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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER 0-21098
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PHYSICIANS HEALTH SERVICES, INC.
(Exact name of Company as specified in charter)
Delaware 06-1116976
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
One Far Mill Crossing 06484
Shelton, Connecticut (ZIP Code)
(Address of principal executive offices)
Company's telephone number, including area code (203) 381-6400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Company: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Aggregate market value of the voting stock held by non-affiliates at March 25,
1997 amounted to $114,394,815 (assuming for purposes of this calculation only,
that all directors and executive officers are affiliates).
(Class B Common Stock is assumed to have a market value of $19.875 per share)
Indicate the number of shares of each of the Company's classes of Common Stock,
as of the latest practicable date.
Shares of Common Stock outstanding as of March 25, 1997:
5,763,905 shares of Class A Common Stock
3,546,212 shares of Class B Common Stock
DOCUMENTS INCORPORATED BY REFERENCE:
1997 Proxy Statement (Part III)
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PART I
ITEM 1. BUSINESS
GENERAL
Physicians Health Services, Inc., a Delaware corporation ("PHS" or the
"Company"), is the parent of three health maintenance organizations ("HMOs"):
(1) Physicians Health Services of Connecticut, Inc., a Connecticut corporation
("PHS/CT"), operating in Connecticut; (2) Physicians Health Services of New
York, Inc., a New York corporation ("PHS/NY"), operating in New York's
Westchester, Dutchess, Orange, Putnam, Rockland, Nassau and Suffolk Counties,
and the five boroughs of New York City; and (3) Physicians Health Services of
New Jersey, Inc., a New Jersey corporation ("PHS/NJ"), operating in New
Jersey. In addition, the Company is the parent of Physicians Health Insurance
Services, Inc. ("PHIS"), which is licensed in Connecticut as an insurance broker
to offer various insurance products, PHS Investments, Inc. ("PHSI"), the
Company's investment subsidiary, PHS Insurance of Connecticut, Inc.
("Insurance/CT"), which holds a health insurance license in the State of
Connecticut, Physicians Health Services Insurance of New York, Inc.
("Insurance/New York"), which holds a health insurance license in the State of
New York, Physicians Health Services (Bermuda), Ltd. ("Bermuda"), an insurance
company licensed as a reinsurer in Bermuda, and PHS Real Estate, Inc. ("PHSRE"),
a Delaware corporation which owns all of the outstanding stock of the Company's
one indirect subsidiary, PHS Real Estate II, Inc. ("PHSREII"), a Delaware
corporation which owns the Company's corporate headquarters in Shelton,
Connecticut. All of the aforementioned subsidiaries are wholly-owned, either
directly or indirectly, by the Company, except for PHS/NJ, in which MasterCare
Companies, Inc. ("MasterCare") holds a 20% minority interest. The Company is
federally qualified as an HMO throughout its Connecticut and New York service
areas.
The Company conducts substantially all of its operations through its
subsidiaries. Unless the context otherwise requires, the terms "Company and PHS"
refer to Physicians Health Services, Inc. and its subsidiaries. Its principal
offices are located at One Far Mill Crossing, Shelton, Connecticut 06484 , and
its telephone number is (203) 381-6400.
The Company's managed care products include traditional HMO products,
in both open access and gatekeeper models, point of service ("POS") products,
administrative services only ("ASO") plans and Medicare and Medicaid plans. The
Company's HMO subsidiaries contract for medical and related services with
individual practice associations ("IPAs"), physician hospital organizations
("PHOs"), physicians, physician groups, hospitals and other health care
providers. The Company arranges for health care coverage for its members for a
fixed monthly payment, generally without regard to the frequency or extent of
health care services actually furnished, although small copayments may apply and
members pay a deductible and coinsurance in connection with the out-of-network
benefits in POS plans.
As of January 1997, the Company had contracted with 23,298 providers
and 183 hospitals throughout its tri-state service area. It had enrolled
400,021 members as of December 31, 1996 (424,940 as of January 1, 1997).
PRODUCTS
The Company offers a broad assortment of managed care products. Its
POS products enable members to choose health care providers from the Company's
network of 23,298 providers and 183 hospitals or to obtain covered services
outside its network. The POS products combine the features of an HMO with the
features of an indemnity-type benefit for out-of-network utilization. Under the
POS plans, a member who obtains benefits outside of the PHS network pays a
deductible and coinsurance. As used herein, a plan with a POS out-of-network
benefit is referred to as a POS plan. The Company's traditional HMO plans
include a gatekeeper model HMO plan, which requires prior approval by a member's
primary care physician before the member may obtain the services of specialists
(the "Passport" plan), and an open access HMO plan in which members can obtain
services from all PHS participating physicians without the need for a referral
(the "Charter" plan). The Charter and Passport plans can be obtained as
traditional HMO plans or as the underlying HMO product for a POS plan. Under the
Company's traditional HMO plans, a member who selects a hospital or physician
from outside the network bears the entire cost of such services, unless the care
is related to an emergency or the member has received prior approval from the
Company.
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The Company sells its products both on a proprietary basis and through
a joint marketing arrangement with The Guardian Life Insurance Company of
America ("The Guardian"). See "Business - Joint Marketing Arrangement with The
Guardian." Proprietary products are sold to medium and large size groups,
typically as one of several health care plans made available by the employer to
its employees ("alternative products"). Under the agreements with The Guardian,
jointly developed managed care products are marketed to existing customers of
The Guardian, as well as to new customers, under the tradename "Healthcare
Solutions". The Healthcare Solutions products are offered principally in the
small employer group market on a total replacement basis. Under this
arrangement, employees are offered the choice of traditional HMO products, POS
products, and, in certain cases, The Guardian indemnity products. Through the
first nine months of 1996, PHS and The Guardian shared profits and losses on the
Healthcare Solutions products through a combination of reinsurance and profit
sharing arrangements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations". Effective October 1, 1996, the Company and
The Guardian converted all of the Healthcare Solutions products to a reinsurance
basis. As of October 1, 1996, the Company no longer shared profits and losses
with The Guardian with respect to indemnity products sold under the joint
marketing arrangement. The joint marketing arrangement covers PHS's New York,
New Jersey and Connecticut service areas.
The Company offers third party administrator ("TPA") services for
administrative services only ("ASO") plans, Medicare risk and cost plans,
Medicaid plans, and individual plans in the New York service area. The Company
has a contract with the Mashantucket Pequot Tribe Employee Benefit Plan to
provide access to the Company's network of health care providers and utilization
management programs. In 1995, the Company began marketing plans to the small
group market through the Connecticut Business and Industry Association ("CBIA").
The Company is one of only four participants in the CBIA program. The Company
has a three-year contract with the Electric Boat Division of General Dynamics to
provide managed health care services to all of its salaried employees in
Connecticut. This contract was effective January 1, 1995 and has been recently
expanded to include the members of the Metal Trades Council Union. The Company
has a three-year contract to provide services to General Electric Company for
its employees in Connecticut. The General Electric plan, which was effective
January 1, 1996, combines elements of a fully insured HMO plan and an ASO plan.
Effective December, 1996, the Company initiated coverage for the New York State
Nurses Association Benefits Fund and its almost 29,000 members under a Charter
POS Plan.
HMO PLANS
The Company's traditional HMO plans provide comprehensive health care
services to enrollees for a fixed monthly premium per enrollee, typically
charged to the enrollee's employer group, that does not vary with the nature,
frequency, or cost of services provided, although, where allowed by regulation,
premiums are age/sex adjusted according to the demographic characteristics of
the employer group. Adjusted community rating, which includes factors related
to a specific employer's claims experience, is used with some of the Company's
larger accounts in certain of its service areas. The Company is also able to
experience rate certain groups insured under its Healthcare Solutions products.
See "Business - Enrollment, Employer Groups and Marketing." Under the
traditional HMO plans, the Company does not cover health care services provided
by non-participating physicians or other health care providers unless pre-
approval for an out-of-plan referral has been obtained or such services are the
result of a medical emergency. Members are required to receive hospital care at
participating hospitals except for preauthorized out-of-plan referrals or
emergency admissions. The traditional HMO benefit plans range from a plan with
limited copayments to a plan combining lower monthly premiums with higher
copayments paid by the member. The plans provide coverage for physicians'
services, surgery, hospital care, x-ray and laboratory services, emergency care,
maternity services, well baby and other preventive health services and, to a
limited extent, skilled nursing, home health care, alcohol and drug
rehabilitation and mental health services. The traditional HMO plans are
marketed to employer groups of all sizes, generally as alternative products. As
of December 31, 1996, 33% of total membership was enrolled in traditional HMO
products (23.2% commercial enrollees, 1.6% ASO enrollees and 8.2% government
enrollees).
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The Company's traditional HMO plans are the Charter and Passport
plans. The Charter plan is an open access model which permits members to use PHS
participating physicians generally without a referral or pre-authorization. The
Passport plan is a gatekeeper plan that the Company developed in response to
employer interest in such plans. Under the Passport plan, each member selects or
is assigned to a primary care provider, typically a family practice physician,
who is responsible for seeing that the member's medical needs are met. Use by
the Passport member of specialists for treatment typically requires a referral
by the primary care provider in order for the services to be covered.
POS PLANS
POS Plans are marketed to all size employer groups as either a total
replacement or alternative product. Under a POS Plan, an enrollee chooses, at
the time of services, whether to use participating providers and hospitals, or
non-participating providers and hospitals. If the enrollee chooses to use out-
of-network services, the enrollee is subject to deductibles, coinsurance and
claim forms. The POS products have become increasingly popular because of the
freedom of choice afforded enrollees under such plans. The POS plans are wrapped
around the Company's traditional HMO plans so that an enrollee has the in-
network benefits of the Charter or Passport HMO plan. An enrollee who has a POS
Passport plan can elect to see participating or non-participating providers
without the customary prior referrals required in the Passport plan, in which
event such non-referred services are treated as out-of-network services.
A significant portion of the Company's recent growth in membership has
occurred in its POS plans. As of December 31, 1996, 60.7% of total membership
was enrolled in POS products (51.1% commercial enrollees, 9.6% ASO enrollees).
Only 36% of total membership was enrolled in such plans at December 31, 1995.
The Company expects this trend to continue for the foreseeable future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statement".
ASO PRODUCTS
Under self-funded medical plans, the employer self-insures its health
care expenses and pays for health claims only as they are incurred, rather than
paying monthly premiums for insurance which covers the cost of medical services
as well as administrative expenses. The Company, as a TPA, typically provides
claims processing and health care cost containment services through its provider
network and utilization management programs, and is paid a fee only in
conjunction with these administrative services. The Company's ASO products
enable employers to access the Company's provider network and to realize savings
through certain of the Company's discounted fee arrangements and medical cost
containment capabilities, while allowing employers to design custom health
benefit plans in accordance with their own requirements and objectives. Certain
of the Company's ASO products include performance guarantees. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Cautionary Statement." As of December 31, 1996, 16.9% of total membership was
enrolled in ASO products (9.6% in POS plans, 1.6% in HMO plans and 5.7% in the
Mashantucket Peqout plan).
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MEDICARE/MEDICAID PRODUCTS
The Company offers PHS/SmartChoice, a federal Medicare program, to
Medicare eligible individuals under the terms of risk contracts with the Health
Care Financing Administration ("HCFA"). PHS/SmartChoice is typically
marketed directly to individuals. The Company also offers PHS/SmartChoice as a
POS product in the group market. It is currently offered in New York and
Connecticut. Enrollees in PHS/SmartChoice have limited copayments as long as
they use health care providers within the Company's network. PHS/SmartChoice
replaces both Medicare Part A and Part B coverage for enrollees and extends
coverage for preventive care, acute hospitalization and skilled nursing care. In
the PHS/SmartChoice gatekeeper product, in the event an enrollee chooses to
receive health care from a non-participating physician, neither PHS/SmartChoice
nor Medicare will cover the costs of such care absent an emergency or urgent
situation.
Under its risk contracts with HCFA, the Company is paid a fixed per
member per month capitation amount by HCFA based upon a formula established by
HCFA establishing the projected cost to provide the covered services to each
Medicare member. The Company bears the risk that the actual costs of health care
services may exceed the per member per month capitation amount.
Medicare risk contracts provide revenues that are generally higher per
member than those for non-Medicare members, and thus provide an opportunity for
increased profits and cash flow. Such risk contracts, however, also carry
certain risks such as higher comparative medical costs, government regulatory
and reporting requirements, the possibility of reduced or insufficient
government reimbursement in the future, and higher marketing and advertising
costs per member as the result of marketing to individuals rather than to
groups.
In Connecticut the PHS/SmartChoice product is intended to replace
another Medicare product (PHS/Carefree) formerly offered by the Company
pursuant to a cost contract with HCFA. As of December 31, 1996, the Company had
9,638 members enrolled in PHS/Carefree. The Company anticipates that almost all
of these members will convert to the PHS/SmartChoice product by the end of 1997.
The Company participates in Connecticut's Medicaid managed care
program pursuant to a contract with the Connecticut Department of Social
Services. PHS had enrolled 20,781 members in this program as of December 31,
1996. The Company receives fixed monthly premiums per member under the contract
with the Connecticut Department of Social Services and bears the risk that the
actual costs of health care may exceed the per member per month capitation
amounts received by the Company. Medicaid plans also involve the risk of
reduced or insufficient government reimbursement and higher marketing and
advertising costs per member as a result of marketing to individuals rather than
to groups. PHS has participated in the New York Medicaid managed care program
in Westchester County since February, 1994. It contracts with Westchester
Prepaid Health Service Plans, Inc. for the provision of services under this
program.
As of December 31, 1996, 9% of total membership was enrolled in a
government program, almost all in HMO plans.
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OTHER PRODUCTS
The Company has entered into marketing arrangements with three
prominent HMO networks, UltraLink/SM/, HMO National Network/SM/ and National
Managed Care, Inc., to facilitate cooperative marketing efforts focusing on
national employer groups with employees in the Company's service area. The
Company's affiliations with national networks allow it to compete with national
managed care companies for employers desiring a national managed care network.
In 1996, the Company generated almost $7 million in premium revenues from
employer groups accessing these national networks. The Company has a multi-year
contract with Dental Benefit Providers, Inc. to market managed dental products
in New York and Connecticut. These managed dental products offer different
levels of dental benefits through a selected panel of dentists at a cost that is
below average indemnity plan prices. These products are designed to increase
the Company's managed care product market penetration and to promote retention
of its enrollee base. The Company also offers prescription drug riders to its
HMO and POS plans. The prescription drug riders are offered through PCS, Inc.,
an unaffiliated company that has established contracts with most of the local
pharmacies in the Company's service area. The prescription drug rider pays the
cost of all covered prescriptions, less, in some instances, a deductible or
copayment. The Company also offers a Connecticut small employer plan to groups
of fewer than 50 employees. The Company also offers an individual HMO and an
individual POS plan throughout its New York State service area. The Company's
insurance brokerage subsidiary,
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PHIS, markets various insurance products of unaffiliated companies such as
dental and life insurance, short-term disability and stop-loss coverage
available from other insurers. PHIS's insurance activities are solely as an
agent and represented less than 0.1% of the Company's total revenues in 1996 .
The Company contracts with Davis Vision of Plainview, New York for provision of
certain routine and non-routine vision services to both commercial and
government product members.
OTHER INVESTMENTS
In 1995, the Company invested $2.3 million in MasterCare Companies,
Inc. ("MasterCare"), a company offering workers compensation managed care
services in New Jersey and Connecticut. See "Business - Arrangement with
MasterCare."
PROVIDER ARRANGEMENTS
PHYSICIANS AND OTHER HEALTH CARE PROVIDERS
The Company contracts with physician groups, such as IPAs, PHOs, and
multi-specialty groups (collectively, "Physician Groups"), individual physicians
and other health care providers for a defined range of health services,
including primary and specialty care. As of January 1, 1997, the Company had
agreements with 23,298 providers and 183 hospitals in its tri-state service
area. The Company's contracts with providers include discounted fee for service
arrangements as well as capitated group arrangements in which the contracting
Physician Group assumes a significant amount of the risk of overutilization. The
Company currently has contracts with four IPAs, three PHOs and one large
physician group ("Group") that provide for most of its physician services in its
Connecticut service area. In New York and New Jersey, the Company generally
contracts directly with physicians and other health care providers. Under the
typical Physician Group arrangements, the Physician Group receives a fixed
monthly capitation payment for each member selecting a primary care physician
from that Physician Group. Capitation payments may be for all members selecting
a primary care physician in the Physician Group or only as to members in certain
commercial HMO and POS plans, depending upon the negotiated arrangement with the
Physician Group. Capitation rates and any increases thereto are negotiated for
the term of the contract. The capitation payment is designed to cover not only
the professional medical services (including ancillary tests and services)
rendered by the physicians and other providers associated with that Physician
Group but also includes payments for certain other services rendered to the
enrollee by providers who are not members of the Physician Group. Services
covered by the capitation payment include, among other things, virtually all
physician claims (whether inpatient or outpatient, including authorized out-of-
plan care) and care rendered by other professionals such as physical therapists
and psychologists. In certain of the contracts, the Physician Groups also are at
risk for hospital, pharmacy and other facility expenses. The Company does not
capitate physicians directly.
Three of the Company's four Connecticut IPA contracts expire on
December 31, 1997; the Company has reached an agreement in principle with the
fourth IPA to extend its present arrangements through December 31, 1997 on
slightly different terms. In the event that the Company was unable or chose not
to renew any Physician Group contract, it would seek alternative arrangements to
ensure the continuation of health care services to its enrollees. However, if
the Company failed to renew any Physician Group contract covering a significant
number of its enrollees and the Company was unable to obtain satisfactory
alternative arrangements, there could be a significant disruption in the
Company's business.
Each Physician Group reimburses its member physicians and other
providers out of the capitation payment paid to it by the Company according to a
maximum fee-for-service schedule for claims submitted by those physicians and
providers affiliated with the Physician Group. A portion of each physician's
and provider's payment is withheld and is
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contributed to the Physician Group's risk pool to cover those expenses that
exceed the Physician Group's budget for health care expenses. The withheld
portion is returned to providers if the Physician Group operates within its
prescribed budget for services. Because in most instances the capitation
payments received by the Physician Group are fixed amounts unrelated to the
services provided, the provision of excessive services would obligate the
Physician Group to pay more to its physicians than the Physician Group receives
from the Company. The principal exception is the Greater Bridgeport IPA, where
overruns are shared equally between the Company and IPA. The Company's
capitation system is designed to place upon the Physician Group and its member
physicians the responsibility for managing the use of hospital and other medical
services. In the event that the Physician Group is required to pay more to its
physicians than it receives from the Company, the Physician Group must continue
to cover ongoing expenses and will be required to take corrective action to
restore its financial position. Corrective action may include, among other
things, lowering its fee-for-service schedule or increasing its withhold
percentage. The Company believes that the member physicians of its Physician
Groups have an interest in supporting the financial condition of their Physician
Group through temporary reductions in fee schedules and increases in withhold.
In 1996, each Physician Group received a return of all or a portion of its
withhold account. Physician Groups may incur an operating loss which would
result in the Physician Group having a retained earnings deficit. If such
deficit were not eliminated through corrective action, the Company might find it
necessary to advance funds to cover such deficit, although it would not be
obligated to do so. Certain of the Company's IPA stockholders, through their
ownership of Company stock or through members who serve on the Company's Board
of Directors, may seek to have the Company fund such deficits in the future and
failure by the IPAs to eliminate such future deficits, if any, could result in
unrecovered cash advances. Any such funding is subject to approval by the
Board's Audit Committee, a majority of which is composed of independent
directors. If any Physician Group with which the Company contracts for services
became insolvent, such insolvency could have a material adverse effect on the
business of the Company.
The capitation payments to Physician Groups other than the PHOs
typically do not cover hospital and other facility expenses, although the
Physician Groups are partially at risk for non-Medicare and non-Medicaid
hospital utilization. The Company establishes an annual per member, per month
target for hospital expenses. The amount varies by benefit plan and Physician
Group, and encompasses both inpatient and outpatient costs. If total hospital
expenses generated by the Physician Group exceed the applicable hospital expense
target, the Company withholds from amounts owed by it to the Physician Group all
or a portion of the excess over budget, in most cases one-half of the excess
over budget. If actual costs are less than budgeted targets, the Physician Group
receives from the Company an incentive credit typically equal to forty to fifty
percent of the amount by which actual costs are less than budgeted targets.
In its New York and New Jersey expansion areas and in areas in
Connecticut not served through Physician Group contracts, the Company contracts
for services principally through direct contracts with individual physicians and
other health care providers. In addition, the Company contracts with two IPAs in
the northern counties of its New York service area. The Company withholds a
percentage of reimbursement for services rendered pursuant to its direct
physician contracts against budgeted amounts to manage excessive utilization.
The Company provides services to enrollees in PHS/SmartChoice pursuant
to a combination of direct physician agreements, and, in New York, risk sharing
agreements with the aforementioned IPAs. In Connecticut, the Company has
contracted with and is in negotiations with PHOs and other risk entities for its
Medicare risk product to shift the risk of all medical costs to the risk
entity in return for a fixed percentage of the Medicare premium received by the
Company. The Company's agreements in connection with its Medicare risk products
are subject to compliance with new risk sharing regulations adopted by HCFA,
which require disclosure and reinsurance for specified levels of risk sharing,
and proposed state regulations that could affect physician risk sharing.
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HOSPITALS
The Company maintains contracts with 30 acute care hospitals in its
Connecticut service area. In New York, the Company contracts with 83 hospitals
in its service area. The Company has direct and indirect (through MasterCare)
arrangements with 70 hospitals in New Jersey. The Company generally negotiates
contracts with hospitals that include compensation on a per diem basis (at a
daily rate, without regard to the scope of services actually provided). Other
compensation arrangements with hospitals include charged-based discounts
(negotiated discounts from the hospital's billed charges) and all inclusive case
rates. In the case of non-participating hospitals, the Company pays either
hospital billed charges or negotiated discounted charges. Additionally, some
hospital contracts include per case, all-inclusive, payment arrangements for
select procedures such as maternity care.
OTHER HEALTH CARE PROVIDERS
PHS maintains contracts with outside vendors to provide certain
ancillary services. Laboratory services are provided in Connecticut through an
exclusive arrangement with Diagnostic Medical Laboratory, Inc. Laboratory
services in New York and New Jersey are provided through arrangements with
Quest Diagnostics. Both are capitated arrangements that are effective through
December 31, 1999 and December 31, 1997, respectively. Mental health, substance
abuse and detoxification services are provided in New York City and Long Island
through a capitated arrangement with CMG Health, Inc. ("CMG"). This agreement is
now in a renewal period and may be terminated by either party with at least 120
days notice. CMG also provides these services for the Company's Medicaid members
in Connecticut under a fully capitated arrangement, which began on August 1,
1995 for a period of 27 months and is automatically renewable thereafter for one
year periods unless terminated by either party on 120 days notice. In
Westchester, Dutchess, Orange, Putnam, and Rockland Counties, New York, CMG
provides case management services only. This agreement is in a renewal period
and may be terminated by either party on at least 120 days notice.
MEDICAL COST CONTROLS
Control of health care expenses is critical to the profitability of a
managed care company. Expansion into new areas, introduction of new products,
changes in health care practices, medical cost inflation, new technologies,
government regulation, major epidemics, natural disasters and numerous other
factors affecting the delivery and costs of health care may adversely affect the
Company's operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Cautionary Statement."
PHYSICIAN COSTS. The Company has developed several integrated
mechanisms and procedures for the control of health care costs. The Company's
health care programs are designed around primary care physicians who assume
overall responsibility for the care of enrollees and determine or recommend the
nature and extent of services provided to enrollees. In the case of enrollees
enrolled in Passport products, primary care physicians are also responsible for
making referrals to contracted specialist physicians and hospitals. Although the
primary care physician's prior approval for most specialist services is not
required in the Company's Charter products, it is recommended. Prior approval is
required in the Company's Charter products for the enrollee's use of certain
services such as home health care, hospice care, cardiac rehabilitation, private
duty nurses, skilled nursing care, drug and alcohol rehabilitation and, except
for enrollees in a POS plan, elective services rendered out-of-network. In
addition to the prior approval process for certain services, the Company
monitors services rendered to enrollees and provides utilization review
information to its Physician Groups. In cases of possible excessive utilization,
the Company counsels the enrollee with respect to the possible duplication of
services or medications.
With respect to physicians who contract with PHS through Physician
Groups, costs are also controlled through contracts that provide for payment to
the Physician Group on a capitation basis. The capitation method of payment,
together with the withhold provisions in its contracts, transfers much of the
Company's risk of excessive physician utilization to the Physician Group.
Physicians who contract with PHS directly are not capitated, although withholds
apply in order to mitigate the risk to PHS of excessive utilization.
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The Company also endeavors to monitor the practice patterns of all
participating physicians and providers in order to identify inappropriate or
excessive utilization. Each physician's utilization pattern is reviewed against
other physicians within the relevant specialty area in the physician's Physician
Group or relevant geographic area to determine whether average costs per patient
are consistent with utilization generally. In the event there are insufficient
aggregate data in a particular area, the Company's Medical Directors review
utilization data on a specific case basis. If inappropriate utilization is
determined, PHS will typically institute corrective measures including, if
necessary, financial sanctions or, in rare instances, termination of the
physician's membership as a participating physician.
The Company has developed a measurement tool called the "practice
profile" to evaluate and promote the quality of care being provided to the
Company's members. The practice profile compares providers to their peers in
relation to specific quality indicators that measure quality across a broad
spectrum of areas. The practice profile also provides feedback to providers to
assist them in assessing and enhancing their performance.
HOSPITAL COSTS; UTILIZATION REVIEW. The control of the use of hospital
and other medical services by a member is primarily the responsibility of the
member's primary care physician. The Company requires preadmission notification
of non-emergency hospital admissions and stays, pre-certification of selected
inpatient and outpatient procedures, and retrospective review of ambulatory
health services. The Company also maintains nurse coordinators who are assigned
to certain participating hospitals to conduct concurrent reviews of hospital
admissions. In the event that the nurse coordinator believes that utilization is
inappropriate, the nurse coordinator first addresses his/her concerns with the
attending physician, then consults with a physician advisor, who reviews
admission information and patient records. Physician advisors as well as PHS
Medical Directors are available to assist the attending physician in determining
whether it is appropriate for a patient to remain hospitalized. The physician
advisor, Medical Director and/or nurse coordinator works with the responsible
physician to arrange alternative health care where appropriate, thereby reducing
the length of hospital stays. The Company performs telephonic reviews at certain
hospitals where it is not practical to perform on-site concurrent reviews.
The Company has implemented special review procedures for
pharmaceutical usage and the treatment of mental health and substance abuse
conditions. In addition to the foregoing controls, the Company has adopted
certain policies relating to the timing of admissions and the use of ambulatory
facilities for certain surgical procedures, among other services, in order to
reduce costs associated with hospital utilization.
For catastrophic cases, the Company uses case management techniques to
work with the attending physician, facility, patient and his/her family, to
provide care in a cost-efficient manner consistent with the medical needs of the
patient.
The Company has a pre-certification program for selected elective
inpatient and outpatient procedures to determine the medical necessity of those
services. The pre-certification program requires the physicians performing the
designated procedures to obtain advance authorization, and permits appeal if the
procedure is initially denied. Procedures that are denied through this program
are ineligible for coverage by the Company. As a pre-certification tool, the
Company utilizes the Value Health Sciences Medical Review System. Since
implementation of this program in March 1993, the program has achieved an
overall 21% decrease in the utilization of procedures subject to the program.
Hospital inpatient costs are also controlled through several
contractual mechanisms. The Company's contracts with Physician Groups contain
risk sharing mechanisms designed to provide incentives to control utilization of
hospital services and its contracts with PHOs include both
professional/physician and hospital/facility services within the capitation
payment to the PHO. In addition, the Company maintains insurance coverage that
reimburses the Company for hospital expenses incurred above certain levels,
limiting the risk to the Company of an individual enrollee's inpatient hospital
expense exceeding specified amounts. See "Business - Stop Loss and Other
Insurance."
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<PAGE>
MANAGEMENT INFORMATION SYSTEMS
The Company believes that timely and relevant information is critical
to the success of its managed health care business. The Company utilizes its
management information systems to process claims on an accurate and timely
basis; to analyze health care utilization; to support provider, member and
employer requirements; and to control administrative costs. The Company's
claims operation is supported by staff and manager training, adherence to
performance standards (for both productivity and accuracy), auditing of claims
for claims processing accuracy, and adequate staffing and system programming to
ensure adherence to all benefit provisions of the Company's provider policies.
Currently, approximately 30% of physician/provider (non-facility) claims and
approximately 20% of institutional claims are received electronically from the
Company's providers. The Company intends to increase the amount of claims that
it processes electronically. The Company's imaging system enables further
automation of the claims process. The Company believes that its electronic
claims capabilities combined with the Company's imaging system have enabled the
Company to establish highly efficient claims processing and information
retrieval systems. The Company has in place a disaster recovery plan that
provides for a back-up of its management information system in case of an
emergency.
The Company is in the process of completing a significant upgrade of
its management information systems. The new systems are expected to begin to
come on line during the second quarter of 1997. At December 31, 1996, the costs
associated with this project included capital expenditures of approximately
$18.6 million, including enhancements beyond the original scope of the project.
The capital expenditures are expected to be amortized over five years commencing
with fiscal year 1997. When completed, the conversion to the new system is
expected to yield significant gains in productivity, accuracy and speed as well
as permit more significant information evaluation. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Cautionary
Statement. "
QUALITY ASSURANCE AND CUSTOMER SERVICE
Prior to a physician's acceptance for participation in the Company's
network of providers, the Company reviews the physician's credentials and
background. Each physician must be board certified in his/her specialty, or
become board certified within five years of becoming credentialled. PHS has a
rigorous credentialling process that consists of primary verification of all
credentials; query of the National Practitioner Data Base, state medical boards
and admitting hospitals for malpractice history, disciplinary actions and/or
restrictions of hospital privileges; and on-site office evaluations including a
review of medical records to determine compliance with PHS's standards. The
Company biennially recredentials all its providers. Recredentialing includes
repeating the initial credentialling process as well as a reviewing the
provider's practice history with PHS. After acceptance, the Company monitors
various aspects of the physician's performance on an ongoing basis, including
the quality and appropriateness of care delivered. The Company evaluates the
quality and appropriateness of medical care provided to its enrollees by
performing medical care evaluation and member satisfaction studies, by reviewing
utilization of certain services and by responding to enrollee and physician
questions and concerns.
In August 1995, the Company was awarded full three-year accreditation
in its then current service areas from the National Committee for Quality
Assurance ("NCQA"), an independent organization that reviews HMOs for compliance
with their quality standards. This accreditation is effective from May, 1994
through May, 1997. In connection with the re-accreditation process, the NCQA
staff made an on-site visit in late March, 1997.
The Company has also established a formal system for documenting and
responding to customer grievances. The Company had no grievances upheld against
it during 1993, 1994 and 1995 by the New York Insurance Department. The Company
also had no complaints upheld against it during 1994 and only one complaint
upheld against it in 1995 by the Connecticut Department of Insurance. The
Company anticipates similarly good results for 1996. The Company believes that
it has established a reputation for high standards of service.
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<PAGE>
ENROLLMENT, EMPLOYER GROUPS AND MARKETING
As of December 31, 1996, the Company provided managed health care
coverage to 400,021 enrollees. The Company offers its products to small groups,
generally on a total replacement basis, and to medium and large groups on both a
total replacement as well as alternative bases. The small group market segment
is currently marketed throughout the Company's tri-state service area through
its alliance with The Guardian and, in Connecticut, also through CBIA. In the
large group market, the Company sells both its proprietary HMO and POS products,
as well as ASO products. The Company's enrollee base is diverse and includes
federal and state employees and employees of banks, hospitals and major
industries. The Company's five largest fully insured employer groups represent
approximately 17% of its 332,363 fully insured enrollees and 14% of its total
enrollees. The New York State Nurses Association Benefits Fund, which
constitutes the largest fully insured employer group, represents 7.2% of the
Company's total enrollees and 8.6% of its fully insured enrollees.
Employer groups of 50 or less are subject to community rating
restrictions throughout the Company's service area. In these areas, the Company
uses underwriting guidelines and rating practices that comply with state
mandated community rating regulations. In Connecticut and New Jersey, groups of
over 50 members are not subject to community rating regulation. For these
groups, the Company employs rating techniques and underwriting guidelines
designed to price its products according to expected health care utilization
based on group experience.
In New York, all groups written on the Company's HMO license are
subject to community rating regulations. The Company uses underwriting
guidelines and rating practices that comply with New York mandated community
rating regulations. See "Business - Competition." The Company expects to begin
marketing an experience rated POS product in the over 50 employee group market
in mid-1997. In addition, the Company currently experience rates certain of its
Healthcare Solutions products offered in the over 50 employee group market in
New York.
Subject to underwriting guidelines, the Company solicits new employer
groups for its proprietary products through its marketing staff and employee
benefits consultants. Most larger employer groups are represented by brokers and
consultants, who are typically paid by the employers, and work with the employer
to recommend or design employee benefit packages. The Company utilizes an
internal staff of sales and account service representatives and managers to
market its benefit plans to employers. Healthcare Solutions products are sold
through the Company's and The Guardian's respective marketing staffs, as well as
through independent brokers.
Marketing the Company's benefit plans in the alternative carrier
market is typically a two-step process in which presentations are first made to
employers and, after the employer selects the Company as one of its health care
providers, to its employees. In the total replacement market, sales are made
solely at the employer levels and employees then can select from a number of PHS
products, or in the case of Healthcare Solutions, PHS or The Guardian products.
The marketing process is continuous because contracts with employers
are typically renewed annually, employees are permitted to change plans annually
and employer groups experience regular employee turnover.
JOINT MARKETING ARRANGEMENT WITH THE GUARDIAN
The Company has a joint marketing arrangement with The Guardian
throughout its tri-state service area. The products that are subject to the
joint marketing arrangement are distributed through the brokerage community in
an integrated marketing effort. The products are generally sold on a total
replacement basis, which eliminates the need for marketing to employees once the
products are sold to the employer group. Products are marketed under the trade
name "Healthcare Solutions" and employees are able to choose among PHS's
traditional HMO and POS products as well as, in certain instances, The
Guardian's indemnity products. The Company and The Guardian target groups that
are currently enrolled in The Guardian's indemnity products. Because of the
higher premiums associated with indemnity insurance generally, such groups are
often receptive to conversion to the Healthcare Solutions products. The Company
and The Guardian also market to new groups.
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<PAGE>
The joint marketing arrangements with The Guardian are for an
unlimited term but can be terminated by either party either with or without
cause, subject to potentially significant payments upon termination in the event
of a termination without cause, by the party electing to terminate, and in the
event of certain for cause terminations, by the party breaching the agreement.
The agreements can also be terminated by either party with respect to new
business following a change in control of the other party, in which event the
parties would continue to share profits and losses on business in effect on the
date of the change in control for a period of up to ten years. For a description
of the Company's financial arrangements with The Guardian in connection with the
Healthcare Solutions business, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 10 to the Consolidated
Financial Statements.
As of December 31, 1996, there were 112,566 members enrolled in
Healthcare Solutions products (43,773 in Connecticut, 53,153 in New York and
15,640 in New Jersey).
STOP-LOSS AND OTHER INSURANCE
The Company maintains reinsurance coverage for its existing business
to limit the risk of an individual member's inpatient hospital expense exceeding
specified amounts. The Company believes that its reinsurance coverage
substantially limits its risk of incurring catastrophic costs at a reasonable
premium cost. Beginning January 1, 1996 and continuing throughout 1997, the
reinsurance arrangement for the Company's HMO products throughout its entire
service area covers 80% of the next $400,000 of any member's inpatient hospital
expense and emergency out-of-area services (up to a stated daily maximum) in
excess of a $600,000 deductible. The reinsurance agreement provides a limit of
$1,000,000 per member, per contract period (12 months) and $2,000,000 per
member, per lifetime. The Company also maintains general liability, property,
fidelity and contingent malpractice insurance coverage in amounts it believes to
be adequate. Such insurance may become increasingly important if plaintiffs
prove successful in recent efforts to expand the liability of a managed health
care company for the negligence of providers with whom the Company directly or
indirectly contracts. The Company also requires contracting Physician Groups and
hospitals to maintain malpractice insurance coverage.
ARRANGEMENT WITH MASTERCARE
The Company has entered into a marketing relationship with MasterCare
and its affiliates. In addition, the parties have network access agreements with
each other stemming from their respective expansion activities. In connection
with the formation of PHS/NJ, the Company used the MasterCare network of
providers to help it develop a network in New Jersey. As consideration, the
Company issued a 20% interest in PHS/NJ to MasterCare. In addition, at December
31, 1996 PHS owned an interst in MasterCare Companies, Inc. and its subsidiary,
MasterCare of Connecticut, formerly Total Employee Care, a workers compensation
company formerly wholly-owned by the Company. See Note 11 to the Condolidated
Financial Statements.
GOVERNMENT REGULATION
FEDERAL REGULATION
The Company is subject to the Health Maintenance Organization Act of
1973, as amended, and the rules and regulations promulgated thereunder ("HMO
Act"), which prescribe the manner in which an HMO must be organized and operated
in order to meet and maintain federal qualification and to be eligible to enter
into Medicare contracts with the federal government. PHS/CT and PHS/NY are
federally qualified under the HMO Act. In order to maintain this status the
Company must file periodic reports with, and is subject to periodic review by,
the Department of Health and Human Services through HCFA and the Office of
Prepaid Health Care. In addition, HCFA has the
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<PAGE>
right to audit the Company to determine compliance with HCFA's regulations and
to monitor the quality of care rendered to PHS/CT's and PHS/NY's Medicare
enrollees. Reimbursements payable to PHS/CT and PHS/NY under the Medicare risk
contracts are subject to periodic unilateral revision by the federal government.
Future levels of such payments may be affected by federal government efforts to
contain health care costs and cannot be predicted with certainty. Each of the
Company's Medicare contracts are renewable on an annual basis. Health plans
which offer a Medicare risk product must also comply with requirements
established by peer review organizations, which are organizations which contract
with HCFA to monitor the quality of health care received by Medicare
beneficiaries. These requirements relate to quality assurance and utilization
review procedures. Recent requirements of HCFA impose requirements relating to
physician incentive plans, which place physicians participating in Medicaid and
Medicare HMO plans at substantial financial risk. Enrollment under
the Medicare risk program cannot exceed 50% of a health plan's total enrollment.
Termination of the Company's Medicare program could have a material adverse
effect on its business.
As a result of its Medicaid contract, PHS/CT is subject to both
federal and state regulation regarding services provided to Medicaid enrollees,
payment for those services and other aspects of the Medicaid program. Medicaid
regulations require that enrollment of Medicaid and other federal government
program beneficiaries cannot exceed 25% of a health plan's total enrollment.
The Company is also required by federal and state regulatory agencies
to maintain restricted cash reserves and/or a minimum net worth. To remain
licensed, it may be necessary for the Company to make changes from time to time
in its services, procedures, structure and marketing methods. Such changes may
be required as a result of amendment to, or other significant modification of,
federal and state laws and regulations controlling the Company's operations.
Any changes in federal or state government regulation could affect the Company's
operations, profitability and business prospects.
STATE REGULATION
The Company's HMO and insurance subsidiaries are subject to
substantial state government regulation. PHS/CT is licensed by the Insurance
Commissioner of Connecticut to be a health maintenance organization and is
subject to regulation by the Connecticut Department of Insurance. PHS/NY is
also licensed as a health maintenance organization by the Commissioner of Health
of the State of New York and is subject to regulation by the Department of
Health of the State of New York and the Department of Insurance of the State of
New York. PHS/NJ is licensed as a health maintenance organization by the
Commissioner of Health and Senior Services and Commissioner of Banking and
Insurance of the State of New Jersey and is subject to regulation by the
Department of Health and Senior Services of the State of New Jersey and the
Department of Banking and Insurance of the State of New Jersey. State regulatory
authorities exercise oversight regarding the Company's provider networks,
medical care delivery and quality assurance programs, contract forms and their
provisions, and financial condition, including reserve and cash flow
requirements. Applicable state law requires periodic financial reports, imposes
minimum standards for investments, capital, deposits and reserves, and regulates
marketing, rates, medical benefits, payment of dividends and affiliate
transactions. In addition, the premiums charged by the Company are subject to
review and changes in rates must be approved in advance by state regulatory
authorities. The Company's HMOs are also subject to periodic examination by the
relevant state regulatory authorities.
Insurance/CT is an accident and health company licensed by the
Connecticut Department of Insurance, Insurance/NY is a property and casualty
company licensed by the New York Department of Insurance and Bermuda is an
insurance company licensed as a reinsurer in Bermuda. Applicable laws contain
requirements relating to Insurance/CT's, Insurance/NY's and Bermuda's financial
condition, reserve requirements, premium rates and contracts and require
periodic filings and examinations.
Applicable Connecticut, New York and New Jersey statutes and
regulations require the prior approval of the Connecticut Commissioner of
Insurance, New York Commissioner of Health and New Jersey Commissioner of
Health, respectively, for any acquisition of control of the Company or its
subsidiaries. For purposes of these statutes and regulations, "control" means
the direct or indirect possession of the power to direct or cause the direction
of the
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management and policies of an entity. Control is presumed to exist when a
person, group of persons or entity acquires the power to vote 10% or more of the
voting securities of another entity.
New York law requires health insurers to accept all individuals and
small groups (between three and fifty employees or group members) without regard
to their age, sex, occupation or medical condition at a "community rated"
premium based on the experience of the entire pool of risks covered by the
insurer. The New York community rating law establishes a pooling mechanism
providing for payments to insurers writing such policies for a disproportionate
share of individuals with certain demographic characteristics and catastrophic
medical expenses. Depending on the age and sex characteristics of an insurer's
members and the incidence of certain high-cost medical conditions among members,
an insurer will either make payments to or receive payments from the state
pooled fund. To date, the Company has incurred expenses related to this fund
amounting to $1,152,000 in 1994, $1,483,000 in 1995 and $3,180,000 in 1996. The
New York community rating law also provides, among other things, for portability
of health insurance, thereby facilitating continued coverage for those wishing
to seek new employment or insurers, and allows members of a small group to
continue their coverage after their membership is terminated. New York law
requires all HMOs to offer an individual HMO plan and an individual POS plan.
The benefits available under these plans are mandated by law and do not differ
between health plans.
Connecticut law also regulates health insurance for employer groups of
fifty and fewer employees. The Connecticut small employer insurance law
includes guaranteed issue, pre-existing condition restrictions and guaranteed
renewability provisions. Connecticut applies adjusted community rating
restrictions to all small employer medical plans. Under adjusted community
rating, the only factors that may be used are age, gender, geographic area,
industry, group size and family composition. Such factors are further limited
by applicable Connecticut law.
New Jersey regulates health insurance for employer groups of two to
forty-nine employees through the New Jersey Small Employer Health Benefits
Program. The law sets out six standard plans, only one of which is an HMO plan
(the others are all indemnity plans). The law also mandates the benefits to be
offered under such plans and sets out the participation and contribution
requirements, applies a preexisting condition restriction, guaranteed
renewability and rating restrictions.
The Company's HMO subsidiaries are subject to statutory regulations
that restrict the payment of dividends. Connecticut law imposes a 1.75% premium
tax on the Company's fully insured business written in Connecticut. All HMOs in
Connecticut are now assessed for the costs of the HRA (Health Reinsurance
Association), which offers individual coverage to any person residing in
Connecticut and special health care plans to low income groups of ten or less.
The assessments are used to cover the losses incurred by the program. In
addition, all Connecticut HMOs are now assessed a portion of the cost of funding
the Connecticut Department of Insurance, which until recently had been funded
entirely by assessments only on insurers operating in the state.
If the Company acquires or establishes HMOs in states where it does
not presently operate, it will have to comply with the applicable state statutes
which vary from state to state.
RECENT REGULATORY DEVELOPMENTS AND INITIATIVES
Federal
The recently enacted Federal Health Insurance Portability and
Accountability Act of 1996 (i) insures portability of health insurance to
individuals changing jobs or moving to individual coverage by limiting
application of pre-exiting condition exclusions, (ii) guarantees availability of
health insurance to employees in the small group market and (iii) prevents
exclusion of individuals from coverage under group plans based on health status.
The Act also permits offering Medical Savings Account plans on a pilot basis and
includes programs targeting fraud and abuse. The provisions are effective
beginning July 1, 1997. The Company is currently subject to similar state law
provisions in New York limiting pre-existing conditions for new group and
individual enrollees who had continuous prior coverage and requiring issuance of
group coverage to small group employers. Recently enacted federal legislation
mandates coverage for minimum hospital stays after childbirth (consistent with
many new state law requirements) and parity between any lifetime limits imposed
on mental health benefits and those for other medical
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benefits. In addition, HCFA adopted rules in 1996 imposing reinsurance,
disclosure and other reporting requirements relating to physician incentive
plans which place physicians participating in Medicare and Medicaid HMO plans at
substantial financial risk.
Congress is also considering significant changes to both Medicare and
Medicaid programs, including changes that would significantly reduce
reimbursement to HMOs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Cautionary Statement". In addition,
proposed Medicare reform bills contain provisions that would facilitate entry of
competing HMOs in the Company's service area by repealing the rule that Medicare
risk contractors have one commercial enrollee for each Medicare or other
government program enrollee and creating permissive licensure for HMOs sponsored
by provider networks. In Connecticut, the Department of Social Services is
expected to request HMOs participating in its Medicaid program to resubmit bids
in 1997. It is expected that Connecticut will mandate additional reporting
requirements and other changes that will reduce the number of companies willing
to participate.
State
There is a national trend among state governments to enact legislation
which increases regulation of HMOs and managed care companies and to mandate
certain policies and procedures. Each state that the Company does business in
is considering or has implemented wide-ranging "Patient Protection" and
"Consumer Disclosure" bills and regulations.
The New York State legislature enacted the Health Care Reform Act of
1996 ("HCRA"), effective January 1, 1997, that eliminated regulation of hospital
rates and adopted surcharges and covered lives assessments to fund various
public programs. This deregulation allows all private health care payors to
negotiate payment rates for inpatient hospital services. Previously, only HMOs
could negotiate rates for these services. As a result of the enactment of HCRA,
non-HMOs who compete with the Company may be able to negotiate better rates with
hospitals in New York because of the volume of patients they represent, which
would have an adverse effect on the Company's ability to compete effectively in
New York. Also, effective January 1, 1997, the Company is required to make
payments to state funding pools to finance hospital bad debt and charity care,
graduate medical education, and other state programs under HCRA. Previously,
hospital bad debt and charity care and graduate medical education were financed
by surcharges on payments to hospitals for inpatient services. The Company has
renegotiated many of its hospital contracts in New York to reflect the
surcharges. These adjustments are generally effective as of January 1, 1997, but
they are not expected to result in savings equal to the cost of the surcharges.
The New York legislature also recently passed legislation related to operation
of managed care plans, which contains provisions relating to, among other
things, utilization review, consumer disclosure and the right of a physician to
a hearing on termination from a health plan network.
In addition, the New Jersey Department of Health and Senior Services
recently issued a comprehensive revision to its existing HMO regulations, which
encompasses many of the same features as the aforementioned New York law, but
also includes a non-binding external appeals process. Connecticut is considering
increased regulation which, like New York and New Jersey, includes extensive new
reporting and data collection requirements. These regulatory developments are
likely to increase the Company's medical and administrative costs.
COMPETITION
The health care industry in the Company's market area is highly
competitive. The Company has numerous competitors, including for-profit and not-
for-profit HMOs , preferred provider organizations ("PPOs") and indemnity
insurance carriers, and certain of the Company's competitors have substantially
greater enrollment and financial
15
<PAGE>
resources than the Company. The Company's major competitors include independent
HMOs, such as Oxford Health Plans, Inc., and United Health Care, which have
significant enrollment in the New York metropolitan area, and HMOs and managed
care plans sponsored by large health insurance companies, such as Aetna/U.S.
Healthcare, Inc., Blue Cross/Blue Shield, The New York Life Insurance Company
and CIGNA. Additional competitors may enter the Company's market in the future.
In addition, the managed care industry has experienced significant consolidation
recently, and such consolidation is expected to continue, possibly resulting in
fewer but larger competitors in the Company's service area. The Company competes
on the basis of price, quality and scope of services provided, including the
extent of its provider network. The Company believes the quality of its service
and physicians, as well as its reputation, are important competitive factors.
However, the cost of providing benefits is in many instances the controlling
factor in obtaining and retaining employer groups and certain of PHS's
competitors have set premium rates at levels below PHS's rates for comparable
products. The Company anticipates that premium pricing will continue to be
highly competitive.
TRADEMARKS AND TRADENAMES
The Company has a number of registered trademarks. The Company
believes that its trademarks and tradenames are important to its marketing
efforts. Any challenge to the use of a material tradename, trademark or service
mark could have an adverse effect upon the Company's business.
EMPLOYEES
As of December 31, 1996, the Company had 971 full-time employees. The
Company is not a party to any collective bargaining agreement and has not
experienced any work stoppage since its organization. The Company believes its
relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters offices were relocated to
Shelton, Connecticut in early 1997 and comprise 327,195 square feet, located in
three adjacent building, which the Company purchased in June, 1996 for $16.6
million. The Company presently occupies approximately 65% of the available space
in this facility. The Company expects that the remainder of the available space
will require renovation before it can be occupied by the Company's employees.
The Company continues to own and occupy its former headquarters in Trumbull,
Connecticut which comprises 74,350 square feet. PHS/CT leases properties at
three locations, for an aggregate of 97,488 square feet. PHS/NY leases 11,752
square feet of property in White Plains, New York, 18,415 square feet in New
York City and 3,415 square feet in Lake Success, New York. PHS/NJ leases 12,895
square feet of space in Paramus, New Jersey.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course
of its business, a significant portion of which involves claims for coverage or
payment of medical services rendered to enrollees. In the opinion of the
Company's management, based upon discussions with legal counsel, existing
litigation will not have a material adverse effect on the Company's financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its initial public offering of 2,975,000 shares
of Class A Common Stock in January, 1993. The Company's Class A Common Stock is
traded in the over-the-counter market on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") National Market System under the symbol
"PHSV." There is no market for the Company's Class B Common Stock. The
following table sets forth the range of high and low sale prices for the Class A
Common Stock for each of the periods indicated as reported on the NASDAQ
National Market System. Quotations represent prices between dealers and do not
reflect retail mark-ups, mark-downs or commissions. There was no market for the
Company's Class A Common Stock prior to its initial public offering in January,
1993.
High Low
------ ------
January 1, 1995 through March 31, 1995 $33.75 $26.75
April 1, 1995 through June 30, 1995 $34.25 $24.50
July 1, 1995 through September 30, 1995 $28.75 $22.00
October 1, 1995 through December 31, 1995 $43.25 $27.25
January 1, 1996 through March 31, 1996 $40.75 $29.50
April 1, 1996 through June 30, 1996 $34.50 $19.75
July 1, 1996 through September 30, 1996 $25.50 $14.50
October 1, 1996 through December 31, 1996 $20.00 $14.00
There were an aggregate of 390 holders of record of the Company's
Class A and Class B Common Stock (the "Common Stock") as of March 25, 1997. The
Company has not paid any dividends on its Common Stock since its issuance. The
Company does not intend to pay any cash dividends in the foreseeable future.
Rather, the Company intends to retain its earnings to provide for the operation
and expansion of its business. The Company's ability to declare and pay
dividends to its stockholders may be dependent upon its ability to obtain cash
distributions from its operating subsidiaries. The ability to pay dividends is
also restricted by insurance and health regulations applicable to its
subsidiaries. See "Business - Government Regulation."
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The income statement data and balance sheet data set forth below have been
derived from the audited consolidated financial statements of the Company. The
information below is qualified by reference to and should be read in conjunction
with the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts and operating statistics)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUES:
Premiums $ 481,534 $342,975 $289,784 $274,795 $265,436
Investment and other income 6,574 6,968 4,160 5,435 3,459
---------- ---------- ---------- ---------- ----------
Total revenues 488,108 349,943 293,944 280,230 268,895
---------- ---------- ---------- ---------- ----------
Health care expenses:
Hospital services 178,059 111,947 94,934 105,592 107,638
Physicians and related health care services 198,591 131,019 117,393 110,599 106,617
Other health care services 42,382 18,707 12,943 9,741 9,724
Indemnity costs 7,008 2,157 -- -- --
---------- ---------- ---------- ---------- ----------
Total health care expenses 426,040 263,830 225,270 225,932 223,979
---------- ---------- ---------- ---------- ----------
Selling, general and administrative 86,728 58,504 44,089 33,730 28,590
Guardian joint marketing (income)
expense, net (809) 2,298 -- -- --
Proxy defense costs 892
Interest 388 -- -- 378 875
---------- ---------- ---------- ---------- ----------
Total expenses 512,347 325,524 269,359 260,040 253,444
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (24,239) 24,419 24,585 20,190 15,451
Income tax expense (benefit) (11,275) 8,449 10,451 8,299 6,890
---------- ---------- ---------- ---------- ----------
Net income (loss) ($12,964) $ 15,970 $ 14,134 $ 11,891 $ 8,561
========== ========== ========== ========== ==========
Net income (loss) per
Common Share ($1.39) $1.70 $1.52 $ 1.31 $ 1.36
Weighted average shares outstanding 9,301 9,403 9,307 9,101 6,283
BALANCE SHEET DATA:
Working capital $ 16,744 $ 62,585 $ 64,037 $ 58,714 $ 13,091
Total assets 238,310 211,068 207,148 171,456 120,031
Total long term debt -- -- -- -- 5,000
Stockholders' equity 96,286 108,881 91,206 77,968 25,586
OPERATING STATISTICS:
Enrollment (1) 400,021 267,116 179,550 158,984 136,832
Enrollment (monthly average) 342,576 219,475 173,523 153,251 135,506
Hospital days per thousand (2) 272 281 327 360 403
Medical loss ratio (3) 89.8% 78.2% 79.0% 82.9% 84.4%
</TABLE>
- ----------
(1) At end of period.
(2) On an annualized basis for commercial products only.
(3) Health care expenses as a percentage of premium revenues excluding
self-funded product revenues.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows certain income statement data expressed as a
percentage of total revenues for the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Premiums 98.7 % 98.0 % 98.6%
Investment and other income 1.3 2.0 1.4
-------- -------- --------
Total revenues 100.0 100.0 100.0
-------- -------- --------
Health care expenses:
Hospital services 36.5 32.0 32.3
Physicians and related health care services 40.7 37.5 39.9
Other health care services 8.7 5.3 4.4
Indemnity costs 1.4 0.6
-------- -------- --------
Total health care expenses 87.3 75.4 76.6
-------- -------- --------
Selling, general and administrative expenses 17.8 16.7 15.0
Guardian joint marketing (income) expense, net (0.2) 0.7 0.0
Proxy defense costs -- 0.2 --
Interest 0.1 0.0 0.0
-------- -------- --------
Total expenses 105.0 93.0 91.6
-------- -------- --------
Income (loss) before taxes (5.0) 7.0 8.4
Income tax expense (benefit) (2.3) 2.4 3.6
-------- -------- --------
Net income (loss) (2.7)% 4.6 % 4.8 %
======== ======== ========
</TABLE>
The Company's subsidiaries, PHS/CT, PHS/NY, PHS/NJ and Bermuda, have entered
into several marketing and reinsurance agreements with The Guardian. Under these
agreements, jointly developed managed care and indemnity products are offered to
existing Guardian insureds as well as to new prospects. The Company and The
Guardian have implemented different ways to share profits and losses under these
agreements which vary among the particular states and time periods as described
below.
In Connecticut, PHS/CT wrote 100% of the managed care business and The
Guardian wrote 100% of the indemnity business. The parties shared profits and
losses through September 30, 1996 pursuant to a "selection adjustment payment"
mechanism. Under this arrangement, each party calculated its quarterly profit or
loss (net premiums earned, minus claims payments, capitation payments and
withholds paid with respect to managed care plans, reserve increases or
decreases, administrative charges, commissions and premium taxes, plus
investment income). The selection adjustment payment, which was designed to
mitigate the effect of potential adverse selection in groups which selected
Healthcare Solutions products and enable the parties to share in any long-term
profits or loses, then provided that if both parties had losses, no adjustment
would be made from one to the other, and each would retain its respective loss.
If both parties had profits, the amounts were combined, and the party with the
greater profit would make a selection adjustment payment to the other, in an
amount equal to half of the profit differential. If only one party had a profit,
the
19
<PAGE>
profitable party made a selection adjustment payment equal to that party's
reported profit, thereby partially or fully reimbursing the other party's loss.
If the result was a combined profit, the profitable party would make a selection
adjustment payment equal to the other party's loss, increased by half of the
combined profit. Selection adjustment calculations were done on a cumulative
basis, and accordingly, losses are carried forward to offset against future
profits. Because both PHS and The Guardian incurred losses in Connecticut in
1996, no selection adjustment payment was made, and the Company reported 100% of
the cumulative losses on the managed care products sold under the Healthcare
Solutions product line.
The parties entered into new agreements with respect to the Connecticut
Healthcare Solutions business that were effective as of October 1, 1996. The
selection adjustment methodology was replaced with a reinsurance agreement
pursuant to which the Company cedes 50% of the risk on the managed care portion
of the Healthcare Solutions products to The Guardian. In connection with the
conversion to reinsurance, the parties agreed that 50% of the cumulative losses
in Connecticut would be offset from amounts otherwise due to The Guardian under
the reinsurance agreement when profits, if any, are generated.
In New York, The Guardian cedes 50% of its risk for the out-of-network portion
of the POS Healthcare Solutions products to Bermuda and the Company cedes 50% of
its risk for HMO products and the in-network portion of the POS Healthcare
Solutions products to The Guardian. In New Jersey, the Company cedes 100% of the
risk of the out-of-network portion of the POS Healthcare Solutions products and
50% of the risk on the other HMO Healthcare Solutions products to The Guardian
and The Guardian retrocedes 50% of the risk for the out-of-network portion of
the POS Healthcare Solutions products back to Bermuda. The reinsurance
agreements were amended in 1996 to reduce the Company's risk for indemnity
Healthcare Solutions products. In New York, the Company was responsible for 10%
of the associated losses on the indemnity business between January 1 and June
30, 1996 and did not share risk with respect to the indemnity portion of the
Healthcare Solutions business after June 30, 1996. In Connecticut, the
agreements were amended effective October 1, 1996 so that the Company will not
share risk with respect to the indemnity business in those states following
September 30, 1996.
As a result of its arrangements with the Guardian, the Company's percentage
growth in its aggregate premium revenue has lagged its percentage growth in
enrollment, since a portion of the Healthcare Solutions revenues and expenses
that were ceded to The Guardian are omitted from the Company's Statement of
Operations. The Company expects that this trend will continue if its Healthcare
Solutions products continue to be successful and the enrollment mix between its
proprietory products and the Healthcare Solutions products shifts to a greater
percentage in Healthcare Solutions. The aggregate revenue is impacted by this
mix due to the fact that for its proprietary products the Company retains 100%
of the revenue and related healthcare expenses while under the Healthcare
Solutions product, 50% of the revenue and related health care expenses are ceded
to The Guardian, therefore impacting the aggregate revenue growth compared to
aggregate membership growth. Per member, per month ("PMPM") amounts are
similarly impacted by this mix due to the fact Healthcare Solutions membership
is reflected at 100% and revenue and related health care expenses are reflected
at 50%.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Premium revenue increased 40.4% to $481.5 million in 1996 from $343.0
million in 1995, while enrollment at December 31, 1996 increased 49.8% over 1995
to 400,021. As of December 31, 1996, fully-insured enrollees increased 59.9% to
332,363 members up from 207,856 as of December 31, 1995, while self-funded
enrollees increased 14.2% to 67,658 members as of December 31, 1996, up from
59,260 at December 31, 1995. The aggregate premium revenue increase lagged the
membership growth due primarily to the growth of membership in the Healthcare
Solutions product where 50% of the premium revenue and related healthcare costs
are ceded to The Guardian pursuant to the agreement and a membership shift in
the fully insured product mix to lower benefit, lower PMPM revenue products.
Also, enrollee statistics include 100% of the approximately 112,000 members
enrolled in Healthcare Solution products at December 31, 1996, while premium
revenue includes only the Company's 50% share of the Healthcare Solutions
revenues derived from the New York arrangements which became effective July 1,
1995, the New Jersey arrangements effective January 1, 1996, and the Connecticut
arrangements effective October 1, 1996.
20
<PAGE>
Investment and other income declined 5.6% in 1996 from $7.0 million for the
year ended December 31, 1995 to $6.6 million for the year ended December 31,
1996. The decline in investment income is due primarily to a decline in
invested assets and lower investment yields due to lower interest rates.
Health care expenses as a percentage of premium revenue (medical loss ratio)
increased to 89.8% for 1996 from 78.2% for 1995. The increase in the medical
loss ratio resulted from a 7.4% increase in medical costs on a PMPM basis
(primarily hospital and prescription drug costs as discussed below) and a
decline of 6.5% in the PMPM premium revenue.
Hospital services expenses increased 59.1% to $178.1 million in 1996 from
$111.9 million in 1995. The increase is due primarily to an increase in fully-
insured membership. On a PMPM basis, however, hospital services increased 5.7%
from 1995 to 1996. This increase is attributable primarily to the recent trend
to perform certain lower cost services, which historically had been performed in
an in-patient setting, in an out-patient setting. This results in a higher
average cost for those services which are still performed in an in-patient
setting. Inpatient hospital utilization for fully-insured commercial enrollees
decreased 3.2% to 272 days per thousand members, per year for the year ending
December 31, 1996 from 281 days per thousand members, per year for the same 1995
period. This decrease was primarily due to the continued trend towards less
expensive treatment being provided in the out-patient setting and more effective
medical management techniques.
Physician and related health care expenses increased 51.6% in 1996 from
1995. The increase is primarily due to the 59.9% increase in fully insured
membership as well as increases in non-capitated expenses, including costs for
out-of-network physicians' services.
Other health care expenses increased by $23.7 million from 1995 to 1996 due
primarily to higher prescription drug costs resulting from an increase in the
number of members covered by prescription drug riders. Additionally, there was
a shift in membership to drug riders which offered greater benefits. At the
same time, fewer generic drugs were prescribed resulting in increased pharmacy
costs.
Indemnity costs reflect the medical costs associated with the indemnity
revenue assumed in connection with The Guardian reinsurance arrangement in New
York which began in 1995. The Company's net indemnity costs for 1996 were $7.0
million, up from $2.2 million for 1995. As a result of continuing adverse
experience related to this business, the Company amended the New York
reinsurance agreement to reduce the Company's share of the indemnity business
assumed from 50% to 10%, for the period from January 1, 1996 to June 30, 1996.
The impact of this adjustment reduced the after tax loss associated with the
indemnity business by approximately $900 thousand, which was recorded in the
second quarter of 1996. The amendment also provided that the Company will assume
no further indemnity risk in the New York market for claims incurred after June
30, 1996. As noted above, after September 30, 1996 the Company did not share
risk in connection with the Healthcare Solutions indemnity business in the
Connecticut market. Selling, general and administrative expenses increased 48.2%
to $86.7 million in 1996 from $58.5 million in 1995. The increase was
principally due to additional staffing, outside services and other costs needed
to support geographic expansion, product diversification and enrollment growth.
The Company's effective tax benefit rate was 46.5% for the year ended
December 31, 1996, as compared to an effective tax provision rate of 34.6% for
the comparable 1995 period. The 1996 effective tax rate resulted primarily from
the favorable effect of the income from tax exempt securities which increases
the tax benefit when there are losses.
The Company has undertaken a number of actions intended to restore
profitability in 1997. It increased its premiums an average of 4.4% at the end
of 1996 for groups renewing in 1997 and may make further adjustments subject to
competitive conditions. It has moved to introduce enhanced medical management,
which is intended to result in reduced health care expenses on a PMPM basis in
1997. In addition, its contracts with risk entities shift a greater amount of
the risk of overutilization to the risk entities, which will provide further
protection against rising health care costs. Moreover, the Company has shifted a
portion of the Healthcare Solutions membership to capitation arrangements with
the Physician Groups. Although there can be no assurance that these changes,
among others, will enable the
21
<PAGE>
Company to be profitable in 1997, the Company expects to see significant
improvement in its financial results in 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Cautionary
Statement."
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Premium revenue increased 18.4% to $343.0 million in 1995 from $289.8
million in 1994 while enrollment at December 31, 1995 increased 48.8% over 1994
to 267,116. As of December 31, 1995, fully-insured enrollees increased 55.5% to
207,856 members from 133,676 as of December 31, 1994, while self-funded
enrollees increased 29.2% to 59,260 members as of December 31, 1995, up from
45,874 as of December 31, 1994. The premium revenue increase lagged the
membership growth due to more aggressive pricing and a shift in fully insured
product mix to lower revenue yielding products. Also, enrollee statistics
include 100% of the enrollees in New York, while premium revenue includes only
the Company's 50% share of revenues derived from the New York Guardian
arrangements which become effective July 1, 1995.
Investment and other income was up 67.5% in 1995 from $4.2 million for the
year ended December 31, 1994 to $7.0 million for the year ended December 31,
1995. The increase in investment income was due to improved portfolio yields
and a reduction in realized losses.
Health care expenses as a percentage of premium revenue (medical loss ratio)
decreased to 78.2% for 1995 from 79.0% for 1994. The decrease in the medical
loss ratio resulted from a 7.0% decline in medical costs on a per member per
month basis which was partially offset by a 6.4% decline in the per member per
month premium revenue. Total health care expenses increased 17.1% to $263.8
million in 1995 from $225.3 million for 1994.
Hospital services expenses increased 17.9% to $111.9 million in 1995 from
$94.9 million in 1994. On a PMPM basis, hospital services declined 6.8% from
1994 to 1995. The decline was due primarily to a reduction in in-patient
hospital utilization which was partially offset by higher out-patient
utilization. In-patient hospital utilization for fully-insured enrollees,
excluding Medicare cost contract enrollees, decreased 14.1% to 281 days per
thousand members per year for the year ending December 31, 1995 from 327 days
per thousand members for the same 1994 period.
Physician and related health care expenses increased 11.6% in 1995 from 1994
despite a 55.5% increase in fully insured enrollees. As a result, physician
expense declined 11.8% on a per member per month basis for the year ended
December 31, 1995 as compared to the same 1994 period. The decrease is largely
due to more favorable capitation arrangements with providers and a shift in
membership to lower cost capitated products.
Other health care expenses increased by $5.8 million from 1994 to 1995 due
primarily to higher prescription drug expense resulting from an increase in
prescription drug benefit coverage and increased utilization. Additionally, in
1995, other health care expenses includes the Healthcare Solutions profit
sharing expense which resulted from The Guardian reinsurance arrangement in
Connecticut.
Indemnity costs reflect the medical costs associated with the indemnity
revenue assumed in connection with The Guardian reinsurance arrangement in New
York which began in 1995.
Selling, general and administrative expenses increased 32.7% to $58.5
million in 1995 from $44.1 million in 1994. The increase was principally due to
continuing resource commitments to support enrollment growth and the expansion
into the Connecticut, New York and New Jersey tri-state region. Additionally,
the related administrative infrastructure was also expanded to accommodate the
increased growth.
The Company's effective tax rate declined to 34.6% for the year ended
December 31, 1995 from 42.5% for the comparable 1994 period. The decline in the
effective tax rate resulted primarily from the shift of much of the Company's
investment portfolio into tax exempt municipal bonds and to a slight decline in
the statutory state income tax rates. Additionally, the effective tax rate for
1995 was favorably affected by the reconciliation of prior provisions.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
PHS has historically financed its operations primarily through internally
generated funds. The Company's primary capital requirements are for working
capital, principally to fund geographic and product expansion, and to maintain
necessary regulatory capital. In addition, the Company's HMO subsidiaries,
PHS/CT, PHS/NY and PHS/NJ, and its insurance subsidiaries, are subject to
statutory regulations that restrict the payment of dividends.
Net cash flows for the year ended December 31, 1996 resulted in an increase
in cash and cash equivalents of $31.7 million. Although operating cash flows
were unfavorably affected by the Company's 1996 loss of $13.0 million, net cash
was provided by operating activities of $24.6 million for the year ended
December 31, 1996. The difference between the net loss and the net cash provided
from operating activities resulted primarily from a $22.3 million increase in
hospital incurred but not reported ("IBNR") claims, which was generated from the
increase in the volume of claims activity due to the rise in membership and
the timing of the related claims payments and from the collection of outstanding
advances to hospitals which totalled $5.5 million. Additionally, the amounts due
to IPAs, physicians and other providers increased $15.3 million in 1996,
reflecting an increase in the amounts payable to non-capitated providers, such
as out of network providers, and the timing of those related payments. These
items were offset in part by the net increase in receivables of approximately
$10.0 million which occurred due to the growth in enrollment from both the
Company's proprietary business and from its arrangements with The Guardian.
Approximately $44.0 million of net cash was provided by the sales and maturities
of marketable securities, of which $34.6 million was used to fund the
enhancement of the Company's computer infrastructure and to purchase the
Company's new corporate headquarters .
PHS's net cash used in operations amounted to $9.5 million in 1995. Since The
Guardian holds the funds generated by Healthcare Solutions, on which the Company
earns interest, and since the funds were not released by year end, operating
cash flows in 1995 were unfavorably affected by the arrangements with The
Guardian. In addition, IPA withhold percentages were generally decreased in
1995, and as a result, the amounts owed to the IPAs tended to be paid over on a
more rapid schedule. Further, accelerated payments related to income taxes and
the Medicare cost contract decreased operating cash flows. These items were
partially offset by the net income of $16.0 million generated during the year.
Cash used for investing activities was $11.7 million for the year ended December
31, 1995, primarily due to capital expenditures of $15.2 million which
represented investments in optical imaging technology and other improvements in
the computer infrastructure needed to support the Company's expansion.
Net cash flow during 1994 resulted in an increase in cash and investments to
$139.8 million at December 31, 1994 from $112.2 million at December 31, 1993.
Cash provided by operating activities totaled $39.3 million, resulting primarily
from net income of $14.1 million generated during the period, the timing of the
receipt of medical claims and the timing of payments related to other
liabilities.
At December 31, 1994, PHS was no longer required to maintain a restricted
cash reserve to comply with the requirement of the Office of Prepaid Healthcare
in connection with the Medicare cost contract. In New York, the Company is
required to maintain an escrow reserve equal to 5% of estimated health care
expenses for the current year, for the protection of enrollees, which, as of
December 31, 1996 was $9.0 million. In Connecticut, the Company is required to
maintain a statutory minimum unimpaired capital surplus of $1.0 million. The
Company is currently in compliance with all applicable statutory capital
requirements. The Company is subject to various laws and regulations which, at
December 31, 1996, caused the aggregate amount of its restricted net assets to
be approximately $38.8 million.
The Company's expenditures for capital equipment, primarily for computers
and related equipment, and in 1996 for the purchase of the Company's new
headquarters, totaled $34.6 million, $15.2 million and $9.7 million for the
years ended December 31, 1996, 1995 and 1994, respectively. The Company expects
to spend additional capital, principally in computer and technology systems
enhancements, over the next several years. The Company expects to require
additional capital over the next several years and, although it can provide no
assurances in this regard, believes that in addition to its current capital
resources and internally generated funds, it will be able to obtain financing,
if necessary, sufficient for its continued operations.
EFFECT OF INFLATION
Health care industry costs have been rising annually at rates higher than
the Consumer Price Index. To offset this trend, PHS has been able to achieve
premium rate increases for its 1997 business which should help mitigate the
effect of medical cost inflation on its operations. The Company's premiums are
higher than many of its competitors, however, and there can be no assurance that
the Company will be able to increase premiums sufficiently to offset the rise in
health care costs without jeopardizing the Company's competitive position. In
addition, PHS contracts with several major hospitals on a multi-year basis with
fixed annual increases. The
23
<PAGE>
Company's risk sharing arrangements with its Physician Groups and other cost
control measures, such as its utilization review program, also help to mitigate
the effects of price increases on operations. There can be no assurance that the
Company's efforts to reduce the impact of inflation will be successful.
CAUTIONARY STATEMENT
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby making cautionary
statements identifying important risk factors that could cause the Company's
actual results to differ materially from those projected in forward-looking
statements made by or on behalf of the Company.
The Company wishes to caution readers that the following important factors,
among others, could cause the Company's actual financial or enrollment results
to differ materially from those expressed in any projected, estimated or
forward-looking statements relating to the Company.
PREMIUM STRUCTURE; UNPREDICTABILITY OF MEDICAL COSTS. A substantial amount of
the Company's revenues are generated by premiums which represent fixed monthly
payments for each person enrolled in the Company's plans. If the Company is
unable to obtain adequate premiums because of competitive or regulatory
considerations, the Company could incur decreased margins or significant losses.
The Company believes that commercial premium pricing will continue to be highly
competitive. The Company's revenues from its Medicare and Medicaid programs
could be adversely affected if reimbursement rates do not keep pace with rising
medical costs. Historically, these rates have been subject to wide variations
from year to year. In the event reimbursement were to decline from projected
amounts, the Company would attempt to renegotiate its contracts with its health
care providers. There can be no assurance that it could successfully renegotiate
these financial arrangements and failure to reduce the health care costs
associated with such programs could have a material adverse effect upon the
Company's business.
The Company's profitability is also dependent, in large part, upon its
ability to accurately project and manage health care costs, including without
limitation, appropriate benefit design, utilization review and case management
programs, and its risk sharing arrangements with providers, while providing
members with quality health care. Health care costs are affected by a variety
of factors that are difficult to predict and are not entirely within the
Company's control, including the severity and frequency of claims. Medical cost
inflation, mandated benefits and other regulatory changes, new technologies,
natural disasters, epidemics and other external factors relating to the delivery
of health care services, inability to establish acceptable risk sharing
arrangements with providers and other factors may adversely affect the Company's
ability to manage the costs of providing health care services. In addition, the
Company experienced high out-of-network utilization in connection with its POS
products in 1996 in New York, which resulted in medical costs for the POS
products exceeding budgeted amounts. The Company is seeking to expand its
network in New York and institute other measures to limit the risk of high out-
of-network utilization. The Company is implementing a variety of measures to
help it manage health care costs better. However, there can be no assurance
that the Company will be able to continue to reduce its medical costs
sufficiently to restore profitability in all its product lines. In light of the
expected continuing growth of the POS products, failure to reduce out-of-network
utilization could adversely affect the Company's profitability.
Accrued health care expenses payable in the Company's financial statements
include reserves for incurred but not reported claims ("IBNR"), the amount of
which is estimated by the Company. The Company estimates the amount of such
reserves using standard actuarial methodologies based upon historical data
including the average interval between the date services are rendered and the
date claims are paid, expected medical cost inflation, seasonality patterns and
increases in membership. The Company believes that its reserves for IBNR are
adequate in order to satisfy its ultimate claims liability. However, there can
be no assurances as to the ultimate accuracy or completeness of such estimates
or that adjustments to reserves will not cause volatility in the Company's
results of operations.
DEPENDENCE UPON KEY EMPLOYER AGREEMENTS. The Company's ability to obtain and
maintain favorable group benefit agreements with employer groups affects the
Company's profitability. Currently, 17% of its total
24
<PAGE>
commercial enrollment (those groups which are fully insured, which includes
332,363 enrollees) is derived from its largest five fully insured accounts.
Fully insured groups produce the highest PMPM revenues for the Company. Although
during the Company's most recent fiscal year, no employer group accounted for
more than 7.5% of total revenues, the loss of one or more of the larger employer
group accounts could have a material adverse effect upon the Company's business.
Although only 8% of the Company's total membership in 1996 was enrolled in
Medicare and Medicaid programs, that percentage is expected to increase in the
future. Loss of one or more of the contracts the Company currently has or
expects to have to serve Medicaid or Medicare participants could have a material
adverse effect upon the Company's business. Finally, the Company has agreed to
certain performance guarantees for certain of the large employer groups with
which it contracts. Failure to satisfy such guarantees could result in financial
penalties.
KEY PARTNERSHIP. The Company's contracts with The Guardian are expected to
represent a significant percentage of the Company's revenue and enrollment in
future years. See "Business-Joint Marketing Arrangement with The Guardian."
The loss of this relationship could have a material adverse effect on the
Company's business.
COMPETITION. Managed care companies and HMOs operate in a highly competitive
environment. The Company has numerous types of competitors, both local and
national, including, among others, HMOs, PPOs, self-insured employer plans and
traditional indemnity carriers, many of which have substantially larger total
enrollments, greater financial resources and other characteristics that give
them an advantage in competing with the Company. Additional competitors with
needs or desires for immediate market share or those with greater financial
resources than the Company have entered or may enter the Company's market. The
Company also believes that the addition of new competitors can occur relatively
easily. In addition, certain of the Company's customers may decide to perform
for themselves certain administrative services currently provided by the
Company, which could adversely affect the Company's revenues. Significant merger
and acquisition activity has occurred in the managed care industry as well as in
industries which are suppliers to the Company. This activity may result in
stronger competitors or increase health care costs. Increased competitive
pressures may limit the Company's ability to increase, or in some instances,
maintain premiums, reduce membership levels or decrease profit margins, and
there can be no assurance that the Company will not incur increased pricing and
enrollment pressure from local and national competitors. Any such pressures
could materially affect the Company's results of operations.
GOVERNMENT REGULATION. The Company's business is subject to extensive federal
and state laws and regulations, including, but not limited to, financial
requirements, licensing requirements, enrollment requirements and periodic
examinations by governmental agencies. The laws and regulations governing the
Company's business and the interpretation of those laws and regulations are
subject to frequent change. Existing or future laws or regulations could force
the Company to change the way it does business and may restrict the Company's
revenue or enrollment growth or increase its health care and/or administrative
costs. In particular, the Company's HMO and insurance subsidiaries are subject
to regulations relating to cash reserves, minimum net worth, premium rates and
approval of policy language and benefits. Although such regulations have not
significantly impeded the growth of the Company's business to date, there can be
no assurance that the Company will be able to continue to obtain or maintain
required governmental approvals or licenses or that regulatory changes will not
have a material adverse effect on the Company's business. In addition, delays
in obtaining regulatory approvals or moratoriums imposed by regulatory
authorities could adversely effect the Company's ability to bring new products
to market as forecasted. The Company is also subject to various governmental
audits and investigations. Such activities could result in the loss of required
licenses or the right to participate in certain programs, or the imposition of
penalties and/or other sanctions . In addition, disclosure of any adverse
investigation or audit results or sanctions could negatively affect the
Company's reputation in various markets and make it more difficult for the
Company to sell its products and services.
MANAGEMENT INFORMATION SYSTEM. The Company's management information system is
critical to its current and future operations. The information gathered and
processed by the Company's management information system assists the Company in,
among other things, pricing its services, monitoring utilization and other cost
factors, processing provider claims, providing bills on a timely basis and
identifying accounts for collection. Any difficulty associated with or failure
to successfully implement the current conversion of its management information
system, or any inability to expand processing capability in the future in
accordance with its business needs, could result in a loss of
25
<PAGE>
existing customers and difficulty in attracting new customers, customer and
provider disputes, regulatory problems, increases in administrative expenses or
other adverse consequences.
NEW SERVICE AREAS AND PRODUCTS. The Company recently undertook a significant
expansion of its geographic market area. In addition, it recently introduced
several new products, including Medicare risk and Medicaid products. The success
of its geographic and product expansion efforts depends in large part on its
ability to develop market share in a highly competitive market and to develop
the infrastructure necessary to support the forecasted enrollment growth. The
Company believes that it has budgeted sufficient amounts to meet its growth
expectations; however, there can be no assurance that it will not require
greater resources than expected or that it will be successful in its marketing
efforts. Furthermore, although it believes it has introduced programs to
effectively manage its new products, there can be no assurance that the health
care and other costs associated with such programs will not be greater than
revenues. Medicare risk contracts provide revenues which are generally higher
per member than those for non-Medicare members, and thus provide an opportunity
for increased profits and cash flow. Such risk contracts, however, also carry
certain risks such as higher comparative medical costs, government regulatory
and reporting requirements, the possibility of reduced or insufficient
government reimbursement in the future, and higher marketing and advertising
costs per member as the result of marketing to individuals as opposed to
groups.
POSSIBLE VOLATILITY OF COMMON STOCK PRICE. Recently, there has been significant
volatility in the market prices of securities of companies in the health care
industry, including the price of the Company's Common Stock. Many factors,
including medical cost increases, analysts' comments, speculation about a
possible merger or acquisition, announcements of new legislative proposals or
laws relating to health care reform, the performance of, and investor
expectations for, the Company, the trading volume of the Company's Common Stock
and general economic and market conditions, may influence the trading price of
the Company's Common Stock. Accordingly, there can be no assurance as to the
price at which the Company's Common Stock will trade in the future.
NEGATIVE PUBLICITY. The managed care industry has recently received a
significant amount of negative publicity. Such general publicity, or any
negative publicity regarding the Company in particular, could adversely affect
the Company's ability to sell its products or services or could create
regulatory problems for the Company. Recently, the managed care industry has
experienced significant merger and acquisition activity. Speculation or
uncertainty about the Company's future could adversely affect the ability of the
Company to market its products.
ACCREDITATION. Certain of the Company's customers or potential customers
consider rating, accreditation or certification of the Company by various
private or governmental bodies or rating agencies as necessary and/or important.
The Company currently has three year accreditation from the National Committee
on Quality Assurance ("NCQA") which will expire in May, 1997. NCQA visited the
Company's offices in connection with its reaccrediation in late March 1997.
Should the Company fail to maintain three-year NCQA accreditation, or obtain any
other certification or accreditation as may be deemed to be necessary and/or
important by customers, it may adversely affect the Company's ability to obtain
or retain the business of such customers.
ADMINISTRATIVE EXPENSE. The level of administrative expense is a partial
determinant of the Company's profitability. While the Company attempts to
effectively manage such expenses, increases in staff-related and other
administrative expenses may occur as a result of business or product expansion,
changes in business, acquisitions, regulatory requirements or other reasons.
Such expense increases are not clearly predictable and increases in
administrative expenses may adversely affect financial results.
The Company currently believes that it has a relatively experienced, capable
management staff. Loss of certain managers or a number of such managers could
adversely affect the Company's ability to administer and manage its business.
LITIGATION AND INSURANCE. The Company is subject to a variety of legal actions
to which any corporation may be subject. In addition, because of the nature of
its business, the Company incurs and likely will continue to incur potential
liability for claims related to its business, such as failure to pay for or
provide health care, poor outcomes for care delivered or arranged, provider
disputes and claims related to self-funded business. It is possible that
punitive or substantial non-economic damages may be sought in cases of this
nature. While the Company currently has insurance coverage for some of
these potential liabilities, others may not be covered by insurance, the
insurers may dispute coverage or the amount of insurance may not be enough to
cover the damages awarded. In
26
<PAGE>
addition, certain types of damages, such as punitive damages, may not be covered
by insurance and insurance coverage for all or certain forms of liability may
become unavailable or prohibitively expensive in the future.
PROVIDER RELATIONS. One of the significant techniques that the Company uses to
manage health care costs and utilization is contracting with physicians,
hospitals and other providers. Because of the large number of providers with
which the Company contracts, the Company currently believes that it has a
limited exposure to provider relations issues. In any particular market,
however, providers could refuse to contract with the Company, demand higher
payments or take other actions which could result in higher health care costs,
less desirable products for customers and members or difficulty in meeting
regulatory or accreditation requirements. In some markets, certain providers,
particularly hospitals, physician/hospital organization or multi-speciality
physician groups, may have significant market positions. Such groups may also
compete directly with the Company. If such providers refuse to contract with
the Company or utilize their market position to negotiate favorable contacts or
place the Company at a competitive disadvantage, the Company's ability to market
products or to be profitable in those areas could be adversely affected.
In addition, the Company has recently entered into a number of contracts with
physician/hospital organizations and other physician groups that place a
significant percentage of the risk of overutilization on those groups. Although
this technique is believed to be advantageous to the Company insofar as it
limits the Company's risk, failure of one or more of the physician/hospital or
other physician groups to successfully manage the risk could have a material
adverse effect on the Company's business and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item is incorporated herein by reference to
the Company's 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the Company's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the Company's 1997 Proxy Statement.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. All financial statements - see Index to Consolidated Financial
Statements and Schedules on page 33.
2. Financial statement schedules - see Index to Consolidated Financial
Statements and Schedules on page 33.
3. Exhibits - see Exhibit Index on page 55.
(b) Reports on Form 8-K
None
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Shelton and State
of Connecticut on the 27th day of March, 1997.
PHYSICIANS HEALTH SERVICES, INC.
By: /S/Robert L. Natt
-----------------
President and Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Company and in the
capacities indicated on March 27th, 1996.
Signature Title
--------- -----
/S/Robert L. Natt Principal Executive Officer
- -----------------
Robert L. Natt
/S/James L. Elrod, Jr. Principal Financial Officer
- ----------------------------
James L. Elrod, Jr.
/S/Craig Dupont Principal Accounting Officer
- --------------------
Craig Dupont
/S/Lewis Bader, M.D. Director
- --------------------
Lewis Bader, M.D.
/S/Larry Coletti, M.D. Director
- ----------------------
Larry Coletti, M.D.
30
<PAGE>
/S/Melvin P. Coolidge, M.D. Director
- ---------------------------
Melvin P. Coolidge, M.D.
/S/Arnold DoRosario, M.D. Director
- -------------------------
Arnold DoRosario, M.D.
/S/Santiago Escobar, M.D. Director
- -------------------------
Santiago Escobar, M.D.
/S/Richard Freeman Director
- ------------------
Richard Freeman
/S/David Grayer, M.D. Director
- ---------------------
David Grayer, M.D.
/S/Michael E. Herbert Director
- ---------------------
Michael E. Herbert
/S/A. Thomas Licciardello, M.D. Director
- -------------------------------
A. Thomas Licciardello, M.D.
/S/Andrew Lozyniak Director
- ------------------
Andrew Lozyniak
/S/Murray A. Morrison, M.D. Director
- ---------------------------
Murray A. Morrison, M.D.
/S/Joseph E. Nechasek, Ph.D. Director
- ----------------------------
Joseph E. Nechasek, Ph.D.
31
<PAGE>
/S/Noel R. Newman, Esq. Director
- -----------------------
Noel R. Newman, Esq.
/S/Kenneth Sacks, M.D. Director
- ----------------------
Kenneth Sacks, M.D.
/S/Edward Sawicki, M.D. Director
- -----------------------
Edward Sawicki, M.D.
/S/Arthur H. Sheer Director
- ------------------
Arthur H. Sheer
/S/Bernard Sherlip, M.D. Director
- ------------------------
Bernard Sherlip, M.D.
/S/John C. Washburn Director
- -------------------
John C. Washburn
32
<PAGE>
PHYSICIANS HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Balance Sheets as of December 31, 1996 and 1995. . . . . . . . . . 35
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994 . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . 36
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 39
Schedule I - Condensed Financial Information of Registrant . . . . . . . . . . 51
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . 54
</TABLE>
33
<PAGE>
Report of Independent Auditors
Board of Directors
Physicians Health Services, Inc.
We have audited the consolidated balance sheets of Physicians Health Services,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the three years in the period ended December 31, 1996. Our audits also included
the financial statement schedules listed in the Index at Item 14(a). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Physicians Health
Services, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for certain investments in debt and
equity securities.
Stamford, Connecticut
March 14, 1997
ERNST & YOUNG LLP
34
<PAGE>
Physicians Health Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 39,213 $ 7,536
Investments available for sale, at
fair value:
Fixed maturity securities 59,115 102,130
Equity securities -- 1,355
Accounts receivable, less allowances 38,028 31,548
(1996-$1,781 and 1995-$1,050)
Other receivables 19,696 14,815
Advances to participating hospitals 400 5,903
Prepaid expenses and other 1,154 204
----------------------
TOTAL CURRENT ASSETS 157,606 163,491
Property, plant and equipment:
Land 8,822 3,322
Building and improvements 26,938 14,645
Furniture and equipment 46,559 29,817
----------------------
82,319 47,784
Less accumulated depreciation and
amortization 15,273 11,028
----------------------
67,046 36,756
Other assets (including restricted
investments) 13,658 10,821
----------------------
TOTAL ASSETS $238,310 $211,068
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued hospital and other health care
expenses $ 46,153 $ 23,878
Unearned premiums 27,757 25,022
Amounts due to IPAs, physicians and
other providers 53,103 37,806
Accounts payable and accrued expenses 13,849 14,199
----------------------
TOTAL CURRENT LIABILITIES 140,862 100,905
Excess of net assets over cost of
company acquired 1,162 1,282
----------------------
TOTAL LIABILITIES 142,024 102,187
Stockholders' equity:
Preferred Stock, par value $0.01 per
share - authorized 500 shares,
none issued -- --
Class A Common Stock, par value $0.01
per share - authorized 13,000,000
shares; issued and outstanding 1996 -
5,566,023 shares; 1995 - 5,310,347
shares; voting rights - 1 per share 56 53
Class B Common Stock, par value $0.01
per share; non-transferable;
authorized and issued 1996 -
3,829,880 shares; 1995 - 4,052,974
shares; voting rights - 10 per share 38 41
Additional paid-in capital 41,360 40,760
Net unrealized gains on marketable
securities, net of tax 279 510
Retained earnings 54,554 67,518
----------------------
96,287 108,882
Less cost of Class B Common Stock
(86,400 shares) in Treasury 1 1
----------------------
TOTAL STOCKHOLDERS' EQUITY 96,286 108,881
----------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $238,310 $211,068
======================
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
PHYSICIANS HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
REVENUES:
Premiums $481,534 $342,975 $289,784
Investment and other income 6,574 6,968 4,160
--------------------------------
488,108 349,943 293,944
Costs and expenses:
Hospital services 178,059 111,947 94,934
Physicians and related health care
services 198,591 131,019 117,393
Other health care services 42,382 18,707 12,943
Indemnity costs 7,008 2,157 --
Selling, general and administrative
expenses 86,728 58,504 44,089
Guardian joint marketing expense
(income), net (809) 2,298 --
Proxy defense costs -- 892 --
Interest expense 388 -- --
--------------------------------
512,347 325,524 269,359
Income (loss) before income taxes (24,239) 24,419 24,585
Income tax expense (benefit) (11,275) 8,449 10,451
--------------------------------
Net income (loss) $(12,964) $ 15,970 $ 14,134
================================
Net income (loss) per common share $(1.39) $1.70 $1.52
================================
Weighted average number of common and
common equivalent shares outstanding 9,301 9,403 9,307
================================
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
PHYSICIANS HEALTH SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CLASS A COMMON STOCK
Balance at beginning of period $ 53 $ 49 $ 45
Conversion of Class B Common Stock into
Class A Common Stock:
1996 - 223,094 shares, 1995 - 437,537
shares, 1994 - 435,228 shares 3 4 4
Options exercised:
1996 - 32,582 shares, 1995 - 14,974
shares, 1994 - 3,558 shares
-------------------------------
Balance at end of period $ 56 $ 53 $ 49
===============================
CLASS B COMMON STOCK
Balance at beginning of period $ 41 $ 45 $ 49
Conversion of Class B Common Stock into
Class A Common Stock:
1996 - 223,094 shares, 1995 - 437,537
shares, 1994 - 435,228 shares (3) (4) (4)
-------------------------------
Balance at end of period $ 38 $ 41 $ 45
===============================
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period $ 40,760 $ 40,514 $40,461
Exercise of stock options 600 246 53
-------------------------------
Balance at end of period $ 41,360 $ 40,760 $40,514
===============================
NET UNREALIZED GAINS (LOSSES) ON
MARKETABLE SECURITIES, NET OF TAX
Balance at beginning of period $ 510 $ (949) $ --
Net unrealized gain at date of adoption
of SFAS 115, net of tax -- -- 184
Net unrealized gain (loss) (231) 1,459 (1,133)
-------------------------------
Balance at end of period $ 279 $ 510 $ (949)
===============================
RETAINED EARNINGS
Balance at beginning of period $ 67,518 $ 51,548 $37,414
Net income (loss) (12,964) 15,970 14,134
-------------------------------
Balance at end of period $ 54,554 $ 67,518 $51,548
===============================
TREASURY STOCK
Balance at beginning and end of period $ (1) $ (1) $ (1)
TOTAL STOCKHOLDERS' EQUITY
Balance at beginning of period $108,881 $ 91,206 $77,968
Exercise of stock options 600 246 53
Net income (loss) (12,964) 15,970 14,134
Net unrealized gain (loss) on
marketable securities, net of tax (231) 1,459 (949)
-------------------------------
Balance at end of period $ 96,286 $108,881 $91,206
===============================
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
PHYSICIANS HEALTH SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) $ (12,964) $ 15,970 $ 14,134
Adjustments to reconcile net income
(loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization 4,302 3,064 2,364
Provision for doubtful accounts 1,485 103 1,423
Amortization of excess of net assets
over cost of company acquired (120) (120) (120)
Deferred income tax expense (benefit) 690 1,421 (233)
Changes in assets and liabilities:
Accounts receivable (7,965) (4,453) (3,273)
Other receivables (4,881) (13,043) (1,217)
Advances to participating hospitals 5,503 1,619 3,794
Prepaid expenses and other (950) 708 (114)
Accrued health care expenses 22,275 (1,232) (4,028)
Unearned premiums 2,735 631 2,233
Due to IPAS, Physicians and other
providers 15,297 (5,793) 8,076
Accounts payable and accrued expenses (856) (8,367) 16,292
---------------------------------
Net cash provided by (used for)
operating activities 24,551 (9,492) 39,331
INVESTING ACTIVITIES
Purchases of property, plant and
equipment (34,633) (15,168) (9,711)
Disposals of property, plant and
equipment 41 14 226
Net increase in other assets (2,837) (6,916) (674)
Purchases of marketable securities (242,451) (324,877) (340,176)
Proceeds from sales of marketable
securities 286,406 335,262 332,629
---------------------------------
Net cash provided from (used for)
investing activities 6,526 (11,685) (17,706)
FINANCING ACTIVITIES
Proceeds from revolving credit line 18,000 -- --
Repayment of revolving credit line (18,000) -- --
Exercise of stock options 600 246 53
---------------------------------
Net cash provided by financing
activities 600 246 53
---------------------------------
Increase (decrease) in cash and cash
equivalents 31,677 (20,931) 21,678
Cash and cash equivalents at beginning
of year 7,536 28,467 6,789
---------------------------------
Cash and cash equivalents at end of year $ 39,213 $ 7,536 $ 28,467
=================================
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. ORGANIZATION AND BUSINESS
Physicians Health Services, Inc. (the "Company" or "PHS") is a holding company
which owns nine subsidiary corporations: Physicians Health Services of
Connecticut, Inc. (PHS/CT), Physicians Health Services of New York, Inc.
(PHS/NY), Physicians Health Insurance Services, Inc. (PHIS), PHS Investments,
Inc., Physicians Health Services (Bermuda), Ltd. (PHS/Bermuda), Physicians
Health Services of New Jersey, Inc. (PHS/NJ), (which was licensed in January
1996), PHS Insurance of Connecticut, Inc. (PHS Insurance CT), Physicians Health
Services Insurance of New York, Inc. (PHS Insurance NY), and PHS Real Estate,
Inc. (PHS RE). PHS/CT and PHS/NY have been designated by the Department of
Health and Human Services (DHHS) as federally qualified Health Maintenance
Organizations (HMOs).
PHS/CT, PHS/NY and PHS/NJ operate as health maintenance organizations in
Connecticut, New York and New Jersey, respectively, and are regulated by their
respective state insurance departments. PHS/NY and PHS/NJ are also regulated by
the Department of Health and Human Services and New Jersey Department of Health
and Senior Services, respectively. State regulations include reserve and cash
flow requirements and restrictions on the ability to pay dividends. Subscribers
pay monthly premiums which entitle them to comprehensive health services as
needed, according to the terms of their contracts.
PHIS, which is licensed as an insurance broker, was formed to market insurance
products to enrollees. The operations of PHIS for all years presented were not
significant.
PHS Insurance CT and PHS Insurance NY operate in and are regulated by the
Insurance Departments of Connecticut and New York, respectively. These companies
are licensed to write accident and health indemnity insurance although no
business has yet been written.
PHS/Bermuda is an offshore property and casualty reinsurer that was formed to
support the business needs of the Company. This includes an agreement to
reinsure certain business with The Guardian Life Insurance Company of America
(see Note 10).
PHS/CT operates throughout most of Connecticut with a significant portion of its
enrollees currently located in Fairfield County. PHS/NY operates only in New
York's Westchester, Putnam, Dutchess, Rockland and Orange Counties, and the
metropolitan New York City and Long Island regions. PHS/NJ operates throughout
New Jersey. The Company's membership consists of commercial, government and
self-funded members.
PHS RE has a wholly owned subsidiary, PHS Real Estate II, Inc. (PHS RE II),
which owns the Company's new corporate headquarters. The operations of PHS RE
and PHS RE II were not significant.
The Company's managed care products include traditional HMO products, in both
open access and gatekeeper models, point of service ("POS") products,
administrative services only ("ASO") plans and Medicare and Medicaid plans.
The Company contracts with physician groups, such as IPAs, PHOs, and
multi-specialty groups (collectively, "Physician Groups"), individual physicians
and other health care providers for a defined range of health services,
including primary and specialty care. The Company's contracts with providers
include discounted fee for service arrangements as well as capitated group
arrangements in which the contracting Physician Group assumes a significant
amount of the risk of overutilization. The Company currently has contracts with
four IPAs, three PHOs and one large physician group ("Group") that provide for
most of its physician services in its Connecticut service area. In New York and
New Jersey, the Company generally contracts directly with physicians and
other health care providers. Under the typical Physician Group arrangements, the
Physician Group receives a fixed monthly capitation payment for each member
selecting a primary care physician from that Physician Group. Capitation rates
and any increases thereto are negotiated for the term of the contract. The
capitation payment is designed to cover not only the professional medical
services (including ancillary tests and services) rendered by the physicians and
other providers associated with that Physician Group but also includes payments
for certain other services rendered to the enrollee by providers who are not
members of the Physician Group. Services covered by the capitation payment
include, among other things, virtually all physician claims (whether inpatient
or outpatient, including authorized out-of-plan care) and care rendered by other
professionals such as physical therapists and psychologists. In certain of the
contracts, the Physician Groups also are at risk for hospital, pharmacy and
other facility expenses. The Company does not capitate physicians directly.
The capitation payments to Physician Groups other than the PHOs typically do not
cover hospital and other facility expenses, although the Physician Groups are
partially at risk for non-Medicare and non-Medicaid hospital utilization. The
Company establishes an annual per member, per month target for hospital
expenses. The amount varies by benefit plan and Physician Group, and encompasses
both inpatient and outpatient costs. If total hospital expenses generated by the
Physician Group exceed the applicable hospital expense target, the Company
withholds from amounts owed by it to the Physician Group all or a portion of
the excess over budget, in most cases one-half of the excess over budget. If
actual costs are less than budgeted targets, the Physician Group receives from
the Company an incentive credit typically equal to forty to fifty percent of the
amount by which actual costs are less than budgeted targets.
In its New York and New Jersey expansion areas and in areas in Connecticut not
served through Physician Group contracts, the Company contracts for services
principally through direct contracts with individual physicians and other health
care providers. In addition, the Company contracts with two IPAs in the northern
counties of its New York service area. The Company withholds a percentage of
reimbursement for services rendered pursuant to its direct physician contracts
against budgeted amounts to manage excessive utilization.
The Company generally negotiates contracts with hospitals that include
compensation on a per diem basis (at a daily rate, without regard to the scope
of services actually provided). Other compensation arrangements with hospitals
include charged-based discounts (negotiated discounts from the hospital's billed
charges) and all inclusive case rates. In the case of non-participating
hospitals, the Company pays either hospital billed charges or negotiated
discounted charges. Additionally, some hospital contracts include per case,
all-inclusive payment arrangements for select procedures such as maternity
care.
39
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND BUSINESS (CONTINUED)
At December 31, 1996, three of the IPA's own common stock of the Company
aggregating approximately 32% (which entitle them to 68% of the vote on matters
submitted to the Stockholders), with one IPA (Greater Bridgeport Individual
Practice Association) owning approximately 27% (58% of the vote). Capitation
expenses incurred relating to these three IPA's which are included in physician
and related healthcare expenses in the accompanying statements of operations
amounted to $55,019,000, $68,523,000 and $65,091,000 for the years ended
December 31, 1996, 1995 and 1994 respectively. At December 31, 1996 and 1995
amounts payable to these IPA's were $21,622,000 and $10,388,000, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly-owned except for PHS/NJ which is 80%
owned by the Company with a 20% minority interest owned by Mastercare
Companies, Inc. (See Note 11). Such minority interest was not material to the
accompanying consolidated financial statements. Significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Premiums from subscribers and assumed or ceded under reinsurance agreements are
reflected in operations as earned on a pro-rata basis over the period of
coverage. Premiums for periods extending beyond year-end are classified as
unearned premiums. The Company maintains an allowance for doubtful accounts at
a level management believes is sufficient to cover potentially uncollectible
amounts.
PHYSICIANS AND RELATED HEALTH CARE SERVICES
The costs of physicians and related health care services are accrued for in the
period they are provided to enrollees. For the services provided for by
individually contracted physicians, the accrual for the incurred but not
reported claims represent the estimated liability on outstanding claims, based
upon an evaluation of reported claims. Such estimates are continually monitored
and, as estimates are adjusted, they are reflected in current operations. The
amounts accrued under capitation arrangements with IPA's are increased or
decreased based on a comparison of the HMO's hospitalization costs to
contractual targets.
40
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HOSPITAL AND OTHER HEALTH CARE SERVICES
The cost of health care services is accrued in the period they are provided to
enrollees. The amounts accrued for hospital and other health care expenses
represent the estimated liabilities for reported and unreported claims. The
reserves for incurred but not reported claims represent the estimated liability
on outstanding claims, based on an evaluation of reported claims. The estimates
are continually monitored and reviewed and, as settlements are made or estimates
adjusted, the resulting differences are reflected in current operations.
Although considerable variability is inherent in such estimates, management
believes that reported reserves are adequate in the aggregate to cover the
ultimate resolution of incurred claims.
CONTRACTS WITH HEALTH CARE FINANCING ADMINISTRATION
Prior to 1996, the Company had entered into a "cost based" contract with the
Health Care Financing Administration ("HCFA"). Under this contract, HCFA pays
the Company a fixed per member per month amount for physician services, while
HCFA pays the costs for inpatient and outpatient services. During 1996, the
Company entered into a "risk based" contract with HCFA. Under the risk-based
contract the Company is paid a fixed per member, per month amount by HCFA for
all services provided. The Company bears the risk that the actual costs of
health care services may exceed the per member, per month amount. The risk based
contract is intended to replace the cost based contract for new enrollees.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated depreciation
and amortization. Provisions for depreciation and amortization are computed
using the straight-line method over the estimated useful lives of the assets or
the terms of the leases, if shorter. Included in property, plant and equipment
are the costs related to the development of a new managed care information
system, approximately $18,600,000 at December 31, 1996. This new system is
expected to be implemented in late 1997. Amortization of the cost of the new
system will begin upon its implementation and continue on a straight-line basis
over its estimated useful life.
EXCESS OF NET ASSETS OVER COST OF COMPANY ACQUIRED
The excess of net assets over the cost of company acquired is being amortized
by the straight-line method over a 20 year period ending August 31, 2006.
Accumulated amortization was $1,240,000 and $1,120,000 at December 31, 1996 and
1995, respectively.
PER SHARE DATA
Per share data are based on the weighted average number of common and common
equivalent shares outstanding during the period. Common stock equivalents
consist of stock options. Fully diluted per share data are not presented as
they are not materially different from primary earnings per share data.
41
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
In 1996, the Company implemented the supplemental pro forma provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123, if adopted, requires companies
to recognize compensation expense for grants of restricted stock, stock options
and similar equity instruments to employees and directors based on their
respective fair values at the date of grant. However, the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") may still be utilized with supplemental pro forma
disclosures of net income and earnings per share being made in the footnotes as
if the accounting provisions of SFAS 123 had been adopted. SFAS 123 is effective
for fiscal years beginning after December 15, 1995. The Company continues to
apply the requirements of APB 25 in the accompanying financial statements with
supplemental pro forma disclosures provided in the notes to the consolidated
financial statements (See note 8).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with a maturity
of three months or less at the time of purchase.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, other receivables, advances to
participating hospitals and all current liabilities have fair values that
approximate their carrying amounts.
INVESTMENTS
In May 1993, the Financial Accounting Standards Board issued SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities." The Company
adopted the provisions of the new standard as of January 1, 1994, and
categorizes its investments in fixed maturity and equity securities as
"available for sale." Accordingly, such investments are reported at fair value
with changes in unrealized gains and losses disclosed separately, net of taxes,
in stockholders' equity. Fair values are based primarily on quoted market
prices.
Investment income includes realized investment gains and losses on the sale or
maturity of investments, determined by the specific identification method, and
dividends and interest, which are recognized when earned. The amortization of
premium and accretion of discount for fixed maturities is computed utilizing
the interest method.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
SFAS 109, "Accounting for Income Taxes."
RECLASSIFICATIONS
Certain reclassifications were made to conform prior year amounts to current
year presentation.
42
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
3. EXCESS OF LOSS REINSURANCE AGREEMENT
During 1996 the Company limited the amount of its risk on eligible hospital
claims for any one member in a contract year by acquiring reinsurance coverage
for claims in excess of $600,000 per member, per year for PHS/CT, PHS/NY and
PHS/NJ. The reinsurance contracts allow the Company to transfer to the reinsurer
80% of the next $400,000 of claims per member per year. The contract limits
covered claims to $2 million per member per lifetime (including the deductible).
During 1995 and 1994, the Company acquired reinsurance coverage for claims in
excess of $250,000 per member, per year for PHS/CT and $100,000 per member, per
year for PHS/NY. Those reinsurance policies allowed the Company to transfer to
the reinsurer 80% of the next $750,000 (PHS/CT) and $900,000 (PHS/NY) of the
amount of claims in excess of the aforementioned annual retentions. Reinsurance
expense and recoveries are included in other health care services.
Reinsurance expense was $910,000, $1,300,000, and $636,000, for 1996, 1995 and
1994, respectively. Recoveries were $311,000, $60,000, and $106,000 for 1996,
1995, and 1994, respectively.
4. INVESTMENTS AND OTHER INCOME
The amortized cost, gross unrealized gains and losses, and estimated fair values
of investments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and its agencies $ 5,598 $ - $15 $ 5,583
Corporate securities 12,803 5 20 12,788
Municipals 40,242 503 1 40,744
-----------------------------------------
Total fixed securities $ 58,643 $508 $36 $ 59,115
=========================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and its agencies $ 10,629 $ 22 $ - $ 10,651
Corporate securities 1,535 14 - 1,549
Municipals 89,017 936 23 89,930
-----------------------------------------
Fixed securities 101,181 972 23 102,130
Equity securities 1,417 - 62 1,355
-----------------------------------------
Total $102,598 $972 $85 $103,485
=========================================
</TABLE>
43
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS AND OTHER INCOME (CONTINUED)
At December 31, 1996, the contractual maturities of investments in fixed
maturities are as follows (in thousands):
AMORTIZED FAIR
COST VALUE
---------------------------
Due in one year or less $ 25,037 $25,131
Due after one year through five years 33,106 33,485
Due after ten years 500 499
---------------------------
$ 58,643 $59,115
===========================
Major sources of and related amounts of net investment and other income are as
follows (in thousands):
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------
Dividends and interest income from
investments $5,444 $7,099 $ 5,091
Realized gains 139 385 290
Realized losses (99) (366) (1,170)
Investment expenses (132) (193) (258)
----------------------------------
Net investment income 5,352 6,925 3,953
Interest on Guardian Receivable 866 -- --
Other income 356 43 207
----------------------------------
Net investment and other income $6,574 $6,968 $ 4,160
==================================
5. INCOME TAXES
Significant components of income tax expense (benefit) were as follows (in
thousands):
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------
Current income tax expense (benefit):
Federal $(10,004) $5,428 $ 7,720
State (1,961) 1,600 2,964
----------------------------------
(11,965) 7,028 10,684
Deferred income tax expense (benefit) 690 1,421 (233)
----------------------------------
Income tax expense (benefit) $(11,275) $8,449 $10,451
==================================
The following is a reconciliation of federal income tax expense computed at
statutory rates to the amount of income tax expense reflected in the
consolidated statements of operations (in thousands):
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------
Federal income tax (benefit) at
statutory rates $(8,484) $ 8,547 $ 8,605
State income taxes (net of federal
tax benefit) (1,750) 1,773 1,938
Tax exempt interest (1,239) (1,790) -
Other 198 (81) (92)
----------------------------------
Income tax expense (benefit) $(11,275) $ 8,449 $10,451
==================================
44
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
Net deferred tax liabilities, which are included in accounts payable and
accrued expenses, reflect the tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes. Significant components of the Company's net deferred tax
liabilities as of December 31 are as follows (in thousands):
1996 1995
-----------------------
Deferred tax assets:
Provision for bad debts $ 748 $ 444
Nondeductible hospitalization accruals 968 643
Accrued vacation 611 428
State net operating loss carryforward 1,864 -
Other 370 -
-----------------------
Total deferred tax assets 4,561 1,515
Deferred tax liabilities:
Unrealized gains on investments 193 377
Depreciation 1,075 1,090
Tax credit for research activities 4,242 751
Prepaid expenses 240 -
Accrued market discount on bonds held 443 423
-----------------------
Total deferred tax liabilities 6,193 2,641
-----------------------
Net deferred tax liability $1,632 $1,126
=======================
As a result of current year losses, approximately $27.0 million of state tax
loss carryforwards will be available for use to offset future state taxable
income through 2001.
The Company paid income taxes of $904,000 in 1996, $10,754,000 in 1995, and
$7,059,000 in 1994.
6. LEASES
The Company leases office space for ten branch locations.
Future minimum lease payments under noncancelable operating leases with
remaining terms of one year or more consisted of the following at December 31,
1996 (in thousands):
1997 $ 2,530
1998 2,573
1999 2,465
2000 2,264
2001 1,779
2002 and thereafter 5,094
-----------
$16,705
===========
Total rent expense was $2,784,000 in 1996, $1,423,000 in 1995,
and $420,000 in 1994.
45
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in various litigation and claims arising in the normal
course of business which management believes, based upon discussions with legal
counsel, will not have a material adverse effect on the accompanying financial
statements.
During 1996, the Company entered into a revolving credit agreement under which
it borrowed $18 million to provide short-term financing for the
purchase of the Company's new headquarters. In the fourth quarter the Company
repaid amounts due under the credit agreement and terminated the credit line.
Total interest expense paid in connection with this agreement was approximately
$388,000.
The Health Reinsurance Association ("HRA") provides for otherwise unavailable
health insurance coverage to uninsured or underinsured Connecticut residents.
All health insurers, including HMOs, licensed in Connecticut are subject to
assessment by the HRA to the extent the HRA incurs net losses. Assessments are
based on premiums written and amounted to $1,018,000, $692,000, and $800,000 in
1996, 1995 and 1994, respectively.
PHS/NY is subject to a community rating law which establishes a pooling
mechanism providing for payments to insurers writing policies for a
disproportionate share of individuals with certain demographic characteristics
and catastrophic medical expenses. Depending on the age and sex characteristics
of an insurer's members, an insurer will either make payments to or receive
payments from the state pooled fund. Expenses related to the demographic pool
were $3,180,000 in 1996, $1,483,000 in 1995 and $1,152,000 in 1994.
For further commitments, refer to Note 11.
8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS
The Company sponsors a defined contribution pension plan covering all full-time
eligible employees (as defined). Contributions are based on a percentage of
eligible salaries as determined by the Board of Directors. This plan also
allows for additional voluntary contributions by covered full-time employees.
Pension cost was approximately $1,061,000 in 1996, $853,000 in 1995 and
$696,000 in 1994. The Company also has a 401(k) plan which covers substantially
all eligible employees (as defined). This plan allows for voluntary employee
contributions and a corporate match of 75% up to 4% of each employee's
compensation. In addition, the Company contributes 1% of each eligible
employee's compensation (as defined) to the plan. Expense related to the 401(k)
plan was $858,000 in 1996, $654,000 in 1995, and $519,000 in 1994.
The Company's Board of Directors, on November 17, 1992, and subsequently on
November 21, 1995, adopted two Stock Option Plans (the "Plans") under
which the Company may grant to certain officers and key employees (and, under
the 1995 Plan, directors) incentive and nonqualified stock options for up to an
aggregate maximum of 1,400,000 shares of Class A Common Stock. Under the Plans,
the Board or Compensation Committee sets the exercise price for such options,
but for incentive stock options, the exercise price shall not be less than the
fair market value of the stock at the date of grant. Under the Plans, options
may be exercised only at such times and under such conditions as determined by
the Board or the Compensation Committee, but in no event more than ten years
after the date of grant. The options that have been granted to date become
exerciseable in equal installments over a period of three years and expire after
ten years except for ten percent shareholders for which such options expire five
years after the grant dates and certain performance based options granted in
1996, whose vesting may be accelerated based upon achievement of certain
earnings targets.
46
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
8. EMPLOYEE BENEFIT AND STOCK OPTION PLANS (CONTINUED)
Information relating to stock options during 1996, 1995, and 1994 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF SHARES AVERAGE OF SHARES AVERAGE OF SHARES AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 574,478 $24.78 187,514 $18.40 86,848 $15.00
Granted 565,040 22.09 413,098 27.45 111,950 20.86
Exercised (32,582) 18.43 (14,974) 16.73 (3,558) 15.00
Canceled (37,153) 29.29 (11,160) 27.05 (7,726) 17.36
-------------------------------------------------------------------------------------------
Outstanding at end of year 1,069,783 $23.40 574,478 $24.78 187,514 $18.40
===========================================================================================
Exercisable at end of year 317,478 $22.90 73,364 $17.55 25,318 $15.00
Available for grant, at end of year 279,103 - 506,990 - 408,928 -
</TABLE>
Supplemental and Pro Forma Disclosure:
The following pro forma information regarding net income (loss) and net income
(loss) per share, required by SFAS 123, has been determined as if the Company
had accounted for its stock-based compensation plans under the fair value
methods described in that statement. The fair value of options granted under the
Company's stock-based compensation plans was estimated at the date of grant
using a Black-Scholes option pricing model. The Black-Scholes option pricing
model was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition, option
pricing models require the input of highly subjective assumptions including the
expected dividend yield, the expected life of the options, the expected price
volatility and the risk free interest rate. The weighted averages of the
assumptions used are set forth in the following paragraph.
The weighted average dividend yield for stock option grants during 1996 and
1995 was 0%. The weighted average expected life for 1996 and 1995 was 5 years.
The weighted average volatility for 1996 and 1995 was .46%. The weighted
average risk-free interest rate for 1996 and 1995 was 5.87% and 6.99%,
respectively.
For purposes of pro forma disclosure, the estimated fair values of the options
awarded are amortized to expense over the options' vesting period and do not
include grants prior to January 1, 1995. As such, the pro forma information is
not indicative of future years. The Company's pro forma information was as
follows (in thousands, except per share data):
1996 1995
---------------------------
Net income (loss):
As reported $(12,964) $15,970
Pro forma (14,379) 15,535
Net income (loss) per common share:
As reported $(1.39) $1.70
Pro forma (1.54) 1.65
47
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
9. DIVIDEND AND INVESTMENT RESTRICTIONS OF SUBSIDIARIES
The Company's HMO and insurance subsidiaries are subject to statutory
regulations that restrict the payment of dividends. Based on laws currently in
effect, PHS/CT generally may not pay dividends in excess of the greater of (1)
the net gain from operations for the preceding calendar year, or (2) 10% of
capital and surplus as of the preceding year end, both as determined in
accordance with statutory accounting practices, without receiving approval of
the Connecticut Insurance Commissioner. The maximum amount of cash dividends
that PHS/CT could pay in 1997 without regulatory approval is approximately
$2,800,000.
The Company is required by the State of New York to maintain an escrow reserve,
currently held in U.S. government obligations, equal to 5% of PHS/NY's
estimated health care expenses for the upcoming year. The escrow reserve was
approximately $9,113,000 and $7,087,000 at December 31, 1996 and 1995,
respectively.
The Company is required by the New Jersey State Insurance Department to
maintain an escrow reserve of $300,000 in the event of insolvency. The escrow
reserve was approximately $322,000 at December 31, 1996.
Based on statutory rules and restrictions, the amount of restricted net assets
of consolidated subsidiaries at December 31, 1996 was approximately $38.8
million.
10. ARRANGEMENT WITH THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
In 1995, the Company's subsidiaries, PHS/CT, PHS/NY and PHS/Bermuda, entered
into several marketing and reinsurance agreements with The Guardian Life
Insurance Company of America ("Guardian") and, together, the "companies".
Under these agreements, jointly developed managed care and indemnity products
are marketed to existing insureds of Guardian. In addition, the companies
distributed these products through the brokerage community and an integrated
marketing effort by the companies under the trade name "Healthcare Solutions."
In 1995 and for the first nine months of 1996, PHS/CT, under the terms of the
marketing agreement, wrote 100% of the HMO/POS business and Guardian wrote 100%
of the indemnity business in Connecticut. Under the terms of the profit sharing
agreement, a profit or loss was determined for each line of business. If both
lines were profitable, profits, after provisions for related expenses, as
defined, were shared equally. If neither line were profitable, each company
retained losses, after provisions for related expenses, for its line of business
written. If one line was profitable and the other unprofitable, payments, as
defined, were to be made by the company writing the profitable line to the
company with the unprofitable line, before net profits, if any, were shared. In
connection with this agreement, PHS/CT reported losses of $7.6 million for the
HMO/POS business.
As of October 1, 1996, PHS/CT writes 100% of the HMO/POS business and, under the
terms of a quota share reinsurance agreement, cedes 50% of it to Guardian.
Accordingly, profits and losses, after provisions for related expenses, as
defined, are shared equally. Additionally, 50% of losses previously reported
under the agreement discussed in the preceeding paragraph are recoverable from
future profits, if any, under the reinsurance agreement. After September 30,
1996, PHS/CT no longer participates in the indemnity business.
In 1995, PHS/NY wrote the HMO/POS In-Network business and, under the terms of a
quota share reinsurance agreement, ceded 50% of it to Guardian, while Guardian
wrote 100% of the Indemnity/POS Out-of-Network business and, under the terms of
a quota share reinsurance agreement with PHS/Bermuda, ceded 50% of it to PHS/
Bermuda. As such, profits and losses, after provisions for related expenses, as
defined, were shared equally.
From January 1, 1996 to June 30, 1996, PHS/NY's participation in the Indemnity
business was reduced from 50% to 10%. After June 30, 1996, PHS/NY no longer
participates in the Indemnity business.
48
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
10. AGREEMENT WITH THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA (CONTINUED)
In 1996, PHS/NJ entered into marketing and reinsurance agreements with Guardian.
PHS/NJ writes the HMO/POS In-Network business and, under the terms of the quota
share reinsurance agreement, cedes 50% of it to Guardian PHS/NJ writes the
HMO/POS out-of-network business and under the terms of a quota share reinsurance
agreement, ceded 100% of it to Guardian, who retrocedes 50% of it back to PHS.
As such, profits and losses, after provisions for related expenses, as defined,
are shared equally.
In 1996, these jointly marketed products generated approximately $114.5 million
of revenue and $129.1 million of medical costs and other expenses for PHS.
In 1995, these jointly marketed products generated approximately $21.5 million
of revenue and $20.2 million of medical costs and other expenses for PHS.
Other receivables at December 31, 1996 and 1995 includes amounts due from
Guardian under profit sharing and reinsurance agreements of approximately $18.4
million and $11.8 million, respectively.
In October 1996, Guardian canceled its warrant that was issued by the
Company in 1995, which originally provided for the purchase of one million
shares of the Company's Class A common stock, once certain operating conditions
had been met. Based upon a subsequent agreement with Guardian, the number
of shares available for purchase under the warrant at the time it was canceled
had been substantially reduced as a result of the Guardian's purchase of shares
of the Company's Class A common stock on the open market. The Company had not
recognized any expense related to the warrant as the conditions to its
exercisability had not been met, nor was it deemed probable that they would be
met up to the date of cancellation.
11. SALE OF TEC AND INVESTMENT IN MASTERCARE COMPANIES, INC.
In September 1995, the Company sold 81% of its wholly-owned subsidiary Total
Employee Care, Inc. to Mastercare Companies, Inc. (Mastercare) for 625,000
voting shares of Mastercare common stock. In addition, the Company purchased
additional shares of Mastercare voting stock in the amount of 1,250,000 shares
at $1.20 per share. The Company owns less than 20% of the voting stock and does
not have the ability to exercise significant influence over the operating and
financial policies of Mastercare and, accordingly has reported this investment
at the lower of cost or market.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected unaudited data reflecting the Company's results of operations for each
of the last eight fiscal quarters are shown in the following table (dollars in
millions):
1996
1ST 2ND 3RD 4TH
-------------------------------------------
Premium revenues $111.8 $118.4 $123.2 $128.1
Total health care expenses 92.9 108.9 109.6 114.6
Selling general and administrative
expenses 19.4 20.0 23.4 23.2
Net income (loss) .9 (5.0) (4.5) (4.4)
Net income (loss) per share 0.09 (0.54) (0.49) (0.46)
49
<PAGE>
Physicians Health Services, Inc.
Notes to Consolidated Financial Statements (continued)
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
1995
1ST 2ND 3RD 4TH
-------------------------------------------
Premium revenues $ 79.6 $ 78.7 $ 85.7 $ 99.0
Total health care expenses 62.5 60.8 63.7 76.8
Selling general and administrative
expenses 12.6 14.0 15.4 18.8
Net income 3.1 3.7 5.2 4.0
Net income per share 0.33 0.39 0.55 0.42
Note: The sum of the quarters' net income (loss) per share does not equal the
full year per share amount due to rounding.
50
<PAGE>
Schedule I
Physicians Health Services, Inc.
Condensed Financial Information of Registrant
(Dollars in Thousands)
Balance Sheets
(Parent Company)
DECEMBER 31
1996 1995
-----------------------
Assets
Cash $ 15,572 $ 187
Other receivables 219 192
Prepaid expenses and other 1,128 99
-----------------------
TOTAL CURRENT ASSETS 16,919 478
-----------------------
Property, plant and equipment 408 250
Other assets 2,319 2,306
Investment in and advances to
wholly-owned subsidiaries 86,603 106,206
-----------------------
TOTAL ASSETS $106,249 $109,240
=======================
Liabilities and stockholders' equity
Accounts payable and accrued
expenses $ 9,963 $ 359
-----------------------
TOTAL CURRENT LIABILITIES 9,963 359
-----------------------
Stockholders' equity
Common Stock 94 94
Additional paid-in capital 41,360 40,760
Net unrealized gains on
marketable securities
of subsidiaries, net of tax 279 510
Retained earnings 54,554 67,518
-----------------------
96,287 108,882
Less treasury stock (1) (1)
-----------------------
TOTAL STOCKHOLDERS' EQUITY 96,286 108,881
-----------------------
TOTAL LIABILITIES AND $106,249 $109,240
STOCKHOLDERS' EQUITY =======================
The condensed financial information should be read in conjunction with the
consolidated financial information and the accompanying notes thereto.
51
<PAGE>
Schedule I
Physicians Health Services, Inc.
Condensed Financial Information of Registrant
(Dollars in Thousands)
Statements of Operations
(Parent Company)
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------
Revenue:
Investment income $ 92 $ 8 $ -
----------------------------------
Costs and expenses:
General and administrative expenses - 2,188 1,243
Interest expense 381 - -
----------------------------------
381 2,188 1,243
----------------------------------
LOSS BEFORE INCOME TAXES (289) (2,180) (1,243)
Income tax expense (benefit) 249 505 (154)
----------------------------------
Loss before equity in net income (loss)
of wholly-owned subsidiaries (538) (2,685) (1,089)
Equity in net income (loss) of
wholly-owned subsidiaries, net of
taxes (12,426) 18,655 15,223
----------------------------------
NET INCOME (LOSS) ($ 12,964) $15,970 $14,134
==================================
The condensed financial information should be read in conjunction with the
consolidated financial information and the accompanying notes thereto.
52
<PAGE>
Schedule I
Physicians Health Services, Inc.
Condensed Financial Information of Registrant
(Dollars in Thousands)
Statements of Cash Flows
(Parent Company)
YEAR ENDED DECEMBER 31
1996 1995 1994
----------------------------------
OPERATING ACTIVITIES
Net income (loss) ($12,964) 15,970 $ 14,134
Plus equity in net loss (income) of 12,426 (18,655) (15,223)
subsidiaries
Adjustments to reconcile net income
(loss) to cash provided by
(used for) operating activities 8,377 2,382 1,271
----------------------------------
Net cash provided by (used for) 7,839 (303) 182
operating activities
FINANCING ACTIVITIES
Advances to subsidiaries (40,198) (9,000) (10,000)
Dividends and return of capital
from subsidiaries 47,144 9,000 10,000
Exercise of stock options 600 246 53
----------------------------------
Net cash provided by financing activities 7,546 246 53
Increase (decrease) in cash 15,385 (57) 235
Cash at beginning of year 187 244 9
----------------------------------
Cash at end of year $ 15,572 $ 187 $ 244
==================================
The condensed financial information should be read in conjunction with the
consolidated financial information and the accompanying notes thereto.
53
<PAGE>
Schedule II
Physicians Health Services, Inc. and Subsidiaries
December 31, 1996
Valuation and Qualifying Accounts
(Dollars in Thousands)
Balance at Charge to Balance at
Beginning Cost and End of
of Period Expenses Deductions Period
------------------------------------------------
Year ended December 31, 1994
Allowance for doubtful
accounts $926 $1,423 ($549) $1,800
==== ====== ====== ========
Year ended December 31, 1995
Allowance for doubtful
accounts $1,800 $103 ($853) $1,050
====== ==== ====== ======
Year ended December 31, 1996
Allowance for doubtful
accounts $1,050 $1,485 ($754) $1,781
====== ====== ====== ======
54
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER
<S> <C> <C>
3 Amended and Restated Certificate of Incorporation of Company
(Incorporated by reference to Exhibit 3 in Company's Registration
Statement on Form S-1 (File No. 33-54918))
3(a) Bylaws of the Company (Incorporated by reference to Exhibit 3(a) in
Company's Registration Statement on Form S-1 (File No. 33-54918))
4 Form of Stock Certificate (Incorporated by reference to Exhibit 4 in
Company's Registration Statement on Form 8-A (File No. 0-21098))
4.1 Stock Warrant Purchase Agreement, dated November 28, 1995, between
the Company and The Guardian Life Insurance Company of America
(Incorporated by reference to Exhibit 4.1 in Company's Current Report
on Form 8-K, dated November 28, 1995)
4.2 Warrant Certificate No. AC-1, dated November 28, 1995, issued by the
Company to The Guardian Life Insurance Company of America
(Incorporated by reference to the Company's Current Report on Form 8-K,
dated November 28, 1995)
4.3 Agreement, dated October 21, 1996, between The Guardian Life Insurance
Company of America and Physicians Health Services, Inc. relinquishing
rights to purchase common stock pursuant to warrant dated November 28,
1995. (Incorporated by reference to Exhibit 10(a) in Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996)
4.4 Agreement, dated August 7, 1996, between Physicians Health Services,
Inc. and The Guardian Life Insurance Company of America (Incorporated
by reference to Exhibit 5.1 in the Company's Current Report on Form 8-K,
dated August 26, 1996)
10(a) Employment Agreement, dated October 29, 1996, between the Company
and Robert L. Natt (Incorporated by reference to Exhibit 10(b) in
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
10(b) Amendment, dated August 28, 1996, to the Employment Agreement
dated December 17, 1995 between Michael E. Herbert and Physicians
Health Services, Inc. (Incorporated by reference to Exhibit 10(c) in
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
10(c) Employment Agreement, dated February 27, 1990, between the
Company and Michael E. Herbert, as amended by Amendment to
Employment Agreement, dated November 19, 1992 (Incorporated by
reference to Exhibit 10(b) in Company's Registration Statement on
Form S-1 (File No. 33-54918))
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER
<S> <C> <C>
10(d) Employment Agreement, dated December 19, 1995, between the Company
and Michael E. Herbert (Incorporated by reference to Exhibit 10(d) in
Company's Annual Report on Form 10-K for the year ended December 31,
1995)
10(e) Employment Agreement, dated December 31, 1994, between the
Company and Richard C. O'Connor, M.D. (Incorporated by
reference to Exhibit 10(c) in Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994)
10(f) Employment Agreement, dated December 31, 1994, between the
Company and Regina M. Campbell (Incorporated by reference to
Exhibit 10(c) in Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994)
10(g) Employment Agreement, dated as of January 1, 1994, between the
Company and Stanley M. Stier, M.D. (Incorporated by reference to
Exhibit 10(g) in Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993)
10(h) Employment Agreement, dated December 1994, between the
Company and James L. Elrod, Jr. (Incorporated by reference to
Exhibit 10(g) in Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994)
10(i) Employment Agreement, dated August 24, 1994, between the
Company and Steven Black (Incorporated by reference to
Exhibit 10(h) in Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994)
10(j) Employment Agreement, dated April 28, 1994, between the
Company and Paul M. Philpott (Incorporated by reference to
Exhibit 10(i) in Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994)
10(k) Employment Agreement, dated May 9, 1995, between the Company
and Paul M. Philpott (Incorporated by reference to Exhibit 10(k) in
Company's Annual Report on Form 10-K for the year ended
December 31, 1995)
10(l) Agreement of Sale, dated March 12, 1996, between the Company and
Richardson-Vicks Real Estate, Inc. (filed herewith)
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER
<S> <C> <C>
10(m) Amended and Restated Marketing and Services Agreement,
dated October 1, 1996, By and Among Physicians Health
Services, Inc., Physicians Health Services of Connecticut, Inc.,
and The Guardian Life Insurance Company of America
(filed herewith)
10(n) Amended and Restated Marketing and Services Agreement,
dated October 1, 1996, By and Among Physicians Health Services, Inc.,
Physicians Health Services of New York, Inc. and The Guardian
Life Insurance Company of America (filed herewith)
10(o) Amended and Restated Marketing and Services Agreement,
dated October 1, 1996, By and Among Physicians Health Services,
Inc., Physicians Health Services of New Jersey, Inc. and The
Guardian Life Insurance Company of America (filed herewith)
10(p) Reinsurance Agreement, dated October 1, 1996, Between Physicians
Health Services of Connecticut, Inc. and The Guardian Life
Insurance Company of America (filed herewith)
10(q) Amended and Restated Reinsurance Agreement, dated October 1, 1996,
Between Physicians Health Services of New York, Inc. and The
Guardian Life Insurance Company of America (filed herewith)
10(r) Amended and Restated Reinsurance Agreement, dated October 1, 1996,
Among Physicians Health Services of New Jersey, Inc. Physicians
Health Services (Bermuda) Ltd. and The Guardian Life Insurance
Company of America (filed herewith)
10(s) Amended and Restated Reinsurance Agreement, dated October 1, 1996,
Between Physicians Health Services (Bermuda) Ltd. and The Guardian
Life Insurance Company of America (filed herewith)
10(t) GBIPA Service Agreement, dated as of January 1, 1997, between
the Company and Greater Bridgeport Individual Practice Association,
Inc. (filed herewith)
10(u) HMO-IPA Service Agreement, dated as of January 1, 1997,
between the Company and Fairfield Individual Practice Association,
Inc. (filed herewith)
10(v) HMO-IPA Service Agreement, dated as of January 1, 1997,
between the Company and Heritage Individual Practice Association,
Inc. (filed herewith)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER
<S> <C> <C>
10(w) HMO-IPA Service Agreement, dated as of April 26, 1984, between
the Company and Colonial Individual Practice Association, Inc., as
amended effective January 1, 1994 (Incorporated by reference to
Exhibit 10(j) in Company's Annual Report on Form 10-K for the year
ended December 31, 1993)
10(x) HMO-IPA Service Agreement, dated as of May 19, 1987, between the
Company and White Plains IPA, Inc., as amended effective January
1, 1992 (Incorporated by reference to Exhibit 10(m) in Company's
Registration Statement on Form S-1 (File No. 33-54918))
10(y) Amendment to HMO-IPA Service Agreement, dated as of April 28,
1993, between the Company and White Plains - Sound Shore IPA,
Inc. (f/k/a White Plains IPA, Inc.) (Incorporated by reference to
Exhibit 10(o) in Company's Annual Report on Form 10-K for the
year ended December 31, 1993)
10(z) 1994-1996 Amendment to HMO-IPA Service Agreement, dated
September 20, 1993, between the Company and White Plains - Sound
Shore IPA, Inc., effective January 1, 1994 (Incorporated by reference
to Exhibit 10(p) in Company's Annual Report on Form 10-K for the
year ended December 31, 1993)
10(aa) HMO-IPA Service Agreement, dated as of May 19, 1987, between the
Company and Hudson IPA, Inc., as amended, effective January 1,
1992 (Incorporated by reference to Exhibit 10(n) in Company's
Registration Statement on Form S-1 (File No. 33-54918))
10(bb) Amendment to HMO-IPA Service Agreement, dated as of April 29,
1993, between the Company and Hudson IPA, Inc. (Incorporated by
reference to Exhibit 10(r) in Company's Annual Report on Form 10-K
for the year ended December 31, 1993)
10(cc) 1994-1996 Amendment to HMO-IPA Service Agreement, dated
August 20, 1993, between the Company and Hudson IPA, Inc.
effective January 1, 1994 (Incorporated by reference to Exhibit 10(s)
in Company's Annual Report on Form 10-K for the year ended
December 31, 1993)
10(dd) Amended and Restated 1995 Stock Option Plan (filed herewith)
10(ee) HMO-PHO Service Agreement, dated as of December 23, 1993,
between the Company and Saint Francis/Mount Sinai Physicians
Hospital Organization (Incorporated by reference to Exhibit 10(t) in
Company's Annual Report on Form 10-K for the year ended December
31, 1993)
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER
<S> <C> <C>
10(ff) Letter Amendment to HMO-PHO Service Agreement, dated
September 28, 1995, between the Company and Saint
Francis/Mount Sinai Physicians Hospital Organization (Incorporated
by reference to Exhibit 10(y) in Company's Annual Report on Form
10-K for the year ended December 31, 1995)
10(gg) Service Agreement between the Company and Hartford Physician
Hospital Corporation effective January 1, 1996 (Incorporated
by reference to Exhibit 10(z) in Company's Annual Report on Form
10-K for the year ended December 31, 1995)
10(hh) Agreement between Company and Yale-New Haven Hospital-
Physicians Corporation Agreement regarding covered services
(Incorporated by reference to Exhibit 10(gg) in Company's Annual
Report on Form 10-K for the year ended December 31, 1994)
10(ii) Financial Letter, dated September 24, 1991, to Bridgeport Hospital
summarizing the arrangements between the Company and Bridgeport
Hospital (Incorporated by reference to Exhibit 10(o) in Company's
Registration Statement on Form S-1 (File No. 33-54918))
10(jj) 1992 Stock Option Plan, as amended (Incorporated by reference to
Exhibit 10(x) in Company's Annual Report on Form 10-K for the
year ended December 31, 1994)
10(kk) Company's 401(k) Plan (Incorporated by reference to Exhibit 10(x) in
Company's Registration Statement on Form S-1 (File No. 33-54918))
10(ll) Amendment to Company's 401(k) Plan (Incorporated by reference to
Exhibit 10(z) in Company's Annual Report on Form 10-K for the year
ended December 31, 1994)
10(mm) Agreement between the Company and Phoenix Mutual Life Insurance
Company ("Phoenix") (Incorporated by reference to Exhibit 10(r) in
Company's Registration Statement on Form S-1 (File No. 33-54918))
10(nn) Letter Agreement, dated as of September 19, 1990 between the
Company and Phoenix (Incorporated by reference to Exhibit 10(s) in
Company's Registration Statement on Form S-1 (File No. 33-54918))
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF DOCUMENT PAGE NUMBER
<S> <C> <C>
10(oo) Form of Change in Control Agreement entered into between the
Company and Messrs. Herbert and Natt, Drs. Stier and O'Connor
and Ms. Campbell. (Incorporated by reference to Exhibit 10(z) in
Company's Annual Report on Form 10-K for the year ended
December 31, 1993)
10(pp) Form of Conditional Employment Agreement entered into between the
Company and Messrs. Herbert, Natt, Elrod and Philpott, Drs.
O'Connor and Stier and Ms. Campbell (Incorporated by reference to
Exhibit 10(dd) in Company's Annual Report on Form 10-K for the
year ended December 31, 1994)
10(qq) Form of Change in Control Agreement entered into between the
Company and certain other members of senior management
(Incorporated by reference to Exhibit 10(aa) in Company's Annual
Report on Form 10-K for the year ended December 31, 1993)
21 Subsidiaries of the Company (filed herewith)
23 Consent of Independent Auditors (filed herewith)
</TABLE>
60
<PAGE>
EXHIBIT 10(dd)
AMENDED AND RESTATED
PHYSICIANS HEALTH SERVICES, INC.
1995 STOCK OPTION PLAN
ARTICLE I
PURPOSE OF STOCK OPTION PLAN; DEFINITIONS
Reference is hereby made to the Physicians Health Services 1995 Stock Option
Plan adopted by the Board of Directors on November 21, 1995. This Amended and
Restated 1995 Stock Option Agreement dated as of November 1, 1996 supersedes and
replaces the 1995 Stock Option Plan in its entirety.
A. Purpose. The purpose of the Physicians Health Services, Inc., 1995 Stock
-------
Option Plan is to provide an incentive, in the form of Incentive Stock
Options and Non-Qualified Stock Options, to key employees of the
Employer, who are in a position to contribute materially to the
long-term success of the Employer, to increase their interest in the
Employer's welfare, and to aid in attracting and retaining Employees of
outstanding ability (terms defined below).
2. Definitions. Unless the context clearly indicates otherwise, the
-----------
following terms shall have the meanings set forth below:
(1) "BOARD" shall mean the Board of Directors of the Company.
(2) "CODE" shall mean the Internal Revenue Code of 1986, as it may be
amended from time to time.
(3) "COMPENSATION COMMITTEE" shall mean a committee consisting of two
or more directors who are not officers of, or otherwise employed
by, PHS or any parent or subsidiary, and who do not posses an
interest in any transaction for which disclosure would be required
under Section 404(a) or (b) of Regulation S-K promulgated by the
Securities and Exchange Commission, and do not receive
compensation, directly or indirectly, in excess of $60,000 from PHS
or any parent or subsidiary.
(4) "COMPANY" shall mean Physicians Health Services, Inc. and any
successor thereto.
(5) "DIRECTORS" shall mean those members of the Board of Directors of
the Company and its subsidiaries who are not Employees.
(6) "DISABILITY" shall mean a medically determinable physical or mental
condition which causes an Employee to be unable to engage in any
substantial gainful activity and which can be expected to result in
death or to be of long-continued and indefinite duration.
(7) "EMPLOYEE" shall mean any common law employee, including officers
of the Employer, including its subsidiaries, as determined in the
Code and the Treasure Regulations thereunder.
(8) "EMPLOYER" shall mean Physicians Health Services, Inc., a Delaware
corporation, and its subsidiaries.
<PAGE>
(9) "FAIR MARKET VALUE" shall mean the average daily public trading
price on the applicable date or the fair market value of the Stock
as determined by the Compensation Committee on the basis of a
review of the facts and circumstances at the time.
(10) "GRANTEE" shall mean an Employee granted a Stock Option under this
Plan.
(11) "INCENTIVE STOCK OPTION" shall mean an option granted pursuant to
the Incentive Stock Option provisions as set forth in Article II of
this Plan and in the form of Exhibit A attached hereto.
---------
(12) "NON-QUALIFIED STOCK OPTION" shall mean an option granted pursuant
to the Non-Qualified Stock Option provisions as set forth in
Article III of this Plan and in the form of Exhibit B attached
---------
hereto.
(13) "PLAN" shall mean the Amended and Restated Physicians Health
Services, Inc. 1995 Stock Option Plan as set forth herein and as
amended from time to time.
(14) "STOCK" shall mean authorized but unissued shares of the Class A
Common Stock of the Company or reacquired shares of the Company's
Class A Common Stock.
(15) "STOCK OPTION" shall mean an option granted pursuant to the Plan to
purchase shares of Stock.
(16) "TEN PERCENT STOCKHOLDER" shall mean an Employee who at the time a
Stock Option is granted owns stock possessing more than ten percent
(10%) of the total combined voting power of all stock of the
Company or of its parent or subsidiary corporation.
C. Shares of Stock Subject to the Plan. Subject to the provisions of
------------------------------------
Paragraph B of Part IV, the Stock which may be issued or transferred
pursuant to Stock Options granted under the Plan and the Stock which is
subject to outstanding but unexercised Stock Options under the Plan
shall not exceed 800,000 shares in the aggregate. If a Stock Option
shall expire and terminate for any reason, whole or in part, without
being exercised, the number of shares of Stock as to which such expired
or terminated Stock Option shall not have been exercised may again
become available for the grant of Stock Options. There shall be no terms
and conditions in a Stock Option which provide that the exercise of an
Incentive Stock Option reduces the number of shares of Stock for which
an outstanding Non-Qualified Stock Option may be exercised; and there
shall be no terms and conditions in a Stock Option which provide that
the exercise of a Non-Qualified Stock Option reduces the number of
shares of Stock for which an outstanding Incentive Stock Option may be
exercised.
D. Administration of the Plan. The Plan shall be administered by the
--------------------------
Compensation Committee. Subject to the express provisions of the Plan,
the Compensation Committee shall have authority to interpret the Plan,
to prescribe, amend and rescind rules and regulations relating to it, to
determine the terms and provisions of Stock Option agreements, and to
make all other determinations necessary or advisable for the
administration of the Plan. Any controversy or claim arising out of or
related to this Plan shall be determined unilaterally by and at the sole
discretion of the Compensation Committee.
E. Amendment or Termination. The Board may, at any time, alter, amend,
------------------------
suspend, discontinue, or terminate this Plan; provided, however, that
such action shall not adversely affect the right of Grantees to Stock
Options previously granted.
<PAGE>
F. Effective Date and Duration of the Plan. The Plan shall become effective
---------------------------------------
upon its approval by the Board. This Plan shall terminate ten years from
the date the Plan becomes effective, and no Stock Option may be granted
under the Plan thereafter, but such termination shall not affect any
Stock Option theretofore granted.
ARTICLE II
INCENTIVE STOCK OPTION PROVISION
A. Granting of Incentive Stock Options.
-----------------------------------
(1) Incentive Stock Options shall be available for grant under the Plan
only in the event that a majority of the stockholders of the
Company approve the adoption of the Plan.
(2) Only key Employees of the Employer shall be eligible to receive
Incentive Stock Options under the Plan. Directors of the Company
who are not also Employees shall not be eligible for Incentive
Stock Options.
(3) The purchase price of each share of Stock subject to an Incentive
Stock Option shall not be less than 100% of the Fair Market Value
of a share of the Stock on the date the Incentive Stock Option is
granted; provided, however, that the purchase price of each share
of Stock subject to an Incentive Stock Option granted to a Ten
Percent Stockholder shall not be less that 110% of the Fair Market
Value of a share of the Stock on the date the Incentive Stock
Option is granted.
(4) No Incentive Stock Option shall be exercisable more than ten years
from the date the Incentive Stock Option was granted; provided,
however, that an Incentive Stock Option granted to a Ten Percent
Stockholder shall not be exercisable more than five years from the
date the Incentive Stock Option was granted.
(5) The Compenstion Committee shall determine and designate from time
to time those Employees who are to be granted Incentive Stock
Options and specify the number of shares subject to each Incentive
Stock Option and such other terms, including vesting requirements
and the minimum number of options exercisable at a time.
(6) Notwithstanding any other provisions hereof, the aggregate Fair
Market Value (determined at the time the option is granted) of the
Stock with respect to which Incentive Stock Options are exercisable
for the first time by the Employee during any calendar year (under
all such plans of the Grantee's employer corporation and its parent
and subsidiary corporations) shall not exceed $100,000.
(7) The Compensation Committee, in its sole discretion, shall determine
whether any particular Incentive Stock Option shall become
exercisable in one or more installments, specify the installment
dates, and, within the limitations herein provided, determine the
total period during which the Incentive Stock Option is
exercisable. Further, the Compensation Committee may make such
other provisions as may appear generally acceptable or desirable to
the Compensation Committee or necessary to qualify its grants under
the provisions of Section 422 of the Code.
<PAGE>
(8) The Compensation Committee may grant at any time new Incentive
Stock Options to an Employee who has previously received Incentive
Stock Options or other options whether such prior Incentive Stock
Options or other options are still outstanding, have previously
been exercised in whole or in part, or are canceled in connection
with the issuance of new Incentive Stock Options. The purchase
price of the new Incentive Stock Option may be established by the
Compensation Committee without regard to the existing Incentive
Stock Options or other options.
B. Exercise of Incentive Stock Options.
-----------------------------------
(1) The option price of an Incentive Stock Option shall be payable on
exercise of the option (i) in cash or by check, bank draft or
postal express money order, (ii) by promissory note, (iii) by the
surrender of Stock or Class B Common Stock then owned by the
Grantee, provided that the stock surrendered by the Grantee has
been owned by the Grantee for at least six (6) months, or (iv) a
combination of clauses (i), (ii) or (iii). Shares of Stock or Class
B Common Stock so surrendered in accordance with clause (iii) or
(IV) shall be valued at the Fair Market Value thereof on the date
of exercise, surrender of such Stock or Class B Common Stock to be
evidenced by delivery of the certificate(s) representing such
shares in such manner, and endorsed in such form, or accompanied by
stock powers endorsed in such form, as the Compensation Committee
may determine.
C. Termination of Employment.
-------------------------
(1) If a Grantee's employment is terminated (other than by Disability
or death) the terms of any then outstanding Incentive Stock Option
held by the Grantee shall extend for a period ending on the earlier
of the date on which such option would otherwise expire or three
months after such termination of employment, and such option shall
be exercisable to the extent it was exercisable as of the date of
termination of employment.
(2) If a Grantee's employment is terminated by reason of Disability,
the term of any then outstanding Incentive Stock Option held by the
Grantee shall extend for a period ending on the earlier of the date
on which such option would otherwise expire or twelve months after
the Grantee's last date of employment, and such option shall be
exercisable to the extent it was exercisable as of such last date
of employment.
(3) If a Grantee's employment is terminated by death, the
representative of his estate or beneficiaries thereof to whom the
option has been transferred shall have the right during the
three-month period following his death to exercise any then
outstanding Incentive Stock Options in whole or in part. If a
Grantee dies within three months after his retirement without
having fully exercised any then outstanding Incentive Stock
Options, the representative of his estate or beneficiaries thereof
to whom the option has been transferred shall have the right during
such three-month period to exercise such options in whole or in
part. The number of shares of Stock in respect of which an
Incentive Stock Option may be exercised after a Grantee's death
shall be the number of shares in respect of which such option could
be exercised as of the date of the Grantee's death or retirement,
whichever occurs first. In no event may the period for exercising
an Incentive Stock Option extend beyond the date on which such
option would otherwise expire.
(4) The Board may grant a leave of absence to any Grantee for purposes
of continuing such Grantee's employment with the Employer.
<PAGE>
ARTICLE III
NON-QUALIFIED STOCK OPTION PROVISIONS
A. Granting of Non-Qualified Stock Options.
---------------------------------------
(1) Only key Employees of the Employer and Directors shall be eligible
to receive Non-Qualified Stock Options under the Plan.
(2) The Compensation Committee shall determine and designate from time
to time those Employees who are to be granted Non-Qualified Stock
Options and the amount subject to each Non-Qualified Stock Option.
(3) The Compensation Committee may grant at any time new Non-Qualified
Stock Options to an Employee who has previously received
Non-Qualified Stock Options or other options, whether such prior
Non-Qualified Stock Options or other options are still outstanding,
have previously been exercised in whole or in part, or are canceled
in connection with the issuance of new Non-Qualified Stock Options.
(4) When granting a Non-Qualified Stock Option, the Compensation
Committee shall determine the purchase price of the Stock subject
thereto. Such price may be less that 100% of the Fair Market Value
of such stock on the date the Non-Qualified Stock Option is
granted.
(5) The Compensation Committee, in its sole discretion, shall determine
whether any particular Non-Qualified Stock Option shall become
exercisable in one or more installments, specify the installment
dates, and, within the limitations herein provided, determine the
total period during which the Non-Qualified Stock Option is
exercisable. Further, the Compensation Committee may make such
other provisions as may appear generally acceptable or desirable to
the Compensation Committee.
(6) No Non-Qualified Stock Option shall be exercisable more than ten
years from the date such option is granted.
B. Exercise of Stock Options.
-------------------------
(1) The option price of a Non-Qualified Stock Option shall be payable
on exercise of the option (i) in cash or by check, bank draft or
postal or express money order, (ii) by promissory note, (iii) by
the surrender of Class B Common Stock or Stock then owned by the
Grantee provided that the Stock surrendered has been held by for at
least six months, or (iv) by a combination of clauses (i), (ii) and
(iii). Shares of Class B Common Stock or Stock so surrendered in
accordance with clause (iii) or (iv) shall be valued at the Fair
Market Value thereof on the date of exercise, surrender of such to
be evidenced by delivery of the certificate(s) representing such
shares in such manner, and endorsed in such form, or accompanied by
stock powers endorsed in such form, as the Compensation Committee
may determine.
C. Termination of Employment.
-------------------------
(1) If a Grantee's employment is terminated (other than by Disability
or death), the terms of any then outstanding Non-Qualified Stock
Option held by the Grantee shall extend for a period ending on the
earlier of the date on which such option would otherwise expire or
three months after such termination of employment and such option
shall be exercisable to the extent it was exercisable as of the
date of termination of employment.
<PAGE>
(2) If a Grantor's employment is terminated by reason of Disability,
the term of any then outstanding Non-Qualified Stock Option held by
the Grantee shall extend for a period ending on the earlier of the
date on which such option would otherwise expire or twelve months
after the Grantee's last date of employment, and such option shall
be exercisable to the extent it was exercisable as of such last
date of employment.
(3) If a Grantee's employment is terminated by death, the
representative of his estate or beneficiaries thereof to whom the
option has been transferred shall have the right during the
three-month or less period following his death to exercise any then
outstanding Non-Qualified Stock Options in whole or in part. If a
Grantee dies within three months after his retirement without
having fully exercised any then outstanding Non-Qualified Stock
Options, the representative of his estate or beneficiaries thereof
to whom the option has been transferred shall have the right during
such three month period to exercise such options in whole or in
part. The number of shares of Stock in respect of which a
Non-Qualified Stock Option may be exercised after a Grantee's death
shall be the number of shares of Stock in respect of which such
option could be exercised as of the date of the Grantee's death or
retirement, whichever first occurs. In no event may the period for
exercising a Non-Qualified Stock Option extend beyond the date on
which such option would otherwise expire.
(4) The Board may grant a leave of absence to any Grantee for purposes
of continuing such Grantee's employment with the Employer.
ARTICLE IV
GENERAL PROVISIONS
A. Substitution of Options. In the event of a corporate merger or
-----------------------
consolidation, or the acquisition by the Employer of property or stock
of an acquired corporation or any reorganization or other transaction
qualifying under Section 425 of the Code, the Compensation Committee
may, in accordance with the provisions of that Section, substitute
options under this Plan for options under the plan of the acquired
corporation provided (i) the excess of the aggregate fair market value
of the shares subject to option immediately after the substitution over
the aggregate option price of such shares is not more than the similar
excess immediately before such substitution and (ii) the new option does
not give the Employee additional benefits, including any extension of
the exercise period.
B. Accelerated Vesting of Options. Notwithstanding anything herein to the
------------------------------
contrary, in the event of a corporate merger or consolidation of the
Employer with another entity, or acquisition of all or substantially all
of the property or stock of the Employer, or any other reorganization or
other transaction (a "Change of Control"), all then outstanding Stock
Options shall be immediately exercisable as of the date immediately
preceding such Change of Control.
C. Adjustment Provision.
--------------------
(1) If the shares of Stock outstanding are changed in number or class by
reason of a split-up, merger, consolidation, reorganization,
reclassification, recapitalization, or any capital adjustment, including
stock dividend, or if any distribution is made to the holders of common
stock other than a cash dividend, then
(i) the aggregate number and class of shares or other securities
that may be issued or transferred pursuant to Paragraph C of
Article I,
<PAGE>
(ii) the number and class of shares or other securities which are
issuable under outstanding Stock Options, and
(iii)the purchase price to be paid per share under outstanding
Stock Options shall be adjusted as provided hereinafter.
(2) Adjustment under this Paragraph B shall be made in an equitable
manner by the Compensation Committee, whose determination as to
what adjustments shall be made, and the extent thereof, shall be
final, binding, and conclusive.
D. General.
-------
(1) Each Stock Option shall be evidenced by a written instrument
containing such terms and conditions, not inconsistent with this
Plan, as the Board shall approve.
(2) The granting of a Stock Option in any year shall not give the
Grantee any right to similar grants in future years or any right to
be retained in the employ of the Employer, and all Employees shall
remain subject to discharge to the same extent as if the Plan were
not in effect.
(3) No employee, and no beneficiary or other person claiming under or
through him, shall have any right, title or interest by reason of
any Stock Option to any particular assets of the Employer, or any
shares of Stock allocated or reserved for the purposes of the Plan
or subject to any Stock Option except as set forth herein. The
Employer shall not be required to establish any fund or make any
other segregation of assets to assure the payment of any Stock
Option.
(4) No right under the Plan shall be subject to anticipation, sale,
assignment, pledge, encumbrance, or charge except by will or the
laws of descent and distribution, and a Stock Option shall be
exercisable during the Grantee's lifetime only by the Grantee.
(5) Notwithstanding any other provision of this Plan or agreements made
pursuant thereto, the Company's obligation to issue or deliver any
certificate or certificates for shares of Stock under a Stock
Option, and the transferability of Stock acquired by exercise of a
Stock Option, shall be subject to all of the following conditions:
(i) Any registration or other qualification of such shares under
any state or federal law or regulation, or the maintaining in
effect of any such registration or other qualification which
the Board shall, in its absolute discretion upon the advice of
counsel, deem necessary or advisable;
(ii) The obtaining of any other consent, approval, or permit from
any state or federal government agency which the Board shall,
in its absolute discretion upon the advice of counsel,
determine to be necessary or advisable; and
(iii)Each stock certificate issued pursuant to a Stock Option shall
bear the following legend:
"The transferability of this certificate and the shares of
Stock represented hereby are subject to restrictions, terms
and conditions contained in the Physicians Health Services,
Inc. 1995 Stock Option Plan, and an Agreement between the
registered owner of such Stock and Physicians Health Services,
Inc. A copy of the Plan and Agreement are on file in the
office of the Secretary of Physicians Health Services, Inc."
<PAGE>
(6) All payments to Grantees or to their legal representatives shall be
subject to any applicable tax, community property, or other
statutes or regulations of the United States or of any state having
jurisdiction thereof. The Grantee may be required to pay to the
Employer the amount of any withhold taxes which the Employer is
required to withhold with respect to a Stock Option or its
exercise. In the event that such payment is not made when due, the
Employer shall have the right to deduct, to the extent permitted by
law, from any payment of any kind otherwise due to such person all
or part of the amount required to be withheld.
(7) In the case of a grant of a Stock Option to any Employee of a
subsidiary of the Company, the Company may, if the Compensation
Committee so directs, issue or transfer the shares, if any, covered
by the Stock Option to the subsidiary, for such lawful
consideration as the Compensation Committee may specify, upon the
condition or understanding that the subsidiary will transfer the
shares to the Employee in accordance with the terms of the Stock
Option specified by the Compensation Committee pursuant to the
provisions of the Plan. For purposes of this Section, a subsidiary
shall mean any subsidiary corporation of the Company as defined in
Section 425 of the Code.
(8) A Grantee entitled to Stock as a result of the exercise of an
option shall not be deemed for any purpose to be, or have rights
as, a stockholder of the Employer by virtue of such exercise,
except to the extent a stock certificate is issued therefor and
then only from the date such certificate is issued. No adjustments
shall be made for dividends or distributions or other rights for
which the record date is prior to the date such stock certificate
is issued. The Employer shall issue any stock certificates required
to be issued in connection with the exercise of a Stock Option with
reasonable promptness after such exercise.
(9) The grant or exercise of Stock Options granted under the Plan shall
be subject to, and shall in all respects comply with, applicable
Delaware corporate law relating to such grant or exercise.
Adopted by the Board of Directors: November 21, 1995
Amended as of November 1, 1996
<PAGE>
EXHIBIT A
---------
PHYSICIANS HEALTH SERVICES, INC.
1995 INCENTIVE STOCK OPTION AGREEMENT
Agreement made this _______ day of _________ between Physicians Health
Services, Inc. a corporation organized under the laws of the State of Delaware
(hereinafter called the "Corporation") and ___________________ (hereinafter
called the "Grantee").
WHEREAS, the Corporation desires to provide the Grantee with an
opportunity to acquire or increase his proprietary interest in the business of
the Corporation and, through stock ownership, to possess an increased personal
interest in its continued success and progress;
NOW THEREFORE, in consideration of the premises, the mutual covenants
hereinafter set forth, and other good and valuable consideration, the
Corporation and the Grantee agree as follows:
1. Award of Option. The Corporation hereby awards to the Grantee, as a
---------------
matter of separate inducement and agreement, and not in lieu of salary or any
other compensation for services, an option to purchase an aggregate of ______
shares of the Corporation's Class A Common Stock pursuant to the Incentive Stock
Option provisions contained in Article II of the Plan, on the terms and
conditions hereinafter set forth, at the purchase price of $_______ per share
(such shares, number of shares and purchase price being subject to adjustment as
provided in Paragraph A of Article IV of the Plan).
2. Terms of Plan. The Plan, a copy of which is attached hereto, is
-------------
incorporated herein by reference and is made part of this Agreement as if fully
set forth herein. This Agreement is subject to, and the Corporation and the
Grantee agree to be bound by, all of the terms and conditions of the Plan as the
Plan exists at the time of this Agreement's execution. The Plan shall control in
the event there is any express conflict between the Plan and the terms hereof,
and on such matters that are not expressly covered in this Agreement. Subsequent
amendments of the Plan shall not adversely affect the Grantee's rights under
this Agreement.
3. Exercise of Option. The Stock Option granted pursuant to this
------------------
Agreement is exercisable in accordance with the vesting schedule approved by the
Compensation Committee, as set forth below.
Installments, if applicable, shall be cumulative, but each exercise must
encompass at lease one installment of _____ shares, whichever is less. In the
event the Grantee's exercise includes a fractional share, the Corporation will
not be required to issue a fractional share but will pay the Grantee in Cash the
value of such fraction. All unexercised rights shall lapse and forever terminate
after the expiration of ten years from the date of this Agreement, provided,
however, that all unexercised rights granted to ten percent stockholders shall
lapse and forever terminate after the expiration of five years from the date of
this Agreement.
4. Termination of Employment. If the Grantee's employment is terminated
-------------------------
(other than by Disability or death) the terms of any then outstanding Incentive
Stock Option held by the Grantee shall extend for a period ending on the earlier
of the date on which such option would otherwise expire or three
<PAGE>
months after such termination of employment, and such option shall be
exercisable to the extent it was exercisable as of the Grantee's last date of
employment.
If a Grantee's employment is terminated by reason of Disability, the term of any
then outstanding Incentive Stock Option held by the Grantee shall extend for a
period ending on the earlier of the date on which such option would otherwise
expire or twelve months after the Grantee's last date of employment, and such
option shall be exercisable to the extent it was exercisable as of the Grantee's
last date of employment.
If a Grantee's employment is terminated by death, the representative of his
estate or beneficiaries thereof to whom the option has been transferred shall
have the right, during the period ending on the earlier of the date on which
such option would otherwise expire or three months after such termination of
employment, or exercise such options in whole or in part. If a Grantee dies
without having fully exercised any then outstanding Incentive Stock Options, the
representative of his estate of beneficiaries thereof to whom the option has
been transferred shall have the right to exercise such options in whole or in
part during the then existing exercise period. The number of shares of Stock in
respect of which an Incentive Stock Option may be exercised after a Grantee's
death shall be the number of shares in respect of which such option could be
exercised as of the Grantee's last date of employment.
5. Manner of Exercise. Full payment for the shares of Stock purchased
------------------
shall be made at the time of any exercise of this Agreement. The purchase price
shall be payable to the Corporation either (i) in cash or by check, bank draft,
or postal or express money order, (ii) by promissory note, (iii) through the
delivery of shares of Class A or Class B Common Stock then owned by the Grantee
having a Fair Market Value on the date of exercise equal to the full purchase
price, provided that the shares so delivered have been owned by the Grantee for
at least six (6) months, or (iv) by a combination of (i), (ii) or (iii) above;
provided, however, that no fractional share shall be accepted by the Corporation
in partial payment of the purchase price of any Stock, and the value of any such
fractional interest shall be paid to the Corporation in the manner specified in
(i) above.
Subject to the terms and conditions hereof, the options shall be exercisable by
notice to the Corporation on the form provided by the Corporation, a copy of
which is attached hereto. In the event that the options are being exercised by
any person or persons other than the Grantee, the notice shall be accompanied by
proof, satisfactory to the Corporation, of the right of such person or persons
to exercise any right under this Agreement.
6. Rights of Grantee. The grant of an option in any year shall give such
-----------------
Grantee neither any right to similar grants in future years nor any right to be
retained in the employ of the Corporation or any of its subsidiaries, such
employment being terminable to the same extent as if the Plan and this Agreement
were not in effect.
Neither the Grantee nor any other person legally entitled to exercise any rights
under this Agreement shall be entitled to any of the rights or privileges of a
stockholder of the Corporation with respect to any shares which may be issuable
upon any exercise pursuant to this Agreement, unless and until a certificate or
certificates representing such shares shall have been actually issued and
delivered to the Grantee or such person.
7. Non-Transferability of Option. Except as otherwise provided herein,
-----------------------------
an option and the rights and privileges conferred hereby may not be transferred,
assigned pledged or hypothecated in any way, other than by will or the laws of
descent and distribution, and an option shall be exercisable during the
Grantee's lifetime only by the Grantee or his conservator.
8. Taxes and Withholding. All payments to Grantee or to his legal
---------------------
representative shall be subject to any applicable tax, community property, or
other statutes or regulations of the United States or of any state having
jurisdiction thereof. The Grantee may be required to pay to the Corporation the
amount of any withholding taxes which the Corporation is required to withhold
with respect to a Stock option or its
<PAGE>
exercise. In the event that such payment is not made when due, the Corporation
shall have the right to deduct, to the extent permitted by law, from any payment
of any kind otherwise due to such person all or part of the amount required to
be withheld.
9. Premature Disposition of Shares. If the Grantee or Grantee's estate
-------------------------------
sells or otherwise disposes of any shares acquired upon exercise of this option
within one year from the date of shares involved were acquired or two years from
the date of this Agreement, the Grantee (or such person exercising this option)
agrees that the Grantee or the Grantee's estate will deliver a written report to
the Secretary of the Corporation within 30 days following the sale or other
disposition, which report shall set forth the date of sale or other disposition
of said shares and the net proceeds of such sale or disposition.
10. Notices. Each notice relating to this Agreement shall be in writing
-------
and delivered in person or by registered mail to the Corporation at its office,
120 Hawley Lane, Trumbull, Connecticut, 06611 to the attention of the Chief
Financial Officer. All notices to the Grantee or other person or persons then
entitled to exercise any right pursuant to this Agreement shall be delivered to
the Grantee or such other person or persons at the Grantee's address specified
below or at such other address as the Grantee or such other person may specify
in writing to the Corporation by a notice delivered in accordance with this
paragraph.
11. Restriction on Shares. The Corporation's obligation to issue or
---------------------
deliver any certificate for shares of Stock under this option, and the
transferability of shares acquired by the exercise of this option, shall be
subject to all of the following conditions:
(a) Any registration or other qualification of such shares under any
state or federal law or regulation, or the maintaining in effect of
any such registration or other qualification which the Corporation
shall in its absolute discretion upon the advice of counsel, deem
necessary or advisable; and
(b) The obtaining of any other consent, approval, or permit from any
state or federal governmental agency which the Corporation shall,
in its absolute discretion upon the advice of counsel, determine to
be necessary or advisable.
(c) Each stock certificate issued pursuant to exercise of this option
shall bear the following legend:
"The transferability of this certificate and the shares of Stock
represented hereby are subject to restrictions, terms and
conditions contained in the Amended and Restated Physicians Health
Services, Inc. 1995 Stock Option Plan, and an Agreement between the
registered owner of such Stock and Physicians Health Services, Inc.
A copy of the Plan and Agreement are on file in the office of the
Secretary of Physicians Health Services, Inc."
12. Miscellaneous. This Agreement comprises the whole agreement between
-------------
the parties hereto. It may not be modified or terminated orally, and it shall be
deemed to be a Connecticut contract, subject to construction and enforcement in
accordance with the laws of Connecticut.
This Agreement shall inure to the benefit of and be binding upon each successor
of the Corporation and to the extent specifically provided herein and in the
Plan, inure to the benefit of and shall be binding upon the Grantee's heirs,
legal representatives, and successors.
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed by the Grantee and by the
Corporation through its duly authorized officer or officers as of the day and
year first above written.
PHYSICIANS HEALTH SERVICES, INC.
By
-------------------------------
---------------------------------
(Grantee)
---------------------------------
(Address)
---------------------------------
(Social Security No.)
<PAGE>
LETTER OF STOCK OPTION EXERCISE
Dated______
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, CT 06611
Attention: Chief Financial Officer
Gentlemen:
I wish to purchase the following shares of Common Stock pursuant to the
option granted to me on _________________________ under the Physicians Health
Services, Inc. 1995 Stock Option Plan:
Incentive Stock Option Shares: __________
Non Qualified Stock Option Shares: __________
Total Shares being exercised: __________
The purchase price for these shares is $_____ per share. My check payable to
Physicians Health Services, Inc. in the amounts of $_______ in payment of the
purchase price is enclosed.* Please issue the stock certificate(s) for these
shares in my name as follows:
**Name
Address
Social Security Number
Sincerely yours,
Signature
Office Telephone
Home Telephone
* If stock is used in payment, please contact ________________'s office at
(203)_________
** If you wish to have the shares issued in your name and that of another
person jointly, we suggest that the following form be used: "(Your name)
and (name of other person), as joint tenants with right of
survivorship."
<PAGE>
LETTER OF STOCK OPTION GRANT
______________ 1994
(Grantee)
Dear _________
I am pleased to confirm that you have been awarded an Incentive Stock Option
under the Physicians Health Services, Inc. 1995 Stock Option Plan. Enclosed are
two copies of an Incentive Stock Option Agreement, which have been signed by
Physicians Health Services, Inc. Please sign both copies and return one to me in
the enclosed envelope.
Also enclosed are copies of the Physicians Health Services, Inc. 1995 Stock
Option Plan and the form to be used based upon exercise of any part of the
option.
The option covers shares of Class A Common Stock of Physicians Health Services,
Inc. and becomes exercisable in installments over the next _____ years, provided
you remain in the employment of Physicians Health Services, Inc. In addition,
the shares covered by this option have not been registered under state or
federal securities laws. Accordingly, under these laws, until such time as an
effective registration statement is filed or an exemption becomes available with
respect to these shares, there are prohibitions upon the exercise of this option
and the later sale of any shares purchased under this option. These prohibitions
stem from the securities laws and will be discussed with you at a later date.
Meanwhile, we wish to forward the copies of the option agreement to you at this
time.
Sincerely,
Regina M. Campbell
Senior Vice President of Legal Affairs
and Human Resources
<PAGE>
EXHIBIT B
---------
PHYSICIANS HEALTH SERVICES, INC.
1995 NON-QUALIFIED STOCK OPTION AGREEMENT
Agreement made this ______ day of ___________, _____ between Physicians
Health Services, Inc., a corporation organized under the laws of the State of
Delaware (hereinafter called the "Corporation" and _____________ (herein after
called the "Grantee").
WHEREAS, the Corporation desires to provide the Grantee with an
opportunity to acquire or increase his proprietary interest in the business of
the Corporation and, through stock ownership, to possess an increased personal
interest in its continued success and progress;
NOW, THEREFORE, in consideration of the premises, the mutual covenants
hereinafter set forth, and other good and valuable consideration, the
Corporation and the Grantee agree as follows:
1. Award of Option. The Corporation hereby awards to the Grantee, as a
---------------
matter of separate inducement and agreement, and not in lieu of salary or any
other compensation for services, an option or purchase an aggregate of _____
shares of the Corporation's Class A Common Stock pursuant to the Non-Qualified
Stock Option provisions contained in Article III of the Plan, on the terms and
conditions hereinafter set forth, at the purchase price of $17.00 per share
(such shares, number of shares and purchase price being subject to adjustment as
provided in Paragraph A of Article IV of the Plan).
2. Terms of the Plan. The Plan, a copy of which is attached hereto, is
-----------------
incorporated herein by reference and is made part of this Agreement as if fully
set forth herein. This Agreement is subject to, and the Corporation and the
Grantee agree to be bound by, all of the terms and conditions of the Plan as the
Plan exists at the time of this Agreement's execution. The Plan shall control in
the event there is any express conflict between the Plan and the terms hereof,
and on such matters that are not expressly covered in this Agreement. Subsequent
amendments of the Plan shall not adversely affect the Grantee's rights under
this Agreement.
3. Exercise of Option. The Stock Options granted pursuant to this
------------------
Agreement are exercisable in accordance with the vesting schedule approved by
the Compensation Committee, as set forth below.
Installments, if applicable, shall be cumulative, but each exercise must
encompass at least one installment of 100 shares, whichever is less. In the
event the Grantee's exercise includes a fractional share, the Corporation will
not be required to issue a fractional share but will pay the Grantee in Cash the
value of such fraction. All unexercised rights shall lapse and forever terminate
after the expiration of ten years from the date of this Agreement.
4. Termination of Employment. If the Grantee's employment is terminated
-------------------------
(other than by Disability or death), the terms of any then outstanding
Non-Qualified Stock Option held by the Grantee shall extend for a period ending
on the earlier of the date on which such option would otherwise expire or three
months after such termination of employment, and such option shall be
exercisable to the extent it was exercisable as of the Grantee's last date of
employment.
If the Grantee's employment with the Corporation is terminated by reason of
Disability, the term of any then outstanding Non-Qualified Stock Option held by
the Grantee shall extend for a period ending on the earlier of the date on which
such option would otherwise expire or twelve months after such termination of
employment, and such option shall be exercisable to the extent it was
exercisable as of the Grantee's last date of employment.
<PAGE>
If a Grantee's employment is terminated by reason of death, the representative
of his estate or beneficiaries thereof to whom the option has been transferred
shall have the right, during the period ending on the earlier of the date on
which such option would otherwise expire or three months after such termination
of employment, to exercise any then outstanding Non-Qualified Stock Options in
whole or in part. If a Grantee dies without having fully exercised any then
outstanding Non-Qualified Stock Options, the representative of his estate or
beneficiaries thereof to whom the option has been transferred shall have the
right to exercise such options in whole or in part. The number of shares of
Stock in respect of which a Non-Qualified Stock Option may be exercised after a
Grantee's death shall be the number of shares of Stock in respect of which such
option could be exercised as of the Grantee's last date of employment.
5. Manner of Exercise. Full payment for the shares of Stock purchased
------------------
shall be made at the time of any exercise of this Agreement. The purchase price
shall be payable to the Corporation either (i) in cash or by check, bank draft,
or postal or express money order, (ii) by promissory note, (iii) through the
delivery of shares of Class A or Class B Common Stock then owned by the Grantee
having a Fair Market Value on the date of exercise equal to the full purchase
price, provided that the shares so delivered have been owned by the Grantee for
at least six (6) months, or (iv) by a combination of (i), (ii) or (iii) above;
provided, however, that no fractional share shall be accepted by the Corporation
in partial payment of the purchase price of any Stock but the value of any such
fractional interest shall be paid to the Corporation in the manner specified in
(i) above.
Subject to the terms and conditions hereof, the options shall be exercisable by
notice to the Corporation on the form provided by the Corporation, a copy of
which is attached hereto. In the event that the options are being exercised by
any person or persons other than the Grantee, the notice shall be accompanied by
proof, satisfactory to the Corporation, of the right of such person or persons
to exercise any right under this Agreement.
6. Rights of Grantee. The grant of an option in any year shall give such
-----------------
Grantee neither any right to similar grants in future years nor any right to be
retained in the employ of the Corporation or any of its subsidiaries, such
employment being terminable to the same extent as if the Plan and this Agreement
were not in effect.
Neither the Grantee nor any other person legally entitled to exercise any rights
under this Agreement shall be entitled to any of the rights or privileges of a
stockholder of the Corporation with respect to any shares which may be issuable
upon any exercise pursuant to this Agreement, unless and until a certificate or
certificates representing such shares shall have been actually issued and
delivered to the Grantee or such person.
7. Non-Transferability of Option. Except as otherwise provided herein,
-----------------------------
an option and the rights and privileges conferred hereby may not be transferred,
assigned, pledged or hypothecated in any way, other than by will or the laws of
descent and distribution, and an option shall be exercisable during the
Grantee's lifetime only by the Grantee or his conservator.
8. Taxes and Withholding. All payments to a Grantee or to his legal
---------------------
representative shall be subject to any applicable tax, community property, or
other statutes or regulations of the United States or of any state having
jurisdiction thereof. The Grantee may be required to pay to the Corporation the
amount of any withholding taxes which the Corporation is required to withhold
with respect to a Stock Option or its exercise. In the event that such payment
is not made when due, the Corporation shall have the right to deduct, to the
extent permitted by law, from any payment of any kind otherwise due to such
person all or part of the amount required to be withheld.
9. Notices. Each notice relating to this Agreement shall be in writing
-------
and delivered in person or by registered mail to the Corporation at its office,
120 Hawley Lane, Trumbull, Connecticut 06611, to the attention of the Chief
Financial Officer. All notices to the Grantee or other person or persons then
entitled to exercise any right pursuant to this Agreement shall be delivered to
the Grantee or such other
<PAGE>
person or persons at the Grantee's address specified below or at such other
address as the Grantee or such other person may specify in writing to the
Corporation by a notice delivered in accordance with this paragraph.
10. Restriction on Shares. The Corporation's obligation to issue or
----------------------
deliver any certificate or certificates for shares of Stock under this option,
and the transferability of shares acquired by the exercise of this option, shall
be subject to all of the following conditions:
(a) Any registration or other qualification of such shares under any
state or federal law or regulation, or the maintaining in effect of
any such registration or other qualification which the Corporation
shall, in its absolute discretion upon the advice of counsel, deem
necessary or advisable; and
(b) The obtaining of any other consent, approval, or permit from any
state or federal governmental agency which the Corporation shall,
in its absolute discretion upon the advice of counsel, determine to
be necessary to advisable.
(c) Each stock certificate issued pursuant to exercise of this option
shall bear the following legend:
"The transferability of this certificate and the share of stock
represented hereby are subject to restrictions, terms and
conditions contained in the Amended and Restated Physicians Health
Services, Inc. 1995 Stock Option Plan, and an Agreement between the
registered owner of such Stock and Physicians Health Services, Inc.
A copy of the Plan and Agreement are on file in the office of the
Secretary of Physicians Health Services, Inc."
11. Miscellaneous. This Agreement comprises the whole agreement between
-------------
the parties hereto. It may not be modified or terminated orally, and it shall be
deemed to be a Connecticut contract, subject to construction and enforcement in
accordance with the laws of Connecticut.
This Agreement shall inure to the benefit of and be binding upon each successor
of the Corporation and to the extent specifically provided herein and in the
Plan inure to the benefit of and shall be binding upon the Grantee's heirs,
legal representatives, and successors.
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed by the Grantee and by the
Corporation through its duly authorized officer or officers as of the day and
year first above written.
PHYSICIANS HEALTH SERVICES, INC.
By
-------------------------------
---------------------------------
(Grantee)
---------------------------------
(Address)
---------------------------------
(Social Security No.)
<PAGE>
LETTER OF STOCK OPTION EXERCISE
Dated_______________
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, CT 06611
Attention: Chief Financial Officer
Gentlemen:
I wish to purchase the following shares of Common Stock pursuant to the
option granted to me on ________________, _____ under the Physicians Health
Services, Inc. 1995 Stock Option Plan:
Incentive Stock Option shares: ___________
Non-Qualified Stock Option shares: ___________
Total shares being exercised: ___________
The purchase price for these shares is $______ per share. My check payable to
Physicians Health Services, Inc. in the amount of $______ in payment of the
purchase price is enclosed.* Please issue the stock certificate(s) for these
shares in my name as follows:
**Name
Address
Social Security Number
Sincerely yours,
Signature
* If stock is issued in payment, please contact _______'s office at (203)
________.
** If you wish to have the shares issued in your name and that of another
person jointly, we suggest that the following form be used: "(Your name)
and (name of other person), as joint tenants with the right of
survivorship."
<PAGE>
LETTER OF STOCK OPTION GRANT
________________ 1995
(Grantee)
Dear___________
I am pleased to confirm that you have been awarded a Non-Qualified Stock Option
under the Physicians Health Services, Inc. 1995 Stock Option Plan. Enclosed are
two copies of a Non-Qualified Stock Option Plan Agreement, which have been
signed by Physicians Health Services, Inc. Please sign both copies and return
one to me in the enclosed envelope.
Also enclosed are copies of the Physicians Health Services, Inc. 1995 Stock
Option Plan and the form to be used upon exercise of any part of the option.
The option covers shares of Class A Common Stock of Physicians Health Services,
Inc. and becomes exercisable in installments over the next ______ years,
provided you remain in the employment of Physicians Health Services, Inc. In
addition, the shares covered by this option have not been registered under state
or federal securities laws. Accordingly, under these laws, until such time as an
effective registration statement is filed or an exemption becomes available with
respect to these shares, there are prohibitions upon the exercise of this option
and the later sale of any shares purchased under this option. These prohibitions
stem from the securities laws and will be discussed with you at a later date.
Meanwhile, we wish to forward the copies of the option agreement to you at this
time.
Sincerely,
Physicians Health Services, Inc.
By: ___________
Its
<PAGE>
Exhibit 10 (1)
Agreement of Sale
AGREEMENT OF SALE (the "Agreement") made as of this 12th day of March, 1996
by and between, RICHARDSON-VICKS REAL ESTATE, INC. ("Seller"), an Ohio
corporation having a place of business at 2 Procter & Gamble Plaza, Cincinnati,
Ohio 45201-3314, and PHYSICIAN'S HEALTH SERVICES, INC. ("Purchaser"), a Delaware
corporation, having a place of business at 120 Hawley Lane, Trumbull,
Connecticut 06611-5343.
Witnesseth:
1. DESCRIPTION OF PROPERTY. Subject to the terms and conditions hereof, and
for the Purchase Price set forth in Schedule C (the "Purchase Price") hereto,
Purchaser agrees to purchase, and Seller agrees to sell, the following
(collectively, the "Property"):
A. The Land and Improvements. Fee simple marketable title in and to
certain land located in the State of Connecticut, County of Fairfield
and Town of Shelton, commonly known as One Far Mill Crossing,
consisting of 74.864 acres together with a second adjoining parcel
consisting of 0.9376 acres, and being more particularly described on
Schedule A attached hereto (the "Land"), together with all of the
buildings and other improvements located on the Land, including, but
not limited to three (3) interconnected buildings (collectively, the
"Improvements"), subject only to the encumbrances, liens or exceptions
to title set forth on Schedule B attached hereto (the "Permitted
Encumbrances");
B. Furnishings and Equipment. All mechanical systems, fixtures and
equipment, electrical systems, fixtures and equipment, plumbing
fixtures, systems and equipment, heating fixtures, systems and
equipment and air conditioning fixtures, systems and equipment and all
furnishings currently installed in, belonging to or constructed as
components of, the Improvements, including, but not limited to, all
office furniture, window covers, cafeteria furniture and kitchen
equipment, video and audio equipment and exercise equipment located in
the fitness center (collectively,
<PAGE>
the "Furnishings and Equipment"), subject only to the Permitted
Encumbrances;
C. Tangible Personal Property. All tangible personal property located on
the Land or Improvements and belonging to the Property and/or used in
the normal operation and maintenance of the Land and Improvements,
including that listed on Schedule E attached hereto (the "Personal
Property");
D. Appurtenant Interests. All of the Seller's interest in and to the
appurtenances to the Land and in and to all streets, alleys and other
public ways adjacent thereto; and
E. Other. All interest of the Seller in and to (i) any warranties
covering the Personal Property and/or the Improvements to the extent
assignable; (ii) all assignable service or maintenance contracts, held
by Seller relating to the Property as described at Schedule F,
providing Purchaser provides Seller with written notice of Purchaser's
election to assume same prior to the Closing (as defined herein) (the
"Service Contracts"); and (iii) all assignable licenses, permits,
approvals and other intangible property rights relating to the
ownership and operation of the Property (it being the agreement of the
parties that the cost and expense of effecting said assignments shall
be the sole responsibility of Purchaser. Purchaser acknowledges that
any warranties, Service Contracts or licenses, permits, approvals and
other intangible property rights shall not be deemed assignable in the
event that Seller's future obligations thereunder do not terminate
upon assignment).
2. CONDITION OF THE PROPERTY. Subject to Purchaser's due diligence
investigation under paragraph 10 of this Agreement and the representations,
warranties and covenants of Seller set forth in paragraph 19 of this Agreement
(it being the agreement of the parties that said representations, warranties and
covenants of Seller shall not survive the Closing), Seller shall convey full and
exclusive possession of the entire Property, "as is," to Purchaser at the
Closing, free of the claim of any tenants or others claiming possessory rights
in the Property, in the same condition the Property is in on the date of this
Agreement,
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subject only to reasonable use, wear and tear, and natural deterioration between
the date hereof and the date of Closing hereunder.
3. FORM OF DEED (the "Deed"); OTHER CLOSING DOCUMENTS. The deed of
conveyance shall be a limited warranty deed in the usual Connecticut form
sufficient to convey to Purchaser fee simple marketable title to the Property
subject only to the Permitted Encumbrances. The Deed shall be in the form
attached hereto as Schedule H and shall be duly executed and acknowledged by
Seller and in proper form for recording and shall be delivered to Purchaser at
Closing together with the following (hereafter, the "Closing Documents"):
A. Conveyance Taxes. Seller's checks in payment of the State of
Connecticut and City of Shelton conveyance taxes;
B. Bill of Sale. A bill of sale, duly executed by Seller and witnessed
with warranties of title, conveying to Purchaser good title to the
Furnishings and Equipment and Personal Property, together with
appropriate endorsements or such other instruments as may be necessary
to transfer title to the Furnishings and Equipment and Personal
Property to Purchaser;
C. Assignment of Service Contracts. A transfer and assignment of Seller's
interest in and to all assignable Service Contracts, set forth at
Schedule F hereto, which Purchaser elects to assume and continue by
written notice provided to Seller prior to Closing, together with the
originals of each of said Service Contracts, provided said original
Service Contracts are in Seller's possession, or in the event that an
original Service Contract is not in Seller's possession, a complete
photocopy of said Service Contract (it being the agreement of the
parties that the cost and expense of effecting said assignment shall
be the sole responsibility of Purchaser. Purchaser acknowledges that
Service Contracts shall not be deemed assignable in the event that
Seller's future obligations thereunder do not terminate upon
assignment);
D. Assignment of Warranties. A transfer and assignment of Seller's
interest in and to all existing
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and assignable warranties (if any) respecting the Improvements
including, but not limited to, roofs, foundations, plumbing, heating,
air conditioning, and electrical, and the Furnishings and Equipment
with the originals of each of said warranties, provided said original
warranties are in seller's possession, or in the event that an
original warranty is not in Seller's possession, a complete photocopy
of the warranty (it being the agreement of the parties that the cost
and expense of effecting said assignment shall be the sole
responsibility of Purchaser. Purchaser acknowledges that warranties
shall not be deemed assignable in the event that Seller's future
obligations thereunder do not terminate upon assignment);
E. Assignment of Intangible Property. A transfer and assignment of
Seller's assignable right, title and interest in and to any and all
licenses, permits, approvals and other intangible property or rights
relating to the Land and/or Property, with the originals of each of
said licenses, permits, approvals and other intangible property or
rights, provided said originals are in Seller's possession, or in the
event that an original is not in Seller's possession, a complete
photocopy of the original (it being the agreement of the parties that
the cost and expense of effecting said assignment shall be the sole
responsibility of Purchaser. Purchaser acknowledges that licenses,
permits, approvals and other intangible property or rights relating to
the Land and/or Property shall not be deemed assignable in the event
that Seller's future obligations thereunder do not terminate upon
assignment);
F. Seller's Affidavit. An affidavit from Seller that, as of the Closing:
(i) there are no outstanding unsatisfied judgments, tax liens or
bankruptcies against the Seller; (ii) there has been no labor or
materials furnished to the Property within the ninety (90) day period
preceding the Closing other than: (a) the Demolition and Removal (as
that term is hereinafter defined) of the Farmhouse (as that term is
hereinafter defined) as provided in paragraph 10 this
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Agreement and (b) labor or materials furnished to the Property by
Purchaser or its affiliates or their respective officers, directors,
employees, agents or contractors, except as otherwise expressly stated
in writing by Seller to Purchaser prior to Closing. Seller shall
deliver to Purchaser at Closing fully executed mechanic's lien waivers
from all persons undertaking any work, or supplying any materials, to
the Property on behalf of Seller, or its affiliates or their
respective officers, directors, employees, agents or contractors,
within the ninety (90) day period preceding the Closing; (iii) there
are no leases, tenancies or occupancy agreements in effect respecting
any portion of the Property; and (iv) there are no fixtures leased by
Seller, or security interests in any fixtures owned by Seller on the
Property;
G. Seller's Incumbency Certificate. An incumbency certificate or
certificates with respect to the officers of, or other authorized
persons acting for, Seller executing any document or instrument, on
behalf of the Seller, in connection with the transactions contemplated
by this Agreement, including the Closing Documents;
H. Nonforeign Taxpayer Certificate. A certification, signed by Seller
under penalties of perjury, containing the following: (i) Seller's
Taxpayer Identification Number; (ii) the business address of Seller;
and (iii) a statement that Seller is not a foreign person within the
meaning of Sections 1445 and 7701 of the Internal Revenue Code (i.e.,
that Seller is not a nonresident alien, foreign corporation, foreign
partnership, foreign trust or foreign estate (as those terms are
defined in the Internal Revenue Code and Income Tax Regulations));
In the event Seller fails to deliver such certification at the
Closing or in the event Seller delivers such certification but
Purchaser has actual knowledge that such certification is false or
Purchaser receives notice that the certification is false from any
agent of Purchaser or Seller, then Purchaser shall be entitled to
withhold from the
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Purchase Price payable hereunder a sum equal to ten percent (10%) of
the total amount which otherwise would have been realized by Seller
from the sale, which sum will be paid by Purchaser to the United
States Treasury pursuant to the requirements of Section 1445 of the
Internal Revenue Code and the regulations promulgated thereunder;
I. Compliance with Hazardous Waste Establishment Transfer Act. Seller
agrees to comply, at its sole expense, with all the provisions of the
Connecticut Hazardous Waste Establishment Transfer Act, Connecticut
General Statutes Sections 22a-134, et seq. (the "Transfer Act").
Seller shall, at its sole cost and expense, prepare and file a "Form
I," "Form II" or "Form "III" pursuant to the Transfer Act in
connection with this transaction. Seller shall be the Certifying
Party, as defined under the Transfer Act with respect to all matters
identified in the "Form II" or "Form "III," and shall be responsible
for all fees payable under the Transfer Act in connection with the
transfer contemplated hereunder.
J. Underground Tank Reporting. Seller shall provide Purchaser, no later
than fifteen (15) days prior to the Closing, with all information
Seller is required to disclose to Purchaser under Regulations of
Connecticut State Agencies 22a-449(d), with respect to all underground
tanks located on the Property, including a certain 550-gallon diesel
underground storage tank located on the Property;
K. Seller's Good Standing Certificate. A recent good standing certificate
for Seller issued by the Secretaries of State for the States of Ohio
and Connecticut; and
L. Other Documents Requested by Purchaser's Title Insurance Company. Any
other document or instrument reasonably requested by Purchaser's title
insurance company which is appropriate to consummate the transactions
contemplated by this Agreement.
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The delivery to and acceptance by Purchaser of the executed Deed of
conveyance and all other Closing Documents shall constitute full performance by
Seller of all of the terms, covenants, conditions and representations made
herein that are on Seller's part to be performed, except as set forth herein.
4. DURATION OF OFFER. The offer to sell on the terms set forth in this
Agreement is conditioned on Purchaser executing this Agreement and delivering
said executed Agreement to Seller together with the payment called for in
subparagraph (a) of Schedule C (the "Deposit") on or before March 14, 1996. If
this Agreement is not executed and delivered to Seller together with the
required payments by that date, this offer to sell shall terminate.
5. CLOSING AND AFFIDAVITS. The closing of title ("Closing") shall take
place at the offices of Gregory and Adams, P.C., 190 Old Ridgefield Road,
Wilton, Connecticut, on May 31, 1996 at 10:00 a.m. or at such other place or
time as agreed to by the parties, at which time the Deed and all checks and
other Closing Documents to be delivered by Seller shall be delivered upon
receipt by Seller of the balance of the Purchase Price. Counsels for Seller and
Purchaser hereby are respectively authorized to execute an agreement or
agreements on behalf of the parties confirming or adjourning the date of
Closing.
6. ADJUSTMENTS TO PURCHASE PRICE. Purchaser shall assume and pay all taxes,
sewer assessments and other public improvement assessments affecting the
Property and personal property taxes affecting the Furnishings and Equipment and
Personal Property which become due and payable on or after the date of Closing.
All real estate taxes, personal property taxes, tax assessments, sewer
assessments, water rents, and other assessments and charges affecting the
Property, Furnishings and Equipment and Personal Property shall be apportioned
as of the date of Closing in accordance with local custom. Should any tax or
charge, tax assessment or rate be undetermined on the date of Closing, the last
determined tax or charge, assessment or rate shall be used for the purpose
of the apportionment and a readjustment shall be made after the tax or charge,
assessment or rate is determined. Purchaser shall pay Seller at the Closing for
the value of any fuel oil, bottled gas or gasoline stored on the Property at the
time of Closing. Seller shall be responsible for the payment of all expenses on
account of services and supplies furnished to and for the benefit of the
Property for the period from the date hereof through the day immediately
preceding the date of the Closing, except as such expenses may be paid in
advance or arrears for periods ending prior or subsequent to the date of the
Closing, in which event the same shall be prorated on and as of the date of the
Closing. The readjustment provisions contained in this Paragraph 6 shall survive
the Closing.
7. UTILITIES. Utility charges shall not be prorated but, rather,
instructions shall be given to the utility companies by Seller (with a duplicate
copy of such instruction being provided concurrently to Purchaser) to read the
meters on the date of the Closing and to issue separate statements thereafter.
Deposits with utility companies, if any, will be returned to Seller after the
Closing of Title.
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8. INSURANCE AND RISK OF LOSS. Throughout the period between the date of
this Agreement and the Closing, Seller shall keep the buildings on the Property
insured against loss by fire and other casualty to the extent they are presently
insured as set forth in Schedule G. If during said period any of the buildings
on the Property shall be destroyed or damaged by fire or other casualty
resulting in more than $2,500,000.00 in damage (according to estimate of one
appraiser appointed by agreement of Seller and Purchaser, or if Seller and
Purchaser cannot agree, then by three appraisers, one appointed by Seller, one
by Purchaser, and the third appointed by the first two appraisers so appointed),
Seller shall so notify Purchaser, and Purchaser may elect by giving Seller
written notice, within fifteen (15) business days of said notice, to either: (a)
terminate this Agreement, in which event Seller shall return to Purchaser the
Deposit and any interest accrued thereon together with a certified check or
cashier's check to the order of Purchaser in payment of all reasonable expenses
actually incurred by Purchaser (not to exceed $80,000.00) for: (i) the due
diligence investigation provided for in subparagraphs A, B, D and E of paragraph
10 of this Agreement; and (ii) reasonable legal fees in connection with the
transactions contemplated by this Agreement, and Purchaser shall return to
Seller any and all documents and plans delivered to Purchaser by Seller,
whereupon all rights and liabilities of the parties hereunder shall be at an
end, with the exception of the parties' indemnification obligations as provided
in paragraph 10 of this Agreement or (b) declare this Agreement to remain in
full force and effect and at Closing, Seller shall assign, transfer and set over
to Purchaser all of the right, title and interest of Seller in and to any
insurance proceeds or claims that have been or that may thereafter be made for
such damage, and the Purchase Price shall be reduced by the amount of any
insurance deductible (which reduction to the Purchase Price shall reduce the
cash payable by Purchaser at Closing). If such damage is reasonably estimated by
the appraiser or appraisers to be less than $2,500,000.00, then this Agreement
shall remain in full force and effect and Seller may elect, by written notice
delivered to Purchaser not later than ten (10) business days following the
occurrence of such damage, to: (i) repair such damage to its pre-existing
condition prior to Closing; or (ii) reduce the Purchase Price by an amount
sufficient to effect a repair of such damage to its pre-existing condition.
9. TITLE. At the Closing, Seller shall convey to Purchaser or its designee
good and marketable fee simple title to the Property, subject only to the
Permitted Encumbrances. It is mutually understood and agreed that no matter
shall be construed to be an encumbrance or defect in title so long as such
matter is not considered an encumbrance or defect under the Standards of Title
of the Connecticut Bar Association as amended or ss. ss.47-33b through 47-33l of
the Connecticut General Statutes, where applicable.
Purchaser shall have a period of thirty (30) days from the execution of
this Agreement to obtain a commitment for title insurance on the Property (the
"Title Commitment"). Within ten (10) days thereafter, Purchaser's attorney shall
notify Seller's attorney in writing of any exceptions to title which do not
appear as Permitted Encumbrances on Schedule B. Seller shall proceed diligently
and in good faith to cure any defects of title within sixty (60) days of receipt
of such notice at Seller's sole cost and expense. Seller shall be required to
undertake any necessary and reasonable measures and to bring any action or
proceeding
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necessary and reasonable and to incur any reasonable expense necessary to render
the title to the Property marketable at the Closing.
If Seller is unable to cure such defect within said sixty (60) day period,
Seller shall so advise Purchaser and Purchaser shall have the right to either:
(i) accept such title as Seller can convey, upon the payment of the balance of
the Purchase Price; or (ii) terminate this Agreement. In the event Purchaser
terminates this Agreement pursuant to this paragraph 9, Seller shall return the
Deposit and any interest accrued thereon to Purchaser together with a certified
check or cashier's check to the order of Purchaser in payment of all reasonable
expenses actually incurred by Purchaser (not to exceed $80,000.00) for: (i) the
due diligence investigation provided for in subparagraphs A, B, D and E of
paragraph 10 of this Agreement; and (ii) reasonable legal fees in connection
with the transactions contemplated by this Agreement, and Purchaser shall return
to Seller any and all documents and plans delivered to Purchaser by Seller,
whereupon all rights and liabilities of the parties hereunder shall be at an
end, with the exception of the parties' indemnification obligations as provided
in paragraph 10 of this Agreement.
No later than five (5) business days prior to the Closing, Purchaser shall
cause an update of the Title Commitment to be prepared. As a condition of
Closing, the updated Title Commitment shall reflect no change since the date of
the original Title Commitment in the state or quality of title to the Property,
except such changes as have been requested by Purchaser, which shall thereafter
be deemed a Permitted Encumbrance. If the updated Title Commitment should
disclose that the Property is affected by an outstanding exception to title
which is not a Permitted Encumbrance and is not disclosed in the original Title
Commitment and is not accepted by Purchaser as an additional Permitted
Encumbrance, Purchaser shall notify Seller in writing of the outstanding
exception and Seller shall have sixty (60) days from the date that it receives
notice from Purchaser of said exception to remove the objection to title or
otherwise reasonably satisfy Purchaser with respect thereto and the Closing
hereunder shall be adjourned until the date which is twenty (20) days following
the earlier of the expiration of Seller's sixty (60) day cure period or the date
that Seller satisfies Purchaser that the objection to title has been removed. If
after any applicable adjournment Seller shall be unable to convey title to the
Property in accordance with the provisions of this Agreement, then Purchaser
shall have the right to either: (i) accept such title as Seller can convey, upon
the payment of the balance of the Purchase Price; or (ii) terminate this
Agreement. In the event Purchaser terminates this Agreement pursuant to this
paragraph 9, Seller shall return the Deposit and any interest accrued thereon to
Purchaser together with a certified check or cashier's check to the order of
Purchaser in payment of all reasonable expenses actually incurred by Purchaser
(not to exceed $80,000.00) for: (i) the due diligence investigation provided for
in subparagraphs A, B, D and E of paragraph 10 of this Agreement; and (ii)
reasonable legal fees in connection with the transactions contemplated by this
Agreement, and Purchaser shall return to Seller any and all documents and plans
delivered to Purchaser by Seller, whereupon all rights and liabilities of the
parties hereunder shall be at an end, with the exception of the parties'
indemnification obligations as provided in paragraph 10 of this Agreement.
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Purchaser shall bear all costs of any title insurance insuring Purchaser's
interest in the Property.
10. DUE DILIGENCE INVESTIGATION. Purchaser acknowledges and agrees that the
Property is to be sold and conveyed to, and purchased and accepted by, Purchaser
in its present condition, "as is" and with all faults. Purchaser further
acknowledges and agrees that Purchaser is not relying on, and Seller has not
made and will not make, any representation or warranty, express or implied, with
respect to the Property or its condition (environmental and otherwise and its
potential for further development), present state of repair, compliance with
laws and regulations (environmental and otherwise) or its potential for further
development, merchantability or suitability for any purpose except as provided
in this Agreement, and that Seller shall have no further liability with respect
to any of the foregoing.
Between the date of execution of this Agreement by both parties and May 25,
1996 (the "Due Diligence Period") Purchaser shall have the opportunity to
inspect the Property, observe its physical characteristics and existing
condition, and conduct such investigations, tests and studies on and of the
Property as Purchaser, in its sole discretion, deems necessary or appropriate to
satisfy itself as to its condition, environmental and otherwise, and its
potential for further development.
Seller acknowledges that Purchaser's due diligence may, in Purchaser's
sole discretion, include, but not be limited to:
A. building structural, mechanical and other engineering inspections of
the Improvements,
B. environmental investigations, inspections and Phase II testing of the
Land (including groundwater, streams and ponds located on the Land)
and the Improvements,
C. investigations and negotiations with the Town of Shelton relative to
the feasibility of obtaining a reduction in the tax assessment for the
Property,
D. title search,
E. surveying, including locating wetlands,
F. zoning investigations as noted in Schedule D hereto,
G. soils compression testing relative to the construction
of future improvements,
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H. traffic studies and investigations relative to the feasibility of
increasing the traffic to the Property, and
I. investigations relative to increasing water usage to and sanitary
waste disposal from the Property in connection with a contemplated
expansion of building area on the Property.
At Purchaser's reasonable request during the Due Diligence Period, Seller
shall use reasonable efforts to respond to requests to provide or make available
to Purchaser documentation and information in Seller's (or Richardson-Vicks
Inc.'s) or Cushman & Wakefield of Connecticut, Inc.'s, in its capacity as the
manager of the Property, possession which pertains to Purchaser's due diligence
investigations relating to the Property.
Purchaser acknowledges that Seller has provided to Purchaser a copy of
Seller's "ASTM Phase I Environmental Site Assessment" (the "Phase I") pertaining
to the Property dated June, 1995 and "Phase II Environmental Site Assessment"
(the "Phase II") pertaining to the Property, dated February, 1996, prepared by
Geraghty & Miller. Purchaser agrees that it has not and will not rely on such
reports to any degree, and will not seek to hold Seller or its consultant
responsible for anything stated or not stated in such reports, and Seller does
not represent or warrant that such reports are comprehensive or accurate.
Notwithstanding the foregoing, at the request of Purchaser, Seller shall request
Geraghty & Miller to issue to Purchaser a letter advising Purchaser that it may
rely on the Phase I and the Phase II to the extent and subject to the conditions
set forth in said letter, it being the agreement of the parties that Purchaser
shall be solely responsible for any costs or expenses associated with the
issuance of the letter.
Upon reasonable oral or written notice, Purchaser, its employees, agents
and contractors, may, at their own risk and expense, enter the Property, from
time to time, during the Due Diligence Period for purposes of conducting
Purchaser's due diligence investigations and studies. Purchaser shall indemnify
and hold Seller, its affiliates and all of their respective directors, officers,
employees, contractors and agents harmless from any claims, damages, loss,
judgments and expenses of any kind, including but not limited to reasonable
attorneys' fees, for damage to the property or person (including death) of
Seller, Purchaser, their respective affiliates, their respective directors,
officers, employees, contractors, agents and any other third party whomsoever
arising out of or in connection with Purchaser's or Purchaser's directors',
officers', employees', agents' or contractors' entry onto the Property,
provided, however, that Seller shall remain fully liable for and shall indemnify
and hold Purchaser, its affiliates and all of their respective officers,
directors, employees, agents or contractors harmless from and against, any and
all liability, claims, loss and damage, including, but not limited to,
reasonable attorney fees, arising out of any negligence or misconduct of Seller
or its affiliates or their respective officers, directors, employees, agents or
contractors. In the event such entry by Purchaser or its affiliates or
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their respective directors, officers, employees, contractors or agents results
in any property damage to the Property, including, but not limited to, lost
opportunity and other damages relating to any delay in Seller's ability or
Seller's inability to promptly market the Property and this Agreement fails to
be consummated for any reason, Purchaser immediately shall restore the Property
to its pre-existing condition reasonable wear and tear and damage due to
casualty not caused by Purchaser's activities excepted (or to the extent
reasonably practicable with respect to any invasive environmental testing) or
reimburse Seller for the reasonable cost of repair of the damage so caused.
Purchaser shall, at Purchaser's sole expense, keep and maintain a policy of
comprehensive public liability insurance which shall include contractual
liability coverage of the indemnification set forth in this paragraph 10. This
insurance policy shall name Seller as an additional insured and afford
protection in limits of not less than $2,000,000.00 for bodily injury or death
in any one accident, and not less than $1,000,000.00 for property damage on an
"occurrence" not "claims made" basis and shall expire no earlier than one (1}
year from the date hereof. All insurance shall be effected under standard form
policies, issued by insurers of recognized responsibility authorized to do
business in the State of Connecticut and having A.M. Best's rating of "A" or
better. Purchaser shall deliver a copy of the policy to Seller prior to the
commencement of the inspections.
Except as otherwise provided in this Agreement, any costs or expenses
incurred by Purchaser in connection with the inspection of the Property shall be
the sole responsibility of Purchaser.
Any objection(s) Purchaser may have to the condition of the Property as a
result of Purchaser's due diligence inspections, tests and studies (including
without limitation objections as to any hazardous substances, hazardous waste,
hazardous materials or other contamination in, at, on, under or related to the
Property) shall be noticed to Seller by the expiration of the Due Diligence
Period or thereafter shall be deemed waived for all purposes. The parties hereby
agree that Seller, in its sole discretion, may elect not to remedy or resolve
the objection. Seller shall provide Purchaser with written notice of its
election within ten (10) days of receipt from Purchaser of notice of
objection(s). In the event Seller elects to remedy the defect giving rise to the
objection(s), Seller shall have sixty (60) days from the date that it notifies
Purchaser of said election to remedy the defect or otherwise reasonably satisfy
Purchaser with respect thereto and the Closing hereunder shall be adjourned
until the date which is twenty (20) days following the earlier of the expiration
of Seller's sixty (60) day cure period or the date that Seller satisfies
Purchaser that the objection has been remedied. In the event Seller: (i) fails
to deliver said notice within said ten (10) day period or (ii) elects not to
remedy the objection(s) or (iii) fails to remedy or resolve the objection(s) to
Purchaser's satisfaction, then Purchaser in its sole discretion, may terminate
this Agreement. In the event Purchaser terminates this Agreement pursuant to
this paragraph 10, Seller shall return the Deposit and any interest accrued
thereon to Purchaser together with a certified check or cashier's check to the
order of Purchaser in payment of all reasonable expenses actually incurred by
Purchaser (not to exceed $80,000.00) for: (i) the
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due diligence investigation provided for in subparagraphs A, B, D and E of this
paragraph 10; and (ii) reasonable legal fees in connection with the transactions
contemplated by this Agreement, and Purchaser shall return to Seller any and all
documents and plans delivered to Purchaser by Seller, whereupon all rights and
liabilities of the parties hereunder shall be at an end, with the exception of
the parties' indemnification obligations as provided in this paragraph 10.
Notwithstanding the provisions of this paragraph 10 to the contrary, in the
event Purchaser's termination is not based upon the due diligence investigation
provided for in subparagraphs A, B, D and E of this paragraph 10, Seller shall
return the Deposit and any interest accrued thereon to Purchaser and Purchaser
shall return to Seller any and all documents and plans delivered to Purchaser by
Seller, whereupon all rights and liabilities of the parties hereunder shall be
at an end, with the exception of the parties' indemnification obligations as
provided in this paragraph 10.
The provisions of this paragraph 10 will survive the closing as necessary
to effectuate their purpose and will not merge in any deed or conveyance.
As a condition precedent to Purchaser's obligation to close herein, Seller
agrees that it shall demolish and remove the residential structure (formerly a
farmhouse) (hereinafter the "Farmhouse") located on the Property and shall
dispose of the Farmhouse structure and all items and debris located within and
about the Farmhouse to the extent required by and in full compliance with all
applicable laws, including, but not limited to all environmental laws (the
"Demolition and Removals"). Any costs or expenses incurred by Seller in
connection with the Demolition and Removal of the Farmhouse to the extent
required by and in full compliance with all applicable laws, shall be the sole
responsibility of Seller. Seller shall make reasonable efforts to complete the
Demolition and Removal on or before May 4, 1996. Upon reasonable notice to
Seller, Purchaser, at its risk, may be present at the Property during the
Demolition and Removal and may conduct, at its sole cost and expense, such due
diligence investigations with respect to the Demolition and Removal as
reasonably may be conducted under the circumstances. In the event that the
Demolition and Removal is not completed by Seller on or before May 4, 1996,
Purchaser shall make its reasonable efforts to complete its due diligence with
respect to the Demolition and Removal prior to May 25, 1996. If, despite its
reasonable efforts, Purchaser does not complete its due diligence with respect
to the Demolition and Removal prior to May 25, 1996, Purchaser may elect, upon
written notice to Seller, to extend the Due Diligence Period with respect to the
Demolition and Removal one (1) day for each day beyond May 4, 1996 that the
Demolition and Removal was not completed by Seller.
11. DEFAULT.
A. Default by Purchaser. If, through no fault of Seller, Purchaser defaults
in its obligation to close title as required by this Agreement, then providing
Seller is not in default of any of its obligations under this Agreement, Seller
by written notice of default to Purchaser, may terminate this Agreement and
immediately may demand the Deposit from the Trustee (as identified in Schedule
C) and thereafter, as Seller's sole and exclusive remedy
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therefor, may retain the Deposit and any interest accrued thereon as agreed upon
Seller's liquidated damages. The parties recognize that Purchaser's default will
cause substantial injury to Seller and agree that the amount represented by the
Deposit and any interest accrued thereon shall be a fair and reasonable
approximation of the damages Seller will suffer in the event of Purchaser's
default. It is understood and agreed that upon Purchaser's default and Seller's
retention of the Deposit and any interest accrued thereon, this Agreement will
terminate and the parties will have no further liability or obligation hereunder
except for: (i) Purchaser's obligation to return to Seller all documents and
plans delivered to Purchaser by Seller; and (ii) the indemnification obligations
of the parties as provided in paragraph 10 of this Agreement. Purchaser's and
Seller's obligation to indemnify the Trustee and hold it harmless (as provided
in Schedule C) shall survive any termination of this Agreement. Payment of said
liquidated damages shall be Seller's sole remedy and it shall have no right
against Purchaser for specific performance or monetary damages.
B. Default by Seller. If, through no fault of Purchaser, Seller defaults in
the performance of its obligations hereunder, then provided Purchaser is not in
default of any of its obligations under this Agreement, Purchaser by written
notice of default to Seller, may elect to terminate this Agreement and
immediately may demand the return of the Deposit from the Trustee and any
interest accrued thereon together with a certified check or cashier's check to
order of Purchaser in payment of all reasonable expenses actually incurred by
Purchaser for: (i) the due diligence investigations provided for in
subparagraphs A, B. C, D, E, F, G, H and I of paragraph 10 of this Agreement;
and (ii) reasonable legal fees in connection with the transactions contemplated
by this Agreement. The parties recognize that Seller's default will cause
substantial injury to Purchaser and agree that the amount represented by the
interest accrued on the Deposit, and the liquidated damages as calculated in
subparagraphs 11.B.(i) and (ii) above shall be a fair and reasonable
approximation of the damages Purchaser will suffer in the event of Seller's
default. It is understood and agreed upon that upon Seller's default and
Purchaser's receipt of the Deposit together with any interest accrued thereon,
and a certified check or cashier's check to the order of Purchaser in the amount
of said liquidated damages due Purchaser, this Agreement will terminate and the
parties will have no further liability or obligation hereunder except for: (i)
Purchaser's obligation to return to Seller all documents and plans delivered to
Purchaser by Seller; and (ii) the indemnification obligations of the parties as
provided in paragraph 10 of this Agreement. Seller's and Purchaser's obligation
to indemnify the Trustee and hold it harmless (as provided in Schedule C) shall
survive any such termination of this Agreement.
As an alternative to Purchaser's election to terminate this Agreement by
reason of Seller's default, Purchaser shall have the right to: (i) specifically
enforce this Agreement and Seller's obligations hereunder; and (ii) seek actual
damages, including, but not limited to, reasonable legal fees incurred by
Purchaser by reason of Seller's default (excluding expenses incurred by
Purchaser for the due diligence investigations provided for in subparagraphs A,
B, C, D, E, F, G, H and I of paragraph 10 of this Agreement and legal fees in
connection with the transactions contemplated by this Agreement prior to
Seller's default).
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<PAGE>
12. ASSIGNMENT. Purchaser may not assign this Agreement or any right, title
or interest therein, except to any affiliated or subsidiary entity, without
Seller's prior written consent, which shall not be unreasonably delayed or
withheld. Upon any effective assignment of Purchaser's rights hereunder,
Purchaser and Purchaser's assignee shall become and be jointly and severally
liable hereunder.
13. POSSESSION. Simultaneously with the Closing, Seller shall deliver
exclusive possession of the Property to Purchaser.
14. BROKERS. The parties hereto recognize Rostenberg-Doern Company, Inc.
and Cushman & Wakefield of Connecticut, Inc. as the sole brokers who negotiated
the sale of the Property, and Seller shall pay said brokers a commission in
accordance with a listing agreement between Seller and Rostenberg-Doern Company,
Inc. The parties enter into this Agreement in reliance on the representation of
each party, hereby made, that no other broker or agent brought the Property to
Purchaser's attention or was in any way a procuring cause of this sale and
purchase. In the event any other broker shall make a claim against either of the
parties (the "Claimant") based upon dealing with the other party, such other
party shall indemnify the Claimant from and hold it harmless against any and all
damages or reasonable attorney's fees the Claimant may pay as a result of such
claim (it being the agreement of the parties that the Claimant will not settle
or compromise any claim without the other party's prior written consent). Seller
represents that no broker other than Rostenberg-Doern has a listing agreement
for the Property. The representations contained in this Paragraph 14 shall
survive the Closing.
15. ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits
referred to in the body of this Agreement and attached hereto) constitutes the
entire agreement between the parties and they hereby acknowledge that neither
relies on any express or implied representations, warranties, conditions or
understandings except those expressly set forth herein.
16. LANGUAGE. Wherever herein used, the singular number shall include the
plural, the plural the singuIar, and the use of any gender shall be applicable
to all genders.
17. BINDING AGREEMENT. This Agreement shall be binding upon, and inure to
the benefit of the successors and permitted assigns of Seller and Purchaser.
18. NOTICES. All notices, elections or other communications to be given
hereunder shall be deemed to have been validly given only if in writing, sent by
the parties or their respective counsel, and either (a) mailed, postage prepaid,
by registered or certified mail, return receipt requested, or (b) delivered in
person or by overnight mail, or (c) forwarded by facsimile transmission, to the
address of the receiving party set forth below:
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If to Seller:
Richardson-Vicks Real Estate, Inc.
2 Procter & Gamble Plaza
Cincinnati, Ohio 45202-3314
Attention: E.E. Curry, Manager, Real Estate Department
If to Purchaser:
Physician's Health Services, Inc.
120 Hawley Lane
Trumbull, Connecticut 06611-5343
Attention: Regina M. Campbell, Esq.
A copy of all such notices, elections or other communications shall be
similarly and simultaneously sent to the attorneys for the parties addressed as
follows: if for Seller, to J. Casey Healy, Esq., Gregory and Adams, P.C., 190
Old Ridgefield Road, Wilton, Connecticut 06897; if for Purchasers, to Michael J.
Hinton, Esq., Cummings & Lockwood, 4 Stamford Plaza, P.O. Box 120, Stamford,
Connecticut 06904. Said notices, elections and other communications may be given
by the attorneys for the party giving such notice. All such notices, elections
or other communications shall be deemed given and received on the next business
day after the date of such mailing or on the day of the facsimile tramsmission
server or delivery in person. The parties shall retain all proofs of delivery
furnished by the messenger, overnight mail delivery service or facsimile
transmission server.
19. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER. Seller hereby
warrants, represents and covenants with Purchaser that each of the following
statements is true and correct as of the date of this Agreement and shall be
true and correct on the date of the Closing:
A. Seller shall have, as of the Closing, good and marketable fee simple
title to the Property free and clear of all liens, charges,
encumbrances, or restrictions, except for the Permitted Encumbrances.
B. There are no leases, tenancies or other occupancy agreements in effect
with respect to the Property and no individuals occupy the Property or
any portion thereof.
C. Seller and Richardson-Vicks Inc. have no actual knowledge of any
current violations of zoning and/or building, inland-wetlands,
environmental, zoning and planning laws, statutes, ordinances, orders,
or
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<PAGE>
requirements affecting the Property, with the exception of the 550
gallon underground diesel fuel tank located on the Property (which
tank shall be brought into full compliance with all applicable laws by
Seller, at its sole cost and expense, prior to Closing), nor has
Seller ever received any notice concerning such noncompliance, the
terms of which have not been complied with, and no breach presently
exists under any public or private covenant, condition, restriction,
right-of-way or easement which affects the use and/or access to the
Property or any portion thereof and Seller will promptly notify
Purchaser of the receipt of any notice of any such violations received
by Seller between the date hereof and the date set for the Closing
hereunder.
D. To the best of Seller's knowledge and belief, no litigation,
investigation, condemnation, eminent domain or other proceeding or
taking of any kind is pending or contemplated against the Property or
any portion thereof and there is no litigation, eviction, proceeding
or administrative proceeding pending or threatened against, or
relating to the Property.
E. Seller has not filed a voluntary petition in bankruptcy or has not
been adjudicated a bankrupt or insolvent, or filed any petition or
answer seeking any reorganization, liquidation, dissolution or similar
relief under any federal bankruptcy, insolvency, or other law relating
to relief for debtors, or sought or consented to or acquiesced in the
appointment of any trustee, receiver, conservator or liquidator of all
or any substantial part of its properties or its interests in the
Property. No court of competent jurisdiction has entered an order,
judgment, or decree approving a petition filed against Seller seeking
any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any federal
bankruptcy act, and no other liquidator has been appointed for Seller
or of all or any substantial part of its properties or its interest in
the Property. Seller has not given notice to any governmental body of
insolvency or pending
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<PAGE>
insolvency, or suspension or pending suspension of operations.
F. To Seller's and Richardson-Vicks Inc.'s actual knowledge, neither
Seller nor Richardson-Vicks Inc. has received any notice from or on
behalf of any of its insurance carriers regarding any dangerous,
illegal, or other condition on the Property requiring corrective
action or indicating that the insurance rates for any part of the
Property will be increased, or that such insurance carriers will not
renew such existing policies, or that alterations to all or any part
of the Property will be required as a condition to any such renewal or
as a requirement of avoiding any such increase in premiums, with the
exception that Richardson-Vicks Inc. may have been advised by its
insurance carrier to install a sprinkler system in the Farmhouse.
G. To the best of Seller's knowledge and belief, there are no intended
public improvements which would result in any special assessments
being levied against the Property or any portion thereof and no
special assessments are currently levied against the Property or any
portion thereof, except as may be disclosed on Schedule B hereto.
H. Seller has not entered into any operation, maintenance, or service
contract for the Property except those listed on Schedule F attached
hereto.
I. Seller has full power and authority to enter into and perform this
Agreement in accordance with its terms and this Agreement has been
duly authorized and executed by Seller and is enforceable against
Seller in accordance with its terms, and the documents to be delivered
by Seller to Purchaser at the Closing will be duly executed by Seller
and enforceable against Seller in accordance with their terms and no
consent, license, approval or authorization of, or filing,
registration or declaration with, or exemption or other action by any
governmental or public body, authority, bureau or agency is required
in connection with the execution, delivery or performance by Seller
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<PAGE>
of this Agreement or the transactions herein contemplated or the
Closing Documents to which Seller is a party.
J. Seller is not a foreign person within the meaning of Sections 1445 and
7701 of the Internal Revenue Code (i.e., Seller is not a nonresident
alien, foreign corporation, foreign partnership, foreign trust or
foreign estate (as those terms are defined in the Internal Revenue
Code and Income Tax Regulations)).
K. There are no outstanding agreements to sell, options or rights of
first refusal held by any third parties to purchase the Property, or
any portion thereof or any interest therein, except as created under
this Agreement.
L. To the best of Seller's knowledge and belief, the Seller,
Richardson-Merrell, Inc. and Richardson-Vicks Inc. have each obtained
all necessary permits, licenses and governmental authorizations
required for the ownership and current operation of the Property and
all such permits, licenses and governmental authorizations remain in
full force and effect.
M. At the Closing, there will be no claim in favor of any person or
entity which is or could become a lien on the Property or the
Improvements arising out of the furnishing of labor or materials to
the Property; and there will be no unpaid assessments against the
Property, except for property taxes assessed but not due and payable
at the time of Closing.
N. Seller will cause all existing policies of insurance for fire and
extended coverage risks, business interruption, rent loss and
liability to be kept in full force and effect through and including
the Closing of title hereunder
0. Seller, and to the actual knowledge of Seller, Richardson-Vicks Inc.,
have not used, consented to the use of, and has no knowledge of the
use of any
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<PAGE>
portion of the Property in a manner not permitted by the Certificate
of Occupancy related to the Property.
P. The Property abuts on and has direct vehicular access to Far Mill
Crossing which is a public road.
Q. There are no leased fixtures on the Property.
R. To Seller's actual knowledge, neither Seller nor Richardson-Vicks Inc.
have violated any of the covenants, conditions, restrictions,
rights-of-way or easements that are listed as Permitted Encumbrances
and Seller has not violated any other covenants, conditions,
restrictions, rights-of-way or easements which affect the Properly,
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
and year first above written.
SELLER:
RICHARDSON-VICKS REAL ESTATE INC,
By: /s/ Eugene E. Curry
-----------------------------------------
Eugene E. Curry
Its Manager, Real Estate Department
Tax Identification No: 31-1193927
PURCHASER:
PHYSICIAN'S HEALTH SERVICES, INC.
By: /s/ Robert L. Natt
-----------------------------------------
Robert L. Natt
Its Executive Vice President and
Chief Operating Officer
Tax Identification No: 06-1116976
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<PAGE>
SCHEDULE A
PROPERTY DESCRIPTION
All those certain pieces, parcels and tracts of land (collectively the
"Land") located in the City of Shelton, County of Fairfield and State of
Connecticut more particularly described on Exhibit A-1 attached hereto and made
a part hereof.
Together with:
1. All easements, rights of way and passage and other rights appurtenant
to the Property, including those set forth in the following
agreements:
A. Easement Agreement dated November 27, 1979 and recorded in Volume
410 of the Shelton Land Records at Page 9.
B. Easement and Agreement to Sell dated November 27, 1979 and
recorded in Volume 401 of the Shelton Land Records at Page 12.
2. The buildings and other improvements situated on the Land
("Improvements").
3. All fixtures, systems, equipment, and machinery attached, affixed or
appurtenant to the Land and Improvements (the "Fixtures"), except
pipes, wires, poles, conduits and related equipment of public
utilities.
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SCHEDULE A
PARCELS 1, 2 and 3:
All those three (3) certain tracts or parcels of land, with all the buildings
and improvements thereon erected, located in the City of Shelton, County of
Fairfield and State of Connecticut, being a contiguous tract of land containing
74.8364 acres ("Parcels 1 and 2") and an adjoining tract of land containing
0.9376 acres ("Parcel 3").
Parcel 1 is more specifically described as follows:
1. Commencing at a point designated by a Connecticut Highway
Department monument, as more particularly shown in Detail "A" of a certain
map entitled "Map of Property Prepared for Richardson-Merrell Inc.,
Shelton, Connecticut, Scale 1" = 120', dated May 9, 1979, Prepared by
Shaughnessy and Plain, Land Surveyors, Fairfield, Connecticut, recorded on
the Shelton land records in Volume 29, Page 1650 (the "Map"), running in a
northeasterly direction, bounded by land of the State of Connecticut as
shown on map of "Conn. Dept. of Transportation Right of Way Map, Sheet No.
3 of 4, August, 1978, Scale 1 in. = 80 ft. and as shown on "Town of Shelton
Map showing land acquired from Anna M. Clapp by the State of Conn.,
Relocation of Route No. 8, Revised to April 13, 1970, Town No. 126, Project
No. 126-91, Serial No. 36, Sheet No. 1 of 2. Also Map Serial No. 61, Sheet
No. 1 of 3, Revised to March 11, 1971" having the following course and
distance:
N41-19-56E, 42.59 feet;
2. Thence in a general easterly direction, bounded by land now or
formerly of Lyman L. Wells and more particularly described in "Map of land
to be conveyed to Lyman L. Wells, Shelton, Connecticut, Scale: 1 in. = 100
ft., December 13, 1976." Prepared by Joseph L. Alberti, Civil Engineer and
Land Surveyor. Said map is on file in the Shelton Town Clerk's office in
Volume No. 27, Page No. 1386, the following courses and distances:
S62-40-42E, 90.29 feet;
S66-29-50E, 42.86 feet;
S54-27-22E, 41.37 feet;
S59-38-12E, 90.68 feet;
S58-37-36E, 155.54 feet;
S63-11-32E, 143.02 feet.
<PAGE>
2
3. Thence in a general northerly direction, bounded by land now or formerly
of Lyman L. Wells, and more particularly described in the map referred to in
paragraph 2 above, the following courses and distances;
N53-26-14E, 14.80 feet;
N35-47-36E, 69.80 feet;
N23-34-44E, 121.32 feet;
N30-53-03E, 46.13 feet;
N36-41-36E, 83.88 feet;
N19-17-59E, 230.68 feet;
N84-02-55W, 19.57 feet;
N14-48-57W, 86.67 feet;
N27-27-25E, 352.90 feet;
N21-09-21E, 52.89 feet;
N36-52-55E, 128.66 feet.
4. Thence in a general easterly direction, bounded by land now or formerly
of Lyman L. Wells and more particularly described in the map referred to in
paragraph 2 above, by Old Mill Road, and by Lot No. 46 more particularly
described in "Final Map of Proposed Lots at Laurel Wood Manor, owned by Nicholas
Conti, Shelton, Conn., Scale 1 in. = 100 ft., October, 1958." Said map is on
file in the Shelton Town Clerk's office, File No. 301, the following courses and
distances:
S50-54-21E, 341.40 feet;
S49-30-48E, 141.27 feet;
S54-38-37E, 74.50 feet;
S79-53-28E, 59.16 feet;
S68-42-54E, 39.62 feet;
S21-05-21W, 136.60 feet;
S70-46-52E, 196.57 feet;
S78-10-54E, 61.11 feet.
5. Thence in a general southerly direction, bounded by lots 41, 42, 43, 44,
45, 46, 47, 48, 49, 50 and 51 more particularly described in Map of "Section
Two, Soundcrest Estates, Shelton, Conn., owned and developed by Walter V. Brown,
Inc., Taulman Road, Orange, Conn., Scale: 1 in. = 100 ft., Revised to September
5, 1961." Said Map is on file in the Shelton Town Clerk's office file No. 545,
the following courses and distances:
S35-49-22W, 28.59 feet;
S16-23-30W, 146.30 feet;
S6-07-09W, 248.33 feet;
<PAGE>
3
S11-26-28W, 63.66 feet;
S7-00-l1E, 259.90 feet;
S8-01-30W, 66.10 feet;
S22-50-13E, 122.19 feet;
S21-00-49W, 98.18 feet;
S31-27-22E, 95.64 feet;
S25-41-00E, 48.81 feet;
S27-31-06E, 151.17 feet;
S32-34-20E, 63.54 feet;
S41-30-13E, 74.72 feet;
S31-05-14E, 120.74 feet;
S2-53-40W, 385.44 feet;
S62-06-16E 124.69 feet;
S72-19-03E 207.20 feet;
S73-27-SOE, 90.00 feet.
6. Thence in a general southwesterly direction bounded by lots 95 and 94
more particularly described in Map of "Final Plan, Soundcrest Estates, Section
4, owned and developed by Soundcrest Development Corp., Shelton, Conn., Scale; 1
in. = 100 ft., May 27, 1962." Said Map is on file in the Shelton Town Clerk's
office, file No. 644, the following courses and distances:
S34-27-0lW, 110.01 feet;
S27-02-23W, 266.92 feet;
S49-03-20W, 93.16 feet;
S36-48-03W, 193.23 feet;
S19-18-42W, 151.03 feet;
S13-05-28W, 101.19 feet.
7. Thence in a general westerly direction bounded by land now or formerly
of Mibern Corp. and by land now or formerly of Myrtle Perri Gutmann to an
intersection with the center line of Far Mill River, the following course and
distance:
S73-48-08W, 230.90 feet;
8. Thence in a northerly, northwesterly, westerly and again northerly
direction to an iron pipe, bounded by the centerline of Far Mill River and Beard
Saw Mill Road, the following courses and distances:
N18-34-34E, 251.88 feet;
N15-59-58E, 165.25 feet;
N00-51-02E, 169.46 feet;
<PAGE>
4
N16-05-26W, 107.46 feet;
N38-23-59W, 222.51 feet;
N44-16-32W, 354.85 feet;
N62-09-27W, 140.49 feet;
S54-51-35W, 173.58 feet;
S77-17-40W, 251.78 feet;
S66-30-37W, 202.23 feet;
S75-23-15W, 44.67 feet;
N51-41-49W, 99.04 feet;
N23-18-36W, 167.55 feet;
N57-25-llW, 79.61 feet;
N31-58-00W, 122.61 feet;
N48-23-39E, 67.70 feet to the iron pipe.
9. Thence from the iron pipe in the general northerly direction bounded by
Beard Saw Mill Road the following courses and distances:
N3-35-0lE, 64.98 feet;
N30-42-27W, 153.15 feet to a railroad spike in Twin Oak;
N12-52-05W, 93.68 feet;
N17-07-SlW, 70.19 feet;
N19-03-55W, 322.31 feet;
N20-02-33W, 142.58 feet;
N34-09-37W, 201.33 feet;
N38-12-26W, 179.93 feet.
10. Thence in a general northeasterly direction to the point or place of
beginning at the Connecticut Highway Department monument as more particularly
described in paragraph 1 above, and bounded by land of the State of Connecticut
also as more particularly described in paragraph 1 above, the following course
and distance:
N26-40-59E, 221.51 feet.
Excepting therefrom from said Parcel 1 the following described premises:
All that certain parcel of land situated in the City of Shelton, County of
Fairfield and State of Connecticut, consisting of .3730 acre, shown as "Parcel
to be Conveyed to Lyman L. Wells" on a map entitled "Survey Map Showing Proposed
Exchange of Property Between Lyman L. Wells and Richardson-Merrell Inc., Beard
Saw Mill & Route 8- Shelton, CT" scale 1" = 40', dated March 7, 1980, Revised
October 26, 1981, and prepared by J. & D. Kasper & Associates, which map has
been filed in the Shelton Town Clerk's Office, in Volume 32, Page 1898, to which
reference is made.
<PAGE>
5
Parcel 2
Parcel 2 is more specifically described as follows:
All that certain parcel of land situated in the City of Shelton, County of
Fairfield and State of Connecticut, consisting of .3730 acre, shown as "Parcel
to be Conveyed to Richardson-Merrell Inc." on a map entitled "Survey Map Showing
Proposed Exchange of Property Between Lyman L. Wells and Richardson-Merrell
Inc., Beard Saw Mill & Route 8 - Shelton, CT" scale 1" = 40', dated March 7,
1980, Revised October 26, 1981, and prepared by J. & D. Kasper & Associates,
which map has been filed in the Shelton Town Clerk's Office, in Volume 32, Page
1898, to which reference is made.
Parcel 3
Parcel 3 is more specifically described as follows:
All that certain parcel of land situated in the City of Shelton, County of
Fairfield and State of Connecticut, consisting of .9376 acres, shown as "Area
40,842 Sq. Ft. Or .9376 acres" on the Map, recorded in Volume 29, Page 1650 of
the Shelton land records, being more particularly bounded and described as
follows:
Commencing at a point in the westerly streetline of Beard Saw Mill Road;
thence southwesterly along land now of Matthew F. Smith and Elma K. Smith the
following course and distance: S 61(degree) 49' 50" W, 155.87 feet;
Thence, in a general northerly direction, bounded by the centerline of Far
Mill River the following courses and distances: N 14(degree) 21' 24" W, 321.65
feet, N 34(degree) 08' 24" W. 86.29 feet;
Thence, in a general northeasterly direction, bounded by land of the State
of Connecticut and more particularly described in Map of "Conn. Dept. of
Transportation Right of Way Map, Sheet No. 3 of 4, August, 1978, Scale: 1 in. =
80 ft.," and "Town of Shelton, Map Showing Land Acquired From Anna M. Clapp by
the State of Conn., Relocation of Route No. 8, Revised to April 13, 1970, Town
No. 126, Project No. 126-91, Serial No. 36, Sheet No. 1 of 2. Also Map Serial
No. 61, Sheet No. 1 of 3, Revised to March 11, 1971", N. 26(degree) 40' 59" E,
55.22 feet to the streetline of Beard Saw Mill Road;
Thence, in a general southerly direction, bounded by Beard Saw Mill Road to
the point or place of beginning, the following courses and distances: S
38(degree) 12' 26" E, 167.33 feet, S 34(degree) 09' 37" E, 197.34 feet, S
22(degree) 29' 04" E, 69.27 feet.
<PAGE>
6
Parcels 1 and 2 are conveyed Together With all rights of the Grantor in and to
the easements recorded Vol. 401 at Page 9 and in Vol. 401 at Page 12 of the
Shelton Land Records.
<PAGE>
EXHIBIT A-1
Legal Description
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SCHEDULE B
PERMITTED ENCUMBRANCES
The Property is subject to such liens and encumbrances as are set forth below:
1. Any restrictions or limitations imposed or to be imposed by governmental
authority, including, but not limited to, laws and regulations pertaining
to environment, toxic hazards, zoning and planning and inland wetlands and
watercourses, of the City of Shelton, State of Connecticut and United
States of America and any agency thereof, provided none have been violated
as of Closing.
2. Taxes of the City of Shelton which become due and payable after the date of
Closing, and which taxes Purchaser assumes and agrees to pay as part of the
consideration for the deed.
3. Sewer maintenance charges, water rents, fire district taxes, special
assessments, other public improvement assessments and any unpaid
installments thereof, which assessments or installments become due and
payable after the date of Closing, and which assessments or installments
Purchaser will assume and pay as part of the consideration for the Deed.
4. Any state of facts an accurate survey of the Property would show, which
Purchaser has not objected to on or before May 25, 1996, provided the same
does not render Seller's title thereto unmarketable.
5. Riparian rights of others in and to any brooks, streams or other bodies of
water running through, bordering upon or situated on the Property.
6. Waterflow rights to the Bridgeport Hydraulic Company dated July 27, 1915
and recorded in Volume 60 of the Shelton Land Records at Page 103.
7. Denial of rights of access and other easements in favor of the State of
Connecticut as set forth in certificates dated March 30, 1971 and recorded
in Volume 245 of the Shelton Land Records at Page 20 and dated January 17,
1973 and recorded in Volume 260 at Page 632.
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<PAGE>
8. Easement to Southern New England Telephone dated January 20, 1982 and
recorded in Volume 458 of the Shelton Land Records at Page 19.
9. Waiver to Matthew F. Smith dated April 12, 1982 and recorded in Volume 468
of the Shelton Land Records at Page 159 (If requested by Purchaser, Seller
shall make a reasonable effort to obtain a release from Matthew F. Smith of
whatever rights he has to enter the Property).
10. Inland Wetlands Notices recorded in Volume 776 at Page 207 and in Volume
869 at Page 106 of the Shelton Land Records.
11. Notes on filed map numbered Volume 29 at Page 1650 in the Shelton City
Clerk's office.
12. Easement to excavate referenced in deed from Anna M. Clapp to
Richardson-Merrell Inc. dated November 27, 1979 and recorded in Volume 401
of the Shelton Land Records at Page 2.
13. Easement agreement dated November 27, 1979 and recorded in Volume 401 of
the Shelton Land Records at Page-9.
14. Easement and Agreement to Sell dated November 27, 1979 and recorded in
Volume 401 of the Shelton Land Records at Page 12.
15. Easement in favor of Iroquois Gas Transmission System, L.P. dated November
19, 1991 and recorded in Volume 1040 of the Shelton Land Records at Page
209.
16. Slope rights in favor of Lyman L. Wells as set forth in a warranty deed
dated January 20, 1983 and recorded in Volume 494 of the Shelton Land
Records at Page 240.
17. Notice of the Water Pollution Control Authority of the City of Shelton
dated April 24, 1992 and recorded in Volume 1063 of the Shelton Land
Records at Page 103.
18. Easement in favor of the Water Pollution Control Authority of the City of
Shelton recorded on May 20, 1992 in Book 1069 of the Shelton Land Records
at Page 197.
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<PAGE>
SCHEDULE C
PURCHASE PRICE
The Purchase Price is EIGHTEEN MILLION FIVE HUNDRED THOUSAND and 00/100
{$18,500,000.00) DOLLARS which Purchaser shall pay as follows:
(a) Upon the signing of this Agreement, by wire
transfer, certified check of Purchaser or bank
check payable to Gregory and Adams, P.C., Trustee
for Richardson-Vicks Real Estate, Inc., the sum of
$ 1,000,000.00
(b) At the Closing, by wire transfer to a bank and
account designated by Seller, subject to
adjustments as provided herein, the sum of
$17,500,000.00
--------------
TOTAL $18,500,000.00
==============
The Purchase Price shall be allocated as follows: $16,588,000.00 to the
Land and Improvements; and $1,912,000.00 to the Furnishings and Equipment and
Tangible Personal Property.
The Seller shall be solely responsible for the payment of any sales tax to
the State of Connecticut which may be due by reason of the sale of the
Furnishings and Equipment and Personal Property.
The proceeds of the $1,000,000.00 check ("Deposit") to the order of Gregory
and Adams, P.C., Trustee for Richardson-Vicks Real Estate, Inc. (the "Trustee")
shall be held by the Trustee in escrow and the Trustee shall invest the Deposit
in one or more interest bearing accounts or instruments maintained at an
F.D.I.C. insured bank or financial institution jointly selected by the parties
at the time of delivery to the Trustee. The Trustee shall pay over the Deposit
and all interest accrued thereon to Seller at the Closing or sooner in
accordance with the terms of this Schedule C. In the event that the Trustee
receives a letter ("Demand for Deposit") from either party dated not earlier
than ten (10) days after the Closing date set forth in paragraph 5 certifying
that the other party has defaulted under this Agreement by failing to close and
further certifying that the party demanding payment of the Deposit is not in
default under this Agreement and demanding payment of the Deposit, the Trustee
promptly will notify the alleged defaulting party by certified mail of the
Demand for Deposit and if the alleged defaulting party does not notify the
Trustee of its objection to such payment within ten (10) days of receipt of the
written notification, the Trustee shall pay over the Deposit and all interest
accrued thereon to the party demanding same. Purchaser and Seller understand
that upon being served with a Demand for Deposit or the alleged defaulting
party's objection thereto, the Trustee shall not be required to substantiate any
claim of
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<PAGE>
default or of objection alleged by Seller or Purchaser and except for the
Deposit and any interest accrued thereon each party hereby waives any claim
either may have against the Trustee as a result of the making or withholding of
the payment referred to above and each agrees to indemnify the Trustee and hold
it harmless from and against any and all claims or losses (including reasonable
attorneys fees) relating thereto except claims or losses arising in instances
where the Trustee: (i.) fails to pay a Demand for Deposit when the alleged
defaulting party has not objected to such payment within the period allowed for
said objection as set forth above; (ii.) pays a Demand for Deposit when the
alleged defaulting party has objected to said payment within the period allowed
for said objection as set forth above; (iii.) fails to deliver the Deposit and
any interest accrued thereon to the Seller at the Closing or when otherwise
required to do so under the terms of this Agreement; or (iv.) fails to refund
the Deposit and any interest accrued thereon to Purchaser when required to do so
under the terms of this Agreement.
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<PAGE>
SCHEDULE D
ADDITIONAL CONDITIONS OF CLOSING
This Agreement is conditioned upon:
1. The satisfaction of Purchaser that an additional 500 parking spaces can be
constructed on the Property at a location and in such configuration which
is acceptable to Purchaser in the exercise of its reasonable discretion.
Purchaser undertakes to use its reasonable, good faith efforts to make this
determination as soon as reasonably possible. In the event that the
Purchaser is unable to satisfy itself on or before May 25, 1996 as to
whether the additional 500 parking spaces can be constructed on the
Property, Purchaser shall have the option to terminate this Agreement by
giving written notice thereof to the Seller by 5:00 p.m Eastern Standard
Time on May 25, 1996. In such event, the Deposit, together with all
interest accrued thereon, shall be delivered to Purchaser by the Trustee
whereupon all rights and liabilities of the parties hereunder shall be at
an end except for Purchaser's obligation to return to Seller all documents
and Plans delivered to Purchaser by Seller and the parties' indemnification
obligations as provided in paragraph 10 of this Agreement. Failure of
Purchaser to give such notice on or before the date and time specified
hereunder shall constitute a waiver by Purchaser of the aforesaid
condition.
2. The satisfaction of Purchaser that a minimum of 150,000 square feet of
additional floor area can be constructed on the Property at a location and
in such configuration which is acceptable to Purchaser in the exercise of
its reasonable discretion. Purchaser undertakes to use its reasonable, good
faith efforts to make this determination as soon as reasonably possible. In
the event that the Purchaser is unable to satisfy itself on or before May
25, 1996 as to whether a minimum of 150,000 square feet of additional floor
area can be constructed on the Property, Purchaser shall have the option to
terminate this Agreement by giving written notice thereof to the Seller or
Seller's attorneys by 5:00 p.m Eastern Standard Time on May 25, 1996. In
such event, the Deposit, together with all interest accrued thereon, shall
be delivered to Purchaser by the Trustee whereupon all rights and
liabilities of the parties hereunder shall be at an end except for
Purchaser's obligation to return to Seller all documents and Plans
delivered to Purchaser by Seller and the parties' indemnification
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<PAGE>
obligations as provided in paragraph 10 of this Agreement. Failure of Purchaser
to give such notice on or before the date and time specified hereunder shall
constitute a waiver by Purchaser of the aforesaid condition.
3. The satisfaction of Purchaser that the terms of Permitted Encumbrances
numbered 1, 11, 17 and/or 18 as set forth in Schedule B of this Agreement
do not prevent Purchaser from constructing an additional 500 parking spaces
and a minimum of 150,000 square feet of additional floor area on the
Property at a location and in such configuration which is acceptable to
Purchaser in the exercise of its reasonable discretion. Purchaser
undertakes to use its reasonable, good faith efforts to make this
determination as soon as reasonably possible. In the event that the
Purchaser is unable to satisfy itself on or before May 25, 1996 as to
whether the terms of Permitted Encumbrances numbered 1, 11, 17 and/or 18
prevent Seller from constructing an additional 500 parking spaces and a
minimum of 150,000 square feet of additional floor area on the Property,
Purchaser shall have the option to terminate this Agreement by giving
written notice thereof to Seller or Seller's attorneys by 5:00 p.m Eastern
Standard Time on May 25, 1996. In such event, the Deposit, together with
all interest accrued thereon, shall be delivered to Purchaser by the
Trustee whereupon all rights and liabilities of the parties hereunder shall
be at an end except for Purchaser's obligation to return to Seller all
documents and Plans delivered to Purchaser by Seller and the parties'
indemnification obligations as provided in paragraph 10 of this Agreement.
Failure of Purchaser to give such notice on or before the date and time
specified hereunder shall constitute a waiver by Purchaser of the aforesaid
condition.
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<PAGE>
SCHEDULE E
PERSONAL PROPERTY
Seller promptly shall determine whether it or its affiliated entities have
a listing of the Personal Property. If such a listing can be located, Seller
promptly shall provide it to Purchaser, provided, however, Seller shall not
warrant the accuracy or completeness of said listing.
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<PAGE>
SCHEDULE F
SERVICE CONTRACTS
1. Management contract with Cushman & Wakefield of Connecticut, Inc., dated
December 1, 1992.
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<PAGE>
SCHEDULE G
INSURANCE
Seller maintains an insurance policy insuring certain named perils (fire,
lightning, removal, wind, hail, leaking from fire protection equipment,
explosion (except for boilers or rotating equipment), smoke, aircraft or
vehicles, some shockwave, civil commotion, vandalism, molten material and civil
or military action with respect to the Property, which provides loss coverage in
an amount equal to the smallest of: (i) limit of specified liability
($51,000,000.00); (ii) actual cash value at the time of loss; or (iii) reduction
in the fair market value as a result of the loss or damage.
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<PAGE>
SCHEDULE H
FORM OF LIMITED WARRANTY DEED
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<PAGE>
Limited Warranty Deed
To all People to Whom these Presents shall Come, Greeting:
Know Ye, That RICHARDSON-VICKS REAL ESTATE, INC., a Delaware corporation, having
a place of business at 2 Proctor & Gamble Plaza, Cincinnati, Ohio ("Grantor")
for the consideration of Ten Dollars ($10.00) and other good and valuable
consideration received to its full satisfaction of
PHYSICIANS HEALTH SERVICES, INC., a___________________ corporation, having an
office at 120 Hawley Lane, Trumbull, Connecticut 06611-5343 ("Grantee")
Does give, grant, bargain, sell and confirm, unto the said Grantee, its
successors and assigns forever, ALL THAT CERTAIN piece, parcel or tract of land
situated in the City of Shelton, County of Fairfield and State of Connecticut
described on Schedule A attached hereto and incorporated herein.
SAID PREMISES being conveyed subject only to the matters set forth on Schedule B
attached hereto and incorporated herein.
To have and to hold the above granted and bargained premises, with the
privileges and appurtenances thereof, unto it, the said Grantee, its successors
and assigns forever, to its and their own proper use and behoof.
And also, it, the said Grantor, does, for itself and its successors and assigns,
executors and administrators, covenant with the said Grantee, its successors and
assigns, that, at and until the ensealing of these presents, Grantee is well
seized of the premises as a good indefeasible estate in fee simple and has good
rights to bargain and sell the same in the manner and form as is above written.
And furthermore, it, the said Grantor, does, by these presents, bind itself and
its successors and assigns forever to Warrant and Defend the above granted and
bargained premises to it, said Grantee, its successors and assigns against all
claims and demands of any person
<PAGE>
SCHEDULE A
PARCELS 1,2 and 3:
All those three (3) certain tracts or parcels of land, with all the buildings
and improvements thereon erected, located in the City of Shelton, County of
Fairfield and State of Connecticut, being a contiguous tract of land containing
74.8364 acres ("Parcels 1 and 2") and an adjoining tract of land containing
0.9376 acres ("Parcel 3").
Parcel 1 is more specifically described as follows:
1. Commencing at a point designated by a Connecticut Highway Department
monument, as more particularly shown in Detail "A" of a certain map entitled
"Map of Property Prepared for Richardson-Merrell Inc., Shelton, Connecticut,
Scale 1" = 120', dated May 9, 1979, Prepared by Shaughnessy and Plain, Land
Surveyors, Fairfield, Connecticut, recorded on the Shelton land records in
Volume 29, Page 1650 (the "Map"), running in a northeasterly direction, bounded
by land of the State of Connecticut as shown on map of "Cone. Dept. of
Transportation Right of Way Map, Sheet No. 3 of 4, August, 1978, Scale 1 in. =
80 ft. and as shown on "Town of Shelton Map showing land acquired from Anna M.
Clapp by the State of Conn., Relocation of Route No. 8, Revised to April 13,
1970, Town No. 126, Project No. 126-91, Serial No. 36, Sheet No. 1 of 2. Also
Map Serial No. 61, Sheet No. 1 of 3, Revised to March 11, 1971" having the
following course and distance:
N41-19-56E, 42.59 feet;
2. Thence in a general easterly direction, bounded by land now or formerly
of Lyman L. Wells and more particularly described in "Map of land to be conveyed
to Lyman L. Wells, Shelton, Connecticut, Scale: 1 in. = 100 ft., December 13,
1976." Prepared by Joseph L. Alberti, Civil Engineer and Land Surveyor. Said map
is on file in the Shelton Town Clerk's office in Volume No. 27, Page No. 1386,
the following courses and distances:
S62-40-42E, 90.29 feet;
S66-29-5OE, 42.86 feet;
S54-27-22E, 41.37 feet;
S59-38-12E, 90.68 feet;
S58-37-36E, 155.54 feet;
S63-11-32E, 143.02 feet.
<PAGE>
2
3. Thence in a general northerly direction, bounded by land now or formerly
of Lyman L. Wells, and more particularly described in the map referred to in
paragraph 2 above, the following courses and distances;
N53-26-14E, 14.80 feet;
N35-47-36E, 69.80 feet;
N23-34-44E, 121.32 feet;
N30-53-03E, 46.13 feet;
N36-41-36E, 83.88 feet;
N19-17-59E, 230.68 feet;
N84-02-55W, 19.57 feet;
N14-48-57W, 86.67 feet;
N27-27-25E, 352.90 feet;
N21-09-21E, 52.89 feet;
N36-52-SSE, 128.66 feet.
4. Thence in a general easterly direction, bounded by land now or formerly
of Lyman L. Wells and more particularly described in the map referred to in
paragraph 2 above, by Old Mill Road, and by Lot No. 46 more particularly
described in "Final Map of Proposed Lots at Laurel Wood Manor, owned by Nicholas
Conti, Shelton, Conn., Scale 1 in. = 100 ft., October, 1958." Said map is on
file in the Shelton Town Clerk's office, File No. 301, the following courses and
distances:
S50-54-21E, 341.40 feet;
S49-30-48E, 141.27 feet;
S54-38-37E, 74.50 feet;
S79-53-28E, 59.16 feet;
S68-42-54E, 39.62 feet;
S21-05-21W, 136.60 feet;
S70-46-52E, 196.57 feet;
S78-10-54E, 61.11 feet.
5. Thence in a general southerly direction, bounded by lots 41, 42, 43, 44,
45, 46, 47, 48, 49, 50 and 51 more particularly described in Map of "Section
Two, Soundcrest Estates, Shelton, Conn., owned and developed by Walter V. Brown,
Inc., Taulman Road, Orange, Conn., Scale: 1 in. = 100 ft., Revised to September
5, 1961." Said Map is on file in the Shelton Town Clerk's office file No. 545,
the following courses and distances:
S35-49-22W, 28.59 feet;
S16-23-30W, 146.30 feet;
S6-07-09W, 248.33 feet;
<PAGE>
3
S11-26-28W, 63.66 feet;
S7-00-llE, 259.90 feet;
S8-01-30W, 66.10 feet;
S22-50-13E, 122.19 feet;
S21-00-49W, 98.18 feet;
S31-27-22E, 95.64 feet;
S25-41-00E, 48.81 feet;
S27-31-06E, 151.17 feet;
S32-34-20E, 63.54 feet;
S41-30-13E, 74.72 feet;
S31-05-14E, 120.74 feet;
S2-53-40W, 385.44 feet;
S62-06-16E 124.69 feet;
S72-19-03E 207.20 feet;
S73-27-SOE, 90.00 feet.
6. Thence in a general southwesterly direction bounded by lots 95 and 94
more particularly described in Map of "Final Plan, Soundcrest Estates, Section
4, owned and developed by Soundcrest Development Corp., Shelton, Conn., Scale; 1
in. = 100 ft., May 27, 1962." Said Map is on file in the Shelton Town Clerk's
office, file No. 644, the following courses and distances:
S34-27-0lW, 110.01 feet;
S27-02-23W, 266.92 feet;
S49-03-20W, 93.16 feet;
S36-48-03W, 193.23 feet;
S19-18-42W, 151.03 feet;
S13-05-28W, 101.19 feet.
7. Thence in a general westerly direction bounded by land now or formerly
of Mibern Corp. and by land now or formerly of Myrtle Perri Gutmann to an
intersection with the center line of Far Mill River, the following course and
distance:
S73-48-08W, 230.90 feet;
8. Thence in a northerly, northwesterly, westerly and again northerly
direction to an iron pipe, bounded by the centerline of Far Mill River and Beard
Saw Mill Road, the following courses and distances:
N18-34-34E, 251.88 feet;
N15-59-58E, 165.25 feet;
N00-51-02E, 169.46 feet;
<PAGE>
4
N16-05-26W, 107.46 feet;
N38-23-59W, 222.51 feet;
N44-16-32W, 354.85 feet;
N62-09-27W, 140.49 feet;
S54-51-35W, 173.58 feet;
S77-17-40W, 251.78 feet;
S66-30-37W, 202.23 feet;
S75-23-15W, 44.67 feet;
N51-41-49W, 99.04 feet;
N23-18-36W, 167.55 feet;
N57-25-llW, 79.61 feet;
N31-58-00W, 122.61 feet;
N48-23-39E, 67.70 feet to the iron pipe.
9. Thence from the iron pipe in the general northerly direction bounded by
Beard Saw Mill Road the following courses and distances:
N3-35-0lE, 64.98 feet;
N30-42-27W, 153.15 feet to a railroad spike in Twin Oak;
N12-52-05W, 93.68 feet;
N17-07-SlW, 70.19 feet;
N19-03-l5W, 322.31 feet;
N20-02-33W, 142.58 feet;
N34-09-37W, 201.33 feet;
N38-12-26W, 179.93 feet.
10. Thence in a general northeasterly direction to the point or place of
beginning at the Connecticut Highway Department monument as more particularly
described in paragraph 1 above, and bounded by land of the State of Connecticut
also as more particularly described in paragraph 1 above, the following course
and distance:
N26-40-59E, 221.51 feet.
Excepting therefrom from said Parcel 1 the following described premises:
All that certain parcel of land situated in the City of Shelton, County of
Fairfield and State of Connecticut, consisting of .3730 acre, shown as "Parcel
to be Conveyed to Lyman L. Wells" on a map entitled "Survey Map Showing Proposed
Exchange of Property Between Lyman L. Wells and Richardson-Merrell Inc., Beard
Saw Mill & Route 8 -Shelton, CT" scale 1" = 40', dated March 7, 1980, Revised
October 26, 1981, and prepared by J. & D. Kasper & Associates, which map has
been filed in the Shelton Town Clerk's Office, in Volume 32, Page 1898, to which
reference is made.
<PAGE>
5
Parcel 2
Parcel 2 is more specifically described as follows:
All that certain parcel of land situated in the City of Shelton, County of
Fairfield and State of Connecticut, consisting of .3730 acre, shown as "Parcel
to be Conveyed to Richardson-Merrell Inc." on a map entitled "Survey Map Showing
Proposed Exchange of Property Between Lyman L. Wells and Richardson-Merrell
Inc., Beard Saw Mill & Route 8 - Shelton, CT" scale 1" = 40', dated March 7,
1980, Revised October 26, 1981, and prepared by J. & D. Kasper & Associates,
which map has been filed in the Shelton Town Clerk's Of lice, in Volume 32, Page
1898, to which reference is made.
Parcel 3
Parcel 3 is more specifically described as follows:
All that certain parcel of land situated in the City of Shelton, County of
Fairfield and State of Connecticut, consiting of .9376 acres, shown as "Area
40,842 Sq. Ft. Or .9376 acres" on the Map, recorded in Volume 29, Page 1650 of
the Shelton land records, being more particularly bounded and described as
follows:
Commencing at a point in the westerly streetline of Beard Saw Mill Road;
thence southwesterly along land now of Matthew F. Smith and Elma K. Smith the
following course and distance: S 61(degree) 49' 50" W. 155.87 feet;
Thence, in a general northerly direction, bounded by the centerline of Far
Mill River the following courses and distances: N 14(degree) 21' 24" W. 321.65
feet, N 34(degree) 08' 24" W. 86.29 feet;
Thence, in a general northeasterly direction, bounded by land of the State
of Connecticut and more particularly described in Map of "Conn. Dept. of
Transportation Right of Way Map, Sheet No. 3 of 4, August, 1978, Scale: 1 in. =
80 ft.," and "Town of Shelton, Map Showing Land Acquired From Anna M. Clapp by
the State of Conn., Relocation of Route No. 8, Revised to April 13, 1970, Town
No. 126, Project No. 126-91, Serial No. 36, Sheet No. 1 of 2. Also Map Serial
No. 61, Sheet No. 1 of 3, Revised to March 11, 1971 ", N. 26(degree) 40' 59" E,
55.22 feet to the streetline of Beard Saw Mill Road;
Thence, in a general southerly direction, bounded by Beard Saw Mill Road to
the point or place of beginning, the following courses and distances:
S 38(degree) 12' 26" E, 167.33 feet, S 34(degree) 09' 37" E, 197.34 feet,
S 22(degree) 29' 04" E, 69.27 feet.
<PAGE>
6
Parcels 1 and 2 are conveyed Together With all rights of the Grantor in and to
the easements recorded Vol. 401 at Page 9 and in Vol. 401 at Page 12 of the
Shelton Land Records.
<PAGE>
Exhibit 10(m)
AMENDED AND RESTATED
MARKETING AND SERVICES AGREEMENT
By and Among
PHYSICIANS HEALTH SERVICES, INC.
and its affiliate,
PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC.
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
<PAGE>
AMENDED AND RESTATED MARKETING AND SERVICES AGREEMENT
Reference is hereby made to the Marketing and Services Agreement (the
"Marketing and Services Agreement") made and entered into as of December 2, 1994
(the "Inception Date") by and among PHYSICIANS HEALTH SERVICES, INC., a
corporation organized under the laws of the State of Delaware, and its
affiliate, PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC., a corporation
organized under the laws of the State of Connecticut as a health care center
(collectively, "PHS," unless the context indicates reference to Physicians
Health Services. Inc. or Physicians Health Services of Connecticut, Inc. as
separate corporate entities), and THE GUARDIAN LIFE INSURANCE COMPANY OF
AMERICA, a mutual life insurance company organized under the laws of the State
of New York ("Guardian"). This Amended and Restated Marketing and Services
Agreement is dated as of October 1, 1996, and when executed by the parties
hereto, shall supersede and replace the Marketing and Services Agreement and
shall constitute a binding and enforceable amendment to the Marketing and
Services Agreement in its entirety.
THE MARKETING AND SERVICES AGREEMENT IS AMENDED AND RESTATED IT ITS
ENTIRETY AS FOLLOWS:
This Amended and Restated Marketing and Services Agreement (this
"Agreements) is made and entered into as of this 1st day of October, 1996 by and
among PHYSICIANS HEALTH SERVICES, INC., PHYSICIANS HEALTH SERVICES OF
CONNECTICUT, INC. and GUARDIAN.
<PAGE>
RECITALS
WHEREAS, PHS, which is licensed to operate a health care center in the
State of Connecticut, maintains a network of health care providers in the State
of Connecticut, and is authorized to offer for sale plans providing managed care
health care benefits in such State;
WHEREAS, Guardian desires to make different types of managed care health
coverage plans available for sale by the Guardian Marketing Force (as defined
herein) in the State of Connecticut;
WHEREAS, PHS is willing to make its managed care health coverage plans
available for sale by the Guardian Marketing Force;
WHEREAS, Guardian is authorized to offer for sale preferred provider
organization plans and indemnity insurance contracts (collectively, "Health
Insurance Contracts," as defined herein) to individuals and groups in the State
of Connecticut and to offer certain other insurance plans in such State,
including group life, disability and dental insurance plans ("Ancillary
Products," as defined herein);
2
<PAGE>
WHEREAS. PHS desires to make Health Insurance Contracts and Ancillary
Products available for sale by PHS in the State of Connecticut;
WHEREAS, PHS and Guardian each desire to market "multi-choice" plans, which
give employees the option of choosing benefits under pre-selected combinations
of health coverage plans; and
WHEREAS, PHS and Guardian desire to enter into a reinsurance transaction,
pursuant to which Guardian will reinsure PHS with respect to risks under HMO
Plans (as defined herein);
NOW THEREFORE, in consideration of the mutual agreements contained herein,
the sufficiency of which is hereby acknowledged, and in consideration of the
performance by the parties of their obligations under this Agreement, the
parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (definitions are applicable to both the singular and the plural form of
each term defined herein):
3
<PAGE>
"Ancillary Products" means the life insurance, short- and long-term
disability insurance, accidental death and dismemberment insurance, and dental
insurance products offered by Guardian as designated by the parties from time to
time.
"Business Day" means any day except Saturday or Sunday or any legal Federal
or Connecticut holiday.
"Change of Control" means the acquisition, in a single transaction or in a
series of related transactions, by a person, an entity, or a group of persons or
entities acting in concert of: (i) twenty-five percent (25 %) or more (a) of the
voting common stock of Physicians Health Services, Inc. or Physicians Health
Services of Connecticut, Inc. (excluding any acquisition of stock by a party
currently owning twenty-five percent (25 %) or more of such common stock), or
(b) fifty-one percent (51 %) or more of the aggregate value of the assets of
Physicians Health Services, Inc. or Physicians Health Services of Connecticut,
Inc.; or (ii) twenty-five percent (25 %) or more of any ownership interest in
Guardian.
"Continuation Plan" has the meaning given such term in the HMO Reinsurance
Agreement
"Contractholder" means an employer in the Service Area who or which
executes an enrollment agreement with respect to any Managed Care Contract
subject to this Agreement.
4
<PAGE>
Contract Termination Date" means the effective date upon which the
Agreement terminates pursuant to the applicable Section in Article X below.
"Eligible Employee" means an employee who is eligible to enroll in the
Contractholder's Plan.
"Effective Date" shall have the meaning set forth in Section 10.1.
"Guardian Marketing Force" means employees of Guardian, and any agents
under contract with Guardian who or which are licensed in the State of
Connecticut to sell individual and/or group health insurance contracts and who
or which are acting on behalf of Guardian, but not including employees or agents
of PHS, or independent brokers.
"Health Insurance Contracts" means contracts for health insurance offered
on a fee for service or indemnity basis by Guardian in the Service Area when
such contracts are marketed and sold under the tradename "The Guardian & PHS
Healthcare Solutions," or such other tradename as the parties may mutually agree
to from time to time. Health Insurance Contracts include preferred provider
plans using the PHS Network or PHCS' network of providers offered by Guardian in
the Service Area.
"HMO Plans" means commercial contracts for health care services provided by
PHS to Contractholders in the Service Area utilizing the PHS Network to provide
health care services
5
<PAGE>
when such contracts are marketed and sold under the tradename "The Guardian &
PHS Healthcare Solutions," or such other tradename as the parties may mutually
agree to from time to time. HMO Plans include HMO Plans with a
"point-of-service" feature.
"HMO Reinsurance Agreement" means the form of Reinsurance Agreement
described in Section 9.1 and attached hereto as Exhibit A-1.
"Managed Care Contracts" means any HMO Plan or Health Insurance Contract
purchased by a Contractholder pursuant to Article II below.
"Marketing Materials" shall have the meaning set forth in Section 2.6.
"Material Change" shall have the meaning set forth in Section 6.3.
"PHCS" means Private Healthcare Systems, Incorporated, a Delaware
corporation with its headquarters in Waltham, Massachusetts, that organizes
managed care networks.
"PHS Network" means the network of health care providers in the Service
Area, including physicians and other individual practitioners and health care
facilities or individual practice associations, who or which are under direct or
indirect contract with PHS to provide services to Subscribers under a HMO Plan.
6
<PAGE>
"Plans" means the HMO Plans, Health Insurance Contracts and Ancillary
Products sold pursuant to this Agreement.
"Quarter" means each of the four consecutive three-month periods in a
calendar year.
"Quarterly Accounting Report" shall have the meaning set forth in Section
8.1.
"Service Area" means the State of Connecticut.
"Subscriber" means the persons, including, but not limited to, Eligible
Employees, who have enrolled in a Managed Care Contract and who meet the
Contractholder's and the Managed Care Contract's eligibility requirements.
ARTICLE 11
MARKETING AND SALES
2.1 Marketing and Sale of the HMO Plans by Guardian. (a) During the term of
this Agreement, Guardian shall have the right to market HMO Plans to its
existing and prospective customers through the Guardian Marketing Force,
pursuant to the terms of Section 2.3 below.
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(b) Except as permitted by 2.1(c) below, Guardian shall not enter into any
marketing agreements or similar agreements with any managed care organization
other than PHS for purpose of offering managed care products for sale in the
Service Area.
(c) Nothing contained in this Agreement shall limit Guardian's right to
contract with PHCS for the purpose of developing managed care networks in the
Service Area or elsewhere; provided, however, that during the term of this
Agreement, Guardian shall not, without consulting with PHS, replace a HMO Plan
with a similar type of plan utilizing a PHCS network.
(d) Nothing contained in this Agreement shall limit Guardian's right to
market Health Insurance Contracts and Ancillary Products not subject to this
Agreement directly to employers with whom Guardian contracts.
2.2 Marketing and Sale of Health Insurance Contracts by PHS: Ancillary
Products. (a) During the term of this Agreement, PHS shall have the right to
market Health Insurance Contracts and Ancillary Products to its existing and
prospective customers in the Service Area, pursuant to the terms of Section 2.3
below.
(b) Except with Guardian's prior written consent and except as permitted by
Section 2.2(c) below, PHS shall not enter into marketing or similar agreements
with any entity other than Guardian with respect to marketing in the Service
Area of HMO Plans, Health Insurance
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Contracts or Ancillary Products or insurance products substantially similar to
the Health Insurance Contracts or Ancillary Products.
(c) PHS expressly acknowledges and agrees that notwithstanding anything to
the contrary stated in this Section 2.2(c), that it has not, and that it will
not, enter into any joint marketing or similar agreement with any entity other
than Guardian with respect to marketing in the Service Area of any commercial,
fully insured HMO Plan, Health Insurance Contract or Ancillary Product. Guardian
acknowledges and agrees that PHS may enter into arrangements in the Service Area
with respect to marketing Ancillary Products in connection with PHS' Medicare
and Medicaid health maintenance organization plans ("Government Plans") Guardian
also acknowledges and agrees that prior to the Effective Date that PHS entered
into an arrangement with Dental Benefit Providers to market dental products (the
"DBP Plans") in the Service Area. PHS agrees that from and after 12/31/97 that
it will not market the DBP Plans other than in connection with the marketing of
the Government Plans. Guardian further acknowledges and agrees that prior to the
Effective Date that PHS entered into arrangements with All America Financial
Services, Inc. ("AAFS"), International Netherlands Group and its subsidiaries
(collectively, "ING") and Lincoln National Life Insurance Company of America
("LNLICA") to market specific and aggregate stop-loss premium health maintenance
organization plans ("Stop-Loss Plans") and that PHS marketed the life insurance
products of AAFS, ING and LNLICA in connection with such arrangements. PHS
agrees that from and after the Effective Date that it will not market Stop-Loss
Plans or life insurance products in connection with such Stop-Loss Plans unless
it gives Guardian the opportunity to provide such stop-loss coverage to PHS. If
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Guardian is able to provide such stop-loss coverage at a rate which does not
exceed by more than five percent (5 %) the average of the rates provided by
AAFS, ING and LNLICA, then PHS will utilize Guardian to provide such stop-loss
coverage. In the event there is a Change of Control and PHS is acquired by, or
PHS is merged with, any entity, the limitations set forth in Section 2.2(b) of
this Agreement shall apply to the surviving entity.
(d) Nothing contained in this Agreement shall limit PHS's right to market
HMO plans not subject to this Agreement directly to employers with whom PHS
contracts.
2.3 Multi-Choice and Stand-Alone Arrangements. (a) Guardian shall have the
right to market HMO Plans after regulatory approval has been obtained, (i) under
multi-choice arrangements with Contractholders, pursuant to which Eligible
Employees will be offered health care coverage options consisting of HMO Plans
or Health Insurance Contracts, and (ii) under stand-alone arrangements, pursuant
to which Eligible Employees will be provided with only the HMO Plan purchased by
the Contractholder.
(b) PHS shall have the right to market Health Insurance Contracts after
regulatory approval has been obtained (i), under multi-choice arrangements with
Contractholders, pursuant to which Eligible Employees will be offered health
care coverage options consisting of HMO Plans or Health Insurance Contracts,
and (ii) under stand-alone arrangements, pursuant to which Eligible Employees
will be provided with only the Health Insurance Contract purchased by the
Contractholder.
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(c) PHS agrees to use its best efforts to market Ancillary Products to its
existing and prospective customers; provided, however, that, the failure of PHS
to use its best efforts to market such Ancillary Products shall not entitle
Guardian to terminate this Agreement pursuant to Article X below.
2.4 Priority. Neither party shall solicit any employer group with which the
other party had an existing contractual relationship as of the Inception Date
for the provision of health care services or health insurance (or with which, as
of the Inception Date. such other party was engaged in negotiating or
renegotiating a contract for such services) without the prior consent of such
other party.
2.5 Identification of Managed Care Contracts. The Managed Care Contracts
shall be marketed under the collective designation "The Guardian & PHS
Healthcare Solutions." Each Managed Care Contract shall be assigned a specific
trade name, to be agreed to by the parties.
2.6 Marketing Materials. PHS and Guardian shall jointly develop handbooks,
enrollment forms, identification cards and all other marketing materials
relating to the Managed Care Contracts (collectively, "Marketing Materials").
The parties agree that the cost of the initial development and production of
such Marketing Materials shall be shared equally by the parties pursuant to
Section 7.4 below. Thereafter, the party responsible for reproducing such
Marketing Materials shall include the cost of such reproduction in Schedule B as
a reimbursable expense. To the extent consistent with administrative
requirements, and to the
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extent permitted by law or regulations, all Marketing Materials will consist of
each party's existing Marketing Materials, modified to reflect the terms of this
Agreement. Neither party will use Marketing Materials reflecting this Agreement
or using the name of the other party, without the other party's prior approval.
2.7 Training. PHS and Guardian shall jointly develop training programs
regarding marketing and administering the Managed Care Contracts for all members
of the Guardian Marketing Force and for Guardian and PHS personnel engaging in
marketing or administrative functions.
ARTICLE III
UNDERWRITING. RATES AND ADMINISTRATION
3.1 Underwriting and Administration of HMO Plans. (a) PHS shall be
responsible for developing and filing with the appropriate regulatory
authorities the rates for the HMO Plans. Guardian shall utilize such filed rates
and shall be responsible for calculating premiums according to established
underwriting guidelines for the HMO Plans subject to the requirements of
applicable law; provided, however, that, the parties agree that they will
mutually develop the premiums for any HMO Plan marketed to a group of more than
five hundred (500) employees. PHS shall provide Guardian with all information
reasonably relating
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to rating methodology, including, without limitation, cost assumptions,
anticipated loss ratios and other actuarial assumptions, and provider and
facility agreements. Underwriting guidelines for HMO Plans that are to be
marketed pursuant to this Agreement will be mutually developed by the parties.
(b) Except as otherwise expressly provided for herein, PHS shall be solely
responsible for administration of the HMO Plans, including the payment of
claims, withholds, taxes and all other amounts (other than commissions) payable
to any person with respect to HMO Plans.
3.2 Underwriting and Administration of Health Insurance Contracts and
Ancillary Products. (a) Guardian shall be responsible for developing and filing
with the appropriate regulatory authorities the rates for the Health Insurance
Contracts and Ancillary Products. Guardian shall utilize such filed rates and
shall be responsible for calculating premiums for the Health Insurance Contracts
and Ancillary Products, subject to the requirements of applicable law.
(b) Guardian shall be solely responsible for administration of Health
Insurance Contracts and Ancillary Products, including the payment of claims,
taxes and all other amounts payable with respect to such contracts.
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3.3 Discounts. Any discount of manual rates for any HMO Plan which exceeds
a mutually agreed upon amount (as set forth in the underwriting guidelines
mutually agreed upon by the parties), must be jointly authorized by 9the
underwriting departments of each of the parties, subject to the laws and
regulations of the State of Connecticut applicable to such Plans.
ARTICLE IV
BILLING AND COLLECTION OF PREMIUMS: PAYMENT OF COMMISSIONS
4.1 Billing and Collection of Premiums. (a) Guardian shall be responsible
for billing and collection of premiums for all Plans, regardless of how such
Plans are marketed.
(b) Premiums received by Guardian from Contractholders with respect to HMO
Plans will be held for the benefit of PHS during the Quarter in which such
premiums are received. Interest shall be credited on the cash balances held by
Guardian, as set forth in Article VII of the HMO Reinsurance Agreement.
(c) The amount of net premiums held by Guardian at the end of each Quarter
with respect to HMO Plans (i.e., premiums received, plus interest credited in
accordance with Section 4.1(b) above, less commissions paid to agents or brokers
pursuant to Section 4.2 below), reduced by any claims reimbursed to PHS
(including withholds) and other amounts as agreed to by the parties shall be
paid to PHS in accordance with Section 7.3 of the HMO Reinsurance Agreement.
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4.2 Commissions. (a) Commissions with respect to Plans sold pursuant to
this Agreement shall be paid according to the schedule of commissions set forth
in Schedule B. The commission rates to be paid with respect to Plans may be
changed from time to time, as agreed to jointly by PHS and Guardian, provided
that the party not proposing the change shall not unreasonably withhold its
consent to a change by the proposing party. All Managed Care Contracts shall be
priced to include expense factors for appropriate commission payments.
(b) Guardian shall make payment of all commissions to members of the
Guardian Marketing Force, to independent brokers and to Physicians Health
Insurance Services, Inc., an insurance agency ("PHIS"), to the extent that such
commissions become due as a result of the sale of Plans subject to this
Agreement. Guardian shall act as PHS's agent in the payment of commissions for
HMO Plans. PHS shall have responsibility for any other compensation with respect
to Plans sold by PHIS.
(c) Each party shall be responsible for ensuring that its employees or
agents are appropriately licensed and appointed, as necessary, to sell Plans and
to receive commissions. All payments of commissions to agents, brokers or
employees shall comply with applicable laws, rules, ordinances and regulations.
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(d) Limitations on Commission and Marketing Fees. Notwithstanding any other
provision of this contract, the total of commissions and marketing fees payable
by Guardian under this Agreement shall not exceed any limitations set forth in
Section 4228 of the New York State Insurance Law.
ARTICLE V
ENROLLMENT: MEMBERSHIP SERVICES
5.1 Enrollment. (a) Guardian and PHS shall jointly enroll new
Contractholders and Subscribers purchasing Managed Care Contracts.
(b) Each party shall be responsible for obtaining enrollment information
from Contractholders and Subscribers with respect to those Managed Care
Contracts sold by such party's Marketing Force and shall transmit such
information to the other party on a timely basis in a format that is acceptable
to the other party.
5.2 Meetings with Contractholders and Subscribers. Guardian and PHS shall
cooperate in conducting employee on-site enrollment meetings.
5.3 Enrollment Materials. All enrollment agreements, forms and other
materials, including Subscriber handbooks and identification cards, used for
Contractholders and
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Subscribers shall be either PHS's or Guardian's existing approved forms,
modified as necessary to reflect the terms of this Agreement. and the
administrative requirements of PHS and Guardian, respectively. All such
materials shall specify that PHS is the underwriter of HMO Plans, and that
Guardian is the underwriter of Health Insurance Contracts and Ancillary
Products. Neither party will use enrollment materials reflecting this Agreement,
or using the name of the other party, without the other party's approval.
5.4 Enrollment Reports. (a) PHS and Guardian shall prepare periodic and
timely reports as set forth in Schedule C showing all Managed Care Contracts
sold, renewed or terminated, and other enrollment information required by either
party in order to perform its duties with respect to such Contracts. Such
reports shall be made by each party on a periodic and timely basis on the
Business Day following the date of transactions or other matters reported, and
shall be transmitted by electronic transmission in a form reasonably acceptable
to the receiving party.
(b) PHS and Guardian shall prepare periodic reconcilations of the
enrollment information in the possession of each party.
5.5 Membership Services. All membership services with respect to
Subscribers under HMO Plans shall be provided by PHS.
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ARTICLE Vl
PHS NETWORK MANAGEMENT
6.1 PHS Network Management. (a) PHS shall be solely responsible for
development and maintenance (including, without limitation, quality assurance,
utilization management and credentialing protocols) of the PHS Network. PHS
shall provide Guardian with an accurate listing of the composition of the PHS
Network at the Effective Date, and thereafter shall update the listing
periodically, showing additions and deletions to the composition of the PHS
Network.
(b) PHS shall be solely responsible for any loss or liability arising from
any inaccuracy in such listings.
(c) Guardian may recommend additions to, or deletions from, the PHS
Network, and PHS shall endeavor to be responsive to accommodate Guardian's
recommendation. PHS shall have the sole authority to enter into contracts with
providers.
6.2 Medical Management. PHS shall be solely responsible for all claims
processing and auditing, health services (including hospital pre-certification,
outpatient pre-certification, large claim case management and utilization
review) and all risk accounting for the provider bonus arrangements under the
HMO Plans.
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6.3 Material Change in PHS Network.
PHS acknowledges that maintenance of an adequate network of health care
providers is of primary concern to Guardian, and agrees to notify Guardian if
the PHS Network fails to meet the criteria set forth below. PHS further
acknowledges and agrees that any failure to meet the following criteria
constitutes material change in PHS Network.
(i) The PHS Network will contain that number of physicians as
determined by the parties, from time to time, equaling 70% or more of the
number of physicians (practicing as individuals or in practice groups or
clinics) determined by averaging the number of such physicians under
contract with the three largest health maintenance organizations operating
in the Service Area (measured by the number of persons eligible to receive
benefits under such plans, but not including any plans offered by Blue
Cross/Blue Shield of Connecticut).
(ii) The PHS network will contain a number of acute care institutions
equaling 80% or more of the number of such institutions determined as in
(i) above.
(iii) The PHS Network will further contain a number of tertiary care
institutions (as defined by the Connecticut Hospital Association) equaling
67 % or more of all such institutions determined as in (i) above.
6.4 Professional Liability Insurance. (a) PHS shall require each physician
member of the PHS Network to maintain professional liability insurance, with
limits of at least $1,000,000 per occurrence, and $3,000,000 in the aggregate
for individual practitioners and practice groups, and $1,000,000 per occurrence
and $3,000,000 aggregate for hospitals,
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clinics and other institutional providers. Guardian accepts that hospitals and
other institutional providers may self-insure or self-retain with respect to
such liability limits, as permitted by applicable Connecticut law and
regulations. Guardian also recognizes that liability limits for the following
individual non-physician members of the PHS Network may be $1,000,000 per
occurrence and $1,000,000 in the aggregate: chiropractors, social workers,
audiologists, speech pathologists, optometrists, physical therapists and
occupational therapists.
ARTICLE VII
MARKETING AND ADMINISTRATIVE SERVICES FEE AND EXPENSES
7.1 Guardian's Marketing and Administrative Services Fee. PHS shall pay
Guardian a Marketing and Administrative Services Fee for the duties assigned to
Guardian under this Marketing and Services Agreement equal to the amount shown
on Schedule B, as it may be amended from time to time, for each Quarter, or
portion thereof, during which this Agreement is in effect.
7.2 PHS's Administrative Services Fee. PHS shall be entitled to an
Administrative Services Fee for the administrative duties assigned to PHS under
this Marketing and Services Agreement equal to the amount shown on Schedule B,
as it may be amended from time to time, for each Quarter, or portion thereof,
during which this Agreement is in effect.
7.3 Adjustments of Fee. The Fees set forth in Schedule B shall remain in
effect for four Quarters, or portion thereof, beginning with the Quarter that
includes the Effective Date.
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Each party shall have the right to adjust the Fees payable hereunder for any
subsequent period of four Quarters by providing notice to the other party of an
amendment of Schedule B no less than forty-five (45) calendar days prior to the
beginning of the next such period. Such adjustment will be limited to an amount
necessary to cover changes in that party's costs of providing services
hereunder, without provision of profit.
7.4 Expenses. Each party shall be responsible for its expenses incurred in
connection with this Agreement; provided, however, that expenses attributable to
the development and initial production of Marketing Materials shall be shared
equally. Each party shall calculate such expenses (including, without
limitation, a reasonable allocation of internal expenses, production and
printing expenses and legal expenses incurred in connection with obtaining
regulatory approval of any forms) on a Quarterly basis, and shall provide the
other party with a schedule of such expenses in connection with each Quarterly
Accounting Report. A party whose expenses under this Section 7.4 exceed one-half
of the aggregate of the expenses incurred by both parties for the Quarter shall
be entitled to reimbursement for such excess within forty-five (45) days from
the end of such Quarter.
7.5 Reinsurance Agreement. At the option of the parties, the fees and
expenses hereunder may be incorporated in any Reinsurance Agreement entered into
between the parties (or affiliates of the parties) to the extent that such fees
relate to reinsured Managed Care Contracts.
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ARTICLE V111
ACCOUNTING AND REPORTING
8.1 Ouarterly Accounting Reports. Within forty-five (45) calendar days of
the end of each Quarter, each party shall supply the other with a Quarterly
Accounting Report as defined in Section 7.3 of the Reinsurance Agreement.
Quarterly Accounting Reports shall be made for the Quarter that includes the
Effective Date, and shall be made for each Quarter following the Contract
Termination Date if any amount is due any party under this Agreement.
8.2 Settlements. Settlement of all amounts due pursuant to this Agreement
shall be made on a net basis in connection with the Quarterly Accounting Report.
If one party owes a net amount to the other, such amount shall be paid in
accordance with Section 7.3 of the HMO Reinsurance Agreement.
8.3 Reconciliation. Each party shall have the right to review all
individual components of transactions entered into each Quarterly Accounting
Report. The parties shall have twenty (20) Business Days from the day the
Quarterly Accounting Report is submitted to report any deficiency in such report
and to request an adjustment of any payment made to or received by either party.
Any amount due either party in connection with such reconciliation shall be paid
within twenty (20) calendar days of the receipt of notice that additional
amounts are due.
8.4 Best Efforts to Supply Actual Data. In preparing all reports required
in this Agreement, Guardian or the PHS, as the case may be, shall make its best
efforts to supply the
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actual data. If the actual data cannot be supplied with the appropriate report,
Guardian or PHS, as the case may be, shall produce best estimates, and shall
provide amended reports based on actual data no more than thirty (30) calendar
days after such report was originally due.
8.5 Statement of Actuarial Opinion. (a) Within forty-five (45) calendar
days after the end of the calendar year, each party shall provide the other with
a Statement of Actuarial Opinion certifying the adequacy of the reserve for
products covered under this Agreement. The Actuarial Opinion must state whether
or not the reserve for products covered under this Agreement meet the minimum
standards of all states where each party is licensed, and if not, the Actuarial
Opinion must state the difference between reserves and state minimums
(b) The Actuarial Opinion shall meet the requirements set forth in the
NAIC's Actuarial Opinion and Memorandum Regulation and shall be signed by each
party's "Appointed Actuary." The Appointed Actuary may or may not be an employee
of such party.
ARTICLE IX
REINSURANCE AGREEMENTS
9.1 HMO Reinsurance Agreement. The parties each hereby acknowledge that.
simultaneously with the execution of this Agreement, they intend to enter into a
reinsurance agreement in the form attached hereto as Exhibit A-1 (the "HMO
Reinsurance Agreement"). The parties intend, under the terms of the HMO
Reinsurance Agreement, that PHS will cede
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to Guardian certain specified percentages of the risks under the HMO Plans,
including those HMO Plans with a point-of-service feature, as more fully
described in the HMO Reinsurance Agreement. In return, Guardian shall be
allocated specified percentages of premiums received by PHS with respect to the
HMO Plans, all as more fully described in the HMO Reinsurance Agreement.
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ARTICLE X
TERM AND TERMINATION
10.1 Effective Date. This Agreement shall become effective on October 1,
1996 (the "Effective Date"), and shall continue in effect unless terminated
pursuant to the terms of this Article X. Nothwithstanding anything to the
contrary stated in this Article X, this Agreement shall continue in effect,
solely with respect to the provision of administrative services, for any Managed
Care Contract in effect on the Contract Termination Date until 180 days
subsequent to the next succeeding renewal date of any Managed Care Contract
following such Contract Termination Date; and provided, further however, that in
the event of a termination pursuant to Section 8.6 of the HMO Reinsurance
Agreement, this Agreement shall remain in effect solely with respect to the
provision of administrative services with respect to any Continuation Plan for
the period stated in Section 8.6 of the HMO Reinsurance Agreement.
10.2 Termination Due to Change of Control. In the event of a Change of
Control in one party, the other party shall have the right to terminate this
Agreement as set forth in Section 8.6 of the HMO Reinsurance Agreement. The
Contract Termination Date under this Section 10.2 shall be the effective date of
the Change of Control.
10.3 Termination Without Cause. (a) Either party shall have the right to
terminate this Agreement without cause upon 180 days prior written notice to the
other party. The
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Contract Termination Date under this Section 10.3 shall be the 180th day
following the giving of notice required by this Section 10.3.
(b) If PHS terminates this Agreement pursuant to Section 10.3(a), it agrees
to pay Guardian an amount equal to one half the fair market value of all HMO
Plans in force on the effective date of termination, other than HMO Plans that
(i) resulted from the conversion of pre-existing PHS contracts to Managed Care
Contracts, or (ii) are not continued as PHS plans on or before the first renewal
date for such contracts following the Contract Termination date.
(c) The parties will agree to a method of valuation of the HMO Plans (using
methods of valuation customarily used in valuing HMO Plans or health insurance
business). If the parties are unable to agree on valuation, the matter will be
referred to arbitration. Payments required under this Section 10.3 shall be made
in connection with the final Annual Accounting Report.
10.4 Termination For Cause. (a) In the event that either party shall
default in the performance of the duties and obligations imposed on it pursuant
to the terms of this Agreement or the Reinsurance Agreement(s), or breach any of
the provisions contained herein or therein, including the failure to pay any
amount when due, or the failure of either party to maintain a level of services
under this Agreement that is reasonably satisfactory to the other party, the
defaulting party shall be allowed thirty (30) days from written notice of such
default
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or breach to present to the non-defaulting party a plan to cure such default or
breach that is reasonably satisfactory to the non-defaulting party. If a
reasonably satisfactory plan to cure the default or breach is not submitted
within that time, or if the plan is not carried out according to its terms, the
non-defaulting party shall have the right to terminate this Agreement and the
Reinsurance Agreement(s) upon delivery of written notice of such termination to
the defaulting party, which shall be effective upon receipt, without prejudice
to any other rights or remedies available to the non defaulting party by reason
of such default or breach.
(b) In the event that either party shall engage in fraudulent, illegal or
grossly negligent conduct with respect to its duties and obligations under this
Agreement or the Reinsurance Agreement(s), the other party shall have the right
to terminate this Agreement and the Reinsurance Agreement(s) upon delivery of
written notice of such termination to the defaulting party, which shall be
effective upon receipt, without prejudice to any other rights or remedies
available to the non defaulting party by reason of the defaulting party's
conduct.
(c) In the event that this Agreement is terminated by Guardian pursuant to
this Section 10.4, the provisions of Section 10.3(b) shall apply as if PHS
elected to terminate this Agreement.
(d) The Contract Termination Date under this Section 10.4 shall be the date
of receipt of notification of termination.
10.5 Termination Due to Financial Impairment or Loss of Authority. In the
event that either party shall become unable to perform its obligations under the
Managed Care
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Contracts because of financial impairment or loss of authority to act under law,
or by action of any regulatory authority, the other party shall have the right,
subject to the requirements of relevant law and receipt of necessary approvals,
to terminate this Agreement and have the Managed Care Contracts assigned to, and
all obligations assumed by, an appropriately licensed organization that provides
substantially similar healthcare services as described in this Agreement. The
Contract Termination Date under this Section 10.5 shall be the date set forth in
Section 8.8 of the HMO Reinsurance Agreement.
10.6 Termination for Material Change in PHS Network. In the event that the
PHS Network undergoes a material change within the meaning of Section 6.3 of
this Agreement, PHS shall be allowed thirty (30) days to present to Guardian a
plan to cure such Material Change that is reasonably satisfactory to Guardian.
If a reasonably satisfactory plan to cure the Material Change is not submitted
within that time, or if the plan is not carried out according to its terms,
Guardian shall have the right to terminate this Agreement, and the Reinsurance
Agreement, upon delivery of written notice of such termination to PHS, which
shall be effective upon receipt, without prejudice to any other rights or
remedies available to Guardian. The Contract Termination Date under this Section
10.6 shall be the date of receipt of notification to terminate.
10.7 Buy-Out Provisions. The parties acknowledge and agree that the
"buy-out" provisions set forth in Section 10.3(b) above apply only to
terminations under Sections 10 3(a)
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and 10.4 above. Such buy-out provisions do not apply to terminations under any
other section of this Agreement or to terminations under the HMO Reinsurance
Agreement.
ARTICLE XI
INDEMNIFICATION
11.1 PHS's Indemnification. PHS shall indemnify Guardian against all
liabilities, losses, suits, damages, costs, and expenses (including, without
limitation, damages resulting from breach of this Agreement and reasonable fees
of Guardian's attorneys and other expenses of litigation), net of recoveries
from third parties, arising out of or in connection with PHS's obligations under
this Agreement, including acts or omissions to act, or negligent, willful,
reckless or intentional wrongs, fraud, oppression or bad faith.
11.2 Guardian's Indemnification. Guardian shall indemnify PHS against all
liabilities, losses, suits, damages, costs and expenses (including, without
limitation, damages resulting from breach of this Agreement, reasonable fees of
PHS's attorneys and other expenses of litigation), net of recoveries from third
parties, arising out of or in connection with Guardian's obligations under this
Agreement, including acts or omissions to act, or negligent, willful, reckless
or intentional wrongs, fraud, oppression or bad faith.
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11.3 Liability under PHS's HMO Plans. Except as specifically set forth in
any Reinsurance Agreement(s) to be entered into between the parties, Guardian is
not a guarantor, insurer, or reinsurer of, or joint venturer with, PHS. Guardian
does not accept any risk of loss for, nor provide any indemnification to PHS,
any Contractholder or Subscriber, any provider or any other person with respect
to an HMO Plan. PHS shall indemnify Guardian for all liabilities, losses, suits,
damages, costs and expenses (including reasonable fees of Guardian's attorneys,
and other expenses of litigation), net of recoveries from third parties, arising
in connection with a HMO Plan or the PHS Network, including action or failure to
act by PHS, or its employees or agents (excluding health care providers who or
which are not employees of, or under an agency agreement with, PHS).
11.4 Liability under Health Insurance Contracts and Ancillary Products. PHS
is not a guarantor, insurer, or reinsurer of, or joint venturer with, Guardian.
PHS does not accept any risk of loss, nor provide any indemnification to
Guardian, any Contractholder or Subscriber, any provider or any other person
with respect to a Health Insurance Contract or Ancillary Product. Guardian shall
indemnify PHS for all liabilities, losses, suits, damages, costs and expenses
(including reasonable fees of PHS's attorneys, and other expenses of
litigation), net of recoveries from third parties, arising in connection with a
Health Insurance Contract or Ancillary Product, including action or failure to
act by Guardian, or its employees or agents.
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11.5 Survival of Article. This Article XI shall survive the termination or
nonrenewal of this Agreement.
ARTICLE Xl1
ARBITRATION
12.l Appointment of Arbitrators. In the event of any disputes or
differences arising hereafter between the parties with reference to any
transaction under or relating in any way to this Agreement, as to which
agreement between the parties hereto cannot be reached, the dispute or
difference shall be resolved by arbitration. Three arbitrators shall decide any
dispute or difference. The arbitrators must be disinterested officers or retired
officers of life and health insurance or health maintenance organizations other
than the two parties to this Agreement or their affiliates. Each of the parties
agrees to appoint one of the arbitrators with the third, to be chosen by the two
appointed arbitrators. In the event that either party should fail to choose an
arbitrator within thirty (30) calendar days following a written request by the
other party to do so, the requesting party may choose a second arbitrator before
entering upon arbitration. In the event that the two arbitrators shall not be
able to agree on the choice of the third arbitrator within twenty (20) calendar
days following their appointment, each arbitrator shall nominate five (5)
candidates within ten (l0) calendar days thereafter, four (4) of whom the other
party shall decline, and the third arbitrator shall be chosen by the President
of the American Arbitration Association or his designee. Should the chosen third
arbitrator so
31
<PAGE>
selected decline to serve, the candidate who was not chosen by the President
shall be appointed. This process shall continue until a candidate has agreed to
serve.
12.2 Decision. The arbitrators shall consider customary and standard
practices in the health insurance and managed care business. They shall decide
by a majority vote of the arbitrators. There shall be no appeal from their
written decision. Judgment may be entered on the decision of the arbitrators by
any court having jurisdiction. If, in the opinion of the arbitrators, a dispute
cannot be otherwise resolved, this Agreement shall be terminated in accordance
with Section 10.4 hereof.
12.3 Expenses of Arbitration. Each party shall bear the expense of its own
arbitrator (whether selected by that party, or by the other party pursuant to
the procedures set out in Section 12.1) and related outside attorneys' fees, and
shall jointly and equally bear with the other party the expenses of the third
arbitrator.
12.4 Applicable Law. Any arbitration instituted pursuant to this Article
shall be held in Connecticut and the laws of the State of Connecticut and, to
the extent applicable, the Federal Arbitration Act, shall govern the
interpretation and application of this Agreement.
32
<PAGE>
12.5 Survival of Article. This Article shall survive termination of this
Agreement.
ARTICLE XIII
MISCELLANEOUS
13. l Stop-Loss Coverage. Guardian shall have the right to provide
Contractholders with stop-loss insurance or reinsurance with respect to HMO
Plans that are Managed Care Contracts subject to this Agreement. Guardian shall
have the right to bid on stop-loss reinsurance protection for all other business
of PHS. Nothing herein shall require PHS to reinsure HMO Plans that are not
Managed Care Contracts with Guardian. In addition, Guardian acknowledges that
PHS has certain existing arrangements, and may enter into additional
arrangements in the future, for stop-loss reinsurance coverage for HMO Plans
that are not Managed Care Contracts which shall remain in effect regardless of
this Agreement.
13.2 Misunderstandings and Oversights. If any delay, omission, error
or failure to perform any act required by this Agreement is unintentional and
caused by misunderstanding or oversight, PHS and Guardian will adjust the
situation to what it would have been had the misunderstanding or oversight not
occurred. The party that first discovers such oversight or incorrect act as a
result of the misunderstanding will notify the other party in writing promptly
upon discovery of the misunderstanding or oversight. The parties shall act to
correct the error, omission or oversight within thirty (30) days of notification
of the problem. This Section 13.2
33
<PAGE>
shall not be construed as a waiver by either party of its right to enforce
strictly the terms of this Agreement.
13.3 Non-Solicitation. (a) During the term of this Agreement, neither
Guardian nor any entity under Guardian's control shall contact, solicit or
contract for services with any PHS Network health care provider then under
contract with PHS. Nothing in this Agreement shall preclude PHCS from
contracting with any PHS Network health care provider.
(b) During the term of this Agreement, neither party shall knowingly
solicit for employment an employee of the other party who has been engaged in
activities covered by this Agreement, without written consent of the other
party.
13.4 Regulatory Approval. Performance of the obligations of either party
under this Agreement shall be subject to the receipt of necessary regulatory
approvals under the laws, regulations and practices of regulatory authorities in
New York and Connecticut. PHS and Guardian shall cooperate in attempting to
obtain expeditiously any necessary regulatory approvals from regulatory
authorities. Each party will bear its own expenses in obtaining such approvals.
13.5 Audits. Each party shall have the right, upon reasonable notice to the
other party, and at the requesting party's expense, to audit the books and
records of the other party
34
<PAGE>
relating to receipts, enrollment, service standards and other matters relating
to this Agreement during regular business hours at the premises of the audited
party where such records are normally maintained. The audited party shall
reasonably cooperate in any such audit.
13.6 Headings and Schedules. Headings used herein are not part of this
Agreement. Any Schedules or Exhibits attached hereto are part of this Agreement.
13.7 Compliance with Applicable Laws and Regulations. It is the intention
of the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the Agreement remains
in full force. Each of the parties agrees to comply with all laws, ordinances,
rules, regulations and orders of regulatory bodies applicable to the
transactions contemplated by this Agreement, including those relating to
maintenance of appropriate licenses and the appointment of agents and payment of
commissions. Either party shall promptly notify the other party of any
complaint, inquiry or lawsuit by any regulatory authority relating to the
Managed Care Contracts or to this Agreement.
13.8 Successors and Assigns: Binding Effect. Except as otherwise provided
herein and in the HMO Reinsurance Agreement, this Agreement cannot be assigned
by PHS or Guardian without the prior written approval of the other party. The
provisions of this
35
<PAGE>
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the parties hereto and their respective permitted successors and assigns.
13.9 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same agreement.
13.10 Entire Agreement: Amendment. This Agreement and the Reinsurance
Agreement constitute the entire agreement between the parties with respect to
the Managed Care Contracts and Ancillary Products, and supersede any previous
written or oral agreements. This Agreement shall be amended only by written
agreement signed by a duly authorized officer of each of PHS and Guardian, and
any change to this Agreement shall be null and void unless made by such written
agreement; provided, however, that where, under insurance, health or other
applicable laws or regulations, the approval of any such amendment to this
Agreement by one or more federal, state or local governmental or regulatory
authorities is required, the amendment shall not take effect unless and until
all such necessary approvals have been obtained and received by both PHS and
Guardian. In the event that any such approval is required, PHS and Guardian
shall each take all necessary actions in order to obtain such approval.
36
<PAGE>
13.11 Waivers. The waiver by either of the parties of the other party's
prompt and complete performance, or breach or violation, of any provisions of
this Agreement and related documents shall not operate or be construed as a
waiver of any subsequent breach or violation, and the waiver by any of the
parties to exercise any right or remedy which it may possess hereunder shall not
operate or be construed as a bar to the exercise of such right or remedy by such
party upon the occurrence of any subsequent breach or violation.
13.12 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut, without giving effect to
the principles of conflicts of laws thereof.
13.13 Severability. In the event any section or provision of this Agreement
or related documents is found to be void and unenforceable by a court of
competent jurisdiction, the remaining sections and provisions of this Agreement
or related documents shall nevertheless be binding upon the parties with the
same force and effect as though the void or unenforceable part had not been
severed or deleted.
37
<PAGE>
13.14 Notices. Any notice to be given pursuant to the terms of this
Agreement shall be given in writing either by personal delivery or by mail,
registered or certified, return receipt requested and postage prepaid. Mail
notices shall be sent to the parties at their respective addresses as shown:
If to Guardian:
The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
Attention: Edward K. Kane, Esq.
If to Physicians Health Services, Inc.:
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, Connecticut 06611
Attention: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
If to Physicians Health Services of Connecticut, Inc.:
Physicians Health Services of Connecticut, Inc.
120 Hawley Lane
Trumbull, Connecticut O6611
Attention: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
13.15 Confidentiality. (a) Neither Guardian nor PHS shall disclose any
proprietary or confidential information of the other party to a third party
without the express written consent of the other party to this Agreement. For
purposes of this Agreement, "proprietary and
38
<PAGE>
confidential" information will include, without limitation, all internal
business practices and business records, information concerning products and
pricing, contracts, computer hardware and software or business methods in any
form whatsoever, peer review, quality assurance and grievance procedures, any
aspect of the utilization review program, provider fee schedules, reimbursement
schedules, or discounts, and advertising or marketing information, but not
including information otherwise available to the public. Neither party shall use
any proprietary and confidential information of the other party for its own
benefit. Upon termination of this Agreement, each party will immediately return
to the other party any confidential information, claims files necessary for the
continued administration of any Plan, and other property of the other party.
(b) Guardian and PHS agree to maintain the confidentiality of any health
care information pertaining to Subscribers including, without limitation, files,
records, reports, and other information prepared and maintained in connection
with this Agreement, in accordance with all applicable laws and regulations.
(c) Each Party shall obtain any necessary consent from Subscribers with
respect to the release to the other party of any confidential information
relating to such Subscribers, by means of general or specific releases, as
appropriate. Each party shall notify the other if it becomes aware that proper
releases have not been obtained.
39
<PAGE>
(d) Guardian shall not make any list of PHS providers available to any
person other than appropriate regulatory authorities, Guardian employees who are
engaged in operations relating to this Agreement, and independent brokers and
other persons engaged in marketing of Managed Care Contracts.
13.16 Press Releases. No public statement or press release regarding the
existence of this Agreement shall be made by either party without obtaining the
prior written consent of the other party, except as required by applicable laws
or regulations.
13.17 Relationship of Parties. The parties to this Agreement are and shall
remain independent contractors. Neither party is the employee or agent of the
other party, except as set forth herein, and neither party has an express or
implied right to bind the other party. The parties do not intend to form a joint
venture, partnership, or to be governed by laws relating to any relationship
other than that of independent contractors. Neither party is authorized to
modify, alter or waive the terms of any product issued by the other party.
13.18 Offset. In the event that either party to this Agreement shall fail
to make payment of any amount that is due and owing to the other party under
this Agreement, all mutual debts shall be offset, and only the balance of such
debts shall be paid.
40
<PAGE>
13.19 Financial Statements. Each party shall furnish financial statements
as filed with the appropriate regulatory authority to the other party upon
request
13.20 Regulatory Review. The parties acknowledge and agree that this
Agreement is subject to the review and approval of the New York State Department
of Insurance. The parties expressly agree that any revisions to this Agreement
required by the New York State Department of Insurance will be addressed in an
amendment to, or restatement of, the Agreement.
41
<PAGE>
EXECUTION
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
PHYSICIANS HEALTH SERVICES, INC.
By /s/ Regina M. Campbell
-----------------------------
Name Regina M. Campbell
Title Senior Vice President
PHYSICIANS HEALTH SERVICES
OF CONNECTICUT
By /s/ Regina M. Campbell
-----------------------------
Name Regina M. Campbell
Title Senior Vice President
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
By /s/ Joseph D. Sargent
-----------------------------
Name Joseph D. Sargent
Title President and CEO
42
<PAGE>
SCHEDULE A
DESCRIPTION OF MANAGED CARE CONTRACTS
[DESCRIBE CT PLANS]
A-1
<PAGE>
<TABLE>
<CAPTION>
CONNECTICUT CHARTER POS - HEALTHCARE SOLUTIONS
====================================================================================================================================
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C3627G PHS 5 $200 $500 70% of the $1,700 $4,250 NA (1)
5CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3637G PHS 5 $300 $750 70% of the $1,800 $4,500 NA (1)
6CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3657G PHS 5 $500 $1,250 70% of the $2,000 $5,000 NA (1)
7CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3628G PHS 5 $200 $500 80% of the $1,200 $3,000 NA (1)
8CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA (1)
9CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA (1)
10CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3837G PHS 5/250 $300 $750 70% of the $1,800 $4,500 NA (1)
11CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3857G PHS 5/250 $500 $1,250 70% of the $2,000 $5,000 NA (1)
12CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3838G PHS 5/250 $300 $750 80% of the $1,300 $3,250 NA (1)
13CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3858G PHS 5/250 $500 $1,250 80% of the $1,500 $3,750 NA (1)
14CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3727G PHS 15 $200 $500 70% of the $1,700 $4,250 NA (1)
15CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA (1)
16CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3757G PHS 15 $500 $1,250 70% of the $2,000 $5,000 NA (1)
17CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3728G PHS 15 $200 $500 80% of the $1,200 $3,000 NA (1)
18CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONNECTICUT CHARTER POS - HEALTHCARE SOLUTIONS
====================================================================================================================================
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C3738G PHS 15 $300 $750 80% of the $1,300 $3,250 NA (1)
19CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3758G PHS 15 $500 $1,250 80% of the $1,500 $3,750 NA (1)
20CTC next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA (1)
21CTC 15/500 next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3958G PHS $500 $1,250 80% of the $1,500 $3,750 NA (1)
22CTC 15/500 next $5,000
- ------------------------------------------------------------------------------------------------------------------------------------
C3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available eff.
23CTC 15/500 next $10,000 1-1-97(1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3918G PHS $1,000 $2,500 80% of the $2,800 $7,000 NA Available eff.
24CTC 15/500 next $10,000 1-1-97(1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3717G PHS 15 $1,000 $2,500 70% of the $3,700 $9,250 NA Available eff.
25CTC next $10,000 1-1-97(1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available eff.
26CTC next $10,000 1-1-97(1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONNECTICUT PASSPORT POS - HEALTHCARE SOLUTIONS
====================================================================================================================================
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C3627G PHS 5 $200 $500 70% of the $1,700 $4,250 NA Available for sale
5CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3637G PHS 5 $300 $750 70% of the $1,800 $4,500 NA Available for sale
6CTP next $5,000 eff. 7/1/95(1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3657G PHS 5 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
7CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3628G PHS 5 $200 $500 80% of the $1,200 $3,000 NA Available for sale
8CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA Available for sale
9CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
10CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3837G PHS 5/250 $300 $750 70% of the $1,800 $4,500 NA Available for sale
11CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3857G PHS 5/250 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
12CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3838G PHS 5/250 $300 $750 80% of the $1,300 $3,250 NA Available for sale
13CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3858G PHS 5/250 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
14CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONNECTICUT PASSPORT POS - HEALTHCARE SOLUTIONS
====================================================================================================================================
Copy In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C3727G PHS 15 $200 $500 70% of the $1,700 $4,250 NA Available for sale
15CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA Available for sale
16CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3757G PHS 15 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
17CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3728G PHS 15 $200 $500 80% of the $1,200 $3,000 NA Available for sale
18CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3738G PHS 15 $300 $750 80% of the $1,300 $3,250 NA Available for sale
19CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3758G PHS 15 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
20CTP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
21CTP 15/500 next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3958G PHS $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
22CTP 15/500 next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale
23CTP 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3918G PHS $1,000 $2,500 80% of the $2,800 $7.000 NA Available for sale
24CTP 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3717G PHS 15 $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale
25CTP next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
C3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale
26CTP next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
CONNECTICUT PASSPORT HMO - HEALTHCARE SOLUTIONS
====================================================================================================================================
<S> <C> <C>
C36000 (5-10CTP) PHS 5 (Customized) Healthcare Solutions, eff. 3/1/95
- ------------------------------------------------------------------------------------------------------------------------------------
C37000 (15-20, 25 and PHS 15 (Customized) Healthcare Solutions, eff. 3/1/95
26CTP)
- ------------------------------------------------------------------------------------------------------------------------------------
C38000 (11-14CTP) PHS 5/250 (Customized) Healthcare Solutions, eff. 3/1/95
- ------------------------------------------------------------------------------------------------------------------------------------
C39000 (21-24CTP) PHS 15/500 (Customized) Healthcare Solutions, eff. 3/1/95
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
CT
Schedule B
Contract Allowances Administrative Service Fee
<TABLE>
<CAPTION>
I. Guardian's Administrative Services Fee (as a percentage of premium)
HMO POS
--- ---
<S> <C> <C>
Marketing 0.63% 0.63%
Sales 1.38% 1.38%
Administration 1.30% 1.30%
Billing/Collections 1.69% 1.69%
Advertising 0.15% 0.15%
Total 5.15% 5.15%
<CAPTION>
II. PHS' Administrative Services Fee (as a Percentage of premium)
HMO POS
--- ---
<S> <C> <C>
Health Services, UR 1.67% 1.67%
Net Mgt, MDD, QA 2.43% 2.43%
Operations 3.55% 3.58%
Acct Svc., Cust Srv. 1.44% 1.44%
Marketing 0.63% 0.63%
Sales 0.15% 0.15%
Administration 1.30% 1.30%
Advertising 0.15% 0.15%
Total 11.35% 11.35%
</TABLE>
<PAGE>
EXHIBIT A-l
HMO REINSURANCE AGREEMENT
EX-I
<PAGE>
Exhibit 10 (n)
AMENDED AND RESTATED
MARKETING AND SERVICES AGREEMENT
By and Among
PHYSICIANS HEALTH SERVICES, INC.
and its affiliate,
PHYSICIANS HEALTH SERVICES OF NEW YORK, INC.
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
<PAGE>
AMENDED AND RESTATED MARKETING AND SERVICES AGREEMENT
Reference is hereby made to the Marketing and Services Agreement (the
"Marketing and Services Agreement") made and entered into as of April 27, 1995
(the "Inception Date") by and among PHYSICIANS HEALTH SERVICES, INC., a
corporation organized under the laws of the State of Delaware, and its
affiliate, PHYSICIANS HEALTH SERVICES OF NEW YORK, INC., a corporation organized
under the laws of the State of New York as a health maintenance organization
(collectively, "PHS," unless the context indicates reference to Physicians
Health Services, Inc. or Physicians Health Services of New York, Inc. as
separate corporate entities), and THE GUARDIAN LIFE INSURANCE COMPANY OF
AMERICA, a mutual life insurance company organized under the laws of the State
of New York ("Guardian"). This Amended and Restated Marketing and Services
Agreement is dated as of October 1, 1996, and when executed by the parties
hereto, shall supersede and replace the Marketing and Services Agreement and
shall constitute a binding and enforceable amendment to the Marketing and
Services Agreement in its entirety.
THE MARKETING AND SERVICES AGREEMENT IS AMENDED AND RESTATED IT ITS
ENTIRETY AS FOLLOWS:
This Amended and Restated Marketing and Services Agreement (this
"Agreement") is made and entered into as of this 1st day of October, 1996 by and
among PHYSICIANS HEALTH SERVICES, INC., PHYSICIANS HEALTH SERVICES OF NEW YORK,
INC. and GUARDIAN.
<PAGE>
RECITALS
WHEREAS, PHS, which is licensed to operate a health maintenance in the
State of New York, maintains a network of health care providers in the State of
New York and is authorized to offer for sale plans providing managed care health
care benefits in such State;
WHEREAS, Guardian desires to make different types of managed care health
coverage plans available for sale by the Guardian Marketing Force (as defined
herein) in the State of New York;
WHEREAS, PHS is willing to make its managed care health coverage plans
available for sale by the Guardian Marketing Force;
WHEREAS, Guardian is authorized to offer for sale preferred provider
organization plans and indemnity insurance contracts ("collectively, Health
Insurance Contracts," as defined herein) to individuals and groups in the State
of New York and to offer certain other insurance plans in such State, including
group life. disability and dental insurance plans ("Ancillary Products," as
defined herein);
2
<PAGE>
WHEREAS, PHS desires to make Health Insurance Contracts and Ancillary
Products available for sale by PHS in the State of New York;
WHEREAS, PHS and Guardian each desire to market "multi-choice" plans, which
give employees the option of choosing benefits under pre-selected combinations
of health coverage plans; and
WHEREAS, PHS and Guardian desire to enter into certain reinsurance
transactions, pursuant to which Guardian will reinsure PHS with respect to risks
under HMO Plans (as defined herein) and an affiliate of PHS, Physicians Health
Services (Bermuda) Ltd., will reinsure Guardian with respect to risks under
Out-of-Network Contracts (as defined herein).
NOW THEREFORE, in consideration of the mutual agreements contained herein,
the sufficiency of which is hereby acknowledged, and in consideration of the
performance by the parties of their obligations under this Agreement, the
parties agree as follows:
3
<PAGE>
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (definitions are applicable to both the singular and the plural form of
each term defined herein):
"Ancillary Products" means the life insurance, short- and long-term
disability insurance, accidental death and dismemberment insurance, and dental
insurance products offered by Guardian as designated by the parties from time to
time.
"Business Day" means any day except Saturday or Sunday or any legal Federal
or New York State holiday.
"Change of Control" means the acquisition, in a single transaction or in a
series of related transactions, by a person, an entity, or a group of persons or
entities acting in concert of: (i) twenty-five percent (25%) or more (a) of the
voting common stock of Physicians Health Services, Inc. or Physicians Health
Services of New York, Inc. (excluding any acquisition of stock by a party
currently owning twenty-five percent (25%) or more of such common stock), or (b)
fifty-one percent (51 %) or more of the aggregate value of the assets of
Physicians Health Services, Inc. or Physicians Health Services of New York,
Inc.; or (ii) twenty-five percent (25%) or more of any ownership interest in
Guardian.
4
<PAGE>
"Continuation Plan" has the meaning given such term in Section 8.6 of the
HMO and Indemnity Reinsurance Agreements.
"Contractholder" means an employer in the Service Area who or which
executes an enrollment agreement with respect to any Managed Care Contract
subject to this Agreement.
"Contract Termination Date" means the effective date upon which this
Agreement terminates pursuant to the applicable section in Article X below.
"Eligible Employee" means an employee who is eligible to enroll in the
Contractholder's Plan.
"Effective Date" shall have the meaning set forth in Section 10.1.
"Guardian Marketing Force" means employees of Guardian. and any agents
under contract with Guardian who or which are licensed in the State of New York
to sell individual and/or group health insurance contracts and who or which are
acting on behalf of Guardian, but not including employees or agents of PHS, or
independent brokers.
"Health Insurance Contracts" means contracts for health insurance offered
on a fee for service or indemnity basis by Guardian in the Service Area when
such contracts are marketed and sold under the tradename "The Guardian & PHS
Healthcare Solutions," or such other tradename as the parties may mutually agree
to from time to time. Health Insurance Contracts
5
<PAGE>
include preferred provider plans using the PHS Network or PHCS' network of
providers and Out-of-Network Contracts offered by Guardian in the Service Area.
"HMO Plans" means commercial contracts for health care services provided by
PHS to Contractholders in the Service Area utilizing the PHS Network to provide
health care services when such contracts are marketed and sold under the
tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as
the parties may mutually agree to from time to time. HMO Plans include HMO Plans
with a "point-of-service" feature sold together with an Out-of-Network Contract.
"HMO Reinsurance Agreement" means the form of Reinsurance Agreement
described in Section 9.1 and attached hereto as Exhibit A-1.
"Indemnity Reinsurance Agreement" means the form of Reinsurance Agreement
described in Section 9.2 and attached hereto as Exhibit A-2.
"Managed Care Contracts" means any HMO Plan or Health Insurance Contract
purchased by a Contractholder pursuant to Article II below.
"Marketing Materials" shall have the meaning set forth in Section 2.6.
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"Material Change" shall have the meaning set forth in Section 6.3.
"Out-of-Network Contract" means a Health Insurance Contract underwritten by
Guardian which is marketed and sold as the "out-of-network" component of a HMO
Plan with a "point-of-service" feature.
"PHCS" means Private Healthcare Systems, Incorporated, a Delaware
corporation with its headquarters in Waltham, Massachusetts, that organizes
managed care networks.
"PHS Network" means the network of health care providers in the Service
Area, including physicians and other individual practitioners and health care
facilities or individual practice associations, who or which are under direct or
indirect contract with PHS to provide services to Subscribers under a HMO Plan.
"Plans" means the HMO Plans, Health Insurance Contracts and Ancillary
Products sold pursuant to this Agreement.
"Quarter" means each of the four consecutive three-month periods in a
calendar year.
"Quarterly Accounting Report" shall have the meaning set forth in Section
8.1.
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"Service Area" means the Counties of Bronx, Dutchess, Kings, Nassau, New
York, Queens, Richmond, Rockland, Suffolk, Orange, Putnam and Westchester in the
State of New York.
"Subscriber" means the persons, including, but not limited to, Eligible
Employees, who have enrolled in a Managed Care Contract and who meet the
Contractholder's and the Managed Care Contract's eligibility requirements.
ARTICLE II
MARKETING AND SALES
2.1 Marketing and Sale of the HMO Plans by Guardian. (a) During the term of
this Agreement, Guardian shall have the right to market HMO Plans to its
existing and prospective customers through the Guardian Marketing Force,
pursuant to the terms of Section 2.3 below.
(b) Except as permitted by 2.1(c) below, Guardian shall not enter into any
marketing agreements or similar agreements with any managed care organization
other than PHS for purpose of offering managed care products for sale in the
Service Area.
(c) Nothing contained in this Agreement shall limit Guardian's right to
contract with PHCS for the purpose of developing managed care networks in the
Service Area or elsewhere;
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provided, however, that during the term of this Agreement, Guardian shall not,
without consulting with PHS, replace a HMO Plan with a similar type of plan
utilizing a PHCS network.
(d) Nothing contained in this Agreement shall limit Guardian's right to
market Health Insurance Contracts and Ancillary Products not subject to this
Agreement directly to employers with whom Guardian contracts.
2.2 Marketing and Sale of Health Insurance Contracts by PHS: Ancillary
Products.
(a) During the term of this Agreement, PHS shall have the right to market
Health Insurance Contracts and Ancillary Products to its existing and
prospective customers in the Service Area, pursuant to the terms of Section 2.3
below.
(b) Except with Guardian's prior written consent and except as permitted by
Section 2.2(c) below, PHS shall not enter into marketing or similar agreements
with any entity other than Guardian with respect to marketing in the Service
Area of HMO Plans, Health Insurance Contracts or Ancillary Products or insurance
products substantially similar to the Health Insurance Contracts or Ancillary
Products
(c) PHS expressly acknowledges and agrees that notwithstanding anything to
the contrary stated in this Section 2.2(c), that it has not, and that it will
not, enter into any marketing or similar agreement with any entity other than
Guardian with respect to marketing in the Service Area of any commercial, fully
insured HMO Plan, Health Insurance Contract or Ancillary Product. Guardian
acknowledges and agrees that PHS may enter into arrangements
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in the Service Area with respect to marketing Ancillary Products in connection
with PHS' Medicare and Medicaid health maintenance organization plans
("Government Plans"). Guardian also acknowledges and agrees that prior to the
Effective Date that PHS entered into an arrangement with Dental Benefit
Providers to market dental products (the "DBP Plans") in the Service Area. PHS
agrees that from and after December 31, 1997 that it will not market the DBP
Plans other than in connection with the marketing of the Government Plans.
Guardian further acknowledges and agrees that prior to the Effective Date that
PHS entered into arrangements with All America Financial Services, Inc.
("AAFS"), International Netherlands Group and its subsidiaries (collectively,
"ING") and Lincoln National Life Insurance Company of America ("LNLICA") to
market specific and aggregate stop-loss premium health maintenance organization
plans ("Stop-Loss Plans") and that PHS marketed the life insurance products of
AAFS, ING and LNLICA in connection with such arrangements. PHS agrees that from
and after the Effective Date that it will not market Stop-Loss Plans or life
insurance products in connection with such Stop-Loss Plans unless it gives
Guardian the opportunity to provide such stop-loss coverage to PHS. If Guardian
is able to provide such stop-loss coverage at a rate which does not exceed by
more than five percent (5 %) the average of the rates provided by AAFS, ING and
LNLICA, then PHS will utilize Guardian to provide such stop-loss coverage. In
the event there is a Change of Control and PHS is acquired by, or PHS is merged
with, any entity, the limitations set forth in Section 2.2(b) of this Agreement
shall apply to the surviving entity.
(d) Nothing contained in this Agreement shall limit PHS's right to market
HMO plans not subject to this Agreement directly to employers with whom PHS
contracts.
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engaged in negotiating or renegotiating a contract for such services) without
the prior consent of such other party.
2.5 Identification of Managed Care Contracts. The Managed Care Contracts
shall be marketed under the collective designation '`The Guardian & PHS
Healthcare Solutions." Each Managed Care Contract shall be assigned a specific
trade name, to be agreed to by the parties.
2.6 Marketing Materials. PHS and Guardian shall jointly develop handbooks,
enrollment forms, identification cards and all other marketing materials
relating to the Managed Care Contracts (collectively, "Marketing Materials").
The parties agree that the cost of the initial development and production of
such Marketing Materials shall be shared equally by the parties pursuant to
Section 7.4 below. Thereafter, the party responsible for reproducing such
Marketing Materials shall include the cost of such reproduction in Schedule B as
a reimbursable expense. To the extent consistent with administrative
requirements, and to the extent permitted by New York law or regulations, all
Marketing Materials will consist of each party's existing Marketing Materials,
modified to reflect the terms of this Agreement. Neither party will use
Marketing Materials reflecting this Agreement or using the name of the other
party, without the other party's prior approval.
2.7 Training. PHS and Guardian shall jointly develop training programs
regarding marketing and administering the Managed Care Contracts for all members
of the Guardian
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Marketing Force and for Guardian and PHS personnel engaging in marketing or
administrative functions.
ARTICLE III
UNDERWRITING. RATES AND ADMINISTRATION
3.1 Underwriting and Administration of HMO Plans. (a) PHS shall be
responsible for developing and filing with the appropriate regulatory
authorities the rates for the HMO Plans. Guardian shall utilize such filed rates
and shall be responsible for calculating premiums according to established
underwriting guidelines for the HMO Plans subject to the requirements of
applicable law; provided, however, that, the parties agree that they will
mutually develop the premiums for any HMO Plan marketed to a group of more than
five hundred (500) employees. PHS shall provide Guardian with all information
reasonably relating to rating methodology, including, without limitation, cost
assumptions, anticipated loss ratios and other actuarial assumptions, and
provider and facility agreements. Underwriting guidelines for HMO Plans that are
to be marketed pursuant to this Agreement will be mutually developed by the
parties, subject to the requirements of New York law, including Section 4317 of
the Insurance Law.
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(b) Guardian shall develop premiums for HMO Plans subject to this Agreement
by using PHS' filed and approved adjusted community rating methodology, subject
to applicable law
(c) Except as otherwise expressly provided for herein, PHS shall be solely
responsible for administration of the HMO Plans, including the payment of
claims, withholds, taxes and all other amounts (other than commissions) payable
to any person with respect to HMO Plans.
3.2 Underwriting and Administration of Health Insurance Contracts and
Ancillary Products. (a) Guardian shall be responsible for underwriting of the
Health Insurance Contracts (including the Out-of-Network Contracts) and
Ancillary Products. Underwriting guidelines for the Out-of-Network Contracts
that are to be marketed pursuant to this Agreement will be developed in
consultation with PHS subject to the requirements of New York law, including
Section 3731 of the New York State Insurance Law.
(b) Guardian shall have sole responsibility for rating of Health Insurance
Contracts (including the Out-of-Network Contracts) and Ancillary Products. With
respect to the Out-of-Network Contracts, Guardian shall provide PHS with all
information reasonably relating to rating methodology, including, without
limitation, cost assumptions, anticipated loss ratios and other actuarial
assumptions.
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(c) Guardian shall be solely responsible for administration of Health
Insurance Contracts (including the Out-of-Network Contracts) and Ancillary
Products, including the payment of claims, taxes and all other amounts payable
with respect to such contracts; provided, however, that, PHS shall act as the
agent of Guardian and shall pay claims and provide certain other administrative
services under the Out-of-Network Contracts, subject to mutually agreed upon
claims standards.
3.3 "Point-of-Service" HMO Plans. The out-of-network component of any
point-of-service HMO Plan shall be made available as a Guardian Health Insurance
Contract.
3.4 Discounts. Any discount of manual rates for any HMO Plan or
Out-of-Network Contract which exceeds a mutually agreed upon amount (as set
forth in the underwriting guidelines mutually agreed upon by the parties), must
be jointly authorized by the underwriting departments of each of the parties,
subject to the laws and regulations of the State of New York applicable to such
Plans.
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ARTICLE IV
BILLING AND COLLECTION OF PREMIUMS: PAYMENT OF COMMISSIONS
4.1 Billing and Collection of Premiums. (a) Guardian shall be responsible
for billing and collection of premiums for all Plans, regardless of how such
Plans are marketed.
(b) Premiums received by Guardian from Contractholders with respect to HMO
Plans will be held for the benefit of PHS during the Quarter in which such
premiums are received. Interest shall be credited on cash balances held by
Guardian, as set forth in Article VII of the HMO Reinsurance Agreement.
(c) The amount of net premiums held by Guardian at the end of each Quarter
with respect to HMO Plans i.e., premiums received plus interest credited in
accordance with Section 4. l(b) above, less commissions paid to agents or
brokers pursuant to Section 4.2 below), reduced by any claims reimbursed to PHS
(including withholds) and other amounts as agreed to by the parties shall be
paid to PHS in accordance with Section 7.3 of the HMO Reinsurance Agreement.
4.2 Commissions. (a) Commissions with respect to Plans sold pursuant to
this Agreement shall be paid according to the schedule of commissions set forth
in Schedule B. Subject to the provisions of New York laws and regulations, the
commission rates to be paid with respect to Plans may be changed from time to
time, as agreed to jointly by PHS and Guardian, provided that the party not
proposing the change shall not unreasonably withhold its
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consent to a change by the proposing party. All Managed Care Contracts shall be
priced to include expense factors for appropriate commission payments
(b) Guardian shall make payment of all commissions to members of the
Guardian Marketing Force, to independent brokers and to Physicians Health
Insurance Services, Inc., an insurance agency ("PHIS"), to the extent that such
commissions become due as a result of the sale of Plans subject to this
Agreement. Guardian shall act as PHS's agent in the payment of commissions for
HMO Plans. PHS shall have responsibility for any other compensation with respect
to Plans sold by PHIS.
(c) Each party shall be responsible for ensuring that its employees or
agents are appropriately licensed and appointed, as necessary, to sell Plans and
to receive commissions. All payments of commissions to agents, brokers or
employees shall comply with applicable laws, rules, ordinances and regulations.
(d) Limitations on Commission and Marketing Fees. Notwithstanding any other
provision of this contract, the total of commissions and marketing fees payable
by Guardian under this Agreement shall not exceed any limitations set forth in
Section 4228 of the New York State Insurance Law.
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ARTICLE V
ENROLLMENT: MEMBERSHIP SERVICES
5.1 Enrollment. (a) Guardian and PHS shall jointly enroll new
Contractholders and Subscribers purchasing Managed Care Contracts.
(b) Each party shall be responsible for obtaining enrollment information
from Contractholders and Subscribers with respect to those Managed Care
Contracts sold by such party's Marketing Force and shall transmit such
information to the other party on a timely basis in a format that is acceptable
to the other party.
5.2 Meetings with Contractholders and Subscribers. Guardian and PHS shall
cooperate in conducting employee on-site enrollment meetings.
5.3 Enrollment Materials. All enrollment agreements, forms and other
materials, including Subscriber handbooks and identification cards, used for
Contractholders and Subscribers shall be either PHS's or Guardian's existing
approved forms, modified as necessary to reflect the terms of this Agreement,
and the administrative requirements of PHS and Guardian, respectively. All such
materials shall specify that PHS is the underwriter of HMO Plans, and that
Guardian is the underwriter of Health Insurance Contracts (including the
Out-of-Network Contracts) and Ancillary Products. Neither party will use
enrollment
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materials reflecting this Agreement, or using the name of the other party,
without the other party's approval.
5.4 Enrollment Reports. (a) PHS and Guardian shall prepare periodic and
timely reports as set forth in Schedule C showing all Managed Care Contracts
sold, renewed or terminated, and other enrollment information required by either
party in order to perform its duties with respect to such Contracts. Such
reports shall be made by each party on a periodic and timely basis on the
Business Day following the date of transactions or other matters reported, and
shall be transmitted by electronic transmission in a form reasonably acceptable
to the receiving party.
(b) PHS and Guardian shall prepare periodic reconciliations of the
enrollment information in the possession of each party.
5.5 Membership Services. All membership services with respect to
Subscribers under HMO Plans shall be provided by PHS.
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ARTICLE VI
PHS NETWORK MANAGEMENT
6.1 PHS Network Management. (a) PHS shall be solely responsible for
development and maintenance (including, without limitation, quality assurance,
utilization management and credentialing protocols) of the PHS Network. PHS
shall provide Guardian with an accurate listing of the composition of the PHS
Network at the Effective Date, and thereafter shall update the listing
periodically, showing additions and deletions to the composition of the PHS
Network.
(b) PHS shall be solely responsible for any loss or liability arising from
any inaccuracy in such listings.
(c) Guardian may recommend additions to, or deletions from, the PHS
Network, and PHS shall endeavor to be responsive to accommodate Guardian's
recommendation. PHS shall have the sole authority to enter into contracts with
providers.
6.2 Medical Management. PHS shall be solely responsible for all claims
processing and auditing, health services (including hospital pre-certification,
outpatient pre-certification, large claim case management and utilization
review) and all risk accounting for the provider bonus arrangements under the
HMO Plans.
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6.3 Material Change in PHS Network.
PHS acknowledges that maintenance of an adequate network of health care
providers is of primary concern to Guardian, and agrees to notify Guardian if
the PHS Network fails to meet the criteria set forth below. PHS further
acknowledges and agrees that any failure to meet the following criteria
constitutes material change in PHS Network.
(i) The PHS Network will contain that number of physicians as determined by
the parties, from time to time, equaling 80% or more of the number of physicians
(practicing as individuals or in practice groups or clinics) determined by
averaging the number of such physicians under contract with the three largest
health maintenance organizations operating in the Service Area (measured by the
number of persons eligible to receive benefits under such plans, but not
including any plans offered by Blue Cross/Blue Shield of New York).
(ii) The PHS network will contain a number of acute care institutions
equaling 80% or more of the number of such institutions determined as in (i)
above.
(iii) The PHS Network will further contain a number of tertiary care
institutions (as defined by the New York Hospital Association) equaling 80% or
more of all such institutions determined as in (i) above.
6.4 Professional Liability Insurance. (a) PHS shall require each physician
member of the PHS Network to maintain professional liability insurance, with
limits of at least $1,000,000 per occurrence, and $3,000,000 in the aggregate
for individual practitioners and practice groups, and $1,000,000 per occurrence
and $3,000,000 aggregate for hospitals,
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clinics and other institutional providers. Guardian accepts that hospitals and
other institutional providers may self-insure or self-retain with respect to
such liability limits, as permitted by applicable New York law and regulations.
Guardian also recognizes that liability limits for the following individual
non-physician members of the PHS Network may be $1,000,000 per occurrence and
$1,000,000 in the aggregate: chiropractors, social workers, audiologists. speech
pathologists, optometrists, physical therapists and occupational therapists.
ARTICLE VII
MARKETING AND ADMINISTRATIVE SERVICES FEE AND EXPENSES
7.1 Guardian's Marketing and Administrative Services Fee. PHS shall pay
Guardian a Marketing and Administrative Services Fee for the duties assigned to
Guardian under this Marketing and Services Agreement equal to the amount shown
on Schedule B. as it may be amended from time to time, for each Quarter, or
portion thereof, during which this Agreement is in effect.
7.2 PHS's Administrative Services Fee. PHS shall be entitled to an
Administrative Services Fee for the administrative duties assigned to PHS under
this Marketing and Services Agreement equal to the amount shown on Schedule B.
as it may be amended from time to time, for each Quarter, or portion thereof,
during which this Agreement is in effect.
7.3 Adjustments of Fee. The Fees set forth in Schedule B shall remain in
effect for four Quarters, or portion thereof, beginning with the Quarter that
includes the Effective Date.
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Each party shall have the right to adjust the Fees payable hereunder for any
subsequent period of four Quarters by providing notice to the other party of an
amendment of Schedule B no less than forty-five (45) calendar days prior to the
beginning of the next such period. Such adjustment will be limited to an amount
necessary to cover changes in that party's costs of providing services
hereunder, without provision of profit.
7.4 Expenses. Each party shall be responsible for its expenses incurred in
connection with this Agreement; provided, however, that expenses attributable to
the development and initial production of Marketing Materials shall be shared
equally. Each party shall calculate such expenses (including, without
limitation, a reasonable allocation of internal expenses, production and
printing expenses and legal expenses incurred in connection with obtaining
regulatory approval of any forms) on a Quarterly basis, and shall provide the
other party with a schedule of such expenses in connection with each Quarterly
Accounting Report. A party whose expenses under this Section 7.4 exceed one-half
of the aggregate of the expenses incurred by both parties for the Quarter shall
be entitled to reimbursement for such excess within forty-five (45) calendar
days from the end of such Quarter.
7.5 Reinsurance Agreement. At the option of the parties, the fees and
expenses hereunder may be incorporated in any Reinsurance Agreement entered into
between the parties (or affiliates of the parties) to the extent that such fees
relate to reinsured HMO Plans or Out-of-Network Contracts.
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ARTICLE VIII
ACCOUNTING AND REPORTING
8.1 Quarterly Accounting Reports. Within forty-five (45) calendar days of
the end of each Quarter, each party shall supply the other with a Quarterly
Accounting Report as defined in Section 7.3 of the Reinsurance Agreement.
Quarterly Accounting Reports shall be made for the Quarter that includes the
Effective Date, and shall be made for each Quarter following the effective date
of termination of this Agreement if any amount is due any party under this
Agreement.
8.2 Settlements. Settlement of all amounts due pursuant to this Agreement
shall be made on a net basis in connection with the Quarterly Accounting Report.
If one party owes a net amount to the other, such amount shall be paid in
accordance with Section 7.3 of the HMO Reinsurance Agreement (with respect to
amounts relating to the HMO Plans) and Section 7.3 of the Indemnity Reinsurance
Agreement (with respect to amounts relating to the Health Insurance Contracts).
8.3 Reconciliation. Each party shall have the right to review all
individual components of transactions entered into each Quarterly Accounting
Report. The parties shall have twenty (20) Business Days from the day the
Quarterly Accounting Report is submitted to report any deficiency in such report
and to request an adjustment of any payment made to or received by either party.
Any amount due either party in connection with such reconciliation
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shall be paid within twenty (20) calendar days of the receipt of notice that
additional amounts are due.
8.4 Best Efforts to Supply Actual Data. In preparing all reports required
in this Agreement, Guardian or PHS, as the case may be, shall make its best
efforts to supply the actual data. If the actual data cannot be supplied with
the appropriate report, Guardian or PHS, as the case may be, shall produce best
estimates, and shall provide amended reports based on actual data no more than
thirty (30) calendar days after such report was originally due.
8.5 Statement of Actuarial Opinion. (a) Within forty-five (45) calendar
days after the end of the calendar year, each party shall provide the other with
a Statement of Actuarial Opinion certifying the adequacy of the reserve for
products covered under this Agreement. The Actuarial Opinion must state whether
or not the reserve for products covered under this Agreement meet the minimum
standards of all states where each party is licensed, and if not, the Actuarial
Opinion must state the difference between reserves and state minimums
(b) The Actuarial Opinion shall meet the requirements set forth in the
NAIC's Actuarial Opinion and Memorandum Regulation and shall be signed by each
party's "Appointed Actuary." The Appointed Actuary may or may not be an employee
of such party.
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ARTICLE IX
REINSURANCE AGREEMENTS
9.1 HMO Reinsurance Agreement. The parties each hereby acknowledge that,
simultaneously with the execution of this Agreement, they intend to enter into a
reinsurance agreement in the form attached hereto as Exhibit A-1 (the "HMO
Reinsurance Agreement"). The parties intend, under the terms of the HMO
Reinsurance Agreement, that PHS will cede to Guardian certain specified
percentages of the risks under the HMO Plans, including those HMO Plans with a
point of service feature, as more fully described in the HMO Reinsurance
Agreement. In return. Guardian shall be allocated specified percentages of
premiums received by PHS with respect to the HMO Plans, all as more fully
described in the HMO Reinsurance Agreement.
9.2 Indemnity Reinsurance Agreement. The parties each hereby acknowledge
that, simultaneously with the execution of this Agreement, they intend to enter
into a reinsurance agreement in the form attached hereto as Exhibit A-2 (the
"Indemnity Reinsurance Agreement"). The parties intend, under the terms of the
Indemnity Reinsurance Agreement, that Guardian will cede to Physicians Health
Services (Bermuda) Ltd. ("PHS (Bermuda)"), an affiliate of PHS, certain
specified percentages of the risks under the Out-of-Network Contracts, as more
fully described in the Indemnity Reinsurance Agreement. In return, PHS (Bermuda)
shall be allocated specified percentages of premiums received by Guardian with
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respect to the Out-of-Network Contracts. all as more fully described hi the
indemnity Reinsurance Agreement.
ARTICLE X
TERM AND TERMINATION
10.1 Effective Date. This Agreement shall become effective on October 1,
1996 (the "Effective Date"), and shall continue in effect unless terminated
pursuant to the terms of this Article X. Notwithstanding anything to the
contrary stated in this Article X. this Agreement shall continue in effect.
solely with respect to the provision of administrative services, for any Managed
Care Contract in effect on the Contract Termination Date until 180 days
subsequent to the next succeeding renewal date of any Managed Care Contract
following such Contract Termination Date; and provided, further however, that in
the event of a termination pursuant to Section 8.6 of the HMO and Indemnity
Reinsurance Agreements, this Agreement shall remain in effect solely with
respect to the provision of administrative services with respect to any
Continuation Plan for the period stated in Section 8.6 of the HMO and Indemnity
Reinsurance Agreements.
10.2 Termination Due to Change of Control. In the event of a Change of
Control in one party, the other party shall have the right to terminate this
Agreement as set forth in Section 8.6 in the HMO and Indemnity Reinsurance
Agreements. The Contract Termination Date under this Section 10.2 shall be the
effective date of the Change of Control.
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10.3 Termination Without Cause. (a) Either party shall have the right to
terminate this Agreement without cause upon 180 days prior written notice to the
other party. The Contract Termination Date under this Section 10.3 shall be the
180th day following the giving of notice required by this Section 10.3.
(b) If PHS terminates this Agreement pursuant to Section 10.3(a), it agrees
to pay Guardian an amount equal to one half the fair market value of all HMO
Plans in force on the effective date of termination, other than HMO Plans that
(i) resulted from the conversion of pre-existing PHS contracts to Managed Care
Contracts, or (ii) are not continued as PHS plans on or before the first renewal
date for such contracts following the effective date of termination. In the
event that Guardian terminates this Agreement pursuant to Section 10.3(a),
Guardian agrees to pay PHS an amount equal to one half the fair market value of
all Out-of-Network Contracts in force on the effective date of termination,
other than Out-of-Network Contracts that (i) resulted from the conversion of
pre-existing Guardian contracts to Managed Care Contracts, or (ii) are not
continued as Guardian health insurance contracts on or before the first renewal
date for such contracts following the effective date of termination.
(c) The parties will agree to a method of valuation of the HMO Plans and
Out-of-Network Contracts (using methods of valuation customarily used in valuing
HMO Plans or health insurance business). If the parties are unable to agree on
valuation, the matter
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will be referred to arbitration. Payments required under this Section 10.3 shall
be made in connection with the final Annual Accounting Report.
10.4 Termination For Cause. (a) In the event that either party shall
default in the performance of the duties and obligations imposed on it pursuant
to the terms of this Agreement or the Reinsurance Agreement(s), or breach any of
the provisions contained herein or therein, including the failure to pay any
amount when due, or the failure of either party to maintain a level of services
under this Agreement that is reasonably satisfactory to the other party, the
defaulting party shall be allowed thirty (30) calendar days from written notice
of such default or breach to present to the non-defaulting party a plan to cure
such default or breach that is reasonably satisfactory to the non-defaulting
party. If a reasonably satisfactory plan to cure the default or breach is not
submitted within that time, or if the plan is not carried out according to its
terms, the non-defaulting party shall have the right to terminate this
Agreement, and the Reinsurance Agreement(s), upon delivery of written notice of
such termination to the defaulting party, which shall be effective upon receipt,
without prejudice to any other rights or remedies available to the non
defaulting party by reason of such default or breach.
(b) In the event that either party shall engage in fraudulent, illegal or
grossly negligent conduct with respect to its duties and obligations under this
Agreement or the Reinsurance Agreement(s), the other party shall have the right
to terminate this Agreement,
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and the Reinsurance Agreement(s), upon delivery of written notice of such
termination to the defaulting party, which shall be effective upon receipt,
without prejudice to any other rights or remedies available to the non
defaulting party by reason of the defaulting party's conduct.
(c) In the event that this Agreement is terminated pursuant to this Section
10.4, the provisions of Section 10.3(b) shall apply as if the defaulting party
elected to terminate this Agreement.
(d) The Contract Termination Date under this Section 10.4 shall be the date
of receipt of notification of termination.
10.5 Termination Due to Financial Impairment or Loss of Authority. In the
event that either party shall become unable to perform its obligations under the
Managed Care Contracts because of financial impairment or loss of authority to
act under law, or by action of any regulatory authority, the other party shall
have the right, subject to the requirements of relevant law and receipt of
necessary approvals, to terminate this Agreement and have the Managed Care
Contracts assigned to, and all obligations assumed by, an appropriately licensed
organization that provides substantially similar healthcare services as
described in this Agreement. The Contract Termination Date under this Section
10.5 shall be the date set forth in Section 8.8 of the HMO and Indemnity
Reinsurance Agreements.
10.6 Termination for Material Change in PHS Network. In the event that the
PHS Network undergoes a material change within the meaning of Section 6.3 of
this Agreement,
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PHS shall be allowed thirty (30) days to present to Guardian a plan to cure such
Material Change that is reasonably satisfactory to Guardian. If a reasonably
satisfactory plan to cure the Material Change is not submitted within that time,
or if the plan is not carried out according to its terms, Guardian shall have
the right to terminate this Agreement, and the Reinsurance Agreement(s), upon
delivery of written notice of such termination to PHS, which shall be effective
upon receipt, without prejudice to any other rights or remedies available to
Guardian. The Contract Termination Date under this Section 10.6 shall be the
date of receipt of notification to terminate.
10.7 Buy-Out Provisions. The parties acknowledge and agree that the
"buy-out" provisions set forth in Section 10.3(b) above apply only to
terminations under Sections 10.3(a) and 10.4 above. Such buy-out provisions do
not apply to terminations under any other section of this Agreement or to
terminations under the HMO Reinsurance Agreement or the Indemnity Reinsurance
Agreement.
ARTICLE XI
INDEMNIFICATION
11.1 PHS's Indemnification. PHS shall indemnify Guardian against all
liabilities, losses, suits, damages, costs, and expenses (including, without
limitation, damages resulting from breach of this Agreement and reasonable fees
of Guardian's attorneys and other expenses
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of litigation), net of recoveries from third parties, arising out of or in
connection with PHS's obligations under this Agreement, including acts or
omissions to act, or negligent, willful, reckless or intentional wrongs, fraud,
oppression or bad faith.
11.2 Guardian's Indemnification. Guardian shall indemnify PHS against all
liabilities, losses, suits, damages, costs and expenses (including, without
limitation, damages resulting from breach of this Agreement, reasonable fees of
PHS's attorneys and other expenses of litigation), net of recoveries from third
parties, arising out of or in connection with Guardian's obligations under this
Agreement, including acts or omissions to act, or negligent, willful, reckless
or intentional wrongs, fraud, oppression or bad faith.
11.3 Liability under PHS's HMO Plans. Except as specifically set forth in
any Reinsurance Agreement(s) to be entered into between the parties, Guardian is
not a guarantor, insurer, or reinsurer of, or joint venturer with, PHS. Guardian
does not accept any risk of loss for, nor provide any indemnification to PHS,
any Contractholder or Subscriber, any provider or any other person with respect
to an HMO Plan. PHS shall indemnify Guardian for all liabilities, losses, suits,
damages, costs and expenses (including reasonable fees of Guardian's attorneys,
and other expenses of litigation), net of recoveries from third parties, arising
in connection with a HMO Plan or the PHS Network, including action or failure to
act by PHS, or its employees or agents (excluding health care providers who or
which are not employees of, or under an agency agreement with, PHS).
32
<PAGE>
11.4 Liability under Health Insurance Contracts and Ancillary Products.
Except as set forth in any Reinsurance Agreement(s) to be entered into between
the parties, PHS is not a guarantor, insurer, or reinsurer of, or joint venturer
with, Guardian. PHS does not accept any risk of loss, nor provide any
indemnification to Guardian, any Contractholder or Subscriber, any provider or
any other person with respect to a Health Insurance Contract or Ancillary
Product. Guardian shall indemnify PHS for all liabilities, losses, suits,
damages, costs and expenses (including reasonable fees of PHS's attorneys, and
other expenses of litigation), net of recoveries from third parties, arising in
connection with a Health Insurance Contract or Ancillary Product, including
action or failure to act by Guardian, or its employees or agents.
11.5 Survival of Article. This Article XI shall survive the termination or
nonrenewal of this Agreement.
ARTICLE XII
ARBITRATION
12.1 Appointment of Arbitrators. In the event of any disputes or
differences arising hereafter between the parties with reference to any
transaction under or relating in any way to this Agreement, as to which
agreement between the parties hereto cannot be reached, the dispute or
difference shall be resolved by arbitration. Three arbitrators shall decide any
33
<PAGE>
dispute or difference. The arbitrators must be disinterested officers or retired
officers of life and health insurance or health maintenance organizations other
than the two parties to this Agreement or their affiliates. Each of the parties
agrees to appoint one of the arbitrators with the third, to be chosen by the two
appointed arbitrators. In the event that either party should fail to choose an
arbitrator within thirty (30) calendar days following a written request by the
other party to do so, the requesting party may choose a second arbitrator before
entering upon arbitration. In the event that the two arbitrators shall not be
able to agree on the choice of the third arbitrator within twenty (20) calendar
days following their appointment. each arbitrator shall nominate five (5)
candidates within ten (10) calendar days thereafter, four (4) of whom the other
party shall decline, and the third arbitrator shall be chosen by the President
of the American Arbitration Association or his designee. Should the chosen third
arbitrator so selected decline to serve, the candidate who was not chosen by the
President shall be appointed. This process shall continue until a candidate has
agreed to serve.
12.2 Decision. The arbitrators shall consider customary and standard
practices in the health insurance and managed care business. They shall decide
by a majority vote of the arbitrators. There shall be no appeal from their
written decision. judgment may be entered on the decision of the arbitrators by
any court having jurisdiction. If, in the opinion of the arbitrators, a dispute
cannot be otherwise resolved. this Agreement shall be terminated in accordance
with Section 10.4 hereof.
34
<PAGE>
12.3 Expenses of Arbitration. Each party shall bear the expense of its own
arbitrator (whether selected by that party, or by the other party pursuant to
the procedures set out in Section 12.1) and related outside attorneys' fees, and
shall jointly and equally bear with the other party the expenses of the third
arbitrator.
12.4 Applicable Law. Any arbitration instituted pursuant to this Article
shall be held in New York and the laws of the State of New York and, to the
extent applicable, the Federal Arbitration Act, shall govern the interpretation
and application of this Agreement.
12.5 Survival of Article. This Article shall survive termination of this
Agreement.
ARTICLE XIII
MISCELLANEOUS
13.1 Stop-Loss Coverage. Guardian shall have the right to provide
Contractholders with stop-loss insurance or reinsurance with respect to HMO
Plans that are Managed Care Contracts subject to this Agreement. Guardian shall
have the right to bid on stop-loss reinsurance protection for all other business
of PHS. Nothing herein shall require PHS to reinsure HMO Plans that are not
Managed Care Contracts with Guardian. In addition, Guardian acknowledges that
PHS has certain existing arrangements, and may enter into
35
<PAGE>
additional arrangements in the future, for stop-loss reinsurance coverage for
HMO Plans that are not Managed Care Contracts which shall remain in effect
regardless of this Agreement.
13.2 Misunderstandings and Oversights. If any delay, omission, error or
failure to perform any act required by this Agreement is unintentional and
caused by misunderstanding or oversight, PHS and Guardian will adjust the
situation to what it would have been had the misunderstanding or oversight not
occurred. The party that first discovers such oversight or incorrect act as a
result of the misunderstanding will notify the other party in writing promptly
upon discovery of the misunderstanding or oversight. The parties shall act to
correct the error, omission or oversight within thirty (30) days of notification
of the problem. This Section 13.2 shall not be construed as a waiver by either
party of its right to enforce strictly the terms of this Agreement.
13.3 Non-Solicitation. (a) During the term of this Agreement, neither
Guardian nor any entity under Guardian's control shall contact, solicit or
contract for services with any PHS Network health care provider then under
contract with PHS. Nothing in this Agreement shall preclude PHCS from
contracting with any PHS Network health care provider.
(b) During the term of this Agreement, neither party shall knowingly
solicit for employment an employee of the other party who has been engaged in
activities covered by this Agreement, without written consent of the other
party.
36
<PAGE>
13.4 Regulatory Approval. Performance of the obligations of either party
under this Agreement shall be subject to the receipt of necessary regulatory
approvals under the laws, regulations and practices of regulatory authorities in
New York. PHS and Guardian shall cooperate in attempting to obtain expeditiously
any necessary regulatory approvals from regulatory authorities. Each party will
bear its own expenses in obtaining such approvals.
13.5 Audits. Each party shall have the right, upon reasonable notice to the
other party, and at the requesting party's expense, to audit the books and
records of the other party relating to receipts, enrollment, service standards
and other matters relating to this Agreement during regular business hours at
the premises of the audited party where such records are normally maintained.
The audited party shall reasonably cooperate in any such audit.
13.6 Headings and Schedules. Headings used herein are not part of this
Agreement. Any Schedules or Exhibits attached hereto are part of this Agreement.
13.7 Compliance with Applicable Laws and Regulations. It is the intention
of the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the Agreement remains
in full force. Each of the parties agrees to comply with all laws, ordinances,
rules, regulations and orders of regulatory bodies applicable to the
transactions contemplated by this Agreement, including those relating to
37
<PAGE>
maintenance of appropriate licenses and the appointment of agents and payment of
commissions. Either party shall promptly notify the other party of any
complaint, inquiry or lawsuit by any regulatory authority relating to the
Managed Care Contracts or to this Agreement.
13.8 Successors and Assigns: Binding Effect. Except as otherwise provided
herein and in the HMO and Indemnity Reinsurance Agreements this Agreement cannot
be assigned by PHS or Guardian without the prior written approval of the other
party. The provisions of this Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
permitted successors and assigns.
13.9 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same agreement.
13.10 Entire Agreement: Amendment. This Agreement and the Reinsurance
Agreements constitute the entire agreement between the parties with respect to
the Managed Care Contracts and Ancillary Products, and supersede any previous
written or oral agreements. This Agreement shall be amended only by written
agreement signed by a duly authorized officer of each of PHS and Guardian, and
any change to this Agreement shall be null and void unless made by such written
agreement; provided, however, that where, under insurance,
38
<PAGE>
health or other applicable laws or regulations, the approval of any such
amendment to this Agreement by one or more federal, state or local governmental
or regulatory authorities is required, the amendment shall not take effect
unless and until all such necessary approvals have been obtained and received by
both PHS and Guardian. In the event that any such approval is required, PHS and
Guardian shall each take all necessary actions in order to obtain such approval.
13.11 Waivers. The waiver by either of the parties of the other party's
prompt and complete performance, or breach or violation, of any provisions of
this Agreement and related documents shall not operate or be construed as a
waiver of any subsequent breach or violation, and the waiver by any of the
parties to exercise any right or remedy which it may possess hereunder shall not
operate or be construed as a bar to the exercise of such right or remedy by such
party upon the occurrence of any subsequent breach or violation.
13.12 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to the
principles of conflicts of laws thereof.
13.13 Severability. In the event any section or provision of this
Agreement or related documents is found to be void and unenforceable by a court
of competent jurisdiction, the remaining sections and provisions of this
Agreement or related documents shall nevertheless be
39
<PAGE>
binding upon the parties with the same force and effect as though the void or
unenforceable part had not been severed or deleted.
13.14 Notices. Any notice to be given pursuant to the terms of this
Agreement shall be given in writing either by personal delivery or by mail,
registered or certified, return receipt requested and postage prepaid. Mail
notices shall be sent to the parties at their respective addresses as shown:
If to Guardian:
The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
Attention: Edward K. Kane, Esq.
Senior Vice President and General Counsel
If to Physicians Health Services, Inc.:
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, Connecticut O6611
Attention: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
If to Physicians Health Services of New York, Inc.:
Physicians Health Services of New York, Inc.
399 Knollwood Road, Suite 212
White Plains, New York 10603
Attention: Executive Director
40
<PAGE>
13.15 Confidentiality. (a) Neither Guardian nor PHS shall disclose any
proprietary or confidential information of the other party to a third party
without the express written consent of the other party to this Agreement. For
purposes of this Agreement, "proprietary and confidential" information will
include, without limitation, all internal business practices and business
records, information concerning products and pricing, contracts, computer
hardware and software or business methods in any form whatsoever, peer review,
quality assurance and grievance procedures, any aspect of the utilization review
program, provider fee schedules, reimbursement schedules, or discounts, and
advertising or marketing information, but not including information otherwise
available to the public. Neither party shall use any proprietary and
confidential information of the other party for its own benefit. Upon
termination of this Agreement, each party will immediately return to the other
party any confidential information, claims files necessary for the continued
administration of any Plan, and other property of the other party.
(b) Guardian and PHS agree to maintain the confidentiality of any health
care information pertaining to Subscribers including, without limitation, files,
records, reports, and other information prepared and maintained in connection
with this Agreement, in accordance with all applicable laws and regulations.
(c) Each Party shall obtain any necessary consent from Subscribers with
respect to the release to the other party of any confidential information
relating to such
41
<PAGE>
Subscribers, by means of general or specific releases, as appropriate. Each
party shall notify the other if it becomes aware that proper releases have not
been obtained.
(d) Guardian shall not make any list of PHS providers available to any
person other than appropriate regulatory authorities, Guardian employees who are
engaged in operations relating to this Agreement, and independent brokers and
other persons engaged in marketing of Managed Care Contracts.
13.16 Press Releases. No public statement or press release regarding the
existence of this Agreement shall be made by either party without obtaining the
prior written consent of the other party, except as required by applicable laws
or regulations.
13.17 Relationship of Parties. The parties to this Agreement are and shall
remain independent contractors. Neither party is the employee or agent of the
other party, except as set forth herein, and neither party has an express or
implied right to bind the other party. The parties do not intend to form a joint
venture, partnership, or to be governed by laws relating to any relationship
other than that of independent contractors. Neither party is authorized to
modify, alter or waive the terms of any product issued by the other party.
42
<PAGE>
13.18 Offset. In the event that either party to this Agreement shall fail
to make payment of any amount that is due and owing to the other party under
this Agreement, all mutual debts shall be offset, and only the balance of such
debts shall be paid.
13.19 Financial Statements. Each party shall furnish financial statements
as filed with the appropriate regulatory authority to the other party upon
request.
13.20 Regulatory Review. The parties acknowledge and agree that this
Agreement is subject to the review and approval of the New York State Department
of Insurance. The parties expressly agree that any revisions to this Agreement
required by the New York State Department of Insurance will be addressed in an
amendment to, or restatement of, the Agreement.
43
<PAGE>
EXECUTION
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
PHYSICIANS HEALTH SERVICES, INC.
By /s/ REGINA M. CAMPBELL
--------------------------
Name Regina M. Campbell
Title Senior Vice President
PHYSICIANS HEALTH SERVICES
OF NEW YORK
By /s/ REGINA M. CAMPBELL
--------------------------
Name Regina M. Campbell
Title Senior Vice President
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
By /s/ JOSEPH D. SARGENT
--------------------------
Name Joseph D. Sargent
Title President and CEO
44
<PAGE>
SCHEDULE A
DESCRIPTION OF MANAGED CARE CONTRACTS
[DESCRIBE NY PLANS]
A-1
<PAGE>
NEW YORK PASSPORT HMO - HEALTHCARE SOLUTIONS
<TABLE>
===============================================================================================================
<S> <C> <C>
N36000 (5-lONYP) PHS 5 (Customized) Healthcare Solutions, eff. 7/1/95
- ---------------------------------------------------------------------------------------------------------------
N37000 (15-20, 25 and PHS 15 (Customized) Healthcare Solutions, eff. 7/1/95
26NYP
- ---------------------------------------------------------------------------------------------------------------
N38000 (11-14NYP) PHS 5/250 (Customized) Healthcare Solutions, eff. 7/1/95
- ---------------------------------------------------------------------------------------------------------------
N39000 (21-24NYP) PHS 15/500 (Customized) Healthcare Solutions, eff. 7/1/95
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
12/18/96 6
<PAGE>
NEW YORK CHARTER POS - HEALTHCARE SOLUTIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
N3627G PHS 5 $200 $5OO 70% of the $1,700 $4,250 NA Available for sale
5NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3637G PHS 5 $300 $750 70% of the $1,800 $4,500 NA Available for sale
6NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3657G PHS 5 $500 $l,250 70% of the $2,000 $5,000 NA Available for sale
7NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3628G PHS 5 $200 $500 80% of the $1,200 $3,000 NA Available for sale
8NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA Available for sale
9NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
1ONYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3837G PHS 5/250 $300 $750 70% of the $1,800 $4,500 NA Available for sale
11NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3857G PHS 5/250 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
12NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3838G PHS 5/25O $300 $750 80% of the $1,300 $3,250 NA Available for sale
13NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3858G PHS 5/250 $500 $1,250 80% of the $l,500 $3,750 NA Available for sale
14NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3727G PHS 15 $200 $500 70% of the $1,700 $4,250 NA Available for sale
15NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3737G PHS 15 $300 $750 70% of the $l,800 $4,500 NA Available for sale
16NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3757G PHS 15 $500 $l,250 70% of the $2,000 $5,000 NA Available for sale
17NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3728G PHS 15 $200 $500 80% of the $1,200 $3,000 NA Available for sale
18NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
12/18/96
<PAGE>
NEW YORK CHARTER POS - HEALTHCARE SOLUTIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
N3738G PHS 15 $300 $75O 80% of the $1,300 $3,250 NA Available for sale
19NYC next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3758G PHS 15 $500 $l,250 80% of the $1,500 $3,750 NA Available for sale
20NYC next $5,OOO eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3957G PHS $500 $l,2SO 70% of the $2,000 $5,000 NA Available for sale
21NYC 15/500 next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3958G PHS $5OO $l,250 80% ofthe $l,500 $3,750 NA Available for sale
22NYC 15/500 next $5,000 eff. 7/1 /95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3917G PHS $l,OOO $2,500 70% of the $3,700 $9,250 NA Available for sale
23NYC 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3918G PHS $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale
24NYC 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3717G PHS 15 $l,OOO $2,500 70% of the $3,700 $9,250 NA Available for sale
25NYC next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale
26NYC next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12/18/96 8
<PAGE>
NEW YORK PASSPORT POS - HEALTHCARE SOLUTIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
N3627G PHS 5 $200 $500 70% of the $l,700 $4,2SO NA Available for sale
5NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3637G PHS 5 $300 $750 70% of the $l,800 $4,500 NA Available for safe
6NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3657G PHS 5 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
7NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3628G PHS 5 $200 $500 80% of the $l,200 $3,000 NA Available for sale
8NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA Available for sale
9NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
lONYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3837G PHS 5/250 $300 $750 70% Of the $l,800 $4,500 NA Available forsale
11NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3857G PHS 5/250 $500 $l,250 70% of the $2,000 $5,000 NA Available for sale
12NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3838G PHS 5/250 $300 $750 80% of lhe $l,300 $3,250 NA Available for sale
13NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3858G PHS 5/250 $500 $l,250 80% of the $l,500 $3,750 NA Available for sale
14NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12/18/96 9
<PAGE>
NEW YORK PASSPORT POS - HEALTHCARE SOLUTIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
N3727G PHS 15 $200 $500 70% of tbe $l,700 $4,250 NA Available for sale
15NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA Available for sale
16NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3757G PHS i5 $500 $l,250 70% of the $2,000 $5,000 NA Available forsale
17NYP next $5,OOO eff. 7/1/95(1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3728G PHS 15 $200 $500 80%of the $1,200 $3,000 NA Available forsale
18NYP next $5,000 eff. 7/l/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3738G PHS 15 $300 $750 80% of the $1,300 $3,250 NA Available for sale
19NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3758C PHS 15 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
20NYP next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA Availabic for sale
21NYP 15/500 next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3958G PHS $500 $1,250 80% of the $l,500 $3,750 NA Available for sale
22NYP 15/500 next $5,000 eff. 7/1/95 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale
23NYP 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3918G PHS $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale
24NYP 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3717G PHS 15 $l,OOO $2,500 70% of the $3,700 $9,250 NA Available for sale
25NYP next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
N3718G PHS 15 $1,OO0 $2,500 80% of the $2,800 $7,000 NA Availabic for sale
26NYP next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12/18/96 10
<PAGE>
NY (IN)
Schedule B
Contract Allowances Administrative Service Fee
I. Guardian's Administrative Services Fee (as a percentage of premium)
HMO POS(In)
--- -------
Marketing 0.63% 0.63%
Sales 1.38% 1.38%
Administration 1.30% 1.30%
Billing/Collections 1.69% 1.69%
Advertising 0.15% 0.15%
Total 5.15% 5.15%
II. PHS' Administrative Services Fee (as a percentage of premium)
HMO POS(In)
--- -------
Health Services, UR 1.67% 1.67%
Net Mgt, MDD, QA 2.43% 2.43%
Operations 3.58% 3.58%
Acct Svc., Cust Srv. 1.44% 1.44%
Marketing 0.63% 0.63%
Sales 0.15% 0.15%
Administration 1.30% 1.30%
Advertising 0.15% 0.15%
Total 11.35% 11.35%
<PAGE>
NY (OUT)
Schedule B
Contract Allowances, Administrative Service Fee
I. Guardian's Administrative Services Fee (as a percentage of premium)
POS (Out)
---------
Marketing 0.63%
Sales 1.38%
Administration 1.30%
Claims N/A
Billing/Collections 1.69%
Advertising 0.15%
Total 5.15%
II. PHS' Administrative Services Fee (as a percentage of premium)
POS (Out)
---------
Health Services, UR 1.67%
Net Mgt, MDD, QA 2.43%
Operations 3.58%
Acct Svc., Cust Srv. 1.44%
Marketing 0.63%
Sales 0.15%
Administration 1.30%
Advertising 0.15%
Total 11.35%
<PAGE>
EXHIBIT A-1
HMO REINSURANCE AGREEMENT
EX-1
<PAGE>
EXHIBIT A-l
INDEMNITY REINSURANCE AGREEMENT
EX-2
<PAGE>
Exhibit 10 (o)
AMENDED AND RESTATED
MARKETING AND SERVICES AGREEMENT
By and Among
PHYSICIANS HEALTH SERVICES, INC.
and its affiliate,
PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC.
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
<PAGE>
AMENDED AND RESTATED MARKETING AND SERVICES AGREEMENT
Reference is hereby made to the Marketing and Services Agreement (the
"Marketing and Services Agreement") made and entered into as of April 17, 1996
(the "Inception Date") by and among PHYSICIANS HEALTH SERVICES, INC., a
corporation organized under the laws of the State of Delaware, and its
affiliate, PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC., a corporation
organized under the laws of the State of New Jersey as a health maintenance
organization (collectively, "PHS," unless the context indicates reference to
Physicians Health Services, Inc. or Physicians Health Services of New Jersey,
Inc. as separate corporate entities), and THE GUARDIAN LIFE INSURANCE COMPANY OF
AMERICA, a mutual life insurance company organized under the laws of the State
of New York ("Guardian"). This Amended and Restated Marketing and Services
Agreement is dated as of October 1, 1996, and when executed by the parties
hereto, shall supersede and replace the Marketing and Services Agreement and
shall constitute a binding and enforceable amendment to the Marketing and
Services Agreement in its entirety.
THE MARKETING AND SERVICES AGREEMENT IS AMENDED AND RESTATED IN ITS
ENTIRETY AS FOLLOWS:
This Amended and Restated Marketing and Services Agreement (this
"Agreement") is made and entered into as of this 1st day of October, 1996 by and
among PHYSICIANS HEALTH SERVICES, INC., PHYSICIANS HEALTH SERVICES OF NEW
JERSEY, INC. and GUARDIAN.
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RECITALS
WHEREAS, PHS, which is licensed to operate a health maintenance
organization in the State of New Jersey, maintains a network of health care
providers in the State of New Jersey, and is authorized to offer for sale plans
providing managed care health care benefits in such State;
WHEREAS, Guardian desires to make different types of managed care health
coverage plans available for sale by the Guardian Marketing Force (as defined
herein) in the State of New Jersey:
WHEREAS, PHS is willing to make its managed care health coverage plans
available for sale by the Guardian Marketing Force;
WHEREAS, Guardian is authorized to offer for sale preferred provider
organization plans and indemnity insurance contracts (collectively, "Health
Insurance Contracts," as defined herein) to individuals and groups in the State
of New Jersey and to offer certain other insurance plans in such State,
including group life, disability and dental insurance plans ("Ancillary
Products," as defined herein);
WHEREAS, PHS desires to make Health Insurance Contracts and Ancillary
Products available for sale by PHS in the State of New Jersey;
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WHEREAS, PHS and Guardian each desire to market "multi-choice" plans, which
give employees the option of choosing benefits under pre-selected combinations
of health coverage plans; and
WHEREAS, PHS and Guardian desire to enter into a reinsurance transaction,
pursuant to which Guardian will reinsure PHS with respect to risks under HMO
Plans (as defined herein);
NOW THEREFORE, in consideration of the mutual agreements contained herein,
the sufficiency of which is hereby acknowledged, and in consideration of the
performance by the parties of their obligations under this Agreement, the
parties agree as follows:
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ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (definitions are applicable to both the singular and the plural form of
each term defined herein):
"Ancillary Products" means the life insurance, short- and long-term
disability insurance, accidental death and dismemberment insurance, and dental
insurance products offered by Guardian as designated by the parties from time to
time.
"Business Day" means any day except Saturday or Sunday or any legal Federal
or New Jersey holiday.
"Change of Control" means the acquisition, in a single transaction or in a
series of related transactions, by a person, an entity, or a group of persons or
entities acting in concert of: (i) twenty-five percent (25 %) or more (a) of the
voting common stock of Physicians Health Services, Inc. or Physicians Health
Services of New Jersey, Inc. (excluding any acquisition of stock by a party
currently owning twenty-five percent (25 %) or more of such common stock), or
(b) fifty-one percent (51 %) or more of the aggregate value of the assets of
Physicians
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Health Services, Inc. or Physicians Health Services of New Jersey, Inc.; or (ii)
twenty-five percent (25 %) or more of any ownership interest in Guardian.
"Continuation Plan" has the meaning given such term in the HMO Reinsurance
Agreement.
"Contractholder" means an employer in the Service Area who or which
executes an enrollment agreement with respect to any Managed Care Contract
subject to this Agreement.
"Contract Termination Date" means the effective date upon which the
Agreement terminates pursuant to the applicable Section in Article X below.
"Eligible Employee" means an employee who is eligible to enroll in the
Contractholder's Plan.
"Effective Date" shall have the meaning set forth in Section 10.1.
"Guardian Marketing Force" means employees of Guardian, and any agents
under contract with Guardian who or which are licensed in the State of New
Jersey to sell individual and/or group health insurance contracts and who or
which are acting on behalf of Guardian, but not including employees or agents of
PHS, or independent brokers.
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"Health Insurance Contracts" means contracts for health insurance offered
on a fee for service or indemnity basis by Guardian in the Service Area when
such contracts are marketed and sold under the tradename "The Guardian & PHS
Healthcare Solutions," or such other tradename as the parties may mutually agree
to from time to time. Health Insurance Contracts include preferred provider
plans using the PHS Network or PHCS' network of providers offered by Guardian in
the Service Area.
"HMO Plans" means commercial contracts for health care services provided by
PHS to Contractholders in the Service Area utilizing the PHS Network to provide
health care services when such contracts are marketed and sold under the
tradename "The Guardian & PHS Healthcare Solutions," or such other tradename as
the parties may mutually agree to from time to time. HMO Plans include HMO Plans
with a "point-of-service" feature.
"HMO Reinsurance Agreement" means the form of Reinsurance Agreement
described in Section 9.1 and attached hereto as Exhibit A-1.
"Managed Care Contracts" means any HMO Plan or Health Insurance Contract
purchased by a Contractholder pursuant to Article 11 below.
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"Marketing Materials" shall have the meaning set forth in Section 2.6.
"Material Change" shall have the meaning set forth hi Section 6.3.
"PHCS" means Private Healthcare Systems, Incorporated, a Delaware
corporation with its headquarters in Waltham, Massachusetts, that organizes
managed care networks.
"PHS Network" means the network of health care providers in the Service
Area; including physicians and other individual practitioners and health care
facilities or individual practice associations, who or which are under direct or
indirect contract with PHS to provide services to Subscribers under a HMO Plan.
"Plans" means the HMO Plans, Health Insurance Contracts and Ancillary
Products sold pursuant to this Agreement.
"Quarter" means each of the four consecutive three-month periods in a
calendar year.
"Quarterly Accounting Report" shall have the meaning set forth in Section
8.1.
"Service Area" means the State of New Jersey.
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"Subscriber" means the persons, including, but not limited to, Eligible
Employees, who have enrolled in a Managed Care Contract and who meet the
Contractholder's and the Managed Care Contract's eligibility requirements.
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ARTICLE II
MARKETING AND SALES
2.1 Marketing and Sale of the HMO Plans by Guardian. (a) During the term of
this Agreement, Guardian shall have the right to market HMO Plans to its
existing and prospective customers through the Guardian Marketing Force,
pursuant to the terms of Section 2.3 below.
(b) Except as permitted by 2.1(c) below, Guardian shall not enter into any
marketing agreements or similar agreements with any managed care organization
other than PHS for purpose of offering managed care products for sale in the
Service Area.
(c) Nothing contained in this Agreement shall limit Guardian's right to
contract with PHCS for the purpose of developing managed care networks in the
Service Area or elsewhere: provided, however, that during the term of this
Agreement, Guardian shall not, without consulting with PHS, replace a HMO Plan
with a similar type of plan utilizing a PHCS network.
(d) Nothing contained in this Agreement shall limit Guardian's right to
market Health Insurance Contracts and Ancillary Products not subject to this
Agreement directly to employers with whom Guardian contracts.
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2.2 Marketing and Sale of Health Insurance Contracts by PHS: Ancillary
Products.
(a) During the term of this Agreement, PHS shall have the right to market
Health Insurance Contracts and Ancillary Products to its existing and
prospective customers in the Service Area, pursuant to the terms of Section 2.3
below.
(b) Except with Guardian's prior written consent and except as permitted by
Section 2.2(c) below, PHS shall not enter into marketing or similar agreements
with any entity other than Guardian with respect to marketing in the Service
Area of HMO Plans, Health Insurance Contracts or Ancillary Products or insurance
products substantially similar to the Health Insurance Contracts or Ancillary
Products.
(c) PHS expressly acknowledges and agrees that notwithstanding anything to
the contrary stated in this Section 2.2(c), that it has not, and that it will
not, enter into any marketing or similar agreement with any entity other than
Guardian with respect to marketing in the Service Area of any commercial, fully
insured HMO Plan, Health Insurance Contract or Ancillary Product. Nothing
contained in this Agreement shall limit PHS' right to contract with Mastercare
Companies, Inc. ("Mastercare") for the purpose of marketing a managed care
workers compensation plan; provided, however, that during the term of this
Agreement, PHS shall not, without consulting with Guardian, solicit any
Contractholder for the purpose of replacing a Managed Care Contract with a plan
jointly marketed by PHS and Mastercare. Guardian acknowledges and agrees that
PHS may enter into arrangements in the Service Area with respect to marketing
Ancillary Products in connection with PHS' Medicare and Medicaid health
maintenance organization plans ("Government Plans"). Guardian also acknowledges
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and agrees that prior to the Effective Date that PHS entered into an arrangement
with Dental Benefit Providers to market dental products (the "DBP Plans") in the
Service Area. PHS agrees that from and after the Effective Date that it will not
market the DBP Plans other than in connection with the marketing of the
Government Plans. Guardian further acknowledges and agrees that prior to the
Effective Date that PHS entered into arrangements with All America Financial
Services, Inc. ("AAFS"), International Netherlands Group and its subsidiaries
(collectively, "ING") and Lincoln National Life Insurance Company of America
("LNLICA") to market specific and aggregate stop-loss premium health maintenance
organization plans ("Stop-Loss Plans") and that PHS marketed the life insurance
products of AAFS, ING and LNLICA in connection with such arrangements. PHS
agrees that from and after the December 31, 1997, that it will not market
Stop-Loss Plans or life insurance products in connection with such Stop-Loss
Plans unless it gives Guardian the opportunity to provide such stop-loss
coverage to PHS. If Guardian is able to provide such stop-loss coverage at a
rate which does not exceed by more than five percent (5 %) the average of the
rates provided by AAFS, ING and LNLICA, then PHS will utilize Guardian to
provide such stop-loss coverage. In the event there is a Change of Control and
PHS is acquired by, or PHS is merged with, any entity, the limitations set forth
in Section 2.2(b) of this Agreement shall apply to the surviving entity.
(d) Nothing contained in this Agreement shall limit PHS's right to market
HMO plans not subject to this Agreement directly to employers with whom PHS
contracts.
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2.3 Multi-Choice and Stand-Alone Arrangements. (a) Guardian shall have the
right to market HMO Plans after regulatory approval has been obtained, (i) under
multi-choice arrangements with Contractholders, pursuant to which Eligible
Employees will be offered health care coverage options consisting of HMO Plans
or Health Insurance Contracts, and (ii) under stand-alone arrangements, pursuant
to which Eligible Employees will be provided with only the HMO Plan purchased by
the Contractholder.
(b) PHS shall have the right to market Health Insurance Contracts (i) after
regulatory approval has been obtained, under multi-choice arrangements with
Contractholders, pursuant to which Eligible Employees will be offered health
care coverage options consisting of HMO Plans or Health Insurance Contracts, and
(ii) under stand-alone arrangements, pursuant to which Eligible Employees will
be provided with only the Health Insurance Contract purchased by the
Contractholder.
(c) PHS agrees to use its best efforts to market Ancillary Products to its
existing and prospective customers; provided, however, that, the failure of PHS
to use its best efforts to market such Ancillary Products shall not entitle
Guardian to terminate this Agreement pursuant to Article X below.
2.4 Priority. Neither party shall solicit any employer group with which the
other party had an existing contractual relationship as of the Inception Date
for the provision of health care services or health insurance (or with which, as
of the Inception Date, such other party was engaged in negotiating or
renegotiating a contract for such services) without the prior consent of such
other party.
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2.5 Identification of Managed Care Contracts. The Managed Care Contracts
shall be marketed under the collective designation "The Guardian & PHS
Healthcare Solutions." Each Managed Care Contract shall be assigned a specific
trade name, to be agreed to by the parties.
2.6 Marketing Materials. PHS and Guardian shall jointly develop handbooks,
enrollment forms, identification cards and all other marketing materials
relating to the Managed Care Contracts (collectively, "Marketing Materials").
The parties agree that the cost of the initial development and production of
such Marketing Materials shall be shared equally by the parties pursuant to
Section 7.4 below. Thereafter, the party responsible for reproducing such
Marketing Materials shall include the cost of such reproduction in Schedule B as
a reimbursable expense. To the extent consistent with administrative
requirements, and to the extent permitted by law or regulations, all Marketing
Materials will consist of each party's existing Marketing Materials, modified to
reflect the terms of this Agreement. Neither party will use Marketing Materials
reflecting this Agreement or using the name of the other party, without the
other party's prior approval.
2.7 Training. PHS and Guardian shall jointly develop training programs
regarding marketing and administering the Managed Care Contracts for all members
of the Guardian Marketing Force and for Guardian and PHS personnel engaging in
marketing or administrative functions.
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ARTICLE III
UNDERWRITING, RATES AND ADMINISTRATION
3.1 Underwriting and Administration of HMO Plans. (a) PHS shall be
responsible for developing and filing with the appropriate regulatory
authorities the rates for the HMO Plans. Guardian shall utilize such filed rates
and shall be responsible for calculating premiums according to established
underwriting guidelines for the HMO Plans subject to the requirements of
applicable law; provided, however, that, the parties agree that they will
mutually develop the premiums for any HMO Plan marketed to a group of more than
five hundred (500) employees. PHS shall provide Guardian with all information
reasonably relating to rating methodology, including, without limitation, cost
assumptions, anticipated loss ratios and other actuarial assumptions, and
provider and facility agreements. Underwriting guidelines for HMO Plans that are
to be marketed pursuant to this Agreement will be mutually developed by the
parties.
(b) Except as otherwise expressly provided for herein, PHS shall be solely
responsible for administration of the HMO Plans, including the payment of
claims, withholds, taxes and all other amounts (other than commissions) payable
to any person with respect to HMO Plans.
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3.2 Underwriting and Administration of Health Insurance Contracts and
Ancillary Products. (a) Guardian shall be responsible for developing and filing
with the appropriate regulatory authorities the rates for the Health Insurance
Contracts and Ancillary Products. Guardian shall utilize such filed rates and
shall be responsible for calculating premiums for the Health Insurance Contracts
and Ancillary Products, subject to the requirements of applicable law.
(b) Guardian shall be solely responsible for administration of Health
Insurance Contracts and Ancillary Products, including the payment of claims,
taxes and all other amounts payable with respect to such contracts.
3.3 Discounts. Any discount of manual rates for any HMO Plan which exceeds
a mutually agreed upon amount (as set forth in the underwriting guidelines
mutually agreed upon by the parties), must be jointly authorized by the
underwriting departments of each of the parties, subject to the laws and
regulations of the States of New Jersey and New York applicable to such Plans.
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ARTICLE IV
BILLING AND COLLECTION OF PREMIUMS: PAYMENT OF COMMISSIONS
4.1 Billing and Collection of Premiums. (a) Guardian shall be responsible
for billing and collection of premiums for all Plans, regardless of how such
Plans are marketed.
(b) Premiums received by Guardian from Contractholders with respect to HMO
Plans will be held for the benefit of PHS during the Quarter in which such
premiums are received. Interest shall be credited on the cash balances held by
Guardian, at an annual rate equal to as set forth in Article VII of the HMO
Reinsurance Agreement.
(c) The amount of net premiums held by Guardian at the end of each Quarter
with respect to HMO Plans (i.e., premiums received, plus interest credited in
accordance with Section 4.l(b) above, less commissions paid to agents or brokers
pursuant to Section 4.2 below), reduced by any claims reimbursed to PHS
(including withholds) and other amounts as agreed to by the parties shall be
paid in accordance with Section 7.3 of the HMO Reinsurance Agreement.
4.2 Commissions. (a) Commissions with respect to Plans sold pursuant to
this Agreement shall be paid according to the schedule of commissions set forth
in Schedule B. The commission rates to be paid with respect to Plans may be
changed from time to time, as agreed to jointly by PHS and Guardian, provided
that the party not proposing the change shall
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not unreasonably withhold its consent to a change by the proposing party. All
Managed Care Contracts shall be priced to include expense factors for
appropriate commission payments.
(b) Guardian shall make payment of all commissions to members of the
Guardian Marketing Force, to independent brokers and to Physicians Health
Insurance Services, Inc., an insurance agency ("PHIS"), to the extent that such
commissions become due as a result of the sale of Plans subject to this
Agreement. Guardian shall act as PHS's agent in the payment of commissions for
HMO Plans. PHS shall have responsibility for any other compensation with respect
to Plans sold by PHIS.
(c) Each party shall be responsible for ensuring that its employees or
agents are appropriately licensed and appointed, as necessary, to sell Managed
Care Contracts or Ancillary Products and to receive commissions. All payments of
commissions to agents, brokers or employees shall comply with applicable laws,
rules, ordinances and regulations.
(d) Limitations on Commission and Marketing Fees. Notwithstanding any other
provision of this contract, the total of commissions and marketing fees payable
by Guardian under this Agreement shall not exceed any limitations set forth in
Section 4228 of the New York State Insurance Law.
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ARTICLE V
ENROLLMENT: MEMBERSHIP SERVICES
5.1 Enrollment. (a) Guardian and PHS shall jointly enroll new
Contractholders and Subscribers purchasing Managed Care Contracts.
(b) Each party shall be responsible for obtaining enrollment information
from Contractholders and Subscribers with respect to those Managed Care
Contracts sold by such party's Marketing Force and shall transmit such
information to the other party on a timely basis in a format that is acceptable
to the other party.
5.2 Meetings with Contractholders and Subscribers. Guardian and PHS shall
cooperate in conducting employee on-site enrollment meetings.
5.3 Enrollment Materials. All enrollment agreements, forms and other
materials, including Subscriber handbooks and identification cards, used for
Contractholders and Subscribers shall be either PHS's or Guardian's existing
approved forms, modified as necessary to reflect the terms of this Agreement,
and the administrative requirements of PHS and Guardian, respectively. All such
materials shall specify that PHS is the underwriter of HMO Plans, and that
Guardian is the underwriter of Health Insurance Contracts and Ancillary
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Products. Neither party will use enrollment materials reflecting this Agreement,
or using the name of the other party; without the other party's approval.
5.4 Enrollment Reports. (a) PHS and Guardian shall prepare periodic and
timely reports as set forth in Schedule C showing all Managed Care Contracts
sold, renewed or terminated, and other enrollment information required by either
party in order to perform its duties with respect to such Contracts. Such
reports shall be made by each party on a periodic and timely basis on the
Business Day following the date of transactions or other matters reported, and
shall be transmitted by electronic transmission in a form reasonably acceptable
to the receiving party.
(b) PHS and Guardian shall prepare periodic reconciliations of the
enrollment information in the possession of each party.
5.5 Membership Services. All membership services with respect to
Subscribers under HMO Plans shall be provided by PHS.
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ARTICLE VI
PHS NETWORK MANAGEMENT
6.1 PHS Network Management. (a) PHS shall be solely responsible for
development and maintenance (including, without limitation, quality assurance,
utilization management and credentialing protocols) of the PHS Network. PHS
shall provide Guardian with an accurate listing of the composition of the PHS
Network at the Effective Date, and thereafter shall update the listing
periodically, showing additions and deletions to the composition of the PHS
Network.
(b) PHS shall be solely responsible for any loss or liability arising from
any inaccuracy in such listings.
(c) Guardian may recommend additions to, or deletions from, the PHS
Network, and PHS shall endeavor to be responsive to accommodate Guardian's
recommendation. PHS shall have the sole authority to enter into contracts with
providers.
6.2 Medical Management. PHS shall be solely responsible for all claims
processing and auditing, health services (including hospital pre-certification,
outpatient pre-certification, large claim case management and utilization
review) and all risk accounting for the provider bonus arrangements under the
HMO Plans.
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6.3 Material Change in PHS Network. (a) PHS acknowledges that maintenance
of an adequate network of health care providers in the Service Area is of
primary concern to Guardian, and agrees to notify Guardian if the PHS Network
fails to meet the criteria set forth below. PHS further acknowledges and agrees
that any failure to meet the PHS Network adequacy criteria to be developed by
the parties constitutes a material change in PHS Network.
(b) PHS agrees to use its best efforts to develop an adequate network of
health care providers. A review of PHS Network adequacy shall be made by the
parties at quarterly intervals for the twelve (12) months following the
Effective Date of this Agreement to monitor the progress of development of the
PHS Network in the Service Area. If, at the end of this twelve (12) month
period, Guardian reasonably determines that the PHS Network is not be
"marketable;" Guardian shall provide written notice of such determination to
PHS. PHS shall be allowed thirty (30) days from the receipt of such notice to
present to Guardian a plan to cure the deficiencies in the PHS Network, which
plan shall be reasonably satisfactory to Guardian. If PHS does not present a
reasonably satisfactory plan to cure such deficiencies within such thirty (30)
day period, or if the plan is not carried out according to its terms, then
Guardian shall have the termination rights provided by Section 10.7 of this
Agreement.
(c) At the end of the twelve (12) month period described in Section 6.3(b)
above, the parties shall develop specific PHS Network adequacy standards, taking
into account both the number of health care providers in the PHS Network in each
county in the Service Area, and the number of providers in other managed care
organizations operating in the same counties.
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6.4 Professional Liability Insurance. (a) PHS shall require each physician
member of the PHS Network to maintain professional liability insurance, with
limits of at least $1,000,000 per occurrence, and $3,000,000 in the aggregate
for individual practitioners and practice groups, and $1,000,000 per occurrence
and $3,000,000 aggregate for hospitals, clinics and other institutional
providers. Guardian accepts that hospitals and other institutional providers may
self-insure or self-retain with respect to such liability limits, as permitted
by applicable New Jersey law and regulations. Guardian also recognizes that
liability limits for the following individual non-physician members of the PHS
Network may be $1,000,000 per occurrence and $1,000,000 in the aggregate:
chiropractors, social workers, audiologists, speech pathologists, optometrists,
physical therapists and occupational therapists.
ARTICLE VII
MARKETING AND ADMINISTRATIVE SERVICES FEE AND EXPENSES
7.1 Guardian's Marketing and Administrative Services Fee. PHS shall pay
Guardian a Marketing and Administrative Services Fee for the duties assigned to
Guardian under this Marketing and Services Agreement equal to the amount shown
on Schedule B; as it may be amended from time to time, for each Quarter, or
portion thereof, during which this Agreement is in effect.
7.2 PHS's Administrative Services Fee. PHS shall be entitled to an
Administrative Services Fee for the administrative duties assigned to PHS under
this Marketing and Services
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Agreement equal to the amount shown on Schedule B, as it may be amended from
time to time, for each Quarter, or portion thereof, during which this Agreement
is in effect.
7.3 Adjustments of Fee. The Fees set forth in Schedule B shall remain in
effect for four Quarters, or portion thereof, beginning with the Quarter that
includes the Effective Date. Each party shall have the right to adjust the Fees
payable hereunder for any subsequent period of four Quarters by providing notice
to the other party of an amendment of Schedule B no less than forty-five (45)
calendar days prior to the beginning of the next such period. Such adjustment
will be limited to an amount necessary to cover changes in that party's costs of
providing services hereunder, without provision of profit.
7.4 Expenses. Each party shall be responsible for its expenses incurred in
connection with this Agreement; provided, however, that expenses attributable to
the development and initial production of Marketing Materials shall be shared
equally. Each party shall calculate such expenses (including, without
limitation, a reasonable allocation of internal expenses, production and
printing expenses and legal expenses incurred in connection with obtaining
regulatory approval of any forms) on a Quarterly basis, and shall provide the
other party with a schedule of such expenses in connection with each Quarterly
Accounting Report. A party whose expenses under this Section 7.4 exceed one-half
of the aggregate of the expenses incurred by both parties for the Quarter shall
be entitled to reimbursement for such excess within forty-five (45) calendar
days from the end of such Quarter.
7.5 Reinsurance Agreement. At the option of the parties, the fees and
expenses hereunder may be incorporated in any Reinsurance Agreement entered into
between the parties
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(or affiliates of the parties) to the extent that such fees relate to reinsured
Managed Care Contracts.
ARTICLE VIII
ACCOUNTING AND REPORTING
8.1 Quarterly Accounting Reports. Within forty-five (45) calendar days of
the end of each Quarter, each party shall supply the other with a Quarterly
Accounting Report as defined in Section 7.3 of the Reinsurance Agreement.
Quarterly Accounting Reports shall be made for the Quarter that includes the
Effective Date, and shall be made for each Quarter following the Contract
Termination Date if any amount is due any party under this Agreement.
8.2 Settlements. Settlement of all amounts due pursuant to this Agreement
shall be made on a net basis in connection with the Quarterly Accounting Report.
If one party owes a net amount to the other, such amount shall be paid in
accordance with Section 7.3 of the HMO Reinsurance Agreement.
8.3 Reconciliation. Each party shall have the right to review all
individual components of transactions entered into each Quarterly Accounting
Report. The parties shall have twenty (20) Business Days from the day the
Quarterly Accounting Report is submitted to report any deficiency in such report
and to request an adjustment of any payment made to or received by either party.
Any amount due either party in connection with such reconciliation shall be paid
within twenty (20) calendar days of the receipt of notice that additional
amounts are due.
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8.4 Best Efforts to Supply Actual Data. In preparing all reports required
in this Agreement, Guardian or the PHS, as the case may be, shall make its best
efforts to supply the actual data. If the actual data cannot be supplied with
the appropriate report, Guardian or PHS, as the case may be, shall produce best
estimates, and shall provide amended reports based on actual data no more than
thirty (30) calendar days after such report was originally due.
8.5 Statement of Actuarial Opinion. (a) Within forty-five (45) calendar
days after the end of the calendar year, each party shall provide the other with
a Statement of Actuarial Opinion certifying the adequacy of the reserve for
products covered under this Agreement. The Actuarial Opinion must state whether
or not the reserve for products covered under this Agreement meet the minimum
standards of all states where each party is licensed, and if not, the Actuarial
Opinion must state the difference between reserves and state minimums
(b) The Actuarial Opinion shall meet the requirements set forth in the
NAIC's Actuarial Opinion and Memorandum Regulation and shall be signed by each
party's "Appointed Actuary." The Appointed Actuary may or may not be an employee
of such party.
ARTICLE IX
REINSURANCE AGREEMENTS
9.1 HMO Reinsurance Agreement. The parties each hereby acknowledge that,
simultaneously with the execution of this Agreement, they intend to enter into a
reinsurance agreement in the form attached hereto as Exhibit A-1 (the "HMO
Reinsurance Agreement").
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The parties intend, under the terms of the HMO Reinsurance Agreement, that PHS
will cede to Guardian certain specified percentages of the risks under the HMO
Plans, including those HMO Plans with a point-of-service feature, as more fully
described in the HMO Reinsurance Agreement. The parties further intend that
Guardian will retrocede to Physicians Health Services (Bermuda) Ltd., a
affiliate of PHS, a specified percentage of the risks under the out-of-network
portion of those HMO Plans with a point-of-service feature. In return, Guardian
and Physicians Health Services (Bermuda) Ltd. shall be allocated specified
percentages of premiums received by Company with respect to the HMO Plans, all
as more fully described in the HMO Reinsurance Agreement.
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ARTICLE X
TERM AND TERMINATION
10.1 Effective Date. This Agreement shall become effective on October 1,
1996 (the "Effective Date"), and shall continue in effect unless terminated
pursuant to the terms of this Article X. Notwithstanding anything to the
contrary stated in this Article X, this Agreement shall continue in effects
solely with respect to the provision of administrative services, for any Managed
Care Contract in effect on the Contract Termination Date until 180 days
subsequent to the next succeeding renewal date of any Managed Care Contract
following such Contract Termination Date; and provided, further however, that in
the event of a termination pursuant to Section 8.6 of the HMO Reinsurance
Agreement, this Agreement shall remain in effect solely with respect to the
provision of administrative services with respect to any Continuation Plan for
the period stated in Section 8.6 of the HMO Reinsurance Agreement.
10.2 Termination for Insufficient Premiums. Either party shall have the
right to terminate this Agreement if, on the first anniversary of the day on
which the Managed Care Contracts are first available for sale pursuant to this
Agreement, the total annualized premiums for Managed Care Contracts do not
exceed five million dollars ($5,000,000). Notice of termination under this
Section 10.2 shall be made within thirty (30) days after the anniversary date,
and shall be effective ninety (90) days after such notice is given.
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10.3 Termination Due to Change of Control. In the event of a Change of
Control in one party, the other party shall have the right to terminate this
Agreement as set forth in Section 8.6 of the HMO Reinsurance Agreement. The
Contract Termination Date under this Section 10.3 shall be the effective date of
the Change of Control.
10.4 Termination Without Cause. (a) Either party shall have the right to
terminate this Agreement without cause upon 180 days prior written notice to the
other party. The Contract Termination Date under this Section 10.4 shall be the
180th day following the giving of the notice required by this Section 10.4.
(b) If PHS terminates this Agreement pursuant to Section 10.4(a), it agrees
to pay Guardian an amount equal to one half the fair market value of all HMO
Plans in force on the effective date of termination, other than HMO Plans that
(i) resulted from the conversion of pre-existing PHS contracts to Managed Care
Contracts, or (ii) are not continued as PHS plans on or before the first renewal
date for such contracts following the effective date of termination.
(c) The parties will agree to a method of valuation of the HMO Plans (using
methods of valuation customarily used in valuing HMO Plans or health insurance
business). If the parties are unable to agree on valuation, the matter will be
referred to arbitration. Payments required under this Section 10.4 shall be made
in connection with the final Annual Accounting Report.
28
<PAGE>
10.5 Termination For Cause. (a) In the event that either party shall
default in the performance of the duties and obligations imposed on it pursuant
to the terms of this Agreement or the Reinsurance Agreement(s), or breach any of
the provisions contained herein or therein, including the failure to pay any
amount when due, or the failure of either party to maintain a level of services
under this Agreement that is reasonably satisfactory to the other party, the
defaulting party shall be allowed thirty (30) days from written notice of such
default or breach to present to the non-defaulting party a plan to cure such
default or breach that is reasonably satisfactory to the non-defaulting party.
If a reasonably satisfactory plan to cure the default or breach is not submitted
within that time, or if the plan is not carried out according to its terms, the
non-defaulting party shall have the right to terminate this Agreement and the
Reinsurance Agreement(s) upon delivery of written notice of such termination to
the defaulting party, which shall be effective upon receipt, without prejudice
to any other rights or remedies available to the non defaulting party by reason
of such default or breach.
(b) In the event that either party shall engage in fraudulent, illegal or
grossly negligent conduct with respect to its duties and obligations under this
Agreement or the Reinsurance Agreement(s), the other party shall have the right
to terminate this Agreement and the Reinsurance Agreement(s) upon delivery of
written notice of such termination to the defaulting party, which shall be
effective upon receipt, without prejudice to any other rights or remedies
available to the non defaulting party by reason of the defaulting party's
conduct.
29
<PAGE>
(c) In the event that this Agreement is terminated by Guardian pursuant to
this Section 10.5, the provisions of Section 10.4(b) shall apply as if the PHS
elected to terminate this Agreement.
(d) The Contract Termination Date under this Section 10.5 shall be the date
of receipt of notification of termination.
10.6 Termination Due to Financial Impairment or Loss of Authority. In the
event that either party shall become unable to perform its obligations under the
Managed Care Contracts because of financial impairment or loss of authority to
act under law, or by action of any regulatory authority, the other party shall
have the right, subject to the requirements of relevant law and receipt of
necessary approvals; to terminate this Agreement and to have the Managed Care
Contracts assigned to, and all obligations assumed by, an appropriately licensed
organization that provides substantially similar healthcare services as
described in this Agreement. The Contract Termination Date under this Section
10.6 shall be the date set forth in Section 8.8 of the HMO Reinsurance
Agreement.
10.7 Termination for Material Change in PHS Network. In the event that the
PHS Network undergoes a material change within the meaning of Section 6.3 of
this Agreement, PHS shall be allowed thirty (30) days to present to Guardian a
plan to cure such Material Change that is reasonably satisfactory to Guardian.
If a reasonably satisfactory plan to cure the Material Change is not submitted
within that time, or if the plan is not carried out
30
<PAGE>
according to its terms, Guardian shall have the right to terminate this
Agreement, and the HMO Reinsurance Agreement, upon delivery of written notice of
such termination to PHS, which shall be effective upon receipt, without
prejudice to any other rights or remedies available to Guardian. The Contract
Termination Date under this Section 10.7 shall be the date of receipt of
notification to terminate.
10.8 Buy-Out Provisions. The parties acknowledge and agree that the
"buy-out" provisions set forth in Section 10.4(b) above apply only to
terminations under Sections 10.4(a) and 10.5 above. Such buy-out provisions do
not apply to terminations under any other section of this Agreement or to
terminations under the HMO Reinsurance Agreement.
ARTICLE XI
INDEMNIFICATION
11.1 PHS's Indemnification. PHS shall indemnify Guardian against all
liabilities, losses, suits, damages, costs, and expenses (including, without
limitation, damages resulting from breach of this Agreement and reasonable fees
of Guardian's attorneys and other expenses of litigation), net of recoveries
from third parties, arising out of or in connection with PHS's obligations under
this Agreement; including acts or omissions to act, or negligent, willful,
reckless or intentional wrongs, fraud, oppression or bad faith.
31
<PAGE>
11.2 Guardian's Indemnification. Guardian shall indemnify PHS against all
liabilities, losses, suits, damages, costs and expenses (including, without
limitation, damages resulting from breach of this Agreement, reasonable fees of
PHS's attorneys and other expenses of litigation), net of recoveries from third
parties, arising out of or in connection with Guardian's obligations under this
Agreement, including acts or omissions to act, or negligent, willful, reckless
or intentional wrongs, fraud, oppression or bad faith.
11.3 Liability under PHS's HMO Plans. Except as specifically set forth in
any Reinsurance Agreement(s) to be entered into between the parties, Guardian is
not a guarantor, insurer, or reinsurer of, or joint venturer with, PHS. Guardian
does not accept any risk of loss for, nor provide any indemnification to PHS,
any Contractholder or Subscriber, any provider or any other person with respect
to an HMO Plan. PHS shall indemnify Guardian for all liabilities, losses, suits,
damages, costs and expenses (including reasonable fees of Guardian's attorneys,
and other expenses of litigation), net of recoveries from third parties, arising
in connection with a HMO Plan or the PHS Network, including action or failure to
act by PHS, or its employees or agents (excluding health care providers who or
which are not employees of, or under an agency agreement with, PHS).
11.4 Liability under Health Insurance Contracts and Ancillary Products. PHS
is not a guarantor, insurer, or reinsurer of, or joint venturer with, Guardian.
PHS does not accept any risk of loss, nor provide any indemnification to
Guardian, any Contractholder or Subscriber,
32
<PAGE>
any provider or any other person with respect to a Health Insurance Contract or
Ancillary Product. Guardian shall indemnify PHS for all liabilities; losses;
suits; damages; costs and expenses (including reasonable fees of PHS's
attorneys, and other expenses of litigation), net of recoveries from third
parties, arising in connection with a Health Insurance Contract or Ancillary
Product, including action or failure to act by Guardian, or its employees or
agents.
11.5 Survival of Article. This Article XI shall survive the termination or
nonrenewal of this Agreement.
33
<PAGE>
ARTICLE XII
ARBITRATION
12.1 Appointment of Arbitrators. In the event of any disputes or
differences arising hereafter between the parties with reference to any
transaction under or relating in any way to this Agreement, as to which
agreement between the parties hereto cannot be reached, the dispute or
difference shall be resolved by arbitration. Three arbitrators shall decide any
dispute or difference. The arbitrators must be disinterested officers or retired
officers of life and health insurance or health maintenance organizations other
than the two parties to this Agreement or their affiliates. Each of the parties
agrees to appoint one of the arbitrators with the third, to be chosen by the two
appointed arbitrators. In the event that either party should fail to choose an
arbitrator within thirty (30) calendar days following a written request by the
other party to do so, the requesting party may choose a second arbitrator before
entering upon arbitration. In the event that the two arbitrators shall not be
able to agree on the choice of the third arbitrator within twenty (20) calendar
days following their appointment, each arbitrator shall nominate five (5)
candidates within ten (10) calendar days thereafter, four (4) of whom the other
party shall decline, and the third arbitrator shall be chosen by the President
of the American Arbitration Association or his designee. Should the chosen third
arbitrator so selected decline to serve, the candidate who was not chosen by the
President shall be appointed. This process shall continue until a candidate has
agreed to serve.
34
<PAGE>
12.2 Decision. The arbitrators shall consider customary and standard
practices in the health insurance and managed care business. They shall decide
by a majority vote of the arbitrators. There shall be no appeal from their
written decision. Judgment may be entered on the decision of the arbitrators by
any court having jurisdiction. If, in the opinion of the arbitrators, a dispute
cannot be otherwise resolved, this Agreement shall be terminated in accordance
with Section 10.5 hereof.
12.3 Expenses of Arbitration. Each party shall bear the expense of its own
arbitrator (whether selected by that party, or by the other party pursuant to
the procedures set out in Section 12.1) and related outside attorneys' fees, and
shall jointly and equally bear with the other party the expenses of the third
arbitrator.
12.4 Applicable Law. Any arbitration instituted pursuant to this Article
shall be held in New Jersey and the laws of the State of New Jersey and, to the
extent applicable, the Federal Arbitration Act, shall govern the interpretation
and application of this Agreement.
12.5 Survival of Article. This Article shall survive termination of this
Agreement.
35
<PAGE>
ARTICLE XIII
MISCELLANEOUS
13.1 Stop-Loss Coverage. Guardian shall have the right to provide
Contractholders with stop-loss insurance or reinsurance with respect to HMO
Plans that are Managed Care Contracts subject to this Agreement. Guardian shall
have the right to bid on stop-loss reinsurance protection for all other business
of PHS. Nothing herein shall require PHS to reinsure HMO Plans that are not
Managed Care Contracts with Guardian. In addition, Guardian acknowledges that
PHS has certain existing arrangements, and may enter into additional
arrangements in the future, for stop-loss reinsurance coverage for HMO Plans
that are not Managed Care Contracts which shall remain in effect regardless of
this Agreement.
13.2 Misunderstandings and Oversights. If any delay, omission, error or
failure to perform any act required by this Agreement is unintentional and
caused by misunderstanding or oversight, PHS and Guardian will adjust the
situation to what it would have been had the misunderstanding or oversight not
occurred. The party that first discovers such oversight or incorrect act as a
result of the misunderstanding will notify the other party in writing promptly
upon discovery of the misunderstanding or oversight. The parties shall act to
correct the error, omission or oversight within thirty (30) days of notification
of the problem. This Section 13.2 shall not be construed as a waiver by either
party of its right to enforce strictly the terms of this Agreement.
36
<PAGE>
13.3 Non-Solicitation. (a) During the term of this Agreement, neither
Guardian nor any entity under Guardian's control shall contact, solicit or
contract for services with any PHS Network health care provider then under
contract with PHS. Nothing in this Agreement shall preclude PHCS from
contracting with any PHS Network health care provider.
(b) During the term of this Agreement, neither party shall knowingly
solicit for employment an employee of the other party who has been engaged in
activities covered by this Agreement, without written consent of the other
party.
13.4 Regulatory Approval. Performance of the obligations of either party
under this Agreement shall be subject to the receipt of necessary regulatory
approvals under the laws, regulations and practices of regulatory authorities in
New York and New Jersey. PHS and Guardian shall cooperate in attempting to
obtain expeditiously any necessary regulatory approvals from regulatory
authorities. Each party will bear its own expenses in obtaining such approvals.
13.5 Audits. Each party shall have the right, upon reasonable notice to the
other party, and at the requesting party's expense, to audit the books and
records of the other party relating to receipts, enrollment, service standards
and other matters relating to this Agreement
37
<PAGE>
during regular business hours at the premises of the audited party where such
records are normally maintained. The audited party shall reasonably cooperate in
any such audit.
13.6 Headings and Schedules. Headings used herein are not part of this
Agreement. Any Schedules or Exhibits attached hereto are part of this Agreement.
13.7 Compliance with Applicable Laws and Regulations. It is the intention
of the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the Agreement remains
in full force. Each of the parties agrees to comply with all laws; ordinances,
rules, regulations and orders of regulatory bodies applicable to the
transactions contemplated by this Agreement, including those relating to
maintenance of appropriate licenses and the appointment of agents and payment of
commissions. Either party shall promptly notify the other party of any
complaint, inquiry or lawsuit by any regulatory authority relating to the
Managed Care Contracts or to this Agreement.
13.8 Successors and Assigns: Binding Effect. Except as otherwise provided
herein and in the HMO Reinsurance Agreement; this Agreement cannot be assigned
by PHS or Guardian without the prior written approval of the other party. The
provisions of this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective permitted
successors and assigns.
38
<PAGE>
13.9 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original; but all of
which will constitute one and the same agreement.
13.10 Entire Agreement: Amendment. This Agreement and the Reinsurance
Agreement constitute the entire agreement between the parties with respect to
the Managed Care Contracts and Ancillary Products, and supersede any previous
written or oral agreements. This Agreement shall be amended only by written
agreement signed by a duly authorized officer of each of PHS and Guardian, and
any change to this Agreement shall be null and void unless made by such written
agreement; provided, however, that where, under insurance, health or other
applicable laws or regulations, the approval of any such amendment to this
Agreement by one or more federal, state or local governmental or regulatory
authorities is required, the amendment shall not take effect unless and until
all such necessary approvals have been obtained and received by both PHS and
Guardian. In the event that any such approval is required, PHS and Guardian
shall each take all necessary actions in order to obtain such approval.
13.11 Waivers. The waiver by either of the parties of the other party's
prompt and complete performance, or breach or violation, of any provisions of
this Agreement and related documents shall not operate or be construed as a
waiver of any subsequent breach or violation,
39
<PAGE>
and the waiver by any of the parties to exercise any right or remedy which it
may possess hereunder shall not operate or be construed as a bar to the exercise
of such right or remedy by such party upon the occurrence of any subsequent
breach or violation.
13.12 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey, without giving effect to
the principles of conflicts of laws thereof.
13.13 Severability. In the event any section or provision of this Agreement
or related documents is found to be void and unenforceable by a court of
competent jurisdiction, the remaining sections and provisions of this Agreement
or related documents shall nevertheless be binding upon the parties with the
same force and effect as though the void or unenforceable part had not been
severed or deleted.
40
<PAGE>
13.14 Notices. Any notice to be given pursuant to the terms of this
Agreement shall be given in writing either by personal delivery or by mail,
registered or certified, return receipt requested and postage prepaid. Mail
notices shall be sent to the parties at their respective addresses as shown:
If to Guardian:
The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
Attention: Edward K. Kane, Esq.
If to Physicians Health Services, Inc.:
Physicians Health Services' Inc.
120 Hawley Lane
Trumbull, Connecticut 06611
Attention: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
If to Physicians Health Services of New Jersey, Inc.:
Physicians Health Services of New Jersey, Inc.
Mack Center 4
South 61
Paramus Road
Paramus, New Jersey 07652
Attention:
Executive Director
13.15 Confidentiality. (a) Neither Guardian nor PHS shall disclose any
proprietary or confidential information of the other party to a third party
without the express written consent
41
<PAGE>
of the other party to this Agreement. For purposes of this Agreement,
"proprietary and confidential" information will include, without limitation, all
internal business practices and business records, information concerning
products and pricing, contracts, computer hardware and software or business
methods in any form whatsoever, peer review, quality assurance and grievance
procedures, any aspect of the utilization review program, provider fee
schedules, reimbursement schedules, or discounts, and advertising or marketing
information, but not including information otherwise available to the public.
Neither party shall use any proprietary and confidential information of the
other party for its own benefit. Upon termination of this Agreement, each party
will immediately return to the other party any confidential information, claims
files necessary for the continued administration of any Plan, and other property
of the other party.
(b) Guardian and PHS agree to maintain the confidentiality of any health
care information pertaining to Subscribers including, without limitation, files,
records, reports, and other information prepared and maintained in connection
with this Agreement, in accordance with all applicable laws and regulations.
(c) Each Party shall obtain any necessary consent from Subscribers with
respect to the release to the other party of any confidential information
relating to such Subscribers, by means of general or specific releases, as
appropriate. Each party shall notify the other if it becomes aware that proper
releases have not been obtained.
42
<PAGE>
(d) Guardian shall not make any list of PHS providers available to any
person other than appropriate regulatory authorities. Guardian employees who are
engaged in operations relating to this Agreement, and independent brokers and
other persons engaged in marketing of Managed Care Contracts.
13.16 Press Releases. No public statement or press release regarding the
existence of this Agreement shall be made by either party without obtaining the
prior written consent of the other party, except as required by applicable laws
or regulations.
13.17 Relationship of Parties. The parties to this Agreement are and shall
remain independent contractors. Neither party is the employee or agent of the
other party, except as set forth herein, and neither party has an express or
implied right to bind the other party. The parties do not intend to form a joint
venture, partnership, or to be governed by laws relating to any relationship
other than that of independent contractors. Neither party is authorized to
modify, alter or waive the terms of any product issued by the other party.
13.18 Offset. In the event that either party to this Agreement shall fail
to make payment of any amount that is due and owing to the other party under
this Agreement, all mutual debts shall be offset, and only the balance of such
debts shall be paid.
43
<PAGE>
13.19 Financial Statements. Each party shall furnish financial statements
as filed with the appropriate regulatory authority to the other party upon
request.
13.20 Regulatory Review. The parties acknowledge and agree that this
Agreement is subject to the review and approval of the New Jersey and the New
York State Departments of Insurance. The parties expressly agree that any
revisions to this Agreement required by the New Jersey or the New York State
Departments of Insurance will be addressed in an amendment to, or restatement
of, the Agreement.
44
<PAGE>
EXECUTION
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
PHYSICIANS HEALTH SERVICES, INC.
By /s/ Regina M. Campbell
------------------------------
Name Regina M. Campbell
Title Senior Vice President
PHYSICIANS HEALTH SERVICES
OF NEW JERSEY, INC.
By /s/ Regina M. Campbell
------------------------------
Name Regina M. Campbell
Title Senior Vice President
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
By /s/ Joseph D. Sargent
------------------------------
Name Joseph D. Sargent
Title President and CEO
45
<PAGE>
SCHEDULE A
DESCRIPTION OF MANAGED CARE CONTRACTS
[DESCRIBE NJ PLANS]
A-1
<PAGE>
NEW JERSEY--STATUTORY PLANS--GROUPS WITH 2-49 EMPLOYEES--HEALTHCARE SOLUTIONS
<TABLE>
PASSPORT HMO
================================================================================
<S> <C> <C>
J40000 PHS/NJ 5/75 Benefits are based on New Jersey
INJSP mandated plan design.
Available eff. 5/1/96
- --------------------------------------------------------------------------------
J41000 PHS/I4J lO/lOO Benefits are based on New Jersey
2NJSP mandated plan design.
Available eff. 5/1/96
- --------------------------------------------------------------------------------
J42000 PHS/NJ 15/150 Benefits are based on New Jersey
3NJSP mandated plan design.
Available eff. 5/1/96
- --------------------------------------------------------------------------------
J43000 PHS/NJ 20/250 Benefits are based on New Jersey
4NJSP mandated plan design.
Available eff. 5/1/96
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
CHARTER POS
================================================================================
<S> <C> <C>
Statutory Charter POS plans in this
market are being developed, and are
anticipated to receive DOI approval
Fall, 1996. These plans will be
sold under Healthcare Solutions.
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
NEW JERSEY STATUTORY PLANS GROUPS WITH 2-49 EMPLOYEES--HEALTHCARE SOLUTIONS
PASSPORT POS (With Inpatient Hospital Copay)
<TABLE>
<CAPTION>
====================================================================================================================================
Copay In Individual Family Coinsurance Coinsured Family Out Annual COMMENTS
Schedule Network Deductible Deductible (paid by PHS) Charge of Pocket Benefit
Plans Limit* Maximum Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J4628S PHS/NJ $250 $5OO 80% $10,000 N/A NA Available eff. 7-1-96
5NJSP $5/75 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4658S PHS/NJ $500 $l,OOO 80% $10,000 N/A NA Available eff. 7-1-96
6NJSP $5/75 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4727S PHS/NJ $250 $500 70% $10,000 N/A NA Available eff. 7-1-96
7NJSP $10/100 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4728S PHS/NJ $250 $500 80% $10,000 N/A NA Available eff. 7-1-96
8NJSP $10/100 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4757S PHS/NJ $500 $ 1,000 70% $10,000 N/A NA Available eff. 7-1-96
9NJSP $10/100 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4758S PHS/NJ $500 $1,000 80% $10,000 N/A NA Available eff. 7-1-96
10NJSP $10/100 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4718S PHS/NJ $l,OOO $2,000 80% $10,000 N/A NA Available eff. 7-1-96
11NJSP $10/100 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4828S PHS/NJ $250 $500 80% $10,000 N/A NA Available eff. 7-1-96
12NJSP $15/150 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4857S PHS/NJ $500 $l,000 70% $10,000 N/A NA Available eff. 7-1-96
13NJSP $15/150 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4957S PHS/NJ $500 $ 1,000 70% $10,000 N/A NA Available eff. 7-1-96
14NJSP $20/250 per member
- ------------------------------------------------------------------------------------------------------------------------------------
J4917S PHS/NJ $l,OOO $2,000 70% $10,000 N/A NA Available eff. 7-1-96
15NJSP $20/250 per member
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Coinsured Charge Limit is the amount of covered charges a member must
incur each Calendar Year before no Coinsurance is required. Charges for
Mental or Nervous Conditions and Substance Abuse Treatment are not subject
to or eligible for the Coinsured Charge Limit.
12
<PAGE>
NEW JERSEY STATUTORY PLANS GROUPS WITH 2-49 EMPLOYEES--HEALTHCARE SOLUTIONS
PASSPORT POS (with $0 (Zero) Hospital Copay)
<TABLE>
<CAPTION>
====================================================================================================================================
Copay In Individual Family Coinsurance Coinsured Family Out Annual COMMENTS
Schedule Network Deductible Deductible (paid by PHS) Charge of Pocket Benefit
Plans Limit* Maximum Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J5028S PHS/NJ $250 $500 80% $10,000 N/A NA Available
5NJSPZ $5 per member eff. 10-1-96
- ------------------------------------------------------------------------------------------------------------------------------------
J5058S PHS/NJ $500 $1,000 80% $10,000 N/A NA Available
6NJSPZ $5 per member eff. 10-1-96
- ------------------------------------------------------------------------------------------------------------------------------------
J5127S PHS/NJ $250 $500 70% $10,000 N/A NA Available
7NJSPZ $10 per member eff. 10-1-96
- ------------------------------------------------------------------------------------------------------------------------------------
J5128S PHS/NJ S250 $500 80% $10,000 N/A NA Available
8NJSPZ $10 per member eff. 10-1-96
- ------------------------------------------------------------------------------------------------------------------------------------
J5157S PHS/NJ $500 $1,000 70% $1O,OOO N/A NA Available
9NJSPZ $10 per member eff. 10-1-96
- ------------------------------------------------------------------------------------------------------------------------------------
J5158S PHS/NJ $500 $1,000 80% $10,000 N/A NA Available
10NJSPZ $10 per member eff. 10-1-96
- ------------------------------------------------------------------------------------------------------------------------------------
J5118S PHS/NJ $1,000 $2,000 80% $lO,OO0 N/A NA Available
11NJSPZ $10 per member eff. 10-1-96
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Coinsured Charge Limit is the amount of covered charges a member must
incur each Calendar Year before no Coinsurance is required. Charges for
Mental or Nervous Conditions and Substance Abuse Treatment are not subject
to or eligible for the Coinsured Charge Limit.
13
<PAGE>
NEW JERSEY STATUTORY PLANS GROUPS WITH 2-49 EMPLOYEES--HEALTHCARE SOLUTIONS
PASSPORT POS with $0 (Zero) Hospital Copay and $5,000 Coinsured Charge Limit
<TABLE>
<CAPTION>
====================================================================================================================================
Copay In Individual Family Coinsurance Coinsured Family Out Annual COMMENTS
Schedule Network Deductible Deductible (paid by PHS) Charge of Pocket Benefit
Plans Limit* Maximum Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J50285 PHS/NJ $250 $500 80% $5,000 N/A NA Available
5NJSPZF $5 per member eff. 1-1-97
- ------------------------------------------------------------------------------------------------------------------------------------
J50585 PHS/NJ $500 $1,000 80% $5,000 N/A NA Available
6NJSPZF $5 per member eff. 1-1-97
- ------------------------------------------------------------------------------------------------------------------------------------
J51285 PHS/NJ $250 $500 80% $5,000 N/A NA Available
8NJSPZF $10 per member eff. 1-1-97
- ------------------------------------------------------------------------------------------------------------------------------------
J51585 PHS/NJ $500 $1,000 80% $5,000 N/A NA Available
lONJSPZF $10 per member eff. 1-1-97
- ------------------------------------------------------------------------------------------------------------------------------------
J151185 PHS/NJ $1,000 $2,000 80% $5,000 N/A NA Available
11NJSPZF $10 per member eff. 1-1-97
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Coinsured Charge Limit Is the amount of covered charges a member must
incur each Calendar Year before no Coinsurance is required. Charges for
Mental or Nervous Conditions and Substance Abuse Treatment are not subject
to or eligible for the Coinsured Charge Limit.
14
<PAGE>
NEW JERSEY--GROUPS WITH 50 OR MORE EMPLOYEES
<TABLE>
PASSPORT HMO--HEALTHCARE SOLUTIONS
================================================================================
<S> <C> <C>
J36000 (5-10NJP) PHS 5 (Customized) Healthcare Solutions, eff. 5/1/96
- --------------------------------------------------------------------------------
J37000 (15-20,25 PHS 15 (Customized) Healthcare Solutions, eff. 5/1/96
and 26NJP)
- --------------------------------------------------------------------------------
J38000 (11-14NJP) PHS 5/250 (Customized) Healthcare Solutions, eff. 5/1/96
- --------------------------------------------------------------------------------
J39000 (15-214NJP) PHS 15/500 (Customized) Healthcare Solutions, eff. 5/1/96
- --------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
NEW JERSEY--GROUPS W1TH 50 OR MORE EMPLOYEES--HEALTHCARE SOLUTIONS
CHARTER POS (Note: NJ Regulations probibit the sale of open access POS plans
with less than a $250 deductible).
<TABLE>
<CAPTION>
====================================================================================================================================
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (paid by PHS) Out of of Pocket Benefit
Plans Pocket Max. Maximum Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J3637G PHS 5 $300 $750 70% of the $1,800 $4,500 NA Available for sale
6NJC next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3657G PHS 5 $5OO $1,250 70% of the $2,000 $5,000 NA Available for sale
7NJC next $5,OOO eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3638G PHS 5 $300 $750 80% of the $l,300 $3,250 NA Available for sale
9NJC next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3658G PHS 5 $500 $1,250 80% of the $l,500 $3,750 NA Available for sale
10NJC next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3837G PHS 5/250 $300 $750 70% of the $1,800 $4,500 NA Available for sale
11NJC next $5,OOO eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3857G PHS 5/250 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
12NJC next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3838G PHS 5/250 $300 $750 80% of the $l,300 $3,250 NA Available for sale
13NJC next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3858H PHS 5/250 $500 $l,250 80% of the $1,500 $3,750 NA Available for sale
14NJC next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA Available for sale
16NJC next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3757G PHS 15 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
17NJC next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
13738G PHS 15 $300 $750 80% ofthe $l,300 $3,250 NA Available for sale
l9NJC next $5 000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3758G PHS 15 $500 $1,250 80% of the $l,500 $3,750 NA Available for sale
20NJC next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
NEW JERSEY--GROUPS WITH 50 OR MORE EMPLOYEES--HEALTHCARE SOLUTIONS
CHARTER POS (Note: NJ Regulations probibit the sale of open access POS plans
with less than a $250 deductible).
<TABLE>
<CAPTION>
====================================================================================================================================
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
21NJC 15/500 next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3958G PHS $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
22NJC 15/500 next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale
23NJC 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3918G PHS 5 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale
24NJC 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3717G PHS 15 $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale
25NJC next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale
26NJC next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
NEW JERSEY--GROUPS W1TH 50 OR MORE EMPLOYEES--HEALTHCARE SOLUTIONS
PASSPORT POS
<TABLE>
<CAPTION>
====================================================================================================================================
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (paid by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J3627G PHS 5 $200 $500 70% of the $1,700 $4,250 NA Available for sale
5NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3637G PHS 5 $3OO $750 70% of the $1,800 $4,500 NA Available for sale
6NJP next $5,OOO eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3657G PHS 5 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
7NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3628G PHS 5 $200 $500 80% of the $l,200 $3,000 NA Available for sale
8NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3638G PHS 5 $300 $750 80% of the $1,300 $3,250 NA Available for sale
9NJP next $5,OOO eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3658G PHS 5 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
10NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3837G PHS 5/250 $300 $750 70% of the $l,800 $4,500 NA Available for sale
11NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3857G PHS 5/250 $500 $l,250 70% of the $2,000 $5,000 NA Available for sale
12NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3838G PHS 5/250 $300 $750 80% of the $1,300 $3,250 NA Available for sale
13NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3858H PHS 5/250 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
14NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
NEW JERSEY--GROUPS WITH 50 OR MORE EMPLOYEES--HEALTHCARE SOLUTIONS
PASSPORT POS
<TABLE>
<CAPTION>
====================================================================================================================================
Copay In Individual Family Coinsurance Individual Family Out Annual COMMENTS
Schedule Network Deductible Deductible (pd by PHS) Out of of Pocket Benefit
Plans Pocket Max. Max. Limit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J3727G PHS 15 $200 $500 70% of the $1,700 $4,250 NA Available for sale
15NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3737G PHS 15 $300 $750 70% of the $1,800 $4,500 NA Available for sale
16NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3757G PHS 15 $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
17NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3728G PHS 15 $200 $500 80% of the $l,200 $3,000 NA Available for sale
18NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3738G PHS 15 $300 $750 80% of the $1,300 $3,250 NA Available for sale
19NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3758G PHS 15 $500 $1,250 80% of the $1,500 $3,750 NA Available for sale
20NJP next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3957G PHS $500 $1,250 70% of the $2,000 $5,000 NA Available for sale
21NJP 15/500 next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3958G PHS $500 $l,250 80% of the $1,500 $3,750 NA Available for sale
22NJP 15/500 next $5,000 eff. 5/1/96 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3917G PHS $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale
23NJP 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3918G PHS $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale
24NJP 15/500 next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3717G PHS 15 $1,000 $2,500 70% of the $3,700 $9,250 NA Available for sale
25NJP next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
J3718G PHS 15 $1,000 $2,500 80% of the $2,800 $7,000 NA Available for sale
26NJP next $10,000 eff. 1-1-97 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
NJ
Schedule B
Contracts Allowances Administrative Service Fee
I. Guardian's Administrative Services Fee (as a percentage of premium)
<TABLE>
<CAPTION>
HMO POS
--- ---
<S> <C> <C>
Marketing 0.63% 0.63%
Sales 1.38% 1.38%
Administration 1.30% 1.30%
Billing/Collections 1.69% 1.69%
Advertising 0.15% 0.15%
Total 5.15% 5.15%
</TABLE>
II. PHS' Administrative Services Fee (as a percentage of premium)
<TABLE>
<CAPTION>
HERO POS
---- ---
<S> <C> <C>
Health Services, UR 1.67% 1.67%
Net Mgt, MDD, QA 2.43% 2.43%
Operations 3.58% 3.58%
Acct Svc., CustSrv. 1.44% 1.44%
Marketing 0.63% 0.63%
Sales 0.15% 0.15%
Administration 1.30% 1.30%
Advertising 0.15% 0.15%
Total 11.35% 11.35%
</TABLE>
<PAGE>
EXHIBIT A-l
HMO REINSURANCE AGREEMENT
EX-1
<PAGE>
Exhibit 10(p)
REINSURANCE AGREEMENT
between
PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC
and
Trumbull, Connecticut
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
New York, New York
<PAGE>
REINSURANCE AGREEMENT
This Reinsurance Agreement (this "Agreement") is made and entered into as
of this 1st day of October, 1996 between PHYSICIANS HEALTH SERVICES OF
CONNECTICUT, INC., a corporation organized under the laws of the State of
Connecticut as a health maintenance organization (the "Company") and THE
GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a mutual life insurance company
organized under the laws of the State of New York (the "Reinsurer").
The Company and the Reinsurer mutually agree to enter into the Agreement on
the terms and conditions stated herein. This Agreement is a reinsurance
agreement solely between the Company and the Reinsurer, and the performance of
the obligations of each party under this Agreement shall be rendered solely to
the other parties. In no instance, except as set forth in Article XII, shall
anyone other than the Company or the Reinsurer have any rights under this
Agreement, and the Company shall be and remain solely liable to any insured,
contractholder, physician or other provider or beneficiary under any contract
reinsured hereunder.
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (definitions are applicable to both the singular and the plural forms
of each term defined in this Article):
<PAGE>
"Accounting Period" means the Fiscal Quarter, except that the first
Accounting Period shall be the period commencing with the Effective Date and
ending with the last day of the then current Fiscal Quarter, and the last
Accounting Period shall be the period commencing with the first day of the last
Fiscal Quarter preceding the Terminal Accounting Date and ending on the Terminal
Accounting Date.
"Administrative Expense" means an expense which will be reimbursable each
Accounting Period and is intended to compensate the Company or the Reinsurer for
a reasonable estimate of the actual cost of performing administrative services
in connection with the HMO Plans, as set forth in the Marketing and Services
Agreement, without provision for profit.
"Affiliate" means with respect to a specified person, a person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
"Business Day" means any day except Saturday or Sunday or any legal Federal
or Connecticut holiday.
"Capitation Agreement" means a health care provider contract pursuant to
which the Company agrees to pay a provider or risk entity a per subscriber fee
in lieu of all or a portion of actual claims made.
"Capitation Fees" means the per subscriber fees to health care providers
incurred under Capitation Agreements, net of amounts paid or payable to the
Company by providers under such agreements.
2
<PAGE>
"Change of Control" means the acquisition, in a single transaction or in a
series of related transactions, by a person, an entity, or a group of persons or
entities acting in concert of: (i) twenty-five percent (25 %) or more (a) of the
voting common stock of the Company or PHS (excluding any acquisition of stock by
a party currently owning twenty-five percent (25 %) or more of such common
stock), or (b) fifty-one percent (51 %) or more of the of the aggregate value of
the assets of the Company or PHS; or (ii) twenty-five percent (25 %) or more of
any ownership interest in the Reinsurer.
"Commissions" means commissions and other incentives or bonuses applicable
to the marketing of the HMO Plans.
"Continuation Plan" has the meaning set forth in Section 8.6.
"Contract Termination Date" means the effective date upon which the
Agreement terminates pursuant to the applicable Section in Article VIII below.
"Contractholder" means an employer in the Service Area who or which
executes an enrollment agreement with respect to any HMO Plan subject to this
Agreement.
"Direct Paid Claims" means amounts paid to health care providers for
medical claims and/or to subscribers for services covered by HMO Plans,
including withholds paid to providers, but not including Capitation Fees.
"Direct Paid Premium" means premiums received.
"Earned Premium" shall consist of the item shown on Schedule C, line I.A.7.
3
<PAGE>
"Effective Date" shall have the meaning set forth in Section 2.1.
"Fiscal Quarter" means each of the four consecutive three-month periods in
a fiscal year commencing on January 1 of each year and ending on December 31 of
that calendar year.
"HMO Plans" means commercial contracts for health care services provided by
Company to Contractholders in the Service Area utilizing the Company's network
of healthcare providers to provide health care services when such contracts are
marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions,"
or such other tradename as the parties may mutually agree to from time to time.
HMO Plans include HMO Plans with a "point-of-service" feature.
"Insurance Taxes" means all taxes, licenses and fees directly imposed on
the HMO Plans reinsured hereunder and shall be given the same meaning as
Insurance Taxes, Licenses and Fees, Excluding Federal Income Taxes in the
Summary of Operations Schedule in the NAIC Life, Accident and Health Convention
Blank which is taken from the Taxes, Licenses and Fees Exhibit, or similar
entries on financial statements filed by the Company. Such term shall not
include any franchise or other federal, state or local tax measured by net
income.
"Interest Compensation Rate" means the rate of interest defined in Schedule
D as applicable to delayed payments.
"LIBOR" means, at any time of determination, the London Interbank Offered
Rate paid on U.S. dollar deposits for the applicable period of time as published
under "Money Rates" in the New York City edition of the Wall Street Journal or,
if
4
<PAGE>
there is no such publication or statement therein as to LIBOR, then in any
publication used in the New York City financial community.
"Marketing and Services Agreement" shall have the meaning set forth in
Section 3.1.
"PHCS" shall mean Private Health Care Systems Incorporated, a corporation
with its corporate offices in Waltham, Massachusetts that develops medical
provider networks and provides utilization review services.
"PHS" shall mean Physicians Health Services, Inc., a Delaware corporation
and the parent of the Company.
"Profit or Loss" shall have the meaning set forth in Article X.
"Quarterly Accounting Report" means the report required to be prepared in
accordance with Section 7.2 and providing the data as shown on Schedules C and
F.
"Quarterly Settlement" means the net amount due and payable to any party
with respect to any Accounting Period as set forth in Section 7.3.
"Renewal Date" means, with respect to a HMO Plan, the date that is the
anniversary of the day on which the liability of the Company began under such
HMO Plan.
"Reserves" means amounts shown in the Company's annual statement as filed
with the State of Connecticut as reserves for the HMO Plans.
"Service Area" means the State of Connecticut.
5
<PAGE>
"Stop Loss Reinsurance" means reinsurance other than the reinsurance under
this Agreement obtained by the Company and provided in connection with HMO
Plans.
"Stop Loss Reinsurance Premium" means consideration paid by the Company for
Stop Loss Reinsurance provided.
"Stop Loss Reinsurance Recoveries Received" means amounts collected
pursuant to Stop Loss Reinsurance.
"Terminal Accounting and Settlement" means the final accounting and payment
of any amount due any party upon the termination of this Agreement, as described
in Section 9.1.
"Terminal Accounting Date" shall have the meaning set forth in Section 9.1.
"Withholds" means amounts withheld by the Company from payments of claims
submitted by primary care physicians and specialists.
ARTICLE II
REINSURANCE COVERAGE
2.1 Coverage. (a) Effective October 1, 1996 (the "Effective Date"), the
Company agrees to cede to the Reinsurer fifty percent (50%) of the risks under
the HMO Plans, all as more specifically described in Schedule A, and the
Reinsurer agrees to indemnify the Company against fifty percent (50%) of the
risks under such HMO Plans.
6
<PAGE>
(b) The parties acknowledge that, pursuant to the terms of Schedule C
(Selection Adjustment) to the Marketing and Services Agreement, the parties
agreed to apportion profit or loss realized on the HMO Plans sold under the
Marketing and Services Agreement. The parties also agreed to apportion profit or
loss realized on the Reinsurer's Health Insurance Contracts sold under the
Marketing and Services Agreement. As of the date hereof, the loss realized on
the HMO Plans sold under the Marketing and Services Agreement is $3,800,000 and
the loss realized on the Health Insurance Contracts sold under the Marketing and
Services Agreement is $500,000. The parties further acknowledge and agree that
the net loss amount of $3,300,000 (the "Net Loss Amount"), payable by the
Reinsurer to the Company, will be deducted from the profit portion of the
amounts otherwise payable by the Company to the Reinsurer pursuant to Section
7.3 below. After the entire Net Loss Amount has been paid to the Company, profit
and loss shall be allocated between the parties as set forth in Article VII
below. The amounts set forth herein shall be subject to quarterly settlement and
may be subject to change as mutually agreed to by the Company and Reinsurer.
2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a
coinsurance basis. Each party agrees to establish and maintain Reserves in an
amount appropriate for the risks assumed by such party, as set forth in Section
2.1.
2.3 Conditions. The reinsurance hereunder is subject to the same
limitations and conditions as the HMO Plans, except as otherwise expressly
provided for in this Agreement.
7
<PAGE>
2.4 Exclusions. The reinsurance hereunder does not apply to the following
risks: (i) any portion of the risk under any HMO Plan issued by the Company
other than the risk reinsured hereunder; (ii) any HMO Plan issued and delivered
in a jurisdiction in which issuance and delivery of such contract constituted
the doing of business where the Company was not properly licensed; and (iii)
those risks for which the Reinsurer is not liable pursuant to the provisions of
Section 3.11 hereof.
ARTICLE III
GENERAL PROVISIONS
3.1 Contract Administration. The Company and the Reinsurer each shall have
responsibility for certain aspects of the marketing and administration of the
HMO Plans, in accordance with the Amended and Restated Marketing and Services
Agreement dated as of October 1, 1996 between the Reinsurer, the Company and PHS
(which amended and restated in its entirety the Marketing and Services Agreement
dated December 2, 1994) (the "Marketing and Services Agreement").
3.2 Non-Solicitation. (a) During the term of this Agreement, the Reinsurer
shall not contact, solicit or contract for services with any health care
provider in the Service Area under contract with the Company. In addition,
during the term of this Agreement, and following its termination, the Reinsurer
will not provide any party with lists of health care providers under contract
with the Company or non-public information concerning contracts between the
Company (or its Affiliates) and its health care providers under contract;
provided, however, that provider lists must be made available to the Departments
of Health or Insurance of the State of Connecticut, to
8
<PAGE>
prospective Contractholders, to the Reinsurer's insureds and as otherwise
required under applicable law. This Section 3.2 shall not apply (i) to
contracting efforts by third parties, including, but not limited to, PHCS acting
on behalf of the Reinsurer, for the purpose of developing managed care networks,
provided, however, that, the names of health care providers solicited by such
third parties shall not have been furnished by the Reinsurer, its employees or
agents, or (ii) following the Termination Date of this Agreement, as described
in the provisions of Article VIII hereof. The Reinsurer further agrees not to
replace a HMO Plan with a PHCS managed health care plan during the term of this
Agreement.
(b) No party, nor any of its Affiliates, shall contact, solicit or contract
with any other party's full-time employees who have been engaged in the
activities covered by this Agreement without the consent of such other party.
3.3 Inspection. Any party, or its designated representative, may inspect,
at the offices of the Company or the Reinsurer, as the case may be, where such
records are located, and conduct reasonable audits of, the papers and any and
all other books or documents of the Company or the Reinsurer reasonably relating
to the HMO Plans and the administrative responsibilities hereunder, during
normal business hours for such period as this Agreement is in effect or for as
long thereafter as the Company or the Reinsurer, as the case may be, seeks
performance by the other party pursuant to the terms of this Agreement. The
information obtained shall be used only for purposes relating to the reinsurance
provided under this Agreement and shall not be disclosed to any person without
the express permission of the other party, except to the extent that
9
<PAGE>
disclosure is required by law. Each party's rights under this Section 3.3 shall
survive termination of this Agreement.
3.4 Misunderstandings and Oversights. If any delay, omission, error or
failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Company and the Reinsurer will adjust the situation to what it would have been
had the misunderstanding or oversight not occurred. The party that first
discovers such oversight or incorrect act as a result of the misunderstanding
will notify the other parties in writing promptly upon discovery of the
misunderstanding or oversight. The parties shall act to correct the error,
omission or oversight within twenty (20) calendar days of notification of the
problem. This Section 3.4 shall not be construed as a waiver by any party of its
right to enforce strictly the terms of this Agreement.
3.5 Reinstatements. If a HMO Plan reinsured hereunder that was terminated
or lapsed is reinstated while this Agreement is in effect, the reinsurance for
such HMO Plan shall be reinstated automatically as if such HMO Plan had not been
terminated or lapsed. All amounts received in connection with such reinstatement
shall be treated as Direct Paid Premiums.
3.6 Contract Changes or Reserve Changes. The Company and the Reinsurer
shall share, based upon the percentages set forth in Section 2.1 and Schedule A,
in any increase or decrease in the Company's liability that results from any
change in the terms or conditions of any HMO Plan reinsured hereunder or in the
calculation of Reserves. The Company must provide written notification to the
Reinsurer within
10
<PAGE>
fifteen (15) calendar days after any such change, if such change can reasonably
be expected to have a significant effect on the transactions contemplated by
this Agreement.
3.7 Compliance with Applicable Laws and Regulations. It is the intention of
the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the agreement remains
in full force and the HMO Plans remain reinsured hereunder. Each of the parties
agrees to comply with all laws, ordinances, rules, regulations and orders of
regulatory bodies applicable to the transactions contemplated by this Agreement,
including those relating to the payment of commissions.
3.8 Amendment and/or Termination Upon Failure to Comply. In the event that
it is determined by an insurance or health regulatory authority, the Internal
Revenue Service or any other federal, state or local regulatory authority or by
any party to this Agreement upon the advice of an insurance or health regulatory
authority or the Internal Revenue Service that this Agreement fails to conform
to, or that the intent of this Agreement cannot be effected as a result of, the
requirements of existing applicable laws and regulations and that this Agreement
may be brought into conformity with said requirements, or the intent of this
Agreement may be effected, only by means of a material change to this Agreement,
or in the event that such laws or regulations are changed subsequent to the
Effective Date and such change has a material adverse effect on any party or
requires a material change to this Agreement in order for this Agreement to
conform with applicable laws and regulations or for its intent to be
11
<PAGE>
effected, the parties shall exercise reasonable efforts to reach an agreement to
amend this Agreement so as to return the parties to the economic position that
they would have been in had no such change occurred or so that both parties
share the economic detriment of such change proportionately. If the parties are
unable to reach an agreement to amend the Agreement, then the differences
between the parties shall be resolved through arbitration in accordance with the
provisions of Article XIII. In the event that any required change is not
material, this Agreement shall be amended in accordance with such requirement.
3.9 Notification of Disapproval or Change in Law. The Company shall
promptly notify the Reinsurer of any actual or anticipated disapprovals or
required changes regarding this Agreement that are made by any insurance or
health regulatory authority or taxing authority and of any change in the laws,
regulations or rulings affecting this Agreement or related documents. The
Reinsurer shall be allowed to participate in the defense of this Agreement or
related documents on its own behalf with such authority after consultation with
the Company.
3.10 Setoff. It is expressly understood that any debts or credits, matured
or unmatured, liquidated or unliquidated, arising or incurred pursuant to the
terms hereof, including but not limited to such debts and credits arising under
Articles IV, V and VI shall, at all times and under all circumstances relevant
to the rights and liabilities of the parties to this Agreement, be deemed mutual
debts or credits, as the case may be, and shall be set off, and only the net
balance shall be allowed or paid.
12
<PAGE>
3.11 Limitations on Liability. (a) The Reinsurer shall not indemnify or be
liable pursuant to this Agreement or otherwise for any of the Company's risk, to
the extent any damages result from the negligent acts or omissions to act,
reckless or intentional wrongs, fraud, oppression or bad faith of the Company.
The Reinsurer shall be liable and indemnify the Company fully for all losses
arising from the negligent acts or omissions to act, reckless or intentional
wrongs, fraud, oppression or bad faith of the Reinsurer acting in connection
with a HMO Plan reinsured hereunder.
(b) The Company does not indemnify and shall not be liable pursuant to this
Agreement or otherwise for any of the Reinsurer's risk, to the extent any
damages result from the negligent acts or omissions to act, reckless or
intentional wrongs, fraud, oppression or bad faith of the Reinsurer. The Company
shall be liable and indemnify the Reinsurer fully for all losses arising from
the negligent acts or omissions to act, reckless or intentional wrongs, fraud,
oppression or bad faith of the Company acting in connection with a HMO Plan
reinsured hereunder.
(c) The Reinsurer shall be liable, based on the applicable percentages set
forth in Section 2.1 and Schedule A, and subject to the election permitted by
Section 6.2, for any losses arising from non-negligent acts or omissions to act
taken by the Company in good faith pursuant to HMO Plans reinsured hereunder.
(d) For purposes of this Agreement, any damages, claims, liabilities or
other expenses for which the Reinsurer shall be liable shall be net of the
appropriate share of any recoveries from third parties, including, without
limitation, recoveries under Stop-Loss Reinsurance Contracts.
13
<PAGE>
(e) The Reinsurer shall not be liable for any damages incurred by the
Company or the Reinsurer to the extent such liability or damages arise from the
action or actions of a health care provider or health care facility in
connection with the HMO Plans reinsured hereunder.
3.12 Exclusivity. The Company and the Reinsurer shall not enter into an
arrangement with other parties similar to this Agreement for reinsurance of
Managed Care Contracts (as defined in the Marketing and Services Agreement)
offered in the Service Area, except as expressly permitted under the Marketing
and Services Agreement.
3.13 Press Releases. No public statement or press release regarding the
existence of this Agreement or the terms thereof shall be made by any party
hereto without the prior written consent of the other parties, except as
required by applicable laws, ordinances, rules and regulations.
3.14 Restrictions on the Reinsurer and the Company Relating to Other
Agreements. During the period from the Effective Date through the last date on
which the provisions of this Agreement are in effect, the Reinsurer and the
Company shall be prohibited from, directly or indirectly, entering into any
contract, lease, sublease, license, sublicense, promissory note, evidence of
indebtedness or other contract or commitment (whether oral or written), which
will, or can reasonably be expected to at any time, place any material
restriction or restrictions on such party's ability to perform any or all of its
obligations under this Agreement; provided, however, that, nothing
14
<PAGE>
herein shall limit either party's right to enter into a Change of Control
transaction in accordance with the provisions set forth herein.
3.15 Investigations. Each party to this Agreement shall immediately notify
the other parties, in writing, of any and all investigations of such party or
its directors, principal officers or shareholders conducted by any federal,
state or local governmental or regulatory authority other than routine
examinations or surveys by state insurance or health regulatory authorities and
federal or state tax authorities.
3.16 Change of Control. Each party shall fully disclose the details of any
pending Change of Control known to it to the other party, and shall provide the
other party with copies of any and all applications for approval therefor made
to Federal, state or local regulatory authorities. Such disclosure shall be made
prior to or concurrent with notification and/or application for approval to such
Federal, state or local regulatory authorities of a Change of Control. In the
event that such Change of Control shall be approved, the party that intends to
undergo the Change of Control shall notify the other party immediately thereof
and the other party shall have the rights set forth in Section 8.6.
3.17 Reinsurance or Sale of HMO Plans. (a) The Company agrees that, during
the period in which this Agreement is in effect, it shall not reinsure. sell or
assign the HMO Plans to another entity (other than in connection with Stop Loss
Reinsurance).
(b) Notwithstanding paragraph (a) above, this Section 3.17 shall not
restrict the ability of the Company to (i) enter into a merger or consolidation,
(ii) effect a sale
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of all or a portion of its capital stock or (iii) effect a sale of its business
as an entirety or substantially as an entirety; provided, however, that the
Company may not enter into a transaction listed in (i), (ii) or (iii) above with
another entity unless such other entity provides the Reinsurer with a writing,
in form and substance satisfactory to the Reinsurer which shall state that the
entity agrees to be bound by the terms of this Agreement to the same extent and
effect as if such entity had been a party to this Agreement.
3.18 Commission Scale and Commission Scale Changes. Commission payments
made with respect to any HMO Plans reinsured hereunder shall be made according
to the same commission scale used by the Company with respect to the specific
types of products listed in Schedule A, or substantially similar products, that
are not subject to this Agreement, as that scale may be changed from time to
time.
3.19 Stop-Loss Reinsurance. The Company agrees, during the period that this
Agreement is in effect, that it will maintain Stop-Loss Reinsurance with respect
to the HMO Plans in effect, with deductibles, coverages and limits of liability
that are substantially the same as those that apply under the Stop Loss
Reinsurance contract or contracts of the Company that are in effect on the
Effective Date, a copy or copies of which are attached as Exhibit I; provided,
however, that each Stop Loss Reinsurance contract or contracts of the Company
relating to HMO Plans must provide coverage with respect to claims relating to
any periods during which the Company is obligated to provide services with
respect to HMO Plans, without regard to (i) the failure of the Company to remain
qualified to conduct the business for which it is organized, or (ii)
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the insolvency or the commencement of supervision, conservation, rehabilitation,
liquidation or similar proceedings against the Company. In the event that any
Stop Loss Reinsurance contract issued to the Company does not meet the
requirements of this Section 3.l9 at the Effective Date, or at any time
thereafter, the Company will obtain substitute Stop Loss Reinsurance meeting
such requirements from a qualified reinsurer, including the Reinsurer.
3.20 Statement of Actuarial Opinion. Within forty-five (45) calendar days
after the end of the calendar year, the Company shall provide the Reinsurer with
a Statement of Actuarial Opinion certifying the adequacy of the reserves which
are covered under this Agreement. In addition, the Actuarial Opinion must state
whether or not the reserves covered under this Agreement meet the minimum
standards of all states where the Company is licensed, and if not the difference
between the Company's reserves and state minimums. The Actuarial Opinion shall
meet the requirements as set forth in the NAIC's Actuarial Opinion and
Memorandum Regulation. The Opinion shall be signed by the Company's "Appointed
Actuary."
ARTICLE IV
PREMIUMS AND RESERVES
4.1 Premiums - HMO Plans. After the Net Loss Amount described in Section
2.1(b) above is satisfied, Premiums under HMO Plans received by the Reinsurer,
pursuant to the terms of the Marketing and Services Agreement, shall be
allocated to the Company and the Reinsurer in accordance with the applicable
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percentages set forth in Section 2.1 and in Schedule A, and the portion of the
Premiums allocated to the Reinsurer shall constitute the consideration in
respect of the Reinsurer's acceptance of risk under this Agreement. The portion
of Premiums allocated to the Company shall be paid over to the Company in
accordance with the settlements required by Section 7.3 of this Agreement. Until
the Net Loss Amount is satisfied, the portion of the Premiums allocated to the
Reinsurer shall also be paid over to the Company in accordance with Section
2.1(b) above.
4.2 HMO Plan Reserves. With respect to the HMO Plans reinsured hereunder,
each of the Company and the Reinsurer shall establish and maintain Reserves in
accordance with the risk assumed by each party and all applicable regulatory
requirements.
ARTICLE V
EXPENSE ALLOWANCE
5.1 Administrative Expenses. Each party shall be entitled to reimbursement
for its Administrative Expenses (not including pre-marketing expenses),
identified in Schedule B, for each Accounting Period. Such Administrative
Expenses, plus any Insurance Taxes and Commissions, paid by such party with
respect to the HMO Plans during the Accounting Period, shall be considered
reimbursable expenses.
5.2 Payment. The Company and the Reinsurer shall be reimbursed for the
amounts shown as Company Expenses or Reinsurer Expenses, as set forth in Section
7.3 below.
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ARTICLE VI
CLAIMS
6.1 Notice of Claim. Upon receipt of any claim on any HMO Plan, which claim
is reasonably anticipated to exceed fifty thousand dollars ($50,000), the
Company shall promptly notify the Reinsurer of such claim. Copies of
notification, claim papers, and proofs shall be furnished by the Company to the
Reinsurer upon request.
6.2 Determination of Claims by the Company. The Reinsurer will accept the
decision of the Company with respect to the payment of a claim under a HMO Plan;
provided, however, that the Company shall promptly advise the Reinsurer of the
Company's intention to contest a claim under a HMO Plan, and the Reinsurer shall
have the right to advise and assist the Company in its determination of
liability and in the best procedure to follow with respect to any such claim of
doubtful validity. The Company and the Reinsurer shall share, in accordance with
the applicable percentages set forth in Section 2.1 and Schedule A, all expenses
incurred in connection with contesting, compromising or settling claims under a
HMO Plan, subject to the limitations of Section 3.11. Such expenses may
include, but are not limited to, all costs and expenses of investigation,
settlement of claims, litigation costs and judgments. If, however, the Reinsurer
has advised the Company that a contested claim should be paid, and elects to
assume liability for its applicable percentage (as set forth in Section 2.1 and
Schedule A) of the claim as originally presented, the Reinsurer shall not share
in any additional costs or expenses associated with such claim.
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ARTICLE VII
ACCOUNTING AND REPORTING
7.1 Reinsurance Accounting. The Company shall maintain separate books or
details of account with respect to the HMO Plans reinsured hereunder, setting
forth the data required in Schedules C and E.
7.2 Quarterly Accounting Reports. Following the end of each Accounting
Period, the Company shall supply the Reinsurer with a Quarterly Accounting
Report providing the data required in Schedules C and E. The Quarterly
Accounting Report shall be submitted within forty-five (45) calendar days of the
end of each calendar quarter.
7.3 Settlements. Settlement of amounts payable between the Company and the
Reinsurer shall be made in a reasonably expeditious manner once the amounts or
estimates are known or determined. All settlement payments shall be made by wire
transfer with same or next day availability unless otherwise agreed.
(a) Weekly Settlements. The Reinsurer shall make reimbursement payments to
the Company for estimated weekly cash claims paid by the Company. Such estimates
are to be mutually determined, and appropriately adjusted from time to time, to
reasonably approximate the timing and amounts of cash claim expenditures made by
the
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Company and to minimize the quarterly settlement amounts with respect to claims.
Such payments are due weekly based upon a mutually agreed upon schedule.
(b) Monthly Settlements. The Reinsurer shall make reimbursement payments to
the Company monthly for any actual or estimated monthly administrative expenses,
premium taxes, licenses, fees or assessments incurred by the Company. Such
payments are due within 20 Business Days after the end of each month in which
they were incurred. The Reinsurer's actual or estimated administrative or
commission expenses incurred are also deemed payable at that time. By mutual
agreement, certain expenses may be added to or deleted from this monthly
reimbursement.
(c) Quarterly Settlements. Based upon the Quarterly Accounting Reports,
including Schedules C and E, settlement payment shall be made to the Company or
Reinsurer, as the case may be, within 45 calendar days from the end of such
quarter. If such reports or schedules are not finalized within this time frame,
a reasonable estimated payment shall be made followed by an adjustment payment.
The Quarterly Settlement payment shall represent settlement, net of any interim
reimbursements or other related settlement payments, of all amounts due during
that quarter and any mutually agreed upon adjustments to prior periods. The
quarterly calculation of this payment shall be substantially in the form of
Schedule E with any positive amounts listed on Line 24 of such Schedule being
payable from the Reinsurer to the Company and any negative amounts being payable
from the Company to the Reinsurer. For the
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purpose of calculating interest on delayed payments relating to this quarterly
settlement payment, the parties agree that the due date is the 15th day (unless
such 15th day falls on a day other than a Business Day, in which case the due
date is the Business Day immediately preceding such 15th day) of the middle
month of the settlement quarter unless otherwise mutually agreed.
(d) Other Settlements. Other settlement payments between the Company and
the Reinsurer such as payment adjustments, preliminary quarterly settlements,
withhold payout reimbursements or interest compensation may be made separately
or along with other settlement payments upon mutual agreement. For the purpose
of calculating interest on delayed payments relating to these payments, due
dates are to be mutually agreed upon if not otherwise specified in this
Agreement.
7.4 Reconciliation. Each party shall have the right to review all
individual components of transactions entered into each Quarterly Accounting
Report, such as Premiums received, Commissions and Insurance Taxes, claims
incurred or paid, and similar items. The parties shall have a reasonable period
from the day the Quarterly Accounting Report is submitted to report any
deficiency in such report and to request an adjustment of any payment made to or
received by either party. Any amount due either party in connection with such
reconciliation shall be paid within forty-five (45) calendar days of the receipt
of notice that additional amounts are due.
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7.5 Best Efforts to Supply Actual Data. In preparing all reports required
in this Agreement, the Reinsurer and the Company shall make their best efforts
to supply the actual data. If the actual data cannot be supplied with the
appropriate report, the Reinsurer or the Company shall produce best estimates,
and shall provide amended reports based on actual data no more than forty-five
(45) days after such report was originally due.
7.6 Interest Delayed Payments. Should any payment in connection with the
Settlements due the Company or the Reinsurer as set forth in Section 7.3 above
be delayed beyond its due date as defined or determined, such delayed payment
shall accrue interest during such period of delay at the Interest Compensation
Rate as defined on Schedule D. Interest is to be calculated based upon an
actual/365 day basis. Any such interest accrued or paid shall not be included in
Schedule C as a jointly shared income or expense item, but rather be paid
directly to the deficient party either separately or as a separate item added to
the Schedule E settlement. The application of this calculation shall also apply
to any over payments, with interest accruing back to the deficient party.
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ARTICLE VIII
DURATION AND TERMINATION
8.1 Duration. Except as otherwise provided herein, this Agreement shall be
unlimited in duration.
8.2 Commencement of Liability. The liability of the Reinsurer on
reinsurance ceded hereunder shall commence on the later of the Effective Date
and the date the liability of the Company commences under a HMO Plan reinsured
hereunder.
8.3 Termination of Liability. Except as provided in the next sentence of
this Section 8.3, the liability of the Reinsurer with respect to any HMO Plan
shall terminate on the date the liability of the Company on such HMO Plan is
terminated. If this Agreement is terminated as provided in this Article VIII,
the Reinsurer's liability with respect to HMO Plans that remain in force shall
terminate on the day that all Direct Paid Claims incurred prior to the date of
such termination are satisfied.
8.4 Termination of Agreement. Either party shall have the right to
terminate this Agreement without cause upon the giving of one hundred eighty
(180) days advance written notice to the other party; provided, however, that,
the liability of the Reinsurer with respect to HMO Plans that remain in force
will terminate on the day that all Direct Paid Claims incurred prior to the date
of such termination are satisfied. The Contract Termination Date under this
Section 8.4 shall be the 180th day following the giving of the notice required
by this Section 8.4.
8.5 Automatic Termination. If, at the end of an Accounting Period, none of
the HMO Plans is in force, this Agreement shall automatically terminate. In the
event
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of termination pursuant to this Section 8.5, the last day of such Accounting
Period shall be the Contract Termination Date.
8.6 Termination Subsequent to a Change of Control. In the event of a Change
of Control of the Company (for purposes of this Section 8.6, the term "Company"
shall include PHS) or the Reinsurer, the party not undergoing the Change of
Control may elect to terminate this Agreement. In the event that this Agreement
is terminated as a result of a Change of Control: (i) without any further action
required of either party, the Marketing and Services Agreement shall be deemed
to be terminated as of the effective date of the Change of Control, except with
respect to the provisions regarding the administration of the HMO Plans
continued under this Section 8.6 which provisions shall be deemed to survive
such termination for the period set forth in clause (ii) of this sentence; and
(ii) the party not undergoing the Change of Control may elect to continue this
Agreement solely with respect to reinsurance of any case that was originally
written as an HMO Plan and that was in force on the Contract Termination Date,
until the tenth (10th) succeeding Renewal Date applicable to such HMO Plan, or
continuation managed care contract issued by the Company (collectively,
"Continuation Plans") following the Contract Termination Date. The Contract
Termination Date under this Section 8.6 shall be the effective date of the
Change of Control.
8.7 Termination for Cause. (a) In the event that either party shall default
in the performance of the duties and obligations imposed on it pursuant to the
terms of
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this Agreement or the Marketing and Services Agreement, or breach any of the
provisions contained herein or therein, including the failure to pay any amount
when due, or the failure of either party to maintain a level of services under
the Marketing and Services Agreement that is reasonably satisfactory to the
other party, the defaulting party shall be allowed thirty (30) calendar days
from receipt of written notice of such default or breach to present to the
non-defaulting party a plan to cure such default or breach that is reasonably
satisfactory to the non-defaulting party. If a reasonably satisfactory plan to
cure the default or breach is not submitted within that time, or if the plan is
not carried out according to its terms, the non-defaulting party shall have the
right to terminate this Agreement upon delivery of written notice of such
termination to the defaulting party, which shall be effective on receipt,
without prejudice to any other rights or remedies available to the
non-defaulting party by reason of such default or breach.
(b) In the event that either party shall engage in fraudulent, illegal or
grossly negligent conduct with respect to its duties and obligations under this
Agreement or the Marketing and Services Agreement, the other party shall have
the right to terminate this Agreement upon delivery of written notice of such
termination to the defaulting party, which shall be effective upon receipt,
without prejudice to any other rights or remedies available to the
non-defaulting party by reason of the defaulting party's conduct.
(c) The Contract Termination Date under this Section 8.7 shall be the date
of receipt of the notice of termination.
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8.8 Termination of Agreement Upon the Occurrence of Certain Events. (a)
Upon the occurrence of either of the following events:
(i) one of the parties to this Agreement fails to remain in good standing
under the laws of its state of domicile, or fails for any reason to remain
qualified to engage in the transaction contemplated by this Agreement under
applicable laws, ordinances, rules or regulations; or
(ii) a voluntary or involuntary proceeding is commenced in any state by or
against one of the parties to this Agreement for the purpose of supervising,
conserving, rehabilitating or liquidating such party; this Agreement may be
terminated at the election of the other party pursuant to a written notice.
The Contract Termination Date under this Section 8.8 will be the day of
receipt of the notice of termination. In the event that the Company shall be
subject to (i) or (ii) above, the Reinsurer shall have the exclusive right
(subject to appropriate regulatory approvals) to acquire the HMO Plans or to
require the Company to assign the HMO Plans to a designated entity authorized to
operate a health maintenance organization in the geographic areas in which the
Company operates.
8.9 Termination for Material Change in PHS Network. In the event that the
PHS Network (as that term is defined in the Marketing and Services Agreement)
undergoes a material change within the meaning of Section 6.3 of the Marketing
and Services Agreement, Company shall be allowed thirty (30) calendar days to
present to
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Reinsurer a plan to cure such Material Change that is reasonably satisfactory to
Reinsurer. If a reasonably satisfactory plan to cure the Material Change is not
submitted within that time, or if the plan is not carried out according to its
terms, Reinsurer shall have the right to terminate this Agreement upon delivery
of written notice of such termination to Company, which shall be effective upon
receipt (the date of receipt being the Contract Termination Date under this
Section 8.9), without prejudice to any other rights or remedies available to
Reinsurer.
ARTICLE IX
PAYMENTS UPON TERMINATION OF AGREEMENT
9.1 Payments on Termination. (a) In the event that this Agreement shall be
terminated pursuant to Article VIII, a net accounting and settlement as to any
balance due under this Agreement shall be undertaken by the parties to this
Agreement (the "Terminal Accounting and Settlement"), which calculations shall
be performed as of the day that is one (1) year from the date that the liability
of the Reinsurer shall have terminated (the "Terminal Accounting Date"). During
the period between the termination of this Agreement and the Terminal Accounting
Date, Direct Paid Claims that accrued prior to the termination of this Agreement
shall continue to be paid, and Reserves shall continue to be held, in accordance
with the terms set forth herein.
(b) The Company shall supply the Reinsurer with final Schedules C and D
which shall show the Terminal Accounting and Settlement. If the Terminal
Accounting and Settlement shows that the Company owes the Reinsurer, then the
Company shall pay the amount owing to the Reinsurer. If the Terminal Accounting
and Settlement
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shows that the Reinsurer owes the Company, then the Reinsurer shall pay the
amount owing the Company. Such Schedules shall be supplied by the Company within
the period agreed by the parties.
(c) Any payment required under the Terminal Accounting and Settlement by
the Company shall be paid by the Company no later than the day on which the
final Schedules C and E, as required by Section 9.l(b), are due. The Reinsurer
shall make any payment required to be made by the Reinsurer hereunder within ten
(10) calendar days of receipt of such final schedules. In the event that the
calculation for the payment required under the Terminal Accounting and
Settlement cannot be accurately calculated by such date, then an estimate shall
be paid with a supplemental accounting being made when the accurate information
shall become available.
9.2 Supplemental Accounting. In the event that, subsequent to the Terminal
Accounting and Settlement, an adjustment is made with respect to any amount
taken into account in the Terminal Accounting and Settlement, or in the event
that the Company pays a Direct Paid Claim that accrued prior to the termination
hereof, a supplemental accounting shall be made. Any net amount owed to the
Reinsurer or the Company by reason of such supplemental accounting, plus any
interest due pursuant to Section 7.6, shall be paid promptly upon the completion
of such supplemental accounting.
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ARTICLE X
CALCULATION OF PROFIT AND LOSS
10.1 Determination and Allocation of Profit or Loss. The Company shall
calculate Profit or Loss with respect to the HMO Plans, and the Reinsurer or the
Company, as appropriate, shall make settlements as required by Section 7.3 or
Section 9.1, as appropriate, according to the calculations as shown on Schedules
C and E and shall be made part of each Quarterly Accounting Report.
ARTICLE XI
CONDITION PRECEDENT
11.1 Condition Precedent. When under insurance, public health or other
applicable laws or regulations, approval of arrangements of the type
contemplated by this Agreement by one or more Federal, state or local
governmental or regulatory authorities is required, the receipt by the Company
and the Reinsurer of any and all such approvals shall be a condition precedent
to the other party's liability under this Agreement. Subject to Section 11.2, if
this condition precedent is not met by the Company or the Reinsurer by the
Effective Date, this Agreement shall be void as of the Effective Date.
11.2 Extension of Time. In the event that the necessary approvals set forth
in Section 11.1 have not been obtained by the Company or the Reinsurer as of the
Effective Date, the parties may mutually agree to modify the Effective Date of
this Agreement.
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11.3 Cooperation of the Parties. Each of the Reinsurer and the Company
shall each use its best efforts to cooperate with and assist the other parties
in obtaining the necessary approvals referred to in Section 11.1.
ARTICLE XII
INSOLVENCY OF THE COMPANY
12.1 Payments by the Reinsurer. In the event of the insolvency of the
Company, payments due the Company on all reinsurance made, ceded, renewed or
otherwise becoming effective under this Agreement shall, subject to Section
12.2, be payable by the Reinsurer directly to the Company or to its liquidator,
receiver, or statutory successor on the basis of the liability of the Company
and the Reinsurer under the HMO Plans reinsured hereunder without diminution
because of the insolvency of the Company.
12.2 Claims. In the event of the insolvency of the Company, the Reinsurer
shall be given written notice of the pendency of a claim against the insolvent
Company on a HMO Plan reinsured hereunder within a reasonable time after such
claim is filed in the insolvency proceeding. During the pendency of such claim,
the Reinsurer may investigate such claim and interpose, at its own expense, in
the proceeding where such claim is to be adjudicated, any defense or defenses
which it may deem available to the Company or its liquidator or receiver or
statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable' subject to court approval, against the insolvent Company as part of
the expense of liquidation to the extent of a proportionate share of
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the benefit which may accrue to the Company solely as a result of the defense
undertaken by the Reinsurer. Where two or more assuming reinsurers are involved
in the same claim and a majority in interest elect to interpose defenses to such
claim, the expense shall be apportioned in accordance with the terms of this
Agreement as though such expense had been incurred by the Company.
ARTICLE XIII
ARBITRATION
13.1 Appointment of Arbitrators. In the event of any disputes or
differences arising hereafter between the contracting parties with respect to
any transaction, matter or issue arising from or relating in any way to this
Agreement on which agreement between the parties hereto cannot be reached, the
same shall be decided by arbitration. Three arbitrators will decide any dispute
or difference. The arbitrators must be disinterested officers or retired
officers of health maintenance organizations or managed health care companies,
or insurance companies with experience in managed health care, other than the
parties to this Agreement or their Affiliates. Each of the Company and the
Reinsurer agrees to appoint one of the arbitrators with the third, the "Umpire,"
to be chosen by the other arbitrators. In the event that either such party
should fail to choose an arbitrator within 30 days following a written request
by the other party to do so, the requesting party may choose an Umpire before
entering upon arbitration. In the event that the two arbitrators shall not be
able to agree on the choice of the Umpire within 30 days following their
appointment, each arbitrator shall nominate five
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candidates within 10 days thereafter, four of whom the other arbitrator shall
decline, and the Umpire shall be chosen from the two remaining nominees by the
President of the American Arbitration Association.
13.2 Decision of Arbitrators: Expenses. The arbitrators shall consider
customary and standard practices in the HMO and managed health care insurance
businesses. They shall decide by a majority vote of the arbitrators. There shall
be no appeal from their written decision. Judgment may be entered on the
decision. Each party shall bear the expense of its own arbitrator and outside
attorney fees, and shall jointly and equally bear with the other party the
expenses of the third arbitrator.
13.3 Applicable Law: Survival. Any arbitration instituted pursuant to this
Article XIII shall be held in Connecticut and the laws of the State of
Connecticut and, to the extent applicable, the Federal Arbitration Act shall
apply. This Article XIII shall survive termination of this Agreement.
13.4 Other Actions. Submission of a matter to arbitration shall be a
condition precedent to any right to institute a proceeding at law or in equity
concerning such matter, except for injunctive or other provisional relief
pending the arbitration of a matter subject to arbitration pursuant to this
Agreement.
ARTICLE XIV
REPRESENTATIONS AND WARRANTIES
14.1 Representations and Warranties of the Reinsurer. The Reinsurer hereby
represents and warrants to the Company as follows:
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The Reinsurer is a mutual life insurance company organized and existing
under the laws, including the insurance laws, of the State of New York and is in
good standing under these laws. The Reinsurer further represents and warrants
that it is duly licensed and admitted as an insurer under the laws of those
jurisdictions in which the HMO Plans reinsured hereunder have been issued and is
authorized under the laws and regulations of said jurisdictions to act as a
reinsurer in those jurisdictions. In addition, the Reinsurer covenants that, so
long as this Agreement is in effect, the Reinsurer shall take all actions
reasonably necessary to remain duly licensed under the laws of those
jurisdictions wherein the HMO Plans have been issued. The Reinsurer shall notify
the Company immediately in the event that any license shall be revoked or
suspended in any jurisdiction hereunder.
The Reinsurer has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Reinsurer of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Reinsurer
of the transactions as herein contemplated and the carrying out by the Reinsurer
of its obligations contemplated hereby have been duly and validly authorized by
all necessary corporate action.
14.2 Representations and Warranties of the Company. The Company hereby
represents and warrants to the Reinsurer as follows:
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The Company is a corporation organized and existing under the laws,
including the insurance and/or public health laws, of the State of Connecticut
and is in good standing under these laws. The Company further represents and
warrants that it is duly licensed as a health maintenance organization under the
laws of those jurisdictions wherein the HMO Plans have been issued. In addition,
the Company covenants that, so long as this Agreement is in effect, the Company
shall take all reasonable actions necessary to remain duly licensed as a health
maintenance organization within the purview of this Agreement under the laws of
those jurisdictions wherein the HMO Plans have been issued. The Company shall
notify the Reinsurer immediately in the event that any license shall be revoked
or suspended in any jurisdiction hereunder.
The Company has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Company of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Company of
the transactions as herein contemplated and the carrying out by the Company of
its obligations contemplated hereby have been duly and validly authorized by all
necessary corporate action.
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ARTICLE XV
CONFIDENTIALITY
15.1 Obligations of the Parties. Each party agrees that all information
concerning the business affairs of the Company or the Reinsurer, as the case may
be, which is not generally available to the public, including but not limited
to, lists of physicians and other health care providers, lists of brokers and
other information of a proprietary nature relating to methods of doing business
heretofore or hereinafter received by it from the other parties shall be kept
and maintained as confidential and in complete secrecy. No party shall, without
the prior written consent of the other parties, disclose at any time, either
orally, or in writing, or otherwise, in any manner, directly or indirectly, to
any person or entity, except to other employees or agents of the non-disclosing
party, any such proprietary information. Any breach of confidentiality shall
give the non-breaching party the right of injunctive relief in addition to any
other remedy permitted by law.
15.2 Survival of Article XV. This Article XV shall survive termination of
this Agreement.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
16.1 Notices. All notices required pursuant to this Agreement shall be in
writing and shall become effective when received. Each written notice shall be
sent by certified or registered mail, return receipt requested, or a nationally
recognized
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overnight delivery service (providing for delivery receipt) or delivered by
hand. All notices under this Agreement shall be addressed as follows:
If to the Reinsurer:
The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
ATTENTION: Edward K. Kane, Esq.
Senior Vice President & General Counsel
If to the Company:
Physicians Health Services of Connecticut, Inc.
120 Hawley Lane
Trumbull, Connecticut 06611
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
If to PHS:
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, Connecticut 06611
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
16.2 Successors and Assigns. Except as provided in Section 3.17(b) this
Agreement cannot be assigned by the Company or the Reinsurer without the prior
written approval of the other party. The provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective permitted successors and assigns.
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16.3 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same agreement.
16.4 Currency. All payments and accounts shall be made in United States
Dollars, and all fractional amounts shall be rounded to the nearest whole
dollar.
16.5 Amendment. This Agreement shall be amended only by written agreement
signed by a duly authorized officer of each of the Company and the Reinsurer,
and any change to this Agreement shall be null and void unless made by such
amendment; provided, however, that where, under insurance, public health or
other applicable laws or regulations, the approval of any such amendment to this
Agreement by one or more Federal, state or local governmental or regulatory
authorities is required, the amendment shall not take effect unless and until
all such necessary approvals have been received by the Company. In the event
that such an approval is required, the Company and the Reinsurer shall each be
obligated to take all necessary actions in order to obtain such approval.
16.6 Entire Agreement. This Agreement and the Schedules and Exhibits
attached hereto, together with the Marketing and Services Agreement, supersede
all prior discussions and written and oral agreements between the parties with
respect to the subject matter of this Agreement, and contain the sole and entire
agreement between the parties hereto with respect to the subject matter hereof.
Headings are not part of this Agreement, and shall not affect the terms hereof.
38
<PAGE>
16.7 Binding Effect. This Agreement is binding upon and will inure to the
benefit of the parties and their respective successors and permitted assigns.
16.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Connecticut, without giving effect to
its provisions relating to conflicts of law.
16.9 Severability. In the event any section or provision of this Agreement
or related documents is found to be void and unenforceable by a court of
competent jurisdiction, the remaining sections and provisions of this Agreement
or related documents shall nevertheless be binding upon the parties with the
same force and effect as though the void or unenforceable part had not been
severed or deleted.
16.10 Waivers and Remedies. The waiver by any of the parties of any other
party's prompt and complete performance, or breach or violation, of any
provisions of this Agreement and related documents shall not operate nor be
construed as a waiver of any subsequent breach or violation, and the waiver by
any of the parties to exercise any right or remedy which it may possess
hereunder shall not operate nor be construed as a bar to the exercise of such
right or remedy by such party upon the occurrence of any subsequent breach or
violation.
16.11 Regulatory Review. The parties acknowledge and agree that this
Agreement is subject to the review and approval of the New York State Department
of Insurance. The parties expressly agree that any revisions to this Agreement
required by
39
<PAGE>
the New York State Department of Insurance will be addressed in an amendment to,
or restatement of, the Agreement.
40
<PAGE>
EXECUTION
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
PHYSICIANS HEALTH SERVICES
OF CONNECTICUT, INC.
By /s/ Regina M. Campbell
-----------------------------
Name Regina M. Campbell
Title Senior Vice President
THE GUARDIAN LIFE INSURANCE
COMPANY, OF AMERICA
By /s/ Joseph D. Sargent
-----------------------------
Name Joseph D. Sargent
Title President and CEO
41
<PAGE>
CT
SCHEDULE A
CONTRACTS AND RISKS REINSURED
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CONTRACT RISKS REINSURED
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- - HMO AND POS The Reinsurer agrees to accept 50% of the risks
Contracts under such contracts
- --------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
CT
Schedule B
Contract Allowances Administrative Service Fee
I. Guardian's Administrative Services Fee (as a percentage of premium)
<TABLE>
<CAPTION>
HMO POS
--- ---
<S> <C> <C>
Marketing 0.63% 0.63%
Sales 1.38% 1.38%
Administration 1.30% 1.30%
Billing/Collections 1.69% 1.69%
Advertising 0.15% 0.15%
Total 5.15% 5.15%
</TABLE>
II. PHS Administrative Services Fee (as a percentage of premium)
<TABLE>
<CAPTION>
HMO POS
--- ---
<S> <C> <C>
Health Services, UR 1.67% 1.67%
Net Mgt, MOD, QA 2.43% 2.43%
Operations 3.58% 3.58%
Acct Svc., Cust Srv. 1.44% 1.44%
Marketing 0.63% 0.63%
Sales 0.15% 0.15%
Administration 1.30% 1.30%
Advertising 0.15% 0.15%
Total 11.35% 11.35%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Schedule C
- --------------------------------------------------------------------------------
Year to Date Accounting
- --------------------------------------------------------------------------------
Quarter Ending:
- --------------------------------------------------------------------------------
CT
- --------------------------------------------------------------------------------
HMO
- --------------------------------------------------------------------------------
& POS
<S> <C> <C>
- --------------------------------------------------------------------------------
I. Profits/losses From Underwriting
- --------------------------------------------------------------------------------
A. Earned Premium
- --------------------------------------------------------------------------------
1 Cash Received
- --------------------------------------------------------------------------------
2 Change in D/U
- --------------------------------------------------------------------------------
3 Change in UPR
- --------------------------------------------------------------------------------
4 Change in Advance Premium
- --------------------------------------------------------------------------------
5 Gross Earned Premium (A1+A2+A3+A4)
- --------------------------------------------------------------------------------
6 CSEHRP & Other Reins. Pool Premium Ceded
- --------------------------------------------------------------------------------
7 Net Earned Premium (A5+A6)
- --------------------------------------------------------------------------------
B. Incurred Claims
- --------------------------------------------------------------------------------
1 Cash Claims (including Capitations) Paid
- --------------------------------------------------------------------------------
2 Cash Withholds +PCP Bonuses Paid
- --------------------------------------------------------------------------------
3 Cash Rein. PI.,COB, Subrog. Recov.
- --------------------------------------------------------------------------------
4 Nurses Line Expenses
- --------------------------------------------------------------------------------
5 Total Cash Claims (B1+B2+B3+B4)
- --------------------------------------------------------------------------------
6 Changes in IBNR
- --------------------------------------------------------------------------------
7 Change in Withholds + PCP Bonuses Payable
- --------------------------------------------------------------------------------
8 Changes in Rein. PL, COB, Subrog. Recov.
- --------------------------------------------------------------------------------
9 Total Change in Reserves (B6+B7+B8)
- --------------------------------------------------------------------------------
10 Total Incurred Claims (B5+B9)
- --------------------------------------------------------------------------------
C. Expenses
- --------------------------------------------------------------------------------
1 Commissions
- --------------------------------------------------------------------------------
a. Cash
- --------------------------------------------------------------------------------
b. Change in Liability
- --------------------------------------------------------------------------------
c. Total Incurred (C1a+C1b)
- --------------------------------------------------------------------------------
2 Px Taxes , Licenses & Fees (if applicable).
- --------------------------------------------------------------------------------
a. Cash
- --------------------------------------------------------------------------------
b. Change in Liability
- --------------------------------------------------------------------------------
c. Total Incurred (C2a+C2b)
- --------------------------------------------------------------------------------
3 Assessments (if applicable)
- --------------------------------------------------------------------------------
a. Cash
- --------------------------------------------------------------------------------
b. Change in Liability
- --------------------------------------------------------------------------------
c. Total Incurred (C3a+C3b)
- --------------------------------------------------------------------------------
4 Field Expenses
- --------------------------------------------------------------------------------
a. Cash
- --------------------------------------------------------------------------------
b. Change in Liability
- --------------------------------------------------------------------------------
c. Total Incurred (C4a+C4b)
- --------------------------------------------------------------------------------
5 Guardian Admin. Exp.
- --------------------------------------------------------------------------------
6 PHS Admin. Exp.
- --------------------------------------------------------------------------------
7 Total Incurred Expenses (C1c+C2c+C3c+C4c+C5+C6)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
II Profit(Loss)(A7-B10-C7)
- --------------------------------------------------------------------------------
D. Guardian Profit (50%)
- --------------------------------------------------------------------------------
E. PHS Profit (50%)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE D
INTERST RATES
The Interest Compensation Rate applicable for any given fiscal quarter is
defined as the annual rate of interest equal to the closed yield on 3-month
LIBOR as of the last trading day of the prior fiscal quarter plus 1.00%. Such
rate shall remain in effect for that entire quarter regardless of any interim
fluctuations or changes in 3-month LIBOR yields.
The above interest rate may be changed or modified as appropriate upon mutual
agreement between the Company and the Reinsurer.
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
Schedule E
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cash Flow and Funds Reconciliation
- --------------------------------------------------------------------------------
Quarter Ending:
- --------------------------------------------------------------------------------
CT
- --------------------------------------------------------------------------------
(All numbers to reflect year to date totals.) HMO
- --------------------------------------------------------------------------------
& POS
- --------------------------------------------------------------------------------
Underwriting Cash Flows
<S> <C> <C> <C>
1 Cash Premiums Received (Sched C:A1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2 Reins. Pool Premiums Ceded (Sched C:A6)
- --------------------------------------------------------------------------------
3 Cash Claims (Total) (Sched C:B4)
- --------------------------------------------------------------------------------
4 Commissions Incurred (Sched C:C1c)
- --------------------------------------------------------------------------------
5 Premium Tx, Licenses, Fees Incurred (Sched C:C2c)
- --------------------------------------------------------------------------------
6 HRA Assessment Incurred (Sched C:C3c)
- --------------------------------------------------------------------------------
7 Field Expenses (Sched C: C4c)
- --------------------------------------------------------------------------------
8 Guardian Admin. Expenses (Sched C:C5)
- --------------------------------------------------------------------------------
9 PHS Admin. Expenses (Sched C:C6)
- --------------------------------------------------------------------------------
10 Total Cash Out (2+3+4+5+6+7+8+9)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11 Net Cash Generated for Period (1-10)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Distribution of Cash Flows
- --------------------------------------------------------------------------------
12 Cash Flow to PHS (1-4-7-8-50% of 11)
- --------------------------------------------------------------------------------
13 Cash Flow to Guardian (4+7+8+50% of 11)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
14 Marketing Expenses Reimbursable from Guardian
- --------------------------------------------------------------------------------
15 Marketing Expenses Reimbursable from PHS
- --------------------------------------------------------------------------------
16 Interest on Delayed Payments Owed from Guardian
- --------------------------------------------------------------------------------
17 Interest on Delayed Payments Owed from PHS
- --------------------------------------------------------------------------------
18 Interest on Cash Reserves held Owed from Guardian
- --------------------------------------------------------------------------------
19 Interest on Cash Reserves held Owed from PHS
- --------------------------------------------------------------------------------
20 Other amounts Owed from Guardian
- --------------------------------------------------------------------------------
21 Other amounts Owed from PHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
22 Gross Amount Due to PHS (12+14-15+16-17+18-19+20-21)
- --------------------------------------------------------------------------------
23 Less Related YTD Payments Made
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
24 Net Amount Due to (from) PHS (22-23)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 10 (q)
AMENDED AND RESTATED
REINSURANCE AGREEMENT
between
PHYSICIANS HEALTH SERVICES OF NEW YORK, INC.
White Plains, New York
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
New York, New York
<PAGE>
AMENDED AND RESTATED REINSURANCE AGREEMENT
Reference is hereby made to the Reinsurance Agreement (the "Reinsurance
Agreement") made and entered into as of April 27, 1995 between THE GUARDIAN LIFE
INSURANCE COMPANY OF AMERICA, a mutual life insurance company organized under
the laws of the State of New York (the "Reinsurer") and PHYSICIANS HEALTH
SERVICES OF NEW YORK, INC., a corporation organized under the laws of the State
of New York as an health maintenance organization (the "Company"). This Amended
and Restated Reinsurance Agreement is dated as of October 1, 1996, and when
executed by the parties hereto, shall supersede and replace the Reinsurance
Agreement and shall constitute a binding and enforceable amendment to the
Reinsurance Agreement in its entirety.
THE REINSURANCE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY AS
FOLLOWS:
This Amended and Restated Reinsurance Agreement (this "Agreement") is made
and entered into as of this 1st day of October, 1996 between the Company and the
Reinsurer.
The Company and the Reinsurer mutually agree to enter into a reinsurance
agreement (the "Agreements) on the terms and conditions stated herein. This
Agreement is a reinsurance agreement solely between the Company and the
Reinsurer, and the performance of the obligations of each party under this
Agreement shall be rendered solely to the other party. In no instance, except as
set forth in
<PAGE>
Article XII, shall anyone other than the Company or the Reinsurer have any
rights under this Agreement, and the Company shall be and remain solely liable
to any insured, contractholder, physician or other provider or beneficiary under
any contract reinsured hereunder.
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (definitions are applicable to both the singular and the plural forms
of each term defined in this Article):
"Accounting Period" means the Fiscal Quarter, except that the first
Accounting Period shall be the period commencing with the Effective Date and
ending with the last day of the then current Fiscal Quarter, and the last
Accounting Period shall be the period commencing with the first day of the last
Fiscal Quarter preceding the Terminal Accounting Date and ending on the Terminal
Accounting Date.
"Administrative Expense" means an expense which will be reimbursable each
Accounting Period and is intended to compensate the Company or the Reinsurer for
a reasonable estimate of the actual cost of performing administrative services
in connection with the HMO Plans, as set forth in the Marketing and Services
Agreement, without provision for profit.
2
<PAGE>
"Affiliate" means with respect to a specified person, a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified.
"Business Day" means any day except Saturday or Sunday or any legal Federal
or New York State holiday.
"Capitation Agreement" means a health care provider contract pursuant to
which the Company agrees to pay a provider or risk entity a per subscriber fee
in lieu of all or a portion of actual claims made.
"Capitation Fees" means the per subscriber fees to health care providers
incurred under Capitation Agreements, net of amounts paid or payable to the
Company by providers under such agreements.
"Change of Control" means the acquisition, in a single transaction or in a
series of related transactions, by a person, an entity, or a group of persons or
entities acting in concert of: (i) twenty-five percent (25 %) or more (a) of the
voting common stock of the Company or PHS (excluding any acquisition of stock by
a party currently owning twenty-five percent (25 %) or more of such common
stock), or (b) fifty-one percent (51 %) or more of the value of the assets of
the Company or PHS; or (ii) twenty-five percent (25 %) or more of any ownership
interest in the Reinsurer.
"Commissions" means commissions and other incentives or bonuses applicable
to the marketing of the HMO Plans.
"Continuation Plan" has the meaning set forth in Section 8.6.
3
<PAGE>
"Contract Termination Date" means the effective date upon which the
Agreement terminates pursuant to the applicable Section in Article VIII below.
"Contractholder" means an employer in the Service Area who or which
executes an enrollment agreement with respect to any HMO Plan subject to this
Agreement.
"Direct Paid Claims" means amounts paid to health care providers for
medical claims and/or to subscribers for services covered by HMO Plans,
including withholds paid to providers, but not including Capitation Fees.
"Direct Paid Premium" means premiums received.
"Earned Premium" shall consist of the item shown on Schedule C, line
I.A.7.
"Effective Date" shall have the meaning set forth in Section 2.1.
"Fiscal Quarter" means each of the four consecutive three-month periods in
a fiscal year commencing on January I of each year and ending on December 31 of
that calendar year.
"HMO Plans" means commercial contracts for health care services provided by
Company to Contractholders in the Service Area utilizing the Company's network
of healthcare providers to provide health care services when such contracts are
marketed and sold under the tradename "The Guardian & PHS Healthcare Solutions,"
or such other tradename as the parties may mutually agree to from time to time.
HMO Plans include HMO Plans with a "point-of-service" feature.
4
<PAGE>
"Insurance Taxes" means all taxes, licenses and fees directly imposed on
the HMO Plans reinsured hereunder and shall be given the same meaning as
Insurance Taxes, Licenses and Fees, Excluding Federal Income Taxes in the
Summary of Operations Schedule in the NAIC Life, Accident and Health Convention
Blank which is taken from the Taxes, Licenses and Fees Exhibit, or similar
entries on financial statements filed by the Company. Such term shall not
include any franchise or other federal, state or local tax measured by net
income.
"Interest Compensation Rate" means the rate of interest defined in Schedule
D as applicable to delayed payments.
"LIBOR" means, at any time of determination the London Interbank Offered
Rate paid on U.S. dollar deposits for the applicable period of time as published
under "Money Rates" in the New York City edition of the Wall Street Journal or,
if there is no such publication or statement therein as to LIBOR, then in any
publication used in the New York City financial community.
"Marketing and Services Agreement" shall have the meaning set forth in
Section 3. 1.
"PHCS" shall mean Private Health Care Systems Incorporated, a corporation
with its corporate offices in Waltham, Massachusetts that develops medical
provider networks and provides utilization review services.
"PHS" shall mean Physicians Health Services, Inc., a Delaware corporation
and the parent of the Company.
"Profit or Loss" shall have the meaning set forth in Article X.
5
<PAGE>
"Quarterly Accounting Report" means the report required to be prepared in
accordance with Section 7.2 and providing the data as shown on Schedule C and F.
"Quarterly Settlement" means the net amount due and payable to any party
with respect to any Accounting Period as set forth in Section 7.3.
"Renewal Date" means, with respect to a HMO Plan, the date that is the
anniversary of the day on which the liability of the Company began under such
HMO Plan.
"Reserves" means amounts shown in the Company's annual statement as filed
with the State of New York as reserves for the HMO Plans.
"Service Area" means the Counties of Bronx, Dutchess, Kings, Nassau, New
York, Queens, Richmond, Rockland, Suffolk, Orange, Putnam and Westchester in the
State of New York.
"Small Case N.Y. Reinsurance" means reinsurance (other than Stop Loss
Reinsurance or the reinsurance under this Agreement) provided by "specified
medical condition" pools established with respect to HMO Plans relating to fifty
(50) or fewer employees, as required by New York State Insurance Department
Regulation 146 (ll NYCRR ss. 361.4) and related circular letters of the New
York State Insurance Department.
"Small Case N.Y. Reinsurance Premium" means the charge paid by the Company
for Small Case N.Y. Reinsurance provided by pools established pursuant to
Regulation 146.
6
<PAGE>
"Stop Loss Reinsurance" means reinsurance (other than Small Case N.Y.
Reinsurance and the reinsurance under this Agreement) obtained by the Company
and provided in connection with HMO Plans.
"Stop Loss Reinsurance Premium" means consideration paid by the Company for
Stop Loss Reinsurance provided.
"Stop Loss Reinsurance Recoveries Received" means amounts collected
pursuant to Stop Loss Reinsurance.
"Terminal Accounting and Settlement" means the final accounting and payment
of any amount due either party upon the termination of this Agreement, as
described in Section 9.1.
"Terminal Accounting Date" shall have the meaning set forth in
"Withholds" means amounts withheld by the Company from payments of claims
submitted by primary care physicians and specialists.
ARTICLE II
REINSURANCE COVERAGE
2.1 Coverage. Effective April 27, 1995 (the "Effective Date"), the Company
agrees to cede to the Reinsurer fifty percent (50%) of the risks under the HMO
Plans, as more specifically described in Schedule A, and the Reinsurer agrees to
indemnify the Company against fifty percent (50%) of the risks under such HMO
Plans.
7
<PAGE>
2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a
coinsurance basis. Each party agrees to establish and maintain Reserves in an
amount appropriate for the risks assumed by such party.
2.3 Conditions. The reinsurance hereunder is subject to the same
limitations and conditions as the HMO Plans, except as otherwise expressly
provided for in this Agreement.
2.4 Exclusions. The reinsurance hereunder does not apply to the following
risks: (i) any portion of the risk under any HMO Plan issued by the Company
other than the risk reinsured hereunder; (ii) any HMO Plan issued and delivered
in a jurisdiction in which issuance and delivery of such contract constituted
the doing of business where the Company was not properly licensed; and (iii)
those risks for which the Reinsurer is not liable pursuant to the provisions of
Section 3.11 hereof.
ARTICLE III
GENERAL PROVISIONS
3.1 Contract Administration. The Company and the Reinsurer each shall have
responsibility for certain aspects of the marketing and administration of the
HMO Plans, in accordance with the Amended and Restated Marketing and Services
Agreement dated as of October 1, 1996 between the Reinsurer, the Company and PHS
(the "Marketing and Services Agreements).
3.2 Non-Solicitation. (a) During the term of this Agreement, the Reinsurer
shall not contact, solicit or contract for services with any health care
provider in the Service Area under contract with the Company. In addition.
during the term of this
8
<PAGE>
Agreement, and following its termination, the Reinsurer will not provide any
party with lists of health care providers under contract with the Company or
non-public information concerning contracts between the Company (or its
Affiliates) and its health care providers under contract; provided, however,
that provider lists must be made available to the Departments of Health or
Insurance of the State of New York, to prospective Contractholders, to the
Reinsurer's insureds and as otherwise required under applicable law. This
Section 3.2 shall not apply (i) to contracting efforts by third parties,
including, but not limited to, PHCS acting on behalf of the Reinsurer, for the
purpose of developing managed care networks, provided, however, that, the names
of health care providers solicited by such third parties shall not have been
furnished by the Reinsurer, its employees or agents, or (ii) following the
Termination Date of this Agreement, as described in the provisions of Article
VIII hereof. The Reinsurer further agrees not to replace a HMO Plan with a PHCS
managed health care plan during the term of this Agreement.
(b) Neither party, nor any of its Affiliates, shall contact, solicit or
contract with any of the other party's full-time employees who have been engaged
in the activities covered by this Agreement without the consent of the other
party.
3.3 Inspection. Either party, or its designated representative, may
inspect, at the offices of the Company or the Reinsurer, as the case may be,
where such records are located, and conduct reasonable audits of, the papers and
any and all other books or documents of the Company or the Reinsurer reasonably
relating to the HMO Plans and the administrative responsibilities hereunder,
during normal business hours for such
9
<PAGE>
period as this Agreement is in effect or for as long thereafter as the Company
or the Reinsurer, as the case may be, seeks performance by the other party
pursuant to the terms of this Agreement. The information obtained shall be used
only for purposes relating to the reinsurance provided under this Agreement and
shall not be disclosed to any person without the express permission of the other
party, except to the extent that disclosure is required by law. Each party's
rights under this Section 3.3 shall survive termination of this Agreement.
3.4 Misunderstandings and Oversights. If any delay, omission, error or
failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Company and the Reinsurer will adjust the situation to what it would have been
had the misunderstanding or oversight not occurred. The party that first
discovers such oversight or incorrect act as a result of the misunderstanding
will notify the other party in writing promptly upon discovery of the
misunderstanding or oversight. The parties shall act to correct the error,
omission or oversight within twenty (20) calendar days of notification of the
problem. This Section 3.4 shall not be construed as a waiver by either party of
its right to enforce strictly the terms of this Agreement.
3.5 Reinstatements. If a HMO Plan reinsured hereunder that was terminated
or lapsed is reinstated while this Agreement is in effect, the reinsurance for
such HMO Plan shall be reinstated automatically as if such HMO Plan had not been
terminated or lapsed. All amounts received in connection with such reinstatement
shall be treated as Direct Paid Premiums.
10
<PAGE>
3.6 Contract Changes or Reserve Changes. The Company and the Reinsurer
shall share, based upon the percentages set forth in Section 2.1 and Schedule A,
in any increase or decrease in the Company's liability that results from any
change in the terms or conditions of any HMO Plan reinsured hereunder or in the
calculation of Reserves. The Company must provide written notification to the
Reinsurer within fifteen (15) calendar days after any such change, if such
change can reasonably be expected to have a significant effect on the
transactions contemplated by this Agreement.
3.7 Compliance with Applicable Laws and Regulations. It is the intention of
the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the agreement remains
in full force and the HMO Plans remain reinsured hereunder. Each of the parties
agrees to comply with all laws, ordinances, rules, regulations and orders of
regulatory bodies applicable to the transactions contemplated by this Agreement,
including those relating to the payment of commissions.
3.8 Amendment and/or Termination Upon Failure to Comply. In the event that
it is determined by an insurance or health regulatory authority, the Internal
Revenue Service or any other federal, state or local regulatory authority or by
either party to this Agreement upon the advice of an insurance or health
regulatory authority or the Internal Revenue Service that this Agreement fails
to conform to, or that the intent of this Agreement cannot be effected as a
result of, the requirements of existing applicable laws and regulations and that
this Agreement may be brought into
11
<PAGE>
conformity with said requirements. or the intent of this Agreement may be
effected. only by means of a material change to this Agreement, or in the event
that such laws or regulations are changed subsequent to the Effective Date and
such change has a material adverse effect on either party or requires a material
change to this Agreement in order for this Agreement to conform with applicable
laws and regulations or for its intent to be effected, the parties shall
exercise reasonable efforts to reach an agreement to amend this Agreement so as
to return the parties to the economic position that they would have been in had
no such change occurred or so that both parties share the economic detriment of
such change proportionately. If the parties are unable to reach an agreement to
amend the Agreement, then the differences between the parties shall be resolved
through arbitration in accordance with the provisions of Article XIII. In the
event that any required change is not material, this Agreement shall be amended
in accordance with such requirement.
3.9 Notification of Disapproval or Change in Law. The Company shall
promptly notify the Reinsurer of any actual or anticipated disapprovals or
required changes regarding this Agreement that are made by any insurance or
health regulatory authority or taxing authority and of any change in the laws,
regulations or rulings affecting this Agreement or related documents. The
Reinsurer shall be allowed to participate in the defense of this Agreement or
related documents on its own behalf with such authority after consultation with
the Company.
3.10 Setoff. It is expressly understood that any debts or credits, matured
or unmatured, liquidated or unliquidated, arising or incurred pursuant to the
terms hereof,
12
<PAGE>
including but not limited to such debts and credits arising under Articles IV, V
and VI shall, at all times and under all circumstances relevant to the rights
and liabilities of the parties to this Agreement, be deemed mutual debts or
credits, as the case may be, and shall be set off, and only the net balance
shall be allowed or paid.
3.11 Limitations on Liability. (a) The Reinsurer shall not indemnify or be
liable pursuant to this Agreement or otherwise for any of the Company's risk, to
the extent any damages result from the negligent acts or omissions to act.
reckless or intentional wrongs, fraud, oppression or bad faith of the Company.
The Reinsurer shall be liable and indemnify the Company fully for all losses
arising from the negligent acts or omissions to act, reckless or intentional
wrongs, fraud, oppression or bad faith of the Reinsurer acting in connection
with a HMO Plan reinsured hereunder.
(b) The Company does not indemnify and shall not be liable pursuant to this
Agreement or otherwise for any of the Reinsurer's risk, to the extent any
damages result from the negligent acts or omissions to act, reckless or
intentional wrongs, fraud. Oppression or bad faith of the Reinsurer. The Company
shall be liable and indemnify the Reinsurer fully for all losses arising from
the negligent acts or omissions to act, reckless or intentional wrongs, fraud,
oppression or bad faith of the Company acting in connection with a HMO Plan
reinsured hereunder.
(c) The Reinsurer shall be liable, based on the applicable percentages set
forth in Section 2.1 and Schedule A, and subject to the election permitted by
Section 6.2, for any losses arising from non-negligent acts or omissions to act
taken by the Company in good faith pursuant to HMO Plans reinsured hereunder.
13
<PAGE>
(d) The Reinsurer shall not be liable for any extracontractual liability of
the Company, or for other loss or liability arising from the action or actions
of a health care provider in connection with the provision of services under HMO
Plans.
(e) For purposes of this Agreement, any damages, claims, liabilities or
other expenses for which the Reinsurer shall be liable shall be net of the
appropriate share of any recoveries from third parties, including, without
limitation, recoveries under Stop-Loss Reinsurance Contracts.
3.12 Exclusivity. The Company and the Reinsurer shall not enter into an
arrangement with other parties similar to this Agreement for reinsurance of
Managed Care Contracts (as defined in the Marketing and Services Agreement)
offered in the Service Area, except as expressly permitted under the Marketing
and Services Agreement.
3.13 Press Releases. No public statement or press release regarding the
existence of this Agreement or the terms thereof shall be made by either party
hereto without the prior written consent of the other party, except as required
by applicable laws, ordinances, rules and regulations.
3.14 Restrictions on the Reinsurer and the Company Relating to Other
Agreements. During the period from the Effective Date through the last date on
which the provisions of this Agreement are in effect, each of the Reinsurer and
the Company shall be prohibited from, directly or indirectly, entering into any
contract, lease, sublease, license, sublicense, promissory note, evidence of
indebtedness or other contract or commitment (whether oral or written), which
will, or can reasonably be
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expected to at any time, place any material restriction or restrictions on such
party's ability to perform any or all of its obligations under this Agreement;
provided, however, that, nothing herein shall limit either party's right to
enter into a Change of Control transaction in accordance with the provisions set
forth herein.
3.15 Investigations. Each party to this Agreement shall immediately notify
the other party, in writing, of any and all investigations of such party or its
directors, principal officers or shareholders conducted by any Federal, state or
local governmental or regulatory authority other than routine examinations or
surveys by state insurance or health regulatory authorities and federal or state
tax authorities.
3.16 Change of Control. Each party shall fully disclose the details of any
pending Change of Control known to it to the other party, and shall provide the
other party with copies of any and all applications for approval therefor made
to Federal, state or local regulatory authorities. Such disclosure shall be made
prior to or concurrent with notification and/or application for approval to such
Federal, state or local regulatory authorities of a Change of Control. In the
event that such Change of Control shall be approved, the party that intends to
undergo the Change of Control shall notify the other party immediately thereof
and the other party shall have the rights set forth in Section 8.6.
3.17 Reinsurance or Sale of HMO Plans. (a) The Company agrees that, during
the period in which this Agreement is in effect, it shall not reinsure, sell or
assign the HMO Plans to another entity (other than in connection with Stop Loss
Reinsurance and Small Case N.Y. Reinsurance).
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(b) Notwithstanding paragraph (a) above, this Section 3.17 shall not
restrict the ability of the Company or PHS to (i) enter into a merger or
consolidation, (ii) effect a sale of all or a portion of its capital stock or
(iii) effect a sale of its business as an entirety or substantially as an
entirety; provided, however, that the Company or PHS may not enter into a
transaction listed in (i), (ii) or (iii) above with another entity unless such
other entity provides the Reinsurer with a writing, in form and substance
satisfactory to the Reinsurer which shall state that the entity agrees to be
bound by the terms of this Agreement to the same extent and effect as if such
entity had been a party to this Agreement.
3.18 Commission payments made with respect to any HMO Plans reinsured
hereunder shall be made according to the same commission scale used by the
Company with respect to the specific types of products listed in Schedule A, or
substantially similar products, that are not subject to this Agreement, as that
scale may be changed from time to time.
3.19 Stop-Loss Reinsurance. The Company agrees, during the period that this
Agreement is in effect. that it will maintain Stop-Loss Reinsurance with respect
to the HMO Plans in effect, with deductibles, coverages and limits of liability
that are substantially the same as those that apply under the Stop Loss
Reinsurance contract or contracts of the Company that are in effect on the
Effective Date, a copy or copies of which are attached as Exhibit 1; provided,
however, that each Stop Loss Reinsurance contract or contracts of the Company
relating to HMO Plans must provide coverage with respect to claims relating to
any periods during which the Company is obligated to
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provide services with respect to HMO Plans, without regard to (i) the failure of
the Company to remain qualified to conduct the business for which it is
organized, or (ii) the insolvency or the commencement of supervision,
conservation, rehabilitation, liquidation or similar proceedings against the
Company. In the event that any Stop Loss Reinsurance contract issued to the
Company does nor meet the requirements of this Section 3.19 at the Effective
Date, or at any time thereafter, the Company will obtain substitute Stop Loss
Reinsurance meeting such requirements from a qualified reinsurer, including the
Reinsurer.
3.20 Statement of Actuarial Opinion. Within forty-five (45) calendar days
after the end of the calendar year, the Company shall provide the Reinsurer with
a Statement of Actuarial Opinion certifying the adequacy of the reserves which
are covered under this Agreement. In addition, the Actuarial Opinion must state
whether or not the reserves covered under this Agreement meet the minimum
standards of all states where the Company is licensed, and if not the difference
between the Company's reserves and state minimums. The Actuarial Opinion shall
meet the requirements as set forth in the NAIC's Actuarial Opinion and
Memorandum Regulation. The Opinion shall be signed by the Company's "Appointed
Actuary."
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ARTICLE IV
PREMIUMS AND RESERVES
4.1 Premiums - HMO Plans. Premiums under HMO Plans received by the
Reinsurer, pursuant to the terms of the Marketing and Services Agreement, shall
be allocated to the Company and the Reinsurer in accordance with the applicable
percentages set forth in Section 2.1 and in Schedule A, and the portion of the
Premiums allocated to the Reinsurer shall constitute the consideration in
respect of the Reinsurer's acceptance of risk under this Agreement. The portion
of Direct Paid Premiums allocated to the Company shall be paid over to the
Company in accordance with the settlements required by Section 7.3 of this
Agreement.
4.2 HMO Plan Reserves. With respect to the HMO Plans reinsured hereunder,
each of the Company and the Reinsurer shall establish and maintain Reserves in
an amount appropriate for the risks assumed by such party and all applicable
regulatory requirements.
ARTICLE V
EXPENSE ALLOWANCE
5.1 Administrative Expenses. Each party shall be entitled to reimbursement
for its Administrative Expenses (not including pre-marketing expenses),
identified in Schedule B, for each Accounting Period. Such Administrative
Expenses, plus any Insurance Taxes and Commissions, paid by such party with
respect to the HMO Plans during the Accounting Period, shall be considered
reimbursable expenses.
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5.2 Payment. The Company and the Reinsurer shall be reimbursed for the
amounts shown as Company Expenses or Reinsurer Expenses, as set forth in Section
7.3 below.
ARTICLE VI
CLAIMS
6.1 Notice of Claim. Upon receipt of any claim on any HMO Plan, which claim
is reasonably anticipated to exceed fifty thousand dollars ($50,000), the
Company shall promptly notify the Reinsurer of such claim. Copies of
notification, claim papers, and proofs shall be furnished by the Company to the
Reinsurer upon request.
6.2 Determination of Claims by the Company. The Reinsurer will accept the
decision of the Company with respect to the payment of a claim under a HMO Plan;
provided, however, that the Company shall promptly advise the Reinsurer of the
Company's intention to contest a claim under a HMO Plan, and the Reinsurer shall
have the right to advise and assist the Company in its determination of
liability and in the best procedure to follow with respect to any such claim of
doubtful validity. The Company and the Reinsurer shall share, in accordance with
the applicable percentages set forth in Section 2.1 and Schedule A, all expenses
incurred in connection with contesting, compromising or settling claims under a
HMO Plan, subject to the limitations of Section 3. 11. Such expenses may
include, but are not limited to, all costs and expenses of investigation,
settlement of claims, litigation costs and judgments. If, however, the Reinsurer
has advised the Company that a contested claim
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should be paid, and elects to assume liability for its applicable percentage (as
set forth in Section 2.1 and Schedule A) of the claim as originally presented,
the Reinsurer shall not share in any additional costs or expenses associated
with such claim.
ARTICLE VII
ACCOUNTING AND REPORTING
7.1 Reinsurance Accounting. The Company shall maintain separate books or
details of account with respect to the HMO Plans reinsured hereunder, setting
forth the data required in Schedules C, E and F.
7.2 Ouarterly Accounting Reports. Following the end of each Accounting
Period, the Company shall supply the Reinsurer with a Quarterly Accounting
Report providing the data required in Schedules C and E. The Quarterly
Accounting Report shall be submitted within forty-five (45) calendar days of the
end of each calendar quarter.
7.3 Settlements. Settlement of amounts payable between the Company and the
Reinsurer shall be made in a reasonably expeditious manner once the amounts or
estimates are known or determined. All settlement payments shall be made by wire
transfer with same or next day availability unless otherwise agreed.
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(a) Weekly Settlements. The Reinsurer shall make reimbursement payments to
the Company for estimated weekly cash claims paid by the Company. Such estimates
are to be mutually determined, and appropriately adjusted from time to time, to
reasonably approximate the timing and amounts of cash claim expenditures made by
the Company and to minimize the quarterly settlement amounts with respect to
claims. Such payments are due weekly based upon a mutually agreed upon schedule.
(b) Monthly Settlements. The Reinsurer shall make reimbursement payments to
the Company monthly for any actual or estimated monthly administrative expenses.
premium taxes, licenses, fees or assessments incurred by the Company. Such
payments are due within 20 Business Days after the end of each month in which
they were incurred. Reinsurer's actual or estimated administrative or commission
expenses incurred are also deemed payable at that time. By mutual agreement,
certain expenses may be added to or deleted from this monthly reimbursement.
(c) Quarterly Settlements. Based upon the Quarterly Accounting Reports,
including Schedules C, E and F, settlement payment shall be made to the Company
or the Reinsurer, as the case may be, within 45 calendar days from the end of
such quarter. If such reports or schedules are not finalized within this time
frame, a reasonable estimated payment shall be made followed by an adjustment
payment. The Quarterly Settlement payment shall represent settlement, net of any
interim reimbursements or other related settlement payments, of all amounts due
during that
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quarter and any mutually agreed upon adjustments to prior periods. The quarterly
calculation of this payment shall be substantially in the form of Schedule E
with any positive amounts listed on Line 24 of such Schedule being payable from
the Reinsurer to the Company and any negative amounts being payable from the
Company to the Reinsurer. For the purpose of calculating interest on delayed
payments relating to this quarterly settlement payment, the parties agree that
the due date is the 15th day (unless such 15th day falls on a day other than a
Business Day, in which case the due date is the Business Day immediately
preceding such 15th day) of the middle month of the settlement quarter unless
otherwise mutually agreed.
(d) Other Settlements. Other settlement payments between the Company and
the Reinsurer such as payment adjustments, preliminary quarterly settlements,
withhold payout reimbursements or interest compensation may be made separately
or along with other settlement payments upon mutual agreement. For the purpose
of calculating interest on delayed payments relating to these payments, due
dates are to be mutually agreed upon if not otherwise specified in this
Agreement.
7.4 Reconciliation. Each party shall have the right to review all
individual components of transactions entered into each Quarterly Accounting
Report, such as Premiums received, Commissions and Insurance Taxes, claims
incurred or paid, and similar items. The parties shall have a reasonable period
from the day the Quarterly Accounting Report is submitted to report any
deficiency in such report and to request
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an adjustment of any payment made to or received by either party. Any amount due
either party in connection with such reconciliation shall be paid within
forty-five (45) calendar days of the receipt of notice that additional amounts
are due.
7.5 Best Efforts to Supply Actual Data. In preparing all reports required
in this Agreement, the Reinsurer and the Company shall make their best efforts
to supply the actual data. If the actual data cannot be supplied with the
appropriate report, the Reinsurer or the Company shall produce best estimates,
and shall provide amended reports based on actual data no more than forty-five
(45) calendar days after such report was originally due.
7.6 Interest Delayed Payments. Should any payment in connection with the
Quarterly Settlements due the Company or the Reinsurer in accordance with
Section 7.3 above be delayed beyond its due date as defined or determined, such
delayed payment shall accrue interest during such period of delay at the
Interest Compensation Rate as defined on Schedule E. Interest is to be
calculated based upon an actual/365 day basis. Any such interest accrued or paid
shall not be included in Schedule C as a jointly shared income or expense item,
but rather be paid directly to the deficient party either separately or as a
separate item added to the Schedule F settlement. The application of this
calculation shall also apply to any over payments, with interest accruing back
to the deficient party.
ARTICLE VIII
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DURATION AND TERMINATION
8.1 Duration. Except as otherwise provided herein, this Agreement shall be
unlimited in duration.
8.2 Commencement of Liability. The liability of the Reinsurer on
reinsurance ceded hereunder shall commence on the later of the Effective Date
and the date the liability of the Company commences under a HMO Plan reinsured
hereunder.
8.3 Termination of Liability. Except as provided in the next sentence of
this Section 8.3, the liability of the Reinsurer with respect to any HMO Plan
shall terminate on the date the liability of the Company on such HMO Plan is
terminated. If this Agreement is terminated as provided in this Article VIII,
the Reinsurer's liability with respect to HMO Plans that remain in force shall
terminate on the day that all Direct Paid Claims incurred prior to the date of
such termination are satisfied.
8.4 Termination of Agreement. Either party shall have the right to
terminate this Agreement without cause upon the giving of one hundred eighty
(180) days advance written notice to the other party; provided, however, that,
the liability of the Reinsurer with respect to HMO Plans that remain in force
will terminate on the day that all Direct Paid Claims incurred prior to the date
of such termination are satisfied. The Contract Termination Date under this
Section 8.4 shall be the 180th day following the giving of the notice required
by this Section 8.4.
8.5 Automatic Termination. If, at the end of an Accounting Period, none of
the HMO Plans is in force, this Agreement shall automatically terminate. In the
event
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of termination pursuant to this Section 8.5, the last day of such Accounting
Period shall be the Contract Termination Date.
8.6 Termination Subsequent to a Change of Control. In the event of a Change
of Control of the Company (for purposes of this Section 8.6, the term "Company"
shall include PHS) or the Reinsurer, the party not undergoing the Change of
Control may elect to terminate this Agreement. In the event that this Agreement
is terminated as a result of a Change of Control: (i) without any further action
required of either party, the Marketing and Services Agreement shall be deemed
to be terminated as of the effective date of the Change of Control except with
respect to the provisions regarding the administration of the HMO Plans
continued under this Section 8.6 which provisions shall be deemed to survive
such termination for the period set forth in clause (ii) of this sentence; and
(ii) the party not undergoing the Change of Control may elect to continue the
reinsurance arrangements provided in this Agreement solely with respect to the
reinsurance of any case that was originally written as an HMO Plan and that was
in force on the Contract Termination Date, until the tenth (lOth) Renewal Date
applicable to such HMO Plan, or continuation managed care contract issued by the
Company (collectively, "Continuation Plans,") following the Contract Termination
Date. The Contract Termination Date under this Section 8.6 shall be the
effective date of the Change of Control.
8.7 Termination for Cause. (a) In the event that either party shall default
in the performance of the duties and obligations imposed on it pursuant to the
terms of
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this Agreement or the Marketing and Services Agreement, or breach any of the
provisions contained herein or therein, including the failure to pay any amount
when due, or the failure of either party to maintain a level of services under
the Marketing and Services Agreement that is reasonably satisfactory to the
other party, the defaulting party shall be allowed thirty (30) calendar days
from receipt of written notice of such default or breach to present to the
non-defaulting party a plan to cure such default or breach that is reasonably
satisfactory to the non-defaulting party. If a reasonably satisfactory plan to
cure the default or breach is not submitted within that time, or if the plan is
not carried out according to its terms, the non-defaulting party shall have the
right to terminate this Agreement upon delivery of written notice of such
termination to the defaulting party, which shall be effective on receipt,
without prejudice to any other rights or remedies available to the
non-defaulting party by reason of such default or breach.
(b) In the event that either party shall engage in fraudulent, illegal or
grossly negligent conduct with respect to its duties and obligations under this
Agreement or the Marketing and Services Agreement, the other party shall have
the right to terminate this Agreement upon delivery of written notice of such
termination to the defaulting party, which shall be effective upon receipt,
without prejudice to any other rights or remedies available to the
non-defaulting party by reason of the defaulting party's conduct.
(c) The Contract Termination Date under this Section 8.7 shall be the date
of receipt of the notice of termination.
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8.8 Termination of Agreement Upon the Occurrence of Certain Events. (a)
Upon the occurrence of either of the following events:
(i) one of the parties to this Agreement fails to remain in good standing
under the laws of its state of domicile, or fails for any reason to remain
qualified to engage in the transaction contemplated by this Agreement under
applicable laws, ordinances, rules or regulations; or
(ii) a voluntary or involuntary proceeding is commenced in any state by or
against one of the parties to this Agreement for the purpose of supervising,
conserving, rehabilitating or liquidating such party; this Agreement may be
terminated at the election of the other party pursuant to a written notice.
The Contract Termination Date under this Section 8.8 will be the day of
receipt of the notice of termination. In the event that the Company shall be
subject to (i) or (ii) above, the Reinsurer shall have the exclusive right
(subject to appropriate regulatory approvals) to acquire the HMO Plans or to
require the Company to assign the HMO Plans to a designated entity authorized to
operate a health maintenance organization in the geographic areas in which the
Company operates.
8.9 Termination for Material Change in PHS Network. In the event that the
PHS Network (as that term is defined in the Marketing and Services Agreement)
undergoes a material change within the meaning of Section 6.3 of the Marketing
and Services Agreement, Company shall be allowed thirty (30) calendar days to
present to
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Reinsurer a plan to cure such Material Change that is reasonably satisfactory to
Reinsurer. If a reasonably satisfactory plan to cure the Material Change is not
submitted within that time, or if the plan is not carried out according to its
terms, Reinsurer shall have the right to terminate this Agreement upon delivery
of written notice of such termination to Company, which shall be effective upon
receipt (the date of receipt being the Contract Termination Date under this
Section 8.9), without prejudice to any other rights or remedies available to
Reinsurer.
ARTICLE IX
PAYMENTS UPON TERMINATION OF AGREEMENT
9.1 Payments on Termination. (a) In the event that this Agreement shall be
terminated pursuant to Article VIII, a net accounting and settlement as to any
balance due under this Agreement shall be undertaken by the parties to this
Agreement (the "Terminal Accounting and Settlements"), which calculations shall
be performed as of the day that is one (1) year from the date that the liability
of the Reinsurer shall have terminated (the "Terminal Accounting Date"). During
the period between the termination of this Agreement and the Terminal Accounting
Date, Direct Paid Claims that accrued prior to the termination of this Agreement
shall continue to be paid, and Reserves shall continue to be held, in accordance
with the terms set forth herein.
(b) The Company shall supply the Reinsurer with final Schedules C and D
which shall show the Terminal Accounting and Settlement. If the Terminal
Accounting and Settlement shows that the Company owes the Reinsurer, then the
Company shall pay the amount owing to the Reinsurer. If the Terminal Accounting
and Settlement
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shows that the Reinsurer owes the Company, then the Reinsurer shall pay the
amount owing the Company. Such Schedules shall be supplied by the Company within
the period agreed by the parties.
(c) Any payment required under the Terminal Accounting and Settlement by
the Company shall be paid by the Company no later than the day on which the
final Schedules C, E and F, as required by Section 9.1(b), are due. The
Reinsurer shall make any payment required to be made by the Reinsurer hereunder
within ten (10) calendar days of receipt of such final schedules. In the event
that the calculation for the payment required under the Terminal Accounting and
Settlement cannot be accurately calculated by such date, then an estimate shall
be paid, with a supplemental accounting being made when the accurate information
shall become available.
9.2 Supplemental Accounting. In the event that, subsequent to the Terminal
Accounting and Settlement, an adjustment is made with respect to any amount
taken into account in the Terminal Accounting and Settlement, or in the event
that the Company pays a Direct Paid Claim that accrued prior to the termination
hereof, a supplemental accounting shall be made. Any net amount owed to the
Reinsurer or the Company by reason of such supplemental accounting, plus any
interest due pursuant to Section 7.6, shall be paid promptly upon the completion
of such supplemental accounting.
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ARTICLE X
CALCULATION OF PROFIT AND LOSS
10.1 Determination and Allocation of Profit or Loss. The Company shall
calculate Profit or Loss with respect to the HMO Plans, and the Reinsurer or the
Company, as appropriate, shall make settlements as required by Section 7.3 or
Section 9.1, as appropriate, according to the calculations as shown on Schedules
C and F and shall be made part of each Quarterly Accounting Report.
ARTICLE XI
CONDITION PRECEDENT
11.1 Condition Precedent. When, under insurance, public health or other
applicable laws or regulations, approval of arrangements of the type
contemplated by this Agreement by one or more Federal, state or local
governmental or regulatory authorities is required, the receipt by the Company
and the Reinsurer of any and all such approvals shall be a condition precedent
to the other party's liability under this Agreement. Subject to Section 11.2, if
this condition precedent is not met by the Company or the Reinsurer by the
Effective Date, this Agreement shall be void as of the Effective Date.
11.2 Extension of Time. In the event that the necessary approvals set forth
in Section 11.1 have not been obtained by the Company or the Reinsurer as of the
Effective Date, the parties may mutually agree to modify the Effective Date of
this Agreement.
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11.3 Cooperation of the Parties. The Reinsurer and the Company shall each
use its best efforts to cooperate with and assist the other party in obtaining
the necessary approvals referred to in Section 11.1
ARTICLE XII
INSOLVENCY OF THE COMPANY
12.1 Payments by the Reinsurer. In the event of the insolvency of the
Company, payments due the Company on all reinsurance made, ceded, renewed or
otherwise becoming effective under this Agreement shall, subject to Section
12.2, be payable by the Reinsurer directly to the Company or to its liquidator,
receiver, or statutory successor on the basis of the liability of the Company
and the Reinsurer under the HMO Plans reinsured hereunder without diminution
because of the insolvency of the Company.
12.2 Claims. In the event of the insolvency of the Company, the Reinsurer
shall be given written notice of the pendency of a claim against the insolvent
Company on a HMO Plan reinsured hereunder within a reasonable time after such
claim is filed in the insolvency proceeding. During the pendency of such claim,
the Reinsurer may investigate such claim and interpose, at its own expense, in
the proceeding where such claim is to be adjudicated, any defense or defenses
which it may deem available to the Company or its liquidator or receiver or
statutory successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to court approval, against the insolvent Company as part of
the expense of liquidation to the extent of a proportionate share of
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the benefit which may accrue to the Company solely as a result of the defense
undertaken by the Reinsurer. Where two or more assuming reinsurers are involved
in the same claim and a majority in interest elect to interpose defenses to such
claim, the expense shall be apportioned in accordance with the terms of this
Agreement as though such expense had been incurred by the Company.
ARTICLE XIII
ARBITRATION
13.1 Appointment of Arbitrators. In the event of any disputes or
differences arising hereafter between the contracting parties with respect to
any transaction, matter or issue arising from or relating in any way to this
Agreement on which agreement between the parties hereto cannot be reached, the
same shall be decided by arbitration. Three arbitrators will decide any dispute
or difference. The arbitrators must be disinterested officers or retired
officers of health maintenance organizations or managed health care companies,
or insurance companies with experience in managed health care, other than the
parties to this Agreement or their Affiliates. Each of the Company and the
Reinsurer agrees to appoint one of the arbitrators with the third, the "Umpire,"
to be chosen by the other arbitrators. In the event that either such party
should fail to choose an arbitrator within 30 days following a written request
by the other party to do so, the requesting party may choose an Umpire before
entering upon arbitration. In the event that the two arbitrators shall not be
able to agree on the choice of the Umpire within 30 days following their
appointment, each arbitrator shall nominate five
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candidates within 10 days thereafter. four of whom the other arbitrator shall
decline. and the Umpire shall be chosen from the two remaining nominees by the
President of the American Arbitration Association.
13.2 Decision of Arbitrators: Expenses. The arbitrators shall consider
customary and standard practices in the HMO and managed health care insurance
businesses. They shall decide by a majority vote of the arbitrators. There shall
be no appeal from their written decision. Judgment may be entered on the
decision of the arbitrators by any court having jurisdiction. Each party shall
bear the expense of its own arbitrator and outside attorney fees, and shall
jointly and equally bear with the other party the expenses of the third
arbitrator.
13.3 Applicable Law: Survival. Any arbitration instituted pursuant to this
Article XIII shall be held in New York, New York and the laws of the State of
New York and, to the extent applicable, the Federal Arbitration Act shall apply.
This Article XIII shall survive termination of this Agreement.
13.4 Other Actions. Submission of a matter to arbitration shall be a
condition precedent to any right to institute a proceeding at law or in equity
concerning such matter, except for injunctive or other provisional relief
pending the arbitration of a matter subject to arbitration pursuant to this
Agreement.
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ARTICLE XIV
REPRESENTATIONS AND WARRANTIES
14.1 Representations and Warranties of the Reinsurer. The Reinsurer hereby
represents and warrants to the Company as follows:
The Reinsurer is a mutual life insurance company organized and existing
under the laws, including the insurance laws, of the State of New York and is in
good standing under these laws. The Reinsurer further represents and warrants
that it is duly licensed and admitted as an insurer under the laws of those
jurisdictions in which the HMO Plans reinsured hereunder have been issued and is
authorized under the laws and regulations of said jurisdictions to act as a
reinsurer in those jurisdictions. In addition, the Reinsurer covenants that, so
long as this Agreement is in effect, the Reinsurer shall take all actions
reasonably necessary to remain duly licensed under the laws of those
jurisdictions wherein the HMO Plans have been issued. The Reinsurer shall notify
the Company immediately in the event that any license shall be revoked or
suspended in any jurisdiction hereunder.
The Reinsurer has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Reinsurer of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Reinsurer
of the transactions as herein contemplated and the carrying out by the Reinsurer
of its
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obligations contemplated hereby have been duly and validly authorized by all
necessary corporate action.
14.2 Representations and Warranties of the Company. The Company hereby
represents and warrants to the Reinsurer as follows:
The Company is a corporation organized and existing under the laws,
including the insurance and/or public health laws, of the State of New York and
is in good standing under these laws. The Company further represents and
warrants that it is duly licensed as a health maintenance organization under the
laws of those jurisdictions wherein the HMO Plans have been issued. In addition,
the Company covenants that, so long as this Agreement is in effect, the Company
shall take all reasonable actions necessary to remain duly licensed as a health
maintenance organization within the purview of this Agreement under the laws of
those jurisdictions wherein the HMO Plans have been issued. The Company shall
notify the Reinsurer immediately in the event that any license shall be revoked
or suspended in any jurisdiction hereunder.
The Company has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Company of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Company of
the transactions as herein contemplated and the carrying out by the Company of
its obligations contemplated hereby have been duly and validly authorized by all
necessary corporate action.
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ARTICLE XV
CONFIDENTIALITY
15.1 Obligations of the Parties. Each party agrees that all information
concerning the business affairs of the Company or the Reinsurer, as the case may
be, which is not generally available to the public, including but not limited
to, lists of physicians and other health care providers, lists of brokers and
other information of a proprietary nature relating to methods of doing business
heretofore or hereinafter received by it from the other party shall be kept and
maintained as confidential and in complete secrecy. Neither party shall, without
the prior written consent of the other party, disclose at any time, either
orally, or in writing, or otherwise, in any manner, directly or indirectly, to
any person or entity, except to other employees or agents of the non-disclosing
party, any such proprietary information. Any breach of confidentiality shall
give the non-breaching party the right of injunctive relief in addition to any
other remedy permitted by law.
15.2 Survival of Article XV. This Article XV shall survive termination of
this Agreement.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
16.1 Notices. All notices required pursuant to this Agreement shall be in
writing and shall become effective when received. Each written notice shall be
sent by certified or registered mail, return receipt requested, or a nationally
recognized
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overnight delivery service (providing for delivery receipt) or delivered by
hand. All notices under this Agreement shall be addressed as follows:
If to the Reinsurer:
The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
ATTENTION: Edward K. Kane, Esq.
Senior Vice President & General Counsel
If to the Company:
Physicians Health Services of New York, Inc.
Crosswest Office Center, Suite 212
399 Knollwood Road
White Plains, New York 10603
ATTENTION: Executive Director
If to PHS:
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, Connecticut O6611
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
16.2 Successors and Assigns. Except as provided in Section 3.17(b) this
Agreement cannot be assigned by the Company or the Reinsurer without the prior
written approval of the other party. The provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective permitted successors and assigns.
37
<PAGE>
16.3 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same agreement.
16.4 Currency. All payments and accounts shall be made in United States
Dollars, and all fractional amounts shall be rounded to the nearest whole
dollar.
16.5 Amendment. This Agreement shall be amended only by written agreement
signed by a duly authorized officer of each of the Company and the Reinsurer,
and any change to this Agreement shall be null and void unless made by such
amendment; provided, however, that where, under insurance, public health or
other applicable laws or regulations, the approval of any such amendment to this
Agreement by one or more Federal, state or local governmental or regulatory
authorities is required, the amendment shall not take effect unless and until
all such necessary approvals have been received by the Company. In the event
that such an approval is required, the Company and the Reinsurer shall each be
obligated to take all necessary actions in order to obtain such approval.
16.6 Entire Agreement. This Agreement and the Schedules and Exhibits
attached hereto, together with the Marketing and Services Agreement, supersede
all prior discussions and written and oral agreements between the parties with
respect to the subject matter of this Agreement, and contain the sole and entire
agreement between the parties hereto with respect to the subject matter hereof.
Headings are not part of this Agreement, and shall not affect the terms hereof.
38
<PAGE>
16.7 Binding Effect. This Agreement is binding upon and will inure to the
benefit of the parties and their respective successors and permitted assigns.
16.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to its
provisions relating to conflicts of law.
16.9 Severability. In the event any section or provision of this Agreement
or related documents is found to be void and unenforceable by a court of
competent jurisdiction, the remaining sections and provisions of this Agreement
or related documents shall nevertheless be binding upon the parties with the
same force and effect as though the void or unenforceable part had not been
severed or deleted.
16.10 Waivers and Remedies. The waiver by any of the parties of any other
party's prompt and complete performance, or breach or violation, of any
provisions of this Agreement and related documents shall not operate nor be
construed as a waiver of any subsequent breach or violation, and the waiver by
any of the parties to exercise any right or remedy which it may possess
hereunder shall not operate nor be construed as a bar to the exercise of such
right or remedy by such party upon the occurrence of any subsequent breach or
violation.
16.11 Regulatory Review. The parties acknowledge and agree that this
Agreement is subject to the review and approval of the New York State Department
of Insurance. The parties expressly agree that any revisions to this Agreement
requested
39
<PAGE>
by the New York State Department of Insurance will be addressed in an amendment
to, or restatement of, the Agreement.
40
<PAGE>
EXECUTION
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
PHYSICIANS HEALTH SERVICES
OF NEW YORK, INC.
By /s/ Regina M. Campbell
--------------------------------
Name REGINA M. CAMBELL
Title Senior Vice President
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
By /s/ Joseph D. Sargent
--------------------------------
Name Joseph D. Sargent
Title President and CEO
41
<PAGE>
NY (IN)
SCHEDULE A
CONTRACTS AND RlSKS REINSURED
- --------------------------------------------------------------------------------
CONTRACT RISKS REINSURED
- --------------------------------------------------------------------------------
- HMO Contracts and In-Network Portion - The Reinsurer agrees to accept 50%
of POS Contracts of the risks under such Contracts"
- --------------------------------------------------------------------------------
A-1
<PAGE>
NY (IN)
Schedule B
Contract Allowances, Administrative Service Fee
I. Guardian's Administrative Services Fee
<TABLE>
<CAPTION>
HMO POS(in)
--- --------
<S> <C> <C>
Marketing 0.63% 0.63%
Sales 1.38% 1.38%
Administration 1.30% 1 30%
Billing/Collections 1.69% 1.69%
Advertising 0.15% 0.15%
Total 5.15% 5.15%
</TABLE>
II. PHS Administrative Services Fee (as a percentage of premium)
<TABLE>
<CAPTION>
HMO POS(in)
--- -------
<S> <C> <C>
Health Services, UR 1.67% 1.67%
Net Mgt, MDD, QA 2.43% 2.43%
Operations 3.58% 3.58%
Acct Svc., Cust Srv. 1.44% 1.44%
Marketing 0.63% 0.83%
Sales 0.15% 0.15%
Administration 1.30% 1.30%
Advertising 0.15% 0.15%
Total 11.35% 11.35%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Schedule C
- --------------------------------------------------------------------------------
Year To Date Accounting
- --------------------------------------------------------------------------------
Quarter Ending:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HMO
- --------------------------------------------------------------------------------
& POS-IN
- --------------------------------------------------------------------------------
<C> <S> <C>
I. Profits/Losses From Underwriting
- --------------------------------------------------------------------------------
A. Earned Premium
- --------------------------------------------------------------------------------
1 Cash Received
- --------------------------------------------------------------------------------
2 Change in D/U
- --------------------------------------------------------------------------------
3 Change in UPR
- --------------------------------------------------------------------------------
4 Change in Advance Premium
- --------------------------------------------------------------------------------
5 Gross Earned Premium (A1+A2+A3+A4)
- --------------------------------------------------------------------------------
6 CSEHRP & Other Reins. Pool Premium Ceded
- --------------------------------------------------------------------------------
7 Net Earned Premium (A5+A6)
- --------------------------------------------------------------------------------
B. Incurred Claims
- --------------------------------------------------------------------------------
1 Cash Claims (Included Capitations) Paid
- --------------------------------------------------------------------------------
2 Cash Withholds + PCP Bonuses Paid
- --------------------------------------------------------------------------------
3 Cash Rein. PI., COB, Subrog. Recov.
- --------------------------------------------------------------------------------
4 Nurses Line Expenses
- --------------------------------------------------------------------------------
5 Total Cash Claims (B1+B2+B3+B4)
- --------------------------------------------------------------------------------
6 Change in IBNR
- --------------------------------------------------------------------------------
7 Change In Withholds + PCP Bonuses Payable
- --------------------------------------------------------------------------------
8 Change in Rein. Pl., Subrog. Recov.
- --------------------------------------------------------------------------------
9 Total Change in Reserves (B6+B7+B8)
- --------------------------------------------------------------------------------
10 Total Incurred Claims (B5+B9)
- --------------------------------------------------------------------------------
C. Expenses
- --------------------------------------------------------------------------------
1 Commissions
- --------------------------------------------------------------------------------
a. Cash
- --------------------------------------------------------------------------------
b. Change in Liability
- --------------------------------------------------------------------------------
c. Total Incurred (C1a+C1b)
- --------------------------------------------------------------------------------
2 Px Taxes, Licenses & Fees (if applicable)
- --------------------------------------------------------------------------------
a. Cash
- --------------------------------------------------------------------------------
b. Change in Liability
- --------------------------------------------------------------------------------
c. Total Incurred (C2a+C2b)
- --------------------------------------------------------------------------------
3 Assessments (if applicable)
- --------------------------------------------------------------------------------
a. Cash
- --------------------------------------------------------------------------------
b. Change in Liability
- --------------------------------------------------------------------------------
c. Total Incurred (C3a+C3b)
- --------------------------------------------------------------------------------
4 Field Expenses
- --------------------------------------------------------------------------------
a. Cash
- --------------------------------------------------------------------------------
b. Change in Liability
- --------------------------------------------------------------------------------
c. Total Incurred (C4a+C4b)
- --------------------------------------------------------------------------------
5 Guardian Admin. Exp.
- --------------------------------------------------------------------------------
6 PHS Admin. Exp.
- --------------------------------------------------------------------------------
7 Total Incurred Expenses (C1c+C2c+C3c+C4c+C5+C6)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
II. Profit/(Loss) (A7-B10-C7)
- --------------------------------------------------------------------------------
D. Guardian Profit (50%)
- --------------------------------------------------------------------------------
E. PHS Profit (50%)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE D
INTEREST RATES
The Interest Compensation Rate applicable for any given fiscal quaver is defined
as the annual rate of interest equal to the closing yield on 3-month LIBOR as of
the last trading day of the prior fiscal quarter plus 1.00%. Such rate shall
remain in effect for that entire quarter regardless of any interim fluctuations
or changes in 3-month LIBOR yields.
The above interest rate may be changed or modified as appropriate upon mutual
agreement between the Company and the Reinsurer.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Schedule E
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cash Flow and Funds Reconciliation
- --------------------------------------------------------------------------------
Quarter Ending:
- --------------------------------------------------------------------------------
NY
- --------------------------------------------------------------------------------
(All numbers to reflect year to date totals.) HMO
- --------------------------------------------------------------------------------
& POS-IN
- --------------------------------------------------------------------------------
<S> <C> <C>
Underwriting Cash Flows
- --------------------------------------------------------------------------------
1 Cash Premiums Received (Sched C: A1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2 Reins. Pool Premiums Ceded (Sched C: A6)
- --------------------------------------------------------------------------------
3 Cash Claims (Total) (Sched C: B4)
- --------------------------------------------------------------------------------
4 Commissions Incurred (Sched C: C1c)
- --------------------------------------------------------------------------------
5 Premium Tx, Licenses, Fees Incurred (Sched C: C2c)
- --------------------------------------------------------------------------------
6 HRA Assessment Incurred (Sched C: C3c)
- --------------------------------------------------------------------------------
7 Field Expenses (Sched C: C4c)
- --------------------------------------------------------------------------------
8 Guardian Admin. Expenses (Sched C: C5)
- --------------------------------------------------------------------------------
9 PHS Admin. Expenses (Sched C: C6)
- --------------------------------------------------------------------------------
10 Total Cash Out (2+3+4-5+6+7+8-9)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11 Net Cash Generated for Period (1-10)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Distribution of Cash Flows
- --------------------------------------------------------------------------------
12 Cash Flow to PHS (1-4-7-8-50% of 11)
- --------------------------------------------------------------------------------
13 Cash Flow to Guardian (4+7+8+50% of 11)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
14 Marketing Expenses Reimbursable from Guardian
- --------------------------------------------------------------------------------
15 Marketing Expenses Reimbursable from PHS
- --------------------------------------------------------------------------------
16 Interest on Delayed Payments Owed from Guardian
- --------------------------------------------------------------------------------
17 Interest on Delayed Payments Owed from PHS
- --------------------------------------------------------------------------------
18 Interest on Cash Reserves held Owed from Guardian
- --------------------------------------------------------------------------------
19 Interest on Cash Reserves held Owed from PHS
- --------------------------------------------------------------------------------
20 Other Amounts Owed from Guardian
- --------------------------------------------------------------------------------
21 Other amounts Owed from PHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
22 Gross Amount Due to PHS (12+14+15+16-17+18-19+20-21)
- --------------------------------------------------------------------------------
23 Less Related YDT Payments Made
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
24 Net Amount Due to (from) PHS (22-23)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 10(r)
AMENDED AND RESTATED
REINSURANCE AGREEMENT
among
PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC.
Paramus, New Jersey,
PHYSICIANS HEALTH SERVICES (BERMUDA) LTD.
Hamilton, Bermuda
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
New York, New York
<PAGE>
AMENDED AND RESTATED REINSURANCE AGREEMENT
------------------------------------------
Reference is hereby made to the Reinsurance Agreement (the "Reinsurance
Agreement") made and entered into as of May 1, 1996 by and among PHYSICIANS
HEALTH SERVICES OF NEW JERSEY, INC., a corporation organized under the laws of
the State of New Jersey as a health maintenance organization (the "Company"),
PHYSICIANS HEALTH SERVICES (BERMUDA) LTD., a stock insurance company organized
under the laws of Bermuda ("PHS (Bermuda)") and THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA, a mutual life insurance company organized under the laws of
the State of New York (the "Reinsurer"). This Amended and Restated Reinsurance
Agreement is dated as of October 1, 1996, and when executed by the parties
hereto, shall supersede and replace the Reinsurance Agreement and shall
constitute a binding and enforceable amendment to the Reinsurance Agreement in
its entirety.
THE REINSURANCE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY AS
FOLLOWS:
This Amended and Restated Reinsurance Agreement (this "Agreement") is made
and entered into as of this 1st day of October, 1996 between the Company, PHS
(BERMUDA) and the Reinsurer.
The Company, PHS (Bermuda) and the Reinsurer mutually agree to enter
into the Agreement on the terms and conditions stated herein. This Agreement is
a reinsurance agreement solely between the Company, PHS (Bermuda) and the
Reinsurer, and the performance of the obligations of each party under this
Agreement
<PAGE>
shall be rendered solely to the other parties. In no instance, except as set
forth in Article XII, shall anyone other than the Company, PHS (Bermuda) or the
Reinsurer have any rights under this Agreement, and the Company shall be and
remain solely liable to any insured, contractholder, physician or other provider
or beneficiary under any contract reinsured hereunder.
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement, the following terms shall have the
following meanings (definitions are applicable to both the singular and
the plural forms of each term defined in this Article):
"Accounting Period" means the Fiscal Quarter, except that the
-----------------
first Accounting Period shall be the period commencing with the Effective
Date and ending with the last day of the then current Fiscal Quarter, and
the last Accounting Period shall be the period commencing with the first
day of the last Fiscal Quarter preceding the Terminal Accounting Date and
ending on the Terminal Accounting Date.
"Administrative Expense" means an expense which will be
----------------------
reimbursable each Accounting Period and is intended to compensate the
Company or the Reinsurer for a reasonable estimate of the actual cost of
performing administrative services in connection with the HMO and POS
Plans, as set forth in the Marketing and Administrative Services
Agreement, without provision for profit.
2
<PAGE>
"Affiliate" means with respect to a specified person, a person
---------
that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, the
person specified.
"Business Day" means any day except Saturday or Sunday or any
------------
legal Federal or New Jersey holiday.
"Capitation Agreement" means a health care provider contract
--------------------
pursuant to which the Company agrees to pay a provider or risk entity a
per subscriber fee in lieu of all or a portion of actual claims made.
"Capitation Fees" means the per subscriber fees to health care
---------------
providers incurred under Capitation Agreements, net of amounts paid or
payable to the Company by providers under such agreements.
"Change of Control" means the acquisition, in a single
-----------------
transaction or in a series of related transactions, by a person, an
entity, or a group of persons or entities acting in concert of: (i)
twenty-five percent (25%) or more (a) of the voting common stock of the
Company, PHS or PHS (Bermuda) (excluding any acquisition of stock by a
party currently owning twenty-five percent (25%) or more of such common
stock), or (b) fifty-one percent (51%) or more of the of the aggregate
value of the assets of the Company, PHS or PHS (Bermuda); or (ii)
twenty-five percent (25%) or more of any ownership interest in the
Reinsurer.
"Commissions" means commissions and other incentives or
-----------
bonuses applicable to the marketing of the HMO and POS Plans.
"Continuation Plan" has the meaning set forth in Section 8.6.
-----------------
3
<PAGE>
"Contract Termination Date" means the effective date upon which the
-------------------------
Agreement terminates pursuant to the applicable Section in Article VIII below.
"Contractholder" means an employer in the Service Area who or which
--------------
executes an enrollment agreement with respect to any Plan subject to this
Agreement.
"Direct Paid Claims" means amounts paid to health care providers for
------------------
medical claims and/or to subscribers for services covered by HMO and POS Plans,
including withholds paid to providers, but not including Capitation Fees.
"Direct Paid Premium" means premiums received.
-------------------
"Earned Premium" shall consist of the item shown on Schedule C, line
--------------
I.A.7.
"Effective Date" shall have the meaning set forth in Section 2.1.
--------------
"Fiscal Quarter" means each of the four consecutive three-month
--------------
periods in a fiscal year commencing on January 1 of each year and ending on
December 31 of that calendar year.
"HMO Plans" means commercial contracts for health care services, other
---------
than POS Plans, provided by Company to Contractholders in the Service Area
utilizing Company's network of healthcare providers to provide health care
services when such contracts are marketed and sold under the tradename "The
Guardian & PHS Healthcare Solutions," or such other tradename as the parties may
mutually agree to from time to time.
4
<PAGE>
"Insurance Taxes" means all taxes, licenses and fees directly imposed
---------------
on the HMO and POS Plans reinsured hereunder and shall be given the same meaning
as Insurance Taxes, Licenses and Fees, Excluding Federal Income Taxes in the
Summary of Operations Schedule in the NAIC Life, Accident and Health Convention
Blank which is taken from the Taxes, Licenses and Fees Exhibit, or similar
entries on financial statements filed by the Company. Such term shall not
include any franchise or other federal, state or local tax measured by net
income.
"Interest Compensation Rate" means the rate of interest defined in
--------------------------
Schedule D as applicable to delayed payments.
"Investment Rate" means the rate of interest defined in Schedule D as
---------------
applicable to cash reserve balances held by the Company, the Reinsurer or PHS
(Bermuda) for the benefit of any other party.
"LIBOR" means, at any time of determination, the London Interbank
-----
Offered Rate paid on U.S. dollar deposits for the applicable period of time as
published under "Money Rates" in the New York City edition of the Wall Street
Journal or, if there is no such publication or statement therein as to LIBOR,
then in any publication used in the New York City financial community.
"Marketing and Services Agreement" shall have the meaning set forth in
--------------------------------
Section 3.1.
"PHCS" shall mean Private Health Care Systems Incorporated, a
----
corporation with its corporate offices in Waltham, Massachusetts that develops
medical provider networks and provides utilization review services.
5
<PAGE>
"PHS" shall mean Physicians Health Services, Inc., a Delaware
---
corporation and the parent of the Company.
"POS Plans" means commercial contracts for health care services, other
---------
than HMO Plans, provided by Company to Contractholders in the Service Area
utilizing Company's network of healthcare providers to provide health care
services when such contracts are marketed and sold under the tradename "The
Guardian & PHS Healthcare Solutions," or such other tradename as the parties may
mutually agree to from time to time. POS Plans include: (i) an in-network
benefit ("In-Network") under which enrollees are required to utilize health care
providers who are part of the PHS Network (as defined in the Marketing and
Services Agreement); and (ii) an "out-of-network" benefit ("Out-of-Network")
under which enrollees may choose to utilize health care providers who are not
part of the PHS Network.
"Profit or Loss" shall have the meaning set forth in Article X.
--------------
"Quarterly Accounting Report" means the report required to be prepared
---------------------------
in accordance with Section 7.2 and providing the data as shown on Schedules C
and F.
"Quarterly Settlement" means the net amount due and payable to any
--------------------
party with respect to any Accounting Period as set forth in Section 7.3.
"Renewal Date" means, with respect to a HMO or POS Plan, the date that
------------
is the anniversary of the day on which the liability of the Company began under
such HMO or POS Plan.
"Reserves" means amounts shown in the Company's annual statement as
--------
filed with the State of New Jersey as reserves for the HMO and POS
Plans.
6
<PAGE>
"Service Area" means the State of New Jersey.
------------
"Stop Loss Reinsurance" means reinsurance other than the reinsurance
---------------------
under this Agreement obtained by the Company and provided in connection with HMO
and POS Plans.
"Stop Loss Reinsurance Premium" means consideration paid by the
-----------------------------
Company for Stop Loss Reinsurance provided.
"Stop Loss Reinsurance Recoveries Received" means amounts collected
-----------------------------------------
pursuant to Stop Loss Reinsurance.
"Terminal Accounting and Settlement" means the final accounting and
----------------------------------
payment of any amount due any party upon the termination of this Agreement, as
described in Section 9.1.
"Terminal Accounting Date" shall have the meaning set forth in
------------------------
Section 9.1.
"Withholds" means amounts withheld by the Company from payments of
---------
claims submitted by primary care physicians and specialists.
7
<PAGE>
ARTICLE II
REINSURANCE COVERAGE
--------------------
2.1 Coverage. (a) Effective May 1, 1996 (the "Effective Date"), the
--------
Company agrees to cede to the Reinsurer: (i) fifty percent (50%) of the risks
under the HMO Plans, and (ii) fifty percent (50%) of the risks under the In-
Network portion of the POS Plans, all as more specifically described in Schedule
A, and the Reinsurer agrees to indemnify the Company against fifty percent (50%)
of the risks under such HMO and In-Network portion of the POS Plans.
(b) Effective the Effective Date, the Company agrees to cede to the
Reinsurer one hundred percent (100%) of the risks under the Out-of-Network
portion of the POS Plans, all as more specifically described in Schedule A, and
the Reinsurer agrees to indemnify the Company against one hundred percent (100%)
of the risks under such Out-of-Network portion of the POS Plans.
(c) Effective the Effective Date, the Reinsurer agrees to retrocede to PHS
(Bermuda) fifty percent (5O%) of the risks under the Out-of-Network portion of
the POS Plans, all as more specifically described in Schedule A, and PHS
(Bermuda) agrees to indemnify the Reinsurer against fifty percent (50%) of the
risks under such Out-of-Network portion of the POS Plans.
2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a
-------------------
coinsurance basis. Each party agrees to establish and maintain Reserves in an
amount
8
<PAGE>
appropriate for the risks assumed by such party, as set forth in Section 2.1
above; provided, however, that, the parties agree that the Reinsurer will
-------- ------- ----
establish and maintain 100% of the Reserves for the Out-of-Network portion of
the POS Plans.
2.3 Conditions. The reinsurance hereunder is subject to the same
----------
limitations and conditions as the HMO and POS Plans, except as otherwise
expressly provided for in this Agreement.
2.4 Exclusions. The reinsurance hereunder does not apply to the following
----------
risks: (i) any portion of the risk under any HMO or POS Plan issued by the
Company other than the risk reinsured hereunder; (ii) any HMO or POS Plan issued
and delivered in a jurisdiction in which issuance and delivery of such contract
constituted the doing of business where the Company was not properly licensed;
and (iii) those risks for which the Reinsurer is not liable pursuant to the
provisions of Section 3.11 hereof.
ARTICLE III
GENERAL PROVISIONS
------------------
3.1 Contract Administration. The Company and the Reinsurer each shall have
-----------------------
responsibility for certain aspects of the marketing and administration of the
HMO and POS Plans, in accordance with the Amended and Restated Marketing and
Services Agreement dated as of October 1, 1996 between the Reinsurer, the
Company and PHS (the "Marketing and Services Agreement").
3.2 Non-Solicitation. (a) During the term of this Agreement, the Reinsurer
----------------
shall not contact, solicit or contract for services with any health care
provider in the
9
<PAGE>
Service Area under contract with the Company. In addition, during the term of
this Agreement, and following its termination, the Reinsurer will not provide
any party with lists of health care providers under contract with the Company or
non-public information concerning contracts between the Company (or its
Affiliates) and its health care providers under contract; provided, however,
-------- -------
that provider lists must be made available to the Departments of Health or
Insurance of the State of New Jersey, to prospective Contractholders, to the
Reinsurer's insureds and as otherwise required under applicable law. This
Section 3.2 shall not apply (i) to contracting efforts by third parties,
including, but not limited to, PHCS acting on behalf of the Reinsurer, for the
purpose of developing managed care networks, provided, however, that, the names
of health care providers solicited by such third parties shall not have been
furnished by the Reinsurer, its employees or agents, or (ii) following the
Contract Termination Date, as described in the provisions of Article VIII
hereof. The Reinsurer further agrees not to replace a HMO or POS Plan with a
PHCS managed health care plan during the term of this Agreement.
(b) No party, nor any of its Affiliates, shall contact, solicit or contract
with any other party's full-time employees who have been engaged in the
activities covered by this Agreement without the consent of such other party.
3.3 Inspection. Any party, or its designated representative, may inspect,
----------
at the offices of the Company, PHS (Bermuda) or the Reinsurer, as the case may
be, where such records are located, and conduct reasonable audits of, the papers
and any and all other books or documents of the Company, PHS (Bermuda) or the
Reinsurer
10
<PAGE>
reasonably relating to the HMO or POS Plans and the administrative
responsibilities hereunder, during normal business hours for such period as this
Agreement is in effect or for as long thereafter as the Company, PHS (Bermuda)
or the Reinsurer, as the case may be, seeks performance by any other party
pursuant to the terms of this Agreement. The information obtained shall be used
only for purposes relating to the reinsurance provided under this Agreement and
shall not be disclosed to any person without the express permission of the other
party, except to the extent that disclosure is required by law. Each party's
rights under this Section 3.3 shall survive termination of this Agreement.
3.4 Misunderstandings and Oversights. If any delay, omission, error or
--------------------------------
failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Company, PHS (Bermuda) and the Reinsurer will adjust the situation to what it
would have been had the misunderstanding or oversight not occurred. The party
that first discovers such oversight or incorrect act as a result of the
misunderstanding will notify the other parties in writing promptly upon
discovery of the misunderstanding or oversight. The parties shall act to correct
the error, omission or oversight within twenty (20) calendar days of
notification of the problem. This Section 3.4 shall not be construed as a waiver
by any party of its right to enforce strictly the terms of this Agreement.
3.5 Reinstatements. If a HMO or POS Plan reinsured hereunder that was
--------------
terminated or lapsed is reinstated while this Agreement is in effect, the
reinsurance for such Plan shall be reinstated automatically as if such Plan had
not been terminated or
11
<PAGE>
lapsed. All amounts received in connection with such reinstatement shall be
treated as Direct Paid Premiums.
3.6 Contract Changes or Reserve Changes. The Company, PHS (Bermuda) and
-----------------------------------
the Reinsurer shall share, based upon the percentages set forth in Section 2.1
and Schedule A, in any increase or decrease in the Company's liability that
results from any change in the terms or conditions of any HMO or POS Plan
reinsured hereunder or in the calculation of Reserves. The Company must provide
written notification to the Reinsurer and PHS (Bermuda) within fifteen (15)
calendar days after any such change, if such change can reasonably be expected
to have a significant effect on the transactions contemplated by this Agreement.
3.7 Compliance with Applicable Laws and Regulations. It is the intention
-----------------------------------------------
of the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the agreement remains
in full force and the HMO and POS Plans remain reinsured hereunder. Each of the
parties agrees to comply with all laws, ordinances, rules, regulations and
orders of regulatory bodies applicable to the transactions contemplated by this
Agreement, including those relating to the payment of commissions.
3.8 Amendment and/or Termination Upon Failure to Comply. In the event that
---------------------------------------------------
it is determined by an insurance or health regulatory authority, the Internal
Revenue Service or any other federal, state or local regulatory authority or by
any party to this Agreement upon the advice of an insurance or health regulatory
authority or the Internal Revenue Service that this Agreement fails to conform
to, or that the intent of
12
<PAGE>
this Agreement cannot be effected as a result of, the requirements of existing
applicable laws and regulations and that this Agreement may be brought into
conformity with said requirements, or the intent of this Agreement may be
effected, only by means of a material change to this Agreement, or in the event
that such laws or regulations are changed subsequent to the Effective Date and
such change has a material adverse effect on any party or requires a material
change to this Agreement in order for this Agreement to conform with applicable
laws and regulations or for its intent to be effected, the parties shall
exercise reasonable efforts to reach an agreement to amend this Agreement so as
to return the parties to the economic position that they would have been in had
no such change occurred or so that both parties share the economic detriment of
such change proportionately. If the parties are unable to reach an agreement to
amend the Agreement, then the differences between the parties shall be resolved
through arbitration in accordance with the provisions of Article XIII. In the
event that any required change is not material, this Agreement shall be amended
in accordance with such requirement.
3.9 Notification of Disapproval or Change in Law. The Company shall
--------------------------------------------
promptly notify the Reinsurer and PHS (Bermuda) of any actual or anticipated
disapprovals or required changes regarding this Agreement that are made by any
insurance or health regulatory authority or taxing authority and of any change
in the laws, regulations or rulings affecting this Agreement or related
documents. The Reinsurer and PHS (Bermuda) shall be allowed to participate in
the defense of this
13
<PAGE>
Agreement or related documents on its own behalf with such authority after
consultation with the Company.
3.10 Setoff. It is expressly understood that any debts or credits, matured
------
or unmatured, liquidated or unliquidated, arising or incurred pursuant to the
terms hereof, including but not limited to such debts and credits arising under
Articles IV, V and VI shall, at all times and under all circumstances relevant
to the rights and liabilities of the parties to this Agreement, be deemed mutual
debts or credits, as the case may be, and shall be set off and only the net
balance shall be allowed or paid.
3.11 Limitations on Liability. (a) The Reinsurer shall not indemnify or be
------------------------
liable pursuant to this Agreement or otherwise for any of the Company's risk, to
the extent any damages result from the negligent acts or omissions to act,
reckless or intentional wrongs, fraud, oppression or bad faith of the Company.
PHS (Bermuda) or the Reinsurer, as the case may be, shall be liable and
indemnify the Company fully for all losses arising from the negligent acts or
omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith
of the Reinsurer or PHS (Bermuda), as the case may be, acting in connection with
a HMO or POS Plan reinsured hereunder.
(b) The Company does not indemnify and shall not be liable pursuant to
this Agreement or otherwise for any of the Reinsurer's risk, to the extent any
damages result from the negligent acts or omissions to act, reckless or
intentional wrongs, fraud, oppression or bad faith of the reinsurer. The company
shall be liable and indemnify the Reinsurer fully for all losses arising from
the negligent acts or omissions to act,
14
<PAGE>
reckless or intentional wrongs, fraud, oppression or bad faith of the Company
acting in connection with a HMO or POS Plan reinsured hereunder.
(c) The Reinsurer and PHS Bermuda shall be liable, based on the applicable
percentages set forth in Section 2.1 and Schedule A, and subject to the election
permitted by Section 6.2, for any losses arising from non-negligent acts or
omissions to act taken by the Company in good faith pursuant to HMO or POS Plans
reinsured hereunder.
(d) For purposes of this Agreement, any damages, claims, liabilities or
other expenses for which the Reinsurer shall be liable shall be net of the
appropriate share of any recoveries from third parties, including, without
limitation, recoveries under Stop-Loss Reinsurance Contracts.
(e) The Reinsurer shall not be liable for any damages incurred by the
Company, PHS (Bermuda) or the Reinsurer to the extent such liability or damages
arise from the action or actions of a health care provider or health care
facility in connection with the HMO or POS Plans reinsured hereunder.
3.12 Exclusivity. The Company and the Reinsurer shall not enter into an
-----------
arrangement with other parties similar to this Agreement for reinsurance of
Managed Care Contracts (as defined in the Marketing and Services Agreement),
except as expressly permitted under the Marketing and Services Agreement.
3.13 Press Releases. No public statement or press release regarding the
--------------
existence of this Agreement or the terms thereof shall be made by any party
hereto
15
<PAGE>
without the prior written consent of the other parties, except as required by
applicable laws, ordinances, rules and regulations.
3.14 Restrictions on the Reinsurer PHS (Bermuda) and the Company Relating
--------------------------------------------------------------------
to Other Agreements. During the period from the Effective Date through the last
- -------------------
date on which the provisions of this Agreement are in effect, each of the
Reinsurer, PHS (Bermuda) and the Company shall be prohibited from directly or
indirectly, entering into any contract, lease, sublease, license, sublicense,
promissory note, evidence of indebtedness or other contract or commitment
(whether oral or written), which will, or can reasonably be expected to at any
time, place any material restriction or restrictions on such party's ability to
perform any or all of its obligations under this Agreement; provided, however,
that, nothing herein shall limit either party's right to enter into a Change of
Control transaction in accordance with the provisions set forth herein.
3.15 Investigations. Each party to this Agreement shall immediately notify
--------------
the other parties, in writing, of any and all investigations of such party or
its directors, principal officers or shareholders conducted by any federal,
state or local governmental or regulatory authority other than routine
examinations or surveys by state insurance or health regulatory authorities and
federal or state tax authorities.
3.16 Change of Control. Each party shall fully disclose the details of any
-----------------
pending Change of Control known to it to the other parties, and shall provide
the other parties with copies of any and all applications for approval therefor
made to Federal, state or local regulatory authorities. Such disclosure shall be
made prior to or
16
<PAGE>
concurrent with notification and/or application for approval to such Federal,
state or local regulatory authorities of a Change of Control. In the event that
such Change of Control shall be approved, the party that intends to undergo the
Change of Control shall notify the other parties immediately thereof and the
other parties shall have the rights set forth in Section 8.6.
3.17 Reinsurance or Sale of HMO or POS Plans. (a) The Company agrees that,
---------------------------------------
during the period in which this Agreement is in effect, it shall not reinsure,
sell or assign the HMO or POS Plans to another entity (other than in connection
with Stop Loss Reinsurance).
(b) Notwithstanding paragraph (a) above, this Section 3.17 shall not
restrict the ability of the Company to (i) enter into a merger or consolidation,
(ii) effect a sale of all or a portion of its capital stock or (iii) effect a
sale of its business as an entirety or substantially as an entirety; provided,
however, that the Company may not enter into a transaction listed in (i), (ii)
or (iii) above with another entity unless such other entity provides the
Reinsurer and PHS (Bermuda) with a writing, in form and substance satisfactory
to the Reinsurer and PHS (Bermuda) which shall state that the entity agrees to
be bound by the terms of this Agreement to the same extent and effect as if such
entity had been a party to this Agreement.
3.18 Commission Scale and Commission Scale Changes. Commission payments
---------------------------------------------
made with respect to any HMO or POS Plans reinsured hereunder shall be made
according to the same commission scale used by the Company with respect to the
17
<PAGE>
specific types of products listed in Schedule A, or substantially similar
products, that are not subject to this Agreement, as that scale may be changed
from time to time.
3.19 Stop-Loss Reinsurance. The Company agrees, during the period that
---------------------
this Agreement is in effect, that it will maintain Stop-Loss Reinsurance with
respect to the HMO Plans and the POS Plans in effect, with deductibles,
coverages and limits of liability that are substantially the same as those that
apply under the Stop Loss Reinsurance contract or contracts of the Company that
are in effect on the Effective Date, a copy or copies of which are attached as
Exhibit I; provided, however, that each Stop Loss Reinsurance contract or
contracts of the Company relating to HMO or POS Plans must provide coverage with
respect to claims relating to any periods during which the Company is obligated
to provide services with respect to HMO or POS Plans, without regard to (i) the
failure of the Company to remain qualified to conduct the business for which it
is organized, or (ii) the insolvency or the commencement of supervision,
conservation, rehabilitation, liquidation or similar proceedings against the
Company. In the event that any Stop Loss Reinsurance contract issued to the
Company does not meet the requirements of this Section 3.19 at the Effective
Date, or at any time thereafter, the Company will obtain substitute Stop Loss
Reinsurance meeting such requirements from a qualified reinsurer, including the
Reinsurer.
3.20 Statement of Actuarial Opinion. Within forty-five (45) calendar days
------------------------------
after the end of the calendar year, the Company shall provide the Reinsurer with
a Statement of Actuarial Opinion certifying the adequacy of the reserves which
are covered under this Agreement. In addition, the Actuarial Opinion must state
whether
18
<PAGE>
or not the reserves covered under this Agreement meet the minimum standards of
all states where the Company is licensed, and if not the difference between the
Company's reserves and state minimums. The Actuarial Opinion shall meet the
requirements as set forth in the NAIC'S Actuarial Opinion and Memorandum
Regulation. The Opinion shall be signed by the Company's "Appointed Actuary."
ARTICLE IV
PREMIUMS AND RESERVES
---------------------
4.1 Premiums - HMO Plans and In-Network Portion of the POS Plans.
-------------------------------------------------------------
Premiums under HMO Plans and under the In-Network portion of the POS Plans
received by the Reinsurer, pursuant to the terms of the Marketing and Services
Agreement, shall be allocated to the Company and the Reinsurer in accordance
with the applicable percentages set forth in Section 2.1 and in Schedule A, and
the portion of the Premiums allocated to the Reinsurer shall constitute the
consideration in respect of the Reinsurer's acceptance of risk under this
Agreement. The portion of Premiums allocated to the Company shall be paid over
to the Company in accordance with the settlements required by Section 7.3 of
this Agreement.
4.2 Premiums - Out-of-Network Portion of the POS Plans. Premiums under the
--------------------------------------------------
Out-of-Network portion of the POS Plans received by the Reinsurer, pursuant to
the terms of the Marketing and Services Agreement, shall be allocated to the
Reinsurer and PHS (Bermuda) in accordance with the applicable percentages set
forth in Section 2.1 and in Schedule A, and the portion of the Premiums
allocated to the Reinsurer and
19
<PAGE>
PHS (Bermuda) shall constitute the consideration in respect of the Reinsurer's
and PHS (Bermuda)'s acceptance of risk under this Agreement. The portion of
Premiums allocated to PHS (Bermuda) shall be paid over to PHS (Bermuda) in
accordance with the settlements required by Section 7.3 of this Agreement.
4.3 HMO and POS Plan Reserves. With respect to the HMO Plans and the In-
-------------------------
Network portion of the POS Plans reinsured hereunder, the Company and the
Reinsurer shall establish and maintain Reserves in an amount appropriate for the
risk assumed by such party and all applicable regulatory requirements. With
respect to the Out-of-Network portion of the POS Plans reinsured hereunder, the
Reinsurer shall establish and maintain 100% of the Reserves in accordance with
all applicable regulatory requirements. The Reinsurer will fund 50% of such
Reserves on behalf of PHS (Bermuda) by deducting the appropriate amount from the
Quarterly Settlements due PHS (Bermuda), as set forth in Section 7.3, to the
extent that such Quarterly Settlements are sufficient for such purpose. To the
extent that the Quarterly Settlements are not sufficient for such purpose, PHS
(Bermuda) will, within 45 calendar days of a request by Reinsurer, pay to the
Reinsurer the amount necessary to fund 50% of such Reserves. The Reinsurer will
credit interest on the Reserve funds held on behalf of PHS (Bermuda) at a rate
equal to the Investment Rate set forth in Schedule E.
20
<PAGE>
ARTICLE V
EXPENSE ALLOWANCE
-----------------
5.1 Administrative Expenses. Each party shall be entitled to reimbursement
-----------------------
for its Administrative Expenses (not including pre-marketing expenses),
identified in Schedule B, for each Accounting Period. Such Administrative
Expenses, plus any Insurance Taxes and Commissions, paid by such party with
respect to the HMO and POS Plans during the Accounting Period, shall be
considered reimbursable expenses.
5.2 Payment. The Company, PHS (Bermuda) and the Reinsurer shall be
-------
reimbursed for the amounts shown as Company Expenses, PHS (Bermuda) Expenses or
Reinsurer Expenses, as set forth in Section 7.3 below.
ARTICLE VI
CLAIMS
------
6.1 Notice of Claim. Upon receipt of any claim on any HMO or POS Plan,
--------- -----
which claim is reasonably anticipated to exceed fifty thousand dollars
($5O,OOO), the Company shall promptly notify the Reinsurer and PHS (Bermuda) of
such claim. Copies of notification, claim papers, and proofs shall be furnished
by the Company to the Reinsurer and to PHS (Bermuda) upon request.
6.2 Determination of Claims by the Company. The Reinsurer and PHS
--------------------------------------
(Bermuda) will accept the decision of the Company with respect to the payment of
a claim under a HMO or POS Plan; provided, however, that the Company shall
promptly advise the Reinsurer and PHS (Bermuda) of the Company's intention to
contest a claim
21
<PAGE>
under a HMO or POS Plan, and the Reinsurer and PHS (Bermuda) shall have the
right to advise and assist the Company in its determination of liability and in
the best procedure to follow with respect to any such claim of doubtful
validity. The Company, PHS (Bermuda) and the Reinsurer shall share, in
accordance with the applicable percentages set forth in Section 2.1 and Schedule
A, all expenses incurred in connection with contesting, compromising or settling
claims under a HMO or POS Plan, subject to the limitations of Section 3.11. Such
expenses may include, but are not limited to, all costs and expenses of
investigation, settlement of claims, litigation costs and judgments. If,
however, the Reinsurer or PHS (Bermuda), as the case may be, has advised the
Company that a contested claim should be paid, and elects to assume liability
for its applicable percentage (as set forth in Section 2.1 and Schedule A) of
the claim as originally presented, the Reinsurer or PHS (Bermuda), as the case
may be, shall not share in any additional costs or expenses associated with such
claim.
ARTICLE VII
ACCOUNTING AND REPORTING
---------- -------------
7.1 Reinsurance Accounting. The Company shall maintain separate books or
----------------------
details of account with respect to the HMO and POS Plans reinsured hereunder,
setting forth the data required in Schedules C, E and F.
7.2 Ouarterly Accounting Reports. Following the end of each Accounting
----------------------------
Period, the Company shall supply the Reinsurer and PHS (Bermuda) with a
Quarterly Accounting Report providing the data required in Schedules C and E.
The Quarterly
22
<PAGE>
Accounting Report shall be submitted within forty-five (45) calendar days of the
end of each calendar quarter.
7.3 Settlements. Settlement of amounts payable between the Company,
-----------
the Reinsurer and PHS (Bermuda) shall be made in a reasonably expeditious manner
once the amounts or estimates are known or determined. All settlement payments
shall be made by wire transfer with same or next day availability unless
otherwise agreed.
(a) Weekly Settlements. Reinsurer shall make reimbursement payments to the
------------------
Company for estimated weekly cash claims paid by the Company. Such estimates are
to be mutually determined, and appropriately adjusted from time to time, to
reasonably approximate the timing and amounts of cash claim expenditures made by
the Company and to minimize the quarterly settlement amounts with respect to
claims. Such payments are due weekly based upon a mutually agreed upon schedule.
(b) Monthly Settlements. Reinsurer shall make reimbursement payments to the
-------------------
Company monthly for any actual or estimated monthly administrative expenses,
premium taxes, licenses, fees or assessments incurred by the Company. Such
payments are due within 20 Business Days after the end of each month in which
they were incurred. Reinsurer's actual or estimated administrative or commission
expenses incurred are also deemed payable at that time. By mutual agreement,
certain expenses may be added to or deleted from this monthly reimbursement.
23
<PAGE>
(c) Quarterly Settlements. Based upon the Quarterly Accounting Reports,
---------------------
including Schedules C, E and F, settlement payment or payments shall be made to
the Company or Reinsurer, or PHS Bermuda as the case may be, within 45 calendar
days from the end of such quarter. If such reports or schedules are not
finalized within this time frame, reasonable estimated payments shall be made
followed by adjustment payments. The Quarterly Settlement payments shall
represent settlement, net of any interim reimbursements or other related
settlement payments, of all amounts due during that quarter and any mutually
agreed upon adjustments to prior periods. The quarterly calculation of this
payment shall be substantially in the form of Schedule E with any positive
amounts listed on Line 24 of such Schedule being payable from the Reinsurer to
the Company and any negative amounts being payable from the Company to the
Reinsurer. For the purpose of calculating interest on delayed payments relating
to this quarterly settlement payment, the parties agree that the due date is the
15th day (unless such 15th day falls on a day other than a Business Day, in
which case the due date is the Business Day immediately preceding such 15th day)
of the middle month of the settlement quarter unless otherwise mutually agreed.
(d) Other Settlements. Other settlement payments between the Company and
-----------------
the Reinsurer such as payment adjustments, preliminary quarterly settlements,
withhold payout reimbursements or interest compensation may be made separately
or along with other settlement payments upon mutual agreement. For the purpose
of calculating
24
<PAGE>
interest on delayed payments relating to these payments, due dates are to be
mutually agreed upon if not otherwise specified in this Agreement.
7.4 Reconciliation. Each party shall have the right to review all
--------------
individual components of transactions entered into each Quarterly Accounting
Report, such as Premiums received, Commissions and Insurance Taxes, claims
incurred or paid, and similar items. The parties shall have a reasonable period
from the day the Quarterly Accounting Report is submitted to report any
deficiency in such report and to request an adjustment of any payment made to or
received by any party. Any amount due any party in connection with such
reconciliation shall be paid within forty-five (45) calendar days of the receipt
of notice that additional amounts are due.
7.5 Best Efforts to Supply Actual Data. In preparing all reports required
----------------------------------
in this Agreement, the Reinsurer, PHS (Bermuda) or the Company, as the case may
be, shall make its best efforts to supply the actual data. If the actual data
cannot be supplied with the appropriate report, the Reinsurer, PHS (Bermuda) or
the Company, as the case may be, shall produce best estimates, and shall provide
amended reports based on actual data no more than forty-five (45) days after
such report was originally due.
7.6 Interest on Delayed Payments. Should any payment in connection with
----------------------------
the Quarterly Settlements due the Company, PHS (Bermuda) or the Reinsurer as set
forth in Section 7.3 above be delayed beyond its due date, as defined or
determined, such delayed payment shall accrue interest during such period of
delay at the Interest Compensation Rate as defined on Schedule D. Interest is to
be calculated based upon
25
<PAGE>
an actual/365 day basis. Any such interest accrued or paid shall not be included
in Schedule C as a jointly shared income or expense item, but rather be paid
directly to the deficient party either separately or as a separate item added to
the Schedule E settlement. The application of this calculation shall also apply
to any over payments, with interest accruing back to the deficient party.
7.7 Interest on Cash Reserves. The Reinsurer shall pay PHS (Bermuda) at
-------------------------
the Investment Rate as defined in Schedule D for any net cumulative cash reserve
balances held by the Reinsurer for the benefit of PHS (Bermuda) after adjusting
for any settlement payments. Interest will be calculated quarterly based upon an
actual/365 day basis and is due and payable at the time of the Quarterly
Settlement. Any such interest accrued or paid shall not be included in Schedule
C as a jointly shared income or expense item, but will be paid directly to PHS
(Bermuda) either separately or as a separate item added to the Schedule E
settlement. Such interest shall be calculated and reported as set forth in
Schedule G.
ARTICLE VIII
DURATION AND TERMINATION
------------------------
8.1 Duration. Except as otherwise provided herein, this Agreement shall be
--------
unlimited in duration.
8.2 Commencement of Liability. The liability of the Reinsurer and PHS
-------------------------
(Bermuda) on reinsurance ceded hereunder shall commence on the later of the
Effective
26
<PAGE>
Date and the date the liability of the Company commences under a HMO or POS
Plan, as the case may be, reinsured hereunder.
8.3 Termination of Liability. Except as provided in the next sentence of
------------------------
this Section 8.3, the liability of the Reinsurer or PHS (Bermuda) with respect
to any HMO or POS Plan, as the case may be, shall terminate on the date the
liability of the Company on such HMO Plan or POS Plan is terminated. If this
Agreement is terminated, as provided in this Article VIII, the Reinsurer's and
PHS (Bermuda)'s liability with respect to HMO and POS Plans that remain in
force shall terminate on the day that all Direct Paid Claims incurred prior to
the date of such termination are satisfied.
8.4 Termination of Agreement. Any party shall have the right to terminate
------------------------
this Agreement without cause upon the giving of one hundred eighty (180) days
advance written notice to the other parties; provided, however, that, the
liability of the Reinsurer and PHS (Bermuda) with respect to HMO and POS Plans
that remain in force will terminate on the day that all Direct Paid Claims
incurred prior to the date of such termination are satisfied. The Contract
Termination Date under this Section 8.4 shall be the 180th day following the
giving of the notice required by this Section 8.4.
8.5 Automatic Termination. If, at the end of an Accounting Period, none of
---------------------
the HMO or POS Plans is in force, this Agreement shall automatically terminate.
In the event of termination pursuant to this Section 8.5, the last day of such
Accounting Period shall be the Contract Termination Date.
27
<PAGE>
8.6 Termination Due to Insufficient Premium. If the total annualized
---------------------------------------
premiums for (i) all HMO and POS Plans reinsured hereunder, plus (ii) premiums
for health insurance contracts issued by the Reinsurer in multi-choice
arrangements with HMO or POS Plans do not exceed five million dollars
($5,000,000) on the first anniversary of the implementation of this Agreement,
then any party May, within forty-five (45) days thereafter, elect to terminate
this Agreement. The Termination Date shall be ninety (90) days thereafter. The
implementation of this Agreement shall be construed as the date the HMO and POS
Plans are available for sale under the Marketing and Services Agreement. The
Contractholder of each HMO or POS Plan reinsured hereunder shall, in compliance
with applicable law, be given the choice of terminating its coverage at the
Termination Date or continuing coverage under such Contract until the Renewal
Date applicable thereto next following the Termination Date.
8.7 Termination Subsequent to a Change of Control. In the event of a
---------------------------------------------
Change of Control of the Company (for purposes of this Section 8.7, the term
"Company" shall include PHS), PHS (Bermuda) or the Reinsurer, the party not
undergoing the Change of Control may elect to terminate this Agreement. In the
event that this Agreement is terminated as a result of a Change of Control: (i)
without any further action required of any party, the Marketing and Services
Agreement shall be deemed to be terminated as of the effective date of the
Change of Control except with respect to the provisions regarding the
administration of the HMO and POS Plans continued under this Section 8.7 which
provisions shall be deemed to survive such
28
<PAGE>
termination for the period set forth in clause (ii) of this sentence; and (ii)
the party not undergoing the Change of Control may elect to continue the
reinsurance arrangements provided in this Agreement solely with respect to the
reinsurance of any case that was originally written as an HMO Plan or POS Plan
and that was in force on the Contract Termination Date, until the tenth (10th)
Renewal Date applicable to such HMO or POS Plan, or continuation managed care
contract issued by the Company (collectively, "Continuation Plans,") following
the Contract Termination Date. The Contract Termination Date under this Section
8.7 shall be the effective date of the Change of Control.
8.8 Termination for Cause. (a) In the event that any party shall default
---------------------
in the performance of the duties and obligations imposed on it pursuant to the
terms of this Agreement or the Marketing and Services Agreement, or breach any
of the provisions contained herein or Therein, including the failure to pay any
amount when due, or the failure of any party to maintain a level of services
under the Marketing and Services Agreement that is reasonably satisfactory to
the other parties, the defaulting party shall be allowed thirty (30) calendar
days from receipt of written notice of such default or breach to present to the
non-defaulting parties a plan to cure such default or breach that is reasonably
satisfactory to the non-defaulting parties. If a reasonably satisfactory plan to
cure the default or breach is not submitted within that time, or if the plan is
not carried out according to its terms, each of the non-defaulting parties shall
have the right to terminate this Agreement upon delivery of written notice of
such termination to the defaulting party, which shall be effective on receipt,
without prejudice to any other
29
<PAGE>
rights or remedies available to the non-defaulting parties by reason of such
default or breach.
(b) In the event that any party shall engage in fraudulent, illegal or
grossly negligent conduct with respect to its duties and obligations under this
Agreement or the Marketing and Services Agreement, each of the other parties
shall have the right to terminate this Agreement upon delivery of written notice
of such termination to the defaulting party, which shall be effective upon
receipt, without prejudice to any other rights or remedies available to the non-
defaulting parties by reason of the defaulting Party's conduct.
(c) The Contract Termination Date under this Section 8.8 shall be the date
of receipt of the notice of termination.
8.9 Termination of Agreement Upon the Occurrence of Certain Events. (a)
--------------------------------------------------------------
Upon the occurrence of either of the following events:
(i) one of the parties to this Agreement fails to remain in good standing
under the laws of its state of domicile, or fails for any reason to remain
qualified to engage in the transaction contemplated by this Agreement under
applicable laws, ordinances, rules or regulations; or
(ii) a voluntary or involuntary proceeding is commenced in any state by or
against one of the parties to this Agreement for the purpose of supervising,
conserving, rehabilitating or liquidating such party;
this Agreement may be terminated at the election of either of the other parties
pursuant to a written notice.
30
<PAGE>
The Contract Termination Date under this Section 8.9 will be the day of
receipt of the notice of termination. In the event that the Company shall be
subject to (i) or (ii) above, the Reinsurer shall have the exclusive right
(subject to appropriate regulatory approvals) to acquire the HMO and POS Plans
or to require the Company to assign the HMO and POS Plans to a designated entity
authorized to operate a health maintenance organization in the geographic areas
in which the Company operates.
8.10 Termination for Material Change in PHS Network. In the event that
----------------------------------------------
the PHS Network (as that term is defined in the Marketing and Services
Agreement) undergoes a material change within the meaning of Section 6.3 of the
Marketing and Services Agreement, Company shall be allowed thirty (30) calendar
days to present to Reinsurer a plan to cure such Material Change that is
reasonably satisfactory to Reinsurer. If a reasonably satisfactory plan to cure
the Material Change is not submitted within that time, or if the plan is not
carried out according to its terms, Reinsurer shall have the right to terminate
this Agreement upon delivery of written notice of such termination to Company,
which shall be effective upon receipt (the date of receipt being the Contract
Termination Date under this Section 8.10), without prejudice to any other rights
or remedies available to Reinsurer.
31
<PAGE>
ARTICLE IX
PAYMENTS UPON TERMINATION OF AGREEMENT
--------------------------------------
9.1 Payments on Termination. (a) In the event that this Agreement shall be
-----------------------
terminated pursuant to Article VIII, a net accounting and settlement as to any
balance due under this Agreement shall be undertaken by the parties to this
Agreement (the "Terminal Accounting and Settlement"), which calculations shall
be performed as of the day that is one (1) year from the date that the liability
of the Reinsurer and PHS (Bermuda) shall have terminated (the "Terminal
Accounting Date"). During the period between the termination of this Agreement
and the Terminal Accounting Date, Direct Paid Claims that accrued prior to the
termination of this Agreement shall continue to be paid, and Reserves shall
continue to be held, in accordance with the terms set forth herein.
(b) The Company shall supply the Reinsurer and PHS (Bermuda) with final
Schedules C and D which shall show the Terminal Accounting and Settlement. If
the Terminal Accounting and Settlement shows that the Company owes the
Reinsurer, then the Company shall pay the amount owing to the Reinsurer. If the
Terminal Accounting and Settlement shows that the Reinsurer owes the Company or
PHS (Bermuda), then the Reinsurer shall pay the amount owing the Company or PHS
(Bermuda), as the case may be. If the Terminal Accounting and Settlement shows
that PHS (Bermuda) owes the Reinsurer, then PHS (Bermuda) shall pay the amount
owing the Reinsurer. Such Schedules shall be supplied by the Company within the
period agreed by the parties.
32
<PAGE>
(c) Any payment required under the Terminal Accounting and Settlement by
the Company shall be paid by the Company no later than the day on which the
final Schedules C, E and F, as required by Section 9.1(b), are due. The
Reinsurer and PHS (Bermuda) shall make any payment required to be made by the
Reinsurer or PHS (Bermuda) hereunder within ten (10) calendar days of receipt of
such final schedules. In the event that the calculation for the payment required
under the Terminal Accounting and Settlement cannot be accurately calculated by
such date, then an estimate shall be paid, with a supplemental accounting being
made when the accurate information shall become available.
9.2 Supplemental Accounting. In the event that, subsequent to the Terminal
-----------------------
Accounting and Settlement, an adjustment is made with respect to any amount
taken into account in the Terminal Accounting and Settlement, or in the event
that the Company pays a Direct Paid Claim that accrued prior to the termination
hereof, a supplemental accounting shall be made. Any net amount owed to the
Reinsurer, PHS (Bermuda) or the Company by reason of such supplemental
accounting, plus any interest due pursuant to Section 7.6, shall be paid
promptly upon the completion of such supplemental accounting.
ARTICLE X
CALCULATION OF PROFIT AND LOSS
------------------------------
10.1 Determination and Allocation of Profit or Loss. The Company shall
----------------------------------------------
calculate Profit or Loss with respect to the HMO and POS Plans, and the
Reinsurer, PHS (Bermuda) or the Company, as appropriate, shall make settlements
as required by
33
<PAGE>
Section 7.3 or Section 9.1, as appropriate, according to the calculations as
shown on Schedules C and E and shall be made part of each Quarterly Accounting
Report.
ARTICLE XI
CONDITION PRECEDENT
-------------------
11.1 Condition Precedent. When, under insurance, public health or other
-------------------
applicable laws or regulations, approval of arrangements of the type
contemplated by this Agreement by one or more Federal, state or local
governmental or regulatory authorities is required, the receipt by the Company,
PHS (Bermuda) and the Reinsurer of any and all such approvals shall be a
condition precedent to the other party's liability under this Agreement. Subject
to Section 11.2, if this condition precedent is not met by the Company, PHS
(Bermuda) or the Reinsurer by the Effective Date, this Agreement shall be void
as of the Effective Date.
11.2 Extension of Time. In the event that the necessary approvals set
------------ ----
forth in Section 11.1 have not been obtained by the Company, PHS (Bermuda) or
the Reinsurer as of the Effective Date, the parties may mutually agree to modify
the Effective Date of this Agreement.
11.3 Cooperation of the Parties. Each of the Reinsurer, PHS (Bermuda) and
--------------------------
the Company shall each use its best efforts to cooperate with and assist the
other parties in obtaining the necessary approvals referred to in Section 11.1.
11.4 Guarantee of PHS (Bermuda). As a further condition precedent to the
--------------------------
obligation of the Reinsurer to retrocede the Out-of-Network portion of the POS
Plans.
34
<PAGE>
on or before the Effective Date hereof PHS (Bermuda) shall deliver to the
Reinsurer an agreement by PHS to guarantee the solvency of PHS (Bermuda). Such
agreement shall be in the form attached hereto as Exhibit A, and shall be
effective for as long as the Reinsurer seeks performance by PHS (Bermuda) under
this Agreement. Any termination or substantial amendment of PHS' agreement to
guarantee the obligations of PHS (Bermuda) shall be cause for termination by the
Reinsurer under Section 8.8 above.
35
<PAGE>
ARTICLE XII
INSOLVENCY OF THE COMPANY
-------------------------
12.1 Pavments by the Reinsurer or PHS (Bermuda). (a) In the event of the
------------------------------------------
insolvency of the Company, payments due the Company on all reinsurance made,
ceded, renewed or otherwise becoming effective under this Agreement shall,
subject to Section 12.2, be payable by the Reinsurer directly to the Company or
to its liquidator, receiver, or statutory successor on the basis of the
liability of the Company and the Reinsurer under the HMO Plans and the In-
Network Portion of the POS Plans reinsured hereunder without diminution because
of the insolvency of the Company.
(b) In the event of the insolvency of the Reinsurer, payments due the
Reinsurer on all reinsurance made, ceded, renewed or otherwise becoming
effective under this Agreement shall, subject to Section 12.2, be payable by PHS
(Bermuda) directly to the Reinsurer or to its liquidator, receiver, or statutory
successor on the basis of the liability of the Reinsurer and PHS Bermuda under
the Out-of-Network Portion of the POS Plans reinsured hereunder without
diminution because of the insolvency of the Reinsurer.
12.2 Claims (a) In the event of the insolvency of the Company, the
------
Reinsurer shall be given written notice of the pendency of a claim against the
insolvent Company on a HMO or the In-Network portion of a POS Plan reinsured
hereunder within a reasonable time after such claim is filed in the insolvency
proceeding. During the pendency of such claim, the Reinsurer may investigate
such claim and interpose, at its own expense, in the proceeding where such claim
is to be adjudicated, any defense
36
<PAGE>
or defenses which it may deem available to the Company or its liquidator or
receiver or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to court approval, against the insolvent Company as
part of the expense of liquidation to the extent of a proportionate share of the
benefit which may accrue to the Company solely as a result of the defense
undertaken by the Reinsurer. Where two or more assuming reinsurers are involved
in the same claim and a majority in interest elect to interpose defenses to such
claim, the expense shall be apportioned in accordance with the terms of this
Agreement as though such expense had been incurred by the Company.
(b) In the event of the insolvency of the Company, the Reinsurer and PHS
(Bermuda) shall be given written notice of the pendency of a claim against the
insolvent Company on the Out-of-Network portion of a POS Plan reinsured
hereunder within a reasonable time after such claim is filed in the insolvency
proceeding. During the pendency of such claim, the Reinsurer or PHS (Bermuda),
as the case may be, may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated, any defense or
defenses which it may deem available to the Company or its liquidator or
receiver or statutory successor. The expense thus incurred by the Reinsurer or
PHS Bermuda), as the case may be, shall be chargeable, subject to court
approval, against the insolvent Company as part of the expense of liquidation to
the extent of a proportionate share of the benefit which may accrue to the
Company solely as a result of the defense undertaken by the Reinsurer or PHS
(Bermuda), as the case may be. Where two or more assuming reinsurers are
involved in the same claim
37
<PAGE>
and a majority in interest elect to interpose defenses to such claim, the
expense shall be apportioned in accordance with the terms of this Agreement as
though such expense had been incurred by the Company.
ARTICLE XIII
ARBITRATION
-----------
13.1 Appointment of Arbitrators. In the event of any disputes or
-------------- -----------
differences arising hereafter between the contracting parties with respect to
any transaction, matter or issue arising from or relating in any way to this
Agreement on which agreement between the parties hereto cannot be reached, the
same shall be decided by arbitration. Three arbitrators will decide any dispute
or difference. The arbitrators must be disinterested officers or retired
officers of health maintenance organizations or managed health care companies,
or insurance companies with experience in managed health care, other than the
parties to this Agreement or their Affiliates. Each of the Company and the
Reinsurer agrees to appoint one of the arbitrators with the third, the "Umpire,"
to be chosen by the other arbitrators. In the event that either such party
should fail to choose an arbitrator within 30 days following a written request
by the other party to do so, the requesting party may choose an Umpire before
entering upon arbitration. In the event that the two arbitrators shall not be
able to agree on the choice of the Umpire within 30 days following their
appointment, each arbitrator shall nominate five candidates within 10 days
thereafter, four of whom the other arbitrator shall decline,
38
<PAGE>
and the Umpire shall be chosen from the two remaining nominees by the President
of the American Arbitration Association.
13.2 Decision of Arbitrators: Expenses. The arbitrators shall consider
---------------------------------
customary and standard practices in the HMO and managed health care insurance
businesses. They shall decide by a majority vote of the arbitrators. There shall
be no appeal from their written decision. Judgment may be entered on the
decision. Each party shall bear the expense of its own arbitrator and outside
attorney fees, and shall jointly and equally bear with the other party the
expenses of the third arbitrator.
13.3 Applicable Law; Survival. Any arbitration instituted pursuant to this
------------------------
Article XIII shall be held in New Jersey and the laws of the State of New Jersey
and, to the extent applicable, the Federal Arbitration Act shall apply. This
Article XIII shall survive termination of this Agreement.
13.4 Other Actions. Submission of a matter to arbitration shall be a
-------------
condition precedent to any right to institute a proceeding at law or in equity
concerning such matter, except for injunctive or other provisional relief
pending the arbitration of a matter subject to arbitration pursuant to this
Agreement.
ARTICLE XIV
REPRESENTATIONS AND WARRANTIES
------------------- ----------
14.1 Representations and Warranties of the Reinsurer. The Reinsurer hereby
-----------------------------------------------
represents and warrants to the Company and PHS (Bermuda) as follows:
39
<PAGE>
The Reinsurer is a mutual life insurance company organized and existing
under the laws, including the insurance laws, of the State of New York and is in
good standing under these laws. The Reinsurer further represents and warrants
that it is duly licensed and admitted as an insurer under the laws of those
jurisdictions in which the HMO and POS Plans reinsured hereunder have been
issued and is authorized under the laws and regulations of said jurisdictions to
act as a reinsurer in those jurisdictions. In addition, the Reinsurer covenants
that, so long as this Agreement is in effect, the Reinsurer shall take all
actions reasonably necessary to remain duly licensed under the laws of those
jurisdictions wherein the HMO and POS Plans have been issued. The Reinsurer
shall notify the Company and PHS (Bermuda) immediately in the event that any
license shall be revoked or suspended in any jurisdiction hereunder.
The Reinsurer has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Reinsurer of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Reinsurer
of the transactions as herein contemplated and the carrying out by the Reinsurer
of its obligations contemplated hereby have been duly and validly authorized by
all necessary corporate action.
14.2 Renresentations and Warranties of PHS (Bermuda). PHS (Bermuda) hereby
-----------------------------------------------
represents and warrants to the Company and the Reinsurer as follows:
40
<PAGE>
PHS (Bermuda) is a corporation organized and existing under the laws,
including the insurance laws, of Bermuda and is in good standing under these
laws. PHS (Bermuda) covenants that, so long as this Agreement is in effect, that
it shall take all reasonable actions necessary to remain duly licensed within
the purview of this Agreement under the insurance laws of Bermuda. PHS (Bermuda)
shall notify the Company and the Reinsurer immediately in the event that its
license shall be revoked or suspended in any jurisdiction hereunder.
PHS (Bermuda) has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by PHS (Bermuda) of this Agreement and the other
agreements and documents contemplated hereby, the consummation by PHS (Bermuda)
of the transactions as herein contemplated and the carrying out by PHS (Bermuda)
of its obligations contemplated hereby have been duly and validly authorized by
all necessary corporate action.
14.3 Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Reinsurer and PHS (Bermuda) as follows:
The Company is a corporation organized and existing under the laws,
including the insurance and/or public health laws, of the State of New Jersey
and is in good standing under these laws. The Company further represents and
warrants that it is duly licensed as a health maintenance organization under the
laws of those jurisdictions
41
<PAGE>
wherein the HMO and POS Plans have been issued. In addition, the Company
covenants that, so long as this Agreement is in effect, the Company shall take
all reasonable actions necessary to remain duly licensed as a health maintenance
organization within the purview of this Agreement under the laws of those
jurisdictions wherein the HMO and POS Plans have been issued. The Company shall
notify the Reinsurer and PHS (Bermuda) immediately in the event that any license
shall be revoked or suspended in any jurisdiction hereunder.
The Company has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Company of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Company of
the transactions as herein contemplated and the carrying out by the Company of
its obligations contemplated hereby have been duly and validly authorized by all
necessary corporate action.
ARTICLE XV
CONFIDENTIALITY
---------------
15.1 Obligations of the Parties. Each party agrees that all information
-------------- -----------
concerning the business affairs of the Company, PHS (Bermuda) or the Reinsurer,
as the case may be, which is not generally available to the public, including
but not limited to, lists of physicians and other health care providers, lists
of brokers and other
42
<PAGE>
information of a proprietary nature relating to methods of doing business
heretofore or hereinafter received by it from the other parties shall be kept
and maintained as confidential and in complete Secrecy. No party shall, without
the prior written consent of the other parties, disclose at any time, either
orally, or in writing, or otherwise, in any manner, directly or indirectly, to
any person or entity, except to other employees or agents of the non-disclosing
party, any such proprietary information. Any breach of confidentiality shall
give the non-breaching party the right of injunctive relief in addition to any
other remedy permitted by law.
15.2 Survival of Article XV. This Article XV shall survive termination of
----------------------
this Agreement.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
------------------------
16.1 Notices. All notices required pursuant to this Agreement shall be in
-------
writing and shall become effective when received. Each written notice shall be
sent by certified or registered mail, return receipt requested, or a nationally
recognized overnight delivery service providing for delivery receipt) or
delivered by hand. All notices under this Agreement shall be addressed as
follows:
If to the Reinsurer:
The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
ATTENTION: Edward K. Kane, Esq.
Senior Vice President & General Counsel
43
<PAGE>
If to the Company:
Physicians Health Services of New Jersey, Inc.
Mach Center 4
South 61
Paramus Road
Paramus, New Jersey 07652
ATTENTION:
Executive Director
If to PHS (Bermuda):
Physicians Health Services (Bermuda) Ltd.
120 Hawley Lane
Trumbull, Connecticut 06611
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
If to PHS:
Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, Connecticut 06611
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
16.2 Successors and Assigns. Except as provided in Section 3.17(b) this
----------------------
Agreement cannot be assigned by the Company, PHS (Bermuda) or the Reinsurer
without the prior written approval of the other parties. The provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the parties hereto and their respective permitted successors and assigns.
16.3 Counterparts. This Agreement may be executed simultaneously in any
------------
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same agreement.
44
<PAGE>
16.4 Currency. All payments and accounts shall be made in United States
--------
Dollars, and all fractional amounts shall be rounded to the nearest whole
dollar.
16.5 Amendment. This Agreement shall be amended only by written agreement
---------
signed by a duly authorized officer of each of the Company, PHS (Bermuda) and
the Reinsurer, and any change to this Agreement shall be null and void unless
made by such amendment; provided, however, that where, under insurance, public
health or other applicable laws or regulations, the approval of any such
amendment to this Agreement by one or more Federal, state or local governmental
or regulatory authorities is required, the amendment shall not take effect
unless and until all such necessary approvals have been received by the Company.
In the event that such an approval is required, the Company, PHS (Bermuda) and
the Reinsurer shall each be obligated to take all necessary actions in order to
obtain such approval.
16.6 Entire Agreement. This Agreement and the Schedules and Exhibits
----------------
attached hereto, together with the Marketing and Services Agreement, supersede
all prior discussions and written and oral agreements between the parties with
respect to the subject matter of this Agreement, and contain the sole and entire
agreement between the parties hereto with respect to the subject matter hereof.
Headings are not part of this Agreement, and shall not affect the terms hereof.
16.7 Binding Effect. This Agreement is binding upon and will inure to the
--------------
benefit of the parties and their respective successors and permitted assigns.
45
<PAGE>
16.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New Jersey, without giving effect to
its provisions relating to conflicts of law.
16.9 Severability. In the event any section or provision of this Agreement
------------
or related documents is found to be void and unenforceable by a court of
competent jurisdiction, the remaining sections and provisions of this Agreement
or related documents shall nevertheless be binding upon the parties with the
same force and effect as though the void or unenforceable part had not been
severed or deleted.
16.10 Waivers and Remedies. The waiver by any of the parties of any other
--------------------
party's prompt and complete performance, or breach or violation, of any
provisions of this Agreement and related documents shall not operate nor be
construed as a waiver of any subsequent breach or violation, and the waiver by
any of the parties to exercise any right or remedy which it may possess
hereunder shall not operate nor be construed as a bar to the exercise of such
right or remedy by such party upon the occurrence of any subsequent breach or
violation.
16.11 Regulatory Review. The parties acknowledge and agree that this
-----------------
Agreement is subject to the review and approval of the New Jersey and New York
State Departments of Insurance. The parties expressly agree that any revisions
to this Agreement required by the New Jersey or New York State Departments of
Insurance will be addressed in an amendment to, or restatement of, the
Agreement.
46
<PAGE>
EXECUTION
---------
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
PHYSICIANS HEALTH SERVICES
OF NEW JERSEY
By /s/ Regina M. Campbell
-------------------------------
Name REGINA M. CAMPBELL
Title Senior Vice President
PHYSICIANS HEALTH SERVICES
(BERMUDA) LTD.
By /s/ Regina M. Campbell
-------------------------------
Name REGINA M. CAMPBELL
Title
THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA
By /s/ Joseph D. Sargent
-------------------------------
Name JOSEPH D. SARGENT
Title Vice President and CEO
47
<PAGE>
SCHEDULE A
----------
CONTRACTS AND RISKS REINSURED
-----------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
CONTRACT RISKS REINSURED
- ------------------------------------------------------------------------------------------------------------
<S> <C>
- - HMO Contracts and In-Network Portion of POS - The Reinsurer agrees to accept 50% of the risks
Contracts under such Contracts
- ------------------------------------------------------------------------------------------------------------
- - Out of Network Portion of POS Contracts - The Reinsurer agrees to accept 100% of the
risks under such Contracts and to re-trocede 50%
of such risks to PHS (Bermuda)
- PHS (Bermuda) agrees to accept 50% of the
risks under such Contracts
- ------------------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
NJ
Schedule B
Contract Allowances Administrative Service Fee
----------------------------------------------
I. Guardian's Adminstrative Services Fee (as a percentage of premium)
- ----------------------------------------------------------------------
HMO POS
--- ---
Marketing 0.63% 0.63%
Sales 1.38% 1.38%
Administration 1.30% 1.30%
Billing/Collections 1.69% 1.69%
Advertising 0.15% 0.15%
Total 5.15% 5.15%
II. PHS' Adminstrative Services Fee (as a percentage of premium)
- ----------------------------------------------------------------
HMO POS
--- ---
Health Services, UR 1.67% 1.67%
Net Mgt, MDD, QA 2.43% 2.43%
Operations 3.58% 3.58%
Acct Svc., Cust Srv. 1.44% 1.44%
Marketing 0.63% 0.63%
Sales 0.15% 0.15%
Administration 1.30% 1.30%
Advertising 0.15% 0.15%
Total 11.35% 11.35%
<PAGE>
<TABLE>
<CAPTION>
Schedule C
Year To Date Accounting
Quarter Ending:
NJ NJ
HMO
& POS-IN POS-OUT
<S> <C> <C>
1. Profits/Losses From Underwriting
A. Earned Premium
--------------
1 Cash Received
2 Change in D/U
3 Change in UPR
4 Change in Advance Premium
5 Gross Earned Premium (A1+A2+A3+A4)
6 CSEHRP & Other Reins. Pool Premium Ceded
7 Net Earned Premium (A5+A6)
B. Incurred Claims
---------------
1 Cash Claims (including Capitations) Paid
2 Cash Withholds + PCP Bonuses Paid
3 Cash Rein. Pl., COB, Subrog. Recov.
4 Nurses Line Expenses
5 Total Cash Claims (B1+B2+B3+B4)
6 Change in IBNR
7 Change in Withholds + PCP Bonuses Payable
8 Change in Rein. Pl., COB, Subrog. Recov.
9 Total Change in Reserves (B6+B7+B8)
10 Total Incurred Claims (B5+B9)
C. Expenses
--------
1 Commissions
a. Cash
b. Change in Liability
c. Total Incurred (C1a+C1b)
2 PX Taxes, Licenses & Fees (if applicable)
a. Cash
b. Change in Liability
c. Total Incurred (C2a+C2b)
3 Assessments (if applicable)
a. Cash
b. Change in Liability
c. Total Incurred (C3a+C3b)
4 Field Expenses
a. Cash
b. Change in Liability
c. Total Incurred (C4a+C4b)
5 Guardian Admin. Exp.
6 PHS Admin. Exp.
7 Total Incurred Expenses (C1c+C2c+C3c+C4c+C5+C6)
II. Profit (Loss) (A7-B10-C7)
D. Guardian Profit (50%)
E. PHS Profit (50%)
</TABLE>
<PAGE>
SCHEDULE D
----------
INTEREST RATES
--------------
The Interest Compensation Rate applicable for any given fiscal quarter is
--------------------------
defined as the annual rate of interest equal to the closing yield on 3-month
LIBOR as of the last trading day of the prior fiscal quarter plus 1.00%. Such
rate shall remain in effect for that entire quarter regardless of any interim
fluctuations or changes in 3-month LIBOR yields.
The Investment Rate applicable for any given fiscal quarter is defined as the
annual rate of interest equal to the closing yield on the then current 2-year
Treasury Note as of the last trading day of the prior fiscal quarter plus 1.00%.
Such rate shall remain in effect for that entire quarter regardless of any
interim fluctuations or changes in 2-year Treasury Note yields.
The above interest rates may be changed or modified as appropriate upon mutual
agreement between the Company, Reinsurer and PHS (Bermuda).
<PAGE>
<TABLE>
<CAPTION>
Schedule E NJ NJ
Cash Flow and Funds Reconciliation HMO
Quarter Ending: & POS-IN POS-OUT
(All numbers reflect year to date totals.)
<S> <C> <C>
Underwriting Cash Flows
1 Cash Premiums Received (Sched C: A1)
2 Reins. Pool Premiums Ceded (Sched C: A6)
3 Cash Claims (Total) (Sched C: B4)
4 Commissions Incurred (Sched C: C1c)
5 Premium Tx, Licenses, Fees Incurred (Sched C: C2c)
6 HRA Assessment Incurred (Sched C: C3c)
7 Field Expenses (Sched C: C4c)
8 Guardian Admin. Expenses (Sched C: C5)
9 PHS Admin. Expenses (Sched C: C6)
10 Total Cash Out (2+3+4+5+6+7+8+9)
11 Net Cash Generated for Period (1-10)
Distribution of Cash Flows
For HMO POS In:
12 Cash Flow to PHS (1-4-7-8-50% of 11)
13 Cash Flow to Guardian (4+7+8+50% of 11)
For POS Out:
12 Cash Flow to PHS (3+9+Sched C: E)
13 Cash Flow to Guardian (1-3-9-Sched C: E)
14 Marketing Expenses Reimbursable from Guardian
15 Marketing Expenses Reimbursable from PHS
16 Interst on Delayed Payments Owed from Guardian
17 Interest on Delayed Payments Owed from PHS
18 Interest on Cash Reserves held Owed from Guardian
19 Interest on Cash Reserves held Owed from PHS
20 Other amounts Owed from Guardian
21 Other amounts Owed from PHS
22 Gross Amount Due to PHS (12+14+15+16+17+18+-19+20-21)
23 Less Related YTD Payments Made
24 Net Amount Due to (from) PHS (22-23)
</TABLE>
<PAGE>
SCHEDULE F
CALCULATION OF INTEREST ON CASH RESERVES HELD
---------------------------------------------
A. Beginning of the calendar quarter's cash reserve balance
held for the benefit of the Reinsurer* $
----
Plus 50% of the net cash generated for the quarter (from
Schedule E Line 11**) $
----
Minus Reinsurer's Quarterly Profit (Loss) (from Schedule C
Line E**) $
----
B. Equals End of Quarter's cash reserve balance held for the
benefit of the Reinsurer $
====
C. Interest on Cash Reserve = ((A + B)/2) x (Investment Rate
from Schedule E) x (Number of days in the quarter/365) $
====
* The Beginning of the calendar quarter's cash reserve balance is defined
as the prior quarter's cash reserve balance (prior quarter's Schedule F
line B).
** Schedules C and E are annual exhibits; however, the above calculation
will use quarterly values. The quarterly values are defined as the
current quarter's year to date values less the current year's prior
quarter year to date values, if applicable.
<PAGE>
Exhibit 10(s)
AMENDED AND RESTATED
REINSURANCE AGREEMENT
between
PHYSICIANS HEALTH SERVICES (BERMUDA) LTD.
Hamilton, Bermuda
and
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
New York, New York
<PAGE>
AMENDED AND RESTATED REINSURANCE AGREEMENT
------------------------------------------
Reference is hereby made to the Reinsurance Agreement (the
"Reinsurance Agreement") made and entered into as of April 27, 1995
between THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA, a mutual life
insurance company organized under the laws of the State of New York (the
"Company") and PHYSICIANS HEALTH SERVICES (BERMUDA) LTD., a stock
insurance company organized under the laws of Bermuda (the "Reinsurer").
This Amended and Restated Reinsurance Agreement is dated as of October 1,
1996, and when executed by the parties hereto, shall supersede and
replace the Reinsurance Agreement and shall constitute a binding and
enforceable amendment to the Reinsurance Agreement in its entirety.
THE REINSURANCE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY AS
FOLLOWS:
This Amended and Restated Reinsurance Agreement (this "Agreement") is
made and entered into as of this 1st day of October, 1996 between the
Company and the Reinsurer.
The Company and the Reinsurer mutually agree to enter into a
reinsurance agreement (the "Agreement") on the terms and conditions
stated herein. This Agreement is a reinsurance agreement solely between
the Company and the Reinsurer, and the performance of the obligations of
each party under this Agreement shall be rendered solely to the other
party. In no instance, except as set forth in Article XII, shall anyone
other than the Company or the Reinsurer have any rights under this
Agreement, and the Company shall be and remain solely liable to any
insured, contractholder, physician or other provider or beneficiary under
any contract reinsured hereunder.
<PAGE>
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement, the following terms shall have the
following meanings (definitions are applicable to both the singular and the
plural forms of each term defined in this Article):
"Accounting Period" means the Fiscal Quarter, except that the first
-----------------
Accounting Period shall be the period commencing with the Effective Date and
ending with the last day of the then current Fiscal Quarter, and the last
Accounting Period shall be the period commencing with the first day of the last
Fiscal Quarter preceding the Terminal Accounting Date and ending on the Terminal
Accounting Date.
"Administrative Expense" means an expense which will be reimbursable
----------------------
each Accounting Period and is intended to compensate the Company or the
Reinsurer for a reasonable estimate of the actual cost of performing
administrative services in connection with the Health Insurance Contracts, as
set forth in the Marketing and Services Agreement, without provision for profit.
"Affiliate" means with respect to a specified person, a person that
---------
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified.
"Business Day" means any day except Saturday or Sunday or any legal
------------
Federal or New York State holiday.
2
<PAGE>
"Change of Control" means the acquisition, in a single transaction or
--------- -------
in a series of related transactions, by a person, an entity, or a group of
persons or entities acting in concert of: (i) twenty-five percent (25 %) or more
(a) of the voting common stock of the Reinsurer or PHS (excluding any
acquisition of stock by a party currently owning twenty-five percent (25 %) or
more of such common stock), or (b) fifty-one percent (51 %) or more of
the aggregate value of the assets of the Reinsurer or PHS; or (II) twenty-five
percent (25 %) or more of any ownership interest in the Company.
"Commissions" means commissions and other incentives or bonuses
-----------
applicable to the marketing of the Health Insurance Contracts.
"Continuation Plan" has the meaning set forth in Section 8.6.
-----------------
"Contract Termination Date" means the effective date upon which the
-------- ----------------
Agreement terminates pursuant to the applicable Section in Article VIII below.
"Contractholder" means an employer in the Service Area who or which
--------------
executes an enrollment agreement with respect to any Health Insurance Contract
subject to this Agreement.
"Direct Paid Claims" means amounts paid to health care providers for
------------------
medical claims and/or to subscribers for services covered by Health Insurance
Contracts.
"Direct Paid Premium" means premiums received.
-------------------
"Earned Premium" shall consist of the item shown on Schedule C, line
--------------
I.A.7.
"Effective Date" shall have the meaning set forth in Section 2.1.
-------------
3
<PAGE>
"Fiscal Quarter" means each of the four consecutive three-month
--------------
periods in a fiscal year commencing on January 1 of each year and ending on
December 31 of that calendar year.
"Health Insurance Contracts" means only those health insurance
--------------------------
contracts issued by the Company in the Service Area that are the "out-of-
network" component of a HMO Plan (as defined in the Marketing and Services
Agreement) with a "point-of-service" feature.
"Insurance Taxes" means all insurance taxes, licenses and fees
--------------
directly imposed with respect to premiums on the Health Insurance Contracts
reinsured hereunder and shall be given the same meaning as Insurance Taxes,
Licenses and Fees, Excluding Federal Income Taxes in the Summary of Operations
Schedule in the NAIC Life, Accident and Health Convention Blank which is taken
from the Taxes, Licenses and Fees Exhibit, or similar entries on financial
statements filed by the Company. Such term shall not include any franchise or
other federal, state or local tax measured by net income.
"Interest Compensation Rate" means the rate of interest defined in
--------------------------
Schedule D as applicable to delayed payments.
"Investment Rate" means the rate of interest defined in Schedule D as
---------------
applicable to cash reserve balances held by either the Company or the Reinsurer
for the benefit of the other.
"LIBOR" means, at any time of determination, the London Interbank
-----
Offered Rate paid on U.S. dollar deposits for the applicable period of time as
published under "Money Rates" in the New York City edition of the Wall Street
Journal or, if there is no such
4
<PAGE>
publication or statement therein as to LIBOR, then in any publication used in
the New York City financial community.
"Marketing and Services Agreement" shall have the meaning set forth
--------------------------------
in Section 3.1.
"PHCS" shall mean Private Health Care Systems Incorporated, a
----
corporation with its corporate offices in Waltham, Massachusetts that develops
medical provider networks and provides utilization review services.
"PHS" shall mean Physicians Health Services, Inc., a Delaware
---
corporation with administrative offices in Trumbull, Connecticut, which is the
ultimate parent corporation of the Reinsurer.
"PHS New York" shall mean Physicians Health Services of New
------------
York, Inc., a corporation organized as a health maintenance organization in the
State of New York.
"Profit or Loss" shall have the meaning set forth in Article X.
---------------
"Quarterly Accounting Report" means the report required to be
---------------------------
prepared in accordance with Section 7.2 and providing the data as shown on
Schedule C.
"Quarterly Settlement" means the net amount due and payable to any
--------------------
Accounting Period as set forth in Section 7.3.
"Renewal Date" means, with respect to a Health Insurance
------------
Contract, the date the anniversary of the day on which the liability of the
Company began under such Insurance Contract.
"Reserves" means the amounts shown in the Company's Annual
--------
Statement as filed with the State of New York as reserves for the Health
Insurance Contracts.
5
<PAGE>
"Service Area" means the Counties of Bronx, Dutchess, Kings, Nassau,
------------
New York, Queens, Richmond, Rockland, Suffolk, Orange, Putnam and Westchester in
the State of New York.
"Small Case N.Y. Reinsurance" means reinsurance provided by "specified
---------------------------
medical condition" pools established with respect to Health Insurance Contracts
relating to fifty (50) or fewer employees, as required by New York State
Insurance Department Regulation 146 (11 NYCRR (S) 361.4) and related circular
letters of the New York State Insurance Department.
"Small Case N.Y. Reinsurance Premium" means the charge paid by the
-----------------------------------
Company for Small Case N.Y. Reinsurance provided by pools established pursuant
to Regulation 146.
"Terminal Accounting and Settlement" means the final accounting and
----------------------------------
payment of any amount due either party upon the termination of this Agreement,
as described in Section 9.1.
"Terminal Accounting Date" shall have the meaning set forth in Section
------------------------
9.1.
"Written Premiums" means the consideration paid for the Health
----------------
Insurance Contracts reinsured hereunder, and shall consist of the items shown on
Schedule C, line I.A.7 plus line I.A.3.
ARTICLE II
REINSURANCE COVERAGE
----------- --------
6
<PAGE>
2.1 Coverage. Effective April 27, 1995 (the "Effective Date"), the
--------
Company agrees to cede to the Reinsurer fifty percent (50%) of the risks under
the Health Insurance Contracts, all as more specifically described in Schedule
A, and the Reinsurer agrees to indemnify the Company against fifty percent (50%)
of the risks under such Health Insurance Contracts.
2.2 Plan of Reinsurance. The reinsurance hereunder shall be on a calendar
-------------------
year renewable term basis. The parties agree that the Company will establish and
maintain 100% of the Reserves for the Health Insurance Contracts.
2.3 Conditions. The reinsurance hereunder is subject to the same
----------
limitations and conditions as the Health Insurance Contracts, except as
expressly provided for in this Agreement.
2.4 Exclusions. The reinsurance hereunder does not apply to the following
----------
risks: (i) any portion of the risk under any Health Insurance Contract issued by
the Company other than the risk reinsured hereunder; (ii) any Health Insurance
Contract issued and delivered in a jurisdiction in which issuance and delivery
of such contract constituted the doing of business where the Company was not
properly licensed; and (iii) those risks for which the Reinsurer is not liable
pursuant to the provisions of Section 3.11 hereof.
ARTICLE III
GENERAL PROVISIONS
------- ----------
3.1 Contract Administration. The Company and PHS New York, an affiliate of
-------- --------------
the Reinsurer, each shall have responsibility for certain aspects of the
marketing and
7
<PAGE>
administration of the Health Insurance Contracts, in accordance with the Amended
and Restated Marketing and Services Agreement dated as of October 1,1996 between
the Company, PHS and PHS New York (the "Marketing and Services Agreement").
3.2 Non-Solicitation. During the term of this Agreement, neither party,
----------------
nor any of its Affiliates, shall contact, solicit or contract with any of the
other party's full-time employees who have been engaged in the activities
covered by this Agreement without the consent of the other party.
3.3 Inspection. Either party or its designated representative may inspect,
---------
at the offices of the Company or the Reinsurer, as the case may be, where such
records are located, and conduct reasonable audits of, the papers and any and
all other books or documents of the Company or the Reinsurer reasonably relating
to the Health Insurance Contracts and the administrative responsibilities
hereunder, during normal business hours for such period as this Agreement is in
effect or for as long thereafter as the Company or the Reinsurer, as the case
may be, seeks performance by the other party pursuant to the terms of this
Agreement. The information obtained shall be used only for purposes relating to
the reinsurance provided under this Agreement and shall not be disclosed to any
person without the express permission of the other party, except to the extent
that disclosure is required by law. Each party's rights under this Section 3.3
shall survive termination of this Agreement.
3.4 Misunderstandings and Oversights. If any delay, omission, error or
--------------------------------
failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Company and the Reinsurer will adjust the situation to what it would have been
had the misunderstanding or oversight not occurred. The
8
<PAGE>
party that first discovers such oversight or incorrect act as a result of the
misunderstanding will notify the other party in writing promptly upon discovery
of the misunderstanding or oversight. The parties shall act to correct the
error, omission or oversight within twenty (20) days of notification of the
problem. This Section 3.4 shall not be construed as a waiver by either party of
its right to enforce strictly the terms of this Agreement.
3.5 Reinstatements. If a Health Insurance Contract reinsured hereunder
--------------
that was terminated or lapsed is reinstated while this Agreement is in effect,
the reinsurance for such Health Insurance Contract under this Agreement will be
reinstated automatically as if the Health Insurance Contract had not been
terminated or lapsed. All amounts received in connection with such reinstatement
shall be treated as Direct Paid Premiums.
3.6 Contract Changes or Reserve Changes. The Company and the Reinsurer
-----------------------------------
shall share, based upon the percentages specified in Section 2.1 and Schedule A,
in any increase or decrease in the Company's liability that results from any
change in the terms or conditions of any Health Insurance Contract reinsured
hereunder or in the calculation of Reserves. The Company must provide written
notification to the Reinsurer within fifteen (15) calendar days after any such
change, if such change can reasonably be expected to have a significant effect
on the transactions contemplated by this Agreement.
3.7 Compliance with Applicable Laws and Regulations. It is the intention
-----------------------------------------------
of the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the agreement remains
in full force and the Health Insurance Contracts remain reinsured on a calendar
year renewable term basis. Each of the parties agrees to comply with all laws,
ordinances, rules, regulations and orders of regulatory bodies
9
<PAGE>
applicable to the transactions contemplated by this Agreement, including those
relating to the payment of commissions.
3.8 Amendment and/or Termination Upon Failure to Comply. In the event that
---------------------------------------------------
it is determined by an insurance or health regulatory authority, the Internal
Revenue Service or any other Bermuda or U.S. federal, state or local regulatory
authority or by either party to this Agreement upon the advice of an insurance
or health regulatory authority or the Internal Revenue Service that this
Agreement fails to conform to, or that the intent of this Agreement cannot be
effected as a result of, the requirements of existing applicable laws and
regulations and that this Agreement may be brought into conformity with said
requirements, or the intent of this Agreement may be effected, only by means of
a material change to this Agreement, or in the event that such laws or
regulations are changed subsequent to the Effective Date and such change has a
material adverse effect on either party or requires a material change to this
Agreement in order for this Agreement to conform with applicable laws and
regulations or for its intent to be effected, the parties shall exercise
reasonable efforts to reach an agreement to amend this Agreement so as to return
the parties to the economic position that they would have been in had no such
change occurred or so that both parties share the economic detriment of such
change proportionately. If the parties are unable to reach an agreement to amend
the Agreement, then the differences between the parties shall be resolved
through arbitration in accordance with the provisions of Article XIII. In the
event that any required change is not material, this Agreement shall be amended
in accordance with such requirement.
3.9 Notification of Disapproval or Change in Law. The Company shall
------------ -- ----------------------------
promptly notify the Reinsurer of any actual or anticipated disapprovals or
required changes regarding
10
<PAGE>
this Agreement that are made by any insurance or health regulatory authority or
taxing authority and of any change in the laws, regulations or rulings affecting
this Agreement or related documents. The Reinsurer shall be allowed to
participate in the defense of this Agreement or related documents on its own
behalf with such authority after consultation with the Company.
3.10 Setoff. It is expressly understood that any debts or credits, matured
------
or unmatured, liquidated or unliquidated, arising or incurred pursuant to the
terms hereof, including but not limited to such debts and credits arising under
Articles IV, V and VI shall, at all times and under all circumstances relevant
to the rights and liabilities of the parties to this Agreement, be deemed mutual
debts or credits, as the case may be, and shall be set off, and only the net
balance shall be allowed or paid.
3.11 Limitations on Liability. (a) The Reinsurer does not indemnify and
------------------------
shall not be liable pursuant to this Agreement or otherwise for any of the
Company's risk, to the extent any damages result from the negligent acts or
omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith
of the Company. The Reinsurer shall be liable and indemnify the Company fully
for all losses arising from the negligent acts or omissions to act, reckless or
intentional wrongs, fraud, oppression or bad faith of the Reinsurer or any
Affiliate of the Reinsurer, acting in connection with a Health Insurance
Contract reinsured hereunder.
(b) The Company does not indemnify and shall not be liable pursuant to
this Agreement or otherwise for any of the Reinsurer's risk, to the extent any
damages result from the negligent acts or omissions to act, reckless or
intentional wrongs, fraud, oppression or bad faith of the Reinsurer or of an
Affiliate of the Reinsurer. The Company shall be liable and
11
<PAGE>
indemnify the Reinsurer fully for all losses arising from the negligent acts or
omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith
of the Company acting in connection with a Health Insurance Contract reinsured
hereunder.
(c) The Reinsurer shall be liable, based on the applicable percentages set
forth in Section 2.1 and Schedule A, and subject to the election permitted by
Section 6.3, for any losses arising from non-negligent acts or omissions to act
taken by the Company in good faith pursuant to Health Insurance Contracts
reinsured hereunder.
3.12 Exclusivity. The Company and the Reinsurer shall not enter into an
-----------
arrangement with other parties similar to this Agreement for reinsurance of
health insurance products to be offered in the Service Area, except as expressly
permitted under the Marketing and Services Agreement.
3.13 Press Releases. No public statement or press release regarding the
--------------
existence of this Agreement or the terms thereof shall be made by either party
hereto without the prior written consent of the other party, except as required
by applicable laws, ordinances, rules and regulations.
3.14 Restrictions on the Reinsurer and the Company Relating to Other
---------------------------------------------------------------
Agreements. During the period from the Effective Date through the last date on
- ----------
which the provisions of this Agreement are in effect, each of the Reinsurer and
the Company shall be prohibited from, directly or indirectly, entering into any
contract, lease, sublease, license, sublicense, promissory note, evidence of
indebtedness or other contract or commitment (whether oral or written), which
will, or can reasonably be expected to at any time, place any material
restriction or restrictions on such party's ability to perform any or all of its
obligations under
12
<PAGE>
this Agreement; provided, however, that, nothing herein shall limit either
party's right to enter into a Change of Control transaction in accordance with
the provisions set forth herein.
3.15 Investigations. Each party to this Agreement shall immediately notify
--------------
the other party, in writing, of any and all investigations of such party or its
directors, principal officers or shareholders conducted by any Federal, foreign
or local governmental or regulatory authority other than routine examinations or
surveys by insurance or health regulatory authorities and federal or state tax
authorities.
3.16 Change of Control. Each party shall fully disclose the details of any
--------- -------
pending Change of Control known to it to the other party, and shall provide the
other party with copies of any and all applications for approval therefor made
to Federal, state or local regulatory authorities (for purposes of this Section
3.16, PHS shall be deemed to be a party hereto). Such disclosure shall be made
prior to or concurrent with notification and/or application for approval to such
Federal, state or local regulatory authorities of a Change of Control. In the
event that such Change of Control shall be approved, the party that intends to
undergo the Change of Control shall notify the other party immediately thereof
and the other party shall have the rights set forth in Section 8.6.
3.17 Reinsurance or Sale of Health Insurance Contracts. (a) The Company
---------------------- --------------------------
agrees that, during the period in which this Agreement is in effect, it shall
not reinsure, sell or assign the Health Insurance Contracts to another entity.
(b) Notwithstanding paragraph (a) above, this Section 3.17 shall not
restrict the ability of the Company to (i) enter into a merger or consolidation,
or (ii) effect a sale of its business as an entirety or substantially as an
entirety; provided, however, that the Company
13
<PAGE>
may not enter into a transaction listed in (i) or (ii) above with another entity
unless such other entity provides the Reinsurer with a writing, in form and
substance satisfactory to the Reinsurer, which shall state that the entity
agrees to be bound by the terms of this Agreement to the same extent and effect
as if such entity had been a party to this Agreement.
3.18 Commission Scale and Commission Scale Changes. Commission payments
---------------------------------------------
made with respect to any Health Insurance Contracts reinsured hereunder shall be
according to the same commission scale used by the Company with respect to the
specific types of products listed on Schedule A, or substantially similar
products, that are not subject to this Agreement, as that scale may be changed
from time to time.
3.19 Statement of Actuarial Opinion. Within forty-five (45) calendar days
------------ -----------------
after the end of the calendar year, the Company shall provide the Reinsurer with
a Statement of Actuarial Opinion certifying the adequacy of the Reserves which
are covered under this Agreement. In addition, the Actuarial Opinion must state
whether or not the Reserves covered under this Agreement meet the minimum
standards of all states where the Company is licensed, and if not the difference
between the Company's reserves and state minimums. The Actuarial Opinion shall
meet the requirements as set forth in the NAIC's Actuarial Opinion and
Memorandum Regulation. The Opinion shall be signed by the Company's
"Appointed Actuary."
ARTICLE IV
PREMIUMS AND RESERVES
-------- --- --------
4.1 Premiums. Premiums with respect to Health Insurance Contracts shall be
--------
allocated to the Company and the Reinsurer in accordance with the applicable
percentages set
14
<PAGE>
forth in Section 2.1 and Schedule A, and the portion of the Premiums allocated
to the Reinsurer shall constitute the consideration in respect of the
Reinsurer's acceptance of risk under this Agreement. The portion of Premiums
allocated to the Reinsurer shall be paid over to the Reinsurer in accordance
with the settlements required by Section 7.3 of this Agreement.
4.2 Reinsurer's Capital and Surplus. The Reinsurer agrees that it shall
-------------------------------
maintain capital and surplus in an amount of assets or letters of credit in
accordance with, and to the extent permitted by, the insurance laws of Bermuda
with respect to the Reinsurer's share of Written Premiums allocated to the
Reinsurer under Section 4.1 above with respect to all Health Insurance Contracts
in force that are reinsured under this Agreement.
4.3 Reserves. The Company shall establish and maintain Reserves with
--------
respect to the Health Insurance Contracts reinsured hereunder. The Company will
fund 50% of such Reserves on behalf of the Reinsurer by deducting the
appropriate amount from the Quarterly Settlements due the Reinsurer, as set
forth in Section 7.3, to the extent that such Quarterly Settlements are
sufficient for such purpose. To the extent that the Quarterly Settlements are
not sufficient for such purpose, Reinsurer will, within 45 calendar days of a
request by Company, pay to Company the amount necessary to fund 50% of such
Reserves. The Company will credit interest on the Reserve funds held on behalf
of the Reinsurer at a rate equal to the Investment Rate set forth in Schedule D.
ARTICLE V
EXPENSE ALLOWANCE
------- ---------
5.1 Administrative Expenses. Each party shall be entitled to reimbursement
-----------------------
for its Administrative Expenses (not including pre-marketing expenses),
identified in Schedule B, for
15
<PAGE>
each Accounting Period. Such Administrative Expenses, plus any Insurance Taxes
and Commissions, paid by such party with respect to the Health Insurance
Contracts during the Accounting Period, shall be considered reimbursable
expenses.
5.2 Payment. The Company and the Reinsurer shall be reimbursed for the
-------
amounts shown as Company Expenses or Reinsurer Expenses, as set forth in Section
7.3 below. A portion of the reinsurer's expenses shall be allotted and similarly
paid to PHS New York for claims payment expenses.
ARTICLE VI
CLAIMS
6.1 Payment of Claims. PHS New York shall act as the agent of the Company
-----------------
and shall pay claims under the Health Insurance Contracts, subject to mutually
agreed upon claims standards. The Company shall reimburse PHS New York as
specified under Section 7.3. The Reinsurer shall reimburse the Company as
specified under Section 7.3.
6.2 Notice of Claim. Upon receipt of any claim on any Health Insurance
------ -- -----
Contract, which claim is reasonably anticipated to exceed fifty thousand dollars
($50,000), PHS New York shall promptly notify the Company of such claim. Copies
of notification, claim papers, and proofs shall be furnished by the Reinsurer
to the Company upon request.
6.3 Determination of Claims by the Company The Reinsurer will accept the
---------------- ---------------------
decision of the Company with respect to the liability for a claim under a Health
Insurance Contract; provided, however, that the Company shall promptly advise
the Reinsurer of the Company's intention to contest a claim under a Health
Insurance Contract, and the Reinsurer shall have
16
<PAGE>
the right to advise and assist the Company in its determination of liability and
in the best procedure to follow with respect to any such claim of doubtful
validity. The Company and the Reinsurer shall share, in accordance with the
applicable percentages set forth in Section 2.1 and Schedule A, all expenses
incurred in connection with contesting, compromising or settling claims under
Health Insurance Contracts, subject to the limitations of Section 3.11. Such
expenses may include, but are not limited to, all costs and expenses of
investigation, settlement of claims, litigation costs and judgments. If,
however, the Reinsurer has advised the Company that a contested claim should be
paid, and elects to assume liability for its applicable percentages set forth in
Section 2.1 and Schedule A of the claim as originally presented, the Reinsurer
shall not share in any additional costs or expenses associated with such claim.
17
<PAGE>
ARTICLE VII
ACCOUNTING AND REPORTING
---------- --- ---------
7.1 Reinsurance Accounting. The Company shall maintain separate books or
----------------------
details of account with respect to the Health Insurance Contracts reinsured
hereunder, setting forth the data required in Schedules C, E and F.
7.2 Quarterly Accounting Reports. Following the end of each Accounting
----------------------------
Period, the Company shall supply the Reinsurer with a Quarterly Accounting
Report providing the data required in Schedules C, E and F. The Quarterly
Accounting Report shall be submitted within forty-five (45) calendar days
following the close of each calendar quarter.
7.3 Settlements. Settlement of amounts payable between the Company, the
-----------
Reinsurer and PHS New York shall be made in a reasonably expeditious manner once
the amounts or estimates are known or determined. All settlement payments shall
be made by wire transfer with same or next day availability unless otherwise
agreed.
(a) Weekly Settlements. The Company shall make reimbursement payments to
------------------
PHS New York for estimated weekly cash claims paid by PHS New York. Such
estimates are to be mutually determined, and appropriately adjusted from time to
time, to reasonably approximate the timing and amounts of cash claim
expenditures made by PHS New York and to minimize the quarterly settlement
amounts with respect to claims. Such payments are due weekly based upon a
mutually agreed upon schedule.
18
<PAGE>
(b) Monthly Settlements. The Company shall make reimbursement payments to
-------------------
the Reinsurer and PHS New York monthly for any actual or estimated monthly
administrative expenses or assessments incurred by them. Such payments are due
within 20 Business Days after the end of each month in which they were incurred.
The Company's actual or estimated administrative expenses, premium taxes, fees,
assessments or commission expenses incurred are also deemed payable at that
time. By mutual agreement, certain expenses may be added to or deleted from this
monthly reimbursement. PHS New York shall be reimbursed for any amounts owed,
net of any reimbursements made as specified in Sections 5.2 and 6.1. Such
amounts are subject to the settlement process described herein and shall be
included in Schedules C and E as part of the Quarterly Accounting Reports.
(c) Quarterly Settlements. Based upon the Quarterly Accounting Reports,
---------------------
including Schedules C, E and F, settlement payment shall be made to the Company
or Reinsurer, as the case may be, within 45 calendar days from the end of such
quarter. If such reports or schedules are not finalized within this time frame,
a reasonable estimated payment shall be made followed by an adjustment payment.
The Quarterly Settlement payment shall represent settlement, net of any interim
reimbursements or other related settlement payments, of all amounts due during
that quarter and any mutually agreed upon adjustments to prior periods. The
quarterly calculation of this payment shall be substantially in the form of
Schedule E with any positive amounts listed on Line 24 of such Schedule being
payable from the Company to the Reinsurer and any negative amounts being payable
from the Reinsurer to the Company. For the purpose of calculating interest on
delayed payments relating to this quarterly settlement
19
<PAGE>
payment, the parties agree that the due date is the 15th day of the middle month
of the settlement quarter unless otherwise mutually agreed.
(d) Other Settlements. Other settlement payments between the Company, the
-----------------
Reinsurer, and PHS New York such as payment adjustments, preliminary quarterly
settlements, withhold payout reimbursements or interest compensation may be made
separately or along with other settlement payments upon mutual agreement. For
the purpose of calculating interest on delayed payments relating to these
payments, due dates are to be mutually agreed upon if not otherwise specified in
this Agreement.
7.4 Reconciliation. Each party shall have the right to review all
--------------
individual components of transactions entered into each Quarterly Accounting
Report, such as Premiums received, Commissions and Insurance Taxes, claims
incurred or paid, and similar items. The parties shall have a reasonable period
from the day the Quarterly Accounting Report is submitted to report any
deficiency in such report and to request an adjustment of any payment made to or
received by either party. Any amount due either party in connection with such
reconciliation shall be paid within forty-five (45) calendar days of the receipt
of notice that additional amounts are due.
7.5 Best Efforts to Supply Actual Data. In preparing all reports required
----------------------------------
in this Agreement, the Reinsurer and the Company shall make their best efforts
to supply the actual data. If the actual data cannot be supplied with the
appropriate report, the Reinsurer or the
20
<PAGE>
Company shall produce best estimates, and shall provide amended reports based on
actual data no more than forty-five (45) calendar days after such report was
originally due.
7.6 Interest Delayed Payments. Should any payment in connection with the
-------------------------
Quarterly Settlements due the Company, the Reinsurer, of PHS New York as set
forth in Section 7.3 above be delayed beyond its due date as defined or
determined, such delayed payment shall accrue interest during such period of
delay at the Interest Compensation Rate as defined on Schedule D. Interest is to
be calculated based upon an actual/365 day basis. Any such interest accrued or
paid shall not be included in Schedule C as a jointly shared income or expense
item, but rather be paid directly to the deficient party either separately or as
a separate item added to the Schedule E settlement. The application of this
calculation shall also apply to any over payments, with interest accruing back
to the deficient party.
7.7 Interest on Cash Reserves. The Company shall pay the Reinsurer at the
-------------------------
Investment Rate as defined in Schedule D for any net cumulative cash reserve
balances held by the Company for the benefit of the Reinsurer after adjusting
for any settlement payments. Interest will be calculated quarterly based upon an
actual/36S day basis and is due and payable at the time of the Quarterly
Settlement. Any such interest accrued or paid shall not be included in Schedule
C as a jointly shared income or expense item, but will be paid directly to the
Reinsurer either separately or as a separate item added to the Schedule E
settlement. Such interest shall be calculated and reported as set forth in
Schedule F.
ARTICLE VIII
DURATION AND TERMINATION
------------------------
21
<PAGE>
8.1 Duration. Except as otherwise provided herein, this Agreement shall be
--------
unlimited in duration.
8.2 Commencement of Liability. The liability of the Reinsurer on
------------------------
reinsurance ceded hereunder shall commence on the later of the Effective Date
and the date the liability of the Company commences under a Health Insurance
Contract reinsured hereunder.
8.3 Termination of Liability. Except as provided in the next sentence of
------------------------
this Section 8.3, the liability of the Reinsurer with respect to any Health
Insurance Contract shall terminate on the date the liability of the Company on
such Health Insurance Contract is terminated. If this Agreement is terminated as
provided in this Article VIII, the Reinsurer's liability with respect to Health
Insurance Contracts that remain in force shall terminate on the day that all
Direct Paid Claims incurred prior to the date of such termination are satisfied.
8.4 Termination of Agreement. Either party shall have the right to
------------------------
terminate this Agreement without cause upon the giving of one hundred eighty
(180) days advance written notice to the other party; provided, however, that,
the liability of the Reinsurer with respect to Health Insurance Contracts that
remain in force will terminate on the day that all Direct Paid Claims incurred
prior to the date of such termination are satisfied. The Contract Termination
Date under this Section 8.4 shall be the 180th day following the giving of the
notice required by this Section 8.4.
8.5 Automatic Termination. If, at the end of an Accounting Period, none of
---------------------
the Health Insurance Contracts is in force, this Agreement shall automatically
terminate; provided, however, that if the parties intend to continue to perform
their marketing activities under the Marketing and Services Agreement, the
automatic termination shall be deemed to be waived.
22
<PAGE>
In the event of termination pursuant to this Section 8.5, the last day of such
Accounting Period shall be the Contract Termination Date.
8.6 Termination Subsequent to a Change In Control. In the event of a
---------------------------------------------
Change In Control of the Company or the Reinsurer (or PHS), the party not
undergoing the Change of Control may elect to terminate this Agreement. In the
event that this Agreement is terminated as a result of a Change of Control: (i)
without any further action required of either party, the Marketing and Services
Agreement shall be deemed to be terminated as of the effective date of the
Change of Control except with respect to the provisions regarding the
administration of the Health Insurance Contracts continued under this Section
8.6 which provisions shall be deemed to survive such termination for the period
set forth in clause (ii) of this sentence; and (ii) the party not undergoing the
Change of Control may elect to continue the reinsurance arrangements provided in
this Agreement solely with respect to the reinsurance of any case that was
originally written as a Health Insurance Contract and that was in force on the
Contract Termination Date, until the tenth (10th) succeeding Renewal Date
applicable to such Health Insurance Contract, or continuation health insurance
contract issued by the Company; (collectively "Continuation Plans"), following
the Contract Termination Date. The Contract Termination Date under this Section
8.6 shall be the effective date of the Change of Control.
8.7 Termination for Cause. (a) In the event that either party shall
---------------------
default in the performance of the duties and obligations imposed on it pursuant
to the terms of this Agreement or the Marketing and Services Agreement, or
breach any of the provisions contained herein or therein, including the failure
to pay any amount when due, or the failure of either party to maintain a level
of services under the Marketing and Services Agreement that is
23
<PAGE>
reasonably satisfactory to the other party, the defaulting party shall be
allowed thirty (30) days calendar from receipt of written notice of such default
or breach to present to the nondefaulting party a plan to cure such default or
breach that is reasonably satisfactory to the non-defaulting party. If a
reasonably satisfactory plan to cure the default or breach is not submitted
within that time, or if the plan is not carried out according to its terms, the
non-defaulting party shall have the right to terminate this Agreement upon
delivery of written notice of such termination to the defaulting party, which
shall be effective on receipt, without prejudice to any other rights or remedies
available to the non-defaulting party by reason of such default or breach.
(b) In the event that either party shall engage in fraudulent, illegal
or grossly negligent conduct with respect to its duties and obligations under
this Agreement or the Marketing and Services Agreement, the other party shall
have the right to terminate this Agreement upon delivery of written notice of
such termination to the defaulting party, which shall be effective upon receipt,
without prejudice to any other rights or remedies available to the non-
defaulting party by reason of the other party's conduct.
(c) The Contract Termination Date under this Section 8.7 shall be the date
of receipt of the notice of termination.
8.8 Termination of Agreement Upon the Occurrence of Certain Events. This
--------------------------------------------------------------
Agreement may be terminated at the election of the other party pursuant to
written notice upon the occurrence of either of the following events:
24
<PAGE>
(a) one of the parties to this Agreement fails to remain in good standing
under the laws of its state of domicile, or fails for any reason to remain
qualified to engage in the transaction contemplated by this Agreement under
applicable laws, ordinances, rules or regulations; or
(b) a voluntary or involuntary proceeding is commenced in any state by or
against one of the parties to this Agreement for the purpose of supervising,
conserving, rehabilitating or liquidating such party.
The Contract Termination Date under this Section 8.8 will be the day of
receipt of the notice of termination. In the event that the Company shall be
subject to (a) or (b) above, the Reinsurer, or a properly licensed Affiliate of
the Reinsurer, shall have the exclusive right (subject to appropriate regulatory
approvals) to acquire the Health Insurance Contracts or to require the Company
to assign the Health Insurance Contracts to a designated entity authorized to
issue health insurance contracts in the geographic areas in which the Company
operates.
8.9 Termination for Material Change in PHS Network. In the event that the
----------------------------------------------
PHS Network (as that term is defined in the Marketing and Services Agreement)
undergoes a material change within the meaning of Section 6.3 of the Marketing
and Services Agreement, the Reinsurer and PHS New York shall be allowed thirty
(30) calendar days to present to Company a plan to cure such Material Change
that is reasonably satisfactory to Company. If a reasonably satisfactory plan to
cure the Material Change is not submitted within that time, or if the plan is
not carried out according to its terms, Company shall have the right to
terminate this Agreement upon delivery of written notice of such termination to
Reinsurer, which shall
25
<PAGE>
be effective upon receipt (the date of receipt being the Contract Termination
Date under this Section 8.9), without prejudice to any other rights or remedies
available to Company.
ARTICLE IX
PAYMENTS UPON TERMINATION OF AGREEMENT
--------------------------------------
9.1 Payments on Termination. (a) In the event that this Agreement shall be
-----------------------
terminated pursuant to Article VIII, a net accounting and settlement as to any
balance due under this Agreement shall be undertaken by the parties to this
Agreement (the "Terminal Accounting and Settlement"), which calculations shall
be performed as of the day that is one (1) year from the date that the liability
of the Reinsurer shall have terminated (the "Terminal Accounting Date"). During
the period between the termination of this Agreement and the Terminal Accounting
Date, Direct Paid Claims that accrued prior to the termination of this Agreement
shall continue to be paid, and Reserves shall continue to be held, in accordance
with the terms set forth herein.
(b) The Company shall supply the Reinsurer with final Schedules C, E and F
which shall show the Terminal Accounting and Settlement. If the Terminal
Accounting and Settlement shows that the Company owes the Reinsurer, then the
Company shall pay the amount owing to the Reinsurer. If the Terminal Accounting
and Settlement shows that the Reinsurer owes the Company, then the Reinsurer
shall pay the amount owing to the Company. Such Schedules shall be supplied by
the Company within the period agreed by the parties.
(c) Any payment required under the Terminal Accounting and Settlement by
the Company shall be paid by the Company no later than the day on which the
final Schedules C,
26
<PAGE>
E and F, as required by Section 9.1(b), are due. The Reinsurer shall make any
payment required to be made by the Reinsurer hereunder within ten (10) calendar
days of receipt of such final schedules. In the event that the calculation for
the payment required under the Terminal Accounting and Settlement cannot be
accurately calculated by such date, then an estimate shall be paid, with a
supplemental accounting being made when the accurate information shall become
available.
9.2 Supplemental Accounting In the event that, subsequent to the Terminal
-----------------------
Accounting and Settlement, an adjustment is made with respect to any amount
taken into account in the Terminal Accounting and Settlement, or in the event
that the Company pays a Direct Paid Claim that accrued prior to the date hereof,
a supplemental accounting shall be made. Any net amount owed to the Reinsurer or
the Company by reason of such supplemental accounting, plus any interest due
pursuant to Section 7.7, shall be paid promptly upon the completion of such
supplemental accounting.
ARTICLE X
CALCULATION OF PROFIT AND LOSS
------------------------------
10.1 Determination and Allocation of Profit or Loss. The Company shall
----------------------------------------------
calculate Profit or Loss with respect to the Health Insurance Contracts, and the
Reinsurer or the Company, as appropriate, shall make settlements as required by
Section 7.3 or Section 9.1, as appropriate, according to the calculations as
shown on Schedules C, E and F and shall be made part of each Quarterly
Accounting Report.
27
<PAGE>
ARTICLE XI
CONDITION PRECEDENT
-------------------
11.1 Condition Precedent. When, under insurance, public health or other
-------------------
applicable laws or regulations, approval of arrangements of the type
contemplated by this Agreement by one or more foreign, federal, state or local
governmental or regulatory authorities is required, the receipt by the Company
and the Reinsurer (or PHS, as applicable) of any and all such approvals shall be
a condition precedent to the other party's liability under this Agreement.
Subject to Section 11.2, if this condition precedent is not met by the Company
or the Reinsurer by the Effective Date, this Agreement shall be void as of the
Effective Date.
11.2 Extension of Time. In the event that the necessary approvals set
-----------------
forth in Section 11.1 have not been obtained by the Company or the Reinsurer as
of the Effective Date, the parties may mutually agree to modify the Effective
Date of this Agreement.
11.3 Cooperation of the Parties. The Reinsurer and the Company shall each
--------------------------
use its best efforts to cooperate with and assist the other party in obtaining
the necessary approvals referred to in Section 11.1.
11.4 Guarantee of Reinsurer. As a further condition precedent to the
----------------------
obligation of the Company to cede reinsurance under this Agreement, on or before
the Effective Date hereof, the Reinsurer shall deliver to the Company an
agreement by PHS to guarantee the solvency of the Reinsurer. Such agreement
shall be in form and content acceptable to the Company in its sole discretion,
and shall be effective for as long as the Company seeks performance by the
Reinsurer under this Agreement. Any termination or substantial
28
<PAGE>
amendment of PHS' agreement to guarantee the obligations of the Reinsurer shall
be cause for termination by the Company under Section 8.7 above.
ARTICLE XII
INSOLVENCY OF THE COMPANY
---------- -- --- -------
12.1 Payments by the Reinsurer. In the event of the insolvency of the
-------------------------
Company, payments due the Company on all reinsurance made, ceded, renewed or
otherwise becoming effective under this Agreement shall, subject to Section
12.2, be payable by the Reinsurer directly to the Company or to its liquidator,
receiver, or statutory successor on the basis of the liability of the Company
under the Health Insurance Contracts reinsured hereunder without diminution
because of the insolvency of the Company.
12.2 Claims. In the event of the insolvency of the Company, the Reinsurer
------
shall be given written notice of the pendency of a claim against the insolvent
Company on a Health Insurance Contract reinsured hereunder within a reasonable
time after such claim is filed in the insolvency proceeding. During the pendency
of such claim, the Reinsurer may investigate such claim and interpose, at its
own expense, in the proceeding where such claim is to be adjudicated, any
defense or defenses which it may deem available to the Company or its liquidator
or receiver or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to court approval, against the insolvent Company as
part of the expense of liquidation to the extent of a proportionate share of the
benefit which may accrue to the Company solely as a result of the defense
undertaken by the Reinsurer. Where two or more assuming reinsurers are involved
in the same claim and a majority in interest elect to interpose
29
<PAGE>
defenses to such claim, the expense shall be apportioned in accordance with the
terms of this Agreement as though such expense had been incurred by the Company.
ARTICLE XIII
ARBITRATION
-----------
13.1 Appointment of Arbitrators. In the event of any disputes or
-------------- -----------
differences arising hereafter between the contracting parties with respect to
any transaction, matter or issue arising from or relating in any way to this
Agreement on which agreement between the parties hereto cannot be reached, the
same shall be decided by arbitration. Three arbitrators will decide any dispute
or difference. The arbitrators must be disinterested officers or retired
officers of health maintenance organizations or managed health care companies,
or insurance companies with experience in managed health care, other than the
two parties to this Agreement or their Affiliates. Each of the contracting
companies agrees to appoint one of the arbitrators with the third, the "Umpire,"
to be chosen by the other arbitrators. In the event that either party should
fail to choose an arbitrator within 30 days following a written request by the
other party to do so, the requesting party may choose an Umpire before entering
upon arbitration. In the event that the two arbitrators shall not be able to
agree on the choice of the Umpire within 30 days following their appointment,
each arbitrator shall nominate five candidates within 10 days thereafter, four
of whom the other arbitrator shall decline, and the Umpire shall be chosen from
the two remaining nominees by the President of the American Arbitration
Association.
13.2 Decision of Arbitrators: Expenses. The arbitrators shall consider
----------- ---------------------
customary and standard practices in the managed health care insurance
businesses. They shall decide by a
30
<PAGE>
majority vote of the arbitrators. There shall be no appeal from their written
decision. Judgment may be entered on the decision of the arbitrators by any
court having jurisdiction. Each party shall bear the expense of its own
arbitrator and outside attorney fees, and shall jointly and equally bear with
the other party the expenses of the third arbitrator.
13.3 Applicable Law: Survival. Any arbitration instituted pursuant to this
------------------------
Article XIII shall be held in New York, New York and the laws of the State of
New York and, to the extent applicable, the Federal Arbitration Act shall apply.
This Article XIII shall survive termination of this Agreement.
13.4 Other Actions. Submission of a matter to arbitration shall be a
------------
condition precedent to any right to institute a proceeding at law or in equity
concerning such matter, except for injunctive or other provisional relief
pending the arbitration of a matter subject to arbitration pursuant to this
Agreement.
31
<PAGE>
ARTICLE XIV
REPRESENTATIONS AND WARRANTIES
------------------- ----------
14.1 Representations and Warranties of the Company. The Company hereby
--------------------------------- -----------
represents and warrants to the Reinsurer as follows:
The Company is a mutual life insurance company organized and existing under
the laws, including the insurance laws, of the State of New York and is in good
standing under these laws. The Company further represents and warrants that it
is duly licensed and admitted as an insurer under the laws of those
jurisdictions in which the Health Insurance Contracts reinsured hereunder have
been issued. In addition, the Company covenants that, so long as this Agreement
is in effect, it shall take all actions reasonably necessary to remain duly
licensed under the laws of those jurisdictions wherein the Health Insurance
Contracts have been issued. The Company shall notify the Reinsurer immediately
in the event that its license shall be revoked or suspended in any jurisdiction
hereunder.
The Company has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Company of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Company of
the transactions as herein contemplated and the carrying out by the Company of
its obligations contemplated hereby have been duly and validly authorized by all
necessary corporate action.
14.2 Representations and Warranties of the Reinsurer. The Reinsurer hereby
------------------- ------------- -------------
represents and warrants to the Company as follows:
32
<PAGE>
The Reinsurer is a corporation organized and existing under the laws,
including the insurance laws, of Bermuda and is in good standing under these
laws. The Reinsurer covenants that, so long as this Agreement is in effect, that
it shall take all reasonable actions necessary to remain duly licensed within
the purview of this Agreement under the insurance laws of Bermuda. The Reinsurer
shall notify the Company immediately in the event that its license shall be
revoked or suspended in any jurisdiction hereunder.
The Reinsurer has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.
The execution and delivery by the Reinsurer of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Reinsurer
of the transactions as herein contemplated and the carrying out by the Reinsurer
of its obligations contemplated hereby have been duly and validly authorized by
all necessary corporate action.
ARTICLE XV
CONFIDENTIALITY
---------------
15.1 Obligations of the Parties. Each party agrees that all information
-------------- -----------
concerning the business affairs of the Company or the Reinsurer (or PHS or its
Affiliates), as the case may be, which is not generally available to the public,
including but not limited to, lists of physicians and other health care
providers, lists of brokers and other information of a proprietary nature
relating to methods of doing business heretofore or hereinafter received by it
from the other party shall be kept and maintained as confidential and in
complete secrecy. Neither party shall, without the prior written consent of the
other party, disclose at any time,
33
<PAGE>
either orally, or in writing, or otherwise, in any manner, directly or
indirectly, to any person or entity, except to other employees or agents of the
non-disclosing party, any such proprietary information. Any breach of
confidentiality shall give the non-breaching party the right of injunctive
relief in addition to any other remedy permitted by law.
15.2 Survival of Article XV. This Article XV shall survive termination of
----------- ----------
this Agreement.
ARTICLE XVI
MISCELLANEOUS PROVISIONS
------------------------
16.1 Notices. All notices required pursuant to this Agreement shall be in
-------
writing and shall become effective when received. Each written notice shall be
sent by certified or registered mail, return receipt requested, or a nationally
recognized overnight delivery service (providing for delivery receipt) or
delivered by hand. All notices under this Agreement shall be addressed as
follows:
If to the Company:
The Guardian Life Insurance Company of America
201 Park Avenue South
New York, New York 10003
ATTENTION: Edward K. Kane, Esq.
Senior Vice President & General Counsel
If to the Reinsurer:
Physicians Health Services (Bermuda) Ltd.
120 Hawley Lane
Trumbull, Connecticut 06611
ATTENTION: Regina M. Campbell, Esq.
Senior Vice President & Chief Administrative Officer
34
<PAGE>
If to PHS:
Physicians Health Services, Inc.
12O Hawley Lane
Trumbull, Connecticut 06611
ATTENTION: Regina M. Campbell
Senior Vice President & Chief Administrative Officer
16.2 Successors and Assigns. Except as provided in Section 3.17(b), this
----------------------
Agreement cannot be assigned by the Company or the Reinsurer without the prior
written approval of the other party. The provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective permitted successors and assigns.
16.3 Counterparts. This Agreement may be executed simultaneously in any
------------
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same agreement.
16.4 Currency. All payments and accounts shall be made in United States
--------
Dollars, and all fractional amounts shall be rounded to the nearest whole
dollar.
16.5 Amendment. This Agreement shall be amended only by written
---------
agreement signed by a duly authorized officer of each of the Company and the
Reinsurer, and any change to this Agreement shall be null and void unless made
by such amendment; provided, however, that where, under insurance, public health
or other applicable laws or regulations, the approval of any such amendment to
this Agreement by one or more Federal, state or Bermuda local governmental or
regulatory authorities is required, the amendment shall not take effect unless
and until all such necessary approvals have been received by the Company. In the
event that
35
<PAGE>
such an approval is required, the Company, the Reinsurer and PHS shall each be
obligated to take all necessary actions in order to obtain such approval.
16.6 Entire Agreement: Headings. This Agreement and the Schedules and
--------------------------
Exhibits attached hereto, together with the Marketing and Services Agreement,
supersede all prior discussions and written and oral agreements between the
parties with respect to the subject matter of this Agreement, and contain the
sole and entire agreement between the parties hereto with respect to the subject
matter hereof. Headings are not part of this Agreement, and shall not affect the
terms hereof.
16.7 Binding Effect. This Agreement is binding upon and will inure to the
--------------
benefit of the parties and their respective successors and permitted assigns.
16.8 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without giving effect to its
provisions relating to conflicts of law.
16.9 Severability. In the event any section or provision of this Agreement
------------
or related documents is found to be void and unenforceable by a court of
competent jurisdiction, the remaining sections and provisions of this Agreement
or related documents shall nevertheless be binding upon the parties with the
same force and effect as though the void or unenforceable part had not been
severed or deleted.
16.10 Waivers and Remedies. The waiver by any of the parties of any other
--------------------
party's prompt and complete performance, or breach or violation, of any
provisions of this Agreement and related documents shall not operate nor be
construed as a waiver of any subsequent breach or violation, and the waiver by
any of the parties to exercise any right or remedy which it may
36
<PAGE>
possess hereunder shall not operate nor be construed as a bar to the exercise of
such right or remedy by such party upon the occurrence of any subsequent breach
or violation.
16.11 Regulatory Review. The parties acknowledge and agree that this
-----------------
Agreement is subject to the review and approval of the New York State Department
of Insurance. The parties expressly agree that any revisions to this Agreement
required by the New York State Department of Insurance will be addressed in an
amendment to, or restatement of, the Agreement.
37
<PAGE>
EXECUTION
---------
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized representatives as of the date first above
written.
PHYSICIANS HEALTH SERVICES (BERMUDA) LTD.
By /s/Regina M. Campbell
---------------------
Name REGINA M. CAMPBELL
Title
THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA
By /s/Joseph D. Sargent
-----------------------------
Name Joseph D. Sargent
Title President and CEO
38
<PAGE>
NY (OUT)
SCHEDULE A
----------
CONTRACTS AND RISKS REINSURED
-----------------------------
- --------------------------------------------------------------------------------
CONTRACT RISKS REINSURED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- - Out-of-Network Portion - The Reinsurer AGREES to accept 50% of the risks
of POS Contracts under such Contracts.
- --------------------------------------------------------------------------------
A-1
<PAGE>
NY (OUT)
Schedule B
Contract Allowances. Administrative Service Fee
-----------------------------------------------
I. Guardian's Administrative Services Fee (as a percentage of premium)
- -- ------------------------------------------------------------------
POS (Out)
--------
Marketing 0.63%
Sales 1.38%
Administration 1.30%
Claims N/A
Billing/Collections 1.69%
Advertising 0.15%
Total 5.15%
II. PHS' Administrative Services Fee (as a percentage of premium)
- --- ------------------------------------------------------------
POS (Out)
--------
Health Services, UR 1.67%
Net Mgt, MDD, QA 2.43%
Operations 3.58%
Acct Svc., Cust Srv. 1.44%
Marketing 0.63%
Sales 0.15%
Administration 1.30%
Advertising 0.15%
Total 11.35%
12/11/96
<PAGE>
<TABLE>
<CAPTION>
Schedule C
Year To Date Accounting
Quarter Ending:
NY
POS-OUT
-------
<S> <C>
I. Profits/Losses From Underwriting
A. Earned Premium
--------------
1 Cash Received
2 Change in D/U
3 Change in UPR
4 Change in Advance Premium
5 Gross Earned Premium (A1+A2+A3+A4)
6 CSEHRP & Other Reins. Pool Premium Ceded
7 Net Earned Premium (A5+A6)
B. Incurred Claims
---------------
1 Cash Claims (including Capitations) Paid
2 Cash Withholds + PCP Bonuses Paid
3 Cash Rein. PI., COB, Subrog. Recov.
4 Nurse Line Expenses
5 Total Cash Claims (B1+B2+B3+B4)
6 Change in IBNR
7 Change in Withholds + PCP Bonuses Payable
8 Change in Rein. PI., COB, Subrog. Recov.
9 Total Change in Reserves (B6+B7+B8)
10 Total Incurred Claims (B5+B9)
C. Expenses
--------
1 Commissions
a. Cash
b. Change in Liability
c. Total Incurred (C1a+C1b)
2 Px Taxes, Licenses & Fees (if applicable)
a. Cash
b. Change in Liability
c. Total Incurred (C2a+C2b)
3 Assessments (if applicable)
a. Cash
b. Change in Liability
c. Total Incurred (C3a+C3b)
4 Field Expenses
a. Cash
b. Change in Liability
c. Total Incurred (C4a+C4b)
5 Guardian Admin. Exp.
6 PHS Admin. Exp.
7 Total Incurred Expenses (C1c+C2c+C3c+C4c+C5+C6)
II. Profit (Loss) (A7-B10-C7)
D. Guardian Profit (50%)
E. PHS Profit (50%)
</TABLE>
<PAGE>
SCHEDULE D
----------
INTEREST RATES
--------------
The Interest Compensation Rate applicable for any given fiscal quarter is
--------------------------
defined as the annual rate of interest equal to the closing yield on 3-month
LIBOR as of the last trading day of the prior fiscal quarter plus 1.00%. Such
rate shall remain in effect for that entire quarter regardless of any interim
fluctuations or changes in 3-month LIBOR yields.
The Investment Rate applicable for any given fiscal quarter is defined as the
---------------
annual rate of interest equal to the closing yield on the then current 2-year
Treasury Note as of the last trading day of the prior fiscal quarter plus 1.00%.
Such rate shall remain in effect for that entire quarter regardless of any
interim fluctuations or changes in 2-year Treasury Note yields.
The above interest rates may be changed or modified as appropriate upon mutual
agreement between the Company and the Reinsurer.
<PAGE>
<TABLE>
<CAPTION>
Schedule E NY
Cash Flow and Funds Reconciliation
Quarter Ending: POS-OUT
-------
(All numbers reflect year to date totals.)
<S> <C> <C>
Underwriting Cash Flows
1 Cash Premiums Received (Sched C: A1)
2 Reins. Pool Premiums Ceded (Sched C: A6)
3 Cash Claims (Total) (Sched C: B4)
4 Commissions Incurred (Sched C: C1c)
5 Premium Tx, Licenses, Fees Incurred (Sched C: C2c)
6 HRA Assessment Incurred (Sched C: C3c)
7 Field Expenses (Sched C: C4c)
8 Guardian Admin. Expenses (Sched C: C5)
9 PHS Admin. Expenses (Sched C: C6)
10 Total Cash Out (2+3+4+5+6+7+8+9)
11 Net Cash Generated for Period (1-10)
Distribution of Cash Flows
12 Cash Flow to PHS (3+9+Sched C: E)
13 Cash Flow to Guardian (1-3-9-Sched C: E)
14 Marketing Expenses Reimbursable from Guardian
15 Marketing Expenses Reimbursable from PHS
16 Interest on Delayed Payments Owed from Guardian
17 Interest on Delayed Payments Owed from PHS
18 Interest on Cash Reserves held Owed from Guardian
19 Interest on Cash Reserves held Owed from PHS
20 Other amounts Owed from Guardian
21 Other amounts Owed from PHS
22 Gross Amount Due to PHS (12+14-15+16-17+18+-19+20-21)
23 Less Related YTD Payments Made
24 Net Amount Due to (from) PHS (22-23)
</TABLE>
<PAGE>
SCHEDULE F
CALCULATION OF INTEREST ON CASH RESERVES HELD
---------------------------------------------
A. Beginning of the calendar quarter's cash reserve balance
held for the benefit of the Reinsurer* $____
Plus 50% of the net cash generated for the quarter (from
Schedule E Line 11**) $____
Minus Reinsurer's Quarterly Profit (Loss) (from Schedule C
Line E**) $____
B. Equals End of Quarter's cash reserve balance held for the
benefit of the Reinsurer $
====
C. Interest on Cash Reserve = ((A + B)/2) x (Investment Rate
from Schedule E) x (Number of days in the quarter/365) $
====
* The Beginning of the calendar quarter's cash reserve balance is defined
as the prior quarter's cash reserve balance (prior quarter's Schedule F
line B).
** Schedules C and E are annual exhibits; however, the above calculation
will use quarterly values. The quarterly values are defined as the
current quarter's year to date values less the current year's prior
quarter year to date values, if applicable.
<PAGE>
Exhibit 10 (t)
GBIPA SERVICE AGREEMENT
This GBIPA Service Agreement is made and entered into as of this 1st day of
January, 1997 by and between PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC., a
Connecticut corporation ("PHS") and Greater Bridgeport Individual Practice
Association ("GBIPA");
WHEREAS, PHS is a health maintenance organization licensed under the laws
of the State of Connecticut, which provides or arranges for the provision of
Covered Services (as defined below) to Members (as defined below);
WHEREAS, GBIPA is an individual practice association which has entered into
contracts with physicians and other health care providers to arrange for and
facilitate the provision and delivery of Covered Services (as defined below) to
Members;
WHEREAS, PHS and GBIPA are currently parties to an IPA Service Agreement
dated January 1, 1996 which expires December 31, 1996;
WHEREAS, PHS and GBIPA desire to continue the provision of Covered Services
(as defined below) to Members (as defined below) pursuant to this GBIPA Service
Agreement as of the Effective Date (as defined below);
WHEREAS, PHS and GBIPA mutually desire to preserve and enhance patient
dignity;
NOW, THEREFORE, in consideration of the premises and other mutual covenants
herein contained and other good and valuable considerations, it is mutually
agreed as follows:
ARTICLE 1. DEFINITIONS
-----------------------
1.1 "Advisory Committee" means a committee comprised of representatives of
GBIPA, and such other individual practice associations, physician hospital
organizations or directly contracted physicians with which PHS contracts
for the provision of Covered Services, which elect to have representation
on the Advisory Committee.
1.2 "Contracted Services" means those Covered Services listed in Exhibit A, and
such other services agreed upon from time to time by the parties to be
included as Contracted Services.
1.3 "Contracted Services Provider" means those third party vendors which assume
the obligation to provide Contracted Services.
1.4 "Consultant Physician" means a physician (other than a Non-GBIPA
Participating Physician) to whom a Member has been referred in writing by a
Participating Physician.
1.5 "Copayment" means the fee specified in Programs, payable by a Member at the
time Covered Services are rendered.
1.6 "Covered Services" means those Medically Necessary health care services and
benefits that Members are entitled to receive pursuant to a Program and as
described in a Subscriber Agreement or pursuant to a Summary Plan
Description, including, without limitation, those services required by the
Health Maintenance Organization Act of 1973, and any amendments thereto,
and applicable state laws. Unless otherwise stated, as used herein,
Covered Services excludes Contracted Services.
1
<PAGE>
1.7 "Effective Date" means January 1, 1997.
1.8 "Eligible Participating Physician" means a Participating Physician who is a
Primary Care Physician and who participates in a gatekeeper model Program,
who satisfies eligibility requirements for distribution of a bonus pool, as
determined by PHS and GBIPA and as described in Section 3.10 of this
Agreement.
1.9 "Emergency" means a sudden unexpected serious occurrence requiring
immediate medical attention or a life-threatening situation. The
determination of whether Emergency services are Covered Services rests
exclusively with the Medical Director.
1.10 "Excess Payment" means in any Health Care Year, payments made by PHS on
behalf of GBIPA pursuant to Section 5.3 that exceed the capitation payments
allocated to GBIPA in accordance with Section 5.2. For purposes of this
calculation, amounts paid pursuant to Section 5.10 shall be added to the
payments made pursuant to Section 5.3 for such Health Care Year.
1.11 "GBIPA Member" means Members for whom the subscriber has chosen a
Participating Physician as a Primary Care Physician.
1.12 "Health Care Year" means the 12 month period commencing January 1, 1996 and
ending on December 31, 1996 and any successive 12 month periods thereafter
if this Agreement is extended beyond its initial term, as set forth in
Section 9.1.
1.13 "Medical Director" means one or more physicians or other persons appointed
by PHS to be responsible for, among other things, administering PHS's
medical affairs and for serving as medical liaison to Participating
Physicians.
1.14 "Medically Necessary" means services or supplies which are necessary and
appropriate for the treatment of a Member's illness or injury or for the
preventive care of a Member, according to accepted standards of medical
practice.
1.15 "Member" means (i) any person who has entered into a contract with PHS,
Physicians Health Services of New York or Physicians Health Services of New
Jersey, or another payor with whom PHS has a joint marketing arrangement,
for the provision of medical and hospital services, and his or her eligible
dependents; (ii) any person and his or her eligible dependents, who is
offered health care services through a plan sponsored by his or her
employer that is administered by PHS, Physicians Health Services of New
York or Physicians Health Services of New Jersey; and (iii) any person who
participates in a Program for a government sponsored plan of health
insurance.
1.16 "Non-GBIPA Participating Physician" means a duly licensed medical doctor,
osteopathic physician or oral surgeon who (i) is a Member of an individual
practice association or physician hospital organization (other than GBIPA)
with which PHS contracts for Covered Services; or (ii) with whom PHS
directly contracts for the provision of Covered Services.
1.17 "Office Manual" shall mean the PHS Office Manual describing, among other
things, GBIPA's rules, regulations, protocols and procedures; GBIPA's
reimbursement guidelines; PHS's billing procedures, referrals and
authorization policies, termination protocols and appeals procedures (the
current termination appeal protocols and procedures are attached hereto and
made a part hereof); and PHS's utilization review and quality assessment
guidelines, coding guidelines and benefit summaries, as such Office Manual
is revised from time to time; provided, however, that no amendments or
modifications to the Office Manual shall be made without GBIPA's consent
which will have the effect of (i) adversely affecting any rights or
remedies of GBIPA as against PHS or any Participating Physician; (ii)
adding to, increasing or adversely affecting (as to GBIPA) any
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obligations of GBIPA to PHS or any Participating Physician; or (iii)
amending or modifying any sanctions, penalties or termination protocols of
PHS as against any Participating Physician or GBIPA's process for
sanctioning, penalizing or terminating any Participating Physician or
appealing decisions with respect thereto. The Office Manual as in effect on
the date hereof is incorporated herein by reference. As used herein,
"Office Manual" means both the PHS and GBIPA sections of the Office Manual.
1.18 "Participating Physician" means a duly licensed medical doctor, osteopathic
physician or oral surgeon who has entered into a currently effective
Physician Agreement with GBIPA.
1.19 "Performance Standards" means standards used by PHS to measure performance
of Participating Physicians, including without limitation, quality of care
and service, compliance with utilization and referral protocols, billing
procedures, claims adjudication, record keeping requirements and such other
criteria reasonably believed by PHS to be appropriate, as such Performance
Standards may be modified from time to time. Without limiting the
foregoing, the measurement instrument currently in force is the Physician
Practice Profile.
1.20 "Physician Agreement" means an agreement between GBIPA and Participating
Physicians in the form of Exhibit B hereto, as such Exhibit B may be
amended or modified from time to time.
1.21 "Primary Care Physician" means a Participating Physician chosen by a GBIPA
Member to provide primary care services, including without limitation,
physical examinations, preventive health services and continuity of care in
the overall management of a Member's health care.
1.22 "Programs" means all programs of health insurance established, administered
and/or maintained by PHS, Physicians Health Services of New York, Inc., or
Physicians Health Services of New Jersey, Inc., or any company that owns or
is owned by PHS, or is established, administered and/or maintained jointly
by PHS and another payer now or at any time during the term of this
Agreement, including, without limitation, fully funded plans,
administrative services only plans, network access plans, small group
plans, governmental plans (other than Medicare and Medicaid plans),
gatekeeper model plans and exclusive provider organization plans. Programs
does not include Medicare, Medicaid, dental or workers' compensation plans.
1.23 "Service Area" means the City of Bridgeport and the towns of Ansonia,
Beacon Falls, Derby, Easton, Fairfield, Milford, Monroe, Oxford, Seymour,
Shelton, Stratford, and Trumbull in the State of Connecticut.
1.24 "Subscriber Agreement" means an agreement between a Member and PHS pursuant
to which a Member is entitled to receive Covered Services or reimbursement
for Covered Services.
1.25 "Summary Plan Description" means a description of a plan for health
benefits pursuant to an employer-sponsored benefits plan.
1.26 "Termination Date" is December 31, 1997 or such later date as provided in
Section 9.1 of this Agreement.
ARTICLE II - PHS RESPONSIBILITIES
---------------------------------
2.1 PHS Functions. PHS will perform, as requested by GBIPA, all
-------------
administrative, marketing, enrollment, financial, utilization review,
accounting, claims processing and payment, management information systems,
quality assessment and other functions necessary or appropriate for the
proper administration of the Programs and all services necessary or
appropriate to Members, other than clinical services. Subject to Section
6.2 of this Agreement, GBIPA shall be responsible for tax accounting and
accounting relating to GBIPA's internal functions. PHS will monitor the
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performance of Participating Physicians and may take action based upon
performance of a Participating Physician or refer such Participating
Physician to GBIPA for disciplinary action.
2.2 Credentials. PHS shall be responsible for all credentialing and
-----------
recredentialing of all Participating Physicians in accordance with PHS and
GBIPA credentialing guidelines. PHS shall promptly notify GBIPA of any
Participating Physicians known by PHS to have (i) retired or relocated from
the Service Area; (ii) terminated participation in all PHS Programs; or
(iii) terminated their status as a Participating Physician. PHS may
terminate any Participating Physician from participation in all its
Programs in accordance with the due process protocols set forth in the
Office Manual. PHS shall develop and maintain grievance procedures for
Members and Participating Physicians.
2.3 Office Manual. PHS shall maintain the Office Manual for the benefit of
-------------
PHS, GBIPA and Participating Physicians, which shall set forth the
programs, procedures, rules, regulations and protocols of GBIPA and PHS,
relating to the delivery of Covered Services by Participating Physicians
and participation of Participating Physicians as members of GBIPA. PHS
shall furnish an Office Manual to GBIPA and each Participating Physician
and shall send supplements or revisions to the Office Manual to GBIPA and
Participating Physicians prior to the effective date thereof. PHS shall
develop Performance Standards which it shall use to monitor performance of
Participating Physicians. PHS shall promptly advise GBIPA (or the Advisory
Committee if such Committee is assigned responsibility by GBIPA for
performance reviews of Participating Physicians) if a Participating
Physician fails to satisfy such Performance Standards.
2.4 PHS Programs. PHS shall develop and administer programs to enhance the
------------
delivery of Covered Services to Members, including programs to achieve more
effective quality controls, cost and utilization efficiencies. PHS shall
consult with the Advisory Committee in the development and implementation
of programs and performance standards that would materially affect the
manner in which participating Physicians deliver Covered Services to
Members and shall use its best efforts to incorporate such recommendations
of the Advisory Committee that would not adversely affect the
administration of such programs, or PHS's financial condition or business
operations.
2.5 Access to Information. PHS shall provide GBIPA, or its designees, computer
---------------------
access at GBIPA's offices to information maintained by PHS relating to all
collected utilization, unit cost, per member per month medical expense and
related data associated with GBIPA Membership and the membership associated
with GBIPA's pricing region (currently Western Connecticut). PHS agrees to
work with GBIPA (or its designee) in the evaluation of this data in order
to address trends in utilization, unit costs, and/or per member per month
medical expenses. PHS will make such information available to GBIPA on a
"CPT-4" code basis, and other basis as determined reasonably by GBIPA and
PHS. PHS will provide GBIPA access to the data at no cost to GBIPA;
provided, however, that PHS shall not be required to provide GBIPA such
computer access if access to data would result in disclosure of information
that is proprietary to PHS, information that relates to vendors other than
GBIPA, or confidential information, the disclosure of which may result in a
breach of a confidentiality agreement between PHS and another party.
Special reports will be provided to GBIPA without charge if the parties
agree that such reports will assist GBIPA in lowering its health care
costs, or the utilization of Participating Physicians.
2.6 Advisory Committee. GBIPA shall participate in the Advisory Committee and
------------------
such other IPA committees, composed of representatives of IPAs, PHOs or
individual physicians contracting with PHS in the State of Connecticut,
that have been formed or may be formed for reasons of establishing
reimbursement schedules, performing utilization review and other issues
relating to the PHS network. The Advisory Committee and such other
committees shall have proportional representation among all IPAs, PHOs or
individual physicians represented therein in accordance with commercial
membership, inclusive of fully insured and administrative services only
members, by IPA in relation to PHS commercial membership in the State of
Connecticut. The President of GBIPA shall serve as an ex officio member of
----------
the Advisory Committee and such
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other Committees, which appointment shall not be considered part of the
proportional representation described in the preceding sentence. The
Advisory Committee may not be dissolved without the consent of all entities
that have representatives on such Committee.
ARTICLE III - GBIPA RESPONSIBILITIES
------------------------------------
3.1 GBIPA Services. PHS hereby retains GBIPA to render Covered Services from
--------------
the Effective Date to the Termination Date to Members through Participating
Physicians and where appropriate, Consultant Physicians. Participating
Physicians, and not GBIPA, shall be solely responsible for all medical
advice provided to and treatment rendered by Participating Physicians and
Consultant Physicians. GBIPA represents that it is authorized to act as
the agent for each Participating Physician for purposes of entering into
this Agreement. GBIPA shall not be responsible for the provision of
Covered Services that are (i) Contracted Services; (ii) inpatient hospital
services by employees or staff of a hospital; (iii) Covered Services
rendered to Members by non-GBIPA participating Physicians. All Covered
Services rendered by Participating Physicians shall be subject to the terms
and conditions of this Agreement and the Physician Agreement.
3.2 Quality of Medical Care. GBIPA shall use its best efforts to ensure that
-----------------------
Covered Services provided to Members by Participating Physicians are of a
quality of medical care that is in conformity with accepted medical care
and surgical practices of the American Medical Association and the practice
prevailing in the Service Area.
3.3 Availability of Services. GBIPA shall provide for the availability of
------------------------
Covered Services within the Service Area at such times and in such
locations as shall be required to satisfy the needs of GBIPA Members and as
shall be necessary to enable GBIPA to discharge its obligations hereunder.
PHS will consult with the Advisory Committee with respect to future actions
to be taken to permit compliance as set forth in the preceding sentence.
3.4 Medical Advice. GBIPA and Participating Physicians shall be solely
--------------
responsible for all medical advice and treatment rendered to Members
receiving medical care from Participating Physicians and for the
performance of Covered Services.
3.5 Training Each Participating Physician will have the training and
----------
experience in the field in which they perform Covered Services. GBIPA
agrees that each Participating Physician shall enter into a Physician
Agreement with GBIPA and GBIPA will take such further acts as necessary or
desirable to amend the Physician Agreement upon reasonable request of PHS.
3.6 PHS Rules. GBIPA shall comply with PHS programs, rules and protocols
---------
(collectively, "Rules") adopted by PHS in furtherance of Article II hereof;
provided, however, that no amendments or modifications to the Rules shall
be made without GBIPA's consent that will have the effect of (i) adversely
affecting any rights or remedies of GBIPA as against PHS or any
Participating Physician; (ii) adding to, increasing or adversely affecting
(as to GBIPA) any obligations of GBIPA to PHS to any Participating
Physician; or (iii) amending or modifying any sanctions, penalties or
termination protocols of PHS or against any Participating Physician or the
process for sanctioning, penalizing or terminating any Participating
Physician from PHS Programs or appealing decisions or terminating any
Participating Physician from PHS Programs or appealing the decisions with
respect thereto. GBIPA shall use its best efforts to ensure that
Participating Physicians comply with all policies and procedures as set
forth in the Office Manual and all applicable law.
3.7 Adequacy of Network. GBIPA shall at all times maintain a sufficient number
-------------------
of Participating Physicians to provide Covered Services hereunder. If PHS
believes at any time that the number of Participating Physicians, taken as
a whole or within any specialty, including without limitation,
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primary care, is insufficient, it shall consult with GBIPA and PHS and
GBIPA shall jointly develop a plan to correct such insufficiency as
expeditiously as possible. Notwithstanding the foregoing, in the event that
PHS reasonably and in good faith determines that there is an unmet need
and/or insufficient delivery system capacity for a specific physician
service and has identified one or more physicians that satisfy its
credentialing criteria, PHS may contract directly with such physician if
GBIPA does not agree, after notice from PHS, to admit the physician as a
Participating Physician.
3.8 Hold Harmless. GBIPA agrees that it shall look solely to PHS for payment
-------------
for Covered Services provided to Members by Participating Physicians under
the Plans. GBIPA further agrees that in no event, including but not
limited to non-payment by PHS or GBIPA, PHS or GBIPA insolvency, or breach
of this Agreement shall GBIPA or Participating Physicians or Consultant
Physicians charge, collect a deposit from, seek compensation, remuneration
or reimbursement from or have any recourse against a Member, other than PHS
acting on a Member's behalf, for Covered Services rendered pursuant to this
Agreement. This provision shall not prohibit collection by Participating
Physicians of copayments or supplemental charges made in accordance with
Programs. This Section 3.8 shall survive termination of this Agreement
regardless of the cause giving rise to termination and shall be construed
to be for the benefit of Members.
3.9 Delegation. GBIPA and PHS agree that GBIPA may delegate to PHS the
----------
performance of such of its responsibilities as GBIPA may determine from
time to time.
3.10 Bonus Pool. PHS shall establish a bonus pool in connection with its
----------
gatekeeper model plan equal to 15% of the annual aggregate capitation
payments to Participating Physicians who receive capitation payments in
respect of IPA Members who have selected a Participating Physician as their
Primary Care Physician in such Program. Interest earnings on amounts held
in the bonus pool shall be the property of PHS and neither GBIPA nor
Participating Physicians shall assert any claims to such amounts. Amounts
in the bonus pool shall be distributed by PHS to Eligible Participating
Physicians no more than 75 days following the end of each Health Care Year.
If PHS fails to distribute the bonus pool within 15 days following written
notice by GBIPA that PHS is in default of the distribution provisions of
the preceding sentence. PHS shall pay interest for each day elapsed
thereafter on amounts owed as bonus pool distributions at a rate equal to
the Citibank prime rate.
3.11 Administrative Services. GBIPA shall be liable for its administrative
-----------------------
costs, including the costs of all insurance deemed necessary or advisable
to it; provided, however, that PHS shall provide to GBIPA, upon GBIPA's
request and without additional charge, administrative support generally
provided as of the date hereof and administrative support similar in scope
to the administrative support given by PHS to other provider organizations
with which PHS contracts for health care services. Additional support
services shall be provided by PHS upon GBIPA's request. GBIPA shall pay
PHS the reasonable out of pocket cost of providing such services and no
services shall be performed without GBIPA's prior approval of the
compensation arrangements.
ARTICLE IV - PROGRAMS
---------------------
4.1 Program Design and Introduction. PHS shall have sole authority over
-------------------------------
matters relating to Program design, participation of a Participating
Physician in PHS Programs, introduction of new Programs and modification or
elimination of existing Programs, including without limitation,
utilization, referral, quality assessment, reimbursement and reimbursement
protocols relating to such Programs. PHS shall consult with the Advisory
Committee in the material design features of Programs and shall use its
best efforts to incorporate the recommendations of the Advisory Committee
into final Program design as are reasonably necessary or desirable in the
Advisory Committee's view and that do not adversely affect the
administration, financial or operational aspects of such Program.
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4.2 Participation in Programs. Except (i) as waived by PHS, which waiver PHS
-------------------------
shall not unreasonably withhold or delay and (ii) for Participating
Physicians who did not elect to participate in the Passport Program at the
time of its inception, Participating Physicians are required to participate
in all Programs and PHS may not exclude any Participating Physician except
as set forth below. GBIPA agrees to sanction or terminate in accordance
with the Physician Agreement, Office Manual, or otherwise, any
Participating Physician who notifies GBIPA or PHS that he or she will not
participate in a Program or who does not accept Members enrolled in one or
more Programs. Notwithstanding the foregoing, PHS may select, after
consultation with GBIPA, a subset of Participating Providers for
governmental Programs if, in its reasonable discretion, PHS believes that
fewer than all Participating Providers should be permitted to participate
in a such governmental Program, or upon GBIPA's consent, which consent
shall not be reasonably withheld for all other Programs, if PHS is
requested to reduce the size of its panel of participating Providers for an
employer group of 1,000 or more eligible Members. Notwithstanding the
foregoing, PHS may terminate a Participating Physician from participation
in all Programs in accordance with the due process protocols set forth in
the Office Manual.
ARTICLE V - COMPENSATION
------------------------
5.1 Capitation System. Except as set forth in Section 5.6 hereof or except as
-----------------
specifically provided and agreed to by GBIPA in connection with certain
Programs, PHS shall allocate to GBIPA a monthly capitation from which GBIPA
shall compensate Participating Physicians, Consultants (in case of Covered
Services rendered to GBIPA Members), and also, in cases of Medical
Emergency or upon prior approval by PHS, non-Participating Physicians and
providers, for Covered Services which are rendered to GBIPA Members except
(i) Covered Services pursuant to Programs which are paid directly by the
employer; and (ii) Covered Services pursuant to Programs for which PHS pays
participating Physicians directly (through capitation, fee for service or
any other payment methodology). GBIPA agrees that, together with PHS, and
upon PHS's request, it will consider special promotional capitation
arrangements for employer groups of 1,000 or more eligible members. Except
as otherwise provided herein, it is understood and agreed that GBIPA shall
be solely responsible for compensating the foregoing health care providers
from the capitation payments allocated to it for such Covered Services, and
GBIPA shall not look to PHS for any additional compensation. The
capitation payments payable hereunder are set forth in Exhibit C.
(a) GBIPA shall not be liable for the costs of rendering Contracted
Services or for Covered Services for which PHS pays Participating
Physicians directly, which Services shall be paid by the Contracted
Service providers or PHS, as the case may be, directly and not charged
against capitation payments held in the risk sharing fund.
5.2 Payments Administered by PHS. The amount allocated as the monthly
----------------------------
capitation for Covered Services pursuant to Section 5.1 shall be held and
administered by PHS for the purpose of enabling GBIPA to discharge its
payment obligations as set forth in Section 5.1. PHS shall act as GBIPA's
agent for purposes of making all payments and distributions to
participating Physician and Consultant Physicians (in cases of Covered
Services rendered to GBIPA Members). GBIPA agrees that the payments made
by PHS as GBIPA's agent hereunder shall be deducted from amounts allocated
to GBIPA as capitation payments. Payments shall be made irrespective of
whether actual payments made pursuant to this paragraph exceed the amounts
allocated to GBIPA as capitation payments. Subject to Section 5.4,
payments shall be made in accordance with the following:
(a) Compensation for Participating Physicians and Consultants shall be
calculated on the basis of the lesser of (i) the Physician's or
Consultant Physician's billed charges, and (ii) the reimbursement
schedules agreed to by PHS and GBIPA (through the reimbursement
committee) from time to time or an actuarially determined capitation
amount. The
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administrative guidelines for reimbursement of fees shall be maintained
by PHS. GBIPA agrees that the aggregate fees for 1996 shall not exceed
the aggregate fees that were payable in 1995.
(b) Participating Physicians shall be paid within two (2) months of the
receipt by PHS of a properly submitted bill for Covered Services,
except for claim payments subject to claims recovery through
coordination of benefits (C.O.B.). Participating Physicians shall only
be paid for bills for Covered Services received by PHS within ninety
(90) days of the date of service, unless such bills have been subject
to claims recovery through C.O.B., basic reparation of benefits under
an automobile no-fault policy, worker's compensation or subrogation
activity. For Covered Services involving C.O.B., GBIPA shall be liable
to pay Participating Physicians only for bills received within twelve
(12) months of the date of service. Participating Physicians may not
bill Members for bills for Covered Services which are not submitted in
accordance with this clause (b).
5.3 Withhold and Reserve Provision. PHS may establish a withhold provision for
------------------------------
a percentage of the compensation payable to GBIPA pursuant to Section 5.1
on behalf of Participating Physicians for Covered Services, to be held in a
risk fund, it being understood and agreed that the amounts retained shall
be applied to offset the amounts by which the actual costs of Covered
Services rendered to GBIPA Members exceed budgeted amounts for such Health
Care Year. PHS may not change the withhold amounts without GBIPA's
consent; provided, however, that if overutilization is projected to result
in deficit balances in the withhold account at the end of the Health Care
Year, GBIPA and PHS shall adjust the withhold amounts to correct the
anticipated deficit in the withhold amount. Actual withhold amounts may
vary according to category of services provided, Program and Participating
Physician, as determined by GBIPA; provided, however, that the withhold may
not be reduced below 15%. The withhold amount shall be initially
established at 20%, but may be reduced to no less than 15% upon request of
GBIPA. PHS and GBIPA shall, at regular intervals, review the utilization
and costs of such services. Amounts withheld or reserved in the risk funds
shall be allocated and distributed at the end of each Health Care Year or
earlier as reasonably agreed to by the parties. Amounts that remain in the
risk sharing fund due to the withhold provision at the end of each Health
Care Year shall be made available to GBIPA not more than 75 days following
the end of each Health Care Year for distribution to Participating
Physicians. If PHS fails to distribute the withhold amount within 15 days
following written notice by GBIPA that PHS is in default of the
distribution provisions of the preceding sentence, PHS shall pay interest
for each day elapsed thereafter on amounts owed as withhold distributions
at a rate equal to the Citibank prime rate. Amounts remaining in the
withhold fund at the end of a Health Care Year shall be distributed in
accordance with GBIPA's instructions, potentially including a variable risk
return in 1996. Amounts earned on funds held in the withhold account shall
be the property of PHS and neither GBIPA nor Participating Physicians shall
assert any claims to such amounts. Amounts payable to Participating
Physicians pursuant to Section 5.6 (Self Funded Payers, Direct Payments)
shall not be subject to this Section 5.4. Commencing on January 1, 1997,
PHS shall, at GBIPA's request, implement a variable withhold for payments
made to individual Participating Physicians pursuant to Section 5.3. The
percent level of withhold for specific programs and the methodology for a
variable withhold program shall be subject to GBIPA's consent.
5.4 Excess Payment. If PHS makes Excess Payments, GBIPA shall be liable to PHS
--------------
for the percent of such Excess Payments as set forth on Exhibit C and shall
repay such amounts within 30 days after notice from PHS of the extent of
the Excess Payment. GBIPA has the right to increase the percentage of
compensation withheld to such levels GBIPA may deem necessary to preserve
GBIPA's fiscal integrity.
5.5 Intra-Network Payments. PHS shall make payments as GBIPA's agent from
----------------------
capitation amounts allocated to GBIPA for Covered Services rendered to
GBIPA Members by Non-GBIPA Participating
8
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Physicians, Consultant Physicians and other providers in PHS's network of
providers. PHS will pay Participating Physicians for Covered Services
rendered to Members who are not GBIPA Members in accordance with Section
5.2; such payments on behalf of Members who are not GBIPA Members shall not
be charged against the capitation amount allocated to GBIPA. All payments
made hereunder will be subject to the withhold provisions set forth in
Section 5.3.
5.6 Self Funded Payers; Direct Payments. For Programs with respect to which an
-----------------------------------
employer group self-funds its claims expense or Programs in which PHS
elects to pay Participating Physicians on a fee for service basis without
regard to capitation, PHS shall compensate Participating Physicians in
accordance with the fee schedule then in effect. For Programs in which
Participating Physicians are capitated directly, PHS shall compensate such
Participating Physicians in accordance with Exhibit C.
5.7 Forms; Cooperation.
------------------
(a) GBIPA shall arrange for Participating Physicians to bill PHS for
Covered Services provided to Members on forms specified by PHS. These
forms shall specify the Covered Services provided and shall include
all of the statistical and descriptive medical, diagnostic and patient
data together with identifying information required by PHS.
(b) GBIPA shall arrange for Participating Physicians to cooperate with and
participate in PHS programs for coordination of benefits with other
health care plans or any other permitted methods of third party
recovery. Such programs include, but are not limited to, the
following:
(i) Assisting Members with required forms.
(ii) Where duplicate coverage exists and the Program appears to be
secondary coverage, notifying PHS and for ninety (90) days
seeking payment from the other health care plan, before seeking
payment from PHS or self funded payer.
(iii) Where other plan(s) must pay their benefits before the benefits
of the applicable Program, accepting as PHS's payment, the
lesser of the payment determined in accordance with Section 5.2
(a) and the amount equal to the provider's usual charges for
Covered Services, reduced by amounts paid by other plan(s) (or
to be paid in the case of Medicare, Worker's Compensation Law,
occupational disease or any similar law).
5.8 Coverage Questions. PHS shall make timely payment to Participating
------------------
Physicians as provided in Section 5.3 unless prior to the expiration of the
period set forth therein PHS notifies the Participating Physician in
writing that additional information is required or that a coverage question
(including without limitation, a question relating to coordination of
benefits or pre-existing conditions) exists. Such notice shall specify any
additional information required and shall describe the nature of the
coverage question. PHS shall endeavor in good faith to promptly resolve
coverage questions, and shall make payment, if appropriate, promptly after
coverage questions are resolved but in no case later than ninety (90) days
after a submission of all required information. In the case of requests
for additional information, the claims shall be paid within the thirty (30)
days of receipt of all requested information.
5.9 Subrogation. In the event a Member is injured by an act or omission of a
-----------
participating Physician in connection with the rendering of Covered
Services hereunder, PHS may elect to pursue its subrogation rights, if any,
against the potentially responsible participating Physician. PHS shall
make payment to the Physician in accordance with this Agreement while
pursuing those rights.
9
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5.10 Administrative Fee. PHS shall pay GBIPA an annual administrative fee,
------------------
payable out of the payments made pursuant to Section 5.1 hereof, in monthly
installments due no later than the fifth working day of each month. GBIPA
shall endeavor to establish the annual administrative fee prior to the
commencement of a Health Care Year, and shall notify PHS of the amounts of
each monthly payment; provided, however, that the fees may be established
and/or changed in the GBIPA Board of Directors' sole discretion no less
than 30 days prior to the effective date of the change. The annual
administrative fee shall be such amount as determined by GBIPA to be
reasonable compensation for its administrative services.
ARTICLE VI - RECORDS
---------------------
6.1. PHS Members. PHS shall maintain such records and establish and adhere to
-----------
such procedures as shall be reasonably required to ascertain the number and
identity of Members, which information shall be provided to GBIPA upon its
request. GBIPA shall cooperate with PHS in connection with such records
and procedures to the end of enabling the parties to accomplish with
maximum efficiency and minimum administrative cost, determinations of
eligibility for coverage and the amount of compensation payable to GBIPA.
6.2. Accounting. PHS shall maintain, in accordance with generally accepted
----------
accounting practices, such financial and accounting records as shall be
necessary, appropriate or convenient for the proper administration of this
Agreement.
6.3. Statistical Records. PHS and GBIPA shall jointly maintain such statistical
-------------------
records with respect to Covered Services, including the utilization
thereof, as shall be necessary, appropriate, or convenient for the proper
administration of this Agreement.
6.4. Compliance With Law. GBIPA and PHS agree to maintain their records in
-------------------
accordance with applicable federal and state laws and regulations and
further agree to participate as necessary in required regulatory
examinations.
6.5. Medical Records. GBIPA shall arrange for Participating Physicians to
---------------
maintain adequate medical records for Members. GBIPA and PHS shall make
reasonably available the medical records, subject to all applicable state
and federal privacy and confidentiality requirements, to each other upon
request without cost in order to determine that the content of such report
and the quality of care rendered are acceptable, as well as for peer
review, grievance review recredentialing or any other reasonably necessary
purposes.
6.6. Confidentiality. PHS and GBIPA shall ensure confidentiality of Members'
---------------
health and medical records. GBIPA and PHS each agree that all records,
reports, data, data formats, financial information and other documents or
information pertaining to the other or any related company which are
provided, made available, or otherwise disclosed to the other pursuant to
this Agreement or the relationship between PHS and GBIPA, are confidential,
and may not be disclosed to any person or entity for any reason at any time
during or subsequent to the term of this Agreement, except for their
attorneys, accountants, or other representatives and except as required by
law. Anything to the contrary contained in the foregoing notwithstanding,
any information which has entered the public domain, except solely by a
party's violation of this provision, shall not be deemed to be confidential
hereunder.
ARTICLE VII - LEGAL RELATIONSHIP BETWEEN PHS AND GBIPA
------------------------------------------------------
Independent Contractors. The relationship of the parties is that of independent
- -----------------------
contractors. None of the provisions of this Agreement are intended to create
nor shall be construed to create a partnership, or joint venture relationship
between the parties. Except as to payment procedures for which PHS shall act as
GBIPA's
10
<PAGE>
agent hereunder, neither party hereto nor any of their respective officers,
members, employees or physicians shall be deemed to be the agent, employee, or
representative of the other party.
ARTICLE VIII - INDEMNIFICATION AND INSURANCE
--------------------------------------------
8.1. Physician Insurance. GBIPA shall require all of its Participating
-------------------
Physicians and all Consultant Physicians to whom a Member is referred by a
Participating Physicians to maintain professional liability insurance
acceptable to PHS in an amount not less than $1,000,000 per incident and
$3,000,000 aggregate to cover all demands, claims and expenses of all kinds
that may result or arise out of any alleged malpractice or neglect caused
or alleged to have been caused by such individuals or any of their agents,
employees, or representatives in the performance or omissions of any act
relating to this Agreement.
8.2. Cooperative Defense. The parties recognize that, during the term of this
-------------------
Agreement and for some period thereafter, certain risk management issues,
legal issues, claims or actions may arise that involve or could potentially
involve the parties and their respective employees and agents. The parties
further recognize the importance of cooperating with each other in good
faith when such issues, claims or actions arise to the extent that such
cooperation does not violate any applicable laws, cause breach of any
duties created by any policies of insurance, or otherwise compromise the
confidentiality of communications of information regarding the issues,
claims or actions. The parties shall cooperate in good faith, using their
best efforts, to address such risk management and claims handling issues in
a manner that strongly encourages full cooperation between the parties.
Nothing in this Section 8.2 shall affect any cross or counter-claims that
may be available to the parties hereto.
ARTICLE IX- TERM OF AGREEMENT
-----------------------------
9.1. Term. The term of this Agreement shall be for a period of one year
----
commencing on January 1, 1996, and shall continue until and through
December 31, 1997. The term shall automatically be extended for subsequent
twelve month periods unless at least 120 days and not more than 150 days in
advance of the Termination Date or such subsequent anniversary date, either
party hereto shall notify the other party of its intention to modify or
terminate the Agreement; provided, however, that such action shall not
release GBIPA of its obligations imposed with respect to Members then
receiving treatment.
ARTICLE X - MISCELLANEOUS
-------------------------
10.1. Successors. This Agreement shall be binding upon and inure to the
----------
benefit of the parties hereto, their respective heirs, successors and
assigns, but may not be assigned by either party without the prior
written consent of the other party, provided, however that a succession
to all of the assets or equity interests of any party shall not be deemed
to be an assignment in violation hereof.
10.2. Delegation. Neither GBIPA nor PHS shall, in a manner inconsistent with
----------
this Agreement, subcontract or otherwise delegate its duties under this
Agreement unless the other party so approves by written consent. All
contracts by GBIPA with subcontractors shall be approved in writing by
PHS prior to execution thereof and copies shall be available to PHS upon
its request.
10.3. Headings. The headings of the various Sections of the Agreement are
--------
inserted merely for the purpose of convenience and do not, expressly or
by implication, limit or define or extend the specific terms of the
Sections so designated.
10.4. Arbitration. In the event any dispute shall arise with regard to the
-----------
performance or interpretations of any of the terms of this Agreement, all
matters in controversy shall be submitted to a Board of Arbitrators
consisting of three (3) persons, under the rules and regulations of the
American Arbitration Association in Bridgeport, Connecticut. Both parties
expressly covenant and agree to be
11
<PAGE>
bound by the decision of the arbitrators and accept any decision by a
majority of the arbitrators as a final determination of the matter in
dispute.
10.5. Enforceability. The validity, enforceability and interpretation of any
--------------
of the clauses of this Agreement shall be determined and governed by the
laws of the State of Connecticut and 42 U.S.C. 300e, et seq., and any
-- ---
amendments thereto.
10.6. Medical Ethics. GBIPA and PHS agree that the administration of PHS's
--------------
program and this Agreement shall at all times be compatible with sound
principles of medical ethics.
10.7. Entire Agreement. This Agreement contains all the terms and conditions
----------------
agreed upon by the parties hereto, and on or after the Effective Date,
supersedes all other agreements, oral and otherwise, regarding the
subject matter of the parties hereto.
10.8. Amendment. This Agreement may be amended at any time by mutual agreement
---------
of the parties, provided that before any amendment shall be operative and
valid, it shall be writing and signed by PHS and GBIPA.
10.9. Interference with Contract. If GBIPA gives written notice to PHS within
--------------------------
three months prior to the termination of this Agreement that GBIPA does
not intend to renew this Agreement after its expiration, then GBIPA may
enter into another contract with any health maintenance organization,
preferred provider organization or similar health care service plan or
insurance program, which contract shall be effective no earlier than the
expiration date for this Agreement. In such case, all existing rights and
obligations of the parties hereto with respect to this Agreement through
and including the expiration date hereof shall remain in effect.
10.10. Notices. Any notice required to be given pursuant to the terms and
-------
provisions hereto shall be in writing and shall be sent by certified
mail, return receipt requested, prepaid, to PHS at:
PHYSICIANS HEALTH SERVICES OF
CONNECTICUT, INC.
120 Hawley Lane
Trumbull, Connecticut 06611-5313
GBIPA at: GREATER BRIDGEPORT INDIVIDUAL PRACTICE
ASSOCIATION, INC.
3180 Main Street
Bridgeport, CT 06606
10.11 Exclusivity.
-----------
(a) Except as provided in Sections 10.11(b) and (c) below and in Section
3.8 hereof, (i) GBIPA agrees that neither it, not any subsidiary of
GBIPA, shall contract with any other health maintenance organization
or preferred provider organization or any other entity that competes
or intends to compete with PHS in the Service Area, and (ii) PHS
agrees that neither it, nor any subsidiary of PHS shall contract with
any individual Participating Physician or any individual practice
association (other than GBIPA), physician hospital organization,
medical service organization or other organization providing
physician services for Covered Services in the Service Area relating
to commercial managed care products, including administrative
services only and point of service products, or other non-
governmental managed care products. Notwithstanding the foregoing,
either party may contract with another party during the 120 day
period immediately preceding the Termination Date, unless the parties
have entered into a new agreement for a subsequent term.
12
<PAGE>
(b) GBIPA shall terminate any Participating Physicians whose principal
office is located outside the Service Area upon PHS's request and in
PHS's sole discretion.
(c) PHS may contract directly or indirectly with (i) health care
providers whose principal office is outside the Service Area; and
(ii) health care providers and entities who have satellite offices in
the Service Area but whose principal office is outside the Service
Area, including without limitation, networks that have a geographic
presence both inside and outside the Service Area, but whose presence
is substantially outside the Service Area.
10.12 Compliance with Law; Policy Changes. During the term of this Agreement,
-----------------------------------
PHS and GBIPA agree to incorporate any changes required by law, regulation
or policy of NCQA. To the extent additional national accreditation bodies
(such as JCAH) develop their own accreditation requirements, and these
requirements have a material impact on the ability of PHS to pursue new
business or retain current business, GBIPA and PHS agree to work together
in developing additional policy changes. GBIPA shall take all acts or
actions necessary to permit compliance by PHS with applicable law as well
as accreditation programs conducted by the NCQA, or another entity
performing similar functions. PHS will consult with the Advisory Committee
with respect to future actions to be taken to permit compliance as set
forth in the preceding sentence.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
month and year above set forth.
PHYSICIANS HEALTH SERVICES OF
CONNECTICUT, INC.
By: ___________________
GREATER BRIDGEPORT INDIVIDUAL PRACTICE
ASSOCIATION, INC.
By: ___________________
13
<PAGE>
EXHIBIT A
---------
1. The following shall be considered as Contracted Services:
Audiology
All Rehabilitative Services
Immunizations and Injectables
Drug and Alcohol Rehabilitative Services
General Laboratory procedures and Cytology
Durable Medical Equipment
Oxygen
Prosthetic Devices
Ambulance
Podiatry
Chiropractic Services
Optometric Services
Prescription Drugs
14
<PAGE>
Exhibit 10 (u)
IPA SERVICE AGREEMENT
This IPA Service Agreement is made and entered into as of this 1st day of
January, 1997 by and between PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC., a
Connecticut corporation, and PHS INSURANCE OF CONNECTICUT, INC., a Connecticut
corporation, (together, "PHS"), on the one hand, and FAIRFIELD INDIVIDUAL
PRACTICE ASSOCIATION, INC. ("IPA"), on the other hand;
WHEREAS, PHS arranges for the provision of Covered Services (as defined
below) to Members (as defined below);
WHEREAS, IPA is an individual practice association which has entered into
contracts with physicians and other health care providers to arrange for and
facilitate the provision and delivery of Covered Services (as defined below) to
Members;
WHEREAS, PHS and IPA mutually desire to preserve and enhance patient
dignity;
NOW, THEREFORE, in consideration of the premises and other mutual covenants
herein contained and other good and valuable considerations, it is mutually
agreed as follows:
ARTICLE 1. DEFINITIONS
-----------------------
1.1 "Affiliate" means any company controlling, controlled by or under common
control with PHS.
1.2 "Consultant" means a physician (other than a Participating Physician and a
Non-IPA Participating Physician) (i) to whom a Member has been referred or
who has been asked to provide Covered Services on behalf of a Member by a
Participating Physician or (ii) who provides Covered Services to IPA
members pursuant to the out of network benefits of a Program.
1.3 "Corridor" means the amount equal to 5% greater or less than budgeted
amounts established pursuant to Section 5.1 hereof.
1.4 "Covered Services" means those Medically Necessary services and benefits
that Members are entitled to receive under a Program. As used herein,
Covered Services excludes PHS Responsible Services.
1.5 "Emergency" means the accidental injury or the unexpected onset of a
serious illness, which has the potential for causing immediate disability
or death or requiring immediate alleviation of pain and discomfort. The
determination of whether Emergency services are Covered Services rests
exclusively with the Medical Director.
1.6 "Excess Payment" means amounts by which actual payments made by PHS on
behalf of IPA pursuant to Section 5.3 exceed the amounts budgeted therefor
in accordance with Section 5.1 hereof (after giving effect to any
applicable Corridors).
1.7 "Funds" means each of the funds established pursuant to Section 5.2 hereof.
1.8 "IPA Member" means Members who have selected or who have been assigned a
Participating Physician as their Primary Care Physician.
1
<PAGE>
1.9 "IPA Advisory Committee" means a committee comprised of representatives of
IPA, and such other individual practice associations or physician hospital
organizations with which PHS contracts for the provision of Covered
Services, which elect to have representation on the IPA Advisory Committee.
1.10 "Medical Director" means one or more physicians or other persons appointed
by PHS to be responsible for, among other things, administering PHS's
medical affairs and for serving as medical liaison to Participating
Physicians.
1.11 "Medically Necessary" means services or supplies which are necessary and
appropriate for the treatment of a Member's illness or injury or for the
preventive care of a Member, according to accepted standards of medical
practice prevailing at the time of treatment.
1.12 "Member" means (i) any person who has entered into a contract with PHS, or
any Affiliate, for the provision of Covered Services, and his or her
eligible dependents; (ii) any person and his or her eligible dependents,
who is offered health care services through a plan sponsored by his or her
employer that is administered by PHS, or any Affiliate; and (iii) any
person who participates in a Program for a government sponsored plan of
health insurance.
1.13 "Non-IPA Participating Providers" means a health care provider with whom
PHS directly or indirectly contracts for the provision of Covered Services
(other than through IPA).
1.14 "Office Manual" shall mean the PHS/IPA Office Manual describing, among
other things, IPA's rules, regulations, protocols and procedures;
reimbursement schedules; termination protocols and appeals procedures; and
PHS's billing procedures, referrals and authorization policies, utilization
review and quality assessment guidelines, coding guidelines and benefit
summaries, as such Office Manual is revised from time to time; provided,
however, that no amendments or modifications to the Office Manual shall be
made without IPA's consent which will have the effect of (i) adversely
affecting any rights or remedies of IPA as against PHS or any Participating
Physician; (ii) adding to, increasing or adversely affecting (as to IPA)
any obligations of IPA to PHS or any Participating Physician; or (iii)
amending or modifying any sanctions, penalties or termination protocols of
PHS as against any Participating Physician or IPA's process for
sanctioning, penalizing or terminating any Participating Physician or
appealing decisions with respect thereto. The Office Manual as in effect
on the date hereof is incorporated herein by reference. As used herein,
"Office Manual" means both the PHS and IPA sections of the Office Manual.
1.15 "Participating Physician" means a duly licensed medical doctor, osteopathic
physician or oral surgeon who has entered into a currently effective
Physician Agreement with IPA.
1.16 "Performance Standards" means standards used by PHS to measure performance
of Participating Physicians, including without limitation, quality of care
and service, compliance with utilization and referral protocols, billing
procedures, claims adjudication, record keeping requirements and such other
criteria reasonably believed by PHS to be appropriate, as such Performance
Standards may be modified from time to time.
1.17 "PHS Responsible Services" means other Covered Services listed in Exhibit A
for which PHS assumes responsibility for payment, as such Exhibit A may be
modified from time to time in accordance with Section 10.8 hereof.
2
<PAGE>
1.18 "Physician Agreement" means an agreement between IPA and Participating
Physicians in the form of Exhibit B hereto, as such Exhibit B may be
amended or modified from time to time in accordance with Section 10.8
hereof.
1.19 "Primary Care Physician" means a Participating Physician who provides
primary care services to Members, initiates referrals for non-primary care
services and is responsible for maintaining its continuity of care provided
to a Member. A Primary Care Physician may be a family practitioner,
internist or pediatrician.
1.20 "Programs" means all programs of health insurance established, administered
and/or maintained by PHS, or any Affiliate, or established, administered
and/or maintained jointly by PHS, or any Affiliate, and another payer now
or at any time during the term of this Agreement, including, without
limitation, fully funded plans, administrative services only plans, point
of service plans, network access plans, Medicare cost plans, small group
plans, governmental plans (other than Medicare risk and Medicaid),
gatekeeper model plans and exclusive provider organization plans, as
such Programs are modified from time to time in PHS's sole discretion. For
purposes of this Agreement, Programs includes all Programs marketed jointly
by PHS and The Guardian Life Insurance Company of America.
1.24 "Referral" means written authorization issued by the Primary Care Physician
prior to the Member's use of a specialist.
1.25 "Surplus Amounts" means amounts by which actual payments made by PHS on
behalf of IPA pursuant to Section 5.3 are less than amounts budgeted
therefor in accordance with Section 5.1 (after giving effect to any
applicable Corridors).
ARTICLE II - PHS RESPONSIBILITIES
---------------------------------
2.1 Administrative Function. PHS will perform, as requested by IPA, all
-----------------------
administrative, marketing, enrollment, financial, utilization review,
accounting, claims processing and payment, management information systems,
member grievance, quality assessment and other functions necessary or
appropriate for the proper administration of the Programs and the provision
of Covered Services necessary or appropriate to Members, other than
clinical services.
2.2 Credentialing. PHS shall be responsible for all credentialing and
-------------
recredentialing of all Participating Physicians. Credentialing shall be
coordinated with appropriate IPA committees.
2.3 Office Manual. PHS shall maintain an Office Manual for the benefit of PHS,
-------------
IPA and Participating Physicians, which shall set forth the programs,
procedures, rules, regulations and protocols of IPA and PHS, relating to
the delivery of Covered Services by Participating Physicians and
participation of Participating Physicians as members of IPA. PHS shall
furnish an Office Manual to each Participating Physician and shall send
supplements or revisions to the Office Manual to Participating Physicians
prior to the effective date thereof. PHS shall develop Performance
Standards which it shall use to monitor performance of Participating
Physicians. PHS shall promptly advise IPA (or the IPA Advisory Committee
if such Committee is assigned responsibility by IPA for performance reviews
of Participating Physicians) if a Participating Physician fails to satisfy
such Performance Standards. If any provisions in the Office Manual with
respect to Participating Physicians conflicts with any provisions of the
Physician Agreement, then the provisions of the Physician Agreement shall
control.
2.4 Performance Standards. PHS shall develop Performance Standards which it
---------------------
shall use to monitor performance of Participating Physicians. PHS shall
promptly advise IPA (or the IPA Advisory
3
<PAGE>
Committee if such Committee is assigned responsibility by IPA for
performance reviews of Participating Physicians) if a Participating
Physician fails to satisfy such Performance Standards.
2.5 Data Reporting. PHS shall provide IPA with quarterly utilization reports.
--------------
The utilization review performed by PHS shall be consistent with
utilization reviews performed for all other health care providers
participating in PHS's network of providers.
2.6 Eligibility Verification. PHS shall make available to the Participating
------------------------
Providers electronic eligibility verification of current Members enrolled
in PHS. PHS shall use its best efforts to assure that its information is
current; provided, however, that in the event a Member has ceased to be
eligible for benefits under a PHS Program at the time services are rendered
by a Participating Physician, neither IPA nor PHS shall be liable for
payment in respect of such services.
2.7 IPA Advisory Committee. PHS shall develop and administer programs to
----------------------
enhance the delivery of Covered Services to Members, including programs to
achieve more effective quality controls, cost and utilization efficiencies.
PHS shall consult with the IPA Advisory Committee in the development and
implementation of programs that would materially affect the manner in which
Participating Physicians deliver Covered Services to Members and shall use
its best efforts to incorporate such recommendations of the IPA Advisory
Committee that would not adversely affect the administration of such
programs, or PHS's financial condition or business operations.
ARTICLE III - IPA RESPONSIBILITIES
----------------------------------
3.1 Services. PHS hereby retains IPA to arrange for the provision of Medically
--------
Necessary Covered Services to Members through Participating Physicians and
where appropriate, Consultants and other health care professionals, in
accordance with PHS's Programs and applicable law. Participating
Physicians shall be responsible for determining Member eligibility and
benefit verification prior to performing Covered Services, and in the case
of a Program for which a Referral or other authorization is required prior
to performing Covered Services, for obtaining such Referral or other
authorization or, in the event that the Member elects not to obtain such
Referral or authorization, for informing the Member that failure to obtain
such Referral or authorization may result in co-payments, deductibles, or
in certain instances, denial of such services as Covered Services under the
benefit provisions of the Member's Program. Failure to inform the Member,
or the Member's representatives, that certain services are beyond the scope
or duration of Covered Services, and obtain a written waiver, will result
in IPA and Participating Physician being unable to bill the Member or PHS.
All Covered Services rendered by Participating Physicians shall be subject
to the terms and conditions of this Agreement and the Physician Agreement.
3.2 Standards of Care. The Physician Agreement shall require Participating
-----------------
Providers to render all Covered Services to Members consistent with the
quality of medical care that is in conformity with accepted medical care
and surgical practices of the American Medical Association and the practice
prevailing in IPA's service area. Each Participating Physician will have
the training and experience in the field in which they perform Covered
Services.
3.3 Further Acts. IPA shall take all acts or actions necessary within the
------------
scope of this Agreement to permit compliance by PHS with applicable law as
well as accreditation programs conducted by the NCQA, or another entity
performing similar functions.
3.4 Medical Advice. IPA and Participating Physicians shall be solely
--------------
responsible for all medical advice and treatment rendered to Members
receiving medical care from Participating Providers and for the performance
of Covered Services.
4
<PAGE>
3.5 Physician Agreements. IPA agrees that each Participating Physician shall
--------------------
enter into a Physician Agreement with IPA and IPA will take such further
acts as necessary or desirable to amend the Physician Agreement upon
reasonable request of PHS. A Participating Physician may not participate
in Programs through any other entity other than IPA or through direct
contract with PHS.
3.6 Compliance with PHS Rules. IPA shall comply with PHS programs rules and
-------------------------
protocols (collectively, "Rules") adopted by PHS in furtherance of Article
II hereof; provided, however, that no amendments or modifications to the
Rules shall be made without IPA's consent which will have the effect of (i)
adversely affecting any rights or remedies of IPA as against PHS or any
Participating Physician; (ii) adding to, increasing or adversely affecting
(as to IPA) any obligations of IPA to PHS or to any Participating
Physician; or (iii) amending or modifying any sanctions, penalties or
termination protocols of PHS or against any Participating Physician or the
process for sanctioning, penalizing or terminating any Participating
Physician or appealing decisions or terminating any Participating Physician
or appealing the decisions with respect thereto. IPA shall use its best
efforts to ensure that Participating Physicians comply with all policies
and procedures as set forth in the Office Manual and all applicable law.
3.7 Notice of Disciplinary Action. IPA shall notify PHS within five calendar
-----------------------------
days should any disciplinary or other action be formally initiated against
a Participating Physician or any of a Participating Physician's employees
or others performing Covered Services hereunder under a Participating
Physician's supervision, which could result in (i) the suspension or loss
of any license or certification; (ii) the impairment for any other reason
of such Participating Provider's ability to render the Covered Services
required under this Agreement; (iii) the imposition of any sanctions
against such Participating Physician; (iv) any malpractice claim filed
against a Participating Physician; (v) any compromise, settlement, or
judgment of such a claim and the terms and conditions thereof; (vi) any
revocation, suspension, modification, restriction or other change in status
of a Participating Physician's medical staff privileges at any hospital or
other health care facility; or (vii) any investigation of a Participating
Physician by any governmental agency or board or any medical association
relating to a disciplinary cause or reason.
3.8 Disclosure of Information and Records. Subject to applicable laws
-------------------------------------
regarding confidentiality, IPA hereby authorizes PHS to release to any
party any and all information, records, summaries of records and
statistical reports specific to the IPA and/or any Participating
Physicians, including but not limited to, utilization profiles, encounter
data, treatment plans, outcome data and other information pertinent to a
Participating Physician's performance of Covered Services, professional
qualifications and credentialing information, without receiving prior
written consent.
3.9 Authority to Act. IPA represents that it is authorized to act as the agent
----------------
for each Participating Physician for purposes of entering into this
Agreement.
3.10 Hold Harmless. IPA agrees that it shall look solely to PHS for payment for
-------------
Covered Services provided to Members by Participating Physicians under the
Plans. IPA further agrees that in no event, including but not limited to
non-payment by PHS or IPA, PHS or IPA insolvency, or breach of this
Agreement shall IPA or Participating Physicians or Consultants (as defined
in Section 1.3(i)) charge, collect a deposit from, seek compensation,
remuneration or reimbursement from or have any recourse against a Member,
other than PHS acting on a Member's behalf, for Covered Services rendered
pursuant to this Agreement. This provision shall not prohibit collection
by Participating Physicians of copayments or supplemental charges made in
accordance with Programs. This Section 3.10 shall survive termination of
this Agreement regardless of the cause giving rise to termination and shall
be construed to be for the benefit of Members.
3.11 Delegation. IPA and PHS agree that IPA may delegate to PHS the
----------
performance such of its responsibilities as IPA may determine from time to
time.
5
<PAGE>
3.12 Non-Discrimination. Except as otherwise provided herein, Participating
------------------
Physicians shall provide Covered Services to all Members in a manner
similar to the manner in which Participating Physicians provide services to
other patients and shall not discriminate in the acceptance of Members as
patients or treatment of Members on the basis of race, color, national
origin, ancestry, religion, sex, marital status, sexual orientation or age.
ARTICLE IV - PROGRAMS
---------------------
4.1 Program Design and Introduction. PHS shall have sole authority over
-------------------------------
matters relating to Program design, introduction of new Programs and
modification or elimination of existing Programs, including without
limitation, utilization, referral, quality assessment, reimbursement and
reimbursement protocols relating to such Programs. PHS shall consult with
the IPA Advisory Committee in the material design features of Programs and
shall use its best efforts to incorporate the reasonable recommendations of
the IPA Advisory Committee into final Program design that do not adversely
affect the administration, financial or operational aspects of such
Program.
4.2 Participation in Programs. Except as waived by PHS, which waiver PHS shall
-------------------------
not unreasonably withhold or delay, Participating Physicians are required
to participate in all Programs and PHS may not exclude any Participating
Physician except as set forth below. IPA agrees to sanction or terminate
in accordance with the Physician Agreement, Office Manual, or otherwise,
any Participating Physician who notifies IPA or PHS that he or she will not
participate in a Program or who does not accept Members enrolled in one or
more Programs. Notwithstanding the foregoing, PHS may select, after
consultation with IPA, a subset of Participating Providers, if PHS is
requested to reduce the size of its panel of Participating Physicians for
an employer group of 1,000 or more eligible Members.
ARTICLE V - COMPENSATION
------------------------
5.1 Health Care Service Budgets. The budget for Covered Services for IPA
---------------------------
Members shall be established by mutual consent and shall be deemed to be
incorporated herein by reference.
5.2 Capitation System.
-----------------
PHS shall allocate to IPA a monthly capitation in accordance with Exhibit C
from which IPA shall compensate Participating Physicians, Consultants, Non-
IPA Participating Providers and also, in cases of Medical Emergency or upon
prior approval by PHS, other health care providers, for Covered Services
rendered to IPA Members except (i) Covered Services pursuant to self-funded
Programs which are paid directly by the employer; (ii) Covered Services
pursuant to Programs for which PHS pays Participating Physicians directly;
(iii) as specifically provided and agreed to by IPA in connection with
certain Programs. PHS shall allocate amounts from the capitation payment
hereunder to each of the following three funds: an in-patient hospital
fund; an out-patient hospital fund and a physician and other capitated
services fund.
The risk sharing arrangements between PHS and IPA are as set forth below:
(i) The In-Patient Hospital Fund. In the event that payments in respect
----------------------------
of hospital in-patient Covered Services rendered to IPA Members exceed
amounts budgeted therefor in accordance with Section 5.1 hereof, fifty
percent (50%) of the deficit over the Corridor shall be deemed to be
Excess Payments hereunder. In the event that payments in respect of
hospital in-patient Covered Services rendered to IPA Members are less
than amounts budgeted therefor in accordance with Section 5.1 hereof,
fifty percent (50%) of the surplus under the Corridor shall be deemed
to be Surplus Amounts hereunder.
6
<PAGE>
(ii) The Out-Patient Hospital Fund. In the event that payments in respect
-----------------------------
of hospital out-patient Covered Services rendered to IPA Members
exceed amounts budgeted therefor in accordance with Section 5.1
hereof, one hundred percent (100%) of the deficit shall be deemed to
be Excess Payments hereunder. In the event that payments in respect
of hospital out-patient Covered Services rendered to IPA Members are
less than amounts budgeted therefor in accordance with Section 5.1
hereof, one hundred percent (100%) of the surplus shall be deemed to
be Surplus Amounts hereunder.
(iii) The Physician and Other Fund. In the event that payments in respect
----------------------------
of Covered Services rendered to IPA Members other than the Covered
Services described in clauses (i), (ii) and (iv) of this Section 5.2,
exceed amounts budgeted therefor in accordance with Section 5.1
hereof, one hundred percent (100%) of the deficit shall be deemed to
be Excess Payments hereunder. In the event that payments in respect
of Covered Services (except as provided in clauses (i), (ii) and (iv),
rendered to IPA Members are less than amounts budgeted therefor in
accordance with Section 5.1 hereof, one hundred percent (100%) of the
surplus shall be deemed Surplus Amounts hereunder.
(iv) The Pharmaceutical Fund. In the event that payments in respect of
-----------------------
pharmaceutical related Covered Services rendered to IPA Members exceed
amounts budgeted therefor in accordance with Section 5.1 hereof, fifty
percent (50%) of the deficit shall be deemed to be Excess Payments
hereunder. In the event that payments in respect of pharmaceutical
related Covered Services rendered to IPA Members are less than amounts
budgeted therefor in accordance with Section 5.1 hereof, fifty percent
(50%) of the surplus shall be deemed to be Surplus Amounts hereunder.
5.3. Payments Administered by PHS. The amount allocated as the monthly
----------------------------
capitation for Covered Services pursuant to Section 5.2 shall be held and
administered by PHS for the purpose of enabling IPA to discharge its
payment obligations as set forth in Section 5.2. PHS shall act as IPA's
agent for purposes of making all payments and distributions to
Participating Physicians, Consultants, Non-IPA Participating Physicians and
other health care providers as set forth in Section 5.2 (in cases of
Covered Services rendered to IPA Members). IPA agrees that the payments
made by PHS as IPA's agent hereunder shall be deducted from amounts
allocated to IPA as capitation payments. Payments shall be made
irrespective of whether actual payments made pursuant to this paragraph
exceed the amounts allocated to IPA as capitation payments. Subject to
Section 5.5, payments shall be made in accordance with the following:
(a) Compensation for Participating Physicians, Consultants and Non-IPA
Participating Providers shall be calculated on the basis of the lesser
of the Physician's, Consultant's or Non-IPA Participating Provider's
billed charges, and (i) in the case of Participating Physicians, the
reimbursement schedules agreed to by PHS and IPA from time to time or
an actuarially determined capitation amount, and (ii) in the case of
Consultants, Non-IPA Participating Physicians, and other health care
providers, the PHS reimbursement schedule in effect from time to time.
The administrative guidelines for reimbursement of fees shall be
maintained by PHS.
(b) Participating Physicians shall be paid within two (2) months of the
receipt by PHS of a properly submitted bill for Covered Services,
except for claim payments subject to claims recovery through
coordination of benefits (C.O.B.). Participating Physicians shall only
be paid for bills for Covered Services received by PHS within 90 days
of the date of service, unless such bills have been subject to claims
recovery through C.O.B., basic reparation of benefits under an
automobile no-fault policy, worker's compensation or subrogation
activity. For Covered Services involving C.O.B., IPA shall be liable
to pay Participating Physicians only for bills received within 18
months of the date of service. Participating
7
<PAGE>
Physicians may not bill Members for bills for Covered Services which
are not submitted in accordance with this Section 5.3 (b).
5.4. Withhold and Reserve Provision. PHS may establish a withhold provision for
------------------------------
a percentage of the compensation payable to IPA pursuant to Section 5.2 on
behalf of Participating Physicians for Covered Services, to be held in a
risk fund, it being understood and agreed that the amounts retained shall
be applied to offset the amounts by which the actual costs of Covered
Services rendered to IPA Members exceed budgeted amounts for the year.
Actual withhold amounts may vary according to Program and Participating
Physician. The percent level of withhold for specific programs and the
methodology for a variable withhold program shall be subject to IPA
consent. PHS and IPA shall, at regular intervals, review the utilization
and costs of such services. PHS has the right to increase the percentage
of compensation withheld to such levels as PHS may deem necessary to
preserve IPA's fiscal integrity; provided, however that any increase is
subject to IPA's consent, which consent shall not be unreasonably withheld.
Amounts earned on funds held in the withhold account shall be the property
of PHS and neither IPA nor Participating physicians shall assert any claims
to such amounts.
5.5 Excess Payments and Surplus Amounts. If PHS makes Excess Payments, IPA
-----------------------------------
shall be liable to PHS for such Excess Payments and shall repay such
amounts within 30 days after notice from PHS of the extent of the Excess
Payment. If there are Surplus Amounts, PHS shall allocate such Surplus
Amounts to Participating Physicians in accordance with instructions from
IPA and shall pay such Surplus Amounts to Participating Physicians not more
than 75 days following the end of the year; provided, however, that prior
to making any payments from surplus Amounts, Surplus Amounts shall be
applied first to reduce or eliminate Excess Payments, if any, in one or
more Funds and shall only be payable as provided in this Section 5.5 if
there are no Excess Payments outstanding in any Fund.
5.5 Intra-Network Payments. PHS shall make payments as IPA's agent from
----------------------
capitation amounts allocated to IPA for Covered Services rendered to IPA
Members by Non-IPA Participating Physicians, Consultants or health care
providers. PHS will pay Participating Physicians for Covered Services
rendered to Members who are not IPA Members in accordance with Section 5.3;
such payments on behalf of Members who are not IPA Members shall not be
charged against the capitation amount allocated to IPA. All payments made
hereunder will be subject to the withhold provisions set forth in Section
5.4.
5.6 Self Funded Payers; Direct Payments. For Programs with respect to which an
-----------------------------------
employer group self-funds its claims expense or Programs in which PHS
elects to pay Participating Physicians on a fee for service basis without
regard to capitation, PHS shall compensate Participating Physicians in
accordance with the PHS fee schedule then in effect.
5.7 Forms; Cooperation.
------------------
(a) IPA shall arrange for Participating Physicians to bill PHS for Covered
Services provided to Members on forms as reasonably specified by PHS.
These forms shall specify the Covered Services provided and shall
include all of the statistical and descriptive medical, diagnostic and
patient data together with identifying information required by PHS.
(b) IPA shall arrange for Participating Physicians to cooperate with and
participate in PHS programs for coordination of benefits with other
health care plans or any other permitted methods of third party
recovery. Such programs include, but are not limited to, the
following:
(i) Assisting Members with required forms.
8
<PAGE>
(ii) Where duplicate coverage exists and the Program appears to be
secondary coverage, notifying PHS and for ninety (90) days
seeking payment from the other health care plan, before seeking
payment from PHS or self funded payer.
(iii) Where other plan(s) must pay their benefits before the benefits
of the applicable Program, accepting as PHS's payment, the lesser
of the payment determined in accordance with Section 5.3 (a) and
the amount equal to the provider's usual charges for Covered
Services, reduced by amounts paid by other plan(s) (or to be paid
in the case of Medicare, Worker's Compensation Law, occupational
disease or any similar law).
5.8 Coverage Questions. PHS shall make timely payment to Participating
------------------
Physicians as provided in Section 5.3 unless, prior to the expiration of
the period set forth therein, PHS notifies the Participating Physician in
writing that additional information is required or that a coverage question
(including without limitation, a question relating to coordination of
benefits or pre-existing conditions) exists. Such notice shall specify any
additional information required and shall describe the nature of the
coverage question. PHS shall endeavor in good faith to promptly resolve
coverage questions, and shall make payment, if appropriate, promptly after
coverage questions are resolved but in no case later than ninety (90) days
after a submission of all required information. In the case of requests
for additional information, the claims shall be paid within 30 days of
receipt of all requested information.
5.9 Subrogation. In the event a Member is injured by an act or omission of a
-----------
Participating Physician in connection with the rendering of Covered
Services hereunder, PHS may elect to pursue its subrogation rights, if any,
against the potentially responsible Participating Physician. PHS shall make
payment to the Physician in accordance with this Agreement while pursuing
those rights.
ARTICLE VI - RECORDS
---------------------
6.1. PHS Members. PHS shall maintain such records and establish and adhere to
-----------
such procedures as shall be reasonably required to ascertain the number and
identity of Members, which information shall be provided to IPA upon its
request. IPA shall cooperate with PHS in connection with such records and
procedures to the end of enabling the parties to accomplish with maximum
efficiency and minimum administrative cost, determinations of eligibility
for coverage and the amount of compensation payable to IPA.
6.2. Accounting. PHS shall maintain, in accordance with generally accepted
----------
accounting practices, such financial and accounting records as shall be
necessary, appropriate or convenient for the proper administration of this
Agreement.
6.3. Statistical Records. PHS and IPA shall jointly maintain such statistical
-------------------
records with respect to Covered Services, including the utilization
thereof, as shall be necessary, appropriate, or convenient for the proper
administration of this Agreement.
6.4. Compliance With Law. IPA and PHS agree to maintain their records in
-------------------
accordance with applicable federal and state laws and regulations and
further agree to participate as necessary in required regulatory
examinations.
6.5. Medical Records. IPA shall arrange for Participating Physicians to
---------------
maintain adequate medical records for Members in accordance with applicable
law. IPA and PHS shall make reasonably available the medical records,
subject to all applicable state and federal privacy and confidentiality
requirements, to each other upon request without cost in order to determine
that the content of such report and the quality of care rendered are
acceptable, as well as for peer review, grievance review, recredentialing
or any other reasonably necessary purposes.
9
<PAGE>
6.6. Confidentiality. PHS and IPA shall ensure confidentiality of Members'
---------------
health and medical records. IPA and PHS each agree that all records,
reports, data, data formats, financial information and other documents or
information pertaining to the other or any related company which are
provided, made available, or otherwise disclosed to the other pursuant to
this Agreement or the relationship between PHS and IPA, are confidential,
and may not be disclosed to any person or entity for any reason at any time
during or subsequent to the term of this Agreement, except for their
attorneys, accountants, or other representatives and except as required by
law. Anything to the contrary contained in the foregoing notwithstanding,
any information which has entered the public domain, except solely by a
party's violation of this provision, shall not be deemed to be confidential
hereunder.
ARTICLE VII - LEGAL RELATIONSHIP BETWEEN PHS AND IPA
----------------------------------------------------
Independent Contractors. The relationship of the parties is that of independent
- -----------------------
contractors. None of the provisions of this Agreement are intended to create
nor shall be construed to create a partnership, or joint venture relationship
between the parties. Except as to payment procedures for which PHS shall act as
IPA's agent hereunder, neither party hereto nor any of their respective
officers, members, employees or physicians shall be deemed to be the agent,
employee, or representative of the other party.
ARTICLE VIII - INDEMNIFICATION AND INSURANCE
--------------------------------------------
8.1. Physician Insurance. IPA shall require all of its Participating Physicians
-------------------
and all Consultants to whom a Member is referred by a Participating
Physician to maintain professional liability insurance acceptable to PHS in
an amount not less than $1,000,000 per incident and $3,000,000 aggregate to
cover all demands, claims and expenses of all kinds that may result or
arise out of any alleged malpractice or neglect caused or alleged to have
been caused by such individuals or any of their agents, employees, or
representatives in the performance or omissions of any act relating to this
Agreement.
8.2. Cooperative Defense. The parties recognize that, during the term of this
-------------------
Agreement and for some period thereafter, certain risk management issues,
legal issues, claims or actions may arise that involve or could potentially
involve the parties and their respective employees and agents. The parties
further recognize the importance of cooperating with each other in good
faith when such issues, claims or actions arise to the extent that such
cooperation does not violate any applicable laws, cause breach of any
duties created by any policies of insurance, or otherwise compromise the
confidentiality of communications of information regarding the issues,
claims or actions. The parties shall cooperate in good faith, using their
best efforts, to address such risk management and claims handling issues in
a manner that strongly encourages full cooperation between the parties.
Nothing in this Section 8.2 shall affect any cross or counter-claims that
may be available to the parties hereto.
8.3 Liability. Each party shall be responsible for its own actions and
---------
omissions as they may relate to or arise from its duties and obligations
under this Agreement.
ARTICLE IX- TERM OF AGREEMENT
-----------------------------
9.1 Term. The term of this Agreement shall be for a period of one year
----
commencing on January 1, 1997, and shall terminate on December 31, 1997.
This Agreement may be terminated by either party prior to the expiration of
its term in the event of the insolvency of the other party, appointment of
a trustee or receiver for any substantial part of the assets of the other
party, or assignment by the other party for the benefit of its creditors or
the commencement of any proceedings under the bankruptcy or insolvency law
by or against such other party. This Agreement may also be terminated upon
60 days prior written notice, by either party upon the other party's
material breach of any of the terms of this Agreement and failure to cure
such breach within such 60 day period.
10
<PAGE>
9.2 Termination of Participating Physicians. A Participating Physician
---------------------------------------
terminating his relationship with IPA will also terminate his participation
in the Programs. A termination by a Participating Physician shall not be
deemed a termination of this Agreement, which may only be terminated
pursuant to Section 9.1. PHS may terminate a Participating Physician in
all Programs subject to the due process protocols set forth in the Office
Manual. Termination of a Participating Physician's participation in
Programs shall not be deemed a termination of the Physician Agreement
without further action on the part of IPA.
9.3 Effect of Termination.
---------------------
(a) Upon the effective termination of this Agreement, all rights and
obligations of the parties under this Agreement shall immediately
cease; provided, however, that IPA shall remain responsible for
providing Covered Services under the terms of this Agreement to Members
who are under the care of Participating Physicians at the time of such
termination through the period for which premiums have been paid (but
in no event more than 90 days, except that if a Member is hospitalized
at the time of termination, until the Member is discharged), unless PHS
makes reasonable and medically appropriate provision for the assumption
of such services by another provider. PHS shall compensate
Participating Physicians for those Covered Services, for which premium
was received, rendered prior to and following the termination date (as
provided in this Section 9.3(a)) pursuant to the PHS/IPA fee schedule
in effect at such time. In the event this Agreement is terminated due
to the last sentence of Section 9.1, the non-defaulting party shall be
entitled to pursue all legally available remedies consistent with
Section 10.4 herein, and damages arising out of such breach.
(b) Upon termination, PHS is authorized to notify Members, prospective
Members and Participating Physicians, and other persons and entities
whom it deems to have an interest herein of such termination.
ARTICLE X - MISCELLANEOUS
-------------------------
10.1.Successors. This Agreement shall be binding upon and inure to the
----------
benefit of the parties hereto, their respective heirs, successors and
assigns, but may not be assigned by either party without the prior written
consent of the other party, provided, however that a succession to all or
substantially all of the assets or equity interests of any party shall not
be deemed to be an assignment in violation hereof.
10.2.Delegation. IPA shall not, in a manner inconsistent with this
----------
Agreement, subcontract or otherwise delegate its duties under this
Agreement unless the other party so approves by written consent. All
contracts by IPA with subcontractors shall be approved in writing by PHS
prior to execution thereof and copies shall be available to PHS upon its
request.
10.3.Headings. The headings of the various Sections of the Agreement
--------
are inserted merely for the purpose of convenience and do not, expressly or
by implication, limit or define or extend the specific terms of the
Sections so designated.
10.4.Arbitration. In the event any dispute shall arise with regard to
-----------
the performance or interpretations of any of the terms of this Agreement,
all matters in controversy shall be submitted to a Board of Arbitrators in
accordance with the commercial arbitration rules and regulations of the
American Arbitration Association, and a judgment upon the award entered in
any court having jurisdiction thereof. Arbitration shall be initiated by
written notice by the party requesting arbitration to the other party.
Both parties expressly covenant and agree to be bound by the decision of
the arbitrators and accept any decision by a majority of the arbitrators as
a final determination of the matter in dispute.
10.5.Governing Law. The validity, enforceability and interpretation of
-------------
any of the clauses of this Agreement shall be determined and governed by
the laws of the State of Connecticut.
11
<PAGE>
10.6. Medical Ethics. IPA and PHS agree that the administration of PHS's
--------------
program and this Agreement shall at all times be compatible with sound
principles of medical ethics .
10.7. Entire Agreement. This Agreement contains all the terms and conditions
----------------
agreed upon by the parties hereto, supersedes all other agreements, oral
and otherwise, regarding the subject matter of the parties hereto.
10.8. Amendment. This Agreement may be amended at any time by mutual
---------
agreement of the parties, provided that before any amendment shall be
operative and valid, it shall be in writing and signed by PHS and IPA. The
parties agree that, in the event of changes in federal or state law that
necessitate an amendment to this Agreement, they shall endeavor in good
faith to reach agreement on such amendment that is consistent with and in
furtherance of the scope and intent of this Agreement.
10.9 Notices. All notices expressly required to be given pursuant to the terms
-------
of this Agreement shall be in writing and shall be deemed effectively
given (i) on the date of receipt if personally delivered or telecopied to
the party to whom the same is directed; or (ii) on the third day after
mailing if mailed to such party, postage prepaid, addressed to the
following addresses, or to such other addresses as the parties may
hereafter designate by like notice:
to PHS at:
Physicians Health Services of Connecticut, Inc.
120 Hawley Lane
Trumbull, CT 06611
ATTN: Executive Director
and to IPA at:
c/o Physicians Health Services, Inc.
120 Hawley Lane
Trumbull, CT 06611
PHS's obligation to notify IPA hereunder for all matters other than
termination of this Agreement may be fulfilled by PHS's mailing to IPA in
the manner set forth above in a letter describing the matters subject to
such notification. Notice of termination shall be by certified mail.
10.10 Third Party Beneficiaries. Nothing in this Agreement, express or
-------------------------
implied, is intended or shall be construed to confer upon any person, firm
or corporation other than the parties hereto and their respective
successors or assigns, any remedy or claim under or by reason of this
Agreement and any term, covenant or condition hereof, as third party
beneficiaries or otherwise, and all of the terms, covenants and conditions
hereof shall be for the sole and exclusive benefit of the parties hereto
and their successors and assigns.
10.11 Policy Changes. To the extent additional national accreditation bodies
--------------
develop their own accreditation requirements, and these requirements have
a material impact on the ability of PHS to pursue new business or retain
current business, PHS and the IPA agree to work together in developing
additional policy changes.
10.12 Unenforceability. If any provision of this Agreement is determined to be
----------------
unenforceable, the rest of the Agreement shall remain in full force and
effect.
10.13 Staff Service. PHS shall provide to IPA, at its expense, PHS staff
-------------
services reasonably necessary or advisable to carry out the terms of this
Agreement.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
month and year above set forth.
PHYSICIANS HEALTH SERVICES OF
CONNECTICUT, INC.
By: ___________________
FAIRFIELD INDIVIDUAL PRACTICE ASSOCIATION
By: ___________________
13
<PAGE>
EXHIBIT A
---------
PHS RESPONSIBLE SERVICES
------------------------
The following are PHS Responsible Services:
General Laboratory procedures and Cytology for which PHS has contracted
with a third-party to provide, including all laboratory procedures as defined by
the CPT code range 80002-89399 but excluding procedures defined by the CPT code
ranges 88104-88199 and 88000-88099 and 88300-88399.
Dental services
Hospital stop- loss insurance for inpatient services
Radiology (other than radiotherapy)
Audiology
Rehabilitative services
Immunizations and Injectables
Drug and alcohol component of behavioral health services
Durable medical equipment
Oxygen and prosthetics
Ambulance
Podiatry services
Chiropractic services
Optometry services
14
<PAGE>
Exhibit 10(v)
IPA SERVICE AGREEMENT
This IPA Service Agreement is made and entered into as of this 1st day of
January, 1997 by and between PHYSICIANS HEALTH SERVICES OF CONNECTICUT, INC., a
Connecticut corporation, and PHS INSURANCE OF CONNECTICUT, INC., a Connecticut
corporation, (together, "PHS"), on the one hand, and HERITAGE INDIVIDUAL
PRACTICE ASSOCIATION, INC. ("IPA"), on the other hand;
WHEREAS, PHS arranges for the provision of Covered Services (as defined
below) to Members (as defined below);
WHEREAS, IPA is an individual practice association which has entered into
contracts with physicians and other health care providers to arrange for and
facilitate the provision and delivery of Covered Services (as defined below) to
Members;
WHEREAS, PHS and IPA mutually desire to preserve and enhance patient
dignity;
NOW, THEREFORE, in consideration of the premises and other mutual covenants
herein contained and other good and valuable considerations, it is mutually
agreed as follows:
ARTICLE 1. DEFINITIONS
-----------------------
1.1 "Affiliate" means any company controlling, controlled by or under common
control with PHS.
1.2 "Consultant" means a physician (other than a Participating Physician and a
Non-IPA Participating Physician) (i) to whom a Member has been referred or
who has been asked to provide Covered Services on behalf of a Member by a
Participating Physician or (ii) who provides Covered Services to IPA
members pursuant to the out of network benefits of a Program.
1.3 "Corridor" means the amount equal to 5% greater or less than budgeted
amounts established pursuant to Section 5.1 hereof.
1.4 "Covered Services" means those Medically Necessary services and benefits
that Members are entitled to receive under a Program. As used herein,
Covered Services excludes PHS Responsible Services.
1.5 "Emergency" means the accidental injury or the unexpected onset of a
serious illness, which has the potential for causing immediate disability
or death or requiring immediate alleviation of pain and discomfort. The
determination of whether Emergency services are Covered Services rests
exclusively with the Medical Director.
1.6 "Excess Payment" means amounts by which payments made by PHS on behalf of
IPA pursuant to Section 5.3 hereof exceed amounts budgeted therefor in
accordance with Section 5.1 hereof (after giving effect to any applicable
Corridor.
1.7 "Fund" means each of the funds established pursuant to Section 5.2
1
<PAGE>
1.8 "IPA Member" means Members who have selected or who have been assigned a
Participating Physician as their Primary Care Physician.
1.9 "IPA Advisory Committee" means a committee comprised of representatives of
IPA, and such other individual practice associations or physician hospital
organizations with which PHS contracts for the provision of Covered
Services, which elect to have representation on the IPA Advisory Committee.
1.10 "Medical Director" means one or more physicians or other persons appointed
by PHS to be responsible for, among other things, administering PHS's
medical affairs and for serving as medical liaison to Participating
Physicians.
1.11 "Medically Necessary" means services or supplies which are necessary and
appropriate for the treatment of a Member's illness or injury or for the
preventive care of a Member, according to accepted standards of medical
practice prevailing at the time of treatment.
1.12 "Member" means (i) any person who has entered into a contract with PHS, or
any Affiliate, for the provision of Covered Services, and his or her
eligible dependents; (ii) any person and his or her eligible dependents,
who is offered health care services through a plan sponsored by his or her
employer that is administered by PHS, or any Affiliate ; and (iii) any
person who participates in a Program for a government sponsored plan of
health insurance.
1.13 "Non-IPA Participating Providers" means a health care provider with whom
PHS directly or indirectly contracts for the provision of Covered Services
(other than through IPA).
1.14 "Office Manual" shall mean the PHS/IPA Office Manual describing, among
other things, HIPA's rules, regulations, protocols and procedures;
reimbursement schedules; termination protocols and appeals procedures; and
PHS's billing procedures, referrals and authorization policies, utilization
review and quality assessment guidelines, coding guidelines and benefit
summaries, as such Office Manual is revised from time to time. The Office
Manual as in effect on the date hereof is incorporated herein by reference.
As used herein, "Office Manual" means both the PHS and IPA sections of the
Office Manual.
1.15 "Participating Physician" means a duly licensed medical doctor, osteopathic
physician or oral surgeon who has entered into a currently effective
Physician Agreement with IPA.
1.16 "Performance Standards" means standards used by PHS to measure performance
of Participating Physicians, including without limitation, quality of care
and service, compliance with utilization and referral protocols, billing
procedures, claims adjudication, record keeping requirements and such other
criteria reasonably believed by PHS to be appropriate, as such Performance
Standards may be modified from time to time.
1.17 "PHS Responsible Services" means other Covered Services listed in Exhibit A
for which PHS assumes responsibility for payment, as such Exhibit A may be
modified from time to time in accordance with Section 10.8 hereof.
1.18 "Physician Agreement" means an agreement between IPA and Participating
Physicians in the form of Exhibit B hereto, as such Exhibit B may be
amended or modified from time to time in accordance with Section 10.8
hereof.
1.19 "Programs" means all programs of health insurance established, administered
and/or maintained by PHS, or any Affiliate, or established, administered
and/or maintained jointly by PHS, or any Affiliate, and another payer now
or at any time during the term of this Agreement, including,
2
<PAGE>
without limitation, fully funded plans, administrative services only plans,
point of service plans, network access plans, Medicare cost plans, small
group plans, governmental plans (other than Medicare risk and Medicaid),
gatekeeper model plans and exclusive provider organization plans, as such
Programs are modified from time to time in PHS's sole discretion. For
purposes of this Agreement, Programs includes all Programs marketed jointly
by PHS and The Guardian Life Insurance Company of America.
1.20 "Primary Care Physician" means a Participating Physician who provides
primary care services to Members, initiates referrals for non-primary care
services and is responsible for maintaining the continuity of care provided
to a Member. A Primary Care Physician may be a family practitioner,
internist or pediatrician.
1.21 "Referral" means written authorization issued by the Primary Care Physician
prior to the Member's use of a specialist.
1.22 "Surplus Amounts" means the amounts by which actual payments made by PHS
on behalf of IPA pursuant to Section 5.3 hereof are less than amounts
budgeted therefore in accordance with Section 5.1 hereof (after giving
effect to any applicable Corridors).
1.23 "Service Area" means the towns in each case listed in Schedule I in the
State of Connecticut and within such towns, the service areas of the
hospitals in each case as listed in Schedule I.
ARTICLE II - PHS RESPONSIBILITIES
---------------------------------
2.1 Administrative Function. PHS will perform, as requested by IPA, all
-----------------------
administrative, marketing, enrollment, financial, utilization review,
accounting, claims processing and payment, management information systems,
member grievance, quality assessment and other functions necessary or
appropriate for the proper administration of the Programs and the provision
of Covered Services necessary or appropriate to Members, other than
clinical services. Utilization review shall be coordinated with
appropriate IPA committees, upon IPA's reasonable request.
2.2 Credentialing. PHS shall be responsible for all credentialing and
-------------
recredentialing of all Participating Physicians. Credentialing shall be
coordinated with appropriate IPA committees.
2.3 Office Manual. PHS shall maintain the Office Manual for the benefit of
-------------
PHS, IPA and Participating Physicians, which shall set forth the programs,
procedures, rules, regulations and protocols of IPA and PHS, relating to
the delivery of Covered Services by Participating Physicians and
participation of Participating Physicians as members of IPA. PHS shall
furnish an Office Manual to each Participating Physician and shall send
supplements or revisions to the Office Manual to Participating Physicians
prior to the effective date thereof. PHS shall develop Performance
Standards which it shall use to monitor performance of Participating
Physicians. PHS shall promptly advise IPA (or the IPA Advisory Committee
if such Committee is assigned responsibility by IPA for performance reviews
of Participating Physicians) if a Participating Physician fails to satisfy
such Performance Standards.
2.4 Performance Standards. PHS shall develop Performance Standards which it
---------------------
shall use to monitor performance of Participating Physicians. PHS shall
promptly advise IPA (or the IPA Advisory Committee if such Committee is
assigned responsibility by IPA for performance reviews of Participating
Physicians) if a Participating Physician fails to satisfy such Performance
Standards.
2.5 Data Reporting. PHS shall provide IPA with quarterly utilization reports.
--------------
The utilization review performed by PHS shall be consistent with
utilization reviews performed for all other health care providers
participating in PHS's network of providers.
3
<PAGE>
2.6 Eligibility Verification. PHS shall make available to the Participating
------------------------
Providers electronic eligibility verification of current Members enrolled
in PHS. PHS shall use its best efforts to assure that its information is
current; provided, however, that in the event a Member has ceased to be
eligible for benefits under a PHS Program at the time services are rendered
by a Participating Physician, neither IPA nor PHS shall be liable for
payment in respect of such services.
2.7 IPA Advisory Committee. PHS shall develop and administer programs to
----------------------
enhance the delivery of Covered Services to Members, including programs to
achieve more effective quality controls, cost and utilization efficiencies.
PHS shall consult with the IPA Advisory Committee in the development and
implementation of programs that would materially affect the manner in which
Participating Physicians deliver Covered Services to Members and shall use
its best efforts to incorporate such recommendations of the IPA Advisory
Committee that would not adversely affect the administration of such
programs, or PHS's financial condition or business operations.
2.8 Service Area. Except as provided in Section 3.10, PHS shall not enter into
------------
another agreement for physician related Covered Services to be provided
within the Service Area. Subject to the foregoing, the composition of
PHS's network of other health care providers within the Service Area shall
be solely within the discretion of PHS.
ARTICLE III - IPA RESPONSIBILITIES
----------------------------------
3.1 Services. PHS hereby retains IPA to arrange for the provision of Medically
--------
Necessary Covered Services to Members through Participating Physicians and
where appropriate, Consultants and other health care professionals, in
accordance with PHS's Programs and applicable law. Participating
Physicians shall be responsible for determining Member eligibility and
benefit verification prior to performing Covered Services, and in the case
of a Program for which a Referral or other authorization is required prior
to performing Covered Services, for obtaining such Referral or other
authorization or, in the event that the Member elects not to obtain such
Referral or authorization, for informing the Member that failure to obtain
such Referral or authorization may result in co-payments, deductibles, or
in certain instances, denial of such services as Covered Services under the
benefit provisions of the Member's Program. Failure to inform the Member,
or the Member's representatives, that certain services are beyond the scope
or duration of Covered Services, and obtain a written waiver, will result
in IPA and Participating Physician being unable to bill the Member or PHS.
All Covered Services rendered by Participating Physicians shall be subject
to the terms and conditions of this Agreement and the Physician Agreement.
3.2 Standards of Care. The Physician Agreement shall require Participating
-----------------
Providers to render all Covered Services to Members consistent with the
quality of medical care that is in conformity with accepted medical care
and surgical practices of the American Medical Association and the practice
prevailing in IPA's service area. Each Participating Physician will have
the training and experience in the field in which they perform Covered
Services.
3.3 Further Acts. IPA shall take all acts or actions necessary within the
------------
scope of this Agreement to permit compliance by PHS with applicable law as
well as accreditation programs conducted by the NCQA, or another entity
performing similar functions.
3.4 Medical Advice. IPA and Participating Physicians shall be solely
--------------
responsible for all medical advice and treatment rendered to Members
receiving medical care from Participating Providers and for the performance
of Covered Services.
3.5 Physician Agreements. IPA agrees that each Participating Physician shall
--------------------
enter into a Physician Agreement with IPA and IPA will take such further
acts as necessary or desirable to amend the
4
<PAGE>
Physician Agreement upon reasonable request of PHS. A Participating
Physician may not participate in Programs through any other entity other
than IPA or through direct contract with PHS. IPA warrants that all
Participating Physicians shall have an unrestricted license to practice
medicine in the State of Connecticut.
3.6 Compliance with PHS Rules. IPA shall comply with all programs, rules and
-------------------------
protocols adopted by PHS in furtherance of Article II hereof. IPA
shall use its best efforts to ensure that Participating Physicians comply
with all policies and procedures as set forth in the Office Manual and all
applicable law.
3.7 Notice of Disciplinary Action. IPA shall notify PHS within five calendar
-----------------------------
days should any disciplinary or other action be formally initiated against
a Participating Physician or any of a Participating Physician's employees
or others performing Covered Services hereunder under a Participating
Physician's supervision, which could result in (i) the suspension or loss
of any license or certification; (ii) the impairment for any other reason
of such Participating Provider's ability to render the Covered Services
required under this Agreement; (iii) the imposition of any sanctions
against such Participating Physician; (iv) any malpractice claim filed
against a Participating Physician; (v) any compromise, settlement, or
judgment of such a claim and the terms and conditions thereof; (vi) any
revocation, suspension, modification, restriction or other change in status
of a Participating Physician's medical staff privileges at any hospital or
other health care facility; or (vii) any investigation of a Participating
Physician by any governmental agency or board or any medical association
relating to a disciplinary cause or reason.
3.8 Disclosure of Information and Records. Subject to applicable laws
-------------------------------------
regarding confidentiality, IPA hereby authorizes PHS to release to any
party any and all information, records, summaries of records and
statistical reports specific to the IPA and/or any Participating
Physicians, including but not limited to, utilization profiles, encounter
data, treatment plans, outcome data and other information pertinent to a
Participating Physician's performance of Covered Services, professional
qualifications and credentialing information, without receiving prior
written consent.
3.9 Authority to Act. IPA represents that it is authorized to act as the agent
----------------
for each Participating Physician for purposes of entering into this
Agreement.
3.10 Adequacy of Services. IPA shall provide for the availability of Covered
--------------------
Services within the service area at such times and in such locations as
shall be required to satisfy the needs of IPA Members and as shall be
necessary to enable IPA to discharge its obligations hereunder. IPA shall
at the times maintain a sufficient number of Participating Physicians to
provide Covered Services hereunder. If PHS believes at any time that the
number of Participating Physicians, taken as a whole or within any
specialty, is insufficient it shall consult with IPA and PHS and IPA shall
jointly develop a plan to correct such insufficiency as expeditiously as
possible.
3.11 Hold Harmless. IPA agrees that it shall look solely to PHS for payment for
-------------
Covered Services provided to Members by Participating Physicians under the
Plans. IPA further agrees that in no event, including but not limited to
non-payment by PHS or IPA, PHS or IPA insolvency, or breach of this
Agreement shall IPA or Participating Physicians or Consultants (as defined
in Section 1.3(i)) charge, collect a deposit from, seek compensation,
remuneration or reimbursement from or have any recourse against a Member,
other than PHS acting on a Member's behalf, for Covered Services rendered
pursuant to this Agreement. This provision shall not prohibit collection
by Participating Physicians of copayments or supplemental charges made in
accordance with Programs. This Section 3.11 shall survive termination of
this Agreement regardless of the cause giving rise to termination and shall
be construed to be for the benefit of Members.
3.12 Delegation. IPA and PHS agree that IPA may delegate to PHS the performance
----------
such of its responsibilities as it may determine from time to time.
5
<PAGE>
3.13 Non-Discrimination. Except as otherwise provided herein, Participating
------------------
Physicians shall provide Covered Services to all Members in a manner
similar to the manner in which Participating Physicians provide services to
other patients and shall not discriminate in the acceptance of Members as
patients or treatment of Members on the basis of race, color, national
origin, ancestry, religion, sex, marital status, sexual orientation or age.
ARTICLE IV - PROGRAMS
---------------------
4.1 Program Design and Introduction. PHS shall have sole authority over
-------------------------------
matters relating to Program design, introduction of new Programs and
modification or elimination of existing Programs, including without
limitation, utilization, referral, quality assessment, reimbursement and
reimbursement protocols relating to such Programs. PHS shall consult with
the IPA Advisory Committee in the material design features of Programs and
shall use its best efforts to incorporate the reasonable recommendations of
the IPA Advisory Committee into final Program design that do not adversely
affect the administration, financial or operational aspects of such
Program.
4.2 Participation in Programs. Except as waived by PHS, which waiver PHS shall
-------------------------
not unreasonably withhold or delay, Participating Physicians are required
to participate in all Programs and PHS may not exclude any Participating
Physician except as set forth below. IPA agrees to immediately terminate
any Participating Physician who notifies IPA or PHS that he or she will not
participate in a Program or who does not accept Members enrolled in one or
more Programs. Notwithstanding the foregoing, PHS may select a subset of
Participating Providers, upon consent of IPA, which consent shall not be
unreasonably withheld, if PHS is requested to reduce the size of its panel
of Participating Physicians for an employer group of 1,000 or more eligible
Members.
ARTICLE V - COMPENSATION
------------------------
5.1 Health Care Service Budgets. This budget for Covered Services for IPA
---------------------------
Members shall be established by mutual consent and shall be deemed to be
incorporated herein by reference.
5.2 Capitation System.
-----------------
PHS shall allocate to IPA a monthly capitation in accordance with Exhibit C
from which IPA shall compensate Participating Physicians, Consultants, Non-
IPA Participating Providers and also, in cases of Medical Emergency or upon
prior approval by PHS, other health care providers, for Covered Services
rendered to IPA Members, except (i) Covered Services pursuant to self-
funded Programs which are paid directly by the employer; (ii) Covered
Services pursuant to Programs for which PHS pays Participating Physicians
directly; (iii) as specifically provided and agreed to by IPA
in connection with certain Programs. PHS shall allocate amounts from
the capitation payment hereunder to each of the following three funds in
accordance with Exhibit C: an in-patient hospital fund; and out-patient
hospital fund and a physician and other capitated services fund.
The risk sharing arrangements between PHS and IPA are as set forth below:
(i) The In-Patient Fund. In the event that payments in respect of
-------------------
hospital in-patient Covered Services rendered to IPA Members exceed
amounts budgeted therefor in accordance with Section 5.1 hereof, fifty
percent (50%) of the deficit over the Corridor shall be deemed to be
Excess Payments hereunder. In the event that payments in respect of
hospital in-patient Covered Services rendered to IPA Members are less
than amounts budgeted therefor in accordance with Section 5.1 hereof,
fifty percent (50%) of the surplus under the Corridor shall be deemed
to be Surplus Amounts hereunder.
6
<PAGE>
(ii) The Out-Patient Hospital Fund. In the event that payments in
-----------------------------
respect of hospital out-patient Covered Services rendered to IPA
Members exceed amounts budgeted therefor in accordance with Section
5.1 hereof, fifty percent (50%) of the deficit shall be deemed to be
Excess Payments hereunder. In the event that payments in respect of
hospital out-patient Covered Services rendered to IPA Members are
less than amounts budgeted therefor in accordance with Section 5.1
hereof, fifty percent (50%) of the surplus shall be deemed to be
Surplus Amounts hereunder.
(iii) The Physician and other Fund. In the event that payments in respect
----------------------------
of Covered Services rendered to IPA Members other than the Covered
Services described in clauses (i), (ii) and (iv) of this Section
5.2, exceed amounts budgeted therefor in accordance with Section 5.1
hereof, one hundred percent (100%) of the deficit shall be deemed to
be Excess Payments hereunder. In the event that payments in respect
of Covered Services (except as provided in clauses (i), (ii) and
(iv) rendered to IPA Members are less than amounts budgeted therefor
in accordance with Section 5.1 hereof, one hundred percent (100%) of
the surplus shall be deemed Surplus Amounts hereunder.
(iv) The Pharmaceutical Fund. In the event that payments in respect of
-----------------------
pharmaceutical related Covered Services rendered to IPA Members
exceed amounts budgeted therefor in accordance with Section 5.1
hereof, fifty percent (50%) of the deficit shall be deemed to be
Excess Payments hereunder. In the event that payments in respect of
pharmaceutical related Covered Services rendered to IPA Members are
less than amounts budgeted therefor in accordance with Section 5.1
hereof, fifty percent (50%) of the surplus shall be deemed to be
Surplus Amounts hereunder.
5.3. Payments Administered by PHS. The amount allocated as the monthly
----------------------------
capitation for Covered Services pursuant to Section 5.2 shall be held and
administered by PHS for the purpose of enabling IPA to discharge its
payment obligations as set forth in Section 5.2. PHS shall act as IPA's
agent for purposes of making all payments and distributions to
Participating Physicians, Consultants, Non-IPA Participating Physicians and
other health care providers as set forth in Section 5.2 (in cases of
Covered Services rendered to IPA Members). IPA agrees that the payments
made by PHS as IPA's agent hereunder shall be deducted from amounts
allocated to IPA as capitation payments. Payments shall be made
irrespective of whether actual payments made pursuant to this paragraph
exceed the amounts allocated to IPA as capitation payments. Subject to
Section 5.5, payments shall be made in accordance with the following:
(a) Compensation for Participating Physicians, Consultants and Non-IPA
Participating Providers shall be calculated on the basis of the lesser
of the Physician's, Consultant's or Non-IPA Participating Provider's
billed charges, and (i) in the case of Participating
Physicians,respect the reimbursement schedules agreed to by PHS and IPA
from time to time or an actuarially determined capitation amount, and
(ii) in the case of Consultants, Non-IPA Participating Physicians, and
other health care providers, the PHS reimbursement schedule in effect
from time to time. The administrative guidelines for reimbursement of
fees shall be maintained by PHS.
(b) Participating Physicians shall be paid within two (2) months of the
receipt by PHS of a properly submitted bill for Covered Services,
except for claim payments subject to claims recovery through
coordination of benefits (C.O.B.). Participating Physicians shall only
be paid for bills for Covered Services received by PHS within 90 days
of the date of service, unless such bills have been subject to claims
recovery through C.O.B., basic reparation of benefits under an
automobile no-fault policy, worker's compensation or subrogation
activity. For Covered Services involving C.O.B., IPA shall be liable
to pay Participating Physicians only for bills received within 18
months of the date of service. Participating
7
<PAGE>
Physicians may not bill Members for bills for Covered Services which
are not submitted in accordance with this Section 5.3 (b).
5.4. Withhold and Reserve Provision. PHS may establish a withhold provision for
------------------------------
a percentage of the compensation payable to IPA pursuant to Section 5.2 on
behalf of Participating Physicians for Covered Services, to be held in a
risk fund, it being understood and agreed that the amounts retained shall
be applied to offset the amounts by which the actual costs of Covered
Services rendered to IPA Members exceed budgeted amounts for such year.
Actual withhold amounts may vary according to Program and Participating
Physician. The percent level of withhold for specific programs and the
methodology for a variable withhold program shall be subject to IPA
consent, which consent shall not be unreasonably withheld. PHS and IPA
shall, at regular intervals, review the utilization and costs of such
services. PHS has the right to increase the percentage of compensation
withheld to such levels PHS may deem necessary to preserve IPA's fiscal
integrity; provided, however that any increase is subject to IPA's consent,
which consent shall not be unreasonably withheld. Amounts earned on funds
held in the withhold account shall be the property of PHS and neither IPA
nor Participating Physicians shall assert any claims to such amounts.
5.5 Excess Payments and Surplus Amounts. If PHS makes Excess Payments, IPA
-----------------------------------
shall be liable to PHS for such Excess Payments and shall repay such
amounts promptly upon demand by PHS. If there are Surplus Amounts, PHS
shall allocate such Surplus Amounts to Participating Physicians in
accordance with instructions from IPA and shall pay such Surplus Amounts to
Participating Physicians not more than 75 days following the end of the
year; provided, however, that prior to making any payments from Surplus
Amounts, Surplus Amounts shall be applied first to reduce or eliminate
Excess Payments, if any, and shall be payable as provided in this Section
5.5 only if there are no Excess Payments outstanding in any Fund.
5.6 Intra-Network Payments. PHS shall make payments as IPA's agent from
----------------------
capitation amounts allocated to IPA for Covered Services rendered to IPA
Members by Non-IPA Participating Physicians, Consultants or health care
providers. PHS will pay Participating Physicians for Covered Services
rendered to Members who are not IPA Members in accordance with Section 5.3;
such payments on behalf of Members who are not IPA Members shall not be
charged against the capitation amount allocated to IPA. All payments made
hereunder will be subject to the withhold provisions set forth in Section
5.4.
5.7 Self Funded Payers; Direct Payments. For Programs with respect to which an
-----------------------------------
employer group self-funds its claims expense or Programs in which PHS
elects to pay Participating Physicians on a fee for service basis without
regard to capitation, PHS shall compensate Participating Physicians in
accordance with the PHS fee schedule then in effect.
5.8 Forms; Cooperation.
------------------
(a) IPA shall arrange for Participating Physicians to bill PHS for Covered
Services provided to Members on forms as reasonably specified by PHS.
These forms shall specify the Covered Services provided and shall
include all of the statistical and descriptive medical, diagnostic and
patient data together with identifying information required by PHS.
(b) IPA shall arrange for Participating Physicians to cooperate with and
participate in PHS programs for coordination of benefits with other
health care plans or any other permitted methods of third party
recovery. Such programs include, but are not limited to, the
following:
(i) Assisting Members with required forms.
8
<PAGE>
(ii) Where duplicate coverage exists and the Program appears to be
secondary coverage, notifying PHS and for ninety (90) days
seeking payment from the other health care plan, before seeking
payment from PHS or self funded payer.
(iii) Where other plan(s) must pay their benefits before the benefits
of the applicable Program, accepting as PHS's payment, the
lesser of the payment determined in accordance with Section 5.3
(a) and the amount equal to the provider's usual charges for
Covered Services, reduced by amounts paid by other plan(s) (or
to be paid in the case of Medicare, Worker's Compensation Law,
occupational disease or any similar law).
5.9 Coverage Questions. PHS shall make timely payment to Participating
------------------
Physicians as provided in Section 5.3 unless, prior to the expiration of
the period set forth therein, PHS notifies the Participating Physician in
writing that additional information is required or that a coverage question
(including without limitation, a question relating to coordination of
benefits or pre-existing conditions) exists. Such notice shall specify any
additional information required and shall describe the nature of the
coverage question. PHS shall endeavor in good faith to promptly resolve
coverage questions, and shall make payment, if appropriate, promptly after
coverage questions are resolved but in no case later than 90 days after a
submission of all required information. In the case of requests for
additional information, the claims shall be paid within 30 days of receipt
of all requested information.
5.10 Subrogation. In the event a Member is injured by an act or omission of a
-----------
Participating Physician in connection with the rendering of Covered
Services hereunder, PHS may elect to pursue its subrogation rights, if any,
against the potentially responsible Participating Physician. PHS shall make
payment to the Physician in accordance with this Agreement while pursuing
those rights.
ARTICLE VI - RECORDS
---------------------
6.1. PHS Members. PHS shall maintain such records and establish and adhere to
-----------
such procedures as shall be reasonably required to ascertain the number and
identity of Members, which information shall be provided to IPA upon its
request. IPA shall cooperate with PHS in connection with such records and
procedures to the end of enabling the parties to accomplish with maximum
efficiency and minimum administrative cost, determinations of eligibility
for coverage and the amount of compensation payable to IPA.
6.2. Accounting. PHS shall maintain, in accordance with generally accepted
----------
accounting practices, such financial and accounting records as shall be
necessary, appropriate or convenient for the proper administration of this
Agreement.
6.3. Statistical Records. PHS and IPA shall jointly maintain such statistical
-------------------
records with respect to Covered Services, including the utilization
thereof, as shall be necessary, appropriate, or convenient for the proper
administration of this Agreement.
6.4. Compliance With Law. IPA and PHS agree to maintain their records in
accordance with applicable federal and state laws and regulations and
further agree to participate as necessary in required regulatory
examinations.
6.5. Medical Records. IPA shall arrange for Participating Physicians to
---------------
maintain adequate medical records for Members in accordance with applicable
law. IPA and PHS shall make reasonably available the medical records,
subject to all applicable state and federal privacy and confidentiality
requirements, to each other upon request without cost in order to determine
that the content of such report and the quality of care rendered are
acceptable, as well as for peer review, grievance review, recredentialing
or any other reasonably necessary purposes.
9
<PAGE>
6.6. Confidentiality. PHS and IPA shall ensure confidentiality of Members'
---------------
health and medical records. IPA and PHS each agree that all records,
reports, data, data formats, financial information and other documents or
information pertaining to the other or any related company which are
provided, made available, or otherwise disclosed to the other pursuant to
this Agreement or the relationship between PHS and IPA, are confidential,
and may not be disclosed to any person or entity for any reason at any time
during or subsequent to the term of this Agreement, except for their
attorneys, accountants, or other representatives and except as required by
law. Anything to the contrary contained in the foregoing notwithstanding,
any information which has entered the public domain, except solely by a
party's violation of this provision, shall not be deemed to be confidential
hereunder.
ARTICLE VII - LEGAL RELATIONSHIP BETWEEN PHS AND IPA
----------------------------------------------------
Independent Contractors. The relationship of the parties is that of independent
- -----------------------
contractors. None of the provisions of this Agreement are intended to create
nor shall be construed to create a partnership, or joint venture relationship
between the parties. Except as to payment procedures for which PHS shall act as
IPA's agent hereunder, neither party hereto nor any of their respective
officers, members, employees or physicians shall be deemed to be the agent,
employee, or representative of the other party.
ARTICLE VIII - INDEMNIFICATION AND INSURANCE
--------------------------------------------
8.1. Physician Insurance. IPA shall require all of its Participating Physicians
-------------------
and all Consultants to whom a Member is referred by a Participating
Physician to maintain professional liability insurance acceptable to PHS in
an amount not less than $1,000,000 per incident and $3,000,000 aggregate to
cover all demands, claims and expenses of all kinds that may result or
arise out of any alleged malpractice or neglect caused or alleged to have
been caused by such individuals or any of their agents, employees, or
representatives in the performance or omissions of any act relating to this
Agreement.
8.2. Cooperative Defense. The parties recognize that, during the term of this
-------------------
Agreement and for some period thereafter, certain risk management issues,
legal issues, claims or actions may arise that involve or could potentially
involve the parties and their respective employees and agents. The parties
further recognize the importance of cooperating with each other in good
faith when such issues, claims or actions arise to the extent that such
cooperation does not violate any applicable laws, cause breach of any
duties created by any policies of insurance, or otherwise compromise the
confidentiality of communications of information regarding the issues,
claims or actions. The parties shall cooperate in good faith, using their
best efforts, to address such risk management and claims handling issues in
a manner that strongly encourages full cooperation between the parties.
Nothing in this Section 8.2 shall affect any cross or counter-claims that
may be available to the parties hereto.
8.3 Liability. Each party shall be responsible for its own actions and
---------
omissions as they may relate to or arise from its duties and obligations
under this Agreement.
ARTICLE IX- TERM OF AGREEMENT
-----------------------------
9.1 Term. The term of this Agreement shall commence on January 1, 1997 and
----
terminate on December 31, 1997. This Agreement may be terminated by either
party prior to the expiration of its term in the event of the insolvency of
the other party, appointment of a trustee or receiver for any substantial
part of the assets of the other party, or assignment by the other party for
the benefit of its creditors or the commencement of any proceedings under
the bankruptcy or insolvency law by or against such other party. This
Agreement may also be terminated upon 60 days prior written notice, by
either party upon the other party's material breach of any of the terms of
this Agreement and failure to cure such breach within such 60 day period.
10
<PAGE>
9.2 Termination of Participating Physicians. A Participating Physician
---------------------------------------
terminating his relationship with IPA will also terminate his participation
in the Programs. A termination by a Participating Physician shall not be
deemed a termination of this Agreement, which may only be terminated
pursuant to Section 9.1. PHS may terminate a Participating Physician in
all PHS Programs subject to the due process protocols set forth in the
Office Manual. Termination of a Participating Physician's participation in
Programs shall not be deemed a termination of the Physician Agreement
without further action on the part of IPA.
9.3 Effect of Termination.
---------------------
(a) Upon the effective termination of this Agreement, all rights and
obligations of the parties under this Agreement shall immediately
cease; provided, however, that IPA shall remain responsible for
providing Covered Services under the terms of this Agreement to Members
who are under the care of Participating Physicians at the time of such
termination through the period for which premiums have been paid (but
in no event more than 90 days, except that if a Member is hospitalized
at the time of termination, until the Member is discharged), unless PHS
makes reasonable and medically appropriate provision for the assumption
of such services by another provider. PHS shall compensate
Participating Physicians for those Covered Services, for which premium
was received, rendered prior to and following the termination date (as
provided in this Section 9.3(a)) pursuant to the PHS/IPA fee schedule
in effect at such time. In the event this Agreement is terminated due
to the last sentence of Section 9.1, the non-defaulting party shall be
entitled to pursue all legally available remedies consistent with
Section 10.4 herein, and damages arising out of such breach.
(b) Upon termination, PHS is authorized to notify Members, prospective
Members and Participating Physicians, and other persons and entities
whom it deems to have an interest herein of such termination.
ARTICLE X - MISCELLANEOUS
-------------------------
10.1. Successors. This Agreement shall be binding upon and inure to the benefit
----------
of the parties hereto, their respective heirs, successors and assigns, but
may not be assigned by either party without the prior written consent of
the other party, provided, however that a succession to all or
substantially all of the assets or equity interests of any party shall not
be deemed to be an assignment in violation hereof.
10.2. Delegation. IPA shall not, in a manner inconsistent with this Agreement,
----------
subcontract or otherwise delegate its duties under this Agreement unless
the other party so approves by written consent. All contracts by IPA with
subcontractors shall be approved in writing by PHS prior to execution
thereof and copies shall be available to PHS upon its request.
10.3. Headings. The headings of the various Sections of the Agreement
--------
are inserted merely for the purpose of convenience and do not, expressly
or by implication, limit or define or extend the specific terms of the
Sections so designated.
10.4. Arbitration. In the event any dispute shall arise with regard to
-----------
the performance or interpretations of any of the terms of this Agreement,
all matters in controversy shall be submitted to a Board of Arbitrators in
accordance with the commercial arbitration rules and regulations of the
American Arbitration Association, and a judgment upon the award entered in
any court having jurisdiction thereof. Arbitration shall be initiated by
written notice by the party requesting arbitration to the other party.
Both parties expressly covenant and agree to be bound by the decision of
the arbitrators and accept any decision by a majority of the arbitrators
as a final determination of the matter in dispute.
10.5. Governing Law. The validity, enforceability and interpretation of
-------------
any of the clauses of this Agreement shall be determined and governed by
the laws of the State of Connecticut.
11
<PAGE>
10.6. Medical Ethics. IPA and PHS agree that the administration of PHS's
--------------
program and this Agreement shall at all times be compatible with sound
principles of medical ethics.
10.7. Entire Agreement. This Agreement contains all the terms and
----------------
conditions agreed upon by the parties hereto, supersedes all other
agreements, oral and otherwise, regarding the subject matter of the
parties hereto.
10.8. Amendment. This Agreement may be amended at any time by mutual
---------
agreement of the parties, provided that before any amendment shall be
operative and valid, it shall be in writing and signed by PHS and IPA. The
parties agree that, in the event of changes in federal or state law that
necessitate an amendment to this Agreement, they shall endeavor in good
faith to reach agreement on such amendment that is consistent with and in
furtherance of the scope and intent of this Agreement.
10.9 Notices. All notices expressly required to be given pursuant to
-------
the terms of this Agreement shall be in writing and shall be deemed
effectively given (i) on the date of receipt if personally delivered or
telecopied to the party to whom the same is directed; or (ii) on the third
day after mailing if mailed to such party, postage prepaid, addressed to
the following addresses, or to such other addresses as the parties may
hereafter designate by like notice:
to PHS at:
Physicians Health Services of Connecticut, Inc.
120 Hawley Lane
Trumbull, CT 06611
ATTN: Executive Director
and to IPA at:
c/o Physicians Health Services
120 Hawley Lane
Trumbull, CT 06611
PHS's obligation to notify IPA hereunder for all matters other than
termination of this Agreement may be fulfilled by PHS's mailing to IPA in
the manner set forth above in a letter describing the matters subject to
such notification. Notice of termination shall be by certified mail.
10.10 Third Party Beneficiaries. Nothing in this Agreement, express or
-------------------------
implied, is intended or shall be construed to confer upon any person, firm
or corporation other than the parties hereto and their respective
successors or assigns, any remedy or claim under or by reason of this
Agreement and any term, covenant or condition hereof, as third party
beneficiaries or otherwise, and all of the terms, covenants and conditions
hereof shall be for the sole and exclusive benefit of the parties hereto
and their successors and assigns.
10.11 Policy Changes. To the extent additional national accreditation bodies
--------------
develop their own accreditation requirements, and these requirements have
a material impact on the ability of PHS to pursue new business or retain
current business, PHS and the IPA agree to work together in developing
additional policy changes.
10.12 Unenforceability. If any provision of this Agreement is determined to be
----------------
unenforceable, the rest of the Agreement shall remain in full force and
effect.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
month and year above set forth.
PHYSICIANS HEALTH SERVICES OF
CONNECTICUT, INC.
By: ___________________
HERITAGE INDIVIDUAL PRACTICE ASSOCIATION
By: ___________________
13
<PAGE>
SCHEDULE 1
----------
IPA
- ---
Barkhamsted
Bethel
Bethlehem
Bridgewater
Brookfield
Canaan
Colebrook
Cornwall
Danbury
Goshen
Hartland
Harwinton
Kent
Litchfield
Monroe
Morris
New Fairfield
New Hartford
New Milford
Newtown
Norfolk
North Canaan
Redding
Roxbury
Salisbury
Sharon
Sherman
Southbury
Thomaston
Torrington
Warren
Washington
Winchester
Woodbury
14
<PAGE>
EXHIBIT A
---------
PHS RESPONSIBLE SERVICES
------------------------
The following are PHS Responsible Services:
General Laboratory procedures and Cytology for which PHS has contracted
with a third-party to provide, including all laboratory procedures as defined by
the CPT code range 80002-89399 but excluding procedures defined by the CPT code
ranges 88104-88199 and 88000-88099 and 88300-88399.
Dental services
Hospital stop- loss insurance for inpatient services
Radiology (other than radiotherapy)
Audiology
Rehabilitative services
Immunizations and Injectables
Drug and alcohol component of behavioral health services
Durable medical equipment
Oxygen and prosthetics
Ambulance
Podiatry services
Chiropractic services
Optometry services
respect
15
<PAGE>
<TABLE>
<CAPTION>
Exhibit 21
SUBSIDIARIES OF PHYSICIANS HEALTH SERVICES, INC.
------------------------------------------------
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
------------------ -----------------------------
<S> <C>
Physicians Health Services of Connecticut, Inc. Connecticut
Physicians Health Services of New York, Inc. New York
Physicians Health Services of New Jersey, Inc. New Jersey
Physicians Health Services (Bermuda), Ltd. Bermuda
PHS Insurance of Connecticut, Inc. Connecticut
Physicians Health Insurance Services, Inc. Connecticut
PHS Investments, Inc. Delaware
Physicians Health Services Insurance of New York, Inc. New York
PHS Real Estate, Inc. Delaware
PHS Real Estate II, Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 33-74486) pertaining to the Physicians Health Services, Inc. 1992 Stock
Option Plan, in the Registration Statement (Form S-8, No. 33-81196) pertaining
to the Physicians Health Services, Inc. Pension Plan, and in the Registration
Statement (Form S-8, No. 33-81142) pertaining to the Physicians Health Services,
Inc. 401(k) Profit Sharing Plan of our report dated March 14, 1997, with
respect to the consolidated financial statements and schedules of Physicians
Health Services, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1996.
ERNST & YOUNG LLP
Stamford, Connecticut
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1996 FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 39,213
<SECURITIES> 59,115
<RECEIVABLES> 39,809
<ALLOWANCES> 1,781
<INVENTORY> 0
<CURRENT-ASSETS> 157,606
<PP&E> 82,319
<DEPRECIATION> 15,273
<TOTAL-ASSETS> 238,310
<CURRENT-LIABILITIES> 140,862
<BONDS> 0
0
0
<COMMON> 94
<OTHER-SE> 96,192
<TOTAL-LIABILITY-AND-EQUITY> 238,310
<SALES> 481,534
<TOTAL-REVENUES> 488,108
<CGS> 426,040
<TOTAL-COSTS> 426,040
<OTHER-EXPENSES> 85,919
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 388
<INCOME-PRETAX> (24,239)
<INCOME-TAX> 11,275
<INCOME-CONTINUING> (12,964)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,964)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
