Document:

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                                                                    EXHIBIT 10.6

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                                                        DSHS Contract Number:
                       CLIENT SERVICE CONTRACT          0312-16028
                                                        Resulting From Solicitation Number:

[LOGO OF DEPARTMENT OF SOCIAL AND HEALTH SERVICES]

This Contract is between the State of Washington        Program Contract Number:
Department of Social and Health Services (DSHS)
and the Contractor identified below.                    Contractor Contract Number:

CONTRACTOR NAME                                 CONTRACTOR doing business as (DBA)

Molina Healthcare of Washington, Inc.

CONTRACTOR ADDRESS                              WASHINGTON UNIFORM BUSINESS    DSHS INDEX NUMBER
                                                IDENTIFIER (UBI)

21540 30th Dr. SE, Suite 400                    600-546-648                    24261
PO Box 1469
Bothell, WA 98041

CONTRACTOR CONTACT        CONTRACTOR TELEPHONE        CONTRACTOR FAX         CONTRACTOR E-MAIL ADDRESS

Peggy Wanta               (425) 424-1146 Ext:         (425) 424-1182         peggyw@molinahealthcare.com

DSHS ADMINISTRATION       DSHS DIVISION                    DSHS CONTRACT CODE

Medical Assistance        Program Support                  7000XC
Administration

DSHS CONTACT NAME AND TITLE          DSHS CONTACT ADDRESS

Michael Paulson                      P O Box 45530
MAA Program Manager
                                     Olympia, WA 98504-5630

DSHS CONTACT TELEPHONE            DSHS CONTACT FAX                 DSHS CONTACT E-MAIL ADDRESS

(360) 725-1641 Ext                (360) 753-7315                   paulsmj@dshs.wa.gov

IS THE CONTRACTOR A SUBRECIPIENT FOR PURPOSES OF THIS CONTRACT?  CFDA NUMBER(S)

No

CONTRACT START DATE               CONTRACT END DATE                CONTRACT MAXIMUM AMOUNT

01/01/2003                        12/31/2003                       $0.00

EXHIBITS, When the box below is marked with an X, the following Exhibits are
attached and are incorporated into this Contract by reference:
[X] Exhibits (specify): A through E

[ILLEGIBLE]

CONTRACTOR SIGNATURE              PRINTED NAME AND TITLE                DATE SIGNED
/s/                               Ann Koontz, President & CEO           12-10-02

DSHS SIGNATURE                    PRINTED NAME AND TITLE                DATE SIGNED
/s/                               Charles H. Pugh, Supervisor           16-Dec-02
                                  Contracts Coordination Unit
                                  Medical Assistance Administration
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DSHS Central Contract Services
Client Service Contract #6012XF (12-13-00)

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                    DEPARTMENT OF SOCIAL AND HEALTH SERVICES

                        MEDICAL ASSISTANCE ADMINISTRATION

                                  2003 CONTRACT

                                       FOR

                                 HEALTHY OPTIONS

                                       AND

                             STATE CHILDREN'S HEALTH
                                 INSURANCE PLAN

              APPROVED AS TO FORM BY THE ATTORNEY GENERAL'S OFFICE

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                                TABLE OF CONTENTS

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1.   DEFINITIONS................................................................................................ 1

   1.1    ANCILLARY SERVICES.................................................................................... 1
   1.2    CHILDREN WITH SPECIAL HEALTH CARE NEEDS............................................................... 1
   1.3    COMPARABLE COVERAGE................................................................................... 1
   1.4    COVERED SERVICES...................................................................................... 1
   1.5    DUAL COVERAGE......................................................................................... 1
   1.6    EPSDT................................................................................................. 1
   1.7    ELIGIBLE CLIENTS...................................................................................... 1
   1.8    EMERGENCY MEDICAL CONDITION........................................................................... 1
   1.9    ENROLLEE.............................................................................................. 2
   1.10     MANAGED CARE........................................................................................ 2
   1.11     MEDICALLY NECESSARY SERVICES........................................................................ 2
   1.12     PARTICIPATING PROVIDER.............................................................................. 2
   1.13     PEER-REVIEWED MEDICAL LITERATURE.................................................................... 2
   1.14     PHYSICIAN GROUP..................................................................................... 2
   1.15     PHYSICIAN INCENTIVE PLAN............................................................................ 2
   1.16     PRIMARY CARE PROVIDER (PCP)......................................................................... 3
   1.17     RISK................................................................................................ 3
   1.18     SERVICE AREA........................................................................................ 3
   1.19     SCHIP............................................................................................... 3
   1.20     SUBCONTRACT......................................................................................... 3

2.   ENROLLMENT................................................................................................. 3

   2.1    SERVICE AREA.......................................................................................... 3
   2.2    ELIGIBLE CLIENT GROUPS................................................................................ 4
   2.3    CLIENT NOTIFICATION................................................................................... 4
   2.4    EXEMPTION FROM ENROLLMENT............................................................................. 5
   2.5    ENROLLMENT PERIOD..................................................................................... 5
   2.6    ENROLLMENT PROCESS.................................................................................... 5
   2.7    EFFECTIVE DATE OF ENROLLMENT.......................................................................... 5
   2.8    ENROLLMENT LISTING AND REQUIREMENTS FOR CONTRACTOR'S RESPONSE......................................... 6
   2.9    TERMINATION OF ENROLLMENT............................................................................. 6

3.   PAYMENT................................................................................................... 10

   3.1    RATES/PREMIUMS....................................................................................... 10
   3.2    DELIVERY CASE RATE PAYMENT........................................................................... 11
   3.3    RENEGOTIATION OF RATES............................................................................... 11
   3.4    REINSURANCE/RISK PROTECTION.......................................................................... 11
   3.5    RECOUPMENTS.......................................................................................... 11
   3.6    ENROLLEE HOSPITALIZED AT ENROLLMENT.................................................................. 12
   3.7    ENROLLEE HOSPITALIZED AT DISENROLLMENT............................................................... 12
   3.8    THIRD-PARTY LIABILITY (TPL).......................................................................... 13
   3.9    SUBROGATION RIGHTS OF THIRD-PARTY LIABILITY.......................................................... 13

4.   ACCESS AND CAPACITY....................................................................................... 14

   4.1    NETWORK CAPACITY..................................................................................... 14
   4.2    ACCESSIBILITY OF SERVICES............................................................................ 14
   4.3    24/7 AVAILABILITY.................................................................................... 14
   4.4    APPOINTMENT STANDARDS................................................................................ 15
   4.5    PROVIDER NETWORK-DISTANCE STANDARDS.................................................................. 15
   4.6    ACCESS TO SPECIALTY CARE............................................................................. 16
   4.7    EQUAL ACCESS FOR ENROLLEES WITH COMMUNICATION BARRIERS............................................... 16
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   4.8    AMERICANS WITH DISABILITIES ACT...................................................................... 18
   4.9    CAPACITY LIMITS AND ORDER OF ACCEPTANCE.............................................................. 18
   4.10     ASSIGNMENT OF ENROLLEES............................................................................ 18
   4.11     PROVIDER NETWORK CHANGES........................................................................... 19
   4.12     WOMEN'S HEALTH CARE SERVICES....................................................................... 20
   4.13     MATERNITY NEWBORN LENGTH OF STAY................................................................... 20

5.   QUALITY OF CARE........................................................................................... 20

   5.1    QUALITY IMPROVEMENT PROGRAM.......................................................................... 20
   5.2    ACCREDITATION........................................................................................ 20
   5.3    NOTICE REQUIREMENTS FOR DENIED, DISCONTINUED, OR MODIFIED SERVICE.................................... 20
   5.4    ENROLLEE COMPLAINTS AND APPEALS, INCLUDING INDEPENDENT REVIEW........................................ 21
   5.5    FAIR HEARING......................................................................................... 21
   5.6    EPSDT/IMMUNIZATIONS.................................................................................. 23
   5.7    PROVIDER EDUCATION................................................................................... 23
   5.8    CLAIMS PAYMENT STANDARDS............................................................................. 23
   5.9    QUALITY IMPROVEMENT STUDIES.......................................................................... 24
   5.10     HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT................................................ 24
   5.11     PRACTICE GUIDELINES................................................................................ 25
   5.12     ADVANCE DIRECTIVES................................................................................. 25

6.   REPORTING REQUIREMENTS.................................................................................... 25

   6.1    CERTIFICATION REQUIREMENTS........................................................................... 25
   6.2    HEDIS(R) MEASURES.................................................................................... 26
   6.3    ENCOUNTER DATA....................................................................................... 27
   6.4    INTEGRATED PROVIDER NETWORK DATABASE (IPND).......................................................... 27
   6.5    MONTHLY ADJUSTMENT REPORT FOR FQHC/RHC ENROLLEES..................................................... 28
   6.6    ENROLLEE MORTALITY................................................................................... 28
   6.7    CAHPS................................................................................................ 28
   6.8    DENIALS, COMPLAINT AND APPEALS....................................................................... 29
   6.9    DRUG FORMULARY REVIEW AND APPROVAL................................................................... 30
   6.10     FRAUD AND ABUSE.................................................................................... 30
   6.11     FIVE PERCENT EQUITY................................................................................ 31

7.   GENERAL TERMS AND CONDITIONS.............................................................................. 31

   7.1    COMPLETE AGREEMENT................................................................................... 31
   7.2    MODIFICATION......................................................................................... 31
   7.3    WAIVER............................................................................................... 31
   7.4    LIMITATION OF AUTHORITY.............................................................................. 31
   7.5    NOTICES.............................................................................................. 31
   7.6    FORCE MAJEURE........................................................................................ 32
   7.7    SANCTIONS............................................................................................ 32
   7.8    ASSIGNMENT OF THIS AGREEMENT......................................................................... 33
   7.9    HEADINGS NOT CONTROLLING............................................................................. 33
   7.10     ORDER OF PRECEDENCE................................................................................ 33
   7.11     PROPRIETARY RIGHTS................................................................................. 34
   7.12     COVENANT AGAINST CONTINGENT FEES................................................................... 34
   7.13     ENROLLEES' RIGHT TO OBTAIN A CONVERSION AGREEMENT.................................................. 34
   7.14     RECORDS MAINTENANCE AND RETENTION.................................................................. 34
   7.15     ACCESS TO FACILITIES AND RECORDS................................................................... 35
   7.16     SOLVENCY........................................................................................... 35
   7.17     COMPLIANCE WITH ALL APPLICABLE LAWS AND REGULATIONS................................................ 36
   7.18     NONDISCRIMINATION.................................................................................. 37
   7.19     REVIEW OF CLIENT INFORMATION....................................................................... 37
   7.20     CONTRACTOR NOT EMPLOYEES OF DSHS................................................................... 37
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   7.21     DSHS NOT GUARANTOR................................................................................. 37
   7.22     MUTUAL INDEMNIFICATION AND HOLD HARMLESS........................................................... 37
   7.23     DISPUTES........................................................................................... 37
   7.24     GOVERNING LAW AND VENUE............................................................................ 38
   7.25     SEVERABILITY....................................................................................... 38
   7.26     EXCLUDED PERSONS................................................................................... 38
   7.27     FRAUD AND ABUSE REQUIREMENTS....................................................................... 39

8.   SUBCONTRACTS.............................................................................................. 40

   8.1    CONTRACTOR REMAINS LEGALLY RESPONSIBLE............................................................... 40
   8.2    SOLVENCY REQUIREMENTS FOR SUBCONTRACTORS............................................................. 40
   8.3    REQUIRED PROVISIONS.................................................................................. 40
   8.4    HEALTH CARE PROVIDER SUBCONTRACTS.................................................................... 41
   8.5    HEALTH CARE PROVIDER SUBCONTRACTS DELEGATING ADMINISTRATIVE FUNCTIONS................................ 42
   8.6    EXCLUDED PROVIDERS................................................................................... 42
   8.7    HOME HEALTH PROVIDERS................................................................................ 43
   8.8    PHYSICIAN INCENTIVE PLANS............................................................................ 43
   8.9    PAYMENT TO FQHCs/RHCs................................................................................ 46

9.   TERM AND TERMINATION...................................................................................... 46

   9.1    TERM................................................................................................. 46
   9.2    TERMINATION FOR CONVENIENCE.......................................................................... 46
   9.3    TERMINATION BY THE CONTRACTOR FOR DEFAULT............................................................ 47
   9.4    TERMINATION BY DSHS FOR DEFAULT...................................................................... 47
   9.5    MANDATORY TERMINATION................................................................................ 48
   9.6    TERMINATION FOR REDUCTION IN FUNDING................................................................. 48
   9.7    INFORMATION ON OUTSTANDING CLAIMS AT TERMINATION..................................................... 48
   9.8    CONTINUED RESPONSIBILITIES........................................................................... 49
   9.9    ENROLLEE NOTICE OF TERMINATION....................................................................... 49

10.  SERVICE DELIVERY.......................................................................................... 49

   10.1     SCOPE OF SERVICES.................................................................................. 49
   10.2     MEDICAL NECESSITY DETERMINATION.................................................................... 50
   10.3     ENROLLEE CHOICE OF PCP............................................................................. 51
   10.4     COORDINATION OF CARE............................................................................... 52
   10.5     SECOND OPINIONS.................................................................................... 52
   10.6     ENROLLEE SELF-DETERMINATION........................................................................ 53
   10.7     COMPLIANCE WITH FEDERAL REGULATIONS FOR STERILIZATIONS AND HYSTERECTOMIES.......................... 53
   10.8     PROGRAM INFORMATION................................................................................ 53
   10.9     CONFIDENTIALITY OF ENROLLEE INFORMATION............................................................ 53
   10.10    MARKETING.......................................................................................... 54
   10.11    INFORMATION REQUIREMENTS FOR ENROLLEES AND POTENTIAL ENROLLEES..................................... 54
   10.12    PHYSICIAN INCENTIVE PLAN INFORMATION............................................................... 56
   10.13    FAIR HEARING INFORMATION........................................................................... 56
   10.14    PROHIBITION ON ENROLLEE CHARGES FOR COVERED SERVICES............................................... 56
   10.15    PROHIBITION ON PROVIDER/ENROLLEE DISCUSSION LIMITATIONS............................................ 56
   10.16    PROVIDER LICENSE NONDISCRIMINATION................................................................. 56
   10.17    EXPERIMENTAL AND INVESTIGATIONAL SERVICES.......................................................... 56

11.  SCHEDULE OF BENEFITS...................................................................................... 58

   11.1     COVERED SERVICES................................................................................... 58
   11.2     EXCLUSIONS......................................................................................... 64

NCQA STANDARDS 2003............................................................................................  2

CONDUCT OF THE APPEAL PROGRAM AS FOLLOWS:...................................................................... 10
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<S>                                                                                                             <C>
   MEDICAL RECORDS............................................................................................. 21

EXHIBIT A            QUALITY IMPROVEMENT PROGRAM 2003 STANDARDS
EXHIBIT B            WAC 388-538 MANAGED CARE
EXHIBIT C-1          2003 HEALTHY OPTIONS/SCHIP ENCOUNTER DATA SPECIFICATIONS
EXHIBIT C-2 (a)      2003 IPND REPORTING REQUIREMENTS
EXHIBIT C-2 (b)      IPND ESCALATION PROCEDURE
EXHIBIT D            PREMIUMS, SERVICE AREAS, AND CAPACITY
EXHIBIT E            WAC 388-542 CHILDREN'S HEALTH INSURANCE PLAN
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                                                        2003 HO & SCHIP Contract

1.      DEFINITIONS

        The following definitions shall apply to this agreement:

        1.1.    ANCILLARY SERVICES means health services ordered by a provider
                including but not limited to, laboratory services, radiology
                services, and physical therapy.

        1.2.    CHILDREN WITH SPECIAL HEALTH CARE NEEDS means children
                identified by DSHS to the Contractor as meeting federal
                guidelines for such children. For the term of this agreement,
                DSHS will limit such identification to children served under the
                provisions of Title V of the Social Security Act.

        1.3.    COMPARABLE COVERAGE means an enrollee has other insurance which
                DSHS has determined provides a full scope of health care
                benefits.

        1.4.    COVERED SERVICES means medically necessary services, as set
                forth in Section 11, Schedule of Benefits, covered under the
                terms of this agreement.

        1.5.    DUAL COVERAGE means an enrollee is privately enrolled on any
                basis with the Contractor and simultaneously enrolled with the
                Contractor under Healthy Options/SCHIP.

        1.6.    EPSDT (Early, Periodic Screening, Diagnosis and Treatment) means
                a package of services in a preventive (well child) exam covered
                by Medicaid as defined in the Social Security Act (SSA) Section
                1905(r). Services covered by Medicaid include a complete health
                history and developmental assessment, an unclothed physical
                exam, immunizations, laboratory tests, health education and
                anticipatory guidance, and screenings for: vision, dental,
                substance abuse, mental health and hearing, as well as any
                medically necessary services found to be necessary during the
                EPSDT exam. EPSDT services covered by the Contractor are
                described in Section 11, Schedule of Benefits.

        1.7.    ELIGIBLE CLIENTS means DSHS clients certified eligible by the
                DSHS, living in the service area, and eligible to enroll for
                health care services under the terms of this agreement, as
                described in Section 2.2.

        1.8.    EMERGENCY MEDICAL CONDITION means a medical condition
                manifesting itself by acute symptoms of sufficient severity
                (including severe pain) such that a prudent layperson, who
                possesses an average knowledge of health and medicine, could
                reasonably expect the absence of immediate medical attention to
                result in: (a) placing the health of the individual (or, with
                respect to a pregnant woman, the health of the woman or her
                unborn child) in

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                serious jeopardy; (b) serious impairment to bodily functions; or
                (c) serious dysfunction of any bodily organ or part (42 USC
                1396u-2(b)(2)(c)).

        1.9.    ENROLLEE means an individual eligible for any medical program
                who is enrolled in Healthy Options/SCHIP managed care through a
                health care plan having an agreement with DSHS.

        1.10.   MANAGED CARE means a prepaid, comprehensive system of medical
                and health care delivery, including preventive, primary,
                specialty and ancillary health services.

        1.11.   MEDICALLY NECESSARY SERVICES means services which are reasonably
                calculated to prevent, diagnose, correct, cure, alleviate, or
                prevent the worsening of conditions that endanger life, cause
                suffering or pain, result in illness or infirmity, threaten to
                cause or aggravate a handicap, or cause physical deformity or
                malfunction, and there is no other equally effective, more
                conservative or substantially less costly course of treatment
                available or suitable for the enrollee requesting the service.
                For the purpose of this agreement, course of treatment may
                include mere observation or, where appropriate, no treatment at
                all. Medically necessary services shall include, but not be
                limited to, diagnostic, therapeutic, and preventive services
                that are generally and customarily provided in the service area
                (WAC 388-500-0005.)

        1.12.   PARTICIPATING PROVIDER means a person, practitioner as defined
                in the Quality Improvement Program 2003 Standards, Exhibit A, or
                entity with a written agreement with the Contractor to provide
                services to enrollees under the terms of this agreement.

        1.13.   PEER-REVIEWED MEDICAL LITERATURE means medical literature
                published in professional journals that submit articles for
                review by experts who are not part of the editorial staff. It
                does not include publications or supplements to publications
                primarily intended as marketing material for pharmaceutical,
                medical supplies, medical devices, health service providers, or
                insurance carriers.

        1.14.   PHYSICIAN GROUP means a partnership, association, corporation,
                individual practice association, or other group that distributes
                income from the practice among its members. An individual
                practice association is a physician group only if it is composed
                of individual physicians and has no subcontracts with physician
                groups (42 CFR 434.70).

        1.15.   PHYSICIAN INCENTIVE PLAN means any compensation arrangement
                between the Contractor and a physician or physician group that
                may directly or indirectly have the effect of reducing or
                limiting services to enrollees under the terms of this agreement
                (42 CFR 434.70).

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        1.16.   PRIMARY CARE PROVIDER (PCP) means a participating provider who
                has the responsibility for supervising, coordinating, and
                providing primary health care to enrollees, initiating referrals
                for specialist care, and maintaining the continuity of enrollee
                care. PCPs include, but are not limited to Pediatricians, Family
                Practitioners, General Practitioners, Internists, Physician
                Assistants (under the supervision of a physician), or Advanced
                Registered Nurse Practitioners (ARNP), as designated by the
                Contractor.

        1.17.   RISK means the possibility that a loss may be incurred because
                the cost of providing services may exceed the payments made for
                services (42 CFR 434.2). When applied to subcontractors, loss
                includes the loss of potential payments made as part of a
                physician incentive plan, as defined in Section 1.15.

        1.18.   SERVICE AREA means the geographic area covered by this agreement
                as described in Section 2.1.

        1.19.   SCHIP: State Children's Health Insurance Program.

        1.20.   SUBCONTRACT means a written agreement between the Contractor and
                a subcontractor, or between a subcontractor and another
                subcontractor, to perform all or a portion of the duties and
                obligations the Contractor is obligated to perform pursuant to
                this agreement.

2.      ENROLLMENT

        2.1.    SERVICE AREAS:

             2.1.1.    The Contractor's service areas are described in Exhibit
                       D, Premiums, Service Areas, and Capacity.

             2.1.2.    Clients in the eligibility groups described in Section
                       2.2 are eligible to enroll with the Contractor if they
                       reside in the Contractor's service areas.

             2.1.3.    Service Area Changes:

               2.1.3.1.       With the written approval of DSHS, the Contractor
                              may expand into additional service areas at any
                              time by giving written notice to DSHS, along with
                              evidence, as DSHS may require, to demonstrate the
                              Contractor's ability to support the expansion.
                              DSHS may withhold approval of a requested
                              expansion, if, in DSHS' sole judgment, the
                              requested expansion is not in the best interest of
                              DSHS.

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               2.1.3.2.       The Contractor may decrease service areas by
                              giving DSHS ninety (90) days written notice. The
                              decrease shall not be effective until the first
                              day of the month which falls after the ninety (90)
                              days has elapsed.

               2.1.3.3.       The Contractor shall notify enrollees affected by
                              any service area decrease sixty (60) calendar days
                              prior to the effective date. Notices must have
                              prior approval of DSHS. If the Contractor fails to
                              notify affected enrollees of a service area
                              decrease sixty (60) calendar days prior to the
                              effective date, the decrease shall not be
                              effective until the first day of the month which
                              falls sixty (60) calendar days from the date the
                              Contractor notifies enrollees.

             2.1.4.    If the U.S. Postal Service alters the zip code numbers or
                       zip code boundaries within the Contractor's service
                       areas, DSHS shall alter the service area zip code numbers
                       or the boundaries of the service areas with input from
                       the affected contractors.

             2.1.5.    DSHS shall determine, in its sole judgment, which zip
                       codes fall within each service area. No zip code will be
                       split between service areas.

             2.1.6.    DSHS will determine whether an enrollee resides within a
                       service area.

        2.2.    ELIGIBLE CLIENT GROUPS: DSHS shall determine eligibility for
                enrollment under this agreement. Clients in the following
                eligibility groups at the time of enrollment are eligible for
                enrollment under this agreement, and must enroll in Healthy
                Options/SCHIP unless the enrollee has dual coverage as defined
                in Section 1.5, has comparable coverage as defined in Section
                1.3, or is exempted pursuant to Section 2.4.

             2.2.1.    Clients receiving Medicaid under Social Security Act
                       (SSA) provisions for coverage of families receiving
                       Temporary Assistance for Needy Families and clients who
                       are not eligible for cash assistance who remain eligible
                       for Medicaid.

             2.2.2.    Children, from birth through eighteen years of age,
                       eligible for Medicaid under expanded pediatric coverage
                       provisions of the Social Security Act ("H" Children).

             2.2.3.    Pregnant Women, eligible for Medicaid under expanded
                       maternity coverage provisions of the Social Security Act
                       ("S" women).

             2.2.4.    Children eligible for SCHIP.

        2.3.    CLIENT NOTIFICATION: DSHS shall notify eligible clients of their
                rights and responsibilities as Healthy Options/SCHIP enrollees
                at the time of initial

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                                                        2003 HO & SCHIP Contract

                eligibility determination and eligibility review. The Contractor
                shall provide enrollees with additional information as described
                in this agreement, including the Quality Improvement Program
                2003 Standards, Exhibit A.

        2.4.    EXEMPTION FROM ENROLLMENT: A client may request exemption from
                enrollment. Each request for exemption will be reviewed by DSHS
                pursuant to WAC 388-538, Exhibit B or WAC 388-542, Exhibit E.
                When the client is already enrolled with the Contractor and
                wishes to be exempted, the exemption request will be treated as
                a disenrollment request consistent with the provisions of
                Section 2.9.

        2.5.    ENROLLMENT PERIOD: Subject to the provisions of Section 2.7,
                enrollment is continuously open. Enrollees shall have the right
                to change enrollment prospectively, from one Healthy
                Options/SCHIP plan to another without cause, each month (42 CFR
                434.27).

        2.6.    ENROLLMENT PROCESS: To enroll with the Contractor, the client,
                his/her representative or his/her responsible parent or guardian
                must complete and submit a DSHS enrollment form to DSHS, or call
                the DSHS, Medical Assistance Administration's (MAA) toll-free
                enrollment number. If the client does not exercise his/her right
                to choose a Healthy Options/SCHIP plan, DSHS will assign the
                client, and all eligible family members, to a Healthy
                Options/SCHIP plan in accord with section 4.10 of this
                agreement.

                DSHS will make every effort to enroll all family members with
                the same Healthy Options/SCHIP plan. If a family member is
                covered by the Basic Health Plan, DSHS will make every effort to
                enroll the remainder of the family with the same managed care
                plan if the plan contracts with DSHS to provide Healthy
                Options/SCHIP. If the plan does not contract with DSHS, the
                remaining family members will be enrolled with a single, but
                different Healthy Options/SCHIP plan of the client's choice, or
                the client will be assigned as described above if they do not
                choose.

        2.7.    EFFECTIVE DATE OF ENROLLMENT:

             2.7.1.    Except for newborns, enrollment with the Contractor shall
                       be effective on the later of the following dates:

               2.7.1.1.       If the enrollment is processed on or before the
                              DSHS cut-off date for enrollment, enrollment shall
                              be effective the first day of the month following
                              the month in which the enrollment is processed; or

               2.7.1.2.       If the enrollment is processed after the DSHS
                              cut-off date for enrollment, enrollment shall be
                              effective the first day of the second month
                              following the month in which the enrollment is
                              processed.

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             2.7.2.    Newborns whose mothers are enrollees shall be deemed
                       enrollees and enrolled beginning from the newborn's date
                       of birth or the mother's date of enrollment, whichever is
                       later. If the mother is disenrolled before the newborn
                       receives a separate client identifier from DSHS, the
                       newborn's coverage shall end when the mother's coverage
                       ends, except as provided in Section 3.7.

             2.7.3.    Adopted children shall be covered consistent with the
                       provisions of Title 48 RCW.

             2.7.4.    No retroactive coverage is provided under this agreement,
                       except as described in this section.

        2.8.    ENROLLMENT LISTING AND REQUIREMENTS FOR CONTRACTOR'S RESPONSE:

             2.8.1.    Before the end of each month DSHS will provide the
                       Contractor with a list of enrollees whose enrollment is
                       terminated the end of that month, and a list of the
                       Contractor's enrollees for the following month.

             2.8.2.    The Contractor shall have ten (10) calendar days from the
                       receipt of the enrollment listing to notify DSHS in
                       writing of the refusal of an application for enrollment
                       or any discrepancy regarding DSHS' proposed enrollment
                       effective date. Written notice shall include the reason
                       for refusal and must be agreed to by DSHS. The effective
                       date of enrollment specified by DSHS shall be considered
                       accepted by the Contractor and shall be binding if the
                       notice is not timely or DSHS does not agree with the
                       reasons stated in the notice. Subject to DSHS approval,
                       the Contractor may refuse to accept an enrollee for the
                       following reasons:

               2.8.2.1.       DSHS has enrolled the enrollee with the Contractor
                              in a service area the Contractor is not contracted
                              for.

               2.8.2.2.       The enrollee is not eligible for enrollment under
                              the terms of this agreement.

        2.9.    TERMINATION OF ENROLLMENT:

             2.9.1.    VOLUNTARY TERMINATION: Enrollees may request termination
                       of enrollment by submitting a written request to
                       terminate enrollment to DSHS or by calling the Medical
                       Assistance Customer Service Center (MACSC) toll-free
                       enrollment number. Requests for termination of enrollment
                       may be made to enroll with another Healthy Options plan,
                       or to disenroll from Healthy Options as provided in WAC
                       388-538, Exhibit B or WAC 388-542, Exhibit E. Except as
                       provided in WAC 388-538, Exhibit B or WAC 388-542,
                       Exhibit E, enrollees whose enrollment is terminated will
                       be prospectively disenrolled. DSHS shall notify the
                       Contractor of enrollee

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                                                        2003 HO & SCHIP Contract

                       terminations pursuant to Section 2.8. The Contractor may
                       not request voluntary disenrollment on behalf of an
                       enrollee.

             2.9.2.    INVOLUNTARY TERMINATION INITIATED BY DSHS FOR
                       INELIGIBILITY: The enrollment of any enrollee under this
                       agreement shall be terminated if the enrollee becomes
                       ineligible for enrollment due to a change in eligibility
                       status.

               2.9.2.1.       When an enrollee's enrollment is terminated for
                              ineligibility, the termination shall be effective:

                 2.9.2.1.1.     The first day of the month following the month
                                in which the termination is processed by DSHS if
                                the termination is processed on or before the
                                DSHS cut-off date for enrollment or the
                                Contractor is informed by DSHS of the
                                termination prior to the first day of the month
                                following the month in which the termination is
                                processed by DSHS.

                 2.9.2.1.2.     Effective the first day of the second month
                                following the month in which the termination is
                                processed if the termination is processed after
                                the DSHS cut-off date for enrollment and the
                                Contractor is not informed by DSHS of the
                                termination prior to the first day of the month
                                following the month in which the termination is
                                processed by DSHS.

               2.9.2.2.       Enrollees Eligible for Social Security Income
                              (SSI):

                 2.9.2.2.1.     Enrollees determined by the Social Security
                                Administration (SSA) to be eligible for SSI in
                                calendar year 2003 shall be ineligible for
                                services under the terms of this agreement when
                                DSHS receives the SSI eligibility information
                                from the Social Security Administration through
                                the electronic State Data Exchange (SDX). Such
                                enrollees will be disenrolled prospectively as
                                described in Section 2.9.2.1. DSHS shall not
                                recoup any premiums for enrollees determined SSI
                                eligible effective in 2003 and the Contractor
                                shall be responsible for providing services
                                under the terms of this agreement until the
                                effective date of disenrollment.

                 2.9.2.2.2.     Enrollees determined by the SSA to be eligible
                                for SSI prior to calendar year 2003 shall be
                                ineligible for services under the terms of this
                                agreement when DSHS receives the SSI eligibility
                                information from the Social Security
                                Administration through the electronic State Data
                                Exchange (SDX). Such enrollees will be
                                disenrolled prospectively as described in

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                                                        2003 HO & SCHIP Contract

                                Section 2.9.2.1. DSHS shall recoup premiums paid
                                prior to calendar year 2003 in accord with
                                Section 3.5.5.

                 2.9.2.2.3.     If the Contractor believes an enrollee has been
                                determined by SSA to be eligible for SSI, the
                                Contractor shall present documentation of such
                                eligibility to DSHS, DSHS will attempt to verify
                                the eligibility and, if the enrollee is SSI
                                eligible, DSHS will act upon SSI eligibility in
                                accord with this section.

             2.9.3.    INVOLUNTARY TERMINATION INITIATED BY DSHS FOR COMPARABLE
                       COVERAGE OR DUAL COVERAGE:

               2.9.3.1.       The Contractor shall notify DSHS as set forth
                              below when an enrollee has health care insurance
                              coverage with the Contractor or any other carrier:

                 2.9.3.1.1.     Within fifteen (15) working days when an
                                enrollee is verified as having dual coverage, as
                                defined in Section 1.5.

                 2.9.3.1.2.     Within sixty (60) calendar days of when the
                                Contractor becomes aware that an enrollee has
                                any health care insurance coverage with any
                                other insurance carrier. The Contractor is not
                                responsible for the determination of comparable
                                coverage, as defined in Section 1.3.

               2.9.3.2.       DSHS will involuntarily terminate the enrollment
                              of any enrollee with dual coverage or comparable
                              coverage as follows:

                 2.9.3.2.1.     When the enrollee has dual coverage which has
                                been verified by DSHS, DSHS shall terminate
                                enrollment retroactively to the beginning of the
                                month of dual coverage and recoup premiums as
                                describe in Section 3.5.

                 2.9.3.2.2.     When the enrollee has comparable coverage which
                                has been verified by DSHS, DSHS shall terminate
                                enrollment effective the first day of the second
                                month following the month in which the
                                termination is processed if the termination is
                                processed on or before the DSHS cut-off date for
                                enrollment or, effective the first day of the
                                third month following the month in which the
                                termination is processed if the termination is
                                processed after the DSHS cut-off date for
                                enrollment.

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<PAGE>

                                                        2003 HO & SCHIP Contract

             2.9.4.    INVOLUNTARY TERMINATION INITIATED BY THE CONTRACTOR: To
                       request involuntary termination of an enrollee, the
                       Contractor must send written notice to DSHS as described
                       in Section 7.5. DSHS shall approve or disapprove the
                       request for termination within thirty (30) working days
                       of receipt of such notice. For the termination to be
                       effective, DSHS must approve the termination request,
                       notify the Contractor, and disenroll the enrollee. The
                       Contractor shall continue to provide services to the
                       enrollee until s/he is disenrolled. DSHS will not
                       disenroll an enrollee solely due to a request based on an
                       adverse change in the enrollee's health status or the
                       cost of meeting the enrollee's health care needs (WAC
                       388-538-130, Exhibit B). DSHS shall involuntarily
                       terminate the enrollee when the Contractor has
                       substantiated in writing:

               2.9.4.1.       The enrollee's behavior is inconsistent with the
                              Contractor's rules and regulations, such as
                              intentional misconduct.

               2.9.4.2.       The Contractor has provided a clinically
                              appropriate evaluation to determine whether there
                              is a treatable condition contributing to the
                              enrollee's behavior and such evaluation either
                              finds no treatable condition to be contributing,
                              or, after evaluation and treatment, the enrollee's
                              behavior continues to prevent the provider from
                              safely or prudently providing medical care to the
                              enrollee.

               2.9.4.3.       The enrollee received written notice from the
                              Contractor of its intent to request the enrollee's
                              disenrollment, unless the requirement for
                              notification has been waived by DSHS because the
                              enrollee's conduct presents the threat of imminent
                              harm to others. The Contractor's notice to the
                              enrollee must include the following:

                 2.9.4.3.1.     The enrollee's right to use the Contractor's
                                appeal process to review the request to end the
                                enrollee's enrollment.

                 2.9.4.3.2.     The enrollee's right to use the DSHS fair
                                hearing process.

             2.9.5.    An enrollee whose enrollment is terminated for any
                       reason, other than incarceration, at any time during the
                       month is entitled to receive covered services, as
                       described in Section 10.1, at the Contractor's expense,
                       through the end of that month.

                       In no event will an enrollee be entitled to receive
                       services and benefits under this agreement after the
                       last day of the month in which his or her enrollment is
                       terminated, except as provided in Section 3.7.

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<PAGE>

                                                        2003 HO & SCHIP Contract

3.      PAYMENT

        3.1.    RATES/PREMIUMS: Subject to the provisions of Section 7.7,
                Intermediate Sanctions, DSHS shall pay a monthly premium for
                each enrollee in full consideration of the work to be performed
                by the Contractor under this agreement. DSHS shall pay the
                Contractor, on or before the tenth (10th) working day of the
                month based on the DSHS list of enrollees whose enrollment is
                ongoing or effective on the first day of said calendar month.
                Such payment will be denied for new enrollees when, and for so
                long as, payment for those enrollees is denied by the Centers
                for Medicare and Medicaid Services (CMS) under 42 CFR 434.67(e)
                (42 CFR 434.22).

                The Contractor shall reconcile the payment listing with
                remittance advice information and submit a claim to DSHS for any
                amount due the Contractor within three hundred sixty five (365)
                calendar days of the month of service. When DSHS' records
                confirm the Contractor's claim, DSHS shall remit payment within
                thirty (30) calendar days of the receipt of the claim.

             3.1.1.    The statewide Base Rate is $129.88.

             3.1.2.    The Geographical Adjustment Factors and First Quarter
                       Risk Adjustment Factors are in Exhibit D, Premiums,
                       Service Areas, and Capacity.

             3.1.3.    The Age/Sex Adjustment Factors are as follows:

                                                Males        Females
                                                -----        -------
                     Under age 1                2.778         2.778
                     Ages 1-2                   0.899         0.899
                     Ages 3-14                  0.468         0.468
                     Ages 15-18                 0.531         1.872
                     Ages 19-34                 0.847         2.314
                     Ages 35-64                 1.639         2.057
                     Age 65 and over            4.247         4.247

             3.1.4.    The monthly premium payment will be calculated as
                       follows:

                       Premium Payment = Base Rate X Age/Sex Factor X Risk
                       Adjustment Factor X Geographical Adjustment Factor

             3.1.5.    The Risk Adjustment Factor will be recalculated for
                       premiums paid for May 2003 based on enrollment with the
                       Contractor on March 1, 2003 using encounter data reported
                       for the 12 months ending June 30, 2002. The recalculated
                       Risk Adjustment Factor shall be used by DSHS to calculate
                       premiums for May through December of 2003. DSHS shall

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<PAGE>

                                                        2003 HO & SCHIP Contract

                       update Exhibit D, Premiums, Service Areas, and Capacity
                       to add the third quarter Risk Adjustment Factor.

             3.1.6.    DSHS shall automatically generate newborn premiums
                       whenever possible. For newborns whose premiums DSHS is
                       not able to automatically generate the Contractor shall
                       submit a supplemental premium payment request to DSHS
                       within 365 days of the month of service. The Contractor
                       shall be responsible for reviewing monthly listings
                       provided by DSHS of the newborn premiums DSHS cannot
                       generate automatically, as well as remittance advice
                       statements, to determine whether a supplemental premium
                       request needs to be submitted. DSHS shall pay
                       supplemental premiums through the end of the month in
                       which the sixtieth (60th) day of life occurs.

             3.1.7.    DSHS shall make a full monthly payment to the Contractor
                       for the month in which an enrollee's enrollment is
                       terminated except as otherwise provided herein.

             3.1.8.    The Contractor shall be responsible for covered medical
                       services provided to the enrollee in any month for which
                       DSHS paid the Contractor for the enrollee's care under
                       the terms of this agreement.

        3.2.    DELIVERY CASE RATE PAYMENT: A one-time payment of $4,300.00
                shall be made to the Contractor for labor and delivery expenses
                for enrollees enrolled with the Contractor during the month of
                delivery. Delivery includes both live and still births, but does
                not include miscarriage, induced abortion, or other fetal demise
                not requiring labor and delivery to terminate the pregnancy. The
                Contractor shall submit a supplemental premium request for
                payment to DSHS after the enrollee delivers.

        3.3.    RENEGOTIATION OF RATES: The base rate set forth in Section 3.1
                shall be subject to renegotiation during the agreement period
                only if DSHS, in its sole judgment, determines that it is
                necessary due to a change in federal or state law or other
                material changes, beyond the Contractor's control, which would
                justify such a renegotiation.

        3.4.    REINSURANCE/RISK PROTECTION: The Contractor may obtain
                reinsurance for coverage of enrollees only to the extent that it
                obtains such reinsurance for other groups enrolled by the
                Contractor, provided that the Contractor remains ultimately
                liable to DSHS for the services rendered.

        3.5.    RECOUPMENTS: Unless mutually agreed to by the parties, DSHS
                shall only recoup premium payments for enrollees who are:

             3.5.1.    Dually-covered with the Contractor.

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<PAGE>

                                                        2003 HO & SCHIP Contract

             3.5.2.    Deceased prior to the month of enrollment. Premium
                       payments shall be recouped effective the first day of the
                       month following the enrollee's date of death.

             3.5.3.    Retroactively disenrolled as a result of the enrollee's
                       placement in foster care.

             3.5.4.    Retroactively disenrolled consistent with the provisions
                       of Section 2.9.1.

             3.5.5.    Determined to have been eligible for SSI prior to
                       calendar year 2003 in accord with Section 2.9.2.2.2. DSHS
                       shall recoup calendar year 2002 premiums paid in and
                       subsequent to the month of SSI eligibility. DSHS shall
                       only recoup premiums paid in 2002.

             3.5.6.    Found ineligible for enrollment with the Contractor and
                       DSHS so notifies the Contractor before the first day of
                       the month for which the premium is paid.

             3.5.7.    The Contractor may recoup payments made to providers for
                       services provided to enrollees during the period for
                       which DSHS recoups premiums for those enrollees. If the
                       Contractor recoups said payments, providers may submit
                       appropriate claims for payment to DSHS through its FFS
                       program.

        3.6.    ENROLLEE HOSPITALIZED AT ENROLLMENT: If an enrollee is in an
                acute care hospital at the time of enrollment and was not
                enrolled in Healthy Options/SCHIP on the day s/he was admitted
                to the hospital, DSHS shall be responsible for payment of all
                inpatient facility and professional services provided from the
                date of admission until the date the enrollee is no longer
                confined to an acute care hospital. If the enrollee was enrolled
                in Healthy Options/SCHIP on the day s/he was admitted to the
                hospital, then the plan the enrollee was enrolled with on the
                date of admission shall be responsible for payment until the
                date the enrollee is no longer confined to an acute care
                hospital. For newborns born while their mother is hospitalized,
                the party responsible for the payment for the mother's
                hospitalization shall be responsible for payment of all
                inpatient facility and professional services provided to the
                newborn from the date of admission until the date the newborn is
                no longer confined to an acute care hospital. If DSHS is
                responsible for payment of all inpatient facility and
                professional services provided to a mother and newborn, DSHS
                shall not pay the Contractor a Delivery Case Rate under the
                provisions of Section 3.2.

        3.7.    ENROLLEE HOSPITALIZED AT DISENROLLMENT: If an enrollee is in an
                acute care hospital at the time of disenrollment and the
                enrollee was enrolled with the Contractor on the date of
                admission, the Contractor shall be responsible for payment of
                all covered inpatient facility and professional services from
                the

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<PAGE>

                                                        2003 HO & SCHIP Contract

                date of admission to the date the enrollee is no longer confined
                to an acute care hospital.

        3.8.    THIRD-PARTY LIABILITY (TPL): Until such time as DSHS shall
                terminate the enrollment of an enrollee who has comparable
                coverage as described in Section 2.9.3., the services and
                benefits available under this agreement shall be secondary to
                any other medical coverage. The Contractor shall:

             3.8.1.    Not refuse or reduce services provided under this
                       agreement solely due to the existence of similar benefits
                       provided under any other health care contracts (RCW
                       48.21.200), except in accordance with applicable
                       coordination of benefits rules in WAC 284-51.

             3.8.2.    Attempt to recover any third-party resources available to
                       enrollees (42 CFR 433 Subpart D) and shall make all
                       records pertaining to TPL collections for enrollees
                       available for audit and review.

             3.8.3.    Pay claims for prenatal care and preventive pediatric
                       care and then seek reimbursement from third parties (42
                       CFR 433.139(b)(3)).

             3.8.4.    Pay claims for covered services when probable third party
                       liability has not been established or the third party
                       benefits are not available to pay a claim at the time it
                       is filed (42 CFR 433.139(c)).

             3.8.5.    Communicate the requirements of this section to
                       subcontractors that provide services under the terms of
                       this agreement, and assure compliance with them.

        3.9.    SUBROGATION RIGHTS OF THIRD-PARTY LIABILITY: Injured person
                means an enrollee covered by this agreement who sustains bodily
                injury. Contractor's medical expense means the expense incurred
                by the Contractor for the care or treatment of the injury
                sustained computed in accordance with the Contractor's
                fee-for-service schedule.

                If an enrollee requires medical services from the Contractor as
                a result of an alleged act or omission by a third-party giving
                rise to a claim of legal liability against the third-party, the
                Contractor shall have the right to obtain recovery of its cost
                of providing benefits to the injured person from the
                third-party. DSHS specifically assigns to the Contractor the
                DSHS' rights to such third party payments for medical care
                provided to an enrollee on behalf of DSHS, which the enrollee
                assigned to DSHS as provided in WAC 388-505-0540.

                DSHS also assigns to the Contractor its statutory lien under RCW
                43.20B.060. The Contractor shall be subrogated to the DSHS'
                rights and remedies under RCW 74.09.180 and RCW 43.20B.040
                through RCW

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<PAGE>

                                                        2003 HO & SCHIP Contract

                43.20B.070 with respect to medical benefits provided to
                enrollees on behalf of DSHS under RCW 74.09.

                The Contractor may obtain a signed agreement from the enrollee
                in which the enrollee agrees to fully cooperate in effecting
                collection from persons causing the injury. The agreement may
                provide that if an injured party settles a claim without
                protecting the Contractor's interest, the injured party shall be
                liable to the Contractor for the full cost of medical services
                provided by the Contractor. The Contractor shall notify DSHS of
                the name, address, and other identifying information of any
                enrollee and the enrollee's attorney who settles a claim without
                protecting the Contractor's interest in contravention of RCW
                43.20B.050.

4.      ACCESS AND CAPACITY

        4.1.    NETWORK CAPACITY:

             4.1.1.    The Contractor agrees to maintain the support services
                       and a provider network sufficient to serve the enrollee
                       capacity stated in Exhibit D, Premiums, Service Areas,
                       and Capacity, consistent with the requirements of this
                       agreement. The Contractor agrees to provide the medical
                       services required by this agreement through
                       non-participating providers if its network of
                       participating providers is insufficient to meet the
                       medical needs of enrollees in a manner consistent with
                       this agreement.

             4.1.2.    With the written approval of DSHS, the Contractor may
                       increase capacity at any time by giving written notice to
                       DSHS, along with evidence, as DSHS may require,
                       demonstrating the Contractor's ability to support the
                       capacity increase. DSHS may withhold approval of a
                       requested capacity increase, if, in DSHS' sole judgment,
                       the requested increase is not in the best interest of
                       DSHS. The Contractor may decrease capacity by giving DSHS
                       ninety (90) days written notice. The decrease shall not
                       be effective until the first day of the month which falls
                       after the ninety (90) days has elapsed. Exhibit D,
                       Premiums, Service Areas, and Capacity will be updated by
                       DSHS for increases and decreases in capacity.

        4.2.    ACCESSIBILITY OF SERVICES: The Contractor shall make services
                accessible consistent with the provisions in the Quality
                Improvement Program 2003 Standards, Exhibit A. The Contractor
                shall make covered services as accessible to enrollees under
                this agreement as under its other state, federal, or private
                contracts.

        4.3.    24/7 AVAILABILITY: The Contractor shall have the following
                services available on a 24-hour-a-day, seven-day-a-week basis by
                telephone. These services

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<PAGE>

                                                        2003 HO & SCHIP Contract

                may be provided directly by the Contractor or may be delegated
                to subcontractors.

             4.3.1.    Medical advice for enrollees from licensed health care
                       professionals concerning the emergent, urgent or routine
                       nature of medical condition.

             4.3.2.    Authorization of emergency services and out-of-area
                       urgent care.

        4.4.    APPOINTMENT STANDARDS: The Contractor shall comply with
                appointment standards that are no longer than the following:

             4.4.1.    Non-symptomatic (i.e. preventive care) office visits
                       shall be available from the enrollee's PCP or an
                       alternative practitioner within thirty (30) calendar
                       days. A non-symptomatic office visit may include, but is
                       not limited to, well/preventive care such as physical
                       examinations, annual gynecological examinations, or
                       children and adult immunizations.

             4.4.2.    Non-urgent, symptomatic (i.e., routine care) office visit
                       shall be available from the enrollee's PCP or an
                       alternative practitioner within seven (7) calendar days.
                       A non-urgent, symptomatic office visit is associated with
                       the presentation of medical signs not requiring immediate
                       attention.

             4.4.3.    Urgent, symptomatic office visits shall be available
                       within 24 hours. An urgent, symptomatic visit is
                       associated with the presentation of medical signs that
                       require immediate attention, but are not life
                       threatening.

             4.4.4.    Emergency medical care shall be available 24 hours per
                       day, seven days per week.

        4.5.    PROVIDER NETWORK - DISTANCE STANDARDS: The Contractor network of
                providers shall meet the distance standards below in every
                service area. The designation of a zip code in a service area as
                rural or urban is in Exhibit D, Premiums, Service Areas, and
                Capacity. DSHS may, at its sole discretion, grant exceptions to
                the distance standards. DSHS' approval of an exception must be
                in writing. The Contractor shall request an exception in writing
                and shall provide evidence as DSHS may require to support the
                request. If the closest qualified provider is beyond the
                distance standard applicable to the zip code, the distance
                standard defaults to the distance to that provider. The closest
                qualified provider may be a provider not participating with the
                Contractor.

             4.5.1.    PCP

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<PAGE>

                                                        2003 HO & SCHIP Contract

             Urban: 2 within 10 miles for 90% of Healthy Options enrollees in
             the Contractor's service area

             Rural: 1 within 25 miles for 90% of Healthy Options enrollees in
             the contractor's service area

             4.5.2.    Obstetrics

             Urban: 2 within 10 miles for 90% of Healthy Options enrollees in
             the contractor's service area

             Rural: 1 within 25 miles for 90% of Healthy Options enrollees in
             the contractor's service area

             4.5.3.    Pediatrician

             Urban: 2 within 10 miles for 90% of Healthy Options enrollees in
             the contractor's service area

             Rural: 1 within 25 miles for 90% of Healthy Options enrollees in
             the contractor's service area

             4.5.4.    Hospital

             Urban/Rural: 1 within 25 miles for 90% of Healthy Options
             enrollees in the contractor's service area

             4.5.5.    Pharmacy

             Urban: 1 within 10 miles for 90% of Healthy Options enrollees in
             the contractor's service area

             Rural: 1 within 25 miles for 90% of Healthy Options enrollees in
             the contractor's service area

        4.6.    ACCESS TO SPECIALTY CARE: The Contractor shall provide all
                medically necessary specialty care for enrollees in a service
                area. If an enrollee needs specialty care from a specialist who
                is not available within the Contractor's provider network, the
                Contractor shall provide the necessary services with a qualified
                specialist outside the Contractor's provider network.

        4.7.    EQUAL ACCESS FOR ENROLLEES WITH COMMUNICATION BARRIERS: The
                Contractor shall assure equal access for all enrollees when oral
                or written language creates a barrier to such access for
                Enrollees with Communication Barriers

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<PAGE>

                                                        2003 HO & SCHIP Contract

             4.7.1.    ORAL INFORMATION:

               4.7.1.1.       The Contractor shall assure that interpreter
                              services are provided for enrollees with a primary
                              language other than English for all interactions
                              between the enrollee and the Contractor or any of
                              its providers including, but not limited to, all
                              appointments with any provider for any covered
                              service, emergency services, and all steps
                              necessary to file complaints and appeals.

               4.7.1.2.       The Contractor is responsible for payment for
                              interpreter services for plan administrative
                              matters including, but not limited to handling
                              enrollee complaints and appeals.

               4.7.1.3.       DSHS is responsible for payment for interpreter
                              services provided by interpreter agencies
                              contracted with the state for outpatient medical
                              visits and DSHS fair hearings.

               4.7.1.4.       Hospitals are responsible for payment for
                              interpreter services during inpatient stays.

               4.7.1.5.       Public entities are responsible for payment for
                              interpreter services provided at their facilities
                              or affiliated sites.

               4.7.1.6.       Interpreter services include the provision of
                              interpreters for enrollees who are deaf or hearing
                              impaired.

             4.7.2.    WRITTEN INFORMATION:

               4.7.2.1.       The Contractor shall provide all generally
                              available and client specific written materials in
                              a form which may be understood by each individual
                              enrollee. The Contractor may meet this requirement
                              by doing one of the following:

                 4.7.2.1.1.     Translating the material into the enrollee's
                                primary reading language.

                 4.7.2.1.2.     Providing the material on tape in the enrollee's
                                primary language.

                 4.7.2.1.3.     Having an interpreter read the material to the
                                enrollee in the enrollee's primary language.

                 4.7.2.1.4.     Providing the material in another alternative
                                medium or format acceptable to the enrollee. The
                                Contractor must document the enrollee's
                                acceptance of the alternative.

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<PAGE>

                                                        2003 HO & SCHIP Contract

                 4.7.2.1.5.     Providing the material in English, if the
                                Contractor documents the enrollee's preference
                                for receiving material in English.

               4.7.2.2.       The Contractor shall ensure that all written
                              information provided to enrollees is
                              comprehensible to its intended audience, designed
                              to provide the greatest degree of understanding,
                              and is written at the sixth grade reading level.
                              Generally available, written materials shall be
                              consumer tested.

        4.8.    AMERICANS WITH DISABILITIES ACT: The Contractor shall make
                reasonable accommodation for enrollees with disabilities, in
                accord with the Americans with Disabilities Act, for all covered
                services and shall assure physical and communication barriers
                shall not inhibit enrollees with disabilities from obtaining
                covered services.

        4.9.    CAPACITY LIMITS AND ORDER OF ACCEPTANCE: The Contractor shall
                provide care to enrollees up to the capacity limits in Exhibit
                D, Premiums, Service Areas, and Capacity. The Contractor shall
                accept enrollees up to the total capacity limit in each service
                area, and enrollees will be accepted in the order in which they
                apply. DSHS shall enroll all eligible clients with the
                contractor of their choice if the contractor has not reached the
                capacity limit unless DSHS determines, in its sole judgment,
                that it is in DSHS' best interest to withhold or limit
                enrollment with the Contractor. The Contractor shall accept
                clients who are assigned by DSHS in accordance with this
                agreement, WAC 388-538, Exhibit B, and WAC 388-542, Exhibit E,
                except as specifically provided in Section 2.8.

                No eligible client shall be refused enrollment or re-enrollment,
                have his/her enrollment terminated, or be discriminated against
                in any way because of his/her health status, the existence of a
                pre-existing physical or mental condition, including pregnancy
                and/or hospitalization, or the expectation of the need for
                frequent or high cost care.

        4.10.   ASSIGNMENT OF ENROLLEES:

             4.10.1.   Enrollees who do not select a plan in a service area
                       identified by DSHS as having mandatory enrollment into
                       managed care shall be assigned to a plan in the following
                       manner:

               4.10.1.1       DSHS shall determine the total capacity of all
                              contractors receiving assignments in each service
                              area.

               4.10.1.2.      The Contractor's capacity in each service area, as
                              stated in Exhibit D, Premiums, Service Areas, and
                              Capacity, modified by increases and decreases in
                              capacity made in accord with this agreement,

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                                                        2003 HO & SCHIP Contract

                              shall be divided by the total capacity of all
                              contractors receiving assignment in each service
                              area.

               4.10.1.3.      The result of the calculation in 4.10.1.2. will be
                              multiplied by the total of the households to be
                              assigned.

               4.10.1.4.      DSHS shall assign the number of households
                              determined in 4.10.1.3. to the Contractor.

             4.10.2.   DSHS shall not make any assignments of enrollees to the
                       Contractor in a service area if the Contractor's
                       enrollment, when DSHS calculates assignments, is ninety
                       percent (90%) or more of its capacity in that service
                       area.

             4.10.3.   The Contractor may choose not to receive assignments or
                       limit assignments in any service area by so notifying
                       DSHS in writing at least seventy-five (75) days before
                       the first of the month it is requesting not to receive
                       assignment of enrollees.

             4.10.4.   DSHS reserves the right to make no assignments, or to
                       withhold or limit assignments to the Contractor, when, in
                       its sole judgment, it is in the best interest of DSHS.

             4.10.5.   If either the Contractor or DSHS limits assignments as
                       described herein, the Contractor's capacity, only for the
                       purposes of the calculation in 4.10.1.2., shall be that
                       limit.

             4.10.6.   Assigned enrollees are notified by DSHS of their
                       assignment and may choose a different managed care
                       organization prior to the effective date of their
                       assignment.

        4.11.   PROVIDER NETWORK CHANGES:

             4.11.1.   The Contractor shall give DSHS a minimum of ninety (90)
                       calendar days prior written notice, in accordance with
                       Section 7.5, Notices, of the loss of a material provider.
                       A material provider is one whose loss would impair the
                       Contractor's ability to provide continuity of and access
                       to care for the Contractor's current enrollees and/or the
                       number of enrollees the Contractor has agreed to serve in
                       a service area.

             4.11.2.   The Contractor shall notify enrollees affected by any
                       provider termination sixty (60) calendar days prior to
                       the effective date. Notices must have prior approval of
                       DSHS. If the Contractor fails to notify affected
                       enrollees of a provider termination sixty (60) calendar
                       days prior to the effective date, the Contractor shall
                       allow affected enrollees to continue to receive services
                       from the terminating provider, at the

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                                                        2003 HO & SCHIP Contract

                       enrollees' option, and administer benefits for the lessor
                       of a period ending the last day of the month in which
                       sixty (60) calendar days elapses from the date the
                       Contractor notifies enrollees or the enrollee's effective
                       date of enrollment with another plan.

        4.12.   WOMEN'S HEALTH CARE SERVICES: In the provision of women's health
                care services, the Contractor shall comply with the provisions
                of WAC 284-43-250, as modified.

        4.13.   MATERNITY NEWBORN LENGTH OF STAY: The Contractor shall ensure
                that hospital delivery maternity care is provided in accordance
                with RCW 48.43.115.

5.      QUALITY OF CARE

        5.1.    QUALITY IMPROVEMENT PROGRAM: The Contractor shall maintain a
                quality improvement program that meets the requirements of the
                Quality Improvement Program 2003 Standards, Exhibit A. The
                Contractor shall, during the annual TEAMonitor visit or upon
                request by DSHS, provide evidence of how data and information
                provided by DSHS, including external quality review findings,
                agency audits and contract monitoring activities, enrollee
                complaint and CAHPS(R) results, are used to identify and correct
                problems and to improve care and services to enrollees.

        5.2.    ACCREDITATION: If the Contractor has had an accreditation visit
                by NCQA or other accrediting body, the Contractor shall make the
                complete accreditation survey report from the accreditation
                organization available to DSHS upon request. The Contractor
                shall allow a state representative to accompany any
                accreditation review team during the site visit in an official
                observer status. The state representative shall be allowed to
                share information with DSHS and Health Care Authority staff as
                needed to reduce duplicated work for both the Contractor and the
                state.

        5.3.    REQUIREMENTS FOR DENIED, DISCONTINUED, OR MODIFIED SERVICE:

             5.3.1.    If the Contractor denies, discontinues, or modifies a
                       service, the Contractor shall comply with the notice
                       requirements in the Quality Improvement Program 2003
                       Standards, Exhibit A, and any other pertinent provisions
                       of this agreement, in providing notice to enrollees and
                       providers.

             5.3.2.    If the notice does not meet the timeliness standards in
                       the Quality Improvement Program 2003 Standards, Exhibit
                       A, and any other pertinent provisions of this agreement,
                       the Contractor shall cover the service.

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                                                        2003 HO & SCHIP Contract

             5.3.3.    If the Contractor denies, discontinues or modifies a
                       medically necessary covered service because the
                       enrollee's whereabouts are unknown, the Contractor shall
                       reinstate the service when the enrollee's whereabouts
                       become known.

             5.3.4.    If the enrollee receives the service before receiving the
                       notice, the Contractor shall cover the service.

             5.3.5.    If an enrollee files an appeal, including independent
                       review, or DSHS fair hearing on a service that is being
                       discontinued or modified, the Contractor shall continue
                       to provide the discontinued or modified service until a
                       final decision is made.

             5.3.6.    The Contractor may seek reimbursement of the amount it
                       actually paid to continue to provide discontinued or
                       modified services, while such services are the subject of
                       an appeal, including independent review, or DSHS fair
                       hearing, if the final decision determines that the
                       services are non-covered services and if the affected
                       enrollee is fully informed in writing, in advance of
                       receiving the continued services, that they will be
                       required to pay for continued services determined to be
                       non-covered.

             5.3.7.    Sections 5.3.1., 5.3.2., 5.3.3., 5.3.4., 5.3.5., and
                       5.3.6. only apply to denial, discontinuance, or
                       modification of services of participating providers,
                       services from a provider to whom the Contractor or a
                       participating provider has made a referral, services
                       previously authorized by the Contractor, and emergency
                       medical services as described in the Schedule of Benefits
                       Section 11.1.6.

        5.4.    ENROLLEE COMPLAINTS AND APPEALS, INCLUDING INDEPENDENT REVIEW:
                The Contractor shall maintain a process that meets the
                requirements in the Quality Improvement Program Standards and
                other pertinent provisions of this agreement for responding to
                enrollee complaints and appeals. DSHS shall approve, in writing,
                all policies and procedures regarding complaints and appeals.
                All procedures for responding to appeals shall include the
                participation of individuals with authority to require
                corrective action (42 CFR 434.32 (c)).

                The Contractor shall also comply with the provisions of WAC
                284-43-630 regarding independent review of adverse
                determinations by an independent review organization.

        5.5.    FAIR HEARING:

             5.5.1.    Enrollees may request a DSHS fair hearing, pursuant to
                       WAC 388-02, without first availing themselves of the
                       Contractor's complaint and appeal

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                                                        2003 HO & SCHIP Contract

                       process, if the subject matter is one for which the
                       enrollee has a fair hearing right under RCW 34.05, and
                       WAC 388-02 or WAC 388-538.

             5.5.2.    If the enrollee requests a DSHS fair hearing without
                       first exhausting the remedies available to the enrollee
                       through the Contractor's complaint and appeal process,
                       including independent review, and DSHS issues a fair
                       hearing determination, the fair hearing shall exhaust the
                       enrollee's rights to administrative review of the subject
                       of the fair hearing, except as provided in section 5.5.6.

             5.5.3.    If the enrollee requests a fair hearing, the Contractor
                       shall provide to DSHS, at DSHS' written request,
                       Contractor-held documentation related to the
                       complaint/appeal, if any, including but not limited to,
                       any transcript(s), records, or written decision(s) from
                       participating providers or delegated entities. The
                       Contractor shall have the opportunity to present its
                       position at the fair hearing. The Contractor's medical
                       director or designee shall review all cases where a fair
                       hearing is requested and any related appeals, when
                       medical necessity is an issue.

             5.5.4.    When an enrollee requests a fair hearing with DSHS, DSHS
                       shall review the request, as follows:

               5.5.4.1.       A program manager will investigate and determine
                              the facts of the complaint/appeal. The program
                              manager may hold a pre-hearing conference with the
                              enrollee to clarify the issue(s). Other parties
                              may be contacted as appropriate to resolve the
                              complaint/appeal. Other staff of DSHS may be
                              involved as necessary. The DSHS, MAA Medical
                              Director shall review any issue(s) involving
                              denied medical services.

               5.5.4.2.       Based on the review of facts, the program manager
                              will respond to the complaint/appeal. The response
                              may include, but not be limited to, clarification
                              of program policy to parties who have not acted in
                              accord with the policy.

               5.5.4.3.       If the matter is not resolved at a pre-hearing
                              conference, the program manager will prepare a
                              written report of the results of the review for
                              the administrative law judge. The report and all
                              supporting documentation will be sent to the
                              enrollee, the enrollee's representative, if any,
                              and the Contractor.

             5.5.5.    DSHS shall notify the Contractor of fair hearing
                       determinations. The Contractor shall be bound by the fair
                       hearing determination, whether or not the fair hearing
                       determination upholds the Contractor's decision.
                       Implementation of such fair hearing decision shall not be
                       the basis for disenrollment of the enrollee by the
                       Contractor.

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                                                        2003 HO & SCHIP Contract

                       If the fair hearing decision is not within the purview
                       of this agreement, then DSHS shall be responsible for
                       the implementation of the fair hearing decision.

             5.5.6.    An enrollee who is aggrieved by the final decision in the
                       DSHS' fair hearing proceeding may appeal the decision in
                       accordance with WAC 388-02-0560--388-02-0590. Notice of
                       this right will be included in the written determination
                       from the administrative law judge.

        5.6.    EPSDT/CHILDHOOD IMMUNIZATION:

             5.6.1.    The Contractor shall meet all requirements under the DSHS
                       EPSDT program policy and billing instructions manual.

             5.6.2.    If any of the Contractor's Health Plan Employer Data and
                       Information Set (HEDIS(R)) Infant Well Child Visit, Child
                       Well Child Visit, Adolescent Well Child Visit, or
                       Childhood Immunization reported rates fall below 60%, the
                       Contractor shall include an appropriate quality
                       improvement project designed to improve the rates in the
                       Contractor's Quality Improvement work plan and shall
                       implement appropriate intervention.

             5.6.3.    Active Participation in a DSHS sponsored well child
                       quality improvement program or an appropriate alternative
                       program approved by DSHS, MAA Quality Management fulfills
                       the requirement under Section 5.6.2. Alternative programs
                       must document: a description and scope of the program
                       with identified problem(s), goals and objectives; a
                       workplan with specific QI activities, timeframes and
                       person(s) responsible for each; sound measurement
                       methodology; barrier and root cause analysis; an
                       evaluation of outcomes; and re-measurement and strong
                       interventions designed to improve outcomes.

        5.7.    PROVIDER EDUCATION: The Contractor shall maintain a system for
                keeping participating practitioners and providers informed
                about:

             5.7.1.    Covered services for enrollees served under this
                       agreement

             5.7.2.    Coordination of care requirements; and

             5.7.3.    DSHS policies as related to this agreement.

             5.7.4.    Interpretation of data from the quality improvement
                       program (42 CFR 434.34(d)).

        5.8.    CLAIMS PAYMENT STANDARDS: The Contractor shall meet the
                timeliness of payment standards specified for Medicaid
                fee-for-service in Section

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                                                        2003 HO & SCHIP Contract

                1902(a)(37)(A) of the Social Security Act and specified for
                health carriers in WAC 284-43-321. To be compliant with both
                payment standards the Contractor shall pay or deny, and shall
                require subcontractors to pay or deny, 95% of clean claims
                within thirty (30) calendar days of receipt, 95% of all claims
                within sixty (60) of receipt and 99% of all claims within ninety
                (90) calendar days of receipt. The Contractor and its providers
                may agree to a different payment requirement in writing on an
                individual claim.

        5.9.    QUALITY IMPROVEMENT STUDIES: The Contractor shall conduct three
                quality improvement studies.

             5.9.1.    Two studies shall be based upon the following questions
                       from the 2002 CAHPS(R) survey:

               5.9.1.1.       In the last 6 months, how often were office staff
                              at your child's doctor's office or clinic as
                              helpful as you thought they should be?

               5.9.1.2.       In the last 6 months, when your child needed care
                              right away for an illness or an injury, how often
                              did your child get care as soon as you wanted?

               5.9.1.3.       The requirement for either of the two studies
                              shall be waived by DSHS if the Contractor's
                              unadjusted percentages for the response rate of
                              "Always" are above the 2001 National Committee's
                              Benchmarking Database (NCBD) data. Sixty-one
                              percent is the benchmark for the question in
                              Section 5.9.1,1. and sixty-seven percent is the
                              benchmark for the question in Section 5.9.1.2.
                              DSHS will notify the Contractor in writing if the
                              requirement is waived.

             5.9.2.    The Contractor shall participate in a third statewide
                       quality improvement study designated by DSHS. The study
                       shall be designed to maximize resources and reduce cost
                       to contractors.

        5.10.   HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT (HIPAA): The
                Contractor shall comply with the applicable provisions of the
                Health Insurance Portability and Accountability Act (HIPAA) of
                1996, codified at 42 USC 1320(d) et.seq. and 45 CFR parts 160,
                162, and 164. HIPAA requires the Contractor to conduct
                electronic financial and administrative transactions using a
                mandatory format and content. The Contractor must have the
                capacity to conduct all transactions required by HIPAA,
                including but not limited to the ability to accept the following
                transactions from the Medical Assistance Administration:

             5.10.1.   The ASC X12 834 - Benefit Enrollment and Maintenance
                       Version 4010.

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                                                        2003 HO & SCHIP Contract

             5.10.2.   The ASC X12 820 - Payroll Deducted and Other Group
                       Premium Payment for Insurance Products, Version 4010
                       Premium Payment transaction.

        5.11.   PRACTICE GUIDELINES: The Contractor shall adopt of practice
                guidelines that meet the following requirements (42 CFR 438.6):

             5.11.1.   Are based on valid and reliable clinical evidence or a
                       consensus of health care professionals in the particular
                       field.

             5.11.2.   Consider the needs of enrollees.

             5.11.3.   Are adopted in consultation with contracting health care
                       professionals.

             5.11.4.   Are reviewed and updated periodically as appropriate.

             5.11.5.   Are disseminated to all affected providers and, upon
                       request, to DSHS, enrollees and potential enrollees.

             5.11.6.   Are the basis for and are consistent with decisions for
                       utilization management, enrollee education, coverage of
                       services, and other areas to which the guidelines apply.

        5.12.   ADVANCE DIRECTIVES: The Contractor shall maintain written
                policies and procedures for advance directives with meet the
                requirements of WAC 388-501-0125 and 42 CFR 438.6. The
                Contractor's Advance directive policies and procedure shall be
                disseminated to all affected providers and, upon request, to
                DSHS, enrollees and potential enrollees.

6.      REPORTING REQUIREMENTS:

        6.1.    CERTIFICATION REQUIREMENTS: Any information and/or data required
                by this agreement and submitted to DSHS after March 31, 2003
                must be certified by the Contractor as follows (42 CFR 438.600
                through 42 CFR 438.606):

             6.1.1.    Source of certification: The information and/or data must
                       be certified by one of the following:

               6.1.1.1.       The Contractor's Chief Executive Officer

               6.1.1.2.       The Contractor's Chief Financial Officer

               6.1.1.3.       An individual who has delegated authority to sign
                              for, and who reports directly to, the Contractor's
                              Chief Executive Officer or Chief Financial Officer

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                                                        2003 HO & SCHIP Contract

             6.1.2.    Content of certification: The Contractor's certification
                       shall attest, based on best knowledge, information, and
                       belief, to the accuracy, completeness and truthfulness of
                       the information and/or data.

             6.1.3.    Timing of certification: The Contractor shall submit the
                       certification concurrently with the certified information
                       and/or data.

        6.2.    HEDIS(R) MEASURES: The Contractor shall report to DSHS (for both
                Healthy Options and SCHIP enrollees), the following HEDIS(R)
                measures in accord with the published HEDIS(R) 2003 Technical
                Specifications and official corrections published by NCQA,
                unless directed otherwise in writing by DSHS.

             6.2.1.    No later than June 30, 2003, the following HEDIS(R)
                       measures shall be submitted electronically to DSHS using
                       the NCQA data submission tool (DST):

               6.2.1.1.       Childhood Immunization Status

               6.2.1.2.       Prenatal and Postpartum Care

               6.2.1.3.       Well Child Visits in the First 15 Months of Life

               6.2.1.4.       Well Child Visits in the Third, Fourth, Fifth and
                              Sixth Years of Life

               6.2.1.5.       Adolescent Well Child Visits

               6.2.1.6.       Use of Appropriate Medications for People with
                              Asthma

               6.2.1.7.       Antidepressant Medication Management

               6.2.1.8.       Inpatient Utilization-General Hospital/Acute Care

               6.2.1.9.       Ambulatory Care

               6.2.1.10.      Birth and Average Length of Stay, Newborns

             6.2.2.    All measures shall be audited, at Contractor expense, by
                       an NCQA licensed organization in accord with the HEDIS
                       2003 COMPLIANCE AUDIT (TM) standards, policies and
                       procedures. The signed and certified audit report shall
                       be submitted to DSHS no later than July 31, 2003.

               6.2.2.1.       If the Contractor has current NCQA accreditation,
                              including Medicaid, a full audit, as defined by
                              NCQA, is allowed.

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                                                        2003 HO & SCHIP Contract

               6.2.2.2.       If the Contractor does not have current NCQA
                              accreditation, including Medicaid, a partial
                              audit, as defined by NCQA, must be conducted.

             6.2.3.    If the Contractor has current NCQA accreditation,
                       including Medicaid, the Contractor may rotate HEDIS(R)
                       measures in accord with the most current requirements for
                       the HEDIS(R) rotation strategy published by NCQA. If the
                       Contractor does not have current NCQA accreditation,
                       including Medicaid, the Contractor may not rotate
                       measures, unless directed otherwise in writing by DSHS.

        6.3.    ENCOUNTER DATA:

             6.2.1.    The Contractor shall comply with the Encounter Data
                       Submission Requirements, Exhibit C-1.

             6.2.2.    DSHS may change the Encounter Data Submission
                       Requirements, Exhibit C-1, with one hundred and fifty
                       (150) calendar days written notice to the Contractor. The
                       Contractor shall, upon receipt of such notice from DSHS,
                       provide notice of changes to subcontractors.

             6.2.3.    The Contractor shall correct rejected encounter data and
                       resubmit within the timelines specified in the Encounter
                       Data Submission Requirements, Exhibit C-1.

             6.2.4.    The Contractor shall correct errors indicated in each
                       DSHS encounter data error report in succeeding
                       submissions in accord with the Encounter Data Submission
                       Requirements, Exhibit C-1.

             6.2.5.    The Contractor may request that DSHS waive reporting
                       requirements. Such request shall be in writing and shall
                       be approved at the sole discretion of DSHS. DSHS also
                       reserves the right to waive data reporting requirements
                       under exceptional circumstances. Any waiver shall be in
                       writing.

        6.4.    INTEGRATED PROVIDER NETWORK DATABASE (IPND):

             6.4.1.    The Contractor shall provide monthly provider network
                       reports to the designated data management contact in
                       accord with the Provider Network Reporting Requirements,
                       Exhibit C-2 (a).

             6.4.2.    DSHS will identify records that do not comply with the
                       Provider Network Reporting Requirements in a monthly
                       report to the Contractor. DSHS will identify records as
                       being rejected or containing errors. Rejected records
                       will not appear in the Integrated Provider Network
                       Database (IPND) for that month.

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                                                        2003 HO & SCHIP Contract

             6.4.3.    The Contractor shall review records identified on the
                       reject and error reports, and make corrections for
                       subsequent monthly submissions.

             6.4.4.    Failure to comply with the data submission schedule shall
                       result in the implementation of the IPND Escalation
                       Procedure, Exhibit C-2 (b).

        6.5.    MONTHLY ADJUSTMENT REPORT FOR FQHC/RHC ENROLLEES: The Contractor
                shall provide DSHS with a monthly report for enrollees enrolled
                with federally-qualified health centers (FQHC) and rural health
                clinics (RHC), in the format described in the DSHS Healthy
                Options Licensed Health Carrier Billing Instructions, published
                by DSHS.

        6.6.    ENROLLEE MORTALITY: The Contractor shall maintain a record of
                known enrollee deaths, including the enrollee's name, date of
                birth, age at death, location of death, and cause(s) of death.
                This information shall be available to DSHS upon request. The
                Contractor shall assist DSHS in efforts to evaluate and improve
                the availability and utility of selected mortality information
                for quality improvement purposes.

        6.7.    CAHPS(R): The contractor is required to conduct a CAHPS(R)
                survey of adult Medicaid members enrolled in Healthy Options.
                The Contractor shall:

             6.7.1.    Ensure the survey sample frame consists of all
                       non-Medicare and non-commercial adult plan members (not
                       just subscribers) 18 years and older, as of December 31
                       of the measurement year, with Washington State addresses.

             6.7.2.    Contract with an NCQA certified vendor qualified to
                       administer the CAHPS(R) survey and conduct the survey
                       according to NCQA protocol.

             6.7.3.    Contract with an NCQA-licensed organization to conduct a
                       HEDIS(R) Compliance Audit for CAHPS(R) and submit the
                       complete audit report to DSHS.

             6.7.4.    Use the most recent HEDIS(R) version of the Medicaid
                       adult questionnaire (currently 2.0H) or as instructed by
                       DSHS for 2003 CAHPS(R) surveys, and include the following
                       questions in the survey instrument:

             6.7.5.    Adult supplemental "Behavioral Health" MH1&MH2

               6.7.5.1.       Adult supplemental "Chronic Conditions" CC2, CC6,
                              CC7, CC11, CC12

               6.7.5.2.       Adult supplemental "Pregnancy Care" P1-P4

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                                                        2003 HO & SCHIP Contract

               6.7.5.3.       Adult supplemental "Prescription Medicine" PM1 &
                              PM2

               6.7.5.4.       Family Centered Care - decisions

             6.4.1.    Conduct the mixed methodology (mail and phone surveys) in
                       2003.

             6.7.6.    Submit a copy of the Washington State adult Medicaid
                       response data set according to NCQA/CAHPS(R) standards to
                       DSHS' External Quality Review vendor by June 30, 2003.

             6.7.7.    DSHS' External Quality Review vendor will forward Health
                       plan data to the National CAHPS(R) Benchmarking Database
                       (NCBD) based on the 2003 NCBD guidelines. Contractors
                       will be responsible for filling out specific NCBD data
                       submission forms as determined by DSHS.

        6.8.    DENIALS, COMPLAINTS AND APPEALS:

        The Contractor shall maintain a record of all denials, complaints and
        appeals, including denials, complaints and appeals handled by a
        delegated entity and independent review of adverse decisions by an
        independent review organization. The Contractor shall provide a report
        of complete denials, complaints and appeals to DSHS quarterly within
        sixty (60) calendar days of the end of the quarter. Delegated denials,
        complaints and appeals are to be integrated into the Contractor's
        report. DSHS and Contractor agree to collaborate in the development of a
        report format. The report medium shall be specified by DSHS. Reporting
        of denials shall include all denials of services to enrollees. The
        records shall be sorted using the sort keys identified and shall
        include, at a minimum:

             6.8.1.    Name of Program: HO, HO-CSHCN, CHIP, CHIP-CSHCN, BH+,
                       or BH+-CSHCN (Primary Sort Key)

             6.8.2.    Name of the delegated entity, if any

             6.8.3.    Enrollee Identifier (three separate fields):

               6.8.3.1.       Patient Identification Code (PIC) (preferred) or

               6.8.3.2.       Enrollee Name and Enrollee Birthday: If PIC not
                              reported

             6.8.4.    Name of Practitioner

             6.8.5.    Type of Practitioner (Optional)

             6.8.6.    Type (Secondary Sort Key):

               6.8.6.1.       Denial

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                                                        2003 HO & SCHIP Contract

               6.8.6.2.       Complaint

               6.8.6.3.       Appeal - First Level

               6.8.6.4.       Appeal - Second Level

               6.8.6.5.       IRO

             6.8.7.    Expedited: Yes or No

             6.8.8.    Complaint, Appeal or IRO Issue

             6.8.9.    Category of Service Denied

             6.8.10.   Reason Service Denied

             6.8.11.   Resolution of Complaint, Appeal or IRO

             6.8.12.   Denial Date

             6.8.13.   Receipt Date of Complaint, Appeal or IRO

             6.8.14.   Date of Resolution of Complaint, Appeal, or IRO

             6.8.15.   Date written notification of Denial or Complaint, Appeal
                       or IRO outcome sent to enrollee and practitioner

        6.9.    DRUG FORMULARY REVIEW AND APPROVAL: The Contractor shall submit
                its drug formulary, for use with enrollees covered under the
                terms of this agreement, to DSHS for review and approval by
                January 31, 2003.

        6.10.   FRAUD AND ABUSE: The Contractor shall report in writing all
                verified cases of fraud and abuse, including fraud and abuse by
                the Contractor's employees and subcontractors, within seven (7)
                calendar days to DSHS according to Section 7.5, Notices. The
                report shall include the following information:

             6.10.1.   Subject(s) of complaint by name and either
                       provider/subcontractor type or employee position.

             6.10.2.   Source of complaint by name and provider/subcontractor
                       type or employee position, if applicable.

             6.10.3.   Nature of complaint.

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             6.10.4.   Estimate of the amount of funds involved.

             6.10.5.   Legal and administrative disposition of case.

        6.11.   FIVE PERCENT EQUITY: The Contractor shall provide the DSHS, MAA,
                Division of Program Support, Contract Manager assigned to the
                Contractor a list of persons with a beneficial ownership of more
                than 5% of the Contractor's equity no later than February 28,
                2003.

7.      GENERAL TERMS AND CONDITIONS

        7.1.    COMPLETE AGREEMENT: This agreement incorporates Exhibits to this
                agreement and the DSHS billing instructions applicable to the
                Contractor. All terms and conditions of this agreement are
                stated in this agreement and its incorporations. No other
                agreements, oral or written, are binding.

        7.2.    MODIFICATION: This agreement may only be modified by mutual
                consent of the parties. All modifications shall be set forth in
                contract amendments issued by DSHS.

        7.3.    WAIVER: The failure of either party to enforce any provision of
                this agreement shall not constitute a waiver of that or any
                other provision, and shall not be construed to be a modification
                of the terms and conditions of the agreement unless incorporated
                into the agreement with an amendment.

        7.4.    LIMITATION OF AUTHORITY: No alteration, modification, or waiver
                of any clause or condition of the agreement is binding unless
                made in writing and signed by a DSHS Contracting Officer in the
                Office of Legal Affairs, Central Contract Services.

        7.5.    NOTICES: Whenever one party is required to give notice to the
                other under this agreement, it shall be deemed given if mailed
                by United States Postal Service, registered or certified mail,
                return receipt requested, postage prepaid and addressed as
                follows:

                In the case of notice to the Contractor:

                  _________________________________________________
                  _________________________________________________
                  _________________________________________________
                  _________________________________________________

                In the case of notice to DSHS:

                MaryAnne Lindeblad, Director (or her successor)
                Division of Program Support
                Medical Assistance Administration
                Department of Social and Health Services
                P.O. Box 45530

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                Olympia, WA 98504-5530

                Said notice shall become effective on the date delivered as
                evidenced by the return receipt or the date returned to the
                sender for non-delivery other than for insufficient postage.
                Either party may at any time change its address for notification
                purposes by mailing as aforesaid a notice stating the change and
                setting forth the new address, which shall be effective on the
                tenth day following the effective date of such notice unless a
                later date is specified.

        7.6.    FORCE MAJEURE: If the Contractor is prevented from performing
                any of its obligations hereunder in whole or in part as a result
                of a major epidemic, act of God, war, civil disturbance, court
                order, or any other cause beyond its control, such
                nonperformance shall not be a ground for termination for
                default. Immediately upon the occurrence of any such event, the
                Contractor shall commence to use its best efforts to provide,
                directly or indirectly, alternate and, to the extent
                practicable, comparable performance. Nothing in this clause
                shall be construed to prevent DSHS from terminating this
                agreement for reasons other than for default during the period
                of events set forth above, or for default, if such default
                occurred prior to such event.

        7.7.    SANCTIONS:

             7.7.1.    When the Contractor fails to meet its obligations under
                       the terms of this agreement, DSHS may impose sanctions by
                       withholding up to five percent of payments to the
                       Contractor rather than terminating the agreement.

                       DSHS shall notify the Contractor in writing of the
                       precise nature of the default and provide a reasonable
                       deadline for curing the default before imposing
                       sanctions. The Contractor may request a dispute
                       resolution, as described in Section 7.23, Disputes, if
                       the Contractor disagrees with DSHS' position. DSHS may
                       withhold payment from the end the cure period until the
                       default is cured or any resulting dispute is resolved in
                       the Contractor's favor.

             7.7.2.    DSHS, CMS or the Office of the Inspector General (OIG)
                       may impose intermediate sanctions, in accord with 42 CFR
                       438.700, 42 CFR 438.702 and 42 CFR 438.704, against the
                       Contractor for:

               7.7.2.1.       Failing to provide medically necessary services
                              that the Contractor is required to provide, under
                              law or under this agreement, to an enrollee
                              covered under this agreement.

               7.7.2.2.       Imposing on enrollees premiums or charges that are
                              in excess of the premiums or charges permitted
                              under law or under this agreement.

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               7.7.2.3.       Acting to discriminate among enrollees on the
                              basis of their health status or need for health
                              care services. This includes termination of
                              enrollment or refusal to reenroll a recipient,
                              except as permitted under law or under this
                              agreement, or any practice that would reasonably
                              be expected to discourage enrollment by recipients
                              whose medical condition or history indicates
                              probable need for substantial future medical
                              services.

               7.7.2.4.       Misrepresenting or falsifying information that it
                              furnishes to CMS or to the State.

               7.7.2.5.       Misrepresenting or falsifying information that it
                              furnishes to an enrollee, potential enrollee, or
                              health care provider.

               7.7.2.6.       Failing to comply with the requirements for
                              physician incentive plans.

               7.7.2.7.       Distributing directly, or indirectly through any
                              agent or independent contractor, marketing
                              materials that have not been approved by the State
                              or that contain false or materially misleading
                              information.

               7.7.2.8.       Violating any of the other requirements of
                              sections 1903(m) or 1932 of the Social Security
                              Act, and any implementing regulations.

        7.8.    ASSIGNMENT OF THIS AGREEMENT: This agreement, including the
                rights, benefits, and duties herein, shall be binding on the
                parties and their successors and assignees but shall not be
                assignable by either party without the express written consent
                of the other. Nor shall any claim, pertinent to this agreement,
                against one of the parties be assignable without the express
                written consent of the other.

        7.9.    HEADINGS NOT CONTROLLING: The headings and the index used herein
                are for reference and convenience only, and shall not enter into
                the interpretation thereof, or describe the scope or intent of
                any provisions or sections of this agreement.

        7.10.   ORDER OF PRECEDENCE: In the interpretation of this agreement and
                incorporated documents, the various terms and conditions shall
                be construed as much as possible to be complementary. In the
                event that such interpretation is not possible the following
                order of precedence shall apply:

             7.10.1.   Federal statutes and regulations concerning the operation
                       of Health Maintenance Organizations and the provisions of
                       Title XIX of the federal Social Security Act.

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             7.10.2.   State of Washington statutes and regulations concerning
                       the operation of the DSHS' Medical Assistance Program,
                       including but not limited to WAC 388-538, Exhibit B.

             7.10.3.   State of Washington statutes and regulations concerning
                       the operation of Health Maintenance Organizations and
                       Health Care Service Contractors.

             7.10.4.   The terms and conditions of this agreement.

        7.11.   PROPRIETARY RIGHTS: DSHS recognizes that nothing in this
                agreement shall give DSHS rights to the systems developed or
                acquired by the Contractor during the performance of this
                agreement. The Contractor recognizes that nothing in this
                agreement shall give the Contractor rights to the systems
                developed or acquired by DSHS during the performance of this
                agreement.

        7.12.   COVENANT AGAINST CONTINGENT FEES: The Contractor promises that
                no person or agency has been employed or retained on a
                contingent fee for the purpose of seeking or obtaining this
                agreement. This does not apply to legitimate employees or an
                established commercial or selling agency maintained by the
                Contractor for the purpose of securing business. In the event of
                breach of this clause by the Contractor DSHS may at its
                discretion: a) annul the agreement without any liability; or b)
                deduct from the agreement price or consideration or otherwise
                recover the full amount of any such contingent fee.

        7.13.   ENROLLEES' RIGHT TO OBTAIN A CONVERSION AGREEMENT: The
                Contractor shall offer a conversion agreement to all enrollees
                whose enrollment is terminated due to loss of eligibility for
                Medical Assistance in accord with RCW 48.46.450.

        7.14.   RECORDS MAINTENANCE AND RETENTION:

             7.14.1.   MAINTENANCE: The Contractor and its subcontractors shall
                       maintain financial, medical and other records pertinent
                       to this agreement. All financial records shall follow
                       generally accepted accounting principles. Medical records
                       and supporting management systems shall include all
                       pertinent information related to the medical management
                       of each enrollee. Other records shall be maintained as
                       necessary to clearly reflect all actions taken by the
                       Contractor related to this agreement.

             7.14.2.   RETENTION: All records and reports relating to this
                       agreement shall be retained by the Contractor and its
                       subcontractors for a minimum of six (6) years after final
                       payment is made under this agreement or, in the event
                       that this agreement is renewed, six (6) years after the
                       renewal date. However, when an audit, litigation, or
                       other action involving

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                       records is initiated prior to the end of said period,
                       records shall be maintained for a minimum of six (6)
                       years following resolution of such action.

        7.15.   ACCESS TO FACILITIES AND RECORDS: The Contractor and its
                subcontractors shall cooperate with medical and financial audits
                performed by duly authorized representatives of DSHS, the State
                of Washington Auditor's Office, DHHS, and federal auditors from
                the United States government General Accounting Office and the
                Office of Management and Budget. With reasonable notice,
                generally thirty (30) calendar days, the Contractor and its
                subcontractors shall provide access to its facilities and the
                financial and medical records pertinent to this agreement to
                monitor and evaluate performance under this agreement,
                including, but not limited to, the quality, cost, use and
                timeliness of services (42 CFR 434.52), and assessment of the
                Contractor's capacity to bear the potential financial losses (42
                CFR 434.58). The Contractor and its subcontractors shall provide
                immediate access to facilities and records pertinent to this
                agreement for Medicaid fraud investigators.

        7.16.   SOLVENCY:

             7.16.1.   The Contractor shall have a Certificate of Registration
                       as either a Health Maintenance Organization or a Health
                       Care Service Contractor from the Office of the Insurance
                       Commissioner (OIC). The Contractor shall comply with the
                       solvency provisions of RCW 48.44 or RCW 48.46, as
                       amended.

             7.16.2.   The Contractor shall submit to DSHS copies of any
                       regulatory annual statement and any quarterly or monthly
                       financial reports filed with OIC and all related
                       documents and correspondence, at the same time the
                       Contractor sends them to OIC. The Contractor shall notify
                       DSHS immediately upon being notified by OIC that they are
                       to report financial information quarterly or monthly and
                       provide DSHS with the same information provided to OIC in
                       response to any OIC request. The Contractor shall deliver
                       all required information and notices to DSHS at the
                       address listed in 7.5 Notices. The Contractor agrees that
                       DSHS may at anytime access any information related to the
                       Contractor's financial condition, or compliance with OIC
                       requirements, from OIC and consult with OIC concerning
                       such information.

             7.16.3.   The Contractor shall provide DSHS with the Contractor's
                       audited financial statements as soon as they become
                       available to the Contractor. Financial statements shall
                       be delivered to the address list in 7.5 Notices.

             7.16.4.   If the Contractor becomes insolvent during the term of
                       this agreement:

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                                                        2003 HO & SCHIP Contract

               7.16.4.1.      The State of Washington and enrollees shall not be
                              in any manner liable for the debts and obligations
                              of the Contractor.

               7.16.4.2.      In accordance with Section 10.15 Prohibition on
                              Enrollee Charges for Covered Services, under no
                              circumstances shall the Contractor, or any
                              providers used to deliver services covered under
                              the terms of this agreement, charge enrollees for
                              covered services.

               7.16.4.3.      The Contractor shall, in accordance with RCW
                              48.44.055, provide for the continuity of care for
                              enrollees.

        7.17.   COMPLIANCE WITH ALL APPLICABLE LAWS AND REGULATIONS: In the
                provision of services under this agreement, the Contractor and
                its subcontractors shall comply with all applicable federal and
                state statutes and regulations, and all amendments thereto, that
                are in effect when the agreement is signed or that come into
                effect during the term of the agreement. This includes, but is
                not limited to:

             7.17.1.   Title XIX and Title XXI of the Social Security Act.

             7.17.2.   All applicable OIC statutes and regulations.

             7.17.3.   All local, state, and federal professional and facility
                       licensing and accreditation requirements/standards that
                       apply to services performed under the terms of this
                       agreement, including but not limited to:

               7.17.3.1.      All applicable standards, orders, or requirements
                              issued under Section 306 of the Clean Air Act (42
                              US 1857(h)), Section 508 of the Clean Water Act
                              (33 US 1368), Executive Order 11738, and
                              Environmental Protection Agency (EPA) regulations
                              (40 CFR Part 15), which prohibit the use of
                              facilities included on the EPA List of Violating
                              Facilities. Any violations shall be reported to
                              DSHS, DHHS, and the EPA.

               7.17.3.2.      Any applicable mandatory standards and policies
                              relating to energy efficiency which are contained
                              in the State Energy Conservation Plan, issued in
                              compliance with the federal Energy Policy and
                              Conservation Act.

               7.17.3.3.      Those specified for laboratory services in the
                              Clinical Laboratory Improvement Amendments (CLIA).

               7.17.3.4.      Those specified in Title 18 for professional
                              licensing.

             7.17.4.   Liability insurance requirements.

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                                                        2003 HO & SCHIP Contract

             7.17.5.   Reporting of abuse as required by RCW 26.44.030.

             7.17.6.   Industrial insurance coverage as required by Title 51
                       RCW.

             7.17.7.   Any other requirements associated with the receipt of
                       federal funds.

        7.18.   NONDISCRIMINATION: The Contractor shall comply with all federal
                and state nondiscrimination laws and regulations.

        7.19.   REVIEW OF CLIENT INFORMATION: DSHS agrees to provide the
                Contractor with written client information, which DSHS intends
                to distribute to all or a class of clients.

        7.20.   CONTRACTOR NOT EMPLOYEES OF DSHS: The Contractor acknowledges
                and certifies that its directors, officers, partners, employees,
                and agents are not officers, employees, or agents of DSHS or the
                state of Washington. The Contractor shall not hold itself out as
                or claim to be an officer, employee, or agent of DSHS or the
                state of Washington by reason of this agreement. The Contractor
                shall not claim any rights, privileges, or benefits that would
                accrue to a civil service employee under RCW 41.06.

        7.21.   DSHS NOT GUARANTOR: The Contractor acknowledges and certifies
                that neither DSHS nor the State of Washington are guarantors of
                any obligations or debts of the Contractor.

        7.22.   MUTUAL INDEMNIFICATION AND HOLD HARMLESS: The parties shall be
                responsible for and shall indemnify and hold each other harmless
                from all claims and/or damages to persons and/or property
                resulting from its negligent acts and omissions. The Contractor
                shall indemnify and hold harmless DSHS from any claims by
                non-participating providers related to the provision to
                enrollees of covered services under this agreement.

        7.23.   DISPUTES: When a dispute arises over an issue concerning the
                terms of the agreement, the parties agree to the following
                process to address the dispute:

             7.23.1.   The Contractor and DSHS shall attempt to resolve the
                       dispute through informal means between the Contractor and
                       the DSHS, MAA, Division of Program Support, Contract
                       Manager assigned to the Contractor.

             7.23.2.   If the Contractor is not satisfied with the outcome of
                       the resolution with the Contract Manager, the Contractor
                       may submit the disputed issue, in writing, for review,
                       within ten (10) working days of the outcome, to:

                                MaryAnne Lindeblad, Director (or her successor)
                                Division of Program Support

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                                                        2003 HO & SCHIP Contract

                                Medical Assistance Administration
                                Department of Social and Health Services
                                P.O. Box 45530
                                Olympia, WA 98504-5530

                       The Director may request additional information from the
                       Contract Manager and/or the Contractor. The Director
                       shall issue a written review decision to the Contractor
                       within thirty (30) calendar days of receipt of all
                       information relevant to the issue. The review decision
                       will be provided to the Contractor according to Section
                       7.5.

             7.23.3.   When the Contractor disagrees with the review decision of
                       the Director, the Contractor may request independent
                       mediation of the dispute. The request for mediation must
                       be submitted to the Director, in writing, within ten (10)
                       working days of the Contractor's receipt of the
                       Director's review decision. The Contractor and DSHS shall
                       mutually agree on the selection of the independent
                       mediator and shall bear all costs associated with
                       mediation equally. The results of mediation shall not be
                       binding on either party.

                Both parties agree to make their best efforts to resolve
                disputes arising from this agreement and agree that the dispute
                resolution process described herein shall precede any court
                action. This dispute resolution process is the sole
                administrative remedy available under this agreement.

        7.24.   GOVERNING LAW AND VENUE: The laws of the State of Washington
                shall govern this agreement. In the event of a lawsuit involving
                this agreement, venue shall be proper only in Thurston County,
                Washington. By execution of this agreement, the Contractor
                acknowledges the jurisdiction of the courts of the State of
                Washington regarding this matter.

        7.25.   SEVERABILITY: If any provision of this agreement, including any
                provision of any document incorporated by reference, shall be
                held invalid, that invalidity shall not affect the other
                provisions of the agreement. To that end, the provisions of this
                agreement are declared to be severable.

        7.26.   EXCLUDED PERSONS:

             7.26.1.   The Contractor may not knowingly have a director,
                       officer, partner, or person with a beneficial ownership
                       of more than 5% of the Contractor's equity, or have an
                       employee, consultant or contractor who is significant or
                       material to the provision of services under this
                       agreement, who has been, or is affiliated with someone
                       who has been, debarred, suspended, or otherwise excluded
                       by any federal agency (SSA 1932(d)(1)). A list of
                       excluded parties is available on the following Internet
                       website: www.arnet.gov/epls.
                                ------------------

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             7.26.2.   By entering into this agreement, the Contractor certifies
                       that it does not knowingly have anyone who is an excluded
                       person, or is affiliated with an excluded person, as a
                       director, officer, partner, employee, contractor, or
                       person with a beneficial ownership of more than 5% of its
                       equity. The Contractor is required to notify DSHS when
                       circumstances change that affect such certification.

             7.26.3.   The Contractor is not required to consult the excluded
                       parties list, but may instead rely on certifications from
                       directors, officers, partners, employees, contractors, or
                       persons with beneficial ownership of more than 5% of the
                       Contractor's equity, that they are not debarred or
                       excluded from a federal program.

        7.27.   FRAUD AND ABUSE REQUIREMENTS - POLICIES AND PROCEDURES:

             7.27.1.   The Contractor shall have policies and procedures to
                       prevent and detect fraud and abuse activities related to
                       Healthy Options/SCHIP. These include, but are not limited
                       to: claims, prior authorization, utilization management
                       and quality review, enrollee complaint and grievance
                       resolution, provider credentialing and contracting, and
                       provider and staff education to prevent fraud and abuse,
                       and corrective action plans to remedy situations where
                       fraud and abuse have been detected.

             7.27.2.   If the Contractor is also a Medicare contractor, and if
                       CMS has promulgated fraud and abuse standards for federal
                       health care program managed care contractors, the
                       Contractor's policies and procedures established which
                       meet CMS standards shall be deemed sufficient to meet
                       DSHS requirements for fraud and abuse prevention and
                       monitoring.

             7.27.3.   The Contractor shall submit a written copy of its fraud
                       and abuse policies and procedures for approval to DSHS
                       according to Section 7.5, Notices. Policies and
                       procedures shall be due by March 31, 2003. DSHS shall
                       respond with approval or denial with required
                       modifications within thirty (30) calendar days of
                       receipt. The Contractor shall have thirty (30) calendar
                       days to resubmit the policies and procedures. If the
                       Contractor's fraud and abuse policies and procedures have
                       been approved by DSHS and are unchanged from the approved
                       policies and procedures, the Contractor shall only be
                       required to submit a written certification that the
                       policies and procedures are unchanged.

             7.27.4.   The Contractor may request a copy of the guidelines that
                       DSHS will use in evaluating the Contractor's fraud and
                       abuse policies and procedures, and may request technical
                       assistance in preparing the

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                       policies and procedures, by contacting the DSHS, MAA,
                       Division of Program Support Contract Manager assigned to
                       the Contractor.

8.      SUBCONTRACTS

        8.1.    CONTRACTOR REMAINS LEGALLY RESPONSIBLE: Subcontracts, as defined
                in Section 1.20, may be used by the Contractor for the provision
                of any service under this agreement. However, no subcontract
                shall terminate the Contractor's legal responsibility to DSHS
                for any work performed under this agreement (42 CFR 434.6 (c)).

        8.2.    SOLVENCY REQUIREMENTS FOR SUBCONTRACTORS: For any subcontractor
                at financial risk, as described in Section 8.8.3. Substantial
                Financial Risk, or 1.17. Risk, the Contractor shall establish,
                enforce and monitor solvency requirements that provide assurance
                of the subcontractor's ability to meet its obligations.

        8.3.    REQUIRED PROVISIONS: Subcontracts must be in writing, consistent
                with the provisions of 42 CFR 434.6. All subcontracts must
                contain the following provisions:

             8.3.1.    Identification of the parties of the subcontract and
                       their legal basis for operation in the state of
                       Washington.

             8.3.2.    Procedures and specific criteria for terminating the
                       subcontract.

             8.3.3.    Identification of the services to be performed by the
                       subcontractor and which of those services may be
                       subcontracted by the subcontractor.

             8.3.4.    Reimbursement rates and procedures for services provided
                       under the subcontract.

             8.3.5.    Release to the Contractor of any information necessary to
                       perform any of its obligations under this agreement.

             8.3.6.    Reasonable access to facilities and financial and medical
                       records for duly authorized representatives of DSHS or
                       DHHS for audit purposes, and immediate access for
                       Medicaid fraud investigators.

             8.3.7.    The requirement to completely and accurately report
                       encounter data to the Contractor. Contractor shall ensure
                       that all subcontractors required to report encounter data
                       have the capacity to comply with the Encounter Data
                       Submission Requirements, Exhibit C-1.

             8.3.8.    The requirement to comply with the Contractor's DSHS
                       approved fraud and abuse policies and procedures.

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                                                        2003 HO & SCHIP Contract

             8.3.9.    No assignment of the subcontract shall take effect
                       without the DSHS' written agreement.

             8.3.10.   The subcontractor must comply with the applicable state
                       and federal rules and regulations as set forth in this
                       agreement.

        8.4.    HEALTH CARE PROVIDER SUBCONTRACTS, including those for
                facilities, must also contain the following provisions:

             8.4.1.    A quality improvement system tailored to the nature and
                       type of services subcontracted, which affords quality
                       control for the health care provided, including but not
                       limited to the accessibility of medically necessary
                       health care, and which provides for a free exchange of
                       information with the Contractor to assist the Contractor
                       in complying with Section 5.1.

             8.4.2.    A means to keep records necessary to adequately document
                       services provided to enrollees.

             8.4.3.    Information about enrollees, including their medical
                       records, shall be kept confidential in a manner
                       consistent with state and federal laws and regulations.

             8.4.4.    The subcontractor accepts payment from the Contractor as
                       payment in full and shall not request payment from DSHS
                       or any enrollee for covered services performed under the
                       subcontract.

             8.4.5.    The subcontractor agrees to hold harmless DSHS and its
                       employees, and all enrollees served under the terms of
                       this agreement in the event of non-payment by the
                       Contractor. The subcontractor further agrees to indemnify
                       and hold harmless DSHS and its employees against all
                       injuries, deaths, losses, damages, claims, suits,
                       liabilities, judgments, costs and expenses which may in
                       any manner accrue against DSHS or its employees through
                       the intentional misconduct, negligence, or omission of
                       the subcontractor, its agents, officers, employees or
                       contractors.

             8.4.6.    If the subcontract includes physician services,
                       provisions for compliance with the PCP requirements
                       stated in this agreement.

             8.4.7.    A ninety (90) day termination notice provision.

             8.4.8.    A specific termination provision for termination with
                       short notice when a provider is excluded from
                       participation in the Medicaid program.

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        8.5.    HEALTH CARE PROVIDER SUBCONTRACTS DELEGATING ADMINISTRATIVE
                FUNCTIONS: Subcontracts that delegate administrative functions
                under the terms of this agreement must include the following
                additional provisions:

             8.5.1.    For those subcontractors at financial risk, that the
                       subcontractor must maintain the Contractor's solvency
                       requirements throughout the term of the agreement.

             8.5.2.    That the terms and conditions of this agreement, between
                       DSHS and the Contractor, apply to the subcontractor for
                       any contract responsibility the Contractor has delegated
                       in the subcontract.

             8.5.3.    Clear descriptions of any administrative functions
                       delegated by the Contractor in the subcontract, including
                       but not limited to utilization/medical management, claims
                       processing, enrollee complaints and appeals, and the
                       provision of data or information necessary to fulfill any
                       of the Contractor's obligations under this agreement.

             8.5.4.    How frequently and by what means the Contractor will
                       monitor compliance with solvency requirements and
                       requirements related to any administrative function
                       delegated in the subcontract.

             8.5.5.    Whether referrals for enrollees will be restricted to
                       providers affiliated with the group and, if so, a
                       description of those restrictions.

        8.6.    EXCLUDED PROVIDERS:

             8.6.1.    Pursuant to Section 1128 of the Social Security Act, the
                       Contractor may not subcontract with an individual
                       practitioner or provider, or an entity with an officer,
                       director, agent, or manager, or an individual who owns or
                       has a controlling interest in the entity, who has been:
                       convicted of crimes as specified in Section 1128 of the
                       Social Security Act, excluded from participation in the
                       Medicare and Medicaid program, assessed a civil penalty
                       under the provisions of Section 1128, has a contractual
                       relationship with an entity convicted of a crime
                       specified in Section 1128, or is a person described in
                       Section 7.26 of this agreement, Excluded Persons.

             8.6.2.    In addition, if DSHS terminates a subcontractor from
                       participation in the Medical Assistance program, the
                       Contractor shall exclude the subcontractor from
                       participation in Healthy Options/SCHIP. The Contractor
                       shall terminate subcontracts of excluded providers
                       immediately when the Contractor becomes aware of such
                       exclusion or when the Contractor receives notice from
                       DSHS, whichever is earlier.

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        8.7.    HOME HEALTH PROVIDERS: If the pending Medicaid home health
                agency surety bond requirement (Section 4708(d) of the Balanced
                Budget Act of 1997) becomes effective before or during the term
                of this agreement, beginning on the effective date of the
                requirement the Contractor may not subcontract with a home
                health agency unless the state has obtained a surety bond from
                the home health agency in the amount required by federal law.
                The Department will provide a current list of bonded home health
                agencies upon request to the Contractor.

        8.8.    PHYSICIAN INCENTIVE PLANS: Physician incentive plans, as defined
                in Section 1.15, are subject to the conditions set forth in this
                Section in accord with federal regulations (42 CFR 434.70).

             8.8.1.    PROHIBITED PAYMENTS: The Contractor shall make no payment
                       to a physician or physician group, directly or
                       indirectly, under a physician incentive plan as an
                       inducement to reduce or limit medically necessary
                       services provided to an individual enrollee.

             8.8.2.    DISCLOSURE REQUIREMENTS: Risk sharing arrangements in
                       subcontracts with physicians or physician groups are
                       subject to review and approval by DSHS. The Contractor
                       shall provide the following information about its
                       physician incentive plan, and the physician incentive
                       plans of all its subcontractors in any tier, to the
                       Department annually upon request:

               8.8.2.1.       Whether the incentive plan includes referral
                              services.

               8.8.2.2.       If the incentive plan includes referral services:

                 8.8.2.2.1.     The type of incentive plan (e.g. withhold,
                                bonus, capitation)

                 8.8.2.2.2.     For incentive plans involving withholds or
                                bonuses, the percent that is withheld or paid as
                                a bonus

                 8.8.2.2.3.     Proof that stop-loss protection meets the
                                requirements of 6.8.4.1., including the amount
                                and type of stop-loss protection

                 8.8.2.2.4.     The panel size and, if commercial members and
                                enrollees are pooled, a description of the
                                groups pooled and the risk terms of each group.
                                Medicaid, Medicare, and commercial members in a
                                physician's or physician group's panel may be
                                pooled provided the terms of risk for the pooled
                                enrollees and commercial members are comparable,
                                and the incentive payments are not calculated
                                separately for pooled enrollees. Commercial
                                members include military and Basic Health Plan
                                members.

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             8.8.3.    SUBSTANTIAL FINANCIAL RISK: A physician, or physician
                       group as defined in Section 1.14, is at substantial
                       financial risk when more than 25% of the total maximum
                       potential payments to the physician or physician group
                       depend on the use of referral services. When the panel
                       size is fewer than 25,000 members arrangements that cause
                       substantial financial risk include, but are not limited
                       to, the following:

               8.8.3.1.       Withholds greater than 25% of total potential
                              payments

               8.8.3.2.       Withholds less than 25% of total potential
                              payments but the physician or physician group is
                              potentially liable for more than 25% of total
                              potential payments.

               8.8.3.3.       Bonuses greater than 33% of total potential
                              payments, less the bonus.

               8.8.3.4.       Withholds plus bonuses if the withholds plus
                              bonuses equal more than 25% of total potential
                              payments.

               8.8.3.5.       Capitation arrangements if the difference between
                              the minimum and maximum possible payments is more
                              than 25% of the maximum possible payments, or the
                              minimum and maximum possible payments are not
                              clearly explained in the contract.

             8.8.4.    REQUIREMENTS IF A PHYSICIAN OR PHYSICIAN GROUP IS AT
                       SUBSTANTIAL FINANCIAL RISK: If the Contractor, or any
                       subcontractor (e.g. IPA, PHO), places a physician or
                       physician group at substantial financial risk, the
                       Contractor shall assure that all physicians and physician
                       groups have either aggregate or per member stop-loss
                       protection for services not directly provided by the
                       physician or physician group.

               8.8.4.1.       If aggregate stop-loss protection is provided, it
                              must cover 90% of the costs of referral services
                              that exceed 25% of maximum potential payments
                              under the subcontract.

               8.8.4.2.       If stop-loss protection is based on a per-member
                              limit, it must cover 90% of the cost of referral
                              services that exceed the limit as indicated below
                              based on panel size, and whether stop-loss is
                              provided separately for professional and
                              institutional services or is combined for the two.

                 8.8.4.2.1.     1,000 members or fewer, the threshold is $3,000
                                for professional services and $10,000 for
                                institutional services, or $6,000 for combined
                                services.

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                 8.8.4.2.2.     1,001 - 5,000 members, the threshold is $10,000
                                for professional services and $40,000 for
                                institutional services, or $30,000 for combined
                                services.

                 8.8.4.2.3.     5,001 - 8,000 members, the threshold is $15,000
                                for professional services and $60,000 for
                                institutional services, or $40,000 for combined
                                services.

                 8.8.4.2.4.     8,001 - 10,000 members, the threshold is $20,000
                                for professional services and $100,000 for
                                institutional services, or $75,000 for combined
                                services.

                 8.8.4.2.5.     10,001 - 25,000, the threshold is $25,000 for
                                professional services and $200,000 for
                                institutional services, or $150,000 for
                                combined services.

                 8.8.4.2.6.     25,001 members or more, there is no risk
                                threshold.

               8.8.4.3.       For a physician or physician group at substantial
                              financial risk, the Contractor shall periodically
                              conduct surveys of enrollee satisfaction with the
                              physician or physician group. DSHS shall require
                              such surveys annually. DSHS may, at its sole
                              option, conduct enrollee satisfaction surveys
                              which satisfy this requirement and waive the
                              requirement for the Contractor to conduct such
                              surveys. DSHS shall notify the Contractor in
                              writing if the requirement is waived. If DSHS does
                              not waive the requirement, the Contractor shall
                              provide the survey results to DSHS annually upon
                              request. The surveys shall:

                 8.8.4.3.1.     Include current enrollees, and enrollees who
                                have disenrolled within 12 months of the survey
                                for reasons other than loss of Medicaid
                                eligibility or moving outside the Contractor's
                                service area.

                 8.8.4.3.2.     Be conducted according to commonly accepted
                                principles of survey design and statistical
                                analysis.

                 8.8.4.3.3.     Address enrollees satisfaction with the
                                physician or physician group's:

                   8.8.4.3.3.1.   Quality of services provided.

                   8.8.4.3.3.2.   Degree of access to services.

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             8.8.5.    Sanctions and Penalties: DSHS or CMS may impose
                       intermediate sanctions, as described in Section 7.7 of
                       this agreement, for failure to comply with the rules in
                       this section.

        8.9.    Payment to FQHCs/RHCs: The Contractor shall not pay a federally
                qualified health center or a rural health clinic less than the
                Contractor would pay non-FQHC/RHC providers for the same
                services (42 USC 1396(m)(2)(A)(ix)).

9.      TERM AND TERMINATION

        9.1.    TERM: This agreement is effective from January 1, 2003 at 12:01
                a.m. Pacific Standard Time (PST) through 12:00 a.m. December 31,
                2003, PST. This agreement may be extended by mutual agreement of
                the parties.

        9.2.    TERMINATION FOR CONVENIENCE:

             9.2.1.    Either party may terminate, upon one-hundred twenty (120)
                       calendar days advance written notice, performance of work
                       under this agreement in whole or in part, whenever, for
                       any reason, either party shall determine that such
                       termination is in its best interest.

             9.2.2.    In the event DSHS terminates this agreement for
                       convenience, the Contractor shall have the right to
                       assert a claim for the Contractor's direct termination
                       costs. Such claim must be:

               9.2.2.1.       Delivered to DSHS as provided in section 7.5.,
                              Notices.

               9.2.2.2.       Asserted within ninety (90) calendar days of
                              termination for convenience, or, in the event the
                              termination was originally issued under the
                              provisions of Section 9.3, Termination by DSHS for
                              Default, ninety (90) calendar days from the date
                              the notice of termination was deemed to have been
                              issued under this section. The Contracts
                              Coordination Unit of MAA (CCU) may extend said
                              ninety (90) calendar days if the Contractor makes
                              a written request to the CCU and CCU deems the
                              grounds for the request to be reasonable. The CCU
                              will evaluate the claim for termination costs and
                              order DSHS to pay the claim or such amount, as
                              s/he deems valid, or deny the claim. The CCU shall
                              notify the Contractor of CCU's decision within
                              sixty (60) calendar days of receipt of the claim.

             9.2.3.    In the event the Contractor terminates this agreement for
                       convenience, DSHS shall have the right to assert a claim
                       for DSHS' direct termination costs. Such claim must be:

               9.2.3.1.       Delivered to the Contractor as provided in section
                              7.5., Notices.

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               9.2.3.2.       Asserted within ninety (90) calendar days of the
                              date of termination for convenience. The CCU may
                              extend said ninety (90) calendar days if DSHS
                              makes a written request to the CCU and CCU deems
                              the grounds for the request to be reasonable. The
                              CCU will evaluate the claim for termination costs
                              and order the Contractor to pay the claim for such
                              amount, as CCU deems valid, or deny the claim.

             9.2.4.    In the event the Contractor or DSHS disagrees with the
                       CCU decision entered pursuant to this section, the
                       Contractor or DSHS shall have the right to a dispute
                       resolution as described in Section 7.23, Disputes.

             9.2.5.    In no event shall the claim for termination costs exceed
                       the average monthly amount paid to the Contractor for the
                       twelve (12) months immediately prior to termination.

             9.2.6.    In addition to DSHS' or Contractor's direct termination
                       costs, the Contractor or DSHS shall be liable for
                       administrative costs incurred by the other party in
                       procuring supplies or services similar to and/or
                       replacing those terminated.

             9.2.7.    The Contractor or DSHS shall not be liable for any
                       termination costs if it notifies the other party of its
                       intent not to renew this agreement at least one hundred
                       twenty (120) calendar days prior to the renewal date.

             9.2.8.    In the event this agreement is terminated for the
                       convenience of either party, the effective date of
                       termination must be the last day of the month in which
                       the one hundred twenty (120) day notification period is
                       satisfied, or the last day of such later month as may be
                       agreed upon by both parties.

        9.3.    TERMINATION BY THE CONTRACTOR FOR DEFAULT: The Contractor may
                terminate its performance under this agreement in whole or in
                part, whenever DSHS shall default in performance of this
                agreement and shall fail to cure such default within a period of
                one hundred twenty (120) calendar days (or such longer period as
                the Contractor may allow) after receipt from the Contractor of a
                written notice specifying the default. In the event it is
                determined that DSHS was not in default, DSHS may claim damages
                for wrongful termination. The procedure for determining damages
                shall be as stated in Section 9.2.

        9.4.    TERMINATION BY DSHS FOR DEFAULT:

             9.4.1.    DSHS may terminate performance of work under this
                       agreement, in whole or in part, whenever the Contractor
                       shall default in performance

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                       of this agreement and shall fail to cure such default
                       within a period of one hundred twenty (120) calendar
                       days (or such longer period as the Contracting Officer
                       may allow) after receipt from the Contracting Officer of
                       a written notice specifying the default. Such
                       termination shall be referred to herein as "Termination
                       for Default."

             9.4.2.    If after notice of termination of this agreement for
                       default it is determined by DSHS or a court of law that
                       the Contractor was not in default or that the
                       Contractor's failure to perform or make progress in
                       performance was due to causes beyond the control and
                       without the error or negligence of the Contractor, or any
                       subcontractor, the Contractor may claim damages. The
                       procedure for determining damages shall be as stated in
                       Section 9.2.

             9.4.3.    In the event DSHS terminates this agreement as provided
                       in (a) above, DSHS may procure, upon such terms and in
                       such manner as the Contracting Officer may deem
                       appropriate, supplies or services similar to those
                       terminated, and if the Contractor is judged to be in
                       default by a court of law, DSHS' damages shall be
                       measured by any excess costs for such similar supplies or
                       services. In addition, DSHS' damages may also include
                       reasonable administrative costs incurred in procuring
                       such similar supplies or services.

        9.5.    MANDATORY TERMINATION: DSHS will terminate this agreement in the
                event that the Secretary of DHHS determines that the Contractor
                does not meet the requirements for participation in the Medicaid
                program pursuant to Title XIX of the Social Security Act and all
                amendments.

                In addition, DSHS is required under federal law to either impose
                temporary management or terminate this agreement if the
                Contractor is repeatedly found to not meet federal requirements
                for managed care Contractors, as specified in Section 1903(m) of
                the Social Security Act. Should this circumstance arise, DSHS
                will terminate this agreement consistent with Section 9.4,
                Termination by DSHS for Default.

        9.6.    TERMINATION FOR REDUCTION IN FUNDING: In the event funding from
                state, federal, or other sources is withdrawn, reduced or
                limited in any way after the effective date of this agreement
                and prior to the termination date, DSHS may terminate the
                agreement under the "Termination for Convenience" clause.

        9.7.    INFORMATION ON OUTSTANDING CLAIMS AT TERMINATION: In the event
                this agreement is terminated, the Contractor shall provide DSHS,
                within three hundred and sixty-five (365) calendar days, all
                available information reasonably necessary for the reimbursement
                of any outstanding claims for

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                                                        2003 HO & SCHIP Contract

                services to enrollees (42 CFR 434.6(a)(6)). Information and
                reimbursement of such claims is subject to the provisions of
                Section 3, Payment.

        9.8.    CONTINUED RESPONSIBILITIES: After the termination of this
                agreement, the Contractor remains obligated to:

             9.8.1.    Cover hospitalized enrollees until discharge consistent
                       with Section 3.7.

             9.8.2.    Submit reports required under Section 6.

             9.8.3.    Provide access to records as required in Section 7.15.

             9.8.4.    Provide the administrative services associated with
                       covered services (e.g. claims processing, enrollee
                       appeals) provided to enrollees under the terms of this
                       agreement.

        9.9.    ENROLLEE NOTICE OF TERMINATION: DSHS shall inform enrollees when
                notice is given by either party of its intent to terminate this
                agreement as provided herein

10.     SERVICE DELIVERY

        10.1.   SCOPE OF SERVICES: The Contractor shall cover enrollees for
                preventive care and diagnosis and treatment of illness and
                injury as set forth in Section 11, Schedule of Benefits. If a
                specific procedure or element of a covered service is covered by
                DSHS under its fee-for-service program as described in DSHS'
                billing instructions, the Contractor shall cover it subject to
                the specific exclusions and limitations in Section 11, Schedule
                of Benefits.

                Except as specifically provided in Section 10.17, this shall not
                be construed to prevent the Contractor from establishing
                utilization control measures as it deems necessary to assure
                that services are appropriately utilized, provided that
                utilization control measures do not deny medically necessary
                covered services to enrollees. The Contractor may limit coverage
                of services to participating providers except as specifically
                provided in Section 4, Access and Capacity, Section 11, Schedule
                of Benefits, for emergency services, and as necessary to provide
                medically necessary services as described in 10.1.2.2., Urgent
                Services.

             10.1.1.   IN SERVICE AREA: In the service area, as defined in
                       Section 2.1, the Contractor shall cover enrollees for all
                       medically necessary services included in the scope of
                       services covered by this agreement.

             10.1.2.   OUT OF SERVICE AREA:

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                                                        2003 HO & SCHIP Contract

               10.1.2.1.      EMERGENCY SERVICES: The Contractor shall cover
                              emergency services and, follow-up care which is
                              medically necessary before the enrollee's return
                              to the service area, for enrollees temporarily
                              outside of the service area, or who have moved to
                              another service area but are still enrolled with
                              the Contractor.

               10.1.2.2.      URGENT SERVICES: The Contractor shall cover urgent
                              care that is medically necessary before the
                              enrollee's return to the service area. Urgent care
                              is associated with the presentation of medical
                              signs that require immediate attention, but are
                              not life threatening. The Contractor shall also
                              cover follow-up care to urgent care when such care
                              is medically necessary and cannot reasonably wait
                              until the enrollee's return to the service area.
                              Such services shall be provided for enrollees
                              temporarily outside of the service area, or who
                              have moved to another service area, but are still
                              enrolled with the Contractor. The Contractor may
                              require pre-authorization for urgent services as
                              long as the wait times specified in Section 4.4,
                              Appointment Standards, are not exceeded.

               10.1.2.3.      COVERAGE LIMITATION: When an enrollee moves out of
                              a service area, or is temporarily staying with a
                              parent or relative outside the service area,
                              coverage shall be limited to ninety (90) calendar
                              days beginning with the first of the month
                              following the month in which the enrollee changes
                              residence.

               10.1.2.4.      REFERRED SERVICES: If the Contractor, or a
                              participating provider, refers an enrollee to a
                              provider out of the service area to receive a
                              covered service, the Contractor shall be
                              responsible for the referred service.

        10.2.   MEDICAL NECESSITY DETERMINATION: The Contractor shall determine
                which services are medically necessary, according to utilization
                management requirements included in the Quality Improvement
                Program 2003 Standards, Exhibit A and according to the
                definition of Medically Necessary Services in Section 1.11 of
                this agreement. The Contractor's determination of medical
                necessity in specific instances shall be final except as
                specifically provided in sections 5.4, Enrollee Complaints and
                Appeals and 5.5, Fair Hearings.

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                                                        2003 HO & SCHIP Contract

        10.3.   ENROLLEE CHOICE OF PCP: The Contractor shall allow, to the
                extent possible and appropriate, each new enrollee to choose a
                participating PCP. In the case of newborns, the parent shall
                choose the newborn's PCP. If the enrollee does not make a choice
                at the time of enrollment, the Contractor shall assign the
                enrollee to a PCP or clinic, within reasonable proximity to the
                enrollee's home, no later than fifteen (15) working days after
                coverage begins. The Contractor shall allow an enrollee to
                change PCP or clinic at anytime with the change becoming
                effective no later than the beginning of the month following the
                enrollees request for the change (WAC 388-538-060, Exhibit B and
                WAC 284-43-251 (1)).

                The Contractor shall allow children with special health care
                needs who utilize a specialist frequently to retain the
                specialist as a PCP, or alternatively, be allowed direct access
                to specialists for needed care.

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        10.4.   COORDINATION OF CARE: The Contractor shall ensure that health
                care services are coordinated for enrollees, in accordance with
                the provisions of the Quality Improvement Program 2003
                Standards, Exhibit A, and as follows:

             10.4.1.   The Contractor shall ensure that PCPs are responsible for
                       the provision, coordination, and supervision of health
                       care to meet the needs of each enrollee, including
                       initiation and coordination of referrals for medically
                       necessary specialty care. The PCPs shall also be
                       responsible for ongoing coordination with community
                       health and social programs, including but not limited to
                       First Steps Maternity Services and Maternity Case
                       Management, and mental health services provided by the
                       Regional Support Networks (RSN).

             10.4.2.   The Contractor shall ensure that PCPs develop
                       individualized care plans for children with special
                       health care needs, which ensure integration of clinical
                       and non-clinical disciplines and services in the overall
                       plan of care.

             10.4.3.   The Contractor shall provide or shall ensure
                       practitioners provide case management of enrollees with
                       chronic/high risk illnesses. These services include, but
                       are not limited to, coordination of services for
                       inpatient and outpatient care, and coordinated discharge
                       planning. The Contractor shall provide support services
                       to assist practitioners in providing such case management
                       if it is not provided directly by the Contractor. The
                       Contractor shall also provide or shall ensure PCPs
                       provide ongoing coordination of community-based services
                       required by enrollees, including but not limited to:
                       First Steps Maternity Services and Maternity Case
                       Management, Transportation, Regional Support Networks for
                       mental health services, developmental disability
                       services, local health departments, Title V services,
                       home and community services for older and physically
                       disabled individuals, alcohol and substance abuse
                       services, and services for children with special health
                       care needs. The Contractor shall provide support services
                       to assist PCPs in providing such coordination of it is
                       not provided directly by the Contractor.

        10.5.   SECOND OPINIONS: The Contractor shall allow enrollees a second
                opinion with any primary or specialty care physician who is
                participating with the Contractor when an enrollee wants
                additional information regarding treatment or believes the
                Contractor is not authorizing medically necessary care. At the
                Contractor's discretion, a clinically appropriate
                non-participating provider who is agreed upon by the Contractor
                and the enrollee may provide the second opinion.

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                                                        2003 HO & SCHIP Contract

                This Section shall not be construed to require the Contractor to
                cover unlimited second opinions, nor to require the Contractor
                to cover any services other than the professional services of
                the second opinion provider.

        10.6.   ENROLLEE SELF-DETERMINATION: The Contractor shall ensure that
                all providers: obtain informed consent prior to treatment from
                enrollees, or persons authorized to consent on behalf of an
                enrollee as described in RCW 7.70.065; comply with the
                provisions of the Natural Death Act (RCW 70.122) and state and
                federal Medicaid rules concerning advance directives (WAC
                388-501-0125 & 42 CFR 438.6); and, when appropriate, inform
                enrollees of their right to make anatomical gifts (RCW
                68.50.540).

        10.7.   COMPLIANCE WITH FEDERAL REGULATIONS FOR STERILIZATIONS AND
                HYSTERECTOMIES: The Contractor shall assure that all
                sterilizations and hysterectomies performed under this agreement
                are in compliance with 42 CFR 441 Subpart F, and that the DSHS
                Sterilization Consent Form (DSHS 13-364(x)) or its equivalent is
                used.

        10.8.   PROGRAM INFORMATION: At the Contractor's request, DSHS shall
                provide the Contractor with pertinent documents including
                statutes, regulations, and current versions of billing
                instructions and other written documents which describe DSHS
                policies and guidelines related to service coverage and
                reimbursement.

        10.9.   CONFIDENTIALITY OF ENROLLEE INFORMATION: The Contractor shall
                comply with all state and federal laws and regulations
                concerning the confidentiality of enrollee information.

             10.9.1.   The use or disclosure of any information concerning an
                       enrollee, including but not limited to medical records,
                       by the Contractor and its subcontractors for any purpose
                       not directly connected with the provision of services
                       under this agreement is prohibited, except by written
                       consent of the enrollee, his/her representative, or
                       his/her responsible parent or guardian, or as otherwise
                       provided by law.

             10.9.2.   The Contractor shall not require parental or guardian
                       consent for, nor inform parents or guardians of, the
                       following services provided to enrollees under age
                       eighteen (18): reproductive health (State v. Koome,
                                                           --------------
                       1975), sexually-transmitted diseases (RCW 70.24.110),
                       drug and alcohol treatment (RCW 70.96A.095), and mental
                       health (RCW 71.34.200), except as specifically provided
                       in law. The Contractor shall suppress these services on
                       any subscriber reports.

             10.9.3.   The Contractor and DSHS agree to share information
                       regarding enrollees in a manner which complies with
                       applicable state and federal

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                                                        2003 HO & SCHIP Contract

                       law protecting confidentiality of such information (42
                       CFR 431 Subpart F, RCW 5.60.060(4), RCW 70.02).

        10.10.  MARKETING: The Contractor, and any subcontractors through which
                the Contractor provides covered services, shall comply with the
                following requirements regarding marketing:

             10.10.1.  Marketing materials means materials distributed to or
                       aimed at Medicaid eligibles, without regard to medium, to
                       influence those individuals to enroll or reenroll in with
                       the Contractor or with the Contractor's subcontractors.
                       All mediums are included but may include brochures,
                       leaflets, newspaper ads, signs, billboards, radio ads,
                       television ads, presentation material for marketing
                       representatives, and websites.

             10.10.2.  All marketing materials must be reviewed by and have the
                       prior written approval of DSHS.

             10.10.3.  Marketing materials shall not contain misrepresentations,
                       or false, inaccurate or misleading information.

             10.10.4.  Marketing materials must be distributed in all services
                       areas the Contractor serves.

             10.10.5.  Marketing materials must be in compliance with Section
                       4.7. Marketing materials in English must give directions
                       in the Medicaid eligible population's primary languages
                       for obtaining understandable materials in accord with
                       contract section 4.7.2. DSHS may determine, in its sole
                       judgment, if materials which are primarily visual meet
                       the requirements of contract section 4.7.

             10.10.6.  The Contractor shall not offer anything of value as an
                       inducement to enrollment.

             10.10.7.  The Contractor shall not use the sale of other insurance
                       to attempt to influence enrollment.

             10.10.8.  The Contractor shall not directly or indirectly conduct
                       door-to-door, telephonic or other cold-call marketing of
                       enrollment.

        10.11.  INFORMATION REQUIREMENTS FOR ENROLLEES AND POTENTIAL ENROLLEES:
                The Contractor must provide sufficient, accurate oral and
                written information to potential enrollees to assist them in
                making an informed decision about enrollment (SSA 1932(d)(2)).
                The Contractor shall provide to potential enrollees upon request
                and to each enrollee, within fifteen (15) working days of
                enrollment, at any time upon request, and at least once a year,
                the

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                information needed to understand benefit coverage and obtain
                care. All enrollee information shall have the prior written
                approval of DSHS.

             The Contractor's written information to enrollees and potential
             enrollees must include:

             10.11.1.  How to choose a PCP, including how to request a list of
                       PCPs that includes their identity, location,
                       qualifications and availability.

             10.11.2.  How obtain a list of specialists that includes their
                       identity, location, qualifications and availability.

             10.11.3.  How to obtain information regarding any limitations to
                       the availability of or referral to specialists to assist
                       the enrollee in selecting a PCP.

             10.11.4.  How to obtain information regarding Physician Incentive
                       Plans.

             10.11.5.  How to change a PCP.

             10.11.6.  Informed consent guidelines.

             10.11.7.  Information regarding conversion rights under RCW
                       48.46.450 or RCW 48.44.370.

             10.11.8.  How to request a disenrollment.

             10.11.9.  Information regarding advance directives.

             10.11.10. How to recommend changes in the Contractor's policies and
                       procedures.

             10.11.11. Health promotion, health education and preventive health
                       services available.

             10.11.12. How to obtain assistance from the Contractor in using the
                       complaint and appeal process, including independent
                       review (must assure enrollees that information will be
                       kept confidential except as needed to process the
                       complaint or appeal).

             10.11.13. The right to initiate a complaint or file an appeal,
                       including independent review, in accord with the
                       Contractor's DSHS approved policies and procedures
                       regarding complaints and appeals.

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             10.11.14. The right to request a DSHS Fair Hearing with no
                       requirement to exhaust the Contractor's complaint and
                       appeal process, and how to do so.

             10.11.15. The enrollee's rights and responsibilities with respect
                       to receiving covered services.

             10.11.16. Information about covered benefits and how to contact
                       DSHS regarding services that may be covered by DSHS, but
                       are not covered benefits under this agreement.

        10.12.  PHYSICIAN INCENTIVE PLAN INFORMATION: The Contractor must
                provide information concerning physician incentive plans upon
                request to enrollees enrolled under the terms of this agreement
                (42 CFR 434.70(a)(4)).

        10.13.  FAIR HEARING INFORMATION: The Contractor shall provide
                information to enrollees about their right to file a Fair
                Hearing request and how to do so, pursuant to WAC 388-02, and
                their right to a second opinion, if services or a referral for
                services have been denied, discontinued or modified.

        10.14.  PROHIBITION ON ENROLLEE CHARGES FOR COVERED SERVICES: Under no
                circumstances shall the Contractor, or any providers used to
                deliver services covered under the terms of this agreement,
                charge enrollees for covered services (SSA 1932(b)(6), SSA
                1128B(d)(1)).

        10.15.  PROHIBITION ON PROVIDER/ENROLLEE DISCUSSION LIMITATIONS: The
                Contractor shall not prohibit any health care professional from
                fully discussing an enrollee's condition and all available
                treatment options, regardless of whether such treatment options
                are covered under the terms of this agreement (SSA 1932(b)(3)).

        10.16.  PROVIDER LICENSE NONDISCRIMINATION: The Contractor shall not
                discriminate, with respect to participation, reimbursement, or
                indemnification, against providers practicing within their
                licensed scope of practice solely on the basis of the type of
                license or certification they hold. This provision shall not be
                construed to prohibit the Contractor from otherwise limiting
                participation to meet its service and cost control needs, and
                standards for quality of care (SSA 1932(b)(7)).

        10.17.  EXPERIMENTAL AND INVESTIGATIONAL SERVICES:

             10.17.1.  If the Contractor excludes or limits benefits for any
                       services for one or more medical conditions or illnesses
                       because such services are deemed to be experimental or
                       investigational, the Contractor must develop and follow
                       policies and procedures for such exclusions and
                       limitations. The policies and procedures shall identify
                       the persons

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                       responsible for such decisions. The policies and
                       procedures and any criteria for making decisions shall
                       be made available to DSHS upon request.

                       In making the determination, whether a service is
                       experimental and investigational and, therefore, not a
                       covered service, the Contractor shall consider the
                       following:

               10.17.1.1.     Evidence in peer-reviewed, medical literature, as
                              defined in Section 1.13, and pre-clinical and
                              clinical data reported to the National Institute
                              of Health and/or the National Cancer Institute,
                              concerning the probability of the service
                              maintaining or significantly improving the
                              enrollee's length or quality of life, or ability
                              to function, and whether the benefits of the
                              service or treatment are outweighed by the risks
                              of death or serious complications.

               10.17.1.2.     Whether evidence indicates the service or
                              treatment is likely to be as beneficial as
                              existing conventional treatment alternatives.

               10.17.1.3.     Any relevant, specific aspects of the condition.

               10.17.1.4.     Whether the service or treatment is generally used
                              for the condition in the state of Washington.

               10.17.1.5.     Whether the service or treatment is under
                              continuing scientific testing and research.

               10.17.1.6.     Whether the service or treatment shows a
                              demonstrable benefit for the condition.

               10.17.1.7.     Whether the service or treatment is safe and
                              efficacious.

               10.17.1.8.     Whether the service or treatment will result in
                              greater benefits for the condition than another
                              generally available service.

               10.17.1.9.     If approval is required by a regulating agency,
                              such as the Food and Drug Administration, whether
                              such approval has been given before the date of
                              service.

             10.17.2.  Criteria to determine whether a service is experimental
                       or investigational must be no more stringent for Healthy
                       Options enrollees than that applied to any other
                       enrollees. A service or treatment that is not
                       experimental for one enrollee with a particular medical
                       condition cannot be determined to be experimental for
                       another enrollee with the same medical condition and
                       similar health status.

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             10.17.3.  A service or treatment may not be determined to be
                       experimental and investigational solely because it is
                       under clinical investigation when there is sufficient
                       evidence in peer-reviewed medical literature to draw
                       conclusions, and the evidence indicates the service or
                       treatment will probably be of significant benefit to
                       enrollees.

             10.17.4.  A determination made by the Contractor shall be subject
                       to appeal through the Contractor's appeal process,
                       including independent review, and through the DSHS fair
                       hearing process.

11.     SCHEDULE OF BENEFITS

        11.1.   COVERED SERVICES:

             11.1.1.   The Contractor shall cover the services described in this
                       Section when medically necessary. The amount and duration
                       of covered services that are medically necessary depends
                       on the enrollee's condition.

             11.1.2.   Except as specifically provided herein, the scope of
                       covered services shall be comparable to the DSHS Medicaid
                       fee-for-service program. For specific covered services,
                       this shall not be construed as requiring the Contractor
                       to cover the specific items covered by DSHS under its
                       fee-for-service program, but shall rather be construed to
                       require the Contractor to cover the same scope of
                       services.

             11.1.3.   Enrollees have the right to self-refer for certain
                       services to providers paid through separate arrangements
                       with the State of Washington. The Contractor is not
                       responsible for the coverage of the services provided
                       through such separate arrangements. The enrollees also
                       may choose to receive such services from the Contractor.
                       The Contractor shall assure that enrollees are informed,
                       whenever appropriate, of all options in such a way as not
                       to prejudice or direct the enrollee's choice of where to
                       receive the services. If the Contractor in any manner
                       deprives enrollees of their free choice to receive
                       services through the Contractor, the Contractor shall pay
                       the local health department, family planning facility, or
                       RSN for such services up to the limits described herein.
                       The services to which an enrollee may self-refer are:

               11.1.3.1.      Outpatient mental health services to community
                              mental health providers of the Regional Support
                              Network for Prepaid Health Plan.

               11.1.3.2.      Family planning services and sexually transmitted
                              disease screening and treatment services provided
                              at family planning facilities, such as Planned
                              Parenthood.

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               11.1.3.3.      Immunizations, sexually-transmitted disease
                              screening and follow-up, immunodeficiency virus
                              (HIV) screening, tuberculosis screening and
                              follow-up, and family planning services through
                              the local health department.

               11.1.3.4.      Medical services provided to enrollees who have a
                              diagnosis of alcohol and/or chemical dependency
                              are covered when those services are otherwise
                              covered services.

             11.1.4.   INPATIENT SERVICES: Provided by acute care hospitals
                       (licensed under RCW 70.41), or nursing facilities
                       (licensed under RCW 18-51) when nursing facility services
                       are not covered by the Department's Aging and Adult
                       Services Administration and the Contractor determines
                       that nursing facility care is more appropriate than acute
                       hospital care. Inpatient physical rehabilitation services
                       are included.

             11.1.5.   OUTPATIENT HOSPITAL SERVICES: Provided by acute care
                       hospitals (licensed under RCW 70.41).

             11.1.6.   EMERGENCY SERVICES: In accord with the requirements of 42
                       CFR 438.114, all inpatient and outpatient services that
                       are provided by a provider who is qualified to furnish
                       Medicaid services, without regard to whether the provider
                       is a participating or non-participating provider, which
                       are necessary to evaluate and stabilize an emergency
                       medical condition as defined in Section 1.8.

                       Emergency services shall be provided without requiring
                       prior authorization.

                       What constitutes an emergency medical condition may not
                       be limited on the basis of lists of diagnoses or
                       symptoms (42 CFR 438.114(d)(i)).

                       Services provided when the PCP or other plan
                       representative has instructed the enrollee to seek
                       emergency services, regardless of whether the enrollee's
                       condition meets the prudent layperson standard.

                       If there is a disagreement between a hospital and the
                       Contractor concerning whether the patient is stable
                       enough for discharge or transfer, or whether the medical
                       benefits of an unstabilized transfer outweigh the risks,
                       the judgment of the attending physician(s) actually
                       caring for the enrollee at the treating facility
                       prevails and is binding on the Contractor.

                       Any post-stabilization services, related to the
                       admitting diagnosis, up to the point of discharge, that
                       the Contractor has either:

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               11.1.6.1.      Authorized

               11.1.6.2.      Failed to authorize because the Contractor did not
                              respond within thirty (30) minutes to a request
                              for authorization for post-stabilization services
                              (RCW 48.43.093(d))

               11.1.6.3.      Failed to authorize due to circumstances beyond
                              the emergency department's control

             11.1.7.   AMBULATORY SURGERY CENTER: Services provided at
                       ambulatory surgery centers.

             11.1.8.   PROVIDER SERVICES: Services provided in an inpatient or
                       outpatient (e.g., office, clinic, emergency room or home)
                       setting by licensed professionals including, but not
                       limited to, physicians, physician assistants, advanced
                       registered nurse practitioners, midwives, podiatrists,
                       audiologists, registered nurses, and certified
                       dietitians.

                       Provider Services include, but are not limited to:

               11.1.8.1.      Medical examinations, including wellness exams for
                              adults and EPSDT for children

               11.1.8.2.      Immunizations

               11.1.8.3.      Maternity care

               11.1.8.4.      Family planning services provided or referred by a
                              participating provider or practitioner

               11.1.8.5.      Performing and/or reading diagnostic tests

               11.1.8.6.      Private duty nursing

               11.1.8.7.      Surgical services

               11.1.8.8.      Surgery to correct defects from birth, illness, or
                              trauma, or for mastectomy reconstruction

               11.1.8.9.      Anesthesia

               11.1.8.10.     Administering pharmaceutical products

               11.1.8.11.     Fitting prosthetic and orthotic devices

               11.1.8.12.     Rehabilitation services

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               11.1.8.13.     Enrollee health education

               11.1.8.14.     Nutritional counseling for specific conditions
                              such as diabetes, high blood pressure, and
                              anemia

               11.1.8.15.     Nutritional counseling when referred as a result
                              of an EPSDT exam

             11.1.9.   TISSUE AND ORGAN TRANSPLANTS: Heart, kidney, liver, bone
                       marrow, lung, heart-lung, pancreas, kidney-pancreas,
                       cornea, and peripheral blood stem cell.

             11.1.10.  LABORATORY, RADIOLOGY, AND OTHER MEDICAL IMAGING
                       SERVICES: Screening and diagnostic services and radiation
                       therapy.

             11.1.11.  VISION CARE: Eye examinations for visual acuity and
                       refraction once every twenty-four (24) months for adults
                       and once every twelve (12) months for children under age
                       twenty-one (21). These limitations do not apply to
                       additional services needed for medical conditions. The
                       Contractor may restrict non-emergent care to
                       participating providers. Enrollees may self-refer to
                       participating providers for these services.

             11.1.12.  OUTPATIENT MENTAL HEALTH:

               11.1.12.1.     Psychiatric and psychological testing, evaluation
                              and diagnosis:

                 11.1.12.1.1.   Once every twelve (12) months for adults
                                twenty-one (21) and over

                 11.1.12.1.2.   Unlimited for children under age twenty-one (21)
                                when identified in an EPSDT visit

               11.1.12.2.     Unlimited medication management:

                 11.1.12.2.1.   Provided by the PCP or by PCP referral

                 11.1.12.2.2.   Provided in conjunction with mental health
                                treatment covered by the Contractor

               11.1.12.3.     Twelve hours per calendar year for treatment

               11.1.12.4.     Transition to the RSN, as needed to assure
                              continuity of care, when the enrollee has
                              exhausted the benefit covered by the Contractor or
                              when enrollee request such transition

               11.1.12.5.     Referrals To and From the RSN:

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                 11.1.12.5.1.   The Contractor shall cover mental health
                                services provided by the RSN, up to the limits
                                described herein, if the Contractor refers an
                                enrollee to the RSN for those services.

                 11.1.12.5.2.   The Contractor may, but is not required to,
                                accept referrals from the RSN for the mental
                                health services described herein.

               11.1.12.6.     The Contractor may subcontract with RSNs to
                              provide the outpatient mental health services that
                              are the responsibility of the Contractor. Such
                              agreements shall not be written or construed in a
                              manner that provides less than the services
                              otherwise described in this Section as the
                              Contractor's responsibility for outpatient mental
                              health services.

               11.1.12.7.     The DSHS Mental Health Division (MHD) and Medical
                              Assistance Administration (MAA) shall each appoint
                              a Mental Health Care Coordinator (MHCC). The MHCCs
                              shall be empowered to decide all Contractor and
                              RSN issues regarding outpatient mental health
                              coverage that cannot be otherwise resolved between
                              the Contractor and the RSN. The MHCCs will also
                              undertake training and technical assistance
                              activities that further coordination of care
                              between MAA, MHD, Healthy Options contractors and
                              RSNs. The Contractor shall cooperate with the
                              activities of the MHCCs.

             11.1.13.  OCCUPATIONAL THERAPY, SPEECH THERAPY, AND PHYSICAL
                       THERAPY: Services for the restoration or maintenance of a
                       function affected by an enrollee's illness, disability,
                       condition or injury, or for the amelioration of the
                       effects of a developmental disability.

             11.1.14.  PHARMACEUTICAL PRODUCTS: Prescription drug products
                       according to a Department approved formulary, which
                       includes both legend and over-the-counter (OTC)
                       products. The Contractor's formulary shall include all
                       therapeutic classes in DSHS' fee-for-service drug file
                       and a sufficient variety of drugs in each therapeutic
                       class to meet medically necessary health needs. The
                       Contractor shall provide participating pharmacies and
                       participating providers with its formulary and
                       information about how to request non-formulary drugs. The
                       Contractor shall approve or deny all requests for
                       non-formulary drugs by the business day following the day
                       of request.

                       Covered drug products shall include:

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               11.1.14.1.     Oral, enteral and parenteral nutritional
                              supplements and supplies, including prescribed
                              infant formulas

               11.1.14.2.     All Food and Drug Administration (FDA) approved
                              contraceptive drugs, devices, and supplies;
                              including but not limited to Depo-Provera,
                              Norplant, and OTC products

               11.1.14.3.     Antigens and allergens

               11.1.14.4.     Therapeutic vitamins and iron prescribed for
                              prenatal and postnatal care.

             11.1.15.  HOME HEALTH SERVICES: Home health services through
                       state-licensed agencies.

             11.1.16.  DURABLE MEDICAL EQUIPMENT (DME) AND SUPPLIES: Including,
                       but not limited to: DME; surgical appliances; orthopedic
                       appliances and braces; prosthetic and orthotic devices;
                       breast pumps; incontinence supplies for enrollees over
                       three (3) years or age; and medical supplies.
                       Incontinence supplies shall not include non-disposable
                       diapers unless the enrollee agrees.

             11.1.17.  OXYGEN AND RESPIRATORY SERVICES: Oxygen, and respiratory
                       therapy equipment and supplies.

             11.1.18.  HOSPICE SERVICES: When the enrollee elects hospice care.

             11.1.19.  BLOOD, BLOOD COMPONENTS AND HUMAN BLOOD PRODUCTS:
                       Administration of whole blood and blood components as
                       well as human blood products. In areas where there is a
                       charge for blood and/or blood products the Contractor
                       shall cover the cost of the blood or blood products.

             11.1.20.  TREATMENT FOR RENAL FAILURE: Hemodialysis, or other
                       appropriate procedures to treat renal failure, including
                       equipment needed in the course of treatment.

             11.1.21.  AMBULANCE TRANSPORTATION: The Contractor shall cover
                       ground and air ambulance transportation for emergency
                       medical conditions, as defined in Section 1.8 of this
                       agreement, including, but not limited to, Basic and
                       Advanced Life Support Services, and other required
                       transportation costs, such as tolls and fares. In
                       addition, the Contractor shall cover ambulance services
                       under two circumstances for non-emergencies:

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                                                        2003 HO & SCHIP Contract

               11.1.21.1.     When it is necessary to transport an enrollee
                              between facilities to receive a covered services;
                              and,

               11.1.21.2.     When it is necessary to transport an enrollee, who
                              must be carried on a stretcher, or who may require
                              medical attention en route (RCW 18.73.180) to
                              receive a covered service.

             11.1.22.  CHIROPRACTIC SERVICES: For children when they are
                       referred during an EPSDT exam.

             11.1.23.  NEURODEVELOPMENTAL SERVICES: When provided by a facility
                       that is not a DSHS recognized neurodevelopmental center.

             11.1.24.  SMOKING CESSATION SERVICES: For pregnant women through
                       sixty (60) days post pregnancy.

11.2.   EXCLUSIONS:

        The following services and supplies are excluded from coverage under
        this agreement. This shall not be construed to prevent the Contractor
        from covering any of these services when the Contractor determines it is
        medically necessary. Unless otherwise required by this agreement,
        ancillary services resulting from excluded services are also excluded.

             11.2.1.   SERVICES COVERED BY DSHS FEE-FOR-SERVICE OR THROUGH
                       SELECTIVE CONTRACTS:

               11.2.1.1.      School Medical Services for Special Students as
                              described in the DSHS billing instructions for
                              School Medical Services.

               11.2.1.2.      Eyeglass Frames, Lenses, and Fabrication Services
                              covered under DSHS' selective contract for these
                              services, and associated fitting and dispensing
                              services.

               11.2.1.3.      Voluntary Termination of Pregnancy, including
                              complications.

               11.2.1.4.      Transportation Services other than Ambulance:
                              Taxi, cabulance, voluntary transportation, and
                              public transportation.

               11.2.1.5.      Dental Care, Prostheses and Oral Surgery,
                              including physical exams required prior to
                              hospital admissions for oral surgery.

               11.2.1.6.      Hearing Aid Devices, including fitting, follow-up
                              care and repair.

               11.2.1.7.      First Steps Maternity Case Management and
                              Maternity Support Services.

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               11.2.1.8.      Sterilizations for enrollees under age 21, or
                              those that do not meet other federal requirements.

               11.2.1.9.      Health care services provided by a
                              neurodevelopmental center recognized by DSHS.

               11.2.1.10.     Certain services provided by a health department
                              or family planning clinic when a client
                              self-refers for care.

               11.2.1.11.     Inpatient psychiatric professional services.

               11.2.1.12.     Pharmaceutical products prescribed by any provider
                              related to services provided under a separate
                              agreement with DSHS or related to services not
                              covered by the Contractor.

               11.2.1.13.     Laboratory services required for medication
                              management of drugs prescribed by community mental
                              health providers whose services are purchased by
                              the Mental Health Division.

               11.2.1.14.     Protease Inhibitors

               11.2.1.15.     Services ordered as a result of an EPSDT exam that
                              are not otherwise covered services.

               11.2.1.16.     Gastroplasty

               11.2.1.17.     Prenatal Diagnosis Genetic Counseling provided to
                              enrollees to allow enrollees and their PCPs to
                              make informed decisions regarding current genetic
                              practices and testing. Genetic services beyond
                              Prenatal Diagnosis Genetic Counseling are covered
                              as maternity care when medically necessary, see
                              Section 11.1.8.3.

               11.2.1.18.     Gender dysphoria surgery and related procedures,
                              treatment, prosthetics, or supplies when approved
                              by DSHS in accord with WAC 388-531.

             11.2.2.   SERVICES COVERED BY OTHER DIVISIONS IN THE DEPARTMENT OF
                       SOCIAL AND HEALTH SERVICES:

               11.2.2.1.      Substance abuse treatment services covered through
                              the Division of Alcohol and Substance Abuse
                              (DASA), including inpatient detoxification
                              services for alcohol (3-day) and drugs (5-day)
                              with no complicating medical conditions.

               11.2.2.2.      Nursing facility and community based services
                              (e.g. COPES and Personal Care Services) covered
                              through the Aging and Adult Services
                              Administration.

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               11.2.2.3.      Mental health services separately purchased for
                              all Medicaid clients by the Mental Health
                              Division, including 24-hour crisis intervention,
                              outpatient mental health treatment services, and
                              inpatient psychiatric services. This shall not be
                              construed to prevent the Contractor from
                              purchasing covered outpatient mental health
                              services from community mental health providers.

               11.2.2.4.      Health care services covered through the Division
                              of Developmental Disabilities for
                              institutionalized clients.

             11.2.3.   SERVICE COVERED BY OTHER STATE AGENCIES:

                       Infant formula for oral feeding provided by the Women,
                       Infants and Children (WIC) program in the Department of
                       Health. Medically necessary nutritional supplements for
                       infants are covered under the pharmacy benefit.

             11.2.4.   SERVICES NOT COVERED BY EITHER DSHS OR THE CONTRACTOR:

               11.2.4.1.      Medical examinations for Social Security
                              Disability.

               11.2.4.2.      Services for which plastic surgery or other
                              services are indicated primarily for cosmetic
                              reasons.

               11.2.4.3.      Physical examinations required for obtaining
                              continuing employment, insurance or governmental
                              licensing.

               11.2.4.4.      Experimental and Investigational Treatment or
                              Services, determined in accord with Section 10.18,
                              Experimental and Investigational Services, and
                              services associated with experimental or
                              investigational treatment or services.

               11.2.4.5.      Reversal of voluntary surgically induced
                              sterilization.

               11.2.4.6.      Personal Comfort Items, including but not limited
                              to guest trays, television and telephone charges.

               11.2.4.7.      Biofeedback Therapy.

               11.2.4.8.      Diagnosis and treatment of infertility, impotence,
                              and sexual dysfunction.

               11.2.4.9.      Orthoptic (eye training) care for eye conditions.

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               11.2.4.10.     Tissue or organ transplants that are not
                              specifically listed as covered.

               11.2.4.11.     Immunizations required for international travel
                              purposes only.

               11.2.4.12.     Court-ordered services.

               11.2.4.13.     Any service provided to an incarcerated enrollee,
                              beginning when a law enforcement officer takes the
                              enrollee into legal custody.

               11.2.4.14.     Any service, product, or supply paid for by DSHS
                              under its fee-for-service program only on an
                              exception to policy basis. The Contractor may also
                              make exceptions and pay for services it is not
                              required to cover under this agreement.

               11.2.4.15.     Any other service, product, or supply not covered
                              by DSHS under its fee-for-service program.

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                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

                                   EXHIBIT A-1
                          QUALITY IMPROVEMENT STANDARDS
                                 2003 STANDARDS
                                      NCQA

The Contractor shall comply with the Quality Improvement Program 2003 Standards.
The standards are adopted primarily from NCQA's Standards for the Accreditation
of Managed Care Organizations. DSHS is implementing as the Quality Improvement
Program 2003 Standards, standards which are substantially the same as the
Quality Improvement Program Standards in the 2002 HO/SCHIP Contract. DSHS
reserves the right to revise the Quality Improvement Program 2003 Standards to
ensure that no standard is in conflict with the Washington State Patient Bill of
Rights (PBOR), Health Insurance Portability and Accountability Act (HIPAA), or
any other applicable state or federal statute or regulation. In the event of
conflict between the Quality Improvement Program 2003 Standards and the
standards in PBOR, HIPAA, or state or federal statute or regulation, the
standard which, in the sole judgment of DSHS, is most favorable to enrollees
shall have precedence.

DSHS agrees that any Contractor that meets or exceeds a 90% TEAMonitor score on
a specific quality standard (Quality Management and Improvement, Utilization
Management, Credentialing and Recredentialing, Members' Rights and
Responsibilities, Preventive Health Services and Medical Records) over two
consecutive audit years to be in compliance with that specific standard for the
next audit year. If DSHS has evidence that subsequent performance has been
deficient, the CONTRACTOR shall be subject to audit on all standards. In
determining whether a Contractor's performance has been deficient with respect
to the Quality Improvement Standards, DSHS will consider NCQA Reports, enrollee
complaints, appeals and denials, and any other substantial data or information.

The above process shall not apply to areas specifically required for annual
review by The Federal Medicaid Act (Social Security Act, 42. US. C. Sec. 1396 et
seq.), applicable federal regulations, The Healthy Options Waiver 1115b,
Guidelines for Addressing Fraud and Abuse in Medicaid Managed Care, The Balanced
Budget Act of 1997 and any published, applicable BBA regulations; applicable
RCWs and applicable WACs.

The following NCQA definitions apply to terms used in this document:

COMPLAINT: A term commonly used to describe an oral or written expression of
dissatisfaction by a member.

APPEAL: A formal request by a practitioner or covered person for reconsideration
of a decision such as a utilization review recommendation, a benefit payment, an
administrative action, quality of care or service issue, with the goal of
finding a mutually acceptable solution.

PRACTITIONER: Any individual who is qualified to practice a profession.
Practitioners are usually required to be licensed as defined by law.

PROVIDER: An institution or organization that provides services for your
organization's members. Examples of providers include hospitals and home health
agencies.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                        1

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

QUALITY MANAGEMENT AND IMPROVEMENT

QI 1        PROGRAM STRUCTURE

            The managed care organization's (MCO) quality improvement (QI)
            structures and processes are clearly defined, and responsibility is
            assigned to appropriate individuals.

QI 1.1      A written description of the QI program outlines the program
            structure and content.

QI 1.1.2    The description of the program includes a section that addresses
            improving patient safety.

QI 1.2      The QI program is accountable to the governing body.

QI 1.3      The program description is evaluated annually and updated as
            necessary.

QI 1.4      A designated physician has substantial involvement in the
            implementation of the QI program.

QI 1.5      A committee oversees and is involved in QI activities.

QI 1.6      The program description specifies the role, structure, and function,
            including frequency of meetings of the QI committee and other
            relevant committees.

QI 1.7      The annual QI work plan, or schedule of activities, includes the
            following:

QI 1.7.1          objectives, scope, and planned projects or activities that
                  address the quality and safety of clinical care and the
                  quality of service for the year;

QI 1.7.2          planned monitoring of previously identified issues, including
                  tracking of issues over time and

QI 1.7.3          planned evaluation of the QI program as described in QI 12.1.

QI 1.8      The QI program resources (e.g. personnel, analytic capabilities,
            data resources) are adequate to meet its needs.

QI 2        PROGRAM OPERATIONS

            The managed care organization's quality improvement program is fully
            operational.

QI 2.1      The QI committee recommends policy decisions, reviews and evaluates
            the results of QI activities, institutes needed actions, and ensures
            follow-up, as appropriate.

QI 2.2      There are contemporaneous minutes (i.e. created at the time the
            activity is conducted), dated and signed, that reflect all QI
            committee decisions and actions.

QI 2.3      The MCO's practitioners participate actively in the QI program.

QI 2.4      Upon request, the MCO makes available to its members and
            practitioners information about its QI program, including a
            description of the QI program and a report on the MCO's progress in
            meeting its goals.

QI 3        HEALTH SERVICES CONTRACTING

            Contracts with individual practitioners and organizational
            providers, including those making UM decisions, specify that
            contractors cooperate with the managed care organization's QI
            program.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                        2

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

QI 3.1      Contracts with practitioners specifically require that:

QI 3.1.1          the practitioners cooperate with QI activities;

QI 3.1.2          the MCO has access to the practitioners' medical records to
                  the extent permitted by state and federal law and

QI 3.1.3          the MCO allows open practitioner-patient communication
                  regarding appropriate treatment alternatives and without
                  penalizing practitioners for discussing medically necessary or
                  appropriate care for the patient.

QI 3.2      Contracts with providers specifically require that:

QI 3.2.1          the providers cooperate with QI activities and

QI 3.2.2          the MCO has access to the provider's medical records to the
                  extent permitted by state and federal law.

QI 4        AVAILABILITY OF PRACTITIONERS

            The MCO ensures that its network is sufficient in numbers and types
            of practitioners.

QI 4.1      In creating and maintaining its delivery system of practitioners,
            the MCO takes into consideration assessed special and cultural needs
            and preferences.

QI 4.2      The MCO implements mechanisms designed to ensure the availability of
            PCPs.

QI 4.2.1          The MCO defines the practitioners who serve as PCPs within its
                  delivery system.

QI 4.2.2          The MCO establishes standards for number and geographic
                  distribution of PCPs.

QI 4.2.3          The MCO collects and analyzes data to measure its performance
                  against the standards established in QI 4.2.2.

QI 4.2.4          The MCO identifies opportunities for improvement and decides
                  which opportunities to pursue.

QI 4.2.5          The MCO implements interventions to improve its performance.

QI 4.2.6          The MCO measures the effectiveness of the interventions.

QI 4.3      The MCO implements mechanisms designed to ensure the availability of
            specialty care practitioners.

QI 4.3.1          The MCO establishes standards for number and geographic
                  distribution of specialty practitioners.

QI 4.3.2          The MCO collects and analyzes data to measure its performance
                  against the standards established in QI 4.3.1.

QI 4.3.3          The MCO identifies opportunities for improvement and decides
                  which opportunities to pursue.

QI 4.3.4          The MCO implements interventions to improve its performance.

QI 4.3.5          The MCO measures the effectiveness of the interventions.

QI 5        ACCESSIBILITY OF SERVICES

            The MCO establishes mechanisms to assure the accessibility of
            primary care services, behavioral health services and member
            services.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                        3

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

QI 5.1      The MCO establishes standards for access to medical care:

QI 5.1.1          preventive care appointments;

QI 5.1.2          routine primary care appointments;

QI 5.1.3          urgent care appointments;

QI 5.1.4          emergency care; and

QI 5.1.5          after-hours care.

QI 5.2      The MCO establishes standards for key elements of telephone customer
            service.

QI 5.4      The MCO collects and analyzes data to measure its performance
            against the standards.

QI 5.5      The MCO identifies opportunities for improvement and decides which
            opportunities to pursue.

QI 5.6      The MCO implements interventions to improve its performance.

QI 5.7      The MCO measures the effectiveness of the interventions.

QI 6        MEMBER SATISFACTION

            The MCO implements mechanisms to assure member satisfaction.

QI 6.1      The MCO assesses member satisfaction by:

QI 6.1.1          evaluating member complaints and appeals and

QI 6.1.2          evaluating requests to change practitioners and/or sites.

QI 6.2      The MCO uses appropriate methods to collect data for the activities
            listed in QI 6.1:

QI 6.2.1          The appropriate population identified.

QI 6.2.2          If sampling used, appropriate samples are drawn from the
                  affected population.

QI 6.2.3          Valid and reliable data are collected.

QI 6.3      The MCO analyzes data from at least the activities listed in QI 6.1
            and the CAHPS(R) 2.0H survey.

QI 6.4      The MCO identifies opportunities for improvement and decides which
            opportunities to pursue.

QI 6.5      The MCO implements interventions to improve its performance.

QI 6.6      The MCO measures the effectiveness of the interventions.

QI 6.7      The MCO informs practitioners and providers of results of member
            satisfaction activities.

QI 7        HEALTH MANAGEMENT SYSTEMS

            The MCO actively works to improve the health status of its members
            with chronic conditions.

QI 7.1      The MCO identifies members with chronic conditions and offers
            appropriate services and programs to assist in managing their
            conditions.

QI 7.2      The MCO informs and educates practitioners about using the health
            management programs for the members assigned to them.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                        4

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

QI 8        CLINICAL PRACTICE GUIDELINES

            The MCO is accountable for adopting and disseminating practice
            guidelines for the provision of acute, chronic and behavioral health
            services that are relevant to its enrolled membership.

QI 8.1      The clinical practice guidelines are based on reasonable medical
            evidence.

QI 8.2      The MCO involves its practitioners in the adoption of clinical
            practice guidelines.

QI 8.3      The MCO has developed a mechanism for reviewing the guidelines at
            least every two years and updating them as appropriate.

QI 8.4      The MCO distributes the guidelines to its practitioners.

QI 8.5      Annually, the MCO measures performance against at least three
            guidelines, one of which relates to behavioral health.

QI 8.6      Decision making in utilization management, member education,
            interpretation of covered benefits and other areas to which the
            clinical guidelines are applicable is consistent with the
            guidelines.

QI 9        CONTINUITY AND COORDINATION OF CARE

            The MCO monitors the continuity and coordination of care that
            members receive.

QI 9.1      The MCO monitors the continuity and coordination of care that
            members receive across practices and provider sites, including at
            minimum PCP sites with 50 or more members.

QI 9.2      The MCO monitors the continuity and coordination of general medical
            care with behavioral health care. To this end, the MCO collaborates
            with its behavioral health specialists to:

QI 9.2.1          Exchange information in an effective, timely and confidential
                  manner, including patient-approved communications between
                  medical practitioners and behavioral health practitioners and
                  providers.

QI 9.3      The MCO collects and analyzes data to evaluate continuity and
            coordination of care.

QI 9.3.1          The MCO analyzes data to identify opportunities for
                  improvement.

QI 9.4      The MCO implements interventions to improve continuity and
            coordination of care.

QI 9.4.1          The MCO implements interventions when it identifies an
                  opportunity for improvement.

QI 9.5      To ensure the continuity and coordination of care, the MCO notifies
            members affected by the termination of a practitioner or practice
            site and assists them in selecting a new practitioner or site.

QI 10       CLINICAL MEASUREMENT ACTIVITIES

            The MCO uses data collection, measurement and analysis to track
            clinical issues that are relevant to its population.

QI 10.1     At a minimum, the MCO adopts or establishes quantitative measures to
            assess performance and to identify and prioritize areas for
            improvement for three clinical issues, including at least one
            behavioral health issue.

QI 10.1.1         The measures used to assess performance are objective and
                  quantifiable.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                        5

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

QI 10.1.2         The measures are based on current scientific knowledge and
                  clinical experience.

QI 10.1.3         Each measure has an established goal and/or benchmark.

QI 10.2     The MCO uses appropriate methods to collect data for each assessment
            measure.

QI 10.2.1         The affected population is identified.

QI 10.2.2         If sampling used, appropriate samples are drawn from the
                  affected population.

QI 10.2.3         Valid and reliable data collected.

QI 10.3     The MCO analyzes data collected for each assessment measure.

QI 10.3.1         There is a quantitative analysis of the assessment data.

QI 10.3.2         Appropriate personnel, including practitioners, evaluate the
                  analyzed data to identify barriers to improvement that are
                  related to clinical practice and/or administrative aspects of
                  the delivery system.

QI 11       INTERVENTION AND FOLLOW UP FOR CLINICAL ISSUES

            The MCO takes action to improve quality by addressing the
            opportunities for improving performance identified in QI 10. The MCO
            also assesses the effectiveness of these interventions through
            systematic follow-up.

QI 11.1     The MCO follows up the opportunities for improvement identified
            through assessment and evaluation activities.

QI 11.1.1         The MCO identifies opportunities for improvement and decides
                  which opportunities to pursue.

QI 11.1.2         The MCO implements interventions to improve practitioner and
                  system performance, as appropriate.

QI 11.1.3         The MCO measures whether the interventions have been
                  effective.

QI 12       EFFECTIVENESS OF THE QI PROGRAM

            The MCO evaluates the overall effectiveness of its QI program in
            addressing the quality and safety of clinical care and demonstrates
            improvements in the quality of clinical care and quality of service
            to its members.

QI 12.1     There is an annual written evaluation of the QI program. This
            evaluation includes:

QI 12.1.1         a description of completed and ongoing QI activities that
                  address the quality and safety of clinical care and the
                  quality of service;

QI 12.1.2         trending of measures to assess performance in the quality and
                  safety of clinical care and the quality of service;

QI 12.1.2         an analysis of whether there have been demonstrated
                  improvements in the quality of clinical care and the quality
                  of service to members and

QI 12.1.3         an evaluation of the overall effectiveness of the QI program,
                  including progress toward influencing safe clinical practices
                  throughout the network.

QI 12.2     There is evidence that QI activities have contributed to meaningful
            improvement in the quality of clinical care and quality of service
            provided to members.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                        6

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

QI 13       DELEGATION OF QI ACTIVITY

            If the MCO delegates any QI activities, there is evidence of
            oversight of the delegated activity.

QI 13.1     A mutually agreed upon document describes:

QI 13.1.1         the responsibilities of the MCO and the delegated entity;

QI 13.1.2         the delegated activities;

QI 13.1.3         the frequency of reporting to the MCO;

QI 13.1.4         the process by which the MCO evaluates the delegated entity's
                  performance and

QI 13.1.5         the remedies, including revocation of the delegation,
                  available to the MCO if the delegated entity does not fulfill
                  its obligations.

QI 13.2     There is evidence that the MCO:

QI 13.2.1         evaluates the delegated entity's capacity to perform delegated
                  activities prior to delegation;

QI 13.2.2         approves the delegated entity's QI work plan and QI program
                  description annually;

QI 13.2.3         evaluates regular reports as specified in QI 13.1.3 and

QI 13.2.4         evaluates annually whether the delegated entity's activities
                  are being conducted in accordance with the MCO's expectations
                  and NCQA standards.

UTILIZATION MANAGEMENT

UM1         UTILIZATION MANAGEMENT STRUCTURE

            The MCO utilization management (UM) structures and processes are
            clearly defined and responsibility is assigned to appropriate
            individuals.

UM 1.1      A written description of the UM program outlines the program
            structure and accountability.

UM 1.2      A designated senior physician has substantial involvement in the UM
            program implementation.

UM 1.3      The description includes the scope of the program and the processes
            and information sources used to make determinations of benefit
            coverage and medical necessity.

UM 1.4      The UM program is evaluated and approved annually by senior
            management or the QI committee. It is updated as necessary.

UM 2        CLINICAL CRITERIA FOR UM DECISIONS

            To make utilization decisions, the MCO uses written criteria based
            on sound clinical evidence and specifies procedures for applying
            those criteria in an appropriate manner.

UM 2.1      The criteria for determining medical necessity are clearly
            documented and include procedures for applying criteria based on the
            needs of individual patients and characteristics of the local
            delivery system.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                        7

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

UM 2.2      The MCO involves appropriate, actively practicing practitioners in
            its development or adoption of criteria and in the development and
            review of procedures for applying the criteria.

UM 2.3      The MCO reviews the criteria at specified intervals and updates them
            as necessary.

UM 2.4      The MCO states in writing how practitioners can obtain the UM
            criteria and makes the criteria available to its practitioners upon
            request.

UM 2.5      At least annually, the MCO evaluates the consistency with which the
            health care professionals involved in utilization review apply the
            criteria in decision making.

UM 3        APPROPRIATE PROFESSIONALS

            Qualified licensed health professionals assess the clinical
            information used to support UM decisions.

UM 3.1      Appropriately licensed health professionals supervise all the review
            decisions.

UM 3.2      An appropriate practitioner reviews any denial of care.

UM 3.2.1          A licensed physician reviews any denial based on medical
                  necessity.

UM 3.3      The MCO has written procedures for using board-certified physicians
            from appropriate specialty areas to assist in making determinations
            of medical necessity.

UM 4        TIMELINESS OF UM DECISIONS/1/

            The MCO makes utilization decisions in a timely manner to
            accommodate the clinical urgency of the situation.

UM 4.1      The MCO follows the NCQA's standards for the timeliness of UM
            decision making.

UM 4.1.1          For pre-certification of non-urgent care, the MCO makes
                  decisions within two working days of obtaining all the
                  necessary information.

UM 4.1.2          For pre-certification of non-urgent care, the MCO notifies
                  practitioners of the decisions within one working day of
                  making the decision.

UM 4.1.3          For pre-certifications of non-urgent care that result in
                  denial, the MCO gives members and practitioners written or
                  electronic confirmation of the decisions within two working
                  days of making the decision.

UM 4.1.4          For pre-certifications of urgent care, the MCO makes decisions
                  and notifies practitioners of the decisions within one
                  calendar day. If the decision is a denial, the MCO must also
                  notify members within one calendar day.

UM 4.1.5          For pre-certification of urgent care that results in denial,
                  the MCO notifies both members and practitioners how to
                  initiate an expedited appeal at the time they are notified of
                  the denial.

UM 4.1.6          For pre-certification of urgent care that results in denial,
                  the MCO gives members and practitioners written or

----------
/1/ See Exhibit A-2 for language to ensure compliance with Patient Bill of
Rights (PBOR) Legislation.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                        8

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

                  electronic confirmation of the decision within two working
                  days of making the decision.

UM 4.1.7          For concurrent review of services, the MCO makes decisions
                  for:

UM 4.1.7.2  See Exhibit A-2, PBOR 4.1.7.2

UM 4.1.8          For concurrent review, the MCO notifies practitioners of
                  decisions within one working day of making the decision.

UM 4.1.9          For concurrent review decisions that result in a denial, the
                  MCO gives members and practitioners written or electronic
                  confirmation within one working day of the original
                  notification.

UM 4.1.10         For concurrent review decisions that result in a denial, the
                  MCO notifies both members and practitioners how to initiate an
                  expedited appeal at the time they are notified of the denial.

UM 4.1.11         For retrospective review, the MCO makes the decision within 30
                  working days of obtaining all the necessary information.

UM 4.1.12   See Exhibit A-2, PBOR 4.1.12

UM 5        MEDICAL INFORMATION

            When making a determination of coverage based on medical necessity,
            the MCO obtains relevant clinical information and consults with the
            treating physician.

UM 5.1      A written description identifies the information that is collected
            to support UM decision making.

UM 5.2      There is documentation that relevant clinical information is
            gathered consistently to support UM decision making

UM 6        DENIAL NOTICES

            The MCO clearly documents and communicates the reasons for each
            denial.

UM 6.1      The MCO makes available to practitioners a physician reviewer to
            discuss by telephone determinations based on medical necessity.

UM 6.2      The MCO sends written notification to members and practitioners, as
            appropriate, of the reason for each denial, including the specific
            utilization review criteria or benefit provisions used in the
            determination.

UM 6.3      The MCO includes information about the appeal process in all denial
            notifications.

UM 7        POLICIES FOR APPEALS/2/

            The MCO has written policies and procedures for the thorough,
            appropriate, and timely resolution of member appeals.

UM 7.1      Procedures for registering and responding to oral and written
            first-level appeals include the following elements:

UM 7.1.1          notification to the member of the appeal process within five
                  working days of receiving a request for a first-

----------
/2/ See Exhibit A-2 for language to ensure compliance with PBOR regulations.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                        9

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

                  level appeal;

UM 7.1.2          documentation of the substance of the appeal and the actions
                  taken;

UM 7.1.3          full investigation of the substance of appeal, including any
                  aspects of clinical care involved;

UM 7.1.4          resolution of appeal, including:

UM 7.1.4.1              The MCO appoints a person of people to review the
                        first-level appeal who were not involved in initial
                        determination.

UM 7.1.4.2  See Exhibit A-2, PBOR 7.1.4.2

UM 7.1.5    See Exhibit A-2, PBOR 7.1.5

UM 7.1.6          The MCO establishes procedures for registering and responding
                  to expedited first-level appeals.

UM 7.1.6.1              An expedited appeal may be initiated by the member or by
                        the practitioner acting on behalf of the member.

UM 7.1.6.2  See Exhibit A-2, PBOR 7.1.6.2

UM 7.3      A procedure for allowing practitioner or member representative to
            act on behalf of the member at any level of appeal.

PBOR 1      See Exhibit A-2, PBOR 1

UM 7.4      See Exhibit A-2, PBOR 7.4

UM 7.5      A procedure for providing independent, external review of final
            determinations including:

UM 7.5.1    See Exhibit A-2, PBOR 7.5.1

UM 7.5.1.1              the member is appealing an adverse determination that is
                        based on medical necessity, as defined NCQA; by

UM 7.5.1.2  See Exhibit A-2, PBOR 7.5.1.2

UM 7.5.1.3              the member has not withdrawn the appeal request, agreed
                        to another dispute resolution proceeding or submitted to
                        an external dispute resolution proceeding required by
                        law.

UM 7.5.2          Notification to members about the independent appeals program
                  as follows:

UM 7.5.2.1              general communications to members announce the
                        availability of the right to independent review.

UM 7.5.2.2              Letters informing members and practitioners of the
                        upholding of a denial by this standard include notice of
                        independent appeal rights and processes, contact
                        information for the IRO and a statement that the member
                        does not bear any costs of the IRO.

UM 7.5.2.3              Letters inform members of the time and procedure for
                        claim payment or approval of service in the event the
                        IRO overturns the managed care organization's decision

UM 7.5.3          CONDUCT OF THE APPEAL PROGRAM AS FOLLOWS:

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       10

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

UM 7.5.3.2              With the exception of exercising its rights as party to
                        the appeal, the MCO must not attempt to interfere with
                        the IRO's proceeding or appeal decision

UM 7.5.3.3              The member is not required to bear costs of the IRO,
                        including any filing fees.

UM 7.5.3.4              The member or his or her legal guardian may designate in
                        writing a representative to act on his or her behalf.

UM 7.5.3.5              The MCO implements the IRO decision within the time
                        frame specified by the IRO.

UM 7.5.3.6              The MCO obtains from the IRO, or maintains, data on each
                        appeal case, including description so fthe denied
                        item(s), reasons for denial, IRO decisions and reasons
                        for decisions. The MCO uses this information in
                        evaluating its medical necessity decision-making
                        process.

UM 8        APPROPRIATE HANDLING OF APPEALS

UM 8.1      See Exhibit A-2, PBOR 8.1

UM 8.2      independent, external appeals.

CS 1        POLICIES FOR COMPLAINTS see Exhibit A-2 CS 1 through 2.1

UM 9        EVALUATION OF NEW TECHNOLOGY

            The MCO evaluates the inclusion of new technologies and the new
            application of existing technologies in the benefit package. This
            includes medical and behavioral procedures, pharmaceuticals and
            devices.

UM 9.1      The MCO has a written description of the process used to determine
            whether new technologies and new uses of existing technologies are
            included in the benefit package.

UM 9.2      The MCO implements this process to assess new technologies and new
            applications of existing technologies.

UM 11       EMERGENCY SERVICES

            The MCO provides, arranges for or otherwise facilitates all needed
            emergency services, including appropriate coverage of costs.

UM 11.1     The MCO covers emergency services necessary to screen and stabilize
            members without precertification in cases where a prudent layperson,
            acting reasonably, would have believed an emergency medical
            condition existed.

UM 11.2     The MCO covers emergency services if an authorized representative
            acting for the MCO has authorized the provision of emergency
            services.

UM 12       PROCEDURES FOR PHARMACEUTICAL MANAGEMENT

            The MCO ensures that its procedures for pharmaceutical management,
            if any, promotes clinically appropriate use of pharmaceuticals.

UM 12.1     The MCO's pharmaceutical management procedures are based upon sound
            clinical evidence, and the organization specifies how to apply the
            procedures in an appropriate manner based on the needs of individual
            patients.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       11

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

UM 12.2     Where the MCO restricts pharmacy benefits to a closed formulary, it
            has a process to consider medical necessity exceptions for members
            to obtain coverage of a pharmaceutical not on the formulary.

UM 13       ENSURING APPROPRIATE UTILIZATION

            The MCO facilitates the delivery of appropriate care and monitors
            the impact of its UM program to detect and correct under- and over
            utilization of services.

UM 13.1     The MCO monitors relevant utilization data for each product line and
            behavioral health services by product line to detect potential
            under- and over-utilization.

UM 13.2     The MCO routinely analyzes all data collected to detect under- and
            over-utilization.

UM 13.3     The MCO implements appropriate interventions whenever it identifies
            under- and overutilization.

UM 13.4     The MCO measures whether the interventions have been effective and
            implement strategies to achieve appropriate utilization.

UM 13.5     The MCO distributes to all its practitioners, providers, members and
            employees a statement describing its policy on financial incentives
            and requires practitioners, providers and staff who make
            utilization-related decisions and those who supervise them to sign a
            document acknowledging that they have received the statement. This
            statement affirms that:

UM 13.5.1         UM decision-making is based only on appropriateness of care
                  and service and existence of coverage.

UM 13.5.2         The MCO does not specifically reward practitioners or other
                  individuals conducting utilization review for issuing denials
                  of coverage or service care.

UM 13.5.3         Financial incentives for UM decision makers do not encourage
                  decisions that result in underutilization.

UM 15       DELEGATION OF UM

            If the MCO delegates any UM activities, there is evidence of
            oversight of the delegated activity.

UM 15.1     A mutually agreed upon document describes:

UM 15.1.1         the responsibilities of the MCO and the delegated entity;

UM 15.1.2         the delegated activities;

UM 15.1.3         the frequency of reporting to the MCO;

UM 15.1.4         the process by which the MCO evaluates delegated entity's
                  performance and

UM 15.1.5         the remedies, including revocation of the delegation,
                  available to the MCO if the delegated entity does not fulfill
                  its obligations.

UM 15.2     There is evidence that the MCO:

UM 15.2.1         evaluates the delegated entity's capacity to perform the
                  delegated activities prior to delegation;

UM 15.2.2         approves the delegated entity's UM program annually;

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       12

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

UM 15.2.3         evaluates regular reports as specified in UM 15.1.3 and

UM 15.2.4         evaluates annually whether the delegated entity's activities
                  are being conducted in accordance with the MCO's expectations
                  & NCQA standards.

CREDENTIALING AND RECREDENTIALING

CR 1        CREDENTIALING POLICIES

            The MCO documents the mechanism for the credentialing and
            recredentialing of licensed independent practitioners with whom it
            contracts or employs and who fall within its scope of authority and
            action. At a minimum, the policies and procedures define:

CR 1.1      the scope of practitioners covered;

CR 1.2      the criteria and the primary source verification of information used
            to meet these criteria;

CR 1.3      the process used to make decisions;

CR 1.4      the process to delegate credentialing or recredentialing;

CR 1.5      the right of practitioners to review the information submitted in
            support of their credentialing applications;

CR 1.6      the process for notification to a practitioner of any information
            obtained during the MCO's credentialing process that varies
            substantially from the information provided to the MCO by the
            practitioner;

CR 1.7      the practitioner's right to correct erroneous information;

CR 1.8      the medical director's or other designated physician's direct
            responsibility and participation in the credentialing program and

CR 1.9      the process used to ensure the confidentiality of all information
            obtained in the credentialing process, except as otherwise provided
            by law.

CR 2        CREDENTIALING COMMITTEE

            The MCO designates a credentialing committee that makes
            recommendations regarding credentialing decisions using a peer
            review process.

CR 3        INITIAL PRIMARY SOURCE VERIFICATION

            At the time of credentialing, the MCO verifies at least the
            following information from primary sources (unless otherwise
            indicated):

CR 3.1      a current valid license to practice;

CR 3.2      a valid DEA or CDS certificate as applicable;

CR 3.3      education and training of practitioners;

CR 3.4      board certification if the practitioner states that he/she is board
            certified on the application;

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       13

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

CR 3.5      work history;

CR 3.6      history of professional liability claims that resulted in
            settlements or judgments paid by or on behalf of the practitioner.

CR 4        APPLICATION AND ATTESTATION

            The applicant completes an application for membership. The
            application includes a current and signed attestation by the
            applicant regarding:

CR 4.1      reasons for any inability to perform the essential functions of the
            position, with or without accommodation;

CR 4.2      lack of present illegal drug use;

CR 4.3      history of loss of license and felony convictions;

CR 4.4      history of loss or limitation of privileges or disciplinary
            activity;

CR 4.5      current malpractice insurance coverage and

CR 4.6      the correctness and completeness of the application.

CR 5        INITIAL SANCTION INFORMATION

            There is documentation that before making a credentialing decision,
            the MCO has received the following information and includes this
            information in the credentialing files.

CR 5.1      The MCO has received information from the National Practitioner Data
            Bank (NPDB) and includes it in the credentialing files.

CR 5.2      The MCO has received information about sanctions or limitations on
            licensure as applicable and includes it in the credentialing files.

CR 5.3      The MCO has reviewed for previous sanction activity by Medicare and
            Medicaid and includes it in the credentialing files.

CR 6        INITAL CREDENTIALING SITE VISITS

            The MCO has a process for ensuring that the offices of all PCPs,
            obstetricians/gynecologists and high volume behavioral health care
            practitioners meet the MCO's office site standards

CR 7        RECREDENTIALING PRIMARY SOURCE VERIFICATION

            The MCO formally recredentials its practitioners at least every
            three years. During the recredentialing process it verifies at least
            the following information from primary sources (unless otherwise
            indicated):

CR 7.1      a valid state license to practice;

CR 7.2      a valid DEA or CDS certificate, as applicable;

CR 7.3      board certification, if the practitioner states that he/she is board
            certified;

CR 7.4      history of professional liability claims that resulted in
            settlements or judgments paid by or on behalf of the

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       14

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

            practitioner;

CR 7.5      a current, signed attestation by the applicant regarding:

CR 7.5.1          reasons for any inability to perform the essential functions
                  of the position, with or without accommodation;

CR 7.5.2          lack of present illegal drug use;

CR 7.5.3          history of loss or limitation of privileges or disciplinary
                  activity;

CR 7.5.4          current malpractice insurance coverage and

CR 7.5.5          the correctness and completeness of the application.

CR 8        RECREDENTIALING SANCTION INFORMATION

            There is documentation that, before making a recredentialing
            decision, the MCO has received the following information on the
            practitioner and includes this information in the recredentialing
            files.

CR 8.1      The MCO has received information from the National Practitioner Data
            Bank and includes it in the recredentialing files.

CR 8.2      The MCO has received information about sanctions or limitations on
            licensure, as applicable, and includes it in the recredentialing
            files:

CR 8.3      The MCO has reviewed for previous sanction activity by Medicare and
            Medicaid and records this in the recredentialing files.

CR 9        PERFORMANCE MONITORING

            The MCO incorporates information from quality improvement activities
            in its recredentialing decision-making process for PCPs and
            high-volume behavioral health care practitioners.

CR 9.1      member complaints

CR 9.2      information from QI activities.

CR 10       ONGOING MONITORING OF SANCTIONS AND COMPLAINTS

            The MCO has implemented policies and procedures for the ongoing
            monitoring of practitioner sanctions and complaints between
            recredentialing cycles. The MCO has taken appropriate action against
            practitioners when it identifies occurrences of poor quality.

CR 10.1     The MCO has a written policy and procedure that addresses the
            ongoing monitoring and use of the following types of information:

CR 10.1.1         Medicare and Medicaid sanctions;

CR 10.1.2         sanctions and limitations on licensure and

CR 10.1.3         complaints

CR 10.2     The MCO implements the policy and procedure by regularly obtaining
            and reviewing documentation on sanctions

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       15

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

            and complaints.

CR 10.3     The MCO implements appropriate interventions when it identifies
            occurrences of poor quality.

CR 11       NOTIFICATION TO AUTHORITIES AND PRACTITIONER APPEAL RIGHT

            When a MCO has taken actions against a practitioner for quality
            reasons, the organization offers a formal appeal process and reports
            the action to the appropriate authorities.

CR 11.1     The MCO has procedures for, and documentation of implementation, as
            appropriate, reporting of serious quality deficiencies that could
            result in a practitioner's suspension or termination to the
            appropriate authorities.

CR 11.2     The MCO has an appeal process for instances in which the MCO chooses
            to alter the condition of the practitioner's participation based on
            issues of quality of care and/or service. The MCO informs
            practitioners of the appeal process.

CR 12       ASSESSMENT OF ORGANIZATIONAL PROVIDERS

            The MCO has written policies and procedures for the initial and
            ongoing assessment of organizational providers with which it intends
            to contract.

CR 12.1     The MCO includes at least the following medical providers:

CR 12.1.1         hospitals, home health agencies, skilled nursing facilities,
                  nursing homes and free standing surgical centers;

CR 12.2     The MCO confirms that the provider is in good standing with the
            state and federal regulatory bodies and

CR 12.3     The MCO confirms that the provider has been reviewed and approved by
            an accrediting body, or

CR 12.4     If the provider has not been approved by an accrediting body, the
            MCO develops and implements standards of participation.

CR 12.5     At least every three years, the MCO confirms that the provider
            continues to be in good standing with state and federal regulatory
            bodies and, if applicable, is reviewed and approved by and
            accrediting body.

CR 13       DELEGATION OF CREDENTIALING

            If the MCO delegates any credentialing and recredentialing
            activities, there is documentation of oversight of the delegated
            activity.

CR 13.1     A mutually agreed upon document describes:

CR 13.1.1         the responsibilities of the MCO and the delegated entity;

CR 13.1.2         the delegated activities;

CR 13.1.3         the process by which the MCO evaluates delegated entity's
                  performance and

CR 13.1.4         the remedies, including revocation of the delegation,
                  available to the MCO if the delegated entity does not fulfill
                  its obligations.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       16

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

CR 13.2     The MCO retains the right, based on quality issues, to approve new
            practitioners, providers and sites and to terminate or suspend
            individual practitioner or providers.

CR 13.3     There is documentation that the MCO:

CR 13.3.1         evaluates the delegated entity's capacity to perform the
                  delegated activities prior to delegation and

CR 13.3.2         evaluates annually whether the delegated entity's activities
                  are being conducted in accordance with the MCO's expectations
                  and NCQA standards.

MEMBERS' RIGHTS AND RESPONSIBILITIES

RR 1        STATEMENT OF MEMBERS RIGHTS AND RESPONSIBILITIES

            The MCO has a written policy that states the organization's
            commitment to treating members in a manner that respects their
            rights as well as its expectations of members' responsibilities.
            This policy addresses the following rights and responsibilities:

RR 1.1      Members have a right to receive information about the MCO, its
            services, its practitioners and providers and members' rights and
            responsibilities.

RR 1.2      Members have a right to be treated with respect and recognition of
            their dignity and right to privacy.

RR 1.3      Members have a right to participate with practitioners in decision
            making regarding their health care.

RR 1.4      Members have a right to a candid discussion of appropriate or
            medically necessary treatment options for their conditions,
            regardless of cost or benefit coverage.

RR 1.5      Members have a right to voice complaints or appeals about MCO or the
            care provided.

RR 1.6      Members have a responsibility to provide, to the extent possible,
            information that the MCO and its practitioners and providers need in
            order to care for them.

RR 1.7      Members have a responsibility to follow the plans and instructions
            for care that they have agreed on with their practitioners.

RR 2        DISTRIBUTION OF RIGHTS STATEMENTS TO MEMBERS AND PRACTITIONERS

            The MCO distributes the policy on members' rights and
            responsibilities to members and participating practitioners.

RR 3        POLICIES FOR COMPLAINTS AND APPEALS

            The MCO has written policies and procedures for the thorough,
            appropriate and timely resolution of member complaints and appeals.

RR 3.1      Procedures for registering and responding to oral and written
            complaints include the following elements:

RR 3.1.1          documentation of the substance of the complaint and the
                  actions taken;

RR 3.1.2          full investigation of the substance of the complaint,
                  including any aspects of clinical care involved;

RR 3.1.3          notification to the member of the disposition of the complaint
                  and the right to appeal, as appropriate, and

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       17

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

RR 3.1.4          standards for timeliness in responding to complaints that
                  accommodate the clinical urgency of the situation.

RR 4        SUBSCRIBER INFORMATION

            The MCO provides each subscriber with information needed to
            understand benefit coverage and obtain care.

RR 4.1      The MCO provides written information about benefits and charges
            applicable to the subscriber. This information addresses the
            following elements:

RR 4.1.1          the benefits and services included in, and excluded from,
                  coverage;

RR 4.1.1.1              this information states whether the MCO has
                        pharmaceutical management procedures. It also describes
                        how to obtain the procedures, the extent to which access
                        to specific pharmaceuticals is restricted, and the
                        process for requesting an exception to receive coverage
                        for non-formulary pharmaceuticals if the MCO has a
                        closed formulary.

RR 4.1.2          co-payments and other charges for which the member is
                  responsible;

RR 4.1.3          any restrictions on benefits that apply to services obtained
                  outside the MCO's system or outside the MCO's service area and

RR 4.2      The MCO provides written information that instructs members about
            how to obtain primary and specialty care. This includes the
            following:

RR 4.2.1          how to obtain information about practitioners who participate
                  in the MCO;

RR 4.2.2          how to obtain primary care services, including points of
                  access;

RR 4.2.3          how to obtain specialty care, behavioral health services and
                  hospital services;

RR 4.2.4          how to obtain care after normal office hours;

RR 4.2.5          how too obtain emergency care, including the MCO's policy on
                  when to directly access emergency care or use 911 services and

RR 4.2.6          how to obtain care and coverage when out of the MCO's service
                  area.

RR 4.3      The MCO provides written information about:

RR 4.3.1          how to voice a complaint;

RR 4.3.2          how to appeal a decision that adversely affects the member's
                  coverage, benefits or relationship to the organization and

RR 4.4      The MCO provides translation services within its member services
            telephone function based on the linguistic needs of its members

RR 5        PRIVACY AND CONFIDENTIALLY

            The MCO protects the confidentiality of member information and
            records.

RR 5.1      The MCO adopts and implements written confidentiality policies and
            procedures to ensure the confidentiality of

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       18

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

            member information used for any purpose including policies for
            members who lack ability to give consent.

RR 5.2      The MCO contracts with practitioners and providers explicitly state
            expectations about the confidentiality of member information and
            records.

RR 5.3      The MCO ensures that data shared with employers, whether fully
            insured or self-insured, are not implicitly or explicitly member
            identifiable, unless specific consent is provided by members.

RR 6        MARKETING INFORMATION

            The MCO ensures that communications with prospective members
            correctly and thoroughly represent the benefits and operating
            procedures of the organization.

RR 6.1      Materials for prospective members contain a summary statement of how
            UM procedures work.

RR 6.2      All materials and presentations accurately describe:

RR 6.2.1          the covered benefits, non-covered services, availability of
                  practitioners and providers and potential restrictions
                  incorporated in the MCO's operating procedures and

RR 6.2.2          the existence of pharmaceutical management procedures. The MCO
                  informs members, upon request, how to obtain the procedures,
                  the extent to which restricted pharmaceuticals are a covered
                  benefit and the exceptions policy for receiving coverage for
                  non-formulary pharmaceuticals if the MCO has a closed
                  formulary.

RR 7        DELEGATION OF MEMBERS' RIGHTS AND RESPONSIBILITIES

            If the MCO delegates any member services activities, there is
            evidence of oversight of the delegated activities.

RR 7.1      A mutually agreed upon document describes:

RR 7.1.1          the responsibilities of the MCO and the delegated entity;

RR 7.1.2          the delegated activities;

RR 7.1.3          the frequency of reporting to the MCO;

RR 7.1.4          the process by which the MCO evaluates the delegated entity's
                  performance and

RR 7.1.5          the remedies, including revocation of the delegation,
                  available to the MCO if the delegated entity does not fulfill
                  its obligations.

RR 7.2      There is evidence that the MCO:

RR 7.2.1          evaluates the delegated entity's capacity to perform the
                  delegated activities prior to delegation;

RR 7.2.2          evaluates regular reports as specified in RR 7.1.3 and

RR 7.2.3          evaluates annually whether the delegated entity's activities
                  are being conducted in accordance with the MCO's expectations
                  and NCQA standards.

PREVENTIVE HEALTH SERVICES

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission

                                       19

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

PH 1        ADOPTION OF PREVENTIVE HEALTH GUIDELINES

            The MCO has preventive health guidelines for prevention and early
            detection of illness and disease.

PH 1.1      The MCO has guidelines for the following categories:
            Prenatal and perinatal care;
            Preventive care for infants up to 24 months;
            Preventive care for children and adolescents, 2-19 years;
            Preventive care for adults, 20-64 years;
            Preventive care for the elderly, 65 years and older.

PH 1.2      Each guideline describes the prevention or early detection
            interventions and the recommended frequency and conditions under
            which the interventions are required. The MCO documents the
            scientific basis or authority that it based the preventive health
            guidelines.

PH 1.3      Practitioners from the MCO who have appropriate knowledge have been
            involved in adoption of the preventive health guidelines.

PH 1.4      These preventive health guidelines or its predecessors have been
            available for use for at least two years.

PH 1.5      For those preventive health guidelines that have been in place for
            at least two years, there is evidence of review and update at least
            once every two years, where appropriate.

PH 2        DISTRIBUTION OF GUIDELINES TO PRACTITIONERS

            The MCO distributes the preventive health guidelines and any updates
            to its practitioners.

PH 3        HEALTH PROMOTION WITH MEMBERS

            The MCO regularly encourages its members to use preventive health
            services.

PH 3.1      The MCO distributes preventive health guidelines to members
            annually.

PH 3.2      The MCO informs and encourages members to use the health promotion,
            health education and preventive health services available.

PH 3.3      The MCO identifies specific members who, according to demographic
            and other identifiable health factors, may be at risk for specific
            health problems and urges these members to use appropriate health
            promotion and prevention services.

PH 4        DELEGATION OF PREVENTIVE HEALTH

            If the MCO delegates any preventive health activities, there is
            evidence of oversight of the delegated activities.

PH 4.1      A mutually agreed upon document describes:

PH 4.1.1          the responsibilities of the MCO and the delegated entity;

PH 4.1.2          the delegated activities;

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       20

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-1

NCQA STANDARDS 2003

PH 4.1.3          the frequency of reporting to the MCO;

PH 4.1.4          the process by which the MCO evaluates the delegated entity's
                  performance and

PH 4.1.5          the remedies, including revocation of the delegation,
                  available to the MCO if the delegated entity does not fulfill
                  its obligations.

PH 4.2      There is evidence that the MCO:

PH 4.2.1          evaluates the delegated entity's capacity to perform the
                  delegated activities prior to delegation;

PH 4.2.2          approves the delegated entity's preventive health work plan
                  annually;

PH 4.2.3          evaluates regular reports as specified in PH 4.1.3 and

PH 4.2.4          evaluates annually whether the delegated entity's activities
                  are being conducted in accordance with the MCO's expectations
                  and NCQA standards.

                                 MEDICAL RECORDS

MR 1        MEDICAL RECORDS DOCUMENTATION STANDARDS

            The MCO requires medical records to be maintained in a manner that
            is current, detailed and organized and permits effective and
            confidential patient care and quality review.

MR 1.1      The MCO has medical record confidentiality policies and procedures.

MR 1.2      The MCO has medical record documentation standards, and these
            standards and goals are distributed to practice sites.

MR 1.3      The MCO establishes and requires its practitioners to have an
            organized medical record keeping system and standards for the
            availability of medical records appropriate to the practice site.

MR 1.4      The MCO has process to assess and improve, as needed, the quality of
            medical record keeping.

MR 2        COMPLIANCE WITH NCQA RECORDS STANDARDS

            Documentation of items on the NCQA medical record review summary
            sheet demonstrates that medical records are in conformity with good
            professional medical practice and appropriate health management.

--------------------------------------------------------------------------------
These Standards are Copyright 2001 (July 1, 2001 - June 30, 2003) by the
National Committee for Quality Assurance (NCQA) and protected by international
and national copyright law. This material may not be copied, reproduced,
distributed, modified, published, adapted, edited or translated, without express
written permission of or license from NCQA. All Rights Reserved. Used with
permission.

                                       21

<PAGE>

                                   EXHIBIT A-2
                   QUALITY IMPROVEMENT PROGRAM 2003 STANDARDS
                  PATIENT BILL OF RIGHTS (PBOR) AND COMPLAINTS

                        TIMELINESS OF UM DECISIONS

WAC 284-43-10(5)(b)     ongoing ambulatory care based on the severity or
Replaces UM 4.1.7.2     complexity of the patient's condition or on necessary
                        treatment and discharge planning activity, but no more
                        than 1 0 working days of obtaining all the necessary
                        information/1/.

WAC 284-43-410(5)(d)    For retrospective review, the MCO notifies practitioners
Replaces UM 4.1.12      and members of denials in writing within two working
                        days of making the decision./2/

                        POLICIES FOR APPEALS

WAC 284-43-620(1)       If the MCO cannot make a decision within 14 days of
Replaces UM 7.1.4.2     receipt of the appeal, the carrier notifies the covered
                        person that an extension is necessary to complete the
                        appeal; however, the extension cannot delay the decision
                        beyond thirty days of the request for appeal, without
                        the informed, written consent of the covered person./3/

RCW 48.43.530(g)        written notification to the member of disposition of the
Replaces UM 7.1.5       appeal and of the potential right to appeal to a
                        certified independent review organization (IRO)./4/

WAC 284-43-620(2)       The MCO makes the expedited appeal decision and notifies
Replaces UM 7.1.6.2     the member and practitioner(s) as expeditiously as the
                        medical condition requires, but no later than three days
                        after the request is made.
                        If the treating provider determines that delay could
                        jeopardize the covered person's health or ability to
                        regain maximum function, the MCO shall presume the need
                        for expeditious determination in any independent
                        review./5/

WAC 284-43-620(4)       At least one of the people appointed to review an appeal
Replaces UM 7.4         involving clinical issues is an actively practicing
                        practitioner in the same or a similar specialty who
                        typically treats the medical condition, performs the
                        procedure or provides the treatment. The individual did
                        not participate in any of the MCO's prior decisions on
                        the case.

WAC 284-43-630(1)       eligibility criteria stating that the MCO offers members
Replaces UM 7.5.1       the right to a certified IRO whenever:/6/

WAC 284-43-630(1)       the MCO has completed one/7/ level of internal review
Replaces UM 7.5. 1.2    and its decision is unfavorable to the member, or has
                        elected to bypass/8/ internal review and proceed to the
                        independent review or has exceeded its time limit for
                        internal reviews, without good cause and without
                        reaching a decision and

WAC 284-43-630(2)       A procedure for providing appropriate records or
                        information to a certified IRO within 3 business days
                        including:/9/

WAC 284-3-630(2)(a)     any medical records of the covered person relevant to
                        the review;

----------
/1/ PBOR states that the frequency of the reviews for the extension of initial
    determinations must be based upon the severity or complexity of the
    patient's condition or on necessary treatment and discharge planning
    activity. See PBOR WAC 284-43-410 Utilization Review--Generally 5(b).
/2/ PBOR distinguishes different timelines for only concurrent review decisions
    i.e., "Notification of the determination shall be provided to the attending
    physician or ordering provider or facility and the covered person within two
    days of the determination and shall be provided within one day of concurrent
    review determination...." See PBOR WAC 284-43-410 Utilization
    Review--Generally 5(d).
/3/ See PBOR WAC 284-43-620(1) Procedures for review and appeal of adverse
    determinations for description of timelines. Timelines must conform with
    PBOR regulations unless NCQA standards more restrictive.
/4/ Deleted standards related to second level appeal; second level appeal is to
    an Independent Review Organization (IRO).
/5/ See PBOR WAC 284-43-620(2) Procedures for review and appeal of adverse
    determinations for description of expedited review. Also note the treating
    health care provider determines if delay could jeopardize health or ability
    to regain function.
/6/ Modified to comply with PBOR language, i.e., 'certified' independent review
    organization.
/7/ Modified from two levels of appeal to one level of appeal.
/8/ Removed reference to 'one or both levels'.
/9/ See PBOR WAC 284-43-630 (2) (a), (b), (c), (d), (e), (f) and (5) Independent
    review of adverse determinations.

                                        1

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit A-2

WAC 284-43-630(2)(b)    any documents used by the MCO in making the
                        determination to be reviewed by the certified IRO;

WAC 284-3-630(2)(C)     any documentation and written information submitted to
                        the carrier in support of the appeal;

WAC 284-43-630(2)(d)    a list of each physician or health care provider who has
                        provided care to the covered person and who may have
                        medical records relevant to the appeal. Health
                        information or other confidential or proprietary
                        information in the custody of a carrier may be provided
                        to an IRO, subject to the privacy provision of Title 284
                        WAC;

WAC 284-43-630(2)(e)    the attending or ordering provider's recommendations;

WAC 284-43-630(2)(f)    the terms and conditions of coverage under the relevant
                        health plan. The MCO shall also make available to the
                        covered person and to any provider acting on behalf of
                        the covered person all materials provided to an IRO
                        reviewing the MCO's determination.

                        APPROPRIATE HANDLING OF APPEALS/10/

WAC 284-43-620          The MCO adjudicates member's appeals in a thorough,
Replaces UM 8           appropriate and timely manner. The MCO meets all the
                        requirements of standard UM 7, Patient Bill of Rights
                        Legislation and its own standards for handling:

Replaces UM 8.1         first level appeals

----------
/10/ Modified to reflect Patient Bill of Rights Legislation and exclusion of
     second level appeals.

                                        2

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

                                    EXHIBIT B
                                   WAC 388-538
                                  MANAGED CARE

WAC 388-538-050
DEFINITIONS. The following definitions and abbreviations and those found in
chapter 388-500-0005 WAC, Medical definitions, apply to this chapter.
"ANCILLARY HEALTH SERVICES" means health services ordered by a provider,
including but not limited to, laboratory services, radiology services, and
physical therapy.
"APPEAL" means a formal request by a provider or covered enrollee for
reconsideration of a decision such as a utilization review recommendation, a
benefit payment, an administrative action, or a quality of care or service
issue, with the goal of finding a mutually acceptable solution.
"ASSIGN" or "ASSIGNMENT" means that MAA selects a managed care organization
(MCO) or primary care case management (PCCM) provider to serve a client who
lives in a mandatory enrollment area and who has failed to select an MCO or PCCM
provider.
"BASIC HEALTH (BH)" means the health care program authorized by title 70.47 RCW
and administered by the health care authority (HCA). MAA considers basic health
to be third-party coverage, however, this does not include basic health plus
(BH.+).
"CHILDREN'S HEALTH INSURANCE PROGRAM (CHIP)" means the health insurance program
authorized by Title XXI of the Social Security Act and administered by the
department of social and health services (DSHS). This program also is referred
to as the state children's health insurance program (SCHIP).
"CHILDREN WITH SPECIAL HEALTH CARE NEEDS" means children identified by the
department of social and health services (DSHS) as having special health care
needs. This includes:
(1) Children designated as having special health care needs by the department of
health (DOH) and served under the Title V program;
(2) Children who meet disability criteria of Title 16 of the Social Security Act
(SSA); and
(3) Children who are in foster care or who are served under subsidized adoption.
"CLIENT" means an individual eligible for any medical program who is not
enrolled with a managed care organization (MCO) or primary care case management
(PCCM) provider. In this chapter, client refers to a person before the person is
enrolled in managed care, while enrollee refers to an individual eligible for
any medical program who is enrolled in managed care.
"COMPLAINT" means an oral or written expression of dissatisfaction by an
enrollee.
"EMERGENCY MEDICAL CONDITION" means a condition meeting the definition in
42 U.S.C. 1396u-2(b)(2)(C).
"EMERGENCY SERVICES" means services as defined in 42 U.S.C. 1396u-2 (b)(2)(B).
"END ENROLLMENT" means an enrollee is currently enrolled in managed care, either
with a managed care organization (MCO) or with a primary care case management
(PCCM) provider, and requests to discontinue enrollment and return to the
fee-for-service delivery system for one of the reasons outlined in WAC
388-538-130. This is also

                                        1

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

referred to as "disenrollment."
"ENROLLEE" means an individual eligible for any medical program who is enrolled
in managed care through a managed care organization (MCO) or primary care case
management (PCCM) provider that has a contract with the state.
"ENROLLEES WITH CHRONIC CONDITIONS" means persons having chronic and disabling
conditions, including persons with special health care needs that meet all of
the following conditions:
(1) Have a biologic, psychologic, or cognitive basis;
(2) Have lasted or are virtually certain to last for at least one year; and
(3) Produce one or more of the following conditions stemming from a disease:
(a) Significant limitation in areas of physical, cognitive, or emotional
function;
(b) Dependency on medical or assistive devices to minimize limitation of
function or activities; or
(c) In addition, for children, any of the following:
(i) Significant limitation in social growth or developmental function;
(ii) Need for psychologic, educational, medical, or related services over and
above the usual for the child's age; or
(iii) Special ongoing treatments, such as medications, special diet,
interventions, or accommodations at home or school.
"EXEMPTION" means a client, not currently enrolled in managed care, makes a pre-
enrollment request to remain in the fee-for-service delivery system for one of
the reasons outlined in WAC 388-538-080.
"HEALTH CARE SERVICE" or "SERVICE" means a service or item provided for the
prevention, cure, or treatment of an illness, injury, disease, or condition.
"HEALTHY OPTIONS CONTRACT OR HO CONTRACT" means the agreement between the
department of social and health services (DSHS) and a managed care organization
(MCO) to provide prepaid contracted services to enrollees.
"HEALTHY OPTIONS PROGRAM OR HO PROGRAM" means the medical assistance
administration's (MAA) prepaid managed care health program for Medicaid-eligible
clients and CHIP clients.
"MANAGED CARE" means a comprehensive system of medical and health care delivery
including preventive, primary, specialty, and ancillary health services. These
services are provided either through a managed care organization (MCO) or
primary care case management (PCCM) provider.
"MANAGED CARE ORGANIZATION" or "MCO" means a health maintenance organization or
health care service contractor that contracts with the department of social and
health services (DSHS) under a comprehensive risk contract to provide prepaid
health care services to eligible medical assistance administration (MAA) clients
under MAA's managed care programs.
"NONPARTICIPATING PROVIDER" means a person or entity that does not have a
written agreement with a managed care organization (MCO) but that provides
MCO-contracted health care services to managed care enrollees with the
authorization of the MCO. The MCO is solely responsible for payment for
MCO-contracted health care services that are authorized by the MCO and provided
by nonparticipating providers.

                                        2

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

"PARTICIPATING PROVIDER" means a person or entity with a written agreement with
a managed care organization (MCO) to provide health care services to managed
care enrollees. A participating provider must look solely to the MCO for payment
for such services.
"PRIMARY CARE CASE MANAGEMENT (PCCM)" means the health care management
activities of a provider that contracts with the department to provide primary
health care services and to arrange and coordinate other preventive, specialty,
and ancillary health services.
"PRIMARY CARE PROVIDER (PCP)" means a person licensed or certified under Title
18 RCW including, but not limited to, a physician, an advanced registered nurse
practitioner (ARNP), or a physician assistant who supervises, coordinates, and
provides health services to a client or an enrollee, initiates referrals for
specialist and ancillary care, and maintains the client's or enrollee's
continuity of care.
"PRIOR AUTHORIZATION (PA)" means a process by which enrollees or providers must
request and receive MAA approval for certain medical services, equipment, drugs,
and supplies, based on medical necessity, before the services are provided to
clients, as a precondition for provider reimbursement. Expedited prior
authorization and limitation extension are forms of prior authorization. See WAC
388-501-0165.
"TIMELY" - in relation to the provision of services, means an enrollee has the
right to receive medically necessary health care without unreasonable delay.

WAC 388-538-060
MANAGED CARE AND CHOICE.
(1) A client is required to enroll in managed care when that client meets all of
the following conditions:
(a) Is eligible for one of the medical programs for which clients must enroll in
managed care;
(b) Resides in an area, determined by the medical assistance administration
(MAA), where clients must enroll in managed care;
(c) Is not exempt from managed care enrollment as determined by MAA, consistent
with WAC 388-538-080, and any related fair hearing has been held and decided;
and
(d) Has not had managed care enrollment ended by MAA, consistent with WAC 388-
538-130.
(2) American Indian/Alaska Native (AI/AN) clients who meet the provisions of 25
U.S.C. 1603 (c)-(d) for federally-recognized tribal members and their
descendants may choose one of the following:
(a) Enrollment with a managed care organization (MCO) available in their area;
(b) Enrollment with an Indian or tribal primary care case management (PCCM)
provider available in their area; or
(c) MAA's fee-for-service system.
(3) A client may enroll with an MCO or PCCM provider by calling MAA's toll-free
enrollment line or by sending a completed enrollment form to MAA.
(a) Except as provided in subsection (2) of this section for clients who are
AI/AN and in subsection (5) of this section for cross-county enrollment, a
client required to enroll in managed care must enroll with an MCO or PCCM
provider available in the area where the client lives.

                                        3

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(b) All family members must either enroll with the same MCO or enroll with PCCM
providers.
(c) Enrollees may request an MCO or PCCM provider change at any time.
(d) When a client requests enrollment with an MCO or PCCM provider, MAA enrolls
a client effective the earliest possible date given the requirements of MAA's
enrollment system. MAA does not enroll clients retrospectively.
(4) MAA assigns a client who does not choose an MCO or PCCM provider as follows:
(a) If the client has family members enrolled with an MCO, the client is
enrolled with that MCO;
(b) If the client does not have family members enrolled with an MCO, and the
client was enrolled in the last six months with an MCO or PCCM provider, the
client is re-enrolled with the same MCO or PCCM provider;
(c) If a client does not choose an MCO or a PCCM provider, but indicates a
preference for a provider to serve as the client's primary case provider (PCP),
MAA attempts to contact the client to complete the required choice. If MAA is
not able to contact the client in a timely manner, MAA documents the attempted
contacts and, using the best information available, assigns the client as
follows. If the client's preferred PCP is:
(i) Available with one MCO, MAA assigns the client in the MCO where the client's
PCP provider is available. The MCO is responsible for PCP choice and assignment;
(ii) Available only as a PCCM provider, MAA assigns the client to the preferred
provider as the client's PCCM provider;
(iii) Available with multiple MCOs or through an MCO and as a PCCM provider, MAA
assigns the client to an MCO as described in (d) of this subsection;
(iv) Not available through any MCO or as a PCCM provider, MAA assigns the client
to an MCO or PCCM provider as described in (d) of this subsection.
(d) If the client cannot be assigned according to (a), (b), or (c) of this
subsection, MAA assigns the client as follows:
(i) If an AI/AN client does not choose an MCO or PCCM provider, MAA assigns the
client to a tribal PCCM provider if that client lives in a zip code served by a
tribal PCCM provider. If there is no tribal PCCM provider in the client's area,
the client continues to be served by MAA's fee-for-service system. A client
assigned under this subsection may request to end enrollment at any time.
(ii) If a non-AI/AN client does not choose an MCO or PCCM provider, MAA assigns
the client to an MCO or PCCM provider available in the area where the client
lives. The MCO is responsible for PCP choice and assignment. An MCO must meet
the healthy options (HO) contract's access standards unless the MCO has been
granted an exemption by MAA. The HO contract standards are as follows:
(A) There must be two PCPs within ten miles for ninety percent of HO enrollees
in urban areas and one PCP within twenty-five miles for ninety percent of HO
enrollees in rural areas;
(B) There must be two obstetrical providers within ten miles for ninety percent
of HO enrollees in urban areas and one obstetrical provider within twenty-five
miles for ninety percent of HO enrollees in rural areas;
(C) There must be one hospital within twenty-five miles for ninety percent of HO
enrollees in the contractor's service area;

                                        4

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(D) There must be one pharmacy within ten miles for ninety percent of HO
enrolles in urban areas and one pharmacy within twenty-five miles for ninety
percent of HO enrollees in rural areas.
(iii) MAA sends a written notice to each household of one or more clients who
are assigned to an MCO or PCCM provider. The notice includes the name of the MCO
or PCCM provider to which each client has been assigned, the effective date of
enrollment, the date by which the client must respond in order to change MAA's
assignment, and either the toll-free telephone number of:
(A) The MCO for enrollees assigned to an MCO; or
(B) MAA for enrollees assigned to a PCCM provider.
(iv) An assigned client has at least thirty calendar days to contact MAA to
change the MCO or PCCM provider assignment before enrollment is effective.
(5) A client may enroll with a plan in an adjacent county when the client lives
in an area, designated by MAA, where residents historically have traveled a
relatively short distance across county lines to the nearest available
practitioner.
(6) An MCO enrollee's selection of the enrollee's PCP or the enrollee's
assignment to a PCP occurs as follows:
(a) MCO enrollees may choose:
(i) A PCP or clinic that is in the enrollee's MCO and accepting new enrollees;
or
(ii) Different PCPs or clinics participating with the same MCO for different
family members.
(b) The MCO assigns a PCP or clinic that meets the access standards set forth in
subsection (4)(d)(ii) of this section if the enrollee does not choose a PCP or
clinic;
(c) MCO enrollees may change PCPs or clinics in an MCO at least once a year for
any reason, and at any time for good cause; or
(d) In accordance with this subsection, MCO enrollees may file an appeal with
the MCO and/or a fair hearing request with the department of social and health
services (DSHS) and may change plans if the MCO denies an enrollee's request to
change PCPs or clinics.

WAC 388-538-065
MEDICAID-ELIGIBLE BASIC HEALTH (BH) ENROLLEES.
(1) Certain children and pregnant women who have applied for, or are enrolled
in, managed care through basic health (BH) (chapter 70.47 RCW) are eligible for
Medicaid under pediatric and maternity expansion provisions of the Social
Security Act. The medical assistance administration (MAA) determines Medicaid
eligibility for children and pregnant women who enroll through BH.
(2) The administrative rules and regulations that apply to managed care
enrollees also apply to Medicaid-eligible clients enrolled through BH, except as
follows:
(a) The process for enrolling in managed care described in WAC 388-538-060(3)
does not apply since enrollment is through the health care authority, the state
agency that administers BH;
(b) American Indian/Alaska Native (AI/AN) clients cannot choose fee-for-service
or PCCM as described in WAC 388-538-060(2). They must enroll in a BH-contracted
MCO.

                                        5

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(c) If a Medicaid eligible client applying for BH does not choose an MCO within
ninety days, the client is transferred from BH to the department of social and
health services (DSHS) for assignment to managed care.

WAC 388-538-067
MANAGED CARE PROVIDED THROUGH MANAGED CARE ORGANIZATIONS (MCOs).
(1) Managed care organizations (MCOs) may contract with the department of social
and health services (DSHS) to provide prepaid health care services to eligible
medical assistance administration (MAA) clients under the healthy options (HO)
managed care program. The MCOs must meet the qualifications in this section to
be eligible to contract with DSHS. The MCO must:
(a) Have a certificate of registration from the office of the insurance
commissioner (OIC) as either a health maintenance organization (HMO) or a health
care services contractor (HCSC).
(b) Accept the terms and conditions of DSHS' HO contract;
(c) Be able to meet the network and quality standards established by DSHS; and
(d) Accept the prepaid rates published by DSHS.
(2) DSHS reserves the right not to contract with any otherwise qualified MCO.

WAC 388-538-068
MANAGED CARE PROVIDED THROUGH PRIMARY CARE CASE MANAGEMENT (PCCM).
(1) A provider may contract with DSHS as a primary care case management (PCCM)
provider to provide health care services to eligible medical assistance
administration (MAA) clients under MAA's managed care program. The PCCM provider
or the individual providers in a PCCM group or clinic must:
(a) Have a core provider agreement with DSHS;
(b) Hold a current license to practice as a physician, certified nurse midwife,
or advanced registered nurse practitioner in the state of Washington;
(c) Accept the terms and conditions of DSHS' PCCM contract;
(d) Be able to meet the quality standards established by DSHS; and
(e) Accept PCCM rates published by DSHS.
(2) DSHS reserves the right not to contract for PCCM with an otherwise qualified
provider.

WAC 388-538-070
MANAGED CARE PAYMENT.
(1) The medical assistance administration (MAA) pays Managed care organizations
(MCOs) monthly capitated premiums that:
(a) Have been determined using generally accepted actuarial methods based on
analyses of historical healthy options (HO) contractual rates and MCO experience
in providing health care for the populations eligible for HO; and
(b) Are paid based on legislative allocations for the HO program.
(2) MAA pays primary care case management (PCCM) providers a monthly case
management fee according to contracted terms and conditions.
(3) MAA does not pay providers on a fee-for-service basis for services that are
the MCO's responsibility under the HO contract, even if the MCO has not paid for
the

                                        6

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

service for any reason. The MCO is solely responsible for payment of
MCO-contracted health care services:
(a) Provided by an MCO-contracted provider; or
(b) That are authorized by the MCO and provided by nonparticipating providers.
(4) MAA pays an additional monthly amount, known as an enhancement rate, to
federally qualified health care centers (FQHC) and rural health clinics (RHC)
for each client enrolled with MCOs through the FQHC or RHC. MCOs may contract
with FQHCs and RHCs to provide services under HO. FQHCs and RHCs receive an
enhancement rate from MAA on a per member, per month basis in addition to the
negotiated payments they receive from the MCOs for services provided to MCO
enrollees.
(a) MAA pays the enhancement rate only for the categories of service provided by
the FQHC or RHC under the HO contact. MAA surveys each FQHC or RHC in order to
identify the categories of services provided by the FQHC or RHC.
(b) MAA bases the enhancement rate on both of the following:
(i) The upper payment limit (UPL) for the county in which the FQHC or RHC is
located; and
(ii) An enhancement percentage.
(c) MAA determines the UPL for each category of service based on MAA's
historical fee-for-service (FFS) experience, adjusted for inflation and
utilization changes.
(d) MAA determines the enhancement percentage for HO enrollees as follows: (i)
For FQHCs, the enhancement percentage is equal to the FQHC finalized audit
period ratio. The "finalized audit period" is the latest reporting period for
which the FQHC has a completed audit approved by, and settled with, MAA.
(A) For a clinic with one finalized audit period, the ratio is equal to: (FQHC
total costs) - FFS reimbursements .+ HO reimbursements)/(FFS .+ HO
reimbursements).
(B) For a clinic with two finalized audit periods, the ratio is equal to the
percentage change in the medical services encounter rate from one finalized
audit period to the next. A "medical services encounter" is a face-to-face
encounter between a physician or mid-level practitioner and a client to provide
services for prevention, diagnosis, and/or treatment of illness or injury. A
"medical services encounter rate" is the individualized rate MAA pays each FQHC
to provide such services to clients, or the rate set by Medicare for each RHC
for such services.
(C) For FQHCs without a finalized audit, the enhancement percentage is the
statewide weighted average of all the FQHCs' finalized audit period ratios.
Weighting is based on the number of enrollees served by each FQHC.
(ii) For RHCs, MAA applies the same enhancement percentage statewide.
(A) On a given month, MAA determines the number of HO enrollees enrolled with
each RHC that is located in the same county as an FQHC. This number is expressed
as a percentage of the total number of RHC enrollees located in counties that
have both FQHCs and RHCs.
(B) For each county that has both an FQHC and an RHC, MAA multiplies the FQHC
enhancement percentage, as determined under subsection (4)(d)(i) of this
section, by the percentage obtained in section (4)(d)(ii)(A) of this section.
(C) The sum of all these products is the weighted statewide RHC enhancement
percentage.

                                        7

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(iii) The HO enhancement percentage for FQHCs and RHCs is updated once a year.
(e) For each category of service provided by the FQHC or RHC, MAA multiplies the
UPL, as determined under subsection (4)(c) of this section, by the FQHC's or
RHC's enhancement percentage. The sum of all these products is the enhancement
rate for the individual FQHC or RHC.
(f) To calculate the enhancement rate for FQHCs and RHCs that provide maternity
and newborn delivery services, MAA applies each FQHC's or RHC's enhancement
percentage to the delivery case rate (DCR), which is a one-time rate paid by MAA
to the HO plan for each pregnant enrollee who gives birth.

WAC 388-538-080
MANAGED CARE EXEMPTIONS.
(1) The medical assistance administration (MAA) exempts a client from mandatory
enrollment in managed care if MAA becomes aware of the following conditions. The
client:
(a) Is receiving foster care placement services from the division of children
and family services (DCFS); or
(b) Has Medicare, basic health (BH), CHAMPUS/TRICARE, or other accessible third-
party health care coverage that would require exemption from enrollment with:
(i) A managed care organization (MCO) in accordance with MAA's healthy options
(HO) contract requirements for MCO enrollment; or
(ii) A primary care case management provider (PCCM) in accordance with MAA's
PCCM contract requirements for PCCM enrollment.
(2) Only a client or a client's representative (RCW 7.70.065) may request an
exemption from managed care enrollment for reasons other than those stated in
subsection (1) of this section. If a client asks for an exemption prior to the
enrollment effective date, the client is not enrolled until MAA approves or
denies the request and any related fair hearing is held and decided.
(3) MAA grants a client's request for an exemption from mandatory enrollment in
managed care if any of the following apply:
(a) The client has a documented and verifiable medical need to continue a
client/provider relationship due to an established course of care with a
physician, physician assistant or advanced registered nurse practitioner. MAA
accepts the established provider's signed statement that the client has:
(i) A medical need that requires a continuation of the established care
relationship; and
(ii) The client's established provider is not available through any managed care
organization (MCO) or as a primary care case management (PCCM) provider.
(b) Prior to enrollment, the client scheduled a surgery with a provider not
available to the client through managed care and the surgery is scheduled within
the first thirty days of enrollment; or
(c) The client is American Indian/Alaska Native (AI/AN) as specified in WAC
388-538- 060(2) and requests exemption; or
(d) The client has been identified by MAA as having special needs that meet
MAA's definition of children with special health care needs and requests
exemption; or
(e) The client is pregnant and wishes to continue her established course of
prenatal care with an obstetrical provider who is not available to her through
managed care; or

                                        8

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(f) On a case-by-case basis, the client presents evidence that managed care does
not provide medically necessary care that is reasonably available and accessible
as offered to the client. MAA considers that medically necessary care is not
reasonably available and accessible when any of the following apply:
(i) The client is homeless or is expected to live in temporary housing for less
than one hundred twenty days from the date the client requests the exemption;
(ii) The client speaks limited English or is hearing impaired and the client can
communicate with a provider who communicates in the client's language or in
American Sign Language and is not available through managed care;
(iii) The client shows that travel to a managed care PCP is unreasonable when
compared to travel to a non-managed care primary care provider (PCP). This is
shown when any of the following transportation situations apply to the client:
(A) It is over twenty-five miles one-way to the nearest managed care PCP who is
accepting enrollees, and the client's PCP is closer and not in an available
plan;
(B) The travel time is over forty-five minutes one-way to the nearest managed
care PCP who is accepting enrollees, and the travel time to the client's PCP,
who is not available in an MCO or as a PCCM provider, is less;
(C) Other transportation difficulties make it unreasonable to get primary
medical services under HO; or
(iv) Other evidence is presented that an exemption is appropriate based on the
client's circumstances, as evaluated by MAA.
(4) MAA exempts the client for the time period the circumstances or conditions
that led to the exemption are expected to exist. If the request is approved for
a limited time, the client is notified in writing or by telephone of the time
limitation, the process for renewing the exemption, and the client's fair
hearing rights.
(5) The client is not enrolled as provided in subsection (2) of this section and
receives timely notice by telephone or in writing when MAA approves or denies
the client's exemption request. If initial denial notice was by telephone, then
MAA gives the reasons for the denial in writing before requiring the client to
enroll in managed care. The written notice to the client contains all of the
following:
(a) The action MAA intends to take, including enrollment information;
(b) The reason(s) for the intended action;
(c) The specific rule or regulation supporting the action;
(d) The client's right to request a fair hearing, including the circumstances
under which the fee-for-service status continues, if a hearing is requested; and
(e) A translation into the client's primary language when the client has limited
English proficiency.

WAC 388-538-095
SCOPE OF CARE FOR MANAGED CARE ENROLLEES.
(1) Managed care enrollees are eligible for the scope of medical care as
described in WAC 388-529-0100 for categorically needy clients.
(a) A client is entitled to timely access to medically necessary services as
defined in WAC 388-500-0005.

                                        9

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(b) The managed care organization (MCO) covers the services included in the
healthy options (HO) contract for MCO enrollees. In addition, MCOs may, at their
discretion, cover services not required under the HO contract.
(c) The medical assistance administration (MAA) covers the categorically needy
services not included in the HO contract for MCO enrollees.
(d) MAA covers services on a fee-for-service basis for enrollees with a primary
care case management (PCCM) provider. Except for emergencies, the PCCM provider
must either provide the covered services needed by the enrollee or refer the
enrollee to other providers who are contracted with MAA for covered services.
The PCCM provider is responsible for instructing the enrollee regarding how to
obtain the services that are referred by the PCCM provider. The services that
require PCCM provider referral are described in the PCCM contract. MAA informs
enrollees about the enrollee's program coverage, limitations to covered
services, and how to obtain covered services.
(e) MCO enrollees may obtain certain services from either a MCO provider or from
a medical assistance provider with a DSHS core provider agreement without
needing to obtain a referral from the PCP or MCO. These services are described
in the HO contract, and are communicated to enrollees by MAA and MCOs as
described in (f) of this subsection.
(f) MAA sends each client written information about covered services when the
client is required to enroll in managed care, and any time there is a change in
covered services. This information describes covered services, which services
are covered by MAA, and which services are covered by MCOs. In addition, MAA
requires MCOs to provide new enrollees with written information about covered
services.
(2) For services covered by MAA through PCCM contracts for managed care:
(a) MAA medically necessary covers services included in the categorically needy
scope of care and rendered by providers with a current department of social and
health services (DSHS) core provider agreement to provide the requested service;
(b) MAA may require the PCCM provider to obtain authorization from MAA for
coverage of nonemergency services;
(c) The PCCM provider determines which services are medically necessary;
(d) An enrollee may request a fair hearing for review of PCCM provider or MAA
coverage decisions; and
(e) Services referred by the PCCM provider require an authorization number in
order to receive payment from MAA.
(3) For services covered by MAA through contracts with MCOs:
(a) MAA requires the MCO to subcontract with a sufficient providers to deliver
the scope of contracted services in a timely manner. Except for emergency
services, MCOs provide covered services to enrollees through their participating
providers;
(b) MAA requires MCOs to provide new enrollees with written information about
how enrollees may obtain covered services;
(c) For nonemergency services, MCOs may require the enrollee to obtain a
referral from the primary care provider (PCP), or the provider to obtain
authorization from the MCO, according to the requirements of the HO contract;
(d) MCOs and their providers determine which services are medically necessary
given the enrollee's condition, according to the requirements included in the HO
contract;

                                       10

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(e) An enrollee may appeal an MCO coverage decisions using the MCO's appeal
process, as described in WAC 388-538-0110. An enrollee may also request a
hearing for review of an MCO coverage decision as described in chapter 388-02
WAC;
(f) A managed care enrollee does not need a PCP referral to receive women's
health care services, as described in RCW 48.42.100 from any women's health care
provider participating with the MCO. Any covered services ordered and/or
prescribed by the women's health care provider must meet the MCO's service
authorization requirements for the specific service.
(4) Unless the MCO chooses to cover these services, or an appeal or a fair
hearing decision reverses an MCO or MAA denial, the following services are not
covered:
(a) For all managed care enrollees:
(i) Services that are not medically necessary;
(ii) Services not included in the categorically needy scope of services; and
(iii) Services, other than a screening exam as described in WAC 388-538-100(3),
received in a hospital emergency department for nonemergency medical conditions.
(b) For MCO enrollees:
(i) Services received from a participating specialist that require prior
authorization from the MCO, but were not authorized by the MCO; and
(ii) Services received from a nonparticipating provider that require prior
authorization from the MCO that were not authorized by the MCO. All nonemergency
services covered under the HO contract and received from nonparticipating
providers require prior authorization from the MCO.
(c) For PCCM enrollees, services that require a referral from the PCCM provider
as described in the PCCM contract, but were not referred by the PCCM provider.
(5) A provider may bill an enrollee for noncovered services as described in
subsection (4) of this section, if the enrollee and provider sign an agreement.
The provider must give the original agreement to the enrollee and file a copy in
the enrollee's record.
(a) The agreement must state all of the following:
(i) The specific service to be provided;
(ii) That the service is not covered by either MAA or the MCO;
(iii) An explanation of why the service is not covered by the MCO or MAA, such
as:
(A) The service is not medically necessary; or
(B) The service is covered only when provided by a participating provider,
(iv) The enrollee chooses to receive and pay for the service; and
(v) Why the enrollee is choosing to pay for the service, such as:
(A) The enrollee understands that the service is available at no cost from a
provider participating with the MCO, but the enrollee chooses to pay for the
service from a provider not participating with the MCO;
(B) The MCO has not authorized emergency department services for nonemergency
medical conditions and the enrollee chooses to pay for the emergency
department's services rather than wait to receive services at no cost in a
participating provider's office; or
(C) The MCO or PCCM has determined that the service is not medically necessary
and the enrollee chooses to pay for the service.
(b) For limited English proficient enrollees, the agreement must be translated
or interpreted into the enrollee's primary language to be valid and enforceable.

                                       11

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(c) The agreement is void and unenforceable, and the enrollee is under no
obligation to pay the provider, if the service is covered by MAA or the MCO as
described in subsection (1) of this section, even if the provider is not paid
for the covered service because the provider did not satisfy the payor's billing
requirements.

WAC 388-538-100
MANAGED CARE EMERGENCY SERVICES.
(1) A managed care enrollee may obtain emergency services, for emergency medical
conditions in any hospital emergency department. These definitions differ from
the emergency services definition that applies to services covered under the
medical assistance administration's (MAA's) fee-for-service system.
(a) The managed care organization (MCO) covers emergency services for MCO
enrollees.
(b) MAA covers emergency services for primary care case management (PCCM)
enrollees.
(2) Emergency services for emergency medical conditions do not require prior
authorization by the MCO, primary care provider (PCP), PCCM provider, or MAA.
(3) Emergency services received by an MCO enrollee for nonemergency medical
conditions must be authorized by the plan for enrollee's MCO.
(4) An enrollee who requests emergency services is entitled to receive an exam
to determine if the enrollee has an emergency medical condition.

WAC 388-538-110
MANAGED CARE COMPLAINTS, APPEALS, AND FAIR HEARINGS.
(1) A managed care enrollee has the right to voice a complaint or submit an
appeal of an MAA, MCO, PCCM, PCP or provider decision, action, or inaction. An
enrollee may do this through the following process:
(a) For managed care organization (MCO) enrolles, the MCO's complaint and appeal
processes, and through the department's fair hearing process; or
(b) For primary care case management (PCCM) enrollees, the complaint and appeal
processes of the medical assistance administration (MAA), and through the
department's fair hearing process (chapter 388-02 WAC).
(2) To ensure the rights of MCO enrollees are protected, MAA approves each MCO's
complaint and appeal policies and procedures annually or whenever the plan makes
a change to the process.
(3) MAA requires MCOs to inform MCO enrollees in writing within fifteen days of
enrollment about their rights and how to use the MCO's complaint and appeal
processes. MAA requires MCOs to obtain MAA approval of all written information
sent to enrollees.
(4) MAA provides PCCM enrollees with information equivalent to that described in
subsection (3) of this section.
(5) MCO enrollees may request assistance from the MCO when using the MCO's
complaint and appeals processes. PCCM enrollees may request assistance from MAA
when using MAA's complaint and appeal process.

                                       12

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(6) An MCO enrollee who submits a complaint under this section is entitled to a
written or verbal response from the MCO or from MAA within the timeline in the
MAA-approved complaint process.
(7) When an enrollee is not satisfied with how the complaint is resolved by the
MCO or by MAA, or if the complaint is not resolved in a timely fashion, the
enrollee may submit an appeal to the MCO or to MAA. An enrollee may also appeal
an MAA, MCO, primary care provider (PCP), or provider decision, or
reconsideration of any action or inaction. An enrollee who appeals an MAA, MCO,
PCP, or provider decision is entitled to all of the following:
(a) A review of the decision being appealed. The review must be conducted by an
MCO or MAA representative who was not involved in the decision under appeal;
(b) Continuation of the service already being received and which is under
appeal, until a final decision is made;
(c) A written decision from MAA or the MCO, within the timeline(s) in the appeal
process standards, in the enrollee's primary language. The decision does not
need to be translated if an enrollee with limited English proficiency prefers
correspondence in English, and the deciding authority documents the enrollee's
preference. The notice must clearly explain all of the following:
(i) The decision and any action MAA or the MCO intends to take;
(ii) The reason for the decision;
(iii) The specific information that supports MAA's or the MCO's decision; and
(iv) Any further appeal or fair hearing rights available to the enrollee,
including the enrollee's right to continue receiving the service under appeal
until a final decision is made.
(d) An expedited decision when it is necessary to meet an existing or
anticipated acute or urgent medical need.
(8) An enrollee may file a fair hearing request without also filing an appeal
with MAA or the MCO or exhausting MAA's or the MCO's appeal process.
(9) The MCO's medical director or designee reviews all fair hearings requests,
and any related appeals, when the issues involve an MCO's determination of
medical necessity.
(10) MAA's medical director or the medical director's designee reviews all fair
hearings requests, and any related appeals, when the PCCM enrollee's issues
involve an MAA determination of medical necessity.

WAC 388-538-120
ENROLLEE REQUEST FOR A SECOND MEDICAL OPINION.
(1) A managed care enrollee has the right to a timely referral for a second
opinion upon request when:
(a) The enrollee needs more information about treatment recommended by the
provider or managed care organization (MCO); or
(b) The enrollee believes the MCO is not authorizing medically necessary care.
(2) A managed care enrollee has a right to a second opinion from a primary or
specialty care physician who is participating with the MCO. At the MCO's
discretion, a clinically appropriate nonparticipating provider who is agreed
upon by the MCO and the enrollee may provide the second opinion.

                                       13

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(3) Primary care case management (PCCM) provider enrollees have a right to a
timely referral for a second opinion by another provider who has a core provider
agreement with medical assistance administration (MAA).

WAC 388-538-130
ENDING ENROLLMENT IN MANAGED CARE.
(1) MAA ends an enrollee's enrollment in a managed care organization (MCO) or
with a primary care case management (PCCM) provider when the enrollee meets any
of the following conditions. The enrollee:
(a) Is no longer eligible for a medical program subject to enrollment; or
(b) Is receiving foster care placement services from the division of children
and family services; or
(c) Is or becomes eligible for Medicare, basic health (BH), CHAMPUS/TRICARE, or
any other accessible third party health care coverage that would require
involuntary disenrollment from:
(i) An MCO in accordance with MAA's healthy options (HO) contract for MCO
enrollees; or
(ii) A PCCM provider in accordance with MAA's PCCM contract for PCCM enrollees.
(2) An enrollee or the enrollee's representative as defined in RCW 7.70.065 may
request MAA to end enrollment as described in subsections (3) through (10) of
this section. A managed care organization (MCO) may request MAA to end
enrollment for an enrollee as described in subsection (11) of this section. Only
MAA has authority to remove an enrollee from managed care. Pending MAA's final
decision, the enrollee remains enrolled unless staying in managed care would
adversely affect the enrollee's health status.
(3) MAA grants an enrollee's request to have the enrollee's enrollment ended
under the following conditions:
(a) Is American Indian or Alaska Native (AI/AN) and requests disenrollment; or
(b) Is identified by DSHS as a child who meets the definition of "children with
special health care needs" and requests disenrollment.
(4) MAA grants an enrollee's requests to be removed from managed care when the
client is pregnant or when there is a verified medical need to continue an
established course of care. These end enrollments are limited to the following
situations: The enrollee:
(a) Has a documented medical need to continue a client/provider relationship due
to an established course of care with a physician, physician assistant, or
advanced registered nurse practitioner. The standards for documenting a medical
need are those in WAC 388-538-080(3)(a). The established course of care must
begin:
(i) While the enrollee was enrolled with managed care but the PCP is no longer
available to the enrollee under managed care; or
(ii) Prior to enrollment in managed care and the PCP is not available under any
MCO or as a PCCM provider.
(b) Is pregnant and requests to continue her course of prenatal care that was
established with an obstetrical provider:
(i) While she was enrolled with the MCO but that provider is no longer available
to her in managed care; or

                                       14

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(ii) Prior to enrollment with the current MCO but that provider is not available
to her under managed care.
(c) Is scheduled for a surgery with a provider not available to the enrollee in
the enrollee's current MCO and the surgery is scheduled to be performed within
the first thirty days of enrollment.
(5) Except as provided in subsection (4) of this section, MAA does not permit an
enrollee to obtain an end enrollment by establishing a course of care with a
provider who is not participating with the enrollee's MCO.
(6) MAA ends enrollment on a case-by-case basis when the enrollee presents
evidence that the managed care program does not provide medically necessary care
that is reasonable available and accessible as offered to the enrollee. MAA
considers enrollee requests under this subsection with the same criteria as
listed in WAC 388-538-080(3)(f).
(7) MAA ends enrollment temporarily if an enrollee asks to be taken out of the
current MCO in order to stay with the enrollee's established provider, but is
willing to enroll in the established provider's MCO for the next enrollment
month. MAA reviews the enrollee request according to the criteria in subsections
(4) and (6) of this section. MAA's decision under this subsection include all of
the following:
(a) The decision is given verbally and in writing;
(b) Verbal and written notices include the reason for the decision and
information on hearings so the enrollee may appeal the decision;
(c) If the request to end enrollment is approved, it may be effective back to
the beginning of the month the request is made; and
(d) If the request to end enrollment is denied, and the enrollee requests a
hearing; the enrollee remains in the MCO or with the PCCM until the hearing
decision is made as provided in subsection (2) of this section.
(8) MAA ends enrollment for the period of time the circumstances or conditions
that led to ending the enrollment are expected to exist. If the request to end
enrollment is approved for a limited time, the client is notified in writing or
by telephone of the time limitation, the process for renewing the disenrollment,
and their fair hearing rights.
(9) MAA does not approve an enrollee's request to end enrollment solely to pay
for services received but not authorized by the MCO.
(10) The enrollee remains in managed care as provided in subsection (1) of this
section and receives timely notice by telephone or in writing when MAA approves
or denies the enrollee's request to end enrollment. Except as provided in
subsection (7) of this section, MAA gives the reasons for a denial in writing.
The written denial notice to the enrollee contains all of the following:
(a) The action MAA intends to take;
(b) The reason(s) for the intended action;
(c) The specific rule or regulation supporting the action;
(d) The enrollee's right to request a fair hearing; and
(e) A translation into the enrollee's primary language when the enrollee has
limited English proficiency.
(11) MAA may end an enrollee's enrollment in a MCO or with a PCCM provider when
the enrollee's MCO or PCCM provider substantiates in writing, to MAA's
satisfaction, that:

                                       15

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(a) The enrollee's behavior is inconsistent with the MCO or PCCM provider rules
and regulations, such as intentional misconduct; and
(b) After the MCO or PCCM provider has provided:
(i) Clinically appropriate evaluation(s) to determine whether there is a
treatable problem contributing to the enrollee's behavior; and
(ii) If so, has provided clinically appropriate referral(s) and treatment(s),
but the enrollee's behavior continues to prevent the provider from safely or
prudently providing medical care to the enrollee; and
(c) The enrollee received written notice from the MCO or PCCM provider of the
MCO or PCCM provider intent to request the enrollee's removal, unless MAA has
waived the requirement for the MCO or PCCM provider notice because the
enrollee's conduct presents the threat of imminent harm to others. The MCO or
PCCM provider notice to the enrollee must include both of the following:
(i) The enrollee's right to use the appeal process as described in WAC
388-538-110 to review the MCO or PCCM provider request to end the enrollee's
enrollment; and
(ii) The enrollee's right to use the department fair hearing process.
(12) MAA makes a decision to remove an enrollee from enrollment in managed care
within thirty days of receiving the MCO or PCCM provider request to do so.
Before making a decision, MAA attempts to contact the enrollee and learn the
enrollee's perspective. If MAA approves the MCO or PCCM provider request to
remove the enrollee, MAA sends a notice at least ten days in advance of the
effective date that enrollment will end. The notice includes the reason for
MAA's approval to end enrollment and information about the enrollee's fair
hearing rights.
(13) MAA does not approve a request to remove an enrollee from managed care when
the request is solely due to an adverse change in the enrollee's health or the
cost of meeting the enrollee's needs.

WAC 388-538-140
QUALITY OF CARE.
(1) In order to assure that managed care enrollees receive appropriate access to
quality health care and services, the medical assistance administration (MAA)
does all of the following:
(a) Requires managed care organizations (MCOs) to have a fully operational
quality assurance system that meets a comprehensive set of quality improvement
program (QIP) standards.
(b) Monitors MCO performance through on-site visits and other audits, and
requires corrective action for deficiencies that are found.
(c) Requires MCOs to report annually on standardized clinical performance
measures that are specified in the contract with MAA, and requires corrective
action for substandard performance.
(d) Contracts with a professional review organization to conduct independent
external review studies of selected health care and service delivery.
(e) Conducts enrollee satisfaction surveys.

                                       16

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit B

(f) Annually publishes individual MCO performance information and primary care
case management (PCCM) program performance information including certain
clinical measures and enrollee satisfaction surveys and makes reports of site
monitoring visits available upon request.
(2) MAA requires MCOs and PCCM providers to have a method to assure
consideration of the unique needs of enrollees with chronic conditions. The
method includes:
(a) Early identification;
(b) Timely access to health care; and
(c) Coordination of health service delivery and community linkages.

                                       17

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

                                   EXHIBIT C-1
                          2003 HEALTHY OPTIONS & SCHIP
                         ENCOUNTER DATA SPECIFICATIONS

                                     PREFACE

Healthy Options & SCHIP encounter data is used for many purposes. Among these
are federal reporting to the Medicaid Statistical Information System (MSIS); HO
& SCHIP rate setting and risk adjustment; Medical Assistance Administration's
(MAA) hospital rate setting; the HO & SCHIP quality improvement program, and
research. To ensure the efficient and timely collection of quality encounter
data for these purposes 2003 encounter data specifications are as follows:

                            GENERAL FILE REQUIREMENTS

     1)   The Contractor shall submit encounter data in accordance with the 2003
          HO & SCHIP Encounter Data Specifications. These specifications apply
          to adjudicated and capitated encounter records. Adjudicated encounter
          records include those that the Contractor paid as well as those for
          which the Contractor denied payment.

     2)   The Contractor shall submit all encounter records no later than 450
          calendar days following the date of service for the encounters
          reported.

     3)   The Contractor shall submit all finalized, not previously submitted
          encounter records that the Contractor processed during the reporting
          quarter by the specified encounter data submission date which is 90
          calendar days after the end of the reporting quarter.

     4)   The Contractor shall submit a "roll up" of any adjustments made to an
          encounter record into a single encounter record for initial
          submission.

     5)   MAA may reject files exceeding 2% overall error rate.

     6)   The Contractor shall correct rejected encounter records and include
          these with a complete resubmission of all records pertinent to the
          reporting quarter. Resubmissions are due no later than 90 calendar
          days after receiving them back from DSHS. After this date encounter
          records are still required to be submitted but shall be considered
          late.

     7)   The Contractor must assign the services and codes to the associated
          encounter type specified in the associated MAA 'fee-for-service'
          Billing Instructions (e.g. for Physician Related Services, that is
          current on the date of service). Examples of the encounter type
          associated with some commonly used procedures are given in the
          Encounter Type Table. Contractors may use 'J' (medical practitioner)
          and 'L' (EPSDT) designations on different records of the same
          encounter when both types of services were provided.

     8)   Excluding inpatient hospital (R) encounter type, "Date of Service" in
          these specifications

                                        1

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

          means the day the enrollee received the service. For inpatient
          hospital (R) encounters, "Date of Service" means the date of
          discharge. Except for inpatient hospital services, the Contractor must
          report services provided on different dates as separate encounters.
          This includes professional medical services provided in a hospital
          setting.

     9)   The Contractor may submit encounters by contract type (HO/SCHIP and
          Basic Health Plus) in a single file. The Plan ID (Field 6) assigned to
          a record must reflect the contract under which the member is enrolled
          on the date of service.

     10)  The Contractor must use the Contractor's Plan ID (Field 6) in
          encounter records when enrollees receive care through an FQHC or RHC.

     11)  Procedure code modifiers are required for outpatient hospital (M)
          services (reported on the federal HCFA/CMS UB-92 form) as well as for
          medical professional (J), EPSDT (L), and (P) encounters (reported on
          HCFA/CMS 1500 form).

     12)  EPSDT Referral Indicator (Field 24) is a required field. The
          associated error flag will be tracked separately by EDU. Related
          errors will be excluded from the total count and percentage of records
          otherwise with errors. Blank-fill Field 24 if the EPSDT indicator
          cannot be obtained. The contractor is required to report the encounter
          even though the blank fill will result in an error during the MAA edit
          process.

     13)  Contractors submitting alternative identifiers (Field 38 and 39) shall
          submit, with each quarterly submission, a separate file list that
          enables MAA to link the alternative identifier with the identity of
          the provider.

     14)  Contractors must meet new, additional, or revised requirements of the
          federal Health Insurance Portability and Accountability Act (HIPAA)
          that may take affect during the contract period.

     15)  MAA reserves the right to:

       a)   Modify any encounter data reporting requirement following 120
            calendar days notice to the Contractor;

       b)   Request data substantiating reported encounter records following at
            least 30 calendar days notice to the Contractor; and

       c)   Waive encounter data requirements under exceptional circumstances
            with written approval from MAA.

                                        2

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

                                    SCHEDULE

The HO/SCHIP 2003 encounter data requirements are effective with data collected
on or after January 1, 2003.

REPORTING QUARTER: The quarter in which the encounter records were processed by
the Contractor for initial submission. The submission is due no later than 90
calendar days after the last day of the reporting quarter.

------------------------------------------------------------------------------
     REPORTING
      QUARTER                REPORTING QUARTER               SUBMISSION DATE
------------------------------------------------------------------------------
       Q3-02         July 1 through September 30, 2002       January 2, 2003
------------------------------------------------------------------------------
       Q4-02        October 1 through December 31, 2002        April 1, 2003
------------------------------------------------------------------------------
       Q1-03          January 1 through March 31, 2003         July 1, 2003
------------------------------------------------------------------------------
       Q2-03           April 1 through June 30, 2003         October 1, 2003
------------------------------------------------------------------------------
       Q3-03         July 1 through September 30, 2003       January 2, 2004
------------------------------------------------------------------------------
       Q4-03        October 1 through December 31, 2003       April 1, 2004
------------------------------------------------------------------------------

                         SUBMISSION MEDIA SPECIFICATIONS

1)   When submitting compact disk or computer diskette, submit fixed width text
     files. Do not include internal labels. For compact disk, computer diskette,
     and tape include:

     Data Set Name format: MCED.Pppppppp.YyyQTRq

     MCED      A literal value abbreviation for "Managed Care Encounter Data"
     P         A literal prefix
     ppppppp   The Contractor's Medicaid Provider Number
     Y         A literal prefix
     yy        The last two digits of the calendar year reported
     QTR       A literal value
     q         The calendar quarter reported (see Schedule of Submissions)

2)   For submissions on magnetic tape:

     Write encounter data file to an IBM OS standard labeled tape (8 1/2 or 10
     1/2 inches) in EBCDIC:

        RECFM=FB
        BLKSIZE=30000
        LRECL=500
        DENSITY=1600BPI or 6250 BPI

                                        3

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

                                   TEST FILES

1)   Contractors may submit a compact disk, computer diskette, or tape
     containing test data (2000-3000 records) to identify and resolve errors and
     problems with field definitions.

2)   Records representing all encounter types covered by the contract should be
     included.

3)   Identify the file as a "test" at the time of submission.

                   EXTERNAL LABEL AND SHIPPING/MAILING ADDRESS

1)   Submit initial encounter records in a file separate from file(s) containing
     adjusted, corrected and/or voided encounter records.

2)   Attach an external label for each file contained on the tape, compact disk,
     and computer diskette including at least the following information:

o  Plan name
o  File name: Specify content: 1) "initial submission" or; 2) "complete
   resubmission (i.e. encounters pertaining to previous submissions)
o  Logical record length
o  Year and quarter reported
o  Program(s) i.e., Healthy Options, BHP Plus, or both
o  Specify whether the compact disk, computer diskette, or tape contains records
   for some encounter types (for example, pharmacy only) or all encounter types
o  Block size (needed only for submissions on tape)
o  Number of records per file

3)   Send to:
       Encounter Data Coordinator
       Information Services Division
       DSHS Medical Assistance Administration
       617 8th Avenue SE, Bldg. 1, 4th Fl.
       P.O. Box 45511
       Olympia, WA 98504-5511

Direct questions and comments to the Encounter Data Coordinator at (360)
725-1288.

                                  ERROR REPORT

The Encounter Data Unit will provide a report evaluating timely reported
encounter data submissions. In addition, error flags will be placed in each
record during MAA's edit of the record to assist the Contractor in the
identification of problem areas.

Contractors must prevent reoccurrence of the same type of errors in subsequent
submissions. If the same type of errors reoccur, DSHS may return the incorrect
encounter submission.

NOTE: To permit error flags to be written to an encounter data tape, the Tape
Label EXPIRATION DATE must either be eliminated or set at a date at least six
months after the date of submission.

                                        4

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

                          GENERIC FIELD SPECIFICATIONS

1)   NUMERIC FIELDS

     o    RIGHT justify (data)

     o    ZERO fill (from left)

     o    EIGHT fill when:
            o  Not applicable to the encounter type. Examples: (1) Eight-fill
               the hospital discharge date for all encounter types, excluding
               inpatient hospital (R). (2) Eight-fill the revenue code (Field
               21) for outpatient hospital encounters when a procedure code is
               reported in Field 16 not IP.

                                      -OR-

            o  Applicable but not required and for which there is no data.
               Example: When a Contractor is unable to obtain a Medicaid Billing
               Provider Number of a pharmacy, it may eight-fill Field 7 and
               report a NAPB Identifier or Federal Tax Identifier as the
               alternate Billing Provider Identification in Field 38.

     o    NINE fill when valid entries are required but unknown. Nine-filling is
          required, but unknown numeric data will result in an error. Nine-fill
          only when the required information cannot be supplied within reporting
          deadlines.

     o    DATE FORMAT - MMDDYY (DSHS edits provide for identifying century)

     o    DECIMAL POINTS - DSHS edits assume decimal points except for Fields
          16, 17, 19 and 20. For these four fields, the decimal points are to be
          inserted as required by the appropriate coding systems.

2)   CHARACTER FIELDS

     o    LEFT justify (data)

     o    BLANK fill (from right) when
            o  valid entries are required but unknown. Blank-filling required
               but unknown character fields will result in an error. Blank-fill
               only when there is a need to meet time requirements for reporting
               encounter events. Example: An EPSDT Referral Indicator is
               unknown. Blank-fill Field 24. The Contractor is required to
               report the encounter even though the Blank-fill will result in an
               error during the MAA edit process.

     o    HYPHEN ('-') fill when
            o  not applicable, OR
            o  applicable but not required and for which there is no data.
               Example: A hospital reports an inpatient stay and there are only
               2 diagnosis codes. Hyphen-fill diagnoses 3 through

                                        5

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

               9 since there are no diagnoses to report.

                                VALIDATION EDITS

DSHS will perform edits on all submitted encounter data files. If an invalid
result is found, it may be treated as an 'error' and included in the count of
records with errors or it may be the result of an 'association check' and
reported as 'information only'.

ERRORS: The edits that will identify the following conditions as errors pertain
to the required fields:

1.   Missing (required) values
2.   Non-numeric data in numeric fields
3.   Negative values in numeric fields
4.   Invalid dates
5.   Invalid values for:

   -------------------------------------------------------------------------
                         FIELD NAME                           FIELD NUMBER
   -------------------------------------------------------------------------
   Encounter Type                                                    1
   -------------------------------------------------------------------------
   Line Item Number                                                  3
   -------------------------------------------------------------------------
   Recipient ID/PIC                                                  4
   -------------------------------------------------------------------------
   Billing and Performing/Attending or Prescribing Provider    7,8,38 & 39
   ID
   (Billing ID may be a Medicaid #, Tax ID, or for
   pharmacies NABP#;

   Performing/Attending or Prescribing ID may be a
   Medicaid #, State License #, or DEA #)
   -------------------------------------------------------------------------
   DRG                                                               9
   -------------------------------------------------------------------------
   Place of Service                                                 15
   -------------------------------------------------------------------------
   Procedure Code                                                16 & 17
   -------------------------------------------------------------------------
   Procedure Code Modifier                                          18
   -------------------------------------------------------------------------
   Diagnosis Code                                                19 & 20
   -------------------------------------------------------------------------
   Revenue Codes                                                    21
   -------------------------------------------------------------------------
   National Drug Code                                               22
   -------------------------------------------------------------------------
   EPSDT Referral Code                                              24
   Tracked separately and not included in count and
   percentage of records otherwise with errors.
   -------------------------------------------------------------------------
   Plan Record ID                                                   25
   -------------------------------------------------------------------------
   Prescription Number                                              27
   -------------------------------------------------------------------------
   Claim Status                                                     28
   -------------------------------------------------------------------------
   Line Status                                                      29
   -------------------------------------------------------------------------
   Patient Control Number                                           41
   -------------------------------------------------------------------------
   Prescription Days Supply                                         88
   -------------------------------------------------------------------------
   Alternate Bill-Provider ID Type                                  90
   -------------------------------------------------------------------------
   Alternate Perf-Attend-Presc ID Type                              91
   -------------------------------------------------------------------------

                                        6

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

6.   EPSDT encounters with incorrect procedure codes or age greater than 20.

7.   Records for the same encounter containing different encounter type
     designations, except J and L Encounter Type designations that may occur on
     different records for the exact same encounter.

8.   Other conditions occurring due to improperly following encounter data
     specifications may also be evaluated.

ASSOCIATION CHECKS: Edits of the association between two fields will check for
invalid recipient age or sex for diagnosis or procedure, and recipient
eligibility and provider Medicaid number active status for the dates of service.
Counts of inconsistent associations will be indicated by the prefix' * ' on the
hard copy of error summary reports and will not be included in the counts of
errors.

                                        7

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

                  PHYSICAL RECORD LAYOUT AND FIELD REQUIREMENTS

--------------------------------------------------------------------------------
                          KEY FOR ENCOUNTER TYPE CODES
--------------------------------------------------------------------------------
   R   Required field - Required for processing. DSHS will return records with
       missing, invalid, or uncorrectable values. Contractors must correct
       returned records and submit within 90 calendar days.
--------------------------------------------------------------------------------
   *   Applicable field - Information entered into these fields(30-33)is used to
       identify valid Patient Identification Codes (PIC) when a plan either does
       not submit a PIC or the submitted PIC is invalid.
--------------------------------------------------------------------------------
   O   Optional field -Contractors are encouraged to submit optional information
--------------------------------------------------------------------------------
   E   Field at the encounter level
--------------------------------------------------------------------------------
   L   Field at the line item level
--------------------------------------------------------------------------------
   X   Cobol Picture for character or alphanumeric field
--------------------------------------------------------------------------------
   9   Cobol Picture for numeric field
--------------------------------------------------------------------------------
  V99  Implied decimal point followed by 2 digits
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
      #      FIELD NAME                                LEVEL           ENCOUNTER TYPE                   PHYSICAL RECORD LAYOUT
                                                              ----------------------------------------------------------------------
                                                                J,L,       R        M       D       COBOL        OCCURS      START
                                                                 P                                 PICTURE                  POSITION
------------------------------------------------------------------------------------------------------------------------------------
     <S>     <C>                                       <C>    <C>          <C>      <C>     <C>   <C>               <C>        <C>
      1      Encounter Type Indicator                  E          R        R        R       R       X(1)            1           1
------------------------------------------------------------------------------------------------------------------------------------
      2      Encounter ID                              E          R        R        R       R       9(9)            1           2
------------------------------------------------------------------------------------------------------------------------------------
      3      Line Item Number                          L          R        R        R       R       9(2)            1          11
------------------------------------------------------------------------------------------------------------------------------------
      4      PIC                                       E          R        R        R       R       X(14)           1          13
------------------------------------------------------------------------------------------------------------------------------------
      5      Date of Birth                             E          R        R        R       R       9(6)            1          27
------------------------------------------------------------------------------------------------------------------------------------
      6      Plan ID                                   E          R        R        R       R       9(7)            1          33
------------------------------------------------------------------------------------------------------------------------------------
      7      Billing Provider Medicaid                 E          R        R        R       R       9(7)            1          40
             Number                                           ----------------------------------
                                                              Required only if the provider has
                                                              a Medicaid provider ID
------------------------------------------------------------------------------------------------------------------------------------
      8      Performing/Attending                      E          R        R        R       R       9(7)            1          47
             or Prescribing Provider                          ----------------------------------
             Medicaid Number                                  Required only if the provider
                                                              has a Medicaid provider ID
------------------------------------------------------------------------------------------------------------------------------------
      9      DRG                                       E                   R                        9(3)            1          54
------------------------------------------------------------------------------------------------------------------------------------
     10      Hospital Admission Date                   E                   R                        9(6)            1          57
------------------------------------------------------------------------------------------------------------------------------------
     11      Patient Destination on Discharge          E                   R                        X(2)            1          63
------------------------------------------------------------------------------------------------------------------------------------
     12      Line Billed Charges                       L                   R        R             9(7)V99           1          65
------------------------------------------------------------------------------------------------------------------------------------
     13      Date of Service                           L          R        R        R       R       9(6)            1          74
------------------------------------------------------------------------------------------------------------------------------------
     14      Hospital Discharge Date                   E                   R                        9(6)            1          80
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                        8

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
      #      FIELD NAME                                LEVEL           ENCOUNTER TYPE                   PHYSICAL RECORD LAYOUT
                                                              ----------------------------------------------------------------------
                                                                J,L,       R        M       D       COBOL        OCCURS      START
                                                                 P                                 PICTURE                  POSITION
------------------------------------------------------------------------------------------------------------------------------------
    <S>      <C>                                       <C>       <C>      <C>      <C>     <C>      <C>             <C>       <C>
      15     Place of Service                          E          R                 R               X(1)            1          86
------------------------------------------------------------------------------------------------------------------------------------
      16     Primary Procedure: Report                 E                   R                        X(5)            1          87
      IP     ICD.9.CM procedures.
------------------------------------------------------------------------------------------------------------------------------------
      16     Primary Procedure:                        L          R                 R               X(5)            1          87
    Not IP   Applicable to 'M' encounters:
             If there is no Revenue Code in
             Field #21, then a CPT,
             HCPCS, or ICD.9.CM code is
             required. If there is a valid
             Revenue Code and no
             procedures to report,
             then hyphen-fill this field.
------------------------------------------------------------------------------------------------------------------------------------
      17     Other ICD.9.CM Procedure                  E                   R        R               X(5)            5          92
             Codes ('M' or 'R' encounters).
------------------------------------------------------------------------------------------------------------------------------------
      18     Procedure Code Modifier                   L          R                 R               X(2)            1         117
------------------------------------------------------------------------------------------------------------------------------------
      19     Principal Diagnosis Code                  L          R        R        R               X(7)            1         119
------------------------------------------------------------------------------------------------------------------------------------
      20     Other Diagnosis Codes                     E                   R        R               X(7)            8         126
------------------------------------------------------------------------------------------------------------------------------------
      21     Revenue Code                              L                   R        R               9(4)            1         182
             Applicable to 'M' encounters:
             If Field #16 has CPT, HCPCS,
             or ICD.9.CM procedure code -
             8-fill if no Revenue Code.
------------------------------------------------------------------------------------------------------------------------------------
      22     National Drug Code (NDC)                  L                                    R       X(11)           1         186
------------------------------------------------------------------------------------------------------------------------------------
      23     Units of Service                          L          R        R        R       R       9(7)            1         197
------------------------------------------------------------------------------------------------------------------------------------
      24     EPSDT Referral Indicator                  E          R                                 X(2)            1         204
                                                                 (L)
------------------------------------------------------------------------------------------------------------------------------------
      25     Plan Record ID (EPRI)                     E          O        O        O       O       X(20)           1         206
------------------------------------------------------------------------------------------------------------------------------------
      26     Newborn Birth Weight                      E                   R        R               9(4)            1         226
------------------------------------------------------------------------------------------------------------------------------------
      27     Prescription Number                       L                                    R       X(7)            1         230
------------------------------------------------------------------------------------------------------------------------------------
      28     Claim Status                              E          R        R        R       R       X(1)            1         237
------------------------------------------------------------------------------------------------------------------------------------
      29     Line Status                               L          R        R        R       R       X(1)            1         238
------------------------------------------------------------------------------------------------------------------------------------
      30     Patient's First Name                      E          *        *        *       *       X(17)           1         239
------------------------------------------------------------------------------------------------------------------------------------
      31     Patient's Middle Initial                  E          *        *        *       *       X(1)            1         256
------------------------------------------------------------------------------------------------------------------------------------
      32     Patient's Last Name                       E          *        *        *       *       X(20)           1         257
------------------------------------------------------------------------------------------------------------------------------------
      33     Patient's SSN                             E          *        *        *       *       X(9)            1         277
------------------------------------------------------------------------------------------------------------------------------------
      34     Subscriber's First Name                   E          O        O        O       O       X18)            1         286
------------------------------------------------------------------------------------------------------------------------------------
      35     Subscriber's Last Name                    E          O        O        O       O       X(20)           1         304
------------------------------------------------------------------------------------------------------------------------------------
      36     Subscriber's SSN                          E          O        O        O       O       X(9)            1         324
------------------------------------------------------------------------------------------------------------------------------------
      37     Subscriber's Birth Date                   E          O        O        O       O       9(6)            1         333
------------------------------------------------------------------------------------------------------------------------------------
      38     Alternate Billing Provider ID:            E         R/O      R/O      R/O     R/O      X(10)           1         339
             Tax or NABP Identifier.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                        9

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
      #      FIELD NAME                                LEVEL           ENCOUNTER TYPE                   PHYSICAL RECORD LAYOUT
                                                              ----------------------------------------------------------------------
                                                                J,L,       R        M       D       COBOL        OCCURS      START
                                                                 P                                 PICTURE                  POSITION
------------------------------------------------------------------------------------------------------------------------------------
<S>          <C>                                       <C>    <C>         <C>      <C>     <C>      <C>             <C>       <C>
                                                              Required only if the provider has
                                                              no Medicaid provider number.
------------------------------------------------------------------------------------------------------------------------------------
      39     Alternate Performing /                    E         R/O      R/O      R/O     R/O      X(10)           1         349
             Attending or Prescribing                         ----------------------------------
             Provider ID: State License                       Required only if the
             Number or DEA Identifier                         provider has no Medicaid
                                                              provider number.
------------------------------------------------------------------------------------------------------------------------------------
      40     ED Processor Tax ID                       E          O        O        O       O       X(10)           1         359
------------------------------------------------------------------------------------------------------------------------------------
      41     Hospital Patient Control                  E                   R        O               X(20)           1         369
             Number (PCN)
------------------------------------------------------------------------------------------------------------------------------------
      42     FILLER                                                                                 X(47)           1         389
------------------------------------------------------------------------------------------------------------------------------------
ERROR FLAG FORMAT (DSHS COMPLETES)
------------------------------------------------------------------------------------------------------------------------------------
      43     Error Flag 1 Enc, Type                                                                 X(1)            1         436
------------------------------------------------------------------------------------------------------------------------------------
      44     Error Flag 2 Enc. ID                                                                   X(1)            1         437
------------------------------------------------------------------------------------------------------------------------------------
      45     Error Flag 3 Line Item                                                                 X(1)            1         438
------------------------------------------------------------------------------------------------------------------------------------
      46     Error Flag 4 PIC                                                                       X(1)            1         439
------------------------------------------------------------------------------------------------------------------------------------
      47     Error Flag 5 Date of Birth                                                             X(1)            1         440
------------------------------------------------------------------------------------------------------------------------------------
      48     Error Flag 6 Plan #                                                                    X(1)            1         441
------------------------------------------------------------------------------------------------------------------------------------
      49     Err. Flg 7 Bill. Prov. Medicaid #                                                      X(1)            1         442
------------------------------------------------------------------------------------------------------------------------------------
      50     Err. Flg 8 Perf. Prov Medicaid #                                                       X(1)            1         443
------------------------------------------------------------------------------------------------------------------------------------
      51     Error Flag 9 DRG                                                                       X(1)            1         444
------------------------------------------------------------------------------------------------------------------------------------
      52     Err. Flag 10 Hosp. Admit Date                                                          X(1)            1         445
------------------------------------------------------------------------------------------------------------------------------------
      53     Err. Flg 11 Disch. Destination                                                         X(1)            1         446
------------------------------------------------------------------------------------------------------------------------------------
      54     Err. Flg 12 Line Billed Charge                                                         X(1)            1         447
------------------------------------------------------------------------------------------------------------------------------------
      55     Error Flag 13 Date of Service                                                          X(1)            1         448
------------------------------------------------------------------------------------------------------------------------------------
      56     Err. Flg 14 Hosp. Disch. Date                                                          X(1)            1         449
------------------------------------------------------------------------------------------------------------------------------------
      57     Error Flag 15 Place of Service                                                         X(1)            1         450
------------------------------------------------------------------------------------------------------------------------------------
      58     Error Flag 16 Principal Proc.                                                          X(1)            1         451
------------------------------------------------------------------------------------------------------------------------------------
      59     Error Flag 17-1 to 17-5: Other                                                         X(1)            5         452
             ICD.9.CM Procedures
------------------------------------------------------------------------------------------------------------------------------------
      60     Error Flag 18 Proc. Modifier                                                           X(1)            1         457
------------------------------------------------------------------------------------------------------------------------------------
      61     Error Flag 19 Principal Diag.                                                          X(1)            1         458
------------------------------------------------------------------------------------------------------------------------------------
      62     Error Flag 20-1 to 20-8                                                                X(1)            8         459
             Other Diagnoses
------------------------------------------------------------------------------------------------------------------------------------
      63     Error Flag 21 Revenue Code                                                             X(1)            1         467
------------------------------------------------------------------------------------------------------------------------------------
      64     Err. Flg 22 National Drug Code                                                         X(1)            1         468
------------------------------------------------------------------------------------------------------------------------------------
      65     Error Flag 23 Units of Service                                                         X(1)            1         469
------------------------------------------------------------------------------------------------------------------------------------
      66     Err. Flg 24 EPSDT Refer. Ind.                                                          X(1)            1         470
------------------------------------------------------------------------------------------------------------------------------------
      67     Filler hyphen-filled: Had been                                                         X(1)            1         471
             Err. Flg 25 Enc. Plan Rec. ID
------------------------------------------------------------------------------------------------------------------------------------
      68     Err. Flg 26 Newborn Birth Wt.                                                          X(1)            1         472
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       10

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
      #      FIELD NAME                                LEVEL           ENCOUNTER TYPE                   PHYSICAL RECORD LAYOUT
                                                              ----------------------------------------------------------------------
                                                                J,L,       R        M       D       COBOL        OCCURS      START
                                                                 P                                 PICTURE                  POSITION
------------------------------------------------------------------------------------------------------------------------------------
      <S>    <C>                                       <C>       <C>      <C>      <C>     <C>      <C>            <C>        <C>
      69     Error Flag 27 Prescription No.                                                         X(1)           1          473
------------------------------------------------------------------------------------------------------------------------------------
      70     Error Flag 28 Claim Status                                                             X(1)           1          474
------------------------------------------------------------------------------------------------------------------------------------
      71     Error Flag 29 Line Status                                                              X(1)           1          475
------------------------------------------------------------------------------------------------------------------------------------
      72     Err. Flg 30                                                                            X(1)           1          476
------------------------------------------------------------------------------------------------------------------------------------
      73     Err. Flg 31                                                                            X(1)           1          477
------------------------------------------------------------------------------------------------------------------------------------
      74     Err. Flg 32                                                                            X(1)           1          478
------------------------------------------------------------------------------------------------------------------------------------
      75     Error Flag 33                                                                          X(1)           1          479
------------------------------------------------------------------------------------------------------------------------------------
      76     Error Flag 38 Bill.Prov. Alt. ID                                                       X(1)           1          480
------------------------------------------------------------------------------------------------------------------------------------
      77     Error Flag 39 Perf.Prov. Alt. #                                                        X(1)           1          481
------------------------------------------------------------------------------------------------------------------------------------
      78     Error Flag 40                                                                          X(1)           1          482
------------------------------------------------------------------------------------------------------------------------------------
      79     Association Flag 41 Patient not                                                        X(1)           1          483
             eligible on date of service
------------------------------------------------------------------------------------------------------------------------------------
      80     Assn. Flg 42 Perf.Prov Medi. #                                                         X(1)           1          484
             is not active on date of service
------------------------------------------------------------------------------------------------------------------------------------
      81     Assn. Flg. 43 Invalid age for                                                          X(1)           1          485
             diagnosis
------------------------------------------------------------------------------------------------------------------------------------
      82     Assn Flg 44 Invalid sex x diag.                                                        X(1)           1          486
------------------------------------------------------------------------------------------------------------------------------------
      83     Assn Flg 45 Invalid age x proc.                                                        X(1)           1          487
------------------------------------------------------------------------------------------------------------------------------------
      84     Assn Flg 46 Invalid sex x proc.                                                        X(1)           1          488
------------------------------------------------------------------------------------------------------------------------------------
      85     Assn. Fl. 47 Invalid place x                                                           X(1)           1          489
             procedure
------------------------------------------------------------------------------------------------------------------------------------
      86     PIC Change Flag                                                                        X(1)           1          490
------------------------------------------------------------------------------------------------------------------------------------
      87     PCN Error Flag                                                                         X(1)           1          491
------------------------------------------------------------------------------------------------------------------------------------
      88     Prescription Days Supply                  L                                  R         9(3)           1          492
------------------------------------------------------------------------------------------------------------------------------------
      89     Err.Flg.Prescrip. Days Supply                                                          X(1)           1          495
------------------------------------------------------------------------------------------------------------------------------------
      90     Alternate Bill-Provider ID Type           E         O        O        O      O         X(1)           1          496
------------------------------------------------------------------------------------------------------------------------------------
      91     Alternate Perf-Attend-Presc               L         O        O        O      O         X(1)           1          497
             Provider ID Type
------------------------------------------------------------------------------------------------------------------------------------
      92     Err. Flg Alt-Bill Prov ID Type                                                         X(1)                      498
------------------------------------------------------------------------------------------------------------------------------------
      93     Err. Flg Alt-Perf-Attend-Presc                                                         X(1)           1          499
             ID Type
------------------------------------------------------------------------------------------------------------------------------------
      94     FILLER                                                                                 X(1)           1          500
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                      GENERAL DEFINITIONS AND DATA SOURCES

      ENCOUNTER:
      ----------
      o    One occurrence (e.g. an office visit); or
      o    A period of examination or treatment (e.g. inpatient hospital stay or
           long term care facility) by a medical practitioner or medical
           facility.

                                       11

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

REPORT:
   1) Any SERVICE or PROCEDURE listed in the following:

      o  AMA Physicians' Current Procedural Terminology (CPT). Use the edition
         concurrent with reporting period.
      o  Standard Edition International Classification of Diseases (ICD.9.CM)
      o  State-specific Codes.
      o  Health Care Financing Administration Comprehensive Procedure Coding
         System (HCPCS).
      o  Dental ADA Procedure Codes.

         NOTE: All carrier and provider-specific ("in-house") codes must be
         converted to a corresponding code from one of the above listed sources.

   2) Any VALID Provider Identifiers are allowed in the following list:

      o  Medicaid Provider Numbers with active status (as per the monthly
         provider list);
      o  Federal Tax Identification numbers used by the billing provider for
         reporting to the U.S. Internal Revenue Service;
      o  State License numbers assigned by the Washington State Department of
         Health assigns to providers certified, registered or licensed in
         accordance with Title 18 RCW or Chapter 70.127 RCW;
      o  DEA Identifier numbers assigned by the U.S. Drug Enforcement
         Administration;
      o  NABP (National Association of Boards of Pharmacy) ID numbers. The NABP
         has been purchased by the National Council for Prescription Drug
         Programs (NCPDP) that now assigns this number. Refer to the NCPDP
         website for further information www.ncpdp.org/provider.asp.

                                       12

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

--------------------------------------------------------------------------------
FIELD ID                   GENERAL FIELD DESCRIPTION
--------------------------------------------------------------------------------
   1      ENCOUNTER TYPE CODE Contractors are required to assign the services
          and codes to the associated encounter type specified on the attached
          Encounter Type Table. Enter a single character code to designate the
          type of encounter. Where EPSDT services are involved, encounters can
          have line item records with encounter type 'L' for EPSDT services and
          encounter type 'J' for non-EPSDT medical services.
               D - Drugs/Medications
               J - Medical Practitioner
               L - EPSDT
               M - Outpatient
               P - Medical Supplies/Equipment, Vision, Hearing, & Transportation
               R - Inpatient Hospital
--------------------------------------------------------------------------------
   2      ENCOUNTER IDENTIFICATION NUMBER
          A number assigned to each encounter and attached to each record in
          that encounter for the purpose of grouping records belonging to a
          single encounter. Number encounters sequentially in an encounter data
          file.
--------------------------------------------------------------------------------
   3      LINE ITEM NUMBER A number (e.g. 01, 02, 03 etc.) assigned sequentially
          to each instance/item separately reported in a single encounter.
--------------------------------------------------------------------------------
   4      PIC = PERSONAL IDENTIFICATION CODE
          Identifier assigned to each recipient approved for Medicaid. DSHS
          provides a list of Medicaid recipients enrolled with the plan to the
          Contractor on a monthly basis. The list includes each recipient's PIC.
          The PIC is to be reported in Field 4 in DATA format:
               o    First 5 characters of last name (Blank-fill unused
                    positions);
               o    Initial character of first name;
               o    Initial character of middle name (If no middle initial, a
                    hyphen is shown);
               o    Date of birth in YYMMDD format;
               o    A tiebreaker code (assigned by DSHS at time of enrollment).

          For NEWBORNS use mother's PIC only until newborn has own PIC and it is
          no more than 90 days after date of birth or:
               o    The family moves out of state;
               o    The newborn is adopted, placed in foster care or dies before
                    getting a PIC; or
               o    The mother leaves the Contractor within 30 calendar days of
                    the birth and the newborn never appears on the payment or
                    enrollment listing for the Contractor.
--------------------------------------------------------------------------------
   5      DATE OF BIRTH
          Patient birth date formatted: MMDDYY. Use newborns birth date when
          using mother's PIC.
--------------------------------------------------------------------------------
   6      PLAN ID
          The Medicaid Provider Number assigned to the carrier designating the
          contract under which the member is enrolled (e.g. Healthy Options,
          Basic Health Plan Plus).
--------------------------------------------------------------------------------

                                       13

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

--------------------------------------------------------------------------------
FIELD ID                   GENERAL FIELD DESCRIPTION
--------------------------------------------------------------------------------
   7      BILLING PROVIDER ID - The Medicaid Provider Number assigned to the:
          o    CLINIC or PROVIDER PRACTICE of the encounter's
               performing/attending provider.
          o    CONTRACTOR, when it is the sole performing/attending provider's
               employer.
          o    FACILITY reporting inpatient and outpatient services. (Encounter
               Types R and M).
          o    PHARMACY for the reporting of Drug encounters (Encounter Type D).
          o    HOME HEALTH/HOSPICE AGENCY when independently operated (Encounter
               type M).
--------------------------------------------------------------------------------
   8      PERFORMING/ATTENDING OR PRESCRIBING PROVIDER ID A Medicaid Provider
          number assigned to:
          o    The provider who renders the service for Medical Practitioner
               (Encounter Type J), EPSDT (Encounter Type L), Inpatient Hospital
               (Encounter Type R) and Outpatient Hospital (Encounter Type M ).

          o    For prescribed services, prescriptions, and supplies use the
               Medicaid Provider Number of the 'prescribing' practitioner who
               writes the prescription. This applies to writers of orders for
               drug prescriptions (Pharmacy Encounter Type D), Medical Supplies
               or equipment (Encounter Type P), or Laboratory, Radiology, and
               other diagnostic services (within Encounter Type J).

          For Inpatient claims this field should identify the Attending Provider
          as described in instructions for UB-92 FL-82.
--------------------------------------------------------------------------------
   9      DRG CODE INPATIENT HOSPITAL (ENCOUNTER TYPE R) ONLY
          Diagnosis Related Group (DRG) Codes developed using All Patient DRG
          (AP-DRG) Grouper Version 14.1 from 3M/HIS. If this number is not
          available from the hospital reporting the encounter, the carrier will
          have to determine the appropriate DRG.
--------------------------------------------------------------------------------
   10     HOSPITAL ADMISSION DATE
          Format: MMDDYY Source: UB-92: FL-17, "Admission Date"
--------------------------------------------------------------------------------
   11     PATIENT DESTINATION ON DISCHARGE Applies only to Inpatient Hospital
          (Encounter Type 'R'). Location to where a patient was discharged.
          Code   Destination at discharge
            01  Home discharge
            02  Discharge/Transfer General Hospital
            03  Discharge/Transfer SNF
            04  Discharge/Transfer ICF
            05  Discharge/Transfer INST
            06  Discharge/Transfer Home
            07  Left against medical advice
            08  Home discharge with IV Therapy
            20  Death

          Source: UB-92: FL-22, "Patient Status"
--------------------------------------------------------------------------------

                                       14

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

--------------------------------------------------------------------------------
FIELD ID                   GENERAL FIELD DESCRIPTION
--------------------------------------------------------------------------------
   12     LINE BILLED CHARGES Applies to hospital (M and R) encounters only.
          Enter the line-billed charges for each Revenue Code reported on an
          inpatient hospital encounter and the line-billed charges for each
          Revenue Code and CPT or HCPCS Code reported on an outpatient hospital
          encounter. Source: UB-92: FL-47, Line charges associated with the
          service codes reported in the rows of the "Total Charges" column.
--------------------------------------------------------------------------------
   13     DATE OF SERVICE
          Format: MMDDYY Source: Hospital Inpatient upon discharge (Encounter
          Type R) & Outpatient (Encounter Type M) - Source: UB 92: FL-6,
          "Through" date; Pharmacy (Encounter Type D) -Source: Form 525-106:
          FL-9, "Fill Date"; Medical Practitioner, EPSDT, & Medical Equip, etc.
          (Encounter types J, L, & P) - Source: HCFA 1500 FL-24.
--------------------------------------------------------------------------------
   14     HOSPITAL DISCHARGE DATE
          Format: MMDDYY Source: UB 92: FL-6, "Through."
--------------------------------------------------------------------------------
   15     PLACE OF SERVICE CODES
          Note: These codes are different from Medicare Place-of-Service codes.
               Code   Place of Service
               ----   --------------------------------------
                1        Hospital, Inpatient
                2        Hospital, Outpatient
                3        Office or ambulatory surgery center
                4        Client's residence
                5        Emergency room
                6        Congregate care facility
                8     Skilled nursing facility
                9     Other
--------------------------------------------------------------------------------
   16     PRIMARY PROCEDURE CODE Includes Primary ICD.9.CM Procedure Code if
          applicable:
          o    Medical Practitioner (Encounter Type J), EPSDT (Encounter Type L)
               and Medical Supplies (Encounter Type P) CPT, HCPCS procedure
               codes. Source: HCFA-1500: FL-24D, "CPT/HCPCS".
          o    Dental ADA Procedure Codes. Source: Form 525-108: FL-15G,
               "Procedure Number"
          o    Hospital, Inpatient (Encounter Type R) ICD.9.CM Procedure Codes.
               Source: UB-92: FL-80, "Principal Procedure Code"
          o    Hospital, Outpatient (Encounter Type M) CPT or HCPCS Procedure
               Codes and/or ICD.9.CM Procedure Codes. Source: UB-92: FL-44,
               "HCPCS/Rates" FL-80, "Principal Procedure Code". (Hyphen-fill
               FL-16 if reporting a Revenue Code and there is no CPT or HCPCS
               code to report.
          o    If Revenue Code F21 is reported on an Outpatient Hospital
               encounter record (Encounter Type M) DO NOT report a CPT or HCPCS
               or ICD.9.CM procedure in FL 16 for the same record. (8-fill FL 21
               if reporting a procedure code and not reporting Revenue Code.)
--------------------------------------------------------------------------------
   17     OTHER ICD.9.CM PROCEDURE CODES (up to 5) Hospital, Inpatient
          (Encounter Type R) and Outpatient (Encounter Type M) Source: UB-92:
          FL-81A-E, "Other Procedure Codes". These should be repeated on each
          line of an inpatient encounter.
--------------------------------------------------------------------------------
   18     PROCEDURE CODE MODIFIER Applicable to all encounters, excluding
          Inpatient Hospital.
--------------------------------------------------------------------------------

                                       15

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

--------------------------------------------------------------------------------
FIELD ID                   GENERAL FIELD DESCRIPTION
--------------------------------------------------------------------------------
          Medical Practitioner (Encounter Type J), EPSDT (Encounter Type L),
          Outpatient Hospital (Encounter Type M) when using CPT or HCPCS
          procedure codes, and Medical Supplies (Encounter Type P). Source:
          HCFA-1500: FL-24D, "Modifier".
          Dental Source: Form 525-108: FL-15H, "Mod".
--------------------------------------------------------------------------------
   19     PRINCIPAL DIAGNOSIS CODE
          o    Only ICD.9.CM diagnosis codes are allowed.
          o    Coding must be explicit using the maximum number of digits
               appropriate AND including the decimal point where applicable.

          Medical Practitioner (Encounter Type J), EPSDT (Encounter Type L) and
          Medical Supplies (Encounter Type P) Source: HCFA-1500: FL-24E,
          "Diagnosis Code";
          Dental: Source: 525-108: FL-5, "Dental Diagnosis Code";
          Hospital, Inpatient (Encounter Type R) and Outpatient (Encounter Type
          M) Source: UB- 92: FL-67, "Principal Diagnosis Code".
--------------------------------------------------------------------------------
   20     OTHER DIAGNOSIS CODES (up to 8) Applicable to hospital encounters only
          Hospital, Inpatient (Encounter Type R) and Outpatient (Encounter Type
          M) Source: UB- 92: FL-68-75, "Other Diagnosis Codes". Hyphen-fill
          unused diagnosis fields (See example-Generic Field Specifications).
--------------------------------------------------------------------------------
   21     REVENUE CODE Applicable to hospital encounters only.
          For Outpatient: Either a Revenue Code or a Procedure Code is required
          for each line item, but NOT BOTH. For Hospital Inpatient, Revenue Code
          is required. Hospital Inpatient (Encounter Type R) and Outpatient
          (Encounter Type M) Source: UB-92: FL-42. (8-fill when using a
          Procedure Code in FL 16.)
--------------------------------------------------------------------------------
   22     NATIONAL DRUG CODE (NDC) Applicable to Pharmacy (Encounter Type D)
          only Enter eleven-digit NDC number without hyphens/spaces. Source:
          Form 525-106: Field "National Drug Code". Include NDCs for
          over-the-counter medications. Use the Food and Drug Administration's
          (FDA's) website to verify federally covered Medicaid NDCs:
          http://www.fda.gov/cder/.
--------------------------------------------------------------------------------

                                       16

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

--------------------------------------------------------------------------------
FIELD ID                   GENERAL FIELD DESCRIPTION
--------------------------------------------------------------------------------
   23     UNITS OF SERVICE
          o    A quantitative measure of services provided.
          o    Hospital Inpatient (Encounter Type R) Revenue Codes 100 - 210
               Accommodations: number of days. Source: UB-92: FL-46, "Units of
               Service"
          o    Hospital Outpatient (M type) Revenue Code 45X Emergency Room:
               number of visits. Source: UB-92: FL-46, "Units of Service"
          o    Pharmacy (Encounter Type D) Source: Form 525-106: Field "Quantity
               - Filled"
          o    Medical Practitioner (J type), EPSDT (L type) and Medical
               Supplies (Encounter Type P). Source: HCFA-1500: FL-24G, "Days or
               Units"
          o    Dental - Source: Form 525-108: FL-15F, "Units"
--------------------------------------------------------------------------------
   24     EPSDT REFERRAL INDICATOR [EPSDT = Early and Periodic Screening
          Diagnosis and Treatment] Applicable to EPSDT encounters only
          (Encounter Type L or Type J when an encounter involves both L and J
          types of services). A two-digit code that indicates that a patient was
          or was not referred for treatment as the result of the EPSDT visit:
               YR - yes, referred
               NR - no, not referred

          If a plan cannot obtain the referral indicator, then leave this field
          blank. Although this will result in an error during the MAA edit, the
          plan is required to report the encounter. Errors due to blank fills
          will be tracked separately.
          Source: HCFA-1500: FL-24D: "Modifier".
--------------------------------------------------------------------------------
   25     PLAN RECORD ID CODE (EPRI) - A plan-assigned code that uniquely
          identifies the encounter in the submitted encounter data and in the
          plan's internal database. The EPRI is Optional for the Year 2003.
--------------------------------------------------------------------------------
   26     NEWBORN BIRTH WEIGHT Hospital encounters for newborns must include the
          Birth Weight in grams. Hospital, Inpatient (R type) and Outpatient (M
          type) Source: UB-92: is given in the "Value Amount column of FL-39-41
          a-d where the Value Code ="80" (in grams).
--------------------------------------------------------------------------------
   27     PRESCRIPTION NUMBER Applicable to Pharmacy (D type) encounters only. A
          seven-character code assigned in sequence to regular prescriptions
          filled by the pharmacy. Contractors may use the original prescription
          number for refills or assign a new number. Source: Form 525-106: Field
          "Prescription Number".
--------------------------------------------------------------------------------
   28     CLAIM STATUS Indicates whether all services of the submitted encounter
          were denied or one or more services were paid/accepted.
               N = Paid or Accepted (e.g. for services provided on a capitation
                   basis). If an inpatient claim is paid on a DRG basis, then
                   use Claim Status N.
               P = Denied (Includes only finalized claims where disposition is a
                   denial).
--------------------------------------------------------------------------------

                                       17

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

--------------------------------------------------------------------------------
FIELD ID                   GENERAL FIELD DESCRIPTION
--------------------------------------------------------------------------------
   29     LINE STATUS Indicates whether or not payment for an individual service
          was denied or paid/accepted. For inpatient encounters that are paid or
          denied based on DRG code, code all lines of the encounter as "N" =
          paid/accepted, unless claim was denied ("P" = Denied).
               N = Paid/Accepted (e.g. for services provided on a capitation
                   basis).
               P = Denied
--------------------------------------------------------------------------------
 30-33    PATIENT FIRST NAME, MIDDLE INITIAL, LAST NAME and SSN. If there is no
          middle initial or it is unknown, insert a "-" in Field 31.
--------------------------------------------------------------------------------
 34-37    SUBSCRIBER FIRST NAME, LAST NAME, SSN and BIRTH DATE (optional). The
          Subscriber is the head of household in which the patient resides
          and/or a guardian (for patients who are dependents). Patient and
          Subscriber can be the same. Information may be used for PIC match.
--------------------------------------------------------------------------------
   38     ALTERNATE BILLING PROVIDER ID is required if the billing provider does
          not have a valid Medicaid Provider Number. Medicaid Provider Numbers
          may be used in combination with any of the following Alternate Billing
          provider Identifiers: Federal Tax Identifier, or NABP Identifier.
--------------------------------------------------------------------------------
   39     ALTERNATE PERFORMING/ATTENDING OR PRESCRIBING PROVIDER ID is required
          if the performing/attending or prescribing provider does not have a
          valid Medicaid Provider Number. Medicaid Provider Numbers may be used
          in combination with any of the following Alternate
          Performing/Attending or Prescribing provider Identifiers: State
          License Number, or DEA Identifier.

          When service is given out-of-state, report the license number issued
          by the associated state. See Field #8 for determining when to report
          the performing/attending or prescribing provider.
--------------------------------------------------------------------------------
   40     ENCOUNTER DATA PROCESSOR TAX ID Optional field to assist Contractor in
          tracking encounter records to their processors.
--------------------------------------------------------------------------------
   41     HOSPTIAL PATIENT CONTROL NUMBER (PCN) Applicable to hospital claims
          (Encounter Type R - required and M - optional). Patient's unique
          alphanumeric number assigned by the provider to facilitate retrieval
          of individual case record. CHARS reporting requires that hospitals
          make the PCN unique. An encounter record PCN must match the PCN
          reported in the associated claims reported to CHARS. For services
          given out-of-state, the PCN number assigned by the hospital should be
          reported.

          For hospitals that use patient-based PCNs on their UB92 claims,
          Contractors should replicate the numbering scheme used by those
          hospitals to make their PCN unique and transaction based for their
          CHARS submissions. For example, if a hospital makes a patient-based
          PCN unique by adding the admit date, the Contractor can do the same
          for that encounter record.

          Source: UB92 Manual Form Locator 3 and the CHARS Procedure Manual for
          Submitting Discharge Data, UB92 Data Elements, page 11.
--------------------------------------------------------------------------------
   42     FILLER
--------------------------------------------------------------------------------

                                       18

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

--------------------------------------------------------------------------------
FIELD ID                   GENERAL FIELD DESCRIPTION
--------------------------------------------------------------------------------
 43-78    ERROR FLAGS - Position #'s 436-482 Codes:
          '1' = field value did not pass edits
          ' ' (blank) = field value did pass edits
          '-' = no edit required

          Codes unique to specific error flag fields:
               Error Flag Field 21 - Revenue Codes:
          o    Code '-' = no edit required.
          o    Code '1' = required revenue code is not valid or is blank.
          o    Code ' ' (blank) = required revenue code is valid.
          o    Code 'M' = required revenue code is modified.
          o    Code 'C' = modified value is valid.
               Error Flag Field 12 - Lined Billed Charges:
          o    Code 'Z' - field 12 = zeros
          o    Code 'U - field 12 = all 9's (i.e. 9999999.99)
          o    Code 'I' - field 12 = all 8's (i.e. 8888888.88)
          o    Code 'N' - field 12 = 099999999 (i.e. 0999999.99)
          o    Code 'E' - field 12 = 088888888 (i.e. 0888888.88)
          o    Code 'G' - field 12 = any other non-numeric or low values
--------------------------------------------------------------------------------
          The following edits are used to validate data in the specified fields
          (Position #s 483-489)
--------------------------------------------------------------------------------
   79     ASSOCIATION FLAG 41 Recipient not eligible for date of service
--------------------------------------------------------------------------------
   80     ASSOCIATION FLAG 42 Performing provider not active for date of service
--------------------------------------------------------------------------------
   81     ASSOCIATION FLAG 43 Invalid recipient age for diagnosis
--------------------------------------------------------------------------------
   82     ASSOCIATION FLAG 44 Invalid recipient sex for diagnosis
--------------------------------------------------------------------------------
   83     ASSOCIATION FLAG 45 Invalid recipient age for procedure
--------------------------------------------------------------------------------
   84     ASSOCIATION FLAG 46 Invalid recipient sex for procedure
--------------------------------------------------------------------------------
   85     ASSOCIATION FLAG 47 Invalid place of service for procedure
--------------------------------------------------------------------------------
   86     PIC-CHANGE-FLAG [PIC = Patient Identification Code] Completed by DSHS.
          When the PIC submitted in Field 4 is invalid and a valid PIC is found
          by DSHS by any of the following:
               o    Name (Fields 31, 32 & 33) and Date of Birth (Field 5);
               o    Name and Social Security Number (Field 34); or
               o    Social Security Number and Date of Birth;

               The matched PIC will replace the invalid PIC in Field 4 for use
               in all subsequent processing of the encounter record. One of the
               following codes will appear in Field 86:
               o    C = PIC corrected;
               o    V = original (submitted) PIC is valid;
               o    I = invalid PIC submitted and no valid PIC identified
                        through match process.
--------------------------------------------------------------------------------
   87     PCN ERROR FLAG (For explanation codes see for Field ID numbers 43-78
          above.)
--------------------------------------------------------------------------------
   88     PRESCRIPTION DAYS SUPPLY: Number of days prescription is to cover.
          Source: Pharmacy Form 525-106: Field "Est. Days' Supply".
--------------------------------------------------------------------------------
   89     ERROR FLAG PRESCRIPTION DAYS SUPPLY: Same codes as for fields 43-78.
--------------------------------------------------------------------------------

                                       19

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-1

--------------------------------------------------------------------------------
FIELD ID                   GENERAL FIELD DESCRIPTION
--------------------------------------------------------------------------------
   90     ALTERNATE BILLING PROVIDER ID: required if no valid Medicaid Provider
          Number is reported - Hyphen-fill if no Alternate Identifier is
          reported and a Medicaid Provider Number is reported:

          o    United States Federal Tax Identifier. Leave Field 90 blank if
               alternate Tax Identifier is reported. No error will be generated.

          o    N = National Association of Boards of Pharmacy Identifier,
               recently purchased by the National Council for Prescription Drug
               Programs (NCPDP) and also known as the NCPDP Identifier.
--------------------------------------------------------------------------------
   91     ALTERNATE PERFORMING/ATTENDING OR PRESCRIBING PROVIDER ID: REQUIRED IF
          NO VALID MEDICAID ID IS REPORTED
          Hyphen-fill if no Alternate Identifier is reported and a Medicaid
          Provider Number is reported:

               o    Washington State Professional License Number. If the service
                    is given out-of-state then the performing/attending or
                    prescribing license number refers to the license number
                    issued by the state in which the provider is licensed. Leave
                    Field 91 blank if an alternate State License Identifier is
                    reported. No error will be generated.

               o    D = U.S. Drug Enforcement Agency issued DEA Identifier.
--------------------------------------------------------------------------------
   92     ERROR FLAG ALT-BILLING PROVIDER ID (FIELD 90)
--------------------------------------------------------------------------------
   93     ERROR FLAG ALTERNATE PERF/ATTEND OR PRESCR. PROVIDER (FIELD 91)
--------------------------------------------------------------------------------

                                       20

<PAGE>

                                                   2003 Healthy Options Contract
                                                   Exhibit C-1

                              ENCOUNTER TYPE TABLE

Contractors are required to assign at least the services and codes specified
below to the associated encounter types. Consult the 2003 HO/SCHIP contract for
the Schedule of Benefits and the MAA Billing Instructions for further
information on code and service encounter type designations (MAA Billing
Instructions take precedence over the listing below).

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                            TYPES OF SERVICES                         TYPICAL CPT-4 AND HCPCS CODES
E-TYPE        DESCRIPTION OF         FOR A COMPLETE LISTING SEE 2003    SEE MAA BILLING INSTRUCTIONS FOR COMPLETE LISTING OF CODES
 CODE         ENCOUNTER TYPE          CONTRACT SCHEDULE OF BENEFITS                  ASSOCIATED WITH COVERED SERVICE
------------------------------------------------------------------------------------------------------------------------------------
  <S>     <C>                       <C>                                 <C>
  D       DRUGS & MEDICATIONS       Includes only drugs and                                        N/A
          Prescriptions ordered     medications dispensed by a
          by the                    pharmacy. Does not include
          performing/attending      those provided during a J, M, or
          or prescribing            R encounter.
          physician. Includes
          dispensing fee.
------------------------------------------------------------------------------------------------------------------------------------
  J       Medical Practitioner      Surgery, including pre-and post-    10040-36410, 36420-55899, 56300-58301, 58340-58960,
          Services Professional     surgical encounters with the        58999, 59525, 60000-69020, 69100-69979, 69990, 92980-
          charges only or the       surgeon and assistant surgeon.      92998, 93501-93536, 93561-93572, A6020-A6406, G0051-
          combined professional     Includes oral surgery services      G0053
          and technical charges
          for the following         Anesthesia                          00100-01999, 99100-99142 or 10040-36410, 36420-55899,
          medical services                                              56300-58301, 58340-58960, 58999, 59525, 60000-69020,
          provided in inpatient,    * MAA FFS: 00100-01999 are          69100-69979, 69990, 92980-92998, 93501-93536, 93561-
          outpatient, and office    billed with surgery procedure +     93572 with anesthesia modifier
          settings.                 modifier

                                    Maternity                           59400-59430, 59610-59614, 59899, 59510-59515, 59618-
                                                                        59622, 59899, 59000-59350, 59812-59871 (excluding
                                                                        59840, 59841, 59850 through 59852 and 59855 through
                                                                        59857)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       23

<PAGE>

                                                   2003 Healthy Options Contract
                                                   Exhibit C-1

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                            TYPES OF SERVICES                          TYPICAL CPT-4 AND HCPCS CODES
E-TYPE        DESCRIPTION OF         FOR A COMPLETE LISTING SEE 2003     SEE MAA BILLING INSTRUCTIONS FOR COMPLETE LISTING OF CODES
 CODE         ENCOUNTER TYPE          CONTRACT SCHEDULE OF BENEFITS                   ASSOCIATED WITH COVERED SERVICE
------------------------------------------------------------------------------------------------------------------------------------
  <S>     <C>                       <C>                                 <C>
  J       MEDICAL PRACTITIONER      Visits, consults and urgent care    99175-99195, 99221-99239, 99356-99357, 99431, 99433-99440;
          SERVICES (continued)                                          99201-99215, 99241-99275, 99201-99215, 99321-99355,
                                                                        99361-99380, 99385 (for persons age 21-39), 99386-99387,
          "J" and "L" encounter                                         99395 (for persons age 21-39), 99499
          types may occur on        Critical care                       99291-99316, 99217-99220, 99281-99288
          different records for
          the same encounter.
                                    Physical Medicine &                 97001-97799, 98925-98929; H5300, Q0082, Q0086,
                                    Rehabilitation                      Q0103-Q0110

                                    Cardiovascular                      92950-92979, 93000-93350, 93539-93556, 93600-93799;
                                                                        G0004-G0007, G0015-G0016, M0300-M0302

                                    Immunizations                       90471-90472, 90476-90749; G0008-G0010, J1670

                                    Mental Health                       90816-90829

                                    Newborn care                        99431-99436,99440

                                    Vision & Hearing/                   92002-92015, 92310, 92314 92506-92510, 92551-92599;
                                    Speech Exams                        V5008-V5010, V5362-V5364

                                    Physical Exams                      99386, 99387, 99396, 99397, 99401-99429

                                    Pathology                           80049-89399; G0058-G0060, P2028-P9615, Q0068, Q0091,
                                                                        Q0111-Q0115

                                    Radiology                           70010-79999; A4647-A4649, A9500-A9600, G0030-G0050, Q0035,
                                                                        Q0092, R0070-R0076

                                    Therapeutic injections              90281-90399, 90780-90799, J0120-J1650, J1690-J7310, Q0081,
                                                                        Q9920-Q9940

                                    Allergy testing & Immunotherapy     95004-95078, 95115-95199
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       24

<PAGE>

                                                   2003 Healthy Options Contract
                                                   Exhibit C-1

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                           TYPES OF SERVICES                          TYPICAL CPT-4 AND HCPCS CODES
E-TYPE        DESCRIPTION OF        FOR A COMPLETE LISTING SEE 2003      SEE MAA BILLING INSTRUCTIONS FOR COMPLETE LISTING OF CODES
 CODE         ENCOUNTER TYPE         CONTRACT SCHEDULE OF BENEFITS                   ASSOCIATED WITH COVERED SERVICE
------------------------------------------------------------------------------------------------------------------------------------
  <S>     <C>                       <C>                                 <C>
  J       MEDICAL PRACTITIONER      Miscellaneous medical services      36415, 90901, 90911, 90918-90999, A4650-A4927, 91000-91299,
          SERVICES (continued)      such as Venipuncture,               92018-92287 92311-92313 92315-92317 92330, 92335
                                    Biofeedback, Dialysis,              92352-92358 92371 92393-92499, 92502-92504 92511-92526,
                                    Gastroenterology, Ophthalmology,    92531-92548, 93875-93990, 94010-94799, 95805-95999,
                                    Otorhinolaryngology, Vestibular     95805-95999, 96400-96549, J8530-J9999, 96900-96999,
                                    Function Tests, Non-Invasive        99000-99070 99199, 99360, G0001-G0002 G0025-G0027
                                    Vascular Diagnostic Studies,        G0062-G0063 Q0083-Q0085 M0075-M0076 M0010 M0101
                                    Pulmonology, Neurology, Central
                                    Nervous System Tests,
                                    Chemotherapy, Dermatology, or
                                    Podiatry.
------------------------------------------------------------------------------------------------------------------------------------
  L       EPSDT                     Well Baby/Well Child Exams          99381-99384, 99385 (for ages 18-20), 99391-99394, and 99395
          All covered services                                          (for ages 18-20)
          for children age 0 - 20
          "J" and "L" encounter     Immunizations                       90471-90472, 90476-90749; G0008-G0010, J1670
          types may occur on
          different records for     Interperiodic well child visit      0203M, 0252M
          the same encounter.
                                    Chiropractic: Visits,               98940-98943, A2000
                                    manipulations and radiology
                                    services provided in the
                                    chiropractor's office.
------------------------------------------------------------------------------------------------------------------------------------
  M       OUTPATIENT facility charges for the technical         Emergency & Urgent Care; Maternity: delivery, non-delivery
          components and services performed by full-time        (miscarriages, therapeutic abortions, ultrasound, amniocentesis),
          staff of a hospital outpatient, freestanding          & well newborn care; Outpatient Surgery including oral surgery,
          facility, ambulatory surgical center, FQHC or RHC,    Anesthesia, Radiology & Pathology; Pharmacy and Blood;
          kidney dialysis center, mobile radiology unit, or     Cardiovascular tests such as EKG and stress tests; Physical therapy,
          birthing center for the following types of medical    occupational therapy, and speech therapy; Home health; Hospice;
          services.  Does not include professional charges      Chemotherapy; Diagnostic services
          that are billed separately
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       25

<PAGE>

                                                   2003 Healthy Options Contract
                                                   Exhibit C-1

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                           TYPES OF SERVICES                          TYPICAL CPT-4 AND HCPCS CODES
E-TYPE        DESCRIPTION OF        FOR A COMPLETE LISTING SEE 2003      SEE MAA BILLING INSTRUCTIONS FOR COMPLETE LISTING OF CODES
 CODE         ENCOUNTER TYPE         CONTRACT SCHEDULE OF BENEFITS                   ASSOCIATED WITH COVERED SERVICE
------------------------------------------------------------------------------------------------------------------------------------
  <S>     <C>                       <C>                                 <C>
  P       MEDICAL SUPPLIES,         Braces (orthotics), canes,          A4206-A4646, A5051-A5149, A5500-A5507,
          APPLIANCES, EQUIPMENT,    crutches, glucoscan, glucometer,    B4034-B9999, E0100-E1830, K0001-K0116,
          VISION, HEARING AIDS,     intermittent positive pressure      K0137-K0439, K0452, L0100-L4398, V2600-
          AND TRANSPORTATION:       machines, rib belt for treatment    V2615, V5336 K0440-K0451, L5000-L8690,
          Includes only those       of an accident or illness,          V2623-V2632; 92325-92326, 92340-92342, 92370,
          dispensed by a medical    walker, wheel chairs, etc;          92390-92392; V2020-V2599, V2700-V2799;
          supplier. Does not        artificial parts that replace a     A0021-A0999, A6020-A6406
          include those provided    missing body part or improve a
          during a J, M, or R       body function (i.e., artificial
          encounter.                limb, heart valve, medically
                                    necessary reconstruction);
                                    glasses or contacts; and
                                    ambulance.
------------------------------------------------------------------------------------------------------------------------------------
  R       INPATIENT HOSPITAL: Inpatient room and board and ancillary    Medical & Surgical Confinement
          services in short-term community hospitals. Ancillary         Surgery, Emergency & Urgent Care; Skilled Nursing
          services include use of surgical and intensive care           Facility; Maternity: delivery, complications of
          facilities, inpatient nursing care, pathology and             pregnancy, non-delivery (includes miscarriages
          radiology procedures, drugs and supplies. Facility charges    & therapeutic abortion), & well newborn care;
          for technical components and services performed by            Surgery, Anesthesia, Radiology & Pathology;
          full-time staff of a hospital on an inpatient basis. Does     Pharmacy and Blood; Chemotherapy; Diagnostic
          not include professional charges unless performed by full-    services
          time staff of the facility and not billed separately.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                 26

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-2 (a)

                                 EXHIBIT C-2(a)
                        2003 IPND REPORTING REQUIREMENTS
                 BASIC HEALTH PLAN (BHP), HEALTHY OPTIONS (HO),
                     PUBLIC EMPLOYEES BENEFIT BOARD (PEBB),
                AND CHILDREN'S HEALTH INSURANCE PROGRAM (SCHIP)

 Note: Validate the field type and maximum size, values bolded, and whether the
               field is required or not, for each Provider Type.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             PROVIDER TYPES
                                                                                                             (SEE FOOTNOTES)   EDIT
                                                                                                             ----------------
                  FIELD NAME       FIELD TYPE  SIZE                    DEFINITION                            PRAC  HOSP  PHA
------------------------------------------------------------------------------------------------------------------------------------
  <S>          <C>                    <C>        <C> <C>                                                     <C>   <C>   <C>   <C>
  Carrier        Program Type         Numeric     1  The program supported by the Practitioner,               X     X     X     TR
   Area                                              hospital or pharmacy at this location. HO = 1,
                                                     BHP = 2, PEBB = 4, CHIP= 8. A separate record
                                                     must be submitted for each program type.
------------------------------------------------------------------------------------------------------------------------------------
               InternalProviderID      Text      15  The internal identification number by which the          A     A     A     ERR
                                                     Carrier refers to the Health Care Provider. Required
                                                     for PEBB PCPs, using ProviderClinic code (used for
                                                     enrollment purposes).
------------------------------------------------------------------------------------------------------------------------------------
                Credential Date        Date      10  The date the Carrier last credentialed the               A                 ERR
                                                     Practitioner. Must be in correct format: MM/DD/YYYY,
                                                     a valid date, and not a date in the future.
------------------------------------------------------------------------------------------------------------------------------------
                   Obstetric          Yes/No      1  Does the Practitioner offer Obstetric services,          X
                                                     including birthing?
------------------------------------------------------------------------------------------------------------------------------------
                      PSB              Text       1  A single upper-case character indicating: P =            X                 TR
                                                     Primary Care Provider, S = Specialist, B = Both.
------------------------------------------------------------------------------------------------------------------------------------
               AcceptNewPatients      Yes/No      1  Does the Practitioner currently accept new               X
                                                     enrollees?
------------------------------------------------------------------------------------------------------------------------------------
                     Limits            Text      50  The practice limitations the Practitioner places         *X
                                                     on his/her services (e.g., age 0-19, 2 days a
                                                     week). *Required only if the carrier is aware of
                                                     practice limitations.
------------------------------------------------------------------------------------------------------------------------------------
                AfterHoursPhone        Text      23  Telephone number of the business (not a specific         X      A    A     ERR
                                                     Practitioner) for after normal business hours.
                                                     Format: (nnn) nnn-nnnn ext. nnnnn. (Telephone
                                                     extensions are optional)
------------------------------------------------------------------------------------------------------------------------------------
                SpecialtyPrimary       Text      50  The full name or approved abbreviation of the            X                 TR
                                                     specialty offered by the Practitioner under the
                                                     current contract. (see tblSpecialtyType for
                                                     approved specialties and their abbreviations)
------------------------------------------------------------------------------------------------------------------------------------
               SpecialtySecondary      Text      50  The full name or approved abbreviation of the            A
                                                     specialty offered by the Practitioner under the
                                                     current contract. Can be multiple if active. (see
                                                     tblSpecialtyType for approved specialties and their
                                                     abbreviations)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

X     =   Required Field
*X    =   Required only if carrier is aware of this information
A     =   Required if applicable
Blank =   Optional

TR    =   Total Reject (don't work record)
ERR   =   Error (blank the field in error but still work the record)

                                        1

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-2 (a)

 Note: Validate the field type and maximum size, values bolded, and whether the
                field is required or not, for each Provider Type.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             PROVIDER TYPES
                                                                                                             (SEE FOOTNOTES)   EDIT
                                                                                                             ----------------
                  FIELD NAME       FIELD TYPE  SIZE                    DEFINITION                            PRACT HOSP  PHAR
------------------------------------------------------------------------------------------------------------------------------------
  <S>          <C>                    <C>       <C>  <C>                                                     <C>   <C>   <C>   <C>
                    Start              Date     10   The effective date the Practitioner, Hospital or
                                                     Pharmacy entered/will enter into a contract with the     X     X     X     TR
                                                     carrier to administer health care for each place of
                                                     business for each program: HO, BHP or PEBB. Must be
                                                     in correct format: MM/DD/YYYY and a valid date.
------------------------------------------------------------------------------------------------------------------------------------
                     End               Date     10   The date the Practitioner, Hospital or Pharmacy          *X    *X    *X    TR
                                                     ended/will end their contract to administer health
                                                     care for each place of business for each program:
                                                     HO, BHP or PEBB. If there is not a known contract
                                                     end date, field can be left blank. Must be in
                                                     correct format: MM/DD/YYYY and a valid date
------------------------------------------------------------------------------------------------------------------------------------
                 RestrictedMSO         Text     35   If the provider is a member of a group that delivers     *X
                                                     services through a sub-capitated (risk-based)
                                                     arrangement and does not permit enrollees to use
                                                     providers outside of that group for routine primary
                                                     and referral care, list the name of that provider
                                                     group. *If the provider is not a member of such a
                                                     group, leave blank.
------------------------------------------------------------------------------------------------------------------------------------
                   Language            Text     30   Language(s), other than English, in which the            *X
                                                     Practitioner is fluent. This does not include all
                                                     languages that may be available at the Health Care
                                                     Provider's place of business. (see tblLanguage for
                                                     approved abbreviations).
------------------------------------------------------------------------------------------------------------------------------------
                   Capacity           Numeric    4   The maximum number of clients the Primary Care
                                                     Provider can manage under the current contract for
                                                     each program, listed separately. (Applies to provider
                                                     Type 1 records only)
------------------------------------------------------------------------------------------------------------------------------------
 Provider          LastName            Text     25   The last name, family name or surname of the             X                 TR
   Area                                              Practitioner and any suffix that applies
                                                     (i.e. Sr., Jr., etc.)
------------------------------------------------------------------------------------------------------------------------------------
                   FirstName           Text     15   The first or given name of the Practitioner.             X                 TR
------------------------------------------------------------------------------------------------------------------------------------
                  MiddleName           Text     15   The middle name(s) or initial(s) of the Practitioner.    A
------------------------------------------------------------------------------------------------------------------------------------
                  ProfDegree           Text     10   The professional title of the Practitioner. This         X                 TR
                                                     title may refer to a graduate title received from a
                                                     college or university, or may refer to the title on
                                                     the professional license (e.g. MD, DO, ARNP, PA, LM,
                                                     CNM). Can be multiple if active.
------------------------------------------------------------------------------------------------------------------------------------
                     DOB               Date     10   The date of birth of the Practitioner, for internal      X                 ERR
                                                     data management purposes, not public distribution.
                                                     Must be in correct format: MM/DD/YYYY, a valid date,
                                                     not be a date in the future, and be a minimum age of
                                                     16 years old.
------------------------------------------------------------------------------------------------------------------------------------
                    Gender             Text      1   The gender of the Practitioner (M or F).                 A                 ERR
------------------------------------------------------------------------------------------------------------------------------------
               PractitionersNPI        Text     10   The Practitioner's National Provider Identification      A
                                                     number. As the NPI numbers are assigned, the carrier
                                                     must report the identification number. Not currently
                                                     required.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

X     =   Required Field
*X    =   Required only if carrier is aware of this information
A     =   Required if applicable
Blank =   Optional

TR    =   Total Reject (don't work record)
ERR   =   Error (blank the field in error but still work the record)

                                        2

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-2 (a)

 Note: Validate the field type and maximum size, values bolded, and whether the
             field is required or not, for each Provider Type.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             PROVIDER TYPES
                                                                                                             (SEE FOOTNOTES)   EDIT
                                                                                                             ----------------
                  FIELD NAME        FIELD TYPE  SIZE                    DEFINITION                           PRACT HOSP  PHAR
------------------------------------------------------------------------------------------------------------------------------------
<S>         <C>                       <C>       <C>  <C>                                                     <C>   <C>   <C>   <C>
                LicensePrimary         Text     10   State-issued professional license number. Submitted      X                 TR
                                                     in complete format and match the following patterns.
                                                     For WAshington = [A-Z][A-Z]######## (ie MD12345678)
                                                     For ORegon MD's: [A-Z][A-Z]#### (ieMD1234)
                                                     For Oregon RN's: ####### (ie 1234567)
                                                     For IDaho MD's: M-#### (ie M-1234)
                                                     For IDaho PA's: PA-### (ie RPA-123)
                                                     For IDaho RN's: ##### (ie N-12345)
------------------------------------------------------------------------------------------------------------------------------------
             LicensingStatePrimary     Text      2   The two-character upper case Postal Service              X                 TR
                                                     abbreviation TR of the state issuing the
                                                     professional license.
------------------------------------------------------------------------------------------------------------------------------------
               LicenseSecondary        Text     10   State-issued professional license number. Submitted      A                 ERR
                                                     in complete format and match the following patterns.
                                                     For Washington = [A-Z][A-Z]######## (ie MD12345678)
                                                     For Oregon MD's: [A-Z][A-Z]#### (ieMD1234)
                                                     For Oregon RN's: ####### (ie 1234567)
                                                     For IDaho MD's: M-#### (ie M-1234)
                                                     For IDaho PA's: PA-### (ie RPA-123)
                                                     For IDaho RN's: N-##### (ie N-12345)
------------------------------------------------------------------------------------------------------------------------------------
            LicensingStateSecondary    Text      2   The two-character upper case Postal Service              A                 ERR
                                                     abbreviation of the state issuing the
                                                     professional license.
------------------------------------------------------------------------------------------------------------------------------------
Business         ProviderType          Numeric   1   Defines the type of provider services offered by         X     X     X     TR
 Area                                                the business:  1 = Practitioner, 2 = Hospital,
                                                     3 = Pharmacy.
------------------------------------------------------------------------------------------------------------------------------------
                 BusinessName          Text     65   Name of Clinic, Office, Hospital or Pharmacy, as the     X     X     X     TR
                                                     public knows it. If a practitioner is located at
                                                     more than one place of business, a separate record
                                                     must be submitted for each address. The Business
                                                     Name may be the Practitioner's name.
------------------------------------------------------------------------------------------------------------------------------------
                StreetAddress1         Text     36   The address of the physical location of the Clinic,      X     X     X     TR
                                                     Office, Hospital or Pharmacy. May not contain Post
                                                     Office Box numbers or separate billing address. If a
                                                     practitioner is located at more than one place of
                                                     business, a separate record must be submitted for
                                                     each address. No suite #s permitted, Use USPS Listing
------------------------------------------------------------------------------------------------------------------------------------
                StreetAddress2         Text     36   Overflow address line only if required. Not a            A     A     A
                                                     different address location. No suite #s permitted.
------------------------------------------------------------------------------------------------------------------------------------
                     City              Text     25   The full name of the city in which the business is       X     X     X     TR
                                                     physically located.
------------------------------------------------------------------------------------------------------------------------------------
                     State             Text      2   The two-character upper-case Postal Service              X     X     X     TR
                                                     abbreviation of the state in which the Clinic,
                                                     Office, Hospital or Pharmacy is physically located.
------------------------------------------------------------------------------------------------------------------------------------
                      ZIP              Text     10   The postal ZIP code in which the Clinic, Office,         X     X     X     TR
                                                     Hospital or Pharmacy is located.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

X     =   Required Field
*X    =   Required only if carrier is aware of this information
A     =   Required if applicable
Blank =   Optional

TR    =   Total Reject (don't work record)
ERR   =   Error (blank the field in error but still work the record)

                                        3

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-2 (a)

 Note: Validate the field type and maximum size, values bolded, and whether the
                field is required or not, for each Provider Type.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             PROVIDER TYPES
                                                                                                             (SEE FOOTNOTES)    EDIT
                                                                                                             ----------------
                    FIELD NAME   FIELD TYPE  SIZE                 DEFINITION                                 PRACT HOSP  PHAR
------------------------------------------------------------------------------------------------------------------------------------
                  <S>               <C>      <C>     <C>                                                     <C>   <C>   <C>   <C>
                      County        Text      15     The name of the County in which the Clinic, Office,      X     X     X     TR
                                                     Hospital or Pharmacy is physically located. Spelled
                                                     out in full.
------------------------------------------------------------------------------------------------------------------------------------
                    Day Phone       Text      23     The telephone number of the business (not a specific     X     X     X     TR
                                                     Practitioner.) available during normal business
                                                     hours to make an appointment. Format: (nnn)
                                                     nnn-nnnn ext. nnnnn. (Telephone extensions are
                                                     optional)
------------------------------------------------------------------------------------------------------------------------------------
                   BusinessNPI      Text      10     The National Provider Identification number              A     A     A
                                                     given to the Clinic, Office, Hospital or Pharmacy.
                                                     As the NPI numbers are assigned, the carrier must
                                                     report the identification number. Not currently
                                                     required.
------------------------------------------------------------------------------------------------------------------------------------
                       NAPB         Text      10     The Pharmacy Board identification number, to use as                  X     ERR
                                                     a unique identifier for pharmacies.
------------------------------------------------------------------------------------------------------------------------------------
                     Comments       Text     255     Comments to IPND Coordinator regarding record.
------------------------------------------------------------------------------------------------------------------------------------
                     Website        Text       1     Is this record available to publish on the IPND Web
                                                     Provider Directory Values of Y or N Defaults to Y
------------------------------------------------------------------------------------------------------------------------------------
                  Billing Address   Text       1     Is this record a billing address only? Values of Y
                                                     or N Defaults to N
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

X     =   Required Field
*X    =   Required only if carrier is aware of this information
A     =   Required if applicable
Blank =   Optional

TR    =   Total Reject (don't work record)
ERR   =   Error (blank the field in error but still work the record)

                                        4

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit C-2 (b)

                                 EXHIBIT C-2 (b)
                            IPND ESCALATION PROCEDURE

The State of Washington has a contract with GeoAccess for provider network data
management for Basic Health (BH), Healthy Options (HO), Children's Health
Insurance Program (CHIP), and Public Employees Benefits Board (PEBB) programs.
The following are guidelines in the event a carrier does not submit their
monthly provider network report by the designated due date, for loading in the
Integrated Provider Network Database (IPND). Late submissions are equal to
non-submission for the month. Late submissions may be used as the next month's
submission if another submission is not received before the deadline.

--------------------------------------------------------------------------------
Late or No Submission                     ESCALATION PROCEDURES
--------------------------------------------------------------------------------
     First Month              o   GeoAccess will follow up with the carrier
                                  contact.

                              o   GeoAccess will notify the IPND Coordinator.

                              o   The IPND Coordinator will contact the
                                  carrier(s) via telephone and follow up in
                                  writing to determine and resolve reasons for
                                  late or non-submittal. IPND Coordinator will
                                  work with the plan to ensure timely future
                                  submission and update routines.

                              o   If no new submission is received by the due
                                  date the prior month's data will be re-entered
                                  in IPND.
--------------------------------------------------------------------------------
    Second Month              o   GeoAccess will follow up with the carrier
                                  contact.

                              o   GeoAccess will notify the IPND Coordinator.

                              o   The plan will receive a "warning letter" from
                                  MAA/HCA.

                              o   Prior month's data will be re-entered in IPND.
--------------------------------------------------------------------------------
     Third Month              o   No data for the carrier(s) will be displayed
                                  in the database until the next monthly
                                  submission is received.

                              o   Notification of the removal of carrier data
                                  will be sent to the HCA/MAA User Interface
                                  customers.

                              o   HCA/MAA will send written notice to the
                                  carrier(s) to inform them of their omission
                                  from the database and steps necessary to
                                  update IPND for their plan.
--------------------------------------------------------------------------------

                                        1

<PAGE>

                                                          2003 HO SCHIP Contract
                                                          Exhibit D

                      Premiums, Service Areas and Capacity
                             Exhibit D-1, Capacity
                                Contractor: MHC
                           Effective: January 1, 2003
<TABLE>
<CAPTION>
----------------------------------------------------------
    REGION           SERVICE AREA                CAPACITY
----------------------------------------------------------
    <S>        <C>                               <C>
      1        Island                               5,000
----------------------------------------------------------
      1        San Juan                               150
----------------------------------------------------------
      1        Skagit                               9,000
----------------------------------------------------------
      1        Whatcom                              7,000
----------------------------------------------------------
      2        Snohomish                              500
----------------------------------------------------------
      3        King                                61,000
----------------------------------------------------------
      3        Pierce                              55,000
----------------------------------------------------------
      4        Clallam                              4,000
----------------------------------------------------------
      4        Jefferson*                               0*
----------------------------------------------------------
      4        Kitsap                               9,000
----------------------------------------------------------
      5        Grays Harbor                         7,000
----------------------------------------------------------
      5        Lewis                                8,400
----------------------------------------------------------
      5        Mason                                  800
----------------------------------------------------------
      5        Pacific                              1,000
----------------------------------------------------------
      5        Thurston                             4,000
----------------------------------------------------------
      6        Clark*                                   0*
----------------------------------------------------------
      6        Cowlitz                              6,400
----------------------------------------------------------
      6        Skamania*                                0*
----------------------------------------------------------
      6        Wahkiakum*                               0*
----------------------------------------------------------
      7        Adams                                1,250
----------------------------------------------------------
      7        Chelan                              10,000
----------------------------------------------------------
      7        Douglas                              4,000
----------------------------------------------------------
      7        Grant                                9,900
----------------------------------------------------------
      7        Okanogan                             7,450
----------------------------------------------------------
      8        Kittitas*                                0*
----------------------------------------------------------
      8        Klickitat*                               0*
----------------------------------------------------------
      8        Yakima                               4,000
----------------------------------------------------------
      9        Ferry*                                   0*
----------------------------------------------------------
      9        Lincoln                              1,000
----------------------------------------------------------
      9        Pend Orielle                         1,600
----------------------------------------------------------
      9        Stevens*                                 0*
----------------------------------------------------------
      10       Spokane                             30,000
----------------------------------------------------------
      11       Asotin*                                  0*
----------------------------------------------------------
      11       Garfield                               120
----------------------------------------------------------
      11       Whitman                              2,300
----------------------------------------------------------
      12       Benton                               9,000
----------------------------------------------------------
      12       Columbia                               450
----------------------------------------------------------
      12       Franklin                             8,500
----------------------------------------------------------
      12       Walla Walla                          6,000
----------------------------------------------------------
</TABLE>

*NOTE: Shaded areas are those not currently served.

<PAGE>

                                                          2003 HO SCHIP Contract
                                                          Exhibit D

                      Premiums, Service Areas and Capacity
                        Exhibit D-2, Adjustment Factors
                                Contractor: MHC
                           Effective: January 1, 2003
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
   REGION           SERVICE AREA              GEO ADJ FACTOR                  HO RISK ADJ FACTOR
-----------------------------------------------------------------------------------------------------
                                                                          1st Qtr      2nd - 4th Qtr
-----------------------------------------------------------------------------------------------------
<S>           <C>                      <C>                             <C>           <C>
      1       Island                            1.005                      0.974
----------------------------------------------------------------------------------------------------
      1       Skagit                            1.005                      0.974
----------------------------------------------------------------------------------------------------
      1       San Juan                          1.005                      0.974
----------------------------------------------------------------------------------------------------
      1       Whatcom                           1.005                      0.974
----------------------------------------------------------------------------------------------------
      2       Snohomish                         1.053                      0.977
----------------------------------------------------------------------------------------------------
      3       King                              0.998                      0.994
----------------------------------------------------------------------------------------------------
      3       Pierce                            0.998                      0.994
----------------------------------------------------------------------------------------------------
      4       Clallam                           1.011                      0.949
----------------------------------------------------------------------------------------------------
      4       Jefferson*                        1.011*                     0.949*
----------------------------------------------------------------------------------------------------
      4       Kitsap                            1.011                      0.949
----------------------------------------------------------------------------------------------------
      5       Grays Harbor                      1.028                      1.002
----------------------------------------------------------------------------------------------------
      5       Lewis                             1.028                      1.002
----------------------------------------------------------------------------------------------------
      5       Mason                             1.028                      1.002
----------------------------------------------------------------------------------------------------
      5       Pacific*                          1.028*                     1.002*
----------------------------------------------------------------------------------------------------
      5       Thurston                          1.028                      1.002
----------------------------------------------------------------------------------------------------
      6       Clark*                            0.955*                     1.046*
----------------------------------------------------------------------------------------------------
      6       Cowlitz                           0.955                      1.046
----------------------------------------------------------------------------------------------------
      6       Skamania*                         0.955*                     1.046*
----------------------------------------------------------------------------------------------------
      6       Wahkiakum*                        0.955*                     1.046*
----------------------------------------------------------------------------------------------------
      7       Adams                             1.011                      1.014
----------------------------------------------------------------------------------------------------
      7       Chelan                            1.011                      1.014
----------------------------------------------------------------------------------------------------
      7       Douglas                           1.011                      1.014
----------------------------------------------------------------------------------------------------
      7       Grant                             1.011                      1.014
----------------------------------------------------------------------------------------------------
      7       Okanogan                          1.011                      1.014
----------------------------------------------------------------------------------------------------
      8       Kittitas*                         0.981*                     1.003*
----------------------------------------------------------------------------------------------------
      8       Klickitat*                        0.981*                     1.003*
----------------------------------------------------------------------------------------------------
      8       Yakima                            0.981                      1.003
----------------------------------------------------------------------------------------------------
      9       Ferry*                            1.044*                     1.009*
----------------------------------------------------------------------------------------------------
      9       Lincoln                           1.044                      1.009
----------------------------------------------------------------------------------------------------
      9       Pend Orielle                      1.044                      1.009
----------------------------------------------------------------------------------------------------
      9       Stevens*                          1.044*                     1.009*
----------------------------------------------------------------------------------------------------
     10       Spokane                           1.018                      0.998
----------------------------------------------------------------------------------------------------
     11       Asotin*                           1.021*                     0.981*
----------------------------------------------------------------------------------------------------
     11       Garfield                          1.021                      0.981
----------------------------------------------------------------------------------------------------
     11       Whitman                           1.021                      0.981
----------------------------------------------------------------------------------------------------
     12       Benton                            0.991                      1.004
----------------------------------------------------------------------------------------------------
     12       Columbia                          0.991                      1.004
----------------------------------------------------------------------------------------------------
     12       Franklin                          0.991                      1.004
----------------------------------------------------------------------------------------------------
     12       Walla Walla                       0.991                      1.004
----------------------------------------------------------------------------------------------------
</TABLE>

*Note: Shaded areas are those not currently served.

<PAGE>
                                                          2003 Ho Schip Contract
                                                                       Exhibit D

                      Premiums, Service Areas and Capacity
                        Exhibit D-3 Service Area Detail
                                Contractor: Mhc
                           Effective January 1, 2002
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
   Adams                            Benton                   Chelan                     Clallam                  Clark
================================================================================================================================
================================================================================================================================
   CITY           ZIP          CITY       ZIP          CITY           ZIP         CITY          ZIP      CITY            ZIP
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
<S>              <C>      <C>             <C>       <C>               <C>        <C>            <C>      <C>             <C>
Benge (50)       99105    Benton City     99320     Ardenvoir         98811      Beaver         98305    Amboy*          98601*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Cunningham       99327    Kennewick (U)   99336     Cashmere          98815      Carlsborg      98324    Battle Ground*  98604*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Hatton           99332    Kennewick       99337     Chelan            98816      Clallam Bay    98326    Bush Prairie*   98606*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Lind             99341    Kennewick       99338     Chelan Falls      98817      Forks          98331    Camas*          98607*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Othello          99344    Paterson        99345     Dryden            98821      Joyce          98343    Heison*         98622*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Washtucna (50)   99371    Plymouth (50)   99346     Entiat            98822      La Push        98350    La Center*      98629*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Ritzville        99169    Prosser         99350     Leavenworth       98826      Neah Bay (50)  98357    Ridgefield*     98642*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                          Richland        99352     Malaga            98828      Port Angeles   98362    Vancouver*      98660*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                          West Richland   99353     Manson            98831      Port Angeles   98363    Vancouver (U)*  98661*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                    Monitor           98836      Sekiu (50)     98381    Vancouver*      98662*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                    Peshastin         98847      Sequim         98382    Vancouver (U)*  98663*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                    Stehekin (CP 65)  98852                              Vancouver (U)*  98664*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                    Wenatchee         98801                              Vancouver*      98665*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                    Wenatchee         98807                              Vancouver*      98666*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Vancouver*      98667*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Vancouver*      98668*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Vancouver*      98682*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Vancouver*      98683*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Vancouver (U)*  98684*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Vancouver*      98685*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Vancouver*      98686*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Vancouver*      98687*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Yacolt*         98675*
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Washougal*       98671*
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

----------------------------------------------
      Columbia                 Cowlitz
==============================================
==============================================
  CITY      ZIP           CITY         ZIP
----------------------------------------------
----------------------------------------------
<S>         <C>       <C>              <C>
Dayton      99328     Ariel (50)       98603
----------------------------------------------
----------------------------------------------
Starbuck    99359     Carrolls         98609
----------------------------------------------
----------------------------------------------
                      Castle Rock      98611
----------------------------------------------
----------------------------------------------
                      Cougar (50)      98616
----------------------------------------------
----------------------------------------------
                      Kalama           98625
----------------------------------------------
----------------------------------------------
                      Kelso            98626
----------------------------------------------
----------------------------------------------
                      Longview         98632
----------------------------------------------
----------------------------------------------
                      Ryderwood        98581
----------------------------------------------
----------------------------------------------
                      Silverlake       98645
----------------------------------------------
----------------------------------------------
                      Toutle           98649
----------------------------------------------
----------------------------------------------
                      Woodland         98674
----------------------------------------------
----------------------------------------------
</TABLE>

<PAGE>

                                                          2003 HO SCHIP Contract
                                                          Exhibit D

                                    Exhibit D
                      Premiums, Service Areas and Capacity
                        Exhibit D-3, Service Area Detail
                                Contractor: MHC
                           Effective: January 1, 2003

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
      Douglas                      Ferry                    Franklin       Garfield
=============================================================================================
        CITY           ZIP         CITY         ZIP       CITY      ZIP      CITY       ZIP
---------------------------------------------------------------------------------------------
<S>                   <C>     <C>             <C>      <C>         <C>    <C>          <C>
Bridgeport            98813   Boyd*            99107*  Connell     99326  Pomeroy      99347
---------------------------------------------------------------------------------------------
East Wenatchee        98802   Curlew (50)*     99118*  Eltopia     99330
---------------------------------------------------------------------------------------------
Mansfield             98830   Danville (50)*   99121*  Kahlotus    99335
---------------------------------------------------------------------------------------------
Orondo                98843   Inchelium (50)*  99138*  Mesa        99343
---------------------------------------------------------------------------------------------
Palisades             98845   Keller*          99140*  Pasco       99301
---------------------------------------------------------------------------------------------
Rock Island           98850   Laurier (50)*    99146*  Pasco       99302
---------------------------------------------------------------------------------------------
Waterville            98858   Malo*            99150*
---------------------------------------------------------------------------------------------
                              Orient*          99160*
---------------------------------------------------------------------------------------------
                              Republic*        99166*
---------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------------------------------------------------------
      Grant                     Grays Harbor           Island                 Jefferson
=====================================================================================================
       CITY         ZIP         CITY          ZIP       CITY        ZIP          CITY          ZIP
-----------------------------------------------------------------------------------------------------
<S>                <C>    <C>                <C>    <C>            <C>    <C>                 <C>
 Beverly           99321  Aberdeen*          98520* Clinton        98236  Brinnon*            98320*
-----------------------------------------------------------------------------------------------------
 Coulee City       99115  Amanda Park*       98526* Coupeville     98239  Chimacum*           98325*
-----------------------------------------------------------------------------------------------------
 Electric City     99123  Copalis Bch.*      98535* Freeland       98249  Port Hadlock*       98339*
-----------------------------------------------------------------------------------------------------
 Ephrata           98823  Copalis Cros*      98536* Greenbank      98253  Nordland*           98358*
-----------------------------------------------------------------------------------------------------
 George            98824  Cosmopolis*        98537* Langley        98260  Port Ludlow*        98365*
-----------------------------------------------------------------------------------------------------
 Grand Coulee      99133  Elma*              98541* Oak Harbor     98277  Port Townsend*      98368*
-----------------------------------------------------------------------------------------------------
 Hartline          99135  Grayland*          98547* Oak Harbor     98278  Quilcene*           98376*
-----------------------------------------------------------------------------------------------------
 Marlin            98832  Hoquiam*           98550*
-----------------------------------------------------------------------------------------------------
 Mattawa (50)      99349  Humptuliips*       98552*
-----------------------------------------------------------------------------------------------------
 Moses Lake        98837  Malone*            98559*
-----------------------------------------------------------------------------------------------------
 Quincy            98848  McCleary*          98557*
-----------------------------------------------------------------------------------------------------
 Royal City        99357  Moclips*           98562*
-----------------------------------------------------------------------------------------------------
 Soap Lake         98851  Montesano*         98563*
-----------------------------------------------------------------------------------------------------
 Stratford         98853  Neilton*           98566*
-----------------------------------------------------------------------------------------------------
 Warden            98857  Oakville*          98568*
-----------------------------------------------------------------------------------------------------
 Wilson Creek      98860  Ocean Shores*      98569*
-----------------------------------------------------------------------------------------------------
                          Pacific Bch.*      98571*
-----------------------------------------------------------------------------------------------------
                          Quinault*          98575*
-----------------------------------------------------------------------------------------------------
                          Satsop*            98583*
-----------------------------------------------------------------------------------------------------
                          Taholah*           98587*
-----------------------------------------------------------------------------------------------------
                          Westport*          98595*
-----------------------------------------------------------------------------------------------------
</TABLE>

NOTES:

* Shaded areas are those not currently served.
Zip codes with a (U) after the city name are urban.
Zip codes with a number (##) after the city name have that number of miles as
the global distance standard.

<PAGE>

                                                          2003 HO SCHIP Contract
                                                          Exhibit D

                      Premiums, Service Areas and Capacity
                        Exhibit D-3, Service Area Detail
                                Contractor: MHC
                           Effective: January 1, 2003
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                  King
==============================================================================================================
        CITY           ZIP         CITY         ZIP       CITY        ZIP             CITY              ZIP
--------------------------------------------------------------------------------------------------------------
<S>                  <C>     <C>              <C>    <C>            <C>    <C>                        <C>
Auburn                98001   Kent             98042  Seattle (U)    98111  Seattle                    98166
--------------------------------------------------------------------------------------------------------------
Auburn (U)            98002   Kent             98064  Seattle (U)    98112  Seattle                    98168
--------------------------------------------------------------------------------------------------------------
Auburn                98071   Kirkland (U)     98033  Seattle (U)    98114  Seattle (U)                98170
--------------------------------------------------------------------------------------------------------------
Auburn                98092   Kirkland (U)     98034  Seattle (U)    98115  Seattle (U)                98171
--------------------------------------------------------------------------------------------------------------
Baring (50)           98224   Kirkland         98083  Seattle (U)    98116  Seattle (U)                98174
--------------------------------------------------------------------------------------------------------------
Bellevue              98004   Maple Valley     98038  Seattle (U)    98117  Seattle (U)                98177
--------------------------------------------------------------------------------------------------------------
Bellevue (U)          98005   Medina           98039  Seattle (U)    98118  Seattle (U)                98178
--------------------------------------------------------------------------------------------------------------
Bellevue              98006   Mercer Is. (U)   98040  Seattle (U)    98119  Seattle (U)                98181
--------------------------------------------------------------------------------------------------------------
Bellevue (U)          98007   North Bend       98045  Seattle (U)    98121  Seattle (U)                98184
--------------------------------------------------------------------------------------------------------------
Bellevue (U)          98008   Pacific (U)      98047  Seattle (U)    98122  Seattle (U)                98185
--------------------------------------------------------------------------------------------------------------
Bellevue              98009   Preston          98050  Seattle (U)    98124  Seattle                    98188
--------------------------------------------------------------------------------------------------------------
Bellevue              98015   Ravensdale       98051  Seattle (U)    98125  Seattle (U)                98190
--------------------------------------------------------------------------------------------------------------
Black Diamond         98010   Redmond          98052  Seattle (U)    98126  Seattle (U)                98191
--------------------------------------------------------------------------------------------------------------
Bothell (U)           98011   Redmond          98053  Seattle (U)    98129  Seattle (U)                98195
--------------------------------------------------------------------------------------------------------------
Bothell               98041   Redmond          98073  Seattle (U)    98131  Seattle                    98198
--------------------------------------------------------------------------------------------------------------
Burton                98013   Redmond          98074  Seattle (U)    98132  Seattle (U)                98199
--------------------------------------------------------------------------------------------------------------
Carnation             98014   Redondo          98054  Seattle (U)    98133  Skykomish (50)             98288
--------------------------------------------------------------------------------------------------------------
Duvall                98019   Renton           98055  Seattle (U)    98134  Snoqualmie                 98065
--------------------------------------------------------------------------------------------------------------
Enumclaw (50)         98022   Renton (U)       98056  Seattle (U)    98136  Vashon                     98070
--------------------------------------------------------------------------------------------------------------
Fall City             98024   Renton           98057  Seattle (U)    98138  Woodinville                98072
--------------------------------------------------------------------------------------------------------------
Federal Way (U)       98003   Renton           98058  Seattle (U)    98144  Bothell (U)                98012
--------------------------------------------------------------------------------------------------------------
Federal Way (U)       98023   Renton           98059  Seattle (U)    98145  Bothell (U)                98021
--------------------------------------------------------------------------------------------------------------
Federal Way           98063   Seahurst         98062  Seattle (U)    98146  Bothell (U)                98082
--------------------------------------------------------------------------------------------------------------
Federal Way           98093   Seattle (U)      98101  Seattle        98148  Snoqualmie Pass (50)       98068
--------------------------------------------------------------------------------------------------------------
Hobart                98025   Seattle (U)      98102  Seattle (U)    98151
--------------------------------------------------------------------------------------------------------------
Issaquah              98027   Seattle (U)      98103  Seattle (U)    98154
--------------------------------------------------------------------------------------------------------------
Issaquah              98029   Seattle (U)      98104  Seattle (U)    98155
--------------------------------------------------------------------------------------------------------------
Kent                  98030   Seattle (U)      98105  SeaTac (U)     98158
--------------------------------------------------------------------------------------------------------------
Issaquah              98075   Seattle (U)      98106  Seattle (U)    98160
--------------------------------------------------------------------------------------------------------------
Kenmore               98028   Seattle (U)      98107  Seattle (U)    98161
--------------------------------------------------------------------------------------------------------------
Kent (U)              98031   Seattle (U)      98108  Seattle (U)    98164
--------------------------------------------------------------------------------------------------------------
Kent                  98032   Seattle (U)      98109
--------------------------------------------------------------------------------------------------------------
Kent                  98035
--------------------------------------------------------------------------------------------------------------
</TABLE>

Shaded areas are those not currently served.
Zip codes with a (U) after the city name are urban.
Zip codes with a number (##) after the city name have that number of miles as
the global distance standard.

<PAGE>

                                                          2003 HO SCHIP Contract
                                                          Exhibit D

                      Premiums, Service Areas and Capacity
                        Exhibit D-3, Service Area Detail
                                Contractor: MHC
                           Effective: January 1, 2003

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
      Kitsap                 Kittitas                Klickitat                   Lewis
=====================================================================================================
       CITY          ZIP       CITY        ZIP         CITY          ZIP          CITY          ZIP
-----------------------------------------------------------------------------------------------------
<S>                 <C>    <C>            <C>    <C>                <C>    <C>                 <C>
Bainbridge Is.      98110  CleElum*       98922* Appleton*          98602* Adna                98522
-----------------------------------------------------------------------------------------------------
Bremerton (U)       98310  Easton*        98925* Bickleton (50)*    99322* Centralia           98531
-----------------------------------------------------------------------------------------------------
Bremerton           98311  Ellensburg*    98926* Bingen*            98605* Chehalis            98532
-----------------------------------------------------------------------------------------------------
Bremerton           98312  Kittitas*      98934* Centerville*       98613* Cinnabar            98533
-----------------------------------------------------------------------------------------------------
Bremerton (U)       98314  Ronald*        98940* Dallesport*        98617* Curtis              98538
-----------------------------------------------------------------------------------------------------
Bremerton           98337  Roslyn*        98941* Glenwood (50)*     98619* Doty                98539
-----------------------------------------------------------------------------------------------------
Bremerton           98322  S. CleElum*    98943* Goldendale*        98620* Ethel               98542
-----------------------------------------------------------------------------------------------------
Hansville           98340  Thorp*         98946* Husum*             98623* Galvin              98544
-----------------------------------------------------------------------------------------------------
Indianola           98342  Vantage*       98950* Klickitat*         98628* Glennoma            98336
-----------------------------------------------------------------------------------------------------
Keyport             98345                        Lyle*              98635* Mineral             98355
-----------------------------------------------------------------------------------------------------
Kingston            98346                        Roosevelt (50)*    99356* Morton              98356
-----------------------------------------------------------------------------------------------------
Manchester          98353                        Trout Lake*        98650* Mossyrock           98564
-----------------------------------------------------------------------------------------------------
Ollala              98359                        Wahkiacus*         98670* Napavine            98565
-----------------------------------------------------------------------------------------------------
Port Gamble         98364                        White Salmon*      98672* Onalaska            98570
-----------------------------------------------------------------------------------------------------
Port Orchard        98366                        Wishram*           98673* Packwood (50)       98361
-----------------------------------------------------------------------------------------------------
Port Orchard        98367                                                  Pe Ell              98572
-----------------------------------------------------------------------------------------------------
Poulsbo             98370                                                  Randle (50)         98377
-----------------------------------------------------------------------------------------------------
Retsil              98378                                                  Salkum              98582
-----------------------------------------------------------------------------------------------------
Rollingbay          98061                                                  Silver Creek        98585
-----------------------------------------------------------------------------------------------------
Seabeck             98380                                                  Toledo              98591
-----------------------------------------------------------------------------------------------------
Silverdale          98315                                                  Vader               98593
-----------------------------------------------------------------------------------------------------
Silverdale          98383                                                  Winlock             98596
-----------------------------------------------------------------------------------------------------
SouthColby          98384
-----------------------------------------------------------------------------------------------------
Southworth          98386
-----------------------------------------------------------------------------------------------------
Suquamish           98392
-----------------------------------------------------------------------------------------------------
Tracyton            98393
-----------------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------------------------------
     Lincoln                Mason                  Okanogan
=========================================================================
      CITY         ZIP       CITY       ZIP          CITY          ZIP
-------------------------------------------------------------------------
<S>               <C>    <C>           <C>    <C>                 <C>
 Almira           99103  Allyn         98524  Brewster            98812
-------------------------------------------------------------------------
 Creston          99117  Belfair       98528  Carlton             98814
-------------------------------------------------------------------------
 Davenport        99122  Grapeview     98546  Conconully          98819
-------------------------------------------------------------------------
 Edwall           99008  Hoodsport     98548  Coulee Dam          99116
-------------------------------------------------------------------------
 Harrington       99134  Lilliwaup     98555  Elmer City          99124
-------------------------------------------------------------------------
 Odessa           99144  Matlock       98560  Loomis              98827
-------------------------------------------------------------------------
 Lincoln          99147  Shelton       98584  Malott              98829
-------------------------------------------------------------------------
 Mohler           99154  Tahuya        98588  Mazama (50)         98833
-------------------------------------------------------------------------
 Odessa           99159  Union         98592  Methow              98834
-------------------------------------------------------------------------
 Reardan          99029                       Nespelem            99155
-------------------------------------------------------------------------
 Sprague (50)     99032                       Okanogan            98840
-------------------------------------------------------------------------
 Wilbur           99185                       Omak                98841
-------------------------------------------------------------------------
                                              Oroville            98844
-------------------------------------------------------------------------
                                              Pateros             98846
-------------------------------------------------------------------------
                                              Riverside           98849
-------------------------------------------------------------------------
                                              Tonasket            98855
-------------------------------------------------------------------------
                                              Twisp (50)          98856
-------------------------------------------------------------------------
                                              Wauconda (50)       98859
-------------------------------------------------------------------------
                                              Winthrop (50)       98862
-------------------------------------------------------------------------
</TABLE>

NOTES:

*  Shaded areas are those not currently served.
Zip codes with a (U) after the city name are urban.
Zip codes with a number (##) after the city name have that number of miles as
the global distance standard.

<PAGE>

2003 HO SCHIP Contract
Exhibit D
Premiums, Service Areas and Capacity
Exhibit D-3, Service Area Detail
Contractor: MHC
Effective: January 1, 2003

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
    Pacific                  Pend Oreille                                      Pierce
=======================================================================================================
      CITY         ZIP           CITY            ZIP         CITY         ZIP        CITY         ZIP
-------------------------------------------------------------------------------------------------------
<S>                <C>   <C>                    <C>    <C>               <C>    <C>              <C>
Bay Center        98527  Cusick (50)            99119  Anderson Is.      98303  South Prairie    98385
-------------------------------------------------------------------------------------------------------
Chinook           98614  Ione (50)              99139  Ashford (50)      98304  Spanaway         98387
-------------------------------------------------------------------------------------------------------
Illwaco           98624  Metaline (50)          99152  Buckley           98321  Steilacoom       98388
-------------------------------------------------------------------------------------------------------
Lebam             98554  Metaline Falls (50)    99153  Camp Murray       98430  Sumner           98352
-------------------------------------------------------------------------------------------------------
Long Beach        98631  Newport                99156  Carbonado         98323  Sumner           98390
-------------------------------------------------------------------------------------------------------
Menlo             98561  Usk                    99180  Dupont            98327  Tacoma (U)       98401
-------------------------------------------------------------------------------------------------------
Nahcotta          98637                                Eatonville        98328  Tacoma (U)       98402
-------------------------------------------------------------------------------------------------------
Naselle           98638                                Elbe              98330  Tacoma (U)       98403
-------------------------------------------------------------------------------------------------------
Ocean Park        98640                                Fox Island        98333  Tacoma (U)       98404
-------------------------------------------------------------------------------------------------------
Oysterville       98641                                Gig Harbor        98329  Tacoma (U)       98405
-------------------------------------------------------------------------------------------------------
Raymond           98577                                Gig Harbor        98332  Tacoma (U)       98406
-------------------------------------------------------------------------------------------------------
Seaview           98644                                Gig Harbor        98335  Tacoma (U)       98407
-------------------------------------------------------------------------------------------------------
South Bend        98586                                Graham            98338  Tacoma (U)       98408
-------------------------------------------------------------------------------------------------------
Tokeland          98590                                Kapowsin          98344  Tacoma (U)       98409
-------------------------------------------------------------------------------------------------------
                                                       La Grande         98348  Tacoma (U)       98411
-------------------------------------------------------------------------------------------------------
                                                       Lake Bay          98349  Tacoma (U)       98412
-------------------------------------------------------------------------------------------------------
                                                       Lakewood          98439  Tacoma (U)       98413
-------------------------------------------------------------------------------------------------------
                                                       Lakewood          98492  Tacoma (U)       98415
-------------------------------------------------------------------------------------------------------
                                                       Lakewood          98497  Tacoma (U)       98416
-------------------------------------------------------------------------------------------------------
                                                       Lakewood          98498  Tacoma (U)       98418
-------------------------------------------------------------------------------------------------------
                                                       Lakewood          98499  Tacoma           98421
-------------------------------------------------------------------------------------------------------
                                                       Longbranch        98351  Tacoma           98422
-------------------------------------------------------------------------------------------------------
                                                       Longmire          98397  Tacoma           98424
-------------------------------------------------------------------------------------------------------
                                                       McChord AFB       98438  Tacoma           98431
-------------------------------------------------------------------------------------------------------
                                                       McKenna           98558  Tacoma           98433
-------------------------------------------------------------------------------------------------------
                                                       Milton            98354  Tacoma           98442
-------------------------------------------------------------------------------------------------------
                                                       Orting            98360  Tacoma           98443
-------------------------------------------------------------------------------------------------------
                                                       Puyallup          98371  Tacoma (U)       98444
-------------------------------------------------------------------------------------------------------
                                                       Puyallup          98372  Tacoma (U)       98445
-------------------------------------------------------------------------------------------------------
                                                       Puyallup (U)      98373  Tacoma           98446
-------------------------------------------------------------------------------------------------------
                                                       Puyallup          98374  Tacoma (U)       98447
-------------------------------------------------------------------------------------------------------
                                                       Puyallup           98375 Tacoma (U)       98450
-------------------------------------------------------------------------------------------------------
                                                       Roy               98580
-------------------------------------------------------------------------------------------------------
<CAPTION>

----------------------------------------------------------
                 Pierce                   San Juan
==========================================================
          CITY             ZIP         CITY         ZIP
----------------------------------------------------------
<S>                       <C>    <C>               <C>
 Tacoma (U)               98455  Deer Harbor       98243
----------------------------------------------------------
 Tacoma (U)               98460  Eastsound         98245
----------------------------------------------------------
 University Place (U)     98464  Friday Harbor     98250
----------------------------------------------------------
 Tacoma (U)               98465  Lopez Is.         98261
----------------------------------------------------------
 Tacoma (U)               98466  Olga              98279
----------------------------------------------------------
 Tacoma                   98471  Orcas             98280
----------------------------------------------------------
 Tacoma                   98477  Shaw Is.          98286
----------------------------------------------------------
 Tacoma                   98481  Waldron           98297
----------------------------------------------------------
 Tacoma                   98493  Blakley Island    98222
----------------------------------------------------------
 University Place         98467
----------------------------------------------------------
 Vaughn                   98394
----------------------------------------------------------
 Wauna                    98395
----------------------------------------------------------
 Wilkeson                 98396
----------------------------------------------------------
 Paradise Inn             98398
----------------------------------------------------------
</TABLE>

NOTES:

* Shaded areas are those not currently served.
Zip codes with a (U) after the city name are urban.
Zip codes with a number (##) after the city name have that number of miles as
the global distance standard.

<PAGE>

                                                          2003 HO SCHIP Contract
                                                          Exhibit D

                      Premiums, Service Areas and Capacity
                        Exhibit D-3, Service Area Detail
                                Contractor: MHC
                           Effective: January 1, 2003

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
        Skagit                      Skamania*                  Snohomish                                Spokane
====================================================================================================================================
====================================================================================================================================
         CITY         ZIP         CITY*        ZIP*            CITY           ZIP          CITY           ZIP        CITY      ZIP
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>     <C>              <C>    <C>                     <C>     <C>                 <C>    <C>           <C>

Anacortes            98221   Carson*          98610* Arlington*              98223*  Airway Hts.         99001  Spokane       99210
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Bow                  98232   N. Bonneville*   98639* Darrington (50)*        98241*  Chattaroy           99003  Spokane       99211
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Bow                  98246   Stevenson*       98648* Edmonds (U)             98020   Cheney              99004  Spokane       99212
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Burlington           98233   Underwood*       98651* Edmonds (U)             98026   Colbert             99005  Spokane       99213
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Clear Lake           98235                           Everett*                98201*  Deer Park           99006  Spokane       99214
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Concrete (50)        98237                           Everett*                98203*  Elk                 99009  Spokane       99215
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Conway               98238                           Everett*                98204*  Fairchild AFB       99011  Spokane       99216
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Hamilton             98255                           Everett*                98205*  Fairfield           99012  Spokane       99217
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
La Conner            98257                           Everett*                98206*  Four Lakes          99014  Spokane (U)   99218
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Lyman                98263                           Everett*                98207*  Freeman             99015  Spokane       99219
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Marble Mount (50)    98267                           Everett*                98208*  Greenacres          99016  Spokane       99220
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Mt. Vernon           98273                           Gold Bar*               98251*  Latah               99018  Spokane       99223
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Mt. Vernon           98274                           Granite Falls*          98252*  Liberty Lake        99019  Spokane       99224
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Rockport (50)        98283                           Index*                  98256*  Marshall            99020  Spokane       99228
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Sedro Wooley         98284                           Lake Stevens*           98258*  Mead                99021  Spokane       99251
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Lynnwood (U)*           98036*  Medical Lake        99022  Spokane       99252
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Lynnwood (U)*           98037*  Mica                99023  Spokane       99256
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Lynnwood (U)*           98046*  Newman Lake         99025  Spokane       99258
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Marysville*             98270*  Nine Miles Falls    99026  Spokane       99260
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Marysville*             98271*  Otis Orchards       99027  Spokane       99299
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Monroe*                 98272* Rockford            99030  Valleyford    99036
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Mountlake Terrace (U)*  98043* Spangle             99031  Veradale      99037
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Mukilteo*               98275* Spokane (U)         99201  Waverly       99039
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     N. Lakewood*            98259* Spokane (U)         99202
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Silvana*                98287* Spokane (U)         99203
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Snohomish*              98290* Spokane (U)         99204
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Snohomish*              98291* Spokane (U)         99205
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Snohomish*              98296* Spokane             99206
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Stanwood*               98282* Spokane (U)         99207
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Stanwood*               98292* Spokane             99208
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Startup*                98293* Spokane             99209
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
                                                     Sultan*                 98294*
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

 NOTES:
*Shaded areas are those not currently served.
 Zip codes with a (U) after the city name are urban.
 Zip codes with a number (##) after the city name have that number of miles as
 the global distance standard.

<PAGE>

                                                          2003 HO SCHIP Contract
                                                          Exhibit D

                      Premiums, Service Areas and Capacity
                        Exhibit D-3, Service Area Detail
                                Contractor: MHC
                           Effective: January 1, 2003
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
      Stevens                   Thurston                    Wahkiakum          Walla Walla                 Whatcom
===============================================================================================================================
       CITY           ZIP         CITY         ZIP        CITY        ZIP          CITY         ZIP         CITY          ZIP
-------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>     <C>              <C>    <C>             <C>      <C>              <C>     <C>               <C>
Addy*                99101*  Bucoda           98530  Cathlamet*      98612*  Burbank           99323  Acme               98220
-------------------------------------------------------------------------------------------------------------------------------
Chewelah*            99109*  East Olympia     98540  Grays River*    98621*  College Place     99324  Bellingham (U)     98225
-------------------------------------------------------------------------------------------------------------------------------
Clayton*             99110*  Lacey            98503  Rosburg*        98643*  Dixie             99329  Bellingham         98226
-------------------------------------------------------------------------------------------------------------------------------
Colville*            99114*  Lacey            98509  Skamokawa*      98647*  Prescott (50)     99348  Bellingham         98227
-------------------------------------------------------------------------------------------------------------------------------
Evans*               99126*  Littlerock       98556                          Touchet           99360  Bellingham         98228
-------------------------------------------------------------------------------------------------------------------------------
Ford*                99013*  Olympia          98501                          Walla Walla       99362  Bellingham         98229
-------------------------------------------------------------------------------------------------------------------------------
Fruitland*           99129*  Olympia          98502                          Wallula           99363  Blaine             98230
-------------------------------------------------------------------------------------------------------------------------------
Gifford*             99131*  Olympia          98504                          Waitsburg         99361  Blaine             98231
-------------------------------------------------------------------------------------------------------------------------------
Hunters (50)*        99137*  Olympia          98505                                                   Custer             98240
-------------------------------------------------------------------------------------------------------------------------------
Kettle Falls (50)*   99141*  Olympia          98506                                                   Deming             98244
-------------------------------------------------------------------------------------------------------------------------------
Loon Lake*           99148*  Olympia          98507                                                   Everson            98247
-------------------------------------------------------------------------------------------------------------------------------
Marcus*              99151*  Olympia          98508                                                   Ferndale           98248
-------------------------------------------------------------------------------------------------------------------------------
Northport (50)*      99157*  Olympia          98512                                                   Lummi Is.          98262
-------------------------------------------------------------------------------------------------------------------------------
Rice*                99167*  Olympia          98513                                                   Lynden             98264
-------------------------------------------------------------------------------------------------------------------------------
Springdale*          99173*  Olympia          98516                                                   Maple Falls        98266
-------------------------------------------------------------------------------------------------------------------------------
Tumtum*              99034*  Olympia          98599                                                   Nooksack           98276
-------------------------------------------------------------------------------------------------------------------------------
Valley*              99181*  Rainier          98576                                                   Pt. Roberts        98281
-------------------------------------------------------------------------------------------------------------------------------
Wellpinit*           99040*  Rochester        98579                                                   Sumas              98295
-------------------------------------------------------------------------------------------------------------------------------
                             Tenino           98589
-------------------------------------------------------------------------------------------------------------------------------
                             Tumwater         98511
-------------------------------------------------------------------------------------------------------------------------------
                             Yelm             98597
-------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
---------------------------------------------------------
    Whitman                         Yakima
=========================================================
     CITY        ZIP                 CITY          ZIP
---------------------------------------------------------
<S>            <C>            <C>                <C>
 Albion         99102          Brownstown*        98920*
---------------------------------------------------------
 Belmont        99104          Buena              98921
---------------------------------------------------------
 Colfax         99111          Cowiche*           98923*
---------------------------------------------------------
 Colton         99113          Goose Prairie*     98929*
---------------------------------------------------------
 Endicott       99125          Grandview          98930
---------------------------------------------------------
 Farmington     99128          Granger            98932
---------------------------------------------------------
 Garfield       99130          Harrah*            98933*
---------------------------------------------------------
 Hay            99136          Mabton             98935
---------------------------------------------------------
 Hooper         99333          Moxee*             98936*
---------------------------------------------------------
 LaCross        99143          Naches (50)*       98937*
---------------------------------------------------------
 Lamont         99017          Outlook            98938
---------------------------------------------------------
 Malden         99149          Parker*            98939*
---------------------------------------------------------
 Oakesdale      99158          Selah              98942
---------------------------------------------------------
 Palouse        99161          Sunnyside          98944
---------------------------------------------------------
 Pullman        99163          Tieton*            98947*
---------------------------------------------------------
 Pullman        99164          Toppenish          98948
---------------------------------------------------------
 Pullman        99165          Wapato*            98951*
---------------------------------------------------------
 Rosalia        99170          White Swan*        98952*
---------------------------------------------------------
 St John        99127          Yakima             98901
---------------------------------------------------------
 St. John       99171          Yakima (U)         98902
---------------------------------------------------------
 Steptoe        99174          Yakima             98903
---------------------------------------------------------
 Tekoa          99033          Yakima*            98904*
---------------------------------------------------------
 Thornton       99176          Yakima*            98907*
---------------------------------------------------------
 Uniontown      99179          Yakima*            98908*
---------------------------------------------------------
                               Yakima*            98909*
---------------------------------------------------------
                               Zillah             98953
---------------------------------------------------------
</TABLE>

NOTES:
* Shaded areas are those not currently served.
Zip codes with a (U) after the city name are urban.
Zip codes with a number (##) after the city name have that number of miles as
the global distance standard.

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit E

                                    EXHIBIT E
                               CHAPTER 388-542 WAC
                     CHILDREN'S HEALTH INSURANCE PLAN (CHIP)

WAC 388-542-0050 DEFINITIONS FOR CHILDREN'S HEALTH INSURANCE PROGRAM (CHIP)
TERMS. The following definitions and abbreviations, those found in WAC
388-538-050 and in 388-500-0005 Medical definitions, apply to this chapter.
"CHILDREN'S HEALTH INSURANCE PROGRAM (CHIP)" means the health insurance program
authorized by Title XXI of the Social Security Act and administered by the
department of social and health services (DSHS). This program also is referred
to as the state children's health insurance program (SCHIP).
"CLIENT PREMIUM" means a monthly payment a client makes to the department of
social and health services (DSHS) for CHIP coverage.
"CREDITABLE COVERAGE" means most types of public and private health coverage,
except Indian health services, that provides access to physicians, hospitals,
laboratory services, and radiology services. This term applies to the coverage
whether or not the coverage is equivalent to that offered under CHIP.
"Creditable coverage" is described in 42 U.S.C. Sec. 1397jj.
"EMPLOYER-SPONSORED DEPENDENT COVERAGE" means creditable health coverage for
dependents offered by a family member's employer or union, for which the
employer or union may contribute in whole or part towards the premium.
Extensions of such coverage (e.g., COBRA extensions) also qualify as
employer-sponsored dependent coverage as long as there remains a contribution
toward the premiums by the employer or union.
"FINANCE DIVISION" means the division of the department of social and health
services that sends out billing statements, monitors accounts, and collects the
CHIP client premiums.

WAC 388-542-0100 CHIP SCOPE OF CARE. (1) Children's health insurance program
(CHIP) clients are eligible for the same scope of medical care as Medicaid
categorically needy clients as described in WAC 388-529-0100.
(2) The medical assistance administration (MAA) requires CHIP clients, except
for clients who are American Indian or Alaska Native (AI/AN), to enroll in
managed care according to WAC 388-538-060(1)(b) through (5)(d). AI/AN clients
may choose to receive services under MAA's fee-for-service system.
(3) For eligible CHIP clients who are not enrolled in managed care:
(a) MAA determines which services are medically necessary;
(b) Clients must obtain covered services from providers who have core provider
agreements with MAA; and
(c) As a condition of coverage, MAA may require the service provider to obtain
authorization from MAA for coverage of nonemergency services.
(4) A CHIP client enrolled in managed care may submit a complaint or appeal as
described in WAC 388-538-110.
(5) Any CHIP client may request a fair hearing as described in chapter 388-02
WAC for

                                        1

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit E

review of MAA coverage decisions. Clients may elect to participate in a
pre-hearing review as described in WAC 388-526-2610.

WAC 388-542-0125 ACCESS TO CARE. (1) If a children's health insurance program
(CHIP) client is subject to mandatory enrollment in a managed care organization
(MCO) or with a primary care case management (PCCM) provider, the medical
assistance administration (MAA) provides fee-for-service coverage between the
time a client becomes eligible for CHIP services and the time the client is
enrolled in managed care.
(2) Not all CHIP clients are required to enroll in an MCO or with a PCCM
provider. The same enrollment criteria are applied to CHIP clients as to
categorically needy Medicaid clients under WAC 388-538-060.
(3) If a CHIP client is not already enrolled in managed care, the client may
request an exemption to mandatory enrollment under the process described in WAC
388-538-080. MAA provides fee-for-service coverage while a client's request for
exemption from mandatory enrollment in an MCO or with a PCCM provider is being
considered and until a final decision is made.
(4) If a CHIP client is already enrolled in an MCO or with a PCCM provider and
requests to end the enrollment, the client remains enrolled in the client's MCO
or with the PCCM provider pending MAA's final decision. The process for ending
enrollment is described in WAC 388-538-130.
(5) If a CHIP client has no MCO or PCCM provider available or is permitted to
choose the fee-for-service system under this chapter, the rules that apply to
service coverage and payment for the children's health program apply to CHIP
coverage (chapters 388-550 through 388-556 WAC).

WAC 388-542-0150 CLIENT ELIGIBILITY REQUIREMENTS FOR CHIP. (1) To be eligible
for the children's health insurance program (CHIP) a client must meet all of the
following. The client must:
(a) Not have other creditable coverage (see WAC 388-542-0220(1)); and
(b) Meet the CHIP program requirements and conditions in WAC 388-505-0210(3).
(2) There are no resource standards for a CHIP client. See WAC 388-478-0075(3).
(3) CHIP eligibility certification periods are described in WAC 388-416-0015.
(4) CHIP eligibility is affected by changes in a client's circumstances. See WAC
388-418-0025(2) and (6).
(5) Ongoing eligibility for CHIP requires the payment of CHIP premiums as
described in WAC 388-542-0250. MAA enrolls an otherwise eligible client into the
CHIP program in advance of any client premium payment.

WAC 388-542-0200 CHIP ENROLLMENT. (1) If the area in which a CHIP client lives
has more than one service delivery option available to the client, the client
must make a choice concerning how to receive health care services. The choice
and enrollment process for CHIP clients is the same as that for categorically
needy Medicaid clients described in WAC 388-538-060.
(2) The medical assistance administration (MAA) enrolls CHIP clients in MAA's
managed care program (with a managed care organization (MCO) or with a primary
care case management (PCCM) provider) prospectively only.

                                        2

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit E

(3) CHIP clients are enrolled in managed care as provided for categorically
needy Medicaid clients in WAC 388-538-060.
(4) A client who is required to enroll in managed care may request a change in
the client's MCO or PCCM provider on the same bases as in WAC 388-538-060.

WAC 388-542-0220 ENDING CHIP CLIENT ELIGIBILITY. (1) If the medical assistance
administration (MAA) finds out after eligibility determination that a CHIP
client has creditable coverage at the time of application, MAA ends the client's
eligibility for CHIP effective at the close of the last day of the current
month.
(2) MAA ends a client's eligibility for CHIP when the client owes four
consecutive months of premiums, based on the due dates listed on the billing
from the finance division for the client premium(s).
(3) When MAA ends a client's eligibility according to subsection (2) of this
section, a client must meet both of the following conditions to become eligible
for CHIP again:
(a) Pay all unforgiven past due premiums (see WAC 388-542-0250(5); and
(b) Serve a waiting period of four consecutive months. The waiting period begins
the day after termination of CHIP coverage for nonpayment of premiums as
described in this section. The waiting period ends once four full consecutive
months of CHIP noncoverage has elapsed. The client does not have CHIP coverage
during the waiting period.

WAC 388-542-0250 CHIP CLIENT COSTS. (1) The finance division charges ten dollars
per covered child, per month, for the CHIP client premium. The family maximum
for CHIP premiums is thirty dollars per month.
(2) The finance division sends bills for client premiums at the beginning of
each month of coverage. Client premiums begin the first of the month in which
the bill was sent, not the date that the client became eligible for services.
(3) MAA limits a client's out-of-pocket expenses for covered services the client
obtains under the CHIP program rules, to the payment of premiums described in
subsection (1) if this section.
(4) MAA exempts American Indian/Alaska Native (AI/AN) clients from paying client
premiums for coverage under the CHIP program.
(5) MAA forgives client premiums that are more than twelve months overdue.

WAC 388-542-0275 REIMBURSEMENT. (1) For contractors serving CHIP clients
enrolled in managed care, MAA reimburses contracted managed care organizations
(MCOs), primary care case management (PCCM) providers and providers of approved
or ancillary care in the same way as described in chapter 388-538 WAC.
(2) For providers of services serving CHIP clients under MAA's fee-for-service
system and without the involvement of MCOs or PCCMs, MAA reimburses according to
the regulations that apply to categorically needy Medicaid clients under
chapters 388-500 through 388-556 WAC.

WAC 388-542-0300 WAITING PERIOD FOR CHIP COVERAGE FOLLOWING EMPLOYER COVERAGE.
(1) The medical assistance administration (MAA) requires applicants to serve a
full four-consecutive-month waiting period for CHIP coverage if the client or

                                        3

<PAGE>

                                                        2003 HO & SCHIP Contract
                                                        Exhibit E

family:
(a) Chooses to end employer sponsored dependent coverage. The waiting period
begins the day after the employment-based coverage ends, and ends on the last
day of the fourth full month of noncoverage; or
(b) Fails to exercise an optional coverage extension (e.g., COBRA) that meets
the following conditions. The waiting period begins on the day there is a
documented refusal of the coverage extension when the extended coverage is:
(i) Subsidized in part or in whole by the employer or union;
(ii) Available and accessible to the applicant or family; and
(iii) At a monthly cost to the family meeting the limitation of subsection
(2)(b)(iv).
(2) MAA does not require a waiting period prior to CHIP coverage when:
(a) The client or family member has a medical condition that, without treatment,
would be life-threatening or cause serious disability or loss of function; or
(b) The loss of employer sponsored dependent coverage is due to any of the
following((;)):
(i) Loss of employment with no post-employment subsidized coverage as described
in subsection (1)(b);
(ii) Death of the employee;
(iii) The employer discontinues employer-sponsored dependent coverage;
(iv) The family's total out-of-pocket maximum for employer-sponsored dependent
coverage is fifty dollars per month or more;
(v) The plan terminates employer-sponsored dependent coverage for the client
because the client reached the maximum lifetime coverage amount;
(vi) Coverage under a COBRA extension period expired;
(vii) Employer-sponsored dependent coverage is not reasonably available (e.g.,
client would have to travel to another city or state to access care); or
(viii) Domestic violence caused the loss of coverage for the victim.

WAC 388-542-0500 MANAGED CARE RULES THAT APPLY TO CHIP. (1) In addition to the
other rules that are incorporated by reference elsewhere in this chapter, the
medical assistance administration (MAA) applies the following rules from chapter
388-538 WAC to the CHIP program:
(a) WAC 388-538-060, Managed care and choice, with the exception of subsection
(1)(a);
(b) WAC 388-538-070, Managed care payment;
(c) WAC 388-538-080, Managed care exemptions;
(d) WAC 388-538-095, Scope of care for managed care enrollees;
(e) WAC 388-538-100, Managed care emergency services;
(f) WAC 388-538-110. Managed care complaints, appeals and fair hearings;
(g) WAC 388-538-120, Enrollee requests for a second medical opinion;
(h) WAC 388-538-130, Ending enrollment in healthy options; and
(i) WAC 388-538-140, Quality of care.

                                        4<PAGE>

                                                                    EXHIBIT 10.7

                              EMPLOYMENT AGREEMENT

     This Employment Agreement (this "Agreement") is made as of January 2, 2002,
between Joseph M. Molina, MD ("Executive") and Molina Healthcare, Inc. (the
"Company").

                                    RECITALS

     The Company desires to establish its right to the services of Executive in
the capacities described below, on the terms and conditions hereinafter set
forth, and Executive is willing to accept such employment on such terms and
conditions. The parties hereto have previously entered into an Employment
Agreement dated May 1,1997 (the "Existing Agreement"), and this Agreement
supercedes the Existing Agreement.

                                    AGREEMENT

          The parties agree as follows:

1. DUTIES

     (a) The Company does hereby hire, engage, and employ Executive as Chief
Executive Officer of the Company, and Executive does hereby accept and agree to
such hiring, engagement, and employment. During the Period of Employment (as
defined in Section 2), Executive shall serve the Company in such position in
conformity with the provisions of this Agreement, directives of the Board of
Directors and the corporate policies of the Company as they presently exist, and
as such policies may be amended, modified, changed, or adopted during the Period
of Employment. Executive shall have duties and authority consistent with
Executive's position as Chief Executive Officer and shall report to the Board of
Directors of the Company (the "Reporting Relationship").

     (b) Throughout the Period of Employment, Executive shall devote his time,
energy, and skill to the performance of his duties for the Company, vacations
and other leave authorized under this Agreement excepted. Notwithstanding the
foregoing, Executive shall be permitted to (i) engage in charitable and
community affairs and (ii) make direct investments of any character in any
non-competing business or businesses and to manage such investments (but not be
involved in the day-to-day operations of any such business); provided, in each
case, and in the aggregate, that such activities do not materially interfere
with the performance of Executive's duties hereunder, and further provided that
Executive may invest in a publicly traded competing business so long as such
investment does not equal or exceed one percent of the outstanding shares of
such publicly traded competing business.

     (c) Executive hereby represents to the Company that the execution and
delivery of this Agreement by Executive and the Company and the performance by
Executive of Executive's duties hereunder shall not constitute a breach of, or
otherwise contravene, the terms of any employment or other agreement or policy
to which Executive is a party or otherwise bound.

JMM Employment Agreement  2002

<PAGE>

2. PERIOD OF EMPLOYMENT

     The "Period of Employment" shall, unless sooner terminated as provided
herein, be a period commencing on January 1, 2002 (the "Effective Date") and
ending with the close of business on December 31,2004. Notwithstanding the
preceding sentence, commencing with January 1, 2005 and on each January 1st
thereafter (each an "Extension Date"), the Period of Employment shall be
automatically extended for an additional one-year period so as to expire one
year from such Extension Date, unless: (i) the Company or Executive provides the
other party hereto ninety (90) days' prior written notice before the next
scheduled Extension Date that the Period of Employment shall not be so extended
(the "Non-Extension Notice"); or (ii) Executive is not less than sixty-five (65)
years of age as of the next scheduled Extension Date. The term "Period of
Employment" shall include any extension that becomes applicable pursuant to the
preceding sentence.

3. COMPENSATION

     (a) BASE SALARY. Executive's Base Salary shall be at a rate of not less
than $500,000 annually ("Executive's Base Salary"), paid in accordance with
regular payroll practices, but not less than monthly. The Board of Directors
shall review at least annually Executive's Base Salary for possible increase in
accordance with the Company's customary review practices for its senior
executives and may, in his sole discretion, periodically adjust Executive's Base
Salary to reflect individual performance. In the event of an increase,
Executive's Base Salary for the year in which the increase occurs shall be
adjusted on a pro rata basis to reflect the increase.

     (b) BONUS. Executive shall be eligible to earn an annual discretionary
bonus for each fiscal year of the Company (an "Annual Bonus") as described in
the Addendum.

4. BENEFITS

     (a) HEALTH AND WELFARE. During the Period of Employment, Executive shall be
entitled to participate, on the same terms and at the same level as other
executives, in all health and welfare benefit plans and programs generally
available to other executives or employees of the Company (including, without
limitation, the Company's medical, dental, vision, life benefits, life
insurance, and long-term disability plans) as in effect from time to time and to
receive any special benefits provided from time to time, subject to any legally
required restrictions specified in such plans and programs. Without limiting the
generality of the foregoing, Company shall provide life insurance for Executive,
with Executive to designate the beneficiary thereunder, in an amount equal to
Executive's Base Salary as in effect on the date of this Agreement and as in
effect on the first business day of each calendar year thereafter.

     (b) PAID TIME OFF AND OTHER LEAVE. During the Period of Employment,
Executive shall receive 10.77 hours of paid time off per "pay period" of the
Company (the "PTO"), subject to the Company's policies concerning accrual of PTO
and provided that for any three hundred sixty five (365) day period within the
Period of Employment Executive shall earn no less than a total of thirty five
(35) days of PTO. Executive shall also be entitled to all other holiday and
leave pay generally available to other executives of the Company.

                                        2
JMM Employment Agreement  2002

<PAGE>

     (c) TRAVEL AND EXPENSE REIMBURSEMENTS. During the Period of Employment,
Company will reimburse Executive for all reasonable expenses incurred in
connection with performance of his duties under section 1 of this Agreement in
accordance with the Company's expense reimbursement policies.

     (d) RETIREMENT. During the Period of Employment, Executive shall be
eligible to participate on the same terms and at the same level as other
executives, in all retirement, 401(k), deferred compensation, or other savings
plans generally available to other executives, or employees of the Company as in
effect from time to time, subject to any legally required restrictions specified
in such plans and programs.

     (e) EQUITY GRANTS.

         (i) Existing Options. Executive holds on the Effective Date options for
     zero shares of common stock of the Company (the "Existing Options"). The
     Existing Options are subject to the terms and conditions of the Employment
     Agreement and shall hereafter continue to be subject to and controlled by
     the terms and conditions of the Employment Agreement.

         (ii) Initial Options. Executive shall, on the Effective Date, be
     granted stock options for sixty five hundred (6500) shares of the common
     stock of the Company (the "Initial Options") pursuant to an option
     agreement The exercise price of the Initial Options will be $ 180 per
     share. The Initial Options are subject to the terms and conditions of the
     "Molina Healthcare, Inc. Amended and Restated Stock Incentive Plan" (the
     "Restated Option Plan").

         (iii) Future Options. Executive shall be eligible, at the sole
     discretion of the Board, for additional annual stock option grants (the
     "Future Options") pursuant to one or more additional option agreements. Any
     Future Options will be granted under and subject to the terms and
     conditions of a stock option plan of the Company as then in effect (as of
     the date of any grant, an "Effective Option Plan"). The terms and
     conditions of such Future Options are intended to be such that Executive
     shall receive a compensation package commensurate with executives
     performing the same functions as Executives for businesses similar to the
     Company.

     (f) OTHER BENEFITS. In addition to benefits specifically provided herein,
during the Period of Employment, Executive shall be entitled to participate, on
the same terms and at the same level as other executives, in all fringe benefit
plans and perquisites provided by Company to its executives.

                                        3
JMM Employment Agreement   2002

<PAGE>

The employee benefits described in Sections 4(a) through (f) inclusive are
referred to as "Executive Benefits."

5.   DEATH OR DISABILITY

     (a)  PERMANENTLY DISABLED AND PERMANENT DISABILITY. The terms "Permanently
Disabled" and "Permanent Disability" shall mean Executive's inability, because
of physical or mental illness or injury, to perform the essential functions of
his customary duties pursuant to this Agreement, with or without reasonable
accommodation, and the continuation of such disabled condition for a period of
twelve (12) months.

     (b)  TERMINATION DUE TO DEATH OR DISABILITY. If Executive dies or becomes
Permanently Disabled during the Period of Employment, the Period of Employment
and Executive's employment shall automatically cease and terminate as of the
date of Executive's death or the date of Permanent Disability as determined by
the Board (which date shall be referred to as the "Disability Date"), as the
case may be. In the event of the termination of the Period of Employment and
Executive's employment hereunder due to Executive's death or Permanent
Disability, Executive or his estate shall be entitled to receive:

          (i)  Within five (5) business days, a lump sum cash payment equal to
     the sum of (x) any accrued but unpaid Base Salary and PTO as of the
     Termination Date hereunder and (y) any unpaid annual incentive compensation
     in respect of the most recently completed fiscal year preceding the
     Termination Date (the "Unpaid Annual Bonus"); and

          (ii) Within thirty (30) days, such employee benefits described in
     Sections 4(a) and 4(c) through 4(f) inclusive, if any, as to which
     Executive may be entitled as of the Termination Date under the employee
     benefit plans and arrangements of the Company ((i) and (ii) collectively,
     the "Accrued Obligations").

6.   TERMINATION BY THE COMPANY

     (a)  TERMINATION FOR CAUSE. The Company may terminate for Cause (as defined
below) at any time the Period of Employment and Executive's employment hereunder
by providing to Executive written notice of such termination ("Notice of
Termination for Cause"). The term "Cause" shall mean a termination of service
based upon a finding by the Company, acting in good faith and based on its
reasonable belief at the time, that Executive:

          (i) has engaged in unlawful acts involving moral turpitude or gross
     negligence with respect to the Company;

          (ii) has consistently and willfully failed to perform his duties or
     has intentionally breached any material provision of any agreement with the
     Company or an affiliated entity; provided, however, that such failure or
     breach shall not constitute Cause unless it is (A) not reasonably curable
     or (B) if reasonably curable, is not cured by the Executive within thirty
     (30) days notice from the Company;

                                        4
JMM Employment Agreement 2002

<PAGE>

     If the Executive's employment is terminated for Cause, the termination
shall take effect on the Termination Date (as defined below). In the event of
termination of the Period of Employment and Executive's employment hereunder due
to a termination by the Company for Cause, Executive shall be entitled to
receive the Accrued Obligations. All of the Accrued Obligations shall be paid on
the Termination Date except those benefits described in Sections 4(a) and 4(c)
through (f) inclusive, which shall be paid within thirty (30) days of the
Termination Date.

     If the Company attempts to terminate Executive's employment pursuant to
this Section 6(a) and it is ultimately determined that the Company lacked Cause,
the provisions of Section 6(b) ("Termination by the Company-Termination Without
Cause") shall apply as if the Company had provided Executive with Notice of
Termination Without Cause (as defined below) on the date the Company actually
provided Executive with Notice of Termination for Cause.

     (b)  TERMINATION WITHOUT CAUSE. The Company may, without cause or reason,
terminate at any time the Period of Employment and Executive's employment
hereunder by providing Executive written notice of such termination ("Notice of
Termination Without Cause"). A Non-Extension Notice by the Company shall be
considered a termination without Cause. If Executive's employment is terminated
without Cause, the termination shall take effect on the Termination Date. In the
event of the termination of Executive's employment hereunder due to a
termination by the Company without Cause (other than due to Executive's death or
Permanent Disability):

          (i)  Executive shall be entitled to receive: (1) an amount equal to
     100% of the sum of (x) Executive's Base Salary then in effect as of the
     Termination Date and (y) the Target Bonus for the fiscal year in which
     Executive's employment is terminated (the "Severance Payment"); (2) a pro
     rata portion of the Target Bonus for the fiscal year in which Executive's
     employment is terminated, based on the number of entire months of such
     fiscal year that have elapsed through the date of Executive's termination
     of employment as a fraction of twelve (12) (the "Pro Rata Bonus"); (3) the
     Accrued Obligations; (4) the entirety of Executive's contributions and the
     Company's contributions to Executive's 401(k) plan account as if Executive
     were fully vested as of the Termination Date, and (5) all other benefits
     under the welfare benefit and retirement plans contemplated by Sections
     4(a) and 4(d) (the "Selected Benefits") until the earlier of (A)
     Executive's receipt of benefits substantially similar in scope and nature
     from another employer or (B) one year and one-half year after the
     Termination Date.

          (ii) Executive shall be entitled to one hundred percent vesting of all
     of the options (including, without limitation, Existing Options, Initial
     Options, and Future Options) to purchase common stock of the Company
     ("Common Stock") held by Executive as of the Termination Date (the
     "Options") and/or right to the difference in cash between the fair market
     value and the exercise price of each vested but unexercised option.

                                        5
JMM Employment Agreement 2002

<PAGE>

          (iii) Company shall, upon the written request of Executive (the
     "Executive Put Option") be required to repurchase all shares of Common
     Stock acquired by Executive pursuant to the exercise of stock options
     granted to and/or held by Executive as of the Termination Date (the
     "Executive Shares"). Executive may not exercise the Executive Put Option
     with respect to Executive Shares within the six-month period following the
     date Executive acquired such Executive Shares, and the Executive Put Option
     may not be exercised at any time after the Company becomes publicly traded.
     The repurchase price for each Executive Share shall be equal to the fair
     market value of a share of Common Stock ("Fair Market Value"), which Fair
     Market Value:

               (A) shall be determined as of the date of the exercise of
          Executive Put Option by an independent appraiser chosen by the Company
          and Executive as follows: the Company shall identify three appraisers
          independent of the Company, and Executive shall select one from the
          three identified; and

               (B) shall be determined without any minority, illiquidity or
          other discount.

          (iv) Amounts payable under this Section 6(b) shall be payable as
     follows:

               (A) amounts payable under clause (i) shall be, or shall commence
          to be, paid within 30 days following the Termination Date either in a
          single lump sum or in regular installments as a continuation of
          Executive's salary according to the Company's customary payroll
          practices, as determined by the Executive in his sole discretion;
          provided however that any amounts representing accrued but unpaid
          Executive Base Salary, PTO an Unpaid Annual Bonus shall be paid on the
          Termination Date.

               (B) amounts payable under clause (iii) that are attributable to
          the exercise of Existing Options and/or Initial Options shall be paid
          by the Company in accordance with the terms and conditions of the
          Option Plan. Amounts payable under clause (iii) that are attributable
          to the exercise of Future Options shall be paid by the Company in
          three annual lump sum installments as follows: (1) within 30 days
          after the Termination Date, one-third of the payout; (2) on the first
          anniversary of the Termination Date, one-third of the payout, with
          interest on the previously unpaid portion of the payout accrued from
          the Termination Date at the applicable federal rate; and (3) on the
          second anniversary of the Termination Date, the remaining one-third of
          the payout, with interest on such previously unpaid portion of the
          payout accrued from the first anniversary of the Termination Date at
          the applicable federal rate.

     Executive shall have no duty to mitigate damages and none of the payments
provided in this Section 6(b) shall be reduced by any amounts earned or received
by Executive from a third party at any time.

                                        6
JMM Employment Agreement 2002

<PAGE>

7.   TERMINATION BY EMPLOYEE

     (a)  TERMINATION WITHOUT GOOD REASON. Executive shall have the right to
terminate the Period of Employment and Executive's employment hereunder at any
time without Good Reason (as defined below) upon fifteen (15) days prior written
notice of such termination to the Company. A Non-Extension Notice by Executive
shall be considered a termination without Good Reason. Any such termination by
Executive without Good Reason shall be treated for all purposes of this
Agreement as a termination by the Company for Cause and the provisions of
Section 6(a) shall apply, provided, however, that notwithstanding the foregoing,
if Executive terminates the Period of Employment without Good Reason, Executive
shall be allowed to exercise the Executive Put Option with respect to Executive
Shares received pursuant to the exercise of Existing Options, subject to the
terms and conditions generally applicable with respect to the Executive Put
Option.

     (b)  TERMINATION WITH GOOD REASON. Executive may terminate the Period of
Employment and resign from employment hereunder for "Good Reason." "Good Reason"
shall mean (with or without regard to whether a Change in Control Event has
occurred), without obtaining Executive's prior written consent thereto:

          (i)   a material and adverse change in Executive's position, duties,
     responsibilities, Reporting Relationship or status with the Company,

          (ii)  a change in Executive's office location to a point more than
     fifty (50) miles from Executive's current office,

          (iii) the taking of any action by the Company to: (A) eliminate
     benefit plans applicable to Executive without providing substitutes which
     provide a substantially similar aggregate value of benefits, (B) materially
     reduce Executive's benefits thereunder or (C) substantially diminish the
     aggregate value to Executive of incentive awards or other fringe benefits,
     provided, however, that it shall not constitute Good Reason for the Company
     to, as part of an overall cost-reduction program, take any action described
     in (A) - (C) so long as such action is taken with respect to all senior
     executives and Executive is not disproportionately affected thereby,

          (iv)  any reduction in the Base Salary, provided, however, that it
     shall not constitute Good Reason for the Company to, as part of an overall
     cost-reduction program, reduce Executive's Base Salary so long as the base
     salaries of all other senior executives are simultaneously reduced by not
     less than the same percentage, or

          (v)   any breach of this Agreement by the Company or any successor
     thereto, including without limitation any failure by the Company to obtain
     the consent of any Successor Entity (as defined below) to the provisions
     contained in Section 9; provided, however, that none of the events
     described in clause (v) of this Section 7(b) shall constitute Good Reason
     unless Executive shall have notified the Company in writing describing the
     events which constitute Good Reason and then only if the Company shall have
     failed to cure such event within thirty (30) days after the Company's
     receipt of such written notice.

                                        7
JMM Employment Agreement 2002

<PAGE>

Any such termination by Executive for Good Reason shall be treated for all
purposes of this Agreement as a termination by the Company without Cause and the
provisions of Section 6(b) shall apply; provided, however, that if Executive
attempts to resign for Good Reason pursuant to this Section 7(b) and it is
ultimately determined that Good Reason did not exist, Executive shall be deemed
to have resigned from employment without Good Reason and the provisions of
Section 7(a) and, by reference therein, the provisions of Section 6(a), shall
apply.

8.   TERMINATION DATE

     The term "Termination Date" shall mean (i) if Executive's employment is
terminated by the Company for Cause, or by Executive for Good Reason, the
effective date (pursuant to Section 25 ("Notices")) of written notice of such
termination to Executive or to the Company, as the case may be; (ii) if
Executive's employment is terminated by the Company other than for Cause or
Disability, the date on which the Company notifies Executive of such
termination; or (iii) if Executive's employment is terminated by reason of Death
or Disability, the Disability Date.

9.   CHANGE IN CONTROL

     (a)  Notwithstanding anything to the contrary in this Agreement, if a
Change in Control Event (as defined below) of the Company occurs during the term
of this Agreement, and if within two years following such Change in Control
Event either (1) the Company terminates Executive's employment without Cause or
(2) Executive terminates his employment for Good Reason:

          (i)   the Company shall pay to Executive an amount equal to the
     sum of (w) two times the Severance Payment, (x) the Pro Rata Bonus, (y) the
     Accrued Obligations and (z) the entirety of Executive's contributions and
     the Company's contributions to Executive's 401(k) plan account as if
     Executive were fully vested as of the Termination Date, such amount to be,
     or to commence to be, paid on the Termination Date either in a single lump
     sum or in regular installments as a continuation of Executive's salary
     according to the Company's customary payroll practices, as determined by
     the Executive in his sole discretion at the time of termination. This
     payment shall be in lieu of the payment otherwise payable under clause (i)
     of Section 6(b).

          (ii)  the Company shall continue to provide the Selected Benefits
     until the earlier of (x) Executive's receipt of benefits substantially
     similar in scope and nature from another employer or (y) three years after
     the Termination Date.

          (iii) and, regardless of whether any of the Options have been assumed
     by any Successor Entity, the provisions of clauses (ii) and (iii) of
     Section 6(b) will apply.

          (iv)  upon a change in control all unassumed and unvested options
     shall vest immediately.

                                        8
JMM Employment Agreement 2002

<PAGE>

     (b)  A "Change in Control Event" shall mean any of the following:

          (i)   Approval by the Board and by shareholders of the Company (or, if
no shareholder approval is required, by the Board alone) of the dissolution or
liquidation of the Company, other than in the context of a transaction that does
not constitute a Change in Control Event under clause (ii) below;

          (ii)  Consummation of a merger, consolidation, or other
reorganization, with or into, or the sale of all or substantially all of the
Company's business and/or assets as an entirety to, one or more entities that
are not Subsidiaries or other affiliates of the Company (a "Business
Combination"), unless (1) as a result of the Business Combination, more than
fifty percent (50%) of the outstanding voting power generally in the election of
directors of the surviving or resulting entity or a parent thereof (the
"Successor Entity") immediately after the reorganization is, or will be, owned,
directly or indirectly, by holders of the Company's voting securities
immediately before the Business Combination; and (2) no "person" (as such term
is used in Sections 13(d) and 14(d) of the Exchange Act), excluding the
Successor Entity or an Excluded Person, beneficially owns, directly or
indirectly, more than fifty percent (50%) of the outstanding shares or the
combined voting power of the outstanding voting securities of the Successor
Entity, after giving effect to the Business Combination, except to the extent
that such ownership existed prior to the Business Combination; or

          (iii) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) other than an Excluded Person: (a) becomes the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing more than fifty percent (50%) of the
combined voting power of the Company's then outstanding securities entitled to
then vote generally in the election of directors (the "Voting Power") of the
Company (a "Majority Holder"), other than as a result of (1) an acquisition
directly from the Company, (2) an acquisition by the Company, or (3) an
acquisition by an entity pursuant to a transaction which is expressly excluded
under clause (ii) above (an "Excluded Transaction"); or (b) provided that the
beneficial owner of a majority of the Voting Power as of the Effective Date is
no longer a Majority Holder, becomes the beneficial owner (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing more than thirty percent (30%) of the Voting Power, other
than as a result of an Excluded Transaction.

          (iv)  For the purposes of this Section 9(c):

               (A)  "Exchange Act" shall mean the Securities Exchange Act of
          1934, as amended from time to time.

               (B)  "Excluded Person" shall mean (a) any person described in and
          satisfying the conditions of Rule 13d-l(b)(l) under the Exchange Act,
          (b) the Company, (c) an employee benefit plan (or related trust)
          sponsored or maintained by the Company or the Successor Entity, or (d)
          any person who is the beneficial owner (as defined in Rule 13d-3 under
          the Exchange Act) of more than [25%] of the Common Stock on the
          Effective Date (or an affiliate, successor, heir, descendant, or
          related party of or to such person).

                                        9
JMM Employment Agreement 2002

<PAGE>

               (C)  "Subsidiary" shall mean any corporation or other entity a
          majority of whose outstanding voting stock or voting power is
          beneficially owned, directly or indirectly, by the Company.

     (c)  Executive shall have no duty to mitigate damages and none of the
payments provided in this Section 9 shall be reduced by any amounts earned or
received by Executive from a third party at any time. Notwithstanding anything
to the contrary in this Section 9, if, in connection with a Change in Control
Event, Executive voluntarily enters a new written employment agreement with the
Company or the Successor Entity, Executive may no longer rely upon the
provisions of this Section 9.

10.  CONFIDENTIALITY

     Executive will not at any time (whether during or after his employment with
the Company), unless compelled by lawful process, disclose or use for his own
benefit or purposes or the benefit or purposes of any other person, firm,
partnership, joint venture, association, corporation or other business
organization, entity or enterprise other than the Company and any of its
subsidiaries or affiliates, any trade secrets, or other confidential data or
information relating to customers, development programs, costs, marketing,
trading, investment, sales activities, promotion, credit and financial data,
financing methods, or plans of the Company or of any subsidiary or affiliate of
the Company; provided that the foregoing shall not apply to information which is
not unique to the Company or which is generally known to the industry or the
public other than as a result of Executive's breach of this covenant. Executive
agrees that upon termination of his employment with the Company for any reason,
he will return to the Company immediately all memoranda, books, papers, plans,
information, letters and other data, and all copies thereof or therefrom, in any
way relating to the business of the Company and its affiliates, except that he
may retain personal notes, notebooks and diaries that do not contain
confidential information of the type described in the preceding sentence.
Executive further agrees that he will not retain or use for his account at any
time any trade names, trademark or other proprietary business designation used
or owned in connection with the business of the Company or its affiliates.

11.  NON-SOLICITATION AND NON-DISPARAGEMENT

     During the Period of Employment and for a period of eighteen (18) months
thereafter, Executive will not, directly or indirectly: (a) solicit or attempt
to solicit any employee of the Company to terminate his or her relationship with
the Company in order to become an employee, consultant or independent contractor
to or for any other person or business entity; (b) solicit customers, suppliers
or clients of the Company to reduce or discontinue their business with the
Company or to engage in business with any competing entity; (c) disparage the
Company, its business, or its reputation; or (d) otherwise disrupt or interfere
with business relationships (whether formed before or after the date of this
Agreement) between the Company or any of its affiliates and customers,
suppliers, partners, members or investors of the Company or its affiliates.

                                       10
JMM Employment Agreement 2002

<PAGE>

12.  RELEASE REQUIRED FOR SEVERANCE PAYMENTS

     Notwithstanding anything to the contrary in this Agreement, as a condition
precedent to the receipt of any payment under Section 6, Section 7, or Section 9
of this Agreement pursuant to Executive's termination of employment with the
Company, Executive shall be required to execute a general waiver and release
agreement, in form drafted by and satisfactory to the Company, providing for the
complete waiver, release, and discharge of all known and unknown present and
future claims against the Company.

13.  SECTION 280G

     (a)  SHAREHOLDER APPROVAL REQUIRED.

     Notwithstanding anything to the contrary in this Agreement, Section 13 of
this Agreement shall not become effective in any part unless and until it is
fully disclosed to and approved by a vote of the persons who own more than
seventy five percent (75%) of the voting power of all outstanding capital stock
of the Company.

     (b)  GROSS-UP.

          (i)   Gross-Up Payment. If, notwithstanding clause (a) above, it is
determined (pursuant to Section 13(b)(ii)) or finally determined (as defined in
Section 13(b)(iii)) that any payment, distribution, transfer, or benefit by the
Company or a direct or indirect subsidiary or affiliate of the Company, to or
for the benefit of Executive or Executive's dependents, heirs or beneficiaries
(whether such payment, distribution, transfer, benefit or other event occurs
pursuant to the terms of this Agreement or otherwise, but determined without
regard to any additional payments required under this Section 13(b)) (each a
"Payment" and collectively the "Payments") is subject to the excise tax imposed
by Section 4999 of the Code, and any successor provision or any comparable
provision of state or local income tax law (collectively, "Section 4999"), or
any interest, penalty or addition to tax is incurred by Executive with respect
to such excise tax (such excise tax, together with any such interest, penalty,
and addition to tax, hereinafter collectively referred to as the "Excise Tax"),
then, within ten (10) days after such determination or final determination, as
the case may be, the Company shall pay to Executive (or to the applicable taxing
authority on Executive's behalf) an additional cash payment (hereinafter
referred to as the "Gross-Up Payment") equal to an amount such that after
payment by Executive of all taxes, interest, penalties, additions to tax and
costs imposed or incurred with respect to the Gross-Up Payment (including,
without limitation, any income and excise taxes imposed upon the Gross-Up
Payment), Executive retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon such Payment or Payments. This provision is intended to
put Executive in the same position as Executive would have been had no Excise
Tax been imposed upon or incurred as a result of any Payment.

                                       11
JMM Employment Agreement 2002

<PAGE>

     (ii)      Determination of Gross-Up.

               (A)  Except as provided in Section 13(b)(iii), the determination
     that a Payment is subject to an Excise Tax shall be made in writing by the
     principal certified public accounting firm then retained by the Company to
     audit its annual financial statements (the "Accounting Firm"). Such
     determination shall include the amount of the Gross-Up Payment and detailed
     computations thereof, including any assumptions used in such computations.
     Any determination by the Accounting Firm will be binding on the Company and
     Executive.

               (B)  For purposes of determining the amount of the Gross-Up
     Payment, Executive shall be deemed to pay Federal income taxes at the
     highest marginal rate of Federal income taxation in the calendar year in
     which the Gross-Up Payment is to be made. Such highest marginal rate shall
     take into account the loss of itemized deductions by Executive and shall
     also include Executive's share of the hospital insurance portion of FICA
     and state and local income taxes at the highest marginal rate of taxation
     in the state and locality of Executive's residence on the date of his or
     her Qualifying Termination Event, net of the maximum reduction in Federal
     income taxes that could be obtained from the deduction of such state and
     local taxes.

     (iii)     Notification.

               (A) Executive shall notify the Company in writing of any claim
          by the Internal Revenue Service (or any successor thereof) or any
          state or local taxing authority (individually or collectively, the
          "Taxing Authority") that, if successful, would require the payment by
          the Company of a Gross-Up Payment. Such notification shall be given as
          soon as practicable but no later than thirty (30) days after Executive
          receives written notice of such claim and shall apprise the Company of
          the nature of such claim and the date on which such claim is requested
          to be paid; provided, however, that failure by Executive to give such
          notice within such thirty (30) day period shall not result in a waiver
          or forfeiture of any of Executive's rights under this Section 13(b)
          except to the extent of actual damages suffered by the Company as a
          result of such failure. Executive shall not pay such claim prior to
          the expiration of the fifteen (15) day period following the date on
          which Executive gives such notice to the Company (or such shorter
          period ending on the date that any payment of taxes, interest,
          penalties or additions to tax with respect to such claim is due). If
          the Company notifies Executive in writing prior to the expiration of
          such fifteen (15) day period (regardless of whether such claim was
          earlier paid as contemplated by the preceding parenthetical) that it
          desires to contest such claim, Executive shall:

                    (1)  give the Company any information reasonably
                    requested by the Company relating to such claim;

                                       12
JMM Employment Agreement 2002

<PAGE>

                    (2)  take such action in connection with contesting such
                    claim as the Company shall reasonably request in writing
                    from time to time, including, without limitation, accepting
                    legal representation with respect to such claim by an
                    attorney selected by the Company;

                    (3)  cooperate with the Company in good faith in order
                    effectively to contest such claim; and

                    (4)  permit the Company to participate in any proceedings
                    relating to such claim;

          provided, however, that the Company shall bear and pay directly all
          attorneys fees, costs and expenses (including additional interest,
          penalties and additions to tax) incurred in connection with such
          contest and shall indemnify and hold Executive harmless, on an
          after-tax basis, for all taxes (including, without limitation, income
          and excise taxes), interest, penalties and additions to tax imposed in
          relation to such claim and in relation to the payment of such costs
          and expenses or indemnification.

               (B)  Without limitation on the foregoing provisions of this
          Section 13(b)(iii), and to the extent its actions do not unreasonably
          interfere with or prejudice Executive's disputes with the Taxing
          Authority as to other issues, the Company shall control all
          proceedings taken in connection with such contest and, in its or their
          reasonable discretion, may pursue or forego any and all administrative
          appeals, proceedings, hearings and conferences with the Taxing
          Authority in respect of such claim and may, at its or in their sole
          option, either direct Executive to pay the tax, interest or penalties
          claimed and sue for a refund or contest the claim in any permissible
          manner, and Executive agrees to prosecute such contest to a
          determination before any administrative tribunal, in a court of
          initial jurisdiction and in one or more appellate courts, as the
          Company shall determine; provided, however, that if the Company
          directs Executive to pay such claim and sue for a refund, the Company
          shall advance an amount equal to such payment to Executive, on an
          interest-free basis, and shall indemnify and hold Executive harmless,
          on an after-tax basis, from all taxes (including, without limitation,
          income and excise taxes), interest, penalties and additions to tax
          imposed with respect to such advance or with respect to any imputed
          income with respect to such advance, as any such amounts are incurred;
          and, further, provided, that any extension of the statute of
          limitations relating to payment of taxes, interest, penalties or
          additions to tax for the taxable year of Executive with respect to
          which such contested amount is claimed to be due is limited solely to
          such contested amount; and, provided, further, that any settlement of
          any claim shall be reasonably acceptable to Executive, and the
          Company's control of the contest shall be limited to issues with
          respect to which a Gross-Up Payment would be payable hereunder, and
          Executive shall be entitled to settle or contest, as the case may be,
          any other issue.

                                       13
JMM Employment Agreement 2002

<PAGE>

               (C)  If, after receipt by Executive of an amount advanced by the
          Company pursuant to Section 13(b)(iii)(A), Executive receives any
          refund with respect to such claim, Executive shall (subject to the
          Company's complying with the requirements of this Section 13(b))
          promptly pay to the Company an amount equal to such refund (together
          with any interest paid or credited thereof after taxes applicable
          thereto), net of any taxes (including, without limitation, any income
          or excise taxes), interest, penalties or additions to tax and any
          other costs incurred by Executive in connection with such advance,
          after giving effect to such repayment. If, after the receipt by
          Executive of an amount advanced by the Company pursuant to Section
          13(b)(iii)(A), it is finally determined that Executive is not entitled
          to any refund with respect to such claim, then such advance shall be
          forgiven and shall not be required to be repaid and the amount of such
          advance shall be treated as a Gross-Up Payment and shall offset, to
          the extent thereof, the amount of any Gross-Up Payment otherwise
          required to be paid.

               (D)  For purposes of this Section 13(b), whether the Excise Tax
          is applicable to a Payment shall be deemed to be "finally determined"
          upon the earliest of: (1) the expiration of the fifteen (15) day
          period referred to in Section 13(b)(iii)(A) if the Company or
          Executive's Company has not notified Executive that it intends to
          contest the underlying claim, (2) the expiration of any period
          following which no right of appeal exists, (3) the date upon which a
          closing agreement or similar agreement with respect to the claim is
          executed by Executive and the Taxing Authority (which agreement may be
          executed only in compliance with this section), or (4) the receipt by
          Executive of notice from the Company that it no longer seeks to pursue
          a contest (which shall be deemed received if the Company does not,
          within fifteen (15) days following receipt of a written inquiry from
          Executive, affirmatively indicate in writing to Executive that the
          Company intends to continue to pursue such contest).

It is possible that no Gross-Up Payment will initially be made but that a
Gross-Up Payment should have been made, or that a Gross-Up Payment will
initially be made in an amount that is less than what should have been made
(either of such events is referred to as an "Underpayment"). It is also possible
that a Gross-Up Payment will initially be made in an amount that is greater than
what should have been made (an "Overpayment"). The determination of any
Underpayment or Overpayment shall be made by the Accounting Firm in accordance
with Section 13(b)(ii). In the event of an Underpayment, the amount of any such
Underpayment shall be paid to Executive as an additional Gross-Up Payment. In
the event of an Overpayment, any such Overpayment shall be treated for all
purposes as a loan to Executive with interest at the applicable Federal rate
provided for in Section 1274(d) of the Code. In such case, the amount of the
loan shall be subject to reduction to the extent necessary to put Executive in
the same after-tax position as if such Overpayment were never made. The amount
of any such reduction to the loan shall be determined by the Accounting Firm in
accordance with the principles set forth in Section 13(b)(ii). Executive shall
repay the amount of the loan (after reduction, if any) to the Company as soon as
administratively practicable after the Company notifies Executive of (x) the
Accounting Firm's determination that an Overpayment was made and (y) the amount
to be repaid.

                                       14
JMM Employment Agreement 2002

<PAGE>

14.  CONTRACT REIMBURSEMENT

     The Company shall reimburse Executive on a fully grossed-up, after-tax
basis or directly pay for all reasonable legal fees and costs attributed to the
development, reviews and modifications of this Agreement and associated legal
services. Such fees and costs shall not exceed two thousand five hundred dollars
($2,500). This Section 14 shall not be deemed to limit any of Executive's rights
under Section 23 ("Attorneys' Fees").

15.  ASSIGNMENT

     This Agreement is personal in its nature and neither of the parties hereto
shall, without the consent of the other, assign or transfer this Agreement or
any rights or obligations hereunder; provided, however, that, in the event of a
merger, consolidation, or transfer or sale of all or substantially all of the
assets of the Company with or to any other individual(s) or entity, this
Agreement shall, subject to the provisions hereof, be binding upon and inure to
the benefit of such successor and such successor shall discharge and perform all
the promises, covenants, duties, and obligations of the Company hereunder.

16.  GOVERNING LAW

     This Agreement and the legal relations hereby created between the parties
hereto shall be governed by and construed under and in accordance with the
internal laws of the State of California, without regard to conflicts of laws
principles thereof.

17.  ENTIRE AGREEMENT

     This Agreement embodies the entire agreement of the parties hereto
respecting the matters within its scope. This Agreement supersedes all prior
agreements of the parties hereto on the subject matter hereof. Any prior
negotiations, correspondence, agreements, proposals, or understandings relating
to the subject matter hereof shall be deemed to be merged into this Agreement
and to the extent inconsistent herewith, such negotiations, correspondence,
agreements, proposals, or understandings shall be deemed to be of no force or
effect. There are no representations, warranties, or agreements, whether express
or implied, or oral or written, with respect to the subject matter hereof,
except as set forth herein.

18.  MODIFICATIONS

     This Agreement shall not be modified by any oral agreement, either express
or implied, and all modifications hereof shall be in writing and signed by the
parties hereto.

19.  WAIVER

     Failure to insist upon strict compliance with any of the terms, covenants,
or conditions hereof shall not be deemed a waiver of such term, covenant, or
condition, nor shall any waiver or relinquishment of, or failure to insist upon
strict compliance with, any right or power hereunder at any one or more times be
deemed a waiver or relinquishment of such right or power at any other time or
times.

                                       15
JMM Employment Agreement 2002

<PAGE>

20.  NUMBER AND GENDER

     Where the context requires, the singular shall include the plural, the
plural shall include the singular, and any gender shall include all other
genders.

21.  SECTION HEADINGS

     The section headings in this Agreement are for the purpose of convenience
only and shall not limit or otherwise affect any of the terms hereof.

22.  ARBITRATION

     Any controversy arising out of or relating to Executive's employment, this
Agreement, its enforcement or interpretation, or because of an alleged breach,
default, or misrepresentation in connection with any of its provisions, shall be
submitted to arbitration in Los Angeles County, California, before a sole
arbitrator who is either (a) a member of the National Academy of Arbitrators
located in the State of California or (b) a retired California Superior Court or
Appellate Court judge, and shall be conducted in accordance with the provisions
of California Civil Procedure Code Sections 1280 et seq. as the exclusive remedy
of such dispute; provided, however, that provisional injunctive relief may, but
need not, be sought in a court of law while arbitration proceedings are pending,
and any provisional injunctive relief granted by such court shall remain
effective until the matter is finally determined by the Arbitrator. Final
resolution of any dispute through arbitration may include any remedy or relief
which the Arbitrator deems just and equitable. Any award or relief granted by
the Arbitrator hereunder shall be final and binding on the parties hereto and
may be enforced by any court of competent jurisdiction. The parties acknowledge
and agree that they are hereby waiving any rights to trial by jury in any
action, proceeding or counterclaim brought by either of the parties against the
other in connection with any matter whatsoever arising out of or in any way
connected with this Agreement or Executive's employment.

23.  ATTORNEYS' FEES

     Executive and the Company agree that in any dispute resolution proceedings
arising out of this Agreement, the prevailing party shall be entitled to its or
his reasonable attorneys' fees and costs incurred by it or him in connection
with resolution of the dispute in addition to any other relief granted.

24.  SEVERABILITY

     In the event that a court of competent jurisdiction determines that any
portion of this Agreement is in violation of any statute or public policy, then
only the portions of this Agreement which violate such statute or public policy
shall be stricken, and all portions of this Agreement which do not violate any
statute or public policy shall continue in full force and effect. Furthermore,
any court order striking any portion of this Agreement shall modify the stricken
terms as narrowly as possible to give as much effect as possible to the
intentions of the parties under this Agreement.

                                       16
JMM Employment Agreement 2002

<PAGE>

25.  NOTICES

     All notices under this Agreement shall be in writing and shall be either
personally delivered or mailed postage prepaid, by certified mail, return
receipt requested:

     (a)  if to the Company:

          Molina Healthcare, Inc.
          Attention:
          One Golden Shore Drive
          Long Beach, California 90802

     (b)  if to Executive:

          Joseph M. Molina, MD
          829 Stratford Avenue
          South Pasadena, CA 91030

Notice shall be effective when personally delivered, or five (5) business days
after being so mailed, or when transmitted via facsimile with confirmation of
receipt.

26.  COUNTERPARTS

     This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same instrument.

27.  WITHHOLDING TAXES

     The Company may withhold from any amounts payable under this Agreement such
federal, state and local taxes as may be required to be withheld pursuant to any
applicable law or regulation.

                                       17
JMM Employment Agreement 2002

<PAGE>

     IN WITNESS WHEREOF, the Company and Executive have executed this Employment
Agreement as of the date first above written.

                                                      "COMPANY"
                                                      Molina Healthcare, Inc.

                                                      By: /s/ Janet Riedman
                                                          ---------------------

                                                      "EXECUTIVE"
                                                      Joseph M. Molina, MD

                                                      /s/
                                                      -------------------------
                                                      Joseph M. Molina, MD

                                       18
JMM Employment Agreement 2002

<PAGE>

                     ADDENDUM JOSEPH M MOLINA, MD AGREEMENT

                                    RECITALS

     Section 3 of the Agreement sets forth certain aspects of Executive's
compensation. The Company and Executive desire to specify additional terms and
conditions of Executive's compensation in this Addendum ("Addendum"), provided
that this Addendum, and each of the terms and conditions set forth herein, shall
be considered to be fully integrated into and a part of Section 3 of the
Agreement.

                                    AGREEMENT

     The parties agree as follows:
1.   Executive's Annual Bonus shall be equal to the lesser of:

     A.   the product of (1 %) and (the EBITDA of the Company and its
     subsidiaries as determined on a consolidated basis by the Company's regular
     annual audit for such year) ("EBITDA"); or

     B.   $500,000

provided that in no event shall such Annual Bonus be less than $0.

2.   Executive's Annual Bonus shall be paid in quarterly estimates, as follows:

     A.   Within a reasonable time after the Company's financial results for the
     first quarter of its fiscal year become available, Executive shall receive
     an amount equal to eighty percent (80%) of the lesser of: (i) the product
     of (1 %) and (EBITDA for such quarter) and (ii) $125,000 (the "First
     Quarter Payment"), provided that in no event shall such First Quarter
     Payment be less than $0.

     B.   Within a reasonable time after the Company's financial results for the
     second quarter of its fiscal year become available, Executive shall receive
     an amount equal to eighty percent (80%) of the lesser of: (i) the
     difference between (a) the product of (1 %) and (EBITDA for the first two
     quarters) and (b) the First Quarter Payment, and (ii) $125,000 (the "Second
     Quarter Payment"), provided that in no event shall such Second Quarter
     Payment be less than $0.

     C.   Within a reasonable time after the Company's financial results for the
     third quarter of its fiscal year become available, Executive shall receive
     an amount equal to the lesser of: (i) the difference between (a) the
     product of (1 %) and (EBITDA for the first three quarters) and (b) the sum
     of the First Quarter Payment and the Second Quarter Payment (the "Q2 Sum"),
     and (ii) the difference between $500,000 and the Q2 Sum (the "Third Quarter
     Payment"), provided that in no event shall such Third Quarter Payment be
     less than $0.

                                        1

<PAGE>

     D.   Prior to the end of the Company's fiscal year, Executive shall receive
     an amount equal to the lesser of: (i) the difference between (a) the
     product of (1 %) and (projected EBITDA, as estimated in good faith on a
     date reasonably close to the date of the Fourth Quarter Payment (as defined
     below) by the Compensation Committee of the Company's Board of Directors,
     for the Company's fiscal year) and (b) the sum of the First Quarter
     Payment, the Second Quarter Payment, and the Third Quarter Payment (the "Q3
     Sum"); and (ii) the difference between $500,000 and the Q3 Sum (the "Fourth
     Quarter Payment" and, together with the First Quarter Payment, the Second
     Quarter Payment, and the Third Quarter Payment, the "Estimation Payments"),
     provided that in no event shall such Fourth Quarter Payment be less than
     $0.

     E.   The difference between the Annual Bonus and the sum of the Estimation
     Payments shall be paid by the Company to Executive, or repaid by Executive
     to the Company, as the case may be, in cash within thirty (30) days of the
     date on which Executive receives notice (as provided in Section 25 of the
     Agreement) of the amount of the Annual Bonus.

 Executed and agreed to:

 "COMPANY"
 Molina Healthcare, Inc.

By: /s/ Janet Riedman
    -------------------------
    Name:
    Title: Chairman of Compensation

"EXECUTIVE"
Joseph M. Molina, MD

/s/
------------------------
Joseph M. Molina, MD

                                        2

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