<PAGE>
Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q/A-1
(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>
The undersigned registrant hereby files this Amendment No. 1 (the "Amendment")
for the purposes of amending and restating in its entirety Part I, Items 1 and 2
and Part II, Item 6. The Amendment is set forth below:
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 12
SIGNATURES 21
EXHIBIT INDEX 22
</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
expressing 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.
As discussed in note 6 to the consolidated financial statements, the
accompanying Condensed Consolidated Balance Sheets as of April 30, 1997 and
October 31, 1997 and the condensed consolidated Statements of Operations and
Cash Flows for the three month and six month periods ended October 31, 1997 and
1996, have been restated to reflect revised accounting for certain contract
costs and certain long-term real estate leases.
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)
RESTATED
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues.......................... $55,753 $58,532 $111,495 $112,015
Direct costs...................... 44,692 45,845 89,575 87,967
------- ------- -------- --------
Gross profit.................. 11,061 12,687 21,920 24,048
General and administrative
expenses........................ 7,092 7,346 14,730 14,419
------- ------- -------- --------
Operating income.............. 3,969 5,341 7,190 9,629
Other income (expense):
Interest expense......... (1,913) (1,411) (3,405) (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 4,285 3,337 7,798
Income tax expense................ 605 1,613 1,168 2,934
------- ------- -------- --------
Net earnings.................. $ 1,124 $ 2,672 $ 2,169 $ 4,864
======= ======= ======== ========
Net earnings per share............ $ 0.08 $ 0.20 $ 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)
RESTATED
<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..................................................................... 3,322 3,322
Other current assets...................................................................... 5,372 4,273
-------- --------
Total current assets.................................................................... 79,972 75,944
Property and equipment, net (notes 2 and 4)................................................ 72,501 58,444
Intangible assets, net of accumulated amortization
of $1,690 in October and $1,236 in April (note 2)......................................... 71,812 7,275
Receivables from officers.................................................................. 498 1,202
Note receivable............................................................................ 2,000 ----
Other assets............................................................................... 10,023 5,508
-------- --------
$236,806 $148,373
======== ========
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 ---
Finance lease obligation.................................................................. 346 ---
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............................................................... 79,251 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
Finance lease obligation................................................................... 17,726 ---
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....................................................................... 197,483 118,923
-------- --------
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......................................................................... 699 (1,471)
Treasury stock, 3,258,485 common shares in October and April, at cost..................... (6,572) (6,572)
-------- --------
Total stockholders' equity.............................................................. 38,041 25,147
-------- --------
Contingencies (note 5)..................................................................... $236,806 $148,373
======== ========
</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)
RESTATED
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings......................................................... $ 1,124 $ 2,672 $ 2,169 $ 4,864
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...................................... 1,614 1,283 3,412 2,576
Other items, net................................................... 33 (22) 12 (43)
Changes in operating assets and liabilities:
Increase in accounts receivable, net................................ (9,206) (8,749) (14,760) (13,392)
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 2,009 1,168 2,908
Increase in other liabilities....................................... 42 35 112 88
------- ------- -------- --------
Net cash provided by (used in) operating activities................ (7,238) 880 (14,902) (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)
Repayments on finance lease obligations.............................. (54) -- (54) --
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......................................................... (6,235) 78 (1,871) (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
======= ======= ======== ========
</TABLE>
(continued)
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)
RESTATED
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
Finance lease obligation incurred in connection with real
estate lease................................................. $ 18,126
</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.
The Emerging Issues Tax Force recently issued EITF Issue No. 97-2,
"Application of APB Opinion No. 16, Business Combinations, and FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to
Physician Practice Entities", effective for financial statements for fiscal
years ending after December 15, 1998. At that time this pronouncement will
require the Company to include in consolidation physician practices with
which the Company has a controlling financial interest. Implementation of
this pronouncement will not have a material impact on the Company's
financial statements since the Company already consolidates the applicable
physician practices.
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 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.
Services provided by the Company subject to this agreement were completed in
November 1997.
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. The $65 million of intangible assets is a
preliminary valuation. In management's opinion, the preliminary valuation is not
expected to materially differ from the final valuation. Due to the uncertainty
of the contingent payments based on membership growth, the Company has not
included any of these amounts in the determination of the purchase price nor has
any liability been recognized. If these additional amounts are required, the
additional consideration will be accounted for as an increase to the purchase
price resulting in increased goodwill.
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 $37.0 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. However, since there remains an element of continuing
involvement by the Company with the lessor beyond a routine leasing
relationship, the new lease is accounted for as a financing (see Note 6). This
continuing involvement is in the form of the new $2.0 million long-term loan
against which the borrower may offset past due lease payments and any related
interest amounts.
Scheduled principal payments on finance lease obligations by fiscal year are as
follows (in thousands): $222 in 1998, $370 in 1999, $421 in 2000, $478 in 2001,
$544 in 2002, and $16,091 thereafter.
(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>
(6) RESTATEMENT
Upon further review the Company has revised its accounting treatment for two
contracts entered into during fiscal years 1994 and 1995. The two contracts, a
constructing contract and a management contract, which were with the same party,
were previously combined for purposes of revenue recognition. The Company has
restated previously issued financial statements and related footnote disclosures
to account for these two contracts separately. As a result, the fiscal year 1995
financial statements have been adjusted to reduce the revenue recognized by $6.9
million for certain cost overruns related to 1995 construction and start-up
activities which would have been recovered prospectively under the two combined
contracts. Furthermore, the Company has recorded additional contract loss
reserves of approximately $915,000 in fiscal year 1995 resulting from the
contracts being accounted for separately. This revised accounting treatment also
resulted in the reduction of fiscal year 1996 revenues and direct cost by
approximately $900,000 and $915,000, respectively. Immaterial adjustments to
revenue were also recorded in fiscal year 1997. The effects of these adjustment
on net earnings and per share amounts as previously reported, were as
follows:
THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------ ----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings, as previously reported.................... $1,124 $2,601 $2,169 $4,759
Adjustment, net of tax.................................. --- 71 --- 105
------ ------ ------ ------
Net earnings (loss) as adjusted......................... $1,124 $2,672 $2,169 $4,864
====== ====== ====== ======
Per Share Amounts:
Basic earnings (loss) per share:
Net earnings as previously reported.................. $ 0.08 $ 0.19 $ 0.16 $ 0.35
Adjustments, net of tax.............................. 0.00 0.01 0.00 0.00
------ ------ ------ ------
Net earnings (loss) as adjusted...................... $ 0.08 $ 0.20 $ 0.16 $ 0.35
====== ====== ====== ======
</TABLE>
The Company has also revised its accounting treatment for the 17 year lease of
the primary care facilities discussed in Note 4 above. In August 1997, the
Company no longer consolidated the REIT and accounted for the lease as an
operating lease. The Company has restated previously issued interim financial
statements and related footnote disclosures to account for this lease as a
financing, instead of as an operating lease, as a result of the Company's
continuing involvement with the lessor. This continuing involvement is in the
form of a $2.0 million long-term loan against which the borrower may offset past
due lease payments and any related interest amounts. Accordingly, in August 1997
during the Company's quarterly period ended October 31, 1997, property and
equipment was increased by $18.1 million with a corresponding increase to
finance lease obligation. Depreciation expense and finance lease obligation
principal payments were subsequently reflected as reductions to these initial
transaction amounts. The effect of this restatement on net earnings and per
share amounts for the periods ended October 31, 1997, was immaterial.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Upon further review the Company has revised its accounting treatment for
two contracts entered into during fiscal years 1994 and 1995. The two
contracts, a construction contract and a management contract, which were with
the same party, were previously combined for purposes of revenue recognition.
The Company has restated previously issued financial statements to account for
these two contracts separately. Accordingly, the Company has also revised the
following Management's Discussion and Analysis.
The Company has also revised its accounting treatment for a 17 year lease
of primary care facilities. Beginning in August 1997 the Company accounted for
the lease as an operating lease. The Company has restated previously issued
interim financial statements to account for this lease as a financing.
Accordingly, the Company has also revised the following Management's Discussion
and Analysis.
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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 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. The 1995 loss resulted from a $8.0
million charge ($4.8 million after tax) related to costs in excess of cash
receipts under a certain contract. 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......................... 80.2 78.3 80.3 78.5
----- ----- ----- -----
Gross profit......................... 19.8 21.7 19.7 21.5
General and administrative expenses.. 12.7 12.6 13.2 12.9
----- ----- ----- -----
Operating income..................... 7.1 9.1 6.5 8.6
Other expense........................ (4.0) (1.7) (3.5) (1.7)
----- ----- ----- -----
Earnings before income taxes......... 3.1 7.4 3.0 6.9
Income tax expense................... 1.1 2.8 1.1 2.6
----- ----- ----- -----
Net earnings......................... 2.0 4.6 1.9 4.3
===== ===== ===== =====
</TABLE>
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
----------------- -----------------
<S> <C> <C>
Revenue % of Revenue % of
Division: (000's) Total (000's) Total
Government Managed Care $15,815 28.4 $27,891 47.7
Commercial Managed Care 39,938 71.6 30,641 52.3
------- ----- ------- -----
Total $55,753 100.0 $58,532 100.0
======= ===== ======= =====
</TABLE>
The Company's revenue decreased by 4.8% or $2.8 million to $55.7 million
for the quarter ended October 31, 1997 compared to $58.5 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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Commercial Managed Care Division revenue increased by $9.3 million or
30.4%, to $39.9 million for the quarter ended October 31, 1997, compared to
$30.6 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.
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 12.6% or $1.6 million, to $11.1
million for the quarter ended October 31, 1997, compared to $12.7 million for
the prior year second quarter. As a percentage of revenue, gross profit
decreased to 19.8% for the current year second quarter compared to 21.7% 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 $100,000 or
1.0%, from $10.0 million during the prior year quarter ended October 31, 1996,
compared to $9.9 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 $1.6 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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Operating income decreased by $1.3 million to $4.0 million for the quarter
ended October 31, 1997, from $5.3 million for the prior year second quarter.
Operating margin decreased to 7.1% from 9.1%. Operating income decreased
primarily due to the gross profit decreases in the Commercial Managed Care
Division and the Government Managed Care Division.
Interest expense increased by $502,000, to $1,913,000 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 $1.6 million or $0.12 per share, to $1.1 million
or $0.08 per share, from $2.7 million or $0.20 per share for the quarters ended
October 31, 1997 and 1996, respectively.
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
---------------- ----------------
<S> <C> <C> <C> <C>
Revenues % of Revenues % of
Division: (000's) Total (000's) Total
Government Managed Care $ 34,434 30.9 $ 52,545 46.9
Commercial Managed Care 77,061 69.1 59,470 53.1
-------- ----- -------- -----
Total $111,495 100.0 $112,015 100.0
======== ===== ======== =====
</TABLE>
The Company's revenue decreased by 0.4% or $500,000 to $111.5 million for
the six months ended October 31, 1997 compared to $112.0 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.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Commercial Managed Care Division revenue increased by $17.6 million or
29.6%, to $77.1 million for the six months ended October 31, 1997, compared to
$59.5 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.
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 8.8% or $2.1 million, to $21.9
million for the six months ended October 31, 1997, compared to $24.0 million for
the prior year period. As a percentage of revenue, gross profit decreased to
19.7% for the current six month period compared to 21.5% 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 $900,000 or
4.8%, from $18.8 million during the six months ended October 31, 1996, compared
to $19.7 million for the current year six month period. The most significant
cause of this increase, in the amount of $2.7 million, resulted from 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.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
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 of $0.8 million in
gross profit related to one new ambulatory care project, two new medical
staffing projects, and one new mental health project which commenced operations
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 $2.4 million to $7.2 million for the six
months ended October 31, 1997, from $9.6 million for the prior year period.
Operating margin decreased to 6.5% from 8.6%. Operating income decreased
primarily due to the net gross profit decrease, as discussed above.
Interest expense increased by $637,000, to $3,405,000 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 $2.7 million or $0.19 per share, to $2.2 million
or $0.16 per share, from $4.9 million or $0.35 per share for the six months
ended October 31, 1997 and 1996, respectively.
17
<PAGE>
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 $14.9 million
in cash. This represents a $10.6 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 $2.7 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 $1.9 million in cash during the six months ended
October 31, 1997, compared to $0.8 million during the prior year period, a
change of $1.1 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").
18
<PAGE>
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. 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.
19
<PAGE>
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
Exhibit Item Page
- ------- ---- ----
<S> <C> <C>
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 Statement re: Computation of per share earnings for
the three months and six months ended October 31,
1997 and 1996
15.1 Letter of Coopers & Lybrand, L.L.P. regarding unaudited
interim financial statements
27 Financial Data Schedule
</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.
20
<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 hereunto duly authorized.
PHP HEALTHCARE CORPORATION
--------------------------
(Registrant)
By: /s/ Anthony M. Picini
---------------------
ANTHONY M. PICINI
Executive Vice President and
Chief Financial Officer
Date: June 3, 1998
21
<PAGE>
<TABLE>
<CAPTION>
Exhibit Item Page
- ------- ---- ----
<S> <C> <C>
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 Statement re: Computation of per share earnings
for the three months and six months ended October 31,
1997 and 1996
15.1 Letter of Coopers & Lybrand, L.L.P. regarding unaudited
interim financial statements
27 Financial Data Schedule
</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.
22
<PAGE>
Exhibit 10.2
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:
1
<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.
2
<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 or a non-PHE Provider
approved by the Plan's Medical Director chosen by 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.
3
<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 15/th/
--------------
day of a month, the first day of such month, or (b) if the Closing Date shall be
after the 15/th/ 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.
"FINANCIAL RISK PERIOD" means the period during which the Plan shall be solely
---------------------
financially responsible for Covered Services rendered to Network Covered
Persons, which period shall commence on the Effective Date and shall continue
for 180 days thereafter or, if such 180 day period does not end on the last day
of a calendar month, the Financial Risk Period shall end on the last day of the
month in which such 180/th/ day falls.
"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.
4
<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.
5
<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.
6
<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:
------------------------
7
<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.
"TRANSITION PERIOD" has the meaning given to such term in Section 3A.1.
-----------------
"TRANSITION PLAN" has the meaning given to such term in Section 3A.1.
---------------
"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, agents or representatives. Notwithstanding the
foregoing, nothing contained in this Section 2.1 is intended to, nor shall
be construed to, limit or otherwise constrain the Plan's obligations under
the Coverage Plans or applicable law, rules or regulations to provide or
arrange for Covered Services to Covered Persons.
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
8
<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. PHE has the right to delegate by subcontract certain
------------
Delegated Functions to the Medical Group and the PHE Providers, under the
Medical Services Agreement and the Provider Agreements, respectively, or to
another subcontractor, subject to the Plan's prior consent, which consent
shall not be unreasonably withheld. PHE may enter into other subcontracts
for the performance of its administrative obligations hereunder; provided,
however, that to the extent any such subcontract for administrative
services has an adverse effect on the Plan's relationship with Covered
Persons, such subcontract shall be subject to the Plan's prior consent upon
ten (10) days' notice. In the event that PHE enters into contracts and/or
subcontracts for the performance of its obligations hereunder, PHE shall be
responsible for assuring performance by its contractors and/or
subcontractors.
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
9
<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) OTHER CONTRACTUAL RELATIONSHIPS - The execution, delivery and
performance of this Agreement, the consummation of the transactions
contemplated hereby, and the compliance by PHE with any of the
provisions hereof, shall not (a) violate or conflict with any
provision of its organizational or charter documents, (b) violate,
conflict with, or result in, a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of time,
or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result
in a right of termination or acceleration under, any of the terms,
conditions or provisions of any contract, indebtedness, note, bond,
indenture, security or pledge agreement, commitment, license, lease,
franchise, permit, agreement, or other instrument or obligation to
which PHE is a party, or (c) violate any applicable laws, rules and
regulations.
(E) PROVIDER SPONSORED NETWORKS - PHE shall not directly compete with the
Plan through a provider sponsored network in the State; provided,
however, that nothing in this Section 2.5(e) shall prohibit PHE from
becoming licensed as a provider sponsored network to the extent
required by law where necessary to provide Covered Services under this
Agreement.
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.
10
<PAGE>
(D) RELATIONSHIP WITH PHE PROVIDERS - The Plan shall not solicit,
encourage, entice or induce any Plan Providers, PHE Providers, or
other Health Care Providers away from participating with PHE. In no
event shall the foregoing restrict the Plan's ability to maintain
contractual relationships with Plan Providers during the term of this
Agreement only as permitted in Section 3A.3 and to separately contract
with Plan Providers, PHE Providers or other Health Care Providers upon
termination of this Agreement, as contemplated by Section 6, for the
provision of Covered Services. Additionally, if PHE fails to exercise
its right of first refusal, as set forth in Section 4.2(c), the Plan
may contract with Providers to deliver the contemplated services to
Covered Persons. Upon request by PHE, the Plan, at no substantial cost
or expense to the Plan, shall cooperate with PHE in enforcing the
exclusivity provisions of PHE's exclusive agreements with PHE
Providers.
(E) COOPERATION DURING IMPLEMENTATION OF TRANSITION PLAN - During the
Transition Period, in the event PHE identifies any material problems
related in any manner to the Plan's operations prior to the Effective
Date, which problems affect PHE's ability to perform its duties and
responsibilities under the Transition Plan or under this Agreement,
the Plan shall make best efforts to rectify the problem to the
reasonable satisfaction of PHE.
(F) OFFERING OF PRODUCTS WITH SUBSIDIARIES - As of the Effective Date, the
Plan shall not, through its indirect subsidiaries, HIP-PRO, Inc., or
HIP Insurance Company of New Jersey, Inc., or any subsidiary, direct
or indirect take any action or fail to take any action which, if taken
or not taken by the Plan, would constitute a violation by the Plan of
its obligations hereunder.
(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. Except where indicated in Attachment 2.6,
the Plan is not a party to any contractual relationship with
any entity performing Delegated Functions that provides for
termination or non-renewal of such contractual relationship
with greater than 120 days' prior notice by the Plan.
(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
11
<PAGE>
under this Agreement, under a capitated or exclusive
relationship. Such list is attached hereto as Attachment
2.6. The Plan represents to the best of its knowledge
that the contracts or arrangements described in
Attachment 2.6 are subject to termination or non-renewal
by the Plan on no more than 90 days notice, with the
exception of certain arrangements identified separately
in 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) Upon PHE's request, the Plan shall terminate, as soon as
possible, any contractual relationship described in
Attachment 2.6. In the event additional contractual
relationships of the type described subsections (i) and
(ii) are disclosed to PHE in any manner, on or after the
date of execution of this Agreement, the Plan shall be
financially responsible for ongoing payments under such
contracts until they are either terminated by the Plan,
upon request by PHE, or are assumed by PHE.
(H) RELATIONSHIPS WITH HEALTH CARE CENTER PHYSICIANS - The Plan has not
entered into any provider agreements or approved any new arrangements
with any Primary Care Physicians who were employed by the Plan at the
Health Care Centers, and whose agreements included covenants not to
compete, and who, since March 1, 1997, have established practices in
service areas near or adjacent to the Health Care Centers where they
were employed.
SECTION 3 - RESPONSIBILITIES AND OBLIGATIONS OF PHE
3.1 PROVISION OF COVERED SERVICES THROUGH THE ISOC(R).
-------------------------------------------------
(A) Subject to the Transition Plan described in Section 3A.1, 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, it being
explicitly understood that the Plan's obligation with respect to
Covered Services rendered to Network Covered Persons is to be
financially responsible for the cost thereof only during the Financial
Risk Period.
12
<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) If the panel of a Primary Care Physician at a Health Care Center
exceeds the access standards for the ratio of Covered Persons and
other patients per Primary Care Physician, and as soon as PHE is aware
of such fact, PHE shall provide the Plan with notice, and shall
require or shall instruct Medical Group to require such Primary Care
Physician not to accept additional patients, whether or not such
patients are Covered Persons.
13
<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) For those Coverage Plans reflected in Exhibit C, PHE shall ensure that
---------
PHE Providers who are obstetrician/gynecologists ("OB/GYNs") shall
-------
comply with the Plan's processes and procedures for direct access to
OB/GYNs for certain primary OB/GYN health care services, including any
requirements regarding notification and coordination with the Covered
Person's Primary Care Physician, as well as compliance with referral
and authorization procedures required for non-OB/GYN Covered Services
and specialized OB/GYN services.
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. Notwithstanding the foregoing, during the Transition
Period, PHE shall only be required to make best efforts to meet the
performance standards. If PHE is deficient in one or more of the
performance standards, PHE will promptly provide a detailed
14
<PAGE>
program, which shall be reasonably satisfactory to the Plan, to improve the
performance of PHE so as to achieve and maintain the required standards
within the time period detailed in Attachment 3.3. PHE's failure to meet
--------------
performance standards shall result in penalties to PHE as set forth in
Attachment 3.3. Failure by PHE to receive the aggregate score for
--------------
satisfactory levels of performance for two (2) consecutive years shall be
grounds for termination for material breach under Section 6.4. Failure by
PHE to meet any single performance standard shall not be grounds for
termination for material breach of this Agreement.
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 (many of
which are delegated to PHE under the Delegation Agreement), including
but not limited to referral authorization and precertification
procedures, Credentialing policies and procedures, Risk Management,
Utilization Management (including Institutional Care Facility and
Emergency services preauthorization requirements within twenty-four
(24) hours), 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. Notwithstanding the foregoing, the Plan shall indemnify
and hold PHE and its Affiliates, as provided in Section 5.3, harmless
from and against any and all Losses which result, arise from, or are
incident to, Plan's request to PHE to prohibit a Provider from
providing Covered Services based upon the Plan's reasonable belief
that the health or safety of Covered Persons will be endangered by his
or her acts or omissions.
15
<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) PHE agrees, at no additional compensation other than the Capitation
Payments, to cooperate with the Plan, at the Plan's reasonable
request, in the provision of health care services (such as, but not
limited to "wellness" programs) which the Plan may make available to
Covered Persons only if such services can reasonably be provided at
nominal additional cost to PHE or PHE Providers. If such health care
related services are available to Covered Persons only upon the
payment of a fee, PHE shall cause PHE Providers to collect such fee
for and on behalf of the Plan and remit the same to the Plan on a
regular basis, but not less frequently than monthly. If the costs are
not nominal, the arrangement for such services shall be made upon a
mutually agreed upon fee-for-service basis.
3.5 HEALTH CARE CENTERS; OTHER FACILITIES AND ARRANGEMENTS.
------------------------------------------------------
(A) Subject to compliance by the Plan with the standards set forth in
Attachment 1.3, PHE shall cause Medical Group to prohibit any
---------------
Physician from providing Primary Care Physician services at any
Exclusive Health Care Centers to any Person who is not a Center
Covered Person for the time period agreed upon by the parties during
which such Health Care Centers shall be Exclusive Health Care Centers;
provided, however, that the foregoing shall not apply to: (i)
-------- -------
Emergency services, (ii) services provided to patients who are (x)
Medicare eligible persons not enrolled in a Medicare risk plan, (y)
fee-for-service patients and (z) insureds of indemnity third party
payors; (iii) services provided under workers' compensation and
occupational medicine programs; or (iv) other Persons agreed to from
time to time by the Plan and PHE. Should any Exclusive Health Care
Center fail to satisfy the capacity requirements set forth in
Attachment 1.3, it shall become a Non-Exclusive Health Care Center.
--------------
A Non-Exclusive Health Care Center may become an Exclusive Health Care
Center if it exceeds the capacity standards set forth in Attachment
----------
1.3.
---
(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) Subject to Section 3.5(d), nothing in this Agreement shall limit or
restrict the ability of PHE to contract with or enter into any
arrangement with other payors, including another Managed Care
Organization, commercial health insurance company, or other deliverer
of health benefits for the provision of health care services to their
enrollees through PHE Providers (other than for the provision of
health care services at Exclusive Health Care Centers to the extent
set forth in this Agreement).
16
<PAGE>
(D) PHE shall not directly solicit the Plan's current customers or any
Plan prospective customer except as a contractor or ISOC(R) through a
Managed Care Organization in an effort to deal directly with those
customers for the provision of Covered Services. These restrictions
shall not apply to activities such as (a) business ventures in which
PHE is involved as of the Effective Date, (b) PHE's agreement to be
the contractor or an ISOC(R) for a Managed Care Organization for
business that such Managed Care Organization obtains independent of
PHE, or (c) direct contracting through another Managed Care
Organization on a fee for service basis.
(E) Subject to the provisions of the Provider Agreements and the Medical
Services Agreement, as applicable, PHE Providers are and shall remain
free to contract with other payors, including another Managed Care
Organization, commercial health insurance companies, or other
deliverer of health benefits for the provision of health care services
to their enrollees (other than by the provision of health care
services at Exclusive Health Care Centers to the extent set forth in
this Agreement).
(F) Except for the Exclusive Health Care Centers, PHE shall have the right
to relocate some or all of the Physicians located at a Health Care
Center, to otherwise move or close such Health Care Center, subject
to: (i) PHE's ongoing compliance with the access and service standards
outlined in Attachment 3.3, (ii) the approval of any applicable
--------------
governmental authorities, and compliance with applicable state and
federal laws and regulations, and (iii) according to reasonable
standards to be mutually agreed to between the parties regarding
access to health care, and (iv) consistent with the provisions of this
Agreement. The Plan will work closely with PHE to obtain any such
approvals that might be required. In addition, PHE may make reasonable
alternative use of excess space at the Health Care Centers that do not
involve the provision of services by Primary Care Physicians.
(G) In the event that PHE or Medical Group or either of their Affiliates
plans to introduce or make available at any Health Care Center (other
than an Exclusive Health Care Center) or through the PHE Providers a
program or service related to health care, but not constituting
Covered Services, PHE shall first inform the Plan of the details,
including the fees to be charged for offering such service to Covered
Persons, if any, and provide the Plan with the right of first refusal
to have such program or service available only for Covered Persons for
a period of two sales cycles, which total period shall not exceed
fifteen (15) months. If such right is not exercised by the Plan, or if
such right is exercised by the Plan and two sales cycles have expired,
PHE may or may permit Medical Group to offer such program or service
to any other Managed Care Organization. If such program or service has
been developed by another Managed Care Organization whose enrollees
also receive health care services at such Health Care Center or
through
17
<PAGE>
the PHE Providers, PHE shall, and shall cause Medical Group to, use
its best efforts to have such program or service available to the Plan
and Covered Persons on the same or similar terms and conditions as
those of the other Managed Care Organization. Any program or service
available to the Plan or Covered Persons shall, at the Plan's request,
be offered to Covered Persons at all Health Care Centers or through
all appropriate PHE Providers.
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, provided that such modifications shall not cause PHE to be
in violation of this Agreement. 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 and the Plan shall have
the opportunity to discuss, and the Plan may provide, input regarding
such material changes prior to their implementation. 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, including but not limited to the
obligations to submit appropriate documentation to the Plan, uphold
the exclusivity provisions, comply with medical management and quality
programs, hold harmless Covered Persons from any billing for Covered
Services, maintain appropriate medical records, secure such
professional liability coverage as required by the Plan, use best
efforts to develop a satisfactory relationship with Covered Persons,
and provide encounter and claims data electronically in accordance
with the standards agreed to by the parties which take into account as
needed by the Plan's need to respond to any regulatory agency,
Accreditation Agency or employer inquiry.
(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.
18
<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;
19
<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. The
Plan shall indemnify and hold PHE and its Affiliates harmless, as
provided in Section 5.3, from and against any and all Losses which
result, arise from, or are incident to, Plan's determination to
require the termination or suspension of a Provider under the
provisions of Section 3.6(d)(vii).
(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:
20
<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
21
<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) that the Plan has privity of contract with PHE Providers
such that Plan has standing to enforce such agreements in
the absence of enforcement by PHE as provided in N.J.A.C.
-------
8:38-15.2; provided, however, that the Plan shall not have
privity of contract with the PHE Providers, as provided in
this Section, upon termination or expiration of this
Agreement, subject only to continuity of care requirements
set forth in Section 3.12.
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 RECIPROCITY. PHE acknowledges the Plan's participation in the reciprocity
-----------
programs established with its Affiliates, and with "The HMO Group". PHE
agrees to provide health care services constituting Covered Services to
persons who are eligible to participate therein. Reimbursement to PHE for
Covered Services provided to covered Persons of Affiliates shall be in
accordance with the provisions of Attachment 1.1. For all other persons
--------------
covered under this section, PHE shall be reimbursed at the usual,
reasonable and customary rate for such services as set forth at the lesser
of the routine rate paid by The HMO Group or the 90/th/ percentile of rates
set by the Health Insurance Association of America; if any unusual
administrative costs are incurred by PHE under this Section, PHE shall be
reimbursed an additional amount therefor as the parties may agree.
3.9 HOLD HARMLESS.
-------------
22
<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, nor shall PHE permit Medical Group, or any
other PHE Providers 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) Notwithstanding the foregoing, provided that the Plan pays to PHE in
a timely manner the Capitation Payments due hereunder, less any sums
withheld in accordance with the terms hereof, PHE shall indemnify,
defend and hold the Plan harmless, in accordance with Section 5.3,
against any claims asserted against the Plan by a PHE Provider for
non-payment of claims (except as to those claims arising from Covered
Services rendered to Network Covered Persons for which the Plan is
financially responsible in accordance with Section 3A and Attachment
----------
1.1 during the Financial Risk Period).
---
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
23
<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.
24
<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.
25
<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
26
<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
27
<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; provided, however, that during the Financial Risk
-----------------
Period, the Plan shall be solely responsible for the payment of Covered
Services for Network Covered Persons as provided in Attachment 1.1. 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) Subject to the Plan's financial responsibility for Covered Services
rendered to Network Covered Persons as provided in Attachment 1.1
--------------
during the Financial Risk Period, the cost of any Covered Services
rendered on behalf of PHE Providers by a Covering Physician shall be
the sole financial responsibility of PHE.
(B) Capitation payable to PHE shall be paid in two equal monthly
installments on the fifteenth (15/th/) and the thirtieth (30/th/) 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. In no event shall Plan deduct any amounts from
28
<PAGE>
Capitation Payments due to retroactive disenrollment for a period of
more than ninety (90) days; provided, however, that where Plan's
existing clients require a longer retroactive disenrollment period or
where a longer period is required by certain governmental contractors
that are Plan's clients, PHE shall honor such extended retroactive
disenrollment period. As of the Effective Date, Plan shall use best
efforts not to enter into agreements that obligate Plan to have a
retroactive enrollment period greater than ninety (90) days. PHE
shall have the right to audit disenrollment history in the event of
retroactive deletions.
3.20 COORDINATION OF BENEFITS. The parties shall cooperate, and PHE shall
------------------------
cause PHE Providers to cooperate, in the performance of coordination of
benefits. The Plan has the right to all coordination of benefit recoveries
for services performed for Network Covered Persons only during the
Financial Risk Period. PHE shall have the right to all coordination of
benefit recoveries for Covered Services performed for Center Covered
Persons from and after the Effective Date and for Network Covered Persons,
after the Financial Risk Period. 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 full customary 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
29
<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.
30
<PAGE>
(G) In the event there is a change in state or federal law or regulations
regarding Physician Incentive Plans or related to Financial Risk,
this Section 3.23 shall be modified to reflect such change.
3.24 NOTIFICATION OF FINANCIAL INTEREST. PHE agrees to notify the Plan of any
----------------------------------
ownership or other financial interest that it or any of its Physicians, or
any of their immediate family members, may have or acquire, now or in the
future, in any Health Care Provider. Where such an interest exists, PHE
agrees to, and shall cause Physicians to, abide by any guidelines
established by the Plan and/or federal or state laws, rules and
regulations, that are applicable to referrals to that Health Care
Provider.
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. Subject to the Transition Plan, which shall set forth
-----------------
a specific period of time after the Effective Date during which the Plan
shall remain responsible for 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 and shall cause PHP to provide
the Plan with audited annual financial statements and quarterly unaudited
financial statements. PHE shall cause PHP to provide, promptly after the
sending or filing thereof, to the Plan, copies of all reports which PHP
sends to its stockholders generally and copies of all reports and
registration statements (promptly after becoming effective) which PHP
files with the Securities and Exchange Commission, any national securities
exchange, or the National Association of Securities Dealers, Inc. If at
any time the Plan reasonably believes that additional financial mechanisms
may be appropriate based upon the financial performance of PHE for Covered
Persons, it shall contact PHE. PHE will take whatever reasonable action is
necessary to assure that its financial obligations under this Agreement
will be satisfied. In the event that PHP is no longer a publicly held
corporation, PHE shall cause PHP to provide financial information
substantially similar to the information provided in its current filings
with the Securities and Exchange Commission.
31
<PAGE>
3.28 RIGHT TO AUDIT CLAIMS.
---------------------
(A) The Plan shall have the right to audit the accuracy of claims paid by
PHE. 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 and shall consist of a
review of a statistically valid sample of such claims, and shall
further be governed by the provisions of the Provider Guide and
applicable regulations. Such audit shall be during normal business
hours of PHE. The audit shall consist of a review of those records
whose review PHE and the Plan agree is necessary to determine the
accuracy of said claim adjudication. 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 COMPLIANCE WITH DRUG FORMULARY. PHE agrees, and shall cause PHE Providers
-------------------------------
to agree, to adhere to the drug formulary as set forth in the Plan's
preferred product reference, from time to time in effect, in prescribing
drugs for Covered Persons. Plan shall provide PHE at all times with an
updated copy of the formulary. Review of prescribing patterns shall be
accomplished through the Quality Improvement and Utilization Management
programs.
SECTION 3A - TRANSITION PLAN OF THE PARTIES
3A.1 DEVELOPMENT OF TRANSITION PLAN. ASSUMPTION OF DELEGATED FUNCTIONS AND
ADMINISTRATIVE DUTIES UNDER A TRANSITION PLAN. Attached hereto as
Attachment 3.1 is the mutually agreed upon fundamental framework for the
--------------
orderly transition of the responsibilities set forth in the Delegation
Agreement and other administrative duties to be assumed by PHE pursuant
hereto. As of the date hereof, the parties are and shall continue
hereafter diligently and in good faith to develop this framework into a
formal "Transition Plan". So long as the parties are each proceeding in
---------------
this manner to
32
<PAGE>
expeditiously complete, and then implement, the Transition Plan, the
failure to finalize the Transition Plan prior to the Closing Date shall
not be a basis upon which either party may refuse to close the
transactions contemplated hereby; provided, however, that the development
and substantial implementation of the Transition Plan must be completed
within 180 days following the Effective Date (the "Transition Period"),
-----------------
unless an extension is mutually agreed to by the parties. The Transition
Plan shall include, but shall not be limited to, the following items:
i) a description of the medical management and administrative services
not otherwise described in the Delegation Agreement, that will be
performed by PHE and/or its Affiliates pursuant to this Agreement
(e.g., medical management, network hospital contracting for new
Providers, Plan network management, claims processing, Health Care
Center and Plan network customer service);
ii) a schedule of the assumption of Delegated Functions and other medical
management and administrative services to be provided by PHE and/or
its Affiliates commencing during the Transition Period;
iii) the duties and performance obligations required to be met by each
party during the Transition Period;
iv) the responsibilities of each party for making decisions and/or
reviewing decisions made regarding the services provided under the
Delegation Agreement and the Transition Plan; and
v) a description of transitioning the Plan's arrangements with Plan
Providers and the Plan's administrators and vendors, to PHE prior to
and during the Transition Period.
3A.2 ARRANGEMENTS WITH PLAN PROVIDERS.
i) PHE or its Affiliates, with the consent and assistance of the Plan,
shall approach Plan Providers, chosen at PHE's sole discretion, for
the purpose of entering into Provider Agreements which will be
effective as of the Effective Date. Where Plan Providers have
executed Provider Agreements with PHE prior to the Effective Date,
the Plan shall review and determine that such Providers continue to
meet Plan Credentialing criteria. For those Providers so
credentialed, the Provider Agreements shall become effective as of
the Effective Date and shall supersede any direct or indirect
agreement with the Plan except as provided in Section 3A.1(b)(ii).
The Plan shall notify Plan Providers that: (i) the Plan has entered
into arrangements with PHE pursuant to which Plan has delegated to
PHE authority to administer claims, conduct Utilization Management
and Quality Improvement and other functions, and that these
arrangements require such Providers to cooperate with PHE's
33
<PAGE>
policies and procedures on behalf of the Plan; and (ii) the Plan
intends to rely exclusively upon PHE to operate the Provider Network.
ii) The Plan shall request that such Providers enter into Provider
Agreements with PHE. Where the provider agreements between the Plan
and the Plan Providers permit unilateral assignment, the Plan shall
assign those provider agreements with Plan Providers that are
designated by PHE. For Plan Providers that have been identified by
PHE, but have not entered into Provider Agreements with PHE, and
which do not permit unilateral assignment, Plan shall make best
efforts to ensure assignment by Plan to PHE of such agreements. Upon
assignment, such Plan Providers shall become PHE Providers for
purposes of this Agreement. Where any existing agreements between
Plan and Plan Providers cannot be assigned to PHE or where PHE or its
Affiliate(s) have not entered into written agreements with such
providers within the time period set forth in the Transition Plan,
Plan shall agree to give notice of non-renewal at the earliest
possible date, and shall cause an orderly transfer of Covered Persons
from such Plan Providers to PHE Providers.
3A.3 CONVERSION OF PLAN PROVIDERS TO PHE PROVIDERS - On a county-by-county
---------------------------------------------
basis, PHE shall report periodically to the Plan on the specific Plan
Providers who have become PHE Providers. For a period of 180 days
following the Effective Date or shorter period in which the parties
determine PHE has a sufficient list of such Providers in a particular
county to meet the Plan's access and adequacy standards, the Plan and PHE
shall continue to utilize Plan Providers as well as PHE Providers. Once
the parties have determined that the Plan's access and adequacy standards
are met in a particular county, the Plan shall, within thirty (30) days of
such determination, give notice of non-renewal effective at the earliest
possible date to any remaining Plan Providers in such county. The Plan and
PHE shall work together to effect an orderly transfer of Covered Persons
from such Plan Providers to PHE Providers in such a manner so as not to
disrupt the care given to, nor to abandon such Covered Persons. During the
period described in this Section, any obligations of PHE set forth in this
Agreement shall apply equally to Plan Providers who are deemed to be PHE
Providers and other PHE Providers.
3A.4 COOPERATION OF THE PARTIES. The parties shall make best efforts during
--------------------------
the Transition Period to meet the performance standards set forth in
Attachments 3.3 and 4.11, but shall not be subject to any financial
------------------------
penalties set forth in Attachments 3.3 and 4.11 for failure to meet such
------------------------
standards during the Transition Period. The parties shall make best
efforts to complete all duties and responsibilities set forth in the
Transition Plan during the established Transition Period; provided,
however, that failure by either party to complete all of its duties and
responsibilities as outlined in the Transition Plan during the Transition
Period shall not constitute a material breach of this Agreement.
SECTION 4 - RESPONSIBILITIES AND OBLIGATIONS OF THE PLAN
34
<PAGE>
4.1 PROVISION OF PLAN COVERED SERVICES. The Plan agrees to bear sole financial
----------------------------------
responsibility for Covered Services provided to Network Covered Persons
during the Financial Risk Period in accordance with the provisions of
Attachment 1.1.
--------------
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, the Plan shall follow prudent
underwriting guidelines and prevailing community standards to assure
itself against adverse selection, and to assure the offering of
Coverage Plans at prices that are competitive with other Managed Care
Organizations, but that do not have a known adverse effect on PHE.
Plan agrees to provide PHE with adequate advance written notice of
material additions or modifications to the scope of Covered Services,
any benefit structures of any Coverage Plans, or other structural
changes to Coverage Plans, including material changes required by law
or regulation, and to permit PHE to provide comments on the financial
risk, adequacy of the ISOC(R) or pricing concerns of any new products.
Plan agrees that, to the extent that such changes materially affect
the payments or other financial or administrative terms contemplated
hereunder, any such changes shall be subject to appropriate adjustment
to the payments made to PHE and shall be subject to mutual agreement
as provided in Section 7.1(c).
(C) Should the Plan develop a new Coverage Plan, premium, pricing
arrangement, geographic expansion, or other such change or new health
care product which the Plan would offer to both current and
prospective Covered Persons, the Plan shall so notify PHE. The Plan
agrees that PHE shall have the right to provide Plan with substantive
input on such proposed addition or revision to the Plan's health care
programs. PHE shall then act as the Plan's exclusive provider for such
new or revised program, partnering with the Plan to develop and
deliver such new or revised healthcare product to current and/or
prospective Covered Persons in a cost
35
<PAGE>
effective manner. Notwithstanding the foregoing, should PHE reasonably
demonstrate to the Plan, upon consultation with the Plan, that to
undertake the delivery of such proposed new or revised product would
be unreasonable, then neither the Plan nor PHE shall deliver such
healthcare product within the State. For the purposes of the
foregoing, the new Medicaid program adopted as of the Effective Date
shall be deemed to be a new product.
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.
---
36
<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 at the Exclusive Health Care Centers and 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. Without limiting the foregoing,
PHE shall use the name "HIP Health Plan of New Jersey", and may use
the names "Pinnacle Health Enterprises", "Pinnacle Health Center" or
"Pinnacle Medical Group" on the exterior signage for the Exclusive
Health Care Centers, which signage shall be agreed upon by the Plan
and PHE.
(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 COVERED PERSON MEMBERSHIP LEVELS. Plan shall make best efforts to maintain
--------------------------------
and increase the enrollment of Covered Persons in Coverage Plans. Plan
shall maintain, at a minimum, the enrollment levels for Covered Persons
enrolled in Coverage Plans as set forth in Attachment 1.1(a). In the event
-----------------
the Plan has failed to maintain the enrollment levels set forth in such
Attachment, the Plan shall compensate PHE for failure to maintain such
enrollment levels, as set forth in Attachment 1.1(a).
-----------------
37
<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. Notwithstanding the foregoing,
during the Transition Period, the Plan shall only be required to make best
efforts to meet the performance standards. If Plan is deficient in one or
more of the performance standards, Plan will promptly provide a detailed
program, which shall be reasonably satisfactory to PHE, to improve the
performance of Plan so as to achieve and maintain the required standards
within a time period mutually agreed to by the parties. Plan's failure to
meet performance standards shall result in financial penalties as set
forth in Attachment 4.11. Failure by the Plan to meet the aggregate score
---------------
to have provided satisfactory levels of performance for two (2)
consecutive years shall be grounds for termination for material breach
under Section 6.4. Failure by the Plan to meet any single performance
standard shall not be grounds for termination for material breach of this
Agreement.
4.12 PLAN REPORTING. For so long as Plan has any responsibilities with respect
---------------
to claims processing for Covered Services to Covered Persons as set forth
in the Transition Plan, 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. To the extent that the Plan performs claims
processing, Plan shall meet the claims processing standards set forth in
Attachment 5.5.
--------------
4.13 SPECIAL ARRANGEMENTS FOR DESIGNATED PROVIDERS. PHE acknowledges that
---------------------------------------------
there are certain Physicians who are Plan Providers and who, due to
various arrangements that Plan has with certain customers, must be
maintained as Providers in the Plan. For purposes of this Section, these
Physicians shall be referred to as "Plan Designated Physicians." PHE and
Plan shall use their best efforts to have Plan Designated Physicians
become PHE Providers. However, regardless of whether Plan Designated
Physicians become PHE Providers, Plan agrees to be solely responsible to
reimburse PHE for excess costs that exceed Capitation Payments made to PHE
for all Covered Services for Covered Persons who elect or are assigned to
receive services from such Plan Designated Physicians. This
38
<PAGE>
means that if PHE has to pay more than the Capitation Payments it receives
for the provision of Covered Services to Covered Persons who have selected
a Plan Designated Physician, Plan shall be responsible to pay PHE the
amount by which PHE's payments exceed the Capitation Payments. This
Provision shall remain in effect as long as there are any Plan Designated
Physicians.
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.
39
<PAGE>
5.3 INDEMNIFICATION
---------------
(A) The Plan shall indemnify and hold PHE, and its directors, officers,
employees, and Affiliates harmless, from and against any and all
"Losses" (as defined below) or claims including, without limitation,
claims of a governmental authority, which result, arise from, or are
incident to the contractual relationship between the Plan and any
contract holders of Coverage Plans or Covered Persons and which have
been caused by the performance or omission of any act or
responsibility assumed by the Plan pursuant to this Agreement,
including, without limitation, the indemnification obligations set
forth in Sections 3.4(b) and 3.5(e) of this Agreement. For the
purposes of this indemnification, the Plan's responsibilities under
this Agreement do not include the delivery of health care services.
(B) PHE shall, and shall cause Medical Group as provided in subsections
(ii) and (iii) to, indemnify and hold the Plan and its respective
directors, officers, employees, and Affiliates harmless, from and
against any and all Losses which result, arise from, or are incident
to any claim or action instituted by any Person or which results or
arises out of (i) the performance or omission of any act by PHE or its
Affiliate, NJ MSO, Inc. under this Agreement, or any Provider
Agreement; (ii) the professional acts or omissions of Medical Group in
providing health care services pursuant to the Medical Services
Agreement, to the extent that such indemnification obligation for
Medical Group is covered by appropriate insurance coverage of PHE;
(iii) PHE's or Medical Group's use or maintenance of any property,
facility or equipment, to the extent that such indemnification
obligation for Medical Group is covered by appropriate insurance
coverage of PHE, or (iv) claims of a governmental authority.
(C) The term "Losses" shall mean all claims, losses, liabilities, damages,
------
judgments, awards, costs or expenses, fines, penalties, taxes,
liabilities, obligations, lawsuits, deficiencies, demands, and
reasonable outside attorney's fees and disbursements. The Plan's
obligations to indemnify PHE and cause Medical Group to indemnify
Plan, shall not limit any right of contribution which either party may
have under statute or common law..
(D) The indemnified party shall cooperate in all reasonable respects with
the indemnifying party in the investigation, trial and defense of any
lawsuit or action that may be subject to this Section 5.3 and any
appeal arising therefrom; provided, however, that the indemnified
-------- -------
party may, at its own cost, participate in the investigation, trial,
and defense of such lawsuit or action and any appeal arising
therefrom. The parties shall cooperate with each other in any
notifications to insurers.
(E) If a claim for Losses (a "Claim") is to be made by a party entitled to
-----
indemnification hereunder against the indemnifying party, the party
claiming such indemnification shall give written notice (a "Claim
-----
Notice") to the indemnifying
------
40
<PAGE>
party as soon as practicable after the party entitled to
indemnification becomes aware of any fact, condition, or event which
may give rise to Losses for which indemnification may be sought under
this Section 5.3. If any lawsuit or enforcement action is filed
against any party entitled to the benefit of indemnity hereunder, a
Claim Notice shall be given to the indemnifying party as promptly as
practicable (and in any event within ten (10) calendar days after the
service of the citation or summons). The failure of an indemnified
party to give a timely Claim Notice hereunder shall not affect its
right to indemnification hereunder, except to the extent that the
indemnifying party demonstrates actual damage caused by such failure.
Upon receipt of such Claim Notice, if the indemnifying party shall
acknowledge in writing to the indemnified party that the indemnifying
party shall be obligated under the terms of its indemnity hereunder in
connection with such lawsuit or action, then the indemnifying party
shall be entitled, if it so elects to, (i) take control of the defense
and investigation of such lawsuit or action; (ii) to employ and engage
attorneys of its own choice to handle and defend the same, at the
indemnifying party's cost, risk and expense unless the named parties
to such action or proceeding include both the indemnifying party and
the indemnified party and the indemnified party has been advised in
writing by counsel that there may be one or more legal defenses
available to such indemnified party that are different from or in
addition to those available to the indemnifying party; and (iii)
compromise or settle such Claim, which compromise or settlement shall
only be made with the consent of the indemnified party, which consent
shall not be unreasonably withheld. If the indemnifying party fails to
assume the defense of such Claim within fifteen (15) calendar days
after receipt of the Claim Notice, the indemnified party against which
such Claim has been asserted shall (upon delivering notice to such
effect to the indemnifying party) have the right to undertake, at the
indemnifying party's cost and expense, the defense, compromise or
settlement of such Claim on behalf of and for the account and risk of
the indemnifying party and such Claim shall only be compromised or
settled with the consent of the indemnifying party, which consent
shall not be unreasonably withheld. In the event the indemnified party
assumes the defense of the Claim, the indemnified party will keep the
indemnifying party reasonably informed of the progress of any such
defense, compromise or settlement. The indemnifying party shall be
liable for any settlement of any action effected pursuant to and in
accordance with this Section 5.3 and for any final judgment or award
(subject to any right of appeal), and the indemnifying party agrees to
indemnify and hold harmless an indemnified party from and against any
Losses by reason of such settlement, judgment or award.
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
41
<PAGE>
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
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. If
during the Transition Period the PC Administrator is required to
process claims for services provided prior to the Effective Date, the
Plan shall be solely responsible for payment of all such claims and
the usual fees of the CP Administrator to process such claims. 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 five (5) 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) To the extent set forth in Attachment 5.5, the CP Administrator
--------------
shall report monthly to the parties on the number of claims
received, processed, approved, denied, or pending, for Covered
Persons, the average time for processing claims during the prior
month, the number of Emergency and Urgent Care Services claims
processed and the number of claims processed without an
authorization number from the Utilization Management Program.
iii) By the 15th day of each month, the CP Administrator shall provide
to the parties an Electronic Claims Payable Report in the format
set forth in Attachment 5.5.
--------------
42
<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; provided however, if this Agreement is terminated without
cause prior to December 31, 2003, the terminating party shall incur the
following:
(A) Where the Plan terminates the Agreement without cause prior to
December 31, 2003, PHE and the Plan shall have the rights as set forth in
Attachment 6.3.
--------------
(B) Where PHE terminates this Agreement without cause, PHE and the Plan
shall have the rights as set forth in Attachment 6.3.
--------------
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;
43
<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. Either party has failed to meet the applicable minimum annual
weighted score for its performance standards for two (2) consecutive
years as set forth in Attachments 3.3 or 4.11, as applicable;
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.
44
<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) by PHE, for non-payment by Plan for two (2) scheduled Capitation
Payments;
(C) by PHE, if Plan violates PHE's rights to exclusively arrange for the
provision of Covered Services to Covered Persons; or
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; provided, however, that the continuation of care shall not extend
beyond twelve (12) months from the effective date of termination. 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) The business relationship between the Plan and Covered Persons, and
the Plan and the group contract holders of Coverage Plans with which
it contracts, shall be deemed the property of the Plan. Similarly, all
lists of Covered Persons and of the employer groups to which they
belong shall be deemed the property of the Plan and so treated by PHE
and its Affiliates, and PHE shall cause PHE Providers to so treat such
property, as confidential and propriety information.
45
<PAGE>
(B) At any time during this Agreement, and for a period of one year
following the termination of this Agreement, and only in the instance
where PHE terminates this Agreement without cause or the Plan
terminates for cause, PHE agrees that it and its Affiliates shall not,
and shall require PHE Providers to agree that they will not:
i) induce or attempt to influence (orally or in writing) any
organization, entity, or individual that has an employment or
other contractual relationship with the Plan or, any Affiliate
of the Plan, to terminate such relationship or, to the extent
such relationship terminates for any reason, prevent or attempt
to prevent the renewal or continuation of such a relationship;
ii) advise or counsel any Covered Person or employer or other groups
to disenroll from the Plan; or
iii) solicit Covered Persons or groups to become enrolled with any
Managed Care Organization or any other similar hospitalization
or medical payment, service plan or insurance plan.
(C) PHE and its affiliates shall not, nor shall it permit PHE Providers to
send any written communications or correspondence to Covered Persons,
group contract holders or their employees relating to this Agreement,
the Plan, the relationship of the Plan and PHE or any matters of a
similar nature hereunder without first obtaining the written consent
of the Plan.
(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) If the Plan terminates without cause or PHE terminates with cause,
these provisions will not apply.
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
46
<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
47
<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. However, any such
change reasonably deemed material by PHE shall require mutual
agreement prior to becoming effective.
(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
48
<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
49
<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) In addition to the confidential information described in Section 6.8,
the Plan hereby designates the Provider Guide and all Plan information
concerning Credentialing, Quality Improvement, Risk Management,
Utilization Management and all Plan business records as confidential
information subject to the provisions of this Section 7.7.
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 MEMBERSHIP INCENTIVE PAYMENTS. Payments due by the Plan hereunder shall be
-----------------------------
independent of those payments which may be due to the Plan under the
transaction related to this Agreement between the parties and their
Affiliates.
7.10 SURVIVAL OF TERMS. Sections 3.9, 3.12, 3.13, 3.14, 3.17, 3.20, 3.22, 5.3,
-----------------
6.7, 6.8, and 7.7 shall survive the termination or expiration of this
Agreement for any reason.
50
<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 MEDICARE RISK CONTRACTS To the extent that this Agreement relates to
-----------------------
Medicare risk arrangements involving the Plan, the terms and provisions
required under the Health Care Financing Administration's rules, manuals
and guidelines as the same may be amended from time to time, shall
supersede any conflicting provisions contained herein.
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.
51
<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, including but not limited to, insofar as such agreement relates to
payment for Covered Services provided under the terms and conditions of
this Agreement.
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
Date: July 24, 1997 Financial Officer
Date: July 24, 1997
52
<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:
Plan's Obligations. Nothing contained in this Agreement, is intended to,
------------------
nor shall be construed to (a) limit or otherwise constrain the Plan's
obligations under the Coverage Plans or applicable law including common
law, rules or regulations, including without limitation the Health
Maintenance Organization Act, N.J.S.A. 26:2J-1 and the rules and
regulations promulgated thereunder (collectively, the "Act") to provide or
---
arrange for Covered Services to Covered Persons; (b) limit or diminish in
any respect the Plan's liability to third parties, including without
limitation Covered Persons, for the breach of its obligations under the
Coverage Plans or its violation of applicable laws including common law,
rules or regulations, including without limitation the Act; (c) modify or
expand the obligations of the Plan to provide or arrange for Covered
Services to Covered Persons or under applicable law including common law,
rules or regulations, including without limitation the Act; or (d) modify
or expand the Plan's liability to other persons or entities, including
without limitation Covered Persons, for the breach of its obligations under
the Coverage Plans or its violation of applicable laws including common
law, rules or regulations, including without limitation the Act.
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:
1
<PAGE>
Subcontracts. PHE has the right to delegate by subcontract certain
------------
Delegated Functions to the Medical Group and the PHE Providers, under the
Medical Services Agreement and the Provider Agreements, respectively, or to
another subcontractor, subject to the Plan's prior consent, which consent
shall not be unreasonably withheld, and provided that no subcontract shall
be entered by PHE unless it complies with the requirements of N.J.A.C.
8:38-1.1 et seq. and in particular N.J.A.C. 8:38-15.1(a) and (b). PHE may
enter into other subcontracts for the performance of its administrative
obligations hereunder; provided, however, that to the extent any such
subcontract for administrative services has an adverse effect on the Plan's
relationship with Covered Persons, such subcontract shall be subject to the
Plan's prior consent upon ten (10) days' notice. In the event that PHE
enters into contracts and/or subcontracts for the performance of its
obligations hereunder, PHE shall be responsible for assuring performance by
its contractors and/or subcontractors.
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, provided that such modifications shall not cause PHE
to be in violation of this Agreement, and 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. PHE and the Plan
shall have the opportunity to discuss, and the Plan may provide, input
regarding such material changes prior to their implementation. 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, including but not limited to
the obligations to submit appropriate documentation to the Plan,
uphold the exclusivity provisions, comply with medical management and
quality programs, hold harmless Covered Persons from any billing for
Covered Services, maintain appropriate medical
2
<PAGE>
records, secure such professional liability coverage as required by
the Plan, use best efforts to develop a satisfactory relationship with
Covered Persons, and provide encounter and claims data electronically
in accordance with the standards agreed to by the parties which take
into account as needed the Plan's need to respond to any regulatory
agency, Accreditation Agency or employer inquiry.
1. 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, nor shall PHE permit Medical Group, or any other PHE Providers 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.
1. Section 3.19(a) is deleted and replaced with the following:
(a) Subject to the Plan's financial responsibility for Covered
Services rendered to Network Covered Persons as provided in Attachment
----------
1.1 during the Financial Risk Period, the cost of any Covered Services
---
rendered on behalf of PHE Providers by a Covering Physician shall be
the financial responsibility of PHE. Notwithstanding this, HIP
recognizes its responsibilities under N.J.A.C. 8:38-15.2(f).
1. 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.
The Plan has the
3
<PAGE>
right to all coordination of benefit recoveries for services performed for
Network Covered Persons only during the Financial Risk Period. PHE shall
have the right to all coordination of benefit recoveries for Covered
Services performed for Center Covered Persons from and after the Effective
Date and for Network Covered Persons, after the Financial Risk Period. 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 full customary 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.
2. Section 3.26 is deleted and replaced with the following:
Claims Processing. Subject to the Transition Plan, which shall set forth a
-----------------
specific period of time after the Effective Date during which the Plan
shall remain responsible for 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. Should PHE fail to pay in accordance with applicable
laws, rules and regulations regarding claims processing, then PHE shall pay
sums covering such claims to the Plan at such time and the Plan shall pay
such Provider claims in accordance with Attachment 5.5 and all applicable
--------------
laws, rules and regulations.
3. 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 and shall cause PHP to
provide the Plan with audited annual financial statements and quarterly
unaudited financial statements. PHE shall cause PHP to provide, promptly
after the sending or filing thereof, to the Plan, copies of all reports
which PHP sends to its stockholders generally and copies of all reports and
registration statements (promptly after becoming effective) which PHP files
with the Securities and Exchange Commission, any national securities
exchange, or the National Association of Securities Dealers, Inc.
4
<PAGE>
If at any time the Plan reasonably believes that additional financial
mechanisms may be appropriate based upon the financial performance of PHE
for Covered Persons, it shall contact PHE. PHE will take whatever
reasonable action is necessary to assure that its financial obligations
under this Agreement will be satisfied including payment of all incurred
claims. In the event that PHP is no longer a publicly held corporation, PHE
shall cause PHP to provide financial information substantially similar to
the information provided in its current filings with the Securities and
Exchange Commission.
4. 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 paid by PHE. 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 and
shall consist of a review of a statistically valid sample of such
claims, and shall further be governed by the provisions of the
Provider Guide and applicable regulations. Such audit shall be during
normal business hours of PHE. The audit shall consist of a review of
those records whose review PHE and the Plan agree is necessary to
determine the accuracy of said claim adjudication. 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.
1. A new Section 6.1(a) is hereby added as follows:
(a) Reserves at Termination. Within 90 days of the date that notice
-----------------------
of renewal is due under this section for the initial or any extended
or renewal term of this Agreement, and if the term of this Agreement
shall not have been extended or renewed, then the parties shall agree
upon a procedure for funding reserves of the incurred but unpaid
claims that are due to be paid by PHE following termination of this
Agreement. PHE agrees to fund any deposit requirement associated with
the Plan's Covered Persons by either: (i) leaving claims unpaid at
termination and providing the Plan with funds that the Plan determines
are sufficient to fund reserves for incurred but unpaid claims,
provided that the Plan and PHE mutually agree on the amount of funds
necessary to cover PHE's liability for incurred and unpaid claims at
termination, or (ii) establishing a joint escrow fund under joint
administration with the Plan to be funded by a portion of the
Percentage of Premium (POP) paid to PHE to pay the incurred but unpaid
claims due from PHE following termination of this Agreement. It is
agreed that any escrow funds shall be used to pay such incurred but
unpaid claims. The amounts to be included in such escrow fund shall be
mutually agreeable, or, if HIP and PHE cannot so agree, then an
initial amount determined by PHE; provided, however, that if such
amount shall not be sufficient to pay such incurred claims, PHE shall
remain
5
<PAGE>
liable to deposit the amount of such deficiency in the escrow fund.
Except as otherwise provided in this Agreement, nothing in this
Section 6.1(a) shall require PHE to pay any amounts prior to the final
year of the initial or any extended or renewal term to fund reserves
or deposit requirements by HIP for any reason including any guarantee
of PHE's performance under this Agreement.
1. Attachment 1.1B first paragraph is deleted and replaced with the following:
Center Covered Persons. From the Effective Date through December 31, 1997
----------------------
(except if PHE assumes responsibility for claims processing at an earlier
date that is mutually agreed to by the Parties), Plan or its designated CP
Administrator shall be responsible for paying "Eligible Claims" for Covered
Services rendered to Center Covered Persons. For purposes of this
Attachment 1.1, Eligible Claims are those incurred claims that are for
services rendered during the Financial Risk Period and that meet the
standards for Claims as set forth in Section 5.5 and Attachment 5.5 of this
Agreement and have been verified to represent a Covered Service to a
Covered Person offset by any applicable third party recoveries and repriced
to meet the criteria set forth herein. For each Plan Provider, Eligible
Claims shall be paid on the basis of the Plan's applicable fee schedule
until such time as the Plan Provider has entered a Provider Agreement with
PHE and is listed by PHE as a PHE Provider; thereafter, each such PHE
Provider shall be paid on the basis of the PHE Fee Schedule. (No claims
shall be paid to the Medical Group for primary care services covered for
Center Covered Persons). In processing claims on behalf of PHE, the Plan
shall meet mutually agreeable and appropriate standards for timeliness,
accuracy, reliability, reporting, and compliance with PHE's utilization
management and cost control policies and procedures. PHE shall reimburse
the Plan by wire transfer or other means as is mutually agreeable for each
Eligible Claim within two days of receiving an Electronic Claims Payable
Report (which shall mean a report, in computer compatible format, which
contains reasonably sufficient detail from which eligibility, and amounts
charged, covered and payable with respect to the claims for Covered Persons
may be determined).
2. 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.
6
<PAGE>
3. 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
7
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS AND SIX MONTHS ENDED
OCTOBER 31, 1997 AND 1996
RESTATED
<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 $ 2,672,000 $ 2,169,000 $ 4,864,000
=========== =========== =========== ===========
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 $ 0.20 $ 0.16 $ 0.35
=========== =========== =========== ===========
Fully Diluted Earnings Per Share
- --------------------------------
Fully diluted
Net earnings.............................. $ 1,124,000 $ 2,672,000 $ 2,169,000 $ 4,864,000
Net interest expense related to
convertible debt.................... 9,000 6,000 18,000 11,000
----------- ----------- ----------- -----------
Net earnings as adjusted.................. $ 1,133,000 $ 2,678,000 $ 2,187,000 $ 4,875,000
=========== =========== =========== ===========
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 $ 0.35
=========== =========== =========== ===========
</TABLE>
<PAGE>
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, which includes an explanatory paragraph regarding
the restatement of previously issued financial statements to reflect revised
accounting for certain contract costs and certain long-term real estate leases,
dated December 17, 1997, on our review of interim financial information of PHP
Healthcare Corporation and consolidated subsidiaries as of October 31, 1997 and
1996, and included in the Company's quarterly report on Form 10-Q, as amended,
for the quarter ended October 31, 1997, is incorporated by reference in
Registration Statement (No. 333-01101) on Form S-3 and in Registration
Statements (Nos. 333-41577, 333-26403 and 333-47093) 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.
Coppers & Lybrand, L.L.P.
Washington, D.C.
June 2, 1998
<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> 79,972
<PP&E> 89,202
<DEPRECIATION> 16,701
<TOTAL-ASSETS> 236,806
<CURRENT-LIABILITIES> 79,251
<BONDS> 66,290
0
0
<COMMON> 148
<OTHER-SE> 37,893
<TOTAL-LIABILITY-AND-EQUITY> 236,806
<SALES> 0
<TOTAL-REVENUES> 111,495
<CGS> 0
<TOTAL-COSTS> 89,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,405
<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>
