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                                                                    EXHIBIT 10.5

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

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

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

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

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

   SECTION 4.01 TERM OF THE AGREEMENT.............................................................................9
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      (a)   General provisions....................................................................................9
      (b)   Initial Term.........................................................................................10
      (c)   Optional extension of Agreement......................................................................10
      (d)   Modifications upon extension or renewal of Agreement.................................................10
   SECTION 4.02 SCOPE OF WORK....................................................................................10
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   SECTION 4.03 AGREEMENT ELEMENTS...............................................................................10
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      (a)   Agreement documentation..............................................................................10
      (b)   Order of documents...................................................................................11
      (c)   Oral and written representations.....................................................................11
   SECTION 4.04 NOTICES..........................................................................................11
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   SECTION 4.05 FUNDING..........................................................................................12
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   SECTION 4.06 DELEGATION OF AUTHORITY..........................................................................12
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   SECTION 4.07 NO WAIVER OF SOVEREIGN IMMUNITY..................................................................12
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   SECTION 4.08 FORCE MAJEURE....................................................................................12
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   SECTION 4.09 HOLD HARMLESS....................................................................................12
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   SECTION 4.10 ASSIGNMENT.......................................................................................12
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   SECTION 4.11 EVIDENCE OF FINANCIAL SOLVENCY...................................................................13
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   SECTION 4.12 MINIMUM NET WORTH................................................................................13
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   SECTION 4.13 PERFORMANCE AND FIDELITY BONDS...................................................................13
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   SECTION 4.14 INSURANCE........................................................................................13
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   SECTION 4.15 REPROCUREMENT RIGHTS.............................................................................14
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<TABLE>
<S>                                                                                                             <C>
ARTICLE 5. CONTRACTOR PERSONNEL MANAGEMENT.......................................................................14

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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                            ARTICLE 1. INTRODUCTION

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

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

               ARTICLE 2. BACKGROUND, INDUCEMENTS AND OBJECTIVES

     SECTION 2.01 BACKGROUND.

     (a) Federal legislative authorization.

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

     (b) State enabling legislation.

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

     (c) State child health plan.

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

     (d) Participation of the private sector.

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

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

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

     SECTION 2.02 INDUCEMENTS.

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

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

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

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

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

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

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

     SECTION 2.03 MISSION OBJECTIVES.

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

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

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

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

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

     SECTION 2.04 DESIRED BENEFITS.

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

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

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

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

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

     SECTION 2.05 CONSTRUCTION OF AGREEMENT.

     (a) Scope of Article.

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

     (b) Severability.

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

                                  Page 3 of 77
<PAGE>   10

     (c) Survival of terms.

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

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

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

     (d) Headings.

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

     (e) Global drafting conventions.

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

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

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

     SECTION 2.06 TIME OF THE ESSENCE.

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

     SECTION 2.07 NO IMPLIED AUTHORITY.

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

         (1) make public policy;

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

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

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

                                  Page 4 of 77
<PAGE>   11

     SECTION 2.08 LEGAL AUTHORITY.

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

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

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

                            ARTICLE 3. DEFINITIONS.

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

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

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

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

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

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

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

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

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

                                  Page 5 of 77
<PAGE>   12

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                  Page 6 of 77
<PAGE>   13

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

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

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

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

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

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

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

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

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

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

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

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

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

     "EXPIRATION DATE" means April 30, 2003.

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

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

                                  Page 7 of 77
<PAGE>   14

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

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

     "IMPLEMENTATION DATE" means May 1, 2000.

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

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

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

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

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

     "PARTIES" means HHSC and CONTRACTOR, collectively.

     "PARTY" means either HHSC or CONTRACTOR, individually.

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

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

     "PUBLIC INFORMATION" means information that:

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

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

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

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

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

                                  Page 8 of 77
<PAGE>   15

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

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

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

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

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

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

     "TDI" means the Texas Department of Insurance.

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

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

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

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

                    ARTICLE 4. GENERAL TERMS AND CONDITIONS

     SECTION 4.01 TERM OF THE AGREEMENT.

     (a) General provisions.

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

                                  Page 9 of 77
<PAGE>   16

     (b) Initial Term.

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

     (c) Optional extension of Agreement.

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

     (d) Modifications upon extension or renewal of Agreement.

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

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

     SECTION 4.02 SCOPE OF WORK.

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

     SECTION 4.03 AGREEMENT ELEMENTS.

     (a) Agreement documentation.

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

                                 Page 10 of 77
<PAGE>   17

     (b) Order of documents.

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

         (1) The final executed Agreement;

         (2) CONTRACTOR's Proposal ; and

         (3) The RFP.

     (c) Oral and written representations.

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

     SECTION 4.04 NOTICES.

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

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

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

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

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

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

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

                                 Page 11 of 77
<PAGE>   18

                            Bellaire, Texas 77401

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

     SECTION 4.05 FUNDING.

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

     SECTION 4.06 DELEGATION OF AUTHORITY.

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

     SECTION 4.07 NO WAIVER OF SOVEREIGN IMMUNITY.

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

     SECTION 4.08 FORCE MAJEURE.

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

     SECTION 4.09 HOLD HARMLESS.

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

     SECTION 4.10 ASSIGNMENT.

                                 Page 12 of 77
<PAGE>   19

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

     SECTION 4.11 EVIDENCE OF FINANCIAL SOLVENCY.

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

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

     SECTION 4.12 MINIMUM NET WORTH.

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

     SECTION 4.13 PERFORMANCE AND FIDELITY BONDS.

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

     SECTION 4.14 INSURANCE.

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

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

                                 Page 13 of 77
<PAGE>   20

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

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

     SECTION 4.15 REPROCUREMENT RIGHTS.

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

                   ARTICLE 5. CONTRACTOR PERSONNEL MANAGEMENT

     SECTION 5.01 QUALIFICATIONS, RETENTION AND REPLACEMENT OF CONTRACTOR
     EMPLOYEES.

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

     SECTION 5.02 KEY CONTRACTOR PERSONNEL.

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

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

                                 Page 14 of 77
<PAGE>   21

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

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

     SECTION 5.03 MEDICAL DIRECTOR

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

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

     SECTION 5.04 RESPONSIBILITY FOR CONTRACTOR PERSONNEL.

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

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

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

     SECTION 5.05 COOPERATION WITH HHSC OR STATE ADMINISTRATIVE AGENCIES.

     (a) Cooperation with HHSC contractors.

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

     (b) Cooperation with state and federal administrative agencies.

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

                                 Page 15 of 77
<PAGE>   22

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

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

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

                    ARTICLE 6. GOVERNING LAW AND REGULATIONS

     SECTION 6.01 GOVERNING LAW AND VENUE.

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

     SECTION 6.02 LAW AND REGULATIONS GOVERNING ADMINISTRATION OF THE AGREEMENT.

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

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

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

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

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

     SECTION 6.03 CONTRACTOR RESPONSIBILITY FOR COMPLIANCE WITH LAWS AND
     REGULATIONS.

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

     SECTION 6.04 LAWS AND REGULATIONS GOVERNING PROCUREMENT OF THE SERVICES.

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

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

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

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

                                 Page 16 of 77
<PAGE>   23

         (4) Section 2155.144, Texas Government Code.

     SECTION 6.05 IMMIGRATION REFORM AND CONTROL ACT OF 1986.

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

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

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

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

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

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

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

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

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

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

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

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

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

     SECTION 6.07 ENVIRONMENTAL PROTECTION LAWS.

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

     (a) Pro-Children Act of 1994.

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

                                 Page 17 of 77
<PAGE>   24

     (b) National Environmental Policy Act of 1969.

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

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

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

     (d) State Clean Air Implementation Plan.

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

     (e) Safe Drinking Water Act of 1974.

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

             ARTICLE 7. SERVICE LEVELS AND PERFORMANCE MEASUREMENT.

     SECTION 7.01 PERFORMANCE MEASUREMENT.

     Satisfactory performance of this Agreement will be measured by:

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

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

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

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

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

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

     SECTION 7.02 MEASUREMENT AND MONITORING TOOLS.

                                 Page 18 of 77
<PAGE>   25

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

     SECTION 7.03 CONTINUOUS IMPROVEMENT AND BEST PRACTICES.

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

     SECTION 7.04 SYSTEMS DEVELOPMENT, MAINTENANCE AND OPERATION.

     (a) General responsibilities.

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

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

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

     (b) General management information system functions.

         (1) General data storage and handling requirements.

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

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

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

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

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

             (ii) Enrolled member information specified by HHSC; and

             (iii) Utilization data specified by HHSC.

                                 Page 19 of 77
<PAGE>   26

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

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

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

                    a. The date of a change;

                    b. The reason and authority for the change;

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

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

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

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

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

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

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

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

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

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

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

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

         (2) Data override capability.

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

                                 Page 20 of 77
<PAGE>   27

          (3) HIPAA compliance.

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

          (4) Data security and confidentiality.

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

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

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

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

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

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

          (5) Back-up.

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

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

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

          (6) Disaster recovery.

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

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

                                 Page 21 of 77
<PAGE>   28

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

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

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

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

     (c) System-wide functions.

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

         (1) Enrollment and Eligibility Subsystem.

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

         (B) The System implemented by CONTRACTOR must:

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

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

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

                   a. The reason for or type of disenrollment; and

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

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

                                 Page 22 of 77
<PAGE>   29

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

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

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

          (2) Provider Subsystem.

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

              (i) Services offered or provided;

              (ii) Payment methodology;

              (iii) License/credentialing information;

              (iv) Service capacity and facility linkages; and

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

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

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

                  a. The appropriate regulatory board
                  certification/eligibility;

                  b. Admission privileges;

                  c. Member linkage;

                  d. Capacity;

                  e. Facility linkages;

                  f. Emergency arrangements or contact; and

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

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

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

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

                                 Page 23 of 77
<PAGE>   30

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

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

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

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

              (ix) Capture provider complaints;

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

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

          (3) Claims/Services Data Subsystem.

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

              (i) Processing claims and tracking service utilization data;

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

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

          (B) Functions and features of this subsystem are:

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

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

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

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

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

                                 Page 24 of 77
<PAGE>   31

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

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

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

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

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

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

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

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

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

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

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

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

         (4) Financial Subsystem.

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

             (i)   Cost accounting;

             (ii)  Inventory;

             (iii) Fixed assets;

             (iv)  Payroll;

                                 Page 25 of 77
<PAGE>   32

              (v) General ledger;

              (vi) Accounts receivable and payable; and

              (vii) Financial statement presentation.

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

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

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

          (5) Utilization/Quality Improvement Subsystem.

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

              (i) Produce reports for analysis which focus on:

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

                   b. Detection of overutilization and underutilization of
                      services; and

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

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

              (iii) Support the quality assessment function;

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

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

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

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

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

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

                                 Page 26 of 77
<PAGE>   33

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

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

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

              (v) Supports focused quality of care studies;

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

              (vii) Monitors primary care provider referral patterns;

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

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

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

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

          (6) Report Subsystem.

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

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

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

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

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

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

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

              (iv) Generates alphabetic and numeric member listings;

                                 Page 27 of 77
<PAGE>   34

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

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

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

             (viii) Generates aged outstanding liability reports;

             (ix) Produces member ID Cards;

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

             (xi) Other appropriate functions specified by HHSC.

         (7) Data Interface Subsystem.

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

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

             (ii) The CHIP Administrative Services Contractor;

             (ii) The CHIP Quality Monitor Contractor; and

             (iii) Any other entity specified by HHSC.

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

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

                   a. Member enrollment data;

                   b. Primary care physician selection;

                   c. Enrollment/disenrollment status; and

                   d. Other relevant data identified by HHSC.

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

             (iii) Exchange data for the following functions:

                   a. Enrollment/disenrollment functions;

                   b. Premiums payable functions;

                   c. Provider capacity and availability functions;

                                 Page 28 of 77
<PAGE>   35

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

                    e. Quality monitoring functions; and

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

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

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

            ARTICLE 8. AMENDMENTS, MODIFICATIONS, AND CHANGE ORDERS

     SECTION 8.01 MODIFICATIONS.

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

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

     (b) Modifications resulting from imposition of remedies.

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

     (c) Modifications upon renewal or extension of Agreement

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

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

     SECTION 8.02 CHANGE ORDER PROCEDURES

                                 Page 29 of 77
<PAGE>   36

     (a) Expectations and understandings.

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

     (b) Change order approval procedure.

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

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

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

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

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

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

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

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

     (c) Written approval required.

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

     SECTION 8.03 REQUIRED COMPLIANCE WITH MODIFICATION PROCEDURES.

                                 Page 30 of 77
<PAGE>   37

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

                   ARTICLE 9. AUDIT AND FINANCIAL COMPLIANCE.

     SECTION 9.01 FINANCIAL RECORD RETENTION AND AUDIT.

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

     SECTION 9.02 OPERATION/PERFORMANCE AUDITS.

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

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

     SECTION 9.03 ACCESS TO RECORDS, BOOKS, AND DOCUMENTS.

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

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

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

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

                                 Page 31 of 77
<PAGE>   38

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

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

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

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

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

                  ARTICLE 10. TERMS AND CONDITIONS OF PAYMENT.

     SECTION 10.01 MONTHLY PREMIUM PAYMENTS.

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

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

     (c) CONTRACTOR further agrees that:

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

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

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

     SECTION 10.02 TIME AND MANNER OF PREMIUM PAYMENT.

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

                                 Page 32 of 77
<PAGE>   39

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

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

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

     SECTION 10.03 DELIVERY SUPPLEMENTAL PAYMENT (DSP).

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

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

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

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

     (a) Second year.

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

                                 Page 33 of 77
<PAGE>   40

     (b) Third year.

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

     SECTION 10.05 ADJUSTMENTS TO PREMIUM PAYMENTS.

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

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

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

     SECTION 10.06 EXPERIENCE REBATE.

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

                             GRADUATED REBATE METHOD

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

                                 Page 34 of 77
<PAGE>   41

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

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

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

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

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

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

     SECTION 10.07 RESTRICTION ON ASSIGNMENT OF FEES.

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

     SECTION 10.08 LIABILITY FOR TAXES.

                                  Page 35 of 77
<PAGE>   42

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

     SECTION 10.09 LIABILITY FOR EMPLOYMENT-RELATED CHARGES AND BENEFITS.

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

     SECTION 10.10 LIABILITY FOR OVERTIME COMPENSATION.

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

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

     SECTION 11.01 CHIP ELIGIBILITY.

     (a) Generally.

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

     (b) Continuous coverage for first twelve months.

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

     (c) Pregnant Members and infants.

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

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

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

                                 Page 36 of 77
<PAGE>   43

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

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

     (d) Span of Coverage.

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

     SECTION 11.02 ENROLLMENT.

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

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

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

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

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

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

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

                                  Page 37 of 77
<PAGE>   44

     There is no retroactive enrollment in CHIP.

     SECTION 11.03 RE-ENROLLMENT.

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

     SECTION 11.04 DISENROLLMENT DUE TO LOSS OF ELIGIBILITY.

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

          "Aging-out" when a child turns nineteen;

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

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

          Failure to meet monthly cost-sharing obligation;

          Death of a child;

          The child permanently moves out of the state; and

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

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

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

     SECTION 11.05 DISENROLLMENT BY CONTRACTOR.

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

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

                                 Page 38 of 77
<PAGE>   45

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

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

     SECTION 11.06 COST-SHARING.

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

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

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

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

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

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

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

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

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

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

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

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

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<PAGE>   46

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

                   ARTICLE 12. SCOPE OF CHIP COVERED SERVICES

     SECTION 12.01 BASIC REQUIRED COVERED SERVICES.

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

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

     SECTION 12.02 DRUG FORMULARIES.

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

     SECTION 12.03 VALUE-ADDED SERVICES.

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

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

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

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<PAGE>   47

     SECTION 12.04 DENTAL SERVICES.

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

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

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

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

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

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

     (a) Outreach and Informing

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

     (b) Enhanced Care Coordination

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

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<PAGE>   48

     (c) Community Referrals

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

     Early Childhood Intervention Program (512/424-6745)

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

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

     Local School District (Special Education)

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

     Texas Information and Referral Network

     Texas Commission for the Blind (TCB)

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

     SECTION 12.06 PRE-EXISTING CONDITIONS.

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

     SECTION 12.07 COURT-ORDERED COMMITMENTS.

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

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

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

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

     SECTION 12.08 EARLY CHILDHOOD INTERVENTION (ECI).

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<PAGE>   49

     (a) ECI Services.

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

     (b) Identification and Referral.

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

     (c) Intervention.

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

                          ARTICLE 13. MEMBER SERVICES

     SECTION 13.01 MEMBER EDUCATION.

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

         (a) How the HMO system operates;

         (b) How to obtain services, including:

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

               (2) Emergency services;

               (3) Behavioral health care services;

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

                                 Page 43 of 77
<PAGE>   50

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

             (6) Early Childhood Intervention (ECI) Services;

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

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

         (e) The value of screening and preventive care.

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

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

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

     SECTION 13.02 MEMBER MATERIALS.

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

     (a) Member Handbook.

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

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

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

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

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

         (2) Additional requirements.

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<PAGE>   51

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

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

     (b) Evidence of Coverage.

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

     (c) Provider Directory.

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

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

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

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

     (d) HHSC review of Member material.

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

     (e) Mailing of Member Material.

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

     SECTION 13.03 CHIP-SPECIFIC INTERNET WEBSITE

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<PAGE>   52

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

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

     SECTION 13.04 MEMBER TELEPHONE HOTLINE

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

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

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

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

     (4) Trained regarding cultural competency; and

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

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

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

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

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

     SECTION 13.05 NOTIFICATION OF PROVIDER TERMINATION.

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<PAGE>   53

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

     SECTION 13.06 MEMBER COMPLAINT AND APPEALS PROCESS.

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

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

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

     SECTION 13.07 MEMBER CULTURAL AND LINGUISTIC SERVICES.

     (a) Cultural Competency Plan.

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

     The Cultural Competency Plan must include the following:

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

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

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

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<PAGE>   54

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

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

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

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

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

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

     A competent interpreter is defined as someone who is:

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

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

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

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

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

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

                             ARTICLE 14. MARKETING.

     SECTION 14.01 AIM OF MARKETING.

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

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<PAGE>   55

     SECTION 14.02 MARKETING GUIDELINES.

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

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

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

     4. CONTRACTOR is prohibited from street marketing.

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

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

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

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

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

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

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

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

     SECTION 14.03 DISENROLLMENTS.

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<PAGE>   56

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

     SECTION 14.04 MARKETING SCHEDULE.

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

     SECTION 14.05 GENERAL PROVISIONS.

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

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

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

     SECTION 14.06 REGULATION.

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

                   ARTICLE 15. PROVIDER NETWORK REQUIREMENTS

     SECTION 15.01 PROVIDER SUBCONTRACTS.

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<PAGE>   57

     (a) Generally.

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

     (b) Subcontract terms.

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

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

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

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

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

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

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

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

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

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

     SECTION 15.02 PROVIDER ACCESSIBILITY.

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

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

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

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

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

     SECTION 15.03 PARTICULAR PROVIDERS.

     (a) Significant Traditional Providers.

     CONTRACTOR must seek participation in its provider network from:

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

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

     (b) Tribal clinics.

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

     (c) Rural providers.

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

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

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

     To contract with CONTRACTOR, rural health providers must:

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

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

     SECTION 15.04 GOOD-FAITH EFFORT

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

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

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

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

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

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

     SECTION 15.05 PROVIDER TAX IDENTIFICATION NUMBERS.

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

     SECTION 15.06 PROVIDER HANDBOOK.

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

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

     SECTION 15.07 CLAIMS SUBMISSION AND PAYMENT.

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

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                  ARTICLE 16. CONTINUOUS QUALITY IMPROVEMENT.

     SECTION 16.01 COMMITMENT TO QUALITY.

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

     SECTION 16.02 QUALITY IMPROVEMENT COMMITTEE.

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

     SECTION 16.03 QUALITY IMPROVEMENT PLAN (QIP).

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

                       ARTICLE 17. REPORTING REQUIREMENTS

     SECTION 17.01 GENERALLY.

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

     SECTION 17.02 FINANCIAL REPORTS.

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

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

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

         The Affiliate Report;

         CONTRACTOR'S  Annual Audited Financial Report;

         Form HCFA-1513;

         Section 1318 Financial Disclosure Report;

         TDI Examination Report on CONTRACTOR; and

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         CONTRACTOR'S IBNR Plan.

     SECTION 17.03 ENCOUNTER DATA SPECIFICATIONS REPORT.

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

     SECTION 17.04 UTILIZATION MANAGEMENT REPORTS.

     (a) HEDIS Reporting.

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

     (b) Physical Health

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

     (c) Behavioral Health

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

     SECTION 17.05 FOCUSED STUDIES REPORTS

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

     SECTION 17.06 ANNUAL QUALITY IMPROVEMENT PLAN (QIP) SUMMARY REPORT

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

     SECTION 17.07 HUB REPORTS

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

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     SECTION 17.08 FRAUDULENT PRACTICES REPORT

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

FRAUD AND ABUSE COMPLIANCE PLAN.

Model Compliance Plan

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

Requirements for the CONTRACTOR's compliance plan

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

Fraud and abuse training.

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

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

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     SECTION 17.09 PROVIDER NETWORK REPORTS

     (a) PCPs and Specialists Report

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

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

     (b) Provider Network Change Report

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

     (c) PCP Network and Capacity Report

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

     SECTION 17.10 THIRD PARTY RECOVERY (TPR) REPORTS

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

     SECTION 17.11 ALL CLAIMS SUMMARY REPORT

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

     SECTION 17.12 SUMMARY REPORT OF PROVIDER AND MEMBER COMPLAINTS

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

     SECTION 17.13 MONTHLY MEMBER HOTLINE STATUS REPORT

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

     SECTION 17.14 PROVIDER HOTLINE PERFORMANCE REPORT

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

     SECTION 17.15 AD HOC REPORTS.

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

           ARTICLE 18. DISCLOSURE AND CONFIDENTIALITY OF INFORMATION.

     SECTION 18.01 CONFIDENTIALITY.

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

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

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

     SECTION 18.02 REQUESTS FOR PUBLIC INFORMATION.

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

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

     SECTION 18.03 PUBLICITY.

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

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<PAGE>   66

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

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

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

     SECTION 18.04 MEMBER RECORDS.

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

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

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

     SECTION 18.05 ACCESSIBILITY AND AVAILABILITY OF MEDICAL RECORDS.

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

     SECTION 18.06 RECORDKEEPING.

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

                    ARTICLE 19. NON-PROVIDER SUBCONTRACTING

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     SECTION 19.01 WRITTEN SUBCONTRACTS.

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

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

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

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

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

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

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

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

     SECTION 19.04 TERMINATION OF NON-PROVIDER SUBCONTRACTS.

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

                                 Page 61 of 77
<PAGE>   68

     SECTION 19.05 FRAUD AND ABUSE INVESTIGATIONS.

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

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

                       ARTICLE 20. REMEDIES AND DISPUTES.

     SECTION 20.01 UNDERSTANDING AND EXPECTATIONS.

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

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

     SECTION 20.02 ADMINISTRATIVE REMEDIES.

     (a) CONTRACTOR responsibility for improvement.

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

     (b) Notification and interim response.

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

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

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

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

     (c) Notice and opportunity to cure.

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

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

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

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

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

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

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

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

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

     (d) Particular Events of Default.

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

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

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

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

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

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

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

     (e) Corrective Action Plan.

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

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

     (f) Additional remedies.

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

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

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

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

         (4) Suspend new enrollment.

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

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<PAGE>   71

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

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

         (5) Decline to renew this Agreement.

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

     (g) Informal review of administrative remedies.

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

     SECTION 20.03 LIQUIDATED DAMAGES.

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

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

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

     (a) Failure to provide contracted services or support.

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

         (1) Maximum damages.

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

         (2) CONTRACTOR responsibility for associated costs.

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

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<PAGE>   72

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

     SECTION 20.04 METHOD OF COLLECTION.

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

     SECTION 20.05 MODIFICATION OF AGREEMENT IN THE EVENT OF REMEDIES.

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

     SECTION 20.06 TERMINATION OF AGREEMENT.

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

     SECTION 20.07 TERMINATION BY MUTUAL AGREEMENT OF THE PARTIES.

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

     SECTION 20.08 TERMINATION FOR CAUSE.

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

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

     HHSC may terminate this Agreement if CONTRACTOR:

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

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

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

     (b) Judgment and execution.

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

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

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

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

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

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

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

     (d) Breach of confidentiality.

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

     (e) Failure to maintain adequate personnel or resources.

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

     (f) Termination for insolvency.

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

         (A) files for bankruptcy;

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

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

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

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

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

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

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

     (g) Termination for gifts and gratuities.

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

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

     SECTION 20.09 TERMINATION FOR NON-APPROPRIATION OF FUNDS.

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

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

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

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

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

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

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

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

     (a) Generally.

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

     (b) Notice of default and opportunity to cure.

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

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

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

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

     SECTION 20.12 NOTICE OF TERMINATION.

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

     SECTION 20.13 EXTENSION OF TERMINATION EFFECTIVE DATE.

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

     SECTION 20.14 INJUNCTIVE RELIEF.

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

     SECTION 20.15 PAYMENT AND OTHER PROVISIONS AT AGREEMENT TERMINATION.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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<PAGE>   77

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

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

     SECTION 20.16 DISPUTE RESOLUTION.

     (a) General agreement of the Parties.

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

     (b) Duty to negotiate in good faith.

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

     (c) Claims for breach of Agreement.

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

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

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

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

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

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

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<PAGE>   78

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

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

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

     SECTION 20.17 LIABILITY OF CONTRACTOR.

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

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

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

                   ARTICLE 21. ASSURANCES AND CERTIFICATIONS

     SECTION 21.01 LOBBYING.

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

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

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

     SECTION 21.02 DEBARMENT AND SUSPENSION.

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

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<PAGE>   79

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

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

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

     SECTION 21.03 CONFLICTS OF INTEREST.

     (a) Representation.

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

     (b) General duty regarding conflicts of interest.

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

     (c) Disclosure requirements.

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

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

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

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

                                 Page 73 of 77
<PAGE>   80

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

     SECTION 21.04 CERTIFICATION REGARDING GOOD FAITH EFFORT.

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

     SECTION 21.05 CHILD SUPPORT CERTIFICATION.

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

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

     SECTION 21.06 TEXAS CORPORATE FRANCHISE TAX CERTIFICATION.

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

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

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

     SECTION 21.08 OUTSTANDING DEBTS AND JUDGMENTS.

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

                                 Page 74 of 77
<PAGE>   81

     SECTION 21.09 UNAUTHORIZED ACTS.

     Each Party agrees to:

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

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

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

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

     SECTION 21.10 LEGAL ACTION.

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

                  ARTICLE 22. REPRESENTATIONS AND WARRANTIES.

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

     SECTION 22.01 AUTHORIZATION.

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

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

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

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

                                 Page 75 of 77
<PAGE>   82

     SECTION 22.02 ABILITY TO PERFORM.

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

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

     SECTION 22.03 WORKMANSHIP AND PERFORMANCE.

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

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

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

     SECTION 22.04 COMPLIANCE WITH LAWS.

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

     SECTION 22.05 COMPLIANCE WITH AGREEMENT.

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

     SECTION 22.06 CONTINGENT FEE ARRANGEMENTS.

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

     SECTION 22.07 PROSELYTIZING.

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

     SECTION 22.08 YEAR 2000 PERFORMANCE WARRANTY

                                 Page 76 of 77
<PAGE>   83

     (a) Terms of Warranty

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

     (b) Duration of warranty.

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

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

     (c) No limitation of rights or remedies.

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

     IN WITNESS HEREOF, HHSC AND CONTRACTOR HAVE EACH CAUSED THIS AGREEMENT TO
BE SIGNED AND DELIVERED BY ITS DULY AUTHORIZED REPRESENTATIVE.

      AMERICAID TEXAS, INC. d/b/a               TEXAS HEALTH AND HUMAN
             AMERIKIDS                           SERVICES COMMISSION

     ---------------------------------      -------------------------------
     JAMES D. DONOVAN, JR.                  DON A. GILBERT
     PRESIDENT AND CEO                      COMMISSIONER

                                 Page 77 of 77

<PAGE>   84

             AMENDMENT NO. 1 TO CHILDREN'S HEALTH INSURANCE PROGRAM
           AGREEMENT FOR THE PROVISION OF HEALTH CARE SERVICES BETWEEN
               THE TEXAS HEALTH AND HUMAN SERVICES COMMISSION AND
                     AMERICAID TEXAS, INC. d/b/a AMERIKIDS

                               ARTICLE 1. PURPOSE

      The Texas Health and Human Services Commission (HHSC) and AMERICAID
Texas, Inc. d/b/a AMERIKIDS (CONTRACTOR) amend the following sections of the
original Children's Health Insurance Program (CHIP) Agreement for the Provision
of Health Care Services (HHSC Contract No.___________).

      This amendment is executed pursuant to article 8 of the original contract.

      These amended terms become effective the day it is executed by HHSC
following execution by CONTRACTOR and terminate on April 30, 2003, unless
extended by mutual agreement of the parties or terminated sooner in accordance
with the provisions of the original contract, as such provisions are amended in
this Amendment No. 1

             ARTICLE 2. AMENDMENT TO THE OBLIGATIONS OF THE PARTIES

      The following numbered articles and sections are amended to read as
follows:

      SECTION 4.10 ASSIGNMENT.

      This Agreement was awarded to CONTRACTOR based on CONTRACTOR's
qualifications to perform the services described in the RFP. CONTRACTOR cannot
assign this Agreement without the written consent of TDI and HHSC. This
provision does not prevent CONTRACTOR from subcontracting duties and
responsibilities to qualified Subcontractors. If TDI and HHSC consent to an
assignment of this Agreement, a transition period of 90 days will run from the
date the assignment is approved by TDI and HHSC so that Members' services are
not interrupted. The assigning CONTRACTOR must also submit a transition plan, as
set out in section 20.18(d), subject to HHSC's approval.

      SECTION 7.02 MEASUREMENT AND MONITORING TOOLS.

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

      SECTION 7.04(b)(3) HIPAA COMPLIANCE.

      The System implemented by CONTRACTOR must comply with applicable
certificate of coverage and data specification and reporting requirements
promulgated pursuant to the federal Health Insurance

                                  Page 1 of 21

<PAGE>   85

Portability and Accountability Act of 1996, P.L. 104-91 (August 21, 1996), as
amended. CONTRACTOR will issue the Certificate of Creditable Coverage to
disenrolled Members upon request by the Member.

      SECTION 7.04(d) ADDITIONS OR CHANGES TO THE REQUIREMENTS SET OUT IN THIS
SECTION.

      The Parties will negotiate in good faith to reach agreement on when
requested additions or changes to the general management information system
functions, data reporting requirements, or required system-wide functions will
be made by CONTRACTOR at no additional charge to HHSC and when requested
additions or changes should be handled through the Change Order Process set out
in Article 8.

      SECTION 8.01(c) MODIFICATIONS UPON RENEWAL OR EXTENSION OF AGREEMENT

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

            (2) Modifications proposed by HHSC may apply to the services under
            this Agreement in any Agreement year beginning after the date of
            notice to CONTRACTOR. CONTRACTOR must respond to HHSC's proposed
            modification within 30 days of receipt. Upon receipt of CONTRACTOR's
            response to the proposed modifications, HHSC may enter into
            negotiations with CONTRACTOR to arrive at mutually agreeable
            Agreement amendments. In the event that HHSC determines that the
            Parties will be unable to reach agreement on mutually satisfactory
            Agreement modifications, then HHSC must provide written notice to
            CONTRACTOR of its intent not to extend the Agreement beyond the
            Agreement term then in effect, at least 90 days before the
            Expiration Date to provide for the approval and implementation of
            the transition plan as set out in section 20.18(d), inclusive of all
            extension options previously exercised.

      SECTION 10.04. PAYMENT PREMIUM RATES AFTER THE FIRST YEAR OF THE INITIAL
TERM

            HHSC will review the methodology submitted by CONTRACTOR for
            determining the premium rate for any period subsequent to the first
            year of the contract ("the Subsequent Period") and reexamine the
            premium rates and other payments paid to CONTRACTOR during the
            initial year of the Initial Term to determine the appropriate
            premium rate for the Subsequent Period of the Initial Term.
            CONTRACTOR's financial data on the CHIP book of business will be
            considered by HHSC in determining rates for the Subsequent Period.
            HHSC will notify the CONTRACTOR in writing of the proposed premium
            rates and other payments for the Subsequent Period no later than
            August 1, 2001, to be effective October 1, 2001. A failure to
            deliver the rates on or before such date shall be a material breach
            of this Agreement and be cause to terminate the contract. CONTRACTOR
            shall notify HHSC in writing of any disagreement (Notice of
            Disagreement) with the proposed premium rates and other payments for
            the Subsequent Period no later than 30 days after the date of the
            HHSC notice of proposed premium rates and other payments. A
            failure to give notice of disagreement within 30 days shall waive
            Contractor's rights under this Section 10.04. In the absence of a
            notice of disagreement, the proposed rates and other payments will
            become effective for services provided beginning October 1, 2001.

            If there is a disagreement, the parties shall exchange actuarial and
            financial data relevant to determination of the CHIP premium or
            other payments. During the 30 days after delivery of the Notice of
            Disagreement (the Negotiation Period) HHSC and CONTRACTOR shall
            negotiate in good faith to reach an agreement on the premium rates
            and other payments for the Subsequent Period. In the event that the
            parties are unable to reach an agreement during this period the
            parties shall appoint a neutral actuary to review the premium rates
            and other payments. In the

                                            Page 2 of 21

<PAGE>   86

            event the parties cannot mutually agree on a neutral actuary within
            15 days after the expiration of the Negotiation Period, each party
            shall appoint an actuary. These two actuaries shall appoint a third
            actuary. In the event that the parties can agree on a neutral
            actuary or the neutral actuary is appointed by the actuaries
            representing both parties, he or she shall evaluate the information
            given him or her by the parties and make a recommendation as to the
            appropriate premium rates and other payments for the Subsequent
            Period.

            HHSC may adopt such recommendations for application during the
            Subsequent Period retroactive to October 1, 2001, in which case, the
            CONTRACTOR shall be bound by the recommendations and shall not be
            authorized to terminate this Agreement pursuant to this provision.
            However, if HHSC does not adopt the recommendations within 30 days
            of receiving notice of the recommendations, the CONTRACTOR may give
            notice of termination of this Agreement, by giving written notice
            within 30 days of the receipt of HHSC's failure to adopt the
            recommendations. If the CONTRACTOR fails to terminate the Agreement
            within such 30-day period, HHSC's rates and other payments as
            specified in the last written proposal of HHSC to CONTRACTOR shall
            govern the premium rates and other payments for the Subsequent
            Period.

            Both parties shall equally share the costs of any neutral actuary
            retained by the parties under this provision.

      SECTION 10.05 ADJUSTMENTS TO PREMIUM PAYMENTS.

      As provided below, HHSC or the Administrative Services Contractor may
adjust or recoup premiums paid to CONTRACTOR in error, which may be either human
or machine error on the part of HHSC. HHSC may recoup or adjust premiums paid to
CONTRACTOR if a CHIP-eligible child is enrolled into CONTRACTOR in error and
CONTRACTOR provides no covered services to the child for the period of time for
which the monthly premium payment was made. If CONTRACTOR arranged for services
to be provided to the Member as a result of the error during the time period for
which the monthly premium payment was made, no recoupment will occur. Under no
circumstances may HHSC recoup premiums paid for a period greater than two (2)
months.

      HHSC or the Administrative Services Contractor may recoup monthly premium
payments paid to CONTRACTOR if an Member for whom the monthly premium payment is
made was deceased during any full month for which CONTRACTOR received a premium
payment for that Member.

      HHSC or the Administrative Services Contractor may adjust a monthly
premium or recoup a monthly premium payment made to CONTRACTOR for a Member if
the Member's eligibility status is changed, corrected, or retroactively adjusted
as a result of error. Adjustments to premium or recoupment may be appealed by
CONTRACTOR using the dispute resolution process outlined in section 20.19.

      SECTION 11.01(b) CONTINUOUS COVERAGE FOR FIRST TWELVE MONTHS.

      A child who is CHIP-eligible will, for at least the first year of CHIP,
have twelve months of continuous coverage. That coverage begins on the first day
of the month following the child's enrollment into a health plan unless
enrollment occurs after the cut-off date, in which case coverage begins on the
first day of the next month. However, a child who is determined to be eligible
for coverage on a date after the beginning of the coverage of at least one
sibling, will have less than twelve months of continuous coverage. In this
situation, coverage will begin on the first day of the month following the
child's enrollment into a health plan unless enrollment occurs after the cut-off
date, in which case coverage begins on the first day of the next month. Coverage
for the later-enrolled child will end on the same day as the final day of
coverage of the sibling who

                                  Page 3 of 21

<PAGE>   87

has been enrolled in CHIP for the longest continuous period of time. This
section does not affect and is not affected by the continuous coverage period
for a pregnant member.

    SECTION 11.01(c) PREGNANT MEMBERS AND INFANTS.

    Becoming pregnant, in and of itself, does not make a Member ineligible for
CHIP. If, after becoming pregnant, a Member chooses to apply for Medicaid and is
determined to be Medicaid-eligible, she is no longer eligible for CHIP. The
Administrative Services Contractor will notify the Member about her potential
Medicaid eligibility and of her ability to apply for Medicaid and will provide
appropriate resource information.

    Infants are automatically enrolled in the mother's CHIP health plan at birth
with CHIP eligibility and reenrollment following the same time frame as those of
the mother.

    CONTRACTOR through electronic means or the providers through calls to the
provider hotline will notify the Administrative Services Contractor when a
pregnancy is diagnosed. The administrative services contractor will deem the
pregnant Member to be eligible for CHIP services under a new period of
continuous coverage. The coverage will extend from the date of notification of
the pregnancy through the later of: (1) the last day of the second month
following the month of the baby's birth, or (2) the date when the mother's
eligibility would have expired under the original twelve-month period of
continuous coverage.

    To further ensure the reliability of the data, families also will be
encouraged to notify the Administrative Services Contractor by phone or in
writing when delivery of a baby to a CHIP-enrolled Member occurs.

    SECTION 11.01(d) SPAN OF COVERAGE.

    If a Member's effective date of coverage occurs while the Member is confined
in a hospital, the CONTRACTOR is responsible for the Member's costs of Covered
Services beginning on the Effective Date of Coverage. For each day that the
Member is hospitalized beginning on the Effective Date of Coverage, HHSC will
pay to CONTRACTOR $700 for non-ICU care and $1400 for ICU care. If a Member is
disenrolled while the Member is confined in a hospital, CONTRACTOR's
responsibility for the Member's costs of Covered Services terminates on the Date
of Disenrollment. Six months after the Implementation Date, the Parties will
review CONTRACTOR's data, including, but not limited to, data relating to the
timing of discharge and re-admission of Members who are hospitalized at the time
of enrollment into CONTRACTOR for the same diagnosis, and if either party
believes that these payments are insufficient, either Party can instigate the
Change Order process set out in Article 8. The Parties agree to negotiate any
requested Change Order in good faith.

    SECTION 12.01 BASIC REQUIRED COVERED SERVICES.

    CONTRACTOR is paid premium for all services that are Covered Services as
described in Appendix C, Scope of Benefits, consisting of Appendix C and
Attachment A. Appendix C, dated July 12, 2000, supercedes and replaces Appendix
C that is referenced in and attached to the original Agreement.

    Unless Appendix C specifies otherwise, CONTRACTOR may determine if a covered
service requires prior authorization, pre-certification, or physician
prescription. CONTRACTOR must pay for or reimburse for all CHIP-covered services
provided to Members for whom CONTRACTOR is paid premium. Appendix G supercedes
and replaces Appendices G and H that are referenced in and attached to the
original Agreement.

                                  Page 4 of 21

<PAGE>   88

    Out-of-network and emergency services also must be provided in accordance
with the Texas Insurance Code and TDI regulations as they apply to CONTRACTOR.
Covered services are subject to change due to changes in federal law, changes in
CHIP policy, and/or responses to changes in medicine, clinical protocols, or
technology. If covered services change, the change will be the subject of a
change order as provided in Article 8 of this Agreement. Any proposed change in
the scope of Covered Services, as set out in Appendix C, will be made through a
Change Order under Article 8 of this Agreement.

    SECTION 12.02 DRUG FORMULARIES.

    If CONTRACTOR utilizes a prescription drug formulary for Members, CONTRACTOR
must fully disclose its use of the formulary in its marketing materials. During
the term of the Agreement, CONTRACTOR cannot create a new formulary or
significantly revise an existing formulary; however, minor revisions to include
new drugs, or to remove drugs are allowed. Other revisions to the formulary may
be approved by HHSC, including the CHIP Medical Director and other program
clinical staff, in consultation with CONTRACTOR's Quality Improvement Committee
(or other committee composed of physicians, pharmacists, and other
professionals). HHSC will determine if a revision is significant. Revisions to
the formulary in compliance with FDA directives are allowed without HHSC prior
approval. CONTRACTOR may revise the formulary on an annual basis, subject to
HHSC review and approval.

    CONTRACTOR will allow a Member to continue receiving a drug that has been
removed from the formulary at the contracted benefit level until the end of the
Member's eligibility year. This does not preclude a physician or other health
professional from prescribing another drug on CONTRACTOR's formulary that is
medically appropriate.

    CONTRACTOR must have a process for consideration of drugs outside the
formulary when medically necessary. If CONTRACTOR refuses to provide benefits
to a Member for a drug that is not included in a drug formulary, and that
Member's physician has determined that the drug is medically necessary, such
refusal constitutes an adverse determination for purposes of section 2, article
21.58A, Texas Insurance Code, and the Member may appeal the adverse
determination under Texas Insurance Code, article 21.58A, sections 6 and 6A.

    SECTION 14.04 MARKETING SCHEDULE.

    (a) Initial marketing schedule.

    CONTRACTOR must submit an initial marketing schedule to HHSC for approval no
later than March 3, 2000. For each particular marketing event listed on the
schedule, CONTRACTOR must indicate the exact address of the site at which it
will market. HHSC will respond to the initial marketing schedule by March 10,
2000. CONTRACTOR must receive HHSC's approval of the schedule prior to the first
marketing event, which approval HHSC may not unreasonably withhold. If HHSC
does not approve the schedule by March 10, 2000, the schedule is deemed
approved. If HHSC expressly disapproves the marketing schedule, CONTRACTOR is
prohibited from engaging in the marketing activity set out on the schedule at
the time indicated. HHSC may require changes in the marketing schedule before it
will approve the schedule. CONTRACTOR need not seek and obtain prior approval of
a change to the initial marketing schedule that deletes or adds a marketing
activity of the type which HHSC has approved in that schedule. CONTRACTOR must
inform HHSC of this deletion or addition within five (5) business days of the
deletion or addition.

                                       Page 5 of 21

<PAGE>   89

    (b) Subsequent annual marketing schedules.

    After submission of the initial marketing schedule, CONTRACTOR must submit
to HHSC for approval an annual marketing schedule at least twenty (20) business
days prior to each Anniversary Date. For each particular marketing event listed
on the schedule, CONTRACTOR must indicate the exact address of the site at which
it will market. HHSC will respond to the submitted marketing schedule within
fifteen (15) business days from the date of receipt. CONTRACTOR must receive
HHSC's approval of the schedule prior to the first listed marketing event, which
approval HHSC may not unreasonably withhold. If HHSC does not approve the
schedule within the allotted fifteen (15) business days, the schedule is deemed
approved. If HHSC expressly disapproves the marketing schedule, CONTRACTOR is
prohibited from engaging in the marketing activity set out on the schedule at
the time indicated. HHSC may require changes in the marketing schedule before it
will approve the schedule. CONTRACTOR need not seek and obtain prior approval of
a change to the annual marketing schedule that deletes or adds a marketing
activity of the type which HHSC has approved in that schedule. CONTRACTOR must
inform HHSC of this deletion or addition within five (5) business days of the
deletion or addition.

    SECTION 14.05 GENERAL PROVISIONS.

    CONTRACTOR must comply with all state insurance law and TDI regulations
regarding prohibitions on marketing.

    CONTRACTOR may conduct a plan-sponsored event without being required to
invite other health plans participating in CHIP.

    At no time during the application, enrollment, and re-enrollment processes
may CONTRACTOR use licensed insurance agents.

    SECTION 14.07 DIRECT MAIL MARKETING.

    (a) General guidelines and restrictions

    CHIP direct mail marketing is not permitted to a person who CONTRACTOR knows
is a Medicaid recipient or a CHIP Member already enrolled in another health
plan. Under no circumstances may CONTRACTOR use the State's CHIP Member database
or a provider's patient/customer database to identify and market its plan to
persons who may be eligible for CHIP. No Medicaid client or CHIP Member names,
addresses, telephone numbers, or Medicaid identification numbers shall be
obtained by CONTRACTOR under any circumstances. CONTRACTOR cannot violate
confidentiality by sharing or selling CHIP or Medicaid enrollee lists of
enrollee/beneficiary data with other persons or organizations for any purpose
other than performance of the CONTRACTOR's obligations under this Agreement.
General population lists such as census tracts, are permissible for direct mail
marketing after review and prior approval by the State.

    The marketing guidelines set out in section 14.02 apply to the content of
direct mail marketing material.

    CONTRACTOR is solely responsible for the cost of direct mail marketing.

    (b) State approval

     Any letters to be sent potential CHIP Members must be submitted to and
approved by State prior to their use. CONTRACTOR may not, under any
circumstances, use direct mail marketing materials that have not been approved
by the State.

                                       Page 6 of 21

<PAGE>   90
        (c) Supplement to Marketing Schedule

        CONTRACTOR must submit to the State for approval a supplement to its
initial marketing schedule. In the supplement, CONTRACTOR must indicate when
direct mail marketing material will be sent and which marketing material will be
sent along with copies of that material. Direct mail marketing must be included
as part of the subsequent annual marketing schedules.

        SECTION 15.01(b) SUBCONTRACT TERMS.

        CONTRACTOR must ensure that, as part of its contract with the provider,
or in its intermediary's contract with the actual provider of health services,
in addition to any requirements imposed by state insurance law or TDI
regulation, the following requirements are included:

                (1) A statement to the effect that the provider is subject to
                    all state and federal laws, rules and regulations that apply
                    to all persons or entities receiving state and federal
                    funds, including provisions of the Clean Air Act and the
                    Federal Water Pollution Control Act, as amended, found at 42
                    C.F.R. 7401, et seq. and 33 U.S.C. 1251, et seq.,
                    respectively; the exclusion, debarment, and suspension
                    provisions of Section 1128(a) or (b) of the Social Security
                    Act (42 USC Section 1320 a-7), or Executive Order 12549; the
                    provisions of the Byrd Anti-Lobbying Amendment, found at 31
                    U.S.C. 1352, relating to use of federal funds for lobbying
                    for or obtaining federal contracts; Health and Safety Code,
                    Chapter 85, Subchapter E, relating to the Duties of State
                    Agencies and State Contractors for the confidentiality of
                    AIDS and HIV-related medical information and an
                    anti-discrimination policy for employees and Members with
                    communicable diseases; confidentiality provisions relating
                    to Member information (cite); Title VI of the Civil Rights
                    Act of 1964, Section 504 of the Rehabilitation Act of 1973,
                    the Americans with Disabilities Act of 1990, and all
                    requirements imposed by the regulations implementing these
                    acts and all amendments to the laws and regulations; the
                    provisions of Executive Order 11246, as amended by 11375,
                    relating to Equal Employment Opportunity; section 9-7.06 of
                    article IX of the General Appropriations Act of 1999
                    regarding "Buy Texas"; Texas Family Code Section 231.006
                    regarding child support payments; and chapter 552 of the
                    Texas Government Code regarding the release of public
                    information;

        SECTION 17.03 ENCOUNTER DATA SPECIFICATIONS REPORT.

        CONTRACTOR will submit on a quarterly basis encounter data in the format
set out in Appendix G attached to this Amendment No. 1, which Appendix G
supercedes and replaces Appendices G and H that are referenced in and attached
to the original Agreement.

        SECTION 17.04 FOCUSED STUDIES REPORTS

        CONTRACTOR must conduct one (1) state-specified focused study and one
(1) study chosen by CONTRACTOR. The state-specified study will be developed
through collaboration among HHSC, TDH, the Administrative Services Contractor,
and the health plans and is conducted and submitted on an annual basis. This
study must be conducted and data collected using criteria and methods developed
by HHSC and TDH in collaboration with the health plans. The report format is
set out in the RFP.

        SECTION 17.05 ANNUAL QUALITY IMPROVEMENT PLAN (QIP) SUMMARY REPORT

                                  Page 7 of 21
<PAGE>   91

        An annual Quality Improvement Plan (QIP) summary report must be
conducted yearly based on the state fiscal year. The annual QIP summary report
must be submitted by March 31 of each year. The information to be included is
set out in the RFP.

        SECTION 17.06 HUB REPORTS

        CONTRACTOR must submit quarterly reports documenting CONTRACTOR's
Historically Underutilized Business (HUB) program efforts and accomplishments.
The format for this report is contained in Appendix I.

        SECTION 17.07 FRAUDULENT PRACTICES REPORT

        CONTRACTOR must report all fraud and abuse enforcement actions or
investigations taken against CONTRACTOR and/or any of its subcontractors or
providers by any state or federal agency for fraud or abuse under Title XVIII or
Title XIX of the Social Security Act or any State law or regulation and any
known or suspected act of fraud or abuse. The report must include information
concerning the detection and the disposition of any potential fraudulent or
abusive practices.

        SECTION 17.08 FRAUD AND ABUSE COMPLIANCE PLAN.

        (d) Model Compliance Plan

        CONTRACTOR must submit a written compliance plan to HHSC for approval no
later than August 15, 2000. CONTRACTOR must comply with the requirements of the
Model Compliance Plan for HMOs when this model plan is issued by the U.S.
Department of Health and Human Services, the Office of Inspector General, if the
federal government mandates the Plan for CHIP. In the meantime, HHSC will
provide guidance in the form of a template for use by plans in developing
compliance plans that will be subject to HHSC approval. That template is
attached to this Agreement as Appendix J.

        (e) Requirements for the CONTRACTOR's compliance plan

        Additionally, the plan must ensure that all officers, directors,
managers and employees know and understand the provisions of the CONTRACTOR's
fraud and abuse compliance plan. The written plan must contain procedures
designed to prevent and detect potential or suspected abuse and fraud in the
administration and delivery of Services under this Agreement. The plan must
contain provisions for the confidential reporting of plan violations to the
designated person, ensure that the identity of an individual reporting
violations of the plan is protected and that no individual who reports plan
violations or suspected fraud and abuse is subject to retaliation. The plan
provisions must provide for the investigation and follow-up of any compliance
plan reports and contain specific and detailed internal procedures for officers,
directors, managers and employees for detecting, reporting, and investigating
fraud and abuse compliance plan violations. The compliance plan also must
require that confirmed violations be reported to HHSC. The plan must require
any confirmed violations or confirmed or suspected fraud and abuse under state
or federal law is reported to HHSC or its designated agents or other units of
state government specified in the Agreement.

        (f) Fraud and abuse training.

        CONTRACTOR must designate executive and essential personnel to attend
mandatory training in fraud and abuse detection, prevention and reporting. The
training will be conducted by the Office of Investigation and Enforcement,
Health and Human Services Commission, and will be provided free of charge.
CONTRACTOR must schedule and complete training no later than 90 days after the
Implementation Date.

                                  Page 8 of 21

<PAGE>   92

        The CONTRACTOR must designate an officer or director in its organization
with responsibility and authority for carrying out the provisions of the
compliance plan. A CONTRACTOR'S failure to report potential or suspected fraud
or abuse may result in sanctions, cancellation of contract, or exclusion from
participation in CHIP. The CONTRACTOR must allow the HHSC, its agents, or other
governmental units to conduct private interviews of the CONTRACTOR's personnel,
Subcontractors and their personnel, witnesses, and patients with regard to a
confirmed violation. The CONTRACTOR's personnel and it Subcontractors and their
personnel must cooperate fully by being available in person for interviews,
consultation, grand jury proceedings, pre-trial conferences, hearings, trials
and in any other process, including investigations, at the CONTRACTOR's and
Subcontractors' own expense.

        SECTION 17.09 PROVIDER NETWORK REPORTS

        (g) PCPs and Specialists Report

        CONTRACTOR must submit to HHSC by the date of the readiness review an
electronic listing of all PCPs participating in their network. The format for
this report is contained in Appendix K.

        CONTRACTOR must also submit to HHSC by the date of the readiness
review an electronic listing of all specialists participating in their network.
The format for this report is contained in Appendix L to the Agreement.

        (h) Provider Network Change Report

        CONTRACTOR must submit a monthly report summarizing changes in
CONTRACTOR's provider network. The report must be submitted to HHSC in the
format set out in the RFP 30 days following the end of the reporting month.

        SECTION 17.10 THIRD PARTY RECOVERY (TPR) REPORTS

        If CONTRACTOR chooses to engage in Third Party Recovery (TPR)
activities, it must file quarterly TPR Reports in accordance with the format
developed by the State. TPR reports must include total dollars recovered from
third party payers for services to Members for each month and the total dollars
recovered.

        SECTION 17.11 INCURRED CLAIMS SUMMARY LAG REPORT

        CONTRACTOR must submit an Incurred Claims Summary Lag Report as a
contract year-to-date report. The report must be submitted quarterly by the last
day of the month following the reporting period. The report must be submitted to
HHSC in a format specified by HHSC, or in a format approved by HHSC. The report
must at a minimum disclose the amount of incurred claims each month and the
amount paid each month by inpatient, non-inpatient, and prescription drug
categories of service. The report must also include total claims incurred and
paid by month.

        SECTION 17.12 SUMMARY REPORT OF PROVIDER AND MEMBER COMPLAINTS

        CONTRACTOR must submit Member and provider complaints reports.
CONTRACTOR must also report complaints submitted to its subcapitated groups
(e.g., IPAs).  The complaint reports must be submitted in two paper copies and
one electronic copy on or before the 45 days following the end of the state
fiscal quarter using the TDI format.

                                  Page 9 of 21

<PAGE>   93

        SECTION 17.13 MONTHLY MEMBER HOTLINE STATUS REPORT

        CONTRACTOR must submit, on a monthly basis, a Member hotline status
report that contains the elements set out in the RFP.

        SECTION 17.14 PROVIDER HOTLINE PERFORMANCE REPORT

        CONTRACTOR must submit, on a monthly basis, a provider telephone status
report that contains the elements set out in the RFP.

        SECTION 17.15 AD HOC REPORTS.

        CONTRACTOR will provide ad hoc reports as requested by HHSC at no
additional charge if the information requested is currently available or easily
modified from existing data. If the requested information is not currently
available or easily modified from existing data, the change order process set
out in Article 8 will apply or the Parties may mutually agree on an alternative.

                       ARTICLE 20. REMEDIES AND DISPUTES.

        SECTION 20.01 UNDERSTANDING AND EXPECTATIONS.

        (a) CONTRACTOR agrees and understands that HHSC may pursue contractual
remedies for both programmatic and financial noncompliance. HHSC, in its
discretion, may impose or pursue one or more remedies for each item of
noncompliance and will determine sanctions on a case-by-case basis. HHSC's
pursuit or non-pursuit of a tailored administrative remedy shall not constitute
a waiver of any other remedy that HHSC may have at law or equity.

        (b) As described in the RFP, CHIP represents a comprehensive and
aggressive effort to provide adequate health care to uninsured children by
providing affordable insurance to their families. Section 2.04 of this Agreement
also describes HHSC's objective to establish a flexible and responsive
relationship with CONTRACTOR. Accordingly, the remedies described in this
article are directed to CONTRACTOR's timely and responsive performance of the
Services and production of Deliverables.

        SECTION 20.02 ADMINISTRATIVE REMEDIES.

        (a) CONTRACTOR responsibility for improvement.

        HHSC expects CONTRACTOR's performance to continuously meet or exceed
performance criteria over the term of this Agreement. Accordingly, CONTRACTOR
will be responsible for ensuring that performance for a particular activity or
result described in its Proposal or the RFP that falls below the expectations
identified in CONTRACTOR's Proposal, the RFP, or this Agreement must improve
within thirty (30) days of written notice from HHSC regarding the deficiency.

        (b) Notification and interim response.

        (1) HHSC will notify CONTRACTOR in writing of specific areas of
CONTRACTOR performance that fail to meet performance standards as set out in
this Agreement, but which, in the determination of HHSC, do not result in a
material delay in the implementation or operation of the CHIP health plan
coverage through HMOs. CONTRACTOR will, within five (5) business days of receipt
of written notice of a non-material deficiency, provide HHSC with a written
response that:

                                 Page 10 of 21

<PAGE>   94

                (A) Explains the reasons for the deficiency, CONTRACTOR's plan
                to address or cure the deficiency, and the date and time by
                which the deficiency will be cured; or

                (B) If CONTRACTOR disagrees with HHSC's findings, its reasons
                for disagreeing with HHSC's findings.

        (2) CONTRACTOR's proposed cure of a non-material deficiency is subject
to the approval of HHSC. CONTRACTOR's repeated commission of non-material
deficiencies or repeated failure to resolve any such deficiencies may be
regarded by HHSC as a material deficiency and entitle HHSC to pursue any other
remedy provided in this Agreement or any other appropriate remedy HHSC may have
at law or equity.

        (c) Corrective Action Plan.

        (1) In the event HHSC assesses a liquidated damage as provided in this
article, HHSC may require CONTRACTOR to submit to HHSC a detailed written plan
(the "Corrective Action Plan") to correct or resolve the deficiency or event
causing the assessment of the liquidated damage. The Corrective Action Plan must
provide a detailed explanation of the reasons for the cited deficiency,
CONTRACTOR's assessment or diagnosis of the cause, and a specific proposal to
cure or resolve the deficiency. The Corrective Action Plan must be submitted
within ten (10) business days following the request for the plan by HHSC and is
subject to approval by HHSC, which approval will not unreasonably be withheld.

        (2) Notwithstanding the submission and acceptance of a Corrective Action
Plan, CONTRACTOR remains responsible for achieving all written performance
criteria. The acceptance of a Corrective Action Plan under this section will not
excuse prior substandard performance, relieve CONTRACTOR of its duty to comply
with performance standards, or prohibit HHSC from assessing additional
liquidated damages or pursuing other appropriate remedies for continued
substandard performance.

        (d) Additional remedies.

        HHSC at its own discretion may impose one or more the following remedies
for each item of noncompliance and will determine the scope and severity of the
remedy on a case-by-case basis. Both Parties agree that a state or federal
statute, rule, regulation or federal guideline will prevail over the provisions
of this section unless the statute, rule, regulation, or guidelines can be read
together with this section to give effect to both.

                (1) Assess liquidated damages in accordance with section 20.05
                and deduct such damages against payments to CONTRACTOR as
                set-off in accordance with section 20.06;

                (2) Conduct accelerated monitoring of CONTRACTOR. Accelerated
                monitoring means more frequent or more extensive monitoring will
                be performed by HHSC than would routinely be accomplished;

                (3) Require additional, more detailed, financial and/or
                programmatic reports to be submitted by CONTRACTOR in accordance
                with Article 17 of this Agreement; or

                (4) Suspend new enrollment.

                        (a) HHSC must give the CONTRACTOR 30 days notice of
                        intent to suspend new enrollment other than for imminent
                        danger to the health or safety of Members. The
                        suspension date will be calculated as 30 days following
                        the date that the CONTRACTOR receives the notice of
                        intent to suspend new enrollment.

                                 Page 11 of 21

<PAGE>   95

                        (b) HHSC may immediately suspend new enrollment into the
                        CONTRACTOR for a default declared as a result of
                        imminent danger to the health and safety of Members.

                        (c) The suspension of new enrollment may be for any
                        duration, up to the termination date of the Agreement.
                        HHSC will base the duration of the suspension upon the
                        type and severity of the default and upon the
                        CONTRACTOR's ability, if any, to cure the default.

                (5) Decline to renew this Agreement.

        HHSC will formally notify CONTRACTOR of the proposed imposition of an
administrative remedy in writing in accordance with paragraph (b) of this
section, with the exception of accelerated monitoring, which may be unannounced.
HHSC may not impose an administrative remedy if CONTRACTOR cures the deficiency
within the timeframe and approved specifications set out in subsection (b)(1) of
this section. CONTRACTOR is required to file a written response to in accordance
with paragraph (b) of this section.

        (e) Informal review of administrative remedies.

        CONTRACTOR may request an informal review of the imposition of the
foregoing remedies in accordance with section 20.19 within ten (10) business
days of receipt of written notification of the imposition of a remedy by HHSC.

        SECTION 20.03 NOTICE OF DEFAULT AND OPPORTUNITY TO CURE.

        (a) Notice and opportunity to cure.

        Unless the health and safety of Members is in jeopardy, HHSC will
provide CONTRACTOR with written notice of default (Notice of Default) under
this Agreement. The Notice of Default may be given by any means that provides
verification of receipt. The Notice of Default must contain the following
information:

        1. A clear and concise statement of the circumstances or conditions that
constitute a default under this Agreement;

        2. The Agreement provision(s) under which HHSC is declaring a default;

        3. A clear and concise statement of how CONTRACTOR may cure the default;

        4. A statement that CONTRACTOR has thirty (30) days from the date
           CONTRACTOR receives the Notice of Default to cure the default;

        5. The remedy or remedies HHSC is electing to pursue if CONTRACTOR does
           not cure the default within thirty (30) days and when the remedy or
           remedies will take effect;

        6. If HHSC is electing to impose liquidated damages if CONTRACTOR does
           not cure the default within thirty (30) days, the amount that HHSC
           intends to withhold or impose;

        7. If HHSC elects to pursue liquidated damages if CONTRACTOR does not
           cure the default within thirty (30) days, whether any part of those
           damages may be passed through to an individual or entity who is or
           may be responsible for the act or omission for which HHSC declares a
           default;

                                 Page 12 of 21

<PAGE>   96

    8. Whether failure of CONTRACTOR to cure the default within any specified
       time period will result in HHSC pursuing an additional remedy or
       remedies, including, but not limited to, additional damages and/or
       termination of the Agreement.

    SECTION 20.04 PARTICULAR EVENTS OF DEFAULT.

    For convenience, specified events of default under this Agreement, which
are listed throughout this Agreement, are listed here. Those events, include,
but are not limited to:

       (1) Failure to demonstrate a good faith effort to include STPs, tribal
       clinics, and rural providers in the CONTRACTOR's provider network, or
       failure to report efforts and compliance as required in section 15.04;

       (2) CONTRACTOR's placing the health and safety of the Members in
       jeopardy;

       (3) Exclusion of the CONTRACTOR or any of the managing employees or
       persons with an ownership interest whose disclosure is required by
       Section 1124(a) of the Social Security Act from the Medicaid or
       Medicare program under the provisions of Section 1128(a) and/or (b) of
       the Social Security Act is a default under this contract;

       (4) Exclusion of any Subcontractor or any of the managing employees or
       persons with an ownership interest of the Subcontractor whose
       disclosure is required by Section 1124(a) of the Social Security Act
       from the Medicaid or Medicare program under the provisions of Section
       1128(a) and/or (b)of the Social Security if the exclusion will
       materially affect the CONTRACTOR's performance under this Agreement;
       and

       (5) A CONTRACTOR'S failure to report potential or suspected fraud or
       abuse.

    SECTION 20.05 LIQUIDATED DAMAGES.

    The liquidated damages prescribed in this section are not intended to be
in the nature of a penalty, but are intended to be reasonable estimates of
HHSC's projected financial loss and damage resulting from CONTRACTOR'S
non-performance, including financial loss as a result of project delays.

    The Parties intend to negotiate liquidated damages specifically tailored
for particular events of non-performance, which schedule will be attached to
this Agreement through amendment. In the event that the Parties fail to reach
agreement on the liquidated damages to be assessed, the events on which they
are to be assessed, or the amount of the damages, the liquidated damages set
out in this section will apply.

    Accordingly, in the event CONTRACTOR fails to perform in accordance with
this Agreement, HHSC may assess liquidated damages as provided in this section
after providing notice of default and opportunity to cure unless the Members'
health and safety are in jeopardy and CONTRACTOR fails to cure timely.

    (a) Failure to provide contracted services or support.

    If CONTRACTOR fails to perform any of the Services described in this
Agreement, HHSC may assess a liquidated damage of $1,000.00 each business
day such Service is not provided.

       (1) Maximum damages.

                                Page 13 of 21
<PAGE>   97

    Liquidated damages assessed pursuant to this paragraph shall not, in any
single month, exceed 25% of the fee due CONTRACTOR for that month. However, if
CONTRACTOR fails to perform any Service or combination of Services, and such
failure represents a budgeted sum greater than 25% of the fee due
CONTRACTOR for that month, HHSC may terminate the Agreement in accordance with
this article.

       (2) CONTRACTOR responsibility for associated costs.

    If HHSC terminates this Agreement pursuant to paragraph (a)(i) of this
section, CONTRACTOR will be responsible to HHSC for all costs incurred by
HHSC, the State of Texas or any of its administrative agencies to replace
CONTRACTOR. These costs include, but are not limited to, the costs of
procuring a substitute vendor following termination of this Agreement and the
cost of any claim or litigation that is reasonably attributable to CONTRACTOR's
failure to perform any Service in accordance with the Agreement.

    SECTION 20.06 METHOD OF COLLECTION.

    HHSC may elect to assess a liquidated damage directly to CONTRACTOR, or it
may deduct amounts assessed as liquidated damages as set-off against payments
then due to CONTRACTOR for the Services or Deliverables or which become due at
any time thereafter.

    SECTION 20.07 ADDITIONAL REMEDIES.

    (i) Generally.

    In addition to liquidated damages and termination of this Agreement, HHSC
may elect to impose any or all of the following remedies:

    (1) Conduct accelerated monitoring of CONTRACTOR. Accelerated monitoring
means more frequent or more extensive monitoring will be performed by HHSC than
would routinely be accomplished;

    (2) Require additional, more detailed, financial and/or programmatic
reports to be submitted by CONTRACTOR in accordance with Article 17 of this
Agreement;

    (3) Decline to renew this Agreement; or

    (4) Suspend new enrollment.

       (a) HHSC must give the CONTRACTOR 30 days notice of intent to suspend
       new enrollment other than for imminent danger to the health or safety
       of Members. The suspension date will be calculated as 30 days following
       the date that the CONTRACTOR receives the notice of intent to suspend
       new enrollment.

       (b) HHSC may immediately suspend new enrollment into the CONTRACTOR for
       a default declared as a result of imminent danger to the health and
       safety of Members;

       (c) The suspension of new enrollment may be for any duration, up to the
       termination date of the Agreement. HHSC will base the duration of the
       suspension upon the type and severity of the default and upon the
       CONTRACTOR's ability, if any, to cure the default.

                                Page 14 of 21

<PAGE>   98

    (j) Informal review.

    CONTRACTOR may request an informal review of the imposition of the
foregoing remedies in accordance with section 20.19 within ten (10) business
days of receipt of written notification of the imposition of a remedy by HHSC.

    SECTION 20.08 MODIFICATION OF AGREEMENT IN THE EVENT OF REMEDIES.

    As provided in section 8.01(b) of this Agreement, HHSC may propose a
modification of this Agreement in response to the imposition of a remedy under
this article. Any modifications under this section must be reasonable, limited
to the matters causing the exercise of a remedy, and in writing. CONTRACTOR
must negotiate such proposed modifications in good faith.

    SECTION 20.09 TERMINATION OF AGREEMENT.

    In addition to other provisions of this article allowing termination, this
Agreement will terminate upon the Expiration Date unless extended in
accordance with Article 4 of this Agreement, or terminated sooner under the
terms of this Agreement. Prior to completion of the Initial Term and any
extensions or renewal thereof, all or a part of this Agreement may be
terminated for any of the following reasons:

    SECTION 20.10 TERMINATION BY MUTUAL AGREEMENT OF THE PARTIES.

    This Agreement may be terminated by mutual agreement of the Parties. Such
agreement must be in writing.

    SECTION 20.11 TERMINATION FOR CAUSE.

    HHSC reserves the right to terminate this Agreement, in whole or in
part, upon the following conditions:

    (a) Assignment for the benefit of creditors, appointment of receiver, or
inability to pay debts.

    HHSC may terminate this Agreement if CONTRACTOR:

          (1) Makes an assignment for the benefit of its creditors;

          (2) Admits in writing its inability to pay its debts generally as
          they become due; or

          (3) Consents to the appointment of a receiver, trustee, or
          liquidator of CONTRACTOR or of all or any part of its property.

    (b) Judgment and execution.

    (1) HHSC may terminate this Agreement if judgment for the payment of
money in excess of $50,000.00 (fifty thousand dollars and zero cents)
which is not covered by insurance is rendered by any court or governmental
body against CONTRACTOR, and CONTRACTOR does not

          (i) Discharge the judgment or provide for its discharge in
          accordance with the terms of the judgment;

          (ii) Procure a stay of execution thereof within 30 days from the
          date of entry thereof; or

                                Page 15 of 21

<PAGE>   99
           (iii) Perfect an appeal of such judgment and cause the execution
           of such judgment to be stayed during the appeal, providing such
           financial reserves as may be required under generally accepted
           accounting principles.

       (2) If a writ or warrant of attachment or any similar process is issued
by any court against all or any material portion of the property of CONTRACTOR,
and such writ or warrant of attachment or any similar process is not released or
bonded within 30 days after its entry, HHSC may terminate this Agreement in
accordance with this section.

       (c) Failure to adhere to laws, rules, ordinances, or orders.

       HHSC may terminate this Agreement if a court of competent jurisdiction
finds CONTRACTOR failed to adhere to any laws, ordinances, rules, regulations or
orders of any public authority having jurisdiction and such violation prevents
or substantially impairs performance of CONTRACTOR's duties under this
Agreement.

       (d) Breach of confidentiality.

       HHSC may terminate this Agreement if CONTRACTOR breaches confidentiality
laws with respect to the Services provided under this Agreement.

       (e) Failure to maintain adequate personnel or resources.

       HHSC may terminate this Agreement if, after providing notice and an
opportunity to correct in accordance with section 20.03 of this Agreement, HHSC
determines that CONTRACTOR has either failed to provide the personnel and
resources described in its Proposal or has failed to supply personnel or
resources and such failure results in CONTRACTOR's inability to fulfill its
duties under this Agreement and substantially compromises HHSC's ability to
comply with legislative mandates regarding the implementation or administration
of CHIP.

       (f) Termination for insolvency.

       (1) HHSC may, by giving written notice of termination to CONTRACTOR,
terminate this Agreement as of a date specified in such notice of termination if
CONTRACTOR:

           (A) files for bankruptcy;

           (B) becomes or is declared insolvent, or is the subject of any
           proceedings related to its liquidation, insolvency or the
           appointment of a receiver or similar officer for it;

           (C) makes an assignment for the benefit of all or substantially all
           of its creditors; or

           (D) enters into a contract for the composition, extension, or
           readjustment of substantially all of its obligations.

       (2) CONTRACTOR agrees to pay for all reasonable expenses of HHSC
including the cost of counsel, incident to:

           (A) The enforcement of payment of all obligations of CONTRACTOR by
           any action or participation in, or in connection with a case or
           proceeding under chapters 7, 11, or 13 of the United States
           Bankruptcy Code, or any successor statute;

                                 Page 16 of 21
<PAGE>   100

           (B) A case or proceeding involving a receiver or other similar
           officer duly appointed to handle CONTRACTOR's business; or

           (C) A case or proceeding in a State court initiated by HHSC when
           previous collection attempts have been unsuccessful.

       (g) Termination for gifts and gratuities.

       (1) HHSC may terminate this Agreement on one (1) days' notice to
CONTRACTOR following the determination by a competent judicial or quasi-judicial
authority and CONTRACTOR's exhaustion of all legal remedies that CONTRACTOR, its
employees, agents or representatives have either offered or given any thing of
value an officer or employee of HHSC or the State of Texas in violation of state
law.

       (2) CONTRACTOR must include a similar provision in each of its
subcontracts and shall enforce this provision against a subcontractor who has
offered or given any thing of value to any of the persons or entities described
in this section, whether or not the offer or gift was in CONTRACTOR's behalf.

    SECTION 20.12 TERMINATION FOR NON-APPROPRIATION OF FUNDS.

    (a) Notwithstanding any other provision of this Agreement, if funds for the
continued fulfillment of this agreement by HHSC are at any time not forthcoming
or are insufficient, through failure of any entity to appropriate funds or
otherwise, then HHSC will have the right to terminate this Agreement at no
additional cost and with no penalty whatsoever by giving prior written notice
documenting the lack of funding.

    (b) In such instance, unless otherwise agreed to by the Parties, this
Agreement will terminate and become null and void on the last day of the fiscal
period for which appropriations were received. HHSC will use all reasonable
efforts to ensure appropriated funds are available.

    SECTION 20.13 TERMINATION IN THE EVENT OF HHSC's FAILURE TO PAY.

    CONTRACTOR may terminate this Agreement if HHSC fails to pay the CONTRACTOR
undisputed charges when due as required under this Agreement. Retaining premium,
recoupment, sanctions, or penalties that are allowed under this Agreement or
that result from the CONTRACTOR's failure to perform or the CONTRACTOR's default
under the terms of this Agreement is not cause for termination. Termination for
failure to pay does not release HHSC from the obligation to pay undisputed
charges for services provided prior to the termination date.

    CONTRACTOR must give HHSC 90 days written notice of intent to terminate
this Agreement. The termination date will be calculated as the last day of the
month following 90 days from the date the notice of intent to terminate is
received by HHSC.

    HHSC must be given 30 days from the date HHSC receives the CONTRACTOR's
written notice of intent to terminate for failure to pay to pay the CONTRACTOR
all undisputed amounts due. If HHSC pays all undisputed amounts then due within
this 30-day period, the CONTRACTOR cannot terminate the Agreement under this
article for that reason.

    SECTION 20.14 TERMINATION FOR HHSC's MATERIAL BREACH OF THIS AGREEMENT.

                                  Page 17 of 21
<PAGE>   101

    (a) Generally.

    HHSC's failure to perform a material duty or responsibility as set out in
this Agreement is a default under this Agreement.

    (b) Notice of default and opportunity to cure.

    CONTRACTOR will provide HHSC with written notice of default (Notice of
Default) under this Agreement. The Notice of Default may be given by any means
that provides verification of receipt. The Notice of Default must contain the
following information:

    1. A clear and concise statement of the circumstances or conditions that
CONTRACTOR contends constitute a default under this Agreement;

    2. The Agreement provision(s) under which CONTRACTOR is declaring a default;
and

    3. A statement that HHSC has thirty (30) days from the date HHSC receives
the Notice of Default to cure the alleged breach.

    SECTION 20.15 NOTICE OF TERMINATION.

    Each Party will provide written notice of termination of this Agreement at
least 90 days prior to the intended date of termination unless the health or
safety of the Members is at issue, in which case HHSC may terminate immediately.

    SECTION 20.16 EXTENSION OF TERMINATION EFFECTIVE DATE.

    HHSC may extend the effective date of termination one or more times as it
elects, in its sole discretion, provided that the total of all such extensions
shall not exceed 90 calendar days following the original effective date of
termination, excluding termination under section 20.14.

    SECTION 20.17 INJUNCTIVE RELIEF.

    Each Party acknowledges and agrees that, in the event of a breach or
threatened breach of any of the provisions of this Agreement, such Party may
have no adequate remedy in damages. Accordingly, each Party will be entitled to
seek an injunction to prevent such breach or threatened breach. However, the
specification of a particular legal or equitable remedy will not be construed as
a waiver, prohibition, or limitation of any other legal or equitable remedies in
the event of a breach of this Agreement.

    SECTION 20.18 PAYMENT AND OTHER PROVISIONS AT AGREEMENT TERMINATION.

    (a) If HHSC terminates this Agreement, HHSC will pay CONTRACTOR on the
effective date of termination (or as soon as possible thereafter taking into
account appropriation and fund accounting requirements) any undisputed amounts
due for all completed, approved, and accepted Services or Deliverables.

    (b) HHSC further agrees to negotiate in good faith with CONTRACTOR to
equitably adjust and settle any accrued or outstanding liabilities for any
unaccepted Service or deliverable and Change Order that

       (1) Is due or delivered prior to or upon contract termination;

                                 Page 18 of 21
<PAGE>   102
             (2) Is complete or substantially complete, or for which
             CONTRACTOR can document to the satisfaction of HHSC substantial
             progress; and

             (3) Benefits HHSC or the State of Texas, notwithstanding its
             unaccepted status.

      (c) CONTRACTOR must provide HHSC all reasonable access to records,
facilities, and documentation as is required to efficiently and expeditiously
close out the Services under this Agreement.

      (d) HHSC and the CONTRACTOR must prepare a transition plan, which is
acceptable to and approved by HHSC, to ensure that Members are reassigned to
other plans without interruption of services. That transition plan will be
implemented during the 90-day period between receipt of notice and the
termination date unless termination is the result of HHSC's reasonable belief
that the CONTRACTOR is placing the health or welfare of Members in jeopardy.

      CONTRACTOR must continue to perform Services under the transition plan
until the last day of the month following 90 days from the date of receipt of
notice if the termination is for any reason other than HHSC's reasonable
belief that the CONTRACTOR is placing the health and safety of the Members in
jeopardy. If termination is due to this reason, HHSC may prohibit the
CONTRACTOR's further performance of Services under this Agreement.

      (1) If HHSC terminates this Agreement for any reason other than
non-appropriation of funds under section 20.12:

             (a) HHSC is responsible for notifying all Members of the date of
             termination and how Members can continue to receive Covered
             Services;

             (b) CONTRACTOR is responsible for all expenses related to giving
             notice to Members; and

             (c) CONTRACTOR is responsible for all expenses incurred by HHSC
             in implementing the transition plan.

      (2) If the Agreement is terminated by the CONTRACTOR for any reason:

             (a) HHSC is responsible for notifying all Members of the date of
             termination and how Members can continue to receive Covered
             Services;

             (b) HHSC is responsible for all expenses related to giving notice
             to Members; and

             (c) HHSC is responsible for all expenses it incurs in
             implementing the transition plan.

      (3) If the Agreement is terminated by mutual agreement of the Parties
under section 20.10:

             (a) HHSC is responsible for notifying all Members of the date of
             termination and how Members can continue to receive Covered
             Services;

             (b) CONTRACTOR is responsible for all expenses related to giving
             notice to Members; and

             (c) HHSC is responsible for all expenses it incurs in
             implementing the transition plan.

      SECTION 20.19 DISPUTE RESOLUTION.

                                Page 19 of 21

<PAGE>   103

      (a) General agreement of the Parties.

      The Parties mutually agree that the interests of fairness, efficiency,
and good business practices are best served when the Parties employ all
reasonable and informal means to resolve any dispute under this Agreement. The
Parties express their mutual commitment to using all reasonable and informal
means of resolving disputes including, but not limited to, the informal review
of liquidated damage assessments under section 20.05 of this Agreement, prior
to invoking a remedy provided elsewhere in this section.

      (b) Duty to negotiate in good faith.

      Any dispute that in the judgment of any Party to this Agreement may
materially or substantially affect the performance of any Party will be
reduced to writing and delivered to the other Party. The Parties must then
negotiate in good faith and use every reasonable effort to resolve such
dispute and the Parties shall not resort to any formal proceedings unless they
have reasonably determined that a negotiated resolution is not possible. The
resolution of any dispute disposed of by agreement between the Parties shall
be reduced to writing and delivered to all Parties within ten (10) business
days.

      (c) Claims for breach of Agreement.

      (1) General requirement. As required by Chapter 2260, Government Code,
CONTRACTOR's claim for breach of this Agreement must resolved in accordance
with the dispute resolution process established by HHSC in accordance with
Chapter 2260, Government Code.

      (2) Negotiation of claims. A CONTRACTOR's claim for breach of this
Agreement that the Parties cannot resolve in the ordinary course of business
or through the use of all reasonable and informal means must be submitted to
the negotiation process provided in Chapter 2260, subchapter B, Government
Code.

          (A) To initiate the process, CONTRACTOR must submit written notice in
          accordance with Section 4.04 of this Agreement that specifically
          states that CONTRACTOR invokes the provisions of Chapter 2260,
          subchapter B, Government Code.

          (B) Compliance by CONTRACTOR with Chapter 2260, subchapter B,
          Government Code, is a condition precedent to the filing of a contested
          case proceeding under Chapter 2260, subchapter C, of the Government
          Code.

      (3) Contested case proceedings. The contested case process provided in
Chapter 2260, subchapter C, Government Code, is CONTRACTOR's sole and
exclusive process for seeking a remedy for any and all alleged breaches of
contract by HHSC if the Parties are unable to resolve their disputes under
subsection (c)(2) of this section.

          (A) Compliance with the contested case process provided in Chapter
          2260, Subchapter C, Government Code, is a condition precedent to
          seeking consent to sue from the Texas Legislature under Chapter 107,
          Civil Practices & Remedies Code. Neither the execution of this
          Agreement by HHSC nor any other conduct of any representative of
          HHSC relating to this Agreement shall be considered a waiver of the
          State's sovereign immunity to suit.

      (4) HHSC rules. The submission, processing and resolution of CONTRACTOR's
claim is governed by the rules to be adopted by HHSC pursuant to Chapter 2260,
Government Code.

          (A) CONTRACTOR expressly acknowledges that, as of the Effective Date
          of this Agreement, HHSC has not adopted rules to implement the
          requirements of Chapter 2260, Government Code.

                                Page 20 of 21

<PAGE>   104

          CONTRACTOR expressly waives any claim regarding the absence of
          any such rules at the Effective Date.

      (5) CONTRACTOR's duty to perform. Neither the occurrence of an event
constituting an alleged breach of contract nor the pending status of any claim
for breach of contract is grounds for the suspension of performance, in whole
or in part, by CONTRACTOR of any duty or obligation with respect to the
Services under this Agreement.

      SECTION 20.20 LIABILITY OF CONTRACTOR.

      CONTRACTOR will not be liable to HHSC for any loss, damages or
      liabilities attributable to or arising from:

          (1) The failure of HHSC or any state agency or HHSC CONTRACTOR to
          perform a service or activity in connection with this Agreement; or

          (2) CONTRACTOR's prudent and diligent performance of the Services in
          compliance with instructions given by HHSC in accordance with section
          2.07 (relating to implied authority), section 4.04 (relating to
          notices), and section 4.06 (relating to delegation of authority) of
          this Agreement.

           ARTICLE 3. REPRESENTATIONS AND AGREEMENTS OF THE PARTIES

      The parties hereto agree that the terms of the contract identified in
article 1 of this amendment shall remain in effect and continue to govern
except to the extent modified herein.

      By signing this amendment, the parties hereto expressly understand and
agree that this amendment is hereby made a part of the contract identified in
article 1 of this amendment as though it were set out word for word herein.

      The parties have executed this amendment in their capacities as stated
below with authority to bind their organizations on the dates set forth by
their signatures.

           HMO                               TEXAS HEALTH AND HUMAN
                                              SERVICES COMMISSION

/S/ JAMES D. DONOVAN, JR.                     /S/ DON A. GILBERT
-------------------------                     ---------------------
JAMES D. DONOVAN, JR.                         DON A. GILBERT
PRESIDENT AND CEO                             COMMISSIONER
AMERICAID TEXAS, INC.

                                Page 21 of 21<PAGE>   1
                                                                    EXHIBIT 10.6

                                    CONTRACT

                                     BETWEEN

                               STATE OF NEW JERSEY

                          DEPARTMENT OF HUMAN SERVICES

               DIVISION OF MEDICAL ASSISTANCE AND HEALTH SERVICES

                                       AND

               ______________________________, CONTRACTOR
<PAGE>   2
                               STATE OF NEW JERSEY
                          DEPARTMENT OF HUMAN SERVICES
               DIVISION OF MEDICAL ASSISTANCE AND HEALTH SERVICES
                                       AND

                           ------------------------

                          CONTRACT TO PROVIDE SERVICES

This risk comprehensive contract is entered into this_______day of_________, and
is effective on the _______ day of __________ between the Department of Human
Services, which is in the executive branch of state government, the state agency
designated to administer the Medicaid program under Title XIX of the Social
Security Act, 42 U.S.C. 1396 et seq. pursuant to the New Jersey Medical
Assistance Act, N.J.S.A. 30:4D-1 et seq. and the State Child Health Insurance
Program under Title XXI of the Social Security Act, 42 U.S.C. 1397aa et seq.,
pursuant to the Children's Health Care Coverage Act, PL 1997, c.272 (also known
as "NJ KidCare"), pursuant to Family Care Health Coverage Act, P.L. 2000, c.71
(also known as "NJ FamilyCare") whose principal office is located at CN 712, in
the City of Trenton, New Jersey hereinafter referred to as the "Department" and
__________________________________________, a federally qualified/ state defined
health maintenance organization (HMO) which is a New Jersey, profit/non-profit
corporation, certified to operate as an HMO by the State of New Jersey
Department of Banking and Insurance and the State of New Jersey Department of
Health and Senior Services, and whose principal corporate office is located
at_______________ __________________, in the City of________________, County
of______________, New Jersey, hereinafter referred to as the "contractor".

WHEREAS, the contractor is engaged in the business of providing prepaid,
capitated comprehensive health care services pursuant to N.J.S.A. 26:2J-1 et
seq.; and

WHEREAS, the Department, as the state agency designated to administer a program
of medical assistance for eligible persons under Title XIX of the Social
Security Act (42 U.S.C. Sec. 1396, et seq., also known as "Medicaid"), for
eligible persons under the Family Care Health Coverage Act (P.L. 2000, c.71) and
for children under Title XXI of the Social Security Act (42 U.S.C. Sec. 1397aa,
et seq., also known as "State Child Health Insurance Program"), is authorized
pursuant to the federal regulations at 42 C.F.R. 434 to provide such a program
through an HMO and is desirous of obtaining the contractor's services for the
benefit of persons eligible for Medicaid/NJ FamilyCare; and

WHEREAS, the Division of Medical Assistance and Health Services (DMAHS), is the
Division within the Department designated to administer the medical assistance
program, and the Department's functions as regards all Medicaid/NJ FamilyCare
program benefits provided through the contractor for Medicaid/NJ FamilyCare
eligibles enrolled in the contractor's plan.
<PAGE>   3
NOW THEREFORE, in consideration of the contracts and mutual covenants herein
contained, the Parties hereto agree as follows:

PREAMBLE

Governing Statutory and Regulatory Provisions: This contract and all renewals
and modifications are subject to the following laws and all amendments thereof:
Title XIX and Title XXI of the Social Security Act, 42 U.S.C. 1396 et. seq., 42
U.S.C. 1397aa et seq., the New Jersey Medical Assistance Act and the Medicaid,
and NJ KidCare and NJ FamilyCare State Plans approved by HCFA (N.J.S.A. 30:4D-1
et seq.; 30:4I-1 et seq.; 30:4J-1 et seq.); federal and state Medicaid and State
Child Health Insurance, and NJ FamilyCare regulations, other applicable federal
and state statutes, and all applicable local laws and ordinances.
<PAGE>   4
TABLE OF CONTENTS

ARTICLE ONE: DEFINITIONS

ARTICLE TWO: CONDITIONS PRECEDENT

ARTICLE THREE: MANAGED CARE MANAGEMENT INFORMATION SYSTEM

<TABLE>
<S>           <C>                                                                                                 <C>
3.1           GENERAL OPERATIONAL REQUIREMENTS FOR THE MCMIS..................................................... III-1
              3.1.1       ONLINE ACCESS.......................................................................... III-1
              3.1.2       PROCESSING REQUIREMENTS................................................................ III-1
              3.1.3       REPORTING AND DOCUMENTATION REQUIREMENTS............................................... III-3
              3.1.4       OTHER REQUIREMENTS..................................................................... III-3
3.2           ENROLLEE SERVICES.................................................................................. III-4
              3.2.1       CONTRACTOR ENROLLMENT DATA............................................................. III-4
              3.2.2       ENROLLEE PROCESSING REQUIREMENTS....................................................... III-5
              3.2.3       CONTRACTOR ENROLLMENT VERIFICATION..................................................... III-6
              3.2.4       ENROLLEE COMPLAINT AND GRIEVANCE TRACKING SYSTEM....................................... III-7
              3.2.5       ENROLLEE REPORTING..................................................................... III-7
3.3           PROVIDER SERVICES.................................................................................. III-7
              3.3.1       PROVIDER INFORMATION AND PROCESSING REQUIREMENTS....................................... III-7
              3.3.2       PROVIDER CREDENTIALING................................................................. III-8
              3.3.3       PROVIDER/ENROLLEE LINKAGE.............................................................. III-8
              3.3.4       PROVIDER MONITORING.................................................................... III-9
              3.3.5       REPORTING REQUIREMENTS................................................................. III-9
3.4           CLAIMS/ENCOUNTER PROCESSING........................................................................ III-9
              3.4.1       GENERAL REQUIREMENTS................................................................... III-9
              3.4.2       COORDINATION OF BENEFITS............................................................... III-11
              3.4.3       REPORTING REQUIREMENTS................................................................. III-11
3.5           PRIOR AUTHORIZATION, REFERRAL AND UTILIZATION MANAGEMENT........................................... III-12
              3.5.1       FUNCTIONS AND CAPABILITIES............................................................. III-12
              3.5.2       REPORTING REQUIREMENTS................................................................. III-13
3.6           FINANCIAL PROCESSING............................................................................... III-13
              3.6.1       FUNCTIONS AND CAPABILITIES............................................................. III-13
              3.6.2       REPORTING PRODUCTS..................................................................... III-14
3.7           QUALITY ASSURANCE.................................................................................. III-14
              3.7.1       FUNCTIONS AND CAPABILITIES............................................................. III-14
              3.7.2       REPORTING PRODUCTS..................................................................... III-16
3.8           MANAGEMENT AND ADMINISTRATIVE REPORTING............................................................ III-16
              3.8.1       GENERAL REQUIREMENTS................................................................... III-16
              3.8.2       QUERY CAPABILITIES..................................................................... III-17
              3.8.3       REPORTING CAPABILITIES................................................................. III-17
</TABLE>

                                                                               i
<PAGE>   5
<TABLE>
<S>           <C>                                                                                                 <C>
3.9           ENCOUNTER DATA REPORTING........................................................................... III-18
              3.9.1       REQUIRED ENCOUNTER DATA ELEMENTS....................................................... III-18
              3.9.2       SUBMISSION OF TEST ENCOUNTER DATA...................................................... III-19
              3.9.3       SUBMISSION OF PRODUCTION ENCOUNTER DATA................................................ III-19
              3.9.4       REMITTANCE ADVICE...................................................................... III-20
              3.9.5       SUBCONTRACTS AND ENCOUNTER DATA REPORTING FUNCTION..................................... III-21
              3.9.6       FUTURE ELECTRONIC ENCOUNTER SUBMISSION REQUIREMENTS.................................... III-21
</TABLE>

ARTICLE FOUR: PROVISION OF HEALTH CARE SERVICES

<TABLE>
<S>           <C>                                                                                                 <C>
4.1           COVERED SERVICES................................................................................... IV-1
              4.1.1       GENERAL PROVISIONS AND CONTRACTOR RESPONSIBILITIES..................................... IV-1
              4.1.2       BENEFIT PACKAGE........................................................................ IV-3
              4.1.3       SERVICES REMAINING IN FEE-FOR-SERVICE PROGRAM AND MAY NECESSITATE CONTRACTOR
                          ASSISTANCE TO THE ENROLLEE TO ACCESS THE SERVICES...................................... IV-6
              4.1.4       MEDICAID COVERED SERVICES NOT PROVIDED BY CONTRACTOR................................... IV-8
              4.1.5       INSTITUTIONAL FEE-FOR-SERVICE BENEFITS -- NO COORDINATION BY THE CONTRACTOR............ IV-9
              4.1.6       BENEFIT PACKAGE FOR NJ FAMILYCARE PLAN D............................................... IV-9
              4.1.7       SUPPLEMENTAL BENEFITS.................................................................. IV-14
              4.1.8       CONTRACTOR AND DMAHS SERVICE EXCLUSIONS................................................ IV-14
4.2           SPECIAL PROGRAM REQUIREMENTS....................................................................... IV-15
              4.2.1       EMERGENCY SERVICES..................................................................... IV-15
              4.2.2       FAMILY PLANNING SERVICES AND SUPPLIES.................................................. IV-20
              4.2.3       OBSTETRICAL SERVICES REQUIREMENTS/ISSUES............................................... IV-20
              4.2.4       PRESCRIBED DRUGS AND PHARMACY SERVICES................................................. IV-20
              4.2.5       LABORATORY SERVICES.................................................................... IV-23
              4.2.6       EPSDT SCREENING SERVICES............................................................... IV-24
              4.2.7       IMMUNIZATIONS.......................................................................... IV-29
              4.2.8       CLINICAL TRIALS........................................................................ IV-30
              4.2.9       HEALTH PROMOTION AND EDUCATION PROGRAMS................................................ IV-32
4.3           COORDINATION WITH ESSENTIAL COMMUNITY PROVIDERS.................................................... IV-33
              4.3.1       GENERAL................................................................................ IV-33
              4.3.2       HEAD START PROGRAMS.................................................................... IV-33
              4.3.3       SCHOOL-BASED YOUTH SERVICES PROGRAMS................................................... IV-34
              4.3.4       LOCAL HEALTH DEPARTMENTS............................................................... IV-36
              4.3.5       WIC PROGRAM REQUIREMENTS/ISSUES........................................................ IV-36
              4.3.6       COMMUNITY LINKAGES..................................................................... IV-36
4.4           COORDINATION WITH MENTAL HEALTH AND SUBSTANCE ABUSE SERVICES....................................... IV-37
</TABLE>

                                                                              ii
<PAGE>   6
<TABLE>
<S>           <C>                                                                                                 <C>
4.5           ENROLLEES WITH SPECIAL NEEDS....................................................................... IV-39
              4.5.1       INTRODUCTION........................................................................... IV-39
              4.5.2       GENERAL REQUIREMENTS................................................................... IV-40
              4.5.3       PROVIDER NETWORK REQUIREMENTS.......................................................... IV-45
              4.5.4       CARE MANAGEMENT AND COORDINATION OF CARE FOR PERSONS WITH SPECIAL NEEDS................ IV-47
              4.5.5       CHILDREN WITH SPECIAL HEALTH CARE NEEDS................................................ IV-48
              4.5.6       CLIENTS OF THE DIVISION OF DEVELOPMENTAL DISABILITIES.................................. IV-50
              4.5.7       PERSONS WITH HIV/AIDS.................................................................. IV-51
4.6           QUALITY MANAGEMENT SYSTEM.......................................................................... IV-52
              4.6.1       QUALITY ASSESSMENT AND PERFORMANCE IMPROVEMENT PLAN.................................... IV-53
              4.6.2       QAPI ACTIVITIES........................................................................ IV-55
              4.6.3       REFERRAL SYSTEMS....................................................................... IV-66
              4.6.4       UTILIZATION MANAGEMENT................................................................. IV-67
              4.6.5       CARE MANAGEMENT........................................................................ IV-73
4.7           MONITORING AND EVALUATION.......................................................................... IV-77
              4.7.1       GENERAL PROVISIONS..................................................................... IV-77
              4.7.2       EVALUATION AND REPORTING - CONTRACTOR RESPONSIBILITIES................................. IV-79
              4.7.3       MONITORING AND EVALUATION - DEPARTMENT ACTIVITIES...................................... IV-81
              4.7.4       INDEPENDENT EXTERNAL REVIEW ORGANIZATION REVIEWS....................................... IV-82
4.8           PROVIDER NETWORK................................................................................... IV-83
              4.8.1       GENERAL PROVISIONS..................................................................... IV-83
              4.8.2       PRIMARY CARE PROVIDER REQUIREMENTS..................................................... IV-85
              4.8.3       PROVIDER NETWORK FILE REQUIREMENTS..................................................... IV-87
              4.8.4       PROVIDER DIRECTORY REQUIREMENTS........................................................ IV-88
              4.8.5       CREDENTIALING/RECREDENTIALING REQUIREMENTS/ISSUES...................................... IV-88
              4.8.6       LABORATORY SERVICE PROVIDERS........................................................... IV-89
              4.8.7       SPECIALTY PROVIDERS AND CENTERS........................................................ IV-90
              4.8.8       PROVIDER NETWORK REQUIREMENTS.......................................................... IV-91
              4.8.9       DENTAL PROVIDER NETWORK REQUIREMENTS................................................... IV-103
              4.8.10      GOOD FAITH NEGOTIATIONS................................................................ IV-103
              4.8.11      PROVIDER NETWORK ANALYSIS.............................................................. IV-103
4.9           PROVIDER CONTRACTS AND SUBCONTRACTS................................................................ IV-103
              4.9.1       GENERAL PROVISIONS..................................................................... IV-103
              4.9.2       CONTRACT SUBMISSION.................................................................... IV-106
              4.9.3       PROVIDER CONTRACT AND SUBCONTRACT TERMINATION.......................................... IV-107
              4.9.4       PROHIBITION OF INTERFERENCE WITH CERTAIN MEDICAL COMMUNICATIONS........................ IV-108
              4.9.5       ANTIDISCRIMINATION..................................................................... IV-109
4.10          EXPERT WITNESS REQUIREMENTS AND COURT OBLIGATIONS.................................................. IV-110
4.11          ADDITIONS, DELETIONS, AND/OR CHANGES............................................................... IV-111
</TABLE>

                                                                             iii
<PAGE>   7
ARTICLE FIVE: ENROLLEE SERVICES

<TABLE>
<S>           <C>                                                                                                 <C>
5.1           GEOGRAPHIC REGIONS................................................................................. V-1
5.2           AID CATEGORIES ELIGIBLE FOR CONTRACTOR ENROLLMENT.................................................. V-2
5.3           EXCLUSIONS AND EXEMPTIONS.......................................................................... V-2
              5.3.1       ENROLLMENT EXCLUSIONS.................................................................. V-3
              5.3.2       ENROLLMENT EXEMPTIONS.................................................................. V-5
5.4           ENROLLMENT OF MANAGED CARE ELIGIBLES............................................................... V-6
5.5           ENROLLMENT AND COVERAGE REQUIREMENTS............................................................... V-6
5.6           VERIFICATION OF ENROLLMENT......................................................................... V-10
5.7           MEMBER SERVICES UNIT............................................................................... V-11
5.8           ENROLLEE EDUCATION AND INFORMATION................................................................. V-12
              5.8.1       GENERAL REQUIREMENTS................................................................... V-12
              5.8.2       ENROLLEE NOTIFICATION/HANDBOOK......................................................... V-12
              5.8.3       ANNUAL INFORMATION TO ENROLLEES........................................................ V-18
              5.8.4       NOTIFICATION OF CHANGES IN SERVICES.................................................... V-18
              5.8.5       ID CARD................................................................................ V-18
              5.8.6       ORIENTATION AND WELCOME LETTER......................................................... V-19
5.9           PCP SELECTION AND ASSIGNMENT....................................................................... V-20
              5.9.1       INITIAL SELECTION/ASSIGNMENT........................................................... V-20
              5.9.2       PCP CHANGES............................................................................ V-21
5.10          DISENROLLMENT FROM CONTRACTOR'S PLAN............................................................... V-22
              5.10.1      GENERAL PROVISIONS..................................................................... V-22
              5.10.2      DISENROLLMENT FROM THE CONTRACTOR'S PLAN AT THE ENROLLEE'S REQUEST..................... V-23
              5.10.3      DISENROLLMENT FROM THE CONTRACTOR'S PLAN AT THE CONTRACTOR'S REQUEST................... V-25
              5.10.4      TERMINATION............................................................................ V-26
5.11          TELEPHONE ACCESS................................................................................... V-27
5.12          APPOINTMENT AVAILABILITY........................................................................... V-29
5.13          APPOINTMENT MONITORING PROCEDURES.................................................................. V-31
5.14          CULTURAL AND LINGUISTIC NEEDS...................................................................... V-32
5.15          ENROLLEE COMPLAINTS AND GRIEVANCES................................................................. V-34
              5.15.1      GENERAL REQUIREMENTS................................................................... V-34
              5.15.2      NOTIFICATION TO ENROLLEES OF GRIEVANCE PROCEDURE....................................... V-35
              5.15.3      GRIEVANCE PROCEDURES................................................................... V-37
              5.15.4      PROCESSING GRIEVANCES.................................................................. V-37
              5.15.5      RECORDS MAINTENANCE.................................................................... V-38
5.16          MARKETING.......................................................................................... V-39
              5.16.1      GENERAL PROVISIONS - CONTRACTOR'S RESPONSIBILITIES..................................... V-39
              5.16.2      STANDARDS FOR MARKETING REPRESENTATIVES................................................ V-44
</TABLE>

                                                                              iv
<PAGE>   8
ARTICLE SIX: PROVIDER INFORMATION

<TABLE>
<S>           <C>                                                                                                 <C>
6.1           GENERAL.......................................................................................      VI-1
6.2           PROVIDER PUBLICATIONS.........................................................................      VI-1
6.3           PROVIDER EDUCATION AND TRAINING...............................................................      VI-3
6.4           PROVIDER TELEPHONE ACCESS.....................................................................      VI-3
6.5           PROVIDER GRIEVANCES AND APPEALS...............................................................      VI-4
</TABLE>

ARTICLE SEVEN: TERMS AND CONDITIONS (ENTIRE CONTRACT)

<TABLE>
<S>           <C>                                                                                                 <C>
7.1           CONTRACT COMPONENTS...........................................................................      VII-1
7.2           GENERAL PROVISIONS............................................................................      VII-1
7.3           STAFFING......................................................................................      VII-4
7.4           RELATIONSHIPS WITH DEBARRED OR SUSPENDED PERSONS PROHIBITED...................................      VII-5
7.5           CONTRACTING OFFICER AND CONTRACTOR'S REPRESENTATIVE...........................................      VII-7
7.6           AUTHORITY OF THE STATE........................................................................      VII-8
7.7           EQUAL OPPORTUNITY EMPLOYER....................................................................      VII-8
7.8           NONDISCRIMINATION REQUIREMENTS................................................................      VII-8
7.9           INSPECTION RIGHTS.............................................................................      VII-10
7.10          NOTICES/CONTRACT COMMUNICATION................................................................      VII-11
7.11          TERM..........................................................................................      VII-11
              7.11.1 CONTRACT DURATION AND EFFECTIVE DATE...................................................      VII-11
              7.11.2 AMENDMENT, EXTENSION, AND MODIFICATION.................................................      VII-11
7.12          TERMINATION...................................................................................      VII-13
7.13          CLOSEOUT REQUIREMENTS.........................................................................      VII-15
7.14          MERGER/ACQUISITION REQUIREMENTS...............................................................      VII-19
7.15          SANCTIONS.....................................................................................      VII-23
7.16          LIQUIDATED DAMAGES PROVISIONS.................................................................      VII-24
              7.16.1 GENERAL PROVISIONS.....................................................................      VII-24
              7.16.2 MANAGED CARE OPERATIONS, TERMS AND CONDITIONS, AND PAYMENT PROVISIONS..................      VII-26
              7.16.3 TIMELY REPORTING REQUIREMENTS..........................................................      VII-27
              7.16.4 ACCURATE REPORTING REQUIREMENTS........................................................      VII-27
              7.16.5 TIMELY PAYMENTS TO MEDICAL PROVIDERS...................................................      VII-28
              7.16.6 CONDITIONS FOR TERMINATION OF LIQUIDATED DAMAGES.......................................      VII-29
              7.16.7 EPSDT PERFORMANCE STANDARDS............................................................      VII-29
              7.16.8 DEPARTMENT OF HEALTH AND HUMAN SERVICES CIVIL MONEY PENALTIES..........................      VII-30
              7.16.8.1 FEDERAL STATUTES.....................................................................      VII-30
              7.16.8.2 FEDERAL PENALTIES....................................................................      VII-31
7.17          STATE SANCTIONS...............................................................................      VII-32
7.18          APPEAL PROCESS................................................................................      VII-32
7.19          ASSIGNMENTS...................................................................................      VII-32
</TABLE>

                                                                               v
<PAGE>   9
<TABLE>
<S>           <C>                                                                                                 <C>
7.20          CONTRACTOR CERTIFICATIONS.........................................................................  VII-33
              7.20.1 GENERAL PROVISIONS.........................................................................  VII-33
              7.20.2 CERTIFICATION SUBMISSIONS..................................................................  VII-33
              7.20.3 ENVIRONMENTAL COMPLIANCE...................................................................  VII-33
              7.20.4 ENERGY CONSERVATION........................................................................  VII-33
              7.20.5 INDEPENDENT CAPACITY OF CONTRACTOR.........................................................  VII-34
              7.20.6 NO THIRD PARTY BENEFICIARIES...............................................................  VII-34
              7.20.7 PROHIBITION ON USE OF FEDERAL FUNDS FOR LOBBYING...........................................  VII-34
7.21          REQUIRED CERTIFICATE OF AUTHORITY.................................................................  VII-35
7.22          SUBCONTRACTS......................................................................................  VII-35
7.23          SET-OFF FOR STATE TAXES AND CHILD SUPPORT.........................................................  VII-35
7.24          CLAIMS............................................................................................  VII-35
7.25          MEDICARE RISK CONTRACTOR..........................................................................  VII-36
7.26          TRACKING AND REPORTING............................................................................  VII-36
7.27          FINANCIAL STATEMENTS..............................................................................  VII-38
              7.27.1 AUDITED FINANCIAL STATEMENTS (GAAP BASIS)..................................................  VII-38
              7.27.2 FINANCIAL STATEMENTS (SAP).................................................................  VII-38
7.28          FEDERAL APPROVAL AND FUNDING......................................................................  VII-39
7.29          CONFLICT OF INTEREST..............................................................................  VII-39
7.30          RECORDS RETENTION.................................................................................  VII-40
7.31          WAIVERS...........................................................................................  VII-41
7.32          CHANGE BY THE CONTRACTOR..........................................................................  VII-41
7.33          INDEMNIFICATION...................................................................................  VII-41
7.34          INVENTIONS........................................................................................  VII-43
7.35          USE OF CONCEPTS...................................................................................  VII-43
7.36          PREVAILING WAGE...................................................................................  VII-43
7.37          DISCLOSURE STATEMENT..............................................................................  VII-44
7.38          FRAUD AND ABUSE...................................................................................  VII-46
              7.38.1 ENROLLEES..................................................................................  VII-46
              7.38.2 PROVIDERS..................................................................................  VII-46
              7.38.3 NOTIFICATION TO DMAHS......................................................................  VII-48
7.39          EQUALITY OF ACCESS AND TREATMENT/DUE PROCESS......................................................  VII-48
7.40          CONFIDENTIALITY...................................................................................  VII-48
7.41          SEVERABILITY......................................................................................  VII-50
7.42          CONTRACTING OFFICER AND CONTRACTOR'S REPRESENTATIVE...............................................  VII-50
</TABLE>

ARTICLE EIGHT: FINANCIAL PROVISIONS

<TABLE>
<S>           <C>                                                                                                 <C>
8.1           GENERAL INFORMATION................................................................................ VIII-1
8.2           FINANCIAL REQUIREMENTS............................................................................. VIII-1
              8.2.1 COMPLIANCE WITH CERTAIN CONDITIONS........................................................... VIII-1
              8.2.2 SOLVENCY REQUIREMENTS........................................................................ VIII-1
              8.2.3 GENERAL PROVISIONS AND CONTRACTOR COMPLIANCE................................................. VIII-2
</TABLE>

                                                                              vi
<PAGE>   10
<TABLE>
<S>           <C>                                                                                                 <C>
8.3           INSURANCE REQUIREMENTS............................................................................. VIII-3
              8.3.1       INSURANCE CANCELLATION AND/OR CHANGES.................................................. VIII-3
              8.3.2       STOP-LOSS INSURANCE.................................................................... VIII-3
8.4           MEDICAL COST RATIO................................................................................. VIII-4
              8.4.1       MEDICAL COST RATIO STANDARD............................................................ VIII-4
              8.4.2       EXEMPTIONS............................................................................. VIII-4
              8.4.3       DAMAGES................................................................................ VIII-5
8.5           REGIONS, PREMIUM GROUPS, AND SPECIAL PAYMENT PROVISIONS............................................ VIII-5
              8.5.1       REGIONS................................................................................ VIII-5
              8.5.2       AFDC/TANF AND NJ FAMILYCARE, PLAN A CHILDREN........................................... VIII-6
              8.5.3       NJ FAMILYCARE PLAN A PARENTS/CARETAKERS................................................ VIII-6
              8.5.4       NJ FAMILYCARE PLAN A ADULTS WITHOUT DEPENDENT CHILDREN UNDER 19 YEARS OF AGE........... VIII-6
              8.5.5       NJ FAMILYCARE PLANS B & C.............................................................. VIII-7
              8.5.6       NJ FAMILYCARE PLAN D CHILDREN.......................................................... VIII-7
              8.5.7       NJ FAMILYCARE PLAN D PARENTS/CARETAKERS................................................ VIII-7
              8.5.8       NJ FAMILYCARE PLAN D ADULTS WITHOUT DEPENDENT CHILDREN UNDER 19 YEARS OF AGE........... VIII-7
              8.5.9       PREMIUM GROUPS FOR DYFS AND AGING OUT FOSTER CHILDREN.................................. VIII-8
              8.5.10      ABD WITHOUT MEDICARE................................................................... VIII-8
              8.5.11      ABD WITH MEDICARE...................................................................... VIII-8
              8.5.12      CLIENTS OF DDD......................................................................... VIII-9
              8.5.13      PREMIUM GROUPS FOR ENROLLEES WITH AIDS................................................. VIII-9
              8.5.14      SUPPLEMENTAL PAYMENT PER PREGNANCY OUTCOME............................................. VIII-10
              8.5.15      PAYMENT FOR CERTAIN BLOOD CLOTTING FACTORS............................................. VIII-10
              8.5.16      PAYMENT FOR HIV/AIDS DRUGS............................................................. VIII-10
              8.5.17      EPSDT INCENTIVE PAYMENT................................................................ VIII-10
8.6           HEALTH BASED PAYMENT SYSTEM (HBPS) FOR THE ABD WITHOUT MEDICARE POPULATION......................... VIII-11
8.7           THIRD PARTY LIABILITY.............................................................................. VIII-13
8.8           COMPENSATION/CAPITATION CONTRACTUAL REQUIREMENTS................................................... VIII-19
8.9           CONTRACTOR ADVANCED PAYMENTS AND PIPS TO PROVIDERS................................................. VIII-21
8.10          FEDERALLY QUALIFIED HEALTH CENTERS................................................................. VIII-23
</TABLE>

                                                                             vii
<PAGE>   11
ARTICLE ONE:  DEFINITIONS

         The following terms shall have the meaning stated, unless the context
         clearly indicates otherwise.

         ABUSE--means provider practices that are inconsistent with sound
         fiscal, business, or medical practices, and result in an unnecessary
         cost to the Medicaid/NJ FamilyCare program, or in reimbursement for
         services that are not medically necessary or that fail to meet
         professionally recognized standards for health care. It also includes
         enrollee practices that result in unnecessary cost to the Medicaid/NJ
         FamilyCare program. (See 42 C.F.R. Section 455.2)

         ADDP--AIDS Drug Distribution Program, a Department of Health and Senior
         Services-sponsored program which provides life-sustaining and
         life-prolonging medications to persons who are HIV positive or who are
         living with AIDS and meet certain residency and income criteria for
         program participation.

         ADJUDICATE--the point in the claims processing at which a final
         decision is reached to pay or deny a claim.

         ADMINISTRATIVE SERVICE(S)--the contractual obligations of the
         contractor that include but may not be limited to utilization
         management, credentialing providers, network management, quality
         improvement, marketing, enrollment, member services, claims payment,
         management information systems, financial management, and reporting.

         ADVERSE EFFECT--medically necessary medical care has not been provided
         and the failure to provide such necessary medical care has presented an
         imminent danger to the health, safety, or well-being of the patient or
         has placed the patient unnecessarily in a high-risk situation.

         ADVERSE SELECTION--the enrollment with a contractor of a
         disproportionate number of persons with high health care costs.

         AFDC OR AFDC/TANF--Aid to Families with Dependent Children, established
         by 42 U.S.C. Section 601 et seq., and N.J.S.A. 44:10-1 et seq., as a
         joint federal/State cash assistance program administered by counties
         under State supervision. For cash assistance, it is now called "TANF."
         For Medicaid, the former AFDC rules still apply.

         AFDC-RELATED--see "SPECIAL MEDICAID PROGRAMS" and "TANF"

         AID CODES--the two-digit number which indicates the aid category under
         which a person is eligible to receive Medicaid and NJ FamilyCare.

         AMELIORATE--to improve, maintain, or stabilize a health outcome, or to
         prevent or mitigate an adverse change in health outcome.

                                                                             I-1
<PAGE>   12
         ANTICIPATORY GUIDANCE--the education provided to parents or authorized
         individuals during routine prenatal or pediatric visits to prevent or
         reduce the risk to their fetuses or children developing a particular
         health problem.

         ASSIGNMENT--the process by which a Medicaid enrollee in a New Jersey
         Care 2000+ contractor receives a Primary Care Provider (PCP).

         AT-RISK--any service for which the provider agrees to accept
         responsibility to provide or arrange for in exchange for the capitation
         payment.

         AUTHORIZED PERSON--in general means a person authorized to make medical
         determinations for an enrollee, including, but not limited to,
         enrollment and disenrollment decisions and choice of a PCP.

         For individuals who are eligible through the Division of Youth and
         Family Services (DYFS), the authorized person is authorized to make
         medical determinations, including but not limited to enrollment,
         disenrollment and choice of a PCP, on behalf of or in conjunction with
         individuals eligible through DYFS. These persons may include a foster
         home parent, an authorized health care professional employee of a group
         home, an authorized health care professional employee of a residential
         center or facility, a DYFS employee, a pre-adoptive or adoptive parent
         receiving subsidy from DYFS, a natural or biological parent, or a legal
         caretaker.

         For individuals who are eligible through the Division of Developmental
         Disabilities (DD), the authorized person may be one of the following:

                  A.       The enrollee, if he or she is an adult and has the
                           capacity to make medical decisions;

                  B.       The parent or guardian of the enrollee, if the
                           enrollee is a minor, or the individual or agency
                           having legal guardianship if the enrollee is an adult
                           who lacks the capacity to make medical decisions;

                  C.       The Bureau of Guardianship Services (BGS); or

                  D.       A person or agency who has been duly designated by a
                           power of attorney for medical decisions made on
                           behalf of an enrollee.

         Throughout the contract, information regarding enrollee rights and
         responsibilities can be taken to include authorized persons, whether
         stated as such or not.

         AUTOMATIC ASSIGNMENT--the enrollment of an eligible person, for whom
         enrollment is mandatory, in a managed care plan chosen by the New
         Jersey Department of Human Services pursuant to the provisions of
         Article 5.4 of this contract.

                                                                             I-2
<PAGE>   13
         BASIC SERVICE AREA--the geographic area in which the contractor is
         obligated to provide covered services for its Medicaid/NJ FamilyCare
         enrollees under this contract.

         BENEFICIARY--any person eligible to receive services in the New Jersey
         Medicaid/NJ FamilyCare program.

         BENEFITS PACKAGE--the health care services set forth in this contract,
         for which the contractor has agreed to provide, arrange, and be held
         fiscally responsible.

         BILINGUAL--see "MULTILINGUAL"

         BONUS--a payment the contractor makes to a physician or physician group
         beyond any salary, fee-for-service payments, capitation, or returned
         withholding amount.

         CAPITATED SERVICE--any covered service for which the contractor
         receives capitation payment.

         CAPITATION--a contractual agreement through which a contractor agrees
         to provide specified health care services to enrollees for a fixed
         amount per month.

         CAPITATION PAYMENTS--the amount prepaid monthly by DMAHS to the
         contractor in exchange for the delivery of covered services to
         enrollees based on a fixed Capitation Rate per enrollee,
         notwithstanding (a) the actual number of enrollees who receive services
         from the contractor, or (b) the amount of services provided to any
         enrollee.

         CAPITATION RATE--the fixed monthly amount that the contractor is
         prepaid by the Department for each enrollee for which the contractor
         provides the services included in the Benefits Package described in
         this contract.

         CARE MANAGEMENT--a set of enrollee-centered, goal-oriented, culturally
         relevant, and logical steps to assure that an enrollee receives needed
         services in a supportive, effective, efficient, timely, and
         cost-effective manner. Care management emphasizes prevention,
         continuity of care, and coordination of care, which advocates for, and
         links enrollees to, services as necessary across providers and
         settings. Care management functions include 1) early identification of
         enrollees who have or may have special needs, 2) assessment of an
         enrollees risk factors, 3) development of a plan of care, 4) referrals
         and assistance to ensure timely access to providers, 5) coordination of
         care actively linking the enrollee to providers, medical services,
         residential, social, and other support services where needed, 6)
         monitoring, 7) continuity of care, and 8) follow-up and documentation.

         CERTIFICATE OF AUTHORITY--a license granted by the New Jersey
         Department of Banking and Insurance and the New Jersey Department of
         Health and Senior Services to operate an HMO in compliance with
         N.J.S.A. 26:2J-1 et. seq.

                                                                             I-3
<PAGE>   14
         CHILDREN'S HEALTH CARE COVERAGE PROGRAM--means the program established
         by the "Children's Health Care Coverage Act", P.L. 1997, c.272 as a
         health insurance program for targeted, low-income children.

         CHILDREN WITH SPECIAL HEALTH CARE NEEDS--those children who have or are
         at increased risk for chronic physical, developmental, behavioral, or
         emotional conditions and who also require health and related services
         of a type and amount beyond that required by children generally.

         CHRONIC ILLNESS--a disease or condition of long duration (repeated
         inpatient hospitalizations, out of work or school at least three months
         within a twelve-month period, or the necessity for continuous health
         care on an ongoing basis), sometimes involving very slow progression
         and long continuance. Onset is often gradual and the process may
         include periods of acute exacerbation alternating with periods of
         remission.

         CLINICAL PEER--a physician or other health care professional who holds
         a non-restricted license in New Jersey and is in the same or similar
         specialty as typically manages the medical condition, procedure, or
         treatment under review.

         CNM OR CERTIFIED NURSE MIDWIFE--a registered professional nurse who is
         legally authorized under State law to practice as a nurse-midwife, and
         has completed a program of study and clinical experience for
         nurse-midwives or equivalent.

         CNP OR CERTIFIED NURSE PRACTITIONER--a registered professional nurse
         who is licensed by the New Jersey Board of Nursing and meets the
         advanced educational and clinical practice requirements beyond the two
         to four years of basic nursing education required of all registered
         nurses.

         CNS OR CLINICAL NURSE SPECIALIST--a person licensed to practice as a
         registered professional nurse who is licensed by the New Jersey State
         Board of Nursing or similarly licensed and certified by a comparable
         agency of the state in which he/she practices.

         COLD CALL MARKETING--any unsolicited personal contact with a potential
         enrollee by an employee or agent of the contractor for the purpose of
         influencing the individual to enroll with the contractor. Marketing by
         an employee of the contractor is considered direct; marketing by an
         agent is considered indirect.

         COMMISSIONER--the Commissioner of the New Jersey Department of Human
         Services or a duly authorized representative.

         COMPLAINT--a protest by an enrollee as to the conduct by the contractor
         or any agent of the contractor, or an act or failure to act by the
         contractor or any agent of the contractor, or any other matter in which
         an enrollee feels aggrieved by the contractor, that is communicated to
         the contractor and that could be resolved by the contractor within the
         same day/24 hours of receipt.

                                                                             I-4
<PAGE>   15
         CONDITION--a disease, illness, injury, disorder, or biological or
         psychological condition or status for which treatment is indicated.

         CONTESTED CLAIM--a claim that is denied because the claim is an
         ineligible claim, the claim submission is incomplete, the coding or
         other required information to be submitted is incorrect, the amount
         claimed is in dispute, or the claim requires special treatment.

         CONTINUITY OF CARE--the plan of care for a particular enrollee that
         should assure progress without unreasonable interruption.

         CONTRACT--the written agreement between the State and the contractor,
         and comprises the contract, any addenda, appendices, attachments, or
         amendments thereto.

         CONTRACTING OFFICER--the individual empowered to act and respond for
         the State throughout the life of any contract entered into with the
         State.

         CONTRACTOR--the Health Maintenance Organization with a valid
         Certificate of Authority in New Jersey that contracts hereunder with
         the State for the provision of comprehensive health care services to
         enrollees on a prepaid, capitated basis.

         CONTRACTOR'S PLAN--all services and responsibilities undertaken by the
         contractor pursuant to this contract.

         CONTRACTOR'S REPRESENTATIVE--the individual legally empowered to bind
         the contractor, using his/her signature block, including his/her title.
         This individual will be considered the Contractor's Representative
         during the life of any contract entered into with the State unless
         amended in writing pursuant to Article 7.

         COPAYMENT--the part of the cost-sharing requirement for NJ FamilyCare
         Plan D enrollees in which a fixed monetary amount is paid for certain
         services/items received from the contractor's providers.

         COST AVOIDANCE--a method of paying claims in which the provider is not
         reimbursed until the provider has demonstrated that all available
         health insurance has been exhausted.

         COVERED SERVICES--see "BENEFITS PACKAGE"

         CREDENTIALING--the contractor's determination as to the qualifications
         and ascribed privileges of a specific provider to render specific
         health care services.

                                                                             I-5
<PAGE>   16
         CULTURAL COMPETENCY--a set of interpersonal skills that allow
         individuals to increase their understanding, appreciation, acceptance
         of and respect for cultural differences and similarities within, among
         and between groups and the sensitivity to how these differences
         influence relationships with enrollees. This requires a willingness and
         ability to draw on community-based values, traditions and customs, to
         devise strategies to better meet culturally diverse enrollee needs, and
         to work with knowledgeable persons of and from the community in
         developing focused interactions, communications, and other supports.

         CWA OR COUNTY WELFARE AGENCY ALSO KNOWN AS COUNTY BOARD OF SOCIAL
         SERVICES-- the agency within the county government that makes
         determination of eligibility for Medicaid and financial assistance
         programs.

         DAYS--calendar days unless otherwise specified.

         DBI--the New Jersey Department of Banking and Insurance in the
         executive branch of New Jersey State government.

         DEFAULT--see "AUTOMATIC ASSIGNMENT"

         DELIVERABLE--a document/report/manual to be submitted to the Department
         by the contractor pursuant to this contract.

         DENTAL DIRECTOR--the contractor's Director of dental services, who is
         required to be a Doctor of Dental Science or a Doctor of Medical
         Dentistry and licensed by the New Jersey Board of Dentistry, designated
         by the contractor to exercise general supervision over the provision of
         dental services by the contractor.

         DEPARTMENT--the Department of Human Services (DHS) in the executive
         branch of New Jersey State government. The Department of Human Services
         includes the Division of Medical Assistance and Health Services (DMAHS)
         and the terms are used interchangeably. The Department also includes
         Division of Youth and Family Services (DYFS), the Division of Family
         Development (DFD), the Division of Mental Health Services (DMHS), and
         the Division of Developmental Disabilities (DDD).

                                                                             I-6
<PAGE>   17
         DEVELOPMENTAL DISABILITY--a severe, chronic disability of a person
         which is attributable to a mental or physical impairment or combination
         of mental and physical impairments; is manifested before the person
         attains age twenty-two (22); is likely to continue indefinitely;
         results in substantial functional limitations in three or more of the
         following areas of major life activity: self-care, receptive and
         expressive language, learning, mobility, self-direction, capacity for
         independent living and economic self-sufficiency; and reflects the
         person's need for a combination and sequence of special,
         interdisciplinary, or generic care, treatment, or other services which
         are lifelong or of extended duration and are individually planned and
         coordinated. Developmental disability includes but is not limited to
         severe disabilities attributable to mental retardation, autism,
         cerebral palsy, epilepsy, spina bifida and other neurological
         impairments where the above criteria are met.

         DFD--the Division of Family Development, within the New Jersey
         Department of Human Services that administers programs of financial and
         administrative support for certain qualified individuals and families.

         DIAGNOSTIC SERVICES--any medical procedures or supplies recommended by
         a physician or other licensed practitioner of the healing arts, within
         the scope of his or her practice under State law, to enable him or her
         to identify the existence, nature, or extent of illness, injury, or
         other health deviation in an enrollee.

         DIRECTOR--the Director of the Division of Medical Assistance and Health
         Services or a duly authorized representative.

         DISABILITY--a physical or mental impairment that substantially limits
         one or more of the major life activities for more than three months a
         year.

         DISABILITY IN ADULTS--for adults applying under New Jersey Care Special
         Medicaid Programs and Title II (Social Security Disability Insurance
         Program) and for adults applying under Title XVI (the Supplemental
         Security Income [SSI] program), disability is defined as the inability
         to engage in any substantial gainful activity by reason of any
         medically determinable physical or mental impairment(s) which can be
         expected to result in death or which has lasted or can be expected to
         last for a continuous period of not less than 12 months.

         DISABILITY IN CHILDREN--a child under age 18 is considered disabled if
         he or she has a medically determinable physical or mental impairment(s)
         which results in marked and severe functional limitations that limit
         the child's ability to function independently, appropriately, and
         effectively in an age-appropriate manner, and can be expected to result
         in death or which can be expected to last for 12 months or longer.

         DISENROLLMENT--the removal of an enrollee from participation in the
         contractor's plan, but not from the Medicaid program.

                                                                             I-7
<PAGE>   18
         DIVISION OF DEVELOPMENTAL DISABILITIES (DDD)--a Division within the New
         Jersey Department of Human Services that provides evaluation,
         functional and guardianship services to eligible persons. Services
         include residential services, family support, contracted day programs,
         work opportunities, social supervision, guardianship, and referral
         services.

         DIVISION OR DMAHS--the New Jersey Division of Medical Assistance and
         Health Services within the Department of Human Services which
         administers the contract on behalf of the Department.

         DHHS OR HHS--United States Department of Health and Human Services of
         the executive branch of the federal government, which administers the
         Medicaid program through the Health Care Financing Administration
         (HCFA).

         DHSS--the New Jersey Department of Health and Senior Services in the
         executive branch of New Jersey State government, one of the regulatory
         agencies of the managed care industry. Its role and functions are
         delineated throughout the contract.

         DURABLE MEDICAL EQUIPMENT (DME)--equipment, including assistive
         technology, which: a) can withstand repeated use; b) is used to service
         a health or functional purpose; c) is ordered by a qualified
         practitioner to address an illness, injury or disability; and d) is
         appropriate for use in the home or work place/school.

         DYFS--the Division of Youth and Family Services, within the New Jersey
         Department of Human Services, whose responsibility is to ensure the
         safety of children and to provide social services to children and their
         families. DYFS enrolls into Medicaid financially eligible children
         under its supervision who reside in DYFS-supported substitute living
         arrangements such as foster care and certain subsidized adoption
         placements.

         DYFS RESIDENTIAL FACILITIES--include Residential Facilities, Teaching
         Family Homes, Juvenile Family In-Crisis Shelters, Children's Shelters,
         Transitional Living Homes, Treatment Homes Programs, Alternative Home
         Care Program, and Group Homes.

         EARLY AND PERIODIC SCREENING, DIAGNOSIS AND TREATMENT (EPSDT)--a Title
         XIX mandated program that covers screening and diagnostic services to
         determine physical and mental defects in enrollees under the age of 21,
         and health care, treatment, and other measures to correct or ameliorate
         any defects and chronic conditions discovered, pursuant to Federal
         Regulations found in Title XIX of the Social Security Act.

         EFFECTIVE DATE OF CONTRACT--shall be October 1, 2000.

         EFFECTIVE DATE OF DISENROLLMENT--the last day of the month in which the
         enrollee may receive services under the contractor's plan.

                                                                             I-8
<PAGE>   19
         EFFECTIVE DATE OF ENROLLMENT--the date on which an enrollee can begin
         to receive services under the contractor's plan pursuant to Article
         Five of this contract.

         ELDERLY PERSON--a person who is 65 years of age or older.

         EMERGENCY MEDICAL CONDITION--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
         medicine and health, could reasonably expect the absence of immediate
         medical attention to result in placing the health of the individual
         (or, with respect to a pregnant woman, the health of the woman or her
         unborn child) in serious jeopardy; serious impairment to bodily
         functions; or serious dysfunction of any bodily organ or part.

         EMERGENCY SERVICES--covered inpatient and outpatient services furnished
         by any qualified provider that are necessary to evaluate or stabilize
         an emergency medical condition.

         ENCOUNTER--the basic unit of service used in accumulating utilization
         data and/or a face-to-face contact between a patient and a health care
         provider resulting in a service to the patient.

         ENCOUNTER DATA--the record of the number and types of services rendered
         to patients during a specific time period and defined in Article 3.9 of
         this contract.

         ENROLLEE--an individual who is eligible for Medicaid/NJ FamilyCare,
         residing within the defined enrollment area, who elects or has had
         elected on his or her behalf by an authorized person, in writing, to
         participate in the contractor's plan and who meets specific Medicaid/NJ
         FamilyCare eligibility requirements for plan enrollment agreed to by
         the Department and the contractor. Enrollees include individuals in the
         AFDC/TANF, AFDC/TANF-Related Pregnant Women and Children, SSI-Aged,
         Blind and Disabled, DYFS, NJ FamilyCare, and Division of Developmental
         Disabilities/Community Care Waiver (DDD/CCW) populations. See also
         "Authorized Person."

         ENROLLEE WITH SPECIAL NEEDS--for adults, special needs includes
         complex/chronic medical conditions requiring specialized health care
         services, including persons with physical, mental/substance abuse,
         and/or developmental disabilities, including such persons who are
         homeless. Children with special health care needs are those who have or
         are at increased risk for a chronic physical, developmental,
         behavioral, or emotional conditions and who also require health and
         related services of a type or amount beyond that required by children
         generally.

         ENROLLMENT--the process by which an individual eligible for Medicaid
         voluntarily or mandatorily applies to utilize the contractor's plan in
         lieu of standard Medicaid benefits, and such application is approved by
         DMAHS.

                                                                             I-9
<PAGE>   20
         ENROLLMENT AREA--the geographic area bound by county lines from which
         Medicaid/NJ FamilyCare eligible residents may enroll with the
         contractor unless otherwise specified in the contract.

         ENROLLMENT LOCK-IN PERIOD--the period between the first day of the
         fourth (4th) month and the end of twelve (12) months after the
         effective date of enrollment in the contractor's plan, during which the
         enrollee must have good cause to disenroll or transfer from the
         contractor's plan. This is not to be construed as a guarantee of
         eligibility during the lock-in period. Lock-in provisions will not
         apply to clients of DDD or SSI, New Jersey Care Special Medicaid
         Program - Aged, Blind, Disabled, and DYFS enrollees.

         ENROLLMENT PERIOD--the twelve (12) month period commencing on the
         effective date of enrollment.

         EPSDT--see "EARLY AND PERIODIC SCREENING, DIAGNOSIS AND TREATMENT"

         EQUITABLE ACCESS--the concept that enrollees are given equal
         opportunity and consideration for needed services without exclusionary
         practices of providers or system design because of gender, age, race,
         ethnicity, sexual orientation, health status, or disability.

         EXCLUDED SERVICES--those services covered under the fee-for-service
         Medicaid program that are not included in the contractor benefits
         package.

         EXTERNAL REVIEW ORGANIZATION (ERO)--an outside independent accredited
         review organization under contract with the Department for the purposes
         of conducting annual contractor operation assessments and quality of
         care reviews for contractors.

         FAIR HEARING--the appeal process available to all Medicaid Eligibles
         pursuant to N.J.S.A. 30:4D-7 and administered pursuant to N.J.A.C.
         10:49-10.1 et seq.

         FEDERAL FINANCIAL PARTICIPATION--the funding contribution that the
         federal government makes to the New Jersey Medicaid and NJ FamilyCare
         programs.

         FEDERALLY QUALIFIED HEALTH CENTER (FQHC)--an entity that provides
         outpatient health programs pursuant to 42 U.S.C. Section 201 et seq.

         FEDERALLY QUALIFIED HMO--an HMO that has been found by the Secretary of
         the federal Department of Health and Human Services to provide "basic"
         and "supplemental" health services to its enrollees in accordance with
         the Health Maintenance Organization Act of 1973, as amended (Title XIII
         of the Public Health Service Act, 42 U.S.C. Section 300e), and to meet
         the other requirements of that Act relating to fiscal assurance
         mechanisms, continuing education for staff, and membership
         representation on the HMO's board of directors.

                                                                            I-10
<PAGE>   21
         FEE-FOR-SERVICE OR FFS--a method for reimbursement based on payment for
         specific services rendered to an enrollee.

         FRAUD--an intentional deception or misrepresentation made by a person
         with the knowledge that the deception could result in some unauthorized
         benefit to him/herself or some other person. It includes any act that
         constitutes fraud under applicable federal or State law. (See 42 C.F.R.
         Section 455.2)

         FULL TIME EQUIVALENT--the number of personnel with the same job title
         and responsibilities who, in the aggregate, perform work equivalent to
         a singular individual working a 40-hour work week.

         GA--means General Assistance, established by N.J.S.A. 10:90-1 et seq.,
         as a State cash assistance program administered by counties and
         municipalities under State supervision.

         GAAP--Generally Accepted Accounting Principles.

         GOOD CAUSE--reasons for disenrollment or transfer that include failure
         of the contractor to provide services including physical access to the
         enrollee in accordance with contract terms, enrollee has filed a
         grievance and has not received a response within the specified time
         period or enrollee has filed a grievance and has not received
         satisfaction. See Article 5.10.2 for more detail.

         GOVERNING BODY--a managed care organization's Board of Directors or,
         where the Board's participation with quality improvement issues is not
         direct, a designated committee of the senior management of the managed
         care organization.

         GRIEVANCE--means any complaint that is submitted in writing, or that is
         orally communicated and could not be resolved within the same day of
         receipt.

         GROUP MODEL--a type of HMO operation similar to a group practice except
         that the group model must meet the following criteria: (a) the group is
         a separate legal entity, (i.e. administrative entity) apart from the
         HMO; (b) the group is usually a corporation or partnership; (c) members
         of the group must pool their income; (d) members of the group must
         share medical equipment, as well as technical and administrative staff;
         (e) members of the group must devote at least 50 percent of their time
         to the group; and (f) members of the group must have "substantial
         responsibility" for delivery of health services to HMO members, within
         four years of qualification. After that period, the group may request
         additional time or a waiver in accordance with federal regulations at
         42 C.F.R. Section 110.104(2), Subpart A.

         HCFA--the Health Care Financing Administration within the U.S.
         Department of Health and Human Services.

                                                                            I-11
<PAGE>   22
         HEALTH BENEFITS COORDINATOR (HBC)--the external organization under
         contract with the Department whose primary responsibility is to assist
         Medicaid eligible individuals in contractor selection and enrollment.

         HEALTH CARE PROFESSIONAL--a physician or other health care professional
         if coverage for the professional's services is provided under the
         contractor's contract for the services. It includes podiatrists,
         optometrists, chiropractors, psychologists, dentists, physician
         assistants, physical or occupational therapists and therapy assistants,
         speech-language pathologists, audiologists, registered or licensed
         practical nurses (including nurse practitioners, clinical nurse
         specialists, certified registered nurses, registered nurse
         anesthetists, and certified nurse midwives), licensed certified social
         workers, registered respiratory therapists, and certified respiratory
         therapy technicians.

         HEALTH CARE SERVICES--are all preventive and therapeutic medical,
         dental, surgical, ancillary (medical and non-medical) and supplemental
         benefits provided to enrollees to diagnose, treat, and maintain the
         optimal well-being of enrollees provided by physicians, other health
         care professionals, institutional, and ancillary service providers.

         HEALTH INSURANCE--private insurance available through an individual or
         group plan that covers health services. It is also referred to as Third
         Party Liability.

         HEALTH MAINTENANCE ORGANIZATION (HMO)--any entity which contracts with
         providers and furnishes at least basic comprehensive health care
         services on a prepaid basis to enrollees in a designated geographic
         area pursuant to N.J.S.A. 26:2J-1 et seq., and with regard to this
         contract is either:

                  A.       A Federally Qualified HMO; or

                  B.       Meets the State Plan's definition of an HMO which
                           includes, at a minimum, the following requirements:

                           1.       It is organized primarily for the purpose of
                                    providing health care services;

                           2.       It makes the services it provides to its
                                    Medicaid enrollees as accessible to them (in
                                    terms of timeliness, amount, duration, and
                                    scope) as the services are to non-enrolled
                                    Medicaid eligible individuals within the
                                    area served by the HMO;

                           3.       It makes provision, satisfactory to the
                                    Division and Departments of Banking and
                                    Insurance and Health and Senior Services,
                                    against the risk of insolvency, and assures
                                    that Medicaid enrollees will not be liable
                                    for any of the HMO's debts if it does become
                                    insolvent; and

                           4.       It has a Certificate of Authority granted by
                                    the State of New Jersey to operate in all or
                                    selected counties in New Jersey.

         HEDIS--Health Plan Employer Data and Information Set.

                                                                            I-12
<PAGE>   23
         INDICATORS--the objective and measurable means, based on current
         knowledge and clinical experience, used to monitor and evaluate each
         important aspect of care and service identified.

         INDIVIDUAL HEALTH CARE PLAN (IHCP)--a multi-disciplinary plan of care
         for enrollees with special needs who qualify for a higher level of care
         management based on a Complex Needs Assessment. IHCPs specify short-
         and long-term goals, identify needed medical services and relevant
         social/support services, specialized transportation and communication,
         appropriate outcomes, and barriers to effective outcomes, and
         timelines. The IHCP is implemented and monitored by the care manager.

         INQUIRY--means a request for information by an enrollee, or a verbal
         request by an enrollee for action by the contractor that is so clearly
         contrary to the Medicaid Managed Care Program or the contractor's
         operating procedures that it may be construed as a factual
         misunderstanding, provided that the issue can be immediately explained
         and resolved by the contractor. Inquiries need not be treated or
         reported as complaints or grievances.

         INSOLVENT--unable to meet or discharge financial liabilities pursuant
         to N.J.S.A. 17B:32-33.

         INSTITUTIONALIZED--residing in a nursing facility, psychiatric
         hospital, or intermediate care facility/mental retardation (ICF/MR);
         this does not include admission in an acute care or rehabilitation
         hospital setting.

         IPN OR INDEPENDENT PRACTITIONER NETWORK--one type of HMO operation
         where member services are normally provided in the individual offices
         of the contracting physicians.

         LIMITED-ENGLISH-PROFICIENT POPULATIONS--individuals with a primary
         language other than English who must communicate in that language if
         the individual is to have an equal opportunity to participate
         effectively in and benefit from any aid, service or benefit provided by
         the health provider.

         MAINTENANCE SERVICES--include physical services provided to allow
         people to maintain their current level of functioning. Does not include
         habilitative and rehabilitative services.

         MANAGED CARE--a comprehensive approach to the provision of health care
         which combines clinical preventive, restorative, and emergency services
         and administrative procedures within an integrated, coordinated system
         to provide timely access to primary care and other medically necessary
         health care services in a cost effective manner.

                                                                            I-13
<PAGE>   24
         MANAGED CARE ENTITY--a managed care organization described in Section
         1903(m)(1)(A) of the Social Security Act, including Health Maintenance
         Organizations (HMOs), organizations with Section 1876 or
         Medicare+Choice contracts, provider sponsored organizations, or any
         other public or private organization meeting the requirements of
         Section 1902(w) of the Social Security Act, which has a risk
         comprehensive contract and meets the other requirements of that
         Section.

         MANDATORY--the requirement that certain DMAHS beneficiaries, delineated
         in Article 5, must select, or be assigned to a contractor in order to
         receive Medicaid services.

         MANDATORY ENROLLMENT--the process whereby an individual eligible for
         Medicaid/NJ FamilyCare is required to enroll in a contractor, unless
         otherwise exempted or excluded, to receive the services described in
         the standard benefits package as approved by the Department of Human
         Services through necessary federal waivers.

         MARKETING--any activity by the contractor, its employees or agents, or
         on behalf of the contractor by any person, firm or corporation by which
         information about the contractor's plan is made known to Medicaid or NJ
         FamilyCare Eligible Persons for enrollment purposes.

         MAXIMUM PATIENT CAPACITY--the estimated maximum number of active
         patients that could be assigned to a specific provider within mandated
         access-related requirements.

         MCMIS--managed care management information system, an automated
         information system designed and maintained to integrate information
         across the enterprise. The State recommends that the system include,
         but not necessarily be limited to, the following functions:

                  -        Enrollee Services

                  -        Provider Services

                  -        Claims and Encounter Processing

                  -        Prior Authorization, Referral and Utilization
                           Management

                  -        Financial Processing

                  -        Quality Assurance

                  -        Management and Administrative Reporting

                  -        Encounter Data Reporting to the State

         MEDICAID--the joint federal/State program of medical assistance
         established by Title XIX of the Social Security Act, 42 U.S.C. Section
         1396 et seq., which in New Jersey is administered by DMAHS in DHS
         pursuant to N.J.S.A. 30:4D-1 et seq.

         MEDICAID ELIGIBLE--an individual eligible to receive services under the
         New Jersey Medicaid program.

                                                                            I-14
<PAGE>   25
         MEDICAID EXPANSION--means the expansion of the New Jersey
         Care...Special Medicaid Programs, incorporates NJ FamilyCare Plan A,
         that will extend coverage to uninsured children below the age of 19
         years with family incomes up to and including 133 percent of the
         federal poverty level. (See NJ FamilyCare Plan A)

         MEDICAID RECIPIENT OR MEDICAID BENEFICIARY--an individual eligible for
         Medicaid who has applied for and been granted Medicaid benefits by
         DMAHS, generally through a CWA or Social Security District Office.

         MEDICAL COMMUNICATION--any communication made by a health care provider
         with a patient of the health care provider (or, where applicable, an
         authorized person) with respect to:

                  A.       The patient's health status, medical care, or
                           treatment options;

                  B.       Any utilization review requirements that may affect
                           treatment options for the patient; or

                  C.       Any financial incentives that may affect the
                           treatment of the patient.

         The term "medical communication" does not include a communication by a
         health care provider with a patient of the health care provider (or,
         where applicable, an authorized person) if the communication involves a
         knowing or willful misrepresentation by such provider.

         MEDICAL DIRECTOR--the licensed physician, in the State of New Jersey,
         i.e. Medical Doctor (MD) or Doctor of Osteopathy (DO), designated by
         the contractor to exercise general supervision over the provision of
         health service benefits by the contractor.

         MEDICAL GROUP--a partnership, association, corporation, or other group
         which is chiefly composed of health professionals licensed to practice
         medicine or osteopathy, and other licensed health professionals who are
         necessary for the provision of health services for whom the group is
         responsible.

         MEDICALLY DETERMINABLE IMPAIRMENT--an impairment that results from
         anatomical, physiological, or psychological abnormalities which can be
         shown by medically acceptable clinical and laboratory diagnostic
         techniques. A physical or mental impairment must be established by
         medical evidences consisting of signs, symptoms, and laboratory
         findings -- not only the individual's statement of symptoms.

         MEDICAL RECORDS--the complete, comprehensive records, accessible at the
         site of the enrollee's participating primary care physician or
         provider, that document all medical services received by the enrollee,
         including inpatient, ambulatory, ancillary, and emergency care,
         prepared in accordance with all applicable DHS rules and regulations,
         and signed by the medical professional rendering the services.

                                                                            I-15
<PAGE>   26
         MEDICAL SCREENING--an examination 1) provided on hospital property, and
         provided for that patient for whom it is requested or required, and 2)
         performed within the capabilities of the hospital's emergency room (ER)
         (including ancillary services routinely available to its ER), and 3)
         the purpose of which is to determine if the patient has an emergency
         medical condition, and 4) performed by a physician (M.D. or D.O.)
         and/or by a nurse practitioner, or physician assistant as permitted by
         State statutes and regulations and hospital bylaws.

         MEDICALLY NECESSARY SERVICES--services or supplies necessary to
         prevent, diagnose, correct, prevent the worsening of, alleviate,
         ameliorate, or cure a physical or mental illness or condition; to
         maintain health; to prevent the onset of an illness, condition, or
         disability; to prevent or treat a condition that endangers life or
         causes suffering or pain or results in illness or infirmity; to prevent
         the deterioration of a condition; to promote the development or
         maintenance of maximal functioning capacity in performing daily
         activities, taking into account both the functional capacity of the
         individual and those functional capacities that are appropriate for
         individuals of the same age; to prevent or treat a condition that
         threatens 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. The services provided, as well as the
         type of provider and setting, must be reflective of the level of
         services that can be safely provided, must be consistent with the
         diagnosis of the condition and appropriate to the specific medical
         needs of the enrollee and not solely for the convenience of the
         enrollee or provider of service and in accordance with standards of
         good medical practice and generally recognized by the medical
         scientific community as effective. Course of treatment may include mere
         observation or, where appropriate, no treatment at all. Experimental
         services or services generally regarded by the medical profession as
         unacceptable treatment are not medically necessary for purposes of this
         contract.

         Medically necessary services provided must be based on peer-reviewed
         publications, expert pediatric, psychiatric, and medical opinion, and
         medical/pediatric community acceptance.

         In the case of pediatric enrollees, this definition shall apply with
         the additional criteria that the services, including those found to be
         needed by a child as a result of a comprehensive screening visit or an
         inter-periodic encounter whether or not they are ordinarily covered
         services for all other Medicaid enrollees, are appropriate for the age
         and health status of the individual and that the service will aid the
         overall physical and mental growth and development of the individual
         and the service will assist in achieving or maintaining functional
         capacity.

         MEDICALLY NEEDY (MN) PERSON OR FAMILY--a person or family receiving
         services under the Medically Needy Program.

                                                                            I-16
<PAGE>   27
         MEDICARE--the program authorized by Title XVIII of the Social Security
         Act to provide payment for health services to federally defined
         populations.

         MEDICARE+CHOICE ORGANIZATION--an entity that contracts with HCFA to
         offer a Medicare+Choice plan pursuant to 42 U.S.C. Section 1395w-27.

         MEMBER--an enrolled participant in the contractor's plan; also means
         enrollee.

         MINORITY POPULATIONS--Asian/Pacific Islanders, African-American/Black,
         Hispanic/Latino, and American Indians/Alaska Natives.

         MIS--management information system.

         MULTILINGUAL--at a minimum, English and Spanish and any other language
         which is spoken by 200 enrollees or five percent of the enrolled
         Medicaid population of the contractor's plan, whichever is greater.

         NCQA--the National Committee for Quality Assurance.

         NEWBORN--an infant born to a mother enrolled in a contractor at the
         time of birth.

         NEW JERSEY STATE PLAN OR STATE PLAN--the DHS/DMAHS document, filed with
         and approved by HCFA, that describes the New Jersey Medicaid program.

         N.J.A.C.--New Jersey Administrative Code.

         NJ FAMILYCARE PLAN A--means the State-operated program which provides
         comprehensive managed care coverage to:

         -        Uninsured children below the age of 19 with family incomes up
                  to and including 133 percent of the federal poverty level;

         -        Children under the age of one year and pregnant women eligible
                  under the New Jersey Care...Special Medicaid Programs;

         -        Pregnant women up to 200 percent of the federal poverty level;

         -        AFDC eligibles with incomes up to and including 133 percent
                  of the federal poverty level;

         -        Parents/caretaker relatives with children below the age of 19
                  years who do not qualify for AFDC Medicaid and have family
                  incomes up to and including 133 percent of the federal poverty
                  level;

         -        Uninsured single adults/couples without dependent children
                  with family incomes up to and including 50 percent of the
                  federal poverty level; and

         -        General Assistance eligibles.

         In addition to covered managed care services, eligibles under this
         program may access certain other services which are paid
         fee-for-service and not covered under this contract.

                                                                            I-17
<PAGE>   28
         NJ FAMILYCARE PLAN B--means the State-operated program which provides
         comprehensive managed care coverage, including all benefits provided
         through the New Jersey Care... Special Medicaid Programs, to uninsured
         children below the age of 19 with family incomes above 133 percent and
         up to and including 150 percent of the federal poverty level. In
         addition to covered managed care services, eligibles under this program
         may access certain other services which are paid fee-for-service and
         not covered under this contract.

         NJ FAMILYCARE PLAN C--means the State-operated program which provides
         comprehensive managed care coverage, including all benefits provided
         through the New Jersey Care... Special Medicaid Programs, to uninsured
         children below the age of 19 with family incomes above 150 percent and
         up to and including 200 percent of the federal poverty level. Eligibles
         are required to participate in cost-sharing in the form of monthly
         premiums and a personal contribution to care for most services. In
         addition to covered managed care services, eligibles under this program
         may access certain other services which are paid fee-for-service and
         not covered under this contract.

         NJ FAMILYCARE PLAN D--means the State-operated program which provides
         managed care coverage to uninsured:

         -        Adults and couples without dependent children under the age of
                  19 with family incomes above 50% and up to and including 100
                  percent of the federal poverty level;

         -        Parents/caretakers with children below the age of 19 who do
                  not qualify for AFDC Medicaid with family incomes up to and
                  including 200 percent of the federal poverty level; and

         -        Children below the age of 19 with family incomes between 201
                  percent and up to and including 350 percent of the federal
                  poverty level.

         Eligibles with incomes above 150 percent of the federal poverty level
         are required to participate in cost sharing in the form of monthly
         premiums and copayments for most services. These groups are identified
         by Program Status Codes (PSCs) on the eligibility system as indicated
         below. For clarity, the codes related to Plan D non-cost sharing groups
         are also listed:

<TABLE>
<CAPTION>
                        Cost Sharing              No Cost Sharing
                        ------------              ---------------
<S>                                               <C>
                            493                         497
                            494                         763
                            495
                            498
</TABLE>

         In addition to covered managed care services, eligibles under these
         programs may access certain services which are paid fee-for-service and
         not covered under this contract.

         N.J.S.A.--New Jersey Statutes Annotated.

                                                                            I-18
<PAGE>   29
         NON-COVERED CONTRACTOR SERVICES--services that are not covered in the
         contractor's benefits package included under the terms of this
         contract.

         NON-COVERED MEDICAID SERVICES--all services that are not covered by the
         New Jersey Medicaid State Plan.

         NON-PARTICIPATING PROVIDER--a provider of service that does not have a
         contract with the contractor.

         OIT--the New Jersey Office of Information Technology.

         OTHER HEALTH COVERAGE--private non-Medicaid individual or group
         health/dental insurance. It may be referred to as Third Party Liability
         (TPL) or includes Medicare.

         OUT OF AREA SERVICES--all services covered under the contractor's
         benefits package included under the terms of the Medicaid contract
         which are provided to enrollees outside the defined basic service area.

         OUTCOMES--the results of the health care process, involving either the
         enrollee or provider of care, and may be measured at any specified
         point in time. Outcomes can be medical, dental, behavioral, economic,
         or societal in nature.

         OUTPATIENT CARE--treatment provided to an enrollee who is not admitted
         to an inpatient hospital or health care facility.

         P FACTOR (P7)--the grade of service for the telephone system. The digit
         following the P (e.g., 7) indicates the number of calls per hundred
         that are or can be blocked from the system. In this sample, P7 means
         seven (7) calls in a hundred may be blocked, so the system is designed
         to meet this criterion. Typically, the grade of service is designed to
         meet the peak busy hour, the busiest hour of the busiest day of the
         year.

         PARTICIPATING PROVIDER--a provider that has entered into a provider
         contract with the contractor to provide services.

         PARTIES--the DMAHS, on behalf of the DHS, and the contractor.

         PATIENT--an individual who is receiving needed professional services
         that are directed by a licensed practitioner of the healing arts toward
         the maintenance, improvement, or protection of health, or lessening of
         illness, disability, or pain.

                                                                            I-19
<PAGE>   30
         PAYMENTS--any amounts the contractor pays physicians or physician
         groups or subcontractors for services they furnished directly, plus
         amounts paid for administration and amounts paid (in whole or in part)
         based on use and costs of referral services (such as withhold amounts,
         bonuses based on referral levels, and any other compensation to the
         physician or physician groups or subcontractor to influence the use of
         referral services). Bonuses and other compensation that are not based
         on referral levels (such as bonuses based solely on quality of care
         furnished, patient satisfaction, and participation on committees) are
         not considered payments for purposes of the requirements pertaining to
         physician incentive plans.

         PEER REVIEW--a mechanism in quality assurance and utilization review
         where care delivered by a physician, dentist, or nurse is reviewed by a
         panel of practitioners of the same specialty to determine levels of
         appropriateness, effectiveness, quality, and efficiency.

         PERSONAL CONTRIBUTION TO CARE (PCC)--means the portion of the
         cost-sharing requirement for NJ FamilyCare Plan C enrollees in which a
         fixed monetary amount is paid for certain services/items received from
         contractor providers.

         PERSONAL INJURY (PI)--a program designed to recover the cost of medical
         services from an action involving the tort liability of a third party.

         PHYSICIAN GROUP--a partnership, association, corporation, individual
         practice association, or other group that distributes income from the
         practice among members. An individual practice association is a
         physician group only if it is composed of individual physicians and has
         no subcontracts with physician groups.

         PHYSICIAN INCENTIVE PLAN--any compensation arrangement between a
         contractor and a physician or physician group that may directly or
         indirectly have the effect of reducing or limiting services furnished
         to Medicaid beneficiaries enrolled in the organization.

         POST-STABILIZATION SERVICES--services subsequent to an emergency that a
         treating physician views as medically necessary after an emergency
         medical condition has been stabilized.

         PREPAID HEALTH PLAN--an entity that provides medical services to
         enrollees under a contract with the DHS and on the basis of prepaid
         capitation fees, but does not necessarily qualify as an MCE.

                                                                            I-20
<PAGE>   31
         PREVENTIVE SERVICES--services provided by a physician or other licensed
         practitioner of the healing arts within the scope of his or her
         practice under State law to:

                  A.       Prevent disease, disability, and other health
                           conditions or their progression;

                  B.       Treat potential secondary conditions before they
                           happen or at an early remediable stage;

                  C.       Prolong life; and

                  D.       Promote physical and mental health and efficiency

         PRIMARY CARE DENTIST (PCD)--a licensed dentist who is the health care
         provider responsible for supervising, coordinating, and providing
         initial and primary dental care to patients; for initiating referrals
         for specialty care; and for maintaining the continuity of patient care.

         PRIMARY CARE PROVIDER (PCP)--a licensed medical doctor (MD) or doctor
         of osteopathy (DO) or certain other licensed medical practitioner who,
         within the scope of practice and in accordance with State
         certification/licensure requirements, standards, and practices, is
         responsible for providing all required primary care services to
         enrollees, including periodic examinations, preventive health care and
         counseling, immunizations, diagnosis and treatment of illness or
         injury, coordination of overall medical care, record maintenance, and
         initiation of referrals to specialty providers described in this
         contract and the Benefits Package, and for maintaining continuity of
         patient care. A PCP shall include general/family practitioners,
         pediatricians, internists, and may include specialist physicians,
         physician assistants, CNMs or CNPs/CNSs, provided that the practitioner
         is able and willing to carry out all PCP responsibilities in accordance
         with these contract provisions and licensure requirements.

         PRIOR AUTHORIZATION (ALSO KNOWN AS "PRE-AUTHORIZATION" OR "APPROVAL")--
         authorization granted in advance of the rendering of a service after
         appropriate medical/dental review.

         PROVIDER--means any physician, hospital, facility, or other health care
         professional who is licensed or otherwise authorized to provide health
         care services in the state or jurisdiction in which they are furnished.

         PROVIDER CAPITATION--a set dollar payment per patient per unit of time
         (usually per month) that the contractor pays a provider to cover a
         specified set of services and administrative costs without regard to
         the actual number of services.

                                                                            I-21
<PAGE>   32
         PROVIDER CONTRACT--any written contract between the contractor and a
         provider that requires the provider to perform specific parts of the
         contractor's obligations for the provision of health care services
         under this contract.

         QAPI--Quality Assessment and Performance Improvement.

         QARI--Quality Assurance Reform Initiative.

         QIP--Quality Improvement Project.

         QISMC--Quality Improvement System for Managed Care.

         QUALIFIED INDIVIDUAL WITH A DISABILITY--an individual with a disability
         who, with or without reasonable modifications to rules, policies, or
         practices, the removal of architectural, communication, or
         transportation barriers, or the provision of auxiliary aids and
         services, meets the essential eligibility requirements for the receipt
         of services or the participation in programs or activities provided by
         a public entity (42 U.S.C. Section 12131).

         REASSIGNMENT--the process by which an enrollee's entitlement to receive
         services from a particular Primary Care Practitioner/Dentist is
         terminated and switched to another PCP/PCD.

         REFERRAL SERVICES--those health care services provided by a health
         professional other than the primary care practitioner and which are
         ordered and approved by the primary care practitioner or the
         contractor.

                  Exception A: An enrollee shall not be required to obtain a
                  referral or be otherwise restricted in the choice of the
                  family planning provider from whom the enrollee may receive
                  family planning services.

                  Exception B: An enrollee may access services at a Federally
                  Qualified Health Center (FQHC) in a specific enrollment area
                  without the need for a referral when neither the contractor
                  nor any other contractor has a contract with the Federally
                  Qualified Health Center in that enrollment area and the cost
                  of such services will be paid by the Medicaid fee-for-service
                  program.

         REINSURANCE--an agreement whereby the reinsurer, for a consideration,
         agrees to indemnify the contractor, or other provider, against all or
         part of the loss which the latter may sustain under the enrollee
         contracts which it has issued.

         RISK OR UNDERWRITING RISK--the possibility that a contractor may incur
         a loss because the cost of providing services may exceed the payments
         made by the Department to the contractor for services covered under the
         contract.

                                                                            I-22
<PAGE>   33
         RISK COMPREHENSIVE CONTRACT--for purposes of this contract, a risk
         contract for furnishing comprehensive health care services, i.e.,
         inpatient hospital services and any three of the following services or
         groups of services:

                  A.       Outpatient hospital services and rural health
                           clinical services;

                  B.       Other laboratory and diagnostic and therapeutic
                           radiologic services;

                  C.       Skilled nursing facility services, EPSDT, and family
                           planning;

                  D.       Physician services; and

                  E.       Home health services.

         RISK THRESHOLD--the maximum liability, if the liability is based on
         referral services, to which a physician or physician group may be
         exposed under a physician incentive plan without being at substantial
         financial risk.

         ROUTINE CARE--treatment of a condition which would have no adverse
         effects if not treated within 24 hours or could be treated in a less
         acute setting (e.g., physician's office) or by the patient.

         SAFETY-NET PROVIDERS OR ESSENTIAL COMMUNITY PROVIDERS--public-funded or
         government-sponsored clinics and health centers which provide
         specialty/specialized services which serve any individual in need of
         health care whether or not covered by health insurance and may include
         medical/dental education institutions, hospital-based programs,
         clinics, and health centers.

         SAP--Statutory Accounting Principles.

         SCOPE OF SERVICES--those specific health care services for which a
         provider has been credentialed, by the plan, to provide to enrollees.

         SCREENING SERVICES--any encounter with a health professional practicing
         within the scope of his or her profession as well as the use of
         standardized tests given under medical direction in the examination of
         a designated population to detect the existence of one or more
         particular diseases or health deviations or to identify for more
         definitive studies individuals suspected of having certain diseases.

         SECRETARY--the Secretary of the United States Department of Health and
         Human Services.

         SEMI--Special Education Medicaid Initiative, a federal Medicaid program
         that allows for reimbursement to local education agencies for certain
         special education related services (e.g., physical therapy,
         occupational therapy, and speech therapy).

                                                                            I-23
<PAGE>   34
         SERVICE AREA--the geographic area or region comprised of those counties
         as designated in the contract.

         SERVICE LOCATION/SERVICE SITE--any location at which an enrollee
         obtains any health care service provided by the contractor under the
         terms of the contract.

         SHORT TERM--a period of 30 calendar days or less.

         SIGNING DATE--the date on which the parties sign this contract. In no
         event shall the signing date be later than 5 P.M. Eastern Standard Time
         on March 17, 2000.

         SPECIAL MEDICAID PROGRAMS--programs for: (a) AFDC/TANF-related family
         members who do not qualify for cash assistance, and (b) SSI-related
         aged, blind and disabled individuals whose incomes or resources exceed
         the SSI Standard.

                  For AFDC/TANF, they are:

                  Medicaid Special: covers children ages 19 to 21 using AFDC
                  standards; New Jersey Care: covers pregnant women and children
                  up to age 1 with incomes at or below 185 percent of the
                  federal poverty level (FPL); children up to age 6 at 133
                  percent of FPL; and children up to age 13 (the age range
                  increases annually, pursuant to federal law until children up
                  to age 18 are covered) at 100 percent of FPL.

                  For SSI-related, they are:

                  Community Medicaid Only-provides full Medicaid benefits for
                  aged, blind and disabled individuals who meet the SSI age and
                  disability criteria, but do not receive cash assistance,
                  including former SSI recipients who receive Medicaid
                  continuation;

                  New Jersey Care-provides full Medicaid benefits for all
                  SSI-related Aged, Blind, and Disabled individuals with income
                  below 100 percent of the federal poverty level and resources
                  at or below 200 percent of the SSI resource standard.

         SSI--the Supplemental Security Income program, which provides cash
         assistance and full Medicaid benefits for individuals who meet the
         definition of aged, blind, or disabled, and who meet the SSI financial
         needs criteria.

         STAFF MODEL--a type of HMO operation in which HMO employees are
         responsible for both administrative and medical functions of the plan.
         Health professionals, including physicians, are reimbursed on a salary
         or fee-for-service basis. These employees are subject to all policies
         and procedures of the HMO. In addition, the HMO may contract with
         external entities to supplement its own staff resources (e.g., referral
         services of specialists).

                                                                            I-24
<PAGE>   35
         STANDARD SERVICE PACKAGE--see "COVERED SERVICES" and "BENEFITS PACKAGE"

         STATE--the State of New Jersey.

         STATE PLAN--see "NEW JERSEY STATE PLAN"

         STOP-LOSS--the dollar amount threshold above which the contractor
         insures the financial coverage for the cost of care for an enrollee
         through the use of an insurance underwritten policy.

         SUBCONTRACT--any written contract between the contractor and a third
         party to perform a specified part of the contractor's obligations under
         this contract.

         SUBCONTRACTOR--any third party who has a written contract with the
         contractor to perform a specified part of the contractor's obligations
         under this contract.

         SUBCONTRACTOR PAYMENTS--any amounts the contractor pays a provider or
         subcontractor for services they furnish directly, plus amounts paid for
         administration and amounts paid (in whole or in part) based on use and
         costs of referral services (such as withhold amounts, bonuses based on
         referral levels, and any other compensation to the physician or
         physician group to influence the use of referral services). Bonuses and
         other compensation that are not based on referral levels (such as
         bonuses based solely on quality of care furnished, patient
         satisfaction, and participation on committees) are not considered
         payments for purposes of physician incentive plans.

         SUBSTANTIAL CONTRACTUAL RELATIONSHIP--any contractual relationship that
         provides for one or more of the following services: 1) the
         administration, management, or provision of medical services; and 2)
         the establishment of policies, or the provision of operational support,
         for the administration, management, or provision of medical services.

         TANF--Temporary Assistance for Needy Families, which replaced the
         federal AFDC program.

         TARGET POPULATION--the population of individuals eligible for
         Medicaid/NJ FamilyCare residing within the stated enrollment area and
         belonging to one of the categories of eligibility found in Article Five
         from which the contractor may enroll, not to exceed any limit specified
         in the contract.

         TDD--Telecommunication Device for the Deaf.

         TT--Tech Telephone.

         TERMINAL ILLNESS--a condition in which it is recognized that there will
         be no recovery, the patient is nearing the "terminus" of life and
         restorative treatment is no longer effective.

                                                                            I-25
<PAGE>   36
         THIRD PARTY--any person, institution, corporation, insurance company,
         public, private or governmental entity who is or may be liable in
         contract, tort, or otherwise by law or equity to pay all or part of the
         medical cost of injury, disease or disability of an applicant for or
         recipient of medical assistance payable under the New Jersey Medical
         Assistance and Health Services Act N.J.S.A. 30:4D-1 et seq.

         THIRD PARTY LIABILITY--the liability of any individual or entity,
         including public or private insurance plans or programs, with a legal
         or contractual responsibility to provide or pay for medical/dental
         services. Third Party is defined in N.J.S.A. 30:4D-3m.

         TRADITIONAL PROVIDERS--those providers who have historically delivered
         medically necessary health care services to Medicaid enrollees and have
         maintained a substantial Medicaid portion in their practices.

         TRANSFER--an enrollee's change from enrollment in one contractor's plan
         to enrollment of said enrollee in a different contractor's plan.

         UNCONTESTED CLAIM--a claim that can be processed without obtaining
         additional information from the provider of the service or third party.

         URGENT CARE--treatment of a condition that is potentially harmful to a
         patient's health and for which his/her physician determined it is
         medically necessary for the patient to receive medical treatment within
         24 hours to prevent deterioration.

         UTILIZATION--the rate patterns of service usage or types of service
         occurring within a specified time.

         UTILIZATION REVIEW--procedures used to monitor or evaluate the clinical
         necessity, appropriateness, efficacy, or efficiency of health care
         services, procedures or settings, and includes ambulatory review,
         prospective review, concurrent review, second opinions, care
         management, discharge planning, or retrospective review.

         VOLUNTARY ENROLLMENT--the process by which a Medicaid eligible
         individual voluntarily enrolls in a contractor.

         WIC--A special supplemental food program for Women, Infants, and
         Children.

         WITHHOLD--a percentage of payments or set dollar amounts that a
         contractor deducts from a practitioner's service fee, capitation, or
         salary payment, and that may or may not be returned to the physician,
         depending on specific predetermined factors.

                                                                            I-26
<PAGE>   37
ARTICLE TWO: CONDITIONS PRECEDENT

         A.       This contract shall be with qualified, established HMOs
                  operating in New Jersey through a Certificate of Authority for
                  Medicaid lines of business approved by the New Jersey
                  Department of Banking and Insurance and Department of Health
                  and Senior Services. The contractor shall receive all
                  necessary authorizations and approvals of governmental or
                  regulatory authorities to operate in the service/enrollment
                  areas as of the effective date of operations.

         B.       The contractor shall ensure continuity of care and full access
                  to primary, specialty, and ancillary care as required under
                  this contract and access to full administrative programs and
                  support services offered by the contractor for all its lines
                  of business and/or otherwise required under this contract.

         C.       The contractor shall, by the effective date, have received all
                  necessary authorizations and approvals of governmental or
                  regulatory authorities including an approved Certificate of
                  Authority (COA) to operate in all counties in a geographic
                  region as defined in Article 5.1 or shall have an approved (by
                  DMAHS) county phase-in plan defined in Section H. This Article
                  does not and is not intended to require the contractor to
                  obtain COAs in all three geographic regions.

         D.       Documentation. Subsequent to the signing date by the
                  contractor but prior to contract execution by the Department,
                  the Department shall review and approve the materials listed
                  in Section B.2.2 of the Appendices.

         E.       Readiness Review. The Department will, prior to the signing
                  date, conduct a readiness review of the areas set forth in
                  Section B.2.3 of the Appendices to generally assess the
                  contractor's readiness to begin operations and issue a letter
                  to the contractor that conveys its findings and any changes
                  required before contracting with the Department.

         F.       This contract, as well as any attachments or appendices hereto
                  shall only be effective, notwithstanding any provisions in
                  such contract to the contrary, upon the receipt of federal
                  approval and approval as to form by the Office of the Attorney
                  General for the State of New Jersey.

         G.       The contractor shall remain in compliance with the following
                  conditions which shall satisfy the Departments of Banking and
                  Insurance, Health and Senior Services, and Human Services
                  prior to this contract becoming effective:

                  1.       The contractor shall maintain an approved certificate
                           of authority to operate as a health maintenance
                           organization in New Jersey from the Department of
                           Banking and Insurance and the Department of Health
                           and Senior Services for the Medicaid population.

                                                                            II-1
<PAGE>   38
                  2.       The contractor shall comply with and remain in
                           compliance with minimum net worth and fiscal solvency
                           and reporting requirements of the Department of
                           Banking and Insurance, the Department of Human
                           Services, the federal government, and this contract.

                  3.       The contractor shall provide written certification of
                           new written contracts for all providers other than
                           FQHCs and shall provide copies of fully executed
                           contracts for new contracts with FQHCs on a quarterly
                           basis.

                  4.       If insolvency protection arrangements change, the
                           contractor shall notify the DMAHS sixty (60) days
                           before such change takes effect and provide written
                           copy of DOBI approval.

         H.       County Expansion Phase-In Plan. If the contractor does not
                  have an approved COA for each of the counties in a designated
                  region, the contractor shall submit to DMAHS a county
                  expansion phase-in plan for review and approval by DMAHS prior
                  to the execution of this contract. The plan shall include
                  detailed information of:

                           -        The region and names of the counties
                                    targeted for expansion;

                           -        Anticipated dates of the submission of the
                                    COA modification to DOBI and DHSS (with
                                    copies to DMAHS);

                           -        Anticipated date of approval of the COA;

                           -        Anticipated date for full operations in the
                                    region;

                           -        Anticipated date for initial beneficiary
                                    enrollment in each county

                  The phase-in plan shall indicate that full expansion into a
                  region shall be completed by June 30, 2001. The contractor
                  shall maintain full coverage for each county in each region in
                  which the contractor operates for the duration of this
                  contract.

         I.       No court order, administrative decision, or action by any
                  other instrumentality of the United States Government or the
                  State of New Jersey or any other state is outstanding which
                  prevents implementation of this contract.

         J.       Net Worth

                  1.       The contractor shall maintain a minimum net worth in
                           accordance with N.J.A.C. Title 8:38-11 et seq.

                                                                            II-2
<PAGE>   39
                  2.       The Department shall have the right to conduct
                           targeted financial audits of the contractor's
                           Medicaid line of business. The contractor shall
                           provide the Department with financial data, as
                           requested by the Department, within a timeframe
                           specified by the Department.

         K.       The contractor shall comply with the following financial
                  operations requirements:

                  1.       A contractor shall establish and maintain:

                           a.       An office in New Jersey, and

                           b.       Premium and claims accounts in a bank with a
                                    principal office in New Jersey.

                  2.       The contractor shall have a fiscally sound operation
                           as demonstrated by:

                           a.       Maintenance of a minimum net worth in
                                    accordance with DOBI requirements (total
                                    line of business) and the requirements
                                    outlined in G and J above and Article 8.2.

                           b.       Maintenance of a net operating surplus for
                                    Medicaid line of business. If the contractor
                                    fails to earn a net operating surplus during
                                    the most recent calendar year or does not
                                    maintain minimum net worth requirements on a
                                    quarterly basis, it shall submit a plan of
                                    action to DMAHS within the time frame
                                    specified by the Department. The plan is
                                    subject to the approval of DMAHS. It shall
                                    demonstrate how and when minimum net worth
                                    will be replenished and present marketing
                                    and financial projections. These shall be
                                    supported by suitable back-up material. The
                                    discussion shall include possible alternate
                                    funding sources, including invoking of
                                    corporate parental guarantee. The plan will
                                    include:

                                    i.       A detailed marketing plan with
                                             enrollment projections for the next
                                             two years.

                                    ii.      A projected balance sheet for the
                                             next two years.

                                    iii.     A projected statement of revenues
                                             and expenses on an accrual basis
                                             for the next two years.

                                    iv.      A statement of cash flow projected
                                             for the next two years.

                                    v.       A description of how to maintain
                                             capital requirements and replenish
                                             net worth.

                                    vi.      Sources and timing of capital shall
                                             be specifically identified.

                                                                            II-3
<PAGE>   40
                  3.       The contractor may be required to obtain prior to
                           this contract and maintain "Stop-Loss" insurance,
                           pursuant to provisions in Article 8.3.2.

                  4.       The contractor shall obtain prior to this contract
                           and maintain for the duration of this contract, any
                           extension thereof or for any period of liability
                           exposure, protection against insolvency pursuant to
                           provisions in G above and Article 8.2.

                                                                            II-4
<PAGE>   41
ARTICLE THREE: MANAGED CARE MANAGEMENT INFORMATION SYSTEM

The contractor's MCMIS shall provide certain minimum functional capabilities as
described in this contract. The contractor shall have sophisticated information
systems capabilities that cannot only support the specific requirements of this
contract, but also respond to future program requirements. The DHS shall provide
the contractor with what the DHS, in its sole discretion, believes is sufficient
lead time to make system changes.

The various components of the contractor's MCMIS shall be sufficiently
integrated to effectively and efficiently support the requirements of this
contract. The contractor's MCMIS shall also be a collection point and repository
for all data required under this contract and shall provide comprehensive
information retrieval capabilities. Contractors with multiple systems and/or
subcontracted health care services shall integrate the data, at a minimum, to
provide for combined reporting and, as required, to support the required
processing functions.

3.1   GENERAL OPERATIONAL REQUIREMENTS FOR THE MCMIS

      The following requirements apply to the contractor's MCMIS. Any
      reference to "systems" in this Article shall mean contractor's MCMIS
      unless otherwise specified. If the contractor subcontracts any MCMIS
      functions, then these requirements apply to the subcontractor's
      systems. For example, if the contractor contracts with a dental network
      to provide services and pay claims/collect encounters, then these
      requirements shall apply to the dental network's systems. However, if
      the contractor contracts with a dental network only to provide dental
      services, then these requirements do not apply.

3.1.1 ONLINE ACCESS

      The system(s) shall provide online access for contractor use to all
      major files and data elements within the MIS including enrollee
      demographic and enrollment information, provider demographic and
      enrollment data, processed claims and encounters, prior approvals,
      referrals, reference files, and payment and financial transactions.

3.1.2 PROCESSING REQUIREMENTS

      A.       Timely Processing. The contractor shall provide for timely
               updates and edits for all transactions on a schedule that
               allows the contractor to meet the State's performance
               requirements. In general, the State expects the following
               schedule:

               1.       Enrollee and provider file updates to be daily

               2.       Reference file updates to be at least weekly or as
                        needed

               3.       Prior authorizations and referral updates to be daily

               4.       Claims and encounters to be processed (entered and
                        edited) daily

               5.       Claim payments to be at a minimum biweekly

               6.       Capitation payments to be monthly

                                                                           III-1
<PAGE>   42
                  Specific update schedule requirements are identified in the
                  remaining subarticles of this Article.

         B.       Error Tracking and Audit Trails. The update and edit processes
                  for each transaction shall provide for the monitoring of
                  errors incurred by type of error and frequency. The system
                  shall maintain information indicating the errors failed, the
                  person making the corrections, when the correction was made,
                  and if the error was overridden on all critical transactions
                  (e.g., terminating enrollment or denying a claim). The major
                  update processes shall maintain sufficient audit trails to
                  allow reconstruction of the processing events.

         C.       Comprehensive Edits and Audits. The contractor's system shall
                  provide for a comprehensive set of automated edits and audits
                  that will ensure the data are valid, the benefits are covered
                  and appropriate, the payments are accurate and timely, other
                  insurance is maximized, and all of the requirements of this
                  contract are met.

         D.       System Controls and Balancing. The contractor's system shall
                  provide adequate control totals for balancing and ensuring
                  that all inputs are accounted for. The contractor shall have
                  operational procedures for balancing and validating all
                  outputs and processes. Quality checkpoints should be as
                  automated as possible.

         E.       Multimedia Input Capability. The system shall support a
                  variety of input media formats including hardcopy, diskette,
                  tape, clearing house, direct entry, electronic transmission or
                  other means, as defined by all federal and State laws and
                  regulations. The contractor may use any clearing house(s)
                  and/or alternatively provide for electronic submissions
                  directly from the provider to the contractor. These
                  requirements apply to claims/encounter and prior authorization
                  (PA), referral, and UM subsystems. Provider/vendor data must
                  be routed through the contractor when submitting
                  data/information to the State.

         F.       Backup/Restore and Archiving. The contractor shall provide for
                  periodic backup of all key processing and transaction files
                  such that there will be a minimum of interruption in the event
                  of a disaster. Unless otherwise agreed by the State, key
                  processes must be restored as follows:

                  1.       Enrollment verification - twenty-four (24) hours

                  2.       Enrollment update process - twenty-four (24) hours

                  3.       Prior authorization/referral processing - twenty-four
                           (24) hours

                  4.       Claims/encounter processing - seventy-two (72) hours

                  5.       Encounter submissions to State - one (1) week

                  6.       Other functions - two (2) weeks

                  The contractor shall demonstrate its restore capabilities at
                  least once a year. The contractor shall also provide for
                  permanent archiving of all major files for a period

                                                                           III-2
<PAGE>   43
                  of no less than seven (7) years. The contractor's
                  backup/recover plan must be approved by State.

3.1.3 REPORTING AND DOCUMENTATION REQUIREMENTS

      A.       Regular Reporting. The contractor's system shall provide
               sufficient reports to meet the requirements of this contract
               as well as to support the efficient and effective operation of
               its business functions. The required reports, including time
               frames and format requirements, are in Section A of the
               Appendices.

      B.       Ad Hoc Reporting. The contractor shall have the capability to
               support ad hoc reporting requests, in addition to those listed
               in this contract, both from its own organization and from the
               State in a reasonable time frame. The time frame for
               submission of the report will be determined by DMAHS with
               input from the contractor based on the nature of the report.
               DMAHS shall at its option request six (6) to eight (8) reports
               per year, hardcopy or electronic reports and/or file extracts.
               This does not preclude or prevent DMAHS from requiring, or the
               contractor from providing, additional reports that are
               required by State or federal governmental entities or any
               court of competent jurisdiction.

      C.       System Documentation. The contractor shall update
               documentation on its system(s) within 30 days of
               implementation of the changes. The contractor's documentation
               must include a system introduction, program overviews,
               operating environment, external interfaces, and data element
               dictionary. For each of the functional components, the
               documentation should include where applicable program
               narratives, processing flow diagrams, forms, screens, reports,
               files, detailed logic such as claims pricing algorithms and
               system edits. The documentation should also include job
               descriptions and operations instructions. The contractor shall
               have available current documentation on-site for State audit
               as requested.

3.1.4 OTHER REQUIREMENTS

      A.       Future Changes. The system shall be easily modifiable to
               accommodate future system changes/enhancements to claims
               processing or other related systems at the same time as
               changes take place in the State's MMIS. In addition, the
               system shall be able to accommodate all future requirements
               based upon federal and State statutes, policies and
               regulations. Unless otherwise agreed by the State, the
               contractor shall be responsible for the costs of these
               changes.

      B.       Year 2000. The MCMIS shall meet the Office of Information
               Technology (OIT) standards for Year 2000 compliance unless
               otherwise approved by the Department. The OIT standards may be
               accessed on the Internet at
               http://www.state.nj.us/infobank/circular/cir9705s.htm.

                                                                           III-3
<PAGE>   44
3.2      ENROLLEE SERVICES

         The MCMIS shall support all of the enrollee services as specified in
         Article 5 of this contract. The system shall:

         A.       Capture and maintain contractor enrollment data
                  electronically.

         B.       Provide information so that the contractor can send plan
                  materials and information to enrollees.

         C.       Capture electronically the Primary Care Provider (PCP)
                  selections by enrollees.

         D.       Provide contractor enrollment and Medicaid information to
                  providers.

         E.       Maintain an enrollee complaint and grievance tracking system
                  for Medicaid and NJ FamilyCare enrollees.

         F.       Produce the required enrollee data reports.

         The enrollee module(s) shall interface with all other required modules
         and permit the access, search, and retrieval of enrollee data by key
         fields, including date-sensitive information.

3.2.1    CONTRACTOR ENROLLMENT DATA

         A.       Enrollee Data. The contractor shall maintain a complete
                  history of enrollee information, including contractor
                  enrollment, primary care provider assignment, third party
                  liability coverage, and Medicare coverage. In addition, the
                  contractor shall capture demographic information relating to
                  the enrollee (age, sex, county, etc.), information related to
                  family linkages, information relating to benefit and service
                  limitations, and information related to health care for
                  enrollees with special needs.

         B.       Updates. The contractor shall accept and process a weekly
                  enrollment and eligibility file (the managed care register
                  files; See Section B.3.2 of the Appendices) within 48 hours of
                  receipt from the Department. The system shall provide reports
                  that identify all errors encountered, count all transactions
                  processed, and provide for a complete audit trail of the
                  update processes. The MCMIS shall accommodate the following
                  specific Medicaid/NJ FamilyCare requirements.

                  1.       The contractor shall be able to access and identify
                           all enrollees by their Medicaid/NJ FamilyCare
                           Identification Number. This number shall be readily
                           cross-referenced to the contractor's enrollee number
                           and the enrollee's social security number. For DYFS
                           cases, it is important that the

                                                                           III-4
<PAGE>   45
                           contractor's system be able to distinguish the DYFS
                           enrolled children from other cases and that mailings
                           to the DYFS enrolled children not be consolidated
                           based on the first 10 digits of the Medicaid ID
                           number because the family members may not be residing
                           together.

                  2.       The system shall be able to link family members for
                           on-line inquiry access and for consolidated mailings
                           based on the first ten-digits of the Medicaid ID
                           number.

                  3.       The system shall be able to identify newborns from
                           the date of birth, submit the proper eligibility form
                           to the State, and link the newborn record to the NJ
                           FamilyCare/Medicaid eligibility and enrollment data
                           when these data are received back from the State.

                  4.       The system shall capture and maintain all of the data
                           elements provided by the Department on the weekly
                           update files.

                  5.       The system shall allow for day-specific enrollment
                           into the contractor.

3.2.2    ENROLLEE PROCESSING REQUIREMENTS

         The contractor's system shall support the enrollee processing
         requirements of this contract. The system shall be modified/enhanced as
         required to meet the contract requirements in an efficient manner and
         ensure that each requirement is consistently and accurately
         administered by the contractor. Materials shall be sent to the enrollee
         or authorized representative, as applicable.

         A.       Enrollee Notification. The contractor shall issue contractor
                  plan materials and information to all new enrollees prior to
                  the effective date of enrollment or within seven (7) calendar
                  days following the receipt of weekly enrollment file specified
                  above, or, in case of retroactive enrollment, issue the
                  materials by the 1stof the subsequent month or within seven
                  (7) calendar days following receipt of the weekly enrollment
                  file. The specifications for the contractor plan materials and
                  information are listed in Article 5.8.

         B.       ID Cards. The contractor shall issue an Identification Card to
                  all new enrollees within ten (10) calendar days following
                  receipt of the weekly enrollment file specified above but no
                  later than seven (7) calendar days after the effective date of
                  enrollment.

                  The specifications for Identification Cards are in Article
                  5.8.5. The system shall produce ID cards that include the
                  information required in that Article. The contractor shall
                  also be able to produce replacement cards on request.

                                                                           III-5
<PAGE>   46
         C.       PCP Selection. The contractor shall provide the enrollee with
                  the opportunity to select a PCP. If no selection is made by
                  the enrollee, the contractor shall assign the PCP for the
                  enrollee according to the timeframes specified in Article 5.9.

                  If the enrollee selects a PCP, the contractor shall process
                  the selection. The contractor is responsible for monitoring
                  the PCP capacity and limitations prior to assignment of an
                  enrollee to a PCP. The contractor shall notify the enrollee
                  accordingly if a selected PCP is not available.

                  The contractor shall notify the PCP of newly assigned
                  enrollees or any other enrollee roster changes that affect the
                  PCP monthly by the second working day of the month.

         D.       Other Enrollee Processing. The contractor's enrollee
                  processing shall also support the following:

                  1.       Notification of State of any enrollee demographic
                           changes including date of death, change of address,
                           newborns, and commercial enrollment.

                  2.       Generation of correspondence to enrollees based on
                           variable criteria, including PCP and demographic
                           information.

3.2.3    CONTRACTOR ENROLLMENT VERIFICATION

         A.       Electronic Verification System. The contractor shall provide a
                  system that supports the electronic verification of contractor
                  enrollment to network providers via the telephone 24 hours a
                  day and 365 days a year or on a schedule approved by the
                  State. This capability should require the enrollee's
                  contractor Identification Number, the Medicaid/NJ FamilyCare
                  Identification Number, or the Social Security Number. The
                  system should provide information on the enrollee's current
                  PCP as well as the enrollment information.

         B.       Telephone Enrollment Inquiry. The contractor shall provide
                  telephone operator personnel (both member services and
                  provider services) to verify contractor enrollment during
                  normal business hours. The contractor's telephone operator
                  personnel should have the capability to electronically verify
                  contractor enrollment based on a variety of fields, including
                  contractor Identification Number, Medicaid/NJ FamilyCare
                  Identification Number, Social Security Number, Enrollee Name,
                  Date of Birth, etc.

                  The contractor shall ensure that a recorded message is
                  available to providers when enrollment capability is
                  unavailable for any reason.

                                                                           III-6
<PAGE>   47
3.2.4    ENROLLEE COMPLAINT AND GRIEVANCE TRACKING SYSTEM

         The contractor shall develop an electronic system to capture and track
         the content and resolution of enrollee complaints or grievances.

         A.       Data Requirements. The system shall capture, at a minimum, the
                  enrollee, the reason of the complaint or grievance, the date
                  the complaint or grievance was reported, the operator who
                  talked to the enrollee, the explanation of the resolution, the
                  date the complaint or grievance was resolved, the person who
                  resolved the complaint or grievance, referrals to other
                  departments, and comments including general information and/or
                  observations. See Article 5.15.

         B.       Processing and Reporting. The contractor shall identify trends
                  in complaint and grievance reasons and responsiveness to the
                  complaints or grievances. The system shall provide detail
                  reports to be used in tracking individual complaints and
                  grievances. The system shall also produce summary reports that
                  include statistics indicating the number of complaints and
                  grievances, the types, the dispositions, and the average time
                  for dispositioning, broken out by category of eligibility. See
                  Article 5.15.

3.2.5    ENROLLEE REPORTING

         The contractor shall produce all of the reports according to the
         timeframes and specifications outlined in Section A of the Appendices.

         The contractor shall provide the State with a monthly file of enrollees
         (See Section A.3.1 of the Appendices). The State's fiscal agent will
         reconcile this file with the State's Recipient File. The contractor
         shall provide for reconciling any differences and taking the
         appropriate corrective action.

3.3      PROVIDER SERVICES

         The contractor's system shall collect, process, and maintain current
         and historical data on program providers. This information shall be
         accessible to all parts of the MCMIS for editing and reporting.

3.3.1    PROVIDER INFORMATION AND PROCESSING REQUIREMENTS

         A.       Provider Data. The contractor shall maintain individual and
                  group provider network information with basic demographics,
                  EIN or tax identification number, professional credentials,
                  license and/or certification numbers and dates, sites, risk
                  arrangements (i.e., individual and group risk pools), services
                  provided, payment methodology and/or reimbursement schedules,
                  group/individual provider relationships, facility linkages,
                  number of grievances and/or complaints.

                                                                           III-7
<PAGE>   48
                  For PCPs, the contractor shall maintain identification as
                  traditional or safety net provider, specialties, enrollees
                  with beginning and ending effective dates, capacity, emergency
                  arrangements or contact, other limitations or restrictions,
                  languages spoken, address, office hours, disability access.
                  See Article 5.

                  The contractor shall maintain provider history files and
                  provide for easy data retrieval. The system should maintain
                  audit trails of key updates.

                  Providers should be identified with a unique number. The
                  contractor shall be able to cross-reference its provider
                  number with the provider's EIN or tax number, the provider's
                  license number, UPIN, Medicaid provider number, and Medicare
                  provider number where applicable.

         B.       Updates. The contractor shall apply updates to the provider
                  file daily.

         C.       Complaint Tracking System. The system shall provide for the
                  capabilities to track and report provider complaints as
                  specified in Article 6.5. The contractor shall provide detail
                  reports identifying open complaints and summary statistics by
                  provider on the types of complaints, resolution, and average
                  time for resolution.

3.3.2    PROVIDER CREDENTIALING

         A.       Credentialing. The contractor shall credential and
                  re-credential each network provider as specified in Article
                  4.6.1. The system should provide a tracking and reporting
                  system to support this process.

         B.       Review. The contractor shall be able to flag providers for
                  review based on problems identified during credentialing,
                  information received from the State, information received from
                  HCFA, complaints, and in-house utilization review results.
                  Flagging providers should cause all claims to deny as
                  appropriate.

3.3.3    PROVIDER/ENROLLEE LINKAGE

         A.       Enrollee Rosters. The contractor shall generate electronic
                  and/or hard copy enrollee rosters to its PCPs each month by
                  the second business day of the month. The rosters shall
                  indicate all enrollees that are assigned to the PCP and should
                  provide the provider with basic demographic and enrollment
                  information related to the enrollee.

         B.       Provider Capacity. The contractor's system shall support the
                  provider network requirements described in Article 4.8.

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<PAGE>   49
3.3.4    PROVIDER MONITORING

         The contractor's system shall support monitoring and tracking of
         provider/enrollee complaints, grievances and appeals from receipt to
         disposition. The system shall be able to produce provider reports for
         quality of medical and dental care analysis, flag and identify
         providers with restrictive conditions (e.g., fraud monitoring), and
         identify the confidentiality level of information (i.e., to manage who
         has access to the information).

3.3.5    REPORTING REQUIREMENTS

         The contractor shall produce all of the reports identified in Section A
         of the Appendices. In addition, the system shall provide ongoing and
         periodic reports to monitor provider activity, support provider
         contracting, and provide administrative and management information as
         required for the contractor to effectively operate.

3.4      CLAIMS/ENCOUNTER PROCESSING

         The system shall capture and adjudicate all claims and encounters
         submitted by providers. The major functions of this module(s) include
         enrollee enrollment verification, provider enrollment verification,
         claims and encounter edits, benefit determination, pricing, medical
         review and claims adjudication, and claims payment. Once claims and
         encounters are processed, the system shall maintain the
         claims/encounter history file that supports the State's encounter
         reporting requirements as well as all of the utilization management and
         quality assurance functions and other reporting requirements of the
         contractor.

3.4.1    GENERAL REQUIREMENTS

         The contractor should have an automated claims and encounter processing
         system that will support the requirements of this contract and ensure
         the accurate and timely processing of claims and encounters. The
         contractor should offer its providers an electronic payment option.

         A.       Input Processing. The contractor should support both hardcopy
                  and electronic submission of claims and encounters for all
                  claim types (hospital, medical, dental, pharmacy, etc.). The
                  contractor should also support hardcopy and electronic
                  submission of referral and authorization documents, claim
                  inquiry forms, and adjustment claims and encounters. Providers
                  shall be afforded a choice between an electronic or a hardcopy
                  submission. Electronic submissions include diskette, tape,
                  clearinghouse, electronic transmission, and direct entry. The
                  contractor must process all standard electronic formats
                  recognized by the State. The contractor may use any
                  clearinghouse(s) and/or alternatively provide for electronic
                  submission directly from providers to the contractor.

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<PAGE>   50
                  The system shall maintain the receipt date for each document
                  (claim, encounter, referral, authorization, and adjustment)
                  and track the processing time from date of receipt to final
                  disposition.

         B.       Edits and Audits. The system shall perform sufficient edits to
                  ensure the accurate payment of claims and ensure the accuracy
                  and completeness of encounters that are submitted. Edits
                  should include, but not be limited to, verification of member
                  enrollment, verification of provider eligibility, field edits,
                  claim/encounter cross- check and consistency edits, validation
                  of code values, duplicate checks, authorization checks, checks
                  for service limitations, checks for service inconsistencies,
                  medical review, and utilization management. Pharmacy claim
                  edits shall include prospective drug utilization review
                  (ProDUR) checks.

                  The contractor shall comply with New Jersey law and
                  regulations to process records in error. (Note: Uncontested
                  payments to providers and uncontested portions of contested
                  claims should not be withheld pending final adjudication.)

         C.       Benefit and Reference Files. The system shall provide
                  file-driven processing for benefit determination, validation
                  of code values, pricing (multiple methods and schedules), and
                  other functions as appropriate. Files should include code
                  descriptions, edit criteria, and effective dates. The system
                  shall support the State's procedure and diagnosis coding
                  schemes and other codes that shall be submitted on the
                  hardcopy and electronic reports and files.

                  The system shall provide for an automated update to the
                  National Drug Code file including all product, packaging,
                  prescription, and pricing information.

                  The system shall provide online access to reference file
                  information. The system should maintain a history of the
                  pricing schedules and other significant reference data.

         D.       Claims/Encounter History Files. The contractor shall maintain
                  two (2) years active history of adjudicated claims and
                  encounter data for verifying duplicates, checking service
                  limitations, and supporting historical reporting. For drug
                  claims, the contractor may maintain nine (9) months of active
                  history of adjudicated claims/encounter data if it has the
                  ability to restore such information back to two (2) years and
                  provide for permanent archiving in accordance with Article
                  3.1.2F. Provisions should be made to maintain permanent
                  history by service date for those services identified as
                  "once-in-a-lifetime" (e.g., hysterectomy). The system should
                  readily provide access to all types of claims and encounters
                  (hospital, medical, dental, pharmacy, etc.) for combined
                  reporting of claims and encounters. Archive requirements are
                  described in Article 3.1.2F.

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<PAGE>   51
3.4.2 COORDINATION OF BENEFITS

         The contractor shall exhaust all other sources of payment prior to
         remitting payment for a Medicaid enrollee.

         A.       Other Coverage Information. The contractor shall maintain
                  other coverage information for each enrollee. The contractor
                  shall verify the other coverage information provided by the
                  State pursuant to Article 8.13 and develop a system to include
                  additional other coverage information when it becomes
                  available. The contractor shall provide a periodic file of
                  updates to other coverage back to the State as specified in
                  Article 8.7.

         B.       Cost Avoidance. As provided in Article 8.13, except in certain
                  cases, the contractor shall attempt to avoid payment in all
                  cases where there is other insurance.

                  The system should have edits to identify potential other
                  coverage situations and flag the claims accordingly. The edits
                  should include looking for accident indicators, other coverage
                  information from the claims, other coverage information on
                  file for the enrollee, and potential accident/injury
                  diagnoses.

         C.       Postpayment Recoupments. Where other insurance is discovered
                  after the fact, for the exceptions identified in 8.13, and for
                  encounters, recoveries shall be initiated on a postpayment
                  basis.

         D.       Personal Injury Cases. These cases should be referred to the
                  Department for recovery.

         E.       Medicare. The contractor's system shall provide for
                  coordinating benefits on enrollees that are also covered by
                  Medicare. See Article 8.13.

         F.       Reporting and Tracking. The contractor's system shall identify
                  and track potential collections. The system should produce
                  reports indicating open receivables, closed receivables,
                  amounts collected, and amounts written off.

3.4.3 REPORTING REQUIREMENTS

         A.       General. The contractor's operational reports shall be
                  created, maintained and made available for audit by State
                  personnel and will include, but will not be limited to, the
                  following:

                  1.       Claims Processing Statistics

                  2.       Inventory and Claims Aging Statistics

                  3.       Error Reports

                  4.       Contested Claims and Encounters

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<PAGE>   52
                  5.       Aged Claims and Encounters

                  6.       Checks and EOB(s)

                  7.       Lag Factors and IBNR

         B.       The contractor shall produce reports according to the
                  timeframes and specification outlined in Section A of the
                  Appendices.

3.5 PRIOR AUTHORIZATION, REFERRAL AND UTILIZATION MANAGEMENT

         The prior authorization/referral and utilization management functions
         shall be an integrated component of the MCMIS. It shall allow for
         effective management of delivery of care. It shall provide a
         sophisticated environment for managing the monitoring of both inpatient
         and outpatient care on a proactive basis.

3.5.1 FUNCTIONS AND CAPABILITIES

         A.       Prior Authorizations. The contractor shall provide an
                  automated system that includes the following:

                  1.       Enrollee eligibility, utilization, and case
                           management information.

                  2.       Edits to ensure enrollee is eligible, provider is
                           eligible, and service is covered.

                  3.       Predefined treatment criteria to aid in adjudicating
                           the requests.

                  4.       Notification to provider of approval or denial.

                  5.       Notification to enrollees of any denials or cutbacks
                           of service.

                  6.       Interface with claims processing system for editing.

         B.       Referrals. The contractor shall provide an automated system
                  that includes the following:

                  1.       Ability for providers to enter referral information
                           directly, fax information to the contractor, or call
                           in on dedicated phone lines.

                  2.       Interface with claims processing system for editing.

         C.       Utilization Management. The contractor should provide an
                  automated system that includes the following:

                  1.       Provides case tracking, notifies the case worker of
                           outstanding actions.

                  2.       Provide case history of all activity.

                  3.       Provide online access to cases by enrollee and
                           provider numbers.

                  4.       Includes an automated correspondence generator for
                           letters to clients and network providers.

                  5.       Reports for case analysis, concurrent review, and
                           case follow up including hospital admissions,
                           discharges, and census reports.

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<PAGE>   53
         D.       Fraud and Abuse. The contractor shall have a system that
                  supports the requirements in Article 7.40 to identify
                  potential and/or actual instances of fraud, abuse,
                  underutilization and/or overutilization and shall meet the
                  reporting requirements in Section A of the Appendices.

3.5.2 REPORTING REQUIREMENTS

         The contractor's system shall support the reporting requirements as
         described in Section A of the Appendices.

3.6 FINANCIAL PROCESSING

         The contractor's system shall provide for financial processing to
         support the requirements of the contract and the contractor's
         operations.

3.6.1 FUNCTIONS AND CAPABILITIES

         A.       General. The system shall provide the necessary data for all
                  accounting functions including claims payment, capitation
                  payment, capitation reconciliation, recoupments, recoveries,
                  accounts receivable, accounts payable, general ledger, and
                  bank reconciliation. The financial module shall provide the
                  contractor's management with information to demonstrate the
                  contractor is meeting, exceeding or falling short of its
                  fiscal and level of risk goals. It shall interface with other
                  relevant modules. The information shall provide management
                  with the necessary tools to monitor financial performance,
                  make prompt payments on financial obligations, monitor
                  accounts receivables, and keep accurate and complete financial
                  records.

                  Reports should:

                  1.       Provide information useful in making business and
                           economic decisions.

                  2.       Provide information that will allow the Department to
                           monitor the future cash flow of the contractor
                           resulting from this contract.

                  3.       Provide information relative to an enterprise's
                           economic resources, the claims on those resources,
                           and the effects of transactions, events and
                           circumstances that change resources and claims to
                           resources.

                  4.       Generate data to evaluate the contractor's operations
                           (i.e., indicators of risk, efficiency,
                           capitalization, and profitability).

                  5.       Provide support for detailed actuarial analysis of
                           the operations performed under the contract resulting
                           from this contract.

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<PAGE>   54
                  6.       Provide other information that is useful in
                           evaluating important past events or predicting
                           meaningful future events.

         B.       Specific Functions. The contractor's system shall provide for
                  integration of the financial system with the claims and
                  encounter system. At a minimum the system shall:

                  1.       Update the specific claim records in the claims
                           history if payments are voided or refunded.

                  2.       Update the specific claims records in the claims
                           history if amounts are recovered.

                  3.       Update capitation history if payments are voided or
                           refunded.

                  4.       Provide for liens and withholds of payments to
                           providers.

                  5.       Provide for reissuing lost or stolen checks.

                  6.       Provide for automatic recoupment if a claim is
                           adjusted and results in a negative payment.

3.6.2 REPORTING PRODUCTS

         Report descriptions and criteria required by the State for the
         financial portion of the system are set forth in Section A of the
         Appendices.

3.7 QUALITY ASSURANCE

         The contractor's system shall produce reports for analysis that focus
         on the review and assessment of quality of care given, the detection of
         over- and under-utilization, the development of user-defined criteria
         and standards of care, and the monitoring of corrective actions.

3.7.1 FUNCTIONS AND CAPABILITIES

         A.       General. The system shall provide data to assist in the
                  definition and establishment of contractor performance
                  measurement standards, norms and service criteria.

                  1.       The system shall provide reports to monitor and
                           identify deviations of patterns of treatment from
                           established standards or norms and established
                           baselines. These reports shall profile utilization of
                           providers and enrollees and compare them against
                           experience and norms for comparable individuals.

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<PAGE>   55
                  2.       The system should provide cost utilization reports by
                           provider and service in various arrays.

                  3.       It should maintain data for medical and dental
                           assessments and evaluations.

                  4.       It should collect, integrate, analyze, and report
                           data necessary to implement the Quality Assessment
                           and Performance Improvement (QAPI) program.

                  5.       It should collect data on enrollee and provider
                           characteristics and on services furnished to
                           enrollees, as needed to guide the selection of
                           performance improvement project topics and to meet
                           the data collection requirements for such projects.

                  6.       It should collect data in standardized formats to the
                           extent feasible and appropriate. The contractor must
                           review and ensure that data received from providers
                           are accurate, timely, and complete.

                  7.       Reports should facilitate at a minimum monthly
                           tracking and trending of enrollee care issues to
                           monitor and assess contractor and provider
                           performance and services provided to enrollees.

                  8.       Reports should monitor billings for evidence of a
                           pattern of inappropriate billings, services, and
                           assess potential mispayments as a result of such
                           practices.

                  9.       Reports should support tracking utilization control
                           function(s) and monitoring activities for out-of-area
                           and emergency services.

         B. Specific Capabilities. The system should:

                  1.       Include a database for utilization, referrals,
                           tracking function for utilization controls, and
                           consultant services.

                  2.       Accommodate and apply standard norms/criteria and
                           medical and dental policy standards for quality of
                           care and utilization review.

                  3.       Include all types of claims and encounters data along
                           with service authorizations and referrals.

                  4.       Include pharmacy utilization data from MH/SA
                           providers.

                  5.       Interface, as applicable, with external utilization
                           and quality assurance/measurement software programs.

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<PAGE>   56
                  6.       Include tracking of coordination requirements with
                           MH/SA providers.

                  7.       Include ability to protect patient confidentiality
                           through the use of masked identifiers and other
                           safeguards as necessary.

         C.       Measurement Functions.  The system should include:

                  1.       Ability to track review committee(s) functions when
                           case requires next review and/or follow-up.

                  2.       Track access, use and coordination of services.

                  3.       Provide patient satisfaction data through use of
                           enrollee surveys, grievance, complaint/appeals
                           processes, etc.

                  4.       Generate HEDIS reports in the version specified by
                           the State.

3.7.2 REPORTING PRODUCTS

         The system shall support the reporting requirements and other functions
         described in Article 4 and Section A of the Appendices.

3.8 MANAGEMENT AND ADMINISTRATIVE REPORTING

         The MCMIS shall have a comprehensive reporting capability to support
         the reporting requirements of this contract and the management needs
         for all of the contractor operations.

3.8.1 GENERAL REQUIREMENTS

         A.       Purpose. The reports should provide information to determine
                  and review fiscal viability, to evaluate the appropriateness
                  of care rendered, and to identify reporting/billing problems
                  and provider practices that are at variance with the norm, and
                  measure overall performance.

         B.       General Capabilities. MCMIS reporting capabilities shall
                  include the capabilities to access relatively small amounts of
                  data very quickly as well as to generate comprehensive reports
                  using multiple years of historical claims and encounter data.
                  The contractor shall provide a management and administrative
                  reporting system that allows full access to all of the
                  information utilized in the MCMIS. The contractor shall
                  provide a solution that makes all data contained in any
                  subcontractor's MIS available to authorized users through the
                  use of the various software that provides the capabilities
                  detailed in the following Articles.

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<PAGE>   57
         C.       Regular Reports. The system shall generate a comprehensive set
                  of management and administrative management reports that
                  facilitate the oversight, evaluation, and management of this
                  program as well as the contractor's other operations.

                  The system should provide the capability for pre-defined,
                  parameter driven report/trend alerts. The system shall have
                  the capability to select important and specific parameters of
                  utilization, and have specified users alerted when these
                  parameters are being exceeded. For example, the State may want
                  to monitor the use of a specific drug as treatment for a
                  specific condition.

         D.       The contractor shall acquire the capability to receive and
                  transmit data in a secure manner electronically to and from
                  the State's data centers, which are operated by OIT. The
                  standard data transfer software that OIT utilizes for
                  electronic data exchange is Connect: Direct. Both mainframe
                  and PC versions are available. A dedicated line is preferred,
                  but at a minimum connectivity software can be used for the
                  connection.

3.8.2 QUERY CAPABILITIES

         The contractor's MCMIS should have a sophisticated, query tool with
         access to all major files for the users.

         A.       General. The system should provide a user-friendly, online
                  query language to construct database queries to data available
                  across all of the database(s), down to raw data elements. It
                  should provide options to select query output to be displayed
                  on-line, in a formatted hard-copy report, or downloaded to
                  disk for PC-based analysis.

         B.       Unduplicated Counts. The system should provide the capability
                  to execute queries that perform unduplicated counts (e.g.,
                  unduplicated count of original beneficiary ID number),
                  duplicated counts (e.g., total number of services provided for
                  a given aid category), or a combination of unduplicated and
                  duplicated counts.

3.8.3 REPORTING CAPABILITIES

         The contractor should provide reporting tools with its MCMIS that
         facilitate ad hoc, user, and special reporting. The MCMIS should
         provide flexible report formatting/editing capabilities that meet the
         contractor's business requirements and support the Department's
         information needs. For example, it should provide the ability to
         import, export and manipulate data files from spreadsheet, word
         processing and database management tools as well as the database(s) and
         should provide the capability to indicate header information, date and
         run time, and page numbers on reports. The system should provide
         multiple pre-defined report types and formats that are easily selected
         by users.

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<PAGE>   58
3.9 ENCOUNTER DATA REPORTING

         The contractor shall collect, process, format, and submit electronic
         encounter data for all services delivered for which the contractor is
         responsible. The contractor shall capture all required encounter data
         elements using coding structures recognized by the Department. The
         contractor shall process the encounter data, integrating any manual or
         automated systems to validate the adjudicated encounter data. The
         contractor shall interface with any systems or modules within its
         organization to obtain the required encounter data elements. The
         contractor shall submit the encounter data to the Department's fiscal
         agent electronically, via diskette, tape, or electronic transmission,
         according to specifications in the Electronic Media Claims (EMC) Manual
         found in Section B.3.3 of the Appendices. The encounter data processing
         system shall have a data quality assurance plan to include timely data
         capture, accurate and complete encounter records, and internal data
         quality audit procedures. If DMAHS determines that changes are
         required, the contractor shall be given advance notice and time to make
         the change according to the extent and nature of the required change.

3.9.1 REQUIRED ENCOUNTER DATA ELEMENTS

         A.       All Types of Claims. The contractor shall capture all required
                  encounter data elements for each of the eight claim types:
                  Inpatient, Outpatient, Professional, Home Health,
                  Transportation, Vision, Dental, and Pharmacy.

         B.       Data Elements. The required data elements are provided in
                  Section A.7.11 and Section B.3.3 of the Appendices. Note that
                  New Jersey-specific Medicaid codes are required in some
                  fields. Providers shall be identified using the provider's EIN
                  or tax identification number. Inpatient hospital claims and
                  encounters shall be combined into a single stay when the
                  enrollee's dates of services are consecutive.

         C.       Contractor Encounter. The contractor shall submit encounter
                  data for claims and encounters received by the contractor. The
                  contractor shall identify a capitated arrangement versus a
                  "fee-for-service" arrangement for each of its network
                  providers. For noncapitated arrangements, the contractor shall
                  report the actual payment made to the provider for each
                  encounter. For capitated arrangements, the contractor may
                  report a zero payment for each encounter. However, a monthly
                  "Capitation Summary Record" shall be required for each
                  provider type, beneficiary capitation category, and service
                  month combination. The specifications for the submission of
                  monthly capitation summary records is further detailed in the
                  EMC Manual, found in Section B.3.3 of the Appendices.

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<PAGE>   59
3.9.2 SUBMISSION OF TEST ENCOUNTER DATA

         A.       Submitter ID. The contractor shall make application in order
                  to obtain a Submitter Identification Number, according to the
                  instructions listed in the EMC Manual found in Section B.3.3
                  of the Appendices.

         B.       Test Requirement. The contractor shall be required to pass a
                  testing phase for each of the eight encounter claim types
                  before production encounter data will be accepted. The
                  contractor shall pass the testing phase for all encounter
                  claim type submissions within twelve (12) calendar weeks from
                  the award date of the contract. Contractors with prior
                  contracting experience with DHS who have successfully passed
                  test phases and have successfully submitted approved
                  production data may be exempted at DHS's option.

                  The contractor shall submit the test encounter data to the
                  Department's fiscal agent electronically, via diskette, tape,
                  or electronic transmission, according to the specifications of
                  the Electronic Media Claims (EMC) Manual found in Section
                  B.3.3 of the Appendices.

                  The contractor shall be responsible for passing a two-phased
                  test for each encounter claim type. The first phase requires
                  that each submitted file follows the prescribed format, that
                  header and trailer records are present and correctly located
                  within the file, and that the key fields are present. The
                  second phase requires that the required data elements are
                  present and properly valued.

                  Following each submission, an error report will be forwarded
                  to the contractor identifying the file and record location of
                  each error encountered for both testing phases. The contractor
                  shall analyze the report, complete the necessary corrections,
                  and re-submit the encounter data test file(s).

                  The contractor shall utilize production encounter data,
                  systems, tables, and programs when processing encounter test
                  files. The contractor shall submit error- free production data
                  once testing has been approved for all of the encounter claims
                  types.

3.9.3 SUBMISSION OF PRODUCTION ENCOUNTER DATA

         A.       Adjudicated Claims and Encounters. The contractor shall submit
                  all adjudicated encounter data for all services provided for
                  which the contractor is responsible. Adjudicated encounter
                  data are defined as data from claims and encounters that the
                  contractor has processed as paid or denied. The contractor is
                  not responsible for submitting contested claims or encounters
                  until final adjudication has been determined.

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<PAGE>   60
         B.       Schedule. Encounter data shall be submitted per the schedule
                  established by the Department. Each submission shall include
                  encounter data that were adjudicated in the prior period and
                  any adjustments for encounter data previously submitted.

         C.       Two-Phase Process. Similar to testing, the contractor shall be
                  responsible for passing a two-phased test for all production
                  encounter data submitted. The first phase requires each
                  submitted file follow the prescribed format, that header and
                  trailer records are present and correctly located within the
                  file, and that the key fields are present. The second phase
                  requires that the required data elements are present and
                  properly valued.

         D.       Phase One Errors. If all or part of a production encounter
                  file(s) rejects during phase one, an error report will be
                  forwarded to the contractor identifying the file and record
                  location of each error encountered. The contractor shall
                  analyze the report, complete the necessary corrections, and
                  re-submit the "rejected" encounter production data within
                  forty-five (45) calendar days from the date the contractor
                  receives the notice of error(s).

         E.       The contractor shall not be permitted to provide services
                  under this contract nor shall the contractor receive
                  capitation payment until it has passed the testing and
                  production submission of encounter data.

3.9.4 REMITTANCE ADVICE

         A.       Remittance Advice File Processing Report. The Department's
                  fiscal agent shall produce a Remittance Advice File on a
                  monthly basis that itemizes all processed encounters. The
                  contractor shall be responsible for the acceptance and
                  processing of a Remittance Advice (RA) File according to the
                  specifications listed in the EMC Manual found in Section B.3.3
                  of the Appendices. The Remittance Advice File is produced on
                  magnetic tape and contains all submitted encounter data that
                  passed phase one testing. The disposition (paid or denied)
                  shall be reported for each encounter along with the "phase
                  two" errors for those claims that New Jersey Medicaid denied.

         B.       Reconciliation. The contractor shall be responsible for
                  matching the encounters on the Remittance Advice File against
                  the contractor's data files(s). The contractor shall correct
                  any encounters that denied improperly and/or any other
                  discrepancies noted on the file. Corrections shall be
                  resubmitted within thirty (30) calendar days from the date the
                  contractor receives the Remittance Advice File.

                  All corrections to "denied" encounter data, as reported on the
                  Remittance Advice File, shall be resubmitted as "full record"
                  adjustments, according to the requirements listed in the EMC
                  Manual found in Section B.3.3 of the Appendices.

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<PAGE>   61
3.9.5 SUBCONTRACTS AND ENCOUNTER DATA REPORTING FUNCTION

         A.       Interfaces. All encounter data shall be submitted to the
                  Department directly by the contractor. DMAHS shall not accept
                  any encounter data submissions or correspondence directly from
                  any subcontractors, and DMAHS shall not forward any electronic
                  media, reports or correspondence directly to a subcontractor.
                  The contractor shall be required to receive all electronic
                  files and hardcopy material from the Department, or its
                  appointed fiscal agent, and distribute them within its
                  organization or to its subcontractors appropriately.

         B.       Communication. The contractor and its subcontractors shall be
                  represented at all DMAHS meetings scheduled to discuss any
                  issue related to the encounter function requirements.

3.9.6 FUTURE ELECTRONIC ENCOUNTER SUBMISSION REQUIREMENTS

         At the present time, the Health Care Financing Administration (HCFA) is
         pursuing a standardization of all electronic health care information,
         including encounter data. The contractor shall be responsible for
         completing and paying for any modifications required to submit
         encounter data electronically, according to the same specifications and
         timeframes outlined by HCFA for the New Jersey MMIS.

                                                                          III-21
<PAGE>   62
ARTICLE FOUR: PROVISION OF HEALTH CARE SERVICES

4.1 COVERED SERVICES

         For enrollees who are eligible through Title XIX or the NJ FamilyCare
         program the contractor shall provide or arrange to have provided
         comprehensive, preventive, and diagnostic and therapeutic, health care
         services to enrollees that include all services that Medicaid
         beneficiaries are entitled to receive under Medicaid, subject to any
         limitations and/or excluded services as specified in this Article.
         Provision of these services shall be equal in amount, duration, and
         scope as established by the Medicaid program, in accordance with
         medical necessity and without any predetermined limits, unless
         specifically stated, and as set forth in 42 C.F.R. Part 440; 42 C.F.R.
         Part 434; the Medicaid State Plan; the Medicaid Provider Manuals: The
         New Jersey Administrative Code, Title 10, Department of Human Services
         Division of Medical Assistance and Health Services; Medicaid/NJ
         FamilyCare Alerts; Medicaid/NJ FamilyCare Newsletters; and all
         applicable federal and State statutes, rules, and regulations.

4.1.1 GENERAL PROVISIONS AND CONTRACTOR RESPONSIBILITIES

         A.       With the exception of certain emergency services described in
                  Article 4.2.1 of this contract, all care covered by the
                  contractor pursuant to the benefits package must be provided,
                  arranged, or authorized by the contractor or a participating
                  provider.

         B.       The contractor and its providers shall furnish all covered
                  services required to maintain or improve health in a manner
                  that maximizes coordination and integration of services, and
                  in accordance with professionally recognized standards of
                  quality and shall ensure that the care is appropriately
                  documented to encompass all health care services for which
                  payment is made.

         C.       For beneficiaries eligible solely through the NJ FamilyCare
                  Plan A the contractor shall provide the same managed care
                  services and products provided to enrollees who are eligible
                  through Title XIX. For beneficiaries eligible solely through
                  the NJ FamilyCare Plans B and C the contractor shall provide
                  the same managed care services and products provided to
                  enrollees who are eligible through Title XIX with the
                  exception of limitations on EPSDT coverage as indicated in
                  Articles 4.1.2A.3 and 4.2.6A.2. NJ FamilyCare Plan D and other
                  plans have a different service package specified in Article
                  4.1.6.

         D.       Out-of-Area Coverage. The contractor shall provide or arrange
                  for out-of-area coverage of contracted benefits in emergency
                  situations and non-emergency situations when travel back to
                  the service area is not possible, is impractical, or when
                  medically necessary services could only be provided elsewhere.
                  The contractor shall not be responsible for out-of-state
                  coverage for routine care if the enrollee resides out-of-state
                  for more than 30 days. For full time students

                                                                            IV-1
<PAGE>   63
                  attending school and residing out of the country, the
                  contractor shall not be responsible for health care benefits
                  while the individual is in school.

         E.       Existing Plans of Care. The contractor shall honor and pay for
                  plans of care for new enrollees, including prescriptions,
                  durable medical equipment, medical supplies, prosthetic and
                  orthotic appliances, and any other on-going services initiated
                  prior to enrollment with the contractor. Services shall be
                  continued until the enrollee is evaluated by his/her primary
                  care physician and a new plan of care is established with the
                  contractor.

                  The contractor shall use its best efforts to contact the new
                  enrollee or, where applicable, authorized person and/or
                  contractor care manager. However, if after documented,
                  reasonable outreach (i.e., mailers, certified mail, use of
                  MEDM system provided by the State, contact with the Medicaid
                  District Office (MDO), DDD, or DYFS to confirm addresses
                  and/or to request assistance in locating the enrollee) the
                  enrollee fails to respond within 20 working days of certified
                  mail, the contractor may cease paying for the pre-existing
                  service until the enrollee or, where applicable, authorized
                  person, contacts the contractor for re-evaluation.

         F.       Routine Physicals. The contractor shall provide for routine
                  physical examinations required for employment, school, camp or
                  other entities/programs that require such examinations as a
                  condition of employment or participation.

         G.       Non-Participating Providers. The contractor shall pay for
                  services furnished by non-participating providers to whom an
                  enrollee was referred, even if erroneously referred, by
                  his/her PCP or network specialist. Under no circumstances
                  shall the enrollee bear the cost of such services when
                  referral errors by the contractor or its providers occur. It
                  is the sole responsibility of the contractor to provide
                  regular updates on complete network information to all its
                  providers as well as appropriate policies and procedures for
                  provider referrals.

         H.       The contractor shall have policies and procedures on the use
                  of enrollee self-referred services.

         I.       The contractor shall have policies and procedures on how it
                  will provide for genetic testing and counseling.

         J.       Second Opinions. The contractor shall have a Second Opinion
                  program that can be utilized at the enrollee's option for
                  diagnosis and treatment of serious medical conditions, such as
                  cancer and for elective surgical procedures. The program shall
                  include at a minimum: hernia repair (simple) for adults (18
                  years or older), hysterectomy (elective procedures), spinal
                  fusion (except for children under 18 years of age with a
                  diagnosis of scoliosis or spina bifida), and laminectomy
                  (except for children under 18 years of age with a diagnosis of
                  scoliosis). The plan shall be incorporated into the
                  contractor's medical procedures.  The exceptions

                                                                            IV-2
<PAGE>   64
                  noted do not require second surgical opinion before surgery
                  can be performed. The Second Opinion program shall be
                  incorporated into the contractor's medical procedures and
                  submitted to DMAHS for review and approval.

         K.       Unless otherwise required by this contract, the contractor
                  shall make no distinctions with regard to the provision of
                  services to Medicaid and NJ FamilyCare enrollees and the
                  provision of services provided to the contractor's
                  non-Medicaid/NJ FamilyCare enrollees.

         L.       DMAHS may intercede on an enrollee's behalf when DMAHS deems
                  it appropriate for the provision of medically necessary
                  services and to assist enrollees with the contractor's
                  operations and procedures which may cause undue hardship for
                  the enrollee. In the event of a difference in interpretation
                  of contractually required service provision between the
                  Department and the contractor, the Department's interpretation
                  shall prevail until a formal decision is reached, if
                  necessary.

         M.       A New Jersey Care 2000+ enrollee who seeks self-initiated care
                  from a non-participating provider without referral/
                  authorization shall be held responsible for the cost of care.
                  The enrollee shall be fully informed of the requirement to
                  seek care when it is available within the network and the
                  consequences of obtaining unauthorized out-of-network care for
                  covered services.

         N.       Protection of Enrollee -- Provider Communications. Health care
                  professionals may not be prohibited from advising their
                  patients about their health status or medical care or
                  treatment, regardless of whether this care is covered as a
                  benefit under the contract.

         O.       Medical or Dental Procedures. For procedures that may be
                  considered either medical or dental such as surgical
                  procedures for fractured jaw or removal of cysts, the
                  contractor shall establish written policies and procedures
                  clearly and definitively delineated for all providers and
                  administrative staff, indicating that either a physician
                  specialist or oral surgeon may perform the procedure and when,
                  where, and how authorization, if needed, shall be promptly
                  obtained.

4.1.2 BENEFIT PACKAGE

         A.       The following categories of services shall be provided by the
                  contractor for all Medicaid and NJ FamilyCare Plans A, B, and
                  C enrollees, except where indicated. See Section B.4.1 of the
                  Appendices for complete definitions of the covered services.

                                                                            IV-3
<PAGE>   65
                  1.       Primary and Specialty Care by physicians and, within
                           the scope of practice and in accordance with State
                           certification/licensure requirements, standards and
                           practices, by Certified Nurse Midwives, Certified
                           Nurse Practitioners, Clinical Nurse Specialists, and
                           Physician Assistants

                  2.       Preventive Health Care and Counseling and Health
                           Promotion

                  3.       Early and Periodic Screening, Diagnosis, and
                           Treatment (EPSDT) Program Services

                           For NJ FamilyCare Plans B and C participants,
                           coverage includes early and periodic screening and
                           diagnosis medical examinations, dental, vision,
                           hearing, and lead screening services. It includes
                           only those treatment services identified through the
                           examination that are available under the contractor's
                           benefit package or specified services under the FFS
                           program.

                  4.       Emergency Medical Care

                  5.       Inpatient Hospital Services including acute care
                           hospitals, rehabilitation hospitals, and special
                           hospitals

                  6.       Outpatient Hospital Services

                  7.       Laboratory Services [Except routine testing related
                           to administration of Clozapine and the other
                           psychotropic drugs listed in Article 4.1.4B for
                           non-DDD clients.]

                  8.       Radiology Services -- diagnostic and therapeutic

                  9.       Prescription Drugs (legend and non-legend covered by
                           the Medicaid program) -- For payment method for
                           Protease Inhibitors and blood clotting factors VIII
                           and IX, and coverage of certain other anti-
                           retrovirals under NJ FamilyCare, see Article 8.

                  10.      Family Planning Services and Supplies

                  11.      Audiology

                  12.      Inpatient Rehabilitation Services

                  13.      Podiatrist Services

                  14.      Chiropractor Services

                  15.      Optometrist Services

                                                                            IV-4
<PAGE>   66
                  16.      Optical Appliances

                  17.      Hearing Aid Services

                  18.      Home Health Agency Services -- Not a
                           contractor-covered benefit for the non-dually
                           eligible ABD population.

                  19.      Hospice Agency Services

                  20.      Durable Medical Equipment (DME)/Assistive Technology
                           Devices in accordance with existing Medicaid
                           regulations

                  21.      Medical Supplies

                  22.      Prosthetics and Orthotics including certified shoe
                           provider

                  23.      Dental Services

                  24.      Organ Transplants

                  25.      Transportation Services for any contractor-covered
                           service or non-contractor covered service including
                           ambulance, mobile intensive care units (MICUs) and
                           invalid coach (including lift equipped vehicles)

                  26.      Post-acute Care

                  27.      Mental Health/Substance Abuse Services for enrollees
                           who are clients of the Division of Developmental
                           Disabilities

         B.       Conditions Altering Mental Status. Those diagnoses which are
                  categorized as altering the mental status of an individual but
                  are of organic origin shall be part of the contractor's
                  medical, financial and care management responsibilities for
                  all categories of enrollees. These include the diagnoses in
                  the following ICD-9-CM Series:

                  1.       290.0 Senile dementia, simple type

                  2.       290.1 Presenile dementia

                  3.       290.3 Senile dementia with acute confusional state

                  4.       290.4 Arteriosclerotic dementia uncomplicated

                  5.       290.8 Other

                  6.       290.9 Unspecified

                  7.       291.1 Korsakov's psychosis, alcoholic

                  8.       291.2 Other alcoholic dementia

                  9.       292.82 Drug induced dementia

                                                                            IV-5
<PAGE>   67
                  10.      292.9 Unspecified drug induced mental disorders

                  11.      293.0 Acute delirium

                  12.      293.1 Subacute delirium

                  13.      294.0 Amnestic syndrome

                  14.      294.1 Dementia in conditions classified elsewhere

                  15.      294.8 Other specified organic brain syndromes
                           (chronic)

                  16.      294.9 Unspecified organic brain syndrome (chronic)

                  17.      305.1 Non-dependent abuse of drugs - tobacco

                  18.      310.0 Frontal lobe syndrome

                  19.      310.2 Postconcussion syndrome

                  20.      310.8 Other specified nonpsychotic mental disorder
                           following organic brain damage

                  21.      310.9 Unspecified nonpsychotic mental disorder
                           following organic brain damage

                  In addition, the contractor shall retain responsibility for
                  delivering all covered Medicaid mental health/substance abuse
                  services to enrollees who are clients of the Division of
                  Developmental Disabilities (referred to as "clients of DDD").
                  Articles Four and Five contain further information regarding
                  clients of DDD.

4.1.3    SERVICES REMAINING IN FEE-FOR-SERVICE PROGRAM AND MAY NECESSITATE
         CONTRACTOR ASSISTANCE TO THE ENROLLEE TO ACCESS THE SERVICES

         A.       The following services provided by the New Jersey Medicaid
                  program under its State plan shall remain in the
                  fee-for-service program but may require medical orders by the
                  contractor's PCPs/providers. These services shall not be
                  included in the contractor's capitation.

                  1.       Personal Care Assistant Services (not covered for NJ
                           FamilyCare Plans B and C)

                  2.       Medical Day Care (not covered for NJ FamilyCare Plans
                           B and C)

                  3.       Outpatient Rehab - Physical therapy, occupational
                           therapy, and speech pathology services (For NJ
                           FamilyCare Plans B & C enrollees, limited to 60 days
                           per therapy per year)

                  4.       Abortions and related services including surgical
                           procedure, cervical dilation, insertion of cervical
                           dilator, anesthesia including para cervical block,
                           history and physical examination on day of surgery;
                           lab tests including PT, PTT, OB Panel (includes
                           hemogram, platelet count, hepatitis B surface
                           antigen, rubella antibody, VDRL, blood typing ABO and
                           Rh, CBC and differential), pregnancy test, urinalysis
                           and urine drug

                                                                            IV-6
<PAGE>   68
                           screen, glucose and electrolytes; routine
                           venapuncture; ultrasound, pathological examination of
                           aborted fetus; Rhogam and its administration.

                  5.       Transportation - lower mode (not covered for NJ
                           FamilyCare Plans B and C)

                  6.       Sex Abuse Examinations

                  7.       Services Provided by New Jersey MH/SA and DYFS
                           Residential Treatment Facilities or Group Homes. For
                           enrollees living in residential facilities or group
                           homes where ongoing care is provided, contractor
                           shall cooperate with the medical, nursing, or
                           administrative staff person designated by the
                           facility to ensure that the enrollees have timely and
                           appropriate access to contractor providers as needed
                           and to coordinate care between those providers and
                           the facility's employed or contracted providers of
                           health services. Medical care required by these
                           residents remains the contractor's responsibility
                           providing the contractor's provider network and
                           facilities are utilized.

                  8.       Family Planning Services and Supplies when furnished
                           by a non-participating provider

                  9.       Home health agency services for the non-dually
                           eligible ABD population

         B.       Dental Services. For those dental services specified below
                  that are initiated by a Medicaid non-New Jersey Care 2000+
                  provider prior to first time New Jersey Care 2000+ enrollment,
                  an exemption from contractor-covered services based on the
                  initial managed care enrollment date will be provided and the
                  services paid by Medicaid FFS. The exemption shall only apply
                  to those beneficiaries who have initially received these
                  services during the 60 or 120 day period immediately prior to
                  the initial New Jersey Care 2000+ enrollment date.

                  1.       Procedure Codes to be paid by Medicaid FFS up to 60
                           days after first time New Jersey Care 2000+
                           enrollment:

<TABLE>
<S>                                           <C>                 <C>
                           02710              02792               03430
                           02720              02950               05110
                           02721              02952               05120
                           02722              02954               05211
                           02750              03310               05211-52
                           02751              03320               05212
                           02752              03330               05212-52
                           02790              03410-22            05213
                           02791              03411               05214
</TABLE>

                                                                            IV-7
<PAGE>   69
                  2.       Procedure Codes to be paid by Medicaid FFS up to 120
                           days from date of last preliminary extractions after
                           patient enrolls in New Jersey Care 2000+ (applies to
                           tooth codes 5 - 12 and 21 - 28 only):

                           05130
                           05130-22
                           05140
                           05140-22

                  3.       Extraction Procedure Codes to be paid by Medicaid FFS
                           up to 120 days from last date of preliminary
                           extractions after first time New Jersey Care 2000+
                           enrollment in conjunction with the following codes
                           (05130, 05130- 22, 05140, 05140-22):

                           07110
                           07130
                           07210

4.1.4    MEDICAID COVERED SERVICES NOT PROVIDED BY CONTRACTOR

         A.       Mental Health/Substance Abuse. The following mental
                  health/substance abuse services (except for the conditions
                  listed in 4.1.2.B) will be managed by the State or its agent
                  for non-DDD enrollees, including all NJ FamilyCare enrollees.
                  (The contractor will retain responsibility for furnishing
                  mental health/substance abuse services, excluding the cost of
                  the drugs listed below, to Medicaid enrollees who are clients
                  of the Division of Developmental Disabilities).

                  -        Substance Abuse Services--diagnosis, treatment, and
                           detoxification

                  -        Costs for Methadone and its administration

                  -        Mental Health Services

         B.       Drugs. The following drugs will be paid fee-for-service by the
                  Medicaid program for all DMAHS enrollees:

                  -        Clozapine

                  -        Risperidone

                  -        Olanzapine

                  -        Quetiapine

                  -        Methadone - cost and its administration. Except as
                           provided in Article 4.4, the contractor will remain
                           responsible for the medical care of enrollees
                           requiring substance abuse treatment

                  -        Generically-equivalent drug products of the drugs
                           listed in this section.

         C.       Up to twelve (12) inpatient hospital days required for social
                  necessity

                                                                            IV-8
<PAGE>   70
         D.       DDD/CCW waiver services: individual supports (which includes
                  personal care and training), habilitation, case management,
                  respite, and Personal Emergency Response Systems (PERS).

4.1.5    INSTITUTIONAL FEE-FOR-SERVICE BENEFITS - NO COORDINATION BY THE
         CONTRACTOR

         The following institutional services shall remain in the
         fee-for-service program without requiring coordination by the
         contractor. In addition, Medicaid beneficiaries participating in a
         waiver (except the Division of Developmental Disabilities Community
         Care Waiver) or demonstration program or admitted for long term care
         treatment in one of the following shall be disenrolled from the
         contractor's plan on the date of admission to institutionalized care.

         A.       Nursing Facility care (if the admission is only for inpatient
                  rehabilitation/postacute care services and is less than 30
                  days, the enrollee will not be disenrolled).

         B.       Inpatient psychiatric services (except for RTCs) for
                  individuals under age 21 and 65 and over - Services that are
                  provided:

                  1.       Under the direction of a physician;

                  2.       In a facility or program accredited by the Joint
                           Commission on Accreditation of Health Care
                           Organizations; and

                  3.       Meet the federal and State requirements.

         C.       Intermediate Care Facility/Mental Retardation Services - Items
                  and services furnished in an intermediate care facility for
                  the mentally retarded.

         D.       Waiver (except Division of Developmental Disabilities
                  Community Care Waiver) and demonstration program services.

4.1.6    BENEFIT PACKAGE FOR NJ FAMILYCARE PLAN D

         A.       Services Included In The Contractor's Benefits Package for NJ
                  FamilyCare Plan D. The following services shall be provided
                  and case managed by the contractor:

                  1.       Primary Care

                           a.       All physicians services, primary and
                                    specialty

                                                                            IV-9
<PAGE>   71
                           b.       In accordance with state
                                    certification/licensure requirements,
                                    standards, and practices, primary care
                                    providers shall also include access to
                                    certified nurse midwifes, certified nurse
                                    practitioners, clinical nurse specialists,
                                    and physician assistants

                           c.       Services rendered at independent clinics
                                    that provide ambulatory services

                           d.       Federally Qualified Health Center primary
                                    care services

                  2.       Emergency room services

                  3.       Family Planning Services, including medical history
                           and physical examinations (including pelvic and
                           breast), diagnostic and laboratory tests, drugs and
                           biologicals, medical supplies and devices,
                           counseling, continuing medical supervision,
                           continuity of care and genetic counseling

                           Services provided primarily for the diagnosis and
                           treatment of infertility, including sterilization
                           reversals, and related office (medical and clinic)
                           visits, drugs, laboratory services, radiological and
                           diagnostic services and surgical procedures are not
                           covered by the NJ FamilyCare program. Obtaining
                           family planning services from providers outside the
                           contractor's provider network is not available to NJ
                           FamilyCare Plan D enrollees.

                  4.       Home Health Care Services -- Limited to skilled
                           nursing for a home bound beneficiary which is
                           provided or supervised by a registered nurse, and
                           home health aide when the purpose of the treatment is
                           skilled care; and medical social services which are
                           necessary for the treatment of the beneficiary's
                           medical condition

                  5.       Hospice Services

                  6.       Inpatient Hospital Services, including general
                           hospitals, special hospitals, and rehabilitation
                           hospitals. The contractor shall not be responsible
                           when the primary admitting diagnosis is mental health
                           or substance abuse related.

                  7.       Outpatient Hospital Services, including outpatient
                           surgery

                  8.       Laboratory Services -- All laboratory testing sites
                           providing services under this contract must have
                           either a Clinical Laboratory Improvement Act (CLIA)
                           certificate of waiver or a certificate of

                                                                           IV-10
<PAGE>   72
                           registration along with a CLIA identification number.
                           Those providers with certificates of waiver shall
                           provide only the types of tests permitted under the
                           terms of their waiver. Laboratories with certificates
                           of registration may perform a full range of
                           laboratory services.

                  9.       Radiology Services -- Diagnostic and therapeutic

                  10.      Optometrist Services, including one routine eye
                           examination per year

                  11.      Optical appliances -- Limited to one pair of glasses
                           (or contact lenses) per 24 month period or as
                           medically necessary

                  12.      Organ transplant services which are non-experimental
                           or non- investigational

                  13.      Prescription drugs, excluding over-the-counter drugs
                           Exception: See Article 8 regarding Protease
                           Inhibitors and other antiretrovirals.

                  14.      Dental Services -- Limited to preventive dental
                           services for children under the age of 12 years,
                           including oral examinations, oral prophylaxis, and
                           topical application of fluorides

                  15.      Podiatrist Services -- Excludes routine hygienic care
                           of the feet, including the treatment of corns and
                           calluses, the trimming of nails, and other hygienic
                           care such as cleaning or soaking feet, in the absence
                           of a pathological condition

                  16.      Prosthetic appliances -- Limited to the initial
                           provision of a prosthetic device that temporarily or
                           permanently replaces all or part of an external body
                           part lost or impaired as a result of disease, injury,
                           or congenital defect. Repair and replacement services
                           are covered when due to congenital growth.

                  17.      Private duty nursing -- Only when authorized by the
                           contractor

                  18.      Transportation Services -- Limited to ambulance for
                           medical emergency only

                  19.      Well child care including immunizations, lead
                           screening and treatments

                  20.      Maternity and related newborn care

                  21.      Diabetic supplies and equipment

                                                                           IV-11
<PAGE>   73
         B.       Services Available To NJ FamilyCare Plan D Under
                  Fee-For-Service. The following services are available to NJ
                  FamilyCare Plan D enrollees under fee-for-service:

                  1.       Abortion services

                  2.       Skilled nursing facility services

                  3.       Outpatient Rehabilitation Services -- Physical
                           therapy, Occupational therapy, and Speech therapy for
                           non-chronic conditions and acute illnesses and
                           injuries. Limited to treatment for a 60-day
                           consecutive period per incident of illness or injury
                           beginning with the first day of treatment per
                           contract year. Speech therapy services rendered for
                           treatment of delays in speech development, unless
                           resulting from disease, injury or congenital defects
                           are not covered

                  4.       Inpatient hospital services for mental health,
                           including psychiatric hospitals, limited to 35 days
                           per year

                  5.       Outpatient benefits for short-term, outpatient
                           evaluative and crisis intervention, or home health
                           mental health services, limited to 20 visits per year

                           a.       When authorized by the Division of Medical
                                    Assistance and Health Services, one (1)
                                    mental health inpatient day may be exchanged
                                    for up to four (4) home health visits or
                                    four (4) outpatient services, including
                                    partial care. This is limited to an exchange
                                    of up to a maximum of 10 inpatient days for
                                    a maximum of 40 additional outpatient
                                    visits.

                           b.       When authorized by the Division of Medical
                                    Assistance and Health Services, one (1)
                                    mental health inpatient day may be exchanged
                                    for two (2) days of treatment in partial
                                    hospitalization up to the maximum number of
                                    covered inpatient days.

                  6.       Inpatient and outpatient services for substance abuse
                           are limited to detoxification.

         C.       Exclusions. The following services not covered for NJ
                  FamilyCare Plan D participants either by the contractor or the
                  Department include, but are not limited to:

                                                                           IV-12
<PAGE>   74
                  1.       Non-medically necessary services.

                  2.       Intermediate Care Facilities/Mental Retardation

                  3.       Private duty nursing unless authorized by the
                           contractor

                  4.       Personal Care Assistant Services

                  5.       Medical Day Care Services

                  6.       Chiropractic Services

                  7.       Dental services except preventive dentistry for
                           children under age 12

                  8.       Orthotic devices

                  9.       Targeted Case Management for the chronically ill

                  10.      Residential treatment center psychiatric programs

                  11.      Religious non-medical institutions care and services

                  12.      Durable Medical Equipment

                  13.      Early and Periodic Screening, Diagnosis and Treatment
                           (EPSDT) services (except for well child care,
                           including immunizations and lead screening and
                           treatments)

                  14.      Transportation Services, including non-emergency
                           ambulance, invalid coach, and lower mode
                           transportation

                  15.      Hearing Aid Services

                  16.      Blood and Blood Plasma, except administration of
                           blood, processing of blood, processing fees and fees
                           related to autologous blood donations are covered.

                  17.      Cosmetic Services

                  18.      Custodial Care

                  19.      Special Remedial and Educational Services

                  20.      Experimental and Investigational Services

                  21.      Medical Supplies (except diabetic supplies)

                  22.      Infertility Services

                  23.      Rehabilitative Services for Substance Abuse

                  24.      Weight reduction programs or dietary supplements,
                           except surgical operations, procedures or treatment
                           of obesity when approved by the contractor

                  25.      Acupuncture and acupuncture therapy, except when
                           performed as a form of anesthesia in connection with
                           covered surgery

                  26.      Temporomandibular joint disorder treatment, including
                           treatment performed by prosthesis placed directly in
                           the teeth

                  27.      Recreational therapy

                  28.      Sleep therapy

                  29.      Court-ordered services

                  30.      Thermograms and thermography

                  31.      Biofeedback

                  32.      Radial keratotomy

                                                                           IV-13
<PAGE>   75
4.1.7 SUPPLEMENTAL BENEFITS

         Any service, activity or product not covered under the State Plan may
         be provided by the contractor only through written approval by the
         Department and the cost of which shall be borne solely by the
         contractor.

4.1.8 CONTRACTOR AND DMAHS SERVICE EXCLUSIONS

         Neither the contractor nor DMAHS shall be responsible for the
         following:

         A.       All services not medically necessary, provided, approved or
                  arranged by a contractor's physician or other provider (within
                  his/her scope of practice) except emergency services.

         B.       Cosmetic surgery except when medically necessary and approved.

         C.       Experimental organ transplants.

         D.       Services provided primarily for the diagnosis and treatment of
                  infertility, including sterilization reversals, and related
                  office (medical or clinic), drugs, laboratory services,
                  radiological and diagnostic services and surgical procedures.

         E.       Rest cures, personal comfort and convenience items, services
                  and supplies not directly related to the care of the patient,
                  including but not limited to, guest meals and accommodations,
                  telephone charges, travel expenses other than those services
                  not in Article 4.1 of this contract, take home supplies and
                  similar cost. Costs incurred by an accompanying parent(s) for
                  an out-of-state medical intervention are covered under EPSDT
                  by the contractor.

         F.       Services involving the use of equipment in facilities, the
                  purchase, rental or construction of which has not been
                  approved by applicable laws of the State of New Jersey and
                  regulations issued pursuant thereto.

         G.       All claims arising directly from services provided by or in
                  institutions owned or operated by the federal government such
                  as Veterans Administration hospitals.

         H.       Services provided in an inpatient psychiatric institution,
                  that is not an acute care hospital, to individuals under 65
                  years of age and over 21 years of age.

         I.       Services provided to all persons without charge. Services and
                  items provided without charge through programs of other public
                  or voluntary agencies (for example, New Jersey State
                  Department of Health and Senior Services, New Jersey Heart
                  Association, First Aid Rescue Squads, and so forth) shall be
                  utilized to the fullest extent possible.

                                                                           IV-14
<PAGE>   76
         J.       Services or items furnished for any sickness or injury
                  occurring while the covered person is on active duty in the
                  military.

         K.       Services provided outside the United States and territories.

         L.       Services or items furnished for any condition or accidental
                  injury arising out of and in the course of employment for
                  which any benefits are available under the provisions of any
                  workers' compensation law, temporary disability benefits law,
                  occupational disease law, or similar legislation, whether or
                  not the Medicaid beneficiary claims or receives benefits
                  thereunder, and whether or not any recovery is obtained from a
                  third-party for resulting damages.

         M.       That part of any benefit which is covered or payable under any
                  health, accident, or other insurance policy (including any
                  benefits payable under the New Jersey no-fault automobile
                  insurance laws), any other private or governmental health
                  benefit system, or through any similar third-party liability,
                  which also includes the provision of the Unsatisfied Claim and
                  Judgment Fund.

         N.       Any services or items furnished for which the provider does
                  not normally charge.

         O.       Services furnished by an immediate relative or member of the
                  Medicaid beneficiary's household.

         P.       Services billed for which the corresponding health care
                  records do not adequately and legibly reflect the requirements
                  of the procedure described or procedure code utilized by the
                  billing provider.

         Q.       Services or items reimbursed based upon submission of a cost
                  study when there are no acceptable records or other evidence
                  to substantiate either the costs allegedly incurred or
                  beneficiary income available to offset those costs. In the
                  absence of financial records, a provider may substantiate
                  costs or available income by means of other evidence
                  acceptable to the Division.

4.2 SPECIAL PROGRAM REQUIREMENTS

4.2.1 EMERGENCY SERVICES

         A.       For purposes of this contract, "emergency" means an onset of a
                  medical or behavioral condition, the onset of which is sudden,
                  that manifests itself by symptoms of sufficient severity,
                  including severe pain, that a prudent layperson, who possesses
                  an average knowledge of medicine and health, could reasonably
                  expect the absence of immediate medical attention to result
                  in:

                                                                           IV-15
<PAGE>   77
                  1.       Placing the health of the person or others in serious
                           jeopardy;

                  2.       Serious impairment to such person's bodily functions;

                  3.       Serious dysfunction of any bodily organ or part of
                           such person; or

                  4.       Serious disfigurement of such person.

                  With respect to a pregnant woman who is having contractions,
                  an emergency exists where there is inadequate time to effect a
                  safe transfer to another hospital before delivery or the
                  transfer may pose a threat to the health or safety of the
                  woman or the unborn child.

         B.       The contractor shall be responsible for emergency services,
                  both within and outside the contractor's enrollment area, as
                  required by an enrollee in the case of an emergency. Emergency
                  services shall also include:

                  1.       Medical examination at an Emergency Room which is
                           required by N.J.A.C. 10:122D-2.5(b) when a foster
                           home placement of a child occurs after business
                           hours.

                  2.       Examinations at an Emergency Room for suspected
                           physical/child abuse and/or neglect.

                  3.       Post-Stabilization of Care. The contractor shall
                           comply with 42 C.F.R. * 422.100(b)(iv). The
                           contractor must cover post-stabilization services
                           without requiring authorization and regardless of
                           whether the enrollee obtains the services within or
                           outside the contractor's network if:

                           a.       The services were pre-approved by the
                                    contractor or its providers; or

                           b.       The services were not pre-approved by the
                                    contractor because the contractor did not
                                    respond to the provider of
                                    post-stabilization care services' request
                                    for pre-approval within one (1) hour after
                                    being requested to approve such care; or

                           c.       The contractor could not be contacted for
                                    pre-approval.

         C.       Access Standards. The contractor shall ensure that all covered
                  services, that are required on an emergency basis are
                  available to all its enrollees, twenty-four (24) hours per
                  day, seven (7) days per week, either in the contractor's own
                  provider network or through arrangements approved by DMAHS.
                  The contractor shall maintain twenty-four (24) hours per day,
                  seven (7) days per week on-call telephone coverage, including
                  Telecommunication Device for the Deaf (TDD)/Tech Telephone
                  (TT) systems, to advise enrollees of procedures for

                                                                           IV-16
<PAGE>   78
                  emergency and urgent care and explain procedures for obtaining
                  non-emergent/non-urgent care during regular business hours
                  within the enrollment area as well as outside the enrollment
                  area.

         D.       Non-Participating Providers. The contractor shall be
                  responsible for developing and advising its enrollees and
                  where applicable, authorized persons of procedures for
                  obtaining emergency services, including emergency dental
                  services, when it is not medically feasible for enrollees to
                  receive emergency services from or through a participating
                  provider, or when the time required to reach the participating
                  provider would mean risk of permanent damage to the enrollee's
                  health. The contractor shall bear the cost of providing
                  emergency service through non-participating providers.

         E.       Emergency Care Prior Authorization. Prior authorization shall
                  not be required for emergency services. This applies to
                  out-of-network as well as to in-network providers.

         F.       Medical Screenings/Urgent Care. Prior authorization shall not
                  be required for medical screenings or in urgent care
                  situations at the hospital emergency room. The hospital
                  emergency room physician may determine the necessity for
                  contacting the PCP or the contractor for information about an
                  enrollee who presents with an urgent condition.

         G.       The contractor shall pay for all medical screening services
                  rendered to its enrollees by hospitals and emergency room
                  physicians. The amount and method of reimbursement for medical
                  screenings shall be subject to negotiation between the
                  contractor and the hospital and directly with non-hospital
                  salaried emergency room physicians and shall include
                  reimbursement for urgent care and non-urgent care rates.
                  Non-participating hospitals may be reimbursed for hospital
                  costs at Medicaid rates or other mutually agreeable rates for
                  medical screening services. Additional fees for additional
                  services may be included at the discretion of the contractor
                  and the hospital.

                  1.       The contractor shall not retroactively deny a claim
                           for an emergency medical screening exam because the
                           condition, which appeared to be an emergency medical
                           condition under the prudent layperson standard, was
                           subsequently determined to be non-emergency in
                           nature.

         H.       The contractor shall be liable for payment for the following
                  emergency services provided to an enrollee:

                  1.       If the screening examination leads to a clinical
                           determination by the examining physician that an
                           actual emergency medical condition exists, the
                           contractor shall pay for both the services involved
                           in the screening exam and the services required to
                           stabilize the patient.

                                                                           IV-17
<PAGE>   79
                  2.       All emergency services which are medically necessary
                           until the clinical emergency is stabilized. This
                           includes all treatment that is necessary to assure,
                           within reasonable medical probability, that no
                           material deterioration of the patient's condition is
                           likely to result from, or occur during, discharge of
                           the patient or transfer of the patient to another
                           facility.

                           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.
                           The contractor may establish arrangements with
                           hospitals whereby the contractor may send one of its
                           physicians with appropriate ER privileges to assume
                           the attending physician's responsibilities to
                           stabilize, treat, or transfer the patient.

                  3.       If the screening examination leads to a clinical
                           determination by the examining physician that an
                           actual emergency medical condition does not exist,
                           but the enrollee had acute symptoms of sufficient
                           severity at the time of presentation to warrant
                           emergency attention under the prudent layperson
                           standard, the contractor shall pay for all services
                           related to the screening examination.

                  4.       The enrollee's PCP or other contractor representative
                           instructs the enrollee to seek emergency care
                           in-network or out-of-network, whether or not the
                           patient meets the prudent layperson definition.

         I.       The contractor may utilize a common list of symptom-based
                  presenting complaints that will reasonably substantiate that
                  an emergent/urgent medical condition existed. Some examples
                  include but are not limited to:

                  1.       Severe pain of any kind.

                  2.       Altered mental status, sustained or transient, for
                           any reason.

                  3.       Abrupt change in neurological status, sustained or
                           transient, for any reason.

                  4.       Complications of pregnancy.

                  5.       Chest pain.

                  6.       Acute allergic reactions.

                  7.       Shortness of breath.

                  8.       Abdominal pain.

                  9.       Multiple episodes of vomiting or diarrhea, any age.

                  10.      Fever greater than 102.5 degrees F in any age group.

                  11.      Fever greater than 100.4 degrees F in infants three
                           months or younger.

                  12.      Injuries with active bleeding.

                                                                           IV-18
<PAGE>   80
                  13.      Injuries with functional loss of any body part.

                  14.      All patients arriving at the hospital by ambulance
                           after an injury with any body part immobilized.

                  15.      All patients arriving at the hospital by paramedic
                           ambulance.

                  16.      Symptoms of substance abuse.

                  17.      Psychiatric disturbances.

         J.       Women who arrive at any emergency room in active labor shall
                  be considered as an emergency situation and the contractor
                  shall reimburse providers of care accordingly.

         K.       If within thirty (30) minutes after receiving a request from a
                  hospital emergency department for a specialty consultation,
                  the contractor fails to identify an appropriate specialist who
                  is available and willing to assume the care of the enrollee,
                  the emergency department may arrange for medically necessary
                  emergency services by an appropriate specialist, and the
                  contractor shall not deny coverage for these services due to
                  lack of prior authorization. The contractor shall not require
                  prior authorization for specialty care emergency services for
                  treatment of any immediately life-threatening medical
                  condition.

         L.       The contractor shall establish and maintain policies and
                  procedures for emergency dental services for all enrollees.

                  1.       Within the contractor's Enrollment/Service Area, the
                           contractor will ensure that:

                           a.       Enrollees shall have access to emergency
                                    dental services on a twenty-four (24) hour,
                                    seven (7) day a week basis.

                           b.       The contractor shall bear full
                                    responsibility for the provision of
                                    emergency dental services, and shall assure
                                    the availability of a back-up provider in
                                    the event that an on-call provider is
                                    unavailable.

                  2.       Outside the contractor's Service Area, the contractor
                           shall ensure that:

                           a.       Enrollees shall be able to seek emergency
                                    dental services from any licensed dental
                                    provider without the need for prior
                                    authorization from the contractor while
                                    outside the Service Area (including out-
                                    of-state services covered by the Medicaid
                                    program).

         M.       The contractor shall reimburse ambulance and MICU
                  transportation providers responding to "911" calls whether or
                  not the patient's condition is determined, retrospectively, to
                  be an emergency.

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<PAGE>   81
4.2.2 FAMILY PLANNING SERVICES AND SUPPLIES

         A.       General. Except where specified in Section 4.1, the
                  contractor's enrollees are permitted to obtain family planning
                  services and supplies from either the contractor's family
                  planning provider network or from any other qualified Medicaid
                  family planning provider. The DMAHS shall reimburse family
                  planning services provided by non-participating providers
                  based on the Medicaid fee schedule.

         B.       Non-Participating Providers. The contractor shall cooperate
                  with non-participating family planning providers accessed at
                  the enrollee's option by establishing cooperative working
                  relationships with such providers for accepting referrals from
                  them for continued medical care and management of complex
                  health care needs and exchange of enrollee information, where
                  appropriate, to assure provision of needed care within the
                  scope of this contract. The contractor shall not deny coverage
                  of family planning services for a covered diagnostic,
                  preventive or treatment service solely on the basis that the
                  diagnosis was made by a non-participating provider.

4.2.3 OBSTETRICAL SERVICES REQUIREMENTS/ISSUES

         A.       Obstetrical services shall be provided in the same amount,
                  duration, and scope as the Medicaid HealthStart program.
                  Guidelines, standards, and required program provisions are
                  found in Section B.4.2 of the Appendices.

         B.       The contractor shall not limit benefits for postpartum
                  hospital stays to less than forty-eight (48) hours following a
                  normal vaginal delivery or less than ninety-six (96) hours
                  following a cesarean section, unless the attending provider,
                  in consultation with the mother, makes the decision to
                  discharge the mother or the newborn before that time and the
                  provisions of N.J.S.A. 26:2J-4.9 are met.

                  1.       The contractor shall not provide monetary payments or
                           rebates to mothers to encourage them to accept less
                           than the minimum protections provided for in this
                           Article.

                  2.       The contractor shall not penalize, reduce, or limit
                           the reimbursement of an attending provider because
                           the provider provided care in a manner consistent
                           with this Article.

4.2.4 PRESCRIBED DRUGS AND PHARMACY SERVICES

         A.       General. The contractor shall provide all medically necessary
                  legend and non-legend drugs which are also covered by the
                  Medicaid program and ensure the availability of quality
                  pharmaceutical services for all enrollees including drugs
                  prescribed by Mental Health/Substance Abuse providers. See
                  Article 4.4C for additional information pertaining to MH/SA
                  pharmacy benefits.

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<PAGE>   82
         B.       Use of Formulary. The contractor may use a formulary as long
                  as the following minimum requirements are met:

                  1.       The contractor shall only exclude coverage of drugs
                           or drug categories permitted under 1927(d) of the
                           Social Security Act as amended by OBRA 1993. In
                           addition, the contractor shall include in its
                           formulary, if it chooses to operate a formulary, any
                           FDA-approved drugs that may allow for clinical
                           improvement or are clinically advantageous for the
                           management of a disease or condition.

                  2.       The contractor's formulary shall be developed by a
                           Pharmacy and Therapeutics (P&T) Committee that shall
                           represent the needs of all its enrollees including
                           enrollees with special needs. Network physicians and
                           dentists shall have the opportunity to participate in
                           the development of the formulary and, prior to any
                           changes to a drug formulary, to review, consider and
                           comment on proposed changes. The formulary shall be
                           reviewed in its entirety and updated at least
                           annually.

                  3.       The formulary for the DMAHS pharmacy benefit and any
                           revision thereto shall be reviewed and approved by
                           DMAHS.

                  4.       The formulary shall include only FDA approved drug
                           products. For each Specific Therapeutic Drug (STD)
                           class, the selection of drugs included for each drug
                           class shall be sufficient to ensure the availability
                           of covered drugs with the least need for prior
                           authorization to be initiated by providers of
                           pharmaceutical services and include FDA approved
                           drugs to best serve the medical needs of enrollees
                           with special needs. In addition, the formulary shall
                           be revised periodically to assure compliance with
                           this requirement.

                  5.       The contractor shall authorize the provision of a
                           drug not on the formulary requested by the PCP or
                           referral provider on behalf of the enrollee if the
                           approved prescriber certifies medical necessity for
                           the drug to the contractor for a determination.
                           Medically accepted indications shall be consistent
                           with Section 1927(k)(6) of the Social Security Act.
                           The contractor shall have in place a DMAHS-approved
                           prior approval process for authorizing the dispensing
                           of such drugs. In addition:

                           a.       Any prior approval issued by the contractor
                                    shall take into consideration prescription
                                    refills related to the original pharmacy
                                    service.

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<PAGE>   83
                           b.       A formulary shall not be used to deny
                                    coverage of any Medicaid covered outpatient
                                    drug determined medically necessary through
                                    the review and appeal process. The prior
                                    approval process shall be used to ensure
                                    drug coverage consistent with the policies
                                    of the New Jersey Medicaid program.

                           c.       Prior approval may be used for covered drug
                                    products under the following conditions:

                                    i.       For prescribing and dispensing
                                             medically necessary non-formulary
                                             drugs.

                                    ii.      To limit drug coverage consistent
                                             with the policies of the Medicaid
                                             program.

                                    iii.     To minimize potential drug
                                             over-utilization.

                                    iv.      To accommodate exceptions to
                                             Medicaid drug utilization review
                                             standards related to proper
                                             maintenance drug therapy.

                           d.       Except for the use of approved generic drug
                                    substitution of brand drugs, under no
                                    circumstances shall the contractor permit
                                    the therapeutic substitution of a prescribed
                                    drug without a prescriber's authorization.

                           e.       The contractor shall not penalize the
                                    prescriber or enrollee, financially or
                                    otherwise, for such requests and approvals.

                           f.       Determinations shall be made within
                                    twenty-four (24) hours of receipt of all
                                    necessary information. A seventy-two
                                    (72)-hour supply of medication shall be
                                    permitted without prior authorization in
                                    emergency situations or if a determination
                                    has not been made within the required
                                    timeframe.

                           g.       Denials of off-formulary requests or
                                    offering of an alternative medication shall
                                    be provided to the prescriber and/or
                                    enrollee in writing. All denials shall be
                                    reported to the DMAHS quarterly.

                  6.       The contractor shall publish and distribute hard copy
                           or on-line, at least annually, its current formulary
                           (if the contractor uses a formulary) to all
                           prescribing providers and pharmacists. Updates to the
                           formulary shall be distributed in all formats within
                           sixty (60) days of the changes.

                  7.       If the formulary includes generic equivalents, the
                           contractor shall provide for a brand name exception
                           process for prescribers to use when medically
                           necessary.

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<PAGE>   84
                  8.       The contractor shall establish and maintain a
                           procedure, approved by DMAHS, for internal review and
                           resolution of complaints, such as timely access and
                           coverage issues, drug utilization review, and claim
                           management based on standards of drug utilization
                           review.

         C.       Pharmacy Lock-In Program. The contractor may implement a
                  pharmacy lock-in program including policies, procedures and
                  criteria for establishing the need for the lock-in which must
                  be prior approved by DMAHS and must include the following
                  components to the program:

                  1.       Enrollees shall be notified prior to the lock-in and
                           must be permitted to choose or change pharmacies for
                           good cause.

                  2.       A seventy-two (72)-hour emergency supply of
                           medication at pharmacies other than the designated
                           lock-in pharmacy shall be permitted to assure the
                           provision of necessary medication required in an
                           interim/urgent basis when the assigned pharmacy does
                           not immediately have the medication.

                  3.       Care management and education reinforcement of
                           appropriate medication/pharmacy use shall be
                           provided. A plan for an education program for
                           enrollees shall be developed and submitted for review
                           and approval.

                  4.       The continued need for lock-in shall be periodically
                           (at least every two years) evaluated by the
                           contractor for each enrollee in the program.

                  5.       Prescriptions from all participating prescribers
                           shall be honored and may not be required to be
                           written by the PCP only.

                  6.       The contractor shall fill medications prescribed by
                           mental health/substance abuse providers, subject to
                           the limitations described in Article 4.4C.

                  7.       The contractor shall submit quarterly reports on
                           Pharmacy Lock-in participants. See Section A.7.17 of
                           the Appendices (Table 15).

         D.       The contractor shall develop criteria and protocols to avoid
                  enrollee injury due to the prescribing of drugs by more than
                  one provider.

4.2.5 LABORATORY SERVICES

         A.       Urgent/Emergent Results. The contractor shall develop policies
                  and procedures to require providers to notify enrollees of
                  laboratory and radiology results within twenty-four (24) hours
                  of receipt of results in urgent or emergent cases. The
                  contractor may allow its providers to arrange an appointment
                  to discuss laboratory/radiology results within 24 hours of
                  receipt of results when it is deemed

                                                                           IV-23
<PAGE>   85
                  face to face discussion with the enrollee/authorized person
                  may be necessary. Urgent/emergency appointment standards must
                  be followed (see Article 5.12). Rapid strep test results must
                  be available to the enrollee within 24 hours of the test.

         B.       Routine Results. The contractor shall assure that its
                  providers establish a mechanism to notify enrollees of
                  non-urgent or non-emergent laboratory and radiology results
                  within ten business days of receipt of the results.

4.2.6 EPSDT SCREENING SERVICES

         A.       The contractor shall comply with EPSDT program requirements
                  and performance standards found below.

                  1.       The contractor shall provide EPSDT services.

                  2.       NJ FamilyCare Plans B and C. For children eligible
                           solely through NJ FamilyCare Plans B and C, coverage
                           includes all preventive screening and diagnostic
                           services, medical examinations, immunizations,
                           dental, vision, lead screening and hearing services.
                           Includes only those treatment services identified
                           through the examination that are included under the
                           contractor's benefit package or specified services
                           through the FFS program. Other services identified
                           through an EPSDT examination that are not included in
                           the New Jersey Care 2000+ covered benefits package
                           are not covered.

                  3.       Enrollee Notification. The contractor shall provide
                           written notification to its enrollees under
                           twenty-one (21) years of age when appropriate
                           periodic assessments or needed services are due and
                           must coordinate appointments for care.

                  4.       Missed Appointments. The contractor shall implement
                           policies and procedures and shall monitor its
                           providers to provide follow up on missed appointments
                           and referrals for problems identified through the
                           EPSDT exams. Reasonable outreach shall be documented
                           and must consist of: mailers, certified mail as
                           necessary; use of MEDM system provided by the State;
                           and contact with the Medicaid District Office (MDO),
                           DDD, or DYFS regional offices in the case of DYFS
                           enrollees to confirm addresses and/or to request
                           assistance in locating an enrollee.

                  5.       PCP Notification. The contractor shall provide each
                           PCP, on a calendar quarter basis, a list of the PCP's
                           enrollees who have not had an encounter during the
                           past year and/or who have not complied with the EPSDT
                           periodicity and immunization schedules for children.
                           Primary care

                                                                           IV-24
<PAGE>   86
                           sites/PCPs and/or the contractor shall be required to
                           contact these enrollees to arrange an appointment.
                           Documentation of the outreach efforts and responses
                           is required.

                  6.       Reporting Standards. The contractor shall submit
                           quarterly reports, hard copy and on diskette, of
                           EPSDT services. See Section A.7.16 of the Appendices
                           (Table 14).

         B.       Section 1905(r) of the Social Security Act (42 U.S.C. * 1396d)
                  and federal regulation 42 C.F.R. * 441.50 et seq. requires
                  EPSDT services to include:

                  1.       EPSDT Services which include:

                           a.       A comprehensive health and developmental
                                    history including assessments of both
                                    physical and mental health development and
                                    the provision of all diagnostic and
                                    treatment services that are medically
                                    necessary to correct or ameliorate a
                                    physical or mental condition identified
                                    during a screening visit. The contractor
                                    shall have procedures in place for referral
                                    to the State or its agent for non-covered
                                    mental health/substance abuse services.

                           b.       A comprehensive unclothed physical
                                    examination including:

                                    -        Vision and hearing screening;

                                    -        Dental inspection; and

                                    -        Nutritional assessment.

                           c.       Appropriate immunizations according to age,
                                    health history and the schedule established
                                    by the Advisory Committee on Immunization
                                    Practices (ACIP) for pediatric vaccines (See
                                    Section B.4.3 of the Appendices). Contractor
                                    and its providers must adjust for periodic
                                    changes in recommended types and schedule of
                                    vaccines. Immunizations must be reviewed at
                                    each screening examination as well as during
                                    acute care visits and necessary
                                    immunizations must be administered when not
                                    contraindicated. Deferral of administration
                                    of a vaccine for any reason must be
                                    documented.

                           d.       Appropriate laboratory tests: A recommended
                                    sequence of screening laboratory
                                    examinations must be provided by the
                                    contractor. The following list of screening
                                    tests is not all inclusive:

                                    -        Hemoglobin/hematocrit/EP

                                    -        Urinalysis

                                    -        Tuberculin test - intradermal,
                                             administered annually and when
                                             medically indicated

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<PAGE>   87
                                    -        Lead screening using blood lead
                                             level determinations must be done
                                             for every Medicaid-eligible and NJ
                                             FamilyCare child:

                                             -        between nine (9) months
                                                      and eighteen (18) months,
                                                      preferably at twelve (12)
                                                      months of age

                                             -        at 18-26 months,
                                                      preferably at twenty-four
                                                      (24) months of age

                                             -        test any child between
                                                      twenty-seven (27) to
                                                      seventy-two (72) months
                                                      of age not previously
                                                      tested

                                    -        Additional laboratory tests may be
                                             appropriate and medically indicated
                                             (e.g., for ova and parasites) and
                                             shall be obtained as necessary.

                           e.       Health education/anticipatory guidance.

                           f.       Referral for further diagnosis and treatment
                                    or follow-up of all abnormalities which are
                                    treatable/correctable or require maintenance
                                    therapy uncovered or suspected (referral may
                                    be to the provider conducting the screening
                                    examination, or to another provider, as
                                    appropriate.)

                           g.       EPSDT screening services shall reflect the
                                    age of the child and be provided
                                    periodically according to the following
                                    schedule:

                                    -        Neonatal exam

                                    -        Under six (6) weeks

                                    -        Two (2) months

                                    -        Four (4) months

                                    -        Six (6) months

                                    -        Nine (9) months

                                    -        Twelve (12) months

                                    -        Fifteen (15) months

                                    -        Eighteen (18) months

                                    -        Twenty-four (24) months

                                    -        Annually through age twenty (20)

                  2.       Vision Services. At a minimum, include diagnosis and
                           treatment for defects in vision, including
                           eyeglasses. Vision screening in an infant means, at a
                           minimum, eye examination and observation of responses
                           to visual stimuli. In an older child, screening for
                           distant visual acuity and ocular alignment shall be
                           done for each child beginning at age three.

                  3.       Dental Services. Dental services may not be limited
                           to emergency services. Dental screening in this
                           context means, at a minimum, observation of tooth
                           eruption, occlusion pattern, presence of caries, or
                           oral infection. A referral to a dentist at or after
                           one year of age is

                                                                           IV-26
<PAGE>   88
                           recommended. A referral to a dentist is mandatory at
                           three years of age and annually thereafter through
                           age twenty (20) years.

                  4.       Hearing Services. At a minimum, include diagnosis and
                           treatment for defects in hearing, including hearing
                           aids. For infants identified as at risk for hearing
                           loss through the New Jersey Newborn Hearing Screening
                           Program, hearing screening should be conducted prior
                           to three months of age using professionally
                           recognized audiological assessment techniques. For
                           all other children, hearing screening means, at a
                           minimum, observation of an infant's response to
                           auditory stimuli and audiogram for a child three (3)
                           years of age and older. Speech and hearing assessment
                           shall be a part of each preventive visit for an older
                           child.

                  5.       Mental Health/Substance Abuse. Include a mental
                           health/substance abuse assessment documenting
                           pertinent findings. When there is an indication of
                           possible MH/SA issues, a mental health/substance
                           abuse screening tool(s) found in Section B.4.9 of the
                           Appendices or a DHS - approved equivalent shall be
                           used to evaluate the enrollee.

                  6.       Such other necessary health care, diagnostic
                           services, treatment, and other measures to correct or
                           ameliorate defects, and physical and mental/substance
                           abuse illnesses and conditions discovered by the
                           screening services.

                  7.       Lead Screening. The contractor shall provide a
                           screening program for the presence of lead toxicity
                           in children which shall consist of two components:
                           verbal risk assessment and blood lead testing.

                           a.       Verbal Risk Assessment - The provider shall
                                    perform a verbal risk assessment for lead
                                    toxicity at every periodic visit between the
                                    ages of six (6) and seventy-two (72) months
                                    as indicated on the schedule. The verbal
                                    risk assessment includes, at a minimum, the
                                    following types of questions:

                                    i.       Does your child live in or
                                             regularly visit a house built
                                             before 1960? Does the house have
                                             chipping or peeling paint?

                                    ii.      Was your child's day care
                                             center/preschool/babysitter's home
                                             built before 1960? Does the house
                                             have chipping or peeling paint?

                                    iii.     Does your child live in or
                                             regularly visit a house built
                                             before 1960 with recent, ongoing,
                                             or planned renovation or
                                             remodeling?

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                                    iv.      Have any of your children or their
                                             playmates had lead poisoning?

                                    v.       Does your child frequently come in
                                             contact with an adult who works
                                             with lead? Examples include
                                             construction, welding, pottery, or
                                             other trades practiced in your
                                             community.

                                    vi.      Do you give your child home or folk
                                             remedies that may contain lead?

                                    Generally, a child's level of risk for
                                    exposure to lead depends upon the answers to
                                    the above questions. If the answer to all
                                    questions are negative, a child is
                                    considered at low risk for high doses of
                                    lead exposure. If the answers to any
                                    question is affirmative or "I don't know," a
                                    child is considered at high risk for high
                                    doses of lead exposure. Regardless of risk,
                                    each child must be tested between nine (9)
                                    months and eighteen (18) months, preferably
                                    at twelve (12) months of age, at 18-26
                                    months, preferably at two (2) years, and any
                                    child between twenty-seven (27) and
                                    seventy-two (72) months of age not
                                    previously tested. A child's risk category
                                    can change with each administration of the
                                    verbal risk assessment.

                           b.       Blood Lead Testing - All screening must be
                                    done through a blood lead level
                                    determination. The contractor must implement
                                    a screening program to identify and treat
                                    high-risk children for lead-exposure and
                                    toxicity. The screening program shall
                                    include blood level screening, diagnostic
                                    evaluation and treatment with follow-up care
                                    of children whose blood lead levels are
                                    elevated. The EP test is no longer
                                    acceptable as a screening test for lead
                                    poisoning; however, it is still valid as a
                                    screening test for iron deficiency anemia.
                                    Screening blood lead testing may be
                                    performed by either a capillary sample
                                    (fingerstick) or a venous sample. However,
                                    all elevated blood levels (equal to or
                                    greater than ten (10) micrograms per one (1)
                                    deciliter) obtained through a capillary
                                    sample must be confirmed by a venous sample.
                                    The blood lead test must be performed by a
                                    New Jersey Department of Health and Senior
                                    Services licensed laboratory. The frequency
                                    with which the blood test is to be
                                    administered depends upon the results of the
                                    verbal risk assessment. For children
                                    determined to be at low risk for high doses
                                    of lead exposure, a screening blood lead
                                    test must be performed once between the ages
                                    of nine (9) and eighteen (18) months,
                                    preferably at twelve (12) months, once
                                    between 18-26 months, preferably at
                                    twenty-four (24) months, and for any child

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                                    between twenty-seven (27) and seventy-two
                                    (72) months not previously tested. For
                                    children determined to be at high risk for
                                    high doses of lead exposure, a screening
                                    blood test must be performed at the time a
                                    child is determined to be a high risk
                                    beginning at six months of age if there is
                                    pertinent information or evidence that the
                                    child may be at risk at younger ages than
                                    stated in 4.2.6B.1.d.

                                    i.      If the initial blood lead test
                                            results are less than ten (10)
                                            micrograms per deciliter, a verbal
                                            risk assessment is required at every
                                            subsequent periodic visit through
                                            seventy-two (72) months of age,
                                            with mandatory blood lead testing
                                            performed according to the schedule
                                            in 4.2.6B.7.

                                    ii.     If the child is found to have a
                                            blood lead level equal to or greater
                                            than ten (10) micrograms per
                                            deciliter, providers should use
                                            their professional judgment, in
                                            accordance with the CDC guidelines
                                            regarding patient management and
                                            treatment, as well as follow-up
                                            blood test.

                                    iii.    If a child between the ages of
                                            twenty-four (24) months and
                                            seventy-two (72) months has not
                                            received a screening blood lead
                                            test, the child must receive the
                                            blood lead test immediately,
                                            regardless of whether the child is
                                            determined to be a low or high risk
                                            according to the answers to the
                                            above-listed questions.

                                    iv.     When a child is found to have a
                                            blood lead level equal to or
                                            greater than twenty (20) mg/dl, the
                                            contractor shall ensure its PCPs
                                            cooperate with the local health
                                            department in whose jurisdiction
                                            the child resides to facilitate the
                                            environmental investigation to
                                            determine and remediate the source
                                            of lead. This cooperation shall
                                            include sharing of information
                                            regarding the child's care,
                                            including the scheduling and
                                            results of follow-up blood lead
                                            tests.

4.2.7 IMMUNIZATIONS

         A.       General. The contractor shall ensure that its providers
                  furnish immunizations to its enrollees in accordance with the
                  most current recommendations for vaccines and periodicity
                  schedule of the Advisory Committee on Immunization Practices
                  (ACIP) (See Section B.4.3 of the Appendices) and any
                  subsequent revision to the schedule as formally recommended by
                  the ACIP, whether or not included as a contract amendment. To
                  the extent possible, the State will provide copies of updated
                  schedules and vaccine recommendations.

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         B.       New Vaccines. New vaccines and/or new scheduling or method of
                  administration shall be provided as recommended by the ACIP.
                  The contractor shall monitor periodic recommendations and
                  disseminate updated instruction to its providers and assure
                  appropriate payment adjustment to its providers.

         C.       The contractor shall build in provisions for appropriate
                  reimbursement for catch-up immunizations its providers shall
                  provide for those pediatric enrollees who have missed
                  age-appropriate vaccines.

         D.       Vaccines for Children Program

                  1.       Contractor's providers must enroll with the
                           Department of Health and Senior Services' Vaccines
                           for Children (VFC) Program and use the free vaccine
                           for its enrollees if the vaccine is covered by VFC.
                           (See Section B.4.4 of the Appendices for list of
                           vaccines to be covered by the NJ DHSS VFC program.)
                           The contractor shall not receive from DHS any
                           reimbursement for the cost of VFC-covered vaccines.

                  2.       For non-VFC vaccines the contractor shall reimburse
                           its providers for the cost of both administration and
                           the vaccines.

         E.       To the extent possible, and as permitted by New Jersey
                  statutes and regulations, the contractor and its network
                  providers shall participate in the Statewide immunization
                  registry database, when it becomes fully operational.

         F.       The contractor shall provide immunizations recommended by
                  local health departments based on local epidemiological
                  conditions.

4.2.8 CLINICAL TRIALS

         A.       The contractor shall permit participation in an approved
                  clinical trial to a qualified enrollee (as defined in 4.2.8B),
                  and the contractor:

                  1.       May not deny the enrollee participation in the
                           clinical trial referred to in 4.2.8B.2.

                  2.       Subject to 4.2.8C, may not deny (or limit or impose
                           additional conditions on) the coverage of routine
                           patient costs for items and services furnished in
                           connection with participation in the trial.

                  3.       May not discriminate against the enrollee on the
                           basis of the enrollee's participation in such trial.

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<PAGE>   92
         B.       Qualified Enrollee Defined. For purposes of this Article, the
                  term "qualified enrollee" means an enrollee under the
                  contractor's coverage who meets the following conditions:

                  1.       The enrollee has a life-threatening or serious
                           illness for which no standard treatment is effective;

                  2.       The enrollee is eligible to participate in an
                           approved clinical trial with respect to treatment of
                           such illness;

                  3.       The enrollee and the referring physician conclude
                           that the enrollee's participation in such trial would
                           be appropriate; and

                  4.       The enrollee's participation in the trial offers
                           potential for significant clinical benefit for the
                           enrollee.

         C.       Payment. The contractor shall provide for payment for medical
                  problems/complications and for routine patient costs described
                  in Article 4.2.8A2 but is not required to pay for costs of
                  items and services that are reasonably expected to be paid for
                  by the sponsors of an approved clinical trial.

         D.       Approved Clinical Trial. For purposes of this Article, the
                  term "approved clinical trial" means a clinical research study
                  or clinical investigation that meets the following
                  requirements:

                  1.       The trial is approved and funded by one or more of
                           the following:

                           a.       The National Institutes of Health

                           b.       A cooperative group or center of the
                                    National Institutes of Health

                           c.       The Department of Veterans Affairs

                           d.       The Department of Defense

                           e.       The Food and Drug Administration, in the
                                    form of an investigational new drug (IND)
                                    exemption

                  2.       The facility and personnel providing the treatment
                           are capable of doing so by virtue of their experience
                           or training.

                  3.       There is no alternative noninvestigational therapy
                           that is clearly superior.

                  4.       The available clinical or preclinical data provide a
                           reasonable expectation that the protocol treatment
                           will be at least as effective as the
                           noninvestigational alternative.

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         E.       Coverage of Investigational Treatment. The contractor should
                  make a determination for coverage/denial of experimental
                  treatment for a terminal condition based on the following:

                  1.       The treating physician refers the case to a
                           contractor internal review group not associated with
                           the case or referral center.

                  2.       If the internal review group denies the referral, a
                           second, ad hoc group with two or more experts in the
                           field and not involved with the case must review the
                           case.

         F.       Experimental treatments for rare disorders shall not be
                  automatically excluded from coverage but decisions regarding
                  their medical necessity should be considered by a medical
                  review board established by the contractor. Routine costs
                  associated with investigational procedures that are part of an
                  approved research trial are considered medically appropriate.
                  Under no circumstances shall the contractor implement a
                  medical necessity standard that arbitrarily limits coverage on
                  the basis of the illness or condition itself.

4.2.9 HEALTH PROMOTION AND EDUCATION PROGRAMS

         The contractor shall identify relevant community issues (such as TB
         outbreaks, violence) and health education needs of its enrollees, and
         implement plans that are culturally appropriate to meet those needs,
         issues relevant to each of the target population groups of enrollees
         served, as defined in Article 5.2, and the promotion of health. The
         contractor shall use community-based needs assessments and other
         relevant information available from State and local governmental
         agencies and community groups. Health promotion activities shall be
         made available in formats and presented in ways that meet the needs of
         all enrollee groups including elderly enrollees and enrollees with
         special needs, including enrollees with cognitive impairments. The
         contractor shall comply with all applicable State and federal statutes
         and regulations on health wellness programs. The contractor shall
         submit a written description of all planned health education activities
         and targeted implementation dates for DMAHS's approval, prior to
         implementation, including culturally and linguistically appropriate
         materials and materials developed to accommodate each of the enrolled
         target population groups. Thereafter, the plan shall be reviewed,
         revised, and pre-approved by the Department annually.

         Health promotion topics shall include, but are not limited to, the
         following:

         A.       General health education classes

         B.       Smoking cessation programs, with targeted outreach for
                  adolescents and pregnant women

         C.       Childbirth education classes

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<PAGE>   94
         D.       Nutrition counseling, with targeted outreach for pregnant
                  women, elderly enrollees, and enrollees with special needs

         E.       Signs and symptoms of common diseases and complications

         F.       Early intervention and risk reduction strategies to avoid
                  complications of disability and chronic illness

         G.       Prevention and treatment of alcohol and substance abuse

         H.       Coping with losses resulting from disability or aging

         I.       Self care training, including self-examination

         J.       Need for clear understanding of how to take over-the-counter
                  and prescribed medications and the importance of coordinating
                  all such medications

         K.       Understanding the difference between emergent, urgent and
                  routine health conditions

4.3 COORDINATION WITH ESSENTIAL COMMUNITY PROVIDERS

4.3.1 GENERAL

         The contractor shall identify and establish working relationships for
         coordinating care and services with external organizations that
         interact with its enrollees, including State agencies, schools, social
         service organizations, consumer organizations, and civic/community
         groups, such as an Hispanic coalition.

4.3.2 HEAD START PROGRAMS

         A.       The contractor shall demonstrate to DMAHS that it has
                  established working relationships with Head Start programs
                  (See Section B.4.5 of the Appendices for a list of Head Start
                  Programs). Such relationships will include an exchange of
                  information on the following:

                  1.       Policies and procedures for referrals for routine,
                           urgent and emergent care.

                  2.       Policies and procedures for scheduling appointments
                           for routine and urgent care.

                  3.       Policies and procedures for the exchange of
                           information of Head Start participants who are
                           contractor enrollees.

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<PAGE>   95
                  4.       Policies and procedures for follow-up and assuring
                           the provision of health care services.

                  5.       Policies and procedures for appealing denials of
                           service and/or reductions in the level of service.

                  6.       Policies and procedures for Head Start staff in
                           supporting enforcement of contractor's health care
                           delivery system policies and procedures for accessing
                           all health care needs.

                  7.       Policies and procedures addressing the need through
                           prior authorization to utilize the contractor's
                           established provider network and what will be done
                           for out-of-network referrals in cases where the
                           contractor does not have an appropriate participating
                           provider in accordance with Article 4.8.7.

                  8.       Policies and procedures for providing comprehensive
                           medical examinations in accordance with EPSDT
                           standards and addressing the need for an examination
                           based on a Head Start referral if the enrollee has
                           had an age-appropriate EPSDT examination (for
                           infants) or an EPSDT examination (for children two
                           (2) to five (5) years old) within six (6) months of
                           the referral date.

                  9.       Policies and Procedures for Head Start's role in
                           prevention activities or programs developed by the
                           contractor.

         B.       The contractor shall evaluate referred Head Start patients to
                  determine the need for treatment/therapies for problems
                  identified by staff of those programs. The contractor/PCP
                  shall be responsible for providing treatment and follow-up
                  information for medically necessary care.

         C.       The contractor shall review referrals and provide appointments
                  in accordance with Article 5.12. Denials of service requests
                  or reduction in level of service, only after an evaluation is
                  completed, shall be in writing, following the requirements in
                  Article 4.6.4.

4.3.3 SCHOOL-BASED YOUTH SERVICES PROGRAMS

         A.       The contractor shall demonstrate to DMAHS that it has
                  established a working linkage with school based youth services
                  programs (SBYSP) that meet credentialing and scope of service
                  requirements for services offered by these programs which are
                  covered MCE services. (See Section B.4.6 of the Appendices for
                  a list of SBYSPs).

                  1.       SBYSP service provision must meet MCE contract
                           requirements, e.g., twenty-four (24)-hour coverage.

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<PAGE>   96
                  2.       SBYSP employees must meet credentialing requirements.

         B.       Such working linkages shall include, at minimum, an exchange
                  of information on the following:

                  1.       Policies and procedures for referrals for routine,
                           urgent and emergent care, and standing referrals.

                  2.       Policies and procedures for scheduling appointments
                           for routine and urgent care.

                  3.       Policies and procedures for the exchange of
                           information of SBYSP participants who are contractor
                           enrollees.

                  4.       Policies and procedures for follow-up and assuring
                           the provision of health care services.

                  5.       Policies and procedures for appealing denials of
                           service and/or reductions in the level of service.

                  6.       Policies and procedures for SBYSP staff in supporting
                           enforcement of contractor's health care delivery
                           system policies and procedures for accessing all
                           health care needs.

                  7.       Policies and procedures addressing the need through
                           prior authorization to utilize the contractor's
                           established provider network and what will be done
                           for out-of-network referrals in cases where the
                           contractor does not have an appropriate participating
                           provider in accordance with Article 4.8.7.

                  8.       Policies and procedures for providing comprehensive
                           medical examinations in accordance with EPSDT
                           standards and addressing the need for an examination
                           based on a SBYSP if the enrollee has had an age-
                           appropriate EPSDT examination (for infants) or an
                           EPSDT examination (for children two (2) to five (5)
                           years) within six (6) months of the referral date.

                  9.       Policies and Procedures for the SBYSP's role in
                           prevention activities or programs developed by the
                           contractor.

         C.       The contractor shall evaluate referred SBYSP patients to
                  determine the need for treatment/therapies for problems
                  identified by staff of those programs. The contractor/PCP
                  shall be responsible for providing treatment and follow-up
                  information for medically necessary care for SBYSPs
                  participants where there is no formal
                  contractual/reimbursement relationship.

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         D.       The contractor shall review referrals and provide appointments
                  in accordance with Article 5.12. Denials of service requests
                  or reduction in level of service, only after an evaluation is
                  completed, shall be in writing, following the requirements in
                  Article 4.6.4.

         E.       The contractor shall provide the DMAHS with a description of
                  its plans to meet the requirements of this contract provision
                  in establishing a working linkage with SBYSPs.

4.3.4 LOCAL HEALTH DEPARTMENTS

         The contractor shall demonstrate to DMAHS that it has established a
         working linkage with local health departments (LHDs) that meet
         credentialing and scope of service requirements.

         The contractor should include linkages with LHDs especially for meeting
         the lead screening and toxicity treatment compliance standards required
         in this contract. The contractor shall refer lead-burdened children to
         LHDs for environmental investigation to determine and remediate the
         source of lead.

4.3.5 WIC PROGRAM REQUIREMENTS/ISSUES

         The contractor shall require its providers to refer potentially
         eligible women (pregnant, breast-feeding and postpartum), infants, and
         children up to age five, to established community Women, Infants and
         Children (WIC) programs. The referral shall include the information
         needed by WIC programs in order to provide appropriate services. The
         required information to be included with the referral is found on the
         sample forms in Section B.4.8 of the Appendices, the New Jersey WIC
         program medical referral form, and must be completed with the current
         (within sixty (60) days) height, weight, hemoglobin, or hematocrit, and
         any identified medical/nutritional problems for the initial WIC
         referral and for all subsequent certifications. The contractor shall
         submit a quarterly WIC referral report. (See Section A.7.14 of the
         Appendices (Table 12).)

4.3.6 COMMUNITY LINKAGES

         The contractor shall describe any relationships being explored,
         planned, and/or existing between the contractor and provider entities
         including for example:

         A.       Public health clinics or agencies

         B.       DYFS contracted Child Abuse Regional Diagnostic Centers

         C.       Environmental health clinics

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         D.       Women's health clinics

         E.       Family Planning/Reproductive health clinics

         F.       Developmental disabilities clinics

4.4      COORDINATION WITH MENTAL HEALTH AND SUBSTANCE ABUSE
         SERVICES

         The State shall retain a separate Mental Health/Substance Abuse system
         for the coordination and monitoring of most mental health/substance
         abuse conditions. The contractor shall furnish MH/SA services to
         clients of DDD. However, as described below, the contractor shall
         retain responsibility for MH/SA screening, referrals, prescription
         drugs, higher-mode transportation, and for treatment of the conditions
         identified in Article 4.1.2B.

         A.       Screening Procedures. Mental health and substance abuse
                  problems shall be systematically identified and addressed by
                  the enrollee's PCP at the earliest possible time following
                  initial participation of the enrollee in the contractor or
                  after the onset of a condition requiring mental health and/or
                  substance abuse treatment. PCPs and other providers shall
                  utilize mental health/substance abuse screening tools as set
                  forth in Section B.4.9 of the Appendices as well as other
                  mechanisms to facilitate early identification of mental health
                  and substance abuse needs for treatment. The contractor may
                  request permission to use alternative screening tools. The use
                  of alternative screening tools shall be pre-approved by DMAHS.
                  The lack of motivation of an enrollee to participate in
                  treatment shall not be considered a factor in determining
                  medical necessity and shall not be used as a rationale for
                  withholding or limiting treatment of an enrollee.

                  The contractor shall present its policies and procedures
                  regarding how its providers will identify enrollees with MH/SA
                  service needs, how they will encourage these enrollees to
                  begin treatment, and the screening tools to be used to
                  identify enrollees requiring MH/SA services. The contractor
                  should refer to the DSM-IV Primary Care Version in development
                  of its procedures.

         B.       Referrals. The contractor shall be responsible for referring
                  or coordinating referrals of enrollees as indicated to Mental
                  Health/Substance Abuse providers. In order to facilitate this,
                  the contractor may contact DMHS or its agent (e.g., if the
                  State contracts with a third party administrator (TPA) for a
                  list of MH/SA providers. Enrollees may be referred to a MH/SA
                  provider by the PCP, family members, other providers, State
                  agencies, the contractor's staff, or may self-refer.

                  1.       The contractor shall be responsible for referrals
                           from MH/SA providers for medical diagnostic work-up
                           to formulate a diagnosis or to effect the treatment
                           of a MH/SA disorder and ongoing medical care for any
                           enrollee

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                           with a MH/SA diagnosis and shall coordinate the care
                           with the MH/SA provider. This includes the
                           responsibility for physical examinations (with the
                           exception of physical examinations performed in
                           direct connection with the administration of
                           Methadone, which will remain FFS), neurological
                           evaluations, laboratory testing and radiologic
                           examinations, and any other diagnostic procedures
                           that are necessary to make the diagnostic
                           determination between a primary MH/SA disorder and an
                           underlying physical disorder, as well as for medical
                           work-ups required for medical clearances prior to the
                           provision of psychiatric medication or
                           electroconvulsive therapy (ECT), or for transfer to a
                           psychiatric/SA facility. Routine laboratory
                           procedures ordered by treating MH/SA providers in
                           conjunction with MH/SA treatment, for routine blood
                           testing performed in conjunction with the
                           administration of Clozapine and the other drugs
                           listed in Article 4.1.4B for non-DDD enrollees, are
                           not the responsibility of the contractor.

                  2.       The contractor shall develop a referral process to be
                           used by its providers which shall include providing a
                           copy of the medical consultation and diagnostic
                           results to the MH/SA provider. The contractor shall
                           develop procedures to allow for notification of an
                           enrollee's MH/SA provider of the findings of his/her
                           physical examination and laboratory/radiological
                           tests within twenty-four (24) hours of receipt for
                           urgent cases and within five business days in
                           non-urgent cases. This notification shall be made by
                           phone with follow-up in writing when feasible.

         C.       Pharmacy Services. Except for the drugs specified in Article
                  4.1.4 (Clozapine, Risperidone, Olanzapine, etc.), all pharmacy
                  services are covered by the contractor. This includes drugs
                  prescribed by the contractor or MH/SA providers. The
                  contractor shall only restrict or require a prior
                  authorization for prescriptions or pharmacy services
                  prescribed by MH/SA providers if one of the following
                  exceptions is demonstrated:

                  1.       The drug prescribed is not related to the treatment
                           of substance abuse/dependency/addiction or mental
                           illness or to any side effects of the
                           psychopharmacological agents. These drugs are to be
                           prescribed by the contractor's PCP or specialists in
                           the contractor's network.

                  2.       The prescribed drug does not conform to standard
                           rules of the contractor's pharmacy plan.

                  3.       The contractor, at its option, may require a prior
                           authorization (PA) process if the number of
                           prescriptions written by the MH/SA provider for
                           MH/SA-related conditions exceed four (4) per month
                           per enrollee. For drugs that require weekly
                           prescriptions, these prescriptions shall be counted
                           as one per month and not as four separate
                           prescriptions. The

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                           contractor's PA process for the purposes of this
                           section shall require review and prior approval by
                           DMAHS.

         D.       Prescription Abuse. If the contractor suspects prescription
                  abuse by a MH/SA provider, the contractor shall contact DMAHS
                  for investigation and decision of potentially excluding the
                  provider from the NJ Medicaid program. The contractor shall
                  provide the Department with any and all documentation.

         E.       Inpatient Hospital Services for Enrollees who are not clients
                  of DDD with both a Physical Health as well as a Mental
                  Health/Substance Abuse Diagnosis. The contractor's financial
                  and medical management responsibilities are as follows:

                  1.       If the inpatient hospital admission of an enrollee
                           who is not a client of DDD is for a physical health
                           primary diagnosis, the contractor shall be
                           responsible for inpatient hospital costs and medical
                           management. Where psychiatric consultation is
                           required to assist the contractor with mental
                           health/substance abuse management, the State or its
                           agent (e.g., a TPA) shall be responsible for
                           authorizing the psychiatric consult/services provided
                           during the inpatient stay. The State shall not
                           require service authorization for at least one
                           psychiatric consultation per inpatient admission.
                           When a substance abuse disorder is known to be the
                           primary diagnosis of an enrollee and a co-occurring
                           psychiatric disorder is not a management concern,
                           then the State or its agent may authorize that the
                           consult/services be by an ASAM certified physician.
                           The contractor shall coordinate inpatient MH/SA
                           consultations and services with the enrollee's MH/SA
                           provider as well as discharge planning and follow-up.

                  2.       If the inpatient hospital admission of an enrollee
                           who is not a client of DDD is for a mental
                           health/substance abuse primary diagnosis, the
                           inpatient stay will be paid by the State through the
                           FFS program. The contractor shall provide and pay for
                           participating providers who may be called in as
                           consultants to manage any physical problems.

         F.       Transportation. The contractor shall be responsible for all
                  transportation through ambulance, Mobile Intensive Care Units
                  (MICUs), and invalid coach modalities, even if the enrollee is
                  being transported to a Medicaid or NJ FamilyCare service that
                  is not included in the contractor's benefit package including
                  to MH/SA services.

4.5 ENROLLEES WITH SPECIAL NEEDS

4.5.1 INTRODUCTION

         For purposes of this contract, adults with special needs includes
         complex/chronic medical conditions requiring specialized health care
         services, including persons with

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         physical, mental, substance abuse, and/or developmental disabilities,
         including such persons who are homeless. Children with special health
         care needs are those who have or are at increased risk for a chronic
         physical, developmental, behavioral, or emotional condition and who
         also require health and related services of a type or amount beyond
         that required by children generally.

         In addition to the standards set forth in this Article, contractor
         shall make all reasonable efforts and accommodations to ensure that
         services provided to enrollees with special needs are equal in quality
         and accessibility to those provided to all other enrollees.

4.5.2 GENERAL REQUIREMENTS

         A.       Identification and Service Delivery. The contractor shall have
                  in place all of the following to identify and serve enrollees
                  with special needs:

                  1.       Methods for identifying persons at risk of, or having
                           special needs who should be referred for a
                           comprehensive needs assessment. (See Articles 4.5.4B
                           and 4.6.5D for information on Complex Needs
                           Assessments). Such methods should include the
                           application of screening procedures/instruments for
                           new enrollees as well as the conditions and
                           indicators listed in Article 4.6.5D.1 and 2. These
                           include review of hospital and pharmacy utilization
                           and policies and procedures for providers or, where
                           applicable, authorized persons, to make referrals of
                           assessment candidates and for enrollees to self-refer
                           for a Complex Needs Assessment.

                  2.       Methods and guidelines for determining the specific
                           needs of referred individuals who have been
                           identified through a Complex Needs Assessment as
                           having complex needs and developing care plans that
                           address their service requirements with respect to
                           specialist physician care, durable medical equipment,
                           medical supplies, home health services, social
                           services, transportation, etc. Article 4.5.4D
                           contains additional information on Individual Health
                           Care Plans.

                  3.       Care management systems to ensure all required
                           services, as identified through a Complex Needs
                           Assessment, are furnished on a timely basis, and that
                           communication occurs between participating and non-
                           participating providers (to the extent the latter are
                           used). Articles 4.5.4 and 4.6.5 contain additional
                           information on care management.

                  4.       Policies and procedures to allow for the continuation
                           of existing relationships with non-participating
                           providers, when appropriate providers are not
                           available within network or it is otherwise
                           considered by the contractor to be in the best
                           medical interest of the enrollee with special

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                           needs. Articles 4.5.2D and 4.8.7G contain more
                           specific standards for use of non-participating
                           providers.

                  5.       Methods to assure that access to all
                           contractor-covered services, including
                           transportation, is available for enrollees with
                           special needs whose disabilities substantially impede
                           activities of daily living. The contractor shall
                           reasonably accommodate enrollees with disabilities
                           and shall ensure that physical and communication
                           barriers do not prohibit enrollees with disabilities
                           from obtaining services from the contractor.

                  6.       Services for enrollees with special needs must be
                           provided in a manner responsive to the nature of a
                           person's disability/specific health care need and
                           include adequate time for the provision of the
                           service.

         B.       The contractor shall ensure that any new enrollee identified
                  (either by the information on the Plan Selection form at the
                  time of enrollment or by contractor providers after
                  enrollment) as having complex/chronic conditions receives
                  immediate transition planning. The planning shall be completed
                  within a timeframe appropriate to the enrollee's condition,
                  but in no case later than ten (10) business days from the
                  effective date of enrollment when the Plan Selection form has
                  an indication of special health care needs or within thirty
                  (30) days after special conditions are identified by a
                  provider. This transition planning shall not constitute the
                  IHCP described in Sections 4.5.4 and 4.6.5. Transition
                  planning shall provide for a brief, interim plan to ensure
                  uninterrupted services until a more detailed plan of care is
                  developed. The transition planning process includes, but is
                  not limited to:

                  1.       Review of existing care plans.

                  2.       Preparation of a transition plan that ensures
                           continuous care during the transfer into the
                           contractor's network.

                  3.       If durable medical equipment had been ordered prior
                           to enrollment but not received by the time of
                           enrollment, the contractor must coordinate and
                           follow-through to ensure that the enrollee receives
                           necessary equipment.

         C.       Outreach and Enrollment Staff. The contractor shall have
                  outreach and enrollment staff who are trained to work with
                  enrollees with special needs, are knowledgeable about their
                  care needs and concerns, and are able to converse in the
                  different languages common among the enrolled population,
                  including TDD/TT and American Sign Language if necessary.

         D.       Specialty Care. The contractor shall have a procedure by which
                  a new enrollee upon enrollment, or an enrollee upon diagnosis,
                  who requires very complex, highly specialized health care
                  services over a prolonged period of time, or with (i)

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                  a life-threatening condition or disease or (ii) a degenerative
                  and/or disabling condition or disease, either of which
                  requires specialized medical care over a prolonged period of
                  time, may receive a referral to a specialist or a specialty
                  care center with expertise in treating the life-threatening
                  disease or specialized condition, who shall be responsible for
                  and capable of providing and coordinating the enrollee's
                  primary and specialty care.

                  If the contractor or primary care provider in consultation
                  with the contractor's medical director and a specialist, if
                  any, determines that the enrollee's care would most
                  appropriately be coordinated by such specialist/specialty care
                  center, the contractor shall refer the enrollee. Such referral
                  shall be pursuant to a care plan approved by the contractor,
                  in consultation with the primary care provider if appropriate,
                  the specialist, care manager, and the enrollee (or, where
                  applicable, authorized person). The contractor-participating
                  specialist/specialty care center acting as both primary and
                  specialty care provider shall be permitted to treat the
                  enrollee without a referral from the enrollee's primary care
                  provider and may authorize such referrals, procedures, tests
                  and other medical services as the enrollee's primary care
                  provider would otherwise be permitted to provide or authorize,
                  subject to the terms of the care plan. If the
                  specialist/specialty care center will not be providing primary
                  care, then the contractor's rules for referrals apply.
                  Consideration for policies and procedures should be given for
                  a standing referral when on-going, long-term specialty care is
                  required.

                  If the contractor refers an enrollee to a non
                  contractor-participating provider, services provided pursuant
                  to the approved care plan shall be provided at no additional
                  cost to the enrollee. In no event shall the contractor be
                  required to permit an enrollee to elect to have a non
                  contractor-participating specialist/specialty care center.

                  For purposes of this Article a specialty care center shall
                  mean the Centers of Excellence identified in Section B.4.10 of
                  the Appendices. These centers have special expertise in
                  treating life-threatening diseases/conditions and degenerative
                  /disabling diseases/conditions.

         E.       Dental. While the contractor must assure that enrollees with
                  special needs have access to all medically necessary care, the
                  State considers dental services to be an area meriting
                  particular attention. The contractor, therefore, shall accept
                  for network participation dental providers with expertise in
                  the dental management of enrollees with developmental
                  disabilities. All current providers of dental services to
                  enrollees with developmental disabilities shall be considered
                  for participation in the contractor's dental provider network.
                  Credentialing and recredentialing standards must be
                  maintained. The contractor shall make provisions for providers
                  of dental services to enrollees with developmental
                  disabilities to allow for limiting their dental practices at
                  their choice to only those patients with developmental
                  disabilities.

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         The contractor shall develop specific policies and procedures for the
         provision of dental services to enrollees with developmental
         disabilities. At a minimum, the policies and procedures shall address:

         1.       Special needs/issues of enrollees with developmental
                  disabilities, including the importance of providing
                  consultations and assistance to patient caregivers.

         2.       Provisions in the contractor's dental reimbursement system for
                  initial and follow-up dental visits which may require up to 60
                  minutes on average to allow for a comprehensive dental
                  examination and other services to include, but not limited to:
                  a visual examination of the enrollee; appropriate radiographs;
                  dental prophylaxis, including extra scaling and topical
                  applications, such as fluoride treatments; non-surgical
                  periodontal treatment, including root planing and scaling; the
                  application of dental sealants on molars and premolars;
                  thorough inquiries regarding patient medical histories; and
                  most importantly, consultations with patient caregivers to
                  establish a thorough understanding of proper dental management
                  during visits.

         3.       Standards for dental visits that recognize the additional time
                  that may be required in treatment of patients with
                  developmental disabilities. Standards should allow for up to
                  four (4) visits annually without prior authorization.

         4.       Provisions for home visits when medically necessary and where
                  available.

         5.       Policies and procedures to ensure that providers specializing
                  in the treatment of enrollees with developmental disabilities
                  have adequate support staff to meet the needs of such
                  patients.

         6.       Provisions for use and replacement of fixed as well as
                  removable prosthetic devices as medically necessary and
                  appropriate.

         7.       Provisions in the contractor's dental reimbursement system to
                  reimburse dentists for the costs of preoperative and
                  postoperative evaluations associated with dental surgery
                  performed on patients with developmental disabilities.
                  Preauthorization shall not be required for dental procedures
                  performed during surgery on these patients for dentally
                  appropriate restorative care provided under general
                  anesthesia. Informed consent, signed by the enrollee or
                  authorized person, must be obtained prior to the surgical
                  procedure. Provisions should be made to evaluate such
                  procedures as part of a post payment review process.

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         8.       Provisions in the contractor's dental reimbursement system for
                  dentists to receive reimbursement for the cost of providing
                  oral hygiene instructions to caregivers to maintain a
                  patient's overall oral health between dental visits. Such
                  provisions shall include designing and implementing a "dental
                  management" plan, coordinated by the care manager, for
                  overseeing a patient's oral health.

         9.       The care manager of an enrollee with a developmental
                  disability shall coordinate authorizations for dentally
                  required hospitalizations by consulting with the plan's dental
                  and medical consultants in an efficient and time-sensitive
                  manner.

F.       After Hours. The contractor shall have policies and procedures to
         respond to crisis situations after hours for enrollees with special
         needs. Training sessions/materials and triage protocols for all
         staff/providers who respond to after-hours calls shall address
         enrollees with special needs. For example, protocols should recognize
         that a non-urgent condition for an otherwise healthy individual, such
         as a moderately elevated temperature, may indicate an urgent care need
         in the case of a child with a congenital heart anomaly.

G.       Behavior Problems. The contractor shall take appropriate steps to
         ensure that its care managers, network providers and Member Services
         staff are able to serve persons with behavior problems associated with
         developmental disabilities, including to the extent these problems
         affect their level of compliance. The contractor shall educate
         providers and staff about the nature of such problems and how to
         address them. The contractor shall identify providers who have
         expertise in serving persons with behavior problems.

H.       ADA Compliance. The contractor shall have written policies and
         procedures that ensure compliance with requirements of the Americans
         with Disabilities Act of 1990, and a written plan to monitor compliance
         to determine the ADA requirements are being met. The plan shall be
         sufficient to determine the specific actions that will be taken to
         remove existing barriers and/or to accommodate the needs of enrollees
         who are qualified individuals with a disability. The plan shall include
         the assurance of appropriate physical access to obtain included
         benefits for all enrollees who are qualified individuals with a
         disability including, but not limited to, the following:

         1.       Street level access or accessible ramp into facilities;

         2.       Access to lavatory; and

         3.       Access to examination rooms.

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         The contractor shall also address in its policies and procedures
         regarding ADA compliance the following issues:

         1.       Provider refusal to treat qualified individuals with
                  disabilities, including but not limited to individuals with
                  HIV/AIDS.

         2.       Contractor's role in ensuring providers receive available
                  resource information on how to accommodate qualified
                  individuals with a disability, particularly mobility impaired
                  enrollees, in examination rooms and for examinations.

         3.       How the contractor will accommodate visual and hearing
                  impaired individuals and assist its providers in communicating
                  with these individuals.

         4.       How the contractor will accommodate individuals with
                  communication-affecting disorders and assist its providers in
                  communicating with these individuals.

         5.       Holding community events as part of its provider and consumer
                  education responsibilities in places of public accommodation,
                  i.e., facilities readily accessible to and useable by
                  qualified individuals with disabilities.

         6.       How the contractor will ensure it will link qualified
                  individuals with disabilities with the providers/specialists
                  with the knowledge and expertise in treating the illness,
                  condition, and special needs of the enrollees.

4.5.3 PROVIDER NETWORK REQUIREMENTS

       A.     General. The contractor's provider network shall include primary
              care and specialist providers who are trained and experienced in
              treating individuals with special needs. The contractor shall
              ensure that such providers will be equally accessible to all
              enrollees covered under this contract.

              1.     The contractor shall operate a program to provide services
                     for enrollees with special needs that emphasizes: (a) that
                     providers are educated regarding the needs of enrollees
                     with special needs; (b) that providers will reasonably
                     accommodate enrollees with special needs; (c) that
                     providers will assist enrollees in maximizing involvement
                     in the care they receive and in making decisions about such
                     care; and (d) that providers maximize for enrollees with
                     special needs independence and functioning through health
                     promotions and preventive care, decreased hospitalization
                     and emergency room care, and the ability to be cared for at
                     home.

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              2.     The contractor shall describe how its provider network will
                     respond to the cultural and linguistic needs of enrollees
                     with special needs.

              3.     The network shall include primary care providers and
                     dentists whose clinical practice has specialized to some
                     degree in treating one or more groups of children and
                     adults with complex/chronic or disabling conditions. To the
                     extent possible, children and adults with complex physical
                     conditions should be in the care of board certified
                     pediatricians and family practitioners or internists,
                     respectively, or subspecialists, as appropriate.

              4.     The network shall include adult and pediatric
                     subspecialists for cardiology, hematology/oncology,
                     gastroenterology, emergency medicine, endocrinology,
                     infectious disease, orthopedics, neurology, neurosurgery,
                     ophthalmology, physiatry, pulmonology, surgery, and
                     urology, as well as providers who have knowledge and
                     experience in behavioral-developmental pediatrics,
                     adolescent health, geriatrics, and chronic illness
                     management.

              5.     The network shall include an appropriate and accessible
                     number of institutional facilities, professional allied
                     personnel, home care and community based services to
                     perform the contractor-covered services included in this
                     contract.

       B.     SCHSNA. The contractor shall include in its provider network
              Special Child Health Services Network Agencies (SCHSNA) for
              children with special health care needs. These agencies are
              designated and approved by the Department of Health and Senior
              Services and include Pediatric Ambulatory Tertiary Centers
              (pediatric tertiary centers may also be used when a pediatric
              subspecialty is not sufficiently accessible in a county to meet
              the needs of the child), Regional Cleft Lip/Palate Centers,
              Pediatric AIDS/HIV Network, Comprehensive Regional Sickle
              Cell/Hemoglobinopathies Treatment Centers, PKU Treatment Centers,
              Genetic Testing and Counseling Centers, and Hemophilia Treatment
              Centers, and others as designated from time to time by the
              Department of Health and Senior Services. A list of such providers
              is found in Section B.4.10 of the Appendices.

       C.     Credentialing. The contractor shall collect and maintain, as part
              of its credentialing process or through special survey process,
              information from licensed practitioners including pediatricians
              and pediatric subspecialists about the nature and extent of their
              experience in serving children with special health care needs
              including developmental disabilities.

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4.5.4  CARE MANAGEMENT AND COORDINATION OF CARE FOR PERSONS
       WITH SPECIAL NEEDS

       A.     The contractor shall provide coordination of care to actively link
              the enrollee to providers, medical services, residential, social
              and other support services as needed. For persons with special
              needs, care management shall be provided, but, for those with
              higher needs, as determined through the Complex Needs Assessment
              (the CNA is described in Article 4.6.5), the contractor shall
              provide care management at a higher level of intensity. (See
              Section B.4.12 of the Appendices for a flowchart of the three
              levels of care management.) Specific requirements for this highest
              level of care management are described below.

       B.     Complex Needs Assessment. For enrollees with special needs, the
              contractor shall perform a Complex Needs Assessment no later than
              thirty (30) days (or earlier, if urgent) from initial enrollment
              if special needs are indicated on the Plan Selection Form or from
              the point of identification of special needs. See 4.6.5 for a
              description of the CNA.

       C.     Experience and Caseload. Care managers for enrollees who require a
              higher level of care management will have the same role and
              responsibilities as the care manager for the lower intensity care
              management and additionally will address the complex intensive
              needs of the enrollee identified as being at "high risk" of
              adverse medical outcomes absent active intervention by the
              contractor. For example, a visually-impaired, insulin-dependent
              diabetic who requires frequent glucose monitoring, nutritional
              guidance, vision checks, and assistance in coordination with
              visits with multiple providers, therapeutic regimen, etc. The
              contractor shall provide intensive acute care services to treat
              individuals with multiple complex conditions. The number of
              medical and social services required by an enrollee in this level
              of care management will generally be greater, thus the number of
              linkages to be created, maintained, and monitored, including the
              promotion of communication among providers and the consumer and of
              continuity of care, will be greater. The contractor shall provide
              these enrollees greater assistance with scheduling
              appointments/visits. The intensity and frequency of interaction
              with the enrollee and other members of the treatment team will
              also be greater. The care manager shall contact the enrollee
              bi-weekly or as needed.

              1.     At a minimum, the care manager for this level of care
                     management shall include, but is not limited to,
                     individuals with an undergraduate or graduate degree in
                     nursing or a graduate degree in social work and with at
                     least two (2) years experience serving enrollees with
                     special needs.

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              2.     The contractor shall ensure that the care manager's
                     caseload is adjusted, as needed, to accommodate the work
                     and level of effort needed to meet the needs of the entire
                     case mix of assigned enrollees including those determined
                     to be high risk.

              3.     The contractor should include care managers with experience
                     working with pediatric as well as adult enrollees with
                     special needs.

       D.     IHCPs. The contractor through its care manager shall ensure that
              an Individual Health Care Plan (IHCP) is developed and implemented
              as soon as possible, according to the circumstances of the
              enrollee. The contractor shall ensure the full participation and
              consent of the enrollee or, where applicable, authorized person
              and participation of the enrollee's PCP and other case managers
              identified through the Complex Needs Assessment (e.g. DDD case
              manager) in the development of the plan.

       E.     The contractor shall provide written notification to the enrollee,
              or authorized person, of the level of care management approved and
              the name of the care manager as soon as the IHCP is completed. The
              contractor shall have a mechanism to allow for changing levels of
              care management as needs change.

       F.     Offering of Service. The contractor shall offer and document the
              enrollee's response for this higher level care management to
              enrollees (or, where applicable, authorized persons) who, upon
              completion of a Complex Needs Assessment, are determined to have
              complex needs which merit development of an IHCP and comprehensive
              service coordination by a care manager. Enrollees shall have the
              right to decline coordination of care services; however, such
              refusal does not preclude the contractor from case managing the
              enrollee's care.

4.5.5 CHILDREN WITH SPECIAL HEALTH CARE NEEDS

       A.     The contractor shall provide services to children with special
              health care needs, who may have or are suspected of having serious
              or chronic physical, developmental, behavioral, or emotional
              conditions (short-term, intermittent, persistent, or terminal),
              who manifest some degree of delay or disability in one or more of
              the following areas: communication, cognition, mobility,
              self-direction, and self-care; and with specified clinically
              significant disturbance of thought, behavior, emotions, or
              relationships that can be described as a syndrome or pattern,
              generally resulting from neurochemical dysfunction, negative
              environmental influences, or some combination of both. Services
              needed by these children may include but are not limited to
              psychiatric care and substance abuse counseling for DDD clients
              (appropriate referrals for all other pediatric enrollees);
              medications; crisis intervention; inpatient hospital services; and
              intensive care management to assure adherence to treatment
              requirements.

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       B.     The contractor shall be responsible for establishing:

              1.     Methods for well child care, health promotion, and disease
                     prevention, specialty care for those who require such care,
                     diagnostic and intervention strategies, home therapies, and
                     ongoing ancillary services, as well as the long-term
                     management of ongoing medical complications.

              2.     Care management systems for assuring that children with
                     serious, chronic, and rare disorders receive appropriate
                     diagnostic work-ups on a timely basis.

              3.     Access to specialty centers in and out of New Jersey for
                     diagnosis and treatment of rare disorders. A listing of
                     specialty centers is included in Section B.4.10 of the
                     Appendices.

              4.     Policies and procedures to allow for continuation of
                     existing relationships with out-of-network providers, when
                     considered to be in the best medical interest of the
                     enrollee.

       C.     Linkages. The contractor shall have methods for coordinating care
              and creating linkages with external organizations, including but
              not limited to school districts, child protective service
              agencies, early intervention agencies, behavioral health, and
              developmental disabilities service organizations. At a minimum,
              linkages shall address:

              1.     Contractor's process for generating or receiving referrals,
                     and sharing information;

              2.     Contractor's process for obtaining consent from enrollees
                     or, where applicable, authorized persons to share
                     individual beneficiary medical information; and

              3.     Ongoing coordination efforts (regularly scheduled meetings,
                     newsletters, joint community based project).

       D.     IEPs. The contractor shall cooperate with school districts to
              provide medically necessary contractor-covered services when
              included as a recommendation in an enrollee's Individualized
              Education Program (IEP) developed by the school district's child
              study team, e.g. recommended medications or DME. The contractor
              shall work with local school districts to develop and implement
              procedures for linking and coordinating services for children who
              need to receive medical services under an Individualized Education
              Plan, in order to prevent duplication of services, and to provide
              for cost effective services. Those services which are included in
              the IEP as required services are paid for by the school district,
              e.g. physical therapy. Services covered under the Special
              Education

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              Medicaid Initiative (SEMI) program, or not included in Article 4.1
              of this contract, or not available under EPSDT are not the
              contractor's responsibility. The provision of services shall be
              based on medical necessity as defined in this contract.

       E.     Early Intervention. The contractor shall cooperate with and
              coordinate its services with local Early Intervention Programs to
              provide medically necessary (as defined in this contract)
              contractor-covered services included in the Individualized Family
              Support Plan (IFSP). These programs are comprehensive, community
              based programs of integrated developmental services which use a
              family centered approach to facilitate the developmental progress
              of children between the ages of birth and three (3) years of age
              whose developmental patterns are atypical, or are at serious risk
              to become atypical through the influence of certain biological or
              environmental risk factors. At a minimum, the contractor must have
              policies and procedures for identifying children who are
              candidates for early intervention, making referrals through
              Special Child Health Services County Case Management Units (See
              Appendix B.4.11) in accordance with the Department of Health and
              Senior Services procedures for referrals, and sharing information
              with early intervention providers.

4.5.6 CLIENTS OF THE DIVISION OF DEVELOPMENTAL DISABILITIES

       A.     The contractor shall provide all physical health services required
              by this contract as well as the MH/SA services included in the
              Medicaid State Plan to enrollees who are clients of DDD. The
              contractor shall include in its provider network a specialized
              network of providers who will deliver both physical as well as
              MH/SA services (in accordance with Medicaid program standards) to
              clients of DDD, and ensure continuity of care within that network.

       B.     The contractor's specialized network shall provide disease
              management services for clients of DDD, which shall include
              participation in:

              1.     Care Management, including Complex Needs Assessment,
                     development and implementation of IHCP, referral,
                     coordination of care, continuity of care, monitoring, and
                     follow-up and documentation.

              2.     Coordination of care across multi-disciplinary treatment
                     teams to assist PCPs in identifying the providers within
                     the network who will meet the specific needs and health
                     care requirements of clients of DDD with both physical
                     health and MH/SA needs and provide continuity of care with
                     an identified provider who has an established relationship
                     with the patient.

              3.     Apply quality improvement techniques/protocols to effect
                     improved quality of life outcomes.

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              4.     Design and implement clinical pathways and practice
                     guidelines that will produce overall quality outcomes for
                     specific diseases/conditions identified in clients of DDD.

              5.     Medical treatment.

       C.     The specialized provider network shall consist of credentialed
              providers for physical health and MH/SA services, who have
              experience and expertise in treating clients of DDD who have both
              physical health and MH/SA needs, and who can provide internal
              management of the complex care needs of these enrollees. The
              contractor shall ensure that the specialized provider network will
              be able to deliver identified physical health and MH/SA outcomes.

       D.     Clients of DDD may, at their option, receive their physical health
              and/or MH/SA services from any qualified provider in the
              contractor's network. They are not required to receive their
              services through the contractor's specialized network.

       E.     Individuals who are both DYFS clients and clients of DDD who
              voluntarily enroll shall receive MH/SA services through the
              contractor's network.

4.5.7 PERSONS WITH HIV/AIDS

       A.     Pregnant Women. The contractor shall implement a program to
              educate, test and treat pregnant women with HIV/AIDS to reduce
              perinatal transmission of HIV from mother to infant. All pregnant
              women shall receive HIV education and counseling and HIV testing
              with their consent as part of their regular prenatal care. A
              refusal of testing shall be documented in the patient's medical
              record. Additionally, counseling and education regarding perinatal
              transmission of HIV and available treatment options (the use of
              Zidovudine [AZT] or most current treatment accepted by the medical
              community for treating this disease) for the mother and newborn
              infant should be made available during pregnancy and/or to the
              infant within the first months of life. The contractor shall
              submit a quarterly report on HIV referrals and treatment. (See
              Section A.7.15 of the Appendices (Table 13).)

       B.     Prevention. The contractor shall address the HIV/AIDS prevention
              needs of uninfected enrollees, as well as the special needs of
              HIV+ enrollees. The contractor shall establish:

              1.     Methods for promoting HIV prevention to all enrollees in
                     the contractor's plan. HIV prevention information shall be
                     consistent with the enrollee's age, sex, and risk factors
                     as well as culturally and linguistically appropriate.

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              2.     Methods for accommodating self-referral and early
                     treatment.

              3.     A process to facilitate access to specialists and/or
                     include HIV/AIDS specialists as PCPs.

       C.     Traditional Providers. The contractor shall include traditional
              HIV/AIDS providers in its networks, including HIV/AIDS Specialty
              Centers (Centers of Excellence), and shall establish linkages with
              AIDS clinical educational programs to keep current on up-to-date
              treatment guidelines and standards.

       D.     Current Protocols. The contractor shall establish policies and
              procedures for its providers to assure the use of the most current
              diagnosis and treatment protocols and standards established by the
              DHSS and the medical community.

       D.     Care Management. The contractor shall develop and implement an
              HIV/AIDS care management program with adequate capacity to provide
              services to all enrollees who would benefit from HIV/AIDS care
              management services. Contractors shall establish linkage with Ryan
              White CARE Act grantees for these services either through a
              contract, MOA, or other cooperative working agreement approved by
              the Department.

       F.     ADDP. The contractor shall have policies and procedures for
              supplying DHSS application forms and referring qualified NJ
              FamilyCare enrollees to the AIDS Drug Distribution Program (ADDP).
              Qualified individuals, described in Article 8.5.16, receive
              protease inhibitors and certain anti-retrovirals solely through
              the ADDP. The contractor shall ensure timely referral for
              registration with the program to assure these individuals receive
              appropriate and timely treatment.

4.6      QUALITY MANAGEMENT SYSTEM

       A.     The contractor shall provide for medical care and health services
              that comply with federal and State Medicaid and NJ FamilyCare
              standards and regulations and shall satisfy all applicable
              requirements of the federal and State statutes and regulations
              pertaining to medical care and services.

              1.     The contractor shall fulfill all its obligations under this
                     contract so that all health care services required by its
                     enrollees under this contract will meet quality standards
                     within the acceptable medical practice of care for that
                     individual, consistent with the medical community standards
                     of care, and such services will comply with equal amount,
                     duration, and scope requirements in this contract, as
                     described in Article 4.1.

       B.     The contractor shall use its best efforts to ensure that persons
              and entities providing care and services for the contractor in the
              capacity of physician, dentist, CNP/CNS, physician's assistant,
              CNM, or other medical professional meet

                                                                           IV-52
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              applicable licensing, certification, or qualification requirements
              under New Jersey law or applicable state laws in the state where
              service is provided, and that the functions and responsibilities
              of such persons and entities in providing medical care and
              services under this contract do not exceed those permissible under
              New Jersey law. This shall also include knowledge, training and
              experience in providing care to individuals with special needs.

4.6.1 QUALITY ASSESSMENT AND PERFORMANCE IMPROVEMENT PLAN

       A.     General. The contractor shall implement and maintain a Quality
              Assessment and Performance Improvement program (QAPI) that is
              capable of producing prospective, concurrent, and retrospective
              analyses. Delegation of any QAPI activities shall not relieve the
              contractor of its obligations to perform all QAPI functions.

       B.     Goals. The contractor's QAPI shall be based on HCFA Guidelines and
              shall:

              1.     Provide for health care that is medically necessary with an
                     emphasis on the promotion of health in an effective and
                     efficient manner;

              2.     Assess the appropriateness and timeliness of the care
                     provided;

              3.     Evaluate and improve, as necessary, access to care and
                     quality of care with a focus on improving enrollee
                     outcomes; and

              4.     Focus on the clinical quality of medical care rendered to
                     enrollees.

       C.     Required Standards. The contractor's QAPI shall include all
              standards described in New Jersey modified QARI/QISMC (See Section
              B.4.14 of the Appendices). The following standards shall be
              included in addition to the QARI/QISMC requirements:

              1.     QM Committee. The contractor shall have adequate general
                     liability insurance for members of the QM committee and
                     subcommittees, if any. The committee shall include
                     representation by providers who serve enrollees with
                     special needs.

              2.     Medical Director. The contractor shall have on staff a
                     Medical Director who is currently licensed in New Jersey as
                     a Doctor of Medicine or Doctor of Osteopathic Medicine. The
                     Medical Director shall be responsible for:

                     a.     The development, implementation and medical
                            interpretation of medical policies and procedures to
                            guide and support the provision of medical care to
                            enrollees;

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                     b.     Oversight of provider recruitment activities;

                     c.     Reviewing all providers' applications and making
                            recommendations to those with contracting authority
                            regarding credentialing and reappointing all
                            providers prior to the providers' contracting (or
                            renewal of contract) with the contractor's plan;

                     d.     Continuing surveillance of the performance of
                            providers in their provision of health care to
                            enrollees;

                     e.     Administration of all medical activities of the
                            contractor;

                     f.     Continuous assessment and improvement of the quality
                            of care provided to enrollees;

                     g.     Serving as Chairperson of Quality Management
                            Committee; [Note: the medical director may designate
                            another physician to serve as chairperson with prior
                            approval from DMAHS.]

                     h.     Oversight of provider education, in-service training
                            and orientation;

                     i.     Assuring that adequate staff and resources are
                            available for the provision of proper medical care
                            to enrollees; and

                     j.     The review and approval of studies and responses to
                            DMAHS concerning QM matters.

              3.     Enrollee Rights and Responsibilities. Shall include the
                     right to the Medicaid Fair Hearing Process for Medicaid
                     enrollees.

              4.     Medical Record standards shall address both Medical and
                     Dental records. Records shall also contain notation of any
                     cultural/linguistic needs of the enrollee.

              5.     Provider Credentialing. Before any provider may become part
                     of the contractor's network, that provider shall be
                     credentialed by the contractor. The contractor must comply
                     with Standard IX of NJ modified QARI/QISMC (Section B.4.14
                     of the Appendices). Additionally, the contractor's
                     credentialing procedures shall include verification that
                     providers and subcontractors have not been suspended,
                     debarred, disqualified, terminated or otherwise excluded
                     from Medicaid, Medicare, or any other federal or state
                     health care program. The contractor shall obtain federal
                     and State lists of suspended/debarred providers from the
                     appropriate agencies.

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<PAGE>   116
              6.     Institutional and Agency Provider Credentialing. The
                     contractor shall have written policies and procedures for
                     the initial quality assessment of institutional and agency
                     providers with which it intends to contract. At a minimum,
                     such procedures shall include confirmation that a provider
                     has been reviewed and approved by a recognized accrediting
                     body and is in good standing with State and federal
                     regulatory bodies. If a provider has not been approved by a
                     recognized accrediting body, the contractor shall develop
                     and implement standards of participation. For home health
                     agency and hospice agency providers, the contractor shall
                     verify that the providers are licensed and meet Medicare
                     certification participation requirements.

              7.     Delegation/subcontracting of QAPI activities shall not
                     relieve the contractor of its obligation to perform all
                     QAPI functions. The contractor shall submit a written
                     request and a plan for active oversight of the QAPI
                     activities to DMAHS for review and approval prior to
                     subcontracting/delegating any QAPI responsibilities.

4.6.2 QAPI ACTIVITIES

         The contractor shall carry out the activities described in its QAPI.
         The contractor shall develop and submit to DMAHS annually an annual
         work plan of expected accomplishments which includes a schedule of
         clinical standards to be developed, medical care evaluations to be
         completed, and other key quality assurance activities to be completed.
         The contractor shall also prepare and submit to DMAHS an annual report
         on quality assurance activities which demonstrate the contractor's
         accomplishments, compliance and/or deficiencies in meeting its previous
         year's work plan and should include studies undertaken, subsequent
         actions, and aggregate data on utilization and clinical quality of
         medical care rendered.

         The contractor's quality assurance activities shall include, at a
         minimum:

         A.       Guidelines. The contractor shall develop guidelines for the
                  management of selected diagnoses and basic health maintenance,
                  and shall distribute all standards, protocols, and guidelines
                  to all providers.

         B.       Treatment Protocols. The contractor may use treatment
                  protocols, however, such protocols shall allow for adjustments
                  based on the enrollee's medical condition and contributing
                  family and social factors.

         C.       Monitoring. The contractor shall have procedures for
                  monitoring the quality and adequacy of medical care including:
                  1) assessing use of the distributed guidelines and 2)
                  assessing possible under-treatment/under-utilization of
                  services.

                                                                           IV-55
<PAGE>   117
         D.       Focused Evaluations. The contractor shall have procedures for
                  focused medical care evaluations to be employed when
                  indicators suggest that quality may need to be studied. The
                  contractor shall also have procedures for conducting
                  problem-oriented clinical studies of individual care.

         E.       Follow-up. The contractor shall have procedures for prompt
                  follow-up of reported problems and complaints involving
                  quality of care issues.

         F.       Utilization Data. The contractor shall conduct a quarterly
                  analysis of utilization data, including inpatient utilization,
                  and shall follow-up on cases of potential under- and
                  over-utilization. Over- and under-utilization shall be
                  determined based on comparison to established medical
                  community standards. See Section A.7.7 of the Appendices
                  (Table 5) for a description of utilization data to be
                  submitted to the Department.

         G.       Data Collection. The contractor shall have procedures for
                  gathering and trending data including outcome data.

         H.       Mortality Rates. The contractor shall review inpatient
                  hospital mortality rates of its enrollees.

         I.       Corrective Action. The contractor shall have procedures for
                  informing providers of identified deficiencies, conducting
                  ongoing monitoring of corrective actions, and taking
                  appropriate follow-up actions, such as instituting progressive
                  sanctions and appeal processes. The contractor shall conduct
                  reassessments to determine if corrective action yields
                  intended results.

         J.       Discharge Planning. The contractor shall have procedures to
                  ensure adequate discharge planning, and to include
                  coordination with services enrollees with special needs.

         K.       Ethical Issues. The contractor shall comply and monitor its
                  providers for compliance with state and federal laws and
                  regulations concerning ethical issues, including but not
                  limited to:

                  -        Advance Directives

                  -        Family Planning services for minors

                  -        Other issues as identified

                  Contractor shall submit report annually or within thirty (30)
                  days to DMAHS with changes or updates to the policies.

         L.       Emergency Care. The contractor shall have methods to track
                  emergency care utilization and to take follow-up action,
                  including individual counseling, to improve appropriate use of
                  urgent and emergency care settings.

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<PAGE>   118
         M.       New Medical Technology. The contractor shall have policies and
                  procedures for criteria which are based on scientific evidence
                  for the evaluation of the appropriate use of new medical
                  technologies or new applications of established technologies
                  including medical procedures, drugs, devices, assistive
                  technology devices, and DME.

         N.       Informed Consent. The contractor is required and shall require
                  all participating providers to comply with the informed
                  consent forms and procedures for hysterectomy and
                  sterilization as specified in 42 C.F.R. Part 441, Sub-part B,
                  and shall include the annual audit for such compliance in its
                  quality assurance reviews of participating providers. Copies
                  of the forms are included in Section B.4.15 of the Appendices.

         O.       Continuity of Care. The contractor's Quality Management Plan
                  shall include a continuity of care system including a
                  mechanism for tracking issues over time with an emphasis on
                  improving health outcomes, as well as preventive services and
                  maintenance of function for enrollees with special needs.

         P.       HEDIS. The contractor shall submit annually, on a date
                  specified by the State, HEDIS 3.0 data or more updated
                  version, stratified by eligibility group: 1) aged, blind, and
                  disabled; 2) AFDC/TANF; and 3) NJ FamilyCare and aggregate
                  population data as well as, if available, the contractor's
                  commercial and Medicare enrollment HEDIS data for its
                  aggregate, enrolled commercial and Medicare population in the
                  State or region (if these data are collected and reported to
                  DHSS, a copy of the report should be submitted also to DMAHS)
                  the following clinical indicator measures:

                                                  Report Period
Reporting Set Measures                          by Contract Year
----------------------                          ----------------

childhood immunization status                       annually
adolescent immunization status                      annually
well-child care                                     annually
prenatal care in the first trimester                annually
low birth weight babies                             annually
check ups after delivery                            annually
prenatal care utilization                           annually

         Q.       Quality Improvement Projects (QIPs). The contractor shall
                  participate in QIPs defined annually by the State with input
                  from the contractor. The State will, with input from the
                  contractor and possibly other MCEs, define measurable
                  improvement goals and QIP-specific measures which shall serve
                  as the focus for each QIP. The contractor shall be responsible
                  for designing and implementing strategies for achieving each
                  QIP's objectives. At the beginning of each contract

                                                                           IV-57

<PAGE>   119

                  year the contractor shall present a plan for designing and
                  implementing such strategies, which shall receive approval
                  from the State prior to implementation. The contractor shall
                  then submit semiannual progress reports summarizing
                  performance relative to each of the objectives of each
                  contract year.

                  For year one the QIPs shall be the two areas identified below.
                  The external review organization (ERO) under contract with DHS
                  shall prepare a final report for year one that will contain
                  data, using State-approved sampling and measurement
                  methodologies, for each of the two measures below. Future
                  contract year QIPs shall be defined by the DHS and
                  incorporated into the contract by amendment.

                  For each measure the DHS will identify a baseline and a
                  compliance standard. The baselines in the following chart are
                  the year one QIPs. They are based on 1995 and 1996 focused
                  studies conducted by the ERO or MCE self-reported data (for
                  immunizations). Baseline data, target standards, and
                  compliance standards shall be established or updated by the
                  State.

                  If DHS determines that the contractor is not in compliance
                  with the requirements of the annual QIP objectives, either
                  based on the contractor's progress report or the ERO's report,
                  the contractor shall prepare and submit a corrective action
                  plan for DHS approval.

                  1.       Well-Child Care (EPSDT)

                  The QIP for Well-Child Care shall focus upon achieving
                  compliance with the EPSDT periodicity schedule (See Article
                  4.2.6) in the following three priority areas:

<TABLE>
<CAPTION>

Clinical Area                              Baseline     Target Standard        Compliance Std.
-------------                              --------     ---------------        ---------------
<S>                                        <C>          <C>                    <C>
Age-appropriate
Comprehensive exams
0 -- 24 months                                 28%            80%                     50%
2 -- 4 yr olds                                 28%            80%                     50%
4 -- 6 yr olds (at least 1 visit)              63%            80%                     65%
12 -- 20 yr olds (at least 1 visit)            45%            80%                     50%

Immunizations
2 year olds (combined rate)                    75%            80%                     80%

Lead screens (6 months through                 39%            80%                     50%
4 yr olds)

Annual Dental Visit --
3 -- 12 yr olds                                23%            80%                     50%
13 -- 21 yr olds                               10%            80%                     40%

</TABLE>

                                                                           IV-58

<PAGE>   120
         2.       Prenatal Care and Pregnancy Outcome

                  The QIP for Prenatal Care and Pregnancy Outcome shall focus
                  upon achieving improvements in compliance with prenatal care
                  protocols and in obtaining positive pregnancy outcomes

<TABLE>
<CAPTION>
Clinical Area                            Baseline     Target          Compliance
                                                      Standard         Std.

<S>                                      <C>          <C>             <C>
Initial visit in first trimester or
within 6 wks of enrollment               58%          85%             70%

Adequate frequency of prenatal           55%          85%             70%
care

Low birth weight babies
1500 grams or less                       1%           --               1%
2500 grams or less                       8%           --               6%

Post  partum  exam  within 60
days after delivery                      39%          75%             50%
</TABLE>

R.       Care for Persons with Disabilities and the Elderly (Defined as SSI-Aged
         and New Jersey Care - Aged enrollees and SSI and New Jersey Care
         enrollees with disabilities)

         1.       General. The contractor's Quality Committee shall promote
                  improved or clinical outcomes and enhanced quality of life for
                  elderly enrollees and enrollees with disabilities. The Quality
                  Committee shall:

                  a.       Oversee quality of life indicators, such as:

                           i.       Degree of personal autonomy;

                           ii.      Provision of services and supports that
                                    assist people in exercising medical and
                                    social choices;

                           iii.     Self-direction of care to the greatest
                                    extent appropriate; and

                           iv.      Maximum use of natural support networks.

                  b.       Review persistent or significant complaints from
                           elderly enrollees and enrollees with disabilities or
                           their authorized person, identified through
                           contractors' complaint procedures and through
                           external oversight;

                  c.       Review quality assurance policies, standards and
                           written procedures to ensure they adequately address
                           the needs of elderly enrollees and enrollees with
                           disabilities;

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<PAGE>   121
                  d.       Review utilization of services, including any
                           relationship to adverse or unexpected outcomes
                           specific to elderly enrollees and enrollees with
                           disabilities;

                  e.       Develop written procedures and protocols for at least
                           the following:

                           i.       Assessing the quality of complex health
                                    care/care management;

                           ii.      Ensuring contractor compliance with the
                                    Americans with Disabilities Act; and

                           iii.     Instituting effective health management
                                    protocols for elderly enrollees and
                                    enrollees with disabilities.

                  f.       Develop and test methods to identify and collect
                           quality measurements including measures of treatment
                           efficacy of particular relevance to elderly enrollees
                           and enrollees with disabilities.

                  g.       The contractor shall submit an annual report of the
                           quality activities of this Article.

         2.       Initiatives for Aged. The contractor shall implement specific
                  initiatives for the aged population through the development of
                  programs and protocols approved by DMAHS including:

                  a.       The contractor shall develop a program to ensure
                           provision of the pneumococcal vaccine and influenza
                           immunizations, as recommended by the Centers for
                           Disease Control (CDC). The adult preventive
                           immunization program shall include the following
                           components:

                           i.       Development, distribution, and measurement
                                    of PCP compliance with practice guidelines;

                           ii.      Educational outreach for enrollees and
                                    practitioners;

                           iii.     Access for ambulatory and homebound
                                    enrollees; and

                           iv.      Mechanism to report to DMAHS, via encounter
                                    data, all immunizations given.

                  b.       The contractor shall develop a program to ensure the
                           provision of preventive cancer screening services
                           including, at a minimum, mammography and prostate
                           cancer screening. The program shall include the
                           following components:

                                                                           IV-60
<PAGE>   122
                           i.       Measurement of provider compliance with
                                    performance standards;

                           ii.      Education outreach for both enrollees and
                                    practitioners regarding preventive cancer
                                    screening services;

                           iii.     Mammography services for women ages
                                    sixty-five (65) to seventy-five (75) offered
                                    at least annually;

                           iv.      Screen for prostate cancer scheduled for
                                    enrollees aged sixty-five (65) to
                                    seventy-five (75) at least every two (2)
                                    years; and

                           v.       Documentation on medical records of all
                                    tests given, positive findings and actions
                                    taken to provide appropriate follow-up care.

                  c.       The contractor shall develop specific programs for
                           the care of enrollees identified with congestive
                           heart failure, chronic obstructive lung disease
                           (COPD), diabetes, hypertension, and depression. The
                           program shall include the following:

                           i.       Written quality of care plan to monitor
                                    clinical management, including diagnostic,
                                    pharmacological, and functional standards
                                    and to evaluate outcomes of care;

                           ii.      Measurement and distribution to providers of
                                    reports on outcomes of care;

                           iii.     Educational programming for enrollees and
                                    significant caregivers which emphasizes
                                    self-care and maximum independence;

                           iv.      Educational materials for clinical providers
                                    in the best practices of managing the
                                    disease;

                           v.       Evaluation of effectiveness of each program
                                    by measuring outcomes of care; and

                  d.       The contractor shall develop a program to manage the
                           care for enrollees identified with cognitive
                           impairments. The program shall include the following:

                           i.       Written quality of care plans to monitor
                                    clinical management, including functional
                                    standards, and to evaluate outcomes of care;

                           ii.      Measurement and distribution to providers of
                                    reports on outcomes of care;

                           iii.     Educational programming for significant
                                    caregivers which emphasizes community based
                                    care and support systems for caregivers; and

                           iv.      Educational materials for clinical providers
                                    in the best practices of managing cognitive
                                    impairments.

                                                                           IV-61
<PAGE>   123
                  e.       Initiatives to Prevent Long Term
                           Institutionalization: Contractor shall develop a
                           program to prevent unnecessary or inappropriate
                           nursing facility admissions for the ABD, dually
                           eligible population. This program shall include, but
                           is not limited to, the following:

                           i.       Identification of medical and social
                                    conditions that indicate risk of being
                                    institutionalized;

                           ii.      Monitoring and risk assessment mechanisms
                                    that assist PCPs and others to identify
                                    enrollees at-risk of institutionalization;

                           iii.     Protocols to ensure the timely provision of
                                    appropriate preventive care services to
                                    at-risk enrollees. Such protocols should
                                    emphasize continuity of care and
                                    coordination of services; and

                           iv.      Provision of home/community services covered
                                    by the contractor as needed.

                  f.       Abuse and Neglect Identification Initiative:
                           Contractor shall develop a program on prevention,
                           awareness, and treatment of abuse and neglect of
                           enrollees, to include the following:

                           i.       Diagnostic tools for identifying enrollees
                                    who are experiencing or who are at risk of
                                    abuse and neglect;

                           ii.      Protocols and interventions to treat abuse
                                    and neglect of enrollees, including ongoing
                                    evaluation of the effectiveness of these
                                    protocols and interventions; and

                           iii.     Coordination of these efforts through the
                                    PCP.

         3.       QIP for Persons with Disabilities and the Elderly. The
                  contractor shall cooperate with the DMAHS and the ERO in
                  providing the data and in participating in the QIP studies for
                  persons with disabilities and the elderly. The study and final
                  report will be conducted and prepared by the ERO.

                  a.       Preventive Medicine

                           i.       Influenza vaccinations rates: percentage of
                                    enrollees who have received an influenza
                                    vaccination in the past year;

                           ii.      Pneumonia vaccination rate: percentage of
                                    enrollees who have received the pneumonia
                                    vaccination at any time.

                           iii.     Biennial eye examination: percentage of
                                    enrollees receiving vision screening in the
                                    past two (2) years;

                           iv.      Biennial hearing examination: percentage of
                                    enrollees receiving hearing screening in the
                                    past two (2) years;

                                                                           IV-62
<PAGE>   124
                           v.       Screening for smoking: percentage of
                                    enrollees who reported smoking tobacco, and
                                    percentage of those encouraged to stop
                                    smoking during the past year;

                           vi.      Screening for drug abuse: percentage of
                                    enrollees reporting alcohol utilization in
                                    the substance abuse risk areas, and
                                    percentage of those referred for counseling;
                                    and

                           vii.     Screening for colon cancer: percentage of
                                    enrollees who received this service in the
                                    past two (2) years.

                  b.       Congestive Heart Failure (CHF):

                           i.       The number of enrollees diagnosed with CHF:

                           ii.      The number hospitalized for CHF and average
                                    lengths of stay;

                           iii.     Percentage of enrollees for whom Angiotensin
                                    Converting Enzyme (ACE) Inhibitors were
                                    prescribed;

                           iv.      Percentage for whom cardiac arrhythmias were
                                    diagnosed;

                           v.       CHF readmission rate (the number of
                                    enrollees admitted more than once for CHF
                                    during the past year);

                           vi.      CHF readmission rate ratio (the ratio of
                                    enrollees admitted more than once for CHF
                                    compared to enrollees admitted only once);

                           vii.     Percentage who died during the past year in
                                    hospitals; and

                           viii.    Percentage who died during the past year in
                                    non-hospital settings.

                  c.       Hypertension:

                           i.       The number of enrollees identified as
                                    hypertensive using HEDIS measures

                           ii.      Percentage who received a blood test for
                                    cholesterol or LDL.

S.       For the elderly and enrollees with disabilities, the contractor shall
         monitor and report outcomes annually to DMAHS of the following quality
         indicators of potential adverse outcomes and provide for appropriate
         education, outreach and care management, and quality improvement
         activities as indicated:

         1.       Aspiration pneumonia

         2.       Injuries, fractures, and contusions

         3.       Decubiti

         4.       Seizure management

                                                                           IV-63
<PAGE>   125
T.       MH/SA Services for Clients of DDD. In addition to including clients of
         DDD and MH/SA services for clients of DDD in other required reports,
         the contractor shall monitor and report on the following measures: 1)
         timely outpatient follow-up to intensive treatment, defined as the
         percentage of enrollees discharged from acute treatment who receive
         ambulatory services within 7 days; and 2) adequacy of outpatient
         follow-up, defined as the percentage of enrollees discharged from an
         inpatient hospital who attend a minimum of one ambulatory service
         appointment per month for four months.

U.       The contractor shall provide to DMAHS for review and approval a written
         description of its compensation methodology for marketing
         representatives, including details of commissions, financial
         incentives, and other income.

V.       Provider Performance Measures. The contractor shall conduct a multi-
         dimensional assessment of a provider's performance, and utilize such
         measures in the evaluation and management of those providers. Data
         shall be supplied to providers for their management activities. The
         contractor shall indicate in its QAPI/Utilization Management Plan how
         it will address this provision subject to DHS approval. At a minimum,
         the evaluation management approach shall address the following:

         1.       Resource utilization of services, specialty and ancillary
                  services;

         2.       Clinical performance measures on outcomes of care;

         3.       Maintenance and preventive services;

         4.       Enrollee experience and perceptions of service delivery; and

         5.       Access.

         For MH/SA services provided to enrollees who are clients of DDD the
         contractor shall report MH/SA utilization data to its providers.

W.       Member Satisfaction. The State will assess member satisfaction of
         contractor services by conducting surveys employing the Consumer
         Assessments of Health Plans Study (CAHPS) survey, or another survey
         instrument specified by the State. The survey shall be stratified to
         capture statistically significant results for all categories of New
         Jersey Care 2000+ enrollees including AFDC/TANF, DYFS, SSI and New
         Jersey Care Aged, Blind and Disabled, NJ FamilyCare, pregnant and
         parenting women, and racial and linguistic minorities. Sample size,
         sample selection, and implementation methodology shall be determined by
         the State, with contractor input, to assure comparability of results
         across State contractors.

                                                                           IV-64
<PAGE>   126
         The State will select an independent survey administrator to perform
         the survey on behalf of all of the State's New Jersey Care 2000+
         contractors.

         The contractor shall fully cooperate with the State and the independent
         survey administrator such that final, analyzed survey results shall be
         available from the survey administrator to the State, in a format
         approved by the State, by a date specified by the State of each
         contract year. Within sixty (60) days of receipt of the final, analyzed
         survey results sent to the contractor, it shall identify leading
         sources of enrollee dissatisfaction, specify additional measurement or
         intervention efforts developed to address enrollee dissatisfaction, and
         a timeline, subject to State approval, indicating when such activities
         will be completed. A status report on the additional measurement or
         intervention efforts shall be submitted to the State by a date
         specified by DMAHS. The contractor shall respond to and submit a
         corrective action to address and correct problems and deficiencies
         found through the survey.

         If the contractor conducts a member satisfaction survey of its own, it
         shall send to DMAHS the results of the survey.

X.       Focus Groups. The State will annually conduct four focus groups with
         enrolled populations identified by the State and communicated in
         writing to the contractor. Objectives for the focus groups will be
         collaboratively developed by the State and the contractor. For the
         first contract year, two focus groups each will be conducted with
         enrollees who have communication-affecting disorders and with enrollees
         who are elderly.

         Focus group results will be reported by the State. The contractor shall
         identify opportunities for improvement identified through the focus
         groups, specify additional measurement or intervention efforts
         developed to address the opportunities for improvement, and a timeline,
         subject to State approval, indicating when such activities will be
         completed. A status report on the additional measurement or
         intervention efforts shall be submitted annually to the State by a date
         specified by DMAHS.

Y.       ERO. Other "areas of concern" shall be monitored through the external
         review process. The External Review Organization (ERO) shall, in its
         monitoring activities, validate the contractor's protocols, sampling,
         and review methodologies.

Z.       Community/Health Education Advisory Committee. The contractor shall
         establish and maintain a community advisory committee, consisting of
         persons being served by the contractor, including enrollees or
         authorized persons, individuals and providers with knowledge of and
         experience with serving elderly people or people with disabilities; and
         representatives from community agencies that do not provide
         contractor-covered services but are important to the health and

                                                                           IV-65
<PAGE>   127
         well-being of members. The committee shall meet at least quarterly and
         its input and recommendations shall be employed to inform and direct
         contractor quality management activities and policy and operations
         changes. The contractor shall submit a narrative annual report
         indicating the constituencies on this committee, as well as the
         committee's activities throughout the year.

AA.      Provider Advisory Committee. The contractor shall establish and
         maintain a provider advisory committee, consisting of providers
         contracting with the contractor to serve enrollees. At least two
         providers on the committee shall maintain practices that predominantly
         serve Medicaid beneficiaries and other indigent populations, in
         addition to at least one other practicing provider on the committee who
         has experience and expertise in serving enrollees with special needs.
         The committee shall meet at least quarterly and its input and
         recommendations shall be employed to inform and direct contractor
         quality management activities and policy and operations changes. The
         contractor shall submit a narrative annual report indicating the
         constituencies on this committee, as well as the committee's activities
         throughout the year.

4.6.3    REFERRAL SYSTEMS

A.       The contractor shall have a system whereby enrollees needing specialty
         medical and dental care will be referred timely and appropriately. The
         system shall address authorization for specific services with specific
         limits or authorization of treatment and management of a case when
         medically indicated (e.g., treatment of a terminally ill cancer patient
         requiring significant specialist care). The contractor shall maintain
         and submit a flow chart accurately describing the contractor's referral
         system, including the title of the person(s) responsible for approving
         referrals. The following items shall be contained within the referral
         system:

         1.       Procedures for recording and tracking each authorized
                  referral.

         2.       Documentation and assurance of completion of referrals.

         3.       Policies and procedures for identifying and rescheduling
                  broken referral appointments with the providers and/or
                  contractor as appropriate (e.g. EPSDT services).

         4.       Policies and procedures for accepting, resolving and
                  responding to verbal and written enrollee requests for
                  referrals made to the PCP and/or contractor as appropriate.
                  Such requests shall be logged and documented. Requests that
                  cannot be decided upon immediately shall be responded to in
                  writing no later than five (5) business days from the date of
                  receipt of the request (with a call made to the enrollee on
                  final disposition) and postmarked the next day.

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         5.       Policies and procedures for proper notification of the
                  enrollee and where applicable, authorized person, the
                  enrollee's provider, and the enrollee's care manager,
                  including notice of right to appeal and/or right to a request
                  a second opinion when services are denied.

         6.       A referral form which can be given to the enrollee or, where
                  applicable, an authorized person to take to a specialist.

         7.       Referral form mailed, faxed, or sent by electronic means
                  directly to the referral provider.

         8.       Telephoned authorization for urgent situations or when deemed
                  appropriate by the enrollee's PCP or the contractor.

         9.       Where applicable, the contractor must also notify the
                  contractor care manager or authorized person.

B.       The contractor shall provide a mechanism to assure the facilitation of
         referrals when traveling by an enrollee (especially when very ill) from
         one location to another to pick-up and deliver forms can cause undue
         hardship for the enrollee. Referrals from practitioners or prior
         authorizations by the contractor shall be sent/processed within two (2)
         working days of the request, one (1) day for urgent cases. The
         contractor shall have procedures to allow enrollees to receive a
         standing referral to a specialist in cases where an enrollee needs
         ongoing specialty care.

C.       The contractor shall not impose an arbitrary number of attempted dental
         treatment visits by a PCD as a condition prior to the PCD initiating
         any specialty referral requests.

D.       The contractor shall authorize any reasonable referral request from a
         PCP/PCD without imposing any financial penalties to the same PCP/PCD.

E.       All final decisions regarding denials of referrals, PAs, treatment and
         treatment plans for non-emergency services shall be made by a physician
         and/or peer physician specialist or by a dentist/dental specialist in
         the case of dental services. Prior authorization decisions for
         non-emergency services shall be made within ten (10) business days or
         sooner as required by the needs of the enrollee.

4.6.4    UTILIZATION MANAGEMENT

A.       Utilization Review Plan. The contractor shall develop a written
         Utilization Review Plan that includes all standards described in the NJ
         modified QARI/QISMC (See Section B.4.14 of the Appendices). The written
         plan shall also include policies and procedures that address the
         following:

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         1.       The contractor shall not deny benefits to require enrollees
                  and providers to go through the appeal process in an effort to
                  forestall and reduce needed benefits. The contractor shall
                  provide all medically necessary services covered by the NJ
                  Division of Medical Assistance and Health Services program in
                  this contract. If a dispute arises concerning the provision of
                  a service or the level of service, the service, if initiated,
                  shall be continued until the issue is resolved.

         2.       Utilization Management Committee. The committee shall have
                  written parameters for operating and will meet on a regular
                  schedule, defined to be at least quarterly. Committee members
                  shall be clearly identified and representative of the
                  contractor's providers, accountable to the medical director
                  and governing body, and shall maintain appropriate
                  documentation of the committee's activities, findings,
                  recommendations, and actions.

         3.       Data Collection and Reporting. The plan shall provide for
                  systematic utilization data collection and analysis, including
                  profiling of provider utilization patterns and patient
                  results. The contractor must use aggregate data to establish
                  utilization patterns, allow for trend analysis, and develop
                  statistical profiles of both individual providers and all
                  network providers. Such data shall be regularly reported to
                  the contractor management and contractor providers. The plan
                  shall also provide for interpretation of the data to
                  providers.

         4.       Corrective Action. The plan shall include procedures for
                  corrective action and follow-up activities when problems in
                  utilization are identified.

         5.       Roles and Responsibilities. The plan shall clearly define the
                  roles, functions, and responsibilities of the utilization
                  management committee and medical director.

         6.       Prohibitions on Compensation. The contractor or the
                  contractor's delegated utilization review agent shall not
                  permit or provide compensation or anything of value to its
                  employees, agents or contractors based on:

                  a.       Either a percentage of the amount by which a claim is
                           reduced for payment or the number of claims or the
                           cost of services for which the person has denied
                           authorization or payment; or

                  b.       Any other method that encourages the rendering of an
                           adverse determination.

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         7.       Retrospective Review. If a health care service has been
                  pre-authorized or approved, the specific standards, criteria
                  or procedures used in the determination shall not be modified
                  pursuant to retrospective review.

         8.       Collection of Information. Only such information as is
                  necessary to make a determination shall be collected. During
                  prospective or concurrent review, copies of medical records
                  shall only be required when necessary to verify that the
                  health care services subject to review are medically
                  necessary. In such cases, only the relevant sections of the
                  records shall be required. Complete or partial medical records
                  may be requested for retrospective reviews. In no event shall
                  such information be reviewed by persons other than health care
                  professionals, registered health information technicians,
                  registered health information administrators, or
                  administrative personnel who have received appropriate
                  training and who will safeguard patient confidentiality.

         9.       Prohibited Actions. Neither the contractor's UM committee nor
                  its utilization review agent shall take any action with
                  respect to an enrollee or a health care provider that is
                  intended to penalize or discourage the enrollee or the
                  enrollee's health care provider from undertaking an appeal,
                  dispute resolution or judicial review of an adverse
                  determination.

B.       Prior Authorization. The contractor shall have policies and procedures
         for prior-authorization. Prior authorization shall be conducted by a
         currently licensed, registered or certified health care professional,
         including a registered nurse or a physician who is appropriately
         trained in the principles, procedures and standards of utilization
         review. The following timeframes and requirements shall apply to all
         prior authorization determinations:

         1.       Routine determinations. Prior authorization determinations for
                  non-urgent services shall be made and a notice of
                  determination provided by telephone and in writing to the
                  provider within ten (10) business days (or sooner as required
                  by the needs of the enrollee) of receipt of necessary
                  information sufficient to make an informed decision.

         2.       Urgent determinations. Prior authorization determinations for
                  urgent services shall be made within twenty-four (24) hours of
                  receipt of the necessary information.

         3.       Determination for Services that have been delivered.
                  Determinations involving health care services which have been
                  delivered shall be made within thirty (30) days of receipt of
                  the necessary information.

         4.       Adverse Determinations. A physician and/or a physician peer
                  reviewer shall make the final determination in all adverse
                  determinations.

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         5.       Continued/Extended Services. A utilization review agent shall
                  make a determination involving continued or extended health
                  care services, or additional services for an enrollee
                  undergoing a course of continued treatment prescribed by a
                  health care provider and provide notice of such determination
                  to the enrollee or the enrollee's designee, which may be
                  satisfied by notices to the enrollee's health care provider,
                  by telephone and in writing within one (1) business day of
                  receipt of the necessary information. Notification of
                  continued or extended services shall include the number of
                  extended services approved, the new total of approved
                  services, the date of onset of services and the next review
                  date. For services that require multiple visits, a series of
                  tests, etc. to complete the service, the authorized time
                  period shall be adequate to cover the anticipated span of time
                  that best fits the service needs and circumstances of each
                  individual enrollee.

         6.       Reconsiderations. The contractor shall have policies and
                  procedures for reconsideration in the event that an adverse
                  determination is made without an attempt to discuss such
                  determination with the referring provider. Determinations in
                  such cases shall be made within the timeframes established for
                  initial considerations.

         7.       The contractor shall provide written notification to enrollees
                  and/or, where applicable, an authorized person at the time of
                  denial, deferral or modification of a request for prior
                  approval to provide a medical/dental service(s), when the
                  following conditions exist:

                  a.       The request is made by a medical/dental or other
                           health care provider who has a formal arrangement
                           with the contractor to provide services to the
                           enrollee.

                  b.       The request is made by the provider through the
                           formal prior authorization procedures operated by the
                           contractor.

                  c.       The service for which prior authorization is
                           requested is a Medicaid covered service for which the
                           contractor has established a prior authorization
                           requirement.

                  d.       The prior authorization decision is being made at the
                           ultimate level of responsibility within the
                           contractor's organization for approving, denying,
                           deferring or modifying the service requested but
                           prior to the point at which the enrollee must
                           initiate the contractor's grievance procedure.

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         8.       Notice of Action. Written notification shall be given on a
                  standardized form approved by the Department and shall inform
                  the provider, enrollee or authorized person of the following:

                  a.       The effective date of the denial, reduction of
                           service, or other medical coverage determination;

                  b.       The enrollee's rights to, and method for obtaining, a
                           State hearing (Fair Hearing and/or IURO) to contest
                           the denial, deferral or modification action;

                  c.       The enrollee's right to represent himself/herself at
                           the State hearing or to be represented by legal
                           counsel, friend or other spokesperson;

                  d.       The action taken by the contractor on the request for
                           prior authorization and the reason for such action
                           including clinical rationale and the underlying
                           contractual basis or Medicaid authority;

                  e.       The name and address of the contractor;

                  f.       Notice of internal (contractor) appeal rights and
                           instructions on how to initiate such appeal;

                  g.       Notice of the availability, upon request, of the
                           clinical review criteria relied upon to make the
                           determination;

                  h.       The notice to the enrollee shall inform the enrollee
                           that he or she may file an appeal concerning the
                           contractor's action using the contractor's appeal
                           procedure prior to or concurrent with the initiation
                           of the State hearing process;

                  i.       The contractor shall notify enrollees, and/or
                           authorized persons within the time frames set forth
                           in this contract;

         9.       In no instance shall the contractor apply prior authorization
                  requirements and utilization controls that effectively
                  withhold or limit medically necessary services, or establish
                  prior authorization requirements and utilization controls that
                  would result in a reduced scope of benefits for any enrollee.

C.       Appeal Process for UM Determinations. The contractor shall have
         policies and procedures for the appeal of utilization management
         determinations and similar determinations. In the case of an enrollee
         who was receiving a covered service (from the contractor, another
         contractor, or the Medicaid Fee-for-Service

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         program) prior to the determination, the contractor shall continue to
         provide the same level of service while the determination is in appeal.
         However, the contractor may require the enrollee to receive the service
         from within the contractor's provider network, if equivalent care can
         be provided within network.

         1.       The contractor shall provide that an enrollee, and any
                  provider acting on behalf of the enrollee with the enrollee's
                  consent (enrollee's consent shall not be required in the case
                  of a deceased patient, or when an enrollee has relocated and
                  cannot be found), may appeal any UM decision resulting in a
                  denial, termination, or other limitation in the coverage of
                  and access to health care services in accordance with this
                  contract and as defined in C.2 under the procedures described
                  in this Article. Such enrollees and providers shall be
                  provided with a written explanation of the appeal process upon
                  the conclusion of each stage in the appeal process.

         2.       Appealable decision means, at a minimum, any of the following:

                  a.       An adverse determination under a utilization review
                           program;

                  b.       Denial of access to specialty and other care;

                  c.       Denial of continuation of care;

                  d.       Denial of a choice of provider;

                  e.       Denial of coverage of routine patient costs in
                           connection with an approved clinical trial;

                  f.       Denial of access to needed drugs;

                  g.       The imposition of arbitrary limitation on medically
                           necessary services; or

                  h.       Denial of payment for a benefit.

         3.       Hearings. If the contractor provides a hearing to the enrollee
                  on the appeal, the enrollee shall have the right to
                  representation. The contractor shall permit the enrollee to be
                  accompanied by a representative of the enrollee's choice to
                  any proceedings and grievances. Such hearing must take place
                  in community locations convenient and accessible to the
                  enrollee.

         4.       The appeal process shall consist of an informal internal
                  review by the contractor (stage 1 appeal), a formal internal
                  review by the contractor (stage 2 appeal), and a formal
                  external review (stage 3 appeal) by an independent utilization
                  review organization under the DHSS and/or the Medicaid Fair
                  Hearing process shall be in accordance with N.J.A.C 10:49 et
                  seq. Stages 1-3 appeals shall be in accordance with N.J.A.C.
                  8:38-8.

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         5.       Utilization Management Grievances. Appropriate clinical
                  personnel shall be involved in the investigation and
                  resolution of all UM grievances. The processing of all such
                  grievances shall be incorporated in the contractor's quality
                  management activities and shall be reviewed periodically (at
                  least quarterly) by the Medical Director/Dental Director.

         6.       Nothing in this Article shall be construed as removing any
                  legal rights of enrollees under State or federal law,
                  including the right to file judicial actions to enforce rights
                  or request a Medicaid Fair Hearing for Medicaid enrollees in
                  accordance with their rights under State and federal laws and
                  regulations. All written notices to Medicaid/NJ FamilyCare
                  Plan A enrollees shall include a statement of their right to
                  access the Medicaid Fair Hearing process at any time.

D.       Drug Utilization Review Program (DUR): The contractor shall establish
         and maintain a drug utilization review (DUR) program that satisfies the
         minimum requirements for prospective and retrospective DUR as described
         in 1927(g) of the Social Security Act, amended by the Omnibus Budget
         Reconciliation Act (OBRA) of 1990. The contractor shall include review
         of Mental Health/Substance Abuse drugs in its DUR program. The State or
         its agent shall provide its expertise in developing review protocols
         and shall assist the contractor in analyzing MH/SA drug utilization.
         Results of the review shall be provided to the State or its agent and,
         where applicable, to the contractor's network providers. The State or
         its agent will take appropriate corrective action to report its actions
         and outcomes to the contractor.

         1.       DUR standards shall encourage proper drug utilization by
                  ensuring maximum compliance, minimizing potential fraud and
                  abuse, and taking into consideration both the quality and cost
                  of the pharmacy benefit.

         2.       The contractor shall implement a claims adjudication system,
                  preferably on-line, which shall include a prospective review
                  of drug utilization, and include age-specific edits.

         3.       The prospective and retrospective DUR standards established by
                  the contractor shall be consistent with those same standards
                  established by the Medicaid Drug Utilization Review Board.
                  DMAHS shall approve the effective date for implementation of
                  any DUR standards by the contractor as well as any subsequent
                  changes within thirty (30) days of such change.

4.6.5    CARE MANAGEMENT

A.       Care Management Standards. The contractor shall develop and implement
         care management as defined in Article 1 with adequate capacity to
         provide services to all enrollees who would benefit from care
         management services. In addition, the

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         contractor shall develop a higher level of care management for
         enrollees with special needs, as described in Article 4.5.4. Specific
         care management activities shall include at least the following:

         1.       An effective mechanism to initiate and discontinue care
                  management services in both inpatient and outpatient settings,
                  in addition to catastrophic incidents.

         2.       An effective mechanism to coordinate services required by
                  enrollees, including community support services. When
                  appropriate, such activities shall be coordinated with those
                  of the Division of Family Development (DFD), Division of Youth
                  and Family Services (DYFS), Division of Mental Health Services
                  (DMHS), Division of Developmental Disabilities, Special Child
                  Health Services County Case Management Units, Division of
                  Addiction Services, and community agencies.

         3.       Care plans specifically developed for each care managed
                  enrollee which ensure continuity and coordination of care
                  among the various clinical and non-clinical disciplines and
                  services.

         4.       A process to evaluate and improve individual care management
                  services as well as the effectiveness of care management as a
                  whole.

         5.       Protocols for the following care management activities:

                  a.       Pregnancy services including HealthStart program
                           requirements;

                  b.       All EPSDT services and coordination for children with
                           elevated blood lead levels;

                  c.       Mental health/substance abuse services coordination;

                  d.       HIV/AIDS services coordination; and

                  e.       Dental services for enrollees with developmental
                           disabilities.

B.       Early Identification. The contractor shall develop policies and
         procedures for early identification of enrollees who require care
         management. The contractor shall include in its policies and procedures
         a review of the following possible indicators of complex care needs:

         1.       Poor health or functional status, as reported by the enrollee
                  or authorized person;

         2.       Existence of a care plan;

         3.       Existence of a case manager;

         4.       Request for an assessment from the enrollee or authorized
                  person;

         5.       Request for an assessment from a State agency or private
                  agency contracting with DDD involved with the enrollee;

         6.       A chronic condition;

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         7.       A recent hospitalization or admission to a nursing facility;

         8.       Recent critical social events, such as the death or relocation
                  of a family member or a move to a new home;

         9.       Existence of multiple medical or social service systems or
                  providers in the life of the enrollee;

         10.      Use of prescription drugs, particularly multiple drugs; and

         11.      Use of interpreter or any special services.

C.       Complex Needs Assessment. The contractor shall have protocols and tools
         for performing and reviewing/updating Complex Needs Assessments.

         1.       The Complex Needs Assessment must cover at least the following
                  risk factors:

                  a.       Medical status and history, including primary and
                           secondary diagnosis and current and past medications
                           prescribed

                  b.       Functional status

                  c.       Physical well-being

                  d.       Mental health status

                  e.       History of tobacco, alcohol and drug use or abuse

                  f.       Identification of existing and potential formal and
                           informal supports

                  g.       Determination of willingness and capacity of family
                           members or, where applicable, authorized persons and
                           others to provide informal support

                  h.       Condition and proximity to services of current
                           housing, and access to appropriate transportation

                  i.       Identification of current or potential long term
                           service needs

                  j.       Need for medical supplies and DME

         2.       When any of the following conditions are met, the contractor
                  shall ensure that a Complex Needs Assessment is conducted, or
                  an existing assessment is reviewed, within a time frame that
                  meets the needs of the enrollee but within no more than thirty
                  (30) days:

                  a.       Special needs are identified at the time of
                           enrollment or any time thereafter;

                  b.       An enrollee or authorized person requests an
                           assessment;

                  c.       The enrollee's PCP requests an assessment;

                  d.       A State agency involved with an enrollee requests an
                           assessment; or

                  e.       An enrollee's status otherwise indicates.

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D.       Plan of Care. The contractor, through its care manager, shall ensure
         that a plan of care is developed and implementation has begun within
         thirty (30) business days of the date of a needs assessment, or sooner,
         according to the circumstances of the enrollee. The contractor shall
         ensure the full participation and consent of the enrollee or, where
         applicable, authorized person and participation of the enrollee's PCP
         and other case managers identified through the Complex Needs Assessment
         (e.g., DDD case manager) in the development of the plan. The plan shall
         specify treatment goals, identify medical service needs, relevant
         social and support services, appropriate linkages and timeframe as well
         as provide an ongoing accurate record of the individual's clinical
         history. The care manager shall be responsible for implementing the
         linkages identified in the plan and monitoring the provision of
         services identified in the plan. This includes making referrals,
         coordinating care, promoting communication, ensuring continuity of
         care, and conducting follow-up. The care manager shall also be
         responsible for ensuring that the plan is updated as needed, but at
         least annually. This includes early identification of changes in the
         enrollee's needs.

E.       Referrals. The contractor shall have policies and procedures to process
         and respond within ten (10) business days to care management referrals
         from network providers, state agencies, private agencies under contract
         with DDD, self-referrals, or, where applicable, referrals from an
         authorized person.

F.       Continuity of Care

         1.       The contractor shall establish and operate a system to assure
                  that a comprehensive treatment plan for every enrollee will
                  progress to completion in a timely manner without unreasonable
                  interruption.

         2.       The contractor shall construct and maintain policies and
                  procedures to ensure continuity of care by each provider in
                  its network.

         3.       An enrollee shall not suffer unreasonable interruption of
                  his/her active treatment plan. Any interruptions beyond the
                  control of the provider will not be deemed a violation of this
                  requirement.

         4.       If an enrollee has already had a medical or dental treatment
                  procedure initiated prior to his/her enrollment in the
                  contractor's plan, the initiating treating provider must
                  complete that procedure (not the entire treatment plan). See
                  4.1.1.E for details.

G.       Documentation. The contractor shall document all contacts and linkages
         to medical and other services in the enrollee's case files.

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H.       Informing Providers. The contractor shall inform its PCPs and
         specialists of the availability of care management services, and must
         develop protocols describing how providers will coordinate services
         with the care managers.

I.       Care Managers. The contractor shall establish a distinct care
         management function within the contractor's plan. This function shall
         be overseen by a Care Management Supervisor, as described in Article
         7.3. Care managers shall be dedicated to providing care management and
         may be employees or contracted agents of the contractor. The care
         manager, in conjunction with and with approval from, the enrollee's
         PCP, shall make referrals to needed services. The care management
         system shall recognize three levels set forth in Section B.4.12 of the
         Appendices. Level 3 is described in Article 4.5.4.

         1.       The care manager for the first level of care management shall
                  have as a minimum a license as a registered nurse or a
                  Bachelor's degree in social work, health or behavioral
                  science.

         2.       For level two of care management, in addition to the
                  requirements in 4.6.5I.1. above, the care managers shall also
                  have at least one (1) year of experience serving enrollees
                  with special needs.

         3.       The contractor shall have procedures to monitor the adequacy
                  of staffing and must adjust staffing ratios and caseloads as
                  appropriate based on its staffing assessment.

J.       Care management shall also be made available to enrollees who exhibit
         inappropriate, disruptive or threatening behaviors in a medical
         practitioner's office when such behaviors may relate to or result from
         the existence of the enrollee's special needs.

K.       Hours of Service. The contractor shall make care management services
         available during normal office hours, Monday through Friday.

4.7      MONITORING AND EVALUATION

4.7.1    GENERAL PROVISIONS

A.       For purposes of monitoring and evaluating the contractor's performance
         and compliance with contract provisions, to assure overall quality
         management (QM), and to meet State and federal statutes and regulations
         governing monitoring, DMAHS or its agents shall have the right to
         monitor and evaluate on an on-going basis, through inspection or other
         means, the contractor's provision of health care services and
         operations including, but not limited to, the quality, appropriateness,
         and timeliness of services provided under this contract and the
         contractor's compliance with its internal QM program. DMAHS shall
         establish the scope of

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         review, review sites, relevant time frames for obtaining information,
         and the criteria for review, unless otherwise provided or permitted by
         applicable laws, rules, or regulations.

B.       The contractor shall cooperate with and provide reasonable assistance
         to DMAHS in monitoring and evaluation of the services provided under
         this contract.

C.       The contractor hereby agrees to medical audits in accordance with the
         protocols for care specified in this contract, in accordance with
         medical community standards for care, and of the quality of care
         provided all enrollees, as may be required by appropriate regulatory
         agencies.

D.       The contractor shall cooperate with DMAHS in carrying out the
         provisions of applicable statutes, regulations, and guidelines
         affecting the administration of this contract.

E.       The contractor shall distribute to all subcontractors providing
         services to enrollees, informational materials approved by DMAHS that
         outlines the nature, scope, and requirements of this contract.

F.       The contractor, with the prior written approval of DMAHS, shall print
         and distribute reporting forms and instructions, as necessary whenever
         such forms are required by this contract.

G.       The contractor shall make available to DMAHS copies of all standards,
         protocols, manuals and other documents used to arrive at decisions on
         the provision of care to its DMAHS enrollees.

H.       The contractor shall use appropriate clinicians to evaluate the
         clinical data, and must use multi-disciplinary teams to analyze and
         address systems issues.

I.       Contractor shall develop an incentive system for providers to assure
         submission of encounter data. At a minimum, the system shall include:

         1.       Mandatory provider profiling that includes complete and timely
                  submissions of encounter data. Contractor shall set specific
                  requirements for profile elements based on data from encounter
                  submissions.

         2.       Contractor shall set up data submission requirements based on
                  encounter data elements for which compliance performance will
                  be both rewarded and/or sanctioned.

J.       The contractor shall include in its quality management system
         reviews/audits which focus on the special dental needs of enrollees
         with developmental disabilities. Using encounter data reflecting the
         utilization of dental services and

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         other data sources, the contractor shall measure clinical outcomes;
         have these outcomes evaluated by clinical experts; identify quality
         management tools to be applied; and recommend changes in clinical
         practices intended to improve the quality of dental care to enrollees
         with developmental disabilities.

4.7.2    EVALUATION AND REPORTING - CONTRACTOR RESPONSIBILITIES

A.       The contractor shall collect data and report to the State its findings
         on the following:

         1.       Encounter Data: The contractor shall prepare and submit
                  encounter data to DMAHS. Instructions and formats for this
                  report are specified in Section B.3.3 of the Appendices of
                  this contract.

         2.       Grievance Reports: The contractor shall provide to DMAHS
                  quarterly reports of all grievances in accordance with
                  Articles 5.15 and the contractor's approved grievance process
                  included in this contract. See Section A.7.5 of the Appendices
                  (Table 3).

         3.       Appointment Availability Studies: The contractor shall conduct
                  a review of appointment availability and submit a report to
                  DMAHS semi-annually. The report must list the average time
                  that enrollees wait for appointments to be scheduled in each
                  of the following categories: baseline physical, routine,
                  specialty, and urgent care appointments. DMAHS must approve
                  the methodology for this review in advance in writing. The
                  contractor shall assess the impact of appointment waiting
                  times on the health status of enrollees with special needs.

         4.       Twenty-four (24) Hour Access Report: The contractor shall
                  submit to DMAHS an annual report describing its twenty-four
                  (24) hour access procedures for enrollees. The report must
                  include the names and addresses of any answering services that
                  the contractor uses to provide twenty-four (24) hour access.

         5.       The contractor shall submit to DMAHS, on a quarterly basis,
                  records of early discharge information which pertain to
                  hospital stays for newborns and mothers.

         6.       The contractor shall monitor, evaluate, and submit an annual
                  report to DMAHS on the incidence of HIV/AIDS patients, the
                  impact of the contractor's program to promote HIV prevention
                  (Article 4.5.7), counseling, treatment and quality of life
                  outcomes, mortality rates.

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         7.       Additional Reports: The contractor shall prepare and submit
                  such other reports as DMAHS may request. Unless otherwise
                  required by law or regulation, DMAHS shall determine the
                  timeframe for submission based on the nature of the report and
                  give the contractor the opportunity to discuss and comment on
                  the proposed requirements before the contractor is required to
                  submit such additional reports.

         8.       The contractor shall submit to the Division, on a quarterly
                  basis, documentation of its ongoing internal quality assurance
                  activities. Such documentation shall include at a minimum:

                  a.       Agenda of quality assurance meetings of its medical
                           professionals; and

                  b.       Attendance sheets with attendee signatures.

B.       Clinical areas requiring improvement shall be identified and documented
         with a corrective action plan developed and monitored by the State.

         1.       Implementation of remedial/corrective action. The QAPI shall
                  include written procedures for taking appropriate remedial
                  action whenever, as determined under the QAPI, inappropriate
                  or substandard services are furnished, or services that should
                  have been furnished were not. Quality assurance actions which
                  result in the termination of a medical provider shall be
                  immediately forwarded by the contractor to DMAHS. Written
                  remedial/corrective action procedures shall include:

                  a.       Specification of the types of problems requiring
                           remedial/corrective action;

                  b.       Specification of the person(s) or body responsible
                           for making the final terminations regarding quality
                           problems;

                  c.       Specific actions to be taken;

                  d.       Provision of feedback to appropriate health
                           professionals, providers and staff;

                  e.       The schedule and accountability for implementing
                           corrective actions;

                  f.       The approach to modifying the corrective action if
                           improvements do not occur; and

                  g.       Procedures for notifying a primary care
                           physician/provider group that a particular
                           physician/provider is no longer eligible to provide
                           services to enrollees.

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         2.       Assessment of effectiveness of corrective actions. The
                  contractor shall monitor and evaluate corrective actions taken
                  to assure that appropriate changes have been made. In
                  addition, the contractor shall track changes in practice
                  patterns.

         3.       The contractor shall assure follow-up on identified issues to
                  ensure that actions for improvement have been effective and
                  provide documentation of same.

         4.       The findings, conclusions, recommendations, actions taken, and
                  results of the actions taken as a result of QM activity, shall
                  be documented and reported to appropriate individuals within
                  the organization and through the established QM channels. The
                  contractor shall document coordination of QM activities and
                  other management activities.

C.       The contractor shall conduct an annual satisfaction survey of a
         statistically valid sample of its participating providers who provide
         services to DMAHS enrollees. The contractor shall submit a copy of the
         survey instrument and methodology to DMAHS. The survey should include
         as a minimum questions that address provider opinions of the impact of
         the referral, prior authorization and provider appeals processes on
         his/her practice/services, reimbursement methodologies, care management
         assistance from the contractor. The contractor shall communicate the
         findings of the survey to DMAHS in writing within one hundred twenty
         (120) days after conducting the survey. The written report shall also
         include identification of any corrective measures that need to be taken
         by the contractor as a result of the findings, a time frame in which
         such corrective action will be taken by the contractor and recommended
         changes as needed for subsequent use.

4.7.3    MONITORING AND EVALUATION - DEPARTMENT ACTIVITIES

The contractor shall permit the Department and the United States Department of
Health and Human Services or its agents to have the right to inspect, audit or
otherwise evaluate the quality, appropriateness and timeliness of services
performed under this contract, including through a medical audit. Medical audit
by Department staff shall include, at a minimum, the review of:

A.       Health care delivery system for patient care;

B.       Utilization data;

C.       Medical evaluation of care provided and patient outcomes for specific
         enrollees as well as for a statistical representative sample of
         enrollee records;

D.       Health care data elements submitted electronically to DMAHS;

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E.       Annual, on-site review of the contractor's operations with necessary
         follow-up reviews and corrective actions;

F.       The grievances and complaints (recorded in a separately designated
         complaint log for DMAHS enrollees) relating to medical care including
         their disposition;

G.       Minutes of all quality assurance committee meetings conducted by the
         contractor's medical staff. Such reviews will be conducted on-site at
         the contractor's facilities or administrative offices.

4.7.4    INDEPENDENT EXTERNAL REVIEW ORGANIZATION REVIEWS

A.       The contractor shall cooperate with the external review organization
         (ERO) audits and provide the information requested and in the time
         frames specified (generally within sixty (60) days or as indicated in
         the notice), including medical and dental records, QAPI reports and
         documents, and financial information. Contractors shall submit a plan
         of action to correct, evaluate, respond to, resolve, and follow-up on
         any identified problems reported by such activities.

B.       The scope of the ERO reviews shall be as follows:

         1.       Annual, onsite review of contractor's operations with
                  necessary follow-up reviews and corrective actions.

         2.       The contractor's quality management plan and activities.

         3.       Individual medical record reviews.

         4.       Randomly selected studies.

         5.       Focus studies utilizing where possible HEDIS measurements and
                  comparison to Healthy People 2010 Objectives and/or Healthy
                  New Jersey 2010 standards and/or EPSDT or HealthStart
                  standards as appropriate.

         6.       Validation review of the contractor's QM/HEDIS studies
                  required in this contract.

         7.       Validation and evaluation of encounter data.

         8.       Health care data analysis.

         9.       Monitoring to ensure enrollees are issued written
                  determinations, including appeal rights and notification of
                  their right to a Medicaid Fair Hearing as well as a review by
                  the DHSS IURO.

         10.      Ad hoc studies and reviews.

         11.      ERO reviews for dental services include but are not limited
                  to:

                  a.       New Jersey licensed Dental Consultants of the ERO
                           will review a random sample of patient charts and
                           conduct provider interviews. A random number of
                           patients will receive screening examinations.

                  b.       Auditors will review appointment logs, referral logs,
                           health education material, and conduct staff
                           interviews.

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                  c.       Audit documents will be completed by appropriate
                           consultant/auditor.

4.8      PROVIDER NETWORK

4.8.1    GENERAL PROVISIONS

A.       The contractor shall establish and maintain at all times a complete
         provider network consisting of traditional providers for primary and
         specialty care, including primary care physicians, other approved
         non-physician primary care providers, physician specialists,
         non-physician practitioners, hospitals (including teaching hospitals),
         Federally Qualified Health Centers and other essential community
         providers/safety-net providers, and ancillary providers. The provider
         network shall be reviewed and approved by DMAHS and the sufficiency of
         the number of participating providers shall be determined by DMAHS in
         accordance with the standards found in Article 4.8.8 "Provider Network
         Requirements."

B.       The contractor shall ensure that its provider network includes, at a
         minimum:

         1.       Sufficient number, available and physically accessible, of
                  physician and non-physician providers of health care to cover
                  all services in the amount, duration, and scope included in
                  the benefits package under this contract. The number of
                  enrollees assigned to a PCP shall be decreased by the
                  contractor if necessary to maintain the appointment
                  availability standards. The contractor's network, at a
                  minimum, shall be sufficient to serve at least 33 percent of
                  all individuals eligible for managed care in each urban county
                  it serves. The contractor's network, at a minimum, shall be
                  sufficient to serve at least 50 percent of all individuals
                  eligible for managed care in the remaining non-urban counties
                  it serves, i.e., Cape May, Hunterdon, Salem, Sussex, and
                  Warren.

         2.       A number and distribution of Primary Care Physicians shall be
                  such as to accord to all enrollees a ratio of at least one (1)
                  full time equivalent Primary Care Physician who will serve no
                  more than 1,500 enrollees and one FTE primary care dentist for
                  1,500 enrollees. Exemption to the 1:1,500 ratio limit may be
                  granted by DMAHS if criteria specified further below are met.

         3.       Providers who can accommodate the different languages of the
                  enrollees including bilingual capability for any language
                  which is the primary language of five (5) percent or more of
                  the enrolled DMAHS population.

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         4.       Providers, including dentists, pediatricians, physiatrists,
                  gynecologists, family practitioners, internists, neurologists,
                  nurse practitioners or other individual specialists, who are
                  experienced in treating enrollees with special needs. This
                  includes dentists who provide service to persons with
                  developmental disabilities and who may have to take additional
                  time in providing a specific service. Each contractor shall
                  demonstrate the availability and accessibility of
                  institutional facilities and professional allied personnel,
                  home care and community based services to perform the agreed
                  upon services.

         5.       Medical primary care network shall include internists,
                  pediatricians, family and general practice physicians. The
                  contractor shall have the option to include
                  obstetricians/gynecologists as PCPs as well as other physician
                  specialists as primary care providers for enrollees with
                  special needs who will supervise and coordinate their care via
                  a team approach providing that the contract with the physician
                  specialist is, at a minimum, the same as for all other PCPs
                  and that enrollees are enrolled with the physician specialist
                  in the same manner and with the same physician/enrollee ratio
                  requirements as for all other primary care physicians. The
                  contractor shall include certified nurse midwives in its
                  provider network where they are available and willing to
                  participate in accordance with 1905 (a)(17) of the Social
                  Security Act. CNPs/CNSs included as PCPs or specialists in the
                  network may provide a scope of services that comply with their
                  licensure requirements.

         6.       A CNP/CNS to enrollee ratio may not exceed one CNP or one CNS
                  to 1000 enrollees per contractor or 1500 enrollees cumulative
                  across plans.

         7.       Compliance with the standards delineated in Article 4.8.

C.       All providers and subcontractors shall, at a minimum, meet Medicaid
         provider requirements and standards as well as all other federal and
         State requirements. For example, a home health agency subcontractor
         shall meet Medicare certification participation requirements and be
         licensed by the Department of Health and Senior Services; hospice
         providers shall meet Medicare certification participation requirements;
         providers for mammography services shall meet the Food and Drug
         Administration (FDA) requirements.

D.       The contractor shall include in its network at least one (1) hospital
         located in the inner city urban area and at least 1 non-urban-based
         hospital in every county. For those counties with only one (1)
         hospital, the contractor shall include that hospital in its network
         subject to good faith negotiations.

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E.       The contractor shall offer a choice of two specialists in each county
         where available. If only one or no providers of a particular specialty
         is available, the contractor shall provide documentation of the lack of
         availability and propose alternative specialty providers in neighboring
         counties.

F.       The contractor shall include in its network mental health/substance
         abuse providers for Medicaid covered MH/SA services with expertise to
         serve enrollees who are clients of the Division of Developmental
         Disabilities.

G.       Changes in large provider groups, IPAs or subnetworks such as pharmacy
         benefits manager, vision network, or dental network shall be submitted
         to DMAHS for review and prior approval at least ninety (90) days before
         the anticipated change. The submission shall include contracts,
         provider network files, enrollee/provider notices and any other
         pertinent information.

H.       Requirement to contract with FQHC. The contractor shall contract for
         primary care services with at least one Federally Qualified Health
         Center (FQHC) located in each enrollment area based on the availability
         and capacity of the FQHCs in that area. FQHC providers shall meet the
         contractor's credentialing and program requirements.

4.8.2    PRIMARY CARE PROVIDER REQUIREMENTS

A.       The contractor shall offer each enrollee a choice of two (2) or more
         primary care physicians furnished by the contractor. Where applicable,
         this offer can be made to an authorized person. An enrollee with
         special needs shall be given the choice of a primary care provider
         which must include a pediatrician, general/family practitioner, and
         internist, and may include physician specialists and nurse
         practitioners. The PCP shall supervise the care of the enrollee with
         special needs who requires a team approach. Subject to any limitations
         in the benefits package, each primary care provider shall be
         responsible for overall clinical direction, serve as a central point of
         integration and coordination of covered services listed in Article 4.1,
         provide a minimum of twenty (20) hours per week of personal
         availability as a primary care provider; provide health counseling and
         advice; conduct baseline and periodic health examinations; diagnose and
         treat covered conditions not requiring the referral to and services of
         a specialist; arrange for inpatient care, for consultation with
         specialists, and for laboratory and radiological services when
         medically necessary; coordinate referrals for dental care, especially
         in accordance with EPSDT requirements; coordinate the findings of
         laboratories and consultants; and interpret such findings to the
         enrollee and the enrollee's family (or, where applicable, an authorized
         person), all with emphasis on the continuity and integration of medical
         care; and, as needed, shall participate in care management and
         specialty care management team processes. The primary care

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         provider shall also be responsible, subject to any limitations in the
         benefits package, for determining the urgency of a consultation with a
         specialist and, if urgent, shall arrange for the consultation
         appointment.

         Justification to include a specialist as a PCP or justification for a
         physician practicing in an academic setting for less than twenty (20)
         hours per week must be provided to DMAHS. Include in the justification
         for the specialist as a PCP the number of enrollees to be served as a
         PCP and as a specialist, full details of the services and scope of
         services to be provided, and coverage arrangements documenting
         twenty-four (24) hours/seven (7) days a week coverage.

B.       The PCP shall be responsible for supervising, coordinating, managing
         the enrollee's health care, providing initial and primary care to each
         enrollee, for initiating referrals for specialty care, maintaining
         continuity of each enrollee's health care and maintaining the
         enrollee's comprehensive medical record which includes documentation of
         all services provided to the enrollee by the PCP, as well as any
         specialty or referral services. The contractor shall establish policies
         and procedures to ensure that PCPs are adequately notified of specialty
         and referral services. PCPs who provide professional inpatient services
         to the contractor's enrollees shall have admitting and treatment
         privileges in a minimum of one general acute care hospital that is
         under subcontract with the contractor and is located within the
         contractor's service area. The PCP shall be an individual, not a
         facility, group or association of persons, although he/she may practice
         in a facility, group or clinic setting.

         1.       The PCP shall provide twenty-four (24) hour, seven (7) day a
                  week access; and

         2.       Make referrals for specialty care and other medically
                  necessary services, both in-network and out-of-network.

         3.       Enrollees with special needs requiring very complex, highly
                  specialized health care services over a prolonged period of
                  time, and by virtue of their nature and complexity would be
                  difficult for a traditional PCP to manage or with a
                  life-threatening condition or disease, or with a degenerative
                  and/or disabling condition or disease may be offered the
                  option of selecting an appropriate physician specialist (where
                  available) in lieu of a traditional PCP. Such physicians
                  having the clinical skills, capacity, accessibility, and
                  availability shall be specially credentialed and contractually
                  obligated to assume the responsibility for overall health care
                  coordination and assuring that the special needs person
                  receives all necessary specialty care related to their special
                  need, as well as providing for or arranging all routine
                  preventive care and health maintenance services, which may not
                  customarily be provided by or the responsibility of such
                  specialist physicians.

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         4.       Where a specialist acting as a PCP is not available for
                  chronically ill persons or enrollees with complex health care
                  needs, those enrollees shall have the option to select a
                  traditional PCP upon enrollment, with the understanding that
                  the contractor may permit a more liberal, direct specialty
                  access (See section 4.5.2) to a specific specialist for the
                  explicit purpose of meeting those specific specialty service
                  needs. The PCP shall in this case retain all responsibility
                  for provision of primary care services and for overall
                  coordination of care, including specialty care.

         5.       If the enrollee's existing PCP is a participating provider in
                  the contractor's network, and if the enrollee wishes to retain
                  the PCP, contractor shall ensure that the PCP is assigned,
                  even if the PCP's panel is otherwise closed at the time of the
                  enrollee's enrollment.

C.       In addition to offering, at a minimum, a choice of two or more primary
         care physicians, the contractor shall also offer an enrollee or, where
         applicable, an authorized person the option of choosing a certified
         nurse midwife, certified nurse practitioner or clinical nurse
         specialist whose services must be provided within the scope of his/her
         license. The contractor shall submit to DMAHS for review a detailed
         description of the CNP/CNS's responsibilities and health care delivery
         system within the contractor's plan.

4.8.3    PROVIDER NETWORK FILE REQUIREMENTS

         The contractor shall provide a provider network file, to be reported by
         hard copy and diskette in a format and software application system
         determined by DMAHS that will include the names and addresses of every
         provider in the contractor's network. The format for computer diskette
         submission is found in Section A.4.1 of the Appendices.

A.       The contractor shall provide the DMAHS a full network, monthly, on
         computer diskette in accordance with the specifications provided in
         Section A.4.1 of the Appendices. The network file shall include an
         indicator for new additions and deletions and shall include:

         1.       Any and all changes in participating primary care providers,
                  including, for example, additions, deletions, or closed
                  panels, must be reported monthly to DMAHS;

         2.       Any and all changes in participating physician specialists,
                  health care providers, CNPs/CNSs, ancillary providers, and
                  other subcontractors must be reported to DMAHS on a monthly
                  basis; and

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B.       The contractor shall provide the HBC with a full network on a monthly
         basis in accordance with the specifications found in Section A.4.1 of
         the Appendices. The diskettes shall be sent to OMHC, DMAHS for
         distribution.

4.8.4    PROVIDER DIRECTORY REQUIREMENTS

         The contractor shall prepare a provider directory which shall be
         presented in the following manner. Fifty (50) copies of the provider
         directory, and any updates, shall be provided to the HBC, and one copy
         shall be provided to DMAHS.

A.       Primary care providers who will serve enrollees listed by

         -        County, by city, by specialty

         -        Provider name and degree; specialty board
                  eligibility/certification status; office address(es) (actual
                  street address); telephone number; fax number if available;
                  office hours at each location; indicate if a provider serves
                  enrollees with disabilities and how to receive additional
                  information such as type of disability; hospital affiliations;
                  transportation availability; special appointment instructions
                  if any; languages spoken; disability access; and any other
                  pertinent information that would assist the enrollee in
                  choosing a PCP.

B.       Contracted specialists and ancillary services providers who will serve
         enrollees

         -        Listed by county, by city, by physician specialty, by
                  non-physician specialty, and by adult specialist and by
                  pediatric specialist for those specialties indicated in
                  Section 4.8.8.C.

C.       Subcontractors

         -        Provide, at a minimum, a list of all other health care
                  providers by county, by service specialty, and by name. The
                  contractor shall demonstrate its ability to provide all of the
                  services included under this contract.

4.8.5    CREDENTIALING/RECREDENTIALING REQUIREMENTS/ISSUES

         The contractor shall develop and enforce credentialing and
         recredentialing criteria for all provider types which should follow the
         HCFA's credentialing criteria, as delineated in the NJ modified
         QARI/QISMC standards found in Article 4.6.1 and Section B.4.14 of the
         Appendices.

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4.8.6 LABORATORY SERVICE PROVIDERS

      A. The contractor shall ensure that all laboratory testing sites providing
         services under this contract, including those provided by primary care
         physicians, specialists, other health care practitioners, hospital
         labs, and independent laboratories have either a Clinical Laboratory
         Improvement Amendment (CLIA) certificate of waiver or a certificate of
         registration along with a CLIA identification number. Those laboratory
         service providers with a certificate of waiver shall provide only those
         tests permitted under the terms of their waiver. Laboratories with
         certificates of registration may perform a full range of laboratory
         tests.

         1.       The contractor shall provide to DMAHS, on request, copies of
                  certificates that its own laboratory or any other laboratory
                  it conducts business with, has a CLIA certificate for the
                  services it is performing as fulfillment of requirements in
                  42 C.F.R. * 493.1809.

         2.       If the contractor has its own laboratory, the contractor shall
                  to submit at the time of initial contracting a written list of
                  all diagnostic tests performed in its own laboratory if
                  applicable and those tests which are referred to other
                  laboratories annually and within fifteen (15) working days of
                  any changes.

         3.       If a new laboratory subcontractor is added or if a laboratory
                  subcontractor is terminated during the contract year, the
                  contractor shall provide this information to DMAHS within
                  thirty (30) days of the effective date of the subcontractor's
                  addition or termination. The contractor shall provide a copy
                  of a new subcontractor's certificate of waiver or certificate
                  of registration within ten (10) days of operation.

      B. The contractor shall contract with clinical diagnostic laboratories
         that have a compliance plan to help avoid activities that might be
         regarded as fraudulent. The compliance plan shall, at a minimum,
         include the following:

         1.       Written standards of conduct for employees;

         2.       Development and distribution of written policies that promote
                  the laboratory's commitment to compliance and that address
                  specific areas of potential fraud, such as billing, marketing,
                  and claims processing;

         3.       The designation of a chief compliance officer or other
                  appropriate high-level corporate structure or official who
                  is charged with the responsibility of operating the compliance
                  program;

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         4.       The development and offering of education and training
                  programs to all employees;

         5.       The use of audits and/or other evaluation techniques to
                  monitor compliance and ensure a reduction in identified
                  problem areas;

         6.       The development of a code of improper/illegal activities and
                  the use of disciplinary action against employees who have
                  violated internal compliance policies or applicable laws or
                  who have engaged in wrongdoing;

         7.       The investigation and remediation of identified systemic and
                  personnel problems;

         8.       The promotion of and adherence to compliance as an element in
                  evaluating supervisors and managers;

         9.       The development of policies addressing the non-employment or
                  retention of sanctioned individuals;

         10.      The maintenance of a hotline to receive complaints and the
                  adoption of procedures to protect the anonymity of
                  complainants; and

         11.      The adoption of requirements applicable to record creation and
                  retention.

      C. The contractor shall maintain a sufficient network of drawing/specimen
         collection stations (may include independent lab stations, hospital
         outpatient departments, provider offices, etc.) to ensure ready access
         for all enrollees.

4.8.7 SPECIALTY PROVIDERS AND CENTERS (ALSO ADDRESSED IN 4.5)

      A. The contractor shall include in its network pediatric medical
         subspecialists, pediatric surgical specialists, and consultants. Access
         to these services shall be provided when referred by a pediatrician.

      B. The contractor shall include in its provider network Centers of
         Excellence (designated by the DHSS; See Appendix B.4.10) for children
         with special health care needs. Inclusion of such agencies or their
         equivalent may be by direct contracting, consultant, or on a referral
         basis. Payment mechanism and rates shall be negotiated directly with
         the center.

      C. The contractor shall include primary care providers experienced in
         caring for enrollees with special needs.

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      D. The contractor shall include providers who have knowledge and
         experience in identifying child abuse and neglect and should include
         Child Abuse Regional Diagnostic Centers or their equivalent through
         either direct contracting, consultant or on a referral basis. A list of
         Child Abuse Regional Diagnostic Centers is in Section B.4.16 of the
         Appendices.

      E. The contractor shall have a procedure by which an enrollee who needs
         ongoing care from a specialist may receive a standing referral to such
         specialist. If the contractor, or the primary care provider in
         consultation with the medical director of the contractor and
         specialist, if any, determines that such a standing referral is
         appropriate, the organization shall make such a referral to a
         specialist. The contractor shall not be required to permit an enrollee
         to elect to have a non-participating specialist if network provider of
         equivalent expertise is available. Such referral shall be pursuant to a
         treatment plan approved by the contractor in consultation with the
         primary care provider, the specialist, the care manager, and the
         enrollee or, where applicable, authorized person. Such treatment plan
         may limit the number of visits or the period during which such visits
         are authorized and may require the specialist to provide the primary
         care provider with regular updates on the specialty care provided, as
         well as all necessary medical information.

      F. The contractor shall have a procedure by which an enrollee as described
         in Articles 4.5.2D may receive a referral to a specialist or specialty
         care center with expertise in treating such conditions in lieu of a
         traditional PCP.

      G. If the contractor determines that it does not have a health care
         provider with appropriate training and experience in its panel or
         network to meet the particular health care needs of an enrollee, the
         contractor shall make a referral to an appropriate out-of-network
         provider, pursuant to a treatment plan approved by the contractor in
         consultation with the primary care provider, the non-contractor
         participating provider and the enrollee or where applicable, authorized
         person, at no additional cost to the enrollee. The contractor shall
         provide for a review by a specialist of the same or similar specialty
         as the type of physician or provider to whom a referral is requested
         before the contractor may deny a referral.

4.8.8 PROVIDER NETWORK REQUIREMENTS

      Provider networks and all provider types within the network shall be
      reviewed on a county basis, i.e., must be located within the county except
      where indicated. The contractor shall monitor the capacity of each of its
      providers and decrease ratio limits as needed to maintain appointment
      availability standards.

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    A.   Primary Care Provider Ratios

         PCP ratios shall be reviewed and calculated by provider specialty on a
         county basis and on an index city basis, i.e., the major city of each
         county where the majority of the Medicaid and NJ FamilyCare
         beneficiaries reside.

         Physician

         A primary care physician shall be a General Practitioner, Family
         Practitioner, Pediatrician, or Internist. Obstetricians/Gynecologists
         and other physician specialists may also participate as primary care
         providers providing they participate on the same contractual basis as
         all other PCPs and contractor enrollees are enrolled with the
         specialists in the same manner and with the same PCP/enrollee ratio
         requirements applied.

         1.       1 FTE PCP per 1500 enrollees per contractor; 1 FTE per 2000
                  enrollees, cumulative across all contractors.

         2.       1 FTE PCP per 1000 DD enrollees per contractor; 1 FTE per
                  1500 DD enrollees cumulative across all contractors.

         Dentist

         The contractor shall include and make available sufficient number of
         primary care dentists from the time of initial enrollment in the
         contractor's plan. Pediatric dentists shall be included in the network
         and may be both primary care and specialty care providing primary care
         ratio limits are maintained.

         1.       1 FTE primary care dentist per 1500 enrollees per contractor;
                  1 FTE per 2000 enrollees, cumulative across all contractors.

         Certified Nurse Midwife (CNM)

         If the contractor includes CNMs in its provider network as PCPs, it
         shall utilize the following ratios for CNMs as PCPs.

         1.       1 FTE CNM per 1000 enrollees per contractor; 1 FTE CNM per
                  1500 enrollees across all contractors.

         2.       A minimum of two (2) providers shall be initially available
                  for selection at the enrollee's option. Additional providers
                  shall be included as capacity limits are needed.

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         Certified Nurse Practitioner/Clinical Nurse Specialist (CNP/CNS)

         If the contractor includes CNPs/CNSs in the provider network as PCPs,
         it shall utilize the following ratios.

         1.       1 FTE CNP or 1 CNS per 1000 enrollees per contractor; 1 FTE
                  CNP or 1 FTE CNS per 1500 enrollees cumulative across all
                  contractors.

         2.       A minimum of two (2) providers where available shall be
                  initially available for selection at the enrollee's option.
                  Additional providers shall be included as capacity limits are
                  reached.

    B.   Primary Care Providers [Non-Institutional File]

         The contractor shall contract with the following primary care
         providers. All provider types within the network shall be located
         within the enrollment area, i.e., county, except where indicated.

         1.       The contractor shall include contracted providers for:

                  a.       General/Family Practice Physicians

                  b.       Internal Medicine Physicians

                  c.       Pediatricians

                  d.       Dentists -- adult and pediatric

         2.       Certified Nurse Midwives and Nurse Practitioners
                  [Non-Institutional File]

                  The contractor shall include in the network and provide access
                  to CNMs/CNPs/CNSs at the enrollee's option. If there are no
                  contracted CNMs/CNPs/CNSs in the contractor's network in an
                  enrollment area, then the contractor shall reimburse for these
                  services out of network.

                  a.       Certified Nurse Midwife

                  b.       Clinical Nurse Specialist

                  c.       Certified Nurse Practitioner

         3.       Optional Primary Care Provider Designations

                  The contractor may include as primary care providers:

                  a.       OB/GYNs who will provide such services in accordance
                           with the requirements and responsibilities of a
                           primary care provider.

                                                                           IV-93
<PAGE>   155
                  b.       Other physician specialists who have agreed to
                           provide primary care to enrollees with special needs
                           and will provide such services in accordance with the
                           requirements and responsibilities of a primary care
                           provider.

                  c.       Physician Assistants in accordance with their
                           licensure and scope of practice provisions.

    C.   Physician Specialists [Non-Institutional File]

         The contractor shall contract with physician specialists, listed below,
         and should include two (2) providers per specialty to permit enrollee
         choice. All specialty types within the enrollment area network are
         reviewed on a county basis, i.e., must be located within the county.
         Where certain specialists are not available within the county, the
         contractor shall provide written documentation (not just a statement
         that there are no specialists available) of the lack of a specialist
         located in the county and a detailed description of how, by whom, and
         where the specialty care will be provided. The contractor shall utilize
         an official resource, such as the Board of Medical Examiners, for
         determining presence or absence of specialists with offices located in
         the county. Specialists shall have admitting privileges in at least one
         participating hospital in the county in which the specialist will be
         seeing enrollees.

         The contractor shall submit prior to execution of this contract and
         semi-annually thereafter, a capacity assessment (form found in Section
         A.4.2 of the Appendices) demonstrating adequate capacity. Access
         standards shall be maintained at all times.

         The contractor shall provide a detailed description of accessibility
         and capacity for each physician who will serve as both a PCP and a
         specialist; and/or who will serve with more than one specialty. The
         description shall include at a minimum a certification that the
         physician is actively practicing in each specialty, has been
         credentialed in each specialty, and a description of the provider's
         availability in each specialty (i.e. percent of time and number of
         hours per week in each specialty). The credentialing criteria used to
         determine a provider's appropriateness for a specialty shall indicate
         whether the provider is board eligible, board certified, or has
         completed an accredited fellowship in the specialty.

         The contractor shall include contracted providers for:

         1.       Allergy/Immunology

         2.       Anesthesiology

         3.       Cardiology -- adult and pediatric

         4.       Cardiovascular surgery

                                                                           IV-94
<PAGE>   156
         5.       Colorectal surgery

         6.       Dermatology

         7.       Emergency Medicine

         8.       Endocrinology -- adult and pediatric

         9.       Gastroenterology -- adult and pediatric

         10.      General Surgery -- adult and pediatric

         11.      Geriatric Medicine

         12.      Hematology -- adult and pediatric

         13.      Infectious Disease -- adult and pediatric

         14.      Neonatology

         15.      Nephrology -- adult and pediatric

         16.      Neurology -- adult and pediatric

         17.      Neurological surgery

         18.      Obstetrics/gynecology

         19.      Oncology -- adult and pediatric

         20.      Ophthalmology

         21.      Orthopedic Surgery

         22.      Otology, Rhinology, Laryngology (ENT)

         23.      Physical Medicine (for inpatient rehabilitation services)

         24.      Plastic Surgery

         25.      Psychiatry (for clients of DDD)

         26.      Pulmonary Disease -- adult and pediatric

         27.      Radiation Oncology

         28.      Radiology

         29.      Rheumatology -- adult and pediatric

         30.      Thoracic surgery

         31.      Urology

    D.   Non-Physician Providers [Non-Institutional File]

         The contractor shall include contracted providers for:

         1.       Chiropractor

         2.       Dentists (including primary care, prosthodontia and
                  specialists for endodontia, orthodontia, periodontia, and
                  oral/maxillary surgery)

         3.       Optometrist

         4.       Podiatrist

         5.       Audiologist

         6.       Psychologist (for clients of DDD)

    E.   Ancillary Providers [Institutional File]

         The contractor shall include contracted providers for:

                                                                           IV-95
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         1.       Durable Medical Equipment

         2.       Federally Qualified Health Centers

         3.       Hearing Aid Providers

         4.       Home Health Agency -- must be approved on a county-specific
                  basis

         5.       Hospice Agency

         6.       Hospitals -- inpatient and outpatient services; at least two
                  per county with one urban where the majority of Medicaid
                  beneficiaries reside

         7.       Laboratory with one (1) drawing station per every five mile
                  radius within a county

         8.       Medical Supplier

         9.       Optical appliance providers

         10.      Organ Transplant Providers/Centers

         11.      Pharmacy

         12.      Private Duty Nursing Agency (service area which includes a 50
                  mile radius from its home administrative base office must be
                  approved on a county-specific basis)

         13.      Prosthetist, Orthotist, and Pedorthist

         14.      Radiology centers including diagnostic and therapeutic

         15.      Transportation providers (ambulance, MICUs, invalid coach)

    F.   The contractor shall also establish relationships with physician
         specialists and subspecialists [Non-Institutional File] for:

         1.       Pain Management

         2.       Medical Toxicology

         3.       Adolescent Medicine

         4.       Maternal and Fetal Medicine

         5.       Medical Genetics

         6.       Developmental and Behavioral Pediatrics

    G.   Specialty Centers (Centers of Excellence) shall be included in the
         network [Institutional File]

         1.       Providers and health care facilities for the care and
                  treatment of HIV/AIDS (list of available centers found in
                  Section B.4.13 of the Appendices).

         2.       Special Child Health Services Network Agencies for:

                  a.       Pediatric Ambulatory Tertiary Centers

                  b.       Regional Cleft Lip/Palate Centers

                  c.       Pediatric HIV Treatment Centers

                  d.       Comprehensive Regional Sickle Cell/Hemoglobinpathies
                           Treatment Centers

                  e.       PKU Treatment Centers

                                                                           IV-96
<PAGE>   158
                  f.       Other as designated from time to time by the
                           Department of Health and Senior Services.

         3.       Other:

                  a.       Genetic Testing and Counseling Centers

                  b.       Hemophilia Treatment Centers

    H.   Other Specialty Centers/Providers [Institutional File]

         Contractor should establish relationships with the following
         providers/centers on a consultant or referral basis.

         1.       Spina Bifida Centers/providers

         2.       Adult Scoliosis

         3.       Autism and Attention Deficits

         4.       Spinal Cord Injury

         5.       Lead Poisoning Treatment Centers

         6.       Child Abuse Regional Diagnostic Centers

         7.       County Case Management Units

                                                                           IV-97
<PAGE>   159
                 I. Provider Network Access Standards and Ratios

<TABLE>
<CAPTION>
                              A -- Miles per 2         B -- Miles per 1      Min. No.               Capacity Limit
Specialty                  Urban       Non-Urban      Urban     Non-urban    Required per County     Per Provider
---------------           ------       ---------      -----     ---------    -------------------    --------------

<S>                        <C>         <C>            <C>       <C>          <C>                     <C>
PCP Children GP            6           15             2         10           2                          1:    1,500
  FP                       6           15             2         10           2                          1:    1,500
  Peds                     6           15             2         10           2                          1:    1,500
Adults GP                  6           15             2         10           2                          1:    1,500
  FP                       6           15             2         10           2                          1:    1,500
  IM                       6           15             2         10           2                          1:    1,500
CNP/CNS                    6           15             2         10           2                          1:      800
CNM                        12          25             6         15           2                          1:    1,500
Dentist, Primary Care      6           15             2         10           2                          1:    1,500
Allergy                    15          25             10        15           2                          1:   75,000
Anesthesiology             15          25             10        15           2                          1:   17,250
Cardiology                 15          25             10        15           2                          1:  100,000
Cardiovascular surgery     15          25             10        15           2                          1:  166,000
Chiropractor               15          25             10        15           2                          1:   10,000
Colorectal surgery         15          25             10        15           2                          1:   30,000
Dermatology                15          25             10        15           2                          1:   75,000
Emergency Medicine         15          25             10        15           2                          1:   19,000
Endocrinology              15          25             10        15           2                          1:  143,000
Endodontia                 15          25             10        15           1                          1:   30,000
Gastroenterology           15          25             10        15           2                          1:  100,000
General Surgery            15          25             10        15           2                          1:   30,000
Geriatric Medicine         6           15             2         10           2                          1:    1,500
Hematology                 15          25             10        15           2                          1:  100,000
Infectious Disease         15          25             10        15           2                          1:  125,000
Neonatology                15          25             10        15           2                          1:  100,000
Nephrology                 15          25             10        15           2                          1:  125,000
Neurology                  15          25             10        15           2                          1:  100,000
Neurological Surgery       15          25             10        15           2                          1:  166,000
Obstetrics/Gynecology      15          25             10        15           2                          1:    7,100
Oncology                   15          25             10        15           2                          1:  100,000
Ophthalmology              15          25             10        15           2                          1:   60,000
Optometrist                15          25             10        15           2                          1:    8,000
Oral Surgery               15          25             10        15           2                          1:   20,000
Orthodontia                15          25             10        15           1                          1:   20,000
Orthopedic Surgery         15          25             10        15           2                          1:   28,000
Otolaryngology (ENT)       15          25             10        15           2                          1:   53,000
Periodontia                15          25             10        15           1                          1:   30,000
Physical Medicine          15          25             10        15           2                          1:   75,000
Plastic Surgery            15          25             10        15           2                          1:  250,000
Podiatrist                 15          25             10        15           2                          1:   20,000
Prosthodontia              15          25             10        15           1 (where available)        1:   30,000
Psychiatrist               15          25             10        15           2                          1:   30,000
Psychologist               15          25             10        15           2                          1:   30,000
Pulmonary Disease          15          25             10        15           2                          1:  100,000
Radiation Oncology         15          25             10        15           2                          1:  100,000
Radiology                  15          25             10        15           2                          1:   25,000
Rheumatology               15          25             10        15           2                          1:  150,000
Ther. -- Audiology         12          25             6         15           2                          1:  100,000
Thoracic Surgery           15          25             10        15           2                          1:  150,000
Urology                    15          25             10        15           2                          1:   60,000
Fed Qual Health Ctr                                                          1                        1/county if available
Hospital                   20          35             10        15           2                          2 per county
Pharmacies                 10          15             5         12                                      1:    1,000
Laboratory                 N/A         N/A            5         12
DME/Med Supplies           12          25             6         15           1                          1:   50,000
Hearing Aid                12          25             6         15           1                          1:   50,000
Optical Appliance          12          25             6         15           2                          1:   50,000
</TABLE>

                                                                           IV-98
<PAGE>   160
J.   Geographic Access

     The following lists guidelines for urban geographic access for the DMAHS
     population. (Standards for non-urban areas are included in the table in H.
     above.) The State shall review (and approve) exceptions on a case-by-case
     basis to determine appropriateness for each situation.

     For each contractor and for each municipality in each county in which the
     contractor is operational, the access shall be reviewed in accordance with
     the number and percentage of:

     1.   Beneficiary children who reside within 6 miles of 2 PCPs whose
          specialty is Family Practice, General Practice or Pediatrics or 2
          CNPs/CNSs; within 2 miles of 1 PCP whose specialty is Family Practice,
          General Practice or Pediatrics or 1 CNP or 1 CNS

     2.   Beneficiary adults who reside within 6 miles of 2 PCPs whose specialty
          is Family Practice, General Practice or Internal Medicine or 2 CNPs or
          2 CNSs; within 2 miles of 1 PCP whose specialty is Family Practice,
          General Practice or Internal Medicine or 1 CNP or 1 CNS

     3.   Beneficiaries who reside within 6 miles of 2 providers of general
          dentistry services; within 2 miles of 1 provider of general dentistry
          services

     4.   Beneficiaries who reside within 10 miles of 2 pharmacies; within 5
          miles of 1 pharmacy

     5.   Beneficiaries who reside within 15 miles of at least 2 specialists in
          each of the following specialties: all physician and dental
          specialists, Podiatry, Optometry, Chiropractic; within 10 miles of at
          least 1 provider in each type of specialty noted above

     6.   Beneficiaries who reside within 15 miles of 2 acute care hospitals;
          within 10 miles of one acute care hospital

     7.   Beneficiaries who reside within 12 miles of 2 of each of the following
          provider types: durable medical equipment, medical supplier, hearing
          aid supplier, optical appliance supplier, certified nurse midwife;
          within 6 miles of one of each type of provider

     8.   Beneficiaries who reside within 5 miles of a laboratory/drawing
          station.

     9.   Beneficiaries with desired access and average distance to 1, 2 or more
          providers

                                                                           IV-99
<PAGE>   161
     10.  Beneficiaries without desired access and average distance to 1, 2 or
          more providers

     Access Standards

     1.   90% of the enrollees must be within 6 miles of 2 PCPs in an urban
          setting

     2.   85% of the enrollees must be within 15 miles of 2 PCPs in a non-urban
          setting

     3.   Covering physicians must be within 15 miles in urban areas and 25
          miles in non-urban areas.

     Travel Time Standards

     The contractor shall adhere to the 30 minute standard, i.e., enrollees will
     not live more than 30 minutes away from their PCPs, PCDs or CNPs/CNSs. The
     following guidelines shall be used in determining travel time.

     1.   Normal conditions/primary roads -- 20 miles

     2.   Rural or mountainous areas/secondary routes -- 20 miles

     3.   Flat areas or areas connected by interstate highways -- 25 miles

     4.   Metropolitan areas such as Newark, Camden, Trenton, Paterson, Jersey
          City -- 30 minutes travel time by public transportation or no more
          than 6 miles from PCP

     5.   Other medical service providers must also be geographically accessible
          to the enrollees.

     6.   Exception: SSI or New Jersey Care-ABD enrollees and clients of DDD may
          choose to see network providers outside of their county of residence.

K.   Conditions for Granting Exceptions to the 1:1500 Ratio Limit for Primary
     Care Physicians

     1.   A physician must demonstrate increased office hours and must maintain
          (and be present for) a minimum of 20 hours per week in each office.

     2.   In private practice settings where a physician employs or directly
          works with nurse practitioners who can provide patient care within the
          scope of their practices, the capacity may be increased to 1 PCP FTE
          to 2500 enrollees. The PCP must be immediately available for
          consultation,

                                                                          IV-100
<PAGE>   162
               supervision or to take over treatment as needed. Under no
               circumstances will a PCP relinquish or be relieved of direct
               responsibility for all aspects of care of the patients enrolled
               with the PCP.

          3.   In private practice settings where a primary care physician
               employs or is assisted by other licensed physicians, the capacity
               may be increased to 1 PCP FTE to 2500 enrollees.

          4.   In clinic practice settings where a PCP provides direct personal
               supervision of medical residents with a New Jersey license to
               practice medicine in good standing with State Board of Medical
               Examiners, the capacity may be increased with the following
               ratios: 1 PCP to 1500 enrollees; 1 licensed medical resident per
               1000 enrollees. The PCP must be immediately available for
               consultation, supervision or to take over treatment as needed.
               Under no circumstances will a PCP relinquish or be relieved of
               direct responsibility for all aspects of care of the patients
               enrolled with the PCP.

          5.   Each provider (physician or nurse practitioner) must provide a
               minimum of 15 minutes of patient care per patient encounter and
               be able to provide four visits per year per enrollee.

          6.   The contractor shall submit for prior approval by DMAHS a
               detailed description of the PCP's delivery system to accommodate
               an increased patient load, work flow, professional relationships,
               work schedules, coverage arrangements, 24 hour access system.

          7.   The contractor shall provide information on total patient load
               across all plans, private patients, Medicaid fee-for-service
               patients, other.

          8.   The contractor shall adhere to the access standards required in
               the contractor's contract with the Department.

          9.   There will be no substantiated complaints or demonstrated
               evidence of access barriers due to an increased patient load.

          10.  The Department will make the final decision on the
               appropriateness of increasing the ratio limits and what the limit
               will be.

     L.   Conditions for Granting Exceptions to the 1:1500 Ratio Limit for
          Primary Care Dentists.

          1.   A PCD must provide a minimum of 20 hours per week per office.

                                                                          IV-101
<PAGE>   163
          2.   In clinic practice settings where a PCD provides direct personal
               supervision of dental residents who have a temporary permit from
               the State Board of Dentistry in good standing and also dental
               students, the capacity may be increased with the following
               ratios: 1 PCD to 1500 enrollees per contractor; 1 dental resident
               per 1000 enrollees per contractor; 1 FTE dental student per 200
               enrollees per contractor. The PCD shall be immediately available
               for consultation, supervision or to take over treatment as
               needed. Under no circumstances shall a PCD relinquish or be
               relieved of direct responsibility for all aspects of care of the
               patients enrolled with the PCD.

          3.   In private practice settings where a PCD employs or is assisted
               by other licensed dentists, the capacity may be increased to 1
               PCD FTE to 2500 enrollees.

          4.   In private practice settings where a PCD employs dental
               hygienists or is assisted by dental assistants, the capacity may
               be increased to 1 PCD to 2500 enrollees. The PCD shall be
               immediately available for consultation, supervision or to take
               over treatment as needed. Under no circumstances shall a PCD
               relinquish or be relieved of direct responsibility for all
               aspects of care of the patients enrolled with the PCD.

          5.   Each PCD shall provide a minimum of 15 minutes of patient care
               per patient encounter.

          6.   The contractor shall submit for prior approval by the DMAHS a
               detailed description of the PCD's delivery system to accommodate
               an increased patient load, work flow, professional relationships,
               work schedules, coverage arrangements, 24 hour access system.

          7.   The contractor shall provide information on total patient load
               across all plans, private patients, Medicaid fee-for-service
               patients, other.

          8.   The contractor shall adhere to the access standards required in
               the contractor's contract with the Department.

          9.   There must be no substantiated complaints or demonstrated
               evidence of access barriers due to an increased patient load.

          10.  The Department will make the final decision on the
               appropriateness of increasing the ratio limits and what the limit
               will be.

                                                                          IV-102
<PAGE>   164
4.8.9 DENTAL PROVIDER NETWORK REQUIREMENTS

     A.   The contractor shall establish and maintain a dental provider network,
          including primary and specialty care dentists, which is adequate to
          provide the full scope of benefits. The contractor shall include
          general dentists and pediatric dentists as primary care dentists
          (PCDs). A system whereby the PCD initiates and coordinates any
          consultations or referrals for specialty care deemed necessary for the
          treatment and care of the enrollee is preferred.

     B.   The dental provider network shall include sufficient providers able to
          meet the dental treatment requirements of patients with developmental
          disabilities. (See Article 4.5.2E for details.)

     C.   The contractor shall ensure the participation of traditional and
          safety-net providers within an enrollment area. Traditional providers
          include private practitioners/entities who provide treatment to the
          general population or have participated in the regular Medicaid
          program. Safety-net providers include dental education institutions,
          hospital-based dental programs, and dental clinics sponsored by
          governmental agencies as well as dental clinics sponsored by private
          organizations in urban/under-served areas.

4.8.10 GOOD FAITH NEGOTIATIONS

     The State shall, in its sole discretion, waive the contractor's specific
     network requirements in circumstances where the contractor has engaged, or
     attempted to engage in good faith negotiations with applicable providers.
     If the contractor asks to be waived from a specific networking requirement
     on this basis, it shall document to the State's satisfaction that good
     faith negotiations were offered and/or occurred. Nothing in this Article
     will relieve the contractor of its responsibility to furnish the service in
     question if its is medically necessary, using qualified providers.

4.8.11 PROVIDER NETWORK ANALYSIS

     The contractor shall submit prior to execution of this contract and
     annually thereafter a provider network accessibility analysis, using
     geographic information system software, in accordance with the
     specifications found in Section A.4.3 of the Appendices.

4.9 PROVIDER CONTRACTS AND SUBCONTRACTS

4.9.1 GENERAL PROVISIONS

     A.   Each generic type of provider contract form shall be submitted to the
          DMAHS for review and prior approval to ensure required elements are
          included and shall have regulatory approval prior to the effective
          date of the contract. Any proposed changes to an approved contract
          form shall be reviewed and prior approved by the

                                                                          IV-103
<PAGE>   165
          DMAHS and shall have regulatory approval from DHSS and DOBI prior to
          the effective date. The contractor shall comply with all DMAHS
          procedures for contract review and approval submission. Letters of
          Intent are not acceptable. Memoranda of Agreement (MOAs) shall be
          permitted only if the MOA automatically converts to a contract within
          six (6) months of the effective date and incorporates by reference all
          applicable contract provisions contained herein, including but not
          limited to Appendix B.7.2, which shall be attached to all MOAs.

     B.   Each proposed subcontracting arrangement or substantial contractual
          relationship including all contract documents and any subcontractor
          contracts including all provider contract forms shall be submitted to
          the DMAHS for review and prior approval to ensure required elements
          are included and shall have regulatory approval prior to the effective
          date. Any proposed change(s) to an approved subcontracting arrangement
          including any proposed changes to approved contract forms shall be
          reviewed and prior approved by the DMAHS and shall have regulatory
          approval from DHSS and DOBI prior to the effective date. The
          contractor shall comply with all DMAHS procedures for contract review
          and approval submissions.

     C.   The contractor shall at all times have satisfactory written contracts
          and subcontracts with a sufficient number of providers in and adjacent
          to the enrollment area to ensure enrollee access to all medically
          necessary services listed in Article 4.1. All provider contracts and
          subcontracts shall meet established requirements, form and contents
          approved by DMAHS.

     D.   The contractor, in performing its duties and obligations hereunder,
          shall have the right either to employ its own employees and agents or,
          for the provision of health care services, to utilize the services of
          persons, firms, and other entities by means of sub-contractual
          relationships.

     E.   No provider contract or subcontract shall terminate or in any way
          limit the legal responsibility of the contractor to the Department to
          assure that all activities under this contract are carried out. The
          contractor is not relieved of its contractual responsibilities to the
          Department by delegating responsibility to a subcontractor.

     F.   All provider contracts and subcontracts shall be in writing and shall
          fulfill the requirements of 42 C.F.R. Part 434 that are appropriate to
          the service or activity delegated under the subcontract.

          1.   Provider contracts and subcontracts shall contain provisions
               allowing DMAHS and HHS to evaluate through inspection or other
               means, the quality, appropriateness and timeliness of services
               performed under a subcontract to provide medical services (42
               C.F.R. * 434.6(a)(5)).

                                                                          IV-104
<PAGE>   166
          2.   Provider contracts and subcontracts shall contain provisions
               pertaining to the maintenance of an appropriate record system for
               services to enrollees. (42 C.F.R. * 434.6(a)(7))

          3.   Each provider contract and subcontract shall contain sufficient
               provisions to safeguard all rights of enrollees and to ensure
               that the subcontract complies with all applicable State and
               federal laws, including confidentiality. See Section B.7.2 of the
               Appendices.

          4.   Provider contracts and subcontracts shall include the specific
               provisions and verbatim language found in Appendix B.7.2. The
               verbatim language requirements shall be used when entering into
               new provider contracts, new subcontracts, and when renewing,
               renegotiating or recontracting with providers and subcontractors
               with existing contracts.

     G.   The contractor shall submit lists of names, addresses,
          ownership/control information of participating providers and
          subcontractors, and individuals or entities, which shall be
          incorporated in this contract. Such information shall be updated every
          quarter.

          1.   The contractor shall obtain prior DMAHS review and written
               approval of any proposed plan for merger, reorganization or
               change in ownership of the contractor and approval by the
               appropriate State regulatory agencies.

          2.   The contractor shall comply with Article 4.9.1G.1 to ensure
               uninterrupted and undiminished services to enrollees, to evaluate
               the ability of the modified entity to support the provider
               network, and to ensure that any such change has no adverse
               effects on DMAHS's managed care program and shall comply with the
               Departments of Banking and Insurance, and Health and Senior
               Services statutes and regulations.

     H.   The contractor shall demonstrate its ability to provide all of the
          services included under this contract through the approved network
          composition and accessibility.

     I.   The contractor shall not oblige providers to violate their state
          licensure regulations.

     J.   The contractor shall provide its providers and subcontractors with a
          schedule of fees and relevant policies and procedures at least 30 days
          prior to implementation.

     K.   The contractor shall arrange for the distribution of informational
          materials to all its providers and subcontractors providing services
          to enrollees, outlining the nature, scope, and requirements of this
          contract.

                                                                          IV-105
<PAGE>   167
4.9.2 CONTRACT SUBMISSION

     The contractor shall submit to DMAHS one complete, fully executed contract
     for each type of provider, i.e., primary care physician, physician
     specialist, non-physician practitioner, hospital and other health care
     providers/services covered under the benefits package, subcontract and the
     form contract of any subcontractor's provider contracts. The use of a
     signature stamp is not permitted and shall not be considered a fully
     executed contract. Contracts shall be submitted with all attachments,
     appendices, rate schedules, etc. A copy of the appropriate completed
     contract checklist for DHS, DHSS, and DOBI shall be attached to each
     contract form. Regulatory approval and approval by the Department is
     required for each provider contract form and subcontract prior to use.
     Submission of all other contracts shall follow the format and procedures
     described below:

     A.   Copies of the complete fully executed contract with every FQHC.
          Certification of the continued in force contracts previously submitted
          will be permitted.

     B.   Hospital contracts shall list each specific service to be covered
          including but not limited to:

          1.   Inpatient services;

          2.   Anesthesia and whether professional services of anesthesiologists
               and nurse anesthetists are included;

          3.   Emergency room services

               a.   Triage fee -- whether facility and professional fees are
                    included;

               b.   Medical screening fee -- whether facility and professional
                    fees are included;

               c.   Specific treatment rates for:

                    (1)  Emergent services

                    (2)  Urgent services

                    (3)  Non-urgent services

                    (4)  Other

               d.   Other -- must specify

          4.   Neonatology -- facility and professional fees

          5.   Radiology

               a.   Diagnostic

               b.   Therapeutic

               c.   Facility fee

               d.   Professional services

          6.   Laboratory -- facility and professional services

          7.   Outpatient/clinic services must be specific and address

               a.   Physical and occupational therapy and therapists

               b.   Speech therapy and therapists

               c.   Audiology therapy and therapists

          8.   AIDS Centers

          9.   Any other specialized service or center of excellence

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          10.  Hospice services if the hospital has an approved hospice agency
               that is Medicare certified.

          11.  Home Health agency services if hospital has an approved home
               health agency license from the Department of Health and Senior
               Services that meets licensing and Medicare certification
               participation requirements.

          12.  Any other service.

     C.   FQHC contracts:

          1.   Shall list each specific service to be covered.

          2.   Shall include reimbursement schedule and methodology.

          3.   Shall include the credentialing requirements for individual
               practitioners.

          4.   Shall include assurance that continuation of the FQHC contract is
               contingent on maintaining quality services and maintaining the
               Primary Care Evaluation Review (PCER) review by the federal
               government at a good quality level. FQHCs must make available to
               the contractor the PCER results annually which shall be
               considered in the contractor's QM reviews for assessing quality
               of care.

     D.   For those providers for whom a complete contract is not required, the
          contractor shall submit a list of their names, addresses, Social
          Security Numbers, and Medicaid provider numbers (if available). The
          contractor shall attach to this list a completed, signed
          "Certification of Contractor Provider Network" form (See Section A.4.4
          of the Appendices). This form must be completed and signed by the
          contractor's attorney or high-ranking officer with decision-making
          authority.

4.9.3 PROVIDER CONTRACT AND SUBCONTRACT TERMINATION

     A.   The contractor shall comply with all the provisions of the New Jersey
          HMO regulations at N.J.A.C. 8:38 et seq. regarding provider
          termination, including but not limited to 30 day prior written notice
          to enrollees and continuity of care requirements.

     B.   The contractor shall notify DMAHS at least 30 days prior to the
          effective date of suspension, termination, or voluntary withdrawal of
          a provider or subcontractor from participation in this program. If the
          termination was "for cause," the contractor's notice to DMAHS shall
          include the reasons for the termination.

          1.   Provider resource consumption patterns shall not constitute
               "cause" unless the contractor can demonstrate it has in place a
               risk adjustment system that takes into account enrollee
               health-related differences when comparing across providers.

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          2.   The contractor shall assure immediate coverage by a provider of
               the same specialty, expertise, or service provision and shall
               submit a new contract with a replacement provider to DMAHS within
               30 days of being finalized.

     C.   If a primary care provider ceases participation in the contractor's
          organization, the contractor shall provide written notice at least
          thirty (30) days from the date that the contractor becomes aware of
          such change in status to each enrollee who has chosen the provider as
          their primary care provider. If an enrollee is in an ongoing course of
          treatment with any other participating provider who becomes
          unavailable to continue to provide services to such enrollee and
          contractor is aware of such ongoing course of treatment, the
          contractor shall provide written notice within fifteen days from the
          date that the contractor becomes aware of such unavailability to such
          enrollee. Each notice shall also describe the procedures for
          continuing care and choice of other providers who can continue to care
          for the enrollee.

     D.   All provider contracts shall contain a provision that states that the
          contractor shall not terminate the contract with a provider because
          the provider expresses disagreement with a contractor's decision to
          deny or limit benefits to a covered person or because the provider
          assists the covered person to seek reconsideration of the contractor's
          decision; or because a provider discusses with a current, former, or
          prospective patient any aspect of the patient's medical condition, any
          proposed treatments or treatment alternatives, whether covered by the
          contractor or not, policy provisions of a plan, or a provider's
          personal recommendation regarding selection of a health plan based on
          the provider's personal knowledge of the health needs of such
          patients. Nothing in this Article shall be construed to prohibit the
          contractor from:

          1.   Including in its provider contracts a provision that precludes a
               provider from making, publishing, disseminating, or circulating
               directly or indirectly or aiding, abetting, or encouraging the
               making, publishing, disseminating, or circulating of any oral or
               written statement or any pamphlet, circular, article, or
               literature that is false or maliciously critical of the
               contractor and calculated to injure the contractor; or

          2.   Terminating a contract with a provider because such provider
               materially misrepresents the provisions, terms, or requirements
               of the contractor.

4.9.4 PROHIBITION OF INTERFERENCE WITH CERTAIN MEDICAL COMMUNICATIONS

     A.   Any contract between the contractor in relation to health coverage and
          a health care provider (or group of health care providers) shall not
          prohibit or restrict the provider from engaging in medical
          communications with the provider's patient, either explicit or
          implied, nor shall any provider manual, newsletters, directives,

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          letters, verbal instructions, or any other form of communication
          prohibit medical communication between the provider and the provider's
          patient. Providers shall be free to communicate freely with their
          patients about the health status of their patients, medical care or
          treatment options regardless of whether benefits for that care or
          treatment are provided under the contract, if the professional is
          acting within the lawful scope of practice. The health care providers
          shall be free to practice their respective professions in providing
          the most appropriate treatment required by their patients and shall
          provide informed consent within the guidelines of the law including
          possible positive and negative outcomes of the various treatment
          modalities.

     B.   Nothing in this Article shall be construed:

          1.   To prohibit the enforcement, as part of a contract or agreement
               to which a health care provider is a party, of any mutually
               agreed upon terms and conditions, including terms and conditions
               requiring a health care provider to participate in, and cooperate
               with, all programs, policies, and procedures developed or
               operated by the contractor to assure, review, or improve the
               quality and effective utilization of health care services (if
               such utilization is according to guidelines or protocols that are
               based on clinical or scientific evidence and the professional
               judgment of the provider) but only if the guidelines or protocols
               under such utilization do not prohibit or restrict medical
               communications between providers and their patients; or

          2.   To permit a health care provider to misrepresent the scope of
               benefits covered under this contract or to otherwise require the
               contractor to reimburse providers for benefits not covered.

     C.   The contractor shall not have to provide, reimburse, or provide
          coverage of a counseling service or referral service if the contractor
          objects to the provision of a particular service on moral or religious
          grounds and if the contractor makes available information in its
          policies regarding that service to prospective enrollees before or
          during enrollment. Notices shall be provided to enrollees within 90
          days after the date that the contractor adopts a change in policy
          regarding such a counseling or referral service.

4.9.5 ANTIDISCRIMINATION

     The contractor shall not discriminate with respect to participation,
     reimbursement, or indemnification against any provider who is acting within
     the scope of the provider's license or certification under applicable State
     law, solely on the basis of such licensure or certification. The contractor
     may, however, include providers only to the extent necessary to meet the
     needs of the organization's enrollees or establish any measure designed to
     maintain quality and control costs consistent with the responsibilities of
     the contractor.

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<PAGE>   171
4.10   EXPERT WITNESS REQUIREMENTS AND COURT OBLIGATIONS

       The contractor shall comply with the following provisions concerning
       expert witness testimony and court-ordered services:

       A.     The contractor shall bear the sole responsibility to provide
              expert witness services within the State of New Jersey for any
              hearings, proceedings, or other meetings and events relative to
              services provided by the contractor.

       B.     These expert witness services shall be provided in all actions
              initiated by the Department, providers, enrollees, or any other
              party(ies) and which involve the Department and the contractor.

       C.     The contractor shall designate and identify staff person(s)
              immediately available to perform the expert witness function,
              subject to prior approval by the Department. The Department shall
              exercise, at its sole discretion, a request for additional or
              substitute employees other than the designated expert witness.

       D.     The contractor shall notify the Department prior to the delivery
              of all expert witness services, and/or response(s) to subpoenas.
              The notification shall be no later than twenty-four (24) hours
              after the contractor is aware of the need to appear or of the
              subpoena.

       E.     The contractor shall provide written analysis and expert witness
              services in Fair Hearings and in court regarding any actions the
              contractor has taken. In the case of a contractor's denial,
              modification, or deferral of a prior authorization request, the
              contractor shall present its position for the denial,
              modification, or deferral of procedures during Fair Hearing
              proceedings.

       F.     The Department will notify the contractor in a timely manner of
              the nature of the subject matter to be covered and the testimony
              to be presented and the date, time and location of the hearing,
              proceeding, or other meeting or event at which specific expert
              witness services are to be provided.

       G.     The contractor shall coordinate and provide court ordered medical
              services (except sexual abuse evaluations). It is the
              responsibility of the contractor to inform the courts about the
              availability of its providers. If the court orders a non-
              contractor source to provide the treatment or evaluation, the
              contractor shall be liable for the cost up to the Medicaid rate if
              the contractor could not have provided the service through its own
              provider network or arrangements.

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4.11   ADDITIONS, DELETIONS, AND/OR CHANGES

       The contractor shall submit any significant and material changes
       regarding policies, procedures, changes to health care delivery system
       and substantial changes to contractor operations, providers, provider
       networks, subcontractors, and reports to DMAHS for final approval at
       least 90 days prior to being published, distributed, and/or implemented.

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ARTICLE FIVE: ENROLLEE SERVICES

5.1    GEOGRAPHIC REGIONS

       A.     Service Area. The geographic region(s) for which the contractor
              has been awarded a contract to establish and maintain operations
              for the provision of services to Medicaid and NJ FamilyCare
              beneficiaries are indicated below. The contractor shall have
              complete provider networks for each of the counties included in
              the region(s) approved for this contract. Coverage for partial
              regions shall only be permitted through a prior approval process
              by DMAHS. The contractor shall submit a phase-in plan to DMAHS.
              See Article 2 for details.

              ___________    Region 1:   Bergen, Hudson, Hunterdon, Morris,
                                         Passaic, Somerset, Sussex, and Warren

              ___________    Region 2:    Essex, Union, Middlesex, and Mercer

              ___________    Region 3:    Atlantic, Burlington, Camden, Cape
                                          May, Cumberland, Gloucester, Monmouth,
                                          Ocean, and Salem

       B.     Enrollment Area. For the purposes of this contract, the
              contractor's enrollment area(s) and maximum enrollment limits
              (cumulative during the term of the contract) shall be as follows:

                                                              Maximum
                                                              Enrollment
                  County:                                     Limit:
                  ______            Atlantic
                  ______            Bergen
                  ______            Burlington
                  ______            Camden
                  ______            Cape May
                  ______            Cumberland
                  ______            Essex
                  ______            Gloucester
                  ______            Hudson
                  ______            Hunterdon
                  ______            Mercer
                  ______            Middlesex
                  ______            Monmouth
                  ______            Morris
                  ______            Ocean
                  ______            Passaic
                  ______            Salem

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                  ______            Somerset
                  ______            Sussex
                  ______            Union
                  ______            Warren

5.2    AID CATEGORIES ELIGIBLE FOR CONTRACTOR ENROLLMENT

       A.     Except as specified in Article 5.3, all persons who are not
              institutionalized, belong to one of the following eligibility
              categories, and reside in any of the enrollment areas, as
              identified in Article 5.1, are in mandatory aid categories and
              shall be eligible for enrollment in the contractor's plan in the
              manner prescribed by this contract.

              1.     Aid to Families with Dependent Children (AFDC)/Temporary
                     Assistance for Needy Families (TANF);

              2.     AFDC/TANF-Related, New Jersey Care...Special Medicaid
                     Program for Pregnant Women and Children;

              3.     SSI-Aged, Blind, Disabled, and Essential Spouses;

              4.     New Jersey Care...Special Medicaid programs for Aged,
                     Blind, and Disabled;

              5.     Division of Developmental Disabilities Clients including
                     the Division of Developmental Disabilities Community Care
                     Waiver;

              6.     Medicaid only or SSI-related Aged, Blind, and Disabled

              7.     Uninsured parents/caretakers and children who qualify for
                     NJ FamilyCare

              8.     Uninsured adults and couples without dependent children
                     under the age of 19 who qualify for NJ FamilyCare

       B.     The contractor shall enroll the entire Medicaid case, i.e., all
              individuals included under the ten digit Medicaid identification
              number.

       C.     DYFS. Individuals who are eligible through the Division of Youth
              and Family Services may enroll voluntarily. All individuals
              eligible through DYFS shall be considered a unique Medicaid case
              and shall be issued an individual 12 digit Medicaid identification
              number, and may be enrolled in his/her own contractor.

       D.     The contractor shall be responsible for keeping its network of
              providers informed of the enrollment status of each enrollee.

       E.     Dual eligibles (Medicaid-Medicare) may voluntarily enroll.

5.3    EXCLUSIONS AND EXEMPTIONS

       Persons who belong to one of the eligible populations (defined in 5.2B)
       shall not be subject to mandatory enrollment if they meet one or more
       criteria defined in this Article. Persons who fall into an "excluded"
       category (Article 5.3.1A) shall not be eligible to

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       enroll in the contractor's plan. Persons falling into the categories
       under Article 5.3.1B are eligible to enroll on a voluntary basis. Persons
       falling into a category under Article 5.3.2 may be eligible for
       enrollment exemption, subject to the Department's review.

5.3.1  ENROLLMENT EXCLUSIONS

       A.     The following persons shall be excluded from enrollment in the
              managed care program:

              1.     Individuals in the following Home and Community-based
                     Waiver programs: Model Waiver I, Model Waiver II, Model
                     Waiver III, Enhanced Community Options Waiver, Aids
                     Community Care Alternative Program (ACCAP), Community Care
                     Program for Elderly and Disabled (CCPED), assisted living
                     programs, ABC Waiver for Children, Traumatic Brain Injury
                     (TBI), and DYFS Code 65 children.

              2.     Individuals in a Medicaid demonstration program.

              3.     Individuals who are institutionalized in an inpatient
                     psychiatric institution, long term care nursing facility or
                     in a residential facility including Intermediate Care
                     Facilities for the Mentally Retarded. However, individuals
                     who are eligible through DYFS and are placed in a DYFS
                     residential center/facility or individuals in a mental
                     health or substance abuse residential treatment facility
                     are not excluded from enrolling in the contractor's plan.

              4.     Individuals in the Medically Needy, Presumptive Eligibility
                     for pregnant women, Presumptive Eligibility for NJ
                     FamilyCare, Home Care Expansion Program, or PACE program.

              5.     Infants of inmates of a public institution living in a
                     prison nursery.

              6.     Individuals already enrolled in or covered by a Medicare or
                     private HMO that does not have a contract with the
                     Department to provide Medicaid services.

              7.     Individuals in out-of-state placements.

              8.     Full time students attending school and residing out of the
                     country will be excluded from New Jersey Care 2000+
                     participation while in school.

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              9.     The following types of dual beneficiaries: Qualified
                     Medicare Beneficiaries (QMBs) not otherwise eligible for
                     Medicaid; Special Low- Income Medicare Beneficiaries
                     (SLMBs); Qualified Disabled and Working Individuals
                     (QDWIs); and Qualifying Individuals 1 and 2.

       B.     The following individuals shall be excluded from the Automatic
              Assignment process described in Article 5.4C but may voluntarily
              enroll:

              1.     Individuals whose Medicaid eligibility will terminate
                     within three (3) months or less after the projected date of
                     effective enrollment.

              2.     Individuals in mandatory eligibility categories who live in
                     a county where mandatory enrollment is not yet required
                     based on a phase-in schedule determined by DMAHS.

              3.     Individuals enrolled in or covered by either a Medicare or
                     commercial HMO will not be enrolled in New Jersey Care
                     2000+ contractor unless the New Jersey Care 2000+
                     contractor and the Medicare/commercial HMO are the same.

              4.     Individuals in the Pharmacy Lock-in or Provider Warning or
                     Hospice programs.

              5.     Individuals in eligibility categories other than AFDC/TANF,
                     AFDC/TANF-related New Jersey Care, SSI-Aged, Blind and
                     Disabled populations, the Division of Developmental
                     Disabilities Community Care Waiver population, New Jersey
                     Care - Aged, Blind and Disabled, or NJ FamilyCare Plan A.

              6.     Children awaiting adoption through a private agency.

              7.     Individuals identified as having more than one active
                     eligible Medicaid number.

              8.     DYFS Population.

       C.     The following individuals shall be excluded from the Automatic
              Assignment process:

              1.     Individuals included under the same Medicaid Case Number
                     where one or more household member(s) are exempt.

              2.     Individuals participating in NJ FamilyCare Plans B, C, and
                     D [Managed Care is the only program option available for
                     these individuals].

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5.3.2  ENROLLMENT EXEMPTIONS

       The contractor, its subcontractors, providers or agents shall not coerce
       individuals to disenroll because of their health care needs which may
       meet an exemption reason, especially when the enrollees want to remain
       enrolled. Exemptions do not apply to NJ FamilyCare Plan B, Plan C, or
       Plan D individuals or to individuals who have been enrolled in any
       contractor for greater than one hundred and eighty (180) days. All
       exemption requests are reviewed by DMAHS on a case by case basis.
       Individuals may be exempted by DMAHS from enrollment in a contractor for
       the following reasons:

       A.     First-time Medicaid/NJ FamilyCare Plan A beneficiaries who are
              pregnant women, beyond the first trimester, who have an
              established relationship with an obstetrician who is not a
              participating provider in any contractor. These individuals will
              be tracked and enrolled after sixty (60) days postpartum.

       B.     Individuals with a terminal illness and who have an established
              relationship with a physician who is not a participating provider
              in any contractor's plan.

       C.     Individuals with a chronic, debilitating illness or disability who
              have received treatment from a physician and/or team of providers
              with expertise in treating that illness with whom the individuals
              have an established relationship (greater than 12 months) and who
              are not participating in any contractor; and there is no other
              reasonable alternative as determined by DMAHS at its sole
              discretion. Such requests shall be reviewed by DMAHS on a case by
              case basis. The individuals or authorized persons must provide
              written documentation identifying all of the providers who provide
              regular, ongoing care and who will certify their continued
              involvement in the care of these individuals; also provide
              documentation detailing how and who will provide medical
              management for the individual.

              1.     Temporary exemption may be granted by DMAHS to allow the
                     contractor time to contract with a specific specialist
                     needed by an enrollee with whom there is a long-standing
                     established relationship (greater than twelve (12) months)
                     and there is no equivalent specialist available in the
                     network. The contractor shall establish appropriate
                     contractual/referral relationships with any or all
                     specialists needed to accommodate the needs of enrollees
                     with special needs.

       D.     Individuals who do not speak English or Spanish and who meet the
              following criteria: i) have an illness requiring on-going
              treatment; ii) have an established relationship with a physician
              who speaks their primary language; and iii) there is no available
              primary care physician in any participating contractor who speaks
              the beneficiary's language. These cases shall be reviewed by DMAHS
              on a case-by-case basis with no automatic exemption from initial
              enrollment.

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<PAGE>   178
       E.     Individuals who do not have a choice of at least two (2) PCPs
              within thirty (30) miles of their residence.

5.4    ENROLLMENT OF MANAGED CARE ELIGIBLES

       A.     Enrollment. The health benefits coordinator (HBC), an agent of
              DMAHS, shall enroll Medicaid and NJ FamilyCare applicants. The HBC
              will explain the contractors' programs, answer any questions, and
              assist eligible individuals or, where applicable, an authorized
              person in selecting a contractor. Except as provided in 5.16, the
              contractor shall not directly market to or assist managed care
              eligibles in completing enrollment forms. The duties of the HBC
              will include, but are not limited to, education, enrollment,
              disenrollment, transfers, assistance through the contractor's
              grievance process and other problem resolutions with the
              contractor, and communications. The contractor shall cooperate
              with the HBC in developing information about its plan for
              dissemination to Medicaid/NJ FamilyCare beneficiaries.

       B.     Individuals eligible under NJ FamilyCare Plan A and NJ FamilyCare
              Plan B, Plan C, and Plan D may request an application via a
              toll-free number operated under contract for the State, through an
              outreach source, or from the contractor. The application may be
              mailed back to a State vendor. Individuals eligible under Plan A
              also have the option of completing the application either via a
              mail-in process or on site at the county welfare agency.
              Individuals eligible under Plan B, Plan C, and Plan D have the
              option of requesting assistance from the State vendor, the
              contractor or one of the registered servicing centers in the
              community. Assistance will also be made available at State field
              offices (e.g. the Medicaid District Offices) and county offices
              (e.g. Offices on Aging for grandparent caretakers).

       C.     Automatic Assignment. Medicaid eligible persons who reside in
              enrollment areas that have been designated for mandatory
              enrollment, who qualify for AFDC/TANF, New Jersey Care...Special
              Medicaid programs eligibility categories, NJ FamilyCare Plan A,
              and SSI populations, who do not meet the exemption criteria, and
              who do not voluntarily choose enrollment in the contractor's plan,
              shall be assigned automatically by DMAHS to a contractor.

5.5    ENROLLMENT AND COVERAGE REQUIREMENTS

       A.     General. The contractor shall comply with DMAHS enrollment
              procedures. The contractor shall accept for enrollment any
              individual who selects or is assigned to the contractor's plan,
              whether or not they are subject to mandatory enrollment, without
              regard to race, ethnicity, gender, sexual or affectional
              preference or orientation, age, religion, creed, color, national
              origin, ancestry, disability, health status or need for health
              services.

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<PAGE>   179
       B.     Coverage commencement. Coverage of enrollees shall commence at
              12:00 a.m., Eastern Time, on the first day of the calendar month
              as specified by the DMAHS with the exceptions noted in Article
              5.5. The day on which coverage commences shall be the enrollee's
              effective date of enrollment.

       C.     The contractor shall accept enrollment of Medicaid/NJ FamilyCare
              eligible persons within the defined enrollment areas in the order
              in which they apply or are auto-assigned to the contractor (on a
              random basis with equal distribution among all participating
              contractors) without restrictions, within contract limits.
              Enrollment shall be open at all times except when the contract
              limits have been met. A contractor shall not deny enrollment of a
              person with an SSI disability or New Jersey Care Disabled category
              who resides outside of the enrollment area. However, such enrollee
              with a disability shall be required to utilize the contractor's
              established provider network. The contractor shall accept
              enrollees for enrollment throughout the duration of this contract.

       D.     Enrollment timeframe. As of the effective date of enrollment, and
              until the enrollee is disenrolled from the contractor's plan, the
              contractor shall be responsible for the provision and cost of all
              care and services covered by the benefits package listed in
              Article 4.1. Enrollees who become eligible to receive services
              between the 1st through the end of the month shall be eligible for
              Managed Care services in that month. When an enrollee is shown on
              the enrollment roster as covered by a contractor's plan, the
              contractor shall be responsible for providing services to that
              person from the first day of coverage shown to the last day of the
              calendar month of the effective date of disenrollment. DMAHS will
              pay the contractor a capitation rate during this period of time.

       E.     Hospitalizations. For any eligible person who applies for
              participation in the contractor's plan, but who is hospitalized
              prior to the time coverage under the plan becomes effective, such
              coverage shall not commence until the date after such person is
              discharged from the hospital and DMAHS shall be liable for payment
              for the hospitalization, including any charges for readmission
              within forty-eight (48) hours of discharge for the same diagnosis.
              If an enrollee's disenrollment or termination becomes effective
              during a hospitalization, the contractor shall be liable for
              hospitalization until the date such person is discharged from the
              hospital, including any charges for readmission within forty-eight
              (48) hours of discharge for the same diagnosis. The contractor
              shall notify DMAHS within 180 days of initial hospital admission.

       F.     Unless otherwise required by statute or regulation, the contractor
              shall not condition any Medicaid/NJ FamilyCare eligible person's
              enrollment upon the performance of any act or suggest in any way
              that failure to enroll may result in a loss of Medicaid/NJ
              FamilyCare benefits.

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       G.     There shall be no retroactive enrollment in Managed Care. Services
              for those beneficiaries during any retroactive period will remain
              fee-for-service, except for individuals eligible under NJ
              FamilyCare Plans B, C, and D who are not eligible until enrolled
              in an MCE. Coverage shall continue indefinitely unless this
              contract expires or is terminated, or the enrollee is no longer
              eligible or is deleted from the contractor's list of eligible
              enrollees.

              1.     Exceptions and Clarifications

                     a.     The contractor shall be responsible for providing
                            services to an enrollee unless otherwise notified by
                            DMAHS. In certain situations, retroactive
                            re-enrollments may be authorized by DMAHS.

                     b.     Deceased enrollees. If an enrollee is deceased and
                            appears on the recipient file as active, the
                            contractor shall promptly notify DMAHS. DMAHS shall
                            recover capitation payments made on a prorated basis
                            after the date of death.

                     c.     Newborn infants. Newborn infants shall be the
                            responsibility of the contractor that covered the
                            mother on the date of birth. The contractor shall
                            notify DMAHS when a newborn has not been accreted to
                            its enrollment roster after eight weeks from the
                            date of birth. DMAHS will take action with the
                            appropriate CWA to have the infant accreted to the
                            eligibility file and subsequently the enrollment
                            roster following this notification. (See Section
                            B.5.1 of the Appendices, for the applicable
                            Notification of Newborns form and amendments
                            thereto). The mother's MCE shall be responsible for
                            the hospital stay for the newborn following delivery
                            and for subsequent services based on enrollment in
                            the contractor's plan. Capitation payments shall be
                            prorated to cover newborns from the date of birth.

                            i.     SSI. Newborns born to an SSI mother who never
                                   applies for or may not be eligible for
                                   AFDC/TANF remain the responsibility of the
                                   mother's MCE from the date of birth. The
                                   contractor shall be responsible for notifying
                                   DMAHS when a newborn has not been accreted to
                                   its enrollment roster after eight weeks from
                                   the date of birth.

                            ii.    DYFS. Newborns who are placed under the
                                   jurisdiction of the Division of Youth and
                                   Family Services are the responsibility of the
                                   MCE that covered the mother on the date of
                                   birth for medically necessary newborn care.
                                   Such

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<PAGE>   181
                                   children shall become FFS upon their
                                   placement in a DYFS-approved out-of-home
                                   placement.

                            iii.   NJ FamilyCare. Newborn infants born to NJ
                                   FamilyCare Plans B, C, and D mothers shall be
                                   the responsibility of the MCE that covered
                                   the mother on the date of birth for a minimum
                                   of 60 days after the birth through the period
                                   ending at the end of the month in which the
                                   60th day falls unless the child is determined
                                   eligible beyond this time period. The
                                   contractor shall notify DMAHS of the birth
                                   immediately in order to assure payment for
                                   this period.

                     d.     Enrollee no longer in contract area. If an enrollee
                            moves out of the contractor's enrollment area and
                            would otherwise still be eligible to be enrolled in
                            the contractor's plan, the contractor shall continue
                            to provide or arrange benefits to the enrollee until
                            the DMAHS can disenroll him/her. The contractor
                            shall ask DMAHS to disenroll the enrollee due to the
                            change of residence as soon as it becomes aware of
                            the enrollee's relocation. This provision does not
                            apply to persons with disabilities, who may elect to
                            remain with the contractor, or to NJ FamilyCare
                            Plans B, C, and D enrollees, who remain enrolled
                            until the end of the month in which the 60th day
                            after the request falls.

       H.     Enrollment Roster. The enrollment roster and weekly transaction
              register generated by DMAHS shall serve as the official contractor
              enrollment list. However, enrollment changes can occur between the
              time when the monthly roster is produced and capitation payment is
              made. The contractor shall only be responsible for the provision
              and cost of care for an enrollee during the months on which the
              enrollee's name appears on the roster, except as indicated in
              Article 8.8. DMAHS shall make available data on eligibility
              determinations to the contractor to resolve discrepancies that may
              arise between the roster and contractor enrollment files. If DMAHS
              notifies the contractor in writing of changes in the roster, the
              contractor shall rely upon that written notification in the same
              manner as the roster. Corrective action shall be limited to one
              (1) year from the date that the change was effective.

       I.     Enrollment of Medicaid case. Enrollment shall be for the entire
              Medicaid case, i.e., all individuals included under the ten-digit
              Medicaid identification number (or 12-digit ID number in the case
              of DYFS population). The contractor shall not enroll a partial
              case except at the DMAHS' sole discretion.

       J.     Weekly Enrollment Transactions. In keeping with a schedule
              established by DMAHS, DMAHS will process and forward enrollment
              transactions to the contractor on a weekly basis.

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       K.     Capitation Recovery. Capitation payments for a full month coverage
              shall be recovered from the contractor on a prorated basis when an
              enrollee is admitted to a nursing facility, psychiatric care
              facility or other institution including incarceration and the
              individual is disenrolled from the contractor's plan on the day
              prior to such admission.

       L.     Adjustments to Capitation. The monthly capitation payments shall
              include all adjustments made by DMAHS for reasons such as but not
              limited to retroactive validation as for newborns or retroactive
              termination of eligibility as for death, incarceration or
              institutionalization. These adjustments will be documented by
              DMAHS by means of a remittance tape. With the exception of
              newborns, DMAHS shall be responsible for fee-for-service payments
              incurred by the enrollee during the period prior to actual
              enrollment in the contractor's plan.

       M.     The contractor shall cooperate with established procedures whereby
              DMAHS and the HBC shall monitor enrollment and disenrollment
              practices.

       N.     Nothing in this Article or contract shall be construed to limit or
              in any way jeopardize a Medicaid beneficiary's eligibility for New
              Jersey Medicaid.

       O.     DMAHS shall arrange for the determination of eligibility of each
              potential enrollee for covered services under this contract and to
              arrange for the provision of complete information to the
              contractor with respect to such eligibility, including
              notification whenever an enrollee's Medicaid/NJ FamilyCare
              eligibility is discontinued.

5.6    VERIFICATION OF ENROLLMENT

       A.     The contractor shall be responsible for keeping its network of
              providers informed of the enrollment status of each enrollee. The
              contractor shall be able to report and ensure enrollment to
              network providers through either manual or electronic means.

       B.     The contractor shall maintain procedures to ensure that each
              individual's enrollment in the contractor's plan may be verified
              with the use of the Medicaid/NJ FamilyCare Eligibility
              Identification Card issued by the State and/or card issued by the
              contractor through:

              1.     Point of Service Device (POS)

              2.     Claims and Eligibility Real Time System (CERTS)

              3.     Automated Eligibility Verification System (AEVS)

       C.     Providers should not wait more than three (3) minutes to verify
              enrollment.

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5.7    MEMBER SERVICES UNIT

       A.     Defined. The contractor shall have in place a Member Services Unit
              to coordinate and provide services to Medicaid/NJ FamilyCare
              managed care enrollees. The services as described in this Article
              include, but are not limited to enrollee selection, changes,
              assignment, and/or reassignment of a PCP, explanation of benefits,
              assistance with filing and resolving inquiries, billing problems,
              grievances and appeals, referrals, appointment scheduling and
              cultural and/or linguistic needs. This unit shall also provide
              orientation to contractor operations and assistance in accessing
              medical and dental care.

       B.     Staff Training. The contractor shall develop a system to ensure
              that new and current Member Services staff receive basic and
              ongoing training and have expertise necessary to provide accurate
              information to all Medicaid/NJ FamilyCare enrollees regarding
              program benefits and contractor's procedures.

       C.     Communication-Affecting Conditions. The contractor shall ensure
              that Member Services staff have training and experience needed to
              provide effective services to enrollees with special needs, and
              are able to communicate effectively with enrollees who have
              communication-affecting conditions, in accordance with this
              Article.

       D.     Language Requirements. The Member Services staff shall include
              individuals who speak English, Spanish and any other language
              which is spoken as a primary language by a population that exceeds
              five (5) percent of the contractor's Medicaid/NJ FamilyCare
              enrollees or two hundred (200) enrollees in the contractor's plan,
              whichever is greater.

       E.     Member Services Manual. The contractor shall maintain a current
              Member Services Manual to serve as a resource of information for
              Member Services staff. A copy shall be provided to the Department
              during the readiness site visit. On an annual basis, all changes
              to the Member Services Manual shall be incorporated into the
              master used for making additional distribution copies of the
              manual.

       F.     The contractor shall provide an after-hours call-in system to
              triage urgent care and emergency calls from enrollees.

       G.     The contractor shall have written policies and procedures for
              member services to refer enrollees to a health professional to
              triage urgent care and emergencies during normal hours of
              operation.

       H.     The Contractor shall submit any significant and material changes
              to its member services policies and procedures to the Department
              prior to being implemented.

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5.8    ENROLLEE EDUCATION AND INFORMATION

5.8.1  GENERAL REQUIREMENTS

       A.     Written Material Submission to DMAHS. The contractor shall submit
              the format and content of all written materials/notifications and
              orientations described in this contract to DMAHS for review and
              approval prior to enrollee contact/distribution. All appropriate
              materials shall be submitted by DMAHS to the State Medical
              Advisory Committee for review.

       B.     The contractor shall prepare and distribute with prior approval by
              DMAHS, bilingual marketing and informational materials to
              Medicaid/NJ FamilyCare beneficiaries, enrollees (or, where
              applicable, an authorized person), and providers, and shall
              include basic information about its plan. Information must be in
              language that ensures that all beneficiaries can understand each
              process. Written information shall be culturally and
              linguistically sensitive.

       C.     The contractor shall establish a mechanism and present to DMAHS
              how its enrollees will be continually educated about its policies
              and procedures; the role of participants in the education process
              including contractor administration, member and provider services,
              care managers, and network providers; how the "educators" are made
              aware of their education role; and how the contractor will assure
              the State this process will be monitored to assure successful
              outcomes for all enrollees, particularly enrollees with special
              needs and the homeless.

5.8.2  ENROLLEE NOTIFICATION/HANDBOOK

       Prior to the effective date of enrollment, the contractor shall provide
       each enrolled case or, where applicable, authorized person, with a
       bilingual (English/Spanish) member handbook and an Identification Card.
       The handbook shall be written at the fifth grade reading level or at an
       appropriate reading level for enrollees with special needs. The handbook
       shall also be available on request in other languages and alternative
       formats, e.g., large print, Braille, audio cassette, or diskette for
       enrollees with sensory impairments or in a modality that meets the needs
       of enrollees with special needs. The content and format of the handbook
       shall have the prior written approval of DMAHS and shall describe all
       services covered by the contractor, exclusions or limitations on
       coverage, the correct use of the contractor's plan, and other relevant
       information, including but not limited to the following:

       A.     Cover letter, explaining the member handbook, expected effective
              date of enrollment, and when identification card will be received
              (if not sent with the handbook);

              1.     The enrollee's expected effective date of enrollment;
                     provided that, if the actual effective date of enrollment
                     is different from that given to the

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                     enrollee or, where applicable, an authorized person, at the
                     time of enrollment, the contractor shall notify the
                     enrollee or, where applicable, an authorized person of the
                     change;

       B.     A clear description of benefits included in this contract with
              exclusions, restrictions, and limitations. Clarification that
              enrollees who are clients of the Division of Developmental
              Disabilities will receive mental health/substance abuse services
              through the contractor (may be addressed through a separate insert
              to the basic handbook);

       C.     An explanation of the procedures for obtaining covered services;

       D.     An explanation of the use of the contractor's toll free telephone
              number (staffed for twenty-four (24) hours per day/seven (7) days
              per week communication);

       E.     A listing of primary care practitioners (in the format described
              in Article 4.8.4);

       F.     An identification card clearly indicating that the bearer is an
              enrollee of the contractor's plan; and the name of the primary
              care practitioner and telephone number on the card; a description
              of the enrollee identification card to be issued by the
              contractor; and an explanation as to its use in assisting
              beneficiaries to obtain services;

       G.     An explanation that beneficiaries shall obtain all covered
              non-emergency health care services through the contractor's
              providers;

       H.     An explanation of the process for accessing emergency services and
              services which require or do not require referrals;

       I.     A definition of the term "emergency medical condition" and an
              explanation of the procedure for obtaining emergency services,
              including the need to contact the PCP for urgent care situations
              and prior to accessing such services in the emergency room;

       J.     An explanation of the importance of contacting the PCP immediately
              for an appointment and appointment procedures;

       K.     An explanation of where and how twenty-four (24) hour per day,
              seven (7) day per week, emergency services are available,
              including out-of-area coverage, and procedures for emergency and
              urgent health care service;

       L.     A list of the Medicaid and/or NJ FamilyCare services not covered
              by the contractor and an explanation of how to receive services
              not covered by this contract including the fact that such services
              may be obtained through the provider of their choice according to
              regular Medicaid program regulations. The contractor

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              may also assist an enrollee or, where applicable, an authorized
              person, in locating a referral provider;

       M.     A notification of the enrollee's right to obtain family planning
              services from the contractor or from any appropriate Medicaid
              participating family planning provider (42 C.F.R. Section
              431.51(b));

       N.     A description of the process for referral to specialty and
              ancillary care providers and second opinions;

       O.     An explanation of the reasons for which an enrollee may request a
              change of PCP, the process of effectuating that change, and the
              circumstances under which such a request may be denied;

       P.     The reasons and process by which a provider may request an
              enrollee to change to a different PCP;

       Q.     An explanation of an enrollee's rights to disenroll or transfer at
              any time for cause; disenroll or transfer in the first 90 days
              after the latter of the date the individual enrolled or the date
              they receive notice of enrollment and at least every twelve (12)
              months thereafter without cause and that the lock-in period does
              not apply to ABD, DDD or DYFS individuals;

       R.     Complaints and Grievances

              1.     Procedures for resolving complaints, as approved by the
                     DMAHS;

              2.     A description of the grievance procedures to be used to
                     resolve disputes between a contractor and an enrollee,
                     including: the name, title, or department, address, and
                     telephone number of the person(s) responsible for assisting
                     enrollees in grievance resolutions; the time frames and
                     circumstances for expedited and standard grievances; the
                     right to appeal a grievance determination and the
                     procedures for filing such an appeal; the time frames and
                     circumstances for expedited and standard appeals; the right
                     to designate a representative; a notice that all disputes
                     involving clinical decisions will be made by qualified
                     clinical personnel; and that all notices of determination
                     will include information about the basis of the decision
                     and further appeal rights, if any;

              3.     The contractor shall notify all enrollees in their primary
                     language of their rights to file grievances and appeal
                     grievance decisions by the contractor;

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       S.     An explanation that Medicaid/NJ FamilyCare Plan A enrollees have
              the right to a Medicaid Fair Hearing with DMAHS and the appeal
              process through the DHSS for Medicaid and NJ FamilyCare enrollees,
              including instructions on the procedures involved in making such a
              request;

       T.     Title, addresses, phone numbers and a brief description of the
              contractor for contractor management/service personnel;

       U.     The interpretive, linguistic, and cultural services available
              through the contractor's personnel;

       V.     An explanation of the terms of enrollment in the contractor's
              plan, continued enrollment, disenrollment procedures, time frames
              for each procedure, default procedures, enrollee's rights and
              responsibilities and causes for which an enrollee shall lose
              entitlement to receive services under this contract, and what
              should be done if this occurs;

       W.     A statement strongly encouraging the enrollee to obtain a baseline
              physical and dental examination, and to attend scheduled
              orientation sessions and other educational and outreach
              activities;

       X.     A description of the EPSDT program, and language encouraging
              enrollees to make regular use of preventive medical and dental
              services;

       Y.     Provision of information to enrollees or, where applicable, an
              authorized person, to enable them to assist in the selection of a
              PCP;

       Z.     Provision of assistance to clients who cannot identify a PCP on
              their own;

       AA.    An explanation of how an enrollee may receive mental health and
              substance abuse services;

       BB.    An explanation of how to access transportation services;

       CC.    An explanation of service access arrangements for home bound
              enrollees;

       DD.    A statement encouraging early prenatal care and ongoing continuity
              of care throughout the pregnancy;

       EE.    A notice that an enrollee may obtain a referral to a health care
              provider outside of the contractor's network or panel when the
              contractor does not have a health care provider with appropriate
              training and experience in the network or panel to meet the
              particular health care needs of the enrollee and procedure by
              which the enrollee can obtain such referral;

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       FF.    A notice that an enrollee with a condition which requires ongoing
              care from a specialist may request a standing referral to such a
              specialist and the procedure for requesting and obtaining such a
              specialist referral;

       GG.    A notice that an enrollee with (i) a life-threatening condition or
              disease or (ii) a degenerative and/or disabling condition or
              disease, either of which requires specialized medical care over a
              prolonged period of time may request a specialist or specialty
              care center responsible for providing or coordinating the
              enrollee's medical care and the procedure for requesting and
              obtaining such a specialist or access to the center;

       HH.    A notice of all appropriate mailing addresses and telephone
              numbers to be utilized by enrollees seeking information or
              authorization;

       II.    A notice of pharmacy Lock-In program and procedures;

       JJ.    An explanation of the time delay of thirty (30) to forty-five (45)
              days between the date of initial application and the effective
              date of enrollment; however, during this interim period,
              prospective Medicaid enrollees will continue to receive health
              care benefits under the regular fee-for-service Medicaid program
              or the HMO with which the person is currently enrolled. Enrollment
              is subject to verification of the applicant's eligibility for the
              Medicaid program and New Jersey Care 2000+ enrollment; and the
              time delay of thirty (30) to forty-five (45) days between the date
              of request for disenrollment and the effective date of
              disenrollment;

       KK.    An explanation of the appropriate uses of the Medicaid/NJ
              FamilyCare identification card and the contractor identification
              card;

       LL.    A notification, whenever applicable, that some primary care
              physicians may employ other health care practitioners, such as
              nurse practitioners or physician assistants, who may participate
              in the patient's care;

       MM.    The enrollee's or, where applicable, an authorized person's signed
              authorization on the enrollment application allows release of
              medical records;

       NN.    Notification that the enrollee's health status survey (obtained
              only by the HBC) will be sent to the contractor by the Health
              Benefits Coordinator;

       OO.    A notice that enrollment and disenrollment is subject to
              verification and approval by DMAHS;

       PP.    An explanation of procedures to follow if enrollees receive bills
              from providers of services, in or out of network;

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       QQ.    An explanation of the enrollee's financial responsibility for
              payment when services are provided by a health care provider who
              is not part of the contractor's organization or when a procedure,
              treatment or service is not a covered health care benefit by the
              contractor and/or by Medicaid;

       RR.    A written explanation at the time of enrollment of the enrollee's
              right to terminate enrollment, and any other restrictions on the
              exercise of those rights, to conform to 42 U.S.C.Section
              1396b(m)(2)(F)(ii). The initial enrollment information and the
              contractor's member handbook shall be adequate to convey this
              notice and shall have DMAHS approval prior to distribution;

       SS.    An explanation that the contractor will contact or facilitate
              contact with, and require its PCPs to use their best efforts to
              contact, each new enrollee or, where applicable, an authorized
              person, to schedule an appointment for a complete, age/sex
              specified baseline physical, and for enrollees with special needs
              who have been identified through a Complex Needs Assessment as
              having complex needs, the development of an Individual Health Care
              Plan at a time mutually agreeable to the contractor and the
              enrollee, but not later than ninety (90) days after the effective
              date of enrollment for children under twenty-one (21) years of
              age, and not later than one hundred eighty (180) days after
              initial enrollment for adults; for adult clients of DDD, no later
              than ninety (90) days after the effective date of enrollment; and
              encourage enrollees to contact the contractor and/or their PCP to
              schedule an appointment;

       TT.    An explanation of the enrollee's rights and responsibilities which
              should include, at a minimum, the following, as well as the
              provisions found in Standard X in NJ modified QARI/QISMC in
              Section B.4.14 of the Appendices.

              1.     Provision for "Advance Directives," pursuant to 42 C.F.R.
                     Part 489, Subpart I;

              2.     Participation in decision-making regarding their health
                     care;

              3.     Provision for the opportunity for enrollees or, where
                     applicable, an authorized person to offer suggestions for
                     changes in policies and procedures; and

              4.     A policy on the treatment of minors.

       UU.    Notification that prior authorization for emergency services,
              either in-network or out-of-network, is not required;

       VV.    Notification that the costs of emergency screening examinations
              will be covered by the contractor when the condition appeared to
              be an emergency medical condition to a prudent layperson;

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       WW.    For beneficiaries subject to cost-sharing (i.e., those eligible
              through NJ FamilyCare Plan C and D; See Section B.5.2 of the
              Appendices), information that specifically explains:

              1.     The limitation on cost-sharing;

              2.     The dollar limit that applies to the family based on the
                     reported income;

              3.     The need for the family to keep track of the cost-sharing
                     amounts paid; and

              4.     Instructions on what to do if the cost-sharing requirements
                     are exceeded.

       XX.    An explanation on how to access WIC services;

       YY.    Any other information essential to the proper use of the
              contractor's plan as may be required by the Division; and

       ZZ.    Inform enrollees of the availability of care management services.

       AAA.   Enrollee right to adequate and timely information related to
              physician incentives.

5.8.3  ANNUAL INFORMATION TO ENROLLEES

       The contractor shall distribute an updated handbook which will include
       the information specified in Article 5.8.2 to each enrollee or enrollee's
       family unit and to all providers at least once every twelve (12) months.

5.8.4  NOTIFICATION OF CHANGES IN SERVICES

       The contractor shall revise and distribute the information specified in
       Article 5.8 at least thirty (30) calendar days prior to any changes that
       the contractor makes in services provided or in the locations at which
       services may be obtained, or other changes of a program nature or in
       administration, to each enrollee and all providers affected by that
       change.

5.8.5  ID CARD

       A.     Except as set forth in Section 5.9.1C. the contractor shall
              deliver to each new enrollee prior to the effective enrollment
              date but no later than seven (7) days after the enrollee's
              effective date of enrollment a contractor Identification Card for
              those enrollees who have selected a PCP. The Identification Card
              shall have at least the following information:

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              1.     Name of enrollee

              2.     Issue Date for use in automated card replacement process

              3.     Primary Care Provider Name (may be affixed by sticker)

              4.     Primary Care Provider Phone Number (may be affixed by
                     sticker)

              5.     What to do in case of an emergency and that no prior
                     authorization is required

              6.     Relevant copayments/Personal Contributions to Care

              7.     Contractor 800 number - emergency message

              Any additional information shall be approved by DMAHS prior to use
              on the ID card.

       B.     For children and individuals eligible solely through the NJ
              FamilyCare Program, the identification card must clearly indicate
              "NJ FamilyCare"; for children and individuals who are
              participating in NJ FamilyCare Plans C and D the cost- sharing
              amount shall be listed on the card. However, if the family limit
              for cost- sharing has been reached, the identification card shall
              indicate a zero cost-sharing amount. The State will notify the
              contractor when such limits have been reached.

5.8.6  ORIENTATION AND WELCOME LETTER

       A.     Welcome Letter. The contractor shall mail a welcome letter to each
              new enrollee or authorized person prior to the enrollee's
              effective date of coverage. The welcome letter shall explain the
              member handbook, the enrollee's expected effective date of
              enrollment, and when the enrollee's identification card will be
              received.

       B.     Individual or Group Orientation. The contractor shall offer
              barrier free individual or group orientation, by telephone or in
              person, to enrollees, family members, or, where applicable,
              authorized persons who are able to be contacted regarding the
              delivery system. Orientation shall normally occur within thirty
              (30) days of the date of enrollment, except that the contractor
              shall attempt to provide orientation within ten (10) days to each
              enrollee who has been identified as having special needs. The
              contractor shall provide orientation education that includes at
              least the following:

              1.     Specific information listed within the member handbook.

              2.     The circumstances under which a team of professionals
                     (e.g., care management) is convened, the role of the team,
                     and the manner in which it functions.

       C.     Prior to conducting the first orientation, the contractor shall
              submit for the readiness on-site review a curriculum that meets
              the requirements of this provision to DMAHS for approval.

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5.9    PCP SELECTION AND ASSIGNMENT

       The contractor shall place a high emphasis on ensuring that enrollees are
       informed and have access to enroll with traditional and safety net
       providers. The contractor shall place a high priority on enrolling
       enrollees with their existing PCP. If an enrollee does not select a PCP,
       the enrollee shall be assigned to his/her PCP of record (based upon prior
       history information) if that PCP is still a participating provider with
       the contractor. All contract materials shall provide equal information
       about enrollment with traditional and safety net providers as that
       provided about contractor operated offices. All materials, documents, and
       phone scripts shall be reviewed and approved by the Department before
       use.

5.9.1  INITIAL SELECTION/ASSIGNMENT

       A.     General. Each enrollee in the contractor's plan shall be given the
              option of choosing a specific PCP in accordance with Articles 4.5
              and 4.8 within the contractor's provider network who will be
              responsible for the provision of primary care services and the
              coordination of all other health care needs through the mechanisms
              listed in this Article.

              The HBC will provide the contractor with information, when
              available, of existing PCP relationships via the Plan Selection
              Form. The contractor shall, at the enrollee's option, maintain the
              PCP-patient relationship.

       B.     PCP Selection. The contractor shall provide enrollees with
              information to facilitate the choice of an appropriate PCP. This
              information shall include, where known, the name of the enrollee's
              provider of record, and a listing of all participating providers
              in the contractor's network. (See Article 4.8.4 for a description
              of the required listing.)

       C.     PCP Assignment. If the contractor has not received an enrollee's
              PCP selection within ten (10) calendar days from the enrollee's
              effective date of coverage or the selected PCP's panel is closed,
              the contractor shall assign a PCP and deliver an ID card by the
              fifteenth (15th) calendar day after the effective date of
              enrollment. The assignment shall be made according to the
              following criteria, in hierarchical order:

              1.     The enrollee shall be assigned to his/her current provider,
                     if known, as long as that provider is a part of the
                     contractor's provider network.

              2.     The enrollee shall be assigned to a PCP whose office is
                     within the travel time/distance standards, as defined in
                     Article 4.8.8. If the language and/or cultural needs of the
                     enrollee are known to the contractor, the enrollee shall be
                     assigned to a PCP who is or has office staff who are
                     linguistically and culturally competent to communicate with
                     the enrollee or have the

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                     ability to interpret in the provision of health care
                     services and related activities during the enrollee's
                     office visits or contacts.

5.9.2  PCP CHANGES

       A.     Enrollee Request. Any enrollee or, where applicable, authorized
              person dissatisfied with the PCP selected or assigned shall be
              allowed to reselect or be assigned to another PCP. Such
              reassignment shall become effective no later than the beginning of
              the first month following a full month after the request to change
              the enrollee's PCP. Except for DYFS enrollees, this reselection or
              reassignment for any cause may be limited, at the contractor's
              discretion, to two (2) times per year. However, in the event there
              is reasonable cause following policies and procedures as
              determined by the contractor and approved by the Department, the
              enrollee or, where applicable, authorized person may reselect or
              be reassigned at any time, regardless of the number of times the
              enrollee has previously changed PCPs.

              In the event an enrollee becomes non-eligible and then re-eligible
              within six (6) months in the same region, said enrollee shall, if
              at all possible, be assigned to the same PCP. In such a
              circumstance, the contractor may count previous PCP changes toward
              the annual two-change limit.

       B.     PCP Request. The contractor shall develop policies and procedures,
              which shall be prior approved by the Department, for allowing a
              PCP to request reassignment of an enrollee, e.g., for
              irreconcilable differences, for when an enrollee has taken legal
              action against the provider, or if an enrollee fails to comply
              with health care instructions and such non-compliance prevents the
              provider from safely and/or ethically proceeding with that
              enrollee's health care services. The contractor shall approve any
              reassignments and require documentation of the reasons for the
              request for reassignment. For example, if a PCP requests
              reassignment of an enrollee for failure to comply with health care
              instructions, the contractor shall take into consideration whether
              the enrollee has a physical or developmental disability that may
              contribute to the noncompliance, and whether the provider has made
              reasonable efforts to accommodate the enrollee's needs. In the
              case of DYFS-eligible children, copies of such requests shall be
              sent to the Division of Youth and Family Services, c/o Medicaid
              Liaison, PO Box 717, Trenton, NJ 08625-0717.

       C.     PCP Change Form. If a change form is used, by the contractor, the
              contractor shall immediately provide the PCP Change Form to an
              enrollee wishing a change, if such request is made in person, or
              by mail if requested by telephone or in writing. The contractor
              shall mail the form within three (3) business days of receiving a
              telephone or written request for a form.

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       D.     Processing of PCP Change Forms. If a change form is used by the
              contractor, enrollees shall submit the PCP change form to the
              contractor for processing. The contractor shall process the form
              and return the enrollee identification card or self- adhering
              sticker to the enrollee within ten (10) calendar days of the
              postmark date on the mailing envelope or, if not received by mail,
              the date received by the contractor.

       E.     Verbal Requests for PCP Change. The contractor may accept verbal
              requests from enrollees or authorized persons to change PCPs.
              However, the contractor shall document the verbal request
              including at a minimum name of caller, date of call, and selected
              PCP. The contractor shall process the request and return the
              enrollee identification card or self-adhering sticker to the
              enrollee within ten (10) calendar days of the request for PCP
              change.

5.10   DISENROLLMENT FROM CONTRACTOR'S PLAN

5.10.1 GENERAL PROVISIONS

       A.     Non-discrimination. Disenrollment from contractor's plan shall not
              be based in whole or in part on an adverse change in the
              enrollee's health, on any of the factors listed in Article 7.8, or
              on amounts payable to the contractor related to the enrollee's
              participation in the contractor's plan.

       B.     Coverage. The contractor shall not be responsible for the
              provision and cost of care and services for an enrollee after the
              effective date of disenrollment unless the enrollee is admitted to
              a hospital prior to the expected effective date of disenrollment,
              in which case the contractor is responsible for the provision and
              cost of care and services covered under this contract until the
              date on which the enrollee is discharged from the hospital,
              including any charge for the enrollee readmitted within
              forty-eight (48) hours of discharge for the same diagnosis.

       C.     Notification of Disenrollment Rights. The contractor shall notify
              through personalized, written notification the enrollee or, where
              applicable, authorized person of the enrollee's disenrollment
              rights at least sixty (60) days prior to the end of his/her twelve
              (12)-month enrollment period. The contractor shall notify the
              enrollee of the effective disenrollment date

       D.     Release of Medical Records. The contractor shall transfer or
              facilitate the transfer of the medical record (or copies of the
              medical record), upon the enrollee's or, where applicable, an
              authorized person's request, to either the enrollee, to the
              receiving provider, or, in the case of a child eligible through
              the Division of Youth and Family Services, to a representative of
              the Division of Youth and Family Services or to an adoptive parent
              receiving subsidy through DYFS, at no charge, in a timely fashion,
              i.e., no later than ten days prior to the effective date of
              transfer. The contractor shall release medical records of the
              enrollee, and/or

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              facilitate the release of medical records in the possession of
              participating providers as may be directed by DMAHS authorized
              personnel and other appropriate agencies of the State of New
              Jersey, or the federal government. Release of medical records
              shall be consistent with the provisions of confidentiality as
              expressed in Article 7.40 of this contract and the provisions of
              42 C.F.R.Section 431.300. For individuals being served through the
              Division of Youth and Family Services, release of medical records
              must be in accordance with the provisions under N.J.S.A. 9:6-8.10a
              and 9:6-8.40 and consistent with the need to protect the
              individual's confidentiality.

       E.     In the event the contract, or any portion thereof, is terminated,
              or expires, the contractor shall assist DMAHS in the transition of
              enrollees to other contractors. Such assistance and coordination
              shall include, but not be limited to, the forwarding of medical
              and other records and the facilitation and scheduling of medically
              necessary appointments for care and services. The cost of
              reproducing and forwarding medical charts and other materials
              shall be borne by the contractor. The contractor shall be
              responsible for providing all reports set forth in this contract.
              The contractor shall make provision for continuing all management
              and administrative services until the transition of enrollees is
              completed and all other requirements of this contract are
              satisfied. The contractor shall be responsible for the following:

              1.     Identification and transition of chronically ill, high risk
                     and hospitalized enrollees, and enrollees in their last
                     four weeks of pregnancy.

              2.     Transfer of requested medical records.

5.10.2 DISENROLLMENT FROM THE CONTRACTOR'S PLAN AT THE ENROLLEE'S REQUEST

       A.     An individual enrolled in a contractor's plan may be subject to
              the enrollment Lock-In period provided for in this Article. The
              enrollment Lock-In provision does not apply to SSI and NJ Care ABD
              individuals, clients of DDD or to individuals eligible to
              participate through the Division of Youth and Family Services.

              1.     An enrollee subject to the enrollment Lock-In period may
                     initiate disenrollment or transfer for any reason during
                     the first ninety (90) days after the latter of the date the
                     individual is enrolled or the date they receive notice of
                     enrollment with a new contractor and at least every twelve
                     (12) months thereafter without cause. NJ FamilyCare Plans
                     B, C, or D enrollees will be subject to a twelve (12)-month
                     Lock-In period.

                     a.     The period during which an individual has the right
                            to disenroll from the contractor's plan without
                            cause applies to an individual's

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                            initial period of enrollment with the contractor. If
                            that individual chooses to re-enroll with the
                            contractor, his/her initial date of enrollment with
                            the contractor will apply.

              2.     An enrollee subject to the Lock-In period may initiate
                     disenrollment for good cause at any time.

                     a.     Good cause reasons for disenrollment or transfer
                            shall include, unless otherwise defined by DMAHS:

                            i.     Failure of the contractor to provide services
                                   including physical access to the enrollee in
                                   accordance with the terms of this contract;

                            ii.    Enrollee has filed a grievance with the
                                   contractor pursuant to the applicable
                                   grievance procedure and has not received a
                                   response within the specified time period
                                   stated therein, or in a shorter time period
                                   required by federal law;

                            iii.   Documented grievance, by the enrollee against
                                   the contractor's plan without satisfaction.

                            iv.    Enrollee is subject to enrollment exemption
                                   as set forth in Article 5.3.2. If an
                                   exemption situation exists within the
                                   contractor's plan but another contractor can
                                   accommodate the individual's needs, a
                                   transfer may be granted.

                            v.     Enrollee has substantially more convenient
                                   access to a primary care physician who
                                   participates in another MCE in the same
                                   enrollment area.

       B.     Voluntary Disenrollment. The contractor shall assure that
              enrollees who disenroll voluntarily are provided with an
              opportunity to identify, in writing, their reasons for
              disenrollment. The contractor shall further:

              1.     Require the return, or invalidate the use of the
                     contractor's identification card; and

              2.     Forward a copy of the disenrollment request or refer the
                     beneficiary to DMAHS/HBC by the eighth (8th) day of the
                     month prior to the month in which disenrollment is to
                     become effective.

       C.     HBC Role. All enrollee requests to disenroll must be made through
              the Health Benefits Coordinator. The contractor may not induce,
              discuss or accept disenrollments. Any enrollee seeking to
              disenroll should be directed to contact

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              the HBC. This applies to both mandatory and voluntary enrollees.
              Disenrollment shall be completed by the HBC at facilities and in a
              manner so designated by DMAHS.

       D.     Effective Date. The effective date of disenrollment or transfer
              shall be no later than the first day of the month immediately
              following the full calendar month the disenrollment is initiated
              by DMAHS. Notwithstanding anything herein to the contrary, the
              remittance tape, along with any changes reflected in the weekly
              register or agreed upon by DMAHS and the contractor in writing,
              shall serve as official notice to the contractor of disenrollment
              of an enrollee.

5.10.3 DISENROLLMENT FROM THE CONTRACTOR'S PLAN AT THE CONTRACTOR'S REQUEST

       A.     Criteria for Contractor Disenrollment Request. The contractor may
              recommend, with written documentation to DMAHS, the disenrollment
              of an enrollee. In no event may an enrollee be disenrolled due to
              health status or need for health services. Enrollees may be
              disenrolled in any of the following circumstances:

              1.     The contractor determines that the willful actions of the
                     enrollee are inconsistent with membership in the
                     contractor's plan, and the contractor has made and provides
                     DMAHS with documentation of at least three attempts to
                     reconcile the situation. Examples of inconsistent actions
                     include but are not limited to: persistent refusal to
                     cooperate with any participating provider regarding
                     procedures for consultations or obtaining appointments
                     (this does not preclude an enrollee's right to refuse
                     treatment), intentional misconduct, willful refusal to
                     receive prior approval for non-emergency care; willful
                     refusal to comply with reasonable administrative policies
                     of the contractor, fraud, or making a material
                     misrepresentation to the contractor. In no way can this
                     provision be applied to individuals on the basis of their
                     physical condition, utilization of services, age,
                     socio-economic status or mental disability.

              2.     The contractor becomes aware that the enrollee falls into
                     an aid category that is not set forth in Article 5.2 of
                     this contract, has become ineligible for enrollment
                     pursuant to Article 5.3.1 of this contract, or has moved to
                     a residence outside of the enrollment area covered by this
                     contract.

       B.     Reasonable Efforts Prior to Disenrollment. Prior to recommending
              disenrollment of an enrollee, the contractor shall make a
              reasonable effort to identify for the enrollee or, where
              applicable, an authorized person those actions that have
              interfered with effective provision of covered medical care and
              services, and to explain what actions or procedures are
              acceptable. The contractor must allow the enrollee or, where
              applicable, an authorized person sufficient opportunity to comply
              with acceptable procedures prior to recommending disenrollment.
              The

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              contractor shall provide at least one verbal and at least one
              written warning to the enrollee regarding the implications of
              his/her actions.

              If the enrollee, or, where applicable, an authorized person fails
              to comply with acceptable procedures, the contractor shall give at
              least thirty (30) days prior written notice to the enrollee, or,
              where applicable, an authorized person, of its intent to recommend
              disenrollment. The notice shall include a written explanation of
              the reason the contractor intends to request disenrollment, and
              advise the enrollee or, where applicable, an authorized person of
              his/her right to file a disenrollment grievance. The contractor
              shall give DMAHS a copy of the notice and advise DMAHS immediately
              if the enrollee or, where applicable, an authorized person files a
              disenrollment grievance.

       C.     Disenrollment Appeals. The contractor shall notify DMAHS of
              decisions related to all appeals filed by an enrollee or, where
              applicable, an authorized person as a result of the contractor's
              notice to an enrollee of its intent to recommend disenrollment. If
              the enrollee has not filed an appeal or if the contractor
              determines that the appeal is unfounded, the contractor may submit
              to the Office of Managed Health Care of DMAHS a recommendation for
              disenrollment of the enrollee. The contractor shall notify the
              enrollee in writing of such request at the time it is filed with
              DMAHS.

              DMAHS will decide within ten (10) business days after receipt of
              the contractor's recommendation whether to disenroll the enrollee
              and will provide a written determination and notification of the
              right to a Fair Hearing to the enrollee or, where applicable, an
              authorized person and the contractor.

       D.     The DMAHS shall review each involuntary disenrollment and may
              require an in- depth review by State staff, including but not
              limited to patient and provider interviews, medical record review,
              and home assessment to determine with the enrollee what plan of
              action would serve the best interests of the enrollee (and family
              as applicable.)

5.10.4 TERMINATION

       A.     Enrollees shall be terminated from the contractor's plan whenever:

              1.     The contract between the contractor and DMAHS is terminated
                     for any reason;

              2.     The enrollee loses Medicaid/NJ FamilyCare eligibility;

              3.     Nonpayment of premium for individuals eligible through the
                     NJ FamilyCare Program occurs;

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              4.     DMAHS is notified that the enrollee has moved outside of
                     the enrollment area that the contractor does not service;

              5.     The enrollee requires more than thirty (30) days of service
                     from a post- acute facility, in which case the contractor
                     shall provide health care services to the enrollee through
                     the last day of the month following the enrollee's
                     admission to the facility.

       B.     For enrollees covered by the contractor's plan who are eligible
              through the Division of Youth and Family Services and who move to
              a residence outside of the enrollment area covered by this
              contract:

              1.     The DYFS representative will immediately contact the HBC.

              2.     The HBC will process the enrollee's disenrollment and
                     transfer the enrollee to a new contractor; or disenroll the
                     enrollee to the fee-for-service coverage under DMAHS.

              3.     The contractor shall continue to provide services to the
                     enrollee until the enrollee is disenrolled from the
                     contractor's plan.

       C.     Loss of Medicaid or NJ FamilyCare Eligibility. When an enrollee's
              coverage is terminated due to a loss of Medicaid or NJ FamilyCare
              eligibility, the contractor shall offer to the enrollee the
              opportunity to convert the enrollee's membership to a non-group,
              non-Medicaid enrollment, consistent with conversion privileges
              offered to other groups enrolled in the contractor.

       D.     In no event shall an enrollee be disenrolled due to health status,
              need for health services, or pre-existing medical conditions.

5.11   TELEPHONE ACCESS

       A.     Twenty-Four Hour Coverage. The contractor shall maintain a
              twenty-four (24) hours per day, seven (7) days per week toll-free
              telephone answering system that will respond in person (not voice
              mail) and will include Telecommunication Device for the Deaf (TDD)
              or Tech Telephone (TT) systems. Telephone staff shall be
              adequately trained and staffed and able to promptly advise
              enrollees of procedures for emergency and urgent care. The
              telephone answering system must be available at no cost to the
              enrollees for local and long-distance calls from within or
              out-of-state.

       B.     The contractor shall maintain toll-free telephone access to the
              contractor for the enrollees at a minimum from 8:00 a.m. to 5:00
              p.m. on Monday through Friday, for calls concerning administrative
              or routine care services.

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       C.     After Hours Response. The contractor shall have standards for PCP
              and on-call medical/dental professional response to after hours
              phone calls from enrollees or other medical/dental professionals
              providing services to an enrollee (including, but not limited to
              emergency department staff). The telephone response time shall not
              exceed two (2) hours, except for emergencies which require
              immediate response from the PCP.

       D.     Protocols.

              1.     Contractor. The contractor shall develop and use telephone
                     protocols for all of the following situations:

                     a.     Answering the volume of enrollee telephone inquiries
                            on a timely basis.

                            i.     Enrollees shall wait no more than five (5)
                                   minutes on hold.

                     b.     Identifying special enrollee needs e.g., wheelchair
                            and interpretive linguistic needs. (See also Article
                            4.5.)

                     c.     Triage for medical and dental conditions and special
                            behavioral needs for non-compliant individuals who
                            are mentally deficient.

                     d.     Response time for telephone call-back waiting times:
                            after hours telephone care for non-emergent,
                            symptomatic issues - within thirty (30) to
                            forty-five (45) minutes; same day for non-
                            symptomatic concerns; fifteen (15) minutes for
                            crisis situations.

              2.     Providers. The contractor shall monitor and require its
                     providers to develop and use telephone protocols for all of
                     the following situations:

                     a.     Answering the enrollee telephone inquiries on a
                            timely basis.

                     b.     Prioritizing appointments.

                     c.     Scheduling a series of appointments and follow-up
                            appointments as needed by an enrollee.

                     d.     Identifying and rescheduling broken and no-show
                            appointments.

                     e.     Identifying special enrollee needs while scheduling
                            an appointment, e.g., wheelchair and interpretive
                            linguistic needs. (See also Article 4.5.)

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                     f.     Triage for medical and dental conditions and special
                            behavioral needs for non-compliant individuals who
                            are mentally deficient.

                     g.     Response time for telephone call-back waiting times:
                            after hours telephone care for non-emergent,
                            symptomatic issues - within thirty (30) to
                            forty-five (45) minutes; same day for
                            non-symptomatic concerns; fifteen (15) minutes for
                            crisis situations.

                     h.     Scheduling continuous availability and accessibility
                            of professional, allied, and supportive
                            medical/dental personnel to provide covered services
                            within normal working hours. Protocols shall be in
                            place to provide coverage in the event of a
                            provider's absence.

       E.     The contractor shall maintain a P-Factor of P7 or less for calls
              to Member Services and shall submit the P-Factor report in Section
              A.5.1 of the Appendices.

5.12   APPOINTMENT AVAILABILITY

       The contractor shall have policies and procedures to ensure the
       availability of medical, mental health/substance abuse (for DDD clients)
       and dental care appointments in accordance with the following standards:

       A.     Emergency Services. Immediately upon presentation at a service
              delivery site.

       B.     Urgent Care. Within twenty-four (24) hours. An urgent, symptomatic
              visit is an encounter with a health care provider associated with
              the presentation of medical signs that require immediate
              attention, but are not life-threatening.

       C.     Symptomatic Acute Care. Within seventy-two (72) hours. A
              non-urgent, symptomatic office visit is an encounter with a health
              care provider associated with the presentation of medical signs,
              but not requiring immediate attention.

       D.     Routine Care. Within twenty-eight (28) days. Non-symptomatic
              office visits shall include but shall not be limited to:
              well/preventive care appointments such as annual gynecological
              examinations or pediatric and adult immunization visits.

       E.     Specialist Referrals. Within four (4) weeks or shorter as
              medically indicated. A specialty referral visit is an encounter
              with a medical specialist that is required by the enrollee's
              medical condition as determined by the enrollee's Primary Care
              Provider (PCP). Emergency appointments must be provided within 24
              hours of referral.

       F.     Urgent Specialty Care. Within twenty-four (24) hours of referral.

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     G.   Baseline Physicals for New Adult Enrollees. Within one hundred-eighty
          (180) calendar days of initial enrollment.

     H.   Baseline Physicals for New Children Enrollees and Adult Clients of
          DDD. Within ninety (90) days of initial enrollment, or in accordance
          with EPSDT guidelines.

     I.   Prenatal Care. Enrollees shall be seen within the following
          timeframes:

          1.   Three (3) weeks of a positive pregnancy test (home or laboratory)

          2.   Three (3) days of identification of high-risk

          3.   Seven (7) days of request in first and second trimester

          4.   Three (3) days of first request in third trimester

     J.   Routine Physicals. Within four (4) weeks for routine physicals needed
          for school, camp, work or similar.

     K.   Lab and Radiology Services. Three (3) weeks for routine appointments;
          forty-eight (48) hours for urgent care.

     L.   Waiting Time in Office. Less than forty-five (45) minutes.

     M.   Initial Pediatric Appointments. Within three (3) months of enrollment.
          The contractor shall attempt to contact and coordinate initial
          appointments for all pediatric enrollees.

     N.   For dental appointments, the contractor shall be able to provide:

          1.   Emergency dental treatment no later than forty-eight (48) hours,
               or earlier as the condition warrants, of injury to sound natural
               teeth and surrounding tissue and follow-up treatment by a dental
               provider.

          2.   Urgent care appointments within three days of referral.

          3.   Routine non-symptomatic appointments within thirty (30) days of
               referral.

     O.   For MH/SA appointments, the contractor shall provide:

          1.   Emergency services immediately upon presentation at a service
               delivery site.

          2.   Urgent care appointments within twenty-four (24) hours of the
               request.

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          3.   Routine care appointments within ten (10) days of the request.

     P.   Maximum Number of Intermediate/Limited Patient Encounters. Four (4)
          per hour for adults and four (4) per hour for children.

     Q.   For SSI and New Jersey Care - ABD elderly and disabled enrollees, the
          contractor shall ensure that each new enrollee or, as appropriate,
          authorized person is contacted to offer an Initial Visit to the
          enrollee's selected PCP. Each new enrollee shall be contacted within
          forty-five (45) days of enrollment and offered an appointment date
          according to the needs of the enrollee, except that each enrollee who
          has been identified through the enrollment process as having special
          needs shall be contacted within ten (10) business days of enrollment
          and offered an expedited appointment.

5.13 APPOINTMENT MONITORING PROCEDURES

     A.   Contractor shall monitor the adequacy of its appointment processes and
          reduce the unnecessary use of alternative methods such as emergency
          room visits. Contractor shall monitor and institute policies that an
          enrollee's waiting time at the PCP or specialist office is no more
          than forty-five (45) minutes, except when the provider is unavailable
          due to an emergency. Contractor shall have written policies and
          procedures, about which it educates its provider network, about
          appointment time requirements. Contractor shall have established
          written procedures for disseminating its appointment standards to the
          network, shall monitor compliance with appointment standards, and
          shall have a corrective action plan when appointment standards are not
          met.

     B.   The contractor shall have established policies and procedures for
          monitoring and evaluating appointment scheduling for all PCPs which
          shall include, but is not limited to, the following:

          1.   A methodology for monitoring:

               a.   Enrollee waiting time for receipt of both urgent and routine
                    appointments

               b.   Availability of appointments

               c.   Providers with whom enrollees regularly experience long
                    waiting times

               d.   Broken and no-show appointments

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          2.   A description of the policies and procedures for addressing
               appointment problems that may occur and the plan for corrective
               action if any of the above-referenced items are not met.

5.14 CULTURAL AND LINGUISTIC NEEDS

     The contractor shall participate in the Department's Cultural and
     Linguistic Competency Task Force, and cooperate in a study to review the
     provision of culturally competent services.

     The contractor shall address the relationship between culture, language,
     and health care outcomes through, at a minimum, the following Cultural and
     Linguistic Service requirements.

     A.   Physical and Communication Access. The contractor shall provide
          documentation regarding the availability of and access procedures for
          services which ensure physical and communication access to: providers
          and any contractor related services (e.g. office visits, health
          fairs); customer service or physician office telephone assistance;
          and, interpreter, TDD/TT services for individuals who require them in
          order to communicate. Document availability of interpreter, TDD/TT
          services.

     B.   Twenty-four (24)-Hour Interpreter Access. The contractor shall provide
          Twenty-four (24)-hour access to interpreter services for all
          enrollees including the deaf or hard of hearing at provider sites
          within the contractor's network, either through telephone language
          services or in-person interpreters to ensure that enrollees are able
          to communicate with the contractor and providers and receive covered
          benefits. The contractor shall identify and report the linguistic
          capability of interpreters or bilingual employed and contracted staff
          (clinical and non-clinical). The contractor shall provide professional
          interpreters when needed where technical, medical, or treatment
          information is to be discussed, or where use of a family member or
          friend as interpreter is inappropriate. Family members, especially
          children, should not be used as interpreters in assessments, therapy
          and other situations where impartiality is critical. The contractor
          shall provide for training of its health care providers on the
          utilization of interpreters.

     C.   Interpreter Listing. Throughout the term of this contract, the
          contractor shall maintain a current list of interpreter
          agencies/interpreters who are "on call" to provide interpreter
          services.

     D.   Language Threshold. In addition to interpreter services, the
          contractor will provide other linguistic services to a population of
          enrollees if they exceed five (5) percent of those enrolled in the
          contractor's Medicaid/NJ FamilyCare line of business or two hundred
          (200) enrollees in the contractor's plan, whichever is greater.

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     E.   The contractor shall provide the following services to the enrollee
          groups identified in D above.

          1.   Key Points of Contact

               a.   Medical/Dental: Advice and urgent care telephone, face to
                    face encounters with providers

               b.   Non-medical: Enrollee assistance, orientations, and
                    appointments

          2.   Types of Services

               a.   Translated signage

               b.   Translated written materials

               c.   Referrals to culturally and linguistically appropriate
                    community services programs

     F.   Community Advisory Committee. Contractor shall implement and maintain
          community linkages through the formation of a Community Advisory
          Committee (CAC) with demonstrated participation of consumers (with
          representatives of each Medicaid/NJ FamilyCare eligibility category-
          See Article 5.2), community advocates, and traditional and safety net
          providers. The contractor shall ensure that the committee
          responsibilities include advisement on educational and operational
          issues affecting groups who speak a primary language other than
          English and cultural competency.

     G.   Group Needs Assessment. Contractor shall assess the linguistic and
          cultural needs of its enrollees who speak a primary language other
          than English. The findings of the assessment shall be submitted to
          DMAHS in the form of a plan entitled, "Cultural and Linguistic
          Services Plan" at the end of year one of the contract. In the plan,
          the contractor will summarize the methodology, findings, and outline
          the proposed services to be implemented, the timeline for
          implementation with milestones, and the responsible individual. The
          contractor shall ensure implementation of the plan within six months
          after the beginning of year two of the contract. The contractor shall
          also identify the individual with overall responsibility for the
          activities to be conducted under the plan. The DMAHS approval of the
          plan is required prior to its implementation.

     H.   Policies and Procedures. The contractor shall address the special
          health care needs of all enrollees. The contractor shall incorporate
          in its policies and procedures the values of (1) honoring enrollees'
          beliefs, (2) being sensitive to cultural diversity, and (3) fostering
          respect for enrollees' cultural backgrounds.

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          The contractor shall have specific policy statements on these topics
          and communicate them to providers and subcontractors.

     I.   Mainstreaming. The contractor shall be responsible for ensuring that
          its network providers do not intentionally segregate DMAHS enrollees
          from other persons receiving services. Examples of prohibited
          practices, based on race, color, creed, religion, sex, age, national
          origin, ancestry, marital status, sexual preference, income status,
          program membership or physical or mental disability, include, but may
          not be limited to, the following:

          1.   Denying or not providing to an enrollee any covered service or
               access to a facility.

          2.   Providing to an enrollee a similar covered service in a different
               manner or at a different time from that provided to other
               enrollees, other public or private patients or the public at
               large.

          3.   Subjecting an enrollee to segregation or separate treatment in
               any manner related to the receipt of any covered service.

          4.   Assigning times or places for the provision of services.

          5.   Closing a provider panel to DMAHS beneficiaries but not to other
               patients.

     J.   Resolution of Cultural Issues. The contractor shall investigate and
          resolve access and cultural sensitivity issues identified by
          contractor staff, State staff, providers, advocate organizations, and
          enrollees.

5.15 ENROLLEE COMPLAINTS AND GRIEVANCES

5.15.1 GENERAL REQUIREMENTS

     A.   DMAHS Approval. The contractor shall draft and disseminate a system
          and procedure which has the prior written approval of DMAHS for the
          receipt and adjudication of complaints and grievances by enrollees.
          The grievance policies and procedures shall be in accordance with
          N.J.A.C. 8:38 et seq. and with the modifications that are incorporated
          in the contract. The contractor shall not modify the grievance
          procedure without the prior approval of DMAHS, and shall provide DMAHS
          with a copy of the modification. The contractor's grievance procedures
          shall provide for expeditious resolution of grievances by contractor
          personnel at a decision-making level with authority to require
          corrective action, and will have separate tracks for administrative
          and utilization management grievances. (For the utilization management
          complaints/grievance process, see Article 4.6.4C.)

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          The contractor shall review the grievance procedure at reasonable
          intervals, but no less than annually, for the purpose of amending same
          as needed, with the prior written approval of the DMAHS, in order to
          improve said system and procedure.

          The contractor's system and procedure shall be available to both
          Medicaid beneficiaries and NJ FamilyCare beneficiaries. All enrollees
          have available the complaint and grievance process under the
          contractor's plan, the Department of Health and Senior Services and,
          for Medicaid beneficiaries, the Medicaid Fair Hearing process.
          Individuals eligible solely through NJ FamilyCare Plans B, C, and D do
          not have the right to a Medicaid Fair Hearing.

     B.   Complaints. The contractor shall have procedures for receiving,
          responding to, and documenting resolution of enrollee complaints that
          are received orally and are of a less serious or formal nature.
          Complaints that are resolved to the enrollee's satisfaction on the day
          of receipt do not require a formal written response or notification.
          The contractor shall call back an enrollee within twenty-four hours of
          the initial contact if the contractor is unavailable for any reason or
          the matter cannot be readily resolved during the initial contact. Any
          complaint that is not resolved timely shall be treated as a grievance,
          in accordance with requirements defined in Article 5.15.3.

     C.   HBC Coordination. The contractor shall coordinate its efforts with the
          health benefits coordinator including referring the enrollee to the
          HBC for assistance as needed in the management of the
          complaint/grievance procedures.

     D.   DMAHS Intervention. DMAHS shall have the right to intercede on an
          enrollee's behalf at any time during the contractor's
          complaint/grievance process whenever there is an indication from the
          enrollee, or, where applicable, authorized person, or the HBC that a
          serious quality of care issue is not being addressed timely or
          appropriately. Additionally, the enrollee may be accompanied by a
          representative of the enrollee's choice to any proceedings and
          grievances.

     E.   Legal Rights. Nothing in this Article shall be construed as removing
          any legal rights of enrollees under State or federal law, including
          the right to file judicial actions to enforce rights.

5.15.2  NOTIFICATION TO ENROLLEES OF GRIEVANCE PROCEDURE

     A.   The contractor shall provide all enrollees or, where applicable, an
          authorized person, upon enrollment in the contractor's plan, and
          annually thereafter, pursuant to this contract, with a concise
          statement of the contractor's grievance procedure and the enrollees'
          rights to a hearing by the Independent Utilization Review Organization
          (IURO) per NJAC 8:38-8.7 as well as their right to pursue the Medicaid
          Fair Hearing process described in N.J.A.C. 10:49-10.1 et seq. The

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          information shall be provided through an annual mailing, a member
          handbook, or any other method approved by DMAHS. The contractor shall
          prepare the information orally and/or in writing in English, Spanish,
          and other bilingual translations and a format accessible to the
          visually impaired, such as Braille, large print, or audio tapes.

     B.   Written information to enrollees regarding the grievance process shall
          include at a minimum:

          1.   Notification that copies of written grievances will be sent to
               DMAHS for monitoring

          2.   Identification of who is responsible for processing and reviewing
               grievances

          3.   Information to enrollees on how to file complaints/grievances

          4.   Local or toll-free telephone number for filing of
               complaints/grievances

          5.   Information on obtaining grievance forms and copies of grievance
               procedures for each primary medical/dental care site

          6.   Expected timeframes for acknowledgment of receipt of grievances

          7.   Expected timeframes for disposition of grievances

          8.   Extensions of the grievance process if needed and time frames

          9.   Fair hearing procedures including the Medicaid enrollee's right
               to access the Medicaid Fair Hearing process at any time to
               request resolution of a grievance

          10.  DHSS process for use of Independent Utilization Review
               Organization (IURO)

     C.   A description of the process under which an enrollee may appeal
          denials of authorization shall include at a minimum:

          1.   Title of person responsible for processing appeal

          2.   Title of person(s) responsible for resolution of appeal

          3.   Time deadlines for notifying enrollee of appeal resolution

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          4.   The right to request a Medicaid Fair Hearing/DHSS IURO processes
               where applicable to specific enrollee eligibility categories

5.15.3 GRIEVANCE PROCEDURES

     A.   Availability. The contractor's grievance procedure shall be available
          to all enrollees or, where applicable, an authorized person, or permit
          a provider acting on behalf of an enrollee and with the enrollee's
          consent, to challenge the denials of coverage of services or denials
          of payment for services. The procedure shall assure that grievances
          may be filed verbally directly with the contractor.

     B.   The grievance procedure shall be in accordance with N.J.A.C. 8:38 et
          seq.

     C.   DMAHS shall have the right to submit comments to the contractor
          regarding the merits or suggested resolution of any grievance.

          By the first and the fifteenth of every month the contractor shall
          mail/fax all enrollee grievance/appeal requests directly to the DMAHS.
          DMAHS will log and monitor the grievance process through each stage.
          In case of verbal filing, the contractor shall submit a written
          statement of the grievance to DMAHS.

          By the first and the fifteenth of every month the contractor shall
          send a copy to DMAHS of the dates of each stage of the
          grievance/appeal process as well as its findings at each stage of the
          grievances/appeals process simultaneously with notification to the
          enrollee. If the contractor finds against the enrollee, the denial
          shall present the enrollee's appeal rights to the contractor, as well
          as the right to a Medicaid Fair Hearing (except for NJ FamilyCare
          Plans B, C and D) and the right to the DHSS' IURO process.

     D.   Time Limits to File. The contractor may provide reasonable time limits
          within which enrollees must file grievances, but such time period
          shall not be less than sixty (60) days from the date of the incident
          giving rise to the grievance.

5.15.4 PROCESSING GRIEVANCES

     A.   Staffing. The contractor shall have an adequate number of staff to
          receive and assist with enrollee grievances by phone, in person and by
          mail. All staff involved in the receipt, investigation and resolution
          of complaints shall be trained on the contractor's policies and
          procedures and shall treat all enrollees with dignity and respect.

     B.   Grievance Forms. If the contractor uses a grievance form, the
          contractor must make available written grievance forms in the
          enrollee's primary language in accordance with the multilingual
          definition. Such forms shall be readily available through the
          contractor upon request by telephone or in writing. The contractor

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          shall mail the form within five (5) work days of receiving a telephone
          or written request for a form. The contractor shall permit grievances
          to be filed in writing, either on the contractor's form or in any
          other written format, by fax, or verbally. For purposes of this
          section the contractor may use an approved translation service to
          translate grievance forms in an enrollee's primary language in order
          to meet the timeframes of this contract provision. A copy of the
          translated form shall be sent to DMAHS for post review.

     C.   Confidentiality. The contractor shall have written policies and
          procedures to assure enrollee confidentiality and reasonable privacy
          throughout the complaint and grievance process.

     D.   Non-discrimination. The contractor shall have written policies and
          procedures to assure that the contractor or any provider or agent of
          the contractor shall not discriminate against an enrollee or attempt
          to disenroll an enrollee for filing a complaint or grievance against
          the contractor.

     E.   Documentation. Upon receipt of a grievance, the contractor's staff
          shall record the date of receipt, a written summary of the problem,
          the response given, the resolution effected, if any, and the
          department or staff personnel to whom the grievance has been routed.
          See Article 5.15.5 for further information on records maintenance.

     F.   Tracking System. The contractor shall maintain a separate complaint
          log as well as a grievance tracking and resolution system for
          Medicaid/NJ FamilyCare enrollees. The tracking system shall
          categorize complaints or grievances according to type of issue,
          standardize a system for routing complaints or grievances to
          operational department(s) for the dual purpose of resolving specific
          complaints or grievances and for improving the contractor's operating
          procedures, indicate the status and focus of each open grievance, send
          all requisite notices to enrollees within the appropriate timeframe,
          and log in the final resolution of each grievance. The tracking system
          shall differentiate between medical/dental and administrative
          complaints and grievances.

5.15.5  RECORDS MAINTENANCE

     A.   The contractor shall develop and maintain a separate complaint log
          tracking and resolution system for Medicaid and NJ FamilyCare
          enrollees for issues not requiring a formal grievance hearing. The
          system shall be made accessible to the State for review.

     B.   A grievance log to document all verbal (telephone or in person) and
          written grievances and resolutions shall be maintained. The grievance
          log shall be available in the office of the contractor. The grievance
          log shall include the following information:

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          1.   A log number

          2.   The date and time the grievance is filed with the contractor or
               provider

          3.   The name of the enrollee filing the grievance

          4.   The name of the contractor, provider or staff person receiving
               the grievance

          5.   A description of the grievance or problem

          6.   A description of the action taken by the contractor or provider
               to investigate and resolve the grievance

          7.   The proposed resolution by the contractor or provider

          8.   The name of the contractor, provider or staff person responsible
               for resolving the grievance

          9.   The date of notification to the enrollee of the proposed
               resolution

     C.   The contractor shall develop and maintain policies for the following:

          1.   Collection and analysis of grievance data

          2.   Frequency of review of the grievance system

          3.   File maintenance

          4.   Protecting the anonymity of the grievant.

5.16    MARKETING

5.16.1  GENERAL PROVISIONS - CONTRACTOR'S RESPONSIBILITIES

     A.   The DMAHS's enrollment agent, health benefits coordinator (HBC), will
          outreach and educate Medicaid and NJ FamilyCare beneficiaries (or,
          where applicable, an authorized person), and assist eligible
          beneficiaries (or, where applicable, an authorized person), in
          selection of a MCE. Direct marketing or discussion by the contractor
          to a Medicaid or NJ FamilyCare beneficiary already enrolled in another
          contractor shall not be permitted; direct marketing to non-enrolled
          Medicaid beneficiaries will be limited and only allowed in locations
          specified by DMAHS. The duties of the HBC will include, but are not
          limited to, education, enrollment, disenrollment, transfers,
          assistance through the contractor's

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          grievance process and other problem resolutions with the contractor,
          and communications. The contractor shall cooperate with the HBC in
          developing information about its plan for dissemination to Medicaid/NJ
          FamilyCare beneficiaries.

          1.   Active face-to-face marketing is prohibited:

               a.   To SSI-Aged, Blind, and Disabled individuals;

               b.   To New Jersey Care...Special Medicaid Programs for Pregnant
                    Women and Children, Aged, Blind, and Disabled;

               c.   To DYFS-supervised individuals;

               d.   At County Welfare Agency offices;

               e.   At open areas (other than designated events); and

               f.   To AFDC/TANF beneficiaries and AFDC/TANF-related
                    beneficiaries.

          2.   Active face-to-face marketing will be allowed:

               a.   Only at times, events, and locations specified and approved
                    by DMAHS. Examples of permissible venues include provider
                    sites, health fairs, and community centers.

               b.   To NJ FamilyCare populations.

     B.   Marketing activities that shall be permitted include:

          1.   Media advertising limited to billboards, bus and newspaper
               advertisements, posters, literature display stands, radio and
               television advertising.

          2.   Fulfillment of potential enrollee requests to the contractor for
               general information, brochure and/or provider directories that
               will be mailed to the beneficiary.

     C.   All marketing plans, procedures, presentations, and materials shall be
          accurate and shall not mislead, confuse, or defraud either the
          enrollee, providers or DMAHS. If such misrepresentation occurs, the
          contractor shall hold harmless the State in accordance with Article
          7.33 and shall be subject to damages described in Article 7.16.

     D.   The contractor shall be required to submit to DMAHS for prior written
          approval a complete marketing plan that adheres to DMAHS's policies
          and procedures. Written or audio-visual marketing materials, e.g.,
          ads, flyers, posters, announcements, and letters, and marketing
          scripts, public information releases to be distributed to or prepared
          for the purpose of informing Medicaid beneficiaries,

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<PAGE>   213
          and subsequent revisions thereto, and promotional items shall be
          approved by DMAHS prior to their use. If the contractor develops new
          or revised marketing materials, it shall submit them to DMAHS for
          review and approval prior to any dissemination. The contractor shall
          not, under any circumstances, use marketing material that has not been
          approved by DMAHS.

     E.   The DMAHS will consult with a medical care advisory committee in the
          review of pertinent marketing materials and will respond within 45
          days with either an approval, denial, or request for additional
          information or modifications.

     F.   The contractor shall distribute all approved marketing materials
          throughout all enrollment areas for which it is contracted to provide
          services.

     G.   All marketing materials that will be used by marketing agents for
          every type of marketing presentation shall be prior approved by DMAHS.
          The contractor shall coordinate and submit, on a quarterly basis, to
          DMAHS and its agents, all of its schedules, plans, activities by month
          and informational materials for community education and outreach
          programs. The contractor shall work in cooperation with
          community-based groups and shall participate in such activities as
          health fairs and other community events. The contractor shall make
          every effort to ensure that all materials and outreach provided by
          them provide both physical and communication accessibility. This
          outreach should go beyond traditional venues and any health fairs or
          community events should be held in accessible facilities.

          1.   For those instances where marketing is allowed, contractors shall
               submit schedules to the DMAHSAT LEAST FIVE (5) DAYS PRIOR to the
               activity taking place. The schedules can be submitted in any
               format, but must include the full name of the marketing
               representative, the name and full address of the location where
               marketing is being conducted, the date(s) and beginning and
               ending times of the activity. All schedules will be reviewed and
               must be approved in writing by the DMAHS. PLANS MAY NOT COMMENCE
               ANY MARKETING ACTIVITY WITHOUT PRIOR DMAHS APPROVAL.

     H.   With the exception allowed under Article 5.16.1I, neither the
          contractor nor its marketing representatives may put into effect a
          plan under which compensation, reward, gift, or opportunity are
          offered to eligible enrollees as an inducement to enroll in the
          contractor's plan other than to offer the health care benefits from
          the contractor pursuant to this contract. The contractor is prohibited
          from influencing an individual's enrollment with the contractor in
          conjunction with the sale of any other insurance.

     I.   The contractor may offer promotional give-aways that shall not exceed
          a combined total of $10 to any one individual or family for marketing
          purposes. Giveaways and premiums that have DMAHS approval may be
          distributed at approved events. These items shall be limited to items
          that promote good health

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          behavior (e.g., toothbrushes, immunization schedules). For NJ
          FamilyCare, other promotional items shall be considered with prior
          approval by DMAHS.

     J.   The contractor shall ensure that marketing representatives are
          appropriately trained and capable of performing marketing activities
          in accordance with terms of this contract, N.J.A.C. 11:17, 11:2-11,
          11:4-17, 8:38-13.2, N.J.S.A. 17:22 A-1, 26:2J-16, and the marketing
          standards described in Article 5.16.

     K.   The contractor shall ensure that marketing representatives are versed
          in and adhere to Medicaid policy regarding beneficiary enrollment and
          disenrollment as stated in 42 C.F.R. Section 434.27. This policy
          includes, but is not limited to, requirements that enrollees do not
          experience unreasonable barriers to disenroll, and that the contractor
          shall not act to discriminate on the basis of adverse health status or
          greater use or need for health care services.

     L.   Door-to-door canvassing, telephone, telemarketing, or "cold call"
          marketing of enrollment activities, by the contractor itself or an
          agent or independent contractor thereof, shall not be permitted. For
          NJ FamilyCare (Plans B, C, D), telemarketing shall be permitted after
          review and prior approval by DMAHS of the contractor's marketing plan,
          scripts and methods to use this approach.

     M.   Contractor employees or agents shall not present themselves
          unannounced at an enrollee's home for marketing or "educational"
          purposes. This shall not limit such visits for medical emergencies,
          urgent medical care, clinical outreach, and health promotion for known
          enrollees.

     N.   Under no conditions shall a contractor use DMAHS's client/enrollee
          data base or a provider's patient/customer database to identify and
          market its plan to Medicaid or NJ FamilyCare beneficiaries. No lists
          of Medicaid/NJ FamilyCare beneficiary names, addresses, telephone
          numbers, or Medicaid/NJ FamilyCare numbers of potential Medicaid/NJ
          FamilyCare enrollees shall be obtained by a contractor under any
          circumstances. Neither shall the contractor violate confidentiality by
          sharing or selling enrollee lists or enrollee/beneficiary data with
          other persons or organizations for any purpose other than performance
          of the contractor's obligations pursuant to this contract. For NJ
          FamilyCare marketing only, general population lists such as census
          tracts are permissible for marketing outreach after review and prior
          approval by DMAHS.

     O.   The contractor shall allow unannounced, on-site monitoring by DMAHS of
          its enrollment presentations to prospective enrollees, as well as to
          attend scheduled, periodic meetings between DMAHS and contractor
          marketing staff to review and discuss presentation content,
          procedures, and technical issues.

     P.   For NJ FamilyCare the contractor shall explain that all health care
          benefits as specified in Article 4.1 must be obtained through a PCP.

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     Q.   For NJ FamilyCare the contractor shall periodically review and assess
          the knowledge and performance of its marketing representatives.

     R.   For NJ FamilyCare the contractor shall assure culturally competent
          presentations by having alternative mechanisms for disseminating
          information and must receive acknowledgment of the receipt of such
          information by the beneficiary.

     S.   Individual Medicaid beneficiaries shall be able to contact the
          contractor for information, and the contractor may respond to such a
          request.

     T.   Incentives.

          1.   The contractor may provide an incentive program to its enrollees
               based on health/educational activities or for compliance with
               health related recommendations. The incentive program may
               include, but is not limited to:

               a.   Health related gift items

               b.   Gift certificates in exchange for merchandise

               Cash or redeemable coupons with a cash value are prohibited.

          2.   The contractor's incentive program shall be proposed in writing
               and prior approved by DMAHS.

     U.   Periodic Survey of Enrollees.

          1.   The contractor shall quarterly survey and report results to DMAHS
               of new enrollees, in person, by phone, or other means, on a
               random basis to verify the enrollees' understanding of the
               contractor's procedures and services availability.

          2.   The contractor shall quarterly survey enrollees on reasons for
               disenrollment who voluntarily disenroll/transfer at time of
               disenrollment/transfer from contractor's plan.

     V.   All marketing materials, plans and activities shall be prior approved
          by DMAHS.

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5.16.2  STANDARDS FOR MARKETING REPRESENTATIVES

     A.   General Requirements

          1.   Only a trained marketing representative of the contractor's plan
               who meets the DHS, DHSS, and DBI requirements shall be permitted
               to market and to enroll prospective NJ FamilyCare enrollees. All
               marketing representatives shall be registered with both the
               Department of Banking and Insurance (DBI) and the Division of
               Medical Assistance and Health Services (DMAHS). Delegation of
               enrollment functions, such as to the office staff of a
               subcontracting provider of service, shall not be permitted.

          2.   The contractor shall submit to DMAHS no less frequently than once
               a month, a listing of the contractor's marketing representatives.
               Marketing schedules shall be submitted at least five days in
               advance of marketing activities. Information on each marketing
               representative shall include the names, three digit
               Identification Numbers, and marketing locations.

          3.   All marketing representatives shall wear an identification tag
               that has been prior approved by DMAHS with a photo identification
               that must be prominently displayed when the marketing
               representative is performing marketing activities. The tag shall
               be at least three inches (3") by five inches (5") and shall
               display the marketing representative's name, the name of the
               contractor, and a three-digit identification number.

          4.   In those counties where enrollment is in a voluntary stage,
               marketing representatives shall not state or imply that
               enrollment may be made mandatory in the future in an attempt to
               coerce enrollment.

          5.   Canvassing shall not be permitted.

          6.   Outbound telemarketing shall not be permitted. For NJ FamilyCare
               (Plans B, C, D), telemarketing shall be permitted after review
               and prior approval by DMAHS of the contractor's marketing plan,
               script, and methods to use this approach.

          7.   Marketing in or around a County Welfare Agency (CWA) office shall
               not be permitted. The term "in and around the CWA" is defined as
               being in an area where the marketing representative can be seen
               from the CWA office and/or where the CWA facility can be seen.
               The fact that an obstructed view prohibits the marketing
               activities from being seen shall not mitigate this prohibition.

          8.   No more than two (2) marketing representatives shall approach a
               Medicaid/NJ FamilyCare beneficiary at any one time.

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          9.   Marketing representatives shall not encourage clients to
               disenroll from another contractor's plan or assist an enrollee of
               another MCE in completing a disenrollment form from the other
               MCE.

          10.  Marketing representatives shall ask the prospective enrollee
               about existing relationships with physicians or other health care
               providers. The prospective enrollees shall be clearly informed as
               to whether they will be able to continue to go to those providers
               as enrollees of the contractor's plan and/or if the Medicaid
               program will pay for continued services with such providers.

          11.  Marketing representatives shall secure the signature of new
               enrollees (head of household) on a statement indicating that an
               explanation has been provided to them regarding the important
               points of the contractor's plan and have understood its
               procedures. A parent or, where applicable, an authorized person,
               shall enroll minors and sign the statement of understanding.
               However, the contractor may accept an application from pregnant
               minors and minors living totally on their own who have their own
               Medicaid ID numbers as head of their own household.

          12.  Prior to approval of this contract by HCFA, the contractor's
               staff or agents are prohibited from marketing to, contacting
               directly or indirectly, or enrolling Medicaid beneficiaries.

          13.  Marketing representatives shall not state or imply that
               continuation of Medicaid benefits is contingent upon enrollment
               in the contractor's plan.

          14.  Attendance by the contractor's marketing representatives at
               State-sponsored training sessions is required at the
               contractor's own expense.

     B.   Commissions/Incentive Payments

          1.   Commissions/incentive payments may not be based on enrollment
               numbers alone but shall include other criteria, such as but not
               limited to, the retention period of enrollees enrolled (at least
               three (3) months), member satisfaction, and education by the
               marketing representative.

               a.   The contractor shall also review disenrollment
                    information/surveys and all complaints/grievances
                    specifically referencing marketing staff.

          2.   Marketing commissions (including cash, prizes, contests, trips,
               dinners, and other incentives) shall not exceed thirty (30)
               percent of the representative's monthly salary.

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     C.   Enrollment Inducements

          1.   The contractor's marketing representatives and other contractor's
               staff are prohibited from offering or giving cash or any other
               form of compensation to a Medicaid beneficiary as an inducement
               or reward for enrolling in the contractor's plan.

          2.   Promotional items, gifts, "give-aways" for marketing purposes
               shall be permitted, but will be limited to items that promote
               good health behavior (e.g., toothbrushes, immunization
               schedules). However, the combined total of such gifts or gift
               package shall not exceed an amount of $10 to any one individual
               or family. Such items:

               a.   Shall be offered to the general public for marketing
                    purposes whether or not an individual chooses to enroll in
                    the contractor's plan.

               b.   Shall only be given at the time of marketing presentations
                    and may not be a continuous, periodic activity for the same
                    individual, e.g., monthly or quarterly give-aways, as an
                    inducement to remain enrolled.

               c.   Shall not be in the form of cash.

               For NJ FamilyCare, other promotional items shall be considered
               with prior approval by DMAHS.

          3.   Raffles shall not be allowed.

     D.   Sanctions

          Violations of any of the above may result in any one or combination of
          the following:

          1.   Cessation or reduction of enrollment including auto assignment.

          2.   Reduction or elimination of marketing and/or community event
               participation.

          3.   Enforced special training/re-training of marketing
               representatives including, but not limited to, business ethics,
               marketing policies, effective sales practices, and State
               marketing policies and regulations.

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          4.   Referral to the Department of Banking and Insurance for review
               and suspension of commercial marketing activities.

          5.   Application of assessed damages by the State.

          6.   Referral to the Secretary of the United States Department of
               Health and Human Services for civil money penalties.

          7.   Termination of contract.

          8.   Referral to the New Jersey Division of Criminal Justice
               Department of Justice as warranted.

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ARTICLE SIX:  PROVIDER INFORMATION

6.1  GENERAL

     The contractor shall provide information to all contracted providers about
     the Medicaid/NJ FamilyCare managed care program in order to operate in full
     compliance with the contract and all applicable federal and State
     regulations. The contractor shall monitor provider knowledge and
     understanding of program requirements, and take corrective actions to
     ensure compliance with such requirements.

6.2  PROVIDER PUBLICATIONS

     A.   Provider Manual. The contractor shall issue a Provider Manual and
          Bulletins or other means of provider communication to the providers of
          medical/dental services. The manual and bulletins shall serve as a
          source of information to providers regarding Medicaid covered
          services, policies and procedures, statutes, regulations, telephone
          access and special requirements to ensure all contract requirements
          are being met. Alternative to provider manuals shall be prior approved
          by DMAHS.

          The contractor shall provide all of its providers with, at a minimum,
          the following information:

          1.   Description of the Medicaid/NJ FamilyCare managed care program
               and covered populations

          2.   Scope of Benefits

          3.   Modifications to Scope of Benefits

          4.   Emergency Services Responsibilities, including responsibility to
               educate enrollees regarding the appropriate use of emergency
               services

          5.   EPSDT program services and standards

          6.   Grievance procedures for both enrollee and provider

          7.   Medical necessity standards as well as practice guidelines or
               other criteria that will be used in making medical necessity
               decisions. Medical necessity decisions must be in accordance with
               the definition in Article 1 and based on peer-reviewed
               publications, expert medical opinion, and medical community
               acceptance.

          8.   Practice protocols/guidelines, including in particular guidelines
               pertaining to treatment of chronic/complex conditions common to
               the enrolled

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               populations if utilized by the contractor to monitor and/or
               evaluate provider performance. Practice guidelines may be
               included in a separate document.

          9.   The contractor's policies and procedures

          10.  PCP responsibilities

          11.  Other provider/subcontractors' responsibilities

          12.  Prior authorization and referral procedures

          13.  Description of the mechanism by which a provider can appeal a
               contractor's service decision through the DHSS' Independent
               Utilization Review Organization process

          14.  Protocol for encounter data element reporting/records

          15.  Procedures for screening and referrals for the MH/SA services

          16.  Medical records standards

          17.  Payment policies

     B.   Bulletins. The contractor shall develop and disseminate bulletins as
          needed to incorporate any and all changes to the Provider Manual. All
          bulletins shall be mailed to the State at least three (3) calendar
          days prior to publication or mailing to the providers or as soon as
          feasible. The Department shall have the right to issue and/or modify
          the bulletins at any time. If the DHS determines that there are
          factual errors or misleading information, the contractor shall be
          required to issue corrected information in the manner determined by
          the DHS.

     C.   Timeframes. Within twenty (20) calendar days after the contractor
          places a newly enrolled provider in an active status, the contractor
          shall furnish the provider with a current Provider Manual, all related
          bulletins and the contractor's methodology for supplying encounter
          data.

     D.   The contractor shall provide a Provider Manual to the Department. All
          updates of the manual shall also be provided to the Department on a
          timely basis.

     E.   The Provider Manual and all policies and procedures shall be reviewed
          at least annually to ensure that the contractor's current practices
          and contract requirements are reflected in the written policies and
          procedures.

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6.3   PROVIDER EDUCATION AND TRAINING

     A.   Initial Training. The contractor shall ensure that all providers
          receive sufficient training regarding the managed care program in
          order to operate in full compliance with program standards and all
          applicable federal and State regulations. At a minimum, all providers
          shall receive initial training in managed care services, the
          contractor's policies and procedures, and information about the needs
          of enrollees with special needs. Ongoing training shall be provided as
          deemed necessary by either the contractor or the State in order to
          ensure compliance with program standards.

          Subjects for provider training shall be tailored to the needs of the
          contractor's plan's target groups. Listed below are some examples of
          topics for training:

          1.   Identification and management of polypharmacy.

          2.   Identification and treatment of depression among elderly people
               and people with disabilities.

          3.   Identification and treatment of alcohol/substance abuse.

          4.   Identification of abuse and neglect.

          5.   Coordination of care with long-term services, mental health and
               substance abuse providers, including instruction regarding
               policies and procedures for maintaining the centralized member
               record.

          6.   Skills to assist elderly people and people with disabilities in
               coping with loss.

          7.   Cultural sensitivity to providing health care to various ethnic
               groups.

     B.   Ongoing Training. The contractor shall continue to provide
          communications and guidance for PCPs, specialty providers, and others
          about the health care needs of enrollees with special needs and foster
          cultural sensitivity to the diverse populations enrolled with the
          contractor.

6.4   PROVIDER TELEPHONE ACCESS

     A.   The contractor shall maintain a mechanism by which providers can
          access the contractor by telephone. The contractor shall maintain
          policies and procedures for staffing and training the allocated
          personnel, including the hours of operation, days of the week and
          numbers of personnel available, and the telephone number to the
          providers. Telephone access to the contractor shall be available to
          providers, at a minimum, from 8:00 a.m. to 5:00 p.m., Monday through
          Friday.

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     B.   Response time. The contractor shall respond to after hours telephone
          calls regarding medical care within the following timeframes: fifteen
          (15) minutes for crisis situations; forty-five (45) minutes for
          non-emergent, symptomatic issues; same day for non-symptomatic
          concerns.

     C.   At no time shall providers wait more than five (5) minutes on hold.

6.5   PROVIDER GRIEVANCES AND APPEALS

     A.   Payment Disputes. The contractor shall establish and utilize a
          procedure to resolve billing, payment, and other administrative
          disputes between health care providers and the contractor for any
          reason including, but not limited to: lost or incomplete claim forms
          or electronic submissions; requests for additional explanation as to
          services or treatment rendered by a health care provider;
          inappropriate or unapproved referrals initiated by the providers; or
          any other reason for billing disputes. The procedure shall include an
          appeal process and require direct communication between the provider
          and the contractor and shall not require any action by the enrollee.

     B.   Complaint, Grievances and Appeal. The contractor shall establish and
          maintain provider complaint, grievance and appeals procedures for any
          provider who is not satisfied with the contractor's policies and
          procedures, or with a decision made by the contractor, or disagrees
          with the contractor as to whether a service, supply, or procedure is a
          covered benefit, is medically necessary, or is performed in the
          appropriate setting. The contractor procedure shall satisfy the
          following minimum standards:

          1.   The contractor shall have in place an informal complaint process
               which network providers can use to make verbal complaints, to ask
               questions, and get problems resolved without going through the
               formal, written grievance process.

          2.   The contractor shall have in place a formal grievance and appeal
               process which network providers and non-participating providers
               can use to complain in writing.

          3.   Such procedures shall not be applicable to any disputes that may
               arise between the contractor and any provider regarding the
               terms, conditions, or termination or any other matter arising
               under contract between the provider and contractor.

     C.   The contractor shall log, track and respond to provider complaints and
          grievances.

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     D.   The contractor shall submit quarterly a Provider Grievances/Complaints
          Report. All provider grievances shall be summarized, with actions and
          recommendations of the Medical or Dental Director and QA Committee (if
          involved) clearly stated. The summary report shall include, but not be
          limited to, the following data elements:

          1.   Total number of all provider grievances and complaints received

          2.   Number of unresolved (pending) grievances and complaints

          3.   Category of the grievance or complaint, including, but not
               limited to:

               a.   Denials of requested services prior authorizations

               b.   Denials of specialty referrals

               c.   Enrollee allocation inequities

     E.   The contractor shall notify providers of the mechanism to appeal a
          contractor service decision on behalf of an enrollee, with the
          enrollee's consent, through the DHSS' Independent Utilization Review
          Organization process and that the provider is not entitled to request
          a Medicaid administrative law hearing.

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ARTICLE SEVEN: TERMS AND CONDITIONS (ENTIRE CONTRACT)

7.1  CONTRACT COMPONENTS

     The Contract, Attachments, Schedules, Appendices, Exhibits, and any
     amendments determine the work required of the contractor and the terms and
     conditions under which said work shall be performed.

     No other contract, oral or otherwise, regarding the subject matter of this
     contract shall be deemed to exist or to bind any of the parties or vary any
     of the terms contained in this contract.

7.2  GENERAL PROVISIONS

     A.   HCFA Approval. This contract is subject to approval by the Health Care
          Financing Administration (HCFA) and shall not be effective absent such
          approval. In addition, this contract is subject to HCFA's grant of a
          1915(b) waiver to mandate enrollment of children with special health
          care needs.

     B.   General. The contractor agrees that it shall carry out its obligations
          as herein provided in a manner prescribed under applicable federal and
          State laws, regulations, codes, and guidelines including New Jersey
          licensing regulations, the Medicaid, NJ KidCare and NJ FamilyCare
          State Plans, and in accordance with procedures and requirements as may
          from time to time be promulgated by the United States Department of
          Health and Human Services. These include:

          1.   42 U.S.C. -> 1396 et seq.

          2.   42 C.F.R., Parts 417, 434, 440, 455, 1000

          3.   45 C.F.R., Part 74

          4.   N.J.S.A. 30:4D-1 et seq.

          5.   N.J.S.A. 30:4I-1 et seq.

          6.   N.J.S.A. 30:4J-1 et seq.

          7.   N.J.S.A. 26:2J-1 et seq.

          8.   N.J.A.C. 10:74 et seq.

          9.   N.J.A.C. 10:49 et seq.

          10.  N.J.A.C. 10:79 et seq.

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          11.  New Jersey Medicaid, NJ KidCare, and NJ FamilyCare State Plans

          12.  1915(b) Waiver

          13.  N.J.A.C. 8:38 et seq. and amendments thereof, and the contractor
               shall comply with the higher standard contained in N.J.A.C. 8:38
               et seq. or this contract.

          14.  N.J.S.A. 59:13 et seq.

          15.  The federal and State laws and regulations above have been cited
               for reader ease. They are available for review at the New Jersey
               State Library, 185 West State Street, Trenton, New Jersey 08625.
               However, whether cited or not, the contractor is obligated to
               comply with all applicable laws and regulations and, in turn, is
               responsible for ensuring that its providers and subcontractors
               comply with all laws and regulations.

          16.  Neither the contractor nor its employees, providers, or
               subcontractors shall violate, or induce others to violate, any
               federal or state laws or regulations, or professional licensing
               board regulations.

     C.   Applicable Law and Venue. This contract and any and all litigation
          arising there from or related thereto shall be governed by the
          applicable laws, regulations, and rules of evidence of the State of
          New Jersey without reference to conflict of laws principles. The
          contractor shall agree and submit to the jurisdiction of the courts of
          the State of New Jersey should any dispute concerning this contract
          arise, and shall agree that venue for any legal proceeding against the
          State shall be in Mercer County.

     D.   Medicaid Provider. The contractor shall be a Medicaid provider and a
          health maintenance organization with a Certificate of Authority to
          operate government programs in New Jersey.

     E.   Significant Changes. The contractor shall report to the Contracting
          Officer(See Article 7.5) immediately all significant changes that may
          affect the contractor's performance under this contract.

     F.   Provider Enrollment Process. The contractor shall comply with the
          Medicaid provider enrollment process including the submission of the
          HCFA 1513 Form.

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<PAGE>   227
     G.   Conflicts in Provisions. The contractor shall advise DMAHS of any
          conflict of any provision of this contract with any federal or State
          law or regulation. The contractor is required to comply with the
          provisions of the federal or State law or regulation until such time
          as the contract may be amended. (See also Article 7.11.)

          Any provision of this contract that is in conflict with the above
          laws, regulations, or federal Medicaid statutes, regulations, or HCFA
          policy guidance is hereby amended to conform to the provisions of
          those laws, regulations, and federal policy. Such amendment of the
          contract shall be effective on the effective date of the statutes or
          regulations necessitating it and will be binding on the parties even
          though such amendment may not have been reduced to writing and
          formally agreed upon and executed by the parties.

     H.   Compliance with Codes. The contractor shall comply with the
          requirements of the New Jersey Uniform Commercial Code, the latest
          National Electrical Code, the Building Officials & Code Administrators
          International, Inc. (B.O.C.A.) Basic Building Code, and the
          Occupational Safety and Health Administration to the extent applicable
          to the contract.

     I.   Corporate Authority. All New Jersey corporations shall obtain a
          Certificate of Incorporation from the Office of the New Jersey
          Secretary of State prior to conducting business in the State of New
          Jersey.

          If a contractor is a corporation incorporated in a state other than
          New Jersey, the contractor shall obtain a Certificate of Authority to
          do business from the Office of the Secretary of State of New Jersey
          prior to execution of the contract. The contractor shall provide
          either a certification or notification of filing with the Secretary of
          State.

          If the contractor is an individual, partnership or joint venture not
          residing in this State or a partnership organized under the laws of
          another state, then the contractor shall execute a power of attorney
          designating the Secretary of State as his true and lawful attorney for
          the sole purpose of receiving process in any civil action which may
          arise out of the performance of this contract or agreement. This
          appointment of the Secretary of State shall be irrevocable and binding
          upon the contractor, his heirs, executors, administrators, successors
          or assigns. Within ten (10) days of receipt of this service, the
          Secretary of State shall forward same to the contractor at the address
          designated in the contract.

     J.   Contractor's Warranty. By signing this contract, the contractor
          warrants and represents that no person or selling agency has been
          employed or retained to solicit or secure the contract upon an
          agreement or understanding for a commission, percentage, brokerage or
          contingent fee, except bona fide employees or bona fide established
          commercial or selling agencies maintained by the

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          contractor for the purpose of securing business. The penalty for
          breach or violation of this provision may result in termination of the
          contract without the State being liable for damages, costs and/or
          attorney fees or, in the Department's discretion, a deduction from the
          contract price or consideration the full amount of such commission,
          percentage, brokerage or contingent fee.

     K.   MacBride Principles. The contractor shall comply with the MacBride
          principles of nondiscrimination in employment and have no business
          operations in Northern Ireland as set forth in N.J.S.A. 52:34-12.1.

     L.   Ownership of Documents. All documents and records, regardless of form,
          prepared by the contractor in fulfillment of the contract shall be
          submitted to the State and shall become the property of the State.

     M.   Publicity. Publicity and/or public announcements pertaining to the
          project shall be approved by the State prior to release. See Article
          5.16 regarding Marketing.

     N.   Taxes. Contractor shall maintain, and produce to the Department upon
          request, proof that all appropriate federal and State taxes are paid.

7.3   STAFFING

     In addition to complying with the specific administrative requirements
     specified in Articles Two through Six and Eight, the contractor shall
     adhere to the standards delineated below.

     A.   The contractor shall have in place the organization, management and
          administrative systems necessary to fulfill all contractual
          arrangements. The contractor shall demonstrate to DMAHS' satisfaction
          that it has the necessary staffing, by function and qualifications, to
          fulfill its obligations under this contract which include at a
          minimum:

          -    A designated administrative liaison for the Medicaid contract who
               shall be the main point of contact responsible for coordinating
               all administrative activities for this contract ("Contractor's
               Representative"; See also Article 7.5 below)

          -    A medical director who shall be a New Jersey licensed physician
               (M.D. or D.O.)

          -    Financial officer(s) or accounting and budgeting officer

          -    QM/UR coordinator who is a New Jersey-licensed registered nurse
               or physician

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          -    Prior authorization staff sufficient to authorize medical care
               twenty-four (24) hours per day/seven (7) days per week

          -    Designated Medicaid care manager(s) who shall be available to
               DMAHS medical staff to respond to medically related problems,
               complaints, and emergent or urgent situations

          -    A full-time Care Management Supervisor who is a New
               Jersey-licensed physician or has a Bachelor's degree in nursing
               and has a minimum of four (4) years of experience serving
               enrollees with special needs. The Care Management Supervisor
               shall be responsible for the management and supervision of the
               Care Management staff.

          -    Member services staff

          -    Provider services staff

          -    Encounter reporting staff/claims processors

          -    Grievance coordinator

          -    Adequate administrative and support staff

     B.   Staff Changes. The contractor shall inform the DMAHS, in writing,
          within seven (7) days of key administrative staffing changes (listed
          in A) in any of the positions noted in this Article.

     C.   Training. The contractor shall ensure that all staff have appropriate
          training, education, experience, and orientation to fulfill the
          requirements of the positions they hold and shall verify and document
          that it has met this requirement.

     D.   DMAHS Meetings. The contractor's CEO, president, or DHS-approved
          representative shall be required to attend DHS-sponsored contractor
          CEO dinners. No substitutes will be permitted. The Contractor's
          Representative, as hereinafter defined, shall be required to attend
          DHS-sponsored contractor Roundtable sessions.

7.4  RELATIONSHIPS WITH DEBARRED OR SUSPENDED PERSONS PROHIBITED

     Pursuant to Section 1932(d)(a) of the Social Security Act (42
     U.S.C.->1396u-2(d)(a)):

     A.   The contractor shall not have a director, officer, partner, or person
          with beneficial ownership of more than five (5) percent of the
          contractor's equity who has been debarred or suspended from
          participating in procurement activities under the

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<PAGE>   230
          Federal Acquisition Regulation or from participating in nonprocurement
          activities under regulations issued pursuant to Executive Order No.
          12549 or under guidelines implementing such order.

     B.   The contractor shall not have an employment, consulting, or any other
          agreement with a debarred or suspended person (as defined in Article
          7.4A above) for the provision of items or services that are
          significant and material to the contractor's contractual obligation
          with the State.

     C.   The contractor shall certify to DMAHS that it meets the requirements
          of this Article prior to initial contracting with the Department and
          at any time there is a changed circumstance from the last such
          certification. The contractor shall, among other sources, consult with
          the Excluded Parties List, which can be obtained from the General
          Services Administration.

     D.   If the contractor is found to be non-compliant with the provisions
          concerning affiliation with suspended or debarred individuals, DMAHS:

          1.   Shall notify the Secretary of the US Department of Health and
               Human Services of such non-compliance;

          2.   May continue the existing contract with the contractor unless the
               Secretary (in consultation with the Inspector General of the US
               Department of Health and Human Services [DHHS]) directs
               otherwise; and

          3.   May not renew or otherwise extend the duration of an existing
               contract with the contractor unless the Secretary (in
               consultation with the Inspector General of the DHHS) provides to
               DMAHS and to Congress a written statement describing compelling
               reasons that exist for renewing or extending the contract.

     E.   The contractor shall agree and certify it does not employ or contract,
          directly or indirectly, with:

          1.   Any individual or entity excluded from Medicaid participation
               under Sections 1128 (42 U.S.C.->1320a-7) or 1128A (42
               U.S.C.->1320a-7a) of the Social Security Act for the provision of
               health care, utilization review, medical social work, or
               administrative services or who could be excluded under Section
               1128(b)(8) of the Social Security Act as being controlled by a
               sanctioned individual;

          2.   Any entity for the provision of such services (directly or
               indirectly) through an excluded individual or entity;

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          3.   Any individual or entity excluded from Medicaid or NJ FamilyCare
               participation by DMAHS;

          4.   Any individual or entity discharged or suspended from doing
               business with the State of New Jersey; or

          5.   Any entity that has a contractual relationship (direct or
               indirect) with an individual convicted of certain crimes as
               described in Section 1128(b)(8) of the Social Security Act.

     F.   The contractor shall obtain, whenever issued, available State listings
          and notices of providers, their contractors, subcontractors, or any of
          the aforementioned individuals or entities, or their owners, officers,
          employees, or associates who are suspended, debarred, disqualified,
          terminated, or otherwise excluded from practice and/or participation
          in the fee-for-service Medicaid program. Upon verification of such
          suspension, debarment, disqualification, termination, or other
          exclusion, the contractor shall immediately act to terminate the
          provider from participation in this program. Termination for loss of
          licensure, criminal convictions, or any other reason shall coincide
          with the effective date of termination of licensure or the Medicaid
          program's termination effective date whichever is earlier.

7.5   CONTRACTING OFFICER AND CONTRACTOR'S REPRESENTATIVE

     A.   The Department shall designate a single administrator, hereafter
          called the "Contracting Officer." The Contracting Officer shall be
          appointed by the Commissioner of DHS. The Contracting Officer shall
          make all determinations and take all actions as are appropriate under
          this contract, subject to the limitations of applicable federal and
          New Jersey laws and regulations. The Contracting Officer may delegate
          his/her authority to act to an authorized representative through
          written notice to the contractor.

     B.   The contractor shall designate a single administrator, hereafter
          called the Contractor's Representative, who shall be an employee of
          the contractor. The Contractor's Representative shall make all
          determinations and take all actions as are appropriate to implement
          this contract, subject to the limitations of the contract, and to
          federal and New Jersey laws and regulations. The Contractor's
          Representative may delegate his or her authority to act to an
          authorized representative through written notice to the Contracting
          Officer. The Contractor's Representative shall have direct managerial
          and administrative responsibility and control over all aspects of the
          contract and shall be empowered to legally bind the contractor to all
          agreements reached with the Department.

     C.   The Contractor's Representative shall be designated in writing by the
          contractor no later than the first day on which the contract becomes
          effective.

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     D.   The Department shall have the right to approve or disapprove the
          Contractor's Representative.

7.6   AUTHORITY OF THE STATE

The State is the ultimate authority under this contract to:

     A.   Establish, define, or determine the reasonableness, the necessity and
          the level and scope of covered benefits under the managed care program
          administered in this contract or coverage for such benefits, or the
          eligibility of enrollees or providers to participate in the managed
          care program, or any aspect of reimbursement to providers, or of
          operations.

     B.   Establish or interpret policy and its application related to the
          above.

7.7   EQUAL OPPORTUNITY EMPLOYER

     The contractor shall, in all solicitations or advertisements for employees
     placed by or on behalf of the contractor, state that it is an equal
     opportunity employer, and shall send to each labor union or representative
     of workers with which it has a collective bargaining agreement or other
     contract or understanding, a notice to be provided by the Department
     advising the labor union or workers' representative of the contractor's
     commitments as an equal opportunity employer and shall post copies of the
     notice in conspicuous places available to employees and applicants for
     employment.

7.8   NONDISCRIMINATION REQUIREMENTS

     The contractor shall comply with the following requirements regarding
     nondiscrimination:

     A.   The contractor shall and shall require its providers and
          subcontractors to accept assignment of an enrollee and not
          discriminate against eligible enrollees because of race, color, creed,
          religion, ancestry, marital status, sexual orientation, national
          origin, age, sex, physical or mental handicap in accordance with Title
          VI of the Civil Rights Act of 1964, 42 U.S.C.->2000d, Section 504 of
          the Rehabilitation Act of 1973, 29 U.S.C. ->794, the Americans with
          Disabilities Act of 1990 (ADA), 42 U.S.C.->12131 and rules and
          regulations promulgated pursuant thereto, or as otherwise provided by
          law or regulation.

     B.   ADA Compliance. The contractor shall and shall require its providers
          or subcontractor to comply with the requirements of the Americans with
          Disabilities Act (ADA). In providing health care benefits, the
          contractor shall not directly or indirectly, through contractual,
          licensing, or other arrangements, discriminate against Medicaid/NJ
          FamilyCare beneficiaries who are qualified disabled

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<PAGE>   233
          individuals covered by the provisions of the ADA (See also Article
          4.5.2 for a description of the contractor's ADA compliance plan).

          A "qualified individual with a disability" defined pursuant to 42
          U.S.C.->12131 is an individual with a disability who, with or without
          reasonable modifications to rules, policies, or practices, the removal
          of architectural, communication, or transportation barriers, or the
          provision of auxiliary aids and services, meets the essential
          eligibility requirements for the receipt of services or the
          participation in programs or activities provided by a public entity
          (42 U.S.C.->12131).

          The contractor shall submit to DMAHS a written certification that it
          is conversant with the requirements of the ADA, that it is in
          compliance with the law, and that it has assessed its provider network
          and certifies that the providers meet ADA requirements to the best of
          the contractor's knowledge. The contractor shall survey its providers
          of their compliance with the ADA using a standard survey document that
          will be developed by the State. Survey attestation shall be kept on
          file by the contractor and shall be available for inspection by the
          DMAHS. The contractor warrants that it will hold the State harmless
          and indemnify the State from any liability which may be imposed upon
          the State as a result of any failure of the contractor to be in
          compliance with the ADA. Where applicable, the contractor shall abide
          by the provisions of Section 504 of the federal Rehabilitation Act of
          1973, as amended, 29 U.S.C.->794, regarding access to programs and
          facilities by people with disabilities.

     C.   The contractor shall and shall require its providers and
          subcontractors to not discriminate against eligible persons or
          enrollees on the basis of their health or mental health history,
          health or mental health status, their need for health care services,
          amount payable to the contractor on the basis of the eligible person's
          actuarial class, or pre-existing medical/health conditions.

     D.   The contractor shall and shall require its providers and
          subcontractors to comply with the Civil Rights Act of 1964 (42
          U.S.C.->2000d), the regulations (45 C.F.R. Parts 80 & 84) pursuant to
          that Act, and the provisions of Executive Order 11246, Equal
          Opportunity, dated September 24, 1965, the New Jersey
          anti-discrimination laws including those contained within N.J.S.A.
          10:2-1 through N.J.S.A. 10:2-4, N.J.S.A. 10:5-1 et seq. and N.J.S.A.
          10:5-38, and all rules and regulations issued thereunder, and any
          other laws, regulations, or orders which prohibit discrimination on
          grounds of age, race, ethnicity, mental or physical disability, sexual
          or affectional orientation or preference, marital status, genetic
          information, source of payment, sex, color, creed, religion, or
          national origin or ancestry. The contractor shall not discriminate
          against any employee engaged in the work required to produce the
          services covered by this contract, or against any applicant for such
          employment because of race, creed, color, national origin, age,
          ancestry, sex, marital status, religion, disability or sexual or
          affectional orientation or preference.

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     E.   The contractor shall not discriminate with respect to participation,
          reimbursement, or indemnification as to any provider who is acting
          within the scope of the provider's license or certification under
          applicable State law, solely on the basis of such license or
          certification. This paragraph shall not be construed to prohibit an
          organization from including providers only to the extent necessary to
          meet the needs of the organization's enrollees or from establishing
          any measure designed to maintain quality and control costs consistent
          with the responsibilities of the organization.

     F.   Scope. This non-discrimination provision shall apply to but not be
          limited to the following: recruitment or recruitment advertising,
          hiring, employment upgrading, demotion, or transfer, lay-off or
          termination, rates of pay or other forms of compensation, and
          selection for training, including apprenticeship included in PL 1975,
          Chapter 127 as attached hereto and made a part hereof.

     G.   Grievances. The contractor shall forward to the Department copies of
          all grievances alleging discrimination against enrollees because of
          race, color, creed, sex, religion, age, national origin, ancestry,
          marital status, sexual or affectional orientation, physical or mental
          handicap for review and appropriate action within three (3) business
          days of receipt by the contractor.

7.9  INSPECTION RIGHTS

     The contractor shall allow the New Jersey Department of Human Services, the
     US Department of Health and Human Services (DHHS), and other authorized
     State agencies, or their duly authorized representatives, to inspect or
     otherwise evaluate the quality, appropriateness, and timeliness of services
     performed under the contract, and to inspect, evaluate, and audit any and
     all books, records, and facilities maintained by the contractor and its
     providers and subcontractors, pertaining to such services, at any time
     during normal business hours (and after business hours when deemed
     necessary by DHS or DHHS) at a New Jersey site designated by the
     Contracting Officer. Pursuant to N.J.S.A. 10:49-9.8m inspections of
     contractors may be unannounced with or without cause, and inspections of
     providers and subcontractors may be unannounced for cause. Books and
     records include, but are not limited to, all physical records originated or
     prepared pursuant to the performance under this contract, including working
     papers, reports, financial records and books of account, medical records,
     dental records, prescription files, provider contracts and subcontracts,
     credentialing files, and any other documentation pertaining to medical,
     dental, and nonmedical services to enrollees. Upon request, at any time
     during the period of this contract, the contractor shall furnish any such
     record, or copy thereof, to the Department or the Department's External
     Review Organization within thirty (30) days of the request. If the
     Department determines, however, that there is an urgent need to obtain a
     record, the Department shall have the right to demand the record in less
     than thirty (30) days, but no less than twenty-four (24) hours.

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     Access shall be undertaken in such a manner as to not unduly delay the work
     of the contractor and/or its provider(s) or subcontractor(s). The right of
     access herein shall include onsite visits by authorized designees of the
     State.

     The contractor shall also permit the State, at its sole discretion, to
     conduct onsite inspections of facilities maintained by the contractor, its
     providers and subcontractors, prior to approval of their use for providing
     services to enrollees.

7.10 NOTICES/CONTRACT COMMUNICATION

     All notices or contract communication under this contract shall be in
     writing and shall be validly and sufficiently served by the State upon the
     contractor, and vice versa, if addressed and mailed by certified mail,
     delivered by overnight courier or hand-delivered to the following
     addresses:

      For DHS:

              Contracting Officer
              Division of Medical Assistance and Health Services
              P.O. Box 712
              Trenton, NJ 08625-0712

     The contractor shall specify the name of the Contractor's Representative
     and official mailing address for all formal communications. The name and
     address of the individual appears in Appendix D.6 and is incorporated
     herein by reference.

7.11    TERM

7.11.1  CONTRACT DURATION AND EFFECTIVE DATE

     The performance, duties, and obligations of the parties hereto shall
     commence on the effective date, provided that at the effective date the
     Director and the contractor agree that all procedures necessary to
     implement this contract are ready and shall continue for a period of nine
     (9) months thereafter unless suspended or terminated in accordance with the
     provisions of this contract. The initial nine (9) month period shall be
     known as the "original term" of the contract. The effective date of the
     contract shall be October 1, 2000.

7.11.2  AMENDMENT, EXTENSION, AND MODIFICATION

     A.   The contract may be amended, extended, or modified by written contract
          duly executed by the Director and the contractor. Any such amendment,
          extension or modification shall be in writing and executed by the
          parties hereto. It is mutually understood and agreed that no amendment
          of the terms of the contract shall be valid unless reduced to writing
          and executed by the parties hereto, and that no oral

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<PAGE>   236
          understandings, representations or contracts not incorporated herein
          nor any oral alteration or variations of the terms hereof, shall be
          binding on the parties hereto. Every such amendment, extension, or
          modification shall specify the date its provisions shall be effective
          as agreed to by the Department and the contractor. Any amendment,
          extension, or modification is not effective or binding unless
          approved, in writing, by duly authorized officials of DHS, HCFA, and
          any other entity, as required by law or regulation.

     B.   This contract may be extended for successive twelve (12) month periods
          beyond the original term of the contract whenever the Division
          supplies the contractor with at least ninety (90) days advance notice
          of such intent and if a written amendment to extend the contract is
          obtained from both parties. This successive twelve (12) month period
          shall be known as an "extension period" of the contract. In addition,
          ninety (90) days prior to the contract expiration, the Director shall
          provide the contractor with the proposed capitation rates for the
          extension period.

     C.   In the event that the capitation rates for the extension period are
          not provided ninety (90) days prior to the contract expiration, the
          contract will be extended at the existing rate which shall be an
          interim rate. After the execution of the succeeding rate amendment, a
          retroactive rate adjustment will be made to bring the interim rate to
          the level established by that amendment.

     D.   The contractor shall begin providing services to all populations
          covered under this contract on October 1, 2000. The State shall pay
          the contractor the capitation rates set forth in Appendix C, except
          for the following premium groups:

          1.   DDD With Medicare
          2.   DDD Without Medicare (ABD)
          3.   DDD Without Medicare (non-ABD)
          4.   AIDS - ABD With Medicare
          5.   AIDS & DDD - ABD With Medicare
          6.   AFDC - AIDS
          7.   AFDC - AIDS & DDD
          8.   Blind/Disabled With Medicare, less than 45 M & F
          9.   Blind/Disabled With Medicare, 45+ M & F

          For those enrollees who are members of the contractor's plan as of
          October 1, 2000 and who are subsequently identified by the State as
          members of one of the above premium groups, the State may initially
          pay the contractor the following capitation rates:

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<PAGE>   237
<TABLE>
<CAPTION>
PREMIUM GROUP                              INTERIM RATE
-------------                              ------------
<S>                                     <C>
DDD With Medicare                       Aged with Medicare

DDD Without Medicare (ABD)              ABD (including AIDS) Without Medicare

DDD Without Medicare (non-ABD)          ABD (including AIDS) Without Medicare

AIDS - ABD With Medicare                ABD (including AIDS) Without Medicare

AIDS & DDD - ABD With                   ABD (including AIDS) Without
Medicare                                Medicare

AFDC - AIDS                             ABD (including AIDS) Without Medicare

AFDC - AIDS & DDD                       ABD (including AIDS) Without Medicare

Blind/Disabled With Medicare,           Aged With Medicare
less than 45 M & F

Blind/Disabled With Medicare, 45+       Aged With Medicare
M & F
</TABLE>

          The State shall retroactively adjust these payments to reflect the
          premium rate for these enrollees.

     E.   Nothing in this Article shall be construed to prevent the Director by
          amendment to the contract from extending the contract on a month to
          month basis under the existing rates until such a time that the
          Director provides revised capitation rates pursuant to Article
          7.11.2B.

7.12 TERMINATION

     A.   Change of Circumstances. Where circumstances and/or the needs of the
          State significantly change or the contract is otherwise deemed by the
          Director to no longer be in the public interest, the DMAHS may
          terminate this contract upon no less than thirty (30) days notice to
          the contractor.

     B.   Emergency Situations. In cases of emergency the Department may shorten
          the time periods of notification.

     C.   For Cause. DMAHS shall have the right to terminate this contract,
          without liability to the State, in whole or in part if the contractor:

          1.   Takes any action or fails to prevent an action that threatens the
               health, safety or welfare of any enrollee, including significant
               marketing abuses;

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          2.   Takes any action that threatens the fiscal integrity of the
               Medicaid program;

          3.   Has its certification suspended or revoked by DOBI, DHSS, and/or
               any federal agency or is federally debarred or excluded from
               federal procurement and non-procurement contracts;

          4.   Materially breaches this contract or fails to comply with any
               term or condition of this contract that is not cured within
               twenty (20) working days of DMAHS' request for compliance;

          5.   Violates state or federal law;

          6.   Becomes insolvent; or

          7.   Brings a proceeding voluntarily, or has a proceeding brought
               against it involuntarily, under the Bankruptcy Act.

     D.   Notice and Hearing. Except as provided in A and B above, DMAHS shall
          give the contractor ninety (90) days advance, written notice of
          termination of this contract, with an opportunity to protest said
          termination and/or request an informal hearing. This notice shall
          specify the applicable provisions of this contract and the effective
          date of termination, which shall not be less than will permit an
          orderly disenrollment of enrollees to the Medicaid fee-for-service
          program or transfer to another managed care program.

     E.   Contractor's Right to Terminate for Material Breach. The contractor
          shall have the right to terminate this contract in the event that
          DMAHS materially breaches this contract or fails to comply with any
          material term or condition of this contract that is not cured within
          twenty (20) working days of the contractor's request for compliance.
          In such event, the contractor shall give DMAHS written notice
          specifying the reason for and the effective date of the termination,
          which shall not be less than will permit an orderly disenrollment of
          enrollees to the Medicaid fee-for-service program or transfer to
          another managed care program and in no event shall be less than ninety
          (90) days from the end of the twenty (20) day working day cure period.
          The effective date of termination is subject to DMAHS concurrence and
          approval.

     F.   Contractor's Right to Terminate for Act of God. The contractor shall
          have the right to terminate this contract if the contractor is unable
          to provide services pursuant to this contract because of a natural
          disaster and/or an Act of God to such a degree that enrollees cannot
          obtain reasonable access to services within the contractor's
          organization, and, after diligent efforts, the contractor cannot make
          other provisions for the delivery of such services. The contractor
          shall give

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          DMAHS, within forty-five (45) days after the disaster, written notice
          of any such termination that specifies:

          1.   The reasons for the termination, with appropriate documentation
               of the circumstances arising from a natural disaster or Act of
               God that precludes reasonable access to services;

          2.   The contractor's attempts to make other provisions for the
               delivery of services; and

          3.   The requested effective date of the termination, which shall not
               be less time than will permit an orderly disenrollment of
               enrollees to the Medicaid fee-for-service program or transfer to
               another managed care program. The effective date of termination
               is subject to DMAHS concurrence and approval.

     G.   Reduction in Funding. In the event that State and federal funding for
          the payment of services under this contract is reduced so that
          payments to the contractor cannot be made in full, this contract shall
          terminate, without liability to the State, unless both parties agree
          to a modification of the obligations under this contract. The
          effective date of such termination shall be ninety (90) days after the
          contractor receives written notice of the reduction in payment, unless
          available funds are insufficient to continue payments in full during
          the ninety (90) day period, in which case the Department shall give
          the contractor written notice of the earlier date upon which the
          contract shall terminate.

     H.   It is hereby understood and agreed by both parties that this contract
          shall be effective and payments by DMAHS made to the contractor
          subject to the availability of State and federal funds. It is further
          agreed by both parties that this contract can be renegotiated or
          terminated, without liability to the State in order to comply with
          state and federal requirements for the purpose of maximizing federal
          financial participation.

     I.   Upon termination of this contract, the contractor shall comply with
          the closeout procedures in Article 7.13.

     J.   Rights and Remedies. The rights and remedies of the Department
          provided in this Article shall not be exclusive and are in addition to
          all other rights and remedies provided by law or under this contract.

7.13 CLOSEOUT REQUIREMENTS

     A.   A closeout period shall begin one hundred-twenty (120) days prior to
          the last day the contractor is responsible for operating under this
          contract. During the closeout period, the contractor shall work
          cooperatively with, and supply program

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          information to, any subsequent contractor and DMAHS. Both the program
          information and the working relationships between the two contractors
          shall be defined by DMAHS.

     B.   The contractor shall be responsible for the provision of necessary
          information and records, whether a part of the MCMIS or compiled
          and/or stored elsewhere, to the new contractor and/or DMAHS during the
          closeout period to ensure a smooth transition of responsibility. The
          new contractor and/or DMAHS shall define the information required
          during this period and the time frames for submission. Information
          that shall be required includes but is not limited to:

          1.   Numbers and status of complaints and grievances in process;

          2.   Numbers and status of hospital authorizations in process, listed
               by hospital;

          3.   Daily hospital logs;

          4.   Prior authorizations approved and disapproved;

          5.   Program exceptions approved;

          6.   Medical cost ratio data;

          7.   Payment of all outstanding obligations for medical care rendered
               to enrollees;

          8.   All encounter data required by this contract; and

          9.   Information on beneficiaries in treatment plans who will require
               continuity of care consideration.

     C.   All data and information provided by the contractor shall be
          accompanied by letters, signed by the responsible authority,
          certifying to the accuracy and completeness of the materials supplied.
          The contractor shall transmit the information and records required
          under this Article within the time frames required by the Department.
          The Department shall have the right, in its sole discretion, to
          require updates to these data at regular intervals.

     D.   The new contractor shall reimburse any reasonable costs associated
          with the contractor providing the required information or as mutually
          agreed upon by the two contractors. The contractor shall not charge
          more than a cost mutually agreed upon by the contractor and DMAHS or
          as mutually agreed upon by the two contractors. If program operations
          are transferred to DMAHS, no such fees shall

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          be charged by the contractor nor paid by DMAHS. Under no circumstances
          shall a Medicaid beneficiary be billed for any record transfer.

     E.   The contractor shall continue to be responsible for provider and
          enrollee toll free numbers and after-hours calls until the last day of
          the closeout period. The new contractor shall bear financial
          responsibility for costs incurred in modifying the toll free number
          telephone system. The contractor shall, in good faith, negotiate a
          contract with the new contractor to coordinate/transfer the toll free
          number responsibilities, and will provide space at the contractor's
          current business address including access to necessary records, and
          information for the new contractor during a due diligence review
          period.

     F.   Effective two (2) weeks prior to the last day of the closeout period,
          the contractor shall work cooperatively with the new contractor to
          process service authorization requests received. The contractor shall
          be financially responsible for approved requests when the service is
          provided on or before the last day of the closeout period or if the
          service is provided through the data of discharge or thirty-one (31)
          days after the cancellation or termination of this contract for
          enrollees who remain hospitalized after the last day of the transition
          period. Disputes between the contractor and the new contractor
          regarding service authorizations shall be resolved by DMAHS.

     G.   The contractor shall continue to provide all required reports during
          the closeout period.

     H.   Runout Requirements - General. Runout for this Managed Care Contract
          shall consist of the processing, payment and monetary
          reconciliation(s) necessary regarding all enrollees, claims for
          payment from the contractor's provider network, appeals by both
          providers and/or enrollees, and final reports which identify all
          expenditures, up to and including the last month of capitated payment
          made to the contractor.

     I.   The contractor shall complete the processing and payment of claims
          generated during the life of the contract.

     J.   Runout Requirements - Items of Concern.

          1.   Information and documentation that the Department deems necessary
               under this Article, to effect a smooth Turnover to a successor
               contractor, shall be required to be submitted on a monthly basis.
               The Department shall have the right to require updates to this
               data at regular intervals.

          2.   Any other information or data, within the parameters of this
               Managed Care Contract, deemed necessary by the Department to
               assist in the reprocurement of the contract including where
               applicable, but not limited

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<PAGE>   242
               to, duplicate copies of x-rays, charting and lab reports, and
               copies of actual documents and supporting documentation, etc.,
               relevant to access, quality of care, and enrollee history shall
               be provided to DMAHS.

     K.   Runout Requirements - Final Transition. During the final forty-five
          (45) days before the end of the closeout period, the terminating and
          successor contractors shall share operational responsibilities, as
          delineated below:

          1.   Record Sharing. The contractor shall make available and/or
               require its providers to make available to the Department copies
               of medical/dental records, patient files, and any other pertinent
               information, including information maintained by any
               subcontractor or sub-subcontractor, necessary for efficient care
               management of enrollees, as determined by the Director. Under no
               circumstances shall a Medicaid enrollee be billed for this
               service.

          2.   Enrollee Notification. The terminating and successor contractors
               shall notify enrollees of the pending transition, with all
               notices to be submitted to DMAHS for review and approval before
               mail out.

     L.   Post-Operations Period. The post-operations period shall begin at
          12:00 a.m. the day after the last day of the closeout period. During
          the post-operations period, the contractor shall no longer be
          responsible for the operation of the program. Obligations of the
          contractor under this contract that are applicable to the post-
          operations period will apply whether or not they are enumerated in
          this Article.

          1.   The contractor shall maintain local telephone access for
               providers during the first six (6) months of the post-operations
               period.

          2.   The contractor shall be financially responsible for the
               resolution of beneficiary complaints and grievances timely filed
               prior to the last day of the post-operations period.

          3.   The contractor shall have a continuing obligation to provide any
               required reports during the closeout and post-operations periods.

          4.   The contractor shall refill prescriptions to cover a minimum of
               ten (10) days beyond the contract termination date, unless other
               arrangements are made with the receiving contractor and approved
               by DMAHS.

          5.   The contractor shall provide DME for a minimum of the first
               thirty (30) days of the post-operations period, unless other
               arrangements are made with the receiving contractor and approved
               by DMAHS.

                                                                          VII-18
<PAGE>   243
               a.   Customized DME is considered to belong to the enrollee and
                    stays with the enrollee when there is a change of
                    contractors.

               b.   Non-customized DME may be reclaimed by the contractor when
                    the enrollee no longer requires the equipment if a system is
                    in place for refurbishing and reissuing the equipment. If no
                    such system is in place, the non-customized DME shall be
                    considered the property of the enrollee.

          6.   The contractor shall, within sixty days after the end of the
               closeout period, account for and return any and all funds
               advanced by the Department for coverage of enrollees for periods
               subsequent to the effective date of post-operations.

          7.   The contractor shall submit to the Department within ninety (90)
               days after the end of the closeout period an annual report for
               the period through which services are rendered, and a final
               financial statement and audit report including at a minimum,
               revenue and expense statements relating to this contract, and a
               complete financial statement relating to the overall lines of
               business of the contractor prepared by a Certified Public
               Accountant or a licensed public accountant.

     M.   In the event of termination of the contract by DMAHS, such termination
          shall not affect the obligation of contractor to indemnify DMAHS for
          any claim by any third party against the State or DMAHS arising from
          contractor's performance of this contract and for which contractor
          would otherwise be liable under this contract.

7.14  MERGER/ACQUISITION REQUIREMENTS

     A.   General Information. In addition to any other information otherwise
          required by the State, a contractor that intends to merge with or be
          acquired by another entity ("non-surviving contractor") shall provide
          the following information and documents to DHS, and copies to DHSS and
          DOBI, one hundred-twenty (120) days prior to the effective date of the
          merger/acquisition:

          1.   The basic details of the sale, including the name of the
               acquiring legal entity, the date of the sale and a list of all
               owners with five (5) percent or more ownership.

          2.   The source of funds for the purchase.

          3.   A Certificate of Authority modification.

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<PAGE>   244
          4.   Any changes in the provider network, including but not limited to
               a comparison of hospitals that no longer will be available under
               the new network, and comparison of PCPs and specialists
               participating and not participating in both HMOs.

          5.   Submit a draft of the asset purchase agreement to DHS, DHSS, and
               DOBI for prior approval prior to execution of the document.

          6.   The closing date for the merger/acquisition, which shall occur
               prior to the required notification to enrollees, i.e. no later
               than forty-five (45) days prior to effective date of transition
               of enrollees.

          7.   Submit a copy of all information, including all financials, sent
               to/required by DHSS and DOBI.

     B.   General Requirements. The non-surviving contractor shall:

          1.   Comply with the provisions of Article 7.13, Closeout; and

          2.   Meet and complete all outstanding issues, reporting requirements
               (including but not limited to encounter data reporting, quality
               assurance studies, financial reports, etc.)

     C.   Medicaid Beneficiary Notification. By no later than sixty (60) days,
          the non-surviving contractor shall prepare and submit, in English and
          Spanish, to the DMAHS, letters and other materials which shall be
          mailed to its enrollees no later than forty-five (45) days prior to
          the effective date of transfer in order to assist them in making an
          informed decision about their health and needs. Separate notices shall
          be prepared for mandatory populations and voluntary populations. The
          letter should contain the following, at a minimum:

          1.   From the non-surviving contractor:

               a.   The basic details of the sale, including the name of the
                    acquiring legal entity, and the date of the sale.

               b.   Any major changes in the provider network, including at
                    minimum a comparison of hospitals that no longer will be
                    available under the network, if that is the case.

               c.   For each enrollee, a representation whether that
                    individual's primary care provider under the non-surviving
                    contractor's plan will be available under the acquiring
                    contractor's plan. When the PCP is no longer available under
                    the acquiring contractor's plan,

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<PAGE>   245
                    the enrollee shall be advised to call the HBC to see what
                    other MCE the PCP participates in.

               d.   In those cases where a primary dentist is selected under the
                    non-surviving contractor's plan, a representation whether
                    each individual's primary dentist under the non-surviving
                    contractor's plan will be available under the acquiring
                    contractor's plan.

               e.   Information on beneficiaries in treatment plans and the
                    status of any continuing medical care being rendered under
                    the non-surviving contractor's plan, how that treatment
                    will continue, and time frames for transition from the
                    non-surviving contractor's plan to the acquiring
                    contractor's plan.

               f.   Any changes in the benefits/procedures between the
                    non-surviving contractor's plan and the acquiring
                    contractor's plan, including for example, eye care and
                    glasses benefits, over-the-counter drugs, and referral
                    procedures, etc.

               g.   Toll free telephone numbers for the HBC and the acquiring
                    entity where enrollees' questions can be answered.

               h.   A time frame of not less than two weeks (fourteen days) for
                    the beneficiary to make a decision about staying in the
                    acquiring contractor's plan, or switching to another MCE
                    (for mandatory beneficiaries). The time frame should
                    incorporate the monthly cut-off dates established by the
                    DMAHS and the HBC for the timely and accurate production of
                    Medicaid identification cards.

               i.   For voluntary populations, the letter should indicate the
                    option to revert to the fee-for-service system.

          2.   From the acquiring contractor:

               a.   If the acquiring contractor wishes to send welcoming
                    letters, it shall submit for prior approval to DMAHS, all
                    welcoming letters and information it will send to the new
                    enrollees no later than thirty (30) days prior to the
                    effective date of transfer.

               b.   The acquiring contractor may not, either directly or
                    indirectly, contact the enrollees of the non-surviving
                    contractor, prior to the enrollees conversion (approximately
                    ten (10) days prior to the effective date of transfer).

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<PAGE>   246
                    Any returned mail should be re-sent two additional times. If
                    the mail to a beneficiary is returned three times, the name,
                    the Medicaid identification number and last know address
                    should be submitted to the DMAHS for research to determine a
                    more current address.

     D.   Provider Notification. By no later than ninety (90) days prior to the
          effective date of transfer, the non-surviving contractor shall notify
          its providers of the pending sale or merger, and of hospitals,
          specialists and laboratories that will no longer be participating as a
          result of the merger/acquisition.

     E.   Marketing/Outreach.

          1.   The acquiring contractor may not make any unsolicited home visits
               or telephone calls to enrollees of the non-surviving contractor,
               before the effective date of coverage under the acquiring
               contractor's plan.

          2.   Coincident with the date that enrollee notification letters are
               sent to those enrollees affected by the merger/acquisition, the
               non-surviving contractor shall no longer be offered as an option
               to either new enrollees or to those seeking to transfer from
               other plans. DMAHS shall approve all enrollee notification
               letters, and they shall be mailed by the non-surviving
               contractor. Marketing by the non-surviving contractor shall also
               cease on that date.

     F.   Provider Network. The acquiring contractor shall supply the DMAHS and
          the HBC with an updated provider network fifty (50) days prior to the
          effective date of transfer on a diskette formatted in accordance with
          the procedures set forth in Section A.4.1 of the Appendices.
          Additionally, the acquiring contractor shall furnish to the DMAHS
          individual provider capacity analyses and how the provider/enrollee
          ratio limits will be maintained in the new entity. This network
          information shall be furnished before the enrollee notification
          letters are to be sent. Such letters shall not be mailed until there
          is a clear written notification by the DMAHS that the provider network
          information meets all of the DMAHS requirements. The network
          submission shall include all required provider types listed in Article
          4, shall be formatted in accordance with specifications in Article 4
          and Section A.4.1 of the Appendices, and shall include a list of all
          providers who decline participation with the acquiring contractor and
          new providers who will participate with the acquiring contractor. The
          acquiring contractor shall submit weekly updates through the ninety
          (90) day period following the effective date of transfer.

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<PAGE>   247
     G.   Administrative.

          1.   The non-surviving contractor shall inform DMAHS of the corporate
               structure it will assume once all enrollees are transitioned to
               the acquiring contractor. Additionally, an indication of the time
               frame that this entity will continue to exist shall be provided.

          2.   The contract of the non-surviving contractor is not terminated
               until the transaction (acquisition or merger) is approved,
               enrollees are placed, and all outstanding issues with DOBI, DHSS,
               and DHS are resolved. Some infrastructure shall exist for up to
               one year beyond the last date of services to enrollees in order
               to fulfill remaining contractual requirements.

          3.   The acquiring contractor and the non-surviving contractor shall
               maintain their own separate administrative structure and staff
               until the effective date of transfer.

7.15 SANCTIONS

     In the event DMAHS finds the contractor to be out-of-compliance with
     program standards, performance standards or the terms or conditions of this
     contract, the Department shall issue a written notice of deficiency,
     request a corrective action plan and/or specify the manner and timeframe in
     which the deficiency is to be cured. If the contractor fails to cure the
     deficiency as ordered, the Department shall have the right to exercise any
     of the administrative sanction options described below, in addition to any
     other rights and remedies that may be available to the Department. The type
     of action taken shall be in relation to the nature and severity of the
     deficiency:

     A.   Suspend enrollment of beneficiaries in contractor's plan.

     B.   Notify enrollees of contractor non-performance and permit enrollees to
          transfer to another MCE.

     C.   Reduce or eliminate marketing and/or community event participation.

     D.   Terminate the contract, under the provisions of the preceding Article.

     E.   Cease auto-assignment of new enrollees.

     F.   Refuse to renew the contract.

     G.   Impose and maintain temporary management in accordance with
          Section 1932(e)(2) of the Social Security Act during the period in
          which improvements are made to correct violations.

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<PAGE>   248
     H.   In the case of inappropriate marketing activities, referral may also
          be made to the Department of Banking and Insurance for review and
          appropriate enforcement action.

     I.   Require special training or retraining of marketing representatives
          including, but not limited to, business ethics, marketing policies,
          effective sales practices, and State marketing policies and
          regulations, at the contractor's expense.

     J.   In the event the contractor becomes financially impaired to the point
          of threatening the ability of the State to obtain the services
          provided for under the contract, ceases to conduct business in the
          normal course, makes a general assignment for the benefit of
          creditors, or suffers or permits the appointment of a receiver for its
          business or its assets, the State may, at its option, immediately
          terminate this contract effective the close of business on the date
          specified.

     K.   Refuse to consider for future contracting a contractor that fails to
          submit encounter data on a timely and accurate basis.

     L.   Refer the matter to the US Department of Justice, the US Attorney's
          Office, the New Jersey Division of Criminal Justice, and/or the New
          Jersey Division of Law as warranted.

     M.   Refer the matter to the applicable federal agencies for civil money
          penalties.

     N.   Refer the matter to the New Jersey Division of Civil Rights where
          applicable.

     O.   Exclude the contractor from participation in the Medicaid program.

     P.   Refer the matter to the New Jersey Division of Consumer Affairs.

     The contractor may appeal the imposition of sanctions or damages in
     accordance with Article 7.18.

7.16    LIQUIDATED DAMAGES PROVISIONS

7.16.1  GENERAL PROVISIONS

     It is agreed by the contractor that:

     A.   If contractor does not provide or perform the requirements referred to
          or listed in this provision, damage to the State may result.

     B.   Proving such damages shall be costly, difficult, and time-consuming.

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<PAGE>   249
     C.   Should the State choose to impose liquidated damages, the contractor
          shall pay the State those damages for not providing or performing the
          specified requirements; if damages are imposed, collection shall be
          from the date the State placed the contractor on notice or as may be
          specified in the written notice.

     D.   Additional damages may occur in specified areas by prolonged periods
          in which contractor does not provide or perform requirements.

     E.   The damage figures listed below represent a good faith effort to
          quantify the range of harm that could reasonably be anticipated at the
          time of the making of the contract.

     F.   The Department may, at its discretion, withhold capitation payments in
          whole or in part, or offset with advanced notice liquidated damages
          from capitation payments owed to the contractor.

     G.   The DHS shall have the right to deny payment or recover reimbursement
          for those services or deliverables which have not been performed and
          which due to circumstances caused by the contractor cannot be
          performed or if performed would be of no value to the State. Denial of
          the amount of payment shall be reasonably related to the amount of
          work or deliverable lost to the State.

     H.   The DHS shall have the right to recover incorrect payments to the
          contractor due to omission, error, fraud or abuse, or defalcation by
          the contractor. Recovery to be made by deduction from subsequent
          payments under this contract or other contracts between the State and
          the contractor, or by the State as a debt due to the State or
          otherwise as provided by law.

     I.   Whenever the State determines that the contractor failed to provide
          one (1) or more of the medically necessary covered contract services,
          the State shall have the right to withhold a portion of the
          contractor's capitation payments for the following month or subsequent
          months, such portion withheld to be equal to the amount of money the
          State shall pay to provide such services along with administrative
          costs of making such payment. Any other harm to the State or the
          beneficiary/enrollee shall be calculated and applied as a damage. The
          contractor shall be given written notice prior to the withholding of
          any capitation payment.

     J.   The contractor shall submit a written corrective action plan for any
          deficiency identified by the Department in writing within five (5)
          business days from the date of receipt of the Department's
          notification or within a time determined by the Department depending
          on the nature of the issue. For each day beyond that time that the
          Department has not received an acceptable corrective action plan,
          monetary damages in the amount of one hundred dollars ($100) per day
          for five (5) days and two hundred fifty ($250) per day thereafter will
          be deducted from the capitation payment to the contractor. The
          contractor shall implement the

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          corrective action plan immediately from time of Department
          notification of the original problem pending approval of the final
          corrective action plan. The damages shall be applied for failure to
          implement the corrective action plan from the date of original State
          notification of the problem. Corrective action plans apply to each of
          the areas in this Article for potential liquidated damages and the
          time period allowed shall be at the sole discretion of the DMAHS.

     K.   Self-Reporting of Failures and Noncompliance. Any monetary damages
          that otherwise would be assessed pursuant to this Article of this
          contract, may be reduced, at the State's option, if the contractor
          reports the failure or noncompliance in written detail to DMAHS prior
          to notice of the noncompliance from the Department. The amount of the
          reduction shall be no more than ninety (90) percent of the total value
          of the monetary damages.

     L.   Nothing in this provision shall be construed as relieving the
          contractor from performing any other contract duty not listed herein,
          nor is the State's right to enforce or to seek other remedies for
          failure to perform any other contract duty hereby diminished.

7.16.2 MANAGED CARE OPERATIONS, TERMS AND CONDITIONS, AND PAYMENT PROVISIONS

     During the life of the contract, the contractor shall provide or perform
     each of the requirements as stated in the contract.

     Except as provided for elsewhere in this Article (i.e., the other
     liquidated damages provisions in this Article take precedence), for each
     and every contractor requirement not provided or performed as scheduled, or
     if a requirement is provided or performed inaccurately or incompletely, the
     Department, if it intends to impose liquidated damages, shall notify the
     contractor in writing that the requirement was not provided or performed as
     specified and that liquidated damages will be assessed accordingly.

     The contractor shall have fifteen (15) business days from the date of such
     written notice from the Department, or longer if the Department so allows,
     or through a corrective action plan approved by DHS to provide or perform
     the requirement as specified.

     Liquidated Damages:

     If the contractor does not provide or perform the requirement within
     fifteen (15) business days of the written notice, or longer if allowed by
     the Department, or through an approved corrective action plan, the
     Department may impose liquidated damages of $250 per requirement per day
     for each day the requirement continues not to be provided or performed. If
     after fifteen (15) additional days from the date the Department imposes
     liquidated damages, the requirement still has not been provided or
     performed, the

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     Department, after written notice to the contractor, may increase the
     liquidated damages to $500 per requirement per day for each day the
     requirement continues to be unprovided or unperformed.

7.16.3  TIMELY REPORTING REQUIREMENTS

     The contractor shall produce and deliver timely reports within the
     specified timeframes and descriptions in the contract including information
     required by the ERO. Reports shall be produced and delivered on both a
     scheduled and mutually agreed upon on-request basis according to the
     schedule established by DMAHS.

     Liquidated Damages:

     For each late report, the Department shall have the right to impose
     liquidated damages of $250 per day per report until the report is provided.
     For any late report that is not delivered after thirty (30) days or such
     longer period as the Department shall allow, the Department, after written
     notice, shall have the right to increase the liquidated damages assessment
     to $500 per day per report until the report is provided.

7.16.4  ACCURATE REPORTING REQUIREMENTS

     Every report due the State shall contain sufficient and accurate
     information and in the approved media format to fulfill the State's purpose
     for which the report was generated.

     If the Department imposes liquidated damages, it shall give the contractor
     written notice of a report that is either insufficient or inaccurate and
     that liquidated damages will be assessed accordingly. After such notice,
     the contractor shall have fifteen (15) business days, or such longer period
     as the Department may allow, to correct the report.

     Encounter data shall be accurate and complete, i.e., have no missing
     encounters or required data elements.

     Liquidated Damages:

     If the contractor fails to correct the report within the fifteen (15)
     business days, or such longer period as the Department may allow, the
     Department shall have the right to impose liquidated damages of $250 per
     day per report until the corrected report is delivered. If the report
     remains uncorrected for more than thirty (30) days from the date liquidated
     damages are imposed, the Department, after written notice, shall have the
     right to increase the liquidated damages assessment to $500 per day per
     report until the report is corrected.

     An amount of $1 may be assessed for each missing or omitted encounter. In
     addition, $1 per encounter or encounter data element may be assessed for
     any pending encounter or error that is not corrected and returned to DMAHS
     within thirty (30) days after

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     notification by DMAHS that the data are incomplete or incorrect. The
     Department shall have the right to calculate the total number of missing or
     omitted encounters and encounter data by extrapolating from a sample of
     missing or omitted encounters and encounter data.

7.16.5  TIMELY PAYMENTS TO MEDICAL PROVIDERS

     The contractor shall process claims in accordance with New Jersey laws and
     regulations and shall be subject to damages pursuant to such laws and
     regulations. In addition, pursuant to this contract the Department may
     assess liquidated damages if the contractor does not process (pay or deny)
     claims within the following timeframes: ninety (90) percent of all claims
     (the totality of claims received whether contested or uncontested)
     submitted electronically by medical providers within thirty (30) days of
     receipt; ninety (90) percent of all claims filed manually within forty (40)
     days of receipt; ninety-nine (99) percent of all claims, whether submitted
     electronically or manually, within sixty (60) days of receipt; and one
     hundred (100) percent of all claims within ninety (90) days of receipt.
     Claims processed for providers under investigation for fraud or abuse and
     claims suppressed pursuant to Article 8.9 (regarding PIPs) are not subject
     to these requirements.

     The amount of time required to process a paid claim shall be computed in
     days by comparing the initial date of receipt with the check mailing date.
     The amount of time required to process a denied claim (whether all or part
     of the claim is denied) shall be computed in days by comparing the date of
     initial receipt with the denial notice mailing date. Claims processed
     during the quarter shall be reported in required categories through the
     Claims Lag report (See Section A.7.6 of the Appendices (Table 4A and B)).
     Table 4A shall be used to report claims submitted manually and Table 4B
     shall be used to report claims submitted electronically.

     Liquidated Damages:

     Liquidated damages may be assessed if the contractor does not meet the
     above requirements on a quarterly basis. Based on the contractor-reported
     information on the claims lag reports, the Department shall determine for
     each time period (thirty (30)/forty (40), sixty (60), and ninety (90) days)
     the actual percentage of claims processed (electronic and manual claims
     shall be added together). This number shall be subtracted from the
     percentage of claims the contractor should have processed in the particular
     time period. The difference shall be expressed in points. For example, if
     the contractor only processed eighty-eight (88) percent of electronic
     claims within thirty (30) days and eighty-eight (88) percent of manual
     claims within forty (40) days, it shall be considered to be two (2) points
     short for that time period. The points that the contractor is short for
     each of the three time periods shall be added together. This sum shall then
     be multiplied times .0004 times the Medicaid capitation payments received
     by the contractor during the quarter at issue to arrive at the liquidated
     damages amount.

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         No offset shall be given if a criterion is exceeded. DMAHS reserves the
         right to audit and/or request detail and validation of reported
         information. DMAHS shall have the right to accept or reject the
         contractor's report and may substitute reports created by DMAHS if
         contractor fails to submit reports or the contractor's reports are
         found to be unacceptable.

7.16.6  CONDITIONS FOR TERMINATION OF LIQUIDATED DAMAGES

         Except as waived by the Contracting Officer, no liquidated damages
         imposed on the contractor shall be terminated or suspended until the
         contractor issues a written notice of correction to the Contracting
         Officer certifying the correction of condition(s) for which liquidated
         damages were imposed and until all contractor corrections have been
         subjected to system testing or other verification at the discretion of
         the Contracting Officer. Liquidated damages shall cease on the day of
         the contractor's certification only if subsequent testing of the
         correction establishes that, indeed, the correction has been made in
         the manner and at the time certified to by the contractor.

         A.       The contractor shall provide the necessary system time to
                  system test any correction the Contracting Officer deems
                  necessary.

         B.       The Contracting Officer shall determine whether the necessary
                  level of documentation has been submitted to verify
                  corrections. The Contracting Officer shall be the sole judge
                  of the sufficiency and accuracy of any documentation.

         C.       System corrections shall be sustained for a reasonable period
                  of at least ninety (90) days from State acceptance; otherwise,
                  liquidated damages may be reimposed without a succeeding grace
                  period within which to correct.

         D.       Contractor use of resources to correct deficiencies shall not
                  be allowed to cause other system problems.

7.16.7  EPSDT PERFORMANCE STANDARDS

         A.       The contractor shall ensure that it has achieved a fifty (50)
                  percent participation rate for the first twelve (12)-month
                  contract period. Participation rates for subsequent years
                  shall be established and incorporated into the contract for
                  future years. "Participation" is defined as one initial or
                  periodicity visit and will be measured using encounter data.
                  If the contractor has not achieved the fifty (50) percent
                  participation rate by the end of the first contract year, it
                  shall submit a corrective action plan to DMAHS within thirty
                  (30) days of notification by DMAHS of its actual participation
                  rate. DMAHS shall have the right to conduct a follow-up onsite
                  review and/or impose financial damages for non-compliance.

                  Failure of the contractor to achieve the minimum screening
                  rate shall require the following refund of capitation paid:

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<PAGE>   254
                  1.       Achievement of a 25 percent to less than 50 percent
                           EPSDT and lead screenings, dental visits and
                           immunization rate (the lowest measured rate of each
                           of the components of EPSDT screening, i.e., periodic
                           exam, immunization rate, lead screening rate, and
                           dental screening rate, shall be considered to be the
                           rate for EPSDT participation and the basis for the
                           sanction): refund of $10 per enrollee for all
                           enrollees under age 21 times the most current average
                           length of enrollment in years of enrollees under age
                           21.

                  2.       Achievement of less than 25 percent: refund of $25
                           per enrollee for all enrollees under age 21 times the
                           most current average length of enrollment in years of
                           enrollees under 21.

         B.       Failure to achieve and maintain the required screening rate
                  shall result in the Local Health Departments being permitted
                  to screen the contractor's pediatric members. The cost of
                  these screenings shall be paid by the DMAHS to the LHD, and
                  the screening cost shall be deducted from the contractor's
                  capitation rate in addition to the damages imposed as a result
                  of failure to achieve EPSDT performance standards.

7.16.8     DEPARTMENT OF HEALTH AND HUMAN SERVICES CIVIL MONEY PENALTIES

7.16.8.1   FEDERAL STATUTES

         Pursuant to 42 U.S.C. Section 1396b(m)(5)(A), the Secretary of the
         Department of Health and Human Services may impose substantial monetary
         and/or criminal penalties on the contractor when the contractor:

         A.       Fails to substantially provide an enrollee with required
                  medically necessary items and services, required under law or
                  under contract to be provided to an enrolled beneficiary, and
                  the failure has adversely affected the enrollee or has
                  substantial likelihood of adversely affecting the enrollees.

         B.       Imposes premiums or charges on enrollees in violation of this
                  contract, which provides that no premiums, deductibles,
                  co-payments or fees of any kind may be charged to Medicaid
                  enrollees.

         C.       Engages in any practice that discriminates among enrollees on
                  the basis of their health status or requirements for health
                  care services by expulsion or refusal to re-enroll an
                  individual or engaging in any practice that would reasonably
                  be expected to have the effect of denying or discouraging
                  enrollment by eligible persons whose medical condition or
                  history indicates a need for substantial future medical
                  services.

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<PAGE>   255
         D.       Misrepresents or falsifies information that is furnished to 1)
                  the Secretary, 2) the State, or 3) to any person or entity.

         E.       Fails to comply with the requirements for physician incentive
                  plans found in 42 U.S.C. Section 1876(i)(8), Section B.7.1 of
                  the Appendices, and at 42 C.F.R. Section 417.479, or fails to
                  submit to the Division its physician incentive plans as
                  required or requested in 42 C.F.R. Section 434.70.

7.16.8.2  FEDERAL PENALTIES

         A.       The Secretary may provide, in addition to any other remedies
                  available under the law, for any of the following remedies:

                  1.       Civil money penalties of not more than $25,000 for
                           each determination above; or,

                           with respect to a determination under Article
                           7.16.8.1C or 1D, above, of not more than $100,000 for
                           each such determination; plus,

                           with respect to a determination under Article
                           7.16.8.1B above, double the amount charged in
                           violation of such Article (and the excess amount
                           charged shall be deducted from the penalty and
                           returned to the individual concerned); and the
                           Secretary may seek criminal penalties; and plus,

                           with respect to a determination under Article
                           7.16.8.1C above, $15,000 for each individual not
                           enrolled as a result of a practice described in such
                           Article.

                  2.       Suspension of enrollment of individuals after the
                           date the Secretary notifies the Division of a
                           determination to assess damages as described in
                           Article 7.16.8.2A above, and until the Secretary is
                           satisfied that the basis for such determination has
                           been corrected and is not likely to recur, or

                  3.       Suspension of payment to the contractor for
                           individuals enrolled after the date the Secretary
                           notifies the Division of a determination under
                           Article 7.16.8.2A above and until the Secretary is
                           satisfied that the basis for such determination has
                           been corrected and is not likely to recur.

         B.       The contractor shall be responsible to pay any costs incurred
                  by the State as a result of the Secretary denying payment to
                  the State under 42 U.S.C. Section 1396(m)(5)(B)(ii). The State
                  shall have the right to offset such costs from amounts
                  otherwise due to the contractor.

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<PAGE>   256
         C.       Determination by the Division/Secretary regarding the amount
                  of the penalty and assessment for failure to comply with
                  physician incentive plans shall be in accordance with 42
                  C.F.R. Section 1003.106, i.e., the extent to which the failure
                  to provide medically necessary services could be attributed to
                  a prohibited inducement to reduce or limit services under a
                  physician incentive plan and the harm to the enrollee which
                  resulted or could have resulted from such failure. It would be
                  considered an aggravating factor if the contracting
                  organization knowingly or routinely engaged in any prohibited
                  practice which acted as an inducement to reduce or limit
                  medically necessary services provided with respect to a
                  specific enrollee in the contractor's plan.

7.17     STATE SANCTIONS

         DMAHS shall have the right to impose any of the sanctions and damages
         authorized or required by N.J.S.A. 30:4D-1 et seq., N.J.A.C. 10:49-1 et
         seq., or federal statute or regulation against the contractor or its
         providers or subcontractors pursuant to this contract. The DMAHS shall
         have the right to withhold and/or offset any payments otherwise due to
         the contractor pursuant to such sanctions and damages.

7.18     APPEAL PROCESS

         In order to appeal the DMAHS imposition of any sanctions or damages,
         the contractor shall request review by and submit supporting
         documentation first to the Executive Director, Office of Managed Health
         Care (OMHC), within twenty (20) days of receipt of notice. The
         Executive Director, OMHC, shall issue a response within thirty (30)
         days of receipt of the contractor's submissions. Thereafter, the
         contractor may obtain a second review by the Director by filing the
         request for review with supporting documentation and copy of the
         Executive Director's decision within twenty (20) days of the
         contractor's receipt of the Executive Director's decision. The
         imposition of sanctions and damages is not automatically stayed pending
         appeal. Pending final determination of any dispute hereunder, the
         contractor shall proceed diligently with the performance of this
         contract and in accordance with the Contracting Officer's direction.

7.19     ASSIGNMENTS

         The contractor shall not, without the Department's prior written
         approval, assign, delegate, transfer, convey, sublet, or otherwise
         dispose of this contract; of the contractor's administrative or
         management operations/service under this contract; of the contractor's
         right, title, interest, obligations or duties under this contract; of
         the contractor's power to execute the contract; or, by power of
         attorney or otherwise, of any of the contractor's rights to receive
         monies due or to become due under this contract. The contractor shall
         retain obligations and responsibilities as stated under this contract
         or under state or federal law or regulations.

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         All requests shall be submitted in writing, including all
         documentation, contracts, agreements, etc., at least 90 days prior to
         the anticipated implementation date, to DMAHS for prior approval. DMAHS
         approval shall also be contingent on regulatory agency review and
         approval. Any assignment, transfer, conveyance, sublease, or other
         disposition without the Department's consent shall be void and subject
         this contract to immediate termination by the Department without
         liability to the State of New Jersey.

7.20     CONTRACTOR CERTIFICATIONS

7.20.1   GENERAL PROVISIONS

         With respect to any report, invoice, record, papers, documents, books
         of account, or other contract-required data submitted to the Department
         in support of an invoice or documents submitted to meet contract
         requirements, including, but not limited to, proofs of insurance and
         bonding, Lobbying Certifications and Disclosures, Conflict of Interest
         Disclosure Statements and/or Conflict of Interest Avoidance Plans,
         pursuant to the requirements of this contract, the Contractor's
         Representative or his/her designee shall certify that the report,
         invoice, record, papers, documents, books of account or other contract
         required data is current, accurate, complete and in full compliance
         with legal and contractual requirements to the best of that
         individual's knowledge and belief.

7.20.2  CERTIFICATION SUBMISSIONS

         Where in this contract there is a requirement that the contractor
         "certify" or submit a "certification," such certification shall be in
         the form of an affidavit or declaration under penalty of perjury dated
         and signed by the Contractor's Representative or his/her designee.

7.20.3  ENVIRONMENTAL COMPLIANCE

         The contractor shall comply with all applicable environmental laws,
         rules, directives, standards, orders, or requirements, including but
         not limited to, Section 306 of the Clean Air Act (42 U.S.C. Section
         1857(h)), Section 508 of the Clean Water Act (33 U.S.C. Section 1368),
         Executive Order 11738, and the Environmental Protection Agency (EPA)
         regulations (40 C.F.R., Part 15) that prohibit the use of the
         facilities included on the EPA List of Violating Facilities.

7.20.4 ENERGY CONSERVATION

         The contractor shall comply with any applicable mandatory standards and
         policies relating to energy efficiency that are contained in the state
         energy conservation plan issued in compliance with the Energy Policy
         and Conservation Act of 1975 (Public L. 94-165) and any amendments to
         the Act.

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7.20.5  INDEPENDENT CAPACITY OF CONTRACTOR

         The parties agree that the contractor is an independent contractor, and
         that the contractor, its agents, officers, and employees act in an
         independent capacity and not as officers or employees or agents of the
         State, the Department or any other government entity.

7.20.6  NO THIRD PARTY BENEFICIARIES

         Nothing in this contract is intended or shall confer upon anyone, other
         than the parties hereto, any legal or equitable right, remedy or claim
         against any of the parties hereto.

7.20.7  PROHIBITION ON USE OF FEDERAL FUNDS FOR LOBBYING

         A.       The contractor agrees, pursuant to 31 U.S.C. Section 1352 and
                  45 C.F.R. Part 93, that no federal appropriated funds have
                  been paid or will be paid to any person by or on behalf of the
                  contractor for the purpose of influencing or attempting to
                  influence an officer or employee of any agency, a member of
                  Congress, an officer or employee of Congress, or an employee
                  of a member of Congress in connection with the award of any
                  federal contract, the making of any federal grant, the making
                  of any federal loan, the entering into of any cooperative
                  contract, or the extension, continuation, renewal, amendment,
                  or modification of any federal contract, grant loan, or
                  cooperative contract. The contractor shall complete and submit
                  the "Certification Regarding Lobbying", as attached in Section
                  A.7.1 of the Appendices.

         B.       If any funds other than federal appropriated funds have been
                  paid or will be paid by the contractor to any person for the
                  purpose of influencing or attempting to influence an officer
                  or employee of any agency, a member of Congress, an officer or
                  employee of Congress, or an employee of a member of Congress
                  in connection with the award of any federal contract, the
                  making of any federal grant, the making of any federal loan,
                  the entering into of any cooperative contract, or the
                  extension, continuation, renewal, amendment, or modification
                  of any federal contract, grant, loan, or cooperative contract,
                  and the contract exceeds $100,000, the contractor shall
                  complete and submit Standard Form LLL-"Disclosure of Lobbying
                  Activities" in accordance with its instructions.

         C.       The contractor shall include the provisions of this Article in
                  all provider and subcontractor contracts under this contract
                  and require all participating providers or subcontractors
                  whose contracts exceed $100,000 to certify and disclose
                  accordingly to the contractor.

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7.21     REQUIRED CERTIFICATE OF AUTHORITY

         During the term of the contract, the contractor shall maintain a
         Certificate of Authority (COA) from the Department of Health and Senior
         Services and the Department of Banking and Insurance and function as a
         Health Maintenance Organization in each of the counties in the
         region(s) it is contracted to serve or for each of the counties as
         approved in accordance with Article 2.H.

7.22     SUBCONTRACTS

         In carrying out the terms of the contract, the contractor may elect to
         enter into subcontracts with other entities for the provision of health
         care services and/or administrative services as defined in Article 1.
         In doing so, the contractor shall, at a minimum, be responsible for
         adhering to the following criteria and procedures.

         A.       All subcontracts shall be in writing and shall be submitted to
                  DMAHS for prior approval at least 90 days prior to the
                  anticipated implementation date. DMAHS approval shall also be
                  contingent on regulatory agency review and approval.

         B.       The Department shall prior approve all provider contracts and
                  all subcontracts.

         C.       All provider contracts and all subcontracts shall include
                  the terms in Section B.7.2 of the Appendices, Provider/
                  Subcontractor Contract Provisions.

         D.       The contractor shall monitor the performance of its
                  subcontractors on an ongoing basis and ensure that performance
                  is consistent with the contract between the contractor and the
                  Department.

         E.       Unless otherwise provided by law, contractor shall not cede or
                  otherwise transfer some or all financial risk of the
                  contractor to a subcontractor.

7.23     SET-OFF FOR STATE TAXES AND CHILD SUPPORT

         Pursuant to N.J.S.A 54:49-19, if the contractor is entitled to payment
         under the contract at the same time as it is indebted for any State tax
         (or is otherwise indebted to the State) or child support, the State
         Treasurer may set off payment by the amount of the indebtedness.

7.24     CLAIMS

         The contractor shall have the right to request an informal hearing
         regarding disputes under this contract by the Director, or the designee
         thereof. This shall not in any way limit the contractor's or State's
         right to any remedy pursuant to New Jersey law.

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7.25     MEDICARE RISK CONTRACTOR

         To maximize coordination of care for dual eligibles while promoting the
         efficient use of public funds, the contractor:

         A.       Is recommended to be a Medicare+Choice contractor.

         B.       Shall serve all eligible populations.

7.26     TRACKING AND REPORTING

         As a condition of acceptance of a managed care contract, the contractor
         shall be held to the following reporting requirements:

         A.       The contractor shall develop, implement, and maintain a system
                  of records and reports which include those described below and
                  shall make available to DMAHS for inspection and audit any
                  reports, financial or otherwise, of the contractor and require
                  its providers or subcontractors to do the same relating to
                  their capacity to bear the risk of potential financial losses
                  in accordance with 42 C.F.R. Section 434.38. Except where
                  otherwise specified, the contractor shall provide reports on
                  hard copy, computer diskette or via electronic media using a
                  format and commonly-available software as specified by DMAHS
                  for each report.

         B.       The contractor shall maintain a uniform accounting system that
                  adheres to generally accepted accounting principles for
                  charging and allocating to all funding resources the
                  contractor's costs incurred hereunder including, but not
                  limited to, the American Institute of Certified Public
                  Accountants (AICPA) Statement of Position 89-5 "Financial
                  Accounting and Reporting by Providers of Prepaid Health Care
                  Services".

         C.       The contractor shall submit financial reports in accordance
                  with the timeframes and formats contained in Section A of the
                  Appendices.

         D.       The contractor shall provide its primary care practitioners
                  with quarterly utilization data within forty-five (45) days of
                  the end of the program quarter comparing the average medical
                  care utilization data of their enrollees to the average
                  medical care utilization data of other managed care enrollees.
                  These data shall include, but not be limited to, utilization
                  information on enrollee encounters with PCPs, specialty
                  claims, prescriptions, inpatient stays, and emergency room
                  use.

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         E.       The contractor shall collect and analyze data to implement
                  effective quality assurance, utilization review, and peer
                  review programs in which physicians and other health care
                  practitioners participate. The contractor shall review and
                  assess data using statistically valid sampling techniques
                  including, but not limited to, the following:

                  Primary care practitioner audits; specialty audits; inpatient
                  mortality audits; quality of care and provider performance
                  assessments; quality assurance referrals; credentialing and
                  recredentialing; verification of encounter reporting rates;
                  quality assurance committee and subcommittee meeting agendas
                  and minutes; enrollee complaints, grievances, and follow-up
                  actions; providers identified for trending and sanctioning;
                  special quality assurance studies or projects; prospective,
                  concurrent, and retrospective utilization reviews of inpatient
                  hospital stays; and denials of off-formulary drug requests.

         F.       The contractor shall prepare and submit to DMAHS quarterly
                  reports to be reported by hard copy and diskette in a format
                  and software application system determined by DMAHS,
                  containing summary information on the contractor's operations
                  for each quarter of the program (See Section A.7 of the
                  Appendices, Tables 1 through 18). These reports shall be
                  received by DMAHS no later than forty-five (45) calendar days
                  after the end of the quarter. After a grace period of five (5)
                  calendar days, for each calendar day after a due date that
                  DMAHS has not yet received at a prescribed location a report
                  that fulfills the requirements of any one item, assessment for
                  damages equal to one half month's negotiated blended
                  capitation rate that would normally be owed by DMAHS to the
                  contractor for one recipient shall be applied. The damages
                  shall be applied as an offset to subsequent payments to the
                  contractor.

                  The contractor shall be responsible for continued reporting
                  beyond the term of the contract because of lag time in
                  submitting source documents by providers.

         G.       The contractor may submit encounter reports daily but must
                  submit encounter reports at least quarterly. However,
                  encounter reports will be processed by DMAHS' fiscal agent no
                  more frequently than monthly. All encounters shall be reported
                  to DMAHS within seventy-five (75) days of the end of the
                  quarter in which they are received by the contractor and
                  within one year plus seventy-five (75) days from the date of
                  service.

         H.       The contractor shall semi-annually report its staffing
                  positions including the names of supervisory personnel
                  (Director level and above and the QM/UR personnel),
                  organizational chart, and any position vacancies in these
                  major areas.

         I.       The contractor shall report, semi-annually, number of appeals
                  received from hospitals, physicians, other providers and
                  enrollees and, for enrollees, average call waiting times, and
                  number of abandoned calls.

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         J.       The contractor shall submit, quarterly, information pertaining
                  to the obstetrical HealthStart programs, as specified by the
                  Department of Health and Senior Services.

         K.       DMAHS shall have the right to create additional reporting
                  requirements at any time as required by applicable federal or
                  State laws and regulations, as they exist or may hereafter be
                  amended and incorporated into this contract.

         L.       Reports that shall be submitted on an annual or semi-annual
                  basis, as specified in this contract, shall be due within
                  sixty (60) days of the close of the reporting period, unless
                  specified otherwise.

7.27     FINANCIAL STATEMENTS

7.27.1   AUDITED FINANCIAL STATEMENTS (GAAP BASIS)

         The contractor shall submit audited annual financial statements
         prepared in accordance with Generally Accepted Accounting Principles
         (GAAP) certified by an independent public accountant, no later than
         June 1, for the immediately preceding calendar year for the contractor
         and any company that is a financial guarantor for the contractor
         completed in accordance with N.J.S.A. 8:38-11.6, "Financial Reporting
         Requirements." In addition to meeting requirements as stated in
         N.J.S.A. 8:38-11.6, the audited financial statements of the contractor
         shall include an opinion supported by adequate testing by the
         independent public accountant as to the accuracy and accounting
         principles used in reporting Medicaid specific financial information
         required by this contract. This includes but is not limited to
         quarterly expense statements, Medical Cost Ratio information, cost
         allocations made to the Medicaid contract, and claims processing
         information reported to the DMAHS. The contractor shall authorize the
         independent accountant to allow representatives of the Department, upon
         written request, to inspect any and all working papers related to the
         preparation of the audit report.

7.27.2   FINANCIAL STATEMENTS (SAP)

         Contractor shall submit to DMAHS all quarterly and annual financial
         statements and annual supplements in accordance with Statutory
         Accounting Principles (SAP) required in N.J.A.C. 8:38-11.6. Submissions
         to DMAHS shall be on the same time frame described in N.J.A.C. 8:38-14,
         i.e., quarterly reports are due the fifteenth (15th)day of the second
         month following the quarter end and statutory unaudited statement and
         the annual supplemental are due March 1 covering the preceding calendar
         year. Such information shall be subject to the confidentiality
         provisions in Article 7.40.

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7.28     FEDERAL APPROVAL AND FUNDING

         This managed care contract shall not be implemented until and unless
         all necessary federal approval and funding have been obtained.

7.29     CONFLICT OF INTEREST

         A.       No contractor shall pay, offer to pay, or agree to pay, either
                  directly or indirectly, any fee, commission, compensation,
                  gift, gratuity, or other thing of value of any kind to any
                  State officer or employee or special State officer or
                  employee, as defined by N.J.S.A. 52:13D-13b and e, in the
                  Department or any other agency with which such contractor
                  transacts or offers or proposes to transact business, or to
                  any member of the immediate family, as defined by N.J.S.A.
                  52:13D-13i, of any such officer or employee, or partnership,
                  firm or corporation with which they are employed or
                  associated, or in which such officer or employee has an
                  interest within the meaning of N.J.S.A. 52:13D-13g.

         B.       The solicitation of any fee, commission, compensation, gift,
                  gratuity or other thing of value by any State officer or
                  employee or special State officer or employee from any State
                  contractor shall be reported in writing forthwith by the
                  contractor to the Attorney General and the Executive
                  Commission on Ethical Standards.

         C.       No contractor may, directly or indirectly, undertake any
                  private business, commercial or entrepreneurial relationship
                  with, whether or not pursuant to employment, contract or other
                  agreement, express or implied, or sell any interest in such
                  contractor to any State officer or employee or special State
                  officer or employee having any duties or responsibilities in
                  connection with the purchase, acquisition or sale of any
                  property or services by or to any State agency or any
                  instrumentality thereof, or with any person, firm or entity
                  with which he is employed or associated or in which he has an
                  interest within the meaning of N.J.S.A. 52:13D-13g. Any
                  relationships subject to this provision shall be reported in
                  writing forthwith to the Executive Commission on Ethical
                  Standards which may grant a waiver of this restriction upon
                  application of the State officer or employee or special State
                  officer or employee upon a finding that the present or
                  proposed relationship does not present the potential, actual
                  or appearance, of a conflict of interest.

         D.       No contractor shall influence, or attempt to influence or
                  cause to be influenced, any State officer or employee or
                  special State officer or employee in his official capacity in
                  any manner which might tend to impair the objectivity or
                  independence of judgment of said officer or employee.

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         E.       No contractor shall cause or influence, or attempt to cause or
                  influence, any State officer or employee or special State
                  officer or employee to use, or attempt to use, his official
                  position to secure unwarranted privileges or advantages for
                  the contractor or any other person.

         F.       The provisions cited above in this Article shall not be
                  construed to prohibit a State officer or employee or special
                  State officer or employee from receiving gifts from or
                  contracting with the contractor under the same terms and
                  conditions as are offered or made available to members of the
                  general public subject to any guidelines the Executive
                  Commission on Ethical Standards may promulgate.

7.30     RECORDS RETENTION

         A.       The contractor hereby agrees to maintain an appropriate
                  recordkeeping system (See Section B.4.14 of the Appendices)
                  for services to enrollees and further require its providers
                  and subcontractors to do so. Such system shall collect all
                  pertinent information relating to the medical management of
                  each enrolled beneficiary; and make that information readily
                  available to appropriate health professionals and the
                  Department. Records shall be retained for the later of

                  1.       Five (5) years from the date of service, or

                  2.       Three (3) years after final payment is made under the
                           contract or subcontract and all pending matters are
                           closed.

         B.       If an audit, investigation, litigation, or other action
                  involving the records is started before the end of the
                  retention period, the records shall be retained until all
                  issues arising out of the action are resolved or until the end
                  of the retention period, whichever is later. Records shall be
                  made accessible at a New Jersey site, and on request to
                  agencies of the State of New Jersey and the federal
                  government. For enrollees covered by the contractor's plan who
                  are eligible through the Division of Youth and Family
                  Services, records shall be kept in accordance with the
                  provisions under N.J.S.A. 9:6-8.10a and 9:6-8:40 and
                  consistent with need to protect the enrollee's
                  confidentiality. All providers and subcontractors shall comply
                  with, and all provider contracts and subcontracts shall
                  contain the requirements stated in this paragraph. (See also
                  Article 7.40, "Confidentiality".)

         C.       If contractor's enrollees disenroll from the contractor's
                  plan, the contractor shall require participating providers to
                  release medical records of enrollees as may be directed by the
                  enrollee, authorized representatives of the Department and
                  appropriate agencies of the State of New Jersey and of the
                  federal government. Release of records shall be consistent
                  with the provision of confidentiality expressed in Article
                  7.40 and at no cost to the enrollee.

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7.31    WAIVERS

         Nothing in the contract shall be construed to be a waiver by the State
         of any warranty, expressed or implied, except as specifically and
         expressly stated in writing executed by the Director. Further, nothing
         in the contract shall be construed to be a waiver by the State of any
         remedy available to the State under the contract, at law or equity
         except as specifically and expressly stated in writing executed by the
         Director. A waiver by the State of any default or breach shall not
         constitute a waiver of any subsequent default or breach.

7.32     CHANGE BY THE CONTRACTOR

         The contractor shall not make any enhancements, limitations, or changes
         in benefits or benefits coverage; any changes in definition or
         interpretation of benefits; or any changes in the administration of the
         managed care program related to the scope of benefits, allowable
         coverage for those benefits, eligibility of enrollees or providers to
         participate in the program, reimbursement methods and/or schedules to
         providers, or substantial changes to contractor operations without the
         express, written direction or approval of the State. The State shall
         have the sole discretion for determining whether an amendment is
         required to effect a change (e.g., to provide additional services).

7.33     INDEMNIFICATION

         A.       The contractor agrees to indemnify and hold harmless the
                  State, its officers, agents and employees, and the enrollees
                  and their eligible dependents from any and all claims or
                  losses accruing or resulting from contractor's negligence to
                  any participating provider or any other person, firm, or
                  corporation furnishing or supplying work, services, materials,
                  or supplies in connection with the performance of this
                  contract.

         B.       The contractor agrees to indemnify and hold harmless the
                  State, its officers, agents, and employees, and the enrollees
                  and their eligible dependents from liability deriving or
                  resulting from the contractor's insolvency or inability or
                  failure to pay or reimburse participating providers or any
                  other person, firm, or corporation furnishing or supplying
                  work, services, materials, or supplies in connection with the
                  performance of this contract.

         C.       The contractor agrees further that it shall require under all
                  provider contracts that, in the event the contractor becomes
                  insolvent or unable to pay the participating provider, the
                  participating provider shall not seek compensation for
                  services rendered from the State, its officers, agents, or
                  employees, or the enrollees or their eligible dependents.

         D.       The contractor agrees further that it shall indemnify and hold
                  harmless the State, its officers, agents, and employees, and
                  the enrollees and their eligible dependents

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<PAGE>   266
                  from any and all claims for services for which the contractor
                  receives monthly capitation payments, and shall not seek
                  payments other than the capitation payments from the State,
                  its officers, agents, and/or employees, and/or the enrollees
                  and/or their eligible dependents for such services, either
                  during or subsequent to the term of the contract.

         E.       The contractor agrees further to indemnify and hold harmless
                  the State, its officers, agents and employees, and the
                  enrollees and their eligible dependents, from all claims,
                  damages, and liability, including costs and expenses, for
                  violation of any proprietary rights, copyrights, or rights of
                  privacy arising out of the contractor's or any participating
                  provider's publication, translation, reproduction, delivery,
                  performance, use, or disposition of any data furnished to it
                  under this contract, or for any libelous or otherwise unlawful
                  matter contained in such data that the contractor or any
                  participating provider inserts.

         F.       The contractor shall indemnify the State, its officers, agents
                  and employees, and the enrollees and their eligible dependents
                  from any injury, death, losses, damages, suits, liabilities
                  judgments, costs and expenses and claim of negligence or
                  willful acts or omissions of the contractor, its officers,
                  agents and employees, subcontractors, participating providers,
                  their officers, agents or employees, or any other person for
                  any claims arising out of alleged violation of any State or
                  federal law or regulation. The contractor shall also indemnify
                  and hold the State harmless from any claims of alleged
                  violations of the Americans with Disabilities Act by the
                  contractor, its subcontractors or providers.

         G.       The contractor agrees to pay all losses, liabilities, and
                  expenses under the following conditions:

                  1.       The parties who shall be entitled to enforce this
                           indemnity of the contractor shall be the State, its
                           officials, agents, employees, and representatives,
                           including attorneys or the State Attorney General,
                           other public officials, Commissioner and DHS
                           employees, any successor in office to any of the
                           foregoing individuals, and their respective legal
                           representatives, heirs, and beneficiaries.

                  2.       The losses, liabilities and expenses that are
                           indemnified shall include but not be limited to the
                           following examples: judgments, court costs, legal
                           fees, the costs of expert testimony, amounts paid in
                           settlement, and all other costs of any type whether
                           or not litigation is commenced. Also covered are
                           investigation expenses, including but not limited to,
                           the costs of utilizing the services of the
                           contracting agency and other State entities incurred
                           in the defense and handling of said suits, claims,
                           judgments, and the like, and in enforcing and
                           obtaining compliance with the provisions of this
                           paragraph whether or not litigation is commenced.

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                  3.       Nothing in this contract shall be considered to
                           preclude an indemnified party from receiving the
                           benefits of any insurance the contractor may carry
                           that provides for indemnification for any loss,
                           liability, or expense that is described in this
                           contract.

                  4.       The contractor shall do nothing to prejudice the
                           State's right to recover against third parties for
                           any loss, destruction of, or damage to the
                           contracting agency's property. Upon the request of
                           the DHS or its officials, the contractor shall
                           furnish the DHS all reasonable assistance and
                           cooperation, including assistance in the prosecution
                           of suits and the execution of instruments of
                           assignment in favor of the contracting agency in
                           obtaining recovery.

                  5.       Indemnification includes but is not limited to, any
                           claims or losses arising from the promulgation or
                           implementation of the contractor's policies and
                           procedures, whether or not said policies and
                           procedures have been approved by the State, and any
                           claims of the contractor's wrong doing in
                           implementing DHS policies.

7.34    INVENTIONS

         Inventions, discoveries, or improvements of computer programs developed
         pursuant to this contract by the contractor, and paid for by DMAHS in
         whole or in part, shall be the property of DMAHS.

7.35     USE OF CONCEPTS

         The ideas, knowledge, or techniques developed and utilized through the
         course of this contract by the contractor, or jointly by the contractor
         and DMAHS, for the performance under the contract, may be used by
         either party in any way they may deem appropriate. However, such use
         shall not extend to pre-existing intellectual property of the
         contractor or DMAHS that is patented, copyrighted, trademarked or
         service marked, which shall not be used by another party unless a
         license is granted.

7.36     PREVAILING WAGE

         The New Jersey Prevailing Wage Act, PL 1963, Chapter 150, is hereby
         made a part of this contract, unless it is not within the contemplation
         of the Act. The contractor's signature on the contract is a guarantee
         that neither the contractor nor any providers or subcontractors it
         might employ to perform the work covered by this contract is listed or
         is on record in the Office of the Commissioner of the New Jersey
         Department of Labor and Industry as one who has failed to pay
         prevailing wages in accordance with the provisions of this Act.

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7.37     DISCLOSURE STATEMENT

         The contractor shall report ownership and related information to DMAHS
         at the time of initial contracting, and yearly thereafter, and upon
         request, to the Secretary of DHHS and the Inspector General of the
         United States in accordance with federal and state law.

         A.       The contractor shall include full and complete information as
                  to the name and address of each person or corporation with a
                  five (5) percent or more ownership or controlling interest in
                  the contractor's plan, or any provider or subcontractor in
                  which the contractor has a five (5) percent or more ownership
                  interest (Section 1903(m)(2)(A) of the Social Security Act and
                  N.J.A.C. 10:49-19.2)

                  The contractor shall comply with this disclosure requirement
                  through submission of the HCFA-1513 Form whether federally
                  qualified or not.

         B.       If the contractor is not federally qualified, it shall
                  disclose to DMAHS at the time of contracting (and within ten
                  days of any change) information on types of transactions with
                  a "party in interest" as defined in Section 1318(b) of the
                  Public Health Service Act (Section 1903(m)(4)(A) of the Social
                  Security Act).

                  1.       All contractor business transactions shall be
                           reported. This requirement shall not be limited to
                           transactions related only to serving the Medicaid
                           enrollees and applies at least to the following
                           transactions:

                           a.       Any sale, exchange, or leasing of property
                                    between the contractor and a "party in
                                    interest";

                           b.       Any furnishing for consideration of goods,
                                    services or facilities between the
                                    contractor and a "party in interest" (not
                                    including salaries paid to employees for
                                    services provided in the normal course of
                                    their employment);

                           c.       Any lending of money or other extension of
                                    credit between the contractor and a "party
                                    in interest"; and

                           d.       Transactions or series of transactions
                                    during any one fiscal year that are expected
                                    to exceed the lesser of $25,000 or five (5)
                                    percent of the total operating expenses of
                                    the contractor.

                  2.       The information that shall be disclosed regarding
                           transactions listed in B.1 above between the
                           contractor and a "party in interest" includes:

                           a.       The name of the "party in interest" for each
                                    transaction;

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                           b.       A description of each transaction and the
                                    quantity or units involved;

                           c.       The accrued dollar value of each transaction
                                    during the fiscal year; and

                           d.       The justification of the reasonableness of
                                    each transaction.

                  3.       This information shall be reported annually to DMAHS
                           and shall also be made available, upon request, to
                           the Office of the Inspector General, the Comptroller
                           General and to the contractor's enrollees. DMAHS may
                           request that the information be in the form of a
                           consolidated financial statement for the organization
                           and entity (N.J.A.C. 10:49-19.2).

         C.       The contractor shall disclose the identity of any person who
                  has been convicted of certain offenses, as defined in Section
                  1126 of the Social Security Act. This includes any person who
                  has ownership or control interest in the contractor, or is an
                  agent or managing employee of the contractor and:

                  1.       Has been convicted of a criminal offense related to
                           the delivery of an item or service under Medicare,
                           Medicaid, or title XXI;

                  2.       Has been convicted of a criminal offense relating to
                           neglect or abuse of patients in connection with the
                           delivery of a health care item or service;

                  3.       Has been convicted for an offense that occurred after
                           the date of the enactment of the Health Insurance
                           Portability and Accountability Act of 1996, in
                           connection with the delivery of a health care item or
                           service or omission in a health care program operated
                           by or financed in whole or in part by any Federal,
                           State, or local government agency, of a criminal
                           offense consisting of a felony relating to fraud,
                           theft, embezzlement, breach of fiduciary
                           responsibility, or other financial misconduct; or

                  4.       Has been convicted for an offense that occurred after
                           the date of the enactment of the Health Insurance
                           Portability and Accountability Act of 1996 of a
                           criminal offense consisting of a felony relating to
                           the unlawful manufacture, distribution, prescription,
                           or dispensing of a controlled substance.

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7.38     FRAUD AND ABUSE

7.38.1   ENROLLEES

         A.       Policies and Procedures. The contractor shall establish
                  written policies and procedures for identifying potential
                  enrollee fraud and abuse. Proven cases are to be referred to
                  the Department for screening for advice and/or assistance on
                  follow-up actions to be taken. Referrals are to be
                  accompanied by all supporting case documentation.

         B.       Typical Cases. The most typical cases of fraud or abuse
                  include but are not limited to: the alteration of an
                  identification card for possible expansion of benefits; the
                  loaning of an identification card to others; use of forged or
                  altered prescriptions; and mis-utilization of services.

7.38.2   PROVIDERS

         A.       Policies and Procedures. The contractor shall establish
                  written policies and procedures for identifying,
                  investigating, and taking appropriate corrective action
                  against fraud and abuse (as defined in 42 C.F.R. Section
                  455.2) in the provision of health care services. The policies
                  and procedures will include, at a minimum:

                  1.       Written notification to DMAHS within five (5)
                           business days of intent to conduct an investigation
                           or to recover funds, and approval from DMAHS prior to
                           conducting the investigation or attempting to recover
                           funds. Details of potential investigations shall be
                           provided to DMAHS and include the data elements in
                           Section A.7.2.B of the Appendices. Representatives of
                           the contractor may be required to present the case to
                           DMAHS. DMAHS, in consultation with the contractor,
                           will then determine the appropriate course of action
                           to be taken.

                  2.       Incorporation of the use of claims and encounter data
                           for detecting potential fraud and abuse of services.

                  3.       Reporting investigation results within twenty (20)
                           business days to DMAHS.

                  4.       Specifications of, and reports generated by, the
                           contractor's prepayment and postpayment surveillance
                           and utilization review systems, including prepayment
                           and postpayment edits.

         B.       Distinct Unit. The contractor shall establish a distinct fraud
                  and abuse unit, separate from the contractor's utilization
                  review and quality of care functions. The unit can either be
                  part of the contractor's corporate structure, or operate under
                  contract with the contractor. The unit shall be staffed with
                  individuals with the

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                  qualifications and an investigator-to-beneficiary ratio
                  consistent, at a minimum, with the Department of Banking and
                  Insurance requirements for fraud units within health insurance
                  carriers or greater ratio as needed to meet the demands.

         C.       Prepayment Monitoring. The contractor shall conduct prepayment
                  monitoring of its own network providers and subcontractors
                  when it believes fraud or abuse may be occurring.

         D.       It shall be the responsibility of the contractor to report in
                  writing to DMAHS' Office of Program Integrity Administration
                  the following:

                  1.       All cases of suspected fraud and abuse, using the
                           format described in Section A.7.2 of the Appendices;

                  2.       Inappropriate or inconsistent practices by providers,
                           subcontractors, enrollees or employees or anyone who
                           can order or refer services, and related parties; and

                  3.       Prepayment monitoring of a provider or a
                           subcontractor by the contractor.

         E.       DMAHS shall have the right to withhold from a contractor's
                  capitation payments an appropriate amount if DMAHS determines
                  that evidence of fraud or abuse exists relating to the
                  contractor, its providers, subcontractors, enrollees,
                  employees, or anyone who can order or refer services, and
                  related parties.

         F.       When DMAHS has withheld payment and/or initiated a recovery
                  action against one of the contractor's providers or
                  subcontractors or a withholding of payments action pursuant to
                  42 C.F.R. Section 455.23, DMAHS may require the contractor to
                  withhold payments to that provider or subcontractor and/or
                  forward those payments to DMAHS.

         G.       DMAHS may direct the contractor to monitor one of its
                  providers or subcontractors, or take such corrective action
                  with respect to that provider or subcontractor as DMAHS deems
                  appropriate, when, in the opinion of DMAHS, good cause exists.

         H.       Sanctions. Failure of the contractor to investigate and
                  correct fraud and abuse problems relating to its enrollees,
                  network providers or subcontractors, and to notify DMAHS
                  timely of same, may result in sanctions. Timely notification
                  is defined as within five (5) business days of identification
                  of the fraud and/or abuse and within twenty (20) business days
                  of the completion of an investigation. For purposes of this
                  subsection, the term "investigation" shall include prepayment
                  monitoring as described above.

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                  DMAHS shall have the right to also impose sanctions and/or
                  withhold payments to the contractor (in accordance with
                  provisions of 42 C.F.R. Section 455.23) if it has reliable
                  evidence of fraud or willful misrepresentation relating to the
                  contractor's participation in the New Jersey Medicaid or NJ
                  FamilyCare program or if the contractor fails to initiate its
                  investigation of an identified fraud and/or abuse within one
                  year of identification.

7.38.3   NOTIFICATION TO DMAHS

         The contractor shall submit quarterly the report in Section A.7.2 of
         the Appendices, Fraud & Abuse.

7.39     EQUALITY OF ACCESS AND TREATMENT/DUE PROCESS

         A.       Unless a higher standard is required by this contract, the
                  contractor shall provide and require its subcontractors and
                  its providers to provide the same level of medical care and
                  health services to DMAHS enrollees as to enrollees in the
                  contractor's plan under private or group contracts unless
                  otherwise required in this contract.

         B.       Enrollees shall be given equitable access, i.e., equal
                  opportunity and consideration for needed services without
                  exclusionary practices of providers or system design because
                  of gender, age, race, ethnicity, color, creed, religion,
                  ancestry, national origin, marital status, sexual or
                  affectional orientation or preference, mental or physical
                  disability, genetic information, or source of payment.

         C.       DMAHS shall assure that all due process safeguards that are
                  otherwise available to Medicaid beneficiaries remain available
                  to enrollees under this contract.

         D.       The contractor shall assure the provision of services,
                  notifications, preparation of educational materials in
                  appropriate alternative formats, for enrollees including the
                  blind, hearing impaired, people with cognitive or
                  communication impairments, and individuals who do not speak
                  English.

7.40     CONFIDENTIALITY

         A.       General. The contractor hereby agrees and understands that all
                  information, records, data, and data elements collected and
                  maintained for the operation of the contractor and the
                  Department and pertaining to enrolled persons, shall be
                  protected from unauthorized disclosure in accordance with the
                  provisions of 42 U.S.C. Section 1396(a)(7)(Section 1902(a)(7)
                  of the Social Security Act), 42 C.F.R. Part 431, subpart F,
                  N.J.S.A. 30:4D-7 (g) and N.J.A.C. 10:49-9.4. Access to such
                  information, records, data and data elements shall be
                  physically secured and safeguarded and shall be limited to
                  those who perform their duties in accordance with provisions
                  of this contract including the Department of Health and Human

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         Services and to such others as may be authorized by DMAHS in accordance
         with applicable law. For enrollees covered by the contractor's plan
         that are eligible through the Division of Youth and Family Services,
         records shall be kept in accordance with the provisions under N.J.S.A.
         9:6-8.10a and 9:6-8:40 and consistent with the need to protect the
         enrollee's confidentiality.

         B.       Enrollee-Specific Information. With respect to any
                  identifiable information concerning an enrollee under the
                  contract that is obtained by the contractor or its providers
                  or subcontractors, the contractor: (1) shall not use any such
                  information for any purpose other than carrying out the
                  express terms of this contract; (2) shall promptly transmit to
                  the Department all requests for disclosure of such
                  information; (3) shall not disclose except as otherwise
                  specifically permitted by the contract, any such information
                  to any party other than the Department without the
                  Department's prior written authorization specifying that the
                  information is releasable under 42 C.F.R. Section 431.300 et
                  seq., and (4) shall, at the expiration or termination of the
                  contract, return all such information to the Department or
                  maintain such information according to written procedures
                  sent the contractor by the Department for this purpose.

         C.       Employees. The contractor shall instruct its employees to keep
                  confidential information concerning the business of DMAHS, its
                  financial affairs, its relations with its enrollees and its
                  employees, as well as any other information which may be
                  specifically classified as confidential by law.

         D.       Medical records and management information data concerning
                  Medicaid beneficiaries enrolled pursuant to this contract
                  shall be confidential and shall be disclosed to other persons
                  within the contractor's organization only as necessary to
                  provide medical care and quality, peer, or grievance review of
                  medical care under the terms of this contract.

         E.       The provisions of this Article shall survive the termination
                  of this contract and shall bind the contractor so long as the
                  contractor maintains any individually identifiable information
                  relating to Medicaid/NJ FamilyCare beneficiaries.

         F.       If DMAHS receives a request pursuant to the Right To Know Law
                  for release of information concerning the contractor, DMAHS
                  shall determine what information is required by law to be
                  released and retain authority over the release of that
                  information. Prior to release of information that was
                  previously labeled by the contractor as "confidential" or
                  "proprietary," DMAHS shall notify the contractor, who may
                  apply to the Superior Court of New Jersey for a protective
                  order if the contractor opposes the release of information.

                                                                          VII-49
<PAGE>   274
7.41    SEVERABILITY

         If this contract contains any unlawful provision that is not an
         essential part of the contract and that was not a controlling or
         material inducement to enter into the contract, the provision shall
         have no effect and, upon notice by either party, shall be deemed
         stricken from the contract without affecting the binding force of the
         remainder of the contract.

7.42     CONTRACTING OFFICER AND CONTRACTOR'S REPRESENTATIVE

         It is agreed that___________________, Director of DMAHS, or her
         representative, shall serve as the Contracting Officer for the State
         and that___________________shall serve as the Contractor's
         Representative. The Contracting Officer and the Contractor's
         Representative each reserve the right to delegate such duties as may be
         appropriate to others in the DMAHS's or contractor's employ.

         Each party shall provide timely written notification of any change in
         Contracting Officer or Contractor's Representative.

                                                                          VII-50
<PAGE>   275
ARTICLE EIGHT: FINANCIAL PROVISIONS

8.1      GENERAL INFORMATION

         This Article includes financial requirements (including solvency and
         insurance), medical cost ratio requirements, information on rates set
         by the State, third party liability (TPL) requirements, general
         capitation requirements, and provider payment requirements.

8.2      FINANCIAL REQUIREMENTS

8.2.1    COMPLIANCE WITH CERTAIN CONDITIONS

         The contractor shall remain in compliance with the following conditions
         which shall satisfy the Departments of Human Services, Banking and
         Insurance (DOBI) and Health and Senior Services prior to this contract
         becoming effective:

         A.       Provider Contracts Executed. The contractor has entered into
                  written contracts with providers in accordance with Article
                  Four of this contract.

         B.       No Judgment Preventing Implementation. No court order,
                  administrative decision, or action by any other
                  instrumentality of the United States government or the State
                  of New Jersey or any other state which prevents implementation
                  of this contract is outstanding.

         C.       Approved Certificate of Authority. The contractor has and
                  maintains an approved certificate of authority to operate as a
                  health maintenance organization in New Jersey from the DOBI
                  and the Department of Health and Senior Services for the
                  Medicaid population.

         D.       Compliance with All Solvency Requirements. The contractor
                  shall comply with and remain in compliance with minimum net
                  worth and fiscal solvency and reporting requirements of the
                  DOBI and the Department of Human Services, the federal
                  government, and this contract.

8.2.2    SOLVENCY REQUIREMENTS

         The contractor shall maintain a minimum net worth in accordance with
         N.J.A.C. 8:38-11 et seq.

         The Department shall have the right to conduct targeted financial
         audits of the contractor's Medicaid line of business. The contractor
         shall provide the Department with financial data, as requested by the
         Department, within a timeframe specified by the Department.

                                                                          VIII-1
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8.2.3    GENERAL PROVISIONS AND CONTRACTOR COMPLIANCE

         The contractor shall comply with the following financial operations
         requirements:

         A.       The contractor must establish and maintain (1) an office in
                  New Jersey, and (2) premium and claims accounts in a bank with
                  a principal office in New Jersey.

         B.       The contractor shall have a fiscally sound operation as
                  demonstrated by:

                  1.       Maintenance of minimum net worth in accordance with
                           DOBI requirements (total line of business) and the
                           requirements outlined in Article 8.2.2.

                  2.       Maintenance of a net operating surplus for Medicaid
                           line of business. If the contractor fails to earn a
                           net operating surplus during the most recent calendar
                           year, or does not maintain minimum net worth
                           requirements on a quarterly basis, it shall submit a
                           corrective plan of action within the time specified
                           by the Department. The plan is subject to the
                           approval of DMAHS. It must demonstrate how and when
                           minimum net worth requirements will be replenished
                           and present marketing and financial projections.
                           These must be supported by suitable back-up material.
                           The discussion must include possible alternative
                           funding sources, including the invoking of a parental
                           guarantee.

                           This plan shall include:

                           a.       A detailed marketing plan with enrollment
                                    projections for the next two years.

                           b.       A projected balance sheet for the next two
                                    years.

                           c.       A projected statement of revenue and
                                    expenses on an accrual basis for the next
                                    two years.

                           d.       A statement of cash flow projected for the
                                    next two years.

                           e.       A description of how to maintain capital
                                    requirements and replenish net worth.

                           f.       Sources and timing of new capital must be
                                    specifically identified.

                  3.       The contractor shall demonstrate it has sufficient
                           cash and adequate liquidity set aside (i.e.,
                           restricted) but accessible to the DOBI to meet
                           obligations as they become due, and which are
                           acceptable to DMAHS. The

                                                                          VIII-2
<PAGE>   277

                           contractor shall comply with DOBI requirements
                           regarding cash reserves and where restricted funds
                           will be held (See N.J.A.C. 8:38-11.3, Reserve
                           Requirements).

8.3      INSURANCE REQUIREMENTS

         The contractor shall maintain general comprehensive liability
         insurance, products/completed operations insurance, premises/operations
         insurance, unemployment compensation coverage, workmen's compensation
         insurance, reinsurance, and malpractice insurance in such amounts as
         determined necessary in accordance with state and federal statutes and
         regulations, insuring all claims which may arise out of contractor
         operations under the terms of this contract. The DMAHS shall be an
         additional named insured with sixty (60) days prior written notice in
         event of default and/or non-renewal of the policy. Proof of such
         insurance shall be provided to and approved by DMAHS prior to the
         provision of services under this contract and annually thereafter. No
         policy of insurance provided or maintained under this Article shall
         provide for an exclusion for the acts of officers.

8.3.1    INSURANCE CANCELLATION AND/OR CHANGES

         In the event that any carrier of any insurance described in 8.4 or
         8.4.2 exercises cancellation and/or changes, or cancellation or change
         is initiated by the contractor, notice of such cancellation and/or
         change shall be sent immediately to DMAHS for approval. At State's
         option upon cancellation and/or change or lapse of such insurance(s),
         DMAHS may withhold all or part of payments for services under this
         contract until such insurance is reinstated or comparable insurance
         purchased. The contractor is obligated to provide any services during
         the period of such lapse or termination.

8.3.2    STOP-LOSS INSURANCE

         At the discretion of the Departments of Banking and Insurance, Human
         Services, and Health and Senior Services and notwithstanding the
         requirements of N.J.A.C. 8:38-11.5 (b), the contractor may be required
         to obtain, prior to this contract, and maintain "stop-loss" insurance
         from a reinsurance company authorized to do business in New Jersey that
         will cover medical costs that exceed a threshold per case for the
         duration of the contract period. Any coverage other than stipulated
         must be based on an actuarial review, taking into account geographic
         and demographic factors, the nature of the clients, and state solvency
         safeguard requirements.

         All "stop-loss" insurance arrangements, including modifications, shall
         be reviewed and prior approved by the Departments of Banking and
         Insurance, Human Services, and Health and Senior Services. The
         "stop-loss" insurance underwriter must meet the standards of financial
         stability as set forth by the DOBI.

                                                                          VIII-3
<PAGE>   278
         Contractors with sufficient reserves may choose self-insurance, subject
         to approval by the Department of Human Services and the DOBI where
         appropriate.

8.4      MEDICAL COST RATIO

8.4.1    MEDICAL COST RATIO STANDARD

         The contractor shall maintain direct medical expenditures for enrollees
         equal to or greater than eighty (80) percent of premiums paid in all
         forms from the State. This medical cost ratio (MCR) shall apply to
         annual periods from the contract effective date (if the contract ends
         before the completion of an annual period, the MCR shall apply to that
         shorter period). The MCR shall be based on reports completed by the
         contractor and acceptable to the Department.

         A.       Direct Medical Expenditures. Direct medical expenditures are
                  the incurred costs of providing direct care to enrollees for
                  covered health care services as stated in Article 4.1.
                  Education and outreach costs and/or administrative costs are
                  not considered direct medical expenditures.

         B.       Calculation of MCR. The calculation of MCR will be made using
                  information submitted by each contractor on the quarterly
                  reports - Statement of Revenues and Expenses (Section A.7.8 of
                  the Appendices (Table 6)). The sum of all applicable quarters
                  for Total Medical and Hospital Expenses (line 28) less
                  Coordination of Benefits (COB) (line 6) and less reinsurance
                  recoveries (line 7) will be divided by the sum of all
                  applicable quarters of Medicaid/NJ FamilyCare premiums (line
                  4) to arrive at the ratio.

8.4.2    EXEMPTIONS

         An exemption may be granted to reduce the eighty (80) percent MCR
         requirement to no lower than seventy-five (75) percent. Under no
         circumstances will an exemption be granted to a contractor for MCR
         below seventy-five (75) percent. An exemption may be granted if the
         contractor meets all of the following established criteria:

         A.       Has no unresolved quality of care issues;

         B.       Has not received any pending or imposed sanctions;

         C.       Is in compliance with all reporting requirements;

         D.       Had no vacancies in key administrative positions for longer
                  than sixty (60) days;

         E.       Is in compliance with all corrective plans of action relating
                  to Medicaid activity imposed by the Departments of Human
                  Services, Banking and Insurance, or Health and Senior
                  Services;

                                                                          VIII-4
<PAGE>   279
         F.       Has demonstrated timely processing of claims over the term of
                  the contract and has had no substantiated pattern of
                  complaints from providers for late payments; and

         G.       Has produced evidence to demonstrate compliance with education
                  and outreach provisions of the contract.

8.4.3    DAMAGES

         The Department shall have the right to impose damages on a contractor
         that has failed to maintain an appropriate MCR. The formula for
         imposing damages follows:

<TABLE>
<CAPTION>
                  ACTUAL MCR                1ST OFFENSE                2ND OFFENSE
                  ----------                -----------                -----------
<S>                                         <C>                        <C>
                  80% or above              NONE                       NONE

                  78.00-79.99%              .15 times                  .15 times
                                            underexpenditure           underexpenditure

                  75.00-77.99%              .50 times                  .50 times
                                            underexpenditure           underexpenditure

                  74.99 or below            .90 times                  1.00 times
                                            underexpenditure           underexpenditure
</TABLE>

         If the contractor fails to meet the MCR requirement and a penalty is
         applied, a plan of corrective action will be required.

8.5      REGIONS, PREMIUM GROUPS, AND SPECIAL PAYMENT PROVISIONS

8.5.1    REGIONS

         Rates for DYFS, NJ FamilyCare Plan A Parents/caretaker relatives with
         children and adults without dependent children under the age of 19, NJ
         FamilyCare Plans B, C and D, and the non risk-adjusted rates for AIDS
         and clients of DDD are statewide. All other rates for each premium
         group have been set for each of the following regions:

         -        Region 1: Bergen, Hudson, Hunterdon, Morris, Passaic,
                  Somerset, Sussex, and Warren counties

         -        Region 2: Essex, Union, Middlesex, and Mercer counties

         -        Region 3: Atlantic, Burlington, Camden, Cape May, Cumberland,
                  Gloucester, Monmouth, Ocean, and Salem counties

                                                                          VIII-5
<PAGE>   280
         Contractors may contract for one or more regions but, except as
         provided in Article 2, may not contract for part of a region.

8.5.2    AFDC/TANF AND NJ FAMILYCARE PLAN A CHILDREN

         The capitation rates for Aid to Families with Dependent Children
         (AFDC)/Temporary Assistance for Needy Families (TANF) includes New
         Jersey Care Pregnant Women and NJ FamilyCare Plan A children (age less
         than 19) but excludes individuals who have AIDS or are clients of DDD.
         Rates have been set for the following premium groups:

         A.       Males and females less than 1 year

         B.       Males and females 1 year to 1.99 years

         C.       Males 2 to 20.99 years and females 2 to 14.99 years

         D.       Females 15 to 44.99 years

         E.       Males 21 to 44.99 years

         F.       Males and females 45 years and older

8.5.3    NJ FAMILYCARE PLAN A PARENTS/CARETAKERS

         The capitation rates for NJ FamilyCare Plan A parents/caretakers,
         excluding individuals with AIDS and clients of DDD, are in the
         following premium groups:

         A.       Males 19 to 44.99 years

         B.       Females 19 to 44.99 years

         C.       Males and females 45 years and older

8.5.4    NJ FAMLYCARE PLAN A ADULTS WITHOUT DEPENDENT CHILDREN
         UNDER 19 YEARS OF AGE

         The capitation rates for NJ FamilyCare Plan A adults without dependent
         children under 19 years of age, excluding individuals with AIDS and
         clients of DDD, are in the following premium groups:

                                                                          VIII-6
<PAGE>   281
         A.       Males 19 to 44.99 years

         B.       Females 19 to 44.99 years

         C.       Males and females 45 years and older

8.5.5    NJ FAMILYCARE PLANS B & C

         The capitation rates for NJ FamilyCare Plans B and C enrollees,
         excluding individuals with AIDS are in the following premium groups:

         A.       Males and females less than 1 year

         B.       Males and females 1 year to 1.99 years

         C.       Males and females 2 to 18.99 years

8.5.6    NJ FAMILYCARE PLAN D CHILDREN

         The capitation rates for NJ FamilyCare Plan D children, excluding
         individuals with AIDS, are in the following premium groups:

         A.       Males and females less than 1 year

         B.       Males and females 1 year to 1.99 years

         C.       Males and females 2 to 18.99 years

8.5.7    NJ FAMILYCARE PLAN D PARENTS/CARETAKERS

         The capitation rates for NJ FamilyCare Plan D parents/caretakers,
         excluding individuals with AIDS, are in the following premium groups:

         A.       Males 19 to 44.99 years

         B.       Females 19 to 44.99 years

         C.       Males and Females 45 years and older

8.5.8    NJ FAMILYCARE PLAN D ADULTS WITHOUT DEPENDENT CHILDREN
         UNDER 19 YEARS OLD

         The capitation rates for NJ FamilyCare Plan D adults without dependent
         children under 19 years old, excluding individuals with AIDS, are in
         the following premium groups:

                                                                          VIII-7
<PAGE>   282
         A.       Males 19 to 44.99 years

         B.       Females 19 to 44.99 years

         C.       Males and Females 45 years and older

8.5.9    PREMIUM GROUPS FOR DYFS AND AGING OUT FOSTER CHILDREN

         The capitation rates for Division of Youth and Family Services,
         excluding individuals with AIDS and clients of DDD, are in the
         following premium groups:

         A.       Males and females less than 1 year

         B.       Males and females 1 year to 1.99 years

         C.       Males and females 2 to 20.99 years

8.5.10   ABD WITHOUT MEDICARE

         Compensation to the contractor for the ABD without Medicare will be
         risk-adjusted using the Health Based Payments System (HBPS), which is
         described in Article 8.6. Since the HBPS adjusts for regional
         variations, a separate rate for each region is not necessary. In
         addition, the HBPS adjusts for the diagnosis of AIDS; therefore,
         separate AIDS rates are not necessary for this population. Finally, the
         HBPS adjusts for age and sex so separate rates for age and sex within
         this population are not necessary. Accordingly, the base rates to be
         used for this population are as follows:

         A.       ABD without Medicare (non-DDD)

         B.       ABD-DDD without Medicare

8.5.11   ABD WITH MEDICARE

         The capitation rates for the ABD with Medicare population, excluding
         individuals with AIDS and clients of DDD, are in the following premium
         groups:

         A.       Aged

         B.       Blind/Disabled less than 45

         C.       Blind/Disabled 45+

         These rates are set by region and will not be risk-adjusted using the
         HBPS.

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<PAGE>   283
8.5.12   CLIENTS OF DDD

         The contractor shall be paid separate, statewide rates for subgroups of
         the DDD population, excluding individuals with AIDS. These rates
         include MH/SA services for the following premium groups:

         A.       ABD-DDD with Medicare

         B.       AFDC-DDD (includes DYFS, New Jersey Care Pregnant Women, and
                  NJ FamilyCare Plan A)

         These rates will not be risk-adjusted using the HBPS.

8.5.13   PREMIUM GROUPS FOR ENROLLEES WITH AIDS

         A.       In an effort to more appropriately match payment to risk, the
                  contractor shall be paid capitation rates according to the
                  following statewide premium groups for enrollees with AIDS:

                  1.       AFDC-AIDS (includes DYFS, New Jersey Care Pregnant
                           Women, and NJ FamilyCare Plans A (children and
                           parents/caretakers), B, and C individuals, NJ
                           FamilyCare Plan D children)

                  2.       NJ FamilyCare AIDS Plan D parents/caretakers and
                           adults without dependent children under 19 years old
                           and Plan A adults without dependent children under 19
                           years old

                  3.       ABD-AIDS with Medicare

                  4.       ABD-DDD-AIDS with Medicare (includes a MH/SA add on
                           to the ABD-AIDS rate)

                  5.       AFDC-DDD-AIDS (includes a MH/SA add on to the
                           AFDC-AIDS rate) Other eligible groups include DYFS,
                           New Jersey Care Pregnant Women and NJ FamilyCare Plan
                           A (children and parents/caretakers).

                  6.       NJ FamilyCare Plan A adults without dependent
                           children under 19 years old, DDD-AIDS (includes MH/SA
                           add on to the NJ FamilyCare AIDS rate).

         B.       The contractor will be reimbursed double the AIDS rate, once
                  in a member lifetime, in the first month of payment for a
                  recorded diagnosis of AIDS, prospective and newly diagnosed.
                  This is a one-time-only-per-member payment, regardless of MCE.

                                                                          VIII-9
<PAGE>   284
8.5.14   SUPPLEMENTAL PAYMENT PER PREGNANCY OUTCOME

         Because costs for pregnancy outcomes were not included in the
         capitation rates, the contractor shall be paid supplemental payments
         for pregnancy outcomes for all eligibility categories.

         Payment for pregnancy outcome shall be a single, predetermined lump sum
         payment. This amount shall supplement the existing capitation rate
         paid. The Department will make a supplemental payment to contractors
         following pregnancy outcome. For purposes of this Article, pregnancy
         outcome shall mean each live birth, still birth or miscarriage
         occurring at the thirteenth (13th) or greater week of gestation. This
         supplemental payment shall reimburse the contractor for its inpatient
         hospital, antepartum, and postpartum costs incurred in connection with
         delivery. Costs for care of the baby are not included. Payment shall be
         made by the State to the contractor based on submission of appropriate
         encounter data and use of a special indicator on the claim as specified
         by DMAHS.

8.5.15   PAYMENT FOR CERTAIN BLOOD CLOTTING FACTORS

         The contractor shall be paid separately for factor VIII and IX blood
         clotting factors. Payment will be made by DMAHS to the contractor based
         on: 1) submission of appropriate encounter data; and 2) prior
         notification from the contractor to DMAHS of identification of
         individuals with factor VIII or IX hemophilia.

8.5.16   PAYMENT FOR HIV/AIDS DRUGS

         The contractor shall be paid separately for protease inhibitors for all
         eligibility groups with the exception of NJ FamilyCare Plan A adults
         without dependent children under the age of 19 and NJ Family Care Plan
         D parents/caretakers and adults without dependent children under the
         age of 19. Payment for protease inhibitors shall be made by DMAHS to
         the contractor based on: 1) submission of appropriate encounter data;
         and 2) prior notification from the contractor to DMAHS of
         identification of individuals with HIV/AIDS.

         Individuals eligible through NJ FamilyCare with a program status code
         of 380 and all children groups shall receive protease inhibitors and
         other anti-retroviral agents under the contractor's plan. All other
         individuals eligible through NJ FamilyCare with program status codes of
         497-498, and 761-763 shall receive protease inhibitors (First Data Bank
         Specific Therapeutic Class Code W5C) and other anti-retrovirals (First
         Data Bank Specific Therapeutic Class Code W5B) through Medicaid
         fee-for-service and the AIDS Drug Distribution Program (ADDP).

8.5.17   EPSDT INCENTIVE PAYMENT

         The contractor shall be paid separately, $10 for every documented
         encounter record for an EPSDT screening examination. The contractor
         shall be required to pass the $10 amount directly to the screening
         provider.

                                                                         VIII-10
<PAGE>   285
         The incentive payment shall be reimbursed for EPSDT encounter records
         submitted in accordance with 1) procedure codes specified by DMAHS, and
         2) EPSDT periodicity schedule.

8.6      HEALTH BASED PAYMENT SYSTEM (HBPS) FOR THE ABD WITHOUT
         MEDICARE POPULATION

         A.       The capitation rates for the ABD without Medicare population
                  account for the potential of the contractor receiving a
                  disproportionate number of higher cost beneficiaries. If a
                  traditional age and sex capitation model were used, the rates
                  may not adequately account for the difference in risk assumed
                  by each contractor. In order to account for this problem
                  diagnostic information, as well as age, sex, and
                  regional/geographic information, will be used to adjust the
                  capitation payments. This process is known as health based
                  capitation. By using this additional information, capitation
                  rates can more adequately match the payment with the risk of
                  the enrolled population.

                  In order to incorporate diagnostic information into the
                  analysis, a health based system categorizes beneficiaries into
                  different diagnostic groups. The Disability Payment System
                  (DPS) grouper will be used to categorize the beneficiaries.
                  This information is then used to create a unique case mix rate
                  for each individual. This individual information is then
                  aggregated to measure the health risk for the contractor.

         B.       The following narrative describes the implementation plan for
                  a health based capitation model in New Jersey:

                  1.       Develop demographic capitation rates.

                  2.       Develop payment weights for the diagnostic
                           categories. In order to estimate the prospective
                           medical cost for each beneficiary, a payment weight
                           for each diagnostic category is developed. These
                           payment weights identify how much an individual will
                           cost relative to an average beneficiary. For example,
                           an average cost beneficiary will have a case mix rate
                           of 1.0, while a higher cost beneficiary - for
                           example, a beneficiary with a high cost pulmonary
                           condition - will have a score of 1.26.

                           Separate payment weights will be developed for the
                           following populations:

                          -    ABD without Medicare (non-DDD)
                          -    ABD-DDD without Medicare

                                                                         VIII-11
<PAGE>   286
         3.       Compile a case mix value for each beneficiary. Using the most
                  recent historical FFS and managed care encounter information,
                  a look-up file will be created that links each eligible
                  beneficiary with a unique case mix score. In order to develop
                  this unique case mix score historical claims information will
                  be run through the DPS grouper. The output from this process
                  will identify the beneficiaries' diagnostic categories. Using
                  this information and the payment weights estimated in step 2,
                  a case mix weight is then computed for each beneficiary. The
                  following example describes the process for an ABD beneficiary
                  who is not a client of DDD, is a forty-five (45) to sixty-four
                  (64) year old male beneficiary, and lives in Region 3, with a
                  medium-cost central nervous system disorder and a high-cost
                  pulmonary condition:

                     .45     Baseline (costs assigned to all beneficiaries -
                             including those in no diagnostic group)
                     .08     Male 45 - 64
                     .78     Medium Cost Central Nervous System Disorder
                    -.10     Region 3
                    1.26     High Cost Pulmonary Condition
                    ----
                    2.47     Total Case Mix Rate

                  In this case, the beneficiary would have projected medical
                  costs 2.47 times the cost of an average beneficiary.

         4.       Compute case mix values for each contractor and the FFS
                  program. After completing the preceding task, the individual
                  case mix rates are used to compute an aggregate case rate for
                  each contractor. This is done by matching the individuals in
                  the eligibility file for each contractor with individuals'
                  case mix weights. In matching the eligibility files, some
                  beneficiaries may have either been eligible for an incomplete
                  time period or have not been eligible during the most recent
                  time period. Beneficiaries with incomplete eligibility will be
                  assigned a case mix of the contractor's average. Individuals
                  without FFS information will not be included in the analysis.
                  These individuals will be assigned the contractor's case mix
                  average.

                  After matching the eligibility file for the contractor and the
                  FFS program with the individual case mix weights, an average
                  case rate for the contractor and the FFS program will be
                  calculated. These aggregate case rates are then normalized to
                  ensure the program will be budget neutral. The following chart
                  describes the normalization process:

                                                                         VIII-12
<PAGE>   287
<TABLE>
<CAPTION>
                            CONTRACTOR         CASE MIX          POPULATION    NORMALIZED
                                               SCORE                           CASE MIX RATE
                            ----------         --------          ----------    -------------
<S>                                            <C>               <C>          <C>
                            Contractor A           1.3               1,000    1.3/1.07 = 1.21
                            Contractor B           1.1               4,000    1.1/1.07 = 1.03
                            Contractor C            .9               4,000    .90/1.07 =  .84
                            FFS                    1.4               1,000    1.4/1.07 = 1.31
                            Total           1.07  (weighted         10,000
                                                   average)
</TABLE>

                           By normalizing the case mix scores, the State can
                           ensure the average cost for each beneficiary will not
                           exceed the average prospective cost estimated in step
                           1.

                           In order to determine the payment for the contractor,
                           the case mix rates for the contractor will be
                           multiplied by the base rate calculated in step 1. The
                           case mix rates will be updated periodically, as
                           deemed necessary.

                  5.       Credibility adjustment. If the contractor has few
                           enrollees, there may not be complete confidence in
                           the contractor's relative case mix produced by the
                           limited number of enrollees. In this case, a
                           credibility rating can be used to blend the
                           contractor's case rate with the State's average case
                           rate. For example, if the State assigns a contractor
                           a case mix credibility of fifty (50) percent, the
                           following formula is used to develop a case mix rate
                           for the contractor:

                           (.5)*(the contractor's relative case mix) +
                           (.5)*(State's average case rate)

                           The credibility factor will be based primarily on the
                           number of beneficiaries enrolled with the contractor.

                  6.       Collect and validate contractor encounter data. The
                           following encounter information will be required to
                           develop individual case mix scores for each enrollee:

                           - Unique identifier code for each enrollee

                           - ICD-9 diagnosis code(s) for each encounter

8.7      THIRD PARTY LIABILITY

         A.       General. The contractor, and by extension its providers and
                  subcontractors, hereby agree to utilize, whenever available,
                  other public or private sources of payment for services
                  rendered to enrollees in the contractor's plan. "Third party",

                                                                         VIII-13
<PAGE>   288
                  for the purposes of this Article, shall mean any person or
                  entity who is or may be liable to pay for the care and
                  services rendered to a Medicaid beneficiary (See N.J.S.A.
                  30:4D-3m). Examples of a third party include a beneficiary's
                  health insurer, casualty insurer, a managed care organization,
                  Medicare, or an employer-administered ERISA plan. Federal and
                  State law requires that Medicaid payments be last dollar
                  coverage and should be utilized only after all other sources
                  of third party liability (TPL) are exhausted, subject to the
                  exceptions in Section F below.

         B.       Third Party Coverage Unknown. If coverage through health or
                  casualty insurance is not known or is unavailable at the time
                  the claim is filed, then the claim must be paid and
                  postpayment recovery must be initiated within six months from
                  the date of service.

         C.       Capitation Rates. The State has taken into account historical
                  and/or anticipated cost avoidance and recovery due to the
                  existence of liable third parties in setting capitation rates
                  and determining the payment amounts. These factors do not
                  include any reductions due to tort recoveries, or to
                  recoveries made by the State from the estates of deceased
                  Medicaid beneficiaries. In addition, future rates may be based
                  upon the contractor's actual or expected performance involving
                  TPL. Consequently, it is in the interests of both the State
                  and the contractor for the contractor to maximize its revenue
                  by fully exhausting all sources of available third party
                  coverage.

         D.       Categories. Third party resources are categorized as 1) health
                  insurance, 2) casualty insurance, 3) legal causes of action
                  for damages, and 4) estate recoveries.

                  1.       Health Insurance. The contractor shall pursue and
                           collect payments from health insurers when health
                           insurance coverage is available, unless prior
                           approval to take other action is obtained from the
                           State. "Health insurance" shall include, but not be
                           limited to, coverage by any health care insurer, HMO,
                           Medicare, or an employer-administered ERISA plan.
                           Funds so collected shall be retained by the
                           contractor. In pursuing such recoveries, the
                           contractor may utilize the State's assignment and
                           subrogation authority to the extent permitted by
                           State law.

                           a.       The State shall have the right to pursue,
                                    collect, and retain payments from liable
                                    health insurers if the contractor has failed
                                    to initiate collection from the health
                                    insurer within six (6) months from the date
                                    of service. The contractor shall cooperate
                                    with the State in all such collection
                                    efforts, and shall also direct its providers
                                    to do so.

         2.       Casualty Insurance. The contractor shall pursue and collect
                  payment from casualty insurance available to the enrollee,
                  unless prior approval to take other action is obtained from
                  the State. "Casualty insurance" shall

                                                                         VIII-14
<PAGE>   289
                  include, but not be limited to, no fault auto insurance
                  benefits, worker's compensation benefits, and medical payments
                  coverage through a homeowner's insurance policy. Funds so
                  collected shall be retained by the contractor. In pursuing
                  such recoveries, the contractor may utilize the State's
                  assignment and subrogation authority to the extent permitted
                  by State law.

                  a.       The State shall have the right to pursue, collect,
                           and retain casualty insurance payments where the
                           contractor has failed to initiate collection within
                           six (6) months from the date of service.

         3.       Legal Causes of Action for Damages. The State shall have the
                  sole and exclusive right to pursue and collect payments made
                  by the contractor when a legal cause of action for damages is
                  instituted on behalf of a Medicaid enrollee against a third
                  party or when the State receives notice that legal counsel has
                  been retained by or on behalf of any enrollee. The contractor
                  shall cooperate with the State in all collection efforts, and
                  shall also direct its providers to do so. State collections
                  identified as contractor-related resulting from such legal
                  actions will be retained by the State.

         4.       Estate Recoveries. The State shall have the sole and exclusive
                  right to pursue and recover correctly paid benefits from the
                  estate of a deceased Medicaid enrollee in accordance with
                  federal and State law. Such recoveries will be retained by the
                  State.

E.       Cost Avoidance.

         1.       When the contractor is aware of health or casualty insurance
                  coverage prior to paying for a health care service, it shall
                  avoid payment by rejecting a provider's claim and directing
                  that the claim be submitted first to the appropriate third
                  party, or by directing its provider to withhold payments to a
                  subcontractor.

         2.       If insurance coverage is not available, or if one of the
                  exceptions to the cost avoidance rule discussed below applies,
                  then payment must be made and a claim made against the third
                  party, if it is determined that the third party is or may be
                  liable.

F.       Exceptions to the Cost Avoidance Rule.

         1.       In the following situations, the contractor must first pay its
                  providers and then coordinate with the liable third party,
                  unless prior approval to take other action is obtained from
                  the State.

                                                                         VIII-15
<PAGE>   290
                  a.       The coverage is derived from a parent whose
                           obligation to pay support is being enforced by the
                           Department of Human Services.

                  b.       The claim is for prenatal care for a pregnant woman
                           or for preventive pediatric services (including EPSDT
                           services) that are covered by the Medicaid program.

                  c.       The claim is for labor, delivery, and post-partum
                           care and does not involve hospital costs associated
                           with the inpatient hospital stay.

                  d.       The claim is for a child who is in a DYFS supported
                           out of home placement.

                  e.       The claim involves coverage or services mentioned in
                           1.a, 1.b, 1.c, or 1.d, above in combination with
                           another service.

         2.       If the contractor knows that the third party will neither pay
                  for nor provide the covered service, and the service is
                  medically necessary, the contractor shall neither deny payment
                  for the service nor require a written denial from the third
                  party.

         3.       If the contractor does not know whether a particular service
                  is covered by the third party, and the service is medically
                  necessary, the contractor shall contact the third party and
                  determine whether or not such service is covered rather than
                  requiring the enrollee to do so. Further, the contractor shall
                  require the provider or subcontractor to bill the third party
                  if coverage is available.

         4.       Postpayment recovery rather than cost avoidance is necessary
                  in cases where the contractor was not aware of third party
                  coverage at the time that services were rendered or paid for,
                  or was unable to cost avoid, in accordance with the provisions
                  of this Article as applicable. Under these circumstances, the
                  contractor shall identify all potentially liable third parties
                  and pursue reimbursement from them, unless prior approval to
                  take other action is obtained from the State. In pursuing such
                  recoveries, the contractor may utilize the State's assignment
                  and subrogation authority to the extent permitted by State
                  law. This provision shall not apply in the case of any tort
                  matter but rather the provisions of Article 8.7D.3 shall be
                  applicable.

G.       Sharing of TPL Information by the State.

         1.       By the fifteenth (15th) day of every month, the State may
                  provide the contractor with a list of all known health
                  insurance coverage information for the purpose of updating the
                  contractor's files.

                                                                         VIII-16
<PAGE>   291
         2.       Additionally, the State may provide a quarterly health insurer
                  file to the contractor that will contain all of the health
                  insurers that the State has on file and related information
                  that is needed in order to file TPL claims.

H.       Sharing of TPL Information by the Contractor.

         1.       The contractor shall notify the State within thirty (30) days
                  after it learns that an enrollee has health insurance coverage
                  not reflected in the State's health insurance coverage file,
                  or casualty insurance coverage, or of any change in an
                  enrollee's health insurance coverage. (See Section A.8.1 of
                  the Appendices.) The contractor shall impose a corresponding
                  requirement upon its servicing providers to notify it of any
                  newly discovered coverage, or of any changes in an enrollee's
                  health insurance coverage.

         2.       When the contractor becomes aware that an enrollee has
                  retained counsel, who either may institute or has instituted a
                  legal cause of action for damages against a third party, the
                  contractor shall notify the State in writing, including the
                  enrollee's name and Medicaid identification number, date of
                  accident/incident, nature of injury, name and address of
                  enrollee's legal representative, copies of pleadings, and any
                  other documents related to the action in the contractor's
                  possession or control. This shall include, but not be limited
                  to (for each service date on or subsequent to the date of the
                  accident/incident), the name of the provider, practitioner or
                  subcontractor, the enrollee's diagnosis, the nature of the
                  service provided to the enrollee, and the amount paid to the
                  provider (or to a provider's authorized subcontractor) by the
                  contractor for each service. A form is available for this
                  purpose and is included in Section A.8.2 of the Appendices.

         3.       The contractor shall notify the State within thirty (30) days
                  of the date it becomes aware of the death of one of its
                  Medicaid enrollees age fifty-five (55) or older, giving the
                  enrollee's full name, Social Security Number, Medicaid
                  identification number, and date of death. The State will then
                  determine whether it can recover correctly paid Medicaid
                  benefits from the enrollee's estate.

         4.       The contractor agrees to cooperate with the State's efforts to
                  maximize the collection of third party payments by providing
                  to the State updates to the information required by this
                  Article.

                                                                         VIII-17
<PAGE>   292
I.       Enrollment Exclusions and Contractor Liability for the Costs of Care.

         1.       Any Medicaid beneficiary enrolled in or covered by either a
                  Medicare or commercial HMO will not be enrolled by the
                  contractor. The only exception to this exclusion from
                  enrollment is when the contractor and the beneficiary's
                  Medicare/commercial HMO are the same. When beneficiaries are
                  enrolled under this exception, appropriate reductions will be
                  made in the State's capitation payments to the contractor.

         2.       If the contractor and the Medicaid beneficiary's Medicare or
                  commercial HMO are the same, the contractor will be
                  responsible for either:

                  a.       Paying all cost-sharing expenses of the Medicaid
                           beneficiary; or

                  b.       Addressing cost sharing in the contracts with its
                           providers in such a way that the Medicaid beneficiary
                           is not liable for any cost-sharing expenses, subject
                           to subarticle 3 below.

         3.       If a Medicaid beneficiary otherwise covered by the provisions
                  of subarticle 2 above wishes to utilize a provider outside of
                  the Medicare or commercial HMO's network, the HMO's rules
                  apply. Failure to follow the HMO's rules relieves both the
                  contractor and the State of any liability for the cost of the
                  care and services rendered to the beneficiary, subject to
                  subarticle 4 below.

         4.       The only exception to subarticle 3 above is if the HMO's rules
                  cannot be followed solely because emergency services were
                  provided by a non-participating provider, practitioner, or
                  subcontractor because the services were immediately required
                  due to sudden or unexpected onset of a medical condition. In
                  this circumstance, the contractor remains responsible for the
                  cost of the care and services rendered to the beneficiary.

         5.       If a Medicaid beneficiary enrolled with the contractor is also
                  enrolled in or covered by a health or casualty insurer other
                  than a Medicare or commercial HMO, the contractor is fully
                  responsible for coordinating benefits so as to maximize the
                  utilization of third party coverage in accordance with the
                  provisions of this Article. The contractor shall be
                  responsible for payment of the enrollee's coinsurance,
                  deductibles, copayments, and other cost-sharing expenses, but
                  the contractor's total liability shall not exceed what it
                  would have paid in the absence of TPL. The contractor shall
                  coordinate benefits and payments with the health or casualty
                  insurer for services authorized by the contractor, but
                  provided outside the contractor's plan. The contractor remains
                  responsible for the costs incurred by the beneficiary with
                  respect to care and services which

                                                                         VIII-18
<PAGE>   293
                  are included in the contractor's capitation rate, but which
                  are not covered or payable under the health or casualty
                  insurer's plan.

                  6.       The State will continue to pay Medicare Part A and
                           Part B premiums for Medicare/Medicaid dual eligibles
                           and Qualified Medicare Beneficiaries.

                  7.       Any references to Medicare coverage in this Article
                           shall apply to both Medicare/Medicaid dual eligibles
                           and Qualified Medicare Beneficiaries.

         J.       Other Protections for Medicaid Enrollees.

                  1.       The contractor shall not impose, or allow its
                           participating providers or subcontractors to impose,
                           cost-sharing charges of any kind upon Medicaid
                           beneficiaries enrolled in the contractor's plan
                           pursuant to this contract. This Article does not
                           apply to individuals eligible solely through the NJ
                           FamilyCare Program Plan C or D, for whom providers
                           will be required to collect cost-sharing for certain
                           services.

                  2.       The contractor's obligations under this Article shall
                           not be imposed upon the enrollees, although the
                           contractor shall require enrollees to cooperate in
                           the identification of any and all other potential
                           sources of payment for services. Instances of
                           non-cooperation shall be referred to the State.

                  3.       The contractor shall neither encourage nor require a
                           Medicaid enrollee to reduce or terminate TPL
                           coverage.

                  4.       Unless otherwise permitted or required by federal and
                           State law, health care services cannot be denied to a
                           Medicaid enrollee because of a third party's
                           potential liability to pay for the services, and the
                           contractor shall ensure that its cost avoidance
                           efforts do not prevent an enrollee from receiving
                           medically necessary services.

8.8      COMPENSATION/CAPITATION CONTRACTUAL REQUIREMENTS

         A.       Contractor Compensation. Compensation to the contractor shall
                  consist of monthly capitation payments, supplemental payments
                  per pregnancy outcome/delivery, certain blood products for
                  hemophilia factors VIII & IX disorders, and payment for
                  certain HIV/AIDS drugs. Contractors must agree to enroll all
                  non-exempt Aged, Blind and Disabled and NJ FamilyCare
                  beneficiaries to qualify to serve AFDC/TANF beneficiaries.

         B.       Capitation Payment Schedule. DMAHS hereby agrees to pay the
                  capitation by the fifteenth (15th) day of any month during
                  which health care services will be available to an enrollee;
                  provided that information pertaining to enrollment and

                                                                         VIII-19
<PAGE>   294
                  eligibility, which is necessary to determine the amount of
                  said payment, is received by DMAHS within the time limitation
                  contained in Article 5 of this contract.

         C.       Upper Payment Limit and Cost-Effectiveness. The contractor
                  shall receive monthly capitation payments, for a defined scope
                  of services to be furnished to a defined number of enrollees,
                  for providing the services contained in the Benefits Package
                  described in Article 4.1 of this contract. Such payments will
                  not exceed the upper payment limit, established by DMAHS,
                  pursuant to 42 C.F.R. Part 447, which is the cost of providing
                  those services on a fee-for-service basis to an actuarially
                  equivalent, non-enrolled population group. The contractor is
                  not entitled to receive payments that exceed the upper payment
                  limit. In addition, the contractor is not entitled to payments
                  that would cause the State to exceed the cost-effectiveness
                  established in its 1915(b) waiver.

         D.       Adjustments and Renegotiation of Capitation Rates. Capitation
                  rates are prospective in nature and will not be adjusted
                  retroactively or subject to renegotiation during the contract
                  period except as explicitly noted in the contract. Capitation
                  rates will be paid only for eligible beneficiaries enrolled
                  during the period for which the adjusted capitation payments
                  are being made. Payments provided for under the contract will
                  be denied for new enrollees when, and for so long as, payments
                  for those enrollees is denied by HCFA under 42 C.F.R.
                  434.67(e).

         E.       Payment by State Fiscal Agent. The State fiscal agent will
                  make payments to the contractor.

         F.       Payment in Full. The monthly capitation payments plus
                  supplemental payments for pregnancy outcomes and payment for
                  certain HIV/AIDS drugs and blood clotting factors VIII and IX
                  to the contractor shall constitute full and complete payment
                  to the contractor and full discharge of any and all
                  responsibility by the Division for the costs of all services
                  that the contractor provides pursuant to this contract.

         G.       Payments to Providers. Payments shall not be made on behalf of
                  an enrollee to providers of health care services other than
                  the contractor for the benefits covered in Article Four and
                  rendered during the term of this contract.

         H.       Time Period for Capitation Payment per Enrollee. The monthly
                  capitation payment per enrollee is due to the contractor from
                  the effective date of an enrollee's enrollment until the
                  effective date of termination of enrollment or termination of
                  this contract, whichever occurs first.

         I.       Payment If Enrollment Begins after First Day of Month. When
                  DMAHS' capitation payment obligation is computed, if an
                  enrollee's coverage begins after

                                                                         VIII-20
<PAGE>   295
                  the first day of a month, DMAHS will pay the contractor a
                  fractional capitation payment that is proportionate to the
                  part of the month during which the contractor provides
                  coverage. Payments are calculated and made to the last day of
                  a calendar month except as noted in this Article.

         J.       Risk Assumption. The capitation rates shall not include any
                  amount for recoupment of any losses suffered by the contractor
                  for risks assumed under this contract or any prior contract
                  with the Department.

         K.       Hospitalizations. For any eligible person who applies for
                  participation in the contractor's plan, but who is
                  hospitalized prior to the time coverage under the plan becomes
                  effective, such coverage shall not commence until the date
                  after such person is discharged from the hospital and DMAHS
                  shall be liable for payment for the hospitalization, including
                  any charges for readmission within forty-eight (48) hours of
                  discharge for the same diagnosis. If an enrollee's
                  disenrollment or termination becomes effective during a
                  hospitalization, the contractor shall be liable for
                  hospitalization until the date such person is discharged from
                  the hospital, including any charges for readmission within
                  forty-eight (48) hours of discharge for the same diagnosis.
                  The contractor must notify DMAHS of these occurrences to
                  facilitate payment to appropriate providers.

         L.       Continuation of Benefits. The contractor shall continue
                  benefits for all enrollees for the duration of the contract
                  period for which capitation payments have been made, including
                  enrollees in an inpatient facility until discharge. The
                  contractor shall notify DMAHS of these occurrences.

8.9      CONTRACTOR ADVANCED PAYMENTS AND PIPS TO PROVIDERS

         A.       The contractor shall make advance payments to its providers,
                  capitation, FFS, or other financial reimbursement arrangement,
                  based on a provider's historical billing or utilization of
                  services if the contractor's claims processing systems become
                  inoperational or experience any difficulty in making timely
                  payments. Under no circumstances shall the contractor default
                  on the claims payment timeliness provisions of this contract.
                  Advance payments shall also be made when compliance with
                  claims payment timeliness is less than ninety (90) percent for
                  two (2) quarters. Such advance payments will continue until
                  the contractor is in full compliance with timely payment
                  provisions for two (2) successive quarters.

         B.       Periodic Interim Payments (PIPs) to Hospitals. The contractor
                  shall provide periodic interim payments to participating,
                  PIP-qualifying hospitals.

                  1.       Designation of PIP-Qualifying Hospitals. Each
                           quarter, DMAHS shall determine which hospitals
                           qualify for monthly PIPs.

                                                                         VIII-21
<PAGE>   296
                  2.       When Contractor is Required to Make PIPs. The
                           contractor shall make PIPs to a participating
                           (network provider), qualifying hospital when the
                           average monthly payment from the contractor to the
                           hospital is at least $100,000 for the most recent
                           six-month period excluding outliers. An outlier is
                           defined as a single admission for which the payment
                           to the hospital exceeds $100,000. It should be noted
                           that outlier claims paid are included in the
                           establishment of the monthly PIPs and the
                           reconciliation of the PIPs.

                  3.       Methodologies to Establish Amount of PIPs.

                           a.       The contractor may work out a mutually
                                    agreeable arrangement with the participating
                                    PIP-qualifying hospitals for developing a
                                    methodology for determining the amount of
                                    the PIPs and reconciling the PIP advances to
                                    paid claims. If a mutually agreeable
                                    arrangement cannot be reached, the
                                    contractor shall make PIPs in accordance
                                    with the methodology described in 3.b.
                                    below.

                           b.       Beginning August 1, 2000, the contractor
                                    shall provide a participating,
                                    PIP-qualifying hospital with an initial
                                    60-day PIP (representing two 30-day cash
                                    advances) which shall be reconciled using a
                                    claims offset process, with the first 30-day
                                    PIP reconciled to claims adjudicated during
                                    the first month following the initial PIP
                                    (August), and the second 30-day PIP
                                    reconciled to claims adjudicated during the
                                    second month following the initial PIP
                                    (September). In September 2000 and all
                                    subsequent months, the hospital shall
                                    receive a 30-day PIP which shall be offset
                                    against claims adjudicated at the end of the
                                    following month. At reconciliation, any
                                    excess claims adjudicated above the PIP
                                    amount shall result in an additional payment
                                    to the hospital equal to the value of any
                                    excess claims above the PIP. If the value of
                                    claims adjudicated is less than the PIP, the
                                    shortage shall be offset against the next
                                    PIP made to the hospital. An example of how
                                    this methodology shall work is as follows:

                                                                         VIII-22
<PAGE>   297
EXAMPLE:

<TABLE>
<CAPTION>
                               PIP             Claims         Reconciliation          Net
                             Payment         Adjudicated        Adjustment          Payment       Balance
                             -------         -----------        ----------          -------       -------
<S>                        <C>               <C>              <C>                 <C>             <C>
            Aug 1            300,000(A)
            Aug 1            300,000(B)                                                           600,000
            Aug 1-31                           180,000                                            420,000
            Sept 1           300,000(C)                          (120,000)(A)       180,000       600,000
            Sept 1-30                          270,000                                            330,000
            Oct 1            300,000(D)                           (30,000)(B)       270,000       600,000
            Oct 1-31                           320,000                                            280,000
            Nov 1            300,000(E)                            20,000(C)        320,000       600,000
</TABLE>

8.10     FEDERALLY QUALIFIED HEALTH CENTERS

         A.       Standards for Contractor FQHC Rates. The contractor shall not
                  reimburse FQHCs less than the level and amount of payment
                  which the contractor would make for a similar set of services
                  if the services were furnished by a non-FQHC. The contractor
                  may pay the FQHCs on a fee-for-service or capitated basis. The
                  contractor shall make payments for primary care equal to, or
                  greater than, the average amounts paid to other primary care
                  providers. Non-primary care services may be included if
                  mutually agreeable between the contractor and FQHC. For
                  non-primary care services, payments shall be equal to, or
                  greater than, the average amounts paid to other non-primary
                  care providers for equivalent services.

         B.       DMAHS Reimbursement to FQHCs. Under Title XIX, an FQHC shall
                  be paid reasonable cost reimbursement by DMAHS. At the end of
                  each fiscal year the contractor and the FQHC will complete
                  certain reporting requirements specified that will enable
                  DMAHS to determine reasonable costs and compare that to what
                  was actually paid by the contractor to the FQHC. DMAHS will
                  reimburse the FQHC for the difference (i.e., difference
                  between the determined reasonable cost per encounter and the
                  payments to the FQHC made by the contractor and DMAHS) if the
                  payments by the contractor to the FQHC are less than
                  reasonable costs. DMAHS will recoup payments from the FQHC in
                  excess of reasonable costs. FQHC providers must meet the
                  contractor's credentialing and program requirements.

         C.       Contractor Participation in Reconciliation Process. The
                  contractor shall participate in the reconciliation processes
                  if there is a dispute between what the contractor reported
                  (See Section A.7.20 of the Appendices (Table 18)) and what the
                  FQHC reported as valid encounters or payments. This
                  participation may include appearances in the Office of
                  Administrative Law, as well as meeting with DMAHS staff.

                                                                         VIII-23
<PAGE>   298
IN WITNESS WHEREOF, the parties hereto have caused this contract and Appendices
to be executed this _____ day of _____, 2000. This contract and Appendices are
hereby accepted and considered binding in accordance with the terms outlined in
the preceding statements.

         CONTRACTOR                     STATE OF NEW JERSEY
         ADDRESS                        DEPARTMENT OF HUMAN SERVICES
                                        DIRECTOR, DIVISION MEDICAL ASSISTANCE
                                        AND HEALTH SERVICES

BY:______________________                            BY:________________________

TITLE:___________________                            TITLE: Director, DMAHS

DATE:____________________                            DATE:______________________

                                          Approved As to Form

                                          _______________________
                                          Deputy Attorney General

                                          Date:_________________

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