<PAGE>
Securities and Exchange Commission
Washington, DC 20549
-----------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 31, 1997.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number 0-16235
PHP Healthcare Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1023168
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
11440 Commerce Park Drive, Reston, VA 20191
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number including area code
(703) 758-3600
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (i) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share, outstanding as of October 31, 1997,
11,559,930 shares.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
- ------------------------------
<S> <C>
Report of Independent Accountants 2
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
PART II - OTHER INFORMATION 21
SIGNATURES 23
EXHIBIT INDEX 24
</TABLE>
1
<PAGE>
Report of Independent Accountants
To the Board of Directors of PHP Healthcare Corporation:
We have reviewed the Condensed Consolidated Balance Sheet of PHP Healthcare
Corporation and subsidiaries as of October 31, 1997, and the related Condensed
Consolidated Statements of Operations and Cash Flows for the three month and six
month periods ended October 31, 1997 and 1996. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the Consolidated Balance Sheet as of April 30, 1997, and the related
Consolidated Statements of Operations, Stockholders' Equity, and Cash Flows for
the year then ended (not presented herein), and in our report dated July 25,
1997, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
Condensed Consolidated Balance Sheet as of April 30, 1997, is fairly stated, in
all material respects, in relation to the Consolidated Balance Sheet from which
it has been derived.
Coopers & Lybrand L.L.P.
Washington, D.C.
December 17, 1997
2
<PAGE>
PHP HEALTHCARE CORPORATION
Condensed Consolidated Statements of Operations
Three Months and Six Months ended October 31, 1997 and 1996
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues......................... $55,753 $58,418 $111,495 $111,846
Direct costs..................... 45,081 45,845 89,964 87,967
------- ------- -------- --------
Gross profit................ 10,672 12,573 21,531 23,879
General and administrative
expenses........................ 7,092 7,346 14,730 14,419
------- ------- -------- --------
Operating income............ 3,580 5,227 6,801 9,460
Other income (expense):
Interest expense....... (1,524) (1,411) (3,016) (2,768)
Interest income........ 379 554 658 1,209
Miscellaneous expense.. (398) 5 (584) (33)
Minority interest in
earnings of
subsidiaries.......... (308) (204) (522) (239)
------- ------- -------- --------
Earnings before income taxes 1,729 4,171 3,337 7,629
Income tax expense............... 605 1,570 1,168 2,870
------- ------- -------- --------
Net earnings................ $ 1,124 $ 2,601 $ 2,169 $ 4,759
======= ======= ======== ========
Net earnings per share........... $ 0.08 $ 0.19 $ 0.16 $ 0.35
======= ======= ======== ========
Weighted average number of
common and common
equivalent shares outstanding.. 13,677 13,700 13,679 13,752
======= ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
See Accountants Review Report.
3
<PAGE>
PHP HEALTHCARE CORPORATION
Condensed Consolidated Balance Sheets
As of October 31, 1997 and April 30, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
October 31, April 30,
1997 1997
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 10,981 $ 15,765
Accounts receivable, net............................ 55,700 45,800
Pharmaceutical and medical supplies................. 671 1,460
Receivables from officers........................... 3,031 4,442
Income tax receivable............................... 895 882
Deferred income taxes............................... 539 539
Other current assets................................ 5,372 4,273
-------- --------
Total current assets............................. 77,189 73,161
Property and equipment, net (notes 2 and 4).......... 54,429 58,444
Intangible assets, net of accumulated amortization
of $1,690 in October and $1,236 in April (note 2)... 79,526 14,989
Receivables from officers............................ 498 1,202
Note receivable...................................... 2,000 ---
Other assets......................................... 10,023 5,508
-------- --------
$223,665 $153,304
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank (note 3)....................... $ 3,000 $ 9,200
Amounts due in connection with acquisition
(notes 2 and 3).................................... 12,902 ---
Current maturities of notes payable - other......... 2,057 1,716
Accounts payable.................................... 18,525 12,036
Claims payable - medical services................... 6,080 8,739
Accrued salaries and benefits....................... 10,605 13,219
Income taxes payable................................ 1,168 ---
Deferred revenue.................................... 24,568 1,068
-------- --------
Total current liabilities......................... 78,905 45,978
Amounts due in connection with acquisition
(notes 2 and 3)..................................... 25,710 ---
Notes payable - other, net of current maturities..... 5,488 3,964
Convertible subordinated debentures.................. 66,290 66,032
Deferred income taxes................................ 1,274 1,274
Deferred gain on sale of building.................... 873 916
Other liabilities.................................... 871 759
-------- --------
Total liabilities................................. 179,411 118,923
-------- --------
Minority interest (note 4)........................... 1,282 4,303
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued............................ --- ---
Common stock, $.01 par value, 100,000,000 shares
authorized, 14,818,415 shares issued in October
and 14,369,849 shares issued in April............. 148 144
Additional paid-in capital (note 3)................. 44,666 33,946
Note receivable from sale of stock.................. (900) (900)
Retained earnings................................... 5,630 3,460
Treasury stock, 3,258,485 common shares in October
and April, at cost................................. (6,572) (6,572)
-------- --------
Total stockholders' equity........................ 42,972 30,078
-------- --------
Contingencies (note 5)............................... $223,665 $153,304
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
See Accountants Review Report.
4
<PAGE>
PHP HEALTHCARE CORPORATION
Condensed Consolidated Statements of Cash Flows
Three Months and Six Months Ended October 31, 1997 and 1996
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Six Months
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................................. $ 1,124 $ 2,601 $ 2,169 $ 4,759
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Minority interest in earnings of subsidiaries............... 308 205 522 239
Depreciation and amortization............................... 1,560 1,283 3,358 2,576
Other items, net............................................ 33 (22) 12 (43)
Changes in operating assets and liabilities:
Increase in accounts receivable, net.......................... (9,206) (8,636) (14,760) (13,224)
Decrease in pharmaceutical and medical supplies............... 81 76 789 77
Decrease (increase) in other current assets................... 1,610 (1,042) 317 (1,661)
Increase in other assets...................................... (56) (195) (1,583) (566)
Increase (decrease) in accounts payable....................... 98 4,229 (1,444) 2,026
Decrease in claims payable.................................... (1,348) (1,705) (2,659) (3,289)
Increase (decrease) in accrued salaries and benefits.......... (1,823) 2,106 (2,614) 1,990
Increase (decrease) in deferred revenue....................... (320) (22) (343) (73)
Increase in income taxes payable.............................. 605 1,967 1,168 2,845
Increase in other liabilities................................. 42 35 112 88
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities.......... (7,292) 880 (14,956) (4,256)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment......................... (4,033) (3,584) (4,901) (6,125)
Net proceeeds from the sale of property and
equipment................................................... 2,091 --- 2,091 ---
Acquisition of subsidiaries................................... (1,634) --- (1,634) ---
Disposition of subsidiaries, net of cash
conveyed.................................................... 16,433 --- 16,433 ---
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.................................................. 12,857 (3,584) 11,989 (6,125)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Net repayments under revolving promissory notes............... (5,200) --- (6,200) ---
Repayments on notes payable................................... (955) (135) (1,606) (268)
Receivables from officers..................................... (156) (87) 2,115 (841)
Issuance of shares to directors............................... 110 --- 110 ---
Proceeds from exercise of stock options....................... 20 300 1,164 357
Proceeds from sale of stock................................... --- --- 2,600 ---
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................................. (6,181) 78 (1,817) (752)
----------- ----------- ----------- -----------
Net decrease in cash and cash
equivalents................................................. (616) (2,626) (4,784) (11,133)
Cash and cash equivalents, beginning of period.................. 11,597 40,140 15,765 48,647
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period........................ $ 10,981 $ 37,514 $ 10,981 $ 37,514
=========== =========== =========== ===========
(continued)
</TABLE>
5
<PAGE>
PHP HEALTHCARE CORPORATION
Condensed Consolidated Statements of Cash Flows
Three Months and Six Months Ended October 31, 1997 and 1996
(Unaudited)
(In thousands)
Supplemental Disclosure of Noncash Investing and Financing Activities
(For the six months ended October 31, 1997)
<TABLE>
<CAPTION>
<S> <C>
Acquisition of subsidiaries:
Fair value of fixed assets acquired........................................ $ 15,000
Excess of cost over fair value of assets acquired.......................... 65,000
Other current assets acquired.............................................. 732
Liabilities assumed........................................................ (7,933)
Amounts due................................................................ (42,462)
Application of credit for first month payment for services................. (28,703)
--------
Acquisition of subsidiaries................................................ $ 1,634
========
Disposition of subsidiaries:
Fair value of assets sold.................................................. $ 22,076
Note receivable issued..................................................... (2,000)
Capital contributions of other shareholders in subsidiaries................ (3,542)
--------
Cash received.............................................................. 16,534
Less cash conveyed......................................................... (101)
--------
Disposition of subsidiaries, net of cash conveyed.......................... $ 16,433
========
Other non-cash activities:
Warrants issued with debt recorded as discount $ 6,850
Debt issuance cost included in amounts due in connection with acquisition.. $ 3,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
See Accountants Review Report.
6
<PAGE>
PHP HEALTHCARE CORPORATION
Notes to Condensed Consolidated Financial Statements
October 31, 1997
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
In the opinion of the Company, the interim condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The interim condensed consolidated
financial statements should be read in conjunction with the Company's April 30,
1997 and 1996 audited consolidated financial statements. The year-end condensed
consolidated balance sheet data was derived from audited consolidated financial
statements but does not include all disclosures required by generally accepted
accounting principles. The interim operating results are not necessarily
indicative of the operating results for the full fiscal year.
(b) New Accounting Pronouncements
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"),
effective for financial statements for both interim and annual periods ending
after December 15, 1997. After that date, the Company will be required to
change the method currently used to calculate earnings per share and to restate
all prior periods. The new requirements will include a calculation of basic
earnings per share, from which the dilutive effect of stock options and warrants
will be excluded. The basic earnings per share are expected to reflect an
increase of $0.02 and $0.05 per share for the three month periods and $0.03 and
$0.08 per share for the six month periods ended October 31, 1997 and October 31,
1996, respectively, compared with the primary earnings per share reported for
these periods. A calculation of diluted earnings per share will also be
required; however, this is not expected to differ materially from the Company's
reported fully diluted earnings per share.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). Both
standards only require additional disclosure and therefore will not have any
effect on the Company's financial position or results of operations. SFAS 130
establishes standards for the reporting and display of comprehensive income and
will be adopted by the Company and reflected in the Company's financial
statements effective with the first quarter of fiscal year 1999. SFAS 131
changes the way companies report segment information and requires segments to be
determined based on how management measures performance and makes decisions
about allocating resources. SFAS 131 will be adopted by the Company and
reflected in the Company's financial statements effective fiscal year end 1999.
7
<PAGE>
PHP HEALTHCARE CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
(2) Acquisition
Effective October 31, 1997, the Company acquired eighteen primary care
health centers located throughout the state of New Jersey from HIP of New Jersey
Inc., a New Jersey health maintenance organization ("HIP"). The total purchase
price of approximately $80 million, including transaction costs and other
consideration, was paid through a combination of cash on hand and bank financing
(see Note 3). The Company may be required to pay HIP additional amounts based
upon membership growth during the years 1997 through 2000, up to a total of $15
million. In conjunction with the purchase agreement, the Company and HIP entered
into a twenty year Health Services Agreement pursuant to which the Company
arranges for the provision of certain health care services to enrolled HIP
beneficiaries and will receive in return global capitation payments. To enable
the Company to provide health care services as promptly as possible, the Company
and HIP also entered into a twenty year Network Access and Transition Agreement,
whereby HIP will pay the Company $5.4 million to perform various transition
functions such as medical management and administrative services, and to provide
HIP members access to the Company's health care network during the transition
period.
Amounts due in connection with acquisition of $45.46 million at October
31, 1997 were paid on November 7, 1997, using funds provided by the Company's
new Credit Agreement, as described in note 3.
The transaction was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated, on an estimated basis, to the
acquired tangible ($15 million) and identifiable intangible ($65 million) assets
and assumed liabilities based on their respective estimated fair market value.
The identifiable intangible assets will be amortized on a straight-line basis
over periods up to 20 years.
3) Note Payable - Bank
To finance the HIP transaction (see Note 2), pay related expenses and
provide future working capital, the Company obtained a $75 million
collateralized credit facility (the "Credit Agreement") from its primary bank
dated as of October 31, 1997. Under the Credit Agreement, the Company has
available up to $75 million in principal amount of senior collateralized
financing in the form of (i) a term facility in the principal amount of $40
million maturing in two years (the "Term Facility"), and (ii) a revolving credit
facility in an aggregate principal amount of up to $35 million (the "Revolving
Facility"). In connection with the Credit Agreement, the Company paid $3.0
million in fees which will be amortized over the life of the Credit Agreement.
In addition to these fees the primary bank is entitled to participate in any
refinancing for which it will receive a fee.
The Company will be required to make quarterly amortization payments in
connection with the Term Facility. Amounts outstanding under the Term Facility
bear interest at LIBOR plus 5%, and amounts outstanding under the Revolving
Facility bear interest at LIBOR plus 4.5%. The initial interest rates
automatically increase by 0.5% in each three month period thereafter.
The Credit Agreement provides for certain customary affirmative and
negative covenants and events of default, including, but not limited to,
covenants regarding the Company's capital
8
<PAGE>
PHP HEALTHCARE CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
expenditures, funded debt, intangible net worth, leverage, working capital,
interest coverage and fixed charge coverage, as well as limitations on other
indebtedness, mergers, acquisitions (and asset sales), other liens and
investments. The Credit Agreement is collateralized by a security interest in
substantially all of the Company's assets.
Under the Credit Agreement, the loans are subject to certain mandatory
prepayments of excess cash flow (as defined in the Agreement), proceeds from
sales of assets, and issuances of debt and equity.
On November 7, 1997, the Company borrowed the entire Term Facility of $40.0
million and $8.46 million on the Revolving Facility, in order to pay the amounts
due in connection with acquisition of $45.46 million as presented at October 31,
1997, which includes the $3.0 million in fees associated with the new Credit
Agreement, and $3.0 million to repay the pre-existing revolving promissory note.
Additionally, the Company issued warrants to its primary bank to acquire
1,421,000 shares of common stock of the Company with no cost to exercise.
Effective October 31, 1997, 500,150 of the warrants became immediately
exercisable. The remaining 920,850 warrants are in escrow and only become
exercisable if any borrowings under the Credit Agreement remain outstanding on
January 31, 1998.
The 500,150 warrants which became exercisable effective October 31, 1997
were recorded as additional paid-in capital using the market price on that day
of $13.69 per share, for a total of $6.85 million. The value of these warrants
was recognized as a discount to the borrowings from the primary bank, $3.65
million with the Term Facility and $3.2 million with the Revolving Facility.
The Company's pre-existing primary banking facility was superseded by this
new Credit Agreement.
(4) Sale of Ownership Interest in New Jersey Primary Care Facilities
On February 28, 1997, the Company and a real estate investment trust
subsidiary in which the Company owned a minority interest (the "REIT"), acquired
certain primary care facilities located throughout the state of New Jersey
formerly operated by Blue Cross Blue Shield of New Jersey, Inc. ("BCBSNJ").
Concurrent with agreement to purchase the primary care facilities, the Company
and BCBSNJ replaced an existing operating agreement with a network services
agreement. The total purchase price related to these agreements, including
transaction costs and other consideration, was approximately $44.7 million, of
which $22.3 million was paid by the REIT. In conjunction with the REIT's
acquisition of the primary care facilities, the Company made a $0.9 million
capital contribution to the REIT and advanced the REIT an additional $18
million, including $16 million in short-term loans and $2 million in long-term
secured loans until permanent financing could be obtained. Since the Company
provided substantially all of the funds at closing, in concert with certain
ownership risk provisions of the lease agreements between the Company and the
REIT, the Company had consolidated the operations of the REIT since February
1997.
9
<PAGE>
PHP HEALTHCARE CORPORATION
Notes to Condensed Consolidated Financial Statements (continued)
On August 15, 1997, the REIT obtained permanent financing and repaid its
loans to the Company. In addition, the REIT's parent company, G&L Realty
Corporation, purchased the Company's ownership interest in the REIT and the
Company provided a new $2.0 million long-term loan to G&L Realty Corporation. In
conjunction with these transactions, the Company committed to a 17-year
operating lease. Accordingly, since the Company has sold its interest in the
subsidiary and its loans have been repaid, the operations of the REIT have not
been consolidated since August 15, 1997.
(5) Contingencies
The Company is a defendant in various legal actions. The principal actions
allege or involve claims under contractual arrangements, employment matters, and
medical malpractice with an estimated possible range of loss between
approximately $50,000 and $250,000. The Company does not believe that it has a
material, estimable and probable liability related to these various legal
actions and therefore has not recorded any reserves at October 31, 1997.
The Company maintains medical malpractice insurance coverage which provides
for reimbursement of any claim amounts in excess of $250,000 per incident on
Government Managed Care Division projects and $50,000 per incident on Commercial
Managed Care Division projects.
10
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
Over the past four years, the Company has altered its focus from a historic
dependence on government contracts to a focus on commercial managed care
markets. Prior to 1993, over 98% of PHP's revenue came from government-related
contracts. PHP's government service contracts required the Company to manage
health care providers in a variety of delivery settings. In 1992, management
realized that the knowledge, expertise and skills which the Company had acquired
in managing health care providers for government agencies could also be applied
to serve the commercial managed care market. At the same time, management
supplemented the Company's existing competencies with additional skills and
capabilities in order to take full advantage of the opportunities available in
commercial managed care. The Company added to existing capabilities by making
several key acquisitions, investing in information systems and recruiting
experienced managed care executives.
Revenues from the Commercial Managed Care Division have grown, in part as a
result of acquisitions, to $134.9 million or 58.1% of total revenues in 1997
from $1.3 million or 1% of total revenues in 1992. Operations in this division
consist of the Company's integrated health care delivery networks applied in
whole or in part to: (i) the Company's HMOs in the District of Columbia and
Virginia, primarily serving the government assisted Medicaid population, (ii)
the Company's statewide Integrated System of Care ("ISOC") in New Jersey which
contracts to provide services with HMOs and insurance companies, (iii) family
health centers which are operated on a contract basis for large employers, and
(iv) the Company's participation in Connecticut Health Enterprises, a provider
sponsored integrated health care delivery network in Fairfield County, which
functions as an alliance between PHP, St. Vincent's Hospital, Fairfield County
physicians, and other hospitals and ancillary providers, and is marketed as a
total health care delivery system to insurers, HMOs, and government agencies.
The Company is compensated for its commercial managed health care services in a
variety of methodologies, including capitation, cost plus fee, percentage of
revenue, percentage of savings, fee-for-service, or some combination of the
foregoing.
Effective October 31, 1997, the Company completed the acquisition of 18
health centers and related assets from HIP of New Jersey, Inc. ("HIP") for
approximately $80 million (including related costs). HIP is a New Jersey
not-for-profit health maintenance organization. In connection with the
transaction, the Company also entered into a Health Services Agreement with HIP
pursuant to which the Company will arrange for the provision of health care
services for more than 200,000 HIP members over the next 20 years on an
exclusive, globally capitated basis.
To finance the transaction, pay related expenses and provide future working
capital, the Company obtained a $75 million secured credit facility from its
primary bank. The credit facility is in the form of (i) a term facility in the
principal amount of $40 million maturing in two years and (ii) a revolving
credit facility in the principal amount of $35 million.
Revenues from the Government Managed Care Division have decreased slightly
from a peak of $116.4 million in 1992 to $97.4 million in 1997. Operations in
this division consist of health care services provided to government agencies
across a diverse scope of service groups including
11
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
ambulatory care, medical staffing, mental health, and total managed care. The
Company generally performs these services under unit-price, fixed-price, cost-
reimbursement-plus-fee, and fixed-rate-labor hour contracts.
The Company's revenues have increased from $118.0 million in 1992 to $232.3
million in 1997. Gross profit margins increased to 18% and 19% in 1997 and 1996,
respectively, after having decreased to 6% and 7% in 1994 and 1993,
respectively. The Company incurred a net loss of $4.1 million in 1997 after
earning net income of $9.1 million and $952,000 in 1996 and 1995, respectively.
The 1997 loss resulted from a $9.8 million reserve for Medicaid receivables,
$2.6 million in restructuring charges, and a $2.3 million charge related to the
retirement of the Company's former chairman. In 1994 and 1993 the Company
incurred losses of $9.3 million and $3.8 million, respectively, due to a
decrease in gross profits resulting from some significant nonrecurring events
including certain contract receivable write-offs, increased corporate staff
costs and increased commercial business development costs.
The following table sets forth, for the periods indicated, certain items in
the Company's Condensed Consolidated Statements of Operations expressed as a
percentage of revenue:
<TABLE>
<CAPTION>
Three Months Six Months
ended October 31, ended October 31,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues............................. 100.0% 100.0% 100.0% 100.0%
Direct costs......................... 80.9 78.5 80.7 78.7
----- ----- ----- -----
Gross profit......................... 19.1 21.5 19.3 21.3
General and administrative expenses.. 12.7 12.6 13.2 12.9
----- ----- ----- -----
Operating income..................... 6.4 8.9 6.1 8.4
Other expense........................ (3.3) (1.8) (3.1) (1.6)
----- ----- ----- -----
Earnings before income taxes......... 3.1 7.1 3.0 6.8
Income tax expense................... 1.1 2.7 1.1 2.5
----- ----- ----- -----
Net earnings......................... 2.0 4.4 1.9 4.3
===== ===== ===== =====
</TABLE>
12
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
RESULTS OF OPERATIONS
The Three Months Ended October 31, 1997 Compared To
---------------------------------------------------
The Three Months Ended October 31, 1996
---------------------------------------
The following table indicates revenue by the Company's divisions and the
related percentage of total revenue:
<TABLE>
<CAPTION>
October 31, 1997 October 31, 1996
---------------- ----------------
Revenue % of Revenue % of
Division: (000's) Total (000's) Total
- --------- ------- ----- ------- -----
<S> <C> <C> <C> <C>
Government Managed Care $15,815 28.4 $27,891 47.7
Commercial Managed Care 39,938 71.6 30,527 52.3
------- ----- ------- -----
Total $55,753 100.0 $58,418 100.0
======= ===== ======= =====
</TABLE>
The Company's revenue decreased by 4.6% or $2.7 million to $55.7 million
for the quarter ended October 31, 1997 compared to $58.4 million for the prior
year quarter. This decrease in revenues was the result of an increase in the
Commercial Managed Care Division offset by a decrease in the Government Managed
Care Division.
Commercial Managed Care Division revenue increased by $9.4 million or
30.8%, to $39.9 million for the quarter ended October 31, 1997, compared to
$30.5 million for the prior year second quarter. The majority of this net
increase, $9.0 million, is attributable to the Company's wholly owned
subsidiary, Pinnacle Health Enterprises, L.L.C. ("PHE") which operates in the
state of New Jersey. PHE's revenues increased because of $4.9 million in new
revenues for transition activities related to the recently concluded HIP
transaction and a $4.1 million increase in the existing operational revenues
with BCBSNJ resulting from a change in that business relationship wherein on
March 1, 1997, PHP began to provide globally capitated services. Another
increase in revenues of $2.0 million was provided by Virginia Chartered Health
Plan, Inc. ("VACHP"), the Company's majority owned Medicaid HMO in Virginia,
resulting from a 45% increase in member months compared with the prior year
quarter. Additional revenue increases totaling $1.6 million resulted from a
growth in activity at the Company's various other operations in Connecticut,
Louisiana, and the employer health centers under management for GTE and
Bethlehem Steel.
These Commercial Managed Care Division revenue increases were partially
offset by a decrease in revenues at Chartered Health Plan, Inc. ("CHP"), the
Company's wholly owned Medicaid HMO in the District of Columbia. CHP's revenues
decreased by $3.2 million resulting from a 15.1% decrease in member months
compared with the prior year quarter and a 14.6% reduction in the contractual
premium rate effective November 1, 1996.
13
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
Government Managed Care Division revenue decreased by $12.1 million or
43.4%, to $15.8 million for the quarter ended October 31, 1997, compared to
$27.9 million for the prior year second quarter. The majority of this net
decrease, in the amount of $9.8 million, resulted from the completion of five
ambulatory care projects, two mental health projects and one total managed care
correctional facilities project on various dates since the beginning of the
prior year second quarter. A further decrease in revenues of $5.7 million is due
to the Company's decision during the third quarter of fiscal 1997 to terminate
its long-term care line of business. These revenue decreases were partially
offset by a $1.8 million increase resulting from two medical staffing and one
ambulatory care project which commenced operations since the beginning of the
prior year second quarter, and a $1.4 million increase at ongoing projects
resulting from an increase in the scope of services and/or increases in the
volume of activity at two ambulatory care projects, one medical staffing project
and one total managed care correctional facilities project.
The Company's gross profit decreased by 15.1% or $1.9 million, to $10.7
million for the quarter ended October 31, 1997, compared to $12.6 million for
the prior year second quarter. As a percentage of revenue, gross profit
decreased to 19.1% for the current year second quarter compared to 21.5% for the
same period in the prior year. Gross profit decreased in both the Commercial
Managed Care Division and the Government Managed Care Division.
The Commercial Managed Care Division gross profit decreased by $400,000 or
3.6%, from $9.9 million during the prior year quarter ended October 31, 1996,
compared to $9.5 million for the current year second quarter. The reduction in
member months and the reduction in the contractual premium rate at CHP produced
a $2.1 million decrease in gross profit. Reducing the impact of that decrease
was an increase of $1.2 million in gross profit provided by the operations of
PHE. Specifically, during the second quarter ended October 31, 1997, the Company
earned gross profit of $2.1 million resulting from the transition services
performed over the most recent two fiscal quarters in connection with the Health
Services Agreement with HIP. Additionally, gross profit at VACHP increased by
$400,000 resulting from the growth in membership.
The Government Managed Care Division gross profit decreased by $1.5 million
or 57.4%, from $2.7 million during the prior year quarter ended October 31,
1996, compared to $1.2 million for the current year second quarter. The majority
of this net decrease, in the amount of $1.4 million, resulted from the
completion of several projects detailed above.
General and administrative expenses decreased by $200,000 to $7.1 million
for the quarter ended October 31, 1997 from $7.3 million for the prior year
second quarter. As a percentage of revenue, general and administrative expenses
increased to 12.7% for the current year second quarter compared to 12.6% during
the prior year period.
Operating income decreased by $1.6 million to $3.6 million for the quarter
ended October 31, 1997, from $5.2 million for the prior year second quarter.
Operating margin decreased to 6.4% from 8.9%. Operating income decreased
primarily due to the gross profit decrease in the Commercial Managed Care
Division and the Government Managed Care Division.
14
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
Interest expense increased by $113,000, to $1,524,000 for the quarter ended
October 31, 1997, from $1,411,000 for the quarter ended October 31, 1996.
Interest income decreased by $175,000, to $379,000 for the quarter ended
October 31, 1997 from $554,000 for the quarter ended October 31, 1996. This
decrease is due to a decrease in cash available for short-term investment as a
result of the BCBSNJ health center acquisition completed in February 1997.
The effective income tax rates of 35.0% in the second quarter of fiscal
1998 and 37.6% in the second quarter of fiscal 1997 represent the combined
federal and state income tax rates adjusted as necessary.
Net earnings decreased by $1.5 million or $0.11 per share, to $1.1 million
or $0.08 per share, from $2.6 million or $0.19 per share for the quarters ended
October 31, 1997 and 1996, respectively.
15
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
RESULTS OF OPERATIONS
The Six Months Ended October 31, 1997 Compared To
-------------------------------------------------
The Six Months Ended October 31, 1996
-------------------------------------
The following table indicates revenues by the Company's divisions and the
related percentage of total revenues:
<TABLE>
<CAPTION>
October 31, 1997 October 31, 1996
---------------- ----------------
Revenues % of Revenues % of
Division: (000's) Total (000's) Total
- -------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
Government Managed Care $ 34,434 30.9 $ 52,545 47.0
Commercial Managed Care 77,061 69.1 59,301 53.0
-------- ----- -------- -----
Total $111,495 100.0 $111,846 100.0
======== ===== ======== =====
</TABLE>
The Company's revenue decreased by 0.3% or $300,000 to $111.5 million for
the six months ended October 31, 1997 compared to $111.8 million for the prior
year period. This decrease in revenues was the result of an increase in the
Commercial Managed Care Division offset by a decrease in the Government Managed
Care Division.
Commercial Managed Care Division revenue increased by $17.8 million or
30.0%, to $77.1 million for the six months ended October 31, 1997, compared to
$59.3 million for the same period during the prior year. The majority of this
net increase, $14.2 million, is attributable to the Company's wholly owned
subsidiary, Pinnacle Health Enterprises, L.L.C. ("PHE") which operates in
the state of New Jersey. This increase is the result of $4.9 million in new
revenues for transition activities related to the recently concluded HIP
transaction and a $9.3 million increase in the existing operational revenues
with BCBSNJ resulting from a change in that business relationship wherein on
March 1, 1997, PHP began to provide globally capitated services. VACHP's
revenues increased by $4.5 million resulting from a 57% increase in member
months compared with the same period in the prior year. Additional revenue
increases totaling $6.2 million occurred as follows: (i) a $3.0 million increase
in revenues from the Company's ISOC development, management, and operations
related to its strategic venture in Connecticut, (ii) a $2.0 million increase in
revenues resulting from the Company's new business venture to develop an ISOC in
the state of Louisiana, and (iii) a $1.2 million increase in revenues resulting
from a growth in activity at the Company's employer health centers under
management for GTE and Bethlehem Steel.
These Commercial Managed Care Division revenue increases were partially
offset by a decrease in revenues at Chartered Health Plan, Inc. ("CHP"), the
Company's wholly owned Medicaid HMO in the District of Columbia. CHP's revenues
decreased by $7.5 million resulting from a 17% decrease in member months
compared with the same period in the prior year and a 14.6% reduction in the
contractual premium rate effective November 1, 1996.
16
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
Government Managed Care Division revenue decreased by $18.1 million or
34.5%, to $34.4 million for the six months ended October 31, 1997, compared to
$52.5 million for the prior year six month period. The majority of this net
decrease, in the amount of $16.1 million, resulted from the completion of five
ambulatory care projects, three mental health projects and one total managed
care correctional facilities project on various dates since the beginning of the
prior year six month period. A further decrease in revenues of $11.0 million is
due to the Company's decision during the third quarter of fiscal 1997 to
terminate its long-term care line of business. These revenue decreases were
partially offset by a $7.3 million increase due to one ambulatory care project,
two medical staffing projects, one mental health project, and one total managed
care correctional facilities project which commenced operations since the
beginning of the prior year six month period. An additional $1.0 million
increase is attributable to ongoing projects, resulting from an increase in the
scope of services and/or increases in the volume of activity at two ambulatory
care and one medical staffing project.
The Company's gross profit decreased by 9.8% or $2.3 million, to $21.5
million for the six months ended October 31, 1997, compared to $23.9 million for
the prior year period. As a percentage of revenue, gross profit decreased to
19.3% for the current six month period compared to 21.3% during the prior year.
Gross profit increased in the Commercial Managed Care Division and decreased in
the Government Managed Care Division.
The Commercial Managed Care Division gross profit increased by $700,000 or
3.6%, from $18.6 million during the six months ended October 31, 1996, compared
to $19.3 million for the current year six month period. The most significant
cause of this increase, in the amount of $2.3 million, resulted from the
operations of PHE. Reducing the impact of that decrease was an increase of $1.2
million in gross profit provided by the operations of PHE. Specifically, during
the second quarter ended October 31, 1997, the Company earned gross profit of
$2.1 million resulting from the transition services performed over the most
recent two fiscal quarters in connection with the Health Services Agreement with
HIP. Additionally, gross profit at VACHP increased by $1.1 million resulting
from the growth in membership. For the six month period ended October 31, 1997,
gross profit also increased by $1.3 million compared to the prior year as a
result of the Company's new business venture to establish a state-wide ISOC in
Louisiana for a large physician organization. Offsetting these increases was a
decrease of $4.0 million at CHP resulting from the reduction in member months
and contractual premium rate.
The Government Managed Care Division gross profit decreased by $3.0 million
or 57.3%, from $5.3 million during the prior year six months ended October 31,
1996, compared to $2.3 million for the current year six month period. The
majority of this net decrease, in the amount of $2.8 million, resulted from the
completion of several projects detailed above. An additional decrease of $1.1
million is due to the combined impact of an increase in secondary care costs at
a total managed care correctional facilities project which commenced operations
during the prior year six month period ended October 31, 1996, and the Company's
decision to terminate its long-term care line of business during the prior year
third quarter. These decreases were offset by an increase
17
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
of $0.8 million in gross profits related to one new ambulatory care project, two
new medical staffing projects and one new mental health project which commenced
operation since the beginning of the prior year six month period, and increased
profitability at two existing ambulatory care projects resulting from an
increase in patient visits.
General and administrative expenses increased by $300,000 to $14.7 million
for the six months ended October 31, 1997 from $14.4 million for the same period
in the prior year. As a percentage of revenue, general and administrative
expenses increased to 13.2% for the current year six month period compared to
12.9% during the prior year.
Operating income decreased by $2.7 million to $6.8 million for the six
months ended October 31, 1997, from $9.5 million for the prior year period.
Operating margin decreased to 6.1% from 8.4%. Operating income decreased
primarily due to the net gross profit decrease, as discussed above.
Interest expense increased by $248,000, to $3,016,000 for the six months
ended October 31, 1997, from $2,768,000 for the six months ended October 31,
1996.
Interest income decreased by $551,000, to $658,000 for the six months ended
October 31, 1997 from $1,209,000 for the six months ended October 31, 1996.
This decrease is due to a decrease in cash available for short-term investment
as a result of the BCBSNJ health center acquisition completed in February 1997.
The effective income tax rates of 35.0% for the six months ended October
31, 1997 and 37.6% for the six months ended October 31, 1996 represent the
combined federal and state income tax rates adjusted as necessary.
Net earnings decreased by $2.6 million or $0.19 per share to $2.2 million
or $0.16 per share, from $4.8 million or $0.35 per share for the six months
ended October 31, 1997 and 1996, respectively.
18
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended October 31, 1997, operations used $15.0
million in cash. This represents a $10.7 million increase in cash used by
operations compared with the $4.3 million used by operations during the prior
year six month period.
This increase in cash used by operations is primarily due to (i) a decrease
in net earnings of $2.6 million, (ii) a $3.5 million comparative decrease in
cash related to accounts payable resulting from the timing of payments to
vendors, and (iii) a $4.6 million comparative decrease in cash related to
accrued salaries and benefits resulting from the timing of pay dates and
associated benefit costs.
At April 30, 1997 and October 31, 1997, the Company had accounts receivable
from the District of Columbia amounting to $12.0 million and $13.5 million,
respectively, related to its Medicaid services contract. The receivable has
increased since April 30, 1997 primarily resulting from delayed payment for
newborn enrollees. Since April 30, 1997, there has been a reduction in claims
payable -medical services resulting from the 17% decrease in member months at
CHP.
Investing activities provided $12.0 million in cash during the six months
ended October 31, 1997, compared to a use of $6.1 million during the prior year
period, a change of $18.1 million. The current period includes $16.4 million in
cash provided by the Company's disposition of its interest in the REIT, which
purchased the primary care facilities in New Jersey from BCBSNJ, and the REIT's
repayment of notes payable due the Company. In addition, during the current
period the Company paid $1.6 million in connection with the HIP transaction and
received $2.1 million upon the sale of certain items of property and equipment.
Financing activities used $1.8 million in cash during the six months ended
October 31, 1997, compared to $0.8 million during the prior year period, a
change of $1.0 million. The current year period includes proceeds of (i) $2.6
million related to the sale of stock to a private investor, (ii) $2.1 million
related to the net repayment of receivables from officers primarily related to
the retirement of the CEO, and (iii) $1.2 million from the exercise of stock
options. The current period also includes a use of cash in the amount of
$6.2 million related to repayments on the revolving promissory note.
To finance the HIP transaction, pay related expenses and provide future
working capital, the Company obtained a $75 million collateralized credit
facility (the "Credit Agreement") from its primary bank dated as of October 31,
1997. Under the Credit Agreement, the Company has available up to $75 million in
principal amount of senior collateralized financing in the form of (i) a term
facility in the principal amount of $40 million maturing in two years (the "Term
Facility"), and (ii) a revolving credit facility in an aggregate principal
amount of up to $35 million (the "Revolving Facility").
19
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
The Company will be required to make quarterly amortization payments in
connection with the Term Facility. Amounts outstanding under the Term Facility
bear interest at LIBOR plus 5%, and amounts outstanding under the Revolving
Facility bear interest at LIBOR plus 4.5%. The initial interest rates
automatically increase by 0.5% in each three month period thereafter.
The Credit Agreement provides for certain customary affirmative and
negative covenants and events of default, including, but not limited to,
covenants regarding the Company's capital expenditures, funded debt, intangible
net worth, leverage, working capital, interest coverage and fixed charge
coverage, as well as limitations on other indebtedness, mergers, acquisitions
(and asset sales), other liens and investments. The Credit Agreement is
collateralized by a security interest in substantially all of the Company's
assets.
Under the Credit Agreement, the loans are subject to certain mandatory
prepayments of excess cashflow (as defined in the agreement), proceeds from
sales of assets, and issuances of debt and equity.
Additionally, the Company issued warrants to its primary bank to acquire
1,421,000 shares of common stock of the Company with no cost to exercise.
Effective October 31, 1997, 500,150 of the warrants became immediately
exercisable. The remaining 920,850 warrants are in escrow and only become
exercisable if any borrowings under the Credit Agreement remain outstanding at
January 31, 1998.
The Company's pre-existing primary banking facility was superseded by this
new Credit Agreement.
The Company is actively pursuing other long-term financing alternatives,
including the issuance of bonds, preferred stock, or common stock, and intends
to complete a transaction for alternative long-term financing before January 31,
1998.
The Company believes that the current cash and cash equivalents,
anticipated cash flow generated by operations and its remaining borrowing
capabilities of $26.5 million (after the November 7, 1997 advances associated
with the HIP transaction) under the new Credit Agreement will be sufficient for
known future capital needs of the Company, other than the long-term refinancing
of the HIP transaction, which will require additional external financing as
described above. In addition to the HIP transaction, there may be further
expansion opportunities which require additional external financing and the
Company may, from time to time, consider obtaining such funds through the public
and private issuance of equity or debt securities.
20
<PAGE>
PHP HEALTHCARE CORPORATION
PART II - OTHER INFORMATION
- ------- -----------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Effective October 31, 1997, the Company issued warrants to acquire
common stock of the Company to its primary bank in connection with the
establishment of the Company's current credit facility and advisory services
related to the HIP transaction. The warrants entitle the Company's primary bank
to acquire 500,150 shares of the Company's common stock at no cost. On January
31, 1998, if any borrowings under the Company's current credit agreement remain
outstanding, the Company's primary bank will be entitled to warrants to acquire
920,850 additional shares of common stock at no cost. The issuance of the
warrants was exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The 1997 annual meeting of shareholders was held on November 3, 1997.
The nominees for Director elected at the meeting were as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- --- --------
<S> <C> <C>
Jerry W. Carlton 10,341,750 290,479
William J. Lubin 10,337,180 295,049
John J. McDonnell 10,340,380 291,849
Charles P. Reilly 10,334,980 297,249
</TABLE>
The other directors whose term of office continued after the meeting
were Robert L. Bowles, Jr., Joseph G. Mathews, Jack M. Mazur, Frank L. Provato,
Donald J. Ruffing and Michael D. Starr.
At the 1997 annual meeting, the stockholders also approved (i) an
amendment to the Company's certificate of incorporation (a) to increase the
authorized Common Stock from 25,000,000 shares to 100,000,000 shares, (b) to
increase the authorized Preferred Stock from 500,000 shares to 10,000,000 shares
and (c) to authorize the Board of Directors to provide for the issuance of the
shares of Preferred Stock in one or more series, to establish the number of
shares to be included in each such series and to fix the designations, powers,
preferences, and rights of each such series, and any qualifications, limitations
or restrictions thereof, with holders of 6,063,545 shares voting for approval,
holders of 862,576 shares voting against approval, and holders of 63,136 shares
abstaining; and (ii) the Amended and Restated PHP Healthcare Corporation 1996
Incentive Plan, with holders of 6,053,669 shares voting for approval, holders of
823,954 shares voting against approval, and holders of 111,634 shares
abstaining.
Item 5. Other Information
-----------------
HIP Transaction. As previously reported in the Company's Current Report
---------------
on Form 8-K filed on November 17, 1997, the Company has completed the
acquisition of certain health centers and related assets from HIP of New Jersey,
Inc., a New Jersey health maintenance organization
21
<PAGE>
PHP HEALTHCARE CORPORATION
PART II - OTHER INFORMATION (continued)
- ------- -----------------
("HIP"), and has entered into an exclusive long term agreement to provide health
services to HIP's members on a global capitation basis. HIP is the third largest
health maintenance organization in New Jersey, with approximately 200,000
members. Under its agreement with HIP, the Company will receive global
capitation payments equal to a percentage of the premiums collected by HIP. The
capitation rate will decrease gradually over the first five years of the
contract and will remain fixed for the last 15 years of the agreement. Based
upon HIP's current premium rates and enrollment, the Company is currently
receiving capitation payments of approximately $30 million per month. In
addition to arranging for medical care, the Company will also have delegated
responsibility for certain administrative functions, including provider
relations, utilization management and claims payment. The health services
agreement has a 20-year term and may be renewed for successive 5-year periods.
This agreement also permits HIP to buy out the contract after December 31, 2000
and prior to December 31, 2003, at a price equal to the greater of (i) the
unamortized purchase price paid by the Company or (ii) the value of the
agreement through the end of the initial 20-year term.
The historical and pro forma financial information required to be filed
in connection with the HIP transaction will be filed in an amendment on Form
8-K/A within 60 days after the initial report on Form 8-K was required to be
filed.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The documents required to be filed as exhibits to this report under
Item 601 of Regulations S-K are listed in the Exhibit Index included
elsewhere in this report, which list is incorporated herein by
reference.
(b) No reports on Form 8-K were filed during the three month period
ended October 31, 1997.
22
<PAGE>
PHP HEALTHCARE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
PHP HEALTHCARE CORPORATION
--------------------------
(Registrant)
By: /s/ Anthony M. Picini
------------------------------
ANTHONY M. PICINI
Executive Vice President and
Chief Financial Officer
Date: December 17, 1997
23
<PAGE>
PHP HEALTHCARE CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Item Page
- ------- ---- ----
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of PHP
Healthcare Corporation
10.1* PHP Healthcare Corporation Amended and Restated 1996 Incentive
Plan
10.2** Health Services Agreement between Pinnacle Health Enterprises,
L.L.C. and HIP of New Jersey, Inc., dated as of July 24, 1997
10.3** Amendment No. 1 to Health Services Agreement between Pinnacle
Health Enterprises, L.L.C. and HIP of New Jersey, Inc., dated
October 31, 1997
11.1 Statement re: Computation of per share earnings for the three
months and six months ended October 31, 1997 and 1996 25
15.1 Letter of Coopers & Lybrand, L.L.P. regarding unaudited interim 26
financial statements
27 Financial Data Schedule 27
</TABLE>
* Filed as Annex A to the Company's definitive proxy statement filed with the
Securities and Exchange Commission on October 7, 1997 and incorporated herein by
reference.
** The Company has filed an application with the Securities and Exchange
Commission seeking confidential treatment of certain portions of this document.
24
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PHP HEALTHCARE CORPORATION
(Incorporated on January 2, 1986 under the name PHP Corporation)
PHP Healthcare Corporation, a corporation organized and existing under the
laws of the State of Delaware, does hereby certify:
FIRST: The name of the corporation is PHP Healthcare Corporation (the
"Corporation").
SECOND: The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on January 2, 1986.
THIRD: Pursuant to Sections 242 and 245 of the General Corporation Law of
the State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the original
Certificate of Incorporation of the Corporation as heretofore amended or
supplemented.
FOURTH: The text of the Certificate of Incorporation, as heretofore
amended or supplemented, is hereby amended and restated to read in its entirety
as follows:
1. The name of the Corporation is PHP Healthcare Corporation (the
"Corporation").
2. The address of its registered office in the State of Delaware is 1209
Orange Street, in the City of Wilmington, County of New Castle. The name of
its registered agent at such address is The Corporation Trust Company.
3. The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
4. The total number of shares of all classes of capital stock which
the Corporation shall have authority to issue is One Hundred Ten Million
(110,000,000) shares divided into two classes of which (i) One Hundred
Million (100,000,000) shares of par value $.01 per share shall be
designated common stock (the "Common Stock") and (ii) Ten Million
(10,000,000) shares of par value $.01 per share shall be designated
preferred stock (the "Preferred Stock").
<PAGE>
(A) Common Stock
------------
1. Dividends. Subject to the preferential rights, if any,
---------
of the Preferred Stock, the holders of shares of Common Stock shall be
entitled to receive, when and if declared by the Board of Directors, out of
the assets of the Corporation which are by law available therefor,
dividends payable either in cash, in property, or in shares of Common
Stock.
2. Voting Rights. At every annual or special meeting of
-------------
the stockholders of the Corporation, every holder of Common Stock shall be
entitled to one vote, in person or by proxy, for each share of Common Stock
standing in his name on the books of the Corporation.
3. Liquidation, Dissolution or Winding Up. In the event of
--------------------------------------
any voluntary or involuntary liquidation, dissolution, or winding up of the
affairs of the Corporation, after payment or provision for payment of the
debts and other liabilities of the Corporation and of the preferential
amounts, if any, to which holders of Preferred Stock shall be entitled, the
holders of all outstanding shares of Common Stock shall be entitled to
share ratably in the remaining net assets of the Corporation.
(B) Preferred Stock. The Board of Directors is authorized,
---------------
subject to limitations prescribed by law, to provide for the issuance of
shares of Preferred Stock in one or more series, to establish the number of
shares to be included in each such series, and to fix the designations,
powers, preferences, and rights of the shares of each such series, and any
qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative
vote of a majority of the votes entitled to be cast by the holders of stock
of the Corporation without the separate vote of the holders of the
Preferred Stock as a class.
Pursuant to Section 105 of the General Corporation Law of the State of
Delaware and this Certificate of Incorporation, the Board of Directors duly
adopted resolutions on July 24, 1992 to create the Series A Junior
Participating Preferred Stock, par value $.01 per share. The designation,
number of shares, the powers, relative rights, preferences, limitations and
other special rights of the Series A Junior Participating Preferred Stock
are set forth in Exhibit A to this Certificate of Incorporation.
2
<PAGE>
5. The corporation is to have perpetual existence.
6. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter or
repeal the By-laws of the Corporation.
7. Meetings of stockholders may be held within or without the State
of Delaware, as the By-laws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside the
State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the By-laws of the Corporation.
8. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and
all rights conferred upon stockholders herein are granted subject to this
reservation.
9. Except as otherwise provided in Section 102(b) of the General
Corporation Law of the State of Delaware as amended from time to time, no
director shall be personally liable to the Corporation or its shareholders
for monetary damages for breach of fiduciary duty as a director.
10. (a) Classified Board. The number of directors of the
Corporation which shall constitute the entire Board of Directors shall be
set forth in the By-laws of the Corporation, but such number shall in no
case be less than five or greater than twelve. Upon the adoption of this
Article 10, the directors shall be divided into three classes (I, II and
III), as nearly equal in number as possible, and no class shall include
less than three directors. The initial term of office for members of Class
I shall expire at the annual meeting of stockholders in 1993; the initial
term of office for members of Class II shall expire at the annual meeting
of stockholders in 1994; and the initial term of office for members of
Class III shall expire at the annual meeting of stockholders in 1995. At
each annual meeting of stockholders following such initial classification
and election, directors elected to succeed those directors whose terms
expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, and shall
continue to hold office until their respective successors are elected and
qualified. In the event of any increase in the number of directors fixed
by the Board of Directors, the additional directors shall be so classified
that all classes of directors have as nearly equal numbers of directors as
may be possible. In the event of any decrease in the number of directors,
all classes of directors shall be decreased equally as nearly as may be
possible.
3
<PAGE>
(b) Vacancies. Newly created directorships resulting from any
increase in the number of directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or any other cause shall be filled only by the Board of
Directors, provided that a quorum is then in office and present, or only by
a majority of the directors then in office, if less than a quorum is then
in office, or by the sole remaining director. Directors elected to fill a
newly created directorship or other vacancies shall hold office for
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor has been elected and has qualified.
Notwithstanding the foregoing provision of this Article 10,
whenever the holders of any one or more class or series of Preferred Stock
issued by the Corporation shall have the right, voting separately by class
or series, to elect directors at an annual or special meeting of
stockholders, the election, term of office, filling of vacancies and other
features of such directorships shall be governed by the rights and
preferences of such Preferred Stock as set forth in this Restated
Certificate of Incorporation, and such directors so elected shall not be
divided into classes pursuant to this Article 10 unless expressly provided
by such rights and preferences.
(c) Election. Elections of directors need not be by written
ballot unless the By-laws of the Corporation shall so provide.
(d) Amendment. Notwithstanding any other provision of this
Restated Certificate of Incorporation, the affirmative vote of the holders
of at least two-thirds of the Corporation's capital stock issued and
outstanding and entitled to vote thereon is required to amend, alter or
repeal any provisions of, or adopt any provisions inconsistent with, this
Article 10.
11. Pursuant to Section 228(a) of the General Corporation Law of the
State of Delaware, any action required to be taken at any annual or special
meeting of stockholders of the Corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
only at such annual or special meeting of the stockholders.
Notwithstanding any other provision of this Restated Certificate of
Incorporation, the affirmative vote of the holders of at least two-thirds
of the Corporation's capital stock issued and outstanding and entitled to
vote thereon is required to amend, alter or repeal any provision of, or
adopt any provisions inconsistent with, this Article 11.
4
<PAGE>
FIFTH: This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors and stockholders of the Corporation in
accordance with Sections 242 and 245 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, PHP Healthcare Corporation has caused its corporate
seal to be hereunto affixed and this Amended and Restated Certificate of
Incorporation to be signed by Jack M. Mazur, its President and Chief Executive
Officer, this 20th day of November, 1997.
PHP Healthcare Corporation
By: /s/ Jack M. Mazur
-----------------------------
Jack M. Mazur, President
and Chief Executive Officer
5
<PAGE>
EXHIBIT A
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF PHP HEALTHCARE CORPORATION
1. Designation, Par Value and Amount. The shares of the series shall
---------------------------------
be designated as "Series A Junior Participating Preferred Stock" (hereinafter
referred to as "Series A Preferred Stock"), the shares of such series shall be
with par value of $.01 per share, and the number of shares constituting such
series shall be 50,000; provided, however, that if more than a total of 50,000
shares of Series A Preferred Stock shall be issuable upon the exercise of rights
(the "Rights") issued pursuant to the Rights Agreement, dated as of April 10,
------
1992, between PHP Healthcare Corporation (the "Corporation") and Riggs National
Bank, N.A., as Rights Agent (as amended from time to time) (the "Rights
Agreement"), the Board of Directors of the Corporation, pursuant to Section 151
of the General Corporation Law of the State of Delaware, shall direct by
resolution or resolutions that a certificate be properly executed, acknowledged
and filed providing for the total number of shares of Series A Preferred Stock
authorized to be issued to be increased (to the extent that the Restated
Certificate of Incorporation then permits) to the largest number of whole shares
(rounded up to the nearest whole number) issuable upon exercise of the Rights.
2. Dividends and Distributions
------------- -------------
(A) Subject to the prior and superior rights of the holders of any
shares of any series of preferred stock ("Preferred Stock") ranking prior and
superior to the shares of Series A Preferred Stock with respect to dividends,
the holders of shares of Series A Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of assets legally
available for the purpose, quarterly dividends payable in cash on the first
business day of July, October, January and April in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $10.00 or (b) subject to the
provision for adjustment hereinafter set forth, 1,000 times the aggregate per
share amount of all cash dividends, and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions other
than a dividend payable in share of common stock, par value $.01 per share, of
the Corporation ("Common Stock") or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on Common Stock since
the immediately preceding Quarterly Dividend Payment Date, or,
<PAGE>
-2-
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred Stock.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on Common Stock (other than a dividend
payable in shares of Common Stock), provided that, in the event no dividend or
distribution shall have been declared on Common Stock during the period between
any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $10.00 per share on the Series A Preferred Stock
shall nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution desired thereon,
which record date shall be not more than 60 days prior to the date fixed for the
payment thereof.
3. Voting Rights. The holders of shares of Series A Preferred Stock
-------------
shall have the following voting rights:
(A) Except as may otherwise be restricted by the Corporation's
Restated Certificate of Incorporation (in which case each share of Series A
Preferred Stock shall have the maximum voting rights permitted under the
Corporation's Restated Certificate of Incorporation), each share of Series A
Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters
submitted to a vote of the stockholders of the Corporation.
<PAGE>
-3-
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
stockholders of the Corporation.
4. Certain Restrictions.
--------------------
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Paragraph 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
(except as provided in (iv) below) shares of any stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred Stock; and
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
<PAGE>
-4-
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Paragraph
4, purchase or otherwise acquire such shares at such time and in such manner.
5. Reacquired Shares. Any shares of Series A Preferred Stock
-----------------
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation became authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Restated Certificate of Incorporation, in any other Certificate of Amendment
creating a series of Preferred Stock or as otherwise required by the law.
6. Liquidation, Dissolution or Winding Up.
---------------------------------------
(A) Subject to the prior and superior rights of holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series A Preferred Stock with respect to rights upon liquidation, dissolution or
winding up (voluntary or otherwise), no distribution shall be made to the
holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A Preferred Stock shall have
received $1,000.00 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payments (the "Series A Liquidation Preference"). Following the payment of
the full amount of the Series A Liquidation Preference, no additional
distributions shall be made to the holders of shares of Series A Preferred Stock
unless, prior thereto, the holders of shares of Common Stock shall have received
an amount per share (the "Capital Adjustment") equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) 1,000 (such number in
clause (ii), the "Adjustment Number"). Following the payment of the full amount
of the Series A Liquidation Preference and the Capital Adjustment in respect of
all outstanding shares of Series A Preferred Stock and Common Stock,
respectively, holders of Series A Preferred Stock and holders of Common Stock
shall receive their ratable and proportionate share of the remaining assets to
be distributed in the ratio of the Adjustment Number to 1 with respect to such
Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the
<PAGE>
-5-
holders of Series A Preferred Stock and the holders of such parity shares in
proportion to their respective liquidation preferences. In the event, however,
that there are not sufficient assets available to permit payment in full of the
Capital Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
7. Consolidation, Merger, etc. In case the Corporation shall enter
---------------------------
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share equal to 1,000 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged.
8. No Redemption. The shares of Series A Preferred Stock shall not
-------------
be redeemable.
9. Banking. The Series A Preferred Stock shall rank junior to all
-------
other series of the Corporation's Preferred Stock as to the payment of dividends
and the distribution of assets, unless the terms of any such series shall
provide otherwise.
10. Amendment. The Restated Certificate of Incorporation of the
---------
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A
Preferred Stock so as to effect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding shares of Series A
Preferred Stock, voting separately as a class.
<PAGE>
EXHIBIT 10.2
HEALTH SERVICES AGREEMENT
by and between
HIP OF NEW JERSEY, INC.,
and
PINNACLE HEALTH ENTERPRISES, L.L.C.
Dated as of July 24, 1997
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
HEALTH SERVICES AGREEMENT
-------------------------
THIS HEALTH SERVICES AGREEMENT (the " Agreement") is dated as of the
---------
24th day of July, 1997, by and between HIP of New Jersey, Inc., a New Jersey
not-for-profit corporation (the "Plan"), and Pinnacle Health Enterprises,
----
L.L.C., a Delaware limited liability company ("PHE").
---
WITNESSETH:
WHEREAS, the Plan is a federally qualified and state certified health
maintenance organization conducting business under the name of "HIP Health Plan
of New Jersey" and provides, or arranges for the provision of, Covered Services
for Covered Persons; and
WHEREAS, PHE is an Integrated System of Care(R) or ISOC(R) comprised of
PHE Providers in the State, and is authorized to contract on their behalf with
managed care plans, and coordinate the delivery of, and reimbursements for, a
continuum of health care services; and
WHEREAS, the Plan wishes to have PHE, through its ISOC(R), arrange for
the delivery of Covered Services to Covered Persons enrolled in the Plan's
Coverage Plans on the terms and conditions set forth herein; and
WHEREAS, PHE and PINNACLE MEDICAL GROUP, P.A., a New Jersey
professional corporation (the "Medical Group") have entered into a Medical
-------------
Services Agreement dated as of February 28, 1997 and annexed hereto as Exhibit A
---------
pursuant to which Physicians and other Providers agree to provide Covered
Services for Center Covered Persons; and
WHEREAS, through a series of Provider Agreements entered into and to be
entered into by PHE with Providers throughout the State, PHE has developed and
will develop a network pursuant to which Physicians and other Providers can
provide Covered Services to Covered Persons; and
WHEREAS, the effectiveness of this Agreement is contingent upon the
consummation of the transactions related to this Agreement, including the
receipt of all necessary governmental approvals and consents in connection
herewith.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
<PAGE>
SECTION 1 - DEFINITIONS
As used herein, the terms below shall have the following meanings:
"Accreditation Agency" means any non-governmental accreditation agency,
--------------------
including without limitation NCQA, which monitors, audits, accredits or performs
other similar functions with respect to health maintenance organizations and
other managed care organizations.
"Affiliate" means, with respect to any Person, any other Person that directly or
---------
indirectly controls, is controlled by, or is under common control with such
Person. For purposes of this definition, "control" means either:
(a) the possession, directly or indirectly, of the power to direct
or to cause the direction of the management of the affairs of a
Person or the conduct of the business of a Person; or
(b) the holding of a direct or indirect equity or voting interest of
50% or more in the Person.
PHP and the Medical Group shall each be deemed to be an Affiliate of PHE.
"Agreement" means this Health Services Agreement between the Plan and PHE,
---------
including all exhibits and attachments hereto, as the same may be amended from
time to time in conformity herewith.
"ASO" means administrative services only.
---
"Capitation Payments" means the payments described in Attachment 1.1 to be made
------------------- --------------
by the Plan to PHE for Covered Services.
"Centers" means, collectively, the Health Care Centers and any other health care
-------
centers which were not previously owned or operated by the Plan and currently
are or hereinafter will be owned or operated by PHE or one of its Affiliates,
including without limitation Medical Group, within the State to provide or
arrange for the provision of health care services.
"Center Covered Persons" means any Person entitled to Covered Services under his
----------------------
or her Coverage Plan, or any other Person designated by the Plan, who has
elected or been designated to receive primary care Covered Services at the
Centers.
"Claim" and "Claim Notice" have the meanings given to such terms in Section 5.3.
------------------------
"Closing Date" means the date of the closing of all transactions between the
------------
Plan and PHE and its Affiliates related to this Agreement.
1
<PAGE>
"Coinsurance" means the amount (expressed as a percentage) of allowable expenses
-----------
payable by a Covered Person for the cost of Covered Services, including those
amounts payable pursuant to an out-of-network benefit or an indemnity or POS
Coverage Plan.
"Copayment" means those charges permitted under a Covered Person's Coverage Plan
---------
which should be collected directly by Physicians or Health Care Providers from a
Covered Person as partial payment for Covered Services.
"Coverage Plan" means a plan of health care coverage that is provided or
-------------
administered by the Plan or its Affiliates for:
(a) one or more employers or other groups through contracts,
including but not limited to insurance contracts, health
maintenance organization contracts, POS contracts, employer
funded or ASO contracts, or any other plan provided or
administered by the Plan or its Affiliates; or
(b) one or more individuals through contracts such as health
maintenance organization contracts or Medicare or Medicaid
contracts.
"Covered Person" means, collectively, Center Covered Persons and Network Covered
--------------
Persons.
"Covered Services" means all Medically Necessary health care services and
----------------
supplies covered under and in accordance with the terms (including any required
preauthorization) of the applicable Coverage Plan, or as required by applicable
law, rules or regulations, for Covered Persons.
"Covering Physician" means (a) in the case of Covered Services provided to
------------------
Center Covered Persons, a Physician chosen directly or indirectly by PHE or the
Medical Group, and (b) in the case of Covered Services provided to Network
Covered Persons, a Physician who is either a PHE Provider [********************
****************************************************************] in each case
who is to provide Covered Services to Covered Persons during a time period when
a Covered Person's regular PHE Provider is not available.
"Credentialing" means a process by which the professional credentials and
-------------
professional qualifications of Physicians, and, if applicable, Health Care
Providers are reviewed, both prior to first providing Covered Services to
Covered Persons and periodically thereafter, to determine whether or not they
meet the Plan's requirements for providing or arranging for Covered Services to
Covered Persons under Coverage Plans. This term specifically includes
recredentialing.
"Deductible" means the portion of the cost of Covered Services which a Covered
----------
Person must pay before the Plan is obligated to pay for such Covered Services.
2
<PAGE>
"Delegation Agreement" means the delegation agreement in the form annexed hereto
--------------------
as Attachment 1.2 to be entered into between Plan and PHE on the Closing Date.
--------------
"Delegated Functions" means those administrative and medical management
-------------------
functions which PHE shall perform or cause to be performed on behalf of the Plan
pursuant to the Delegation Agreement.
"Edison Health Care Center" means the health care center located at 312 Pierson
-------------------------
Avenue in Edison, New Jersey which shall be conveyed by the Plan to PHE.
"Effective Date" means (a) if the Closing Date shall be on or before the 15th
--------------
day of a month, the first day of such month, or (b) if the Closing Date shall be
after the 15th day of a month, the first day of the next succeeding month, or
(c) such other date as is mutually agreed upon by the Plan and PHE.
"Emergency" means a medical condition manifesting itself by acute symptoms of
---------
sufficient severity including, but not limited to, severe pain, psychiatric
disturbances and/or symptoms of substance abuse such that absence of immediate
attention could reasonably be expected to result in: placing the health of the
individual (or, with respect to a pregnant woman, the health of the woman or her
unborn child) in serious jeopardy; serious impairment to bodily functions; or
serious dysfunction of a bodily organ or part. With respect to a pregnant woman
who is having contractions, an emergency exists where: there is inadequate time
to effect a safe transfer to another hospital before delivery; or the transfer
may pose a threat to the health or safety of the woman or the unborn child.
"Exclusive Health Care Centers" means those Centers so designated in Attachment
----------------------------- ----------
1.3.
- ---
"Financial Risk" has the meaning given to such term in N.J.A.C. 8:38-1.2, as
-------------- --------
amended from time to time.
[******************************************************************************
*******************************************************************************
*******************************************************************************
*******************************************************************************
*******************************************************************************
***********************************]
"Force Majeure" has the meaning given to such term in Section 7.14.
-------------
"Health Care Centers" means those health care centers, listed in Attachment 1.3,
------------------- --------------
which PHE will lease and, in the case of the Edison Health Care Center, which
will be conveyed to PHE by the Plan, which will be staffed by Medical Group to
provide Covered Services as described in this Agreement.
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
3
<PAGE>
"Health Care Provider" means an individual or organization (other than a
--------------------
Physician, Supplier, or Institutional Care Facility) who or which is certified,
licensed or otherwise recognized to provide health care services in the state
where such services shall be furnished.
"Institutional Care Facility" means a hospital, acute care facility, sub-acute
---------------------------
care facility, rehabilitation facility, skilled nursing care facility, or other
institution which:
(a) provides facilities for inpatient and/or outpatient health
care services; and
(b) has all necessary licenses, approvals and authorizations to
operate as such a facility.
"Losses" has the meaning given to such term in Section 5.3.
------
"Managed Care Organization" means any of the following (other than the Plan or
-------------------------
its Affiliates): (a) any health maintenance organization; (b) any comprehensive
medical plan; (c) an exclusive provider organization; or (d) any Person other
than PHE or its Affiliates offering or operating a point-of-service plan, or
preferred provider organization.
"Medical Group" means Pinnacle Medical Group, P.A., a New Jersey professional
-------------
corporation.
"Medical Services Agreement" means the agreement between PHE and Medical Group,
--------------------------
annexed hereto as Exhibit A.
---------
"Medically Necessary" means any health care service or supply provided by a
-------------------
Provider for the diagnosis or treatment of a Covered Person's condition and
which the Plan determines is:
(a) consistent with the symptoms, diagnosis and treatment of the
Covered Person's condition;
(b) in accordance with standards of good medical practice;
(c) not primarily for the convenience of the Covered Person, the
Covered Person's family, or his or her Provider; and
(d) approved by the appropriate medical body or board for the
Covered Person's condition.
"NCQA" means the National Committee for Quality Assurance.
----
"Network Covered Persons" means any person entitled to Covered Services under
-----------------------
his or her Coverage Plan, or any other Person designated by the Plan, who has
elected or been designated to receive primary care Covered Services through a
PHE Provider, and who is not a Center Covered Person.
4
<PAGE>
"Non-Covered Services" means those health care services and supplies which:
--------------------
(a) are not covered under the terms of a Covered Person's Coverage
Plan, and are, therefore, the financial responsibility of the
Covered Person; or
(b) if a Covered Service, the total cost of such Covered Service
which exceeds the limitations set forth in the Covered
Person's Coverage Plan, and which excess amount is, therefore,
the financial responsibility of the Covered Person.
"Non-Exclusive Health Care Centers" means those Health Care Centers so
---------------------------------
designated in Attachment 1.3 or determined pursuant thereto.
--------------
"Person" means a natural person, partnership (general or limited), corporation,
------
limited liability company, trust, estate, association or other entity.
"PHE" means Pinnacle Health Enterprises, L.L.C., a Delaware limited liability
---
company.
"PHE Provider" means Medical Group and a Provider who has agreed to provide
------------
Covered Services to Covered Persons pursuant to:
(a) an employment agreement or other contractual arrangement
which it has entered into with Medical Group;
(b) a Provider Agreement which it has entered into or under which
it is covered with PHE; or
(c) is a Plan Provider who is deemed to have entered into a
Provider Agreement with PHE and who the Plan and PHE have
agreed shall continue to provide Covered Services to Covered
Persons.
"PHP" means PHP Healthcare Corporation, a Delaware corporation.
---
"Physician" means a person licensed to practice medicine or osteopathy in a
---------
state where such person practices or a professional corporation or other
business entity of such persons.
"Physician Incentive Plan" has the meaning specified in 42 C.F.R. (S)417.479, as
------------------------
amended from time to time.
"Plan" means HIP of New Jersey, Inc. and its successors and permitted assigns.
----
"Plan's Medical Director" means the Physician identified by the Plan (and his or
-----------------------
her designees) whose responsibilities include the oversight of the protocols and
procedures constituting the Provider Guide as well as other medical management
programs and such other responsibilities as determined by the Plan from time to
time.
5
<PAGE>
"Plan Provider" means a Provider who, as of the Effective Date, is not a PHE
-------------
Provider, and is under a contractual arrangement with Plan.
"POS" means point of service.
---
"Primary Care Physician" means a Physician who is a PHE Provider:
----------------------
(a) specializing in family practice, general practice, internal
medicine, or pediatrics; and
(b) who is chosen by a Covered Person, or to whom a Covered
Person is assigned, to:
i) provide initial and primary medical care;
ii) maintain the continuity of that medical care;
iii) initiate referrals to Specialty Care Physicians and
other Health Care Providers who are Plan Providers
or PHE Providers; and
iv) arrange and coordinate all Covered Services for
Covered Persons who have selected or been assigned
to such Primary Care Physician pursuant to this
Agreement.
"Provider" means a Health Care Provider, Institutional Care Facility, Physician,
--------
or Supplier.
"Provider Agreement" means a contractual arrangement between a Provider and PHE,
------------------
other than the Medical Services Agreement, whereby such Provider agrees to
provide or arrange, inter alia, for the provision of some or all Covered
Services to Covered Persons. A copy of the model Provider Agreement with a
Physician is annexed hereto as Exhibit B.
---------
"Provider Guide" means the protocols and procedures developed by the Plan which
--------------
PHE shall cause all PHE Providers to follow with respect to the provision of
Covered Services, as modified from time to time in accordance with this
Agreement.
"Quality Improvement" means the continuous quality improvement program to
-------------------
monitor the quality and appropriateness of care and services provided to Covered
Persons.
"Risk Management" means that part of the Quality Improvement process involving
---------------
the reduction and/or prevention of losses and injuries to Covered Persons and
employees, for identification, analysis, and evaluation of areas of potential
loss, and for review of specific incidents (both reported and unreported).
"Specialty Care Physician" means a Physician who:
------------------------
6
<PAGE>
(a) provides certain specialty medical care to Covered Persons
upon referral by a Primary Care Physician; and
(b) is a PHE Provider.
"State" means the State of New Jersey.
-----
"Substantial Financial Risk" has the meaning specified in 42 C.F.R. (S)417.479,
--------------------------
as amended from time to time.
"Supplier" means a Person who provides health care related products and services
--------
and who has all necessary licenses, permits and authority to provide such
products and services.
"**********************************************************************]
"**********************************************************************]
"Urgent Care" means a non-life-threatening condition that requires care by a
-----------
Provider within twenty-four (24) hours.
"Utilization Management" means that part of the Quality Improvement process that
----------------------
involves a comprehensive effort to monitor access to and appropriate utilization
of health care and services.
SECTION 2 -
INDEPENDENT CONTRACTOR-RELATIONSHIP OF PARTIES;
REPRESENTATIONS AND WARRANTIES OF PARTIES
2.1 Independent Contractors. The Plan and PHE are independent contractors
-----------------------
and separate legal entities. The relationship between the Plan and PHE
is reflected in this Agreement, and neither the Plan, PHE, nor the
employees, servants, agents or representatives of either, shall be
considered the employee, servant, agent or representative of the other.
None of the provisions of this Agreement are intended to create or to
be construed as creating any agency, partnership, joint venture or
employer-employee relationship between or among the Plan, PHE or any of
their respective employees, servants, [****] or representatives.
[**********************************************************************
********************************************************************
******************************************************************
******************************************************************
***************]
2.2 Physician-Patient Relationship. PHE shall, and shall cause Medical
------------------------------
Group to, require in their Provider Agreements that each PHE Provider
acknowledge and agree that such PHE Provider is solely responsible for
all decisions regarding the medical care and treatment of Covered
Persons and that the traditional relationship between physician
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
7
<PAGE>
and patient shall in no way be affected by the terms of this Agreement,
the Medical Services Agreement or the Provider Agreement,
notwithstanding the fact that the Plan is ultimately responsible for
determinations concerning claims, Utilization Management, coverage and
benefit payment issues. Any determination by the Plan or PHE denying
approval for a particular health care service shall not relieve said
Provider from providing or recommending such service if it deems it
appropriate.
2.3 Non-Covered Services. Subject to the provisions of Section 2.2 hereof
--------------------
and applicable law, PHE shall not be required hereunder to arrange for,
and PHE Providers shall not be required to provide, any health care
services not explicitly identified as Covered Services.
2.4 Subcontracts. [***************************************************
------------
*********************************************************************
***********************************************************
**********************************************************************
******************************************************************
***********************************************************************
*********************************************************************
********************************************************************
*******************************************************************
**********************************************************************
****************************************************************
**********************************************************************
**************************************************************]
2.5 Representations and Warranties of PHE. PHE represents and warrants to
-------------------------------------
the Plan that:
(a) PHE Good Standing - PHE is a Delaware limited liability
company, duly organized, existing, in good standing under and
by virtue of the laws of the jurisdiction of its organization.
PHE is, and shall remain during the initial and all subsequent
terms of this Agreement, in good standing under applicable
Federal and State statutes and regulations governing its
existence and operation, including any applicable insurance,
health maintenance organization, preferred provider
organization, and utilization review licensing statutes and
regulations.
(b) PHE Provider Good Standing - As of the Effective Date, each
PHE Provider is, to the best of PHE's knowledge, in good
standing under applicable statutes, regulations, and
accreditation standards governing his, her, or its practice,
existence, and operation, including licensing statutes and
regulations. PHE shall use its best efforts to ensure that all
PHE Providers remain in good standing under applicable
statutes and regulations, including licensing statutes and
regulations, during the initial and all subsequent terms of
this Agreement and their respective Provider Agreements.
(c) Future Provider Agreements - PHE shall not execute a Provider
Agreement
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
8
<PAGE>
with any Physician or Provider, and shall cause Medical Group
not to employ or otherwise contract with any Physician or
Provider as of the Effective Date, unless such Physician or
Provider is in good standing under applicable statutes,
regulations, and accreditation standards governing his, her,
or its practice, existence, and operation, including licensing
statutes and regulations, on the date that he, she, or it
executes such Provider Agreement.
(d) [**********************************************************
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*************************************************************
*********************************************************
*********************************************************
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*********************************************************
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*********************************************************]
(e) [***********************************************************
*********************************************************
*************************************************************
*******************************************************
*****************************************************
***********************************************************]
2.6 Representations and Warranties of the Plan. The Plan represents and
------------------------------------------
warrants to PHE that:
(a) Plan Good Standing - The Plan is a New Jersey not-for-profit
corporation duly organized, existing, in good standing under
and by virtue of the laws of the State.
(b) Compliance - The Plan is a federally qualified and State
certified health maintenance organization, shall maintain its
license and certifications, shall comply with all applicable
State and Federal statutes and regulations, is in compliance
with applicable State and Federal statutes and regulations and
shall continue such compliance during the initial and all
subsequent terms of this Agreement.
(c) Coverage Plans - Exhibit C to this Agreement includes a copy
---------
of each standard form of Coverage Plan filed by the Plan with
the State Department of Banking and Insurance or the State
Department of Health and Senior Services.
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
9
<PAGE>
(d) [************************************************************
*************************************************************
************************************************************
********************************************************
*******************************************************
*************************************************************
****************************************************
************************************************************
************************************************************
***********************************************************
*************************************************************
*******************************************************
**********************************************************
**************************************************************
***************************************************
*************************************************************
**********]
(e) [************************************************************
******************************************************
*****************************************************
*************************************************************
**************************************************************
***********************************************************
**********************************************************
********************]
(f) [***********************************************************
************************************************************
************************************************************
*************************************************************
************************************************************
***********************************************************
*********]
(g) Contractor Information -
(i) Delegated Functions - The Plan has provided PHE
with a complete list and copies of any written
contracts entered into with Providers and other
Persons currently performing Delegated
Functions. Such list is attached hereto as
Attachment 2.6. [************************
**********************************************
****************************************
********************************************
***************************************
**********************************************
******************************]
(ii) Administrative Functions, and Capitated or
Exclusive Relationships in Health Care Centers-
The Plan has provided PHE with a complete list
and copies of any written contracts, as well as
a description of any oral contracts, entered
into with Providers and other Persons
performing administrative functions, other than
Delegated Functions, or currently providing
services which shall be deemed to be Covered
Services
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
10
<PAGE>
under this Agreement, under a capitated or
exclusive relationship. Such list is attached
hereto as Attachment 2.6. [******************
*************************************
***************************************
********************************************
*******************************************
******************************************
**************************************
**************] For those administrative
functions described in this subsection (ii)
which shall be assumed by PHE hereunder, at
the time PHE assumes the responsibility for
such functions, the assumption shall not be in
violation of any agreement the Plan has with
any other Person to perform such
administrative functions.
(iii) [********************************************
************************************
*********************************************
*********************************************
*********************************************
*****************************************
*********************************************
*********************************************
*******************************************
********************************************
*************************************]
(h) [**********************************************************
************************************************************
**********************************************************
**********************************************************
************************************************************
**********************************************************
***********************************************************
********]
SECTION 3 - RESPONSIBILITIES AND OBLIGATIONS OF PHE
3.1 Provision of Covered Services through the ISOC(R).
-------------------------------------------------
(a) [*******************************************************] PHE,
through the PHE Providers, shall have the exclusive right and
obligation to arrange for the delivery of Covered Services to
Covered Persons. PHE agrees that it will (i) arrange for the
provision of Covered Services (x) at all Centers pursuant to
its contractual relationship with Medical Group, as set forth
in the Medical Services Agreement, and (y) through other PHE
Providers pursuant to the Provider Agreements entered into by
PHE with each such PHE Provider; and (ii) manage the rendering
of all Covered Services to Covered Persons, [*******
*************************************************************
*************************************************************
*************************************************************
*************************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
11
<PAGE>
(b) PHE shall be responsible for confirming whether Covered
Persons are eligible for Covered Services by using the
eligibility information and system provided by the Plan in
accordance with Section 4.3.
(c) PHE shall cause PHE Providers to provide health care services
of a quality that, at a minimum, is consistent with accepted
medical and surgical practices in the State.
(d) PHE shall cause PHE Providers to provide health care services
that are generally recognized as being within their medical
and specialty training.
(e) PHE may on its own behalf or on behalf of Medical Group
transfer the care of a Covered Person from one Primary Care
Physician to another Primary Care Physician upon demonstrating
to the satisfaction of Plan's Medical Director that the
original Primary Care Physician is unable to maintain a
satisfactory Physician-patient relationship with the Covered
Person. If the Plan's Medical Director grants such request,
the transfer shall be accomplished at an appropriate time and
in such a manner so as to not constitute the abandonment of
the Covered Person.
(f) PHE shall cause Medical Group and PHE Providers to provide
sufficient support staff to enable Covered Persons to receive
the health care services that are generally recognized and
accepted as being within the Physician's medical practice and
specialty. All such support staff must be duly licensed as may
be required by State law, rules and regulations.
(g) [***********************************************************
***********************************************************
************************************************************
*************************************************************
**************************************************************
*****************************************************
************************************************************
*********]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
12
<PAGE>
3.2 Covered Persons' Access To Care.
-------------------------------
(a) PHE shall ensure that all Covered Services, including Emergency
services and Urgent Care (including call coverage services) shall
be available and accessible to Covered Persons (including
telephone access) on a twenty four (24) hours per day, seven (7)
days a week basis. In order to ensure access to such Covered
Services, including Emergency services and Urgent Care, PHE shall
cause PHE Providers to make arrangements with Covering Physicians
and to ensure that Covering Physicians abide by all of the terms
and conditions of this Agreement and the Provider Agreements
pertaining to the provision of Covered Services including for
Covered Persons eligible for Medicaid and Medicare. PHE shall
cause PHE Providers to comply with the Plan's call coverage
standards as described in the Provider Guide.
(b) PHE shall: (i) maintain an adequate panel of PHE Providers to
provide timely service to Covered Persons; (ii) diligently pursue
and arrange for the provision of an adequate number of PHE
Physicians to support any increase in the number of Covered
Persons; and (iii) assure timely access to Covered Services for
Covered Persons. Timely access and service is defined by access
and service standards outlined in Attachment 3.2.
--------------
(c) The availability and accessibility of Covered Services to Covered
Persons is further subject to PHE causing PHE Providers to meet
the standards and provisions of the Plan's Quality Improvement
program, pursuant to the terms of the Delegation Agreement.
(d) [****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
********]
3.3 Performance Standards. PHE agrees to meet or exceed the performance
---------------------
standards to be outlined in Attachment 3.3, as such standards may be
--------------
amended from time to time upon mutual written consent of the parties,
including for reasons related to newly adopted or revised regulatory or
Accreditation Agency Standards or requirements, or for competitive
market reasons, as mutually acknowledged by the parties. The parties
shall agree upon the timing, measurement tools, authority to measure,
performance scales, and notice and cure periods applicable to all
performance standards required of PHE. [*****************************
*********************************************************************
*********************************************************************
*********************************************************************
*******]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
13
<PAGE>
[********************************************************************
*********************************************************************
*********************************************************************
*********************************************************************
*********************************************************************
*********************************************************************
*********************************************************************
*********************************************************************
*********************************************************************
**************]
3.4 Compliance With Laws and Participation in Programs.
--------------------------------------------------
(a) PHE agrees that it shall, and shall cause PHE Providers to comply
with all applicable Federal and State laws, rules and regulations
in the provision of Covered Services to Covered Persons. PHE
agrees that a comprehensive program for monitoring utilization
and quality of service, and other aspects of the delivery system
is necessary. Therefore, PHE shall, and shall cause the PHE
Providers to comply with, participate in and cooperate with the
Plan's programs [********************************************
*********************] including but not limited to referral
authorization and precertification procedures, Credentialing
policies and procedures, Risk Management, Utilization Management
[*************************************************************
*************************************************************]
Quality Improvement programs, peer review, Covered Person
complaint resolution, case management, and all of the standards
and rules constituting the Provider Guide. PHE shall, and agrees
that it shall cause PHE Providers to, be bound by and comply with
all final determinations rendered by Covered Person complaint
resolution and peer review process maintained by the Plan. PHE
also agrees to participate in and cooperate with the programs and
other mechanisms that are used by the Plan to enhance and monitor
the quality and cost effectiveness of Covered Services.
(b) PHE shall: (i) prohibit any Provider who fails to meet the
standards set forth in the Plan's Credentialing, Quality
Improvement, Risk Management, and Utilization Management programs
from providing Covered Services to Covered Persons; and (ii)
prohibit any Provider from providing Covered Services to Covered
Persons if the Plan reasonably determines that the health or
safety of Covered Persons will be endangered. [******************
********************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*********************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
14
<PAGE>
(c) PHE shall cause PHE Providers to comply with the rules
established by the Plan's Medical Director and the Plan regarding
the utilization of Covered Services, and abide by all of the
protocols and procedures constituting the Provider Guide.
(d) [*******************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
****************************]
3.5 Health Care Centers; Other Facilities and Arrangements.
------------------------------------------------------
(a) [****************************************************************
*************************************************************
***************************************************************
***************************************************************
*************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
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***************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
***************************************************************
**************************************************************]
(b) During the term hereof, so long as PHE is in compliance with its
obligations hereunder, Plan agrees that PHE shall have the
exclusive right to arrange for delivery of Covered Services to
Covered Persons.
(c) [***************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
**************************************************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
15
<PAGE>
(d) PHE shall not directly solicit the Plan's current customers or
any Plan prospective customer [********************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************]
(e) [***********************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
**************************************************]
(f) [***************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*************]
(g) [********************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
**********************************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
16
<PAGE>
[**************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
****************************************************************]
3.6 Provider Agreements.
(a) PHE has two basic models of PHE Provider Agreements; one for
Medical Group, which is the Medical Services Agreement, and one
for other PHE Providers, which is the Provider Agreement. The
form of the Medical Services Agreement is annexed as Exhibit A,
and the model form of Provider Agreement is annexed as Exhibit B.
These forms are approved by all applicable governmental
authorities and Accreditation Agencies (to the extent required).
PHE shall have the right to modify these agreements, [*******
*****************************************************************
**************] PHE shall provide the Plan with prior notice of
any material changes to the model forms described herein and any
changes required by law or regulation. [*********************
*****************************************************************
**************************************************************]
PHE hereby represents and warrants, and has secured from Medical
Group in the Medical Services Agreement and will secure from
other Providers in the Provider Agreement, their representation
and warranty, that it has the authority to bind the Medical Group
and Providers, and that it will require the Medical Group and
Providers to comply with the applicable provisions of this
Agreement, [*****************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
***********************************************************]
(b) PHE's arrangements with PHE Providers shall (i) require that
Physicians do not provide Covered Services to Covered Persons
until each has been credentialed pursuant to the Plan's
Credentialing program and approved by the Plan as set forth in
the Delegation Agreement; and (ii) require best efforts to
provide the Plan with written notice of each new Physician within
five (5) business days after such Physician has entered into a
Provider Agreement or is affiliated with the Medical Group under
the Medical Services Agreement.
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
17
<PAGE>
(c) PHE shall, and shall cause PHE Providers to, provide the Plan
with not less than forty-five (45) business days notice of the
termination, resignation or withdrawal of any Provider who is
providing a course of treatment to a Covered Person; provided,
however that notice provided by PHE within ten (10) business days
of receipt of notice of such event by PHE shall be deemed to be
compliance with the provisions of this Section 3.6(c).
Notwithstanding the foregoing, such prior notice may be waived
where immediate termination is necessary for the protection of
health, safety and welfare of Covered Persons. PHE shall, and
shall cause PHE Providers to, provide written notice, within five
(5) days after the occurrence thereof, of any such immediate
termination or any suspension of any Provider.
(d) PHE shall, or PHE shall cause PHE Providers to, notify the Plan,
in writing, immediately upon becoming aware of any of the
following actions taken by or against a Physician:
i) the surrender, revocation or suspension of a Physician's
medical license, or a current DEA registration or state
narcotics license or controlled dangerous substance
certification;
ii) the restriction, suspension or revocation of a Physician's
medical staff privileges at any Institutional Care
Facility;
iii) the filing of a report with the National Practitioner Data
Bank or State professional medical disciplinary board, if
applicable;
iv) receipt by a Physician of a notice of intent to commence
or the commencement, settlement or entry of judgment of
any malpractice claim;
v) any lapse or material change in a Physician's professional
liability insurance required by this Agreement;
vi) any indictment, arrest or conviction for a felony or any
criminal charge, or the commencement of any proceeding,
inquiry or investigation, including a grand jury
investigation relating thereto;
vii) the filing of any complaint or institution of any action,
inquiry, investigation or disciplinary proceeding by the
New Jersey Board of Medical Examiners, the New Jersey
Department of Health and Senior Services or any similar
regulatory or governmental authority of the State or any
medical board, peer review organization, Medicare or
Medicaid agency hospital committee or other committee,
organization or body which reviews quality of medical
care;
viii) the failure of a Physician to meet the Plan's
Credentialing policies;
18
<PAGE>
ix) the sanction or expulsion of a Physician from
participation in Medicare or Medicaid;
x) the failure in any material respect of a Physician to
comply with the provisions of this Agreement or the
applicable Medical Services or Provider Agreement; or
xi) or any other circumstance which would materially affect a
Physician's ability to carry out his or her duties and
obligations under this Agreement, or the applicable
Medical Services or Provider Agreement or which would
materially change the representations made in Physician's
Credentialing application.
(e) The Plan shall have the right to require that any Physician with
respect to whom an event described in Section 3.6(d) has occurred
immediately cease providing Covered Services for Covered Persons.
[*******************************************************
**************************************************************
***************************************************************
***********************************************************
*****************************************************]
(f) Without limiting the foregoing, in all cases, PHE's arrangements
with PHE Providers shall prohibit any Provider who has been
sanctioned or expelled from participation in Medicaid or Medicare
from rendering Covered Services to Covered Persons in those
programs. PHE shall provide notice to Plan of any action taken by
PHE under this Section 3.6(f).
(g) PHE agrees that if it receives written notice from the Plan
setting forth specific concerns of the Plan about the failure of
a Physician to comply with Plan policies and procedures,
credentialing criteria, Provider Agreement, Physician employment
requirements, PHE shall, or, if the subject Physician's
participation is with Medical Group, shall cause Medical Group
to, within five (5) business days of its receipt of such notice,
meet with a representative of the Plan to discuss the Plan's
concerns. The parties shall use their best efforts to resolve any
problems identified through measures which may include, but are
not limited to, enhanced communication between the parties, or
the establishment of a joint PHE/Plan (as appropriate) committee
to address particular issues.
(h) PHE shall include in the Medical Services Agreement and in all
Provider Agreements provisions consistent with and/or required
pursuant to this Agreement and applicable laws, rules and
regulations, including, without limitation, the following:
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
19
<PAGE>
i) specification of the circumstances under which such
Agreements may be terminated including procedures for
notice and effectuation of termination and opportunities,
if any, for cure;
ii) specification:
a) of the term of such Agreements;
b) that no PHE Provider may be terminated or
penalized solely because of filing a complaint or
appeal;
c) of the method of reimbursement, the right of the
Physician or Health Care Provider to receive a
periodic accounting (no less frequently than
annually) of funds held, to the extent that some
portion of compensation is tied to the occurrence
or non-occurrence of a pre-determined event, which
event shall be clearly specified, and the process
whereby a Provider may appeal a decision denying
additional compensation, in whole or in part, in
accordance with such compensation arrangement tied
to the occurrence or nonoccurrence of a pre-
determined event;
d) of the Covered Services to be provided;
e) that each PHE Provider shall hold each Covered
Person harmless for Covered Services, regardless
of such Provider's belief that his, her or its
compensation is made in accordance with the
reimbursement provision of the Provider Agreement
or is otherwise inadequate, except for applicable
Copayments, Coinsurance or Deductibles.
f) that PHE Providers shall not discriminate in their
treatment of Covered Persons;
g) that PHE Providers shall comply with the delegated
Quality Improvement and Utilization Management
functions;
h) that PHE Providers shall maintain licensure,
certification, and adequate malpractice coverage;
i) that patient information shall be kept
confidential; provided, however that subject to
-------- -------
applicable law, rules and regulations, the Plan,
PHE or Medical Group, as appropriate, shall have
the right to inspect a Covered Person's medical
records, as well as timely and appropriate
communication of patient information, in order
that the
20
<PAGE>
Plan, PHE or Medical Group may perform their
respective duties efficiently and effectively for
the benefit of such Covered Person;
j) the process for an internal Provider complaint and
grievance procedure;
k) of any applicable Primary Care Physician,
Specialty Care Physician or Institutional Care
Facility requirements; and
l) [*********************************************
************************************************
************************************************
************************************************
************************************************
************************************************
************************************************
************************************************
************************************************
**************************************]
iii) in the case of a Provider Agreement with a Physician, or
the Medical Services Agreement with the Medical Group,
acknowledgment by PHE or Medical Group (as appropriate)
and such Physician that upon the termination or expiration
of this Agreement, such agreement shall be deemed to and
shall be construed, at the option of PHE, as a continuing
agreement between PHE or Medical Group and such Physician.
iv) Plan is a third-party beneficiary of the Medical Services
Agreement and all Provider Agreements with respect to
Covered Persons.
3.7 Continuing Education. PHE shall cause the PHE Providers to participate
--------------------
in continuing education programs in accordance with standards set by
the Credentialing Criteria.
3.8 [************************************************************
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***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
**************************************************]
3.9 Hold Harmless.
-------------
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
21
<PAGE>
(a) PHE hereby agrees that in no event, including, but not limited to
non-payment by the Plan, the Plan's insolvency or breach of this
Agreement, shall PHE, [*****************************************
******************] to bill, charge, collect a deposit from, seek
compensation, remuneration or reimbursement from, or have any
recourse against any Covered Person, or persons other than the
Plan or PHE acting on their behalf, for Covered Services provided
pursuant to this Agreement. This provision shall not prohibit
collection of fees for Non-Covered Services, Coinsurance,
Copayments, or Deductibles in accordance with the terms of the
Covered Person's Coverage Plan. PHE further agrees that (i) this
Section 3.9 shall survive the termination of this Agreement
regardless of the cause giving rise to termination and shall be
construed to be for the benefit of Covered Persons and (ii)
supersedes any oral or written contrary agreement now existing or
hereafter entered into between PHE and Medical Group, or between
Medical Group or PHE and a PHE Provider and a Covered Person, or
Persons acting on their behalf. Any modification, addition, or
deletion to the provisions of this Section 3.9 shall become
effective on a date no earlier than fifteen (15) days after the
Commissioner of Banking and Insurance has received written notice
of such proposed changes.
(b) [***************************************************************
****************************************************************
****************************************************************
****************************************************************
****************************************************************
****************************************************************
****************************************************************
****************************************************************
****************************************************************
*************]
3.10 Covered Person's Responsibility for Non-Covered Services. It is
--------------------------------------------------------
recognized that a Covered Person may request health care services from
a Provider that are Non-Covered Services. In such cases, PHE shall
cause its PHE Providers to advise such Covered Person, prior to the
service or supply being provided, that the requested health care
services are not covered by the Coverage Plan and that he or she is
responsible for the full payment of such service or supply. If a
Covered Person and a Provider agree in writing to proceed with a Non-
Covered Service for which payment may be required, the Covered Person
may be billed for the service and a payment collected.
3.11 Collection of Charges from Covered Persons. PHE Providers shall be
------------------------------------------
responsible for the collection of applicable Coinsurance, Copayments
and Deductibles from Covered Persons upon the rendition of Covered
Services to Covered Persons pursuant to the Coverage Plan.
3.12 Continuity of Patient's Care. If a Covered Person's coverage under a
----------------------------
Coverage Plan is terminated while confined in an Institutional Care
Facility, PHE agrees to ensure that PHE Providers shall actively manage
the Covered Person's care through the earlier of
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
22
<PAGE>
discharge or transfer to another physician. If health care services are
provided to such person after discharge, PHE shall have the right to
seek compensation for the services provided from such person. PHE shall
assist in the transfer of such person's care to another Physician based
upon medical prudence and standards of practice.
3.13 Medical Records.
---------------
(a) Consistent with applicable law, rule and regulation, including
without limitation, patient confidentiality, a Covered Person's
medical records maintained by PHE or PHE Provider shall be made
available, without charge, to Providers treating the Covered
Person, to state and federal regulatory authorities,
Accreditation Agencies (if required), and to the Plan (including
to the Plan's Medical Director) and to their respective designees
(i) to determine that the content of such records meet the
standards and procedures established by the Plan; (ii) for peer
review, Quality Improvement, Utilization Management, risk
management, credentialing and complaint resolution purposes;
(iii) to collect clinical outcome data for programs such as HEDIS
and/or information required for research studies in which the
Plan is authorizing or participating in; (iv) to determine
compliance with federal and State, laws, rules, regulations
and/or to verify charges; (v) to audit compliance with
Accreditation Agency standards and requirements; and (vi) for any
legitimate business purpose related to the administration of a
Coverage Plan.
(b) PHE agrees to ensure that a medical record is established and
maintained in a uniform format for each Covered Person. This
record will be opened at the time of each Covered Person's first
visit and shall conform with applicable Plan and federal and
State laws, rules and regulations.
(c) PHE agrees to maintain or cause to be maintained such records
and, subject to applicable law, rule, regulation or regulatory
agency requirement, medical records shall be retained in a
legible format by PHE, Medical Group, Physicians and Health Care
Providers for at least ten (10) years or until the Covered Person
reaches the age of twenty-three (23) years old, whichever is
longer.
(d) PHE shall agree to, and shall cause PHE Providers to, maintain
and provide any other records the Plan may request for regulatory
compliance or program management purposes and shall cooperate
with the Plan in all fiscal and medical audits, site inspections,
peer review, utilization review and other monitoring required by
federal and state regulatory agencies and authorities and
Accreditation Agencies. Any record required by a federal or state
regulatory agency or authority or a Accreditation Agency shall,
at PHE's expense, be delivered to the Plan and/or such regulatory
agency or authority or Accreditation Agency within seven (7)
business days of its request, or such shorter period as may be
required by applicable law, rule, or regulation or such federal
or state regulatory agency or authority or Accreditation Agency.
23
<PAGE>
(e) PHE shall cause PHE Providers to use their best efforts to
secure, at the time of patient encounter, the consent of a
Covered Person to the review or furnishing of his or her medical
records. In the event that PHE Providers do not secure such
written consent at the time of encounter, PHE agrees to use it's
best efforts to obtain any consent required from a Covered Person
to enable PHE to comply with this Section 3.13.
(f) PHE shall develop and follow, and cause PHE Providers to follow a
policy for the transfer of Covered Person medical records within
thirty (30) calendar days of the occurrence of one or more of the
following:
i) change of PHE Provider;
ii) such Covered Person is no longer a Covered Person; or
iii) other circumstances where requested by current or former
Covered Persons.
(g) Subject to Section 3.6(h)(ii), PHE shall, and shall cause PHE
Providers to, maintain any data or information pertaining to the
diagnosis, treatment, or health of any Covered Person obtained
from the Covered Person or any Provider in confidence. The data
or information shall not be disclosed to any person, except:
i) to the extent that it may be necessary under applicable
law, regulation, and rule;
ii) upon the express consent of the Covered Person;
iii) pursuant to state or court order for the production of
evidence or the discovery thereof; or
iv) in the event of a claim or litigation between such Covered
Person and PHE or such PHE Provider wherein such data or
information is pertinent.
(h) The obligations of PHE under this Section 3.14 shall survive
termination of this Agreement, and PHE shall ensure that PHE
Providers obligations hereunder, as reflected in the Medical
Services Agreement, or the Provider Agreement, as applicable,
shall survive termination of such agreements. Subject to
appropriate confidentiality requirements, and upon reasonable
notice, all records, electronic files, books, and papers of PHE
or PHE Providers pertaining to Covered Persons shall be open for
inspection by the Plan, authorized state and federal regulatory
agencies and authorities and Accreditation Agencies (to the
extent required) during normal business hours.
24
<PAGE>
3.14 Maintenance and Access to Information.
-------------------------------------
(a) PHE shall, and shall cause PHE Providers to maintain, during the
term of this Agreement and for seven (7) years thereafter, such
records and information as reasonably deemed necessary by the
Plan to allow the Plan to properly administer its Coverage Plans,
including books and records to account for all financial
transactions pertaining to the delivery of Covered Services to
Covered Persons.
(b) PHE shall, and shall cause PHE Providers to provide access to the
Plan and its representatives and permit the Plan and its
representatives to copy all books, records, electronic files,
data, accounting systems, medical records and meeting minutes as
they relate to the provision of Covered Services delivered to
Covered Persons.
(c) PHE shall, and shall cause PHE Providers to comply with the
Plan's request for information as it relates to regulatory or
Accreditation Agency compliance, including, but not limited to,
the Medicaid and Medicare program reporting requirements. Quality
Improvement activities, complaint resolution, peer review,
Utilization Management, Physician and Health Care Provider
complaints, Credentialing, benefit determinations for Covered
Persons, coordination of benefits, subrogation, and claim
adjudication. PHE agrees, and shall cause PHE Providers to agree,
that such access will be timely and responsive to the Plan's
request therefor.
(d) Plan shall coordinate all requests for information through PHE
and shall not contact PHE Providers directly for such information
without PHE's prior written consent, except when required by law
or regulation or pursuant to a governmental audit.
3.15 Access to Facilities and Offices. PHE shall, and shall require PHE
--------------------------------
Providers to, permit the Plan, its designees, clients, potential
clients, regulators and representatives of Accreditation Agencies
access to the Health Care Centers and any office of PHE, or any PHE
Provider for review, inspection and evaluations incident to this
Agreement. Except when required by law or regulation, or pursuant to a
governmental audit, the Plan will give reasonable notice of the visits,
the purpose of the visit and identification of persons making the
visit. Any such visit shall be coordinated with PHE or the PHE
Provider, as applicable, so as to not unreasonably interfere with PHE
or the PHE Provider.
3.16 Listing of Providers; Hours of Operation
----------------------------------------
(a) PHE shall furnish the Plan with a list of all Physicians who are
PHE Providers. The list will include the name of each Physician;
the services available at the Center or office, the Physician's
usual hours of operation and location(s) or offices, daytime
telephone number and twenty-four (24) hour service telephone
number; and other information as may be required by the Plan.
Such information
25
<PAGE>
shall also be provided with respect to other PHE Providers
designated from time to time by the Plan. This list may be used
by the Plan in marketing Coverage Plans. PHE will provide the
Plan with an updated list on a monthly basis.
(b) Each Health Care Center will have the hours of operation set
forth in Attachment 3.16. Any proposed changes in hours of
operation of Health Care Centers will be submitted to the Plan
for review and comment. In no case will hours of operation be
changed or decreased without adequate consultation with the Plan
as set forth in Attachment 3.16.
3.17 PHE Insurance.
-------------
(a) PHE, at PHE's sole cost and expense at all times during the term
of this Agreement, and all renewals hereof, shall have in full
force and effect:
i) a general comprehensive liability policy including
coverage for errors and omissions, and professional
liability coverage in amounts comparable to coverage
maintained by similar entities in the State for PHE, its
agents and employees. PHE agrees that such policies shall
not be canceled or amended unless written notice is given
by the carrier to the Plan and PHE at least thirty (30)
days prior to any cancellation or amendment;
ii) such policies of general liability, directors, officers,
and other insurance of the types and in the amounts as
required by the Plan to insure PHE, and its agents,
servants, and employees, acting within the scope of their
duties, against any claim or claims for damages arising by
reason of personal injury or death occasioned directly or
indirectly by PHE or its agents, servants or employees in
connection with the performance of PHE's responsibilities
hereunder, including with respect to Delegated Functions;
iii) workers' compensation insurance and any other coverage
required to meet minimum statutory requirements of the
State.
(b) PHE shall ensure that its Medical Services Agreement and its
Provider Agreement with PHE Providers include an obligation by
such PHE Providers to:
i) Maintain throughout the term of such agreements
professional liability insurance and general liability
insurance providing coverage in the minimum amounts of One
Million Dollars ($1,000,000.00) per occurrence and Three
Million Dollars ($3,000,000.00) combined single limits for
the PHE Provider;
ii) In the event the PHE Provider procures a "claims made"
policy as distinguished from an occurrence policy, procure
and maintain prior to
26
<PAGE>
termination of such insurance, continuing "tail coverage"
in the same coverage amounts;
iii) Immediately notify PHE of any material changes in the PHE
Provider's insurance coverages; and
iv) Provide a certificate of such insurance coverage to PHE
upon PHE's request. PHE shall provide written notice to
the Plan within five (5) working days upon PHE's receipt
of notice of any cancellation and such insurance policy in
whole or in part. PHE shall obtain and present to Plan a
certificate of such insurance upon reasonable request by
the Plan.
(c) All the carriers, types of coverage, and limits referred to in
this Section 3.17 are subject to approval by the Plan, which
shall not be unreasonably withheld. PHE shall provide the Plan
annually with evidence of coverage, and shall give the Plan
immediate notice of any material changes in insurance coverage.
3.18 Accreditation. PHE shall, and shall cause PHE Providers to assist and
-------------
participate fully with the Plan in accreditation or certification
programs such as the NCQA and any other Accreditation Agency or
certification organizations designated by the Plan.
3.19 PHE Payments. The Plan shall pay PHE for all Covered Services based on
------------
the Capitation Payments; [*******************************************
********************************************************************
***********************************************************************
***] PHE agrees to accept such amounts as payment in full (other than
applicable Copayments, Coinsurance, or Deductibles which shall be
retained by PHE (subject to Attachment 1.1) for Covered Services
--------------
provided or arranged for Covered Persons.
(a) [**********************************************************
************************************************************
************************************************************
************************************************************
************************************************************
************************************************************
***]
(b) Capitation payable to PHE shall be paid in two equal monthly
installments on the fifteenth (15th) and the thirtieth (30th) day
of each month. The first monthly installment shall be accompanied
by a complete enrollment register including, without limitation,
the following information for each Covered Person: Covered
Person's name, Covered Person's identification number, Covered
Person's address, date of birth, Primary Care Physician, coverage
date, coverage end date, Copayment amount, product identification
and group number, as well as details on any retroactive additions
and deletions. The portion of the Capitation Payment payable for
each Covered Person shall be prorated from the applicable
coverage date to the coverage end date. [*********************
***********************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
27
<PAGE>
[****************************************************************
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*****************************************************************
*****************************************************************
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*****************************************************************
*********]
3.20 Coordination of Benefits. The parties shall cooperate, and PHE shall
------------------------
cause PHE Providers to cooperate, in the performance of coordination of
benefits. [****************************************************
******************************************************************
*****************************************************************
*********************************************************************
****************************************************************
********************************************************] If a Covered
Person who is treated by a PHE Provider is covered by health care
coverage provided by any Person other than the Plan, and if such other
Person is the primary carrier, PHE shall, and shall cause PHE Providers
to, cooperate with the Plan in all billings of such primary carrier on
behalf of the Covered Person for the Covered Services rendered by PHE
or PHE Providers, such billings to be at PHE Providers [*************
*** fee.] Furthermore, PHE shall, or shall cause PHE Providers to
execute any necessary document in connection with the submission of
such bills and claims by the Plan or the Covered Person.
3.21 Nondiscrimination in Patient Care. PHE shall not, nor shall it permit
---------------------------------
PHE Providers to discriminate against any Covered Person on the basis
of race, color, national origin, ancestry, religion, sex, marital
status, sexual orientation, age, health status, handicap, Plan
membership or source of payment including but not limited to Medicaid
or Medicare or frequency or cost of utilization of Covered Services.
PHE shall, and shall cause Medical Group, Physicians and Health Care
Providers to, render health care services to patients who are Covered
Persons in all lines of business in the same manner, in accordance with
the same standards, and subject to the same access to appointments and
services as are offered to its patients and which in any case shall
meet the requirements of Section 2.2 hereof.
3.22 Encounter Data. PHE agrees to provide encounter data for services
--------------
provided to Covered Persons. Such data shall be supplied in such manner
(including electronic transmission) as may be mutually agreed to by the
parties. The format shall be a HCFA 1500, as otherwise required by
regulation, or such other format as mutually agreed to by the parties.
3.23 Physician Incentive Plans.
-------------------------
(a) PHE shall not, nor shall it permit PHE Providers to establish any
Physician Incentive Plan with respect to Medicare or Medicaid
Coverage Plans which would
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
28
<PAGE>
result in a Physician being at Substantial Financial Risk without
first notifying the Plan at least sixty (60) days in advance of
the anticipated implementation thereof and obtaining the prior
approval of the Plan which shall not be unreasonably withheld.
Any such approval by the Plan shall be conditioned upon PHE's
procuring and maintaining, or causing its PHE Providers to
procure and maintain individual stop-loss protection on terms and
with coverage meeting applicable regulatory requirements.
(b) In order to assist the Plan in satisfying potential enrollee
survey, disclosure, stop-loss and reporting requirements under 42
C.F.R. (S)417.479, PHE shall, or shall cause PHE Providers to,
provide the Plan with sufficient and appropriate information as
to any Physician Incentive Plan between PHE and PHE Providers or
between either of them and the Physicians that bases compensation
on the use or cost of services not rendered by Physicians to
Covered Persons who are Medicare beneficiaries or Medicaid
recipients.
(c) PHE shall not, nor shall it permit PHE Providers to, enter into
any contract or arrangement providing for the assumption of
Financial Risk except in compliance with the provisions of
N.J.A.C. 8:38-15.1. PHE further agrees to provide to the Plan any
--------
information necessary for the Plan to demonstrate to regulators
and/or Accreditation Agencies that the Provider Agreements are in
compliance with N.J.A.C. 8:38-15.1.
--------
(d) PHE shall, and shall cause PHE Providers to, provide the
information described in Sections 3.23(b) and (c) to the Plan
within fifteen (15) days of a request by the Plan. In addition,
PHE shall, and shall cause PHE Providers to, notify the Plan
within fifteen (15) days before implementing any changes to any
Physician Incentive Plan.
(e) PHE acknowledges, and shall cause PHE Providers to so
acknowledge, that the Plan may subsequently disclose information
about a Physician Incentive Plan of PHE Providers to the Health
Care Financing Administration as required under 42 C.F.R.
(S)417.479 or to State regulators as required under N.J.A.C.
--------
8:38-15.1 and N.J.A.C. 8:38-13.4 and releases and, as
--------
appropriate, shall cause Medical Group to release, the Plan from
any claims that PHE or PHE Providers may have against the Plan as
a result of such subsequent disclosures. Notwithstanding the
above, the Plan shall release only the minimum required to be in
compliance with state and federal law in this regard.
(f) No compensation under this Agreement, whether direct or indirect,
nor any other provision of this Agreement shall be construed as
the Plan inducing PHE to reduce or limit health care services to
Covered Persons.
29
<PAGE>
(g) In the event there is a change in state or federal law or
regulations regarding Physician Incentive Plans [************
**************] this Section 3.23 shall be modified to reflect
such change.
3.24 [*******************************************************************
******************************************************************
******************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
**************]
3.25 Physician Grievances. PHE shall establish a PHE Provider grievance
--------------------
procedure in accordance with requirements established by the Plan. No
PHE Provider shall be terminated or penalized solely because of filing
any complaint or appeal.
3.26 Claims Processing. [**********************************************
-----------------
*********************************************************************
*******************************************************] PHE shall
adjudicate all Provider claims for all Covered Services in accordance
with its policies and procedures, subject to approval by the Plan,
which shall not be unreasonably withheld. PHE shall provide to the Plan
claims payment reports reasonably satisfactory to the Plan including
those claims paid for ASO and POS products. PHE shall perform claims
processing in accordance with the applicable standards set forth in
Attachment 5.5.
--------------
3.27 Financial Net Worth. PHE shall be responsible at all times to have
-------------------
sufficient funds to perform its financial responsibilities under this
Agreement related to payment of claims. PHE shall report to the Plan on
its fiscal soundness and fiscal solvency [*****************************
***************************************************************
***************************************************************
*********************************************************************
***********************************************************************
*********************************************************************
***********************************************************************
*********************************************************************
*********************************************************************
*********************************************************************
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*********************************************************************
*********************************************************************
*********************************************************************
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*********************************************************************
********************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
30
<PAGE>
3.28 Right to Audit Claims.
---------------------
(a) The Plan shall have the right to audit the accuracy of claims
[**********] Such audit shall be conducted in accordance with the
standards established by the Plan and as otherwise required by
federal and State regulators and/or Accreditation Agencies [***
*****************************************************************
**************************************************************
*****************************************] Such audit shall be
during normal business hours of PHE. [***************************
**************************************************************
**************************************************************]
The Plan, at its own cost, may engage a third party to conduct
such audit on its behalf, provided that such third party agrees
in writing to the limitations on right to audit set forth in
Subsection (b) below.
(b) With respect to any audit of PHE's information and records
pursuant to this section, the Plan agrees that (i) the
information and records will be kept confidential, provided that
-------------
the Plan's disclosure of such information to governmental
regulators and Accreditation Agencies to the extent required
shall not constitute a violation of this confidentiality
obligation; (ii) the Plan shall comply with all federal, state,
and local laws regarding the confidentiality of health care
information; and (iii) no original record (or copies thereof) may
be removed from the site where the auditors locate such
information except as required by any governmental regulators and
Accreditation Agencies, in which case the Plan shall be permitted
to make copies of documents necessary to comply with such
regulators and/or Accreditation Agencies disclosure requirements.
(c) The Plan shall bear all of its costs of such audit.
3.29 [**************************************************************
***********************************************************************
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*******************************]
SECTION 3A [*******************************]
[*******************************************************************************
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*********************************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
31
<PAGE>
[**********************************************************************
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[***************************************************************
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********]
[**********************************************************************
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******]
[**********************************************************************
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[*******************************************************************
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[*********************************************************************
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[****************************************]
[****************************************************************
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*********************************************************
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
32
<PAGE>
[***********************************************************
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****************]
[********************************************************
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[*****************************************************************************
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[******************************************************************************
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SECTION 4 - RESPONSIBILITIES AND OBLIGATIONS OF THE PLAN
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
33
<PAGE>
4.1 [***************************************************************
******************************************************************
***********************************************************************
****************************]
4.2 Administrative Operations
-------------------------
(a) Except for Delegated Functions which are the subject of the
Delegation Agreement, and as otherwise set forth in this
Agreement, the Plan, either directly or through its Affiliates,
shall conduct the day-to-day administrative operations of the
Coverage Plans, including but not limited to: setting premiums
and pricing; establishing the Coverage Plans; processing
enrollment applications; determining Covered Person eligibility;
providing Covered Person education and services regarding plan
administration; performing accounting; billing employers and
subscribers; collecting premiums; managing regulatory and
Accreditation Agency compliance and reporting for Coverage Plans;
administering Covered Person grievances and appeals; marketing
for Coverage Plans; and any other functions that are necessary
and appropriate for the proper administrative and support of the
arrangement for Covered Services to be provided for Covered
Persons.
(b) The Plan agrees that in adopting any changes to the scope of
Covered Services provided under a Coverage Plan, any changes in
benefit structure, including Copayments, Coinsurance and
Deductibles, or other structural changes to Coverage Plans, [**
****************************************************************
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****************************************************************
****************************************************************
****************************************************************
****************************************************************
****************************************************************
****************************************************************
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****************************************************************
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**************]
(c) [************************************************************
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************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
34
<PAGE>
[**********************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**********************************************************]
4.3 Covered Person Identification and Eligibility. The Plan, either
---------------------------------------------
directly or through its Affiliates, shall maintain a system of Covered
Person identification, including Covered Person identification cards
and eligibility information, to enable PHE and its Affiliates to
confirm a Covered Person's eligibility for Covered Services. The
identification cards shall include PHE's telephone number. Further, on
a monthly basis, Plan shall provide PHE a list of Covered Persons
during the following month and any other eligibility data required by
PHE in electronic form to discharge its duties hereunder.
4.4 Listing of Physicians and Health Care Providers. The Plan, either
-----------------------------------------------
directly or through its Affiliates, shall make available and provide to
Covered Persons and to PHE a current listing of Physicians and Health
Care Providers who shall provide Covered Services to Covered Persons as
described in this Agreement.
4.5 Delegated Functions
-------------------
(a) The Plan, in consultation with PHE, shall establish the terms,
policies, procedures and systems for its Quality Improvement,
Risk Management, and Utilization Management, and credentialing
programs. PHE shall administer the Plan's programs and the Plan
shall provide PHE with copies of the applicable Plan's Quality
Improvement Utilization Management, Credentialing, peer review,
and complaint resolution programs, and the Provider Guide. Plan
shall also provide PHE with advanced written notice of proposed
changes to the Plan's programs identified herein, and to its
Policies and Procedures, including the Provider Guide.
(b) The Plan has reviewed and hereby approves PHE's policies and
procedures regarding the Delegated Functions as being consistent
with the policies and procedures adopted by the Plan. The Plan
hereby delegates to PHE the responsibility of conducting the
Delegated Functions on the Plan's behalf to ensure that each PHE
Provider (and their respective employees, if any) shall (i)
comply with all applicable federal and State laws, rules and
regulations and (ii) accept and abide by all policies and
procedures of PHE in accordance with the provisions of the
Delegation Agreement.
4.6 Payment Transmission. The Plan shall make payments to PHE of Capitation
--------------------
Payments or other payments required to be made by the Plan to PHE, in
accordance with the terms and conditions of this Agreement and
Attachment 1.1.
--------------
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
35
<PAGE>
4.7 Sales and Marketing
-------------------
(a) The Plan will be responsible for the development, pricing,
distribution, marketing, advertising and sale of all health
coverage products, subject to Section 4.2(b) above. From time to
time the Plan may require PHE and/or PHE Providers, and PHE
agrees to, and shall cause PHE Providers to agree, to participate
in employer, regulatory and Accreditation Agency presentations
and meetings as part of the sales process.
(b) PHE shall, as reasonably requested by the Plan, use the Plan's
name and service marks [**************************************]
on its stationery, business cards and other similar literature.
Samples of such proposed uses shall be submitted to the Plan for
its prior approval. PHE may not nor shall it permit any PHE
Provider to use the Plan's name, nor the names of any of its
Affiliates, nor any of their service marks, in any other manner
or for any other purpose without the prior written consent of the
Plan. [**********************************************************
***********************************************************
***********************************************************
***********************************************************
***********************************************************
***]
(c) The Plan may use the name of PHE and PHE Providers and other
relevant information (including, but not limited to, address,
telephone numbers, and hours of operation and/or office hours) in
its marketing materials, provider directories, and other
materials mutually agreed to.
(d) The Plan agrees to use its best efforts to market in order to
increase Plan membership.
4.8 Plan Insurance. Plan shall at all times maintain all insurance typical
--------------
of similar health plans. In addition, it shall provide tail coverage
for all employed Physicians who practice at Health Care Centers with
respect to Covered Services rendered to Covered Persons prior to the
Effective Date, unless the Plan required such Physicians to maintain
appropriate tail coverage, and the Plan has provided PHE with the
relevant certificates of insurance coverage.
4.9 [****************************************************************
*******************************************************************
*******************************************************************
*******************************************************************
*******************************************************************
*******************************************************************
*******************************************************************
******]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
36
<PAGE>
4.10 Product Information. On or before the Effective Date of this Agreement,
-------------------
Plan shall furnish PHE with copies of Plan's model contracts,
subscriber agreements, Evidences of Coverage approved by the State, and
special arrangements with large employers, special intercompany
agreements for coverage of large groups, and other special arrangements
of the Plan.
4.11 Performance Standards of Plan. Plan agrees to meet the performance
-----------------------------
standards set forth in Attachment 4.11, as such standards may be
---------------
amended from time to time upon mutual written consent of the parties.
The parties shall agree upon the timing, measurement tools, authority
to measure, performance scales, and notice and cure periods applicable
to all performance standards required of the Plan. [******************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
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***********************************************************************
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**************]
4.12 Plan Reporting. For so long as Plan has any responsibilities with
--------------
respect to claims processing for Covered Services to Covered Persons [*
********************************] the Plan shall provide PHE with such
reports and information on Covered Persons, including but not limited
to, detailed documentation on claims paid and other encounter data, as
may reasonably be requested by PHE and agreed to by the Plan. The
claims payable report shall supply sufficient data elements to provide
eligibility data regarding Covered Persons, summary claims activity,
patient identification, provider identification, place of service,
primary diagnoses, primary procedure codes, amounts charged (except
when under a capitation arrangement), amounts covered, amounts paid,
and authorization codes when applicable. [***************************
***********************************************************************
*************************************]
4.13 [********************************************************************
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***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
****************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
37
<PAGE>
[**********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
*******************************]
4.14 Plan Financial Net Worth. The Plan shall be responsible at all times to
------------------------
have sufficient funds to perform its financial responsibilities under
this Agreement. Upon reasonable request by PHE, the Plan shall report
to PHE on its fiscal soundness and financial solvency by providing
annual audited financial statements and quarterly unaudited financial
statements.
SECTION 5 - OTHER PROVISIONS
5.1 Cooperation and Coordination.
----------------------------
(a) The Plan and PHE acknowledge and agree that it is in their best
interests and the best interest of Covered Persons for the Plan
and PHE to consult and coordinate the delivery of Covered
Services and the implementation of the provisions of this
Agreement. Accordingly, each of the Plan and PHE agree to appoint
a senior executive who shall meet on a regular basis to discuss
and resolve such issues as they shall determine consistent with
the foregoing. In addition, at the request of the Plan, PHE shall
appoint additional persons, including representatives from PHE
Providers to serve as ex-officio members of committees
established by the Plan with respect to Credentialing, Quality
Improvement, Risk Management, Utilization Management, peer review
and other similar matters.
(b) PHE further agrees, at the reasonable request of the Plan, to
assist the Plan in other matters of mutual interest, including,
but not limited to, attendance at meetings with governmental
authorities and Accreditation Agencies and participation in
hearings of legislative bodies regulatory agencies.
(c) PHE further agrees, at the reasonable request of the Plan, to
assist the Plan in the development of responses to requests for
proposals from employer associations and governmental programs
including, without limitation, Medicaid or Medicare.
5.2 Amendment of Certificate of Authority. PHE agrees not to, nor shall it
-------------------------------------
permit PHE Providers to take any action or fail to take any action
which, under applicable law, rules or regulations, would jeopardize the
Plan's federal qualification or require the Plan to obtain an amendment
to its certificate of authority without, in each instance, seeking the
prior written approval of the Plan, which may be withheld in its sole
discretion.
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
38
<PAGE>
5.3 Indemnification
---------------
[**************************************************************
*****************************************************************
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******************************************************]
[************************************************************
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[******************************************************************
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[*********************************************************************
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************************************************]
[***************************************************************
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**************************************************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
39
<PAGE>
[****************************************************************
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**********]
5.4 Effective Date of Coverage for Covered Persons. For the purpose of
----------------------------------------------
Capitation Payments to PHE under this Agreement, and for this purpose
only, the effective date of coverage for a Covered Person shall be
deemed to be the first day of the month in which the Covered Person is
enrolled in a Coverage Plan, if the Covered Person enrolls in a
Coverage Plan within the first fifteen (15) days of a month and shall
be the first day of the month following the month in which the Covered
Person is enrolled in a Coverage
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
40
<PAGE>
Plan, if the Covered Person enrolls in a Coverage Plan after the first
fifteen days of a month.
5.5 Claims Processing.
-----------------
(a) General - To the extent that either the Plan and/or PHE or its
respective subcontractor is designated to perform claims
processing services ("CP Administrator") such party shall meet
the claims processing standards set forth in Attachment 5.5.
--------------
(b) Obligations To Pay Claims - The obligation of the CP
Administrator to pay claims submitted for Covered Persons for
Covered Services shall be limited to claims that have been
submitted in accordance with the time period for coverage of
claims of the respective Coverage Plan. [***********************
*************************************************************
****************************************************************
***************************************************************
***************************************************] The CP
Administrator shall be obligated to process only claims submitted
in accordance with HCFA Form 1500 (for Physician claims) or
UB-92- (for Institutional Facility claims) and if such claims are
submitted in accordance with the claims submission methods
approved by the Plan.
(c) Reporting
i) Within [*********** days] of receiving a reasonable
request from either party, the CP Administrator shall
provide claims payment reports organized either by
Covered Person or by Provider which contains sufficient
detail to allow the requesting party to determine (a)
whether each patient was a Covered Person on the date of
each service; (b) the benefits available to each Covered
Person; (c) the amounts charged, covered, and payable for
each service; and (d) whether each service was pre-
approved by the Utilization Management program.
ii) [************************************************
********************************************************
********************************************************
********************************************************
********************************************************
********************************************************
********************************************************
**********************************************]
iii) By the [*********************] the CP Administrator shall
provide to the parties an Electronic Claims Payable Report
in the format set forth in Attachment 5.5.
--------------
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
41
<PAGE>
(d) Final Authority - The Plan shall have final authority to
adjudicate disputes over denied claims by Covered Persons and PHE
shall have such authority for claims submitted by Providers.
(e) The CP Administrator shall have no responsibility to indemnify
either party for erroneously paid claims attributed as Covered
Services on behalf of Covered Persons.
SECTION 6 - TERM AND TERMINATION
6.1 Duration of Agreement and Renewal. The initial term of this Agreement
---------------------------------
shall be for twenty (20) years commencing on the Effective Date. This
Agreement shall thereafter automatically be renewed for successive five
(5) year periods unless either party gives written notice of non-
renewal to the other party at least one hundred and twenty (120) days
prior to the annual renewal date, or unless this Agreement is
terminated pursuant to the terms of this Section 6.
6.2 Mutual Consent. This Agreement may be terminated at any time upon the
--------------
mutual written consent of both parties.
6.3 Termination Without Cause. Prior to December 31, 2000, neither party
-------------------------
may terminate this Agreement without cause. After December 31, 2000,
either party may terminate this Agreement without cause on ninety (90)
days' prior written notice; [****************************************
*********************************************************************
********************************]
[*******************************************************************
****************************************************************
************************]
[*******************************************************************
*********************************************************]
6.4 Termination for Cause. Either party may terminate this Agreement after
---------------------
a material breach, on the grounds set forth in this Section 6.4, by
providing to the breaching party at least sixty (60) days' prior
written notice of its intent to terminate this Agreement unless a
shorter time period is required pursuant to the provisions of
subparagraphs 3 and 5 of the definition of "material breach" set forth
below. Such notice shall be accompanied by a statement setting forth
the grounds for any alleged material breach of this Agreement. Such
termination shall be effective no less than sixty (60) days after the
date on which notice of the material breach is received by the
breaching party. Notwithstanding, the foregoing, in no event shall this
Agreement be terminated pursuant to Section 6.4 if:
(a) the material breach has been cured within such sixty (60) day
period or other period determined by the parties, to the
reasonable satisfaction of the non-breaching party;
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
42
<PAGE>
(b) in the case of a material breach that can be cured, but cannot be
cured within such sixty (60) days period, the breaching party has
instituted corrective action within such sixty (60) day period
and diligently implements such corrective action until the
material breach is cured to the reasonable satisfaction of the
non-breaching party.
The term "material breach" includes the following:
1. Plan interferes with PHE's business arrangements
with other Managed Care Organizations in violation of
Section 3.5(c);
2. [*********************************************
***************************************************
*******************************************************
**************************************]
3. Where Plan receives notice of the impending
suspension or revocation of its Certificate of Authority
from the State or receives notice of threatened
termination of its federal qualification as an HMO from
the U.S. Health Care Financing Administration, and such
notice cites the Plan's failure to comply with duties or
responsibilities for which PHE is contractually
responsible and for which PHE has (i) received prior
notice from the Plan of pending federal or state
regulatory action and (ii) has failed to cure such
compliance duties or responsibilities within the time
period provided despite reasonably sufficient time to
cure;
4. PHE is in breach of Section 3.5(d); or
5. Where the Plan receives notice of termination
from the (i) State employees health benefits plan; (ii)
the Federal Employees Health Benefits Plan; (iii) the
State Medicaid program or (iv) the Federal Medicare
program (collectively "Special Payors") and such notice
from such Special Payor cites the failure of the Plan to
comply with duties or responsibilities for which PHE is
contractually responsible and for which PHE has received
reasonable advance notice of its noncompliance with the
applicable Special Payor's requirements, and PHE failed
to cure such violation within the stated cure period
despite sufficient notice from the Plan.
The rights and remedies of the parties upon termination with cause
under this Agreement are set forth in Attachment 6.3, in addition to
--------------
all other rights and remedies available at law or in equity.
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
43
<PAGE>
6.5 Immediate Termination. Either party may terminate this Agreement
---------------------
immediately upon the following:
(a) a party files a petition in or for bankruptcy, reorganization or
an arrangement with creditors; make a general assignment for the
benefit of creditors; be adjudged bankrupt; be unable to pay
debts as they become due; have a trustee, receiver or other
custodian appointed on its behalf; or should any other case or
proceeding under any bankruptcy or insolvency law, or any
dissolution or liquidation proceeding be commenced against it,
which case or proceeding is not dismissed within sixty (60) days
of filing;
(b) [***************************************************************
*********]
(c) [***************************************************************
********************************************************]
6.6 Danger to Health or Safety of Covered Persons. The Plan may require
---------------------------------------------
that PHE cause the termination of any PHE Provider from participation
in this Agreement immediately, upon written notice to PHE, whenever it
or any State or federal regulatory agency reasonably believes that the
health or safety of Covered Persons is endangered by actions of such
PHE Provider. The Plan shall provide indemnification protections to PHE
as set forth in Section 5.3(a) of this Agreement related to the Plan's
determination and belief that the health or safety of Covered Persons
is endangered, as provided in this Section 6.6.
6.7 Continuation of Services. Any termination or non-renewal of this
------------------------
Agreement shall not release PHE from fulfilling its obligations
hereunder including, at the Plan's request, in the Plan's sole
discretion, arranging for the provision of Covered Services for the
benefit of Covered Persons until such time as, in the Plan's sole
judgment, an orderly transfer of Covered Persons to other physicians
and health care providers has been effected; [**********************
*******************************************************************
**************************************] Unless otherwise provided by
State or Federal law (i.e., Medicare/Medicaid), the Plan shall make
Capitation Payments to PHE as compensation for such services rendered
pursuant to this Section, as set forth in Attachment 1.1.
--------------
6.8 Non-Solicitation of Covered Persons
-----------------------------------
(a) [**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
*************************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
44
<PAGE>
(b) At any time during this Agreement, and for a period of [******]
following the termination of this Agreement, [**************
*****************************************************************
*************************] PHE agrees that it and its Affiliates
shall not, and shall require PHE Providers to agree that they
will not:
i) [********************************************************
**********************************************************
**********************************************************
**********************************************************
**********************************************************
**********************************************************
**********************]
ii) [********************************************************
*********************************] or
iii) solicit Covered Persons or groups to become enrolled with
any Managed Care Organization [*******************
***************************************************
**************]
(c) [**********************************************************
*****************************************************************
*****************************************************************
*****************************************************************
*****************************************************************
***********************************************]
(d) Notwithstanding the above, nothing in this Section 6.8 shall be
interpreted to restrict Providers in any way from discussing with
Covered Persons any aspects of the Provider's rendering of
Covered Services to such Covered Persons.
(e) [**********************************************************
**************************************]
6.9 Right to Transfer Covered Persons. In addition to any other rights
---------------------------------
granted to the Plan hereunder, as of the effective date of termination
of this Agreement, pursuant to Sections 6.3(b), 6.4 or 6.5 or
termination of a PHE Provider from participation under this Agreement,
the Plan, subject to applicable laws, rules and regulations, may
immediately transfer Covered Persons to Plan Providers or other PHE
Providers, as appropriate.
6.10 Remedies. The parties acknowledges that it may be impossible to measure
--------
in money the damages to the other party if the breaching party fails to
comply with any of the restrictions or obligations contained in this
Agreement. If the non-breaching party determines that it does not have
an adequate remedy at law and determines to pursue
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
45
<PAGE>
relief in equity, then the breaching party agrees that, in addition to
any other rights or remedies which the non-breaching party may have,
the non-breaching party shall be entitled to immediate injunctive
relief to enforce its restrictions or obligations without the necessity
of posting a bond. In any action or proceeding brought in equity to
enforce the provisions of this Agreement, the court shall have the
power to render an award directing the breaching party to specifically
perform in accordance with the provisions of this Agreement. If any
restriction is held to be unenforceable because of the scope or
duration of such provision or the geographic area covered thereby, the
parties agree that the court making such determination shall have the
power to reduce or limit the scope or duration or geographic area of
such provision and, in its reduced form, said provision shall be fully
enforceable as if set forth herein. All rights and remedies provided
under this Agreement are cumulative and not alternative.
6.11 Dispute Resolution. If any dispute, controversy, or claim arises out
------------------
of, or is related to this Agreement, or the breach thereof, except with
respect to any matter covered under Sections 6.4 or 6.5, the parties
shall first make their best efforts to resolve such dispute,
controversy, or claim informally. If it cannot be resolved informally,
the dispute, controversy, or claim shall be settled by arbitration by
each selecting one (1) arbitrator from the list provided by the
National Health Lawyers Association ("NHLA") Dispute Resolution
----
Service. The two (2) arbitrators shall then select a fair and impartial
third person from the list of arbitrators provided by the NHLA Dispute
Resolution Service to complete a panel of three (3) arbitrators (the
"Panel"). Each of the parties agree that the Panel shall conduct
-----
itself, and the arbitration proceedings, in accordance with the NHLA
Alternative Dispute Resolution Service Rules of Procedure for
Arbitration. Arbitration costs shall be borne equally by the parties;
each party shall bear the costs of its own counsel and technical or
consulting support in connection with the arbitration. Upon occurrence
of any of the following events, which are expressly subject to this
Section 6.11, either party may demand and be subject to arbitration as
set forth herein:
(a) Should either party undergo any material changes to the
organizational structure or composition of the party or its
Affiliates, including but not limited to a sale of assets,
merger, consolidation, or any transaction that would materially
affect the terms and conditions of this Agreement or would
otherwise materially alter the management of the business affairs
of the party; or
(b) Should there be an adverse change in the law such that, in the
opinion of the Plan's or PHE's legal counsel, materially and
adversely affects the legality of this Agreement or the ability
of that party to perform its obligations or receive the benefits
intended under this Agreement, or
(c) Unless otherwise required by state and federal law, where the
Plan, in consultation with the appropriate state or federal
regulatory entity having jurisdiction, determines that the number
of PHE Providers is not sufficient to meet the needs of Covered
Persons with respect to the availability, accessibility, or
continuity of
46
<PAGE>
care necessary and such insufficiency has remained uncured for a
period of forty-five (45) days following receipt of notice by the
Plan declaring same.
SECTION 7 - GENERAL PROVISIONS
7.1 Entire Agreement; Modification.
------------------------------
(a) This Agreement, its Exhibits and its Attachments (incorporated
herein by reference), and any other documents incorporated by
reference, constitute the entire understanding of the parties
hereto and supersede any and all prior written or oral agreements,
representations, or understandings.
(b) Except as otherwise set forth herein, no modifications, discharges,
amendments, or alterations to this Agreement shall be effective
unless signed by both parties. Furthermore, neither this Agreement
nor any modifications, discharges, amendments or alterations hereof
shall be considered executed by, or binding upon, either party
unless and until signed by officers of PHE and the Plan.
(c) Minor or immaterial revisions by the Plan from time to time of its
Policies and Procedures, including its Credentialing, Quality
Improvement, Risk Management, Utilization Management, peer review
and complaint resolution programs, the terms and conditions of the
Provider Guide or the Coverage Plans, or any other right reserved
to the Plan hereunder, shall not constitute a modification,
amendment, or alteration to this Agreement which require the
execution of a formal amendment to this Agreement signed by both
parties. [*********************************************************
**********************************************************]
(d) The Plan or PHE may amend this Agreement, by providing thirty (30)
days' prior written notice to the other party, in order to maintain
compliance with applicable federal and/or state law, rules or
regulations. Such amendment shall be binding .
7.2 Invalid Provisions. It is understood that any provision of this Agreement
------------------
which is determined to be in violation of any state or federal law, rule
or regulation shall be null and void and that any such determination
shall not affect the validity or enforceability of any of the other
provisions of this Agreement.
7.3 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New Jersey without giving effect
to the principles of conflicts of law.
7.4 Compliance with Law. At all times during the term of this Agreement and
-------------------
during any period when PHE is providing continuation services, PHE and
the Plan each agree that it shall, and PHE shall cause PHE Providers to
comply with all applicable requirements of municipal, county, state and
federal authorities, all applicable municipal and county
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
47
<PAGE>
ordinances and regulations; and all applicable state and federal statutes
and regulations now or hereafter in force and effect to the extent that
they bear upon the subject matter of this Agreement. These include,
without limitation of the foregoing, applicable requirements under any
confidentiality laws, privacy laws, fair employment practices or similar
laws declaring discrimination in employment based upon race, color,
creed, religion, sex, sexual preference, disabilities (including the
Americans with Disabilities Act) or national origin as illegal and, if
applicable, Title VII of the Civil Rights Act of 1964 or any applicable
rule or regulation promulgated pursuant to any such laws described above.
Each party shall be responsible for the payment of all applicable
federal, state and local taxes relating to its business.
7.5 No Waiver. No responsibility, condition, or undertaking contained in this
---------
Agreement may be waived except by the written agreement of the parties.
Forbearance or indulgence in any other form by either party in regard to
any responsibility, condition, or undertaking to be kept or performed by
the other party shall not constitute a waiver thereof, and until complete
satisfaction or performance of all such responsibilities, conditions, and
undertakings have been satisfied, the other party shall be entitled to
invoke any remedy available under this Agreement, despite any such
forbearance or indulgence.
7.6 Notice. All notices, requests, demands and other communications which are
------
required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally
delivered; when transmitted if transmitted by facsimile; the day after
being sent, if sent for next day delivery by a recognized overnight
delivery service as verified (e.g., Federal Express); and upon receipt,
if sent by certified or registered mail, return receipt requested. In
each case notice shall be given as follows:
If to the Plan, addressed to: HIP Health Plan of New Jersey
One HIP Plaza
North Brunswick, New Jersey 08902
Facsimile Number: (732) 937-7792
Attention: Victoria A. Wicks, President
with a copy to: Frederick S. Title, Vice President
and General Counsel
HIP Health Plan of New Jersey
One HIP Plaza
North Brunswick, New Jersey 08902
Facsimile Number: (732) 937-7792
If to PHE, addressed to: Pinnacle Health Enterprises, L.L.C.
103 Eisenhower Parkway
Third Floor
Roseland, New Jersey 07068
48
<PAGE>
Facsimile Number: (973) 403-9358
Attention: Paul Frankel, M.D.
President
and PHP Healthcare Corporation
11440 Commerce Park Drive
Reston, Virginia 20191
Facsimile Number: (703) 758-7232
Attention: Jerrold J. Hercenberg
Senior Vice President and Counsel
7.7 Confidentiality
---------------
(a) The Plan and PHE each acknowledge a duty to maintain the
confidentiality of the relationship and arrangements between them,
including but not limited to the payment terms of this Agreement.
Both parties shall make no disclosure of the terms of their
relationship beyond that contained in a mutually agreed written
summary and shall not release all or any part of this Agreement to
any Person without the prior written consent of the parties.
(b) Both parties agree that confidential information furnished to each
other in performance of this Agreement will not be discussed with
third parties without the written consent of the other party. Both
parties agree that unless otherwise indicated, information
disclosed shall be deemed confidential and each party will be
responsible for any breach of this provision by Affiliates,
advisors, contractors and employees.
(c) [******************************************************************
*******************************************************************
*******************************************************************
******************************************************************
*******************************************************************
****]
7.8 Ownership of Records. The parties acknowledge and agree that the business
--------------------
records of each party, including but not limited to those related to
Covered Person eligibility, benefits, polices and procedures, manuals,
and Coverage Plans and Covered Services shall remain the property of such
party.
7.9 [**********************************************************************
***********************************************************************
*******************************************************************
**********}
7.10 [************************************************************************
*********************************************************************
************************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
49
<PAGE>
7.11 Duplicate Originals. This Agreement may be executed in two counterparts,
-------------------
each of which shall be deemed an original; however, all shall constitute
one and the same Agreement.
7.12 Headings. The Section headings used herein are for reference and
--------
convenience only and shall not enter into the interpretation hereof. Any
attachments, exhibits, tables or schedules referred to herein and/or
attached or to be attached hereto are incorporated herein to the same
extent as if set forth in full herein.
7.13 Assignment.
----------
(a) This Agreement, and the right to receive payment hereunder, may not
be assigned by PHE without the prior written consent of the Plan.
Any attempt by PHE to assign this Agreement without the prior
written consent of the Plan shall void the attempted assignment.
(b) This Agreement may not be assigned by Plan without the prior
written consent of PHE.
(c) All provisions hereof shall be binding upon, inure to the benefit
of, and be enforceable by and against the respective successors and
permitted assigns of the parties hereto.
7.14 Force Majeure. Neither party shall be liable for an inability to meet its
-------------
obligations under this Agreement by "Force Majeure". "Force Majeure"
-------------
means any cause beyond the control of a party, including but not limited
to an act of God, act or omission of civil or military authorities of a
state or nation, fire, strike, flood, riot, war, delay of transportation,
or inability due to any of these causes to obtain necessary labor,
materials or facilities; provided, however, that the lack of financial
-------- -------
resources or the failure to maintain policies of insurance shall never be
excused.
7.15 Construction of Agreement. This Agreement shall be construed without
-------------------------
regard to any presumption or other rules requiring construction against
the party causing the Agreement to be drafted.
7.16 [*********************************************************************
************************************************************************
************************************************************************
************************************************************************
*****************************************************]
7.17 Payments on Business Days. Any payments to be made hereunder which become
-------------------------
due and payable on a day other than a business day shall be due on the
business day immediately following the day on which such payment would
otherwise have been due hereunder.
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
50
<PAGE>
7.18 Prior Agreements. PHE agrees, and PHE shall cause PHE Providers to agree,
----------------
that this Agreement supersedes any oral or written agreement to the
contrary now existing or hereinafter entered into between PHE or PHE
Providers and Covered Persons or Persons acting on Covered Persons'
behalf, [**************************************************************
***********************************************************************
*****************]
7.19 No Third-Party Beneficiaries. Except as provided in Section 3.6(h)(iv),
----------------------------
this Agreement is not a third-party beneficiary contract and shall not in
any manner whatsoever confer any rights upon or increase the rights of
any Covered Person with respect to the Plan or the duties of the Plan to
any Covered Person.
*****
IN WITNESS WHEREOF, this Agreement has been duly executed by the
authorized representatives of the Plan and PHE, on July 24, 1997 to be
effective on the Effective Date.
HIP OF NEW JERSEY, INC. PINNACLE HEALTH ENTERPRISES, L.L.C.
By: /s/ Anthony L. Watson By: /s/ Anthony M. Picini
---------------------------------- --------------------------------
Name: Anthony L. Watson Name: Anthony M. Picini
-------------------------------- ------------------------------
Title: Chairman and CEO Title: Senior Vice President and
------------------------------ Chief Financial Officer
----------------------------
Date: July 24, 1997 Date: July 24, 1997
-------------------------------- ------------------------------
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
51
<PAGE>
EXHIBIT 10.3
FIRST AMENDMENT TO HEALTH SERVICES AGREEMENT BETWEEN
HIP OF NEW JERSEY, INC. AND PINNACLE HEALTH ENTERPRISES, L.L.C.
(DATED AS OF JULY 24, 1997)
HIP of New Jersey, Inc. and Pinnacle Health Enterprises, L.L.C. hereby
agree that the Health Services Agreement by and between HIP of New Jersey, Inc.
and Pinnacle Health Enterprises, L.L.C. dated as of July 24, 1997 is hereby
amended as follows:
1. A new Section 2A is hereby added as follows:
[*************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
******************************************************************]
2. Section 2.1 is hereby deleted and replaced with the following:
Independent Contractors. The Plan and PHE are independent contractors and
-----------------------
separate legal entities. The relationship between the Plan and PHE is
reflected in this Agreement, and neither the Plan, PHE, nor the employees,
servants or representatives of either, shall be considered the employee,
servant or representative of the other. None of the provisions of this
Agreement are intended to create or to be construed as creating any
partnership, joint venture or employer-employee relationship between or
among the Plan, PHE or any of their respective employees, servants or
representatives.
3. Section 2.4 is hereby deleted and replaced with the following:
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
Subcontracts. [****************************************************
------------
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
*************************************]
The parties agree that PHE shall not enter any agreement with any third-
party for the delivery of health care services to HIP covered persons which
is subject to N.J.A.C. 8:38-15.1(a) and (b), without first meeting the
requirements of N.J.A.C. 8:38-15.2 including required approvals from the
State of New Jersey.
4. Section 3.6(a) is hereby deleted and replaced with the following:
(a) PHE has two basic models of PHE Provider Agreements; one for Medical
Group, which is the Medical Services Agreement, and one for other PHE
Providers, which is the Provider Agreement. The form of the Medical
Services Agreement is annexed as Exhibit A, and the model form of Provider
Agreement is annexed as Exhibit B. These forms are approved by all
applicable governmental authorities and Accreditation Agencies (to the
extent required). PHE shall have the right to modify these agreements,
[*************************************************************************
**************] subject to approval of governmental agencies with
jurisdiction, PHE shall provide the Plan with prior notice of any material
changes to the model forms described herein and any changes required by law
or regulation. [**********************************************************
*************************************************************************r
**************] PHE hereby represents and warrants, and has secured from
Medical Group in the Medical Services Agreement and will secure from other
Providers in the Provider Agreement, their representation and warranty,
that it has the authority to bind the Medical Group and Providers, and that
it will require the Medical Group and Providers to comply with the
applicable provisions of this Agreement, [*********************************
***************************************************************************
***************************************************************************
***************************************************************************
**************************************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
*************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************]
5. Section 3.9(a) is deleted and replaced with the following:
(a) PHE hereby agrees that in no event, including, but not limited to non-
payment by the Plan, insolvency or breach of this Agreement, shall PHE, [**
********************************************************] to bill, charge,
collect a deposit from, seek compensation, remuneration or reimbursement
from, or have any recourse against any Covered Person, or persons other
than the Plan or PHE acting on their behalf, for Covered Services provided
pursuant to this Agreement. This provision shall not prohibit collection of
fees for Non-Covered Services, Coinsurance, Copayments, or Deductibles in
accordance with the terms of the Covered Person's Coverage Plan. PHE
further agrees that (I) this Section 3.9 shall survive the termination of
this Agreement regardless of the cause giving rise to termination and shall
be construed to be for the benefit of Covered Persons and (ii) supersedes
any oral or written contrary agreement now existing or hereafter entered
into between PHE and Medical Group, or between medical Group or PHE and a
PHE Provider and a Covered Person, or Persons acting on their behalf. Any
modification, addition, or deletion to the provisions of this Section 3.9
shall become effective on a date no earlier than thirty (30) days after the
Commissioner of Banking and Insurance has received written notice of such
proposed changes and the change has been deemed approved, or else the
Commissioner of Banking and Insurance has approved the proposed changes.
6. Section 3.19(a) is deleted and replaced with the following:
(a) [**********************************************************************
*****************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
********************************************]
7. Section 3.20 is deleted and replaced with the following:
Coordination of Benefits. The parties shall cooperate, and PHE shall cause
------------------------
PHE Providers to cooperate, in the performance of coordination of benefits.
[***************]
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
[*************************************************************************
************************************************************************
************************************************************************
************************************************************************
*********************************************************************] If a
Covered Person who is treated by a PHE Provider is covered by health care
coverage provided by any Person other than the Plan, and if such other
Person is the primary carrier, PHE shall, and shall cause PHE Providers to,
cooperate with the Plan in all billings of such primary carrier on behalf
of the Covered Person for the Covered Services rendered by PHE or PHE
Providers, such billings to be at PHE Providers [***************** fee.]
Furthermore, PHE shall, or shall cause PHE Providers to execute any
necessary document in connection with the submission of such bills and
claims by the Plan or the Covered Person. The parties agree to abide by any
applicable state or federal law concerning coordination of benefits.
8. Section 3.26 is deleted and replaced with the following:
Claims Processing. [******************************************************
-----------------
**********************************************************************
**********************************************] PHE shall adjudicate all
Provider claims for all Covered Services in accordance with its policies
and procedures, subject to approval by the Plan, which shall not be
unreasonably withheld. PHE shall provide to the Plan claims payment
reports reasonably satisfactory to the Plan including those claims paid for
ASO and POS products. PHE shall perform claims processing in accordance
with the applicable standards set forth in Attachment 5.5 and shall comply
---------------
with all applicable laws, rules and regulations regarding claims
processing. Without limiting the foregoing, the parties agree to abide by
-
the requirements of N.J.S.A. 26:25-5.1, including with respect to Network
provider claims. [***************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************]
9. Section 3.27 is deleted and replaced with the following:
Financial Net Worth. PHE shall be responsible at all times to have
-------------------
sufficient funds to perform its financial responsibilities under this
Agreement related to payment of all incurred claims. PHE shall report to
the Plan on its fiscal soundness and fiscal solvency [*********************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
[************************************************************************
*************************************************************************
*************************************************************************
*************************************************************************
*************************************************************************
*************************************************************************
*************************************************************************
*************************************************************************
*******************]
10. Section 3.28(a) is hereby deleted and replaced with the following:
(a) The Plan and the State shall have the right to audit the accuracy of
claims [*****] Such audit shall be conducted in accordance with the
standards established by the Plan and as otherwise required by federal and
State regulators and/or Accreditation Agencies [*********************
***************************************************************************
****************************************************************
***********] Such audit shall be during normal business hours of PHE. [***
*************************************************************************
*****************************************************************
************] The Plan, at its own cost, may engage a third party to
conduct such audit on its behalf, provided that such third party agrees in
writing to the limitations on right to audit set forth in Subsection (b)
below.
11. A new Section 6.1(a) is hereby added as follows:
(a) [*********************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
**************************************
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
[*************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***********]
12. Attachment 1.1B first paragraph is deleted and replaced with the
following:
[*************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
***************************************************************************
******************]
13. Except as amended as expressly provided herein, all other terms and
conditions of the Health Services Agreement by and between HIP of New
Jersey, Inc. and Pinnacle Health Enterprises, L.L.C., dated as of July 24,
1997, shall remain in full force and effect.
PORTIONS OF THIS EXHIBIT MARKED BY "*" HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
<PAGE>
14. This First Amendment to the Health Services Agreement by and between HIP of
New Jersey, Inc. and Pinnacle Health Enterprises, L.L.C., dated as of July
24, 1997, shall be effective on the date signed by the last party to sign
this Amendment.
HIP OF NEW JERSEY, INC. PINNACLE HEALTH ENTERPRISES, L.L.C.
By: /s/ Victoria A. Wicks By: /s/ Paul W. Frankel, M.D.
------------------------ -----------------------------
Date: October 31, 1997 Date: October 31, 1997
---------------------- ---------------------------
<PAGE>
PHP HEALTHCARE CORPORATION
EXHIBIT 11
Statement Re: Computation of per Share Earnings
Three Months and Six Months ended
October 31, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Six Months
ended October 31, ended October 31,
----------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary Earnings Per Share
- --------------------------
Primary
Net earnings.............................. $ 1,124,000 $ 2,601,000 $ 2,169,000 $ 4,759,000
=========== =========== =========== ===========
Weighted average number of common
shares outstanding......................... 11,557,971 11,081,376 11,483,894 11,064,598
Add common share equivalents (determined
using the "treasury stock method") repre-
senting shares issuable upon exercise of
stock options and warrants................. 2,118,697 2,707,067 2,195,522 2,775,879
Shares held in escrow........................ --- (88,572) --- (88,572)
----------- ----------- ----------- -----------
Weighted average number of shares used
in calculation of primary earnings per
share...................................... 13,676,668 13,699,871 13,679,416 13,751,905
=========== =========== =========== ===========
Primary earnings per common share............ $0.08 $0.19 $0.16 $0.35
=========== =========== =========== ===========
Fully Diluted Earnings Per Share
- --------------------------------
Fully diluted
Net earnings.............................. $ 1,124,000 $ 2,601,000 $ 2,169,000 $ 4,759,000
Net interest expense related to
convertible debt.................... 9,000 6,000 18,000 11,000
----------- ----------- ----------- -----------
Net earnings as adjusted.................. $ 1,133,000 $ 2,607,000 $ 2,187,000 $ 4,770,000
=========== =========== =========== ===========
Weighted average number of common
shares outstanding......................... 11,557,971 11,081,376 11,483,894 11,064,598
Add common share equivalents (determined
using the "treasury stock" method) repre-
senting shares issuable upon exercise of
stock options and warrants................. 2,118,681 2,707,067 2,195,191 2,775,879
Assumed conversion of convertible debt....... 111,111 111,111 111,111 111,111
Shares held in escrow........................ --- (88,572) --- (88,572)
----------- ----------- ----------- -----------
Weighted average number of shares used
in calculation of fully diluted earnings
per share.................................. 13,787,763 13,810,982 13,790,196 13,863,016
=========== =========== =========== ===========
Fully diluted earnings per common share...... $0.08 $0.19 $0.16 $0.34
=========== =========== =========== ===========
</TABLE>
25
<PAGE>
PHP HEALTHCARE CORPORATION
Exhibit 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: PHP Healthcare Corporation, Registrations on Form S-3 and on Form S-8
We are aware that our report dated December 17, 1997 on our review of interim
financial information of PHP Healthcare Corporation and consolidated
subsidiaries as of October 31, 1997 and for the three month and six month
periods ended October 31, 1997 and 1996, and included in the Company's quarterly
report on Form 10-Q for the quarter then ended, is incorporated by reference in
Registration Statement No. 33-301101 on Form S-3 and in Registration Statement
No. 33-41577 on Form S-8. Pursuant to Rule 436(c) under the Securities Act of
1933, this report should not be considered a part of the prospectus and
registration statement prepared or certified by us within the meaning of Section
7 and 11 of that Act.
Coopers & Lybrand L.L.P.
Washington, D.C.
December 17, 1997
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for PHP Healthcare Corporation and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000803568
<NAME> PHP HEALTHCARE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 10,981
<SECURITIES> 0
<RECEIVABLES> 55,842
<ALLOWANCES> 142
<INVENTORY> 671
<CURRENT-ASSETS> 77,189
<PP&E> 71,076
<DEPRECIATION> 16,647
<TOTAL-ASSETS> 223,665
<CURRENT-LIABILITIES> 78,905
<BONDS> 71,778
0
0
<COMMON> 148
<OTHER-SE> 42,824
<TOTAL-LIABILITY-AND-EQUITY> 223,665
<SALES> 0
<TOTAL-REVENUES> 111,495
<CGS> 0
<TOTAL-COSTS> 89,964
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,016
<INCOME-PRETAX> 3,337
<INCOME-TAX> 1,168
<INCOME-CONTINUING> 2,169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,169
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>