FIRST HEALTH GROUP CORP
DEF 14A, 2000-04-14
INSURANCE AGENTS, BROKERS & SERVICE
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<PAGE>   1

                                  SCHEDULE 14A
                                 (RULE 14a-101)

                    INFORMATION REQUIRED IN PROXY STATEMENT

                            SCHEDULE 14A INFORMATION
          PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 (AMENDMENT NO.  )

     Filed by the registrant [X]

     Filed by a party other than the registrant [ ]

     Check the appropriate box:

     [ ] Preliminary proxy statement        [ ] Confidential, for Use of the
                                                Commission Only (as permitted by
                                                Rule 14a-6(e)(2))

     [X] Definitive proxy statement

     [ ] Definitive additional materials

     [ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
                         FIRST HEALTH GROUP CORPORATION
- --------------------------------------------------------------------------------
                (Name of Registrant as Specified in Its Charter)
                         FIRST HEALTH GROUP CORPORATION
- --------------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of filing fee (Check the appropriate box):

     [X] No fee required.

     [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.

     (1) Title of each class of securities to which transaction applies:

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

     (2) Aggregate number of securities to which transaction applies:

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

     (3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):

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

     (4) Proposed maximum aggregate value of transaction:

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

     (5) Total fee paid:

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

     [ ] Fee paid previously with preliminary materials.

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

     [ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.

     (1) Amount previously paid:

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

     (2) Form, schedule or registration statement no.:

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

     (3) Filing party:

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

     (4) Date filed:

- --------------------------------------------------------------------------------
<PAGE>   2

                    NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

                                  May 16, 2000

     Notice is hereby given that the Annual Meeting of Stockholders of First
Health Group Corp., a Delaware corporation (the "Company"), will be held at the
offices of the Company, 3200 Highland Avenue, Downers Grove, Illinois 60515 on
Tuesday, May 16, 2000 at 10:00 a.m., local time, for the following purposes:

          (1) To elect ten directors to serve until the next Annual Meeting of
     Stockholders or until their successors are duly elected and qualified;

          (2) To consider and vote upon a proposal to approve the Company's 2000
     Stock Option Plan;

          (3) To consider and vote upon a proposal to approve the
     performance-based compensation provision of the employment agreement with
     the Company's Chief Executive Officer;

          (4) To consider and vote upon a proposal to approve the grant of two
     stock options to the Company's Chief Executive Officer; and

          (5) To transact such other business as may properly come before the
     meeting or any postponements or adjournments thereof.

     Stockholders of record at the close of business on March 31, 2000 are
entitled to notice of and to vote at the meeting and any postponements or
adjournments thereof. A complete list of the stockholders entitled to vote at
the meeting will be available for examination by any stockholder at the
Company's executive offices, for any purpose germane to such meeting, during
ordinary business hours, for a period of at least 10 days prior to the meeting.

                                          By Order of the Board of Directors,

                                          /s/ RONALD H. GALOWICH
                                          Ronald H. Galowich
                                          Secretary

Downers Grove, Illinois
April 14, 2000

     THE BOARD OF DIRECTORS EXTENDS A CORDIAL INVITATION TO ALL STOCKHOLDERS TO
ATTEND THE MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE
COMPLETE, DATE, SIGN AND RETURN AS PROMPTLY AS POSSIBLE THE ENCLOSED PROXY IN
THE ACCOMPANYING REPLY ENVELOPE. STOCKHOLDERS WHO ATTEND THE MEETING MAY REVOKE
THEIR PROXIES AND VOTE IN PERSON IF THEY DESIRE TO DO SO.
<PAGE>   3

                            FIRST HEALTH GROUP CORP.
                              3200 HIGHLAND AVENUE
                         DOWNERS GROVE, ILLINOIS 60515

                                PROXY STATEMENT

                         ANNUAL MEETING OF STOCKHOLDERS

                                  May 16, 2000

                                  INTRODUCTION

     The Board of Directors of First Health Group Corp., a Delaware corporation
(the "Company"), is soliciting the accompanying proxy for use at the Annual
Meeting of Stockholders of the Company to be held on the date, at the time and
place and for the purposes set forth in the accompanying Notice of Annual
Meeting of Stockholders and at any postponements or adjournments thereof. The
Company's principal executive offices are located at 3200 Highland Avenue,
Downers Grove, Illinois 60515, and its telephone number is (630) 737-7900.
Stockholders of record at the close of business on March 31, 2000 are entitled
to notice of and to vote at the meeting. This Proxy Statement and the
accompanying proxy are first being mailed to stockholders on or about April 14,
2000.

                                  THE MEETING

VOTING AT THE MEETING

     On March 31, 2000, 47,745,612 shares of common stock, $.01 par value (the
"Common Stock"), were issued and outstanding and held by approximately 900
holders of record. Each holder of Common Stock issued and outstanding on March
31, 2000 is entitled to one vote for each share of Common Stock held on that
date on all matters submitted to a vote of stockholders at the meeting.

     The presence in person or by proxy of the holders of a majority of the
outstanding shares of Common Stock will constitute a quorum. The affirmative
vote of the holders of a plurality of the shares represented at the meeting, in
person or by proxy, will be necessary for the election of directors. The
affirmative vote of the holders of a majority of shares voting thereon, in
person or by proxy, will be necessary for the approval of (i) the 2000 Stock
Option Plan (the "2000 Plan"), (ii) the performance-based compensation provision
of the employment agreement with James C. Smith, the Company's President and
Chief Executive Officer, (iii) the related grant of two stock options (the
"Options") to Mr. Smith, and (iv) any other matter that properly comes before
the meeting and any postponements or adjournments thereof.

PROXIES AND PROXY SOLICITATION

     All shares of Common Stock represented by properly executed proxies will be
voted at the meeting in accordance with the directions marked on the proxies,
unless such proxies previously have been revoked. If no directions are indicated
on such proxies, they will be voted FOR the election of each nominee named below
under "Election of Directors", FOR approval of the 2000 Plan, FOR the approval
of the performance-based compensation provision of the employment agreement with
the Company's Chief Executive Officer and FOR the grant of the Options to the
Company's Chief Executive Officer. If any other matters are properly presented
at the meeting for action, which is not presently anticipated, the proxy holders
will vote the proxies (which confer discretionary authority upon such holders to
vote on such matters) in accordance with their best judgment. Each proxy
executed and returned by a stockholder may be revoked at any time before it is
voted by timely submission of written notice of revocation or by submission of a
duly executed proxy bearing a later date (in either case directed to the
Secretary of the Company) or, if a stockholder is present at the meeting, he may
elect to revoke his proxy and vote his shares personally.

                                        1
<PAGE>   4

     Abstentions will be treated as shares that are present for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of any matter submitted to a vote of the stockholders. If a broker
indicates on a proxy that he or she does not have discretionary authority to
vote on a particular matter as to certain shares, those shares will be counted
for quorum purposes but will not be considered as present and entitled to vote
with respect to that matter.

     In addition to solicitation by mail, the Company has hired the firm of D.F.
King & Co. Inc. to assist in the solicitation of proxies at an estimated cost of
not more than $5,000. Certain directors, officers and other employees of the
Company, not specially employed for this purpose, may solicit proxies, without
additional remuneration therefor, by personal interview, mail, telephone or
other means of communication. The Company will ask brokers and other fiduciaries
to forward proxy soliciting material to the beneficial owners of shares of
Common Stock which are held of record by such brokers and fiduciaries and will
reimburse them for their reasonable out-of-pocket expenses.

              COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The following table sets forth certain information concerning each person
who is known by the Company to beneficially own more than 5% of the outstanding
shares of Common Stock as of March 31, 2000.

<TABLE>
<CAPTION>
                                                              NUMBER OF SHARES   APPROXIMATE
                                                                BENEFICIALLY     PERCENT OF
                                                                   OWNED            CLASS
NAME AND ADDRESS                                              ----------------   -----------
<S>                                                           <C>                <C>
Blum Capital Partners, L.P..................................     4,325,400           9.1%
  909 Montgomery Street
  Suite 400
  San Francisco, California 94133
Dodge & Cox, Inc. ..........................................     4,151,500           8.7%
  One Sansome Street
  35th Floor
  San Francisco, California 94104
CIBC Trust Company (Bahamas) Limited, as Trustee of
  Settlement T-551(1).......................................     4,000,000           8.4%
  Post Office Box N-3933
  Shirley Street
  Nassau, Bahamas
Wanger Asset Management, L.P................................     3,578,000           7.5%
  227 West Monroe Street
  Suite 3000
  Chicago, Illinois 60606
</TABLE>

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

(1) The beneficiaries of the trusts are the grandchildren of A.N. Pritzker,
    deceased, including Thomas J. Pritzker, the Chairman of the Board of the
    Company. The trustee has sole voting and investment power with respect to
    such shares.

                                        2
<PAGE>   5

                      COMMON STOCK OWNERSHIP OF MANAGEMENT

     The following table sets forth certain information concerning the
beneficial ownership of Common Stock by (i) each director and nominee, (ii) each
executive officer named in the Summary Compensation Table appearing elsewhere
herein, and (iii) all directors and executive officers as a group as of March
31, 2000. Unless otherwise indicated, each person has sole investment and voting
power (or shares such powers with his or her spouse) with respect to the shares
set forth in the following table.

<TABLE>
<CAPTION>
                                                                                      APPROXIMATE
                                                               NUMBER OF SHARES    PERCENT OF CLASS
                            NAME                              BENEFICIALLY OWNED   (IF MORE THAN 1%)
                            ----                              ------------------   -----------------
<S>                                                           <C>                  <C>
Michael J. Boskin, Ph.D.....................................           92,000(1)            *
Daniel S. Brunner...........................................          255,186(2)            *
Robert S. Colman............................................          110,624(3)            *
Ronald H. Galowich..........................................          203,500(4)            *
Harold S. Handelsman........................................           42,000(5)            *
Burton W. Kanter............................................           80,000(6)            *
Don Logan...................................................           44,000(7)            *
Thomas J. Pritzker..........................................        1,434,400(8)          2.9%
David E. Simon..............................................           62,000(9)            *
James C. Smith..............................................       1,521,195(10)          3.1%
Mary Anne Carpenter.........................................         192,138(11)            *
Patrick G. Dills............................................         160,089(12)            *
Joseph E. Whitters..........................................         291,309(13)            *
Edward L. Wristen...........................................         297,915(14)            *
All Directors and Executive Officers as a Group (14
  persons)..................................................       4,786,356(15)          9.7%
</TABLE>

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

  *  Less than 1%.

 (1) Consists of 80,000 shares subject to immediately exercisable options held
     by Dr. Boskin.

 (2) Includes 38,000 shares subject to immediately exercisable options held by
     Mr. Brunner and 120,000 shares held by a trust of which Mr. Brunner is a
     co-trustee.

 (3) Consists of 30,000 shares subject to immediately exercisable options held
     by Mr. Colman, 80,252 shares held by a trust of which Mr. Colman is the
     trustee and 372 shares beneficially owned by Mr. Colman's wife.

 (4) Includes 40,000 shares subject to immediately exercisable options held by
     Mr. Galowich.

 (5) Consists of 42,000 shares subject to immediately exercisable options held
     by Mr. Handelsman.

 (6) Consists of 80,000 shares subject to immediately exercisable options held
     by Mr. Kanter. Does not include 380,000 shares owned by Walnut Capital
     Corp., of which Mr. Kanter is the Chairman of the Board, or 20,000 shares
     owned by Walnut Financial Services, Inc. of which Mr. Kanter is the
     Chairman of the Board. Mr. Kanter disclaims beneficial ownership of all
     shares owned by Walnut Capital Corp. and by Walnut Financial Services, Inc.

 (7) Consists of 44,000 shares subject to immediately exercisable options held
     by Mr. Logan.

 (8) Includes 244,000 shares subject to immediately exercisable options held by
     Mr. Pritzker.

 (9) Consists of 62,000 shares subject to immediately exercisable options held
     by Mr. Simon.

(10) Includes 106,792 shares held by a foundation of which Mr. Smith is an
     officer and director. Also includes 280,000 shares subject to immediately
     exercisable options held by Mr. Smith.

(11) Includes 148,000 shares subject to immediately exercisable options held by
     Ms. Carpenter.

(12) Includes 96,000 shares subject to immediately exercisable options held by
     Mr. Dills.

(13) Includes 165,600 shares subject to immediately exercisable options held by
     Mr. Whitters.

(14) Includes 208,000 shares subject to immediately exercisable options held by
     Mr. Wristen.

(15) Includes an aggregate of 1,557,600 shares subject to immediately
     exercisable options.

                                        3
<PAGE>   6

            SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors and
persons who beneficially own more than 10% of the outstanding Common Stock to
file reports of initial ownership and changes in ownership of Common Stock with
the Securities and Exchange Commission (the "Commission"). Based solely on a
review of such reports furnished to the Company, the Company believes that
during 1999 all persons known by it to be subject to these requirements complied
with them on a timely basis.

                             ELECTION OF DIRECTORS

     At the meeting, ten directors will be elected to the Board of Directors.
Each director elected at the meeting will hold office until the next Annual
Meeting of Stockholders of the Company or until his respective successor is duly
elected and qualified.

     The Board of Directors has nominated and it is the intention of the persons
named in the enclosed proxy to vote for the election of the nominees named
below, each of whom has consented to serve as a director if elected. All of the
nominees have previously been elected at meetings of the Company's stockholders
except for Edward L. Wristen.

INFORMATION CONCERNING NOMINEES FOR ELECTION AS DIRECTORS

     The following information is furnished with respect to each nominee:

<TABLE>
<CAPTION>
                 NAME, PRINCIPAL OCCUPATION                         YEAR FIRST
                 AND OTHER DIRECTORSHIPS(1)                   AGE    ELECTED
                 --------------------------                   ---   ----------
<S>                                                           <C>   <C>
Michael J. Boskin, Ph.D.....................................  54       1994
Professor of Economics, Stanford University since 1971;
Research Associate, National Bureau of Economic Research
since 1975; President and Chief Executive Officer of Boskin
& Company, an economic consulting firm, since 1980; Adjunct
Scholar, American Enterprise Institute since 1993; Chairman
of the Council of Economic Advisors from 1989 to 1993;
director of Oracle Systems, Inc., a developer of computer
software, EXXON MOBIL Corporation, an integrated oil and gas
company and Vodofone Airtouch PLC, a wireless communications
company.
Daniel S. Brunner...........................................  56       1988
Executive Vice President -- Government Affairs of the
Company since January 1994; Chief Operating
Officer -- Policy and Government Affairs of the Company from
1992 to January 1994.
Robert S. Colman............................................  58       1992
Founder in 1996 of Colman Partners, a private merchant
banking firm; member since 2000 of MacAulay Investment
Partners LLC, an investment management firm; director of Van
Wagoner Funds, a management investment company.
Ronald H. Galowich..........................................  64       1982
Chairman of the Board of Madison Group Holdings, Inc., a
multipurpose business and investment company, since 1990;
Chairman, Madison Realty Group, Inc., a real estate
investment and development firm, since 1985; Chairman and
Chief Executive Officer of Madison Information Technologies,
Inc., a data integration, software solutions and technology
company serving the healthcare industry, since 1994;
Secretary and General Counsel of the Company since 1983;
General Counsel of the Company from 1983 to March 1997;
Executive Vice President of the Company from 1983 to May
1994.
</TABLE>

                                        4
<PAGE>   7

<TABLE>
<CAPTION>
                 NAME, PRINCIPAL OCCUPATION                         YEAR FIRST
                 AND OTHER DIRECTORSHIPS(1)                   AGE    ELECTED
                 --------------------------                   ---   ----------
<S>                                                           <C>   <C>
Harold S. Handelsman........................................  53       1996
Senior executive officer of Hyatt Corporation, a diversified
company primarily engaged in real estate and hotel
management activities, since 1978 and Senior Vice President,
General Counsel and Secretary since 1983; Executive Vice
President and General Counsel of The Pritzker Organization,
LLC, a private investment firm, since 1998; director of a
number of private corporations.
Don Logan...................................................  56       1996
Chairman and Chief Executive Officer of Time Inc., a wholly
owned subsidiary of Time Warner Inc., since 1994; President
and Chief Operating Officer of Time Inc. from June 1992 to
July 1994; Chairman and Chief Executive Officer of Southern
Progress Corp., a wholly owned subsidiary of Time Inc.,
since June 1992.
Thomas J. Pritzker..........................................  49       1990(2)
Chairman of the Board of the Company since May 1990;
Chairman of Hyatt Corporation and Hyatt International
Corporations, primarily engaged in hotel management
activities; Chairman of the Board of Directors and Chief
Executive Officer of The Pritzker Organization, LLC, a
private investment firm; Director of Royal Caribbean Cruise
Lines, an operator of cruise ships; Director of Unext.Com,
an on-line education firm. Both are publicly traded
companies.
David E. Simon..............................................  38       1990
President, Chief Executive Officer and director of Simon
Property Group, Inc., a real estate investment trust which
is a shopping center owner, developer and manager, since
1993; Executive Vice President and Chief Financial Officer
of Melvin Simon & Associates, Inc., a privately-held firm
engaged in the development of shopping centers, since 1990;
Vice President of Wasserstein Perella & Co., Inc., an
investment banking firm, from 1988 to 1990.
James C. Smith..............................................  59       1984
President and Chief Executive Officer of the Company since
January 1984.
Edward L. Wristen...........................................  48         --
Chief Operating Officer of the Company since 1998, and
Executive Vice President since 1992. Mr. Wristen joined the
Company in 1990 as Director of Strategic Planning and was
promoted to Vice President, Managed Outpatient Care Programs
in 1991. In 1992, Mr. Wristen became Executive Vice
President and Corporate Operating Officer in charge of
Provider Networks. Prior to joining the Company, Mr. Wristen
was President of Parkside Data Services, a subsidiary of
Parkside Health Management Corporation, a firm engaged in
data and analytic services, from 1989 to 1990. From 1987 to
1989, Mr. Wristen was Chief Operating Officer and Executive
Vice President of Addiction Recovery Corporation, a regional
chain of chemical dependency hospitals. Mr. Wristen has over
24 years experience in the health care industry.
</TABLE>

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

(1) Only directorships of issuers with a class of securities registered pursuant
    to Section 12 of the Exchange Act, or subject to the requirements of Section
    15(d) of the Exchange Act and directorships of issuers registered as
    investment companies under the Investment Company Act of 1940, as amended,
    are required to be listed in the above table.

(2) Mr. Pritzker previously served as a director of the Company from 1985 to
    1986.

                                        5
<PAGE>   8

INFORMATION CONCERNING THE BOARD OF DIRECTORS

     The Board of Directors has designated an Audit Committee, a Compensation
Committee and a Committee on Director Affairs. The current members of the Audit
Committee are Ronald H. Galowich (Chairman), Michael J. Boskin and Harold S.
Handelsman. The current members of the Compensation Committee are Don Logan
(Chairman), Robert S. Colman, David E. Simon and Ronald H. Galowich. The current
members of the Committee on Director Affairs are Michael J. Boskin (Chairman),
Robert S. Colman and Thomas J. Pritzker.

     The functions of the Audit Committee include reviewing the independence of
the Company's independent auditors, recommending to the Board of Directors the
engagement and discharge of independent auditors, reviewing with the independent
auditors the plan, scope and results of auditing engagements, reviewing the
accounting principles being applied and the effectiveness of internal controls,
assuring, in its oversight role, that management fulfills its responsibilities
in the preparation of the Company's financial statements, directing and
supervising special investigations at the Board of Directors' request and
reviewing and approving or disapproving specific transactions when requested to
do so by the Board of Directors.

     The functions of the Compensation Committee include administering and
interpreting the Company's various stock option and stock purchase plans, and
making certain recommendations to the Board of Directors with respect to
executive compensation and the hiring of members of senior management whose
salaries exceed a level specified from time to time by the Board of Directors.

     The functions of the Committee on Director Affairs include identifying
potential candidates to serve as directors of the Company, recommending such
candidates to the Board of Directors and providing an annual assessment to the
Board of its performance. The Committee on Director Affairs will consider
nominees recommended by stockholders. Any suggestions may be submitted in
writing to the attention of "Committee on Director Affairs of the Board of
Directors" at the Company's principal offices.

     During 1999, the Board of Directors held 5 meetings, the Audit Committee
held 1 meeting, the Compensation Committee held 2 meetings and the Committee on
Director Affairs held 1 meeting. Each director attended at least 80% of the
meetings held by the Board of Directors and the committees on which he served
during 1999, with the exception of David E. Simon.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Other than Mr. Galowich, none of the members of the committee, during 1999,
was an officer or employee of the Company or any of its subsidiaries.

CERTAIN OTHER TRANSACTIONS

     During 1999, the Company extended loans to Edward L. Wristen, its Executive
Vice President and Chief Operating Officer and a nominee for election as
director, Patrick G. Dills, its Executive Vice President, Sales and Joseph E.
Whitters, its Vice President, Finance and Chief Financial Officer, of $435,245,
$522,294 and $898,804 respectively, to enable them to exercise options to
purchase shares of Common Stock. In January 2000, the Company loaned Mr. Dills
an additional $354,480 to enable him to exercise an option to purchase shares of
Common Stock. In addition, in March 2000, the Company loaned Mr. Smith, its
President and Chief Executive Officer, $1,999,986 to enable him to exercise an
option to purchase shares of Common Stock. Each loan is secured by the Common
Stock purchased by the executive upon exercise of the option, and the Company
has full recourse against the executive in the event of default. The loans bear
interest at the applicable federal rate for short-term obligations with
semi-annual interest payments. The interest rate is adjusted on a semi-annual
basis on June 30 and December 31 to such applicable federal rate as of the date
of adjustment. Interest is payable semi-annually, and a minimum of 3% of the
outstanding loan balance must be repaid annually. As of March 31, 2000, the four
named executives owed the Company principal and interest under these loans of
$4,187,456.

     Trusts for the benefit of certain members of the Pritzker family
beneficially own approximately 8.4% of the Common Stock. See "Common Stock
Ownership of Certain Beneficial Owners." In addition, other trusts
                                        6
<PAGE>   9

for the benefit of certain members of the Pritzker family control Hyatt
Corporation ("Hyatt") and other trusts for the benefit of certain members of the
Pritzker family own, directly or indirectly, Marmon Holdings, Inc. ("Marmon").
As used herein, "Pritzker family" refers to the lineal descendants of Nicholas
J. Pritzker, deceased. Thomas J. Pritzker, Chairman of the Board of the Company,
is the President of Hyatt. The Company provides utilization management services
and preferred provider organization ("PPO") services to a benefit plan
maintained by Hyatt. In addition, the Company provides utilization review and
PPO services to certain subsidiaries of Marmon. Such services are performed
pursuant to standardized service contracts, the terms of which are no less
favorable to the Company than those obtainable from unaffiliated parties. During
1999, the aggregate fees paid to the Company by Hyatt and by subsidiaries of
Marmon were approximately $133,000 and $155,000, respectively.

     David E. Simon, a director of the Company, is the Chief Executive Officer
and a director of Simon Property Group, Inc. ("Simon Property"). The Company
provides managed care services (risk products) to Simon Property. Such services
are performed pursuant to a standardized service contract, the terms of which
are no less favorable to the Company than those obtainable from unaffiliated
parties. During 1999, the aggregate fees paid to the Company by Simon Property
were approximately $864,000.

     A subsidiary of the Company has invested funds in Triton Container
Investments, LLC ("TCI"), the manager of which is Triton Container International
Limited ("Triton"). One of the other investors in TCI is Rosemont Leasing, Inc.
("Rosemont"). Trimont Leasing Partners owns intermodal cargo containers which
are managed by Triton and leased to third parties. Trusts for the benefit of
certain members of the Pritzker family and their relatives beneficially own
approximately 90% of Triton, and trusts for the benefit of members of the
Pritzker family indirectly own all of the capital stock of Rosemont. In 1999,
the Company made an investment of approximately $6,700,000. The Company has been
advised that its investments in TCI have been made on the same basis as Rosemont
and other investors unrelated to the Company and Rosemont.

OTHER INFORMATION

     Currently, the Company has 7,170,092 options outstanding at a weighted
average exercise price of $18.93 with an average weighted term to expiration of
5.5 years. Additionally, the Company has 472,627 shares available for grant
under its existing option plans.

                                        7
<PAGE>   10

                             EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

     The following table sets forth certain information with respect to all
compensation paid to the Company's Chief Executive Officer and to each of the
four other most highly paid executive officers as of December 31, 1999 during
each of the Company's last three fiscal years by the Company for services
rendered in all capacities.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                             LONG-TERM
                                                                            COMPENSATION
                                                                               AWARDS
                                                                            ------------
                                           ANNUAL COMPENSATION               SECURITIES
                                -----------------------------------------    UNDERLYING     ALL OTHER
       NAME AND                                            OTHER ANNUAL       OPTIONS/       COMPEN-
  PRINCIPAL POSITION     YEAR   SALARY($)(1)   BONUS($)   COMPENSATION($)     SARS(#)      SATION($)(2)
  ------------------     ----   ------------   --------   ---------------   ------------   ------------
<S>                      <C>    <C>            <C>        <C>               <C>            <C>
James C. Smith.........  1999     $926,607     $     --       $9,600           800,000       $10,107
President and Chief      1998      920,700      250,000        9,600                --        10,650
Executive Officer        1997      900,000           --        9,600         1,200,000        10,635
Edward L. Wristen......  1999      320,833           --           --           200,000         8,226
Executive Vice
  President,             1998      325,000       50,000           --                --         8,457
and Chief Operating      1997      294,583      125,000           --           200,000         8,326
Officer
Patrick G. Dills.......  1999      266,704           --           --           200,000         8,069
Executive Vice
  President,             1998      263,750      150,000           --                --         8,248
Sales                    1997      248,750      101,196           --           160,000         7,893
Mary Anne Carpenter....  1999      320,833           --           --           200,000         8,672
Executive Vice
  President,             1998      323,750       50,000           --                --         9,084
Service Products         1997      280,000      100,000           --           160,000         8,791
Joseph E. Whitters.....  1999      286,828           --           --           200,000         7,881
Vice President, Finance  1998      282,917       50,000           --                --         7,979
and Chief Financial      1997      257,917      100,000           --           160,000         7,762
Officer
</TABLE>

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

(1) Pursuant to the rules promulgated by the Commission, does not include
    discounts on shares of Common Stock purchased by each of the named executive
    officers from the Company pursuant to the Company's Employee Stock Purchase
    Plan, which discounts are available generally to all eligible employees.

(2) The amounts shown in this column for 1999 consist of payments made by the
    Company on behalf of each of Messrs. or Ms. Smith, Wristen, Dills, Carpenter
    and Whitters of $7,500, $7,500, $7,500, $7,500 and $7,500, respectively,
    under the Company's Retirement Savings Plan, together with insurance
    premiums paid by the Company in the amounts of $2,607, $726, $569, $1,172
    and $381 for the benefit of Messrs. or Ms. Smith, Wristen, Dills, Carpenter
    and Whitters, respectively.

                                        8
<PAGE>   11

                       OPTION GRANTS IN LAST FISCAL YEAR

     The following table provides information on options granted in fiscal 1999
to each of the named executive officers.

<TABLE>
<CAPTION>
                             INDIVIDUAL GRANTS                                    POTENTIAL REALIZABLE
                        ---------------------------                                 VALUE AT ASSUMED
                         NUMBER OF      % OF TOTAL                                ANNUAL RATES OF STOCK
                         SECURITIES    OPTIONS/SARS                                PRICE APPRECIATION
                         UNDERLYING     GRANTED TO    EXERCISE OR                    FOR OPTION TERM
                        OPTIONS/SARS   EMPLOYEES IN   BASE PRICE    EXPIRATION   -----------------------
         NAME             GRANTED      FISCAL YEAR     ($/SHARE)       DATE          5%          10%
         ----           ------------   ------------   -----------   ----------   ----------   ----------
<S>                     <C>            <C>            <C>           <C>          <C>          <C>
James C. Smith........    280,000         8.13%        $19.125      05/18/2006   $2,180,000   $5,080,000
James C. Smith........    260,000          7.55         21.04       12/31/2006    1,744,600    4,824,600
James C. Smith........    260,000          7.55         22.95       12/31/2007    1,608,000    5,357,000
Edward L. Wristen.....    200,000          5.81         15.6875     03/16/2006    1,277,300    2,976,600
Patrick G. Dills......    200,000          5.81         15.6875     03/16/2006    1,277,300    2,976,600
Mary Anne Carpenter...    200,000          5.81         15.6875     03/16/2006    1,277,300    2,976,600
Joseph E. Whitters....    200,000          5.81         15.6875     03/16/2006    1,277,300    2,976,600
</TABLE>

                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR-END OPTION VALUES

     The following table provides information concerning option exercises in
fiscal 1999 by each of the named executive officers and the value of such
officers' unexercised options at December 31, 1999.

<TABLE>
<CAPTION>
                                                           NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                                          UNDERLYING UNEXERCISED             IN-THE-MONEY
                                                              OPTIONS/SARS AT               OPTIONS/SARS AT
                              SHARES                        FISCAL YEAR END(#)           FISCAL YEAR-END($)(1)
                            ACQUIRED ON      VALUE      ---------------------------   ---------------------------
           NAME             EXERCISE(#)   REALIZED($)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
           ----             -----------   -----------   -----------   -------------   -----------   -------------
<S>                         <C>           <C>           <C>           <C>             <C>           <C>
James C. Smith............        --       $     --       400,000        800,000      $1,428,000     $4,707,600
Edward L. Wristen.........    40,000        387,125       168,000        320,000       1,461,550      2,995,000
Patrick G. Dills..........    36,000        289,350        84,000        296,000         703,500      2,843,500
Mary Anne Carpenter.......        --             --       136,000        296,000       1,482,200      2,843,500
Joseph E. Whitters........    63,000        459,488       133,600        296,000       1,417,235      2,843,500
</TABLE>

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

(1) The closing sale price of the Common Stock on December 31, 1999 as reported
    on the Nasdaq National Market was $26.875.

                                        9
<PAGE>   12

EMPLOYMENT AGREEMENTS

     In May, 1999 the Company entered into an employment agreement with James C.
Smith which expires on December 31, 2001 unless otherwise previously terminated
in accordance with its terms. Under this agreement, Mr. Smith serves as the
President and Chief Executive Officer of the Company and receives an annual base
salary of not less than $920,700 (adjusted yearly) and his annual base
compensation is currently $950,000. Additionally, for each year in which the
Company's Pretax Income (as determined in accordance with generally accepted
accounting principles) increases by at least 5% from the prior year (the
"Threshold Increase"), the resulting percentage increase will determine any
additional compensation to be payable to Mr. Smith, as follows:

<TABLE>
<CAPTION>
                                                   ADDITIONAL COMPENSATION
                                                       (AS A PERCENTAGE
PRETAX INCOME INCREASE                         OF THE PRIOR YEAR'S BASE SALARY)
- ----------------------                         --------------------------------
<S>                                            <C>
5%...........................................              25%
10%..........................................              50%
20%..........................................              75%
30%..........................................             100%
40%..........................................             125%
50%..........................................             150%
                                                For each 10% over 50%, an
Over 50%.....................................        additional 25%
</TABLE>

Pursuant to the agreement, Mr. Smith is entitled to participate in all employee
benefit programs and other policies and programs of the Company. The Company has
also agreed to provide to Mr. Smith and his wife, for the life of each of them,
at the Company's expense (subject to certain limitations) various health
benefits. The agreement also requires the Company (under certain circumstances)
to pay Mr. Smith the balance of the base salary amounts due under the agreement,
including all accrued benefits, upon the termination of his employment.

     In May 1999, the Company entered into an employment agreement with Edward
L. Wristen which expires on April 30, 2002 and is subject to automatic renewal
for consecutive one year terms unless terminated by either party. Pursuant to
this agreement, Mr. Wristen receives an annual base salary of $325,000, subject
to annual increases that are approved by the Company. Currently, Mr. Wristen's
annual base salary is fixed at $425,000. In addition, Mr. Wristen is entitled to
participate in all employee benefit programs and other policies and programs of
the Company.

     In April 1997, the Company entered into an employment agreement with
Patrick G. Dills which expires on April 28, 2000 and is subject to automatic
renewal for consecutive one year terms unless terminated by either party.
Pursuant to this agreement, Mr. Dills receives an annual base salary of
$265,000, subject to annual increases that are approved by the Company.
Currently, Mr. Dills' annual base salary is fixed at $265,000. In addition, Mr.
Dills is entitled to participate in all employee benefit programs and other
policies and programs of the Company.

     In May 1999, the Company entered into an employment agreement with Mary
Anne Carpenter which expires on April 30, 2002 and is subject to automatic
renewal for consecutive one year terms unless terminated by either party.
Pursuant to this agreement, Ms. Carpenter receives an annual base salary of
$325,000, subject to annual increases that are approved by the Company.
Currently, Ms. Carpenter's annual base salary is fixed at $360,000. In addition,
Ms. Carpenter is entitled to participate in all employee benefit programs and
other policies and programs of the Company.

     In May 1999, the Company entered into an employment agreement with Joseph
E. Whitters which expires on April 30, 2002 and is subject to automatic renewal
for consecutive one year terms unless terminated by either party. Pursuant to
this agreement, Mr. Whitters receives an annual base salary of $285,000, subject
to annual increases that are approved by the Company. Currently, Mr. Whitters'
annual base salary is fixed at

                                       10
<PAGE>   13

$325,000. In addition, Mr. Whitters is entitled to participate in all employee
benefit programs and other policies and programs of the Company.

DIRECTORS' COMPENSATION

     The Company pays each director who is not an employee or officer of the
Company an annual fee of $25,000 for serving on the Board of Directors. In
addition, the Company pays each outside director $1,000 for each Board of
Directors meeting attended and $750 for each committee meeting attended which is
on a date other than a date on which there is a Board of Directors meeting.

     The Company maintains the Directors' Stock Option Plan (the "Directors'
Plan") pursuant to which the Chairman of the Board and other members of the
Board of Directors who are not employees or officers of the Company are eligible
to receive options to purchase shares of Common Stock. The Committee is also
permitted under the Directors' Plan to make discretionary grants of options to
new members of the Board of Directors. Under the Directors' Plan, on the date of
the Board of Directors meeting immediately following each Annual Meeting of
Stockholders of the Company, each eligible participant receives an option to
purchase 8,000 shares of Common Stock. The Chairman of the Board of Directors
receives an option to purchase an additional 20,000 shares of Common Stock, and
the Chairman of each of the Audit Committee, Compensation Committee and
Committee on Director Affairs receives an option to purchase an additional 2,000
shares of Common Stock. The exercise price of each such option is equal to the
"fair market value" of the Common Stock on the date of grant. All such options
granted under the Directors' Plan have been immediately exercisable. In 1999,
pursuant to the Directors' Plan, Mr. Pritzker was granted an option to purchase
28,000 shares of Common Stock, each of Messrs. Galowich and Logan and Dr. Boskin
was granted an option to purchase 10,000 shares of Common Stock and each of
Messrs. Colman, Simon, Handelsman and Kanter was granted an option to purchase
8,000 shares of Common Stock. Each of such options was granted on May 18, 1999
and has an exercise price of $19.125, the closing price of the Common Stock on
the Nasdaq National Market on such date.

     The Company has agreed to provide to Mr. Galowich and his wife (if he
subsequently remarries and requests coverage for his wife), for the life of each
of them, at the Company's expense (subject to certain limitations), various
health benefits in consideration of his past services as General Counsel to the
Company.

     On March 26, 1996, the Company entered into a consulting agreement with Dr.
Boskin, a director of the Company, pursuant to which the Company agreed for each
year during which he serves as a director of the Company to pay Dr. Boskin a
consulting fee of $5,000 and to grant him an option under the Company's 1995
Stock Option Plan (the "Option Plan"), to purchase 6,000 shares of Common Stock.
Pursuant to this agreement, on May 18, 1999, the Company granted to Dr. Boskin
an option to purchase 6,000 shares of Common Stock at an exercise price of
$19.125 per share, the closing price of the Common Stock on the Nasdaq National
Market on such date.

     See "Election of Directors -- Certain Other Transactions" for information
regarding certain transactions with other directors of the Company.

                                       11
<PAGE>   14

     Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act, that might incorporate future filings, including
this Proxy Statement, in whole or in part, the report presented below and the
Performance Graph following shall not be incorporated by reference into any such
filings.

                           REPORT OF THE COMPENSATION
                      COMMITTEE ON EXECUTIVE COMPENSATION

     The Compensation Committee (the "Committee") is responsible for reviewing
and approving the two primary elements of the Company's executive compensation
program -- cash compensation (comprised of base salary and bonuses) and stock
options. The Committee carries out its responsibilities with significant input
from the Chief Executive Officer and other members of senior management. Based
on such input and on an assessment of various subjective criteria including the
overall contributions made by an individual (both on a current and a long-term
basis) and the Company's performance, the Committee makes recommendations to the
Board of Directors with respect to executive cash compensation, the
establishment and maintenance of other compensation programs and the granting of
stock options. During 1999, the Board of Directors did not modify or otherwise
alter any of the Committee's recommendations. The Company's philosophy, which
the Committee and the Board of Directors seek to implement, is to design
compensation packages which will enable the Company to attract and retain
qualified employees and encourage such persons to maximize their efforts on
behalf of the Company.

     The Company currently maintains the 1998 Stock Option Plan (the "Option
Plan"). The purpose of the Option Plan is to aid the Company in securing and
retaining employees and consultants and to motivate such employees and
consultants to exert their best efforts on behalf of the Company. Option grants
are intended to encourage performance that will result in appreciation of the
market value of the Common Stock. The Committee believes that the Company's
stock option plans have historically been very helpful in attracting and
retaining skilled employees at all levels. Stock options are generally awarded
once during the year to optionees selected by the Committee based on
recommendations from the Chief Executive Officer and other members of senior
management of the Company. In recommending or making option awards, the
Committee considers various factors, including senior management's subjective
assessment of the contributions made to the Company by the proposed optionee
during the preceding year, the potential future contributions to be made by such
person, such person's current salary level and the terms of previous option
grants. In addition, the Committee considers other performance measures which
may not directly bear on short term stock performance, including, where
appropriate, sales growth, market share and improvements in relations with
customers, providers and employees. The Company has submitted for stockholder
approval the 2000 Stock Option Plan. See "Approval of the 2000 Stock Option
Plan."

     The Company also maintains the Executive Program, the purpose of which is
to attract and retain highly qualified members of senior management and to align
the interests of such persons with the interests of the Company's stockholders.
Pursuant to the Executive Program, which is administered under and as part of
the Option Plan, key members of senior management are eligible to receive
incrementally vesting stock options. The Chief Executive Officer nominates
participants and recommends grant awards. In addition to the factors outlined
above, these recommendations are based on predetermined guidelines which take
into account a potential grantee's salary and current management position. The
recommendations are then considered and voted upon by the Committee. Stock
options are to be granted under the Executive Program upon the recommendation of
the Committee at approximately a three year interval (grants to newly hired key
employees may be made earlier) and the options vest and become exercisable over
the five years following the date of grant. By making large, infrequent grants
of options and extending the vesting of such options over a five-year period,
the Company is able to provide senior management with a significant financial
stake in the future success of the Company while also creating a strong
disincentive for such persons to leave the Company's employ before the options
fully vest. In 1994, options covering an aggregate of 1,140,000 shares of Common
Stock were granted to 14 members of senior management and in March 1997, options
covering an aggregate of 1,610,000 shares of Common Stock were granted to 28
members of senior management. These options vest at a rate of 20% per year on
each of the first five annual anniversaries of the date of grant and
                                       12
<PAGE>   15

expire ten years from the grant date. In March 1999, options covering an
aggregate of 2,000,000 shares of Common Stock were granted to 46 members of
Senior Management. The 1999 options do not begin to vest until the fourth
anniversary of the date of grant, at which time the options will vest with
respect to 60% of the shares subject thereto. These options will continue to
vest at the rate of 20% per year on each of the fifth and sixth anniversaries of
the date of grant. The 1999 options expire seven years from the grant date.

     The Chief Executive Officer is authorized to extend an offer of employment
to, and establish the salary of, an executive officer whose annual salary is
less than $350,000. In the case of an executive officer whose annual salary will
equal or exceed $350,000, the hiring of such individual and the amount of
compensation to be paid is subject to the approval of the Board of Directors.
The Company has never extended an offer of employment requiring such approval.
After an executive officer has joined the Company, depending on the relevant
circumstances, increases in his or her salary are either as provided for in his
or her employment agreement, approved by the Chief Executive Officer, or
approved by the Committee or the Board of Directors.

     In May 1999, the Company entered into an employment agreement with James C.
Smith which expires on December 31, 2001. Pursuant to this agreement, Mr. Smith
is paid an annual base salary of not less than $920,700, plus an additional
performance-based compensation payment in the event the Company's Pretax Income
increases by at least 5% from the prior year. See "Approval of Performance-Based
Compensation Provision." Mr. Smith also was granted options to purchase an
aggregate of 800,000 shares of Common Stock pursuant to the employment
agreement. See "Approval of Stock Option Grants." The terms of Mr. Smith's
employment agreement were approved by the Committee and ratified by the Board of
Directors. In its deliberations, the Committee considered, among other factors,
Mr. Smith's continuing importance to the Company's future growth and his
leadership in guiding the exploration of new markets (and expanding current
markets) in order to ensure that the Company retains its preeminent position in
the managed care industry.

     As one of the factors in its review of compensation matters, the Committee
considers the anticipated tax treatment to the Company and to the executives of
various payments and benefits. The deductibility of some types of compensation
payments depends on various factors beyond the Committee's control. Therefore,
not all executive compensation may be deductible under Section 162(m) of the
Internal Revenue Code of 1986, as amended. The Committee will consider various
alternatives to preserving the deductibility of compensation payments and
benefits to the extent reasonably practicable and to the extent consistent with
its other compensation objectives.

                                          THE COMPENSATION COMMITTEE

                                          Don Logan, Chairman
                                          Robert S. Colman
                                          David E. Simon
                                          Ronald H. Galowich

                                       13
<PAGE>   16

                               PERFORMANCE GRAPH

     The graph below compares the cumulative total stockholder return on the
Company's Common Stock for the five fiscal years ended December 31, 1999 with
the cumulative total return on the Nasdaq Health Services Index and the Nasdaq
Total Return Index (US) over the same period (assuming the investment of $100 in
each of the Common Stock, the Nasdaq Health Services Index and the Nasdaq Total
Return Index (US) on December 31, 1994).

     NOTE: The stock price performance shown on the graph below is not
necessarily indicative of future price performance.

                COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
         AMONG THE COMPANY'S COMMON STOCK, NASDAQ HEALTH SERVICES INDEX
                       AND NASDAQ TOTAL RETURN INDEX (US)

                               PERFORMANCE GRAPH

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
                                                        12/31/94   12/31/95   12/31/96   12/31/97   12/31/98   12/31/99
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>                                                 <C>        <C>        <C>        <C>        <C>        <C>      <C>
    Company Common Stock                                  100        127        124        150         97        158
- ---------------------------------------------------------------------------------------------------------------------------
    NASDAQ Health Services Index                          100        127        127        129        109         90
- ---------------------------------------------------------------------------------------------------------------------------
    Total Return Index for the NASDAQ Stock Market
    (U.S.)                                                100        141        174        213        300        542
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

                     APPROVAL OF THE 2000 STOCK OPTION PLAN

     General. The Board of Directors has adopted the 2000 Plan, which provides
for the granting of options to purchase up to an aggregate of 1,000,000 shares
of Common Stock to salaried officers and other key employees of, and consultants
to, the Company. The 2000 Plan is intended to replace, after all options
available thereunder have been granted, and the terms and conditions thereof are
substantially similar to, the Option Plan, which was adopted by the Board of
Directors in April 1998 and approved by the stockholders of the Company on May
19, 1998, which provides for the granting of options to purchase up to 2,800,000
shares of Common Stock on a split adjusted basis. As of April 1, 2000, options
covering an aggregate of 2,567,267 shares of Common Stock had been granted under
the Option Plan, and 232,733 shares remained available for future option grants.
The 2000 Plan will become effective upon the grant of all of the remaining
options under the Option Plan.

     The purpose of the 2000 Plan is to promote the interests of the Company and
its stockholders by providing employees of the Company with additional incentive
to increase their efforts on the Company's behalf and to remain in the employ or
service of the company and with the opportunity, through stock ownership, to
increase their proprietary interest in the Company and their personal interest
in its continued success and progress.

                                       14
<PAGE>   17

     The following summary is qualified in its entirety by reference to the full
text of the 2000 Plan, which is attached to this Proxy Statement as Exhibit A.

     Purpose. The purpose of the 2000 Plan is to promote the interests of the
Company and its stockholders by encouraging salaried officers and other key
employees and consultants to develop an increased personal interest in the
welfare of the Company as a result of their proprietary interest in its
continued success and progress. The 2000 Plan is also intended to aid the
Company in securing and retaining salaried officers, key employees and
consultants and to motivate such persons to exert their best efforts on behalf
of the Company.

     Administration. The 2000 Plan will be administered by the Compensation
Committee, which, subject to orders or resolutions adopted by the Board which
are not inconsistent with the provisions of the 2000 Plan, has the power to
administer, construe and interpret the 2000 Plan and to implement fully the
provisions thereof. The Compensation Committee is comprised of at least two
"Non-Employee Directors" within the meaning of Rule 16b-3 under the Exchange
Act. The Board of Directors appoints the members of the Compensation Committee,
fills vacancies on the Compensation Committee and has the power to replace
members of the Compensation Committee with other eligible persons at any time.
The current members of the Compensation Committee are Don Logan (Chairman),
Robert S. Colman, David E. Simon and Ronald H. Galowich.

     The Compensation Committee will, among other things, select the persons to
whom options are to be granted, determine whether such options are to be
incentive stock options ("Incentive Options") granted pursuant to Section 422 of
the Code or nonstatutory stock options ("Nonstatutory Options"), and the number
of shares of Common Stock to be subject to each option. The Compensation
Committee also will have the power to administer, construe and interpret the
2000 Plan to implement fully the provisions thereof.

     Eligibility. Salaried officers and other key employees of, and consultants
to, the Company (whether or not such persons are directors) are eligible to
receive options under the 2000 Plan. No Incentive Option may be granted to a
consultant. Furthermore, no Incentive Option may be granted to a salaried
officer or key employee of the Company who immediately after the grant and
giving effect thereto, owns or would own, directly or indirectly, shares of
Common Stock possessing 10% of the total combined voting power or value of all
classes of capital stock of the Company, unless the option exercise price is at
least 110% of the fair market value (as of the date of the grant) of the Common
Stock subject thereto and the term of the option is limited to five years from
the date of grant. Approximately 3,000 current officers, key employees and
consultants are expected to be eligible to participate in the 2000 Plan.

     Shares Subject to Plan. The 2000 Plan provides for the issuance of up to
1,000,000 authorized and unissued or treasury shares of Common Stock (subject to
adjustment pursuant to the anti-dilution provisions of the plan). In the event
that there is any change in the outstanding Common Stock by reason of a
recapitalization, merger, reorganization, consolidation, stock split, stock
dividend or stock right distribution, the number and kind of shares deliverable
upon exercise of options granted pursuant to the 2000 Plan and the exercise
price thereof will be adjusted by the Compensation Committee. In the event that
provision is not made, in connection with any merger, reorganization,
consolidation or other change in corporate structure, for the continuation of
the 2000 Plan and assumption of the options theretofore granted (or the
substitution of substantially identical options of the surviving corporation,
successor employer or a parent thereof), then, prior to the effective date of
any such transaction, each holder of an option granted pursuant to the 2000 Plan
shall be entitled to exercise such option for the full number of shares covered
thereby which the holder would otherwise have been entitled to acquire during
the remaining term of such option. Subject to adjustment as described above, the
aggregate number of shares of Common Stock for which an option may be granted to
any one participant under the 2000 Plan shall not exceed 10% of the number of
shares permitted to be issued under such plan.

     If an option expires, terminates or is forfeited for any reason during the
term of the 2000 Plan without having been exercised in full, the shares subject
to the unexercised portion of such option will be available for issuance upon
the exercise of future options granted under the 2000 Plan.

     Exercise Price. Nonstatutory Options granted pursuant to the 2000 Plan will
have an exercise price of not less than 100% of the "fair market value" (as
defined in the 2000 Plan) of a share of Common Stock on

                                       15
<PAGE>   18

the date of grant. Incentive Options granted pursuant to the 2000 Plan will have
an exercise price of not less than 100% of the fair market value of a share of
Common Stock on the date of grant. See "Eligibility" above for the minimum
exercise price required in the case of certain Incentive Options. On April 4,
2000, the closing sale price of the Common Stock on the Nasdaq National Market
was $30.375 per share.

     Terms of Options. Options granted under the 2000 Plan may have a term of up
to seven years, except for certain Incentive Options as described above under
"Eligibility." The period during which an option is exercisable may be shortened
as provided in the 2000 Plan in the event of termination of employment or upon
the retirement or death of the optionholder. See "Death, Disability, Retirement
or Termination of Employment" below.

     Exercise of Options. Options granted pursuant to the 2000 Plan are
exercisable in such installments and during such periods as may be fixed by the
Compensation Committee at the time of grant. In the case of Incentive Options
which are exercisable in more than one installment, the aggregate fair market
value (determined at the time the option is granted) of the Common Stock with
respect to which such Incentive Options are exercisable for the first time by
any optionee during any calendar year may not exceed $100,000.

     Upon the exercise of an option, the optionee will be required to make
payment in full to the Company of the exercise price therefor (and any required
tax withholding payment relative to Nonstatutory Options) (i) in cash or (ii)
with previously acquired shares of Common Stock or a combination of cash and
Common Stock having an aggregate fair market value equal to the exercise price
(and any required tax withholding payment). The Compensation Committee may
permit an optionholder to elect to pay the exercise price of an option by
authorizing a third-party to sell shares of Common Stock (or a sufficient
portion of the shares) acquired upon exercise of the option and remit to the
Company a sufficient portion of the sale proceeds to pay the entire exercise
price and any tax withholding resulting from such exercise.

     Non-Assignability of Options. Incentive Options will only be transferable
by will and by the laws of descent and distribution. Nonstatutory Options will
not be transferable other than (i) by will, (ii) pursuant to the laws of descent
and distribution, (iii) pursuant to a domestic relations order (as defined in
the Code), or (iv) to members of the family of an optionee or certain trusts for
the benefit of such persons or partnerships or other entities in which such
family members are holders of more then fifty percent of the voting interests.
During the lifetime of an optionholder, options may be exercised only by the
optionholder or by those persons to whom the option was transferred as specified
above.

     Death, Disability, Retirement or Termination of Employment. If an
optionholder dies while employed or retained as a consultant by the Company or
within two years of retirement from the Company or of becoming disabled (or such
shorter period as is specified in such optionholder's option agreement), options
held by such person will be accelerated and thereafter must be exercised within
the earlier of two years after the date of death or the date of expiration of
the subject option. Such options may be exercised during the permitted period
only by the person or persons to whom the optionholder's rights under the
options pass by the optionholder's will or by the laws of descent and
distribution.

     If an optionholder ceases to be an employee of, or consultant to, the
Company by virtue of disability, he may, within up to two years after the date
of such termination (one year if the optionee intends that an Incentive Option
qualify for treatment as an incentive stock option under the Code) (or such
shorter period as is specified in such optionholder's option agreement) but
before expiration of the original exercise period, purchase some or all of the
shares with respect to which he was entitled to exercise the option immediately
prior to such termination, giving effect to any acceleration of exercisability
triggered by such disability.

     In the case of an optionholder whose employment or consulting arrangement
is terminated other than by virtue of death or disability, such optionholder
may, within two years after the date of such termination not "due to cause" (as
defined in the 2000 Plan) (three months if the optionee intends that an
Incentive Option qualify for treatment as an incentive stock option under the
Code) (or such shorter period as is specified in such optionholder's option
agreement) but before the expiration of the original exercise period, acquire
the shares subject to such option immediately prior to such termination, giving
effect to any acceleration of

                                       16
<PAGE>   19

exercisability triggered by such termination. In the case of a termination "due
to cause", all outstanding options of the optionee shall be cancelled as of the
date such optionee is given notice of termination.

     Rights as a Stockholder. No person shall have any rights of a stockholder
of the Company as to shares subject to an option until such option is exercised
and certificates representing such shares are received by the optionholder.

     Amendment and Discontinuance. The Board of Directors may at any time and
from time to time, alter, suspend or discontinue the 2000 Plan without the
approval of the Company's stockholders, but may not, without the approval of the
holders of a majority of the Company's outstanding voting capital stock, make
any alteration or amendment to the 2000 Plan which operates to (a) increase the
total number of shares reserved for purposes of the 2000 Plan, except for such
adjustments as are permitted under the 2000 Plan, (b) increase the total number
of shares for which an option or options may be granted to any single employee
or consultant or (c) reprice, replace, regrant through cancellation or lower the
exercise price of a previously granted option.

     Termination. The period during which options can be granted under the 2000
Plan expires in 2007 unless earlier terminated by the Board of Directors. No
amendment, discontinuance or termination of the 2000 Plan will have any effect
on options then outstanding.

     Miscellaneous. The 2000 Plan is not qualified under Section 401 of the
Code. In addition, the 2000 Plan is not subject to any of the provisions of the
Employee Retirement Income Security Act of 1974, as amended.

     Federal Income Tax Consequences. Following is a brief summary of the
principal federal income tax consequences of the grant and exercise of options
granted under the 2000 Plan and the subsequent disposition of shares acquired
upon such exercise. This summary is not intended to be exhaustive and does not
describe all federal, state, or local tax laws.

     Taxation of Incentive Options. An optionee does not generally recognize
taxable income upon the grant or upon the exercise of Incentive Options. Upon
the sale of Incentive Option Stock, the Optionee recognizes income in an amount
equal to the difference, if any, between the exercise price of the Incentive
Option Stock and the fair market value of those shares on the date of sale. The
income is taxed at long-term capital gains rates if the optionee: (i) has not
disposed of the stock within two years after the date of the grant of the
Incentive Option, (ii) has held the stock for at least one year after the date
of exercise and (iii) has continuously remained in the employ of the Company
from the date of grant until three months before exercise (expanded to 12 months
if the employment has ceased as a result of total and permanent disability). The
employment and holding period requirements are waived when an employee/optionee
dies.

     The exercise of an Incentive Option may, depending upon the number of
Incentive Options exercised and upon other factors unique to the optionee's
individual income tax situation, trigger liability for the alternative minimum
tax because the optionee must include in any alternative minimum tax income the
amount by which the exercise price is exceeded by the fair market value of the
Common Stock at the time the Incentive Option is exercised.

     The Company does not receive a federal income tax deduction when an
employee exercises an Incentive Option or sells Incentive Option Stock if the
employee: (i) has held the stock for at least one year after the date of
exercise, and (ii) has held the stock for at least two years after the date of
the grant of the Incentive Option.

     If an optionee makes a disqualifying disposition of Incentive Option Stock
(i.e., sells Incentive Option Stock before having held it for at least one year
after the date of exercise and two years after the date of grant), the optionee
recognizes ordinary income to the extent of the lesser of (i) the difference
between the disposition price and the exercise price or (ii) the difference
between the exercise price and the fair market value of the stock on the date of
exercise. Any additional gain is treated as long-term or short-term capital gain
depending upon how long the optionee holds the Incentive Option Stock prior to
disposing of it in a disqualifying disposition. In the year of a disqualifying
disposition, the Company receives a federal income tax deduction in an amount
equal to the ordinary income which the optionee recognizes as a result of the
disqualifying disposition.

                                       17
<PAGE>   20

     Taxation of Nonstatutory Options. Generally, an optionee does not realize
taxable income upon the grant of a Nonstatutory Option (if such option does not
have a readily ascertainable fair market value). Upon the exercise of such a
Nonstatutory Option, the optionee recognizes ordinary income to the extent the
fair market value of the Nonstatutory Option Stock on the date of exercise
exceeds the exercise price. The Company receives an income tax deduction in an
amount equal to the ordinary income which the optionee recognizes upon the
exercise of the Nonstatutory Options.

     If an optionee sells shares of Nonstatutory Option Stock, assuming such
shares constitute capital assets in the optionee's hands, the optionee
recognizes capital gain income to the extent the sales proceeds exceed the fair
market value of the Nonstatutory Option Stock on the date of exercise. The
capital gains will be short-term or long-term depending upon the holding period
of the Nonstatutory Option Stock.

     Payment of Option Price in Shares. If an option (whether Incentive or
Nonstatutory) is exercised and payment is made by means of previously acquired
shares, or previously acquired shares and cash, there is no gain or loss
recognized by the optionholder with respect to the previously acquired shares.
For the number of option shares received in exchange for the previously acquired
shares, the optionholder's basis is the same as the optionholder's basis in the
previously acquired shares. For the remaining option shares, the optionholder's
basis is the amount of any additional cash paid by the optionholder and, in the
case of a Nonstatutory Option, the ordinary income realized by the optionholder
on the exercise of the option for Federal income tax purposes.

     Exercising a Nonstatutory Option with shares which were originally acquired
on the exercise of an Incentive Option will not constitute a "disqualifying
disposition" of such previously held shares. If, however, the new shares are not
held for the balance of the Required Holding Periods (described above), there
will be a disqualifying disposition for Federal income tax purposes, resulting
in recognition of ordinary income to the optionholder in an amount equal to the
excess of the fair market value over the option price at the time such shares of
Incentive Option Stock were originally acquired (but not in excess of the
optionholder's gain). However, exercising an Incentive Option with shares
acquired on the exercise of an Incentive Option will constitute a disqualifying
disposition of such previously acquired shares if the one- and two-year Required
Holding Periods (described above) have not been met before such exercise.

     Limitations on Deductibility of Compensation. Section 162(m) limits the
deductibility (under certain circumstances) of the compensation paid by the
Company to its Chief Executive Officer and the four most highly compensated
employees of the Company (other than the Chief Executive Officer) at the end of
the Company's taxable year that exceeds $1,000,000 annually. Section 162(m) and
the regulations issued thereunder provide certain exclusions from the amounts
included under the $1,000,000 limitation, including compensation that is
"qualified performance-based compensation" within the meaning of the
regulations. The 2000 Plan is generally intended to satisfy the requirements set
forth in the regulations with respect to "qualified performance-based
compensation" with respect to Nonstatutory Options that are exercisable at an
exercise price of not less than 100% of the price of a share of Common Stock on
the date of grant and with respect to Incentive Options, because such options
are exercisable at an exercise price of 100% of the price of a share of Common
Stock on the date of grant. However, if the exercise price of an option is less
than 100% of the price of a share of Common Stock on the date of grant, the
compensatory element of such Nonstatutory Option will not constitute "qualified
performance-based compensation."

     Board Recommendation. The Board of Directors believes that the Company's
existing Option Plan historically has been very helpful in attracting and
retaining skilled employees at all levels and in motivating such persons to
exert their best efforts on behalf of the Company. The Board of Directors
believes that the 2000 Plan will provide similar benefits to the Company, and,
accordingly, recommends that stockholders vote FOR approval of the 2000 Plan.

                                       18
<PAGE>   21

              APPROVAL OF PERFORMANCE-BASED COMPENSATION PROVISION

     As described under "Executive Compensation -- Employment Agreements," in
1999 the Company entered into a new employment agreement with James C. Smith,
who has served as its President and Chief Executive Officer since 1984,
providing for Mr. Smith's continued service through December 31, 2001. Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), eliminates
the deductibility of compensation over $1,000,000 paid to certain executive
officers in any year unless, among other things, the stockholders have approved
such compensation. In order to satisfy this criteria, the Board of Directors is
submitting the performance-based compensation provision of Mr. Smith's
employment agreement for approval by the Company's stockholders.

The full text of the performance-based compensation provision is set forth
below:

         "Additional Compensation" As soon as practicable after the end
         of each fiscal year of the Company during the term of this
         Agreement and commencing with the year ending December 31,
         2000, the Company's Pretax Income for such fiscal year (as
         determined in accordance with generally accepted accounting
         principles) will be compared to the Company's Pretax Income
         for the immediately preceding fiscal year (Threshold Year). If
         Pretax Income has increased by 5% or more for the year, the
         resulting percentage increase (rounded to the nearest whole
         number) will be used to determine any Additional Compensation
         payable to Employee in accordance with the following table:

<TABLE>
<CAPTION>
                                       ADDITIONAL COMPENSATION FACTOR (AS % OF
PRETAX INCOME INCREASE                       THRESHOLD YEAR BASE SALARY)
- ----------------------                 ---------------------------------------
<S>                                    <C>
        5%...........................                     25%
       10%...........................                     50%
       20%...........................                     75%
       30%...........................                    100%
       40%...........................                    125%
       50%*..........................                    150%
</TABLE>

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

* For each additional 10% Pretax Income Increase above 50%, the Additional
  Compensation Factor will increase by 25%.

         Additional Compensation will be earned pro rata to the Pretax
         Income Increase. In example, if the Pretax Income increases
         15%, Employee will receive 62.5% (50% plus 12.5% (the pro rata
         increase)) of Threshold Year Base Salary in Additional
         Compensation.

         If a merger, acquisition, accounting pronouncement or other
         unusual financial event of the Company causes a material
         change to the Pretax Income for any year, Employee and company
         agree that for the purpose of this Agreement only, Pretax
         Income will not include the unusual event and/or will be
         modified to neutralize the financial effect of the event.

     The Board believes that the performance-based compensation provision, as a
component of the entire compensation package contained in Mr. Smith's employment
agreement, is in the best interests of the Company and its stockholders. In
approving and ratifying this agreement, the Board and the Compensation Committee
took into account, among other things, Mr. Smith's substantial contributions to
the Company in the course of its growth since he first became Chief Executive
Officer and the desirability of obtaining Mr. Smith's commitment to carry out
future projects of the Company beyond the term of his prior employment
agreement.

     If the performance-based compensation provision is not approved by the
Company's stockholders, then no compensation will be paid to Mr. Smith under
such provision. However, the Company will negotiate with

                                       19
<PAGE>   22

Mr. Smith to reach a mutually acceptable alternative to such provision which
would also be subject to stockholder approval at a later date.

     The Board of Directors recommends that stockholders vote FOR the approval
of the performance-based compensation provision.

                        APPROVAL OF STOCK OPTION GRANTS

     In connection with the execution of his new employment agreement, Mr. Smith
was granted an option to purchase 280,000 shares of Common Stock at an exercise
price of $19.125 per share (the "$19.125 Option"), an option to purchase 260,000
shares of Common Stock at an exercise price of $21.04 per share (the "$21.04
Option") and an option to purchase 260,000 shares of Common Stock at an exercise
price of $22.95 per share (the "$22.95 Option"; and collectively with the
$19.125 Option and the $21.04 Option, the "Options"). See "Executive
Compensation -- Employment Agreements." The exercise price of the $19.125
Option, the $21.04 Option and the $22.95 Option equal 100%, 110% and 120%,
respectively, of the closing price of the Common Stock on the Nasdaq National
Market on May 18, 1999, the date on which such options were granted. Mr. Smith
will not receive any benefit from exercising the Options unless subsequent to
the date on which each Option becomes exercisable the market price of the Common
Stock exceeds the exercise price of such Option. The closing sale price of the
Common Stock on April 4, 2000 was $30.375 per share.

     The Company believes that the retention of the services of Mr. Smith as
President and Chief Executive Officer through 2001 will provide the Company with
the opportunity to arrange for a smooth transition to new senior management once
his term is complete and will enable the Company to maintain its preeminent
position in the managed care industry. The Company further believes that the
grant of the Options is an integral part of the new employment agreement for Mr.
Smith, as well as for the Company, as the Options are a strong incentive to
maximize the Company's potential. The fact that Mr. Smith was keenly interested
in receiving the Options underlines his confidence in the future of the business
of the Company and his belief in such potential.

     The $19.125 Option is exercisable, in whole or in part, beginning on May
18, 2000 and ending on May 18, 2006. The $21.04 Option is exercisable, in whole
or in part, beginning on December 31, 2000 and ending on December 31, 2006. The
$22.95 Option is exercisable, in whole or in part, beginning on December 31,
2001 and ending on December 31, 2007. In the event (a) the Company enters into
any agreement providing for (i) the sale of all or substantially all of the
assets of the Company or (ii) a merger, consolidation or reorganization which
would result in the stockholders of the Company immediately prior to such
transaction owning less than 50% of the surviving corporation, (b) if Mr.
Smith's employment is terminated by the Company without cause or (c) if Mr.
Smith dies, becomes incapacitated or his employment is termination by voluntary
reasons (other than cause), the Options will become exercisable in full without
regard to any limitations on exercise. The number of shares to be issued under
and the exercise price of the Options are subject to adjustment, in accordance
with the terms of the Options, to reflect stock dividends, stock splits and
other similar transactions effected by the Company prior to the exercise,
expiration or termination of the Options.

     Upon the exercise of an Option, Mr. Smith is required to make payment in
full to the Company of the exercise price therefor, (i) in cash or (ii) with
previously acquired shares of Common Stock or (iii) a combination of cash and
shares of Common Stock having an aggregate fair market value equal to the
exercise price, in each case, at Mr. Smith's option, together with any required
tax withholding payments.

     The Options are not transferable or assignable by Mr. Smith other than by
will or by the laws of descent and distribution and are exercisable during his
lifetime only by Mr. Smith, except that, following the death of Mr. Smith, Mr.
Smith or his legal representative may for 2 years following the death (but
before termination of the exercise period), exercise such Option.

     The Options are intended to be "incentive stock options" as defined in
Section 422 of the Code, to the extent permitted by the Code, and nonstatutory
options to the extent not so permitted. No income was recognized by Mr. Smith
for federal income tax purposes on the date the Options were granted. Upon
exercise
                                       20
<PAGE>   23

of a nonstatutory option, Mr. Smith will be required to recognize ordinary
income, and the Company will be entitled to a corresponding deduction as
compensation paid, in an amount equal to the difference between aggregate
exercise price paid by Mr. Smith and the then current market value of the shares
acquired. Section 162(m) of the Code does not limit the amount of the deduction
to which the Company will be entitled upon the exercise of the $19.125 Option.
Similarly, if the $21.04 Option and the $22.95 Option are approved by the
Company's stockholders, such Options also should be exempt from the limitations
of Section 162(m) of the Code. No income will be recognized for federal income
tax purposes by Mr. Smith, and no deduction will be available to the Company,
when the incentive stock options are exercised. The incentive stock options will
be taxed as nonstatutory options, however, if Mr. Smith sells the shares
acquired upon exercise of the incentive stock options within one year after
exercise or two years after the date of grant.

     The $19.125 Option was granted pursuant to the Option Plan, and the shares
of Common Stock underlying such Option have been registered under the Securities
Act. Because (i) no optionee may be granted options to purchase more than ten
percent of the shares of Common Stock subject to the Option Plan and (ii) the
grant of the $21.04 Option and the $22.95 Option under the Option Plan would
have resulted in Mr. Smith receiving options in excess of such limitation, the
$21.04 Option and the $22.95 Option were granted outside the Option Plan. The
Company has agreed to effect the registration under the Securities Act of the
shares of Common Stock underlying the $21.04 Option and the $22.95 Option.

     The Board of Directors is submitting the $21.04 Option and the $22.95
Option for approval by the Company's stockholders in order to satisfy the
provisions of Section 162(m) of the Code and the requirements of Nasdaq. Amounts
includable in income upon the exercise of an option are excluded from the
deduction limitations on compensation paid under Code Section 162(m) if, among
other things, the material terms of the option are disclosed to and approved by
the stockholders prior to exercise of the option. The only provision of Section
162(m) of the Code which the $21.04 Option and the $22.95 Option do not
currently satisfy is the stockholder approval requirement. Accordingly, the
Board of Directors is submitting the $21.04 Option and the $22.95 Option for the
requisite approval by the Company's stockholders. In addition, under the rules
of the National Association of Securities Dealers, Inc., stockholder approval is
required to be obtained with respect to the $21.04 Option and the $22.95 Option.

     The Board of Directors recommends that stockholders vote FOR the approval
of the $21.04 Option and the $22.95 Option.

                                    AUDITORS

     The Company has engaged Deloitte & Touche LLP to audit the Company's
financial statements for fiscal 2000. Deloitte & Touche LLP audited the
Company's financial statements for fiscal 1999 and the decision to retain
Deloitte & Touche LLP was approved by the Audit Committee of the Board of
Directors and the Board of Directors of the Company.

     A representative of Deloitte & Touche LLP is expected to attend the Annual
Meeting of Stockholders where he will have the opportunity to make a statement,
if he so desires, and will be available to respond to appropriate questions.

                      2001 ANNUAL MEETING OF STOCKHOLDERS

     The 2001 Annual Meeting of Stockholders is presently scheduled to be held
on May 15, 2001. Any proposals of stockholders intended to be personally
presented at such meeting must be received by the Secretary of the Company for
inclusion in the Company's Proxy Statement and form of proxy no earlier than
January 15, 2001 and no later than February 14, 2001.

                                       21
<PAGE>   24

                                                                       EXHIBIT A

                            FIRST HEALTH GROUP CORP.

                             2000 STOCK OPTION PLAN

     1. Purpose. The purpose of the 2000 Stock Option Plan (the "Plan") is to
aid First Health Group Corp. and its subsidiaries (collectively, the "Company"),
in securing and retaining salaried officers and other key employees and
consultants and to motivate such persons to exert their best efforts on behalf
of the Company. In addition, the Company expects that it will benefit from the
added interest which the respective optionees will have in the welfare of the
Company as a result of their proprietary interest in the Company's success.

     2. Administration.

          (a) The Compensation Committee (the "Committee") of the Board of
     Directors (the "Board") which shall at all times be comprised of two or
     more directors, appointed by the Board from time to time to serve at the
     pleasure of the Board shall have full power and authority, subject to such
     orders or resolutions not inconsistent with the provisions of the Plan as
     may from time to time be issued or adopted by the Board, to interpret the
     provisions and supervise the administration of the Plan. Each member of the
     Committee shall be (i) a "Non-Employee Director" as determined under Rule
     16b-3(b)(3)(i) of the Securities Exchange Act of 1934, as amended and (ii)
     an outside director as determined under Treasury Regulation 26, CFR Section
     1.162-27(e)(3).

          (b) In accordance with the provisions of this Plan, the Committee
     shall select the key employees and consultants to whom options shall be
     granted, shall determine, in the case of key employees, whether such
     options shall be incentive stock options ("Incentive Options") granted
     pursuant to Section 422 of the Internal Revenue Code of 1986, as amended
     (the "Code"), or nonstatutory stock options ("Nonstatutory Options"), and
     shall determine the number of shares of Common Stock, $.01 par value, of
     the Company (the "Common Stock") to be subject to each option and the time
     at which the option is to be granted. Subject to the express provisions of
     the Plan, the Committee shall have authority to adopt administrative
     regulations and procedures which are consistent with the terms of the Plan;
     to adopt and amend option agreements as they deem advisable; to determine
     the terms and provisions of such option agreements (including the period
     during which the option is exercisable, the option price, and the manner in
     which options become exercisable) to construe and interpret such option
     agreements; to impose such limitations and restrictions as are deemed
     necessary or advisable by counsel for the Company so that compliance with
     the Federal securities and tax laws and with the securities laws of the
     various states may be assured; and to make all other determinations
     necessary or advisable for administering the Plan. The Committee may
     designate any officers or employees of the Company to assist the Committee
     in the administration of the Plan and to execute documents on its behalf,
     and the Committee may delegate to them such other ministerial and limited
     discretionary duties as it sees fit. All determinations and selections made
     by the Committee shall be by the affirmative vote of a majority of its
     members, but any determination reduced to writing and signed by a majority
     of the members shall be fully as effective as if it had been made by a
     majority vote at a meeting duly called and held.

          (c) Each option shall be evidenced by a written instrument duly
     executed by the Company and optionee which shall contain such terms and
     conditions not inconsistent with the Plan as the Committee, upon the advice
     of counsel for the Company, shall determine; provided, however, that such
     terms need not be identical as between any two agreements.

          (d) All determinations and selections made by the Committee pursuant
     to the provisions of the Plan shall be final and conclusive.

     3. Eligibility and Participation. The group of persons eligible to receive
options shall consist of salaried officers and other key employees of, and
consultants to the Company (whether or not such persons are directors of the
Company). As used herein, the terms "key employee" and "key consultant" shall
mean any employee of, or consultant to, the Company who, in the opinion of the
Committee, has demonstrated a
<PAGE>   25

capacity for contributing in a substantial measure to the success of the
Company. No Incentive Option may be granted to a key consultant nor may an
Incentive Option be granted to an officer or employee of the Company who,
immediately after such grant, owns directly or indirectly stock possessing more
than 10% of the total combined voting power or value of all classes of
outstanding stock of the Company or any subsidiary or parent corporation,
unless, in the case of an individual who is not a consultant, the option
exercise price is at least 110% of the fair market value (as of the date of the
grant) of the Common Stock subject thereto and the term of the option is limited
to five years from the date of grant. No purported grant of an option to any
person whose employment or consulting arrangement with the Company has
terminated on or before the date on which the grant of such option is approved
by the Committee shall be effective.

     4. Shares Subject to the Plan. The stock subject to the Plan shall be
shares of the Company's authorized Common Stock and may be authorized but
unissued shares or treasury shares, as the Board may from time to time determine
in its sole discretion. Subject to adjustment as provided in paragraph 9 hereof,
the aggregate number of shares to be delivered upon exercise of all options
shall not exceed 1,000,000 shares; and, subject to like adjustment, the
aggregate number of shares for which options may be granted to any one optionee
shall not exceed 10% of the total number of shares permitted to be issued under
the Plan. If an option expires or terminates for any reason during the period in
which options may be granted under the Plan and prior to the exercise thereof in
full, the shares subject to, but not delivered under, such option shall, except
as hereinafter provided, be available for options thereafter granted.

     5. Exercise Price; Fair Market Value. Nonstatutory Options granted
hereunder shall have a per share exercise price of not less than 100% of the
"fair market value" of a share of Common Stock on the date on which the grant of
such option is approved by the Committee (such date being the effective date of
the grant of such option). Incentive Options granted hereunder shall have a per
share exercise price of not less than 100% of the "fair market value" of a share
of Common Stock on the effective date of the grant of such option; provided,
however, if an optionee owns (including constructive ownership pursuant to
Section 494(d) of the Code) more than 10% of the total combined voting power or
value of all classes of outstanding shares of stock of the Company or any
subsidiary or parent corporation (within the meaning of Section 424(d) of the
Code), then an Incentive Option granted under this Plan to such optionee shall
by its terms fix the option price per share of Common Stock to be at least 110%
of the fair market value of the shares of Common Stock on the date of the grant
of such option and such Incentive Option shall terminate and become
non-exercisable upon the expiration of five years from the date of the grant of
such option. Subject to the foregoing, the option price shall be determined by
the Committee.

     For purposes of this Plan, "fair market value" of a share of Common Stock
shall mean: (i) if the Common Stock is traded on a national stock exchange on
the effective date of the grant of such option, fair market value shall be the
closing price reported by the applicable composite transactions report on such
day, or if the Common Stock is not traded on such date, the mean between the
closing bid-and-asked prices thereof on such exchange; (ii) if the Common Stock
is traded on the Nasdaq National Market on the date of the grant of such option,
fair market value shall be the closing sale price on that day; (iii) if the
Common Stock is traded over-the-counter and not on the Nasdaq National Market on
the date of the grant of such option, fair market value shall be the mean
between the last representative bid-and-asked prices quoted by the Nasdaq on
that day: or (iv) if none of the foregoing provisions is applicable, fair market
value shall be determined by the Committee in good faith on such basis as it
deems appropriate. In all cases, the determination of fair market value shall be
binding and conclusive on all persons.

     6. Term and Exercise of Options.

          (a) Options shall be exercisable in such installments and during such
     period as may be fixed by the Committee at the time of grant, but no option
     shall be exercisable after the expiration of seven years from the date of
     grant of such option and, in the case of an individual who, immediately
     after the grant of an Incentive Option, owns directly or indirectly stock
     possessing more than 10% of the total combined voting power or value of all
     classes of outstanding stock of the Company or any subsidiary, after the
     expiration of five years from the date of grant of such option; further
     provided that in the case of Incentive Options which are exercisable in
     more than one installment, the aggregate fair market value (determined at
     the

                                        2
<PAGE>   26

     time the option is granted) of the Common Stock with respect to which such
     Incentive Options are exercisable for the first time by any optionee during
     any calendar year may not exceed $100,000.

          (b) No option shall be granted hereunder and no option granted
     hereunder shall be exercisable, unless, at the time of any grant or
     exercise of an option, such grant or exercise is in full compliance with
     all Federal and state securities laws. Upon the exercise of an option, the
     optionee shall be required to make payment in full to the Company of the
     exercise price therefor (and any required tax withholding payment relative
     to Nonstatutory Options) (i) in cash or (ii) with previously acquired
     shares of Common Stock which have been owned by the optionee for more than
     six (6) months prior to the date of surrender or a combination of cash and
     such Common Stock having an aggregate fair market value equal to the
     exercise price (and any required tax withholding payment). The Committee
     may permit the holder of an option to elect to pay the exercise price of
     such option by authorizing a third-party to sell shares of Common Stock (or
     a sufficient portion of the shares) acquired upon exercise of such option
     and remit to the Company a sufficient portion of the sale proceeds to pay
     the entire exercise price and any tax withholding resulting from such
     exercise. No holder of any option, or his legal representative, legatee, or
     distributee shall be or be deemed to be a holder of any shares of Common
     Stock subject to such option unless and until he has received a certificate
     or certificates therefor. If, on the date on which any option granted
     hereunder is exercised, a registration statement relating to the shares of
     Common Stock issuable pursuant to the Plan is not in effect, as a condition
     to the exercise of such option, the Company may require the person
     exercising such option to represent and warrant at the time of any such
     exercise that (i) such person is an "accredited investor" within the
     meaning of Regulation D promulgated under the Securities Act of 1933, as
     amended, or either alone or with his purchaser representative has such
     knowledge and experience in financial and business matters that he is
     capable of evaluating the merits and lists of exercising the option, and
     (ii) the Common Stock is being purchased for investment purposes only and
     without any present intention to sell or distribute such Common Stock. and
     the certificate evidencing shares of Common Stock acquired upon exercise of
     such option shall contain upon its face, or on the reverse thereof, the
     following legend:

         "These shares have not been registered under the Securities
         Act of 1933, as amended, or under any applicable state law.
         They may not be offered for sale, sold, transferred, or
         pledged without (1) registration under the Securities Act of
         1933, as amended, and any applicable state law, or (2) an
         opinion (satisfactory to the corporation) that registration is
         not required."

          (c) The proceeds received by the Company from the sale of stock
     subject to an option are to be added to the general funds of the Company
     and used for general business purposes as the Board shall, in its sole
     discretion, determine.

          (d) No later than the date as of which an amount first becomes
     includible in the gross income of the optionee for Federal income tax
     purposes with respect to any grant under the Plan, the optionee shall pay
     to the Company, or make arrangements satisfactory to the Company regarding
     the payment of, any Federal, state, local or foreign taxes of any kind
     required by law to be withheld with respect to such amount. Unless
     otherwise determined by the Committee, withholding obligations may be
     settled with Common Stock, including Common Stock that is part of the grant
     that gives rise to the withholding requirement. The obligations of the
     Company under the Plan shall be conditional on such payment or
     arrangements, and the Company shall, to the extent permitted by law, have
     the right to deduct any such taxes from any payment otherwise due to the
     optionee. The Committee may establish such procedures as it deems
     appropriate, including the making of irrevocable elections, for the
     settlement of withholding obligations with Common Stock.

          (e) If an Option granted hereunder is exercised or transferred or
     stock issued pursuant to the exercise of an Incentive Option disposed of
     within (i) two years from the date of granting of the Incentive Option or
     (ii) one year from the date of issuing such stock, the holder of the Option
     must notify the Company within five (5) business days of the exercise or
     transfer, as the case may be.

                                        3
<PAGE>   27

     7. Transferability of Options. Incentive Options may only be transferred by
will or pursuant to the laws or descent or distribution and may only be
exercised by the optionholder. Nonstatutory Options granted under the Plan may
not be transferred except (i) by will, (ii) pursuant the laws of descent and
distribution or (iii) by gift or a domestic relations order (as defined by the
Code) to a "family member" of the optionholder. For purposes of this paragraph
7, "family member" means any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law,
including adoptive relationships, any person sharing the optionholder's
household (other than as a tenant or employee), a trust in which these persons
have more than fifty percent of the beneficial interest, a foundation in which
these persons (or the optionholder) control the management of assets, and any
other entity in which these persons (or the optionholder) own more than fifty
percent of the voting interests. During the lifetime of the holder, may be
exercised only by the optionholder or by persons to whom the option was
transferred as specified above.

     8. Death, Disability, Retirement and Termination of Employment. Any option,
the exercise period of which has not theretofore expired, shall terminate at the
time of an optionee's death, the optionee's disability or termination of an
optionee's employment or consulting arrangement with the Company, and no shares
of Common Stock may thereafter be delivered pursuant to such option except as
set forth below:

          (a) In the case of any employee or consultant who has been employed or
     retained by the Company continuously from the effective date of the grant
     of such option to the date of termination due to disability (as defined in
     Section 22(e)(3) of the Code), such optionee may, within two years (or such
     shorter period of time as is specified in the Option Agreement) after the
     date of such termination (one year in the case of an Incentive Option in
     order for such option to qualify for treatment as an incentive stock option
     under the Code) but before expiration of the original exercise period,
     purchase some or all of the shares subject to an option immediately prior
     to such termination, to the extent the optionee was then entitled to
     exercise such option, giving effect to any acceleration of exercisability
     triggered by such disability; and

          (b) Upon the death of any such employee while in active service or of
     any such disabled or retired employee within such two-year period (or such
     shorter period of time as is specified in the Option Agreement), the person
     or persons to whom his rights under the option are transferred by will or
     the laws of descent and distribution may within two years after the date of
     death, but before the expiration of the original exercise period, purchase
     some or all of the shares with respect to which the optionee was then
     entitled to exercise such option immediately prior thereto, giving effect
     to any acceleration of exercisability triggered by such death. Leaves of
     absence for those periods and purposes conforming to the personnel policy
     of the Company and as may be approved by the Committee, shall not be deemed
     terminations or interruptions of employment.

     In the case of any optionee who has been employed or retained by the
Company continuously from the date of grant to the date of termination and whose
employment or consulting arrangement is terminated due to retirement,
resignation or termination, such optionee may, within two years (or such shorter
period of time as is specified in the Option Agreement) after the date of any
such termination not "due to cause" (three months in the case of an Incentive
Option in order for such option to qualify for treatment as an incentive stock
option under the Code), but before the expiration of the original exercise
period, purchase some or all of the shares with respect to which the optionee
was then entitled to exercise such option immediately prior to retirement,
resignation or termination, giving effect to any acceleration of exercisability
triggered by such termination; provided, however, in the case of a termination
of employment or consulting arrangement of an optionee "due to cause", all
outstanding options of the optionee shall be cancelled and terminated as of the
date on which such optionee is given notice of termination. For purposes of this
Plan, termination "due to cause" shall have the same meaning as ascribed thereto
in any employment, consulting or similar agreement then in effect between the
optionee and the Company, or if none, shall mean, in the reasonable belief of
the Committee, the commission of fraud, embezzlement or theft against: (i) the
Company; (ii) employees of the Company; or (iii) a customer or business
associate of the Company.

                                        4
<PAGE>   28

     9. Changes in Common Stock. In the event that, prior to the delivery by the
Company of all of the shares of Common Stock which may be delivered hereunder
and after the effective date of the Plan, there shall be any change in the
outstanding Common Stock of the Company by reason of the recapitalization,
merger, reorganization, consolidation, stock split, stock dividend or stock
right distribution, the number and kind of shares deliverable hereunder and the
exercise price shall be adjusted (but without regard to fractions) in a fair and
equitable manner by the Committee, which determination in each case shall be
conclusive and binding on the Company and the optionee and his legal
representative.

     10. Merger, Consolidation, or Sale of Assets. In the event that provision
is not made in connection with any merger, reorganization, consolidation or
other change in corporate structure, for the continuation of the Plan and
assumption of the options theretofore granted hereunder (or the substitution of
substantially identical options of the surviving corporation or successor
employer or a parent thereof), then each holder of an Option shall be entitled,
prior to the effective date of any such transaction, to exercise such option for
the full number of shares of Common Stock covered thereby which the holder would
otherwise have been entitled to acquire during the remaining term of such
option.

     11. Rights as a Stockholder. No person participating in the Plan shall have
any rights of a stockholder of the Company as to shares subject to an option
until such option is exercised and certificates representing such shares are
received by the optionee.

     12. Implied Consent of Optionee. Every optionee, by his acceptance of an
option under the Plan, shall be deemed to have consented to be bound, on his own
behalf and on behalf of his heirs and legal representatives, by all of the terms
and conditions of the Plan.

     13. The Company's Responsibility. All expenses of the Plan, including the
cost of maintaining records hereunder, shall be borne by the Company. The
Company shall have no responsibility or liability (other than under applicable
securities laws) for any act or thing done or left undone with respect to the
determination to grant (or not grant) an option hereunder or the exercise price,
number of shares or other terms and conditions of any option granted under the
Plan, so long as the Company acts in good faith.

     14. Amendment and Discontinuance. The Board may alter, suspend, or
discontinue the Plan at any time and from time to time, without obtaining the
approval of the Company's stockholders, but may not, without the approval of the
holders of a majority of the Company's outstanding capital stock, make any
alteration or amendment thereof which operates to (a) increase the total number
of shares reserved for purposes of this Plan except as provided in paragraph 9
hereof, (b) increase the total number of shares for which an option or options
may be granted to any single employee or consultant or (c) reprice, replace,
regrant through cancellation or lower the exercise price of a previously granted
option. No amendment to or termination of the Plan shall impair the rights of
optionholders under outstanding options theretofore granted under the Plan
without the consent of the optionholders affected thereby, and, unless the
option agreements relating to such options are amended, such options shall
remain in full force and effect as if the Plan had not been amended or
terminated.

     15. Effective Date. Subject to stockholder approval, the Plan shall become
effective on May 16, 2000.

     16. Termination. The period during which options may be granted under the
Plan expires on May 16, 2007 unless the Plan is terminated by the Board prior to
such date.

                                        5
<PAGE>   29


                     [LOGO OF FIRST HEALTH] FIRST HEALTH(R)




                                   IMPORTANT
                 PLEASE COMPLETE BOTH SIDES OF THE PROXY CARD,
                 DETACH AND RETURN IN THE ENCLOSED ENVELOPE.

<TABLE>
<CAPTION>
<S><C>
                             DETACH PROXY CARD HERE                                                                           401(k)
- ------------------------------------------------------------------------------------------------------------------------------------
                           (continued from other side)                                       |
        THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED         401(k)|
HEREIN, IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF                |
DIRECTORS. FOR THE APPROVAL OF THE 2000 STOCK OPTION PLAN, FOR THE APPROVAL OF               |
THE PERFORMANCE-BASED COMPENSATION PROVISION AND FOR THE APPROVAL OF THE GRANT               |
OF TWO STOCK OPTIONS TO THE COMPANY'S CHIEF EXECUTIVE OFFICER.                               |
                                                                                             |
                                                                                             |
                                                                                             |
                                                  Signed:                                    |
                                                         ---------------------               |
                                                                                             |
                                                         ---------------------               |
                                                  Dated:                , 2000               |
                                                        ----------------                     |
                                                  (Please sign proxy as name                 |
                                                  appears thereon. Joint owners              |
                                                  should each sign personally.               |
                                                  Trustees and others signing                |
                                                  in a representative capacity               |
                                                  should indicate the capacity               |
                                                  in which they sign.)                       |

</TABLE>
<PAGE>   30



<TABLE>
<CAPTION>

                                                                                                                      401(k)  |
                                                                                                                              |
                                                                                      (PLEASE SIGN AND DATE ON REVERSE SIDE)  |
                                                                                                                              |
                                                                                                                              |
                            FIRST HEALTH GROUP CORP.                                                                          |
          THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS                                                         |
                                                                                                                              |
                                                                                                                              |
JAMES C. SMITH, RONALD H. GALOWICH and JOSEPH E. WHITTERS and each of them, are                                               |
hereby constituted and appointed the lawful attorneys and proxies of the                                                      |
undersigned, with full power of substitution, to vote and act as proxy with                                                   |
respect to all shares of common stock, $.01 par value, of FIRST HEALTH GROUP                                                  |
CORP. (the "Company") standing in the name of the undersigned on the books of                                                 |
the Company at the close of business on March 31, 2000, at the Annual Meeting                                                 |
of Stockholders to be held at the offices of the Company, 3200 Highland Avenue,                                               |
Downers Grove, Illinois 60515, at 10:00 a.m., local time, on Tuesday, May 16,                                                 |
2000, and at any postponements or adjournments thereof, as follows.                                                           |
                                                                                                                              |
<S>                                <C>                                           <C>                                          |
(1) ELECTION OF DIRECTORS          [ ] FOR all nominees listed below             [ ] WITHHOLD AUTHORITY                       |
                                   (except as marked to the contrary below)      to vote for all nominees listed below        |
                                                                                                                              |
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike a line through the nominee's                   |
name in the list below)                                                                                                       |
Michael J. Boskin, Ph.D., Daniel S. Brunner, Robert S. Colman, Ronald H. Galowich,                                            |
Harold S. Handelsman, Don Logan, Thomas J. Pritzker, David E. Simon, James C. Smith, Edward L. Wristen                        |
                                                                                                                              |
(2) APPROVAL OF THE 2000 STOCK OPTION PLAN      [ ] FOR        [ ] AGAINST        [ ] ABSTAIN                                 |
                                                                                                                              |
(3) APPROVAL OF THE PERFORMANCE-BASED COMPENSATION PROVISION OF THE EMPLOYMENT AGREEMENT WITH THE COMPANY'S                   |
    CHIEF EXECUTIVE OFFICER.                                                                                                  |
                                                                                                                              |
                                                [ ] FOR        [ ] AGAINST        [ ] ABSTAIN                                 |
                                                                                                                              |
(4) APPROVAL OF THE GRANT OF TWO STOCK OPTIONS TO THE COMPANY'S CHIEF EXECUTIVE OFFICER.                                      |
                                                                                                                              |
                                                [ ] FOR        [ ] AGAINST        [ ] ABSTAIN                                 |
                                                                                                                              |
(5) In their discretion, the proxies are authorized to vote upon such other                                                   |
business as may properly come before the meeting and any postponements or adjournments thereof.                               |
                                                                                                                              |
The Board of Directors recommends a vote FOR proposals 1, 2, 3 and 4.                                                         |
                                                                                                                              |
                                                                                                                              |
                                                                                                                              |
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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