MEDPARTNERS INC, S-3/A, 1997-01-27

MEDPARTNERS INC
S-3/A, 1997-01-27
SPECIALTY OUTPATIENT FACILITIES, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1997

REGISTRATION STATEMENT NO. 333-17337

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 1

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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MEDPARTNERS, INC.
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C> <C>
DELAWARE 63-1151076
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
</TABLE>

3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
(205) 733-8996
(Address, including Zip Code, and Telephone Number,
including Area Code, of Registrant's Principal Executive Offices)

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LARRY R. HOUSE
CHAIRMAN OF THE
BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
3000 GALLERIA TOWER, SUITE 1000
BIRMINGHAM, ALABAMA 35244
TEL: (205) 733-8996
FAX: (205) 733-1568
(Name, Address, including Zip Code, and Telephone Number, including Area Code,
of Agent for Service)

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COPIES OF COMMUNICATIONS TO:

<TABLE>
<S> <C>
J. BROOKE JOHNSTON, JR., ESQ. ROBERT E. LEE GARNER, ESQ.
SENIOR VICE PRESIDENT & GENERAL COUNSEL F. HAMPTON MCFADDEN, JR., ESQ.
MEDPARTNERS, INC. JAMES H. SINNOTT, ESQ.
3000 GALLERIA TOWER, SUITE 1000 HASKELL SLAUGHTER & YOUNG, LLC
BIRMINGHAM, ALABAMA 35244-2331 1200 AMSOUTH/HARBERT PLAZA
TEL: (205) 733-8996 1901 SIXTH AVENUE NORTH
FAX: (205) 982-7709 BIRMINGHAM, ALABAMA 35203
TEL: (205) 251-1000
FAX: (205) 324-1133
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH AMOUNT MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share
(including the Common Stock Purchase
Rights).............................. 10,000,000 $21.875 $218,750,000 $66,287.88(2)
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</TABLE>

(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) based upon the average of the high and low prices of the
Registrant's Common Stock as reported on the New York Stock Exchange on
December 4, 1996.

(2) This amount was paid at the time of the original filing of the Registration
Statement.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2

PROSPECTUS

10,000,000 SHARES

MEDPARTNERS LOGO

COMMON STOCK
PAR VALUE $.001 PER SHARE

AFFILIATE STOCK PURCHASE PLAN

MedPartners, Inc. (the "Company" or "MedPartners") is the largest physician
practice management ("PPM") company in the United States. Through its Affiliate
Stock Purchase Plan (the "Plan"), MedPartners is offering certain eligible
affiliates of the Company and its subsidiaries an opportunity to purchase shares
of the Company's Common Stock, par value $.001 per share (the "Common Stock"),
at a price that represents a modest discount as compared to the price paid by
the general public. The individuals who will be able to participate in the Plan
("Affiliates") are members, partners and shareholders of, and physician
employees and other personnel employed by, any professional corporation or
association or practice with which the Company or a subsidiary has a services,
management or similar agreement in effect, as well as any physician who is a
member of an independent physician association ("IPA") or other organized
network or group with which the Company or a subsidiary has such an agreement in
effect. The Plan will be administered by the Company's Board of Directors (the
"Board"), with the assistance of Aon Consulting, Inc. (the "Administration
Agent") and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Brokerage
Agent").

Eligible Affiliates may elect to participate in the Plan (and become
"Participating Affiliates") by completing the enrollment form and mailing the
form and a check for the selected contribution amount to the Administration
Agent. An Affiliate may enroll effective as of the first day of any calendar
quarter while the Plan remains in effect, commencing with the first quarter of
1997. Each enrollee must commit to contributing an amount between $10.00 and
$1,600.00 per month. Amounts contributed by a Participating Affiliate during the
year following enrollment (the "Affiliate Plan Year") will be credited to a
contribution account maintained on his or her behalf (the "Contribution
Account").

On the last trading date of the Affiliate Plan Year (the "Purchase Date"),
the balance in the Participating Affiliate's Contribution Account will be used
to purchase whole shares of Common Stock. The purchase price for each share will
be the lesser of 85% of the Market Price (as defined herein) on the Purchase
Date, or 85% of the Market Price on the first trading date of the Affiliate Plan
Year. See "The Plan."

The Common Stock is listed on The New York Stock Exchange under the symbol
"MDM." On January 23, 1997, the closing sale price of the Company's Common Stock
was $19.375 per share.

SEE "RISK FACTORS" AT PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

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THE DATE OF THIS PROSPECTUS IS JANUARY 27, 1997

<PAGE> 3

AVAILABLE INFORMATION

The Company has filed a Registration Statement (the "Registration
Statement") on Form S-3 under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission (the
"Commission") with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
which the Company has filed with the Commission, certain portions of which have
been omitted pursuant to the rules and regulations of the Commission, and to
which portions reference is hereby made for further information with respect to
the Company and the Common Stock offered hereby. Statements contained herein
concerning certain documents are not necessarily complete, and in each instance,
reference is made to the copies of such documents filed as exhibits to the
Registration Statement. Each such statement is qualified in its entirety by such
reference.

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (Commission File No.
0-27276), and in accordance therewith files periodic reports, proxy statements
and other information with the Commission relating to its business, financial
statements and other matters. The Registration Statement, as well as such
reports, proxy statements and other information, may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. and
should be available for inspection and copying at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048
and at Citicorp Center, 500 West Madison Street, Chicago, Illinois. Copies of
such material can be obtained at prescribed rates by writing to the Commission,
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission also maintains a Web site that contains reports, proxy statements and
other information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov. The Common Stock is
listed on the NYSE. The reports, proxy statements and certain other information
of the Company can be inspected at the office of the NYSE, 20 Broad Street, New
York, New York. See "Incorporation of Certain Documents by Reference".

FORWARD-LOOKING STATEMENTS

This Prospectus contains or incorporates certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 with
respect to the financial condition, results of operations and business of the
Company. The words "estimate", "project", "intend", "expect" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those contemplated in such
forward looking-statements. For a discussion of certain of such risks and
uncertainties, see "Risk Factors". Investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless the context
otherwise requires, as used herein, the term "MedPartners" or the "Company"
refers collectively to MedPartners, Inc. and its predecessor, also named
MedPartners, Inc. (the "Original Predecessor"), and their respective
subsidiaries and affiliates. In September 1996, the Company changed its name
from MedPartners/Mullikin, Inc. ("MedPartners/Mullikin") to "MedPartners, Inc."

THE COMPANY

GENERAL

MedPartners, with annualized revenues of approximately $4.7 billion as of
September 30, 1996, is the largest physician practice management ("PPM") company
in the United States. The Company develops, consolidates and manages integrated
healthcare delivery systems. Through its network of affiliated group and
independent practice association ("IPA") physicians, the Company provides
primary and specialty healthcare services to prepaid managed care enrollees and
fee-for-service patients. The Company also operates one of the largest
independent prescription benefit management ("PBM") programs in the United
States and provides disease management services and therapies for patients with
certain chronic conditions. As of September 30, 1996, the Company operated in 26
states through affiliations with approximately 8,000 physicians, including
approximately 2,500 in group practices, 4,550 through IPA relationships and 950
who were hospital-based, providing healthcare to approximately 1.5 million
prepaid enrollees.

The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and advanced
management information systems. In addition, MedPartners contracts with health
maintenance organizations and other third-party payors that compensate the
Company and its affiliated physicians on a prepaid basis (collectively, "HMOs"),
as well as hospitals and outside providers on behalf of its affiliated
physicians. These relationships provide physicians with the opportunity to
operate under a variety of payor arrangements and increase their patient flow.

The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or physician practices and related assets, either
for cash or through an equity exchange, or by affiliation on a contractual
basis. In all instances, the Company enters into long-term practice management
agreements with the affiliated physicians that provide for the management of
their practices by the Company while at the same time providing for the clinical
independence of the physicians.

The Company also manages outpatient prescription drug benefit programs for
more than 1,300 clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses 42,000 prescriptions daily through four
mail service pharmacies and manages patients' immediate prescription needs
through a network of approximately 53,000 retail pharmacies. The Company is in
the process of integrating its PBM program with the PPM business by providing
pharmaceutical services to affiliated physicians, clinics and HMOs. The
Company's disease management services are intended to meet the healthcare needs
of individuals with chronic diseases or conditions. These services include the
design, development and management of comprehensive programs that comprise drug
therapies, physician support and patient education. The Company currently
provides therapies and services for individuals with such conditions as
hemophilia, growth disorders, immune deficiencies, genetic emphysema, cystic
fibrosis and multiple sclerosis.

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ACQUISITION PROGRAM

The Company believes it is the leading consolidator in the PPM industry.
The Company's acquisition strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The Company implements this strategy
through growth in its existing markets, expansion into new markets through
acquisitions and affiliations and through the implementation of comprehensive
healthcare solutions for patients, physicians and payors. In pursuing its
acquisition strategy, the Company creates strategic alliances with hospital
partners and HMOs. As an integral element of these alliances, MedPartners
utilizes sophisticated information systems to improve the operational efficiency
of, and to reduce the operating costs associated with the Company's networks and
the practices of affiliated physicians. The Company's principal methods of
expansion are the acquisition of PPM businesses and affiliations with physician
and medical groups.

In September 1996, the Company acquired Caremark International Inc.
("Caremark"), a publicly traded PPM and PBM company based in Northbrook,
Illinois, in exchange for approximately 90.6 million shares of Common Stock
having a total value of approximately $1.8 billion (the "Caremark Acquisition"),
creating the largest PPM business in the United States. Caremark provides PPM
services to approximately 1,000 affiliated physicians.

In November 1995, the Company acquired Mullikin Medical Enterprises, L.P.
("MME"), a privately held PPM entity based in Long Beach, California, in
exchange for approximately 13.5 million shares of Common Stock having a total
value of approximately $384.1 million. MME provided PPM services to
approximately 400 group and 2,600 IPA physicians. In February 1996, the Company
acquired Pacific Physician Services, Inc. ("PPSI"), a publicly traded PPM
company based in Redlands, California, in exchange for approximately 11.0
million shares of Common Stock having a total value of $341.8 million. PPSI
provided PPM services to approximately 710 group and 100 IPA physicians. PPSI
had acquired Team Health, Inc. ("Team Health"), based in Knoxville, Tennessee in
June 1995. Team Health primarily manages physicians and other healthcare
professionals engaged in the delivery of emergency medicine and hospital-based
primary care.

The Company had affiliated with 190 physicians through December 31, 1994.
As of September 30, 1996, after giving effect to the Caremark Acquisition, the
Company had affiliated with approximately 8,000 physicians.

On January 20, 1997, the Company entered into and executed an Agreement and
Plan of Merger by and between the Company, Seabird Acquisition Corporation (the
"Subsidiary") and InPhyNet Medical Management Inc. ("InPhyNet") relating to the
merger of InPhyNet with and into the Subsidiary (the "Merger"). The Merger is
expected to be accounted for as a pooling of interests under generally accepted
accounting practices and is expected to qualify for treatment as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). The Merger is subject to certain conditions typical for
transactions of this kind.

THE PLAN

Through the Plan, MedPartners is offering eligible Affiliates of the
Company and its subsidiaries an opportunity to purchase shares of the Company's
Common Stock at a price that represents a modest discount as compared to the
price paid by the general public. Affiliates who will be able to participate in
the Plan are members, partners and shareholders of, and physician employees and
other personnel employed by, any professional corporation or association or
practice with which the Company or a subsidiary has a services, management or
similar agreement in effect, as well as any physician who is a member of an IPA
or other organized network or group with which the Company or a subsidiary has
such an agreement in effect. The Plan will be administered by the Board, with
the assistance of the Administration Agent and the Brokerage Agent.

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effective as of the first day of any calendar quarter while the Plan remains in
effect, commencing with the first quarter of 1997. Each enrollee must commit to
contributing an amount between $10.00 and $1,600.00 per month. Amounts
contributed by a Participating Affiliate during the year following enrollment
will be credited to his or her Contribution Account.

On the last trading date of the Affiliate Plan Year, the balance in the
Participating Affiliate's Contribution Account will be used to purchase whole
shares of Common Stock. The purchase price for each share will be the lesser of
85% of the Market Price (as defined herein) on such Purchase Date, or 85% of the
Market Price on the first trading date of the Affiliate Plan Year.

THE OFFERING

Common Stock offered by the
Company under the Plan... 10,000,000 shares

Common Stock outstanding
after the Offering......... 176,684,478 shares(1)

New York Stock Exchange
symbol................... MDM
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(1) Represents shares of Common Stock to be issued under the Plan plus the
shares outstanding as of January 17, 1997, excluding shares of Common Stock
reserved for issuance pursuant to outstanding stock options.

RISK FACTORS

See "Risk Factors" beginning on page 4 of this Prospectus for a discussion
of certain factors related to the Company and the Common Stock offered hereby.

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THE COMPANY

The Company was incorporated under the laws of Delaware in August 1995 as
"MedPartners/Mullikin, Inc." to be the surviving corporation in the combination
of the businesses of the Original Predecessor, incorporated under the laws of
Delaware in 1993, and MME, a California limited partnership which, directly or
through its predecessor entities, had operated since 1957. In September 1996,
the Company changed its name to "MedPartners, Inc." The executive offices of
MedPartners are located at 3000 Galleria Tower, Suite 1000, Birmingham, Alabama
35244, and its telephone number is (205) 733-8996. See "Business".

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective purchasers of the Common Stock should consider carefully the factors
listed below.

RISKS RELATING TO THE COMPANY'S GROWTH STRATEGY

The Company intends to continue to pursue an aggressive growth strategy
through acquisitions and internal development for the foreseeable future. The
Company's ability to pursue new growth opportunities successfully will depend on
many factors, including, among others, the Company's ability to identify
suitable growth opportunities and successfully integrate acquired businesses and
practices. There can be no assurance that the Company will anticipate all of the
changing demands that expanding operations will impose on its management,
management information systems and physician network. Any failure by the Company
to adapt its systems and procedures to those changing demands could have a
material adverse effect on the operating results and financial condition of the
Company.

Competition for Expansion Opportunities. The Company is subject to the
risk that it will be unable to identify and recruit suitable acquisition
candidates in the future. The Company competes for acquisition, affiliation and
other expansion opportunities with national, regional and local PPM companies
and other physician management entities. In addition, certain companies,
including hospital management companies, hospitals and insurers, are expanding
their presence in the PPM market. The Company's failure to compete successfully
for expansion opportunities or to attract and recruit suitable acquisition
candidates could have a material adverse effect on the operating results and
financial condition of the Company. The Company is also subject to the risk that
it will be unable to recruit and retain qualified physicians and other
healthcare professionals to serve as employees or independent contractors of the
Company and its affiliates. See "Business -- Competition".

Integration Risks. Acquisitions of PPM companies and physician practices
entail the risk that such acquisitions will fail to perform in accordance with
expectations and that the Company will be unable to successfully integrate such
acquired businesses and physician practices into its operations. The
profitability of the Company is largely dependent on its ability to develop and
integrate networks of physicians, to manage and control costs and to realize
economies of scale from acquisitions of PPM companies and physician practices.
The histories, geographic location, business models, including emphasis on
managed care and fee-for-service, and cultures of acquired PPM businesses and
physician practices may differ from the Company's past experiences. Dedicating
management resources to the integration process may detract attention from the
day-to-day business of the Company. Moreover, the integration of the acquired
businesses and physician practices may require substantial capital and financial
investments. These, together with other risks described herein, could result in
the incurrence of substantial costs in connection with acquisitions that may
never achieve revenue and profitability levels comparable to the Company's
existing physician networks, which could have a material adverse effect on the
operating results and financial condition of the Company.

The major acquisitions carried out by the Company since January 1995 have
been structured as poolings of interests. As a result, the operating income of
the Company has been reduced by the merger expenses incurred in connection with
those acquisitions, resulting in a net loss for the nine months ended September
30, 1996. The expenses of the Caremark Acquisition are expected to result in a
net loss for the year ended December 31, 1996. There can be no assurance that
future merger expenses will not result in further net losses. Nor can there be
any assurance that there will not be substantial future costs associated with

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integrating acquired companies; that the Company will be successful in
integrating such companies; or that the anticipated benefits of such
acquisitions will be realized fully. The unsuccessful integration of such
companies or the failure of the Company to realize such anticipated benefits
fully could have a material adverse effect on the operating results and
financial condition of the Company. See "-- Risks Relating to Capital
Requirements".

Dependence on HMO Enrollee Growth. The Company is also largely dependent
on the continued increase in the number of HMO enrollees who use its physician
networks. This growth may come from development or acquisition of other PPM
entities, affiliation with additional physicians, increased enrollment in HMOs
currently contracting with the Company through its affiliated physicians and
additional agreements with HMOs. There can be no assurance that the Company will
be successful in identifying, acquiring and integrating additional medical
groups or other PPM companies or in increasing the number of enrollees. A
decline in enrollees in HMOs could have a material adverse effect on the
operating results and financial condition of the Company. The Company is
statutorily and contractually prohibited from controlling any medical decisions
made by a healthcare provider. Accordingly, affiliated physicians may decline to
enter into HMO agreements that are negotiated for them by the Company or may
enter into contracts for the provision of medical services or make other
financial commitments that are not intended to benefit the Company and which,
accordingly, could have a material adverse effect on the operating results and
financial condition of the Company. See "Business -- Operations".

Risks Relating to Capital Requirements. The Company's growth strategy
requires substantial capital for the acquisition of PPM businesses and assets of
physician practices, and for their effective integration, operation and
expansion. Affiliated physician practices may also require capital for
renovation, expansion and additional medical equipment and technology. The
Company believes that its existing cash resources, the use of Common Stock for
selected practice and other acquisitions, and available borrowings under the
$1.0 billion credit facility (the "Credit Facility") with NationsBank, National
Association (South), as administrative bank to a group of lenders, or any
successor credit facility, will be sufficient to meet the Company's anticipated
acquisition, expansion and working capital needs for the next twelve months. The
Company expects from time to time to raise additional capital through the
issuance of long-term or short-term indebtedness or the issuance of additional
equity securities in private or public transactions, at such times as management
deems appropriate and the market allows in order to meet the capital needs of
the Company. There can be no assurance that acceptable financing for future
acquisitions or for the integration and expansion of existing networks can be
obtained. Any of such financings could result in increased interest and
amortization expense, decreased income to fund future expansion and dilution of
existing equity positions.

RISKS RELATING TO CAPITATED NATURE OF REVENUES; CONTROL OF HEALTHCARE COSTS

A substantial portion of the Company's revenue is derived from agreements
with HMOs that provide for the receipt of capitated fees. Under these
agreements, the Company, through its affiliated physicians, is generally
responsible for the provision of all covered outpatient benefits, regardless of
whether the affiliated physicians directly provide the medical services
associated with the covered benefits. The Company is statutorily and
contractually prohibited from controlling any medical decisions made by any
healthcare provider. To the extent that enrollees require more care than is
anticipated or require supplemental medical care that is not otherwise
reimbursed by the HMO, aggregate capitation rates may be insufficient to cover
the costs associated with the treatment of enrollees. If revenue is insufficient
to cover costs, the operating results and financial condition of the Company
could be materially adversely affected. As a result, the Company's success will
depend in large part on the effective management of healthcare costs through
various methods, including utilization management, competitive pricing for
purchased services and favorable agreements with payors. Recently, many
providers, including the Company, have experienced pricing pressures with
respect to negotiations with HMOs. In addition, employer groups are becoming
increasingly successful in negotiating reductions in the growth of premiums paid
for their employees' health insurance, which tends to depress the reimbursement
for healthcare services. At the same time, employer groups are demanding higher
accountability from payors and providers of healthcare services with respect to
measurable accessibility, quality and service. If these trends continue, the
cost of providing physician services could increase while the level of

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reimbursement could grow at a lower rate or could decrease. There can be no
assurance that these pricing pressures will not have a material adverse effect
on the operating results and financial condition of the Company. In addition,
changes in healthcare practices, inflation, new technologies, major epidemics,
natural disasters and numerous other factors affecting the delivery and cost of
healthcare could have a material adverse effect on the operating results and
financial condition of the Company.

The Company's financial statements include estimates of costs for covered
medical benefits incurred by HMO enrollees, but not yet reported. While these
estimates are based on information available at the time of calculation, there
can be no assurance that actual costs will approximate the estimates of such
amounts. If the actual costs significantly exceed the amounts estimated and
accrued, such additional costs could have a material adverse effect on the
operating results and financial condition of the Company.

The HMO agreements often contain shared-risk provisions under which
additional revenue can be earned or economic penalties can be incurred based
upon the utilization of hospital and non-professional services by HMO enrollees.
The Company's financial statements contain accruals for estimates of shared-risk
amounts receivable from or payable to the HMOs that contract with their
affiliated physicians. These estimates are based upon inpatient utilization and
associated costs incurred by HMO enrollees compared to budgeted costs.
Differences between actual contract settlements and amounts estimated as
receivable or payable relating to HMO risk-sharing arrangements are generally
reconciled annually. This may cause fluctuations from amounts previously
accrued. To the extent that HMO enrollees require more care than is anticipated
or require supplemental care that is not otherwise reimbursed by the HMOs,
aggregate capitation rates may be insufficient to cover the costs associated
with the treatment of enrollees. Any such insufficiency could have a material
adverse effect on the operating results and financial condition of the Company.

Physician groups that render services on a fee-for-service basis (as
opposed to a capitated plan) typically bill various third-party payors, such as
governmental programs (e.g., Medicare and Medicaid), private insurance plans and
managed care plans, for the healthcare services provided to their patients. A
significant portion of the revenue of the Company is derived from payments made
by these third-party payors. There can be no assurance that payments under
governmental programs or from other third-party payors will remain at present
levels. In addition, third-party payors can deny reimbursement if they determine
that treatment was not performed in accordance with the cost-effective treatment
methods established by such payors or was experimental or for other reasons. Any
material decrease in payments received from such third-party payors could have a
material adverse effect on the operating results and financial condition of the
Company.

RISKS RELATING TO CERTAIN CAREMARK LEGAL MATTERS

OIG Settlement and Related Claims. Caremark agreed in June 1995 to settle
with the Office of the Inspector General (the "OIG") of the United States
Department of Health and Human Services (the "DHHS"), the Department of Justice
("DOJ"), the Veteran's Administration, the Federal Employee Health Benefits
Program ("FEHBP"), the Civilian Health and Medical Program of the Uniformed
Services ("CHAMPUS") and related state investigative agencies in all 50 states
and the District of Columbia a four-year-long investigation of Caremark (the
"OIG Settlement"). Under the terms of the OIG Settlement, which covered
allegations dating back to 1986, a subsidiary of Caremark pled guilty to two
counts of mail fraud -- one each in Minnesota and Ohio -- resulting in the
payment of civil penalties and criminal fines. The basis of these guilty pleas
was Caremark's failure to provide certain information to CHAMPUS, FEHBP and
federally funded healthcare benefit programs concerning financial relationships
between Caremark and a physician in each of Minnesota and Ohio. See
"Business -- Legal Proceedings".

In its agreement with the OIG and DOJ, Caremark agreed to continue to
maintain certain compliance-related oversight procedures. Should these oversight
procedures reveal credible evidence of legal or regulatory violations, Caremark
is required to report such violations to the OIG and DOJ. Caremark is,
therefore, subject to increased regulatory scrutiny and, in the event it commits
legal or regulatory violations, Caremark may be subject to an increased risk of
sanctions or penalties, including disqualification as a provider of Medicare or
Medicaid services, which would have a material adverse effect on the operating
results and financial condition of the Company.

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<PAGE> 10

In connection with the matters described above relating to the OIG
Settlement, Caremark is a party to various non-governmental claims and may in
the future become subject to additional OIG-related claims. Caremark is a party
to, or the subject of, and may be subjected to in the future, various private
suits and claims (including stockholder derivative actions and an alleged class
action suit) being asserted in connection with matters relating to the OIG
Settlement by Caremark's stockholders, patients who received healthcare services
from Caremark and such patients' insurers. The Company cannot determine at this
time what costs may be incurred in connection with future disposition of
non-governmental claims or litigation. Therefore there can be no assurance that
the ultimate costs of these matters will not exceed such reserve or that
additional costs, claims and damages will not occur. Such additional costs, if
incurred, could have a material adverse effect on the operating results and
financial condition of the Company. See "Business -- Legal Proceedings", Note 14
to the consolidated financial statements of the Company and Note 5 to the
unaudited consolidated financial statements of the Company incorporated herein
by reference.

In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's competitors in the alternate site infusion
therapy industry, filed a complaint against Caremark, a subsidiary of Caremark,
and two other corporations in the United States District Court for the District
of Hawaii alleging violations of the federal conspiracy laws, the antitrust laws
and of California's unfair business practices statute. The complaint seeks
unspecified treble damages, and attorneys' fees and expenses. The Company
intends to defend this case vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance, that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.

Private Payor Settlements. In March 1996, Caremark agreed to settle all
disputes with a number of private payors. These disputes relate to businesses
that were covered by the OIG Settlement. The settlements resulted in an
after-tax charge of approximately $42.3 million. In addition, the Company paid
$23.3 million after-tax to cover the private payors' pre-settlement and
settlement-related expenses. An after-tax charge for the above amounts was
recorded in first quarter 1996 discontinued operations.

Coram Litigation. On September 11, 1995, Coram Healthcare Corporation
("Coram") filed a complaint in the San Francisco Superior Court against Caremark
and its subsidiary, Caremark Inc., and 50 unnamed individual defendants. The
complaint, which arises from Caremark's sale to Coram of Caremark's home
infusion therapy business in April 1995, for approximately $209.0 million in
cash and $100.0 million in securities, alleges breach of the Asset Sale and Note
Purchase Agreement, dated January 29, 1995, as amended April 1, 1995, between
Coram and Caremark, breach of related contracts, fraud, negligent
misrepresentation and a right to contractual indemnity. Requested relief in
Coram's amended complaint includes specific performance, declaratory relief,
injunctive relief and damages of $5.2 billion. Caremark filed counterclaims
against Coram in this lawsuit and also filed a lawsuit in the United States
District Court in Chicago claiming that Coram committed securities fraud in its
sale to Caremark of its securities in connection with the sale of Caremark's
home infusion business to Coram. The lawsuit filed in federal court in Chicago
has been dismissed, and Caremark's appeal of the dismissal was argued on May 10,
1996 and is now under submission. Coram's lawsuit is currently in the discovery
phase. In October 1996, Coram agreed to merge with Integrated Health Services,
Inc. ("IHS"). In connection with the merger agreement, IHS and the Company have
agreed to a settlement of the Coram litigation, contingent upon consummation of
the proposed merger, expected to be completed in the first quarter of 1997.
Under the settlement proposal, the notes that are now payable by Coram to
Caremark will be cancelled and replaced with a new two-year note in the
principal amount of $57.5 million. Caremark had previously established a reserve
for a portion of the $100 million in securities, and, therefore, the terms of
the new note will not require any additional charge against earnings by the
Company.

MedPartners and ISH/Coram will enter into long-term preferred provider
agreements pursuant to which IHS/Coram will provide services to the patients
served by MedPartners' integrated delivery systems on a national basis.
MedPartners understands that the acquisition of Coram by IHS is subject to the
usual

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<PAGE> 11

conditions found in transactions of this type, including approval of the
stockholders of both companies, and is expected to be consummated early in the
first quarter of 1997. The Company has no control over the conduct of the
IHS/Coram transaction, and there can be no assurance that it will be
consummated.

Caremark Acquisition Litigation. In May 1996, two stockholders, each
purporting to represent a class, filed complaints against Caremark and each of
its directors in the Court of Chancery of the State of Delaware alleging
breaches of the directors' fiduciary duty in connection with Caremark's then
proposed merger with the Company. The complaints seek unspecified damages,
injunctive relief, and attorneys' fees and expenses. The Company believes these
complaints will not have a material adverse effect on the operating results and
financial condition of the Company. See "Business -- Legal Proceedings" and Note
17 to the consolidated financial statements of the Company.

RISKS RELATING TO EXPOSURE TO PROFESSIONAL LIABILITY; LIABILITY INSURANCE

In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice and related legal theories. Many of these lawsuits
involve large claims and substantial defense costs. Although the Company does
not engage in the practice of medicine or provide medical services, or control
the practice of medicine by its affiliated physicians or the compliance with
regulatory requirements directly applicable to the affiliated physicians and
physician groups, there can be no assurance that the Company will not become
involved in such litigation in the future. Through the Company's ownership and
operation of Pioneer Hospital ("Pioneer Hospital"), U.S. Family Care Medical
Center ("USFMC") and Friendly Hills Hospital ("Friendly Hills"), the Company
could be subject to allegations of negligence and wrongful acts by its
hospital-based physicians or arising out of providing nursing care, emergency
room services, credentialing of medical staff members and other activities
incident to the operation of acute care hospitals. In addition, through its
management of clinic locations and provision of non-physician healthcare
personnel, the Company could be named in actions involving care rendered to
patients by physicians employed by or contracting with affiliated medical
organizations and physician groups.

The Company maintains professional and general liability insurance.
Nevertheless, certain types of risks and liabilities are not covered by
insurance and there can be no assurance that the limits of coverage will be
adequate to cover losses in all instances. In addition, the Company's practice
management agreements require the affiliated physicians to maintain professional
liability insurance coverage on their practice and on each employee and agent of
the practice, and the Company generally is indemnified under each of the
practice management agreements by the affiliated physicians for liabilities
resulting from the performance of medical services. There can be no assurance
that a future claim or claims will not exceed the limits of available insurance
coverages or that indemnification will be available for all such claims. See
"Business -- Corporate Liability and Insurance".

GOVERNMENT REGULATION

Federal and state laws regulate the relationships among providers of
healthcare services, physicians and other clinicians. These laws include the
fraud and abuse provisions of the Medicare and Medicaid statutes, which prohibit
the solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for
recommendation, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services, as well as laws that impose significant penalties for
false or improper billings for physician services. These laws also impose
restrictions on physicians' referrals for designated health services to entities
with which they have financial relationships. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare and Medicaid programs. Such exclusion and penalties, if applied to the
Company's affiliated physicians, could result in significant loss of
reimbursement.

Moreover, the laws of many states, including California (from which a
significant portion of the Company's revenues are derived), prohibit physicians
from splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine. These laws and their interpretations vary from state to
state

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<PAGE> 12

and are enforced by the courts and by regulatory authorities with broad
discretion. As stated in Note 1 to the consolidated financial statements of the
Company incorporated herein by reference, the Company believes that it has
perpetual and unilateral control over the assets and operations of the various
affiliated professional corporations. There can be no assurance that regulatory
authorities will not take the position that such control conflicts with state
laws regarding the practice of medicine or other federal restrictions. Although
the Company believes its operations as currently conducted are in material
compliance with existing applicable laws, there can be no assurance that the
existing organization of the Company and its contractual arrangements with
affiliated physicians will not be successfully challenged as constituting the
unlicensed practice of medicine or that the enforceability of the provisions of
such arrangements, including non-competition agreements, will not be limited.
There can be no assurance that review of the business of the Company and its
affiliates by courts or regulatory authorities will not result in a
determination that could adversely affect their operations or that the
healthcare regulatory environment will not change so as to restrict existing
operations or expansion thereof. In the event of action by any regulatory
authority limiting or prohibiting the Company or any affiliate from carrying on
its business or from expanding the operations of the Company and its affiliates
to certain jurisdictions, structural and organizational modifications of the
Company may be required, which could have a material adverse effect on the
operating results and financial condition of the Company.

In addition to the regulations referred to above, significant aspects of
the Company's operations are subject to state and federal statutes and
regulations governing workplace health and safety, the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances and the
disposal of medical waste. The Company's operations may also be affected by
changes in ethical guidelines and operating standards of professional and trade
associations and private accreditation commissions such as the American Medical
Association and the Joint Commission on Accreditation of Healthcare
Organizations. Accordingly, changes in existing laws and regulations, adverse
judicial or administrative interpretations of such laws and regulations or
enactment of new legislation could have a material adverse effect on the
operating results and financial condition of the Company. See "-- Risks Relating
to Pharmacy Licensing and Operation".

As of September 30, 1996, approximately 5% of the revenues of the Company's
affiliated physician groups is derived from payments made by
government-sponsored healthcare programs (principally, Medicare and state
reimbursed programs). As a result, any change in reimbursement regulations,
policies, practices, interpretations or statutes could adversely affect the
operations of the Company. There are also state and federal civil and criminal
statutes imposing substantial penalties (including civil penalties and criminal
fines and imprisonment) on healthcare providers that fraudulently or wrongfully
bill governmental or other third-party payors for healthcare services. The
Company believes it is in material compliance with such laws, but there can be
no assurance that the Company's activities will not be challenged or scrutinized
by governmental authorities or that any such challenge or scrutiny would not
have a material adverse effect on the operating results and financial condition
of the Company.

Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute", prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. The Anti-Kickback Statute contains
provisions prescribing civil and criminal penalties to which individuals or
providers who violate such statute may be subjected. The criminal penalties
include fines up to $25,000 per violation and imprisonment for five years or
more. Additionally, the DHHS has the authority to exclude anyone, including
individuals or entities, who has committed any of the prohibited acts from
participation in the Medicare and Medicaid programs. If applied to the Company
or any of its subsidiaries or affiliated physicians, such exclusion could result
in a significant loss of reimbursement for the Company, up to a maximum of the
approximately 5% of revenues derived from such programs, which could have a
material adverse effect on the operating results and financial condition of the
Company. Although the Company believes that it is not in violation of the
Anti-kickback Statute or similar state statutes, its operations do not fit
within any of the existing or proposed federal safe harbors.

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<PAGE> 13

Significant prohibitions against physician referrals were enacted by the
federal Omnibus Budget Reconciliation Act of 1993. Subject to certain
exemptions, a physician or a member of his immediate family is prohibited from
referring Medicare or Medicaid patients to an entity providing "designated
health services" in which the physician has an ownership or investment interest
or with which the physician has entered into a compensation arrangement. While
the Company believes it is in compliance with such legislation, future
regulations could require the Company to modify the form of its relationships
with physician groups. Some states have also enacted similar self-referral laws,
and the Company believes it is likely that more states will follow. The Company
believes that its practices fit within exemptions contained in such statutes.
Nevertheless, expansion of the operations of the Company into certain
jurisdictions may require structural and organizational modifications of the
Company's relationships with physician groups to comply with new or revised
state statutes. Such structural and organizational modifications could have a
material adverse effect on the operating results and financial condition of the
Company.

The Knox-Keene Health Care Service Plan Act of 1975 (the "Knox-Keene Act")
and the regulations promulgated thereunder subject entities which are licensed
as healthcare service plans in California to substantial regulation by the
California Department of Corporations (the "DOC"). In addition, licensees under
the Knox-Keene Act are required to file periodic financial data and other
information (which generally become available to the public), maintain
substantial tangible net equity on their balance sheets and maintain adequate
levels of medical, financial and operational personnel dedicated to fulfilling
the licensee's statutory and regulatory requirements. The DOC is empowered by
law to take enforcement actions against licensees that fail to comply with such
requirements. On March 5, 1996, the DOC issued to Pioneer Provider Network, Inc.
("PPN"), a wholly-owned subsidiary of the Company, a healthcare service plan
license (the "Restricted License"). PPN is a recently created organization
without an operating history, and there is no assurance that the DOC will view
PPN's operations to be fully in compliance with applicable laws, including the
Knox-Keene Act, and regulations. Any material non-compliance could have a
material adverse effect on the operating results and financial condition of the
Company.

RISKS RELATING TO PHARMACY LICENSING AND OPERATION

The Company is subject to federal and state laws and regulations governing
pharmacies. Federal controlled substance laws require the Company to register
its pharmacies with the United States Drug Enforcement Administration and comply
with security, record-keeping, inventory control and labeling standards in order
to dispense controlled substances. State controlled substance laws require
registration and compliance with the licensing, registration or permit standards
of the state pharmacy licensing authority. State pharmacy licensing,
registration and permit laws impose standards on the qualifications of the
applicant's personnel, the adequacy of its prescription fulfillment and
inventory control practices and the adequacy of its facilities. In general,
pharmacy licenses are renewed annually. Pharmacists must also satisfy state
licensing requirements. Any failure to satisfy such pharmacy licensing statutes
and regulations could have a material adverse effect on the operating results
and financial condition of the Company.

RISKS RELATING TO HEALTHCARE REFORM

As a result of the continued escalation of healthcare costs and the
inability of many individuals to obtain health insurance, numerous proposals
have been, and other proposals may be, introduced in the United States Congress
and state legislatures relating to healthcare reform. There can be no assurance
as to the ultimate content, timing or effect of any healthcare reform
legislation, nor is it possible at this time to estimate the impact of potential
legislation, which may be material, on the Company.

ANTI-TAKEOVER CONSIDERATIONS

Certain provisions of the Company's Second Amended and Restated Certificate
of Incorporation, as amended (the "Certificate of Incorporation"), the Company's
Second Amended and Restated By-laws (the "By-laws") and the Delaware General
Corporation Law ("DGCL") could, together or separately, discourage potential
acquisition proposals, delay or prevent a change in control of the Company.
These provisions include a classified Board of Directors and the issuance,
without further stockholder approval, of preferred stock with

10
<PAGE> 14

rights and privileges which could be senior to the Company's Common Stock. The
Company also is subject to Section 203 of the DGCL, which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested stockholder" for a period of
three years following the date that such stockholder became an interested
stockholder. In addition, the Company Rights Plan (as defined herein), which
provides for discount purchase rights to certain stockholders of the Company
upon certain acquisitions of 10% or more of the outstanding shares of the
Company's Common Stock, may also inhibit a change in control of the Company.

POSSIBLE VOLATILITY OF STOCK PRICE

There may be significant volatility in the market price for the Common
Stock. Quarterly operating results of the Company, changes in general conditions
in the economy, the financial markets or the healthcare industry, or other
developments affecting the Company or its competitors, could cause the market
price of the Common Stock to fluctuate substantially. In addition, in recent
years, the stock market and, in particular, the healthcare industry segment, has
experienced significant price and volume fluctuations. This volatility has
affected the market prices of securities issued by many companies for reasons
unrelated to their operating performance.

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<PAGE> 15

BUSINESS

GENERAL

The Company, with annualized revenues of approximately $4.7 billion as of
September 30, 1996, is the largest PPM company in the United States. The Company
develops, consolidates and manages integrated healthcare delivery systems.
Through its network of affiliated group and IPA physicians, the Company provides
primary and specialty healthcare services to prepaid managed care enrollees and
fee-for-service patients. The Company also operates one of the largest
independent PBM programs in the United States and provides disease management
services and therapies for patients with certain chronic conditions. As of
September 30, 1996, the Company operated in 26 states and was affiliated with
approximately 8,000 physicians, including approximately 2,500 in group
practices, 4,550 through IPA relationships and 950 who were hospital-based,
providing healthcare to approximately 1.5 million prepaid enrollees.

The Company affiliates with physicians who are seeking the resources
necessary to function effectively in healthcare markets that are evolving from
fee-for-service to managed care payor systems. The Company enhances clinic
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
The Company provides affiliated physicians with access to capital and to
advanced management information systems. In addition, the Company contracts with
HMOs, as well as hospitals and outside providers on behalf of its affiliated
physicians. These relationships provide physicians with the opportunity to
operate under a variety of payor arrangements and to increase their patient
flow.

The Company's PPM revenue is derived from the provision of fee-for-service
medical services and from contracts with HMOs that compensate the Company and
its affiliated physicians on a prepaid basis. In the prepaid arrangements, the
Company, through its affiliated physicians, typically is paid by the HMO a fixed
amount per member ("enrollee") per month ("professional capitation") or a
percentage of the premium per member per month ("percent of premium") paid by
employer groups and other purchasers of healthcare coverage to the HMOs. In
return, the Company, through its affiliated physicians, is responsible for
substantially all of the medical services required by enrollees. In many
instances, the Company and its affiliated physicians accept financial
responsibility for hospital and ancillary healthcare services in return for
payment from HMOs on a capitated or percent of premium basis ("institutional
capitation"). In exchange for these payments (collectively, "global
capitation"), the Company, through its affiliated physicians, provides the
majority of covered healthcare services to enrollees and contracts with
hospitals and other healthcare providers for the balance of the covered
services.

The Company offers medical group practices and independent physicians a
range of affiliation models. These affiliations are carried out by the
acquisition of PPM entities or physician practices and related assets, either
for cash or through an equity exchange, or by affiliation on a contractual
basis. In all instances, the Company enters into long-term practice management
agreements with the affiliated physicians that provide for the management of the
practices by the Company while at the same time providing for the clinical
independence of the physicians.

The Company also manages outpatient prescription drug benefit programs for
more than 1,300 clients throughout the United States, including corporations,
insurance companies, unions, government employee groups and managed care
organizations. The Company dispenses 42,000 prescriptions daily through four
mail service pharmacies and manages patients' immediate prescription needs
through a network of approximately 53,000 retail pharmacies. The Company is in
the process of integrating the PBM program with the PPM business by providing
pharmaceutical services to affiliated physicians, clinics and HMOs. The
Company's disease management services are intended to meet the healthcare needs
of individuals with chronic diseases or conditions. These services include the
design, development and management of comprehensive programs that comprise drug
therapies, physician support and patient education. The Company currently
provides therapies and services for individuals with such conditions as
hemophilia, growth disorders, immune deficiencies, genetic emphysema, cystic
fibrosis and multiple sclerosis.

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<PAGE> 16

ACQUISITION PROGRAM

The Company believes it is the leading consolidator in the PPM industry.
The Company's strategy is to develop locally prominent, integrated healthcare
delivery networks that provide high quality, cost-effective healthcare in
selected geographic markets. The Company implements this strategy through growth
in its existing markets, expansion into new markets through acquisitions and
affiliations and through the implementation of comprehensive healthcare
solutions for patients, physicians and payors. In connection with pursuing its
strategy, the Company creates strategic alliances with hospital partners and
HMOs. As an integral element of these alliances, the Company utilizes
sophisticated information systems to improve the operational efficiency of, and
reduce the operating costs associated with the Company's network and the
practices of the affiliated physicians. The Company's principal methods of
expansion are the acquisition of PPM businesses and affiliations with physician
and medical groups.

In September 1996, the Company acquired Caremark, a publicly traded PPM and
PBM company based in Northbrook, Illinois, in exchange for approximately 90.6
million shares of Common Stock having a total value of $1.8 billion, creating
the largest PPM company in the United States. Caremark provides PPM services to
approximately 1,000 affiliated physicians.

In November 1995, the Company acquired MME, a privately held PPM entity
based in Long Beach, California, in exchange for approximately 13.5 million
shares of Common Stock having a total value of approximately $384.1 million. MME
provides PPM services to approximately 400 group and 3,100 IPA physicians. In
February 1996, the Company acquired PPSI, a publicly traded PPM company based in
Redlands, California, in exchange for approximately 11.0 million shares of
Common Stock having a total value of $341.8 million. PPSI provided PPM services
to approximately 710 group and 100 IPA physicians. PPSI acquired Team Health,
based in Knoxville, Tennessee, in June 1995. Team Health primarily manages
physicians and other healthcare professionals engaged in the delivery of
emergency medicine and hospital based primary care.

On January 20, 1997, the Company entered into and executed an Agreement and
Plan of Merger by and between the Company, the Subsidiary and InPhyNet relating
to the merger of InPhyNet with and into the Subsidiary. The Merger is expected
to be accounted for as a pooling of interests under generally accepted
accounting practices and is expected to qualify for treatment as a tax-free
reorganization under Section 368(a) of the Code. The Merger is subject to
certain conditions typical for transactions of this kind.

INDUSTRY

The Health Care Financing Administration ("HCFA") estimates that national
healthcare spending in 1995 was in excess of $1 trillion, with physicians
controlling more than 80% of the overall expenditures. The American Medical
Association reports that approximately 565,000 physicians are actively involved
in patient care in the United States, with a growing number participating in
multi-specialty or single-specialty groups. Expenditures directly attributable
to physicians is estimated at $246 billion.

Concerns over the cost of healthcare have resulted in the increasing
prominence of managed care. As markets evolve from traditional fee-for-service
medicine to managed care, HMOs and healthcare providers confront market
pressures to provide high quality healthcare in a cost-effective manner.
Employer groups have begun to bargain collectively in an effort to reduce
premiums and to bring about greater accountability of HMOs and providers with
respect to accessibility, choice of provider, quality of care and other
indicators of consumer satisfaction. The focus on cost-containment has placed
small to mid-sized physician groups and solo practices at a disadvantage because
they typically have higher operating costs and little purchasing power with
suppliers, they often lack the capital to purchase new technologies that can
improve quality and reduce costs

13
<PAGE> 17

and they do not have the cost accounting and quality management systems
necessary for entry into sophisticated risk-sharing contracts with payors.

Industry experts expect that the medical delivery system may evolve into a
system where the primary care physician manages and directs healthcare
expenditures. As a result of these developments, primary care physicians have
increasingly become the conduit for the delivery of medical care by acting as
"case managers" and directing referrals to certain specialists, hospitals,
alternate-site facilities and diagnostic facilities. By contracting directly
with payors, organizations that control primary care physicians are able to
reduce the administrative overhead expenses incurred by HMOs and insurers and
thereby reduce the cost of delivering medical services.

As a result of the trends toward increased HMO enrollment and physician
membership in group medical practices, healthcare providers have sought to
reorganize themselves into healthcare delivery systems that are better suited to
the managed care environment. Physician groups and IPAs are joining with
hospitals, pharmacies and other institutional providers in various ways to
create vertically integrated delivery systems that provide medical and hospital
services ranging from community-based primary medical care to specialized
inpatient services. These healthcare delivery systems agree with HMOs to provide
hospital and medical services to enrollees pursuant to full risk contracts.
Under these contracts, providers assume the obligation to provide both the
professional and institutional components of covered healthcare services to the
HMO enrollees.

In order to compete effectively in such an emerging environment, the
Company believes many physicians are concluding that they must obtain control
over the delivery and financial impact of a broader range of healthcare services
through global capitation. To this end, groups of independent physicians and
medium to large medical groups are taking steps to assume responsibility and
risk for healthcare services that they do not provide, such as hospitalization
and pharmacy services. Physicians are increasingly abandoning traditional
private practice in favor of affiliations with larger organizations, such as the
Company, that offer skilled and innovative management, sophisticated information
systems and capital resources. Many payors and their intermediaries, including
governmental entities and HMOs, are increasingly looking to outside providers of
physician and pharmacy services to develop and maintain quality outcomes,
management programs and patient care data. In addition, such payors and
intermediaries look to share the risk of providing healthcare services through
capitation arrangements that provide for fixed payments for patient care over a
specified period of time. While the acceptance of greater responsibility and
risk provides the opportunity to retain and enhance market share and operate at
a higher level of profitability, medical groups and independent physicians are
concluding that the acceptance of global capitation carries with it significant
requirements for infrastructure, information systems, capital, network resources
and financial and medical management. Physicians are increasingly turning to
organizations such as the Company to provide the resources necessary to function
effectively in a managed care environment.

STRATEGY

The Company's strategy is to develop locally prominent, integrated
healthcare delivery networks that provide high quality, cost-effective
healthcare in selected geographic markets. The key elements of this strategy are
as follows:

Expansion of Existing Markets. The Company's principal strategy for
expanding its existing markets is through the acquisition of, or
affiliation with, physicians and medical groups within those markets. The
Company seeks to acquire or otherwise affiliate with physician groups, IPAs
and other providers with significant market shares in their local markets
and established reputations for providing quality medical care. The Company
also develops multi-specialty physician networks that are designed to meet
the specific medical needs of a targeted geographic market. The Company
seeks to further enhance its existing market share by increasing enrollment
and fee-for-service business in its existing affiliated practices and IPAs.
The Company anticipates further internal growth by expanding more of its
payor contracts to global capitation through PPN. Additionally, the Company
believes that increasing

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<PAGE> 18

marketing activities, enhancing patient service and improving the
accessibility of care will also increase the Company's market share.

Expansion into New Markets. The Company expands into new markets
through the acquisition of or affiliation with other PPM entities and
medical groups. The Company believes it is a leading consolidator in the
PPM industry and that the MME acquisition was the first major consolidation
in the industry, followed by the merger with PPSI and the Caremark
Acquisition. As a result of the consolidation of physician practices and
the entry of other PPM companies into the market, the Company's management
has determined that it is important for the Company to continue its rate of
expansion through acquisitions and mergers. The Company believes that by
concentrating on larger acquisitions and continuing to expand its core of
physician groups and IPAs, as well as its network of hospital affiliations,
it will create vertically integrated healthcare delivery systems and
enhance its competitive position. The Company continually reviews potential
acquisitions and physician affiliations and is currently in preliminary
negotiations with various candidates.

Integration of PPM and PBM Services. The Company believes that there
is significant opportunity for growth through the integration of the PBM
program and the PPM business. The Company expects PBM activity to increase
as payors seek to shift the responsibility of pharmacy services to PPM
entities and physician groups, and such entities turn to prescription
benefit managers to control pharmaceutical costs. The Company expects its
PBM program to grow as enrollees and fee-for-service patients use the
Company's mail-order and retail pharmacy networks. In addition, the Company
expects to expand its PBM contracts with managed care organizations for
capitated pharmaceutical services for its prepaid enrollees.

Strategic Alliances. The Company believes that strategic alliances
with hospitals and health plans improve the delivery of managed healthcare.
The Company has entered into arrangements with various hospitals under
which a portion of the capitation revenue received from HMOs for
institutional care of enrollees assigned to designated the Company clinics
and IPA physicians is deposited into "subcapitated risk pools" managed by
the Company. The Company believes that such arrangements can be enhanced
through the implementation of the Restricted License held by PPN. Under
these arrangements, the hospital is at risk in the event that the costs of
institutional care exceed the available funds and the Company shares in
cost savings and revenue enhancements. The Company believes that through
these and other similar alliances, the providers will devote greater
resources to ensuring the wellness of HMO enrollees, provide high-quality
and cost-effective care and seek to retain and expand their respective
market shares. As a result, it is anticipated that the overall cost of
providing care will be contained, rendering both the Company and the
participating providers more appealing to both HMOs and medical care
consumers. The Company and its affiliated physicians have also established
relationships with HMOs pursuant to which the Company and the HMOs share
proportionately in the risks and rewards of market trends.

Sophisticated Information Systems. The Company believes that
information technology is critical to the growth of integrated healthcare
delivery systems and that the availability of detailed clinical data is
fundamental to quality control and cost containment. The Company develops
and maintains sophisticated management information systems that collect and
analyze clinical and administrative data. These systems allow the Company
to effectively control overhead expenses, maximize reimbursement and
provide effective utilization management. The Company evaluates the
administrative and clinical functions of affiliated practices and
re-engineers these functions as appropriate in conjunction with the
implementation of the Company's management information systems to maximize
the benefits of those systems.

The Company also utilizes a sophisticated database to provide
pharmaceutical-related information to participating physicians, payors,
affiliated physician practices and other specialty service entities. The
database is designed to provide a safe and effective method for
distributing and administering drugs and drug therapies.

Increased Operational Efficiencies and Cost Reductions. The Company
is seeking to increase its operating efficiency through expansion of its
market area and number of HMO enrollees, refinement of its

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utilization management programs that deliver information used by
participating physicians to monitor and improve their practice patterns,
increased specialization, development of additional in-house services and
increased emphasis on outpatient care. The Company's physician networks
attempt to achieve economies of scale through centralizing billing,
scheduling, information management and other functions.

OPERATIONS

Prior to affiliation with MME in November 1995, the Company concentrated
its PPM development efforts in the southeastern United States, affiliating
primarily with physician groups that practice on a fee-for-service basis. With
the MME, PPSI and Caremark organizations, the Company acquired additional
business models, specifically designed to operate efficiently in the capitated
managed care environment. These business models, which are replicable and
flexible, allow the Company to capitalize on the full range of market
opportunities in the PPM industry and enable the Company to build integrated
physician networks attractive to payors of all types. The Company has networks
currently under development in 25 states.

To meet payor demand for price competitive, quality services, the Company
utilizes a market-based approach that incorporates primary care and specialty
physicians into a network of providers serving a targeted geographic area. The
Company engages in research activities and market analysis to determine the
network configuration for a particular market. Primary care includes family
practice, internal medicine, pediatrics and obstetrics/gynecology. Key
specialties include orthopedics, cardiology, oncology, radiology, neurosciences,
urology, surgery, ear, nose and throat and ophthalmology. At certain locations,
affiliated physicians and support personnel operate centers for diagnostic
imaging, urgent care, cancer management, mental health treatment and health
education. Network physicians also treat fee-for-service patients on a
per-occurrence basis. After-hours care is available in several of the Company's
clinics. Each network is configured to contain, when complete, the physician
services necessary to capture at least 10% of market share and to provide at
least 90% of the physician services required by payors. The Company markets its
networks to managed care and third-party payors, referring physicians and
hospitals.

Affiliated Physicians. The relationship between the Company and its
affiliated physicians is set forth in asset purchase and practice management
agreements. Through the asset purchase agreement, the Company acquires the
assets utilized in the practice and may also assume certain leases and other
contracts of the physician group. Under a practice management agreement, a
physician group delegates to the Company administrative, management and support
functions required in connection with its medical practice. The Company provides
the physician group with the equipment and facilities used in its medical
practice, manages practice operations and employs substantially all of the
practice's non-physician personnel, except certain allied health professionals,
such as nurses and physical therapists. See also Notes 1 and 10 to consolidated
financial statements of the Company incorporated by reference herein.

Pursuant to the practice management agreement, the affiliated professional
corporation assigns to the Company, or otherwise grants control over, all or
substantially all its rights and interest in the revenue it receives. In return
for providing services pursuant to such agreement, the physicians receive
compensation, as negotiated, either as a fixed percentage of net revenues, a
pre-determined salary and incentive arrangement, or an arrangement based
directly on the profitability of the practice. The Company works closely with
affiliated physicians in targeting and recruiting physicians and in merging sole
practice or single specialty groups into the affiliated physician groups. The
Company seeks to recognize and develop opportunities to provide services
throughout a market by positioning its practices so that the entire market is
covered geographically. This approach provides patients with convenient medical
facilities and services and responds to coverage criteria essential to payors.
See Note 1 to consolidated financial statements of the Company incorporated by
reference herein.

IPAs. The Company's networks include approximately 4,550 primary care and
specialist IPA physicians serving approximately 185,000 HMO enrollees. An IPA
allows individual practitioners to access patients in their area through
contracts with HMOs without having to join a group practice or sign exclusive
contracts and also coordinates utilization review and quality assurance programs
for its affiliated physicians. In addition to providing access to HMO contracts,
an IPA offers other benefits to physicians seeking to remain

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independent, including economies of scale in the marketplace, enhanced
risk-sharing arrangements and access to other strategic alliances. The Company
identifies IPAs that need access to capitated HMO contracts, and such IPA
organizations typically agree to assign their existing HMO contracts to the
Company. The Company believes that the expansion of its IPAs will enable it to
increase its market share with relatively low risk because of the low
incremental investment required to recruit additional physicians.

HMOs. The Company, through its affiliated physicians, began contracting
with HMOs to provide healthcare on a capitated reimbursement basis in 1975
(through predecessors). Under these contracts, which typically are automatically
renewed on an annual basis, the Company provides virtually all covered medical
services and receives a fixed monthly capitation payment from HMOs for each
member who chooses an affiliated physician as his or her primary care physician.
The capitation amount may be fixed, based upon a percentage of premium, or
adjusted based on the age and/or sex of the HMO enrollee. Contracts for prepaid
healthcare with HMOs accounted for approximately 32% of the Company's pro forma
combined net revenue for the nine months ended September 30, 1996.

To the extent that enrollees require more care than is anticipated or
require supplemental medical care that is not otherwise reimbursed by HMOs or
other payors, aggregate capitation payments may be insufficient to cover the
costs associated with the treatment of enrollees. Stop-loss coverage is
maintained, which mitigates the effect of occasional high utilization of
healthcare services. As of September 30, 1996, over 1.5 million prepaid HMO
enrollees were covered beneficiaries for professional services in the Company's
network. These patients are covered under either commercial (typically
employer-sponsored) or senior (Medicare-funded) HMOs. Higher capitation rates
are typically received for senior patients because their medical needs are
generally greater. Consequently, the cost of their covered care is higher. As of
September 30, 1996, the Company's HMO enrollees comprised approximately 1.3
million commercial enrollees and approximately 0.1 million senior (over age 65)
enrollees and approximately 0.1 million Medicaid and other enrollees. As of
September 30, 1996, the Company was receiving institutional capitation payments
for approximately 0.6 million enrollees.

Hospitals. The Company operates Pioneer Hospital, a 99-bed acute care
hospital located in Artesia, California, USFMC, a 102-bed acute care hospital in
Montclair, California, and Friendly Hills, a 274-bed acute care hospital in La
Habra, California. Many of the physicians on professional staff rosters of these
hospitals are either employed by an affiliated professional corporation or under
contract with the Company's IPAs. The traditional hospital-based physicians,
such as emergency room physicians, anesthesiologists, pathologists, radiologists
and cardiologists provide services through contractual arrangements. Several of
the Company's medical clinics are located sufficiently close to these hospitals
to allow enrollees who utilize these clinics to also use these hospitals. Under
the HMO contracts, the Company, through its affiliated medical groups or
Knox-Keene licensee, is obligated to pay for inpatient hospitalization and
related services. Over 50% of Pioneer Hospital's and approximately 85% of
USFMC's daily census is made up of the Company's affiliated medical group
enrollees. Approximately 87% of Friendly Hills' daily census is comprised of the
Company's affiliated medical group enrollees. The Company, through its
Knox-Keene licensee or affiliated medical groups, has entered into agreements
with other hospitals in California for the delivery of hospital services to the
remainder of its enrollees. In each instance, the institutional capitation
payments received from HMOs are placed at risk for the benefit of the applicable
hospital, the Company and its affiliated physicians, to the extent such services
have not reached a stop-loss threshold. The Company and these providers split
any savings realized if hospital utilization declines due to the success of the
Company's programs for early intervention, wellness and outpatient treatment.

Pharmaceutical Services. The Company manages outpatient PBM programs
throughout the United States for corporations, insurance companies, unions,
government employee groups and managed care organizations. Prescription drug
benefit management involves the design and administration of programs for
reducing the costs and improving the safety, effectiveness and convenience of
prescription drugs. The Company has one of the largest independent PBM programs,
dispensing 42,000 prescriptions daily from four mail service pharmacies. The
Company also manages patients' immediate prescription needs through a network of
approximately 53,000 retail pharmacies. Under the Company's PBM quality
assurance program, the Company maintains rigorous quality assurance and
regulatory policies and procedures. A computerized

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order processing system reviews each prescription order for a variety of
potential concerns, including reactions with other drugs known to be prescribed
to that patient, reactions with a patient's known allergies, duplication of
therapies, appropriateness of dosage and early refill requests that may indicate
overutilization or fraud. Each prescription is verified by a licensed pharmacist
before shipment. The Company has retained the services of an independent
national advisory panel of physician specialists that advises it on the clinical
analysis of its intervention strategies and on cost-effective clinical
procedures. The Company offers a full range of drug cost and clinical management
services, including clinical case management, drug utilization review, formulary
management and customized prescription programs for senior citizens.

Disease Management. The Company delivers comprehensive long-term support
for high-cost, chronic illnesses in an effort to improve outcomes for patients
and to lower costs. The Company believes that these programs efficiently provide
for a patient's entire healthcare needs. The programs utilize advanced protocols
and eliminate unnecessary procedural steps. The Company provides therapies and
services to individuals with such conditions as hemophilia, growth disorders,
immune deficiencies, genetic emphysema, cystic fibrosis and multiple sclerosis.
The Company estimates that there are over 200,000 patients in the United States
suffering from these diseases. The Company's disease management services utilize
the Company's integrated health data to develop therapies to manage the high
cost of treating these patients.

Hospital-Based Physician Operations. The Company's Hospital-Based
Physician ("HBP") operations organize and manage physicians and other healthcare
professionals engaged in the delivery of emergency, radiology and teleradiology
services, hospital-based primary care and temporary staffing and support
services to hospitals, clinics, managed care organizations and physician groups.
Team Health currently serves 126 hospital emergency departments and 15 hospital
radiology departments in 18 states. Under contracts with hospitals and other
clients, the Company's HBP operations identify and recruit physicians and other
healthcare professionals for admission to a client's medical staff, monitor the
quality of care and proper utilization of services and coordinate the ongoing
scheduling of staff physicians who provide clinical coverage in designated areas
of care. Hospitals have found it increasingly difficult to recruit, schedule,
retain and appropriately compensate hospital-based physician specialists
required to operate hospital emergency, radiology and other departments. As a
consequence, a large number of hospitals have turned to contract management
firms as a more cost-effective and reliable alternative to the development of
in-house physician staffing.

INFORMATION SYSTEMS

The Company develops and maintains integrated information systems to
support its growth and acquisition plans. The Company's overall information
systems design is open, modular and flexible. The Company has implemented a
flexible individual patient electronic medical record ("EMR") that is
continually updated to complement primary practice management and billing
functions. The Company has configured its systems to give affiliated physicians
and their staff efficient and rapid access to complex clinical data. The
Company's use of the EMR enhances operational efficiencies through automation of
many routine clinical functions, as well as the capacity to link
"physician-specific" treatment protocols by diagnosis. This allows physicians to
have treatments checked against pre-defined protocols at the time of service.
The Company also utilizes a sophisticated database to provide
pharmaceutical-related information to participating physicians, payors,
affiliated physician practices and other specialty service entities. The
database is designed to provide a safe and effective method for distributing and
administering drugs and drug therapies.

Effective and efficient access to key clinical patient and pharmaceutical
data is critical in obtaining quality outcomes and improving costs as the
Company enters into more capitation contracts. The Company utilizes its existing
information systems to measure patient care satisfaction and outcomes of care,
improve productivity, manage complex reimbursement procedures and integrate
information from multiple facilities throughout the care spectrum. These systems
allow the Company to analyze clinical and cost data to determine thresholds of
profitability under various capitation arrangements.

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INTERNATIONAL

The Company has minimal operations in several European countries and Japan.
The Company believes increasing healthcare costs, an expanding population base
over age 65, advances in medical technology and the ability to provide improved
quality of life while managing the cost of care will foster growth of healthcare
services internationally as well as domestically. Accordingly, the Company is
considering whether to expand its efforts in offering new approaches to
healthcare delivery and management around the world.

COMPETITION

The PPM industry is highly competitive and is subject to continuing changes
in the provision of services and the selection and compensation of providers.
The Company competes for acquisition, affiliation and other expansion
opportunities with national, regional and local PPM companies and other PPM
entities. In addition, certain companies, including hospitals and insurers, are
expanding their presence in the PPM market. The Company also competes with
prescription drug benefit programs, prescription drug claims processors,
regional claims processors, providers of disease management services and
insurance companies.

GOVERNMENT REGULATION

As a participant in the healthcare industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels. The Company
believes its operations are in material compliance with applicable laws.
Nevertheless, because the structure of the relationship with the physician
groups is unique, many aspects of the Company's business operations have not
been the subject of state or federal regulatory interpretation. Thus, there can
be no assurance that a review of the Company's or the affiliated physicians'
businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or of
the affiliated physicians. Nor can there be any assurance that the healthcare
regulatory environment will not change so as to restrict the Company's or the
affiliated physicians' existing operations or their expansion. Any significant
restriction could materially adversely affect the operating results and
financial condition of the Company.

Approximately 5% of the revenues of the Company's affiliated physician
groups is derived from payments made by government-sponsored healthcare programs
(principally, Medicare and state reimbursed programs). As a result, any change
in reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. There are also state and
federal civil and criminal statutes imposing substantial penalties, including
civil and criminal fines and imprisonment, on healthcare providers that
fraudulently or wrongfully bill governmental or other third-party payors for
healthcare services. While the Company believes it is in material compliance
with such laws, there can be no assurance that the Company's activities will not
be challenged or scrutinized by governmental authorities.

The laws of many states prohibit business corporations such as the Company
from practicing medicine and employing physicians to practice medicine. The
Company performs only non-medical administrative services. It does not represent
to the public or its clients that it offers medical services, and the Company
does not exercise influence or control over the practice of medicine by the
physicians with whom it contracts. Accordingly, the Company believes that it is
not in violation of applicable state laws relating to the practice of medicine.
Numerous states also prohibit entities such as the Company from engaging in
certain healthcare-related activities, such as fee-splitting with physicians.

Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute", prohibit the offer, payment, solicitation or receipt of
any form of remuneration in return for the referral of Medicare or state health
program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals of Medicaid
and other third-party payor patients. Although the Company believes that it is
in material compliance with the Anti-kickback Statute and similar state
statutes, the Company's operations do not fit specifically within any of the
existing or proposed federal safe harbors.

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Federal Referral Laws. Significant prohibitions against physician
referrals were enacted by the United States Congress in the Omnibus Budget
Reconciliation Act of 1993. Subject to certain exemptions, a physician or a
member of his immediate family is prohibited from referring Medicare or Medicaid
patients to an entity providing "designated health services" in which the
physician has an ownership or investment interest or with which the physician
has entered into a compensation arrangement. While the Company believes it is in
compliance with such legislation, future regulations could require the Company
to modify the form of its relationships with physician groups. Some states have
also enacted similar self-referral laws, and the Company believes it is likely
that more states will follow. The Company believes that its practices fit within
exemptions contained in such statutes. Nevertheless, expansion of the Company's
operations to new jurisdictions could require structural and organizational
modifications of the Company's relationships with physician groups in order to
comply with new or revised state statutes.

The Company is subject to the laws and regulations that govern
reimbursement under Medicare and Medicaid. Federal law prohibits, with some
exceptions, an entity from filing a claim for reimbursement under the Medicare
or Medicaid programs for certain designated services if the entity has a
financial relationship with the referring physician. Federal law (the "Medicare
Referral Payments Law") also prohibits the solicitation or receipt of
remuneration in exchange for, or the offer or payment of remuneration to induce,
the referral of Medicare or Medicaid beneficiaries. The OIG has promulgated
regulatory "safe harbors" under the Medicare Referral Payments Law that describe
payment practices between healthcare providers and referral sources that will
not be subject to criminal prosecution and that will not provide the basis for
exclusion from the Medicare and Medicaid programs. The Company retains
healthcare professionals to provide advice and non-medical services to the
Company in return for compensation pursuant to employment, consulting or service
contracts. In addition, the Company manages physician practices in return for a
management fee. The Company also enters into contracts with hospitals under
which the Company provides products and administrative services for a fee. Many
of the parties with whom the Company contracts refer or are in a position to
refer patients to the Company. The breadth of these federal laws, the paucity of
court decisions interpreting these laws, the limited nature of regulatory
interpretations and the absence of court decisions interpreting the safe harbor
regulations have resulted in ambiguous and varying interpretations of these
federal laws and regulations. The OIG or the DOJ could seek a determination that
the Company's past or current policies and practices regarding contracts and
relationships with healthcare providers violate federal law. In such event, no
assurance can be given that the Company's interpretation of these laws will
prevail, except with respect to those matters that were the subject of the OIG
investigation. See "-- Legal Proceedings". The failure of the Company's
interpretation of these laws to prevail could materially adversely affect the
operating results and financial condition of the Company.

Caremark agreed, in its settlement agreement with the OIG and DOJ prior to
the Caremark Acquisition, to continue to enforce certain compliance-related
oversight procedures. Should the oversight procedures reveal violations of
federal law, Caremark would be required to report such violations to the OIG and
DOJ. Caremark is therefore subject to increased regulatory scrutiny and, in the
event that Caremark commits legal or regulatory violations, it may be subject to
an increased risk of sanctions or penalties, including disqualification as a
provider of Medicare or Medicaid services which could materially adversely
affect the operating results and financial condition of the Company.

State Referral Payment Laws. The Company is also subject to state statutes
and regulations that prohibit payments for referral of patients, splitting of
professional fees by physicians and referrals by physicians to healthcare
providers with whom the physicians have a financial relationship. State statutes
and regulations generally apply to services reimbursed by both governmental and
private payors. Violations of these laws may result in prohibition of payment
for services rendered, loss of pharmacy or health provider licenses as well as
fines and criminal penalties. State statutes and regulations that may affect the
referral of patients to healthcare providers range from statutes and regulations
that are substantially the same as the federal laws and the safe harbor
regulations to a simple requirement that physicians or other healthcare
professionals disclose to patients any financial relationship the physicians or
healthcare professionals have with a healthcare provider that is being
recommended to the patients. These laws and regulations vary significantly from
state to state, are often vague, and, in many cases, have not been interpreted
by courts or regulatory agencies. The Company

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is not materially dependent upon revenues derived from any single state. Adverse
judicial or administrative interpretations of such laws in several states, taken
together, could, however, materially adversely affect the operating results and
financial condition of the Company.

On March 5, 1996, the DOC issued the Restricted License to PPN in
accordance with the requirements of the Knox-Keene Act. The Restricted License
authorizes PPN to operate as a healthcare service plan in the State of
California. The Company, through PPN, intends to utilize the Restricted License
for purposes of contracting with HMOs for a broad range of healthcare services,
including both institutional and professional medical services, through a
consolidated contract with the HMO. The Knox-Keene Act and the regulations
promulgated thereunder subject entities that are licensed as healthcare service
plans in California to substantial regulation by the DOC. In addition, licensees
under the Knox-Keene Act must file periodic financial data and other information
(that generally become available to the public), maintain substantial tangible
net equity on their balance sheets and maintain adequate levels of medical,
financial and operational personnel dedicated to fulfilling the licensee's
statutory and regulatory requirements. The DOC is empowered to take enforcement
actions against licensees that fail to comply with such requirements. PPN is a
recently created organization without an operating history, and there is no
assurance that the DOC will view PPN's operations as being fully in compliance
with applicable laws and regulations.

The operation of Pioneer Hospital, USFMC and Friendly Hills is highly
regulated, and each is accredited by the Joint Commission on Accreditation of
Healthcare Organizations. Accreditation from the Joint Commission on
Accreditation of Healthcare Organizations allows Pioneer Hospital to serve
Medicare patients and provides authorization from the California Department of
Health Services and the Los Angeles County Department of Health to operate as a
licensed hospital facility. Each of Pioneer Hospital, USFMC and Friendly Hills
is licensed and regulated as a general acute care hospital by the State of
California Department of Health Services. Additionally, each of Pioneer
Hospital, USFMC and Friendly Hills has a clinical laboratory license from the
State of California Department of Health Services, a clinical laboratory license
for its cardio-pulmonary laboratory and a pharmacy license for its inpatient
pharmacy.

Corporate Practice of Medicine Laws. The laws of many states prohibit
corporations other than professional corporations or associations from
practicing medicine and prohibit physicians from practicing medicine in
partnership with, or as employees of, any person not licensed to practice
medicine. These laws and their interpretations vary from state to state, and
they are enforced by regulatory authorities that have broad discretionary
authority. The Company does not employ physicians to practice medicine, does not
represent to the public that it offers medical services and does not control the
practice of medicine by its affiliated physician groups. There can, however, be
no assurance that the Company's arrangements will not be successfully challenged
as constituting the unauthorized practice of medicine.

Antitrust Laws. In connection with the corporate practice of medicine laws
referred to above, the physician practices with whom the Company is affiliated
necessarily are organized as separate legal entities. As such, the physician
practice entities may be deemed to be persons separate both from the Company and
from each other under the antitrust laws and, accordingly, subject to a wide
range of laws that prohibit anticompetitive conduct among separate legal
entities. The Company believes it is in compliance with these laws and intends
to comply with any state and federal laws that may affect its development of
integrated healthcare delivery networks. There can be no assurance, however,
that a review of the Company's business by courts or regulatory authorities
would not adversely affect the operation of the Company and its affiliated
physician groups.

Insurance Laws. The assumption of risk on a prepaid basis by health
provider networks is occurring with increasing frequency, and the practice is
being reviewed by various state insurance commissioners as well as the National
Association of Insurance Commissioners to determine whether the practice
constitutes the business of insurance. The Company believes that it is currently
in material compliance with the insurance laws in the states where it is
operating and it intends to comply with interpretative and legislative changes
as they may develop. There can be no assurance, however, that the Company's
activities will not be challenged or scrutinized by governmental authorities.

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Pharmacy Licensing and Operation. The Company is subject to federal and
state laws and regulations governing pharmacies. Federal controlled substance
laws require the Company to register its pharmacies with the United States Drug
Enforcement Administration and comply with security, record-keeping, inventory
control and labeling standards in order to dispense controlled substances. State
controlled substance laws require registration and compliance with the
licensing, registration or permit standards of the state pharmacy licensing
authority. State pharmacy licensing, registration and permit laws impose
standards on the qualifications of the applicant's personnel, the adequacy of
its prescription fulfillment and inventory control practices and the adequacy of
its facilities. In general, pharmacy licenses are renewed annually. Pharmacists
employed by each branch must also satisfy state licensing requirements.

Several states have enacted legislation that requires mail service
pharmacies located elsewhere to register with the state board of pharmacy prior
to mailing drugs into the state and to meet certain operating and disclosure
requirements. These statutes generally permit a mail service pharmacy to operate
in accordance with the laws of the state in which it is located. In addition,
various pharmacy associations and state boards of pharmacy have promoted
enactment of laws and regulations directed at restricting or prohibiting the
operation of out-of-state mail service pharmacies by, among other things,
requiring compliance with all laws of certain states into which the mail service
pharmacy dispenses medications whether or not those laws conflict with the laws
of the state in which the pharmacy is located. To the extent that such laws or
regulations are found to be applicable to the Company's operations, the Company
would be required to comply with them. Some states have enacted laws and
regulations which, if successfully enforced, would effectively limit some of the
financial incentives available to plan sponsors that offer mail service
prescription programs. With respect to self-insured plans, the United States
Department of Labor has commented that such laws and regulations are pre-empted
by the Employee Retirement Income Security Act of 1974, as amended. The Attorney
General in one state has reached a similar conclusion and has raised additional
constitutional issues. Finally, the FTC's Bureau of Competition has concluded
that such laws and regulations may be anticompetitive and not in the best
interests of consumers. To date, there have been no formal administrative or
judicial efforts to enforce any of such laws against the Company. To the extent
that any of the foregoing laws or regulations prohibit or restrict the operation
of mail service pharmacies and are found to be applicable to the Company, they
could have an adverse effect on the Company's prescription mail service
operations. United States Postal Service regulations expressly permit the
transmission of prescription drugs through the postal system. The United States
Postal Service has authority to restrict such transmission.

The PBM and disease management services of the Company are subject to state
and federal statutes and regulations governing the operation of pharmacies,
repackaging of drug products, dispensing of controlled substances, reimbursement
under federal and state medical assistance programs, financial relationships
between healthcare providers and potential referral sources, medical waste
disposal, risk sharing by non-insurance companies and workplace health and
safety. The Company's operations may also be affected by changes in ethical
guidelines and operating standards of professional and trade associations and
private accreditation commissions such as the American Medical Association, the
National Committee for Quality Assurance and the Joint Commission on
Accreditation of Healthcare Organizations.

Future Legislation and Regulation. As a result of the continued escalation
of healthcare costs and the inability of many individuals to obtain health
insurance, numerous proposals have been or may be introduced in the United
States Congress and state legislatures relating to healthcare reform. There can
be no assurance as to the ultimate content, timing or effect of any healthcare
reform legislation, nor is it possible at this time to estimate the impact of
potential legislation, which may be material, on the Company.

LEGAL PROCEEDINGS

The Company is named as a defendant in various legal actions arising
primarily out of services rendered by physicians employed by its affiliated
physician entities and Pioneer Hospital and USFMC, personal injury and
employment disputes. In addition, certain of its affiliated medical groups are
named as defendants in numerous actions alleging medical negligence on the part
of their physicians. In certain of these actions, the Company's and the medical
group's insurance carrier has either declined to provide coverage or has
provided a defense subject to a reservation of rights. Management does not view
any of these actions as likely to result in

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an uninsured award which would have a material adverse effect on the operating
results and financial condition of the Company.

In May 1996, two stockholders, each purporting to represent a class, filed
complaints against Caremark and each of its directors in the Court of Chancery
of the State of Delaware alleging breaches of the directors' fiduciary duty in
connection with Caremark's then proposed merger with the Company. The complaints
seek unspecified damages, injunctive relief, and attorneys' fees and expenses.
The Company intends to defend these cases vigorously. Although the ultimate
outcome of such litigation cannot be predicted, the Company does not believe
such litigation, if adversely determined, would not have a material adverse
effect on the operating results and financial condition of the Company.

In May 1996, three home infusion companies, purporting to represent a class
consisting of all of Caremark's former competitors in the alternate site
infusion therapy industry, filed a complaint against Caremark, a subsidiary of
Caremark, and two other corporations in the United States District Court for the
District of Hawaii alleging violations of the federal conspiracy laws, the
antitrust laws and of California's unfair business practices statute. The
complaint seeks unspecified treble damages and attorneys' fees and expenses. The
Company intends to defend this case vigorously. Although management believes,
based on information currently available, that the ultimate resolution of this
matter is not likely to have a material adverse effect on the operating results
and financial condition of the Company, there can be no assurance that the
ultimate resolution of this matter, if adversely determined, would not have a
material adverse effect on the operating results and financial condition of the
Company.

In June 1995, Caremark agreed to settle a nearly four year long
investigation with the DOJ, OIG, the Veterans Administration, the FEHBP, the
CHAMPUS and related state investigative agencies in all 50 states and the
District of Columbia. Under the terms of the OIG Settlement, which covered
allegations dating back to 1986, a subsidiary of Caremark pled guilty to two
counts of mail fraud -- one each in Minnesota and Ohio. The basis of these
guilty pleas was Caremark's failure to provide certain information to CHAMPUS
and FEHBP, federally funded healthcare benefit programs, concerning financial
relationships between Caremark and a physician in each of Minnesota and Ohio.
The OIG Settlement allows Caremark to continue participating in Medicare,
Medicaid and other government healthcare programs.

Under the OIG Settlement, Caremark agreed to make civil payments of $85.3
million to the federal government in installments and $44.6 million to the
states. The plea agreement imposed $29.0 million in federal criminal fines. All
of these fines and payments have been fully paid. In addition, Caremark has
contributed $2.0 million to a grant program set up under the Ryan White
Comprehensive AIDS Resources Emergency (CARE) Act. Caremark took an after-tax
charge of $154.8 million in 1995 for these settlement payments, costs to defend
ongoing derivative, security and other lawsuits, and other related costs. This
charge has been reflected in Caremark's discontinued operations and will not
materially affect the Company's ability to pursue its long-term business
strategy. There can be no assurance, however, that the ultimate costs related to
the OIG Settlement will not exceed these estimates or that additional costs,
claims and damages will not occur, or if they occur, will not have a material
adverse effect on the operating results and financial condition of the Company.

In August and September 1994, stockholders, each purporting to represent a
class, filed complaints against Caremark and certain officers and employees of
Caremark in the United States District Court for the Northern District of
Illinois, alleging violations of the Securities Act and the Exchange Act, and
fraud and negligence and various state law claims in connection with public
disclosures by Caremark regarding Caremark's business practices and the status
of the OIG investigation. The complaints seek unspecified damages, declaratory
and equitable relief, and attorneys fees and expenses. In June 1996, the
complaint filed by one group of stockholders alleging violations of the Exchange
Act only, was certified as a class. The parties to all of the complaints
continue to engage in discovery proceedings. The Company intends to defend these
cases vigorously. Although management believes, based on information currently
available, that the ultimate resolution of this matter is not likely to have a
material adverse effect on the operating results and financial condition of the
Company, there can be no assurance that the ultimate resolution of this matter,
if adversely

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<PAGE> 27

determined, would not have a material adverse effect on the operating results
and financial condition of the Company.

In late August 1994, certain patients of a physician who prescribed human
growth hormone distributed by Caremark and the sponsor of the health insurance
plan of one of those patients filed complaints against Caremark, employees of
Caremark and others in the United States District Court for the District of
Minnesota. Each complaint purported to be on behalf of a class and alleged
violations of the federal mail and wire fraud statutes, the federal conspiracy
statute and the state consumer fraud statute, as well as conspiracy to breach a
fiduciary duty, negligence and fraud. Each complaint sought unspecified treble
damages, and attorneys fees and expenses. In July 1996, these plaintiffs also
served (but have not yet filed) a separate lawsuit in the Minnesota State Court
in the County of Hennepin against a subsidiary of Caremark purporting to be on
behalf of a class and alleging all of the claims contained in the complaint
filed with the Minnesota federal court other than the federal claims contained
therein. The complaint seeks unspecified damages, attorneys' fees and expenses
and an award of punitive damages. In July 1995, another patient of this same
physician filed a separate complaint in the District Court of South Dakota
against the physician, Caremark and another corporation alleging violations of
the federal laws prohibiting payment of remuneration to induce referral of
Medicare and Medicaid beneficiaries, and the federal mail fraud and conspiracy
statutes. The complaint also alleges the intentional infliction of emotional
distress and seeks trebling of at least $15.9 million in general damages,
attorneys fees and costs, and an award of punitive damages. In August 1995, the
parties to the case filed in South Dakota agreed to a stay of all proceedings
until final judgment has been entered in a criminal case that is presently
pending against this physician. The Company intends to defend these cases
vigorously. Although management believes, based on information currently
available, that the ultimate resolution of this matter is not likely to have a
material adverse effect on the operating results and financial condition of the
Company, there can be no assurance that the ultimate resolution of this matter,
if adversely determined, would not have a material adverse effect on the
operating results and financial condition of the Company.

In September 1995, Coram filed a complaint in the San Francisco Superior
Court against Caremark and its subsidiary, Caremark Inc. and 50 unnamed
individual defendants. The complaint, which arises from Caremark's sale to Coram
of Caremark's home infusion therapy business in April 1995 for approximately
$209.0 million in cash and $100.0 million in securities, alleges breach of the
Asset Sale and Note Purchase Agreement, dated January 29, 1995, as amended April
1, 1995, between Coram and Caremark, breach of related contracts, fraud,
negligent misrepresentation and a right to contractual indemnity. Requested
relief in Coram's amended complaint includes specific performance, declaratory
relief, injunctive relief, and damages of $5.2 billion. Caremark filed
counterclaims against Coram in this lawsuit and also filed a lawsuit in the U.S.
District Court in Chicago claiming that Coram committed securities fraud in its
sale to Caremark of its securities in connection with the sale of the company's
home infusion business to Coram. The lawsuit filed in federal court in Chicago
has been dismissed, and Caremark's appeal of the dismissal was argued on May 10,
1996 and is now under submission. Coram's lawsuit is currently in the discovery
phase. In October 1996, Coram agreed to merge with Integrated Health Services,
Inc. ("IHS"). In connection with the merger agreement, IHS and the Company have
agreed to a settlement of the Coram litigation, contingent upon consummation of
the proposed merger, expected to be completed in the first quarter of 1997.
Under the settlement proposal, the notes that are now payable by Coram to
Caremark will be cancelled and replaced with a new two-year note in the
principal amount of $57.5 million. Caremark had previously established a reserve
for a portion of the $100 million in securities, and, therefore, the terms of
the new note will not require any additional charge against earnings by the
Company.

The Company and IHS/Coram will enter into long-term preferred provider
agreements pursuant to which IHS/Coram will provide services to the patients
served by the Company's integrated delivery systems on a national basis. The
Company understands that the acquisition of Coram by IHS is subject to the usual
conditions found in transactions of this type, including approval of the
stockholders of both companies, and is expected to be consummated early in the
first quarter of 1997. The Company has no control over the conduct of the
IHS/Coram transaction, and there can be no assurance that it will be
consummated.

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<PAGE> 28

Beginning in September 1994, Caremark was named as a defendant in a series
of lawsuits added to a pending group of actions (including a class action)
brought in 1993 under the antitrust laws by local and chain retail pharmacies
against brand name pharmaceutical manufacturers, wholesalers and prescription
benefit managers other than Caremark. The lawsuits, filed in federal district
courts in at least 38 states (including the United States District Court for the
Northern District of Illinois), allege that at least 24 pharmaceutical
manufacturers provided unlawful price and service discounts to certain favored
buyers and conspired among themselves to deny similar discounts to the
complaining retail pharmacies (approximately 3,900 in number). The complaints
charge that certain defendant prescription benefit managers, including Caremark,
were favored buyers who knowingly induced or received discriminatory prices from
the manufacturers in violation of the Robinson-Patman Act. Each complaint seeks
unspecified treble damages, declaratory and equitable relief, and attorneys fees
and expenses. All of these actions have been transferred by the Judicial Panel
for Multidistrict Litigation to the United States District Court for the
Northern District of Illinois for coordinated pretrial procedures. Caremark was
not named in the class action. In April 1995, the Court entered a stay of
pretrial proceedings as to certain Robinson-Patman Act claims in this
litigation, including the Robinson-Patman Act claims brought against Caremark,
pending the conclusion of a first trial of certain of such claims brought by a
limited number of plaintiffs against five defendants not including Caremark. On
July 1, 1996, the district court directed entry of a partial final order in the
class action approving an amended settlement with certain of pharmaceutical
manufacturers. The amended settlement provides for a cash payment of
approximately $351.0 million to class members in settlement of conspiracy claims
as well as a commitment from the settling manufacturers to abide by certain
injunctive provisions. All class action claims against non-settling
manufacturers as well as all opt out and other claims generally, including all
Robinson-Patman Act claims against Caremark, remain unaffected by the
settlement. The district court also certified to the court of appeals for
interlocutory review certain orders relating to non-settled conspiracy claims
against the pharmaceutical manufacturers and wholesalers. These interlocutory
orders do not relate to any of the claims brought against Caremark. The Company
intends to defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.

In December 1994, Caremark was notified by the FTC that it was conducting a
civil investigation of the industry concerning whether acquisitions, alliances,
agreements or activities between prescription benefit managers and
pharmaceutical manufacturers, including Caremark's alliance agreements with
certain drug manufacturers, violate Sections 3 or 7 of the Clayton Act or
Section 5 of the Federal Trade Commission Act. The specific nature, scope,
timing and outcome of the investigation are not currently determinable. Under
the statutes, if violations are found, the FTC could seek remedies in the form
of injunctive relief to set aside or modify Caremark's alliance agreements and
an order to cease and desist from certain marketing practices and from entering
into or continuing with certain types of agreements. The Company intends to
defend these cases vigorously. Although management believes, based on
information currently available, that the ultimate resolution of this matter is
not likely to have a material adverse effect on the operating results and
financial condition of the Company, there can be no assurance that the ultimate
resolution of this matter, if adversely determined, would not have a material
adverse effect on the operating results and financial condition of the Company.

EMPLOYEES

As of September 30, 1996, the Company, including its affiliated
professional entities, employed approximately 20,000 people on a full-time
equivalent basis.

CORPORATE LIABILITY AND INSURANCE

The Company's business entails an inherent risk of claims of physician
professional liability. To protect its overall operations from such potential
liabilities, the Company has a multi-tiered corporate structure and preserves
the operational integrity of each of its operating subsidiaries. In addition,
the Company maintains

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<PAGE> 29

professional liability insurance, general liability and other customary
insurance on a claims-made and modified occurrence basis, in amounts deemed
appropriate by management based upon historical claims and the nature and risks
of the business, for all of the affiliated physicians, practices and operations.
This insurance includes "tail" coverage for claims against the Company's
affiliated medical organizations, including those acquired from Caremark, to
cover incidents which were or are incurred but not reported during the periods
for which the related risk was covered by "claims made" insurance. There can be
no assurance that a future claim will not exceed the limits of available
insurance coverage or that such coverage will continue to be available.

Moreover, the Company requires each physician group with which it
affiliates to obtain and maintain professional liability insurance coverage.
Such insurance would provide coverage, subject to policy limits, in the event
the Company were held liable as a co-defendant in a lawsuit for professional
malpractice against a physician. In addition, generally, the Company is
indemnified under the practice management agreements by the affiliated physician
groups for liabilities resulting from the performance of medical services.

PROPERTIES

The Company's corporate headquarters is located at 3000 Galleria Tower in
Birmingham, Alabama. Additionally, the Company has corporate offices in Long
Beach, California and Northbrook, Illinois. The Company currently owns or leases
facilities providing medical services in 26 states, Puerto Rico and six
countries. The Company also leases, subleases or occupies, pursuant to certain
acquisition agreements, the clinic facilities of the affiliated physician
groups. The Company anticipates that, as the affiliated practices continue to
grow and add new services, expanded facilities will be required.

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<PAGE> 30

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information about the executive
officers and directors of the Company as of September 30, 1996:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
-------------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Larry R. House(1)........................... 53 Chairman of Board, President and Chief Executive
Officer and Director
Mark L. Wagar............................... 45 President -- Western Operations
John J. Gannon.............................. 58 President -- Eastern Operations
James G. Connelly, III...................... 50 President -- Caremark
H. Lynn Massingale, M.D..................... 43 President -- Team Health
Harold O. Knight, Jr........................ 38 Executive Vice President and Chief Financial
Officer
Tracy P. Thrasher........................... 33 Executive Vice President and Corporate Secretary
William R. Dexheimer........................ 39 Executive Vice President and Chief Operating
Officer -- East
J. Rodney Seay.............................. 49 Executive Vice President of Mergers and
Acquisitions
J. Brooke Johnston, Jr...................... 56 Senior Vice President and General Counsel
Peter J. Clemens, IV........................ 31 Vice President of Finance and Treasurer
Richard M. Scrushy.......................... 44 Director
Larry D. Striplin, Jr.(2)................... 66 Director
Charles W. Newhall III(1)................... 51 Director
Ted H. McCourtney(1)........................ 57 Director
Walter T. Mullikin, M.D..................... 78 Director
John S. McDonald, J.D.(1)................... 64 Director
Rosalio J. Lopez, M.D.(2)................... 44 Director
Richard J. Kramer........................... 53 Director
C.A. Lance Piccolo.......................... 56 Director
Roger L. Headrick(1)........................ 60 Director
Thomas W. Hodson(2)......................... 49 Director
Harry M. Jansen Kraemer, Jr................. 41 Director
</TABLE>

- ---------------

(1) Member of the Compensation Committee
(2) Member of the Audit Committee

Larry R. House has been President and Chief Executive Officer of the
Company since August 1993, and has been Chairman of the Board since January
1993. From 1985 to 1992, he was Chief Operating Officer of HEALTHSOUTH
Rehabilitation Corporation, now HEALTHSOUTH Corporation, a publicly traded
provider of rehabilitative healthcare services ("HEALTHSOUTH"). From 1992 to
1993, Mr. House was President of HEALTHSOUTH International, Inc. Mr. House is a
member of the Board of Directors of each of HEALTHSOUTH, Capstone Capital
Corporation ("Capstone"), a publicly traded real estate investment trust, and
the American Sports Medicine Institute.

Mark L. Wagar has been President-Western Operations of the Company since
January 1996. From January 1995 through December 1995, Mr. Wagar was Chief
Operating Officer of MME. From March 1994 to December 1994, he was the President
of CIGNA HealthCare of California, a healthcare plan serving enrollees in
California, Oregon and Washington, from January 1993 through February 1994, was
a Vice President of CIGNA HealthCare of California, an HMO. From November 1989
to December 1992, he was the President of Managed Care Partners, Inc., a private
consulting management company specializing in

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<PAGE> 31

managed care services. He has been involved in healthcare management for over 20
years, including 10 years in managed care companies.

John J. Gannon has been President-Eastern Operations of the Company since
July 1996. For 23 years, Mr. Gannon was a Partner with KPMG Peat Marwick. His
most recent position with KPMG was that of National Partner-in-Charge of
Strategy and Marketing, Healthcare and Life Sciences. He served as one of the
firm's designated industry review specialists for healthcare financial
feasibility studies.

James G. Connelly, III has been President and Chief Operating Officer of
Caremark since August 1992. Mr. Connelly was the President of a subsidiary of
Caremark from April 1992 to November 1992. From May 1990 to November 1992, Mr.
Connelly was a Group Vice President of Baxter International, Inc., a publicly
traded company that is a leading manufacturer and marketer of healthcare
products and services ("Baxter"). Prior to 1990, he was a Corporate Vice
President of Baxter, responsible for its hospital supply business group. Mr.
Connelly also serves as a director of Boise Cascade Office Products Corporation,
a publicly traded company.

H. Lynn Massingale, M.D. has been President and Chief Executive Officer of
Team Health since its formation in March 1994. Dr. Massingale has served as
President of Southeastern Emergency Physicians, Inc., a subsidiary of Team
Health, since 1981. A graduate of the University of Tennessee Center for Health
Sciences in Memphis, Dr. Massingale is certified by the National Board of
Medical Examiners, Tennessee Board of Medical Examiners and American Board of
Emergency Medicine. Dr. Massingale's professional memberships include the
Knoxville Academy of Medicine, Tennessee Medical Association, American Medical
Association and American College of Emergency Physicians.

Harold O. Knight, Jr. has been Executive Vice President and Chief Financial
Officer of the Company since November 1994. Mr. Knight was Senior Vice President
of Finance and Treasurer of the Company from August 1993 to November 1994, and
from March 1993 to August 1993, Mr. Knight served as Vice President of Finance
of the Company. From 1980 to 1993, Mr. Knight was with Ernst & Young LLP, most
recently as Senior Manager. Mr. Knight is a member of the Alabama Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants.

Tracy P. Thrasher has been Executive Vice President of the Company since
November 1994 and has been Secretary since March 1994. Ms. Thrasher was Senior
Vice President of Administration from March 1994 to November 1994, and from
January 1993 to March 1994, she served as Corporate Comptroller and Vice
President of Development. From 1990 to 1993, Ms. Thrasher was the Audit and
Health Care Management Advisory Service Manager with Burton, Canady, Moore &
Carr, P.C., independent public accountants. Ms. Thrasher began her career with
Ernst & Young LLP in 1985, and became a certified public accountant in 1986.

William R. Dexheimer has been Executive Vice President and Chief Operating
Officer-East of the Company since August 1993. From 1989 to 1993, Mr. Dexheimer
was a principal stockholder and Chief Executive Officer of Strategic Health
Resources of the South, Inc., a healthcare development and consulting firm. From
1986 to 1989, Mr. Dexheimer was employed by AMI Brookwood Medical Center as
Senior Vice President of Development and Chief Executive Officer of AMI
Brookwood Primary Care Centers, Inc.

J. Rodney Seay has been Executive Vice President of Mergers and
Acquisitions of the Company since April 1995. From August 1993 to April 1995, he
served as Executive Vice President of Development of the Company. Mr. Seay was
also Secretary of the Company from August 1993 to March 1994. From 1992 to 1993,
he was Vice President of Finance of HEALTHSOUTH. From 1988 to 1992, Mr. Seay was
a Senior Manager with KPMG Peat Marwick. From 1982 to 1988, he served as Chief
Executive Officer of Medical Data Services, a physician practice management
company with over 650 employees and over 1,500 physician clients.

J. Brooke Johnston, Jr. has been Senior Vice President and General Counsel
of the Company since April 1996. Prior to that, Mr. Johnston was a senior
principal of the law firm of Haskell Slaughter Young & Johnston, Professional
Association, Birmingham, Alabama where he practiced corporate and securities law
for over seventeen years. Prior to that Mr. Johnston was engaged in the practice
of law in New York, New York

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<PAGE> 32

and at another firm in Birmingham. Mr. Johnston is a member of the Alabama State
Bar and the New York and American Bar Associations. Mr. Johnston is a member of
the Board of Directors of United Leisure Corporation, a publicly traded leisure
time services company.

Peter J. Clemens, IV has been Vice President of Finance and Treasurer of
the Company since April 1995. From 1991 to 1995, Mr. Clemens worked in Corporate
Banking with Wachovia Bank of Georgia, N.A. Mr. Clemens began his career with
AmSouth Bank, N.A. in 1987, and received a Masters Degree in Business
Administration from Vanderbilt University in 1991.

Richard M. Scrushy has been a member of the Company's Board of Directors
since January 1993. Since 1984, Mr. Scrushy has been Chairman of the Board and
Chief Executive Officer of HEALTHSOUTH. Mr. Scrushy is also a member of the
Board of Directors of Capstone.

Larry D. Striplin, Jr. has been a member of the Company's Board of
Directors since January 1993. Since December 1995, Mr. Striplin has been the
Chairman and Chief Executive Officer of Nelson-Brantley Glass Contractors, Inc.
and Chairman and Chief Executive Officer of Clearview Properties, Inc. Until
December 1995, Mr. Striplin had been Chairman of the Board and Chief Executive
Officer of Circle "S" Industries, Inc., a privately owned bonding wire
manufacturer. Mr. Striplin is a member of the Board of Directors of Kulicke &
Suffa, Inc. a publicly traded manufacturer of electronic equipment, and of
Capstone.

Charles W. Newhall III has been a member of the Company's Board of
Directors since September 1993. He has been a general partner of New Enterprise
Associates, a venture capital firm, since 1978. Mr. Newhall is a member of the
Board of Directors of HEALTHSOUTH, Integrated Health Services, Inc. and OPTA
Food Ingredients, Inc., all publicly traded companies. He is founder and
Chairman of the Mid-Atlantic Venture Association, which was organized in 1988.

Ted H. McCourtney has been a member of the Company's Board of Directors
since August 1993. He has been a general partner of Venrock Associates, a
venture capital firm, since 1970. Mr. McCourtney is a member of the Board of
Directors of Cellular Communications, Inc., Cellular Communications of Puerto
Rico, Inc., Cellular Communications International, Inc., International CabelTel
Incorporated, SBSF, Inc. and Structural Dynamics Research Corporation, all
publicly traded companies.

Walter T. Mullikin, M.D., a surgeon, has been a member of the Company's
Board of Directors since November 1995. Dr. Mullikin was Chairman of the Board
of the general partner of MME from 1989 to 1995. He founded Pioneer Hospital and
the predecessors to MME's principal professional corporation in 1957. He was
also the Chairman of the Board, President and a shareholder of Mullikin
Independent Practice Association ("MIPA"), until November 1995. Dr. Mullikin is
a member of the Board of Directors of Health Net, a publicly traded HMO, and was
one of the founders and a past chairman of the Unified Medical Group
Association.

John S. McDonald, J.D. has been a member of the Company's Board of
Directors since November 1995. Mr. McDonald was the Chief Executive Officer of
the general partner of MME from March 1994 to 1995, and he was an executive of
Pioneer Hospital and their related entities since 1967. Mr. McDonald was also a
director, the Secretary and a shareholder of MME's general partner. Mr. McDonald
is on the Board of Directors of the Truck Insurance Exchange and is a past
president of the Unified Medical Group Association.

Rosalio J. Lopez, M.D. has been a member of the Company's Board of
Directors since November 1995. Mr. Lopez had been a director of the general
partner of MME since 1989. Dr. Lopez joined MME's principal professional
corporation in 1984 and serves as the Chairman of its Medical Council and Family
Practice and Managed Care committees. He also acted as a director and a Vice
President of MME's principal professional corporation. He is also a director and
shareholder of MIPA.

Richard J. Kramer has been a member of the Company's Board of Directors
since November 1995. Mr. Kramer is President/Chief Executive Officer and a
director of Catholic Healthcare West ("CHW"). Before joining CHW in September
1989, Mr. Kramer served as the Executive Vice President of LifeSpan, Inc., a
multi-hospital/healthcare system headquartered in Minneapolis, which he joined
in 1971, serving in a variety of capacities, including Vice President of
Planning and Marketing and administrator for Abbott-

29
<PAGE> 33

Northwestern Hospital. Mr. Kramer is currently a member of the Board of
Directors of the California Association of Hospitals and Health Systems and the
Hospital Council of Northern and Central California, the Board of Directors of
the California Chamber of Commerce, the Governing Council of the American
Hospital Association Section on Health Systems and the House of Delegates of the
American Hospital Association, the Advisory Council for the Center for Clinical
Integration and the Board of Directors of the Alumni Association of the
University of Minnesota Program in Health Care Administration.

C.A. Lance Piccolo has been Vice Chairman of the Company's Board of
Directors since September 1996. From August 1992 to September 1996, he was
Chairman of the Board of Directors and Chief Executive Officer of Caremark. From
1987 until November 1992, Mr. Piccolo was an Executive Vice President of Baxter
and from 1988 until November 1992, he served as a director of Baxter. Mr.
Piccolo also serves as a director of Crompton & Knowles Corporation ("Crompton")
and Baxter, each of which is publicly traded.

Roger L. Headrick has been a member of the Company's Board of Directors
since September 1996 and has been President and Chief Executive Officer of the
Minnesota Vikings Football Club since 1991. Additionally, since June 1989, Mr.
Headrick has been president and chief executive officer of ProtaTek
International, Inc., a bio-process and biotechnology company that develops and
manufactures animal vaccines. Prior to 1989, he was Executive Vice President and
Chief Financial Officer of The Pillsbury Company, a food manufacturing and
processing company. Mr. Headrick also serves as a director of Crompton.

Thomas W. Hodson has been a member of the Company's Board of Directors
since September 1996, and was the Senior Vice President and Chief Financial
Officer of Caremark from August 1992 until September 1996. Mr. Hodson was a
Group Vice President of Baxter, from April 1992 to November 1992, and from 1990
to 1992 he was a Senior Vice President of Baxter responsible for financial
relations, strategic planning, acquisitions and divestitures and corporate
communications. From 1988 to 1990, Mr. Hodson was a corporate vice president of
Baxter. Mr. Hodson also serves as a director of APACHE Medical Systems, Inc., a
provider of clinically-based decision support information systems to the
healthcare industry.

Harry M. Jansen Kraemer, Jr. has been a member of the Company's Board of
Directors since September 1996, and is a Vice President and Chief Financial
Officer of Baxter, having served in that capacity since November 1993. He was
promoted to Baxter's three-member Office of the Chief Executive in June 1995,
and appointed to Baxter's Board of Directors in November 1995. In addition to
his duties as its chief financial officer he is responsible for Baxter's Global
Hospital Business, Global Renal Business, and the Baxter Japan subsidiary. Mr.
Kraemer has been an employee of Baxter since 1982 serving in a variety of
positions, including Vice President, Group Controller for Baxter's hospital and
alternate-site businesses, president of Baxter's Hospitex Division and Vice
President Finance and Operations for Baxter's global-business group.

CLASSIFIED BOARD OF DIRECTORS

Pursuant to the terms of the Company's Certificate of Incorporation and
By-laws, the Board of Directors is divided into three classes, with each class
being as nearly equal in number as reasonably possible. One class holds office
for a term that will expire at the Annual Meeting of Stockholders to be held in
1997, a second class holds office for a term that will expire at the Annual
Meeting of Stockholders to be held in 1998 and a third class holds office for a
term that will expire at the Annual Meeting of Stockholders to be held in 1999.
Each director holds office for the term to which he is elected and until his
successor is duly elected and qualified. At each annual meeting of stockholders
of the Company, the successors to the class of directors whose terms expire at
such meeting are elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election. Messrs. Scrushy, McCourtney and Piccolo and Dr. Lopez have terms
expiring in 1997, Messrs. House, McDonald, Kramer, Newhall and Headrick have
terms expiring in 1998, and Messrs. Striplin, Kraemer and Hodson and Dr.
Mullikin have terms expiring in 1999. The Company's Board of Directors elects
officers annually and such officers serve at the discretion of the Board of
Directors.

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<PAGE> 34

COMMITTEES OF THE BOARD OF DIRECTORS

The Company's Board of Directors currently has two committees: the Audit
Committee and the Compensation Committee.

The Audit Committee has the responsibility for reviewing and supervising
the financial controls of the Company. The Audit Committee makes recommendations
to the Company's Board of Directors with respect to the Company's financial
statements and the appointment of independent auditors, reviews significant
audit and accounting policies and practices, meets with the Company's
independent public accountants concerning, among other things, the scope of
audits and reports, and reviews the performance of overall accounting and
financial controls of the Company. The Audit Committee consists of Messrs.
Striplin and Hodson and Dr. Lopez.

The Compensation Committee has the responsibility for reviewing the
performance of the officers of the Company and recommending to the Company's
Board of Directors annual salary and bonus amounts for all officers of the
Company. The Compensation Committee consists of Messrs. Newhall, McCourtney,
McDonald and Headrick.

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<PAGE> 35

THE PLAN

INTRODUCTION

Through the Plan, MedPartners is offering eligible Affiliates of the
Company and its subsidiaries an opportunity to purchase shares of the Company's
Common Stock at a price that represents a modest discount as compared to the
price paid by the general public. Affiliates who will be able to participate in
the Plan are members, partners and shareholders of, and physician employees and
other personnel employed by, any professional corporation or association or
practice with which the Company or a subsidiary has a services, management or
similar agreement in effect, as well as any physician who is a member of an IPA
or other organized network or group with which the Company or a subsidiary has
such an agreement in effect. The Plan will be administered by the Board with the
assistance of the Administration Agent and the Brokerage Agent.

Eligible Affiliates may elect to participate in the Plan by completing the
enrollment form and mailing the form and a check for the selected contribution
amount to the Administration Agent. An Affiliate may enroll effective as of the
first day of any calendar quarter while the Plan remains in effect, commencing
with the first quarter of 1997. Each enrollee must commit to contributing an
amount between $10.00 and $1,600.00 per month. Amounts contributed by a
Participating Affiliate during the year following enrollment will be credited to
his or her Contribution Account.

The description of the Plan contained in this Prospectus is qualified in
its entirety by reference to the Plan itself, a copy of which shall be furnished
or made available to all eligible Affiliates. Questions regarding the Plan may
be directed to Clark Wingfield, MedPartners' Senior Vice President of Human
Resources, at MedPartners, Inc., 3000 Galleria Tower, Suite 1000, Birmingham,
Alabama 35244, telephone number (205) 733-8996.

DEFINITIONS

Capitalized terms used and not otherwise defined in this Prospectus shall
have the following meanings. To the extent definitions provided elsewhere herein
for the sake of convenience are inconsistent with the definitions provided
below, the definitions provided below shall govern.

"Administration Agent" means Aon Consulting, Inc., the administration firm
selected by the Board to provide administrative services with respect to the
Plan.

"Affiliate" shall refer to any member, partner or shareholder of, or
physician employee or other person employed by, any professional corporation,
association or practice with which the Company or a subsidiary has a services,
management or similar agreement in effect, or any physician who is a member of
an IPA or other organized network or group with which the Company or a
subsidiary has a services, management or similar agreement in effect.

"Affiliate Plan Year" means the 12-month period following the Effective
Date of a Participating Affiliate's enrollment in the Plan.

"Board" means the Board of Directors of the Company.

"Brokerage Agent" means Merrill Lynch, Pierce, Fenner & Smith Incorporated,
the registered broker-dealer selected by the Board to administer the brokerage
accounts of Participating Affiliates.

"Commission" means the Securities and Exchange Commission.

"Common Stock" shall mean the Company's Common Stock, par value $.001 per
share.

The "Company" means MedPartners, Inc.

"Contribution Account" refers to an account established on behalf of a
Participating Affiliate to which contributions under the Plan are credited.

32
<PAGE> 36

A Participating Affiliate's "Contribution Rate" is the amount selected by
the Participating Affiliate to be contributed to his or her Contribution
Account.

The "Effective Date" of the Plan is January 1, 1997. The "Effective Date"
of a particular Affiliate's enrollment in the Plan is the first day of the
calendar quarter following such Affiliate's timely election to participate in
the Plan.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended.

"Issue Price" refers to the purchase price of shares of the Company's
Common Stock to be charged to a Participating Affiliate on the Purchase Date.

"Market Price" means the closing sale price of a share of Common Stock for
the day upon which the Market Price is to be determined as reported on the
National Association of Securities Dealers' New York Stock Exchange Composite
Reporting Tape (or, if the Common Stock is no longer traded on The New York
Stock Exchange, the closing sale price on the exchange on which it is traded or
as reported by an applicable automated quotation system).

"Participating Affiliate" means any eligible Affiliate opting to
participate in the Plan.

The "Plan" means the MedPartners, Inc. Affiliate Stock Purchase Plan, and
all subsequent amendments thereto.

"Purchase Date" is The New York Stock Exchange's last trading date during
an Affiliate Plan Year.

"Registration Statement" shall refer to the Registration Statement, of
which this Prospectus is a part, on Form S-3 as filed with the Commission by the
Company relating to the shares of Common Stock reserved for issuance under the
Plan.

"Securities Act" means the Securities Act of 1933, as amended.

PURPOSE AND NATURE OF THE PLAN

The Board adopted and approved the Plan on October 24, 1996 to offer
eligible Affiliates an opportunity to purchase shares of the Company's Common
Stock on a more advantageous basis than would otherwise be available, thereby
increasing their interest in the Company. The Plan became effective on January
1, 1997, subject to the Registration Statement of which this Prospectus is a
part being declared effective by the Commission. The Plan will remain in effect
until all of the shares of Common Stock reserved for issuance under the Plan
have been issued and balances in Participating Affiliates' Contribution Accounts
have been distributed, unless earlier terminated by the Board.

The Plan is not a qualified plan under Section 401(a) of the Internal
Revenue Code, and is not subject to any provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"). Nor is the Plan designed to qualify as an
"employee stock purchase plan" within the meaning of Section 423 of the Code.

ADMINISTRATION

The Plan will be administered by the Board, although the Company's Human
Resources Department and the Administration Agent will operate the Plan on a
day-to-day basis and the Brokerage Agent will manage the brokerage accounts set
up on Participating Affiliates' behalf following purchases of Common Stock under
the Plan. Affiliates interested in participating in the Plan should direct
questions regarding the Plan to:

<TABLE>
<S> <C> <C>
MedPartners, Inc. or Aon Consulting, Inc.
3000 Galleria Tower, Suite 1000 Benefits on Call -- MedStock
Birmingham, Alabama 35244 P. O. Box 66
Telephone: (205) 733-8996 Winston-Salem, North Carolina 27102-0066
Attention: Clark Wingfield Telephone: (800) 750-3887 ("Benefits on Call"), or
Sr. Vice President, Human Resources (910) 748-1120
Attention: Craig Harris
</TABLE>

SHARES SUBJECT TO THE PLAN

The Company has reserved 10,000,000 shares of Common Stock for issuance
under the Plan. In the event of any merger, consolidation, reorganization,
recapitalization, spin-off, stock dividend, stock split, exchange or

33
<PAGE> 37

other change in the corporate structure or capitalization affecting the Common
Stock, the number of shares which are subject to the Plan will be equitably
adjusted by the Board, in its sole discretion, to preserve the value of benefits
under the Plan.

ELIGIBILITY AND PARTICIPATION

Eligibility. Every member, partner, shareholder, physician employee or
employee, as the case may be, who has been an Affiliate as defined herein for at
least the 60 consecutive days preceding the Effective Date of his or her
enrollment in the Plan may participate.

Enrollment. Eligible Affiliates may enroll in the Plan effective January
1, 1997. Those who are unable to enroll or do not choose to participate by such
time may enroll effective as of the commencement of any calendar quarter for so
long as the Plan remains in effect. Enrollment in the Plan is for one year from
the Effective Date of enrollment, an Affiliate Plan Year. Participating
Affiliates may enroll in only one Affiliate Plan Year at a time. Following such
year, the Participating Affiliate's enrollment will be automatically rolled over
for an additional Affiliate Plan Year unless discontinued in the manner
described below.

Affiliates electing to participate enroll by completing the enrollment form
and submitting the completed form and their first contribution payment to the
Administration Agent at the following address: Benefits on Call -- MedStock,
Attention: Craig Harris, P. O. Box 66, Winston-Salem, NC 27102-0066. The
completed enrollment form and the contribution check must be received by the
Administration Agent before an Affiliate Plan Year can begin. Participating
Affiliates will receive a confirmation statement from the Administration Agent
confirming enrollment, the Effective Date of enrollment and the Contribution
Rate selected by the Affiliate to be applied toward Common Stock purchases under
the Plan.

CONTRIBUTIONS, MODIFICATIONS AND PLAN WITHDRAWAL

Upon enrollment, a Participating Affiliate must commit to contribute each
month during the Affiliate Plan Year an amount not less than $10.00 nor more
than $1600.00. The minimum and maximum amounts may be adjusted by the Company at
any time in its sole discretion. The first contribution check is due with the
enrollment forms. Thereafter, contribution checks, submitted with transmittal
notices in the form provided by the Administration Agent, will be due by the
15th day of each month.

Contribution payments at the selected Contribution Rate will be allocated
to the Contribution Account administered on the Participating Affiliate's behalf
by the Administration Agent. No interest will accrue or be paid on any amounts
contributed under the Plan. Participating Affiliates may call the Administration
Agent at its toll-free number to obtain information regarding their Contribution
Accounts and the balances in such accounts.

Participating Affiliates may reduce (but not increase) their Contribution
Rate or choose to discontinue contributions under the Plan at any time during
their Affiliate Plan Year by notifying the Administration Agent in writing. The
modification or discontinuation will be implemented as soon as administratively
feasible following such notification. A Participating Affiliate who discontinues
contributions may choose to remain in the Plan and have the already-contributed
balance in his or her Contribution Account applied to purchases of Common Stock
on the Purchase Date, or to withdraw from the Plan and have the balance in his
or her Contribution Account returned. The Company will return the balance amount
as soon as administratively feasible. An Affiliate who has discontinued
contributions under the Plan may not resume contributions during such person's
Affiliate Plan Year, and an Affiliate who has withdrawn from the Plan may not
re-enroll until such person's Affiliate Plan Year has expired.

PURCHASES UNDER THE PLAN

On the last trading date of a Participating Affiliate's Affiliate Plan
Year, the balance in the Participating Affiliate's Contribution Account will be
applied to purchase the maximum number of whole shares of Common Stock possible
at the discounted Issue Price. The Issue Price for a share of Common Stock will
be the lesser of 85% of the Market Price on the Purchase Date, or 85% of the
Market Price on the first trading date of an Affiliate Plan Year. The Market
Price means the closing sale price of a share of Common Stock as reported on the
National Association of Securities Dealers' New York Stock Exchange Composite
Reporting Tape (or, if the Common Stock is no longer traded on The New York
Stock Exchange, on the exchange on

34
<PAGE> 38

which it is traded or as reported by an applicable automated quotation system).
There is no commission charged to Participating Affiliates for purchases under
the Plan.

The shares of Common Stock purchased on behalf of a Participating Affiliate
under the Plan will be deposited in a brokerage account opened on the
participant's behalf and maintained by the Brokerage Agent. Participating
Affiliates will receive quarterly statements from the Brokerage Agent detailing
the number of shares credited to their accounts; in addition, Participating
Affiliates may obtain information regarding their purchased shares via a
toll-free telephone service which will be maintained by the Brokerage Agent.

Once shares have been purchased, Participating Affiliates will be entitled
to all of the voting and other rights that holders of Common Stock enjoy. The
Brokerage Agent will transmit all proxy material and other reports furnished by
the Company to its stockholders to Participating Affiliates, and will vote the
shares of Common Stock on behalf of Participating Affiliates in accordance with
their instructions.

SALES OF STOCK PURCHASED UNDER THE PLAN

To sell some or all of the shares of Common Stock which they have purchased
under the Plan, Participating Affiliates simply contact the Brokerage Agent
through its toll-free telephone service. Following a sale, the Brokerage Agent
will mail the Participating Affiliate a check for the proceeds, less brokerage
fees and commissions, as soon as administratively feasible. Brokerage fees and
commissions charged by the Brokerage Agent to participants in the Plan will be
lower than the Brokerage Agent's standard fees and commissions, but
Participating Affiliates are urged to inquire about what fees and commissions to
expect before initiating a sale. Selling shares under the Plan does not affect a
Participating Affiliate's on-going contributions under or participation in the
Plan.

RESTRICTIONS ON THE TRANSFER OF RIGHTS UNDER THE PLAN AND PURCHASED SHARES

The right of an eligible Affiliate to participate in the Plan and to
purchase shares of Common Stock under the Plan may not be transferred or
assigned.

Any person who is not an "affiliate" of MedPartners, as defined under
applicable securities laws and regulations, and purchases shares of Common Stock
under the Plan may generally resell such stock without restriction. Persons who
are "affiliates" of MedPartners within the meaning of applicable securities laws
and regulations (for example, control persons and certain officers, including,
in some cases, certain officers and directors of subsidiaries of MedPartners)
may only sell shares of Common Stock pursuant to the volume and certain other
limitations of Rule 144 under the Securities Act, or by complying with the
registration requirements of the Securities Act. While such an affiliate need
not comply with the holding period limitations of Rule 144, and thus is free
under Rule 144 to resell shares of MedPartners Common Stock immediately upon
purchase, the volume, manner of sale and notice provisions of Rule 144 would be
applicable to any resale of Common Stock by such person. The Company does not
anticipate that any eligible Affiliate would be deemed an affiliate of
MedPartners under the securities laws.

TAX CONSIDERATIONS

In general, a Plan participant will recognize ordinary income, and
accordingly incur federal income tax and applicable state income tax liability,
upon the purchase of shares of Common Stock under the Plan in an amount equal to
the difference between his or her actual purchase price and the fair market
value of the stock on the Purchase Date. Such ordinary income should be reported
on Form 1099. The Affiliate's adjusted tax basis in the purchased shares will be
the fair market value of the stock on the Purchase Date (as opposed to the
actual purchase price). Upon the sale or other disposition of such shares, the
Affiliate will recognize a capital gain (or loss) on the difference between the
sale price or disposition consideration and the Affiliate's adjusted tax basis
for such shares. Such a gain (or loss) will be considered a long-term capital
gain (or loss) if the shares have been held for more than one year. A long term
capital gain may result in a lower tax rate being applied against such gain.

35
<PAGE> 39

The following is an illustration of the tax consequences of a purchase of
shares of Common Stock under the Plan and a subsequent sale of such shares:

Assume the Market Price of a share of Common Stock is $20.00 at
enrollment and $25.00 on the Purchase Date; the participant's purchase
price per share is thus $17.00 (85% of $20.00). The ordinary income
recognized at purchase would be $8.00 per share (the fair market value
minus the actual purchase price), which would be reported on Form 1099. The
participant's basis in the shares would be $25.00 per share. If the stock
is then sold at $30.00 per share, the participant would recognize a capital
gain of $5.00 per share in the year of disposition. If the stock is sold at
$20.00 per share, on the other hand, a capital loss of $5.00 per share
would result.

MedPartners will not receive any deduction for purchases or sales under the
Plan.

This description of tax considerations does not describe all federal tax
consequences of participating in the Plan; nor does it describe state or local
tax consequences. Affiliates considering participating in the Plan are urged to
consult a tax advisor regarding these complicated tax laws and their unique tax
situations.

CHANGES IN STATUS AFFECTING ELIGIBILITY

Only eligible Affiliates may participate in the Plan. Upon the occurrence
of any event which ends a participant's status as an Affiliate, for any reason,
such person's participation in the Plan will be deemed discontinued and
contributions credited to his or her Contribution Account will be returned to
him or her as promptly as administratively feasible. Such a terminating event
could be, among other things, the termination of the Affiliate's relationship
with his or her practice or IPA; the termination of the relationship between
such practice or IPA and MedPartners or its subsidiary; or the Company's
determination, in its sole discretion, that the Affiliate's participation in the
Plan could constitute, or be construed as constituting, a violation of any
applicable healthcare laws.

USE OF PROCEEDS

The Company is unable to estimate the amount of proceeds it will receive
from Participating Affiliates' purchases of Common Stock under the Plan. The
Company intends to use any such proceeds for general corporate purposes,
including working capital.

PLAN OF DISTRIBUTION

The shares of Common Stock to be issued under the Plan are being offered by
the Company pursuant to the terms and conditions of the Plan. Neither the
Administration Agent nor the Brokerage Agent is acting as underwriter with
respect to the offering of shares of Common Stock pursuant to the Plan as
described herein. The Brokerage Agent will establish and administer brokerage
accounts for Plan participants following participants' purchases of shares under
the Plan, and will earn brokerage fees and commissions in connection with
participants' subsequent sales of shares of Common Stock purchased under the
Plan. Such fees and commissions should be lower than the Brokerage Agent's
customary fees and commissions for providing such services.

Some Affiliates may be residents of jurisdictions in which the Company
determines that it may not legally or economically offer its Common Stock under
the Plan, and the Company may preclude such residents from participating in the
Plan. This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, any shares of Common Stock or other securities in any state or
any other jurisdiction to any person to whom it is unlawful to make such offer
in such jurisdiction.

EXPERTS

The consolidated financial statements of MedPartners, Inc. appearing in
MedPartners, Inc.'s Current Report on Form 8-K dated December 5, 1996, and the
consolidated financial statements of InPhyNet Medical Management Inc. and
Subsidiaries appearing in InPhyNet Medical Management Inc. and Subsidiaries'
Annual Report (Form 10-K) for the year ended December 31, 1995, each have been
audited by Ernst & Young LLP, as set forth in their reports included therein and
incorporated herein by reference. Such consolidated financial statements
referred to above are incorporated herein by reference in reliance upon such
firm as experts in accounting and auditing.

36
<PAGE> 40

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon by Haskell Slaughter & Young, L.L.C.,
Birmingham, Alabama.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

There are hereby incorporated by reference in this Prospectus the following
documents, all of which were previously filed by the Company with the Commission
(File No. 0-27276):

1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.

2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, June 30, and September 30, 1996.

3. The Company's Current Report on Form 8-K filed February 23, 1996
(relating to the acquisition of Pacific Physician Services Inc.).

4. The Company's Current Report on Form 8-K filed September 12, 1996
(reporting the acquisition of Caremark and CHS Management).

5. The Company's Current Report on Form 8-K filed October 29, 1996
(relating to the settlement of the Coram Litigation).

6. The Company's Current Report on Form 8-K filed December 5, 1996
(updating the Company's Management's Discussion and Analysis as contained in
previous filings under the Exchange Act and presenting the consolidated
financial statements of the Company).

7. The Company's Current Report on Form 8-K filed December 6, 1996
(relating to earnings and the acquisition of Drs. Sheer Ahearn & Assoc., P.A.
and Cardinal HealthCare, P.A.).

8. The Company's Current Report on Form 8-K filed January 27, 1997
(reporting the entering into of the Plan of Merger with InPhyNet and setting
forth certain pro forma financial information for the combined companies).

9. The description of securities to be registered contained in the
Registration Statement filed with the Commission on Form 8-B under the Exchange
Act and declared effective on November 29, 1995, including any amendment or
reports filed for the purpose of updating such description.

There are also hereby incorporated by reference into this Prospectus and
made a part hereof the following documents filed by InPhyNet with the Commission
(File No. 0-24336):

1. InPhyNet's Annual Report on Form 10-K for the fiscal year ended December
31, 1995.

2. InPhyNet's Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, June 30, and September 30, 1996.

3. InPhyNet's Current Report on Form 8-K filed on March 6, 1996 (relating
to an Amendment to the Rights Agreement, dated as of August 23, 1995).

4. InPhyNet's Current Report on Form 8-K filed on January 23, 1997
(reporting the entering into of the Plan of Merger with MedPartners).

5. InPhyNet's Registration Statement on Form 8-A dated March 6, 1996.

Additionally, all documents subsequently filed by the Company and InPhyNet
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus. Any statement contained in a previously filed
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein modifies or replaces such statement. Any such

37
<PAGE> 41

statement so modified or superseded shall not be deemed, except as so modified
or replaced, to constitute a part of this Prospectus.

The Company undertakes to provide to any person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of any such
person, without charge a copy of any or all of the documents which have been or
may be incorporated by reference into this Prospectus, and which relate to the
Company or InPhyNet, as the case may be, other than exhibits to such documents.
Written or oral requests for such copies that relate to the Company should be
directed to Tracy P. Thrasher, Executive Vice President and Corporate Secretary,
at the executive offices of the Company, which are located at 3000 Galleria
Tower, Suite 1000, Birmingham, Alabama 35244 (telephone (205) 733-8996).

38
<PAGE> 42

------------------------------------------------------
------------------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF
COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
The Company........................... 4
Risk Factors.......................... 4
Business.............................. 12
Management............................ 27
The Plan.............................. 32
Use of Proceeds....................... 36
Plan of Distribution.................. 36
Experts............................... 36
Legal Matters......................... 37
Incorporation of Certain Documents by
Reference........................... 37
</TABLE>

------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------

10,000,000 SHARES

(LOGO) MEDPARTNERS(TM)
COMMON STOCK
PAR VALUE $.001 PER SHARE

AFFILIATE STOCK PURCHASE PLAN

------------

PROSPECTUS

JANUARY 27, 1997

------------
------------------------------------------------------
------------------------------------------------------
<PAGE> 43

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the shares of Common Stock, par
value $.001 per share (the "Common Stock"), offered hereby.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............................. $ 66,288*
Legal Fees and Expenses......................................................... $ 10,000
Accounting Fees................................................................. $ 10,000
Printing Costs.................................................................. $ 45,000
Miscellaneous Expenses.......................................................... $ 15,750
-----------
Total................................................................. $ 147,038
==========
</TABLE>

- ---------------

* Actual amount.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 102(b)(7) of the General Corporation Law of Delaware ("DGCL")
grants corporations the right to limit or eliminate the personal liability of
their directors in certain circumstances in accordance with provisions therein
set forth. The Company's Second Amended and Restated Certificate of
Incorporation contains a provision eliminating or limiting director liability to
the Company and its stockholders for monetary damages arising from acts or
omissions in the director's capacity as a director. The provision does not,
however, eliminate or limit the personal liability of a director (i) for any
breach of such director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under the Delaware statutory
provision making directors personally liable, under a negligence standard, for
unlawful dividends or unlawful stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision offers persons who serve on the Board of Directors of the Company
protection against awards of monetary damages resulting from breaches of their
duty of care (except as indicated above). As a result of this provision, the
ability of the Company or a stockholder thereof to successfully prosecute an
action against a director for a breach of his duty of care is limited. However,
the provision does not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care. The
Commission has taken the position that the provision will have no effect on
claims arising under the federal securities laws.

Section 145 of the DGCL grants corporations the right to indemnify their
directors, officers, employees and agents in accordance with the provisions
therein set forth. The Company's Amended and Restated By-laws provide for
mandatory indemnification rights, subject to limited exceptions, to any
director, officer, employee, or agent of the Company who, by reason of the fact
that he or she is a director, officer, employee, or agent of the Company, is
involved in a legal proceeding of any nature. Such indemnification rights
include reimbursement for expenses incurred by such director, officer, employee,
or agent in advance of the final disposition of such proceeding in accordance
with the applicable provisions of the DGCL.

The Company has agreed to indemnify all of its directors and executive
officers against liability incurred by them by reason of their services as a
director to the fullest extent allowable under applicable law. In addition, the
Company has purchased insurance containing customary terms and conditions as
permitted by Delaware law on behalf of its directors and officers, which may
cover liabilities under the Securities Act.

II-1
<PAGE> 44

ITEM 16. FINANCIAL STATEMENTS AND EXHIBITS

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<C> <S> <C>
(4)-1 -- MedPartners, Inc. Rights Agreement, filed as Exhibit (4)-1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-00774), is hereby
incorporated herein by reference.
+(4)-2 -- Affiliate Stock Purchase Plan.
(4)-3 -- Amendment No. 2 to the Rights Agreement of MedPartners, Inc., filed as Exhibit
(4)-2 to the Company's Registration Statement on Form S-3 (Registration No.
333-17339), is hereby incorporated herein by reference.
(5) -- Opinion of Haskell Slaughter & Young L.L.C., as to the legality of the Common
Stock of MedPartners, Inc.
(23)-1 -- Consent of Ernst & Young LLP. See pages immediately following signature pages to
the Registration Statement.
(23)-2 -- Consent of Haskell Slaughter & Young L.L.C. (included in the opinion filed as
Exhibit (5)).
+(24) -- Powers of Attorney. See the signature pages to the original filing of this
Registration Statement.
</TABLE>

- ---------------

+ Previously Filed.

(b) Financial Statements Schedule:

None are applicable.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;

(2) For the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be

II-2
<PAGE> 45

deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 14 hereof, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.

II-3
<PAGE> 46

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Birmingham,
State of Alabama on January 27, 1997.

MEDPARTNERS, INC.

By /s/ LARRY R. HOUSE

------------------------------------

Larry R. House

Chairman of the Board, President and

Chief Executive Officer

Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- ------------------------------ ----------------
<C> <S> <C>

/s/ LARRY R. HOUSE Chairman of the Board, January 27, 1997
- --------------------------------------------- President and Chief
Larry R. House Executive Officer and
Director

* Executive Vice President and January 27, 1997
- --------------------------------------------- Chief Financial Officer
Harold O. Knight, Jr. (Principal Financial and
Accounting Officer)

* Director January 27, 1997
- ---------------------------------------------
Richard M. Scrushy

* Director January 27, 1997
- ---------------------------------------------
Larry D. Striplin, Jr.

* Director January 27, 1997
- ---------------------------------------------
Charles W. Newhall III
* Director January 27, 1997
- ---------------------------------------------
Ted H. McCourtney

* Director January 27, 1997
- ---------------------------------------------
Walter T. Mullikin, M.D.

* Director January 27, 1997
- ---------------------------------------------
John S. McDonald, J.D.

* Director January 27, 1997
- ---------------------------------------------
Richard J. Kramer

* Director January 27, 1997
- ---------------------------------------------
Rosalio J. Lopez, M.D.

* Director January 27, 1997
- ---------------------------------------------
C.A. Lance Piccolo

* Director January 27, 1997
- ---------------------------------------------
Thomas W. Hodson
</TABLE>

II-4
<PAGE> 47

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------------------------------------------- ------------------------------ ----------------

* Director January 27, 1997
- ---------------------------------------------
Roger L. Headrick

* Director January 27, 1997
- ---------------------------------------------
Harry M. Jansen Kraemer, Jr.

*By /s/ LARRY R. HOUSE
- ---------------------------------------------
Larry R. House
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 48

EXHIBIT (23)-1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-3, No. 333-17337) and the
related Prospectus of MedPartners, Inc. for the registration of shares of its
Common Stock and the incorporation by reference therein of our report dated
October 10, 1996, with respect to the consolidated financial statements of
MedPartners, Inc. for the year ended December 31, 1995, included in its Current
Report on Form 8-K dated December 5, 1996, and our report dated February 12,
1996, with respect to the consolidated financial statements of InPhyNet Medical
Management Inc. and Subsidiaries, included in its Annual Report (Form 10-K) for
the year ended December 31, 1995, filed with the Securities and Exchange
Commission.

ERNST & YOUNG LLP

Birmingham, Alabama

January 27, 1997

<PAGE> 49

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- ------------
<C> <S> <C> <C>
(4)-1 -- MedPartners, Inc. Rights Agreement, filed as exhibit (4)-1 to the
Company's Registration Statement on Form S-4 (Registration No.
333-00774), is hereby incorporated herein by reference.
+(4)-2 -- Affiliate Stock Purchase Plan.
(4)-3 -- Amendment No. 2 to the Rights Agreement of MedPartners, Inc., filed as
Exhibit (4)-2 to the Company's Registration Statement on Form S-3
(Registration No. 333-17339), is hereby incorporated herein by
reference.
(5) -- Opinion of Haskell Slaughter & Young L.L.C., as to the legality of the
Common Stock of MedPartners, Inc.
(23)-1 -- Consent of Ernst & Young LLP. See pages immediately following signature
pages to the Registration Statement.
(23)-2 -- Consent of Haskell Slaughter & Young L.L.C. (included in the opinion
filed as Exhibit (5)).
+(24) -- Powers of Attorney. See the signature pages to the original filing of
this Registration Statement.
</TABLE>

- ---------------

+ Previously filed.

<PAGE> 1
Exhibit (5)

[Haskell Slaughter & Young, LLC letterhead]

January 27, 1997

MedPartners, Inc.
3000 Galleria Tower, Suite 1000
Birmingham, Alabama 35244

RE: MEDPARTNERS, INC.--

AMENDMENT NO. 1 TO

REGISTRATION STATEMENT ON FORM S-3
(OUR FILE NO. 48367-066)

Gentlemen:

We have served as counsel for MedPartners, Inc., a Delaware
corporation (the "Company" or the "Issuer"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act"), of an
aggregate of 10,000,000 shares (the "Shares") of the Company's authorized
Common Stock, par value $.001 per share, to be issued to participants in the
Company's Affiliate Stock Purchase Plan (the "Plan") pursuant to Amendment No.
1 to the Company's Registration Statement on Form S-3 (Commission File No.
333-17337) filed under the Act with the Securities and Exchange Commission on
January 27, 1997 (the "Registration Statement"). This opinion is furnished to
you pursuant to the requirements of Form S-3.

In connection with this opinion, we have examined and are familiar
with originals or copies (certified or otherwise identified to our
satisfaction) of such documents, corporate records and other instruments
relating to the incorporation of the Company and the authorization and issuance
of the Shares as we have deemed necessary and appropriate.

Based upon the foregoing, and having regard for such legal
considerations as we have deemed relevant, it is our opinion that:

1. The Shares have been duly authorized; and

2. Upon issuance, sale and delivery of the Shares as contemplated
in the Registration Statement, the Shares will be legally issued, fully paid
and nonassessable.
<PAGE> 2

MedPartners, Inc.

January 27, 1997

Page 2

We do hereby consent to the reference to our Firm under the heading
"Legal Matters" in the Prospectus which forms a part of the Registration
Statement, and to the filing of this opinion as an Exhibit thereto.

Very truly yours,

HASKELL SLAUGHTER & YOUNG, L.L.C.

By /s/ Robert E. Lee Garner
-------------------------------------
Robert E. Lee Garner