Document:

exv10w5

 

Exhibit 10.5

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of September 29, 2003, by
and between Hythiam, Inc., a Delaware corporation (“Employer”), and Chuck Timpe, an individual
(“Employee”).

RECITALS

     A. WHEREAS, Employee has experience and expertise applicable to employment with Employer to
perform as the Chief Financial Officer of Employer, Employer has agreed to employ Employee and
Employee has agreed to enter into such employment, on the terms set forth in this Agreement.

     B. WHEREAS, Employee acknowledges that this Agreement is necessary for the protection of
Employer’s investment in its business, good will, products, methods of operation, information, and
relationships with its customers and other employees.

     C. WHEREAS, Employer acknowledges that Employee desires definition of his compensation and
benefits, and other terms of his employment.

     NOW, THEREFORE, in consideration thereof and of the covenants and conditions contained herein,
the parties agree as follows:

AGREEMENT

     1. TERM OF AGREEMENT

          1.1 Initial Term. The initial term of this Agreement shall begin on September 29,
2003 (“Commencement Date”) and shall continue until the earlier of: (a) the date on which it is
terminated pursuant to Section 5; or (b) four (4) years following the Commencement Date (“Initial
Term”). After the expiration of the Initial Term, Employee shall be employed on an at-will basis,
with either party able to terminate the employment, with or without cause and with or without
notice.

     2. EMPLOYMENT

          2.1 Employment of Employee. Employer agrees to employ Employee to render services on
the terms set forth herein. Employee hereby accepts such employment on the terms and conditions of
this Agreement.

          2.2 Position and Duties. Employee shall serve as the Chief Financial Officer of
Employer, reporting to Employer’s Chief Executive Officer (“CEO”), and shall have the general
powers, duties and responsibilities of management usually vested in that office in a

 

 

corporation and such other powers and duties as may be prescribed from time to time by the CEO
and Employer’s Board of Directors (“Board”).

          2.3 Standard of Performance. Employee agrees that he will at all times faithfully and
industriously and to the best of his ability, experience and talents perform all of the duties that
may be required of and from him pursuant to the terms of this Agreement. Such duties shall be
performed at such place or places as the interests, needs, business and opportunities of Employer
shall require or render advisable.

          2.4 Exclusive Service. Except as set forth in Attachment A, (a)
Employee shall devote all of his business energies and abilities and all of his productive time to
the performance of his duties under this Agreement (reasonable absences during holidays and
vacations excepted), and shall not, without the prior written consent of Employer, render to others
any service of any kind (whether or not for compensation) that, in the opinion of Employer, would
materially interfere with the performance of his duties under this Agreement, and (b) Employee
shall not, without the prior written consent of Employer, maintain any affiliation with, whether as
an agent, consultant, employee, officer, director, trustee or otherwise, nor shall he directly or
indirectly render any services of an advisory nature or otherwise to, or participate or engage in,
any other business activity. Employee and Employer agree that those items set forth in Attachment
A are subject to periodic review by Employer and in the event that Employer determines, in its sole
discretion, that such obligations negatively impact Employer, Employer shall have the right to
direct Employee to terminate such relationships.

     3. COMPENSATION

          3.1 Compensation. During the term of this Agreement, Employer shall pay the amounts
and provide the benefits described in this Section 3, and Employee agrees to accept such amounts
and benefits in full payment for Employee’s services under this Agreement.

          3.2 Base Salary. Employer shall pay to Employee a base salary of $200,000 annually in
equal semi-monthly installments, less applicable taxes. At Employer’s sole discretion, Employee’s
base salary may be increased, but not decreased, annually. Notwithstanding the foregoing,
commencing on January 1, 2005 and annually thereafter, the Base Salary shall be increased by at
least the Consumer Price Index for Los Angeles, CA (or a reasonable proxy thereof).

          3.3 Discretionary Bonus. Except as described in Section 5.1 below, Employee is
eligible to receive an annual bonus in the sole discretion of Employer. This discretionary bonus
will be targeted at 50% of Employee’s base salary, and will be based on Employee achieving
designated individual goals and milestones, and the overall performance and profitability of the
Company. The goals and milestones will be established and reevaluated on an annual basis by mutual
agreement of Employee and the CEO, subject to review and approval by the Board or its Compensation
Committee. To the extent that a discretionary bonus is granted, it will be based on a calendar
year and shall be paid no later than April 30th of the following year. The first annual
bonus, to the extent granted at the sole discretion of the Company, shall be prorated based on the
Commencement Date.

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          3.4 Equity Incentive Plan.

               (a) Employee shall be granted options to purchase 300,000 shares of Employer’s common stock,
at fair market value, under the provisions of Employer’s 2003 Stock Incentive Plan, upon approval
by the Board. The options will vest as follows: 20% on June 26, 2004, and 20% on the second,
third, fourth and fifth anniversaries thereof.

               (b) Except as otherwise set forth herein, vesting of options will cease upon the termination
of Employee’s employment with Employer.

          3.5 Fringe Benefits. Subject to Section 3.7 and upon satisfaction of the applicable
eligibility requirements, Employee and Employee’s family shall be provided with group medical and
dental insurance and group dental coverage through Employer’s plans. Medical and dental benefits
will commence on the first day of the month following the Commencement Date. In the event that no
benefit plans are in place at that time, the Company will reimburse Employee for COBRA coverage
until such time as Employee is covered under the Company’s group medical and dental plans.
Employer will pay for $300,000 of term life insurance for the benefit of Employee, subject to the
standard physical examination that is required by the issuing insurance company. In addition,
Employee will be provided with accidental death and disability and long-term disability insurance.
Employee is also eligible to participate in Employer’s 401K plan beginning on the first day of the
month following the Commencement Date.

          3.6 Paid Time Off. Employee shall accrue, on a daily basis, a total of four (4)
workweeks of paid time off (PTO) per year following the date of this Agreement, provided, however,
that Employee’s accrued and unused PTO may not exceed a total of seven (7) workweeks. This PTO
shall be in addition to normal Company holidays, which shall be determined at the discretion of the
Company from time to time. Thereafter, Employee will not continue to accrue PTO benefits until he
has used enough PTO time to fall below this maximum amount. Any accrued but unused PTO will be paid
to Employee, on a pro rata basis, at the time that his employment is terminated. In addition to
PTO, the Employee shall be entitled to normal Company holidays.

          3.7 Deduction from Compensation. Employer shall deduct and withhold from all
compensation payable to Employee all amounts required to be deducted or withheld pursuant to any
present or future law, ordinance, regulation, order, writ, judgment, or decree requiring such
deduction and withholding.

     4. REIMBURSEMENT OF EXPENSES

          4.1 Travel and Other Expenses. Employer shall pay to or reimburse Employee for those
travel, promotional, professional continuing education and licensing costs (to the extent
required), professional society membership fees, seminars and similar expenditures incurred by
Employee which Employer determines are reasonably necessary for the proper discharge of Employee’s
duties under this Agreement and for which Employee submits appropriate receipts and indicates the
amount, date, location and business character in a timely manner.

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          4.2 Liability Insurance. Employer shall provide Employee with officers and directors’
insurance, or other liability insurance, consistent with its usual business practices, to cover
Employee against all insurable events related to his employment with Employer.

          4.3 Indemnification. Promptly upon written request from Employee, Employer shall
indemnify Employee, to the fullest extent under applicable law, for all judgements, fines,
settlements, losses, costs or expenses (including attorney’s fees), arising out of Employee’s
activities as an agent, employee, officer or director of Employer, or in any other capacity on
behalf of or at the request of Employer. Such agreement by Employer shall not be deemed to impair
any other obligation of Employer respecting indemnification of Employee otherwise arising out of
this or any other agreement or promise of Employer or under any statute.

     5. TERMINATION

          5.1 Termination With Good Cause; Resignation Without Good Reason. Employer may
terminate Employee’s employment at any time, with or without notice or Good Cause (as defined
below). If Employer terminates Employee’s employment with Good Cause, or if Employee resigns
without Good Reason (as defined below), Employer shall pay Employee his salary prorated through the
date of termination, at the rate in effect at the time notice of termination is given, together
with any benefits accrued through the date of termination. Employer shall have no further
obligations to Employee under this Agreement or any other agreement, and all unvested options will
terminate.

          5.2 Termination Without Good Cause; Resignation with Good Reason. Employee shall have
the right to terminate his employment with notice and Good Reason. If Employer terminates
Employee’s employment without Good Cause, or Employee resigns for Good Reason:

               (a) Employer shall pay Employee his salary prorated through the date of termination, at the
rate in effect at the time notice of termination is given, together with any benefits accrued
through the date of termination;

               (b) Employer shall pay Employee in a lump sum an amount equal to one (1) year’s salary (at the
rate in effect at the time of termination) plus a bonus equal to 100% of the targeted bonus;

               (c) All of Employee’s unvested stock options will vest immediately; and

               (d) In addition to any rights under COBRA, the term for continued medical benefits provided by
Employer shall continue for a period of one year from the date of termination, provided that
coverage will terminate sooner if Employee becomes eligible for coverage under another employer’s
plan.

          To be eligible for the compensation provided for in Section 5.2(b), (c) and (d) above,
Employee must execute a full and complete release of any and all claims against

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Employer in the standard form then used by Employer (“Release”). Employer shall have no
further obligations to Employee under this Agreement or any other agreement.

          5.3 Good Cause. For purposes of this Agreement, a termination shall be for “Good
Cause” if Employee, in the subjective, good faith opinion of Employer, shall:

               (a) Commit an act of fraud, moral turpitude, misappropriation of funds or embezzlement in
connection with his duties;

               (b) Breach Employee’s fiduciary duty to Employer, including, but not limited to, acts of
self-dealing (whether or not for personal profit);

               (c) Materially breach this Agreement, the Confidentiality Agreement (defined below), or
Employer’s written Codes of Ethics as adopted by the Board;

               (d) Willful, reckless or grossly negligent violation of any material provision of Employer’s
written Employee Handbook, or any applicable state or federal law or regulation;

               (e) Fail or refuse (whether willful, reckless or negligent) to comply with all relevant and
material obligations, assumable and chargeable to an executive of his corporate rank and
responsibilities, under the Sarbanes-Oxley Act and the regulations of the Securities and Exchange
Commission promulgated thereunder;

               (f) Fail or refuse (whether willful, reckless or negligent) to substantially perform the
responsibilities and duties specified herein (other than a failure caused by temporary disability);
provided, however, that no termination shall occur on that basis unless the Employer first provides
the Employee with written notice to cure; the notice to cure shall reasonably specify the acts or
omissions that constitute the Employee’s failure or refusal to perform his duties, and the Employee
shall have a reasonable opportunity (not to exceed 10 days after the date of notice to cure) to
correct his failure or refusal to perform his duties; termination shall be effective as of the date
of written notice to cure; or

               (g) Be convicted of, or enter a plea of guilty or no contest to, a felony or misdemeanor under
state or federal law, other than a traffic violation or misdemeanor not involving dishonesty or
moral turpitude.

          5.4 Good Reason. For purposes of this Agreement, a resignation shall be for “Good
Reason” if tendered within ninety (90) days of any of the following actions by Employer:

               (a) Assignment to Employee of duties materially inconsistent with Employee’s status as defined
in Section 2.2, or a substantial reduction in the nature or status of Employee’s responsibilities;

               (b) Relocation of Employee’s site of employment outside a 30 mile radius of Los Angeles
(unless closer to Employee’s residence) without Employee’s consent, except for reasonably required
travel on Employer’s business;

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               (c) Failure to cause any acquiring or successor entity following a Change in Control to assume
Employer’s obligations under this Agreement, unless such assumption occurs by operation of law; or

               (d) Material breach of this Agreement by Employer, or failure to timely pay to Employee any
amount due under Section 3, which continues after written notice and reasonable opportunity to cure
(not to exceed 10 days after the date of notice).

          5.5 Effects of Change in Control. Immediately upon a Change in Control (as defined
below) all of Employee’s unvested options shall vest immediately, and remain exercisable for a
period of three (3) years thereafter. Further, if Employee is terminated without Good Cause or
resigns for Good Reason during the first twelve (12) months following a Change in Control, Employee
shall be entitled to receive a lump sum in an amount equal to: (i) one and one-half years of salary
(at the rate in effect at the time of termination); and (ii) one and one-half times the Employee’s
full targeted bonus for that year. In addition to any rights under COBRA, the term for continued
medical benefits provided by Employer shall continue for a period of eighteen (18) months from the
date of termination, provided that coverage will terminate sooner if Employee becomes eligible for
coverage under another employer’s plan. To be eligible for the compensation provided for in this
Section 5.5, Employee must execute a Release. Employer shall have no further obligations to
Employee under this Agreement or any other agreement.

          5.6 Change in Control. For purposes of this Agreement, a “Change in Control” shall be
defined as:

               (a) The acquisition of Employer by another entity by means of a transaction or series of
related transactions (including, without limitation, any reorganization, merger, stock purchase or
consolidation); or

               (b) The sale, transfer or other disposition of all or substantially all of the Employer’s
assets.

          5.7 No Change in Control. Notwithstanding the provisions of Section 5.6, the
following shall not constitute a Change in Control:

               (a) If the sole purpose of the transaction is to change the state of the Employer’s
incorporation or to create or eliminate a holding company that will be owned in substantially the
same proportions by the same beneficial owners as before the transaction;

               (b) If Employer’s stockholders of record as constituted immediately prior to the transaction
will, immediately after the transaction (by virtue of securities issued as a consideration for
Employer’s capital stock or assets or otherwise), hold more than 50% of the combined voting power
of the surviving or acquiring entity’s outstanding securities;

               (c) An underwritten public offering of Employer’s common stock, if Employer’s stockholders of
record as constituted immediately prior to the offering will,

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immediately after the offering, continue to hold more than 50% of the combined voting power of
Employer’s outstanding securities;

               (d) The private placement of preferred or common stock, or the issuance of debt instruments
convertible into preferred or common stock, for fair market value as determined by the Board,
provided the acquiring person does not as a result of the transaction own more than 50% of the
outstanding capital stock of Employer, have the right to vote more than 50% of the outstanding
voting stock of Employer, or have the right to elect a majority of the Board; or

               (e) If Employee is a member of a group that acquires control of Employer in an event that
would otherwise be a Change in Control, such event shall not be deemed a Change in Control and
Employee shall have no right to benefits hereunder as a result of such event; provided, however,
that Employee shall not be deemed a member of any acquiring group solely by virtue of his continued
employment or ownership of stock or stock options following a Change in Control.

          5.8 Death or Disability. To the extent consistent with federal and state law,
Employee’s employment, salary, and accrual of commissions shall terminate on his death or
disability. “Disability” means any health condition, physical or mental, or other cause beyond
Employee’s control, that prevents him from performing his duties, even after reasonable
accommodation is made by Employer, for a period of 180 consecutive days within any 360 day period.
In the event of termination due to death or Disability, Employer shall pay Employee (or his legal
representative) his salary prorated through the date of termination, at the rate in effect at the
time of termination, together with any benefits accrued through the date of termination. Employer
shall have no further obligations to Employee (or his legal representative) under this Agreement.

          5.9 Return of Employer Property. Within five (5) days after the Termination Date,
Employee shall return to Employer all products, books, records, forms, specifications, formulae,
data processes, designs, papers and writings relating to the business of Employer including without
limitation proprietary or licensed computer programs, customer lists and customer data, and/or
copies or duplicates thereof in Employee’s possession or under Employee’s control. Employee shall
not retain any copies or duplicates of such property and all licenses granted to him by Employer to
use computer programs or software shall be revoked on the Termination Date.

     6. DUTY OF LOYALTY

          6.1 During the term of this Agreement, Employee shall not, without the prior written consent
of Employer, directly or indirectly render services of a business, professional, or commercial
nature to any person or firm, whether for compensation or otherwise, or engage in any activity
directly or indirectly competitive with or adverse to the business or welfare of Employer, whether
alone, as a partner, or as an officer, director, employee, consultant, or holder of more than 1 %
of the capital stock of any other corporation. Otherwise, Employee may make personal investments
in any other business so long as these

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investments do not require him to participate in the operation of the companies in which he
invests.

     7. CONFIDENTIAL INFORMATION

          7.1 Trade Secrets of Employer. Employee, during the term of this Agreement, will
develop, have access to and become acquainted with various trade secrets which are owned by
Employer and/or its affiliates and which are regularly used in the operation of the businesses of
such entities. Employee shall not disclose such trade secrets, directly or indirectly, or use them
in any way, either during the term of this Agreement or at any time thereafter, except as required
in the course of his employment by Employer. All files, contracts, manuals, reports, letters,
forms, documents, notes, notebooks, lists, records, documents, customer lists, vendor lists,
purchase information, designs, computer programs and similar items and information, relating to the
businesses of such entities, whether prepared by Employee or otherwise and whether now existing or
prepared at a future time, coming into his possession shall remain the exclusive property of such
entities, and shall not be removed for purposes other than work-related from the premises where the
work of Employer is conducted, except with the prior written authorization by Employer.

          7.2 Confidential Data of Customers of Employer. Employee, in the course of his
duties, will have access to and become acquainted with financial, accounting, statistical and
personal data of customers of Employer and of their affiliates. All such data is confidential and
shall not be disclosed, directly or indirectly, or used by Employee in any way, either during the
term of this Agreement (except as required in the course of employment by Employer) or at any time
thereafter.

          7.3 Inevitable Disclosure. After Employee’s employment has terminated, Employee shall
not accept employment with any competitor of Employer, where the new employment is likely to result
in the inevitable disclosure of Employer’s trade secrets or confidential information, or it would
be impossible for Employee to perform his new job without using or disclosing trade secrets or
confidential information.

          7.4 Continuing Effect. The provisions of this Section 7 shall remain in effect after
the Termination Date.

     8. NO SOLICITATION

          8.1 No Solicitation of Employees. Employee agrees that he will not, during his
employment with Employer, and for two (2) years thereafter, encourage or solicit any other employee
of Employer to terminate his or her employment for any reason, nor will he assist others to do so.

          8.2 No Solicitation of Customer. Employee agrees that he will not, during his
employment with Employer, and for two (2) years thereafter, directly or indirectly call on, or
otherwise solicit, business from any actual customer or potential customer known by Employee to be
targeted by Employer, nor will he assist others in doing so.

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     9. INTELLECTUAL PROPERTIES.

          To the extent permissible under applicable law, all intellectual properties made or conceived
by Employee during the term of this employment by Employer shall be the right and property solely
of Employer, whether developed independently by Employee or jointly with others. The Employee will
sign the Employer’s standard Employee Innovation, Proprietary Information and Confidentiality
Agreement (“Confidentiality Agreement”).

     10. OTHER PROVISIONS

          10.1 Compliance With Other Agreements. Employee represents and warrants to Employer
that the execution, delivery and performance of this Agreement will not conflict with or result in
the violation or breach of any term or provision of any order, judgment, injunction, contract,
agreement, commitment or other arrangement to which Employee is a party or by which he is bound.

          10.2 Injunctive Relief. Employee acknowledges that the services to be rendered under
this Agreement and the items described in Sections 6, 7, 8 and 9 are of a special, unique and
extraordinary character, that it would be difficult or impossible to replace such services or to
compensate Employer in money damages for a breach of this Agreement. Accordingly, Employee agrees
and consents that if he violates any of the provisions of this Agreement, Employer, in addition to
any other rights and remedies available under this Agreement or otherwise, shall be entitled to
temporary and permanent injunctive relief, without the necessity of proving actual damages and
without the necessity of posting any bond or other undertaking in connection therewith.

          10.3 Attorneys’ Fees. The prevailing party in any suit or other proceeding brought to
enforce, interpret or apply any provisions of this Agreement, shall be entitled to recover all
costs and expenses of the proceeding and investigation (not limited to court costs), including all
attorneys’ fees.

          10.4 Counsel. The parties acknowledge and represent that, prior to the execution of
this Agreement, they have had an opportunity to consult with their respective counsel concerning
the terms and conditions set forth herein. Additionally, Employee represents that he has had an
opportunity to receive independent legal advice concerning the taxability of any consideration
received under this Agreement. Employee has not relied upon any advice from Employer and/or its
attorneys with respect to the taxability of any consideration received under this Agreement.
Employee further acknowledges that Employer has not made any representations to him with respect to
tax issues.

          10.5 Nondelegable Duties. This is a contract for Employee’s personal services. The
duties of Employee under this Agreement are personal and may not be delegated or transferred in any
manner whatsoever, and shall not be subject to involuntary alienation, assignment or transfer by
Employee during his life.

          10.6 Governing Law. The validity, construction and performance of this Agreement
shall be governed by the laws, without regard to the laws as to choice or conflict of laws, of the
State of California.

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          10.7 Venue. If any dispute arises regarding the application, interpretation or
enforcement of any provision of this Agreement, including fraud in the inducement, such dispute
shall be resolved either in federal or state court in Los Angeles, California.

          10.8 No Jury. If any dispute arises regarding the application, interpretation or
enforcement of any provision of this Agreement, including fraud in the inducement, the parties
hereby waive their right to a jury trial.

          10.9 No Punitive Damages. If any dispute arises regarding the application,
interpretation or enforcement of any provision of this Agreement, including fraud in the
inducement, the parties hereby waive their right to seek punitive damages in connection with said
dispute.

          10.10 Severability. The invalidity or unenforceability of any particular provision of
this Agreement shall not affect the other provisions, and this Agreement shall be construed in all
respects as if any invalid or unenforceable provision were omitted.

          10.11 Binding Effect. The provisions of this Agreement shall bind and inure to the
benefit of the parties and their respective successors and permitted assigns.

          10.12 Notice. Any notices or communications required or permitted by this Agreement
shall be deemed sufficiently given if in writing and when delivered personally or 48 hours after
deposit with the United States Postal Service as registered or certified mail, postage prepaid and
addressed as follows:

               (a) If to Employer, to the principal office of Employer in the State of California, marked
“Attention: Chief Executive Officer”; or

               (b) If to Employee, to the most recent address for Employee appearing in Employer’s records.

          10.13 Headings. The Section and other headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or interpretation of this
Agreement.

          10.14 Amendment and Waiver. This Agreement may be amended, modified or supplemented
only by a writing executed by each of the parties. Either party may in writing waive any provision
of this Agreement to the extent such provision is for the benefit of the waiving party. No waiver
by either party of a breach of any provision of this Agreement shall be construed as a waiver of
any subsequent or different breach, and no forbearance by a party to seek a remedy for
noncompliance or breach by the other party shall be construed as a waiver of any right or remedy
with respect to such noncompliance or breach.

          10.15 Entire Agreement. This Agreement is the only agreement and understanding
between the parties pertaining to the subject matter of this Agreement, and supersedes all prior
agreements, summaries of agreements, descriptions of compensation

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packages, discussions, negotiations, understandings, representations or warranties, whether
verbal or written, between the parties pertaining to such subject matter.

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year
first above written.

EMPLOYEE:

	 	 	 
	 	 	 
	 	 	 
	Chuck Timpe

	 	 

	 	 	 	 	 
	 	EMPLOYER:

HYTHIAM, INC.

 	 
	 	By   	 	 
	 	 	         Terren S. Peizer 	 
	 	 	         Its Chairman & CEO 	 

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ATTACHMENT A

1. Employee may continue to serve as a Board Member of IPC-The Hospitalist Company and attend
regularly scheduled Board and Board Committee meetings consistent with past practice.

2. Employee may continue his consulting assignment with Life Outcomes, which shall require no more
than 2 hours per week on Employee’s own time.

 -12 -exv10w6

 

EXHIBIT 10.6

MANAGEMENT AND SUPPORT SERVICES AGREEMENT

BETWEEN

HYTHIAM, INC.

AND

David E. Smith, M.D., Medical Group, Inc.

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
	 	 	 	 	Page
	ARTICLE 1. DEFINITIONS AND INTERPRETATION	 	 	2	 
	 
	 	 	 	 	 	 
	1.1

	 	Definitions
	 	 	2	 
	1.2

	 	Sections and Headings
	 	 	4	 
	1.3

	 	Number and Gender
	 	 	4	 
	1.4

	 	Currency
	 	 	4	 
	1.5

	 	Time of Essence
	 	 	4	 
	1.6

	 	Applicable Law
	 	 	4	 
	1.7

	 	Severability
	 	 	4	 
	1.8

	 	No Waiver
	 	 	4	 
	1.9

	 	Date of any Action
	 	 	5	 
	1.10

	 	Interpretation
	 	 	5	 
	 
	 	 	 	 	 	 
	ARTICLE 2. APPOINTMENT AND AUTHORITY OF THE MANAGER	 	 	5	 
	 
	 	 	 	 	 	 
	2.1

	 	Appointment
	 	 	5	 
	2.2

	 	Authority
	 	 	5	 
	 

	 	2.2.1  Authority of the Manager
	 	 	5	 
	 

	 	2.2.2  The PC Retains Medical Authority
	 	 	5	 
	2.3

	 	Patient Referrals
	 	 	6	 
	2.4

	 	Practice of Medicine
	 	 	6	 
	 
	 	 	 	 	 	 
	ARTICLE 3. RESPONSIBILITIES OF THE MANAGER	 	 	6	 
	 
	 	 	 	 	 	 
	3.1

	 	Services Generally
	 	 	6	 
	3.2

	 	Office Space
	 	 	6	 
	 

	 	3.2.1  During the Term
	 	 	6	 
	 

	 	3.2.2  Non-Exclusive Basis
	 	 	7	 
	 

	 	3.2.3  Premise Use
	 	 	7	 
	3.3

	 	Equipment and Supplies
	 	 	7	 
	3.4

	 	Employees
	 	 	7	 
	 

	 	3.4.1  Manager Employees
	 	 	7	 
	 

	 	3.4.2  Medical Contractors
	 	 	7	 
	3.5

	 	Quality Assurance and Risk Management
	 	 	8	 
	3.6

	 	Third Party Contracts
	 	 	8	 
	3.7

	 	Billing and Collection; Power of Attorney
	 	 	8	 
	 

	 	3.7.1  Billing
	 	 	8	 
	 

	 	3.7.2  Accounts Receivable
	 	 	9	 
	 

	 	3.7.3  Deposits
	 	 	9	 
	 

	 	3.7.4  Deposits
	 	 	9	 
	 

	 	3.7.5  Governmental Third Party Payors
	 	 	9	 
	 

	 	3.7.6  Government Payor Account
	 	 	9	 
	 

	 	3.7.7  Other Actions
	 	 	10	 

i

 

	 	 	 	 	 	 	 
	 	 	 	 	Page
	3.8

	 	PC Determines Medical Fees
	 	 	10	 
	3.9

	 	Payment of PC Expenses
	 	 	10	 
	3.10

	 	Administrative Services
	 	 	11	 
	 

	 	3.10.1  Scheduling
	 	 	11	 
	 

	 	3.10.2  Records
	 	 	11	 
	 

	 	3.10.3  Personnel Policies
	 	 	11	 
	 

	 	3.10.4  Non-Medical Quality Assurance
	 	 	11	 
	 

	 	3.10.5  Current Business Information
	 	 	11	 
	 

	 	3.10.6  Consent Forms
	 	 	11	 
	 

	 	3.10.7  Non-Clinical Training
	 	 	11	 
	 

	 	3.10.8  Financing Programs
	 	 	12	 
	 

	 	3.10.9  Aftercare Programs
	 	 	12	 
	3.11

	 	Bank Account
	 	 	12	 
	3.12

	 	Fiscal Matters
	 	 	12	 
	3.13

	 	Medical Records
	 	 	12	 
	3.14

	 	Business Reports
	 	 	13	 
	3.15

	 	Other Reports and Records
	 	 	13	 
	3.16

	 	Licensing of PROMETATM Protocols
	 	 	13	 
	 

	 	3.16.1  Grant of License Rights to PC
	 	 	13	 
	 

	 	3.16.2  Term of License
	 	 	13	 
	 

	 	3.16.3  License Restrictions
	 	 	13	 
	 

	 	3.16.4  PC Obligations
	 	 	14	 
	 

	 	3.16.5  Data Collection and Reporting
	 	 	14	 
	 

	 	3.16.6  Aftercare Services
	 	 	14	 
	 

	 	3.16.7  Use of Licensed Technology
	 	 	14	 
	 

	 	3.16.8  Clinical Activities
	 	 	14	 
	 

	 	3.16.9  Subject Data
	 	 	15	 
	 

	 	3.16.10  Patient Consents; Regulatory Approvals
	 	 	15	 
	 

	 	3.16.11  Reservation of Rights
	 	 	15	 
	 

	 	3.16.12  Manager Ownership
	 	 	15	 
	 

	 	3.16.13  Intellectual Property
	 	 	16	 
	 

	 	3.16.14  Disclaimer Of Warranties
	 	 	17	 
	 

	 	3.16.15  Limitation of Liability
	 	 	17	 
	 

	 	3.16.16  Debarment or Exclusion
	 	 	18	 
	 

	 	3.16.17  Government Access
	 	 	18	 
	3.17

	 	Licensing of Name
	 	 	18	 
	 

	 	3.17.1  Grant of License
	 	 	18	 
	 

	 	3.17.2  Termination of License
	 	 	19	 
	 

	 	3.17.3  Injunctive Relief
	 	 	19	 
	3.18

	 	Advertising, Marketing and Promotional Services
	 	 	19	 
	 

	 	3.18.1  Advertising Services
	 	 	19	 
	3.19

	 	Non-Exclusivity
	 	 	20	 
	 
	 	 	 	 	 	 
	ARTICLE 4. COVENANTS AND RESPONSIBILITIES OF THE PC	 	 	20	 
	 
	 	 	 	 	 	 
	4.1

	 	Organization and Operation
	 	 	20	 
	4.2

	 	Retention of Medical Contractors
	 	 	20	 

ii

 

	 	 	 	 	 	 	 
	 	 	 	 	Page
	4.3

	 	Professional Standards
	 	 	21	 
	4.4

	 	Medical Practice
	 	 	21	 
	4.5

	 	Compliance with Laws
	 	 	21	 
	4.6

	 	Premises and Equipment
	 	 	22	 
	4.7

	 	Delegation by the Provider
	 	 	22	 
	 
	 	 	 	 	 	 
	ARTICLE 5. RELATIONSHIP OF THE PARTIES	 	 	22	 
	 
	 	 	 	 	 	 
	5.1

	 	Medical Practices
	 	 	22	 
	 

	 	5.1.1  Delivery of Medical Services
	 	 	22	 
	 

	 	5.1.2  Quality
	 	 	23	 
	 

	 	5.1.3  Manager Not Practicing Medicine
	 	 	23	 
	5.2

	 	Independent Contractors
	 	 	23	 
	 
	 	 	 	 	 	 
	ARTICLE 6. FINANCIAL TERMS	 	 	23	 
	 
	 	 	 	 	 	 
	6.1

	 	Manager Compensation
	 	 	23	 
	6.2

	 	Payment of Management Fee
	 	 	24	 
	6.3

	 	Invoices
	 	 	24	 
	6.4

	 	Authorization to Pay Invoices
	 	 	24	 
	6.5

	 	Records and Audit of Accounts
	 	 	25	 
	6.6

	 	Physician Contractor Compensation
	 	 	25	 
	 

	 	6.6.1  Medical Fee; Initial Term
	 	 	25	 
	 

	 	6.6.2  Renewal Terms
	 	 	25	 
	 

	 	6.6.3  Payment and Statements
	 	 	25	 
	6.7

	 	Grant of Security Interest in Accounts
	 	 	25	 
	 

	 	6.7.1  Grant of Security Interest
	 	 	25	 
	 

	 	6.7.2  Exercising Remedies
	 	 	26	 
	 

	 	6.7.3  Financial Statements
	 	 	26	 
	6.8

	 	License Fee
	 	 	26	 
	 

	 	6.8.1  License Fees
	 	 	26	 
	 

	 	6.8.2  Payment Terms
	 	 	26	 
	 

	 	6.8.3  Reconciliation
	 	 	27	 
	 
	 	 	 	 	 	 
	ARTICLE 7. REPRESENTATIONS AND WARRANTIES	 	 	27	 
	 
	 	 	 	 	 	 
	7.1

	 	Representations and Warranties of the PC
	 	 	27	 
	 

	 	7.1.1  Organization
	 	 	27	 
	 

	 	7.1.2  No Violation – Professional Services Agreement
	 	 	27	 
	 

	 	7.1.3  No Violation – Medical Contractor Agreements
	 	 	28	 
	 

	 	7.1.4  Covenant Regarding Trade Secrets
	 	 	28	 
	 

	 	7.1.5  Licensed Medical Contractors
	 	 	28	 
	 

	 	7.1.6  Insurance
	 	 	28	 
	7.2

	 	Representations and Warranties of the Manager
	 	 	28	 
	 

	 	7.2.1  Organization
	 	 	29	 
	 

	 	7.2.2  No Violation
	 	 	29	 
	 

	 	7.2.3  Trade Name
	 	 	29	 

iii

 

	 	 	 	 	 	 	 
	 	 	 	 	Page
	ARTICLE 8. INSURANCE	 	 	29	 
	 
	 	 	 	 	 	 
	8.1

	 	Insurance Obligations of the Manager
	 	 	29	 
	8.2

	 	Insurance Obligations of the PC
	 	 	29	 
	8.3

	 	Notices from Insurance Companies
	 	 	30	 
	 
	 	 	 	 	 	 
	ARTICLE 9.  TERM AND TERMINATION	 	 	30	 
	 
	 	 	 	 	 	 
	9.1

	 	Initial and Renewal Term
	 	 	30	 
	9.2

	 	Termination
	 	 	30	 
	 

	 	9.2.1  Without Cause
	 	 	30	 
	 

	 	9.2.2  With Cause
	 	 	30	 
	 

	 	9.2.3  Disciplinary Actions
	 	 	31	 
	9.3

	 	Effect of Termination
	 	 	31	 
	 
	 	 	 	 	 	 
	ARTICLE 10. CONFIDENTIAL AND PROPRIETARY INFORMATION	 	 	31	 
	 
	 	 	 	 	 	 
	10.1

	 	Confidential Information
	 	 	31	 
	10.2

	 	Confidentiality and Non-Disclosure
	 	 	32	 
	10.3

	 	Patient Medical Records; HIPAA Compliance
	 	 	32	 
	 
	 	 	 	 	 	 
	ARTICLE 11. INDEMNIFICATION	 	 	33	 
	 
	 	 	 	 	 	 
	11.1

	 	Indemnification
	 	 	33	 
	 
	 	 	 	 	 	 
	ARTICLE 12.  MISCELLANEOUS	 	 	33	 
	 
	 	 	 	 	 	 
	12.1

	 	Access to Records
	 	 	33	 
	12.2

	 	Amendment
	 	 	34	 
	 

	 	12.2.1  Amendment
	 	 	34	 
	 

	 	12.2.2  Contract Modification for Prospective Legal Event
	 	 	34	 
	12.3

	 	Assignment
	 	 	34	 
	12.4

	 	Rights and Remedies; Injunctive Relief
	 	 	34	 
	12.5

	 	Status as Independent Contractor
	 	 	35	 
	12.6

	 	Notices
	 	 	35	 
	12.7

	 	Collateral Agreements
	 	 	35	 
	12.8

	 	Survival
	 	 	35	 

EXHIBIT A            Trademarks

EXHIBIT B            Licensed Technology

EXHIBIT C            Professional Services Agreement

EXHIBIT D            Business Associate and Data Use Agreement

Schedule 7.1.6        Insurance Policies

iv

 

MANAGEMENT AND SUPPORT SERVICES AGREEMENT

THIS AGREEMENT made as of the 15th day of November, 2005.

Hythiam, Inc.

a corporation existing under the laws of the
State of Delaware,

(hereinafter referred to as the “Manager”),

- and -

David E. Smith, M.D. Medical Group, Inc.

a professional corporation existing under the
laws of the State of California,

(hereinafter referred to as “PC” ) (each a
“Party” and collectively, the “Parties”).

     WHEREAS PC is a professional corporation engaged in the private practice of medicine that
specializes in various methods of health care services, including without limitation, the provision
of addiction treatment services (the “Medical Services”) in California;

     WHEREAS Manager is engaged in the business of licensing to providers its proprietary PROMETATM
protocols for the treatment of addiction and providing management and administrative services to
professional practices and/or facilities, to which it also may license the use of certain
registered marks (the “Company Business”); and

     WHEREAS PC recognizes that the intellectual property and services described in the preceding
recital are of great value and that PC can benefit from the availability and use of that
intellectual property and those services.

     NOW THEREFORE, in consideration of the mutual terms, covenants and conditions contained in
this Agreement and other good and valuable consideration, the receipt and sufficiency of which is
confirmed, the Parties agree as follows:

 

 

ARTICLE 1.

DEFINITIONS AND INTERPRETATION

1.1 Definitions

     For the purposes of this Agreement (including the recitals and the Schedules), the following
terms shall have the respective meanings set out below and grammatical variations of such terms
shall have corresponding meanings:

“Accounts” has the meaning set out in Section 6.7.1.

“Advertising Materials” has the meaning set out in Section 3.18.1(a).

“Aftercare” has the meaning set out in Exhibit B.

“Aftercare Services” has the meaning set out in Section 3.16.6.

“Authorized Period” has the meaning set out in Exhibit B.

“Authorized User” has the meaning set out in Exhibit B.

“Bank Account” has the meaning set out in Section 3.11.

“Collateral” has the meaning set out in Section 6.7.1.

“Company” means Hythiam, Inc.

“Company Business” has the meaning set out in the recitals.

“Confidential Information” has the meaning set out in Section 10.1.

”Data Collection and Reporting” has the meaning set out in Section 3.16.5.

“Data Reports” has the meaning set out in Section 3.16.5.

“Effective Date” means November 15, 2005.

“Equipment” has the meaning set out in Section 3.3.

“HIPAA” has the meaning set out in Section 10.3.

“HIPAA Regulations” has the meaning set out in Section 10.3.

“Hythiam License” has the meaning set out in Section 3.16.1.

“Governmental Third Party Payors” has the meaning set forth in Section 3.7.5.

“Government Payor Account” has the meaning set forth in Section 3.7.6.

2

 

“Intellectual Property” has the meaning set out in Section 3.16.13.

“Law” has the meaning set out in Section 4.5.

“License Fees” has the meaning set out in Section 6.8.1.

“Licensee Modifications” has the meaning set out in Section 3.16.12.

”Licensed Technology” has the meaning set out in Exhibit B.

“Management Fee” has the meaning set out in Section 6.1.

“Management Services” has the meaning set out in Section 2.1.

“Manager’s Costs” has the meaning set out in Section 6.1.

“Manager Employee” has the meaning set out in Section 3.2.2.

“Manager Statement” has the meaning set out in Section 6.3.

“Media” has the meaning set out in Section 3.18.1 (b).

“Medical Contractor Agreements” has the meaning set out in Section 7.1.3.

“Medical Contractors” has the meaning set out in Section 2.2.2.

“Medical Fees” has the meaning set out in Section 6.6.1.

“Medical Services” has the meaning set out in the recitals.

“Notice” has the meaning set out in Section 12.6.

“Obligations” has the meaning set out in Section 6.4.

“Payer Discount” has the meaning set out in Exhibit B.

“PHI” has the meaning set out in Section 10.3.

“Physician Contractors” has the meaning set out in Section 4.2.

“Physician Corporation” has the meaning set out in Section 4.2.

“Policies” has the meaning set out in Section 7.1.6.

“Power of Attorney” has the meaning set out in Section 3.7.

“Premises” has the meaning set out in Section 3.2.1.

“Private Pay Patient” has the meaning set out in Exhibit B.

3

 

“Professional Services Agreement” has the meaning set out in Section 4.2.

“Subject Data” has the meaning set out in Section 3.16.9.

“Term” has the meaning set out in Section 9.1.

“Third Party Contracts” has the meaning set out in Section 3.6.

“Trademarks” has the meaning set out in Section 3.17.1.

“Trade Name” has the meaning set out in Section 3.17.1.

1.2 Sections and Headings

     The division of this Agreement into sections and the insertion of headings are for reference
purposes only and shall not affect the interpretation of this Agreement.

1.3 Number and Gender

     In this Agreement, words importing the singular number only shall include the plural and vice
versa and words importing any gender shall include all genders.

1.4 Currency

     Unless otherwise indicated, all dollar amounts referred to in this Agreement are expressed in
U.S. funds.

1.5 Time of Essence

     Time shall be of the essence of this Agreement.

1.6 Applicable Law

     This Agreement shall be construed, interpreted and enforced in accordance with, and the
respective rights and obligations of the Parties shall be governed by, the laws of the State of
California.

1.7 Severability

     If any provision of this Agreement is determined by a court of competent jurisdiction to be
invalid, illegal or unenforceable in any respect, such determination shall not impair or affect the
validity, legality or enforceability of the remaining provisions hereof and each provision is
hereby declared to be separate, severable and distinct.

1.8 No Waiver

     The failure of any Party to insist upon strict adherence to any provision of this Agreement on
any occasion shall not be considered a waiver or deprive that Party of the right thereafter to
insist upon strict adherence to such provision or any other

4

 

provision of this Agreement. No
purported waiver shall be effective as against any Party unless consented to in writing by such
Party. The waiver by any Party of a breach of any provision of this Agreement shall not operate or
be construed as a waiver of any subsequent or other breach.

1.9 Date of any Action

     If any date on which any action is required to be taken under this Agreement is not a Business
Day, that action shall be required to be taken on the next following Business Day.

1.10 Interpretation

     Should any provision of this Agreement require judicial interpretation, it is agreed that the
court interpreting or construing this Agreement shall not construe it against one Party more
strictly by reason of the rule of construction that a document is to be construed more strictly
against the Party who itself or through its agent or counsel prepared such document, it being
agreed that all Parties were afforded adequate opportunity to consult legal counsel prior to
execution of this Agreement.

ARTICLE 2.

APPOINTMENT AND AUTHORITY OF THE MANAGER

2.1 Appointment

     The PC hereby appoints the Manager as its sole and exclusive agent for the provision of
services related to the management and administration of the PC’s business functions and affairs in
California (the “Management Services”), and the Manager hereby accepts that appointment.

2.2 Authority

2.2.1 Authority of the Manager. Subject to the terms of this Agreement, the PC expressly
authorizes the Manager to provide the Management Services in any reasonable manner the Manager
deems appropriate to meet the PC’s day-to-day requirements. The PC also expressly authorizes the
Manager to negotiate on the PC’s behalf all Third Party Contracts related to the provision of
Management Services by the Manager and the business components of the Medical Services provided by
the PC as set forth in Section 3.6.

2.2.2 The PC Retains Medical Authority. The Parties acknowledge that the PC, through
physicians and through non-physician medical assistants employed by or provided by the PC
(collectively, the “Medical Contractors”), shall be responsible for, and shall have authority,
responsibility, supervision and control over, the provision of all Medical Services, and that all
diagnoses, treatments, procedures and other professional Medical Services shall be provided and
performed exclusively by the PC, through Medical Contractors acting within the scope of their
respective licensure and

5

 

exercising their independent medical judgment. The PC agrees that the
Medical Services performed at the Premises shall be defined and limited as set forth in the
Professional Services Agreement.

2.3 Patient Referrals

     The Manager and the PC agree that the benefits afforded either Party under this Agreement are
not payment for, and are not in any way contingent upon, the volume or value of referrals for
Medical Services or other items or services.

2.4 Practice of Medicine

     The Parties acknowledge that the Manager is not authorized or qualified to engage in any
activity that may be construed or deemed to constitute the practice of medicine. To the extent
that any act or service required to be performed by the Manager under this Agreement should be
construed by a court of competent jurisdiction or by the Medical Board of California to constitute
the practice of medicine, the Manager’s obligation to perform that act or service shall be deemed
waived and unenforceable.

ARTICLE 3.

RESPONSIBILITIES OF THE MANAGER

3.1 Services Generally

     The Manager shall, and shall cause its employees, independent contractors and agents to,
provide all Management Services in accordance with all applicable laws, rules, regulations and
guidelines and generally recognized standards within the industry. Management Services shall
include, among other things, (a) general administrative support services including secretarial,
telephone, fax, office equipment, information systems, recordkeeping, scheduling, billing and
collection; (b) establishing budgets and business planning; (c) marketing Medical Services and
local business development; (d) arranging for financing of capital requirements; and (e) assisting
the PC in obtaining and maintaining all federal, state and local licenses, certifications and
regulatory permits required for, or in connection with, the PC’s operation and equipment located at
any office of the PC.

3.2 Office Space

3.2.1 During the Term. The Manager hereby agrees to provide, or cause an affiliate to
provide, to the PC, on a non-exclusive and non-assignable basis, office space at 1315 Lincoln
Boulevard, Santa Monica, CA 90401 (the “Premises”) for the conduct of the practice of the PC. The
Manager shall be responsible for all costs in connection with the rent, maintenance, utilities,
repairs and real estate taxes included in connection with, and all such other expenses associated
with, the operation of the Premises and such costs shall be included in the Manager’s Costs (as
defined in Section 6.1); provided, however, the PC shall be responsible for the repair of
all

6

 

damages to the Premises caused by the PC’s negligence or intentional misconduct, or which is
beyond normal wear and tear. This Agreement shall not constitute an assignment to the PC of any
rights of the Manager or any of its affiliates to the use of the Premises, nor does it constitute a
requirement that the PC practice at any specific location not of the PC’s choosing.

3.2.2 Non-Exclusive Basis. The term “non-exclusive basis” shall mean that the Premises shall
also be occupied by Manager employees who shall provide the Management Services to the PC (as more
fully described in this Agreement) (“Manager Employees”). In addition, the Manager Employees or
Manager’s affiliates may also perform the Company Business at the Premises.

3.2.3 Premise Use. The PC shall use the Premises exclusively for the provision of the Medical
Services. The PC shall comply with all applicable rules and regulations of governmental bodies
having jurisdiction over the PC with respect to the provision of the Medical Services at the
Premises.

3.3 Equipment and Supplies

     The Manager shall be responsible for providing, or arranging for the provision to the PC, for
use in providing Medical Services, office equipment, computer equipment, medical equipment,
telephone lines, furniture, fixtures, leasehold improvements, information systems and office
supplies (the “Equipment”) as reasonably necessary for the conduct of the practice of the PC. The
costs of purchasing, leasing, providing, maintaining, repairing and replacing such items shall be
included in the Manager’s Costs. The Manager (or lessor thereof if any such item is leased rather
then owned) shall retain title to all such items. The Manager will consult from time to time with
the PC concerning the Equipment to be provided by the Manager and may make recommendations to the
PC; provided, however, that the final decision with respect to the Equipment to be provided by the
Manager that is medical shall be made by the PC.
Without limiting the generality of the foregoing, the PC and not the Manager shall be solely
responsible for the selection of any and all pharmaceutical products and ancillary medical services
(e.g., lab) ordered by or on behalf of the PC.

3.4 Employees

3.4.1 Manager Employees. The Manager shall employ or otherwise retain, and shall be
responsible for selecting, hiring or arranging for, training, supervising and terminating, all
non-medical personnel (“Manager Employees”) as the Manager deems necessary and appropriate for the
Manager’s performance of the Management Services under this Agreement. The Manager shall determine
the salaries or contract payments, provide employee benefits (if appropriate), and administer
payroll withholding for all Manager Employees as required by applicable laws or regulations.

3.4.2 Medical Contractors. The Manager shall also assist the PC in the recruitment of new
Medical Contractors and other medical professionals to become employees of, or otherwise be
retained by, the PC, individually or through a Physician

7

 

Corporation (as defined in Section
4.2). The Manager shall provide the PC with model agreements to document the PC’s employment,
retention or other service arrangements with such individuals. Notwithstanding the foregoing, the
PC shall employ or otherwise retain, and shall be solely responsible for training, directing,
supervising, credentialing, controlling and terminating, any and all Medical Contractors and other
medical professionals performing Medical Services or other professional services for or on behalf
of the PC.

3.5 Quality Assurance and Risk Management

     The Manager shall assist the PC in the PC’s establishment and implementation of procedures to
ensure the consistency, quality and appropriateness of Medical Services that the PC’s Medical
Contractors provide. The Manager shall also provide administrative support for the PC’s overall
quality assurance and risk management programs. The Manager shall use commercially reasonable
efforts to perform these tasks so as to ensure the confidentiality of, and the privileged status
afforded to, these programs and procedures to the fullest extent allowable under state and federal
law.

3.6 Third Party Contracts

     The Manager shall assist the PC with and negotiate, either directly or on the PC’s behalf, as
appropriate, all contractual arrangements with third parties as are reasonably necessary and
appropriate for the business operation of the PC, including, without limitation, agreements with
equipment and supply vendors and, after and only after approval of the terms by PC, third party
payors (“Third Party Contracts”). The Manager shall provide oversight and management of all such
Third Party Contracts. As
provided in Section 2.2.1, the PC authorizes the Manager to execute on the PC’s behalf
all Third Party Contracts that the Manager determines are necessary and appropriate for the conduct
of the PC’s practice.

3.7 Billing and Collection; Power of Attorney

     In the name of and on behalf of the PC, the Manager shall establish and maintain billing and
collection policies and procedures, and shall timely bill and collect all professional and other
fees of the PC for its provision of Medical Services to patients. The PC hereby grants to the
Manager an exclusive special power of attorney (the “Power of Attorney”) and appoints the Manager
as the PC’s exclusive true and lawful agent and attorney-in-fact, and the Manager hereby accepts
such special power of attorney and appointment, for the following purposes:

3.7.1 Billing. To bill, on behalf of the PC, patients to whom the PC has contracted to
provide the Medical Services, and, where not prohibited by applicable law or regulatory
requirements or the rules and regulations or a particular third party payor, to bill patients in
advance of the provision of the Medical Services, subject to a reconciliation of the amounts so
billed with the charges for the Medical Services actually provided. The Manager, in billing third
party payors, shall render such bills in accordance with all applicable rules, regulations and
policies of such payors;

8

 

3.7.2 Accounts Receivable. Except for Governmental Third Party Payors as defined in
Section 3.7.5, to collect on behalf of the PC accounts receivable generated by billings
done in the name of the PC relating to the Medical Services provided or to be provided by the PC,
whether from patients or from third party payors on behalf of patients; provided, however, that
such obligation does not encompass the institution of collection proceedings by the Manager;

3.7.3 Deposits. Except for payments from Governmental Third Party Payors, to receive on
behalf of the PC payments from whatever source for the provision of the Medical Services by the PC,
including, but not limited to, payments, where not prohibited, in the form of advances or deposits
from patients in anticipation of receipt of the Medical Services and payments from insurance
companies and any other third party payors, and the PC hereby covenants to turn over to the
Manager, for deposit in a Bank Account (as defined in Section 3.11), all payments that it
receives or collects from patients or from third party payors (other than Governmental Third Party
Payors) on behalf of patients receiving Medical Services at the Premises;

3.7.4 Deposits.
Except for payments from Governmental Third Party Payors, to take possession of, and endorse
in the name of the PC, and cause to be deposited any notes, checks, money orders, insurance
payments, and any other instruments received in payment of Medical Services performed, or to be
performed, payable to the PC or to any of the Medical Contractors engaged by the PC to provide the
Medical Services, and to deposit the same as provided in Section 3.11;

3.7.5 Governmental Third Party Payors. For all accounts receivable generated by billings
and claims to Governmental Third Party Payors, PC shall instruct such Governmental Third Party
Payor to deposit all claims payments directly into the account described in Section 3.7.6
below. The term “Governmental Third Party Payor” means third party payors providing reimbursement
for eligible beneficiaries under a federal, state or local governmental health insurance program,
including Medicare and Medicaid, under which direct payment to Manager is not permitted under
applicable law or regulation.

3.7.6 Government Payor Account. PC shall open, and at all times during the Term of this
Agreement maintain, an account at a bank that does not provide financing to PC or the Physician
Contractors, either directly or on behalf of another party, including Manager (the “Government
Payor Account”). All payments from Governmental Third Party Payors shall be deposited in the
Government Payor Account. PC covenants that : (i) at all times during the Term of this Agreement,
PC shall maintain sole and exclusive control over the Government Payor Account; and (ii) the terms
on which the Government Payor Account are established shall provide that the bank at which such
account is maintained shall be subject only to the instructions of PC with respect to such account.
Subject to the requirements of this Section 3.7.6, PC shall instruct the bank at which the
Government Payor Account is maintained to transfer on a daily basis all of the funds deposited in
the Government Payor Account on such day to a Bank Account (as defined in Section 3.11).
Upon Manager’s reasonable request, PC shall execute and deliver to the financial institution where
the Government

9

 

Payor Account is maintained, such additional documents or instruments as may be
necessary to effect the provisions of this Agreement.

3.7.7 Other Actions. To take such other actions relative to billing, collection of fees, and
financial matters, including the review and revision, as necessary, of the PC’s credit and
collection policies, in connection with the PC provision of the Medical Services as are appropriate
and consistent with sound business practice and the purposes of this Agreement.

     The Power of Attorney shall be coupled with an interest and shall be irrevocable during the
Term. The Power of Attorney shall expire on the later of the (i) termination
of this Agreement, or (ii) the collection, sale or release of all accounts receivable
generated by the PC’s practice prior to the effective date of such termination, and the payment of
all amounts due to the Manager as of such effective date. The Parties agree to revise the terms of
this Section 3.7 as necessary to comply with applicable law.

3.8 PC Determines Medical Fees

     In no event shall the Manager have any control over or responsibility for the establishment or
determination of the professional fees charged by the PC for the Medical Services. Subject to the
foregoing, the Manager shall provide to the PC such information and materials as are appropriate to
assist the PC in maintaining a competitive fee schedule, and shall have the right to review and
comment on the professional fee schedule proposed to be charged by the PC for the Medical Services
prior to the implementation of such fee schedule; provided, however, that the final decision
regarding all fees charged by the PC for Medical Services shall be made by the PC in its sole and
absolute discretion. The PC hereby agrees that all fees charged for the Medical Services shall be
reasonable and customary for the locality of its medical practice at the Premises. The PC further
agrees to consult with the Manager prior to the implementation of any discounts or discounted fee
schedules so that the Manager may assist in making recommendations based on standards that are
reasonable and customary for the locality of the PC’s medical practice at the Premises.

3.9 Payment of PC Expenses

     Except as provided otherwise in this Agreement, (i) the Manager shall pay, in the name of and
on behalf of the PC, all bills, costs and expenses incurred by the Manager on behalf of the PC, or
otherwise incurred by the PC, in accordance with this Agreement, including the payment of the
Medical Fee as set forth in Section 6.6.1; and (ii) bills, costs and expenses incurred by
the Manager on behalf of the PC, or otherwise incurred by the PC, in accordance with this
Agreement, and paid by the Manager, other than the Medical Fee, shall constitute Manager Costs.
Any and all payment of salaries and benefits for PC employees or independent contractors, purchases
of pharmaceutical products or ancillary medical services (e.g., lab), and medical malpractice
insurance shall be paid in the name of and on behalf of the PC.

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3.10 Administrative Services

     The Manager, subject to the ongoing supervision and control of the PC, shall conduct, or
arrange for, manage, and coordinate all business and administrative aspects of the PC’s provision
of the Medical Services to patients at the Premises. In connection therewith, the Manager shall
supply, or arrange for the supply of, to the PC the ordinary, necessary, or appropriate services
for the efficient provision of the Medical Services at the Premises, including, without limitation,
necessary clerical, accounting, purchasing, payroll, legal, bookkeeping, banking and computer
services, information management, printing, postage and duplication services and medical
transcribing services, unless expressly provided otherwise in this Agreement. Without
limiting the generality of the foregoing, the Manager shall:

3.10.1 Scheduling. Handle the clerical aspects of patient intake registration procedures and
perform the clerical tasks necessary to schedule patient appointments for the Medical Services,
including follow-up services;

3.10.2 Records. Subject to applicable bookkeeping requirements, and the provisions of this
Agreement, provide administrative assistance to the PC in connection with the maintenance and
retention of the PC patient records developed in connection with the provision of the Medical
Services (but shall have no responsibility for the creation or the contents of any such medical
records);

3.10.3 Personnel Policies. Assist and consult with the PC in developing, reviewing and
revising, as appropriate, non-medical personnel policies and procedures if and when requested by
the PC;

3.10.4 Non-Medical Quality Assurance. Assist in non-medical quality assurance functions and
provide all administrative support services, such as administrative and secretarial services needed
for the PC to undertake quality assurance activities and to enhance the provision of the Medical
Services;

3.10.5 Current Business Information. Keep current on medical, technical, scientific and
business information regarding the provision of Medical Services, and provide such information to
the PC for use in its clinical practice, if the PC so desires, subject to confidentiality and
non-disclosure covenants;

3.10.6 Consent Forms. As directed by the PC, complete the clerical aspects necessary for
preparing patient consent forms; provided, however, that the content of such forms shall be
determined by the PC and provided further that the communication of medical information to patients
shall solely be the responsibility of the PC and the Medical Contractors;

3.10.7 Non-Clinical Training.
Assist in providing non-clinical educational programs for, and supervise non-clinical aspects
of the training of the Medical Contractors at the Premises;

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3.10.8 Financing Programs. Research, recommend and arrange for financing programs for
prospective patients who wish to have the Medical Services performed; and

3.10.9 Aftercare Programs. Arrange for the provision of certain Aftercare programs and
services, such as researching area Aftercare providers for the PC and handling any administrative
functions of payment, if and when applicable; provided that the referral to, or selection of, any
particular Aftercare provider for a patient shall be solely within PC’s discretion and medical
judgment.

3.11 Bank Account

     Following execution of this Agreement, the Manager shall establish one or more bank accounts
as agent for the PC (each a “Bank Account”). Subject to Sections 3.7.5 and 3.7.6, on
behalf of the PC, all funds collected from patients receiving Medical Services at the Premises,
whether collected by the PC, the Physician Corporation or the Medical Contractors or by the Manager
on behalf of the PC, which relate to the provision of the Medical Services at the Premises, shall
be deposited in one or more Bank Accounts. To the extent permitted by law, the Manager’s
administrative functions hereunder shall include maintenance of the Bank Account(s). The Manager
may establish one or more deposit Bank Accounts (each a “Deposit Account”) and one or more
operating Bank Accounts (each an “Operating Account”) and arrange for funds in any Deposit Account
to be automatically swept by the depository bank on a daily or other periodic basis into any
Operating Account. The Manager shall be the sole signatory on the Operating Account(s).

3.12 Fiscal Matters

     The Manager shall establish and administer, or arrange for the establishment and
administration of, adequate accounting procedures, controls and systems for the development,
preparation and safekeeping of administrative and financial records in connection with its duties
and responsibilities, all of which shall be prepared and maintained in accordance with applicable
laws and regulations. The Manager shall prepare or assist in the preparation of any other
financial statements or records that the PC may reasonably request. In addition, the Manager shall
prepare, or arrange for the preparation of, the PC’s tax returns.

3.13 Medical Records

     The Manager shall advise and assist the PC in establishing, monitoring and maintaining
procedures and policies for the timely creation, preparation, filing and
retrieval of all medical records. All such medical records shall be retained and maintained
in accordance with all applicable state and federal laws, provided that neither the Manager nor the
PC will limit the rights of patients to access their medical records. The PC shall obtain all
patient consents, authorizations or acknowledgements necessary or required by law to permit the
Manager access to such medical records for purposes of providing the Management Services.

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3.14 Business Reports

     The Manager shall prepare management and decision support reports with respect to PC
efficiency and research on cost of labor and competitor pricing relative to comparable markets.

3.15 Other Reports and Records

     The Manager shall timely create, prepare, file, review, analyze, and interpret such additional
reports and records as are reasonably necessary or appropriate for the PC’s provision of high
quality, cost-effective Medical Services, and as reasonably requested by the PC.

3.16 Licensing of PROMETATM Protocols

3.16.1 Grant of License Rights to PC. Subject to the terms and conditions of this Agreement,
Manager hereby grants to and PC hereby accepts, a limited nontransferable (except as set forth in
this Section 3.16), non-exclusive, commercial license to operate and use the Licensed
Technology identified generally in more detail on Exhibit B in the provision of the Medical
Services at the Premises for the purposes set forth on Exhibit B without the right to
sublicense the foregoing rights (“Hythiam License”). PC acknowledges that (i) this Agreement does
not transfer any interest in the ownership or title of any portion of the Licensed Technology; and
(ii) PC shall not own any portion of the Licensed Technology.

3.16.2 Term of License. The Hythiam License shall terminate in total simultaneously with the
expiration or termination for any reason of this Agreement and shall terminate with respect to any
Medical Contractor simultaneously with the termination for any reason of the Professional Services
Agreement with that Medical Contractor.

3.16.3 License Restrictions. PC may use all or any part of the Hythiam Licensed Technology
only for the purposes set forth in this Agreement and only at the Premises. Without limiting the
generality of the foregoing, PC shall not, nor shall authorize any third party to (and shall take
reasonable measures designed to prevent any third party from doing the same without authorization),
(a) copy, modify, market, reproduce, sell or distribute the
Hythiam Licensed Technology other than as actually necessary and then only in strict
accordance with this Agreement for delivery of Medical Services; (b) make the Licensed Technology
or services available to any Person, except the Medical Contractors who have been authorized by
Manager in writing as set forth on Exhibit B and who have been informed by PC of the terms
and conditions of this Agreement; (c) modify or create derivative works based upon the Licensed
Technology; (d) rent, lease, grant a security interest in, or otherwise transfer or attempt to
transfer any rights in or to the Licensed Technology; or (e) remove, alter or deface any legends,
restrictions, product identification, copyright, trademark or other proprietary notices from the
Licensed Technology.

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3.16.4 PC Obligations. PC shall (a) keep the Licensed Technology free and clear of any and
all claims, liens and encumbrances incurred or caused by PC, (b) ensure that the Professional
Services Agreements it enters into with Physician Contractors or any Physician Corporation obligate
the Physician Contractors and the Physician Corporation to comply with the terms and conditions of
this Section 3.16, and (c) notify Manager promptly if and when it becomes aware of any use
or disclosure of all or part of the Licensed Technology not authorized by this Agreement. ANY USE
OF ALL OR ANY PORTION OF THE LICENSED TECHNOLOGY OUTSIDE THE SCOPE OF THE RIGHTS GRANTED IN THIS
SECTION 3.16 IS STRICTLY PROHIBITED.

3.16.5 Data Collection and Reporting. Manager has developed proprietary business processes
that it uses to process and report data generated from the use of the Licensed Technology (“Data
Reports”) on behalf of PC. As part of the Management Services, Manager or its designated
contractor may collect encounter, treatment and outcomes data on behalf of PC, including follow-up
patient surveys, in which event it will provide, or arrange for the provision of, Data Reports to
PC for treatment performed by or on behalf of PC using the Licensed Technology, all as set forth in
more detail on Exhibit B (“Data Collection and Reporting”).

3.16.6 Aftercare Services. On PC’s behalf, Manager will arrange for Aftercare (as defined in
Exhibit B) for PC patients treated using the Licensed Technology (“Aftercare Services”).

3.16.7 Use of Licensed Technology. PC agrees that its use of the Licensed Technology will be
in accordance with the terms of this Agreement and will comply with all applicable Laws and third
party payer requirements. Only PC Medical Contractors who have received education and training on
the use of the Licensed Technology may use it and will have and maintain all training, licenses,
approvals, certification, equipment and information necessary for
them to safely and properly use the Licensed Technology. PC will report promptly to Manager
any knowledge it acquires that the Licensed Technology is being used in a manner not in accordance
with this Section 3.16, or otherwise with this Agreement. Notwithstanding the foregoing,
this Section 3.16.7 is not intended to restrict or limit in any way each Medical
Contractor’s responsibility to exercise his or her clinical judgment in treating patients, but
instead to protect Manager’s interest in and to its Licensed Technology and the integrity of that
Licensed Technology. For the avoidance of doubt, PC has no obligation to treat any patient using
the Licensed Technology and the decision about how to treat any patient and whether or not to use
the Licensed Technology or any other treatment protocol or regimen is solely within PC’s
discretion.

3.16.8 Clinical Activities. The Licensed Technology is provided by Manager to PC and/or to
any Medical Contractor as additional points of information and not, in whole or in part, as medical
advice, diagnosis or treatment recommendations. The Parties acknowledge and agree that Manager in
performing its obligations under this Agreement is providing access to technology and management
and support services only and will not be delivering patient care and will not be sponsoring or
performing human subjects research. PC , as between the Parties, and/or Medical Contractors, as

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appropriate consistent with applicable Law, control and are fully responsible for any and all
patient care, Aftercare and/or research activity delivered by PC or Medical Contractors using the
Licensed Technology. PC and Medical Contractors shall at all times exercise their independent
medical judgments when treating patients, providing Aftercare, referring to other providers, or
performing research using the Licensed Technology.

3.16.9 Subject Data. Manager acknowledges and agrees that, as between the Parties, all
patient medical records shall be the property of PC. PC agrees that to the extent necessary for
Manager to perform its obligations under this Agreement and to the extent permitted by Law,
including but not limited to in accordance with any patient authorizations that meet the
requirements of applicable Law, Manager shall have access at all times to all patient records for
patients provided care using the Licensed Technology (“Subject Data”). In addition, PC shall
provide the Subject Data to Manager for prompt downloading and/or processing in an agreed-upon
format to the extent maintained by PC, PC personnel or PC staff physicians, to the extent permitted
by Law. The Business Associate/Data Use Agreement attached to this Agreement as Exhibit D
shall govern the use and disclosure by Manager of the Subject Data.

3.16.10 Patient Consents; Regulatory Approvals. PC shall be solely responsible for seeking
any and all necessary patient consents or authorizations, and obtaining any and all approvals or
licenses from regulatory bodies or other authorities that are required by applicable Laws or PC
policy for Manager’s delivery of the Management Services, PC’s use of the Licensed
Technology, and the provision of the Subject Data to Manager, all in accordance with this
Agreement, including but not limited to, seeking any authorizations or consents necessary for
disclosure of data to Manager by Aftercare providers to the extent Manager requires such data to
perform its obligations under this Agreement. Without limiting PC’s obligations in the foregoing
sentence, PC shall provide Manager advance written notice if it determines it needs any regulatory
approvals or licenses for its use of the Licensed Technology. PC acknowledges Manager may conduct
or sponsor research that is not part of Manager’s obligations under this Agreement and PC shall
seek patient authorizations or consents as required by Law and in accordance with Law for provision
of the Subject Data to Manager for its own research purposes.

3.16.11 Reservation of Rights. All rights and licenses of any kind in the Licensed Technology
not expressly granted in this Agreement are reserved exclusively to Manager. There shall be no
licenses by implication to the PC or any Medical Contractor under this Agreement, and PC agrees not
to attack or contest Manager’s ownership and rights to the Licensed Technology in connection with
this Agreement.

3.16.12 Manager Ownership. PC acknowledges and agrees that all right, title and interest in
and to the Licensed Technology shall be solely and exclusively owned by Manager. If PC creates,
conceives, develops, invents or reduces to practice any inventions (whether or not patentable),
documented records of invention or patent disclosures, derivative works, continuations,
continuations-in-part, enhancements, trade secrets, know-how, show-how, discoveries, improvements,
innovations, ideas, industrial

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models, processes, methods, formulae, compositions, findings,
research and development information, data, databases, content, electronic data files, training
manuals, user guides, manufacturing, engineering and technical drawings, manufacturing and
production processes and techniques, software and computer programs (in object code and source
code), business information and plans, technical knowledge and information, maintenance
information, mask works, integrated circuit topographies, confidential information, and all other
items with similar characteristics, arising out of or related to the Licensed Technology
(collectively, the “Licensee Modifications”), PC agrees to assign, and hereby irrevocably assigns,
all of PC’s right, title and interest in and to the Licensee Modifications to Manager, including
any Intellectual Property rights. PC agrees to take or cause to be taken such further actions, to
execute, deliver and file or cause to be executed, delivered and filed such further instruments,
documents and agreements, and will obtain such consents or waivers, as may be necessary or as may
be reasonably requested in order to fully effectuate the purposes, terms and conditions of this
Agreement at Manager’s cost. PC further agrees to ensure that all PC and Medical Contractors who
are involved in any way with the Licensee Modifications agree (i) to assign and do assign all of
their right, title and interest in the Licensee Modifications, including, without limitation, all
Intellectual Property, to PC (who in turn shall assign and hereby assigns the same to Manager as
set forth in this
Section 3.16.12) and/or to assign all such rights directly to Manager; and (ii) to
waive all moral rights and agree to never assert any moral rights in the Licensee Modifications.
PC agrees that for purposes of this Agreement the term “moral rights” means any rights of paternity
or integrity, including any right to claim authorship of a copyrightable work, to object to a
modification of such copyrightable work, and any similar right existing under the judicial or
statutory law of any country in the world or under any treaty, regardless of whether or not such
right is denominated or generally referred to as a “moral right.” PC hereby waives and agrees
never to assert any moral rights that PC may have in any Licensee Modifications, and PC hereby
further agrees to obtain waivers from PC and Medical Contractors to any moral rights that they may
have in any Licensee Modifications. Manager shall be solely entitled to and shall be solely
responsible for, at its sole expense, filing, having filed, prosecuting, having prosecuted,
maintaining and having maintained all patents and patent applications, as applicable, relating to
the Licensee Modifications. Notwithstanding the foregoing, PC shall be solely responsible for, at
its sole expense, compliance with any and all applicable laws, regulations, policies, procedures
and guidelines relating to the use of the Licensed Technology as set forth in this Agreement. The
Parties acknowledge and agree that upon creation and assignment to Manager, the Licensee
Modifications shall automatically without further action by either Party become part of the
Licensed Technology. PC will promptly disclose and deliver to Manager all Licensee Modifications.

3.16.13 Intellectual Property. For purposes of this Agreement, “Intellectual Property” shall
mean all intellectual property and proprietary rights worldwide (whether or not registered or
registrable, patented or patentable) including, without limitation, patents, patent applications or
filings, copyrights, trademark rights, trade secret rights, discoveries, improvements, moral
rights, semiconductor chip rights, and rights in ideas,

16

 

inventions, innovations, industrial models,
processes, methods, formulae, compositions, findings, research and development information,
databases, industrial designs, content, electronic data files, training manuals, user guides,
drawings, techniques, software, computer programs (in object code and source code), business
information, business plans, technical knowledge, technical information, maintenance information,
brochures, labels, mask works, integrated circuit topographies, and all other items with similar
characteristics, along with all other similar rights and all applications, registrations,
divisionals, continuations, continuations-in-part, re-examinations, extensions, reissues and
foreign counterparts and documented records of invention or patent disclosures or the like in and
to any and all of the foregoing. Intellectual Property shall not include the Subject Data, but
will include (i) any de-identified information or database created using the Subject Data, (ii) the
underlying formats and designs of any reports or other materials containing all or any part of the
Subject Data and capable of intellectual property protection, and (iii) other information or other
materials created, derived, developed, improved or otherwise obtained by or on behalf of a party
directly or indirectly using the Subject Data.

3.16.14 Disclaimer Of Warranties. PC ACKNOWLEDGES AND AGREES THAT THE LICENSED TECHNOLOGY AND
SERVICES PROVIDED, BEING LOANED, AND/OR LICENSED TO PC ARE PROVIDED ON AN “AS IS” AND “AS
AVAILABLE” BASIS WITH NO WARRANTY OF ANY KIND. WITH RESPECT TO THIS AGREEMENT HYTHIAM MAKES NO
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE REGARDING THE LICENSED TECHNOLOGY OR ANY OTHER
MATERIALS OR INFORMATION PROVIDED UNDER THIS AGREEMENT. ADDITIONALLY, WITH RESPECT TO THIS
AGREEMENT HYTHIAM MAKES NO REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED, REGARDING THE SAFETY OR
EFFICACY OF THE LICENSED TECHNOLOGY, THAT THE LICENSED TECHNOLOGY WILL OPERATE IN A MANNER THAT IS
UNINTERRUPTED OR ERROR-FREE, OR REGARDING ANY OTHER SUBJECT MATTER OF THE AGREEMENT.

3.16.15 Limitation of Liability. HYTHIAM ASSUMES NO LIABILITY OR RESPON-SIBILITY FOR HOW PC
OR ANY MEDICAL CONTRACTOR USES THE LICENSED TECHNOLOGY FOR OR IN CONNECTION WITH ANY DIAGNOSIS OR
TREATMENT MADE OR PROVIDED IN CONNECTION WITH OR RELIANCE ON THE LICENSED TECHNOLOGY, OR FOR INJURY
TO PERSONS OR PROPERTY ARISING FROM THE USE OF THE LICENSED TECHNOLOGY. NOT WITHSTANDING ANY OTHER
PROVISION OF THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY FOR ANY INDIRECT,
SPECIAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES OF ANY KIND, INCLUDING BUT NOT LIMITED TO
LOST REVENUES OR LOST PROFITS, LOSS OF BUSINESS OR GOODWILL OR LOSS OF DATA, IN ANY WAY ARISING OUT
OF, RELATED TO OR IN CONNECTION WITH THIS AGREEMENT, EVEN IF ADVISED OR OTHERWISE HAS REASON TO
KNOW OR KNOWS OF THE POSSIBILITY OF SUCH DAMAGES.

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3.16.16 Debarment or Exclusion. Each Party hereby represents and warrants that neither it,
nor any of its principals, officers, employees or agents providing services under this Agreement,
is and at no time has been excluded from participation in any federally funded health care program,
including Medicare and Medicaid. Each Party hereby agrees to immediately notify the other Party of
any threatened, proposed, or actual exclusion from any federally funded health care program,
including Medicare and Medicaid. In the event that either Party is excluded from participation in
any federally funded health care program during the Term of this Agreement, or if at any time after
the Effective Date of this Agreement it is determined that the excluded Party is in breach of this
Section, this Agreement shall, as of the effective date of such exclusion or breach, automatically
terminate.

3.16.17 Government Access. If applicable, the Parties shall comply with the provisions of
Section 1861(v)(1)(l) of the Social Security Act and shall make available, upon written request of
the Comptroller General of the United States or the Secretary of the United States Department of
Health and Human Services or any of their duly authorized representatives, any books, documents and
records that are necessary to verify the nature and extent of the costs incurred by either Party
under this Agreement. In addition, each Party shall cooperate with the other Party and provide
reasonable access to books and records pertaining to this Agreement and the performance of its
obligations to the extent reasonably necessary for compliance with any governmental agency review
or audit of the other Party.

3.17 Licensing of Name

3.17.1 Grant of License. In conjunction with the provision of the Medical Services at the
Premises, the Manager hereby grants to the PC a non-exclusive and non-assignable license, during
the Term to use the Trademarks set forth on Exhibit A (“Trademarks”), and such other trade
name as may be chosen by the PC with the prior consent of the Manager in the future, subject to the
PC’s compliance with applicable legal and regulatory requirements including, without limitation,
fictitious name statutes (collectively referred to as the “Trade Name”). The PC shall use the
Trade Name only in connection with the provision of the Medical Services at the Premises in
accordance with this Agreement. All intellectual property rights in and to the Trade Name, and any
additions thereto, shall be and remain the property of the Manager. Any application for
registration by the PC for such Trade Name which may be permitted or required by the statutes or
laws of any governing body, except for any applicable fictitious name statutes in the State of
California, shall specify that the PC’s use of the Trade Name is pursuant to a license from Manager
and is limited to the Premises at which the Medical Services are provided and further limited by
the terms of this Agreement. Except as provided in Section 3.17.2, no property right in or
privilege to use the Trade Name is created hereby which will extend beyond the expiration or
termination of this Agreement. The PC agrees to assist the Manager, at the expense of the Manager,
to the extent necessary in the procurement of any protection of the Manager’s right to the Trade
Name including, without limitation, the filing of a trademark application with the U.S. Patent and
Trademark Office. Recognizing the special and unique value of the Trade Name to the Manager, the
PC agrees that it shall take no action nor permit any

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action to be taken that shall materially
detract from the high level of quality and value associated with the Trade Name and the ownership
and enjoyment of same by the Manager, except for action which has been approved by the Manager
pursuant to the terms of this Agreement.

3.17.2 Termination of License.
After the expiration or termination of this Agreement for any reason, the PC shall (a) cease
using the Trade Name in all respects and refrain from making any reference on its letterhead or
other publicly disseminated information and materials to its former relationship with the Manager;
(b) take any and all action required, including execution of appropriate documents, to make the
Trade Name available for use by another person or entity designated by the Manager; and (c) not use
or otherwise seek the benefits of the Trade Name so as to derogate from the full and complete
ownership and enjoyment of the same by and for the benefit of the Manager.

3.17.3 Injunctive Relief. The PC acknowledges that the PC’s failure to comply with this
Section 3.17 will result in immediate and irreparable damage to the Manager and its
affiliates. The PC acknowledges and agrees that in the event of such failure, the Manager shall be
entitled to seek injunctive or other equitable relief without posting bond or other security, in
addition to any other remedies which may be available in accordance with this Agreement.

3.18 Advertising, Marketing and Promotional Services

3.18.1 Advertising Services. The Manager shall conduct, manage, and coordinate all
advertising, marketing and promotional services in connection with the PC’s provision of the
Medical Services at the Premises. The PC shall cooperate with the Manager in the performance of
such services including, without limitation, consulting with the Manager concerning the content of
proposed Advertising Materials (as defined in Section 3.18.1(a)). It is hereby understood
and agreed between the Parties that, subject to applicable legal and regulatory requirements, the
Manager may advertise, market and promote the Medical Services and the Company Business jointly in
the same programs and through the same Media. Without limiting the generality of the foregoing and
subject to applicable standards of medical ethics, laws, and regulations, the Manager may:

	 	(a)	 	Develop, create, implement and produce, or arrange for the production of, all
forms of advertising, marketing and promotional programs and materials, including,
without limitation, network television and cable television commercials and
infomercials, radio commercials, brochures, pamphlets and other materials of a similar
nature (collectively, “Advertising Materials”) promoting the Medical Services at the
Premises;
	 
	 	(b)	 	Purchase media for the broadcast, cablecast, radiocast, publication, non-active
electronic (excluding interactive media) or other distribution of commercial
advertisements (collectively, “Media”) produced by or on

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	 	 	 	behalf of the Manager to
promote the Medical Services and the Company Business;
	 
	 	(c)	 	Provide and/or arrange for the provision and maintenance of one or more Web
sites to provide information about and/or promote the Medical Services; and
	 
	 	(c)	 	Conduct public information programs concerning the Medical Services offered at
the Premises.

3.19 Non-Exclusivity

     The PC acknowledges that the Manager will be performing the Company Business at the Premises
and at other locations during the Term. This Agreement shall not prevent the Manager from
performing the Management Services or other services for any of its affiliates or other independent
contractors, or restrict the Manager from using for the benefit of any of its affiliates or other
independent contractors, the Trade Name, or any of the Manager Employees or other persons who are
performing Management Services pursuant to this Agreement. The decision as to which Manager
Employees are to be employed at what time and for what purposes shall be solely within the
Manager’s discretion.

ARTICLE 4.

COVENANTS AND RESPONSIBILITIES OF THE PC

4.1 Organization and Operation

     The PC shall at all times during the Term be, and remain, legally organized and operated to
provide the Medical Services in a manner consistent with all state and federal laws. The PC
represents and warrants that it shall not provide any patient care services in the Premises other
than professional services related to the Medical Services, and shall not use any facilities,
equipment, supplies or services in the Premises other than in connection with the Medical Services,
all in accordance with this Agreement.

4.2 Retention of Medical Contractors

     The PC shall have complete control and responsibility for the hiring, compensation,
supervision, training, evolution and terminations of its Medical Contractors, although at the
request of the PC, the Manager may consult with the PC with respect to such matters. The Manager
acknowledges and agrees that the PC shall be retaining the services of its Medical Contractors who
are physicians (the “Physician Contractors”) through a medical services agreement (“Professional
Services Agreement”), a current copy of which is attached to this Agreement as Exhibit C.
PC may retain Physician Contractors by entering into a Professional Services Agreement with a third
party professional corporation that employs or retains those Medical Contractors (“Physician
Corporation”). Any reference in this Agreement to Medical

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Contractors or Physician Contractors
shall include any Physician Corporation. If at any
time PC and any Physician Contractor materially amend the Professional Services Agreement, PC
promptly shall provide Manager with a copy of the amended agreement. Pursuant to the Professional
Services Agreement, the Physician Contractor will provide to the PC the Medical Services as
described in the Professional Services Agreement. None of the PC, any Physician Corporation or the
Medical Contractors shall have any claim under this Agreement or otherwise against the Manager for
workers compensation, unemployment compensation or social security benefits, all of which shall be
the responsibility of the PC and/or the Physician Corporation. It shall be the PC’s sole
responsibility to ensure that the Physician Corporation and its Physician Contractors and other
employees who may have malpractice exposure or liability, are insurable and have maintained
appropriate amounts of professional liability insurance.

4.3 Professional Standards

     The PC shall provide Medical Services to patients at the Premises in compliance at all times
with ethical standards, laws, rules and regulations applicable to the operations of the PC and
Medical Contractors. The PC shall ensure that each Medical Contractor has all required licenses,
credentials, approvals or other certifications to perform his or her duties and services for the PC
at the Premises. In the event that any disciplinary action or medical malpractice action is
initiated against any Medical Contractor, the PC shall promptly inform the Manager of such action
and the underlying facts and circumstances. The PC shall develop and carry out a program to
monitor the quality of medical care practices at the Premises to ensure that it meets the standard
of care that is customary for the locality of the medical practice at the Premises. The PC shall
retain a sufficient number of properly trained and experienced Medical Contractors as are necessary
to provide the Medical Services to the average number of patients of the PC at the Premises as
reasonably estimated by the Parties on a monthly basis consistent with the volume of patients that
received Medical Services in the previous month.

4.4 Medical Practice

     The PC shall use and occupy the Premises exclusively for providing Medical Services. It is
expressly acknowledged by the Parties that the medical practice shall be conducted solely by
Medical Contractors and no other physician or medical practitioner shall be permitted to occupy the
Premises without the Manager’s written consent.

4.5 Compliance with Laws

     The PC shall, and it shall use its best efforts to cause the Medical Contractors to, comply
with all applicable federal, state and local laws, rules, regulations and restrictions (“Law”) in
the provision of the Medical Services. Without limiting the generality of the foregoing, the PC
shall comply, and shall use its best efforts to cause each Medical Contractor to comply, with all
Medical Waste Laws applicable to the operation of the Premises in the generation, transportation,
treatment, storage, disposal

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or other handling of Medical Waste (to the extent that the PC or the Medical Contractors
engage in such activities), and the PC shall not, and shall use its best efforts to forbid any
Medical Contractor, to enter into any contract, lease, agreement or arrangement, including, but not
limited to, any joint venture or consulting agreement, to provide services, lease space, lease
equipment or engage in any other venture or activity with any physician, hospital, pharmacy, home
health agency or other person or entity which is in a position to make or influence referrals to,
or otherwise generate business for, the PC, if such transaction is in violation of any applicable
law, rule or regulation.

4.6 Premises and Equipment

     The PC shall use commercially reasonable efforts to prevent damage, excessive wear and tear,
and malfunction or other breakdown of the Premises and Equipment or any part thereof by the Medical
Contractors. The PC shall promptly inform the Manager of any and all necessary replacements,
repairs or maintenance to any of the Premises or Equipment and any failures of Equipment of which
the PC becomes aware. Once provided to the PC, the PC shall comply with all of the covenants and
provisions regarding the use of the Premises as set forth in the subleases for the Premises and all
covenants and provisions regarding actual use of the Equipment as set forth in any applicable
Equipment leases, but only to the extent that any such Equipment leases have been delivered to the
PC.

4.7 Delegation by the Provider

     Except as otherwise allowed under this Agreement, the PC shall not delegate any of its
obligations under this Agreement to any other person or entity, hire any non-medical employees or
engage any non-medical independent contractors or consultants in connection with the provision of
the Medical Services, without the consent of the Manager.

ARTICLE 5.

RELATIONSHIP OF THE PARTIES

5.1 Medical Practices

5.1.1 Delivery of Medical Services. The PC shall be solely and exclusively in control of all
aspects of the practice of medicine and the delivery of Medical Services at the Premises. The
provision of all medical professional services, including, but not limited to, medical consultation
with patients, both prospective and actual, diagnosis, treatment, surgery, therapy, the
prescription of medicine and drugs, and the supervision and preparation of medical reports and
records shall be the sole responsibility of the PC.

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5.1.2 Quality.
The PC shall at all times be solely responsible for the quality of the Medical Services it
provides, it being agreed that the Manager shall have no responsibility or liability for such
services.

5.1.3 Manager Not Practicing Medicine. It is acknowledged that the Manager is not competent
or authorized to engage in any activity that constitutes the practice of medicine and that nothing
contained in this Agreement is intended to authorize the Manager or the Manager Employees to engage
in the practice of medicine. To the extent that any act or service required of the Manager under
the terms of this Agreement is construed or considered to constitute the practice of medicine, this
Agreement shall be immediately and automatically amended so as not to require the performance of
such act or service by the Manager.

5.2 Independent Contractors

     The PC and the Manager intend to act and perform as independent contractors, and the
provisions of this Agreement are not intended to create any partnership, joint venture, agency
(other than as provided herein) or employment relationship between the Parties. The PC and the
Manager agree that the PC shall retain the exclusive authority to direct the medical, professional
and ethical aspects of its medical practice. The Manager shall neither exercise control over nor
interfere with the physician-patient relationships of the PC, which shall be maintained strictly
between the Medical Contractors and the PC’s patients. The Management Fee has been determined by
the Parties through good faith and arm’s-length bargaining to be the fair market value of the
Management Services. No amount paid or advanced hereunder is intended to be, nor shall it be
construed to be, an inducement or payment for referral of patients by the Manager to the PC and any
such inducement or payment for referral of patients is expressly prohibited under this Agreement.

ARTICLE 6.

FINANCIAL TERMS

6.1 Manager Compensation

     In consideration for the Management Services that the Manager provides to the PC in accordance
with this Agreement, the PC agrees to pay the Manager on a monthly basis, and the Manager shall
accept as payment in full, a fee equal to the aggregate amount of (a) the Manager’s costs of
providing the Management Services (including reasonable overhead costs of the Manager allocable to
the delivery of Management Services and including start-up costs such as pre-operating salaries,
rent, equipment, and tenant improvements incurred for the benefit of the PC; provided that any
capitalized expenses (including, for purposes of this paragraph, all start-up expense) shall be
amortized over a five year period of time for purposes of inclusion) (the “Manager’s Costs”), (b)
ten percent (10%) of the Manager’s Costs and (c) any
performance bonus amount, as determined by the PC, in its sole discretion (collectively, the
“Management Fee”). For greater certainty, any performance bonus paid by the PC

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to the Manager
shall be based solely on the Manager’s performance of the Management Services and shall in no way
be based on the provision of Medical Services by the PC. Notwithstanding the foregoing, (i) third
party medical care expenses (e.g., the cost for any blood work, pharmaceutical products, or lab
work ordered by the PC) shall be included in Manager’s Costs at the Manager’s actual cost for the
payment for the service or supply for or on behalf of the PC, without the application of any
overhead costs of the Manager, and the cost of these items will be deducted from Manager’s Costs
prior to calculation of the ten percent (10%) of Manager’s Costs set forth in (b) above; and (ii)
any sales commissions paid to Manager Employees or independent sales agents retained by the Manager
shall be excluded from Manager’s Costs.

6.2 Payment of Management Fee

     On or before the thirtieth (30th) day of each month during the Term of this Agreement,
beginning with the second such month, and continuing through the month following the expiration or
termination of this Agreement, the PC shall pay the Manager the Management Fee, which payment shall
relate to Management Services furnished by the Manager for the preceding month.

6.3 Invoices

     In order to facilitate the payment by the PC for the Management Services, the Parties agree
that the Manager will prepare an invoice, in a format agreed upon by the Parties (the “Manager
Statement”) setting forth the Manager’s Costs for the preceding month on an accrual basis and the
monthly Management Fee payment due to the Manager. The invoice shall be submitted to the PC on or
before the twentieth (20th) business day of the month following the month during which the
Management Services were provided.

6.4 Authorization to Pay Invoices

     The PC hereby authorizes and directs the Manager to make the following payments on behalf of
the PC from any Bank Account, in the order specified: (1) the Medical Fee; (2) any obligations of
PC related to PC’s employees (e.g., salary, benefits and administrative expenses specifically
approved by PC); (3) all third party obligations; and (4) any invoice owed by the PC to the Manager
and all other monetary obligations of the PC to the Manager hereunder on the date such amount is
due and payable (including, without limitation, the Management Fee), (subparagraphs (1) through (4)
above are referred to collectively as the “Obligations”). In the event there are not sufficient
monies in the Bank Account(s) to pay any of the Obligations, Manager shall provide the PC a
revolving line of credit to be available as a working capital loan up to a maximum amount of five
hundred thousand dollars ($500,000) (“Working Capital Loan”) to allow PC to pay such Obligations.
PC shall execute and deliver to
Manager a promissory note, dated the Effective Date and payable to the order of Manager,
evidencing PC’s unconditional obligation to repay Manager for the Working Capital Loan. The
Working Capital Loan shall be repaid by PC, with interest equal to prime

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plus two percent (2%), as
funds become available; provided, however, upon termination of this Agreement, the entire
principal balance and all other costs, fees and expenses, if any, shall be due and payable in full.
The Working Capital Loan shall be secured as provided in Section 6.7.1. The Manager
agrees that all third party obligations shall be paid prior to any payments of the Management Fee
each month.

6.5 Records and Audit of Accounts

     The Manager shall keep records of the Manager Costs for each month during the Term of this
Agreement. The Manager shall provide the PC with all data that the PC deems necessary to verify
the Management Services performed and the Manager Costs during each calendar month. Either Party
shall have the right, at its sole expense, through an auditor mutually acceptable to the Parties,
to audit the other Party’s books and records to confirm the accuracy of the Manager Costs, the
Management Fee, and/or any other financial information relating to this Agreement. Such audits may
be conducted at any time upon reasonable notice, and such audits shall be conducted at such times
and locations as are reasonably acceptable to the Parties.

6.6 Physician Contractor Compensation

6.6.1 Medical Fee; Initial Term. As full and complete compensation for the Medical Services
that any Physician Contractor will provide to the PC, the PC shall pay, and the Physician
Contractor shall receive, the medical fees set forth in the applicable Professional Services
Agreement (the “Medical Fees”).

6.6.2 Renewal Terms. Payment of the Medical Fees for any Renewal Term shall be determined as
set forth in the Professional Services Agreement.

6.6.3 Payment and Statements. The Manager shall pay, in the name of and on behalf of the PC,
payments of the Medical Fees from the Bank Account. The payment of the Medical Fees shall have
priority over the payment of the Management Fee. Each payment of the Medical Fees shall be
accompanied by a statement prepared by the Manager setting forth the manner in which the Medical
Fees for the preceding calendar month was calculated. Upon written request by PC, Manager will
provide PC with a copy of the bank statement for the Bank Account for the month at issue.

6.7 Grant of Security Interest in Accounts

6.7.1 Grant of Security Interest. The PC hereby grants, pledges and assigns to the Manager a
security interest in all of the PC’s assets, including, but not limited to, accounts receivable
(including all rights to payment by any insurance company or prepaid managed care organization to
the extent permitted by law), whether now existing or hereafter acquired and in and to all products
and proceeds thereof, substitutions therefore and additions thereto (collectively, the
“Collateral”), to secure the payment of the Working Capital Loan. Collateral shall not include any
assets separately (personally) owned by Physician Contractors.

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          In furtherance of the grant of the security interest, the PC hereby agrees (i) to deliver to
the Administrative Agent any and all instruments constituting part of the Collateral, each endorsed
and/or accompanied by any instrument of assignment and (ii) to authorize, execute and deliver, and
consents to the filing of, all financing statements, notices, instruments, documents or other
papers, each as may be necessary or desirable, or as the Manager may direct, to create, preserve,
perfect or validate the security interest granted above or to enable the Manager to exercise and
enforce its rights hereunder.

6.7.2 Exercising Remedies. In the event any of the Obligations are not paid when due or upon
any default by the PC of any term or condition hereunder with respect to the Obligations, the
Manager may, with or without terminating this Agreement, exercise all rights and remedies afforded
a secured party under the Uniform Commercial Code in the State of California.

6.7.3 Financial Statements. The PC agrees to execute all financing or continuation statements
or other documents which may be necessary or desirable, or as the Manager may request, in order to
perfect and preserve the security interest(s) granted or purported to be granted under this
Agreement. The PC authorizes the Manager to file one or more financing or continuation statements,
and amendments thereto, relative to all or any part of the collateral without the signature of the
PC where permitted by law. The PC hereby appoints the Manager as the PC’s true and lawful
attorney-in-fact, with full power of assignment and substitution, to take possession of the
Accounts of the PC and endorse in the name of the PC any notes, checks, money orders, insurance
payments or other instruments received in payment of such Accounts, or any part thereof; to
collect, sue on and satisfy the obligation of monies due on such Accounts; and to initiate or
withdraw claims, lawsuits or proceedings pertaining to, arising out of, or relating to the
Manager’s right to such Accounts or any collections therefrom.

6.8 License Fee

6.8.1 License Fees. PC shall pay Manager the license fees set forth on Exhibit B
(“License Fees”).

6.8.2 Payment Terms. PC will deliver every two (2) weeks during the Term to Manager (i) a
report identifying the number and type of patients treated using the Licensed Technology during the
two-week period covered by the report, the total fees charged to those patients, the amounts
collected to date with respect to those patients, and License Fees payable to Manager based on
those treatments; and (ii) a check or other readily available funds payable to Manager in the
amount of the License Fees (computed as provided in this Section 6.8.2 and Exhibit
B), and including any Aftercare Service Fees that may have accrued since the cutoff date for
the previous report (or from the Effective Date in the case of the first report), by mailing or
delivering them to the Manager’s address and person identified on the first page of this Agreement
(unless and until otherwise directed by Manager). Within ten (10) days after receipt of each
report and/or following each reconciliation meeting (as defined in Section 6.8.3),

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Manager will invoice PC for any additional License Fees due under this Agreement, and PC will pay any
undisputed invoices within thirty (30) days after receipt by PC. Notwithstanding any other
provision of this Agreement and subject to the terms of the Aftercare Services set forth in
Exhibit B, Manager in no event or circumstance is or shall be responsible for any costs of,
or related to, patient care provided by PC, or extended or unanticipated care required for patients
treated using the Licensed Technology.

6.8.3 Reconciliation. To facilitate payment and compliance with the terms of this Agreement,
at Manager’s request, the Parties will meet no less frequently than monthly and no more frequently
than every two weeks for purposes of reconciling License Fees. In addition, PC will investigate
and resolve promptly and thoroughly any evidence that all or any part of the Licensed Technology is
being used at PC in cases that are not reported for purposes of this Section 6.8. Any such
unreported uses of the Licensed Technology shall be included by PC in the next two-week report (as
defined in Section 6.8.2). Manager shall have the right at least once during any 12-month
period during the Term and upon at least fifteen (15) days advance notice to engage a third party
accounting firm to review and audit PC books and records during normal business hours to the extent
reasonably necessary to reconcile License Fees and ensure Manager receives the License Fees in
compliance with this Agreement

ARTICLE 7.

REPRESENTATIONS AND WARRANTIES

7.1 Representations and Warranties of the PC

     The PC hereby makes the following representations and warranties to the Manager:

7.1.1 Organization. The PC is a professional corporation duly organized, validly existing and in
good standing under the laws of the State of California, has full power and authority to own or
lease its property and to carry on its business as now being conducted.

7.1.2 No Violation – Professional Services Agreement. To the best of its knowledge, neither the
execution and delivery of this Agreement or any Professional Services Agreement, nor the
consummation of any transactions contemplated hereby or thereby, nor the performance of the PC’s
obligations hereunder or thereunder, will (a) violate any constitution, law, statute, regulation,
or rule, (b) violate any injunction, judgment, order, decree, ruling, charge or other restriction
of any government, governmental agency, or court to which the PC is subject, (c) violate any
provision of the Certificate of Incorporation or bylaws of the PC or any Physician Corporation, or
(d)(i) conflict with, (ii) result in a breach of, (iii) constitute a default under, (iv) result in
the acceleration of, (v) create in any Party the right to accelerate, terminate, modify, or cancel,
or (vi) require any notice under, any other agreement, contract, lease, license, instrument,
franchise, permit or other arrangement to which the PC or Medical Contractor is a party or by which
the PC or Medical Contractor is bound.

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7.1.3 No Violation – Medical Contractor Agreements. PC represents and warrants, and has required
each Medical Contractor to represent and warrant, to the best of its knowledge that neither the
execution and delivery of this Agreement or the Professional Services Agreements entered into with
the Medical Contractors (the “Medical Contractor Agreements”), nor the consummation of the
transactions contemplated under any of the foregoing agreements, nor the performance of the PC’s or
Medical Contractors’ obligations under any of the foregoing agreements, will (a) violate any
constitution, law, statute, regulation or rule, (b) violate any injunction, judgment, order,
decree, ruling, charge or other restriction of any government, governmental agency, or court to
which such parties are subject, (c) violate any provision of the Certificate of Incorporation or
bylaws of PC or any Physician Corporation, or (d)(i) conflict with, (ii) result in a breach of,
(iii) constitute a default under, (iv) result in the acceleration of, (v) create in any party the
right to accelerate, terminate, modify, or cancel, or (vi) require any notice under, any agreement,
contract, lease, license, instrument, franchise, permit or other arrangement
to which the PC or Medical Contractor is a party or by which the PC or the Medical Contractor is
bound.

7.1.4 Covenant Regarding Trade Secrets. That it has required any Physician Corporation to
represent and warrant that the Physician Corporation has entered into a Medical Contractor
Agreement with each of the Physician Contractors and that each of such Medical Contractor
Agreements contains a covenant prohibiting the Physician Contractor’s unauthorized use or
disclosure of the PC’s or Manager’s trade secrets.

7.1.5 Licensed Medical Contractors. Each of the Medical Contractors are (or will be prior to
providing any services hereunder or under the Professional Services Agreement) duly licensed, as
applicable, within their respective professions in the State of California and hold (or will hold
prior to providing any services hereunder or under the Professional Services Agreement) all
necessary licenses and rights to enable the PC to perform its obligations hereunder. The PC has
all permits, license, orders and approvals of all federal, state and local government or regulatory
bodies required of it to carry out its obligations hereunder. To the best of its knowledge, the PC
is in compliance with all applicable laws and regulations.

7.1.6 Insurance. The PC has (or will have prior to the commencement of the Medical Services) all
the professional liability insurance described in Section 8.2 (collectively, the
"Policies”). Schedule 7.1.6 sets forth a true and correct list of all Policies (including binders,
declaration pages and endorsements) that the PC has or will have prior to the commencement of the
Medical Services. The PC shall deliver true and complete copies of all Policies to the Manager
prior to the commencement of the Medical Services.

7.2 Representations and Warranties of the Manager

     The Manager hereby makes the following representations and warranties to the PC:

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7.2.1 Organization. The Manager is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, is duly qualified as a foreign corporation
in the State of California and has full power and authority to own or lease its property and to
carry on its business as now being conducted.

7.2.2 No Violation. To the best of its knowledge, neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, nor the performance of the Manager’s
obligations hereunder, will (a) violate any constitution, law, statute, regulation or rule, (b)
violate any injunction, judgment, order, decree, ruling, charge or other restriction of any
government, governmental agency, or court to which the Manager is subject, (c) violate any
provision of the Certificate of Formation or Operating Agreement of the Manager, or (d)(i) conflict
with, (ii) result in a breach of, (iii) constitute a default under, (iv) result in the acceleration
of, (v) create in any party the right to accelerate, terminate, modify, or cancel, or (vi) require
any notice under, any agreement, contract, lease, license, instrument, franchise, permit or other
arrangement to which the Manager is a party or by which the Manager is bound. The Manager has all
permits, licenses, orders and approvals of all federal, state and local government or regulatory
bodies required of it to carry out its obligations hereunder. To the best of its knowledge the
Manager is in compliance with all applicable laws and regulations.

7.2.3 Trade Name. The Manager is duly authorized to license the Trade Name to PC and, to the
knowledge of the Manager, neither the Trade Name nor the license granted to the PC, infringe upon
the intellectual property rights of any third party.

ARTICLE 8.

INSURANCE

8.1 Insurance Obligations of the Manager

     During the Term, the Manager will provide and maintain comprehensive general liability and
property insurance covering the Premises with such limits and coverages as may reasonably be
determined to be appropriate by the Manager. The Manager shall use reasonable commercial efforts
to have the PC named as an additional insured on its comprehensive general liability and property
insurance policies. Certificates of insurance evidencing such policies shall be presented to the
PC within thirty (30) days after the execution of this Agreement

8.2 Insurance Obligations of the PC

     The PC shall obtain or require any Physician Corporation and each of its Physician Contractors
to obtain continuing liability insurance coverage under either a “tail policy,” “prior acts policy”
or other policy covering malpractice actions asserted against the PC for a period of not less than
two (2) years from the termination of such Physician Contractor’s relationship with the PC, in the
minimum amounts of $1,000,000

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per incident, $3,000,000 in the aggregate, upon the termination of
such Physician Contractor’s relationship with the PC for any reason.

8.3 Notices from Insurance Companies

     Each of the parities shall arrange for its insurance carriers to agree to provide the other
Party with written notice, at least ten (10) days in advance of the effective date, of any
reduction, amendment, cancellation or termination of any insurance required to be carried by such
Party under this Agreement.

ARTICLE 9.

TERM AND TERMINATION

9.1 Initial and Renewal Term

     This Agreement shall commence on the Effective Date and shall continue until terminated as
provided in Section 9.2 (the “Term”).

9.2 Termination

     The Agreement shall terminate upon the occurrence of any of the following events:

9.2.1 Without Cause. After the first year of the Term, at any time upon thirty (30) days
written notice by Manager to PC;

9.2.2 With Cause. Upon ten (10) days written notice by either Party to the other:

	 	(a)	 	in the event that the other Party shall admit in writing its inability to
generally pay its debts when due, apply for or consent to the appointment of a
receiver, trustee or liquidator of all or substantially all of its assets, file a
petition in bankruptcy or make an assignment for the benefit of creditors, or upon
other action taken or suffered by such Party, voluntarily or involuntarily, under any
federal or state law for the benefit or creditors, except for the filing of a petition
in involuntary bankruptcy against such Party which is dismissed within sixty (60) days
thereafter; or
	 
	 	(b)	 	in the event of a breach by the other Party of any of the material terms or
conditions of this Agreement, which is not remedied within thirty (30) days prior
notice to such Party, if capable of being remedied or, if capable of being remedied but
not within such period, such remedy has not been commenced in good faith within such
period; or
	 
	 	(c)	 	in the event of a breach by the other Party of any material representation or
warranty contained in this Agreement; or
	 
	 	(d)	 	as provided in Section 12.2.2.

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9.2.3 Disciplinary Actions. By the Manager at any time, upon ten (10) days prior notice to
the PC, if (a) the PC or any Physician Contractor is convicted of or disciplined for violating any
federal, state or local law, rule or regulation applicable to the PC or such Medical Contractor; or
(b) the PC or any Medical Contractor is otherwise disciplined by any licensing or regulatory
authority, the result of any of which events described in clause (a) or (b) does or reasonably
would be expected to materially adversely affect the PC.

9.3 Effect of Termination

     Upon termination of this Agreement, neither Party shall have any further obligations hereunder
except for obligations accruing prior to the date of termination of this Agreement. Without
limiting the foregoing, the PC and the Manager specifically acknowledge and agree that the Manager
shall continue to bill and collect and receive on the PC’s behalf, in accordance with Section
3.7, all charges and cash collections for accounts receivable with respect to all items and
services provided by or through the PC or the Medical Contractors prior to the time of termination,
it being understood that such cash collections will be applied in accordance with Section
3.7, and will represent, in part, the Manager’s compensation for Management Services already
rendered. The PC shall pay the Manager fair market value for any services provided by the Manager
pursuant to this Section 9.3 after termination of this Agreement.

     Upon the expiration or termination of this Agreement, the PC shall promptly relinquish to the
Manager all files, data or materials in its possession that are Confidential Information (as
defined in Section 10), except that the PC may keep a copy of patient records to the extent
permitted by and in compliance with applicable law.

ARTICLE 10.

CONFIDENTIAL AND PROPRIETARY INFORMATION

10.1 Confidential Information

     In the operation and development of the Manager’s business, the Manager generates technology,
other intellectual property, information and data, which is and will be proprietary and
confidential (the “Confidential Information”), the disclosure of which would be extremely
detrimental to its business and of assistance to its competitors. The Confidential Information
includes, but is not limited to:

	 	(i)	 	Statistical, financial, cost and accounting data;
	 
	 	(ii)	 	Data, plans and projections regarding the location, development and expansion
of existing and proposed facilities;
	 
	 	(iii)	 	The Licensed Technology and any other technology, software and other
intellectual property;
	 
	 	(iv)	 	Administrative, accounting, operations and policy and procedure manuals;

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	 	(v)	 	Market surveys, studies and analyses;
	 
	 	(vi)	 	Personnel and other the Manager business records;
	 
	 	(vii)	 	Information concerning legislative, administrative, regulatory and zoning
requirements, bodies and officials;
	 
	 	(viii)	 	Private or secret processes, methods and ideas;
	 
	 	(ix)	 	Training methods;
	 
	 	(x)	 	Information concerning the identities, locations and qualifications of
professionals and other persons presently, or prospectively to be, employed by the
Manager; and
	 
	 	(xi)	 	Information concerning the identities, locations, prices, costs, and other
terms of dealings with referral and reimbursement sources, suppliers, providers and
supplier and provider organizations and entities.

10.2 Confidentiality and Non-Disclosure

     Due to the highly competitive nature of the health care industry and the business of the
Manager, unauthorized use or disclosure of any of the Confidential Information would be extremely
damaging to the Manager. The PC shall not (i) use any Confidential Information except as necessary
to deliver the Medical Services in the Premises in accordance with this Agreement; or (ii) copy or
divulge to any third party any Confidential Information without the prior written consent of the
Manager. The obligations set forth in this Section 10.2 restraining use and disclosure of
Confidential Information shall survive the expiration or termination of this Agreement for any
reason. Confidential Information shall not include protected health information as defined under
HIPAA (“PHI”), but shall include (i) any de-identified information or database created using PHI,
(ii) the underlying formats and designs of any reports or other materials containing all or any
part of the PHI, and (iii) other information or materials created, derived, developed, improved, or
otherwise obtained by or on behalf of a Party directly or indirectly using the PHI. Any
unauthorized use of Confidential Information or disclosure to the extent, but only to the extent,
required by Law to be made as the result of legal process or proceedings is not a violation of this
Section 10.

10.3 Patient Medical Records; HIPAA Compliance

     The PC agrees that it shall, and in the Professional Services Agreements shall require the
Physician Corporation and the Medical Contractors to, comply at all times
with all federal, state and local statutes, regulations and rules relating to the use,
disclosure and confidentiality of patient medical information, including, without limitation, the
privacy, security or transactions and code sets regulations (“HIPAA Regulations”) promulgated
pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). The Parties
acknowledge and agree that data or other information disclosed to or obtained by Manager in
performance of its obligations

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under this Agreement may be “protected health information” (“PHI”) as defined in HIPAA
or the HIPAA regulations, and agree to comply with the terms and conditions of the Business
Associate and Data Use Agreement attached at Exhibit D.

ARTICLE 11.

INDEMNIFICATION

	11.1	 	Indemnification

          Each Party shall indemnify and hold harmless the other Party, its directors, officers,
employees and agents from and against any and all liabilities, losses, damages, claims, causes of
action, judgments, liens and expenses (including reasonable attorney’s fees and court costs),
whether or not covered by insurance (collectively “Claims”), resulting from or related to (a) the
acts or omissions of such Party, or such Party’s officers, directors, employees, agents or
subcontractors in connection with the performance of this Agreement, or (b) the breach by such
Party of any provision of this Agreement.

          PC shall indemnify and hold harmless Manager, its directors, officers, employees and agents
from and against any and all Claims resulting from or related to any claims made by a third party
alleging malpractice by the PC or any of the Medical Contractors with respect to the provision of
the Medical Services.

          The Parties’ indemnification obligations set forth in this Section 11.1 shall survive
the expiration or termination of this Agreement for any reason.

ARTICLE 12.

MISCELLANEOUS

	12.1	 	Access to Records

          For a period of six (6) years after Management Services are furnished under this Agreement,
the PC shall make available to the Secretary of the U.S. Department of Health and Human Services
(the “Secretary”), the U.S. Comptroller General (the “Comptroller General”) and their
representatives, this Agreement and all books, documents and records necessary to certify the
nature and extent of the costs of those Management Services and will provide such documentation as
they may reasonably
require pursuant to Section 1861(v)1(l) of the U.S. Social Security Act (42 U.S.C. §
1395(x)(v)(1)(l)) as amended and regulations thereunder or any successor provisions. If the PC
carries out any of the duties of this Agreement through a subcontract worth Ten Thousand Dollars
($10,000) or more over a twelve-month period with a related organization, the subcontract will also
contain a clause to permit access by the Secretary, Comptroller General and their representatives
to the related organization books and records pursuant to such statute.

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	12.2	 	Amendment

12.2.1 Amendment. No amendment of this Agreement shall be effective unless set forth in writing and
signed by the PC and the Manager.

12.2.2 Contract Modification for Prospective Legal Event. If both Parties to this Agreement
determine that any state or federal laws or regulations, now existing or enacted or promulgated
after the date of execution of this Agreement are interpreted by judicial decision, a regulatory
agency, or legal counsel in such a manner as to indicate that this Agreement or any provision
hereof may be in violation of such laws or regulations, then the Parties shall immediately enter
into good faith negotiations regarding a new service arrangement or basis for compensation for the
Management Services furnished pursuant to this Agreement that complies with the changed conditions
and that approximates as closely as possible the economic position of the Parties prior to the
change. If a court of competent jurisdiction compels or requires a Party hereto to refrain from
performing its duties and obligations hereunder, or a Party’s performance hereunder shall be
directly violative of a court order directed at such Party, then, to the extent necessary to comply
with such court order, this Agreement shall be deemed suspended. In no event shall such suspension
be construed to relieve either Party’s obligation under this Section 12.2.2 and the Parties
will immediately commence good faith negotiations regarding a new service arrangement or
compensation structure that is in compliance with any such court order, which arrangement or
structure will allocate the economic aspects of the relationship between the Parties in a manner as
nearly as possible to that intended by this Agreement.

	12.3	 	Assignment

          The PC may not assign this Agreement without the Manager’s prior written consent. This
Agreement may be assigned by the Manager to any parent, subsidiary, affiliate or successor entity
without the prior written consent of the PC, with all other assignments requiring the written
consent of the PC, which consent shall not be unreasonably withheld. Except as may be specifically
provided in this Agreement to the contrary, this Agreement shall inure to the benefit of and be
binding upon the Parties and their respective legal representatives, successors and permitted
assigns.
Whenever a reference is made in this Agreement to the PC or the Manager, such reference shall
be deemed to include a reference to the heirs, executors, legal representatives, successors and
permitted assigns of such Party.

	12.4	 	Rights and Remedies; Injunctive Relief

          Either Party may, at its option, elect to institute and prosecute proceedings in any court of
competent jurisdiction, either in law or equity, to enforce specific performance of any Party to
this Agreement, to enjoin any threatened or actual breach of this Agreement by the other Party as
appropriate and/or to recover any damages resulting from the breach of this Agreement.

34

 

	12.5	 	Status as Independent Contractor

          In the performance of this Agreement, the Manager shall at all times be and shall act as an
independent contractor.

	12.6	 	Notices

          Any notice provided for in this Agreement and any other notice, demand or communication
required or permitted to be given under this Agreement or which any Party may wish to send to
another (“Notice”) shall be in writing and shall be served by (i) personal delivery; (ii)
registered or certified U.S. Mail, or by comparable private carrier, First Class, return receipt
requested in a sealed envelope, postage or other charges prepaid; or (iii) telegram, telecopy,
facsimile, telex or other similar form of communication, addressed to the Party for whom the Notice
is intended as follows:

	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	PC:
	 	David E. Smith, MD, Medical Group, Inc.	 	 
	 

	 	 	 	1315 Lincoln Boulevard	 	 
	 

	 	 	 	Santa Monica, CA 90401	 	 
	 

	 	 	 	Attn: David E. Smith, MD	 	 
	 
	 	 	 	 	 	 
	 

	 	The Manager:
	 	Hythiam, Inc.	 	 
	 

	 	 	 	11150 Santa Monica Blvd.	 	 
	 

	 	 	 	Suite 1500	 	 
	 

	 	 	 	Los Angeles, CA 90025	 	 
	 

	 	 	 	Attn: Chief Operating Officer	 	 

          All Notices given pursuant to this Section 12.6 shall be deemed given and effective
when received if personally delivered or sent by telegram, telecopy, telex or similar form of
communication, or, if mailed, on the date shown on the return receipt, or, if a receipt has not
then been received, five (5) days after mailing, or, if sent by overnight courier, on the date
shown for receipt on the courier’s records. Either Party may change to whom or where Notice is to
be given by providing Notice to the other Party of such change at such other Party’s last address
provided pursuant to this Agreement.

	12.7	 	Collateral Agreements

          This Agreement constitutes the final and entire agreement between the Parties respecting the
Management Services of the Manager, and there are no representations, warranties or commitments
concerning those Management Services, except as set forth in this Agreement.

	12.8	 	Survival

          The provisions of Sections 1.6, 1.7, 1.8, 1.10, 2.4, 3.7, 3.16.12, 3.16.14, 3.16.15,
3.16.17, 3.17.3, 6.7.2, 6.7.3, 8.2, 9.3, 10, 11, 12.1, 12.4 and this 12.8 of this Agreement
shall survive the termination of this Agreement in accordance with their terms.

35

 

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

36

 

          IN WITNESS WHEREOF, the PC and the Manager have caused this Management and Support Services
Agreement to be executed by their duly authorized representatives, as of the day and year first
above written.

	 	 	 	 	 	 	 	 	 	 	 
	 	 	David E. Smith, MD Medical Group, Inc.	 	 	 	HYTHIAM, INC.
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 	 	By:	 	 
	 

	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	Print Name:	 	 	 	 	Print Name:	 
	 

	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	Print Title:	 	 	 	 	Print Title:	 
	 

	 	 	 	 
	 	 	 	 	 	 

37

 

EXHIBIT A

Trademarks

PROMETATM

The PROMETATM Center

 

 

EXHIBIT B

Licensed Technology

	1.	 	Description of Licensed Technology to be Provided to PC:

          Any and all Manager treatment protocols provided by Manager during the Term to PC for, or
related to, a medically supervised treatment protocol for neurostabilization and detoxification
from alcohol or addictive psycho-stimulants, including but not limited to: Manager’s PROMETATM
treatment Protocol; PROMETATM for Addictions; PROMETATM for Alcohol; PROMETATM for Cocaine; PROMETATM
for Crack Cocaine; PROMETATM for Methamphetamines; PROMETATM for Poly-Drug; PROMETATM for Alcohol and
Cocaine; along with all related Intellectual Property, Confidential Information, Services and other
materials and information provided by Manager to PC, including without limitation all Licensee
Modifications.

	2.	 	Authorized Purposes for Use of Licensed Technology:

          For provision of substance abuse and/or addiction treatment related to alcohol and/or
psycho-stimulants in accordance with the terms of this Agreement.

	3.	 	Authorization to be Provided by Manager:

          Manager will designate each individual authorized to use the Licensed Technology upon the
execution by qualified individuals of confidentiality and proprietary information agreements with
Manager (each an “Authorized User”). Notwithstanding the foregoing, execution by Authorized Users
of confidentiality agreements with Manager shall not eliminate or limit in any way PC’s obligations
as set forth in this Agreement with respect to disclosure and use to and by PC and each Medical
Contractor of the Licensed Technology. The list of Authorized Users is set forth on Schedule
B, as amended from time to time. Unless a shorter period is specified in writing by Manager,
during the Term each Authorized User must undergo reauthorization at least every twenty-four (24)
months (“Authorized Period”) after notification thereof by Manager to PC. Any Medical Contractors
who are not reauthorized within the specified time frame must immediately cease any and all use of
the Licensed Technology at the end of the Authorized Period. Notwithstanding the foregoing, all
Medical Contractors must immediately cease any and all use of the Licensed Technology upon
termination of this Agreement for any reason. Designation of an individual by Manager as an
Authorized User is in no way an evaluation or certification by Manager of that individual’s ability
or fitness to deliver patient care services, but instead is only a mechanism for protection of
Manager’s Intellectual Property and other rights in and to the Licensed Technology.

 

 

	4.	 	Terms for Provision by PC of PC Data to Manager:

          PC will provide Manager access to its files and records to the extent reasonably necessary for
Manager to access and make use of the Subject Data, including but not limited to seeking all
necessary patient authorizations and consents for Manager to be able to collect from Aftercare
providers, and to authorize Aftercare providers to disclose to Manager, patient data with respect
to PC patients treated using the Licensed Technology for a period of up to two years following that
PC treatment, all in compliance with all applicable Laws and this Agreement. In addition, at
Manager’s request and expense, PC shall cooperate with Manager in enabling the interface of the PC
information system with Manager’s information system to the extent reasonably necessary to
facilitate Manager’s access to the Subject Data, subject to compliance of the interface with
applicable Laws.

	5.	 	Terms for Provision by Manager of Data Collection and Reporting to PC:

          Any data collection and reporting services or data aggregation services provided to PC will be
provided in accordance with the HIPAA Privacy Rule. Manager’s data collection services may include
interviews with patients and administration of certain questionnaires. Manager will provide any of
the data collection services that involve direct patient contact only in strict accordance with
protocols, procedures and questionnaires provided by or approved by PC in writing and in advance.
Manager shall not provide under any circumstances any medical advice, diagnosis or treatment
services to patients. Nothing in this paragraph 5 or elsewhere in this Agreement shall limit in
any way PC’s obligations under Section 6.6 to seek all patient consents or authorizations
required for Manager to collect Subject Data, including from Aftercare (as defined in paragraph 6
of this Exhibit B) providers.

	6.	 	Terms for Administration by Manager of Aftercare Services to PC:

          The term “Aftercare”, as used in this Exhibit B and otherwise in the Agreement, refers
to a program of follow-up care provided to a patient treated using the Licensed Technology where
services are provided by a certified or licensed health care provider (which may be PC). All on
behalf of PC, and in consideration for PC’s payment to Manager (as provided in Section 5.2)
of the applicable Aftercare Service Fee (as defined in paragraph 7 of this Exhibit B),
Manager shall arrange and pay up to an amount equal to the Aftercare Service Fee for Aftercare for
each patient treated using the Licensed Technology, provided that within thirty (30) days after
receiving that treatment, the patient enrolls in an appropriate Aftercare program. Manager shall
provide PC and treating Medical Contractors with options for Aftercare providers for their patients
from a list maintained by Manager. Notwithstanding the foregoing, Manager does not and shall not
endorse or recommend any specific provider and is not and shall not be responsible or accountable
in any way for the care provided by any Aftercare provider. Manager, at its discretion and for its
own behalf, with appropriate patient authorization, may collect data (for a period of up to two
years following treatment) concerning the recovery follow-up treatment for PC patients provided
treatment using the Licensed Technology. Nothing in this Agreement shall limit a

2

 

patient’s
ability to choose a provider other than PC for Aftercare, nor shall this Agreement require any
Party to refer patients or otherwise generate business for the other Party.

	7.	 	License Fees; Aftercare Service Fees:

          License Fees: PC shall pay Manager the following License Fees for any patient who is
not covered by, eligible for coverage by, or reimbursed by, on a primary or secondary basis,
Medicare, Medicaid, or any other federal healthcare payer or funding
source (“Private Pay
Patient”):

	 	 	 	 	 
	                    Private Pay Patients	 	 
	                    Treated Using Licensed Technology	 	Manager
	Fee	 	 	 	 
	                    Each episode of treatment for alcohol dependency
	 	$	4,500	 
	                    Each episode of treatment for psycho-stimulant dependency
	 	$	6,000	 

          The License Fees set forth in this paragraph 7 are for treatment of private pay patients only
and not for treatment of commercially insured patients or patients reimbursed, on a primary or
secondary basis, by Medicare or Medicaid or any other governmental payer or funding source. Before
treating any such excluded patient, PC will advise Manager of its desire so to do, whereupon the
Parties will meet and attempt in good faith to negotiate appropriate fees for such treatments, and
will advise the patient in advance of the non-covered status of the treatment and obtain an
appropriate waiver therefrom.

          Aftercare Service Fees: PC shall pay Manager an Aftercare Service Fee (“Aftercare
Service Fee”) of $1,500 for each patient treated at or by PC using the Licensed Technology,
provided such patient timely initiates a qualifying Aftercare program (see paragraph 6 of this
Exhibit B).

          For purposes of this paragraph 7, except as set forth in paragraph 8 of this Exhibit
B, any treatment provided to any patient by, at or on behalf of the PC using all or any part of
the Licensed Technology shall be included in the calculation of the License Fees with respect to
such patient.

          For purposes of this Agreement, an Episode of Treatment shall include:

	 	•	 	Alcohol dependency- two administrations of the PROMETATM for alcohol protocol
provided during a consecutive two-day treatment period.
	 
	 	•	 	Psycho-stimulant dependency or poly-addictions — Five administrations of the
PROMETATM for cocaine, crack cocaine or methamphetamines protocol provided during a
consecutive three-day initial treatment period plus a follow-up treatment three
weeks later for two consecutive days.

3

 

EXHIBIT C

Professional Services Agreement

 

 

EXHIBIT D

BUSINESS ASSOCIATE AND DATA USE AGREEMENT

PC

AND

HYTHIAM, INC.

          This Business Associate Agreement (“B.A. Agreement”), effective as of November 15, 2005
(“Effective Date”), is entered into by and between David E. Smith, MD Medical Group, Inc. (“Covered
Entity”) and Hythiam, Inc. (“Hythiam”) (each a “Party” and collectively the “Parties”).

1. BACKGROUND AND PURPOSE. The Parties have entered or are entering into an agreement for
the provision by Hythiam of technology and services to Covered Entity (“Agreement”). Performance
of the Agreement may involve Protected Health Information (as defined in 45 C.F.R. §160.103)
(“PHI”) subject to the federal privacy and security regulations issued pursuant to the Health
Insurance Portability and Accountability Act (“HIPAA”) and codified at 45 C.F.R. parts 160 and 164
(“Privacy and Security Rule”). The purpose of this B.A. Agreement is to amend the Agreement to the
extent and only to the extent necessary to allow for Covered Entity’s compliance with the Privacy
and Security Rule.

2. DEFINITIONS. Unless otherwise defined in this B.A. Agreement, all capitalized terms
used in this B.A. Agreement have the meanings ascribed in HIPAA and/or the Privacy and Security
Rule.

	3.	 	OBLIGATIONS OF THE PARTIES WITH RESPECT TO PHI.

	3.1	 	Uses and Disclosures of PHI by Hythiam. Except as otherwise specified in this B.A.
Agreement, Hythiam may make any and all uses and disclosures of PHI necessary to perform its
obligations under the Agreement. In addition, unless otherwise limited in this B.A.
Agreement, Hythiam may (a) use the PHI in its possession for its proper management and
administration and to carry out the legal responsibilities of Hythiam; (b) disclose the
Minimum Necessary information in its possession to a third party for the purpose of Hythiam’s
proper management and administration or to carry out the legal responsibilities of Hythiam,
provided, that such disclosure is required by law or Hythiam obtains reasonable assurances in
writing from the third party regarding the confidential handling of such PHI as required under
the Privacy and Security Rule; (c)
provide Data Aggregation services relating to the health care operations of the

 

 

	 	 	Covered
Entity; (d) use the PHI to create a Limited Data Set (“LDS”), the use and disclosure of
which shall be governed by the Data Use Agreement set forth in 5 of this B.A. Agreement and
by the Privacy and Security Rule; and (e) de-identify any and all PHI obtained by Hythiam
under this B.A. Agreement, and use such de-identified data, all in accordance with the
de-identification requirements of the Privacy and Security Rule.

	3.2	 	Obligations of Hythiam. With regard to its use and/or disclosure of PHI that is not
in an LDS, Hythiam agrees to:

	 	a.	 	not use or further disclose the PHI other than as permitted or required by this
B.A. Agreement or as Required By Law;
	 
	 	b.	 	use appropriate safeguards to prevent use or disclosure of PHI other than as
permitted in Section 3.2(a);
	 
	 	c.	 	report to Covered Entity in writing any use or disclosure of PHI not permitted
in Section 3.2(a) and any Security Incident involving electronic PHI of which
Hythiam becomes aware and, to the extent practicable, minimize harmful effects of that
use or disclosure or Security Incident;
	 
	 	d.	 	ensure that any agents and subcontractors to which Hythiam provides PHI agree
in writing to the same restrictions and conditions that apply to Hythiam with respect
to such PHI;
	 
	 	e.	 	make available within fifteen (15) days after request by the Covered Entity PHI
necessary for Covered Entity to respond to an Individuals’ request for access to PHI
about them in the event that the PHI in Hythiam’s possession constitutes a Designated
Record Set;
	 
	 	f.	 	make available PHI for amendment and incorporate within ten (10) days after
request by Covered Entity any amendments to the PHI in accordance with the Privacy Rule
in the event that the PHI in Hythiam’s possession constitutes a Designated Record Set;
	 
	 	g.	 	document such disclosures of PHI as would be required for Covered Entity to
respond to a request by an Individual for an accounting of disclosures in accordance
with 45 CFR § 164.528 and provide, within 20 days after Covered Entity requests the
information in writing, an accounting of any disclosures of PHI for up to the six-year
period preceding the date of the request for an accounting that includes the date of
the disclosure, the name and address of the person or entity to whom the PHI was
disclosed, a brief description of the PHI disclosed and a brief statement of the
purpose of the disclosure and an explanation of the basis for the disclosure;

2

 

	 	h.	 	make its internal practices, books and records relating to the use and
disclosure of PHI available to the Secretary of HHS within a reasonable timeframe as
required by the Secretary for purposes Section of determining Covered Entity’s
compliance with the Privacy Rule; and
	 
	 	i.	 	return to Covered Entity or destroy, within ninety (90) days of the termination
of this B.A. Agreement, the PHI in its possession as a result of the Agreement and
retain no copies, if it is feasible to do so. If Hythiam in its reasonable discretion
determines that return or destruction is infeasible, Hythiam agrees to extend all
protections contained in this B.A. Agreement to Hythiam’s use and/or disclosure of any
retained PHI, and to limit any further uses and/or disclosures to the purposes that
make the return or destruction of the PHI infeasible. Notwithstanding the foregoing,
this 3.2(i) shall not apply to any PHI in an LDS, the use and disclosure of which shall
be governed by Section 5 of this B.A. Agreement.
	 
	 	j.	 	Hythiam agrees to implement administrative, physical and technical safeguards
that reasonably and appropriately protect the confidentiality, integrity and
availability of any electronic PHI that it creates, receives, maintains or transmits to
or on behalf of Covered Entity, as required by the Security Regulations as set forth at
45 C.F.R. Parts 160 and 164. Hythiam further agrees to ensure that any agent,
including a subcontractor to whom it provides such information, will implement
reasonable and appropriate safeguards to protect it.

	3.3	 	Obligations of Covered Entity. Covered Entity agrees to timely notify Hythiam in
writing of any arrangements between Covered Entity and the individual that is the subject of
PHI that may impact in any manner the use and/or disclosure of that PHI by Hythiam under this
B.A. Agreement.
	 
	3.4	 	Effect of Changes to the Privacy and Security Rule. To the extent that any relevant
provision of the Privacy and Security Rule is materially amended in a manner that changes the
obligations of Business Associates or Covered Entities that are embodied in the terms of this
B.A. Agreement, the Parties agree to negotiate in good faith appropriate amendment(s) to this
B.A. Agreement to give effect to these revised obligations. If the Parties in good faith are
unable to agree to appropriate amendment(s) satisfactory to both Parties by the required
compliance date, either Party may terminate this B.A. Agreement and the Agreement upon fifteen
(15) days prior written notice to the other Party.

4. TERMINATION BY COVERED ENTITY. With respect to the Agreement, upon Covered Entity’s
knowledge of a material breach of the terms of this B.A. Agreement by Hythiam, Covered Entity shall
provide Hythiam written notice of that breach in sufficient detail to enable Hythiam to understand
the specific nature of that breach and afford Hythiam an opportunity to cure the breach to the
extent cure is possible in Covered Entity’s reasonable discretion. If Hythiam fails to cure the
breach within a reasonable
time specified by Covered Entity (in any event not less than ten (10) days and if

3

 

Hythiam is making
reasonable efforts to cure, Covered Entity may extend the cure period to allow for that cure), or
if cure is not possible, Covered Entity may terminate this B.A. Agreement as well as terminate
those portions, but only those portions, of the Agreement that, by their express terms or in
practice, require or permit Hythiam access to PHI and only to the extent of that requirement or
permission. In such instance, the remaining provisions of the Agreement that do not, by their
express terms or in practice, require or permit Hythiam access to PHI shall remain in full force
and effect, including any and all of Covered Entity’s payment and performance obligations (to the
extent any such performance obligations do not require Hythiam access to PHI); provided that,
notwithstanding the foregoing, Covered Entity shall be entitled to terminate the Agreement in its
entirety if and to the extent that the overall intent and purpose of the Agreement (i) is directly
and materially related to and dependent upon Hythiam access to PHI, and (ii) would be frustrated if
Covered Entity were not permitted to terminate the Agreement. In addition, if Covered Entity, in
its sole discretion, determines that Hythiam can perform the Agreement with information that has
been de-identified under the Privacy Rule or with an LDS, the Agreement will remain in full force
and effect, except with respect to, and only with respect to, those provisions that require or
permit Hythiam access to PHI that is not in an LDS, which provisions shall be deemed modified to
provide Hythiam access to PHI that has been de-identified under the Privacy and Security Rule and
access to PHI in an LDS.

	5.	 	DATA USE AGREEMENT.
	 
	5.1	 	Preparation of the LDS. Hythiam may prepare an LDS in accordance with the Privacy
and Security Rule and specifically the standards set forth at 45 C.F.R § 164.513(e)(2)
	 
	5.2	 	Minimum Necessary Data. In preparing the LDS, Hythiam will include only those data
fields which are the minimum necessary to accomplish the purposes set forth in Section
5.3 of this B.A. Agreement.
	 
	5.3	 	Permitted Uses and Disclosures of the LDS. Hythiam may only use the LDS for its
Research and Public Health activities, for the Health Care Operations of Covered Entity, and
as Required By Law. Hythiam may only disclose the LDS for the same purposes in accordance
with the Privacy and Security Rule.
	 
	5.4	 	Responsibilities of Hythiam. With regard to its use and/or disclosure of the LDS,
Hythiam agrees to:

	 	a.	 	not use or further disclose the LDS other than as permitted by Section
5.3 of this B.A. Agreement;
	 
	 	b.	 	use appropriate safeguards to prevent use or disclosure of the LDS other than
as permitted by Section 5.3 of this B.A. Agreement;
	 
	 	c.	 	report to Covered Entity in writing any use or disclosure of the LDS that is
not permitted by Section 5.3 of this B.A. Agreement of which Hythiam’s

4

 

	 	 	 	management becomes aware and, to the extent practicable, minimize harmful effects of
that use or disclosure;
	 
	 	d.	 	ensure that any agents, subcontractors, or other third parties to which Hythiam
provides the LDS agree in writing to the same restrictions and conditions that apply to
Hythiam with respect to such LDS; and
	 
	 	e.	 	not use the information in the LDS to identify or contact individuals who are
the data subjects.

	6.	 	MISCELLANEOUS.
	 
	6.1	 	Agreement. The Agreement is hereby amended to incorporate the terms of this B.A.
Agreement. The terms of this B.A. Agreement shall prevail in the case of any conflict with
the terms of the Agreement to the extent and only to the extent necessary to allow Covered
Entity to comply with the Privacy and Security Rule.
	 
	6.2	 	Survival. With respect to the Agreement,
Sections 1, 2, 3.2, 3.3, 3.4, 4. and
6 of this B.A. Agreement shall survive termination of this B.A. Agreement and continue
indefinitely solely with respect to PHI Hythiam retains in accordance with Section
3.2.i. With respect to the Agreement, Section 5 of this B.A. Agreement shall
survive termination of this B.A. Agreement and continue indefinitely solely with respect to
any LDS that Hythiam possesses.
	 
	6.3	 	No Third Party Beneficiaries. Nothing in this B.A. Agreement shall confer upon any
person other than the Parties and their respective successors or assigns, any rights,
remedies, obligations, or liabilities whatsoever.

IN WITNESS WHEREOF, each of the undersigned has caused this B.A. Agreement to be duly executed in
its name and on its behalf.

	 	 	 	 	 	 	 	 	 	 	 
	 	 	David E. Smith, MD Medical Group, Inc.	 	 	 	HYTHIAM, INC.
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 	 	By:	 	 
	 

	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	Print Name:
	 	 	 	 	Print Name:	 
	 

	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	Print Title:
	 	 	 	 	 	Print Title:	 	 
	 

	 	 	 	 
	 	 	 	 	 	 

5

 

Schedule 7.1.6

Insurance Policies

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