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Kaiser Permanente MEDICAL SERVICE AGREEMENT

Term and Termination

Section I-1.     Term

     This Agreement will continue in effect until terminated (a) by mutual agreement, or (b) as provided in this Article I.  If at any time it appears probable that this Agreement will be terminated as provided in this Article I, then Health Plan and Medical Group will cooperate to limit Medical Group's continuing responsibilities under this Article I, insofar as practical under the circumstances.  Consistent with the foregoing, Health Plan will advise Medical Group in writing at least once each week from the date the First Notice (as defined below) is given until the end of the Interim Period (as defined below) the date or expected date of termination of any Membership Contract, any change in the number of Members expected to be enrolled under any Membership Contract (including date of the expected change) and any other information that Health Plan acquires relating to the number of expected Members, so that Medical Group may adjust its staffing in order to provide appropriate levels of service to Members through the end of the Interim Period.

Section I-2.     Termination

     (a)  Exclusive Procedure for Termination

           Unless terminated by mutual consent, this Agreement may be terminated only as provided in this Section.

     (b)  Purpose of Article

            The purpose of this Article is to provide for winding down the Medical Care Program in a manner that ensures that Members are appropriately served, that Medical Group is appropriately compensated, and that Health Plan is appropriately protected against unnecessary cost during the period of winding down (the "Interim Period").  The Interim Period will be at least 3 calendar months but not more than 15 calendar months.

     (c)  First Notice

            Either Health Plan or Medical Group may initiate commencement of the Interim Period by giving the other party a written notice ("First Notice") specifying the date ("First Notice Effective Date") that the Interim Period will begin.  The First Notice must (i) give at least one calendar month's notice of the First Notice Effective Date, and (ii) specify a First Notice Effective Date that is the first day of a calendar month.

     (d)  Second Notice

            Health Plan (but not Medical Group) may terminate the Interim Period by giving Medical Group a written notice ("Second Notice") specifying the date  ("Second Notice Effective Date") that the Interim Period will end.  The Second Notice must (i) give at least one calendar month's notice of the Second Notice Effective Date, and (ii) specify a Second Notice Effective Date that (A) is the last day of a calendar month, and (B) provides an Interim Period of at least 3 calendar months  (counting both the First Notice Effective Date and the Second Notice Effective Date.)

     (e)  Automatic Termination of Interim Period

            If Health Plan does not give Medical Group a Second Notice specifying a Second Notice Effective Date that occurs earlier than the last day of the 15th month of the Interim Period, the Interim Period shall then end.

Section I-3     Agreement Continues in Effect.

     During the Interim Period, all provisions of this Agreement will remain in effect, except that the provisions of Articles J and K will be superseded by the compensation provisions in Section I-4 hereof, and Health Plan will not seek to recover any amount from any individual Physician on account of breach by Medical Group of any provision of this Article I.  Articles J and K will apply on a prorated basis for any part of the calendar year prior to the Interim Period.

     Upon termination of the Interim Period, neither Health Plan nor Medical Group will have any obligation to the other by virtue of this Agreement with respect to matters or events occurring after the Interim Period, but each party will retain and satisfy all obligations it has to the other arising out of events occurring during the term of this Agreement, including the Interim Period.  Health Plan will indemnify Medical Group and Physicians against any Claim any Member asserts against Medical Group or any Physician for the cost of Medical Services obtained by the Member after the Interim Period.

Section I-4.     Compensation

•   Revenue attributable to Nonmember and Workers' Compensation Medical SErvices; plus
•   Other Revenue; plus
•   Any other revenue of a type previously agreed to by Health Plan and Medical Group pursuant to Section J-3 (b) (iii) hereof.  Compensation payable hereunder shall be paid on the last day of each month during the Interim Period.  If any amount payable hereunder cannot be fixed in amount by the payment date therefor, it will be reasonable estimated  by Health Plan, and the payment will be adjusted when the correct amount is known so that total payments by Health Plan to Medical Group during the Interim Period will be as computed under this Article I.  Health Plan also will make the payments referred to in Sections J-3 (a) (i)  (including amounts to fund any retirement plan), J-3(a)(ii) and J-3 (c) for the Interim Period.

                     (a)  Basic Compensation

                            (i)  First 3.5 months
 

       During each of the first 3 calendar months (and if the Interim Period is longer than 3 calendar months, the first half of the fourth calendar month) of the Interim Period, Health Plan will pay Medical Group, and Medical Group will pay each Physician and each Medical Group non-physician employee employed by Medical Group on the date that the First Notice is given (collectively "First Notice Employees:) the regular monthly compensation ("Basic Compensation") of each First Notice Employee who continues to provide Medical SErvices to Members.  Basic Compensation does not include any amount that represents a share of profits, year end bonus or other form of special compensation in excess of the First Notice Employees full-time basic rate.

                    (ii)  After First 3.5 Months

      "Payment Month" means the period beginning on the 16th day of a calendar month (beginning with the 16th day of the fourth calendar month of the Interim Period), and ending on the 15th day of the next calendar month, except that the last Payment Month will be the last half of the calendar month that is the last calendar month of the Interim Period, and Basic Compensation for that half month will be fifty percent of the amount otherwise payable under this Section I-4 (a) (ii).

     If the Interim Period continues for more than 3 calendar months, then for each Payment Month Health Plan will pay Medical Group, and Medical Group will pay each First Notice Employee designated by Medical Group, Basic Compensation for providing Medical Services to Members, except that the number of full-time equivalent Physicians ("FTE Physicians") and full-time equivalent Medical Group non-physician employees ("FTE Employees") for whom payment will be made under this Section I-4 (a) (ii) for any Payment Months will not exceed the number of FTE Physicians (or 110% of the number of FTE employees) that is in the same proportion to the number of FTE Physicians (and the number of FTE Employees), respectively, employed by Medical Group on the date the First Notice is given, as the number of Members for the calendar month ("Measuring Month") immediately next preceding the calendar month in which the Payment Month commences bears to the number of Members on the First Notice Effective Date.

     In addition to the information regarding Members and Membership Contracts to be provided by Health Plan to Medical Group under Section I-1, on or before the 15th day of each month, beginning on the 15th day of the fourth calendar month of the Interim Period, Health Plan will advise Medical Group in writing if the number of Members during the immediately next preceding calendar month (the first Measuring Month will be the third calendar month of the Interim Period), and such number of Members will provide the basis for computation of Basic Compensation under the preceding sentence for the next succeeding Payment Month, which begins the next day.

     (iii)  Limitation on Basic Compensation

     Basic Compensation under Section I-4(a)(i) and (ii) will be paid only for Medical Services actually performed, and no First Notice Employee's rate of compensation reimbursable under this Section I-4(a) may exceed his or her rate of compensation on the date the First Notice is given.  Work schedules of First Notice Employees may be changed by Medical Group, but the total amount of Basic Compensation during any calendar month of the Interim Period may not exceed the amount that would be payable if work schedules remained the same as they were when the First Notice was given.

     (b)  Special Fund Compensation

       Health Plan will (i) make available an amount ("Special Fund") equal to one full month's Basic Compensation of Physicians employed by Medical Group on the date the First Notice is given (on the basis of their actual rate of compensation and work schedule on that date) to provide additional compensation to be paid pursuant to arrangements between Medical Group and individual Physicians to induce Physicians to (A) remain in Medical Group's employ, or (B) leave Medical Group's employ, and (ii) reimburse Medical Group in an aggregate amount no greater than the amount of the Special Fund for all payments made by Medical Group pursuant to any such arrangement, subject to the requirements that (A) such arrangements will be negotiated by Medical Group with individual Physicians in good faith and at arm's length, and (B) no arrangement will be made by Medical Group with (and no payment will be made from the Special Fund to) a Medical Group officer or director, without Health Plan's written approval.

     (c)  Incentive compensation

            (i)    Establishment of Outside Cost Budget

        Health Plan and Medical Group will calculate the per Member per month amount ("Outside Per Capita Cost") for the 6 complete calendar months prior to the date the First Notice is given of the sum of (A) the amount paid to non-Medical Care Program providers of health care (including inpatient, outpatient and ancillary care of all kinds) for covered services to Members, plus (B) the amount of all Reimbursement and Service Claims for Members.  The "Outside Cost Budget" is an amount equal to 135% of the Outside Per Capita cost multiplied by Member months during the Interim Period, and "Outside Cost" is the sum of the amounts referred to in Section I-4(c)(i)(A) and (B) incurred during the Interim Period.

           (ii)  Application of Outside Budget to Outside cost

      Health Plan will pay all Outside Cost, and the amount of Outside Cost (but not any cost in excess of $50,000 for any one Member during the Interim Period), will e charged to the Outside Cost Budget..

            (iii)  Calculation of Incentive Compensation

       Incentive Compensation is an amount equal to 50% of the sum of (A) the unexpended portion, if any, of the Outside Cost Budget (but not more than the amount paid or payable as Basic Compensation pursuant to Section I-4 (a)(i) during the first 2 calendar months of the Interim Period), plus (b) the uncommitted portion of the Special Fund referred to in Section I-4(b).

             (iv)  Distribution of Incentive Compensation

       As soon as reasonably practicable after Outside Cost for the Interim Period is calculated, but not more than four calendar months after the end of the Interim Period, Health Plan will pay each Physician employed by Medical Group on the date that the First Notice is given that proportion of Incentive Compensation as his or her Retirement Plan Credit bears to the Retirement Plan Credit of all such Physicians.  "Retirement Plan Credit" for any Physician means the amount of retirement income payable to the Physician at age 65 on a life-only basis under any defined benefit retirement plan the cost of which is paid by Health Plan to Medical Group that covers Physicians (ignoring any vesting requirement), based upon service through the Interim Period, except that (A) no payment will be made to any Physician who voluntarily terminates Medical Group service after being asked by Medical Group to continue serving Members during all or a portion of the Interim Period, or who dies after the First Notice is given but prior to the end of the Interim Period, and (B) the maximum payment from Incentive Compensation to any Physician will be the lesser of (1) 200% of the average payment from Incentive Compensation to all such Physicians, or (2) the maximum amount permitted by law.

Section I-5     Ancillary Personnel

     The number of full-time equivalent non-physician personnel of the type referred to in Section C-1(a) engaged or arranged by Health Plan and available to Medical Group during the Interim Period will be at least that number that is in the same proportion to such full-time equivalent non-physician personnel available to Medical Group on the date the First Notice is given as the number of Members for the calendar month immediately next preceding the calendar month in question bears to the number of Members on the First Notice Effective Date.