACTOR is required to file a written response to in accordance
with paragraph (b) of this section.

        (e) Informal review of administrative remedies.

        CONTRACTOR may request an informal review of the imposition of the
foregoing remedies in accordance with section 20.19 within ten (10) business
days of receipt of written notification of the imposition of a remedy by HHSC.


        SECTION 20.03 NOTICE OF DEFAULT AND OPPORTUNITY TO CURE.

        (a) Notice and opportunity to cure.

        Unless the health and safety of Members is in jeopardy, HHSC will
provide CONTRACTOR with written notice of default (Notice of Default) under
this Agreement. The Notice of Default may be given by any means that provides
verification of receipt. The Notice of Default must contain the following
information:

        1. A clear and concise statement of the circumstances or conditions that
constitute a default under this Agreement;

        2. The Agreement provision(s) under which HHSC is declaring a default;

        3. A clear and concise statement of how CONTRACTOR may cure the default;

        4. A statement that CONTRACTOR has thirty (30) days from the date
           CONTRACTOR receives the Notice of Default to cure the default;

        5. The remedy or remedies HHSC is electing to pursue if CONTRACTOR does
           not cure the default within thirty (30) days and when the remedy or
           remedies will take effect;

        6. If HHSC is electing to impose liquidated damages if CONTRACTOR does
           not cure the default within thirty (30) days, the amount that HHSC
           intends to withhold or impose;

        7. If HHSC elects to pursue liquidated damages if CONTRACTOR does not
           cure the default within thirty (30) days, whether any part of those
           damages may be passed through to an individual or entity who is or
           may be responsible for the act or omission for which HHSC declares a
           default;


                                 Page 12 of 21



<PAGE>   96




    8. Whether failure of CONTRACTOR to cure the default within any specified
       time period will result in HHSC pursuing an additional remedy or
       remedies, including, but not limited to, additional damages and/or
       termination of the Agreement.


    SECTION 20.04 PARTICULAR EVENTS OF DEFAULT.

    For convenience, specified events of default under this Agreement, which
are listed throughout this Agreement, are listed here. Those events, include,
but are not limited to:

       (1) Failure to demonstrate a good faith effort to include STPs, tribal
       clinics, and rural providers in the CONTRACTOR's provider network, or
       failure to report efforts and compliance as required in section 15.04;

       (2) CONTRACTOR's placing the health and safety of the Members in
       jeopardy;

       (3) Exclusion of the CONTRACTOR or any of the managing employees or
       persons with an ownership interest whose disclosure is required by
       Section 1124(a) of the Social Security Act from the Medicaid or
       Medicare program under the provisions of Section 1128(a) and/or (b) of
       the Social Security Act is a default under this contract;

       (4) Exclusion of any Subcontractor or any of the managing employees or
       persons with an ownership interest of the Subcontractor whose
       disclosure is required by Section 1124(a) of the Social Security Act
       from the Medicaid or Medicare program under the provisions of Section
       1128(a) and/or (b)of the Social Security if the exclusion will
       materially affect the CONTRACTOR's performance under this Agreement;
       and

       (5) A CONTRACTOR'S failure to report potential or suspected fraud or
       abuse.


    SECTION 20.05 LIQUIDATED DAMAGES.

    The liquidated damages prescribed in this section are not intended to be
in the nature of a penalty, but are intended to be reasonable estimates of
HHSC's projected financial loss and damage resulting from CONTRACTOR'S
non-performance, including financial loss as a result of project delays.

    The Parties intend to negotiate liquidated damages specifically tailored
for particular events of non-performance, which schedule will be attached to
this Agreement through amendment. In the event that the Parties fail to reach
agreement on the liquidated damages to be assessed, the events on which they
are to be assessed, or the amount of the damages, the liquidated damages set
out in this section will apply.

    Accordingly, in the event CONTRACTOR fails to perform in accordance with
this Agreement, HHSC may assess liquidated damages as provided in this section
after providing notice of default and opportunity to cure unless the Members'
health and safety are in jeopardy and CONTRACTOR fails to cure timely.

    (a) Failure to provide contracted services or support.

    If CONTRACTOR fails to perform any of the Services described in this
Agreement, HHSC may assess a liquidated damage of $1,000.00 each business
day such Service is not provided.

       (1) Maximum damages.



                                Page 13 of 21
<PAGE>   97




    Liquidated damages assessed pursuant to this paragraph shall not, in any
single month, exceed 25% of the fee due CONTRACTOR for that month. However, if
CONTRACTOR fails to perform any Service or combination of Services, and such
failure represents a budgeted sum greater than 25% of the fee due
CONTRACTOR for that month, HHSC may terminate the Agreement in accordance with
this article.

       (2) CONTRACTOR responsibility for associated costs.

    If HHSC terminates this Agreement pursuant to paragraph (a)(i) of this
section, CONTRACTOR will be responsible to HHSC for all costs incurred by
HHSC, the State of Texas or any of its administrative agencies to replace
CONTRACTOR. These costs include, but are not limited to, the costs of
procuring a substitute vendor following termination of this Agreement and the
cost of any claim or litigation that is reasonably attributable to CONTRACTOR's
failure to perform any Service in accordance with the Agreement.


    SECTION 20.06 METHOD OF COLLECTION.

    HHSC may elect to assess a liquidated damage directly to CONTRACTOR, or it
may deduct amounts assessed as liquidated damages as set-off against payments
then due to CONTRACTOR for the Services or Deliverables or which become due at
any time thereafter.

    SECTION 20.07 ADDITIONAL REMEDIES.

    (i) Generally.

    In addition to liquidated damages and termination of this Agreement, HHSC
may elect to impose any or all of the following remedies:

    (1) Conduct accelerated monitoring of CONTRACTOR. Accelerated monitoring
means more frequent or more extensive monitoring will be performed by HHSC than
would routinely be accomplished;

    (2) Require additional, more detailed, financial and/or programmatic
reports to be submitted by CONTRACTOR in accordance with Article 17 of this
Agreement;

    (3) Decline to renew this Agreement; or


    (4) Suspend new enrollment.

       (a) HHSC must give the CONTRACTOR 30 days notice of intent to suspend
       new enrollment other than for imminent danger to the health or safety
       of Members. The suspension date will be calculated as 30 days following
       the date that the CONTRACTOR receives the notice of intent to suspend
       new enrollment.

       (b) HHSC may immediately suspend new enrollment into the CONTRACTOR for
       a default declared as a result of imminent danger to the health and
       safety of Members;

       (c) The suspension of new enrollment may be for any duration, up to the
       termination date of the Agreement. HHSC will base the duration of the
       suspension upon the type and severity of the default and upon the
       CONTRACTOR's ability, if any, to cure the default.



                                Page 14 of 21

<PAGE>   98

    (j) Informal review.


    CONTRACTOR may request an informal review of the imposition of the
foregoing remedies in accordance with section 20.19 within ten (10) business
days of receipt of written notification of the imposition of a remedy by HHSC.

    SECTION 20.08 MODIFICATION OF AGREEMENT IN THE EVENT OF REMEDIES.

    As provided in section 8.01(b) of this Agreement, HHSC may propose a
modification of this Agreement in response to the imposition of a remedy under
this article. Any modifications under this section must be reasonable, limited
to the matters causing the exercise of a remedy, and in writing. CONTRACTOR
must negotiate such proposed modifications in good faith.


    SECTION 20.09 TERMINATION OF AGREEMENT.

    In addition to other provisions of this article allowing termination, this
Agreement will terminate upon the Expiration Date unless extended in
accordance with Article 4 of this Agreement, or terminated sooner under the
terms of this Agreement. Prior to completion of the Initial Term and any
extensions or renewal thereof, all or a part of this Agreement may be
terminated for any of the following reasons:


    SECTION 20.10 TERMINATION BY MUTUAL AGREEMENT OF THE PARTIES.

    This Agreement may be terminated by mutual agreement of the Parties. Such
agreement must be in writing.

    SECTION 20.11 TERMINATION FOR CAUSE.

    HHSC reserves the right to terminate this Agreement, in whole or in
part, upon the following conditions:

    (a) Assignment for the benefit of creditors, appointment of receiver, or
inability to pay debts.

    HHSC may terminate this Agreement if CONTRACTOR:

          (1) Makes an assignment for the benefit of its creditors;

          (2) Admits in writing its inability to pay its debts generally as
          they become due; or

          (3) Consents to the appointment of a receiver, trustee, or
          liquidator of CONTRACTOR or of all or any part of its property.

    (b) Judgment and execution.

    (1) HHSC may terminate this Agreement if judgment for the payment of
money in excess of $50,000.00 (fifty thousand dollars and zero cents)
which is not covered by insurance is rendered by any court or governmental
body against CONTRACTOR, and CONTRACTOR does not

          (i) Discharge the judgment or provide for its discharge in
          accordance with the terms of the judgment;

          (ii) Procure a stay of execution thereof within 30 days from the
          date of entry thereof; or


                                Page 15 of 21






<PAGE>   99
           (iii) Perfect an appeal of such judgment and cause the execution
           of such judgment to be stayed during the appeal, providing such
           financial reserves as may be required under generally accepted
           accounting principles.

       (2) If a writ or warrant of attachment or any similar process is issued
by any court against all or any material portion of the property of CONTRACTOR,
and such writ or warrant of attachment or any similar process is not released or
bonded within 30 days after its entry, HHSC may terminate this Agreement in
accordance with this section.

       (c) Failure to adhere to laws, rules, ordinances, or orders.

       HHSC may terminate this Agreement if a court of competent jurisdiction
finds CONTRACTOR failed to adhere to any laws, ordinances, rules, regulations or
orders of any public authority having jurisdiction and such violation prevents
or substantially impairs performance of CONTRACTOR's duties under this
Agreement.

       (d) Breach of confidentiality.

       HHSC may terminate this Agreement if CONTRACTOR breaches confidentiality
laws with respect to the Services provided under this Agreement.

       (e) Failure to maintain adequate personnel or resources.

       HHSC may terminate this Agreement if, after providing notice and an
opportunity to correct in accordance with section 20.03 of this Agreement, HHSC
determines that CONTRACTOR has either failed to provide the personnel and
resources described in its Proposal or has failed to supply personnel or
resources and such failure results in CONTRACTOR's inability to fulfill its
duties under this Agreement and substantially compromises HHSC's ability to
comply with legislative mandates regarding the implementation or administration
of CHIP.

       (f) Termination for insolvency.

       (1) HHSC may, by giving written notice of termination to CONTRACTOR,
terminate this Agreement as of a date specified in such notice of termination if
CONTRACTOR:

           (A) files for bankruptcy;

           (B) becomes or is declared insolvent, or is the subject of any
           proceedings related to its liquidation, insolvency or the
           appointment of a receiver or similar officer for it;

           (C) makes an assignment for the benefit of all or substantially all
           of its creditors; or

           (D) enters into a contract for the composition, extension, or
           readjustment of substantially all of its obligations.

       (2) CONTRACTOR agrees to pay for all reasonable expenses of HHSC
including the cost of counsel, incident to:

           (A) The enforcement of payment of all obligations of CONTRACTOR by
           any action or participation in, or in connection with a case or
           proceeding under chapters 7, 11, or 13 of the United States
           Bankruptcy Code, or any successor statute;


                                 Page 16 of 21
<PAGE>   100


           (B) A case or proceeding involving a receiver or other similar
           officer duly appointed to handle CONTRACTOR's business; or

           (C) A case or proceeding in a State court initiated by HHSC when
           previous collection attempts have been unsuccessful.

       (g) Termination for gifts and gratuities.

       (1) HHSC may terminate this Agreement on one (1) days' notice to
CONTRACTOR following the determination by a competent judicial or quasi-judicial
authority and CONTRACTOR's exhaustion of all legal remedies that CONTRACTOR, its
employees, agents or representatives have either offered or given any thing of
value an officer or employee of HHSC or the State of Texas in violation of state
law.

       (2) CONTRACTOR must include a similar provision in each of its
subcontracts and shall enforce this provision against a subcontractor who has
offered or given any thing of value to any of the persons or entities described
in this section, whether or not the offer or gift was in CONTRACTOR's behalf.

    SECTION 20.12 TERMINATION FOR NON-APPROPRIATION OF FUNDS.

    (a) Notwithstanding any other provision of this Agreement, if funds for the
continued fulfillment of this agreement by HHSC are at any time not forthcoming
or are insufficient, through failure of any entity to appropriate funds or
otherwise, then HHSC will have the right to terminate this Agreement at no
additional cost and with no penalty whatsoever by giving prior written notice
documenting the lack of funding.

    (b) In such instance, unless otherwise agreed to by the Parties, this
Agreement will terminate and become null and void on the last day of the fiscal
period for which appropriations were received. HHSC will use all reasonable
efforts to ensure appropriated funds are available.

    SECTION 20.13 TERMINATION IN THE EVENT OF HHSC's FAILURE TO PAY.

    CONTRACTOR may terminate this Agreement if HHSC fails to pay the CONTRACTOR
undisputed charges when due as required under this Agreement. Retaining premium,
recoupment, sanctions, or penalties that are allowed under this Agreement or
that result from the CONTRACTOR's failure to perform or the CONTRACTOR's default
under the terms of this Agreement is not cause for termination. Termination for
failure to pay does not release HHSC from the obligation to pay undisputed
charges for services provided prior to the termination date.

    CONTRACTOR must give HHSC 90 days written notice of intent to terminate
this Agreement. The termination date will be calculated as the last day of the
month following 90 days from the date the notice of intent to terminate is
received by HHSC.

    HHSC must be given 30 days from the date HHSC receives the CONTRACTOR's
written notice of intent to terminate for failure to pay to pay the CONTRACTOR
all undisputed amounts due. If HHSC pays all undisputed amounts then due within
this 30-day period, the CONTRACTOR cannot terminate the Agreement under this
article for that reason.

    SECTION 20.14 TERMINATION FOR HHSC's MATERIAL BREACH OF THIS AGREEMENT.



                                  Page 17 of 21
<PAGE>   101


    (a) Generally.

    HHSC's failure to perform a material duty or responsibility as set out in
this Agreement is a default under this Agreement.

    (b) Notice of default and opportunity to cure.

    CONTRACTOR will provide HHSC with written notice of default (Notice of
Default) under this Agreement. The Notice of Default may be given by any means
that provides verification of receipt. The Notice of Default must contain the
following information:

    1. A clear and concise statement of the circumstances or conditions that
CONTRACTOR contends constitute a default under this Agreement;

    2. The Agreement provision(s) under which CONTRACTOR is declaring a default;
and

    3. A statement that HHSC has thirty (30) days from the date HHSC receives
the Notice of Default to cure the alleged breach.

    SECTION 20.15 NOTICE OF TERMINATION.

    Each Party will provide written notice of termination of this Agreement at
least 90 days prior to the intended date of termination unless the health or
safety of the Members is at issue, in which case HHSC may terminate immediately.

    SECTION 20.16 EXTENSION OF TERMINATION EFFECTIVE DATE.

    HHSC may extend the effective date of termination one or more times as it
elects, in its sole discretion, provided that the total of all such extensions
shall not exceed 90 calendar days following the original effective date of
termination, excluding termination under section 20.14.

    SECTION 20.17 INJUNCTIVE RELIEF.

    Each Party acknowledges and agrees that, in the event of a breach or
threatened breach of any of the provisions of this Agreement, such Party may
have no adequate remedy in damages. Accordingly, each Party will be entitled to
seek an injunction to prevent such breach or threatened breach. However, the
specification of a particular legal or equitable remedy will not be construed as
a waiver, prohibition, or limitation of any other legal or equitable remedies in
the event of a breach of this Agreement.

    SECTION 20.18 PAYMENT AND OTHER PROVISIONS AT AGREEMENT TERMINATION.

    (a) If HHSC terminates this Agreement, HHSC will pay CONTRACTOR on the
effective date of termination (or as soon as possible thereafter taking into
account appropriation and fund accounting requirements) any undisputed amounts
due for all completed, approved, and accepted Services or Deliverables.

    (b) HHSC further agrees to negotiate in good faith with CONTRACTOR to
equitably adjust and settle any accrued or outstanding liabilities for any
unaccepted Service or deliverable and Change Order that

       (1) Is due or delivered prior to or upon contract termination;


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<PAGE>   102
             (2) Is complete or substantially complete, or for which
             CONTRACTOR can document to the satisfaction of HHSC substantial
             progress; and

             (3) Benefits HHSC or the State of Texas, notwithstanding its
             unaccepted status.

      (c) CONTRACTOR must provide HHSC all reasonable access to records,
facilities, and documentation as is required to efficiently and expeditiously
close out the Services under this Agreement.

      (d) HHSC and the CONTRACTOR must prepare a transition plan, which is
acceptable to and approved by HHSC, to ensure that Members are reassigned to
other plans without interruption of services. That transition plan will be
implemented during the 90-day period between receipt of notice and the
termination date unless termination is the result of HHSC's reasonable belief
that the CONTRACTOR is placing the health or welfare of Members in jeopardy.

      CONTRACTOR must continue to perform Services under the transition plan
until the last day of the month following 90 days from the date of receipt of
notice if the termination is for any reason other than HHSC's reasonable
belief that the CONTRACTOR is placing the health and safety of the Members in
jeopardy. If termination is due to this reason, HHSC may prohibit the
CONTRACTOR's further performance of Services under this Agreement.

      (1) If HHSC terminates this Agreement for any reason other than
non-appropriation of funds under section 20.12:

             (a) HHSC is responsible for notifying all Members of the date of
             termination and how Members can continue to receive Covered
             Services;

             (b) CONTRACTOR is responsible for all expenses related to giving
             notice to Members; and

             (c) CONTRACTOR is responsible for all expenses incurred by HHSC
             in implementing the transition plan.

      (2) If the Agreement is terminated by the CONTRACTOR for any reason:

             (a) HHSC is responsible for notifying all Members of the date of
             termination and how Members can continue to receive Covered
             Services;

             (b) HHSC is responsible for all expenses related to giving notice
             to Members; and

             (c) HHSC is responsible for all expenses it incurs in
             implementing the transition plan.

      (3) If the Agreement is terminated by mutual agreement of the Parties
under section 20.10:

             (a) HHSC is responsible for notifying all Members of the date of
             termination and how Members can continue to receive Covered
             Services;

             (b) CONTRACTOR is responsible for all expenses related to giving
             notice to Members; and

             (c) HHSC is responsible for all expenses it incurs in
             implementing the transition plan.

      SECTION 20.19 DISPUTE RESOLUTION.

                                Page 19 of 21

<PAGE>   103


      (a) General agreement of the Parties.

      The Parties mutually agree that the interests of fairness, efficiency,
and good business practices are best served when the Parties employ all
reasonable and informal means to resolve any dispute under this Agreement. The
Parties express their mutual commitment to using all reasonable and informal
means of resolving disputes including, but not limited to, the informal review
of liquidated damage assessments under section 20.05 of this Agreement, prior
to invoking a remedy provided elsewhere in this section.

      (b) Duty to negotiate in good faith.

      Any dispute that in the judgment of any Party to this Agreement may
materially or substantially affect the performance of any Party will be
reduced to writing and delivered to the other Party. The Parties must then
negotiate in good faith and use every reasonable effort to resolve such
dispute and the Parties shall not resort to any formal proceedings unless they
have reasonably determined that a negotiated resolution is not possible. The
resolution of any dispute disposed of by agreement between the Parties shall
be reduced to writing and delivered to all Parties within ten (10) business
days.

      (c) Claims for breach of Agreement.

      (1) General requirement. As required by Chapter 2260, Government Code,
CONTRACTOR's claim for breach of this Agreement must resolved in accordance
with the dispute resolution process established by HHSC in accordance with
Chapter 2260, Government Code.

      (2) Negotiation of claims. A CONTRACTOR's claim for breach of this
Agreement that the Parties cannot resolve in the ordinary course of business
or through the use of all reasonable and informal means must be submitted to
the negotiation process provided in Chapter 2260, subchapter B, Government
Code.

          (A) To initiate the process, CONTRACTOR must submit written notice in
          accordance with Section 4.04 of this Agreement that specifically
          states that CONTRACTOR invokes the provisions of Chapter 2260,
          subchapter B, Government Code.

          (B) Compliance by CONTRACTOR with Chapter 2260, subchapter B,
          Government Code, is a condition precedent to the filing of a contested
          case proceeding under Chapter 2260, subchapter C, of the Government
          Code.

      (3) Contested case proceedings. The contested case process provided in
Chapter 2260, subchapter C, Government Code, is CONTRACTOR's sole and
exclusive process for seeking a remedy for any and all alleged breaches of
contract by HHSC if the Parties are unable to resolve their disputes under
subsection (c)(2) of this section.

          (A) Compliance with the contested case process provided in Chapter
          2260, Subchapter C, Government Code, is a condition precedent to
          seeking consent to sue from the Texas Legislature under Chapter 107,
          Civil Practices & Remedies Code. Neither the execution of this
          Agreement by HHSC nor any other conduct of any representative of
          HHSC relating to this Agreement shall be considered a waiver of the
          State's sovereign immunity to suit.

      (4) HHSC rules. The submission, processing and resolution of CONTRACTOR's
claim is governed by the rules to be adopted by HHSC pursuant to Chapter 2260,
Government Code.

          (A) CONTRACTOR expressly acknowledges that, as of the Effective Date
          of this Agreement, HHSC has not adopted rules to implement the
          requirements of Chapter 2260, Government Code.

                                Page 20 of 21

<PAGE>   104


          CONTRACTOR expressly waives any claim regarding the absence of
          any such rules at the Effective Date.

      (5) CONTRACTOR's duty to perform. Neither the occurrence of an event
constituting an alleged breach of contract nor the pending status of any claim
for breach of contract is grounds for the suspension of performance, in whole
or in part, by CONTRACTOR of any duty or obligation with respect to the
Services under this Agreement.


      SECTION 20.20 LIABILITY OF CONTRACTOR.

      CONTRACTOR will not be liable to HHSC for any loss, damages or
      liabilities attributable to or arising from:


          (1) The failure of HHSC or any state agency or HHSC CONTRACTOR to
          perform a service or activity in connection with this Agreement; or

          (2) CONTRACTOR's prudent and diligent performance of the Services in
          compliance with instructions given by HHSC in accordance with section
          2.07 (relating to implied authority), section 4.04 (relating to
          notices), and section 4.06 (relating to delegation of authority) of
          this Agreement.


           ARTICLE 3. REPRESENTATIONS AND AGREEMENTS OF THE PARTIES

      The parties hereto agree that the terms of the contract identified in
article 1 of this amendment shall remain in effect and continue to govern
except to the extent modified herein.

      By signing this amendment, the parties hereto expressly understand and
agree that this amendment is hereby made a part of the contract identified in
article 1 of this amendment as though it were set out word for word herein.

      The parties have executed this amendment in their capacities as stated
below with authority to bind their organizations on the dates set forth by
their signatures.



           HMO                               TEXAS HEALTH AND HUMAN
                                              SERVICES COMMISSION

/S/ JAMES D. DONOVAN, JR.                     /S/ DON A. GILBERT
-------------------------                     ---------------------
JAMES D. DONOVAN, JR.                         DON A. GILBERT
PRESIDENT AND CEO                             COMMISSIONER
AMERICAID TEXAS, INC.

                                Page 21 of 21