-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S8Tiq+oMuiIQBGFI0Axvpd/KwyX3bLRkgbrdtgc0kVhIAOcIOnorbr7DmdpqRqaO sqkqGqkwR4gyCbeTBrIaFQ== 0000950153-97-000044.txt : 19970115 0000950153-97-000044.hdr.sgml : 19970115 ACCESSION NUMBER: 0000950153-97-000044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MANAGED CARE SOLUTIONS INC CENTRAL INDEX KEY: 0000876625 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 363338328 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19393 FILM NUMBER: 97505800 BUSINESS ADDRESS: STREET 1: 2510 WEST DUNLAP AVE STREET 2: SUITE 300 CITY: PHOENIX STATE: AZ ZIP: 85021 BUSINESS PHONE: 6029435660 MAIL ADDRESS: STREET 1: 2510 WEST DUNLAP AVE STREET 2: SUITE 300 CITY: PHOENIX STATE: AZ ZIP: 85021 FORMER COMPANY: FORMER CONFORMED NAME: MEDICUS SYSTEMS CORP /DE DATE OF NAME CHANGE: 19930328 10-Q 1 REPORT FOR PERIOD ENDING NOVEMBER 30, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 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 0-19393 MANAGED CARE SOLUTIONS, INC. (Exact name of registrant as specified in its charter)
DELAWARE 36-3338328 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
7600 NORTH 16TH STREET SUITE 150 PHOENIX, ARIZONA 85020 (Address of principal executive offices) (Zip Code) 602-331-5100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- There were 4,364,712 shares of common stock outstanding as of January 10, 1997. 2 TABLE OF CONTENTS Page ---- Part I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets..................................3 Consolidated Statements of Operations......................4-5 Consolidated Statements of Cash Flows........................6 Notes to Unaudited Consolidated Financial Statements.......7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................9-12 Part II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................13 2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MANAGED CARE SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, MAY 31, 1996 1996 ------------ ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents, including restricted cash of $4,482,000 and $3,082,000 $ 6,957,000 $ 3,804,000 Short-term investments 2,356,000 3,000,000 Accounts and notes receivable and unbilled services, net 5,445,000 4,353,000 Related party accounts and notes receivable 93,000 91,000 Prepaid expenses and other current assets 1,563,000 832,000 Deferred taxes, net 169,000 169,000 ------------ ------------ Total current assets 16,583,000 12,249,000 Notes receivable 280,000 139,000 Related party notes receivable 793,000 2,783,000 Property and equipment, net 4,698,000 4,147,000 Performance bonds 4,192,000 4,078,000 Goodwill, net 3,375,000 3,534,000 Deferred taxes, net 73,000 73,000 Other assets 596,000 596,000 ------------ ------------ $ 30,590,000 $ 27,599,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 810,000 $ 379,000 Accrued medical claims 8,200,000 6,331,000 Risk pool payable 2,431,000 1,646,000 Related party risk pool payable 162,000 117,000 Accrued expenses 4,071,000 3,609,000 Loss contract reserve -- 510,000 Due to Medicus Systems Corporation 194,000 647,000 Current portion of long-term debt 200,000 1,650,000 ------------ ------------ Total current liabilities 16,068,000 14,889,000 Long-term debt 2,956,000 267,000 Related party long-term debt 549,000 249,000 ------------ ------------ Total liabilities 19,573,000 15,405,000 ------------ ------------ Commitments -- -- Stockholders' Equity: Voting preferred stock, $1,000 par value Authorized, issued and outstanding - 6.85 shares 7,000 7,000 Common stock, $0.01 par value Authorized - 10,000,000 shares Issued - 4,365,000 shares 44,000 44,000 Capital in excess of par value 14,540,000 14,310,000 Retained earnings (deficit) (3,574,000) (2,167,000) ------------ ------------ Total stockholders' equity 11,017,000 12,194,000 ------------ ------------ $ 30,590,000 $ 27,599,000 ============ ============
3 The accompanying notes are an integral part of these statements. 4 MANAGED CARE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED --------------------------------- NOVEMBER 30, NOVEMBER 30, 1996 1995 ------------ ------------ Revenues $ 17,566,000 $ 1,997,000 ------------ ------------ Direct cost of operations 14,621,000 1,600,000 Marketing, sales and administrative 3,431,000 169,000 ------------ ------------ Total costs and expenses 18,052,000 1,769,000 ------------ ------------ Operating income (loss) (486,000) 228,000 ------------ ------------ Interest expense (95,000) -- Interest income 166,000 67,000 ------------ ------------ Net interest income 71,000 67,000 ------------ ------------ Income (loss) from continuing operations before income taxes (415,000) 295,000 Provision (benefit) for income taxes -- 151,000 ------------ ------------ Income (loss) from continuing operations (415,000) 144,000 Discontinued operations, net of taxes -- 188,000 ------------ ------------ Net income (loss) $ (415,000) $ 332,000 ============ ============ Income (loss) per share: Continuing operations $ (0.09) $ 0.07 Discontinued operations -- 0.08 ------------ ------------ $ (0.09) $ 0.15 ============ ============ Weighted Average Common and Common Equivalent Shares Outstanding 4,365,000 2,146,000 ============ ============
4 The accompanying notes are an integral part of these statements. 5 MANAGED CARE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED --------------------------------- NOVEMBER 30, NOVEMBER 30, 1996 1995 ------------ ------------ Revenues $ 35,101,000 $ 3,853,000 ------------ ------------ Direct cost of operations 28,699,000 3,042,000 Marketing, sales and administrative 7,963,000 467,000 ------------ ------------ Total costs and expenses 36,662,000 3,509,000 ------------ ------------ Operating income (loss) (1,561,000) 344,000 ------------ ------------ Interest expense (131,000) -- Interest income 235,000 118,000 Net interest income 104,000 118,000 ------------ ------------ Income (loss) from continuing operations before income taxes (1,457,000) 462,000 Provision (benefit) for income taxes (50,000) 165,000 ------------ ------------ Income (loss) from continuing operations (1,407,000) 297,000 Discontinued operations, net of taxes -- 528,000 ------------ ------------ Net income (loss) $ (1,407,000) $ 825,000 ============ ============ Income (loss) per share: Continuing operations $ (0.32) $ 0.14 Discontinued operations -- 0.24 ------------ ------------ $ (0.32) $ 0.38 ============ ============ Weighted Average Common and Common Equivalent Shares Outstanding 4,365,000 2,148,000 ============ ============
5 The accompanying notes are an integral part of these statements. 6 MANAGED CARE SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED -------------------------------- NOVEMBER 30, NOVEMBER 30, 1996 1995 ----------- ----------- Cash flows from operating activities: Income (loss) from continuing operations $(1,407,000) $ 297,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Bad debt expense 764,000 -- Depreciation and amortization 893,000 31,000 Changes in current assets and current liabilities: Deferred income taxes -- 23,000 Accounts receivable and unbilled services (1,856,000) (787,000) Prepaid expenses and other current assets (731,000) (671,000) Accounts payable 431,000 52,000 Accrued medical claims 1,869,000 -- Risk pool payable 785,000 -- Related party risk pool payable 45,000 -- Accrued expenses 462,000 63,000 Loss contract reserve (510,000) -- ----------- ----------- Net cash provided by (used in) operating activities 745,000 (992,000) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (1,285,000) (258,000) Proceeds from maturity/sale of short-term investments 1,919,000 4,000,000 Related party notes receivable 1,782,000 -- Increases in assets securing performance bond (114,000) -- Purchases of short-term investments (1,210,000) -- ----------- ----------- Net cash provided by investing activities 1,092,000 3,742,000 ----------- ----------- Cash flows from financing activities: Due to Medicus Systems Corporation (453,000) -- Principal payment on long-term debt (1,531,000) -- Issuance of long-term debt 3,070,000 -- Purchase of treasury stock -- (532,000) Reissuance of treasury stock -- 541,000 Dividends paid -- (384,000) Issuance of stock warrants 230,000 -- ----------- ----------- Net cash provided by financing activities 1,316,000 (375,000) ----------- ----------- Net increase in cash and cash equivalents 3,153,000 2,375,000 Cash and cash equivalents, beginning of period 3,804,000 1,475,000 Cash allocated from discontinued operations -- 1,190,000 ----------- ----------- Cash and cash equivalents, end of period $ 6,957,000 $ 5,040,000 =========== ===========
6 The accompanying notes are an integral part of these statements. 7 MANAGED CARE SOLUTIONS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended November 30, 1996 are not necessarily indicative of the results to be expected for the full year. The interim consolidated financial statements should be read in conjunction with Managed Care Solutions, Inc. ("MCS" or "Company") consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended May 31, 1996. NOTE 2 - MERGERS The Company as it presently exists is the result of a spinoff and subsequent merger transactions which occurred on March 1, 1996. Prior to March 1, 1996 the Company was named Medicus Systems Corporation (the "Predecessor Corporation"). On March 1, 1996, all of the assets of the Predecessor Corporation, other than those related to its managed care business, were transferred to a wholly owned subsidiary of the Predecessor Corporation, and all of the shares of that company, then named Medicus Systems Corporation, were distributed (the "Distribution") on a share-for-share basis to stockholders of the Predecessor Corporation. Immediately after the Distribution, the Company, which then consisted only of the managed care business of the Predecessor Corporation, effected a one-for-three reverse stock split. Also on March 1, 1996, immediately after the reverse stock split, the Company acquired three Arizona corporations engaged in the managed care business through merger transactions (the "Mergers") pursuant to which each of the Arizona corporations (Managed Care Solutions, Inc., now named Managed Care Solutions of Arizona, Inc. ("MCSAZ"), Ventana Health Systems, Inc. ("Ventana") and Arizona Health Concepts, Inc. ("AHC")) became wholly owned subsidiaries of the Company, and the Company's name was changed to Managed Care Solutions, Inc. NOTE 3 - DISCONTINUED OPERATIONS The software and related lines of business of the Predecessor Corporation that were separated as of March 1, 1996 are reported as discontinued operations. Prior years' operating results have also been reclassified to segregate the discontinued operations. Revenues from discontinued operations were $8,161,000 and $16,642,000 for the three and six months ended November 30, 1995, respectively. NOTE 4 - EARNINGS PER SHARE Income (loss) per common share has been computed by dividing net income (loss) by the weighted average common equivalent shares outstanding during the period. Common stock equivalents include shares issuable on the exercise of stock options and warrants when dilutive, using the treasury stock method from date of grant. Average shares outstanding and all per share amounts included in the financial statements and notes thereto have been adjusted retroactively to reflect the one-for-three reverse stock split effective March 1, 1996. 7 8 NOTE 5 - RESTRICTIONS ON FUND TRANSFERS Certain of the Company's operating subsidiaries are subject to state regulations which require compliance with certain net worth, reserve and deposit requirements. To the extent the operating subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to the parent organization, MCS. Net assets of subsidiaries (after inter-company eliminations) which, at November 30, 1996, may not be transferred to MCS by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party is referred to as "Restricted Net Assets". Total Restricted Net Assets of these operating subsidiaries was $8,529,000 at November 30, 1996, with deposit and reserve requirements (performance bonds) representing $2,171,000 of the Restricted Net Assets and net worth requirements, in excess of deposit and reserve requirements, representing the remaining $6,358,000. NOTE 6 - LIQUIDITY The Company experienced a loss from continuing operations in the six month period ended November 30, 1996. In an effort to improve its operating results in fiscal 1997, the Company reduced its total workforce by approximately 10% in July 1996. In addition, the Company has implemented stringent controls over other expenses. In August 1996, the Company consolidated its AHC operations by closing two satellite offices in Arizona. The Company also relocated its corporate headquarters in January 1997 in an effort to reduce rent expense and more efficiently utilize the space available. On October 2, 1996, the Company signed an agreement with Blue Cross and Blue Shield of Texas, Inc. ("BCBSTX") whereby BCBSTX invested $3,000,000 in the Company in the form of a convertible secured loan. The loan has an original term of three years with a renewal option for an additional two years if certain conditions are met. The loan is initially secured by all of the assets of the Company. Eligible assets must be maintained pursuant to the pledge agreement equal to at least 150% of the outstanding balance. The Company can have collateral released from the pledge with the consent of BCBSTX. The loan bears interest at a rate of 8% per annum. Principal and interest are payable at the end of the initial three year term, and, thereafter, at the end of each annual extension. The loan is convertible into the Company's common stock at a conversion price of $3.85 per share. BCBSTX also received a warrant to purchase 100,000 shares of the Company's common stock at an exercise price of $4.45 per share and has the right of first refusal to participate as an equity partner in future MCS funding requirements. In a separate transaction, a trust controlled by William Brown, a director of MCS, invested $300,000 in the Company through a convertible unsecured loan and received a warrant to purchase 10,000 shares of MCS common stock. The interest rate, term, conversion price and warrant exercise price are the same for Mr. Brown's trust as for BCBSTX, except that interest on the loan is payable monthly. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following discussion pertains to the managed care business and continuing operations of the Company. The other business activities, which had been conducted by the Predecessor Corporation prior to the distribution on March 1, 1996, are separately identified as discontinued operations. Results presented consist of the Company's managed care business consolidated with the operations of all three wholly-owned subsidiaries (MCSAZ, Ventana and AHC) for the reporting period since March 1, 1996. Revenues increased from $1,997,000 and $3,853,000 for the three and six month periods ended November 30, 1995, respectively, to $17,566,000 and $35,101,000 for the three and six month periods ending November 30, 1996, respectively, principally as a result of the Mergers. For the three and six months periods ending November 30, 1996, revenues consisted of $5,497,000 and $10,780,000, respectively, from fees received from management of health plans not owned by the Company and $12,069,000 and $24,321,000, respectively, from capitation revenue received by Ventana and AHC. Management fee revenue increased 171% and 179% for the three and six months ended November 30, 1996, respectively, over the comparable periods in the prior year due to an increase in rates and services provided on contracts in existence at June 1, 1995, the addition of new contracts and revenues generated by contracts managed by MCSAZ since the effective date of the Mergers. The most significant new contract revenue growth occurred as a result of a contract that commenced December 1995 with Colorado Access to administer its Medicaid and indigent acute care program. The Company incurred significant operating losses attributable to the Colorado Access contract in the third and fourth quarters of fiscal 1996 as a result of a rate reduction and start-up expenses. The contract included a significant rate reduction when membership reached the 40,000 membership level. Colorado Access achieved a 42,000 membership level in its third month of operation. It was originally estimated that the program would not reach this membership level for two years, at which time the cost to administer this program would have decreased significantly. After unsuccessful attempts to negotiate a rate increase, the Company notified Colorado Access in July 1996 that it was terminating the contract. It was mutually agreed that the Company would assist in a timely transfer of management operations to Colorado Access. The transition was completed on October 31, 1996. In April 1996, the Company entered into an agreement with Community Health Care, Inc. (CHCI) pursuant to which the Company became a 49% owner in Community Health Choice, Inc. ("Choice"), a new HMO being developed in Illinois. The Company had undertaken to develop the HMO, provide the capital to purchase equipment for the plan and provide the equity capital necessary to apply for the HMO license. The equity capital requirement was met in April 1996, when the Company loaned Choice $2,000,000 pursuant to a seven year note. The Company concluded that existing capitation and hospital rates would not allow choice to be financially viable and therefore, the Company notified Choice that the Company's relationship with Choice should be terminated and the $2,000,000 repaid. On November 18, 1996 the Company entered into an agreement pursuant to which the parties terminated their relationship, mutually released each other from all liability, and Choice returned to the Company $1,782,000 of the money loaned. The total loss recorded in the three month period ended November 30, 1996 for the Colorado Access and Choice contracts was $505,000. Ventana is the Company's long term care Medicaid HMO that provided services in eight Arizona counties under a contract that expired September 30, 1996. In July 1996, Ventana was awarded a five year contract for seven counties, which commenced October 1, 1996. 9 10 AHC, the Company's acute care Medicaid HMO in Arizona, is operating under a three year contract (October 1994 through September 1997) that had intense pricing competition during the bidding process. The agreed upon rates have resulted in AHC, as well as several other HMO plans participating in this program, incurring operating losses. Arizona Health Care Cost Containment System Administration ("AHCCCSA") has increased capitation rates for the third year of the contract by approximately 5%, which began October 1, 1996. However, AHCCCSA also increased hospital rates in counties served by AHC by approximately 7%. The Company is unable to determine, at this time, whether these rate changes, combined with planned improvements in medical expense costs currently anticipated, will reduce or eliminate operating losses at AHC or the extent of any such improvements in results. In conjunction with the acquisition of AHC, the Company recorded a loss contract reserve of $542,000, including anticipated contract losses of $440,000 for the period June 1, 1996 to September 30, 1996. The Company has charged operating losses incurred totaling $110,000 and $440,000 for the three and six month periods ended November 30, 1996, respectively, against this reserve. As a result, these contract losses are not fully reflected in the Company's operating results for the periods presented. Management does not believe that an additional loss contract reserve is necessary. AHC, under its contract with AHCCCSA, is obligated to maintain a positive net worth. AHCCCSA requested that AHC increase its net worth sighting AHC's negative position. In November 1996, MCS increased its investment in AHC by $950,000 to fulfill this request. AHC has been notified by one of its subcontractors that the subcontractor is significantly behind in paying claims received from providers for services rendered to AHC members. At November 30, 1996, the subcontractor currently owes approximately $1,400,000 for such claims and contends that, in spite of a lack of cash, it will be able to satisfy all related obligations. In the event this subcontractor cannot fulfill these obligations, AHC could be held liable for payment. AHC is aggressively pursuing payment of these claims by the subcontractor. Direct cost of operations increased to $14,621,000 and $28,699,000 for the three and six month periods ended November 30, 1996, respectively, from $1,600,000 and $3,042,000 for the three and six month periods ended November 30, 1995, respectively. For the three and six month periods ended November 30, 1996 direct cost of operations consisted of $3,863,000 and $6,777,000, respectively, related to fees generated from management of health plans not owned by the Company and $10,758,000 and $21,922,000, respectively, from operating expenses of Ventana and AHC. The direct cost of operations to manage plans as a percentage of revenue was 92% for the three month period ended November 30, 1995 and 1996. For the six month period ending November 30, 1996, the direct cost of operations to manage plans as a percentage of related revenue increased to 90% from 84% for the comparable period in the prior year. The increase was primarily a result of the Colorado Access Contract. The direct costs as a percentage of related revenue for the three and six month periods ending November 30,1996 were 86% and 84% for Ventana and 93% and 90% for AHC. Marketing, sales and administrative expenses increased from $169,000 and $467,000 for the three and six month periods ended November 30, 1995, respectively, to $3,431,000 and $7,963,000 for the three and six month periods ended November 30, 1996, respectively. This increase is primarily the result of the additional marketing, sales and administrative activities of MCSAZ, Ventana and AHC subsequent to the effective date of the Mergers. Net interest income for the three and six month periods ended November 30, 1996 was $71,000 and $104,000, respectively, which is primarily related to investments held by Ventana and AHC subsequent to the effective date of the Merger. For the three and six month periods ended November 30, 1995, net interest income was $67,000 and $118,000, respectively, related to short-term investments of the Company. 10 11 Income taxes are the result of the Company carrying back the losses generated by the parent entity against income generated in prior periods. The current subsidiaries' losses can only be utilized against taxable income of the consolidated group subsequent to the effective date of the Mergers. A tax valuation allowance has been provided against any such losses recognized in the current fiscal year as their realizability is not certain. The variation in the tax rate between the six months ended November 30, 1996 and the comparable prior year period is primarily due to nondeductible goodwill amortization and the valuation allowance for the net operating losses of the subsidiaries. Income (loss) from continuing operations was ($415,000) and ($1,407,000) for the three and six month periods ended November 30, 1996 respectively versus $144,000 and $297,000 for the related periods in the prior fiscal year. The primary reasons for the change in profitability were costs related to terminating contracts in Colorado, Illinois and Missouri and costs associated with terminated employees as part of the workforce reduction effort in July 1996. LIQUIDITY AND CAPITAL RESOURCES During the six month period ended November 30, 1996, the Company's cash and cash equivalents increased $3,153,000 to $6,957,000 on November 30, 1996. Operating activity provided $745,000 for the six month period ended November 30, 1996, versus using $992,000 for the same period in the prior fiscal year. The primary cause for the change was the growth in current liabilities, partially offset by the loss from continuing operations and growth in accounts receivable. Investing activities provided $1,092,000 for the six months ended November 30, 1996 versus $3,742,000 for the comparable periods of the prior fiscal year. Sources of cash consisted of proceeds from the maturity of investments and the settlement of the loan with Choice. Cash was used to purchase $1,285,000 of property and equipment primarily for the Michigan, Indiana and Colorado contracts. Financing activities provided $1,316,000 for the six months ended November 30, 1996 versus using $375,000 for the comparable period of the prior fiscal year. Principal payment on long-term debt in fiscal 1997 was the primary use of funds, while treasury stock activity and dividend payments were the primary use of funds for the comparable periods in the prior fiscal year. Sources of cash consisted of proceeds from the long term debt issued to BCBSTX and to a trust controlled by William Brown. On October 2, 1996, the Company signed an agreement with BCBSTX whereby BCBSTX invested $3,000,000 in the Company in the form of a convertible secured loan. The loan has an original term of three years with a renewal option for an additional two years if certain conditions are met. The loan is initially secured by all of the assets of the Company. Eligible assets must be maintained pursuant to the pledge agreement equal to at least 150% of the outstanding balance. The Company can have collateral released from the pledge with the consent of BCBSTX. The loan bears interest at a rate of 8% per annum. Principal and interest are payable at the end of the initial three-year term, and, thereafter, at the end of each annual extension. The loan is convertible into the Company's common stock at a conversion price of $3.85 per share. BCBSTX also received a warrant to purchase 100,000 shares of the Company's common stock at an exercise price of $4.45 per share and has the right of first refusal to participate as an equity partner in future MCS funding requirements. In a separate transaction, a trust controlled by William Brown, a director of MCS, invested $300,000 in the Company through a convertible unsecured loan and received a warrant to purchase 10,000 shares of MCS common stock. The interest rate, term, conversion price and warrant exercise price are the same for Mr. Brown's trust as for BCBSTX, except that interest on the loan is payable monthly. 11 12 Certain of the Company's operating subsidiaries are subject to state regulations which require compliance with certain net worth, reserve and deposit requirements. To the extent the operating subsidiaries must comply with these regulations, they may not have the financial flexibility to transfer funds to MCS. Net assets of subsidiaries (after inter-company eliminations) which, at November 30, 1996, may not be transferred to MCS by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party is referred to as "Restricted Net Assets". Total Restricted Net Assets of these operating subsidiaries was $8,529,000 at November 30, 1996, with deposit and reserve requirements (performance bonds) representing $2,171,000 of the Restricted Net Assets and net worth requirements, in excess of deposit and reserve requirements, representing the remaining $6,348,000. Ventana provided funds to MCS under loan agreements totaling $2,345,000 at November 30, 1996. VHS provided these loans in the normal course of operations. All such agreements were pre-approved as required by AHCCCSA. The Company experienced a loss from continuing operations in the six-month period ended November 30, 1996. In an effort to improve its operating results in the six month period ended November 30, 1996, the Company reduced its total workforce by approximately 10%, which is expected to result in an estimated annual savings of $1,700,000. In addition, the Company has implemented stringent controls over other expenses. In August, the Company consolidated its AHC operations by closing two satellite offices in Arizona. The closure of these two offices is expected to result in estimated savings of $240,000 annually and, by bringing these operations into one facility, is also expected to improve controls over medical expenses. There can be no assurance as to the amount of savings which will actually result from the actions described above. The Company believes that, based on its current projections, its cash and capital resources should be sufficient to meet its financial requirements in fiscal 1997. The Company will continue its effort to increase revenues, renegotiate existing agreements and minimize operating costs. However, the Company can make no assurances that it will meet its current projections. 12 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10.1)(a) Contract between Ventana Health Systems and Arizona Health Care Cost Containment System (10.1)(a)(1) Contract Amendment 1 to contract between Ventana Health Systems and Arizona Health Care Cost Containment System (10.1)(a)(2) Solicitation Amendment 1 between Ventana Health Systems and Arizona Health Care Cost Containment System (10.1)(a)(3) Solicitation Amendment 2 to contract between Ventana Health Systems and Arizona Health Care Cost Containment System (10.1)(a)(4) Solicitation Amendment 3 to contract between Ventana Health Systems and Arizona Health Care Cost Containment System (10.2) Loan Agreement between the Company and Blue Cross Blue Shield of Texas, Inc. (10.3) Loan Agreement between the Company and William Brown Gardner Trust. (10.4) Lease Agreement between the Company and Pivotal Simon Office XVI, LLC (21) Subsidiaries of the Registrant (27) Financial Data Schedule (b) Reports on Form 8-K None 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MANAGED CARE SOLUTIONS, INC. By: /s/ James A. Burns ----------------------------------- James A. Burns, President and Chief Executive Officer By: /s/ Michael J. Kennedy ----------------------------------- Michael J. Kennedy, Chief Financial Officer Dated: January 13, 1997 14 EX-10.1.A 2 SOLICITATION OFFER AND AWARD 1 EXHIBIT (10.1)(a) ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM SOLICITATION, OFFER AND AWARD Contract No: RFP No: YH6-0012 Date Issued: APRIL 1, 1996 Issued by: AHCCCSA Subject of Solicitation: Contracts and Purchasing 701 E. Jefferson Ave. LONG-TERM CARE SERVICES Phoenix, AZ 85034 FOR CY 97 (10/1/96 - 9/30/97) ================================================================================ I. SOLICITATION Sealed offers (original and 5 copies) for providing the services described herein will be received at the issuing office (above) until 3:00 p.m. local time June 14, 1996. For information call: Mark Renshaw, Contracts and Purchasing Phone: (602) 417-4577 ================================================================================ TABLE OF CONTENTS A. SOLICITATION, OFFER AND AWARD FORM ......................... 1 B. RATES ...................................................... 2 C. DEFINITIONS ................................................ 3-7 D. PROGRAM REQUIREMENTS ....................................... 8-38 E. CONTRACT CLAUSES ........................................... 39-47 F. LIST OF ATTACHMENTS ........................................ 48 G. REPRESENTATIONS & CERTIFICATIONS ........................... 49-57 H. INSTRUCTIONS TO OFFERORS ................................... 58-66 I. EVALUATION FACTORS ......................................... 67-69 INDEX ......................................................... 70-71 ================================================================================ II. OFFER (Must be fully completed by Offeror) The undersigned Offeror hereby agrees, if this offer is accepted within 120 days of bid opening to provide all services in accordance with the terms and requirements stated herein, including all attachments, amendments, and best-and-final offer (if any). NAME OF OFFEROR: Ventana Health Systems, Inc PHONE: (602) 943-5660 ADDRESS: 2510 W. Dunlap Avenue, Suite #300 CITY/STATE: Phoenix, Arizona Zip: 85021 NAME OF PERSON AUTHORIZED TO SIGN OFFER: James A. Burns TITLE: Chief Executive Officer OFFEROR'S SIGNATURE: James A. Burns DATE: 6-14-96 ================================================================================ III. AWARD (To be completed by AHCCCSA) The offer, including all attachments, amendments and best-and-final offer (if any), contained herein, is accepted. NAME OF AHCCCSA CONTRACTING OFFICER: Michael Veit DATE:_____________________ SIGNATURE OF AHCCCSA CONTRACTING OFFICER:_______________________________________ ================================================================================ 1 2 SECTION B - CAPITATION RATES The Program Contractor shall provide services as described in this solicitation. In consideration for these services, the Program Contractor will be paid as shown below. (The Offeror must enter below its proposed monthly capitation rates for each county bid.) - -------------------------------------------------------------------------------- PROPOSED CAPITATION RATES (Per member per month) COUNTY: PROPOSED RATE (PMPM): Apache $1,672.41 Cochise* $ Coconino $ Gila $2,050.14 Graham $ Greenlee $2,153.03 La Paz $1,901.53 Maricopa** $ Mojave $1,778.26 Navajo $1,812.29 Pima** $ Pinal* $ Santa Cruz $1,957.35 Yavapai* $ Yuma $ * By statute, this county has the right of first refusal to act as sole program contractor for the county. It has indicated its intention to continue functioning in this capacity for Contract Year 96-97 and no competing offers will be considered at this time. ** By statute, this county is required to act as sole program contractor for the county. No competing offers will be considered at this time. SECTION C - DEFINITIONS 2 3 ABUSE (OF MEMBER) Intentional infliction of physical, emotional or mental harm, caused by negligent acts or omissions, unreasonable confinement, sexual abuse or sexual assault. (See ARS Section 46-451.) ABUSE (BY PROVIDER) Provider practices that are inconsistent with sound fiscal, business or medical practices, and result in an unnecessary cost to the AHCCCS program, or in reimbursement for services that are not medically necessary or that fail to meet professionally recognized standards for health care. It also includes recipient practices that result in unnecessary cost to the AHCCCS program. (See 42 CFR 455.2) ADHS Arizona Department of Health Services. ADULT CARE HOME An ALTCS HCBS approved alternative residential setting that is licensed by the Arizona Department of Health Services to provide room, board, supervision, personal care and/or custodial care services for up to 10 adults. (AHCCCS Medical Policy Manual, Section 1230) ADULT DAY HEALTH A program that provides planned care and supervision, recreation and socialization, personal care, personal living skills training, group meals, health monitoring and various preventive, therapeutic and restorative health care services. ADULT FOSTER CARE An ALTCS HCBS approved alternative residential setting which is certified by the ADHS to provide room, board, supervision and coordination of necessary ALTCS HCBS services within a family type environment for up to four adult residents. (AHCCCS Medical Policy Manual, Section 12030) AGENT Any person who has been delegated the authority to obligate or act on behalf of another person or entity. AHCCCS Arizona Health Care Cost Containment System as defined by ARS 36-2901, et seq. AHCCCSA Arizona Health Care Cost Containment System Administration ALTCS The Arizona Long Term Care System (ALTCS), a program under AHCCCSA that delivers long term, acute and behavioral health care services to eligible members, as authorized by ARS 36-2931 et seq. AMPM AHCCCS Medical Policy Manual ATTENDANT CARE A service wherein a certified trained attendant provides assistance with homemaking, personal care, general supervision and companionship. BEHAVIORAL HEALTH, A behavioral health service agency licensed LEVEL I by ADHS to provide a structured treatment setting with 24-hour supervision, on-site medical services and an intensive behavioral health treatment program. These facilities are the highest level of inpatient behavioral health services (other than psychiatric hospitalization) and when considered an alternative residential setting may provide mental health crisis stabilization and/or substance abuse detoxification. BEHAVIORAL HEALTH, A behavioral health service agency licensed by ADHS to provide a 3 4 LEVEL II structured residential setting with 24-hour supervision and counseling or other therapeutic activities for individuals who do not require the intensity of treatment services or on-site medical services found in a Level I behavioral health facility. BIDDERS' LIBRARY A repository of manuals, statutes, rules and other reference material referred to in this RFP, located at AHCCCS Contracts and Purchasing, 701 E. Jefferson, Phoenix, AZ. CAPITATION Payment to contractor by AHCCCSA of a fixed monthly payment per person in advance for which the contractor provides a full range of covered services. CATEGORICALLY ELIGIBLE A member eligible for Medicaid under ARS MEMBER 36-2901(4)(b) and 36-2931(5). CONTINUING OFFEROR An existing ALTCS program contractor who submits a response to this solicitation. CONTRACT YEAR (CY) Corresponds to federal fiscal year (Oct. 1 through Sept. 30). For example, Contract Year 97 is 10/1/96 - 9/30/97. CONVICTED A judgment of conviction has been entered by a federal, state or local court, regardless of whether an appeal from that judgment is pending. CO-PAYMENT An amount which the member pays directly to a contractor or provider at the time covered services are rendered. COST AVOIDANCE The process of identifying and utilizing all sources of third-party benefits BEFORE SERVICES ARE RENDERED by the Program Contractor or before payment is made by the Program Contractor. (This assumes the Program Contractor can avoid costs by not paying until the third party has paid what it covers first, or having the third party contracted provider render the service so that the Program Contractor is only liable for coinsurance and/or deductibles.) COVERED SERVICES ALTCS services to be delivered by the Program Contractor which are so designated in Section D of this contract and the Arizona Administrative Code R9-28-201 et seq. CRS Children's Rehabilitative Services DAYS Calendar days unless otherwise specified. DME Durable medical equipment; an item that can withstand repeated use such as hospital beds, wheelchairs, crutches. DUAL ELIGIBLE QUALIFIED A person, eligible under ARS 36-2971(4), who MEDICARE BENEFICIARY is entitled to Medicare Part A insurance, meets certain income, resource and residency requirements of the Qualified Medicare Beneficiary program, and who has been determined categorically eligible for full AHCCCS acute, behavioral health and/or long-term care benefits. ENCOUNTER An encounter is a record of a medically related service rendered by a provider or providers registered with AHCCCSA to a member who is enrolled with a program contractor on the date of service. It includes all services for which the program contractor incurred any financial liability. ENROLLMENT The process by which a person who has been determined eligible becomes a member with a program contractor subject to the limitations specified in the 4 5 AHCCCS Rules. EPSDT Early and Periodic Screening, Diagnosis and Treatment services for persons under 21 years of age as described in AHCCCS Rules R9-22-101 and R9-22-213. FEE-FOR-SERVICE (FFS) A method of payment to registered providers on an amount-per-service basis. FFP Federal financial participation (FFP) refers to the contribution that the federal government makes to the Title XIX program portion of AHCCCS as described in AHCCCS Rule R9-28-101 (26). FISCAL YEAR (STATE) July 1 through June 30. FISCAL YEAR (FEDERAL) October 1 through September 30. FRAUD An intentional deception or misrepresentation made by a person with the knowledge that the deception could result in some unauthorized benefit to himself or some other person. It includes any act that constitutes fraud under applicable state or federal law. (42 CFR 455.2) HCBS Home and community-based services. (See Section D.) HCFA Health Care Financing Administration, an organization within the U.S. Department of Health and Human Services which administers the Medicare and Medicaid programs. HEALTH MAINTENANCE Various forms of plan organization, including ORGANIZATION (HMO) staff and group models, that meet the HMO licensing requirements of the federal and/or state government and offer a full array of health care services to members on a capitated basis. HOME DELIVERED MEALS A service that provides a nutritious meal containing at least one-third of the federal recommended daily allowance for the member, delivered to the member's place of residence. HOMEMAKER SERVICE Assistance in the performance of routine household activities such as shopping, cooking, running errands, etc. HOSPICE A program that provides care to terminally ill patients who have six months or less to live. A participating Hospice must meet Medicare requirements and have a written provider contract with the Program Contractor. IBNR Incurred But Not Reported liabilities for services rendered for which claims have not been received. IHS Indian Health Service; a division of the U.S. Public Health Service. It administers a system of hospitals and health centers providing health services to Native Americans and Native Alaskans. MANAGEMENT SERVICES A person or organization who agrees to SUBCONTRACTOR perform any administrative service for the Program Contractor related to securing or fulfilling the Program Contractor's obligations to AHCCCSA under the terms of the contract. MATERIAL OMISSION A fact, data or other information excluded from a report, contract, etc. the absence of which could lead to erroneous conclusions following reasonable review of such report, contract, etc. 5 6 MEDICAID A federal/ state program authorized by Title XIX of the Social Security Act, as amended, which provides federal matching funds for a medical assistance program for recipients of federally aided public assistance and SSI benefits and other specified groups. Certain minimum populations and services must be included to receive FFP; however, a state may, at its option, include additional populations and services at state expense and also receive FFP. MEDICARE A federal program authorized by Title XVIII of the Social Security Act, as amended. MEMBER For purposes of this solicitation, a person eligible for ALTCS who is enrolled with a program contractor. OFFEROR The organization, entity or person which submits a proposal in response to this AHCCCS Request for Proposal. An offeror who is awarded a contract becomes a program contractor. PAS Pre-admission screen; diagnostic tool administered by an AHCCCS DMS social worker or nurse to assess, or refer to a physician for assessment, the functional, medical, nursing and social needs of the member. PASARR Preadmission Screening and Annual Resident Review. Assessment required prior to admission to a nursing facility. Level I is the identification of members who are suspected of having mental illness or mental retardation. Level II determines whether nursing facility or specialized services are needed. PAY AND CHASE Recovery method used by the Program Contractor to collect from legally liable third parties AFTER the Program Contractor pays the member's medical bills. The service may be provided by a contracted or noncontracted provider. Regardless of who provides the service, pay and chase assumes that the Program Contractor will pay the provider, then seek reimbursement from the third party. PERSONAL CARE A service that provides assistance with personal physical needs such as washing hair, bathing and dressing. PRIMARY CARE PROVIDER/ An individual responsible for the management PRACTITIONER (PCP) of the member's health care that includes, but is not limited to, a physician who is a family practitioner, general practitioner, pediatrician, general internist, obstetrician, gynecologist, certified nurse practitioner or, under the supervision of a physician, a physician's assistant. The PCP must be an individual, not a group or association of persons such as a clinic. REINSURANCE A risk-sharing program provided by AHCCCSA to program contractors for the reimbursement of certain contract service costs incurred by a member beyond a certain monetary threshold. RELATED PARTY A party that has, or may have, the ability to control or significantly influence a program contractor, or a party that is, or may be, controlled or significantly influenced by a program contractor. "Related parties" include, but are not limited to, agents, managing employees, persons with an ownership or controlling interest in the disclosing entity, and their immediate families, subcontractors, wholly-owned subsidiaries or suppliers, parent companies, sister companies, holding companies, and other entities controlled or 6 7 managed by any such entities or persons. RESPITE CARE A service that provides short-term care and supervision to relieve primary caregivers. It is available 24-hours per day and is limited to 30 days per year. RFP Request For Proposal; document prepared by AHCCCSA which describes the services required and which instructs prospective offerors how to prepare a response (proposal). STATE PLAN The written agreement between the State of Arizona and HCFA which describes how the AHCCCS program meets HCFA requirements for participation in the Medicaid program. SUBCONTRACT An agreement entered into by a program contractor with a provider of health care services who agrees to furnish covered services to members, or with any other organization or person who agrees to perform any administrative function or service for a program contractor specifically related to fulfilling the program contractor's obligations to AHCCCSA under the terms of this contract. SUBCONTRACTOR (1) A person, agency or organization to which a program contractor has contracted or delegated some of its management functions or responsibilities to provide covered services to its members; or (2) A person, agency or organization with which a fiscal agent has entered into a contract, agreement, purchase order or lease (or leases of real property) to obtain space, supplies, equipment or services provided under the AHCCCS agreement. SUPPORTIVE RESIDENTIAL Supportive Residential Living Center -- An LIVING CENTER ALTCS HCBS approved alternative residential setting composed of individual apartments licensed by ADHS to provide room, board and general supervision, as well as coordinate supportive living services to members on a 24-hour basis. (AHCCCS Medical Policy Manual, Section 1230) THIRD PARTY A person, program or entity that is or may be, by agreement, circumstance or otherwise, liable to pay all or part of the medical expenses incurred by an AHCCCS member. THIRD PARTY LIABILITY Resources available from person, program or entity that is or may be, by agreement, circumstance or otherwise, liable to pay all or part of the medical expenses incurred by an AHCCCS member. TRAUMATIC BRAIN INJURY An ALTCS HCBS approved alternative TREATMENT FACILITY residential setting which is licensed by the ADHS as an Unclassified Health Care Facility and whose purpose is to provide services for the treatment of people with traumatic brain injuries. VENTILATOR DEPENDENT An ALTCS member who is dependent on a ventilator for respiratory support at least six hours per day for at least 30 consecutive days. [END OF SECTION C] SECTION D - PROGRAM REQUIREMENTS TABLE OF CONTENTS 1. Covered Services..........................................................13 2. Behavioral Health Services................................................13 3. Therapeutic Leave And Bed Hold............................................13 4. Dental Services...........................................................14 5. Family Planning...........................................................14 7 8 6. Emergency Services........................................................14 7. Children's Rehabilitative Services (Crs)..................................14 8. Altcs Transitional Program................................................15 9. Case Management...........................................................15 10 Pre-Admission Screening And Annual Resident Review (Pasarr).............17 11. Quality Management/ Utilization Management................................17 12. Quality Management/ Utilization Management Reports........................18 13. Denials Of Services Requiring Prior Authorization.........................18 14. Member Handbook And Member Communications.................................19 15. Enrollment And Disenrollment..............................................20 16. Request For Change In Enrollment..........................................20 17. Reporting Changes In Members' Circumstances...............................20 18. Out-Of-State Placement And Medical Services...............................21 19. Advance Directives........................................................21 20. Staff Requirements And Support Services...................................21 21. Medical Director..........................................................22 22. Written Policies, Procedures And Job Descriptions.........................23 23. Provider Manual...........................................................23 24. Network Development.......................................................24 25. Network Management........................................................24 26. Provider Registration.....................................................25 27. Network Deficiencies......................................................25 28. Appointment Standards.....................................................25 29. Fraud And Abuse...........................................................25 30. On-Site Reviews...........................................................26 31. Operational And Financial Readiness Reviews...............................27 32. Patient Trust Account Monitoring..........................................27 33. Financial Management......................................................27 34. Required Financial Reports................................................28 35. Performance Bond Or Bond Substitute.......................................28 37. Financial Viability Criteria And Performance Measures.....................29 38. Advances, Distributions And Loans.........................................29 39. Accumulated Fund Deficit..................................................30 40. Hcbs Assumed Mix And Recoupment...........................................30 41. Hospital Reimbursement....................................................30 42. Ventilator Dependent Reimbursement Rates..................................31 43. Reinsurance...............................................................31 44. Coordination Of Benefits/ Third Party Liability..........................32 45. Medicare Services And Cost Sharing........................................34 46. Member Share Of Cost.....................................................34 47. Management Services And Distribution Of Funds.............................35 48. Management Services Subcontractor Audits..................................35 49. Merger, Reorganization And Change Of Ownership............................35 50. Related Party Transactions................................................36 51. Requests For Information..................................................36 52. Data Management...........................................................36 53. Data Exchange Requirement.................................................36 54. Encounter Data Reporting..................................................36 55. Specialty Contracts.......................................................37 56. Sanctions.................................................................37 57. Term Of Contract And Option To Renew....................................38 58. Grievance Process And Standards...........................................38 59. Quarterly Grievance Report................................................38 60. Legislative Issues........................................................38 8 9 SECTION D - PROGRAM REQUIREMENTS BACKGROUND AND INTRODUCTION 1982 - ARIZONA JOINS MEDICAID In 1982 Arizona introduced its Medicaid program by establishing the Arizona Health Care Cost Containment System (AHCCCS), a demonstration program based on principles of managed care. In 1987, the State passed legislation to add long-term care services to the AHCCCS program by establishing the Arizona Long Term Care System (ALTCS). Before the ALTCS program was introduced, nursing facility care for the elderly and physically disabled was provided primarily through the state's various county governments while the Arizona Department of Economic Security, in coordination with the Area Agencies on Aging, provided home and community based services and case management. ALTCS officially began accepting developmentally disabled members in December 1988; the Department of Economic Security is, by law, the program contractor for this population. The program for the elderly and physically disabled (EPD) population was added January 1, 1989. The ALTCS program now administers acute, long term and behavioral health services in both institutional and home and community based settings, and provides case management services. AHCCCSA'S MISSION The AHCCCS Administration's mission is to administer innovative managed care programs effectively and efficiently, and to continually improve the accessibility and delivery of quality health care to members. To do this, AHCCCSA annually evaluates the performance of its program contractors in the following areas: Executive management Case management Medical direction Provider services Network management Member services Behavioral health services Quality management Utilization management Grievance and appeals Accounting systems Claims and encounter systems In the future, performance will be measured against clinical quality management indicators once baselines are established by the Administration. WHO'S ELIGIBLE FOR ALTCS? First,the person must be financially eligible. Anyone may apply for ALTCS at any of the 15 AHCCCS eligibility offices located throughout the state. The applicant must either be age 65 or older, disabled, under 18, or pregnant. The applicant must be an Arizona resident, a U.S. citizen or legal alien, and have countable income and resources below certain thresholds. Chapter 1600 of the ALTCS Eligibility Policy and Procedures Manual provides a detailed discussion of all eligibility criteria. Second, the person must be medically eligible. Once a person's financial eligibility has been established, a preadmission screen (PAS) is conducted by an AHCCCS registered nurse, social worker or, by referral, a physician to evaluate the person's medical status. The PAS is also used initially to determine whether the person should be placed, or is at risk of being placed, 9 10 in a nursing facility or an intermediate care facility for the mentally retarded. In most cases, AHCCCS will reevaluate each ALTCS member annually. THE GROWTH OF THE ALTCS PROGRAM ALTCS services are provided in the 15 counties by program contractors under contract with AHCCCS. Program contractors coordinate, manage and provide long-term care services to ALTCS members. Unlike the acute care program, however, there is currently only one ALTCS program contractor in each county. The ALTCS population has grown from a total of 9,989 in its first full year to 21,356 as of February 1996, a 114% increase. Of this population, 64% are EPD and less than 1% of these are ventilator dependent members. The yearly growth of the EPD population is as follows: STATE FISCAL YEAR NUMBER INCREASE % INCREASE 1990 6,142 1991 7,971 1,829 +29.8% 1992 8,954 983 +12.3% 1993 10,145 1,191 +13.3% 1994 10,984 839 + 8.3% 1995 12,084 1,100 +10.0% 1996 (as of 2/96) 13,751 1,667 +13.8% THE GROWTH OF Home and Community Based Services (HCBS) ALTCS members are considered to be "at risk" of institutionalization. Alternative residential settings have recently been developed, however, in which some of these members can be safely cared for in a less restrictive setting. These HCBS alternative residential settings allow placement options other than the traditional nursing home when the member can no longer safely live at home. (See Section D, Paragraph 1, for a listing of the alternative settings available through the ALTCS program.) At first, because of its concern about an unmanageable surge in demand, HCFA limited the amount Arizona could spend on HCBS services to 5% of the total ALTCS budget. This limit was later changed from a cap on spending to a limitation on member months. HCFA has since allowed ALTCS to increase the HCBS cap by approximately 5% per year so that the cap is now at 40% for HCBS placements. As of December 1995, HCBS members comprised approximately 35% of the ALTCS EPD population. HCBS: THE FUTURE OF ALTCS AHCCCS has supported and encouraged the growth of HCBS in the ALTCS program through the Supportive Residential Living and Adult Care Home pilot programs. The growth of HCBS has given members a variety of residential options to choose from beyond the traditional nursing home. To encourage further growth and expansion in this area, AHCCCS has established HCBS percentages and a reimbursement method that rewards those program contractors who excel in the development and expansion of these settings. In addition, AHCCCSA has requested federal approval for removing the percentage cap entirely on HCBS placements. 1. COVERED SERVICES 10 11 The Program Contractor shall, at a minimum, be responsible for providing the following acute, long term and behavioral health services in accordance with the AHCCCS Medical Policy Manual: ACUTE CARE SERVICES (REF. AHCCCS RULE R9-22-202) Inpatient and outpatient hospital Emergency room Physician Outpatient, including those AHCCCS covered services that may be provided in a rural health clinic or Federally Qualified Health Center Laboratory, x-ray and medical imaging Prescription drugs, including psychotropic medications Medical supplies, durable medical equipment and prosthetic devices Emergency transportation Medically necessary transportation Family Planning, including drugs, supplies, devices and surgical procedures provided to delay or prevent pregnancy Medically Necessary Abortions, when the pregnancy would endanger the life of the mother if the fetus were carried to term, or if the pregnancy is a result of rape or incest Therapies (physical, occupational, respiratory, audiologic, speech) Podiatry Private Duty Nursing for ventilator dependent members Early and periodic screening, diagnosis and treatment services for members under the age of 21. These services include all medically necessary Title XIX services. Organ transplants deemed medically necessary are limited to the following services: kidney, cornea, bone, heart, lung, heart/lung, liver, autologous and allogeneic bone marrow with related chemotherapy or radiotherapy Eyeglasses and contact lenses for members 21 years and older as the sole prosthetic device after a cataract extraction Emergency dental care, extractions and medically necessary dentures for members 21 years and older. ACUTE CARE SERVICES - BEHAVIORAL HEALTH (REF. AHCCCS RULE R9-28-1104) Inpatient hospital Inpatient Psychiatric Facility for members under 21 years Institution for mental diseases for members 65 years and older Individual therapy and counseling Group and family therapy and counseling Partial care (Basic and Intensive) Emergency crisis mental health care Behavior management Evaluation Psychotropic medications, including adjustment and monitoring LONG TERM CARE SERVICES (REF. AHCCCS RULE R9-28-202) Nursing Facility, including Christian Science sanitoria and nursing Hospice Adult Day Health Home Delivered Meals Home Health Agency, including nursing services and home health aide Homemaker 11 12 Personal Care Respite Care Group Respite as an alternative to Adult Day Health Attendant Care Environmental modifications LONG TERM CARE - INSTITUTIONAL SETTINGS Nursing facility Institution for Mental Disease (for age 65 and over) Inpatient Psychiatric Residential Treatment Center (under age 21) LONG TERM CARE - HCBS ALTERNATIVE RESIDENTIAL SETTINGS Adult Care Home Adult Foster Care Behavioral health, Level I and Level II (Residential Treatment Center; licensed by ADHS; under age 21) Supportive Residential Living centers (certified by ADHS - Maricopa County pilot program) Traumatic Brain Injury treatment facility Other services and settings, if approved by HCFA and/or the Director of AHCCCSA, may be added as appropriate. Exclusions and limitations of ALTCS covered services are discussed in AHCCCS and ALTCS Rules and the AHCCCS Medical Policy Manual. 2. BEHAVIORAL HEALTH SERVICES The Program Contractor shall provide medically necessary Title XIX (Medicaid) behavioral health services to all members in accordance with the AHCCCS Medical Policy Manual. Referral for behavioral health services may be made by the Primary Care Provider, case manager, nursing facility staff, family, guardian, the member, or by any health care professional in coordination with the case manager assigned to the member. The Program Contractor shall develop, monitor and continually evaluate its processes for timely referral, screening, evaluation and treatment planning for behavioral health services. The Program Contractor is responsible for training case managers and providers to identify and screen for members' behavioral health needs. The initial behavioral health screen for HCBS members must be performed within seven days of referral. There shall be procedures in place for ensuring that members' behavioral health services are appropriately provided, coordinated and tracked by the case manager, PCP and behavioral health providers and included in the member's individual service plan. Quality management for behavioral health services must be included in the Program Contractor's Quality Management Plan and shall meet the quality management requirements of AHCCCSA. Behavioral health utilization reports shall be submitted quarterly in a format to be determined by AHCCCSA. 3. THERAPEUTIC LEAVE AND BED HOLD For therapeutic leave and bed hold policies, refer to the AHCCCS Medical Policy Manual, Section 1620-21. 4. DENTAL SERVICES The Program Contractor shall ensure that members under age 21 have direct access to dental providers. Members may also be referred by their PCPs. Members over age three and under 21 shall be screened annually by a dentist who will perform an evaluation and report findings and treatment to the member's PCP or the Program 12 13 Contractor. Members under age three shall be screened by their PCP and referred to a dentist when medically necessary. Dental standards may be found in the AHCCCS Medical Policy Manual, Section 310. 5. FAMILY PLANNING The Program Contractor shall provide Family Planning services in accordance with the AHCCCS Medical Policy Manual, Section 420, to members who choose to delay or prevent pregnancy. The Program Contractor is responsible for annually notifying members of reproductive age (12-55 years) of the availability of Family Planning services. 6. EMERGENCY SERVICES The Program Contractor shall provide the following at a minimum: a. A designated emergency services facility providing care on a 24-hour-a-day, 7-day-a-week basis, accessible to members in each contracted service area. One or more physicians and one nurse shall be on call or on duty at such facility at all times. b. An emergency services system employing at least one physician, registered nurse, physician's assistant or nurse practitioner, accessible to members by telephone 24-hours-a-day, 7-days-a-week, for information in the event of any emergency and to providers who need verification of patient membership and treatment authorization. c. An emergency services telephone log containing member's name, address, telephone number, date of call, time of call, nature of complaint or problem, and instructions given to the caller. d. A written procedure for the communication of emergency services information to the member's primary care physician and other appropriate network elements. 7. CHILDREN'S REHABILITATIVE SERVICES (CRS) CRS, a program administered by the Arizona Department of Health Services (DHS), is designed to provide specialty medical and surgical care of a comprehensive and rehabilitative nature to children who meet CRS financial and medical eligibility criteria. CRS is not an emergency services program. While attempts will be made by CRS administrators to accommodate emergency referrals, the Program Contractor remains ultimately responsible for the provision of all covered services to its members. Since CRS is not an entitlement program and eligibility is based on medical judgment, there is no guarantee that CRS administrators will accept responsibility for treatment. The Program Contractor shall refer potentially eligible children to CRS administrators. The referral process is discussed in the CRS Policy and Procedures Manual, a copy of which may be obtained through the Contracts and Purchasing Office. The CRS program provides a comprehensive multi-disciplinary approach to management of CRS-covered conditions, but does not provide primary care. Eligibility criteria for these services include: a. Child has a CRS-covered condition as defined in the CRS Policy and Procedures Manual. b. Child requires comprehensive multi-disciplinary care. c. Child has a reasonable potential for rehabilitation. 13 14 CRS-covered services will ordinarily include the planned management of the covered condition, including inpatient care, surgery, therapy, limited DME and home health care, and social and educational services, as well as periodic follow-up. Emergency services are not ordinarily covered by CRS, nor is initial care of newborn infants. 8. ALTCS TRANSITIONAL PROGRAM The ALTCS Transitional Program is available for members (both institutional and HCBS) who, at the time of medical reassessment, have improved either medically, functionally or both to the extent that they no longer need institutional care, but who still need significant long term care services. For those members who are living in a medical institution when determined eligible for the ALTCS Transitional program, the Program Contractor shall arrange for home and community based placement as soon as possible, but not later than 90 days after the effective date of eligibility. ALTCS Transitional members are entitled to all ALTCS covered services except for institutional care* which is not covered unless it's medically necessary. In such situations, the period of institutionalization may not exceed 90 days. If institutional care is expected to exceed 90 days, the Program Contractor shall request a medical eligibility reassessment (PAS). ALTCS Transitional members determined by the PAS to be at risk of institutionalization will be transferred from the ALTCS Transitional Program to the regular ALTCS program effective the first of the month following the PAS reassessment decision date. EPD institutionalized members will continue to be considered institutional placement until the member is placed in an HCBS setting or expiration of the 90 day period, whichever occurs first. HCBS members will continue to be HCBS placed. For ALTCS Transitional members who remain institutionalized after the 90 day period, member months will be considered as HCBS member months for the HCBS recoupment process. (See Section D, Paragraph 40, HCBS Assumed Mix and Recoupment, for a discussion of the HCBS recoupment process.) Program Contractor compliance with this program will be monitored through the AHCCCS Office of Managed Care and the Office of the Medical Director. 9. CASE MANAGEMENT The Program Contractor shall ensure adequate staffing to meet case management requirements. The case management caseload size for HCBS and mixed has been revised and caseload limits have been established for acute care only, ventilator dependent and hospice. The case management caseload sizes effective October 1, 1996 are as follows: - ------------------------------------ * I.e., nursing facility, institution for mental diseases for persons age 65 or older, inpatient psychiatric facility for persons under the age of 21 or intermediate care facility for the mentally retarded. HCBS or Acute 1:48 CM visit every 90 days Nursing Facility (NF) 1:120 CM visit every 180 days Vent. Dep. and/or Hospice 1:16 CM visit every 30 days Over a 180 day time period, one case manager could perform 96 HCBS or acute care visits, 120 NF visits, or 96 ventilator dependent or hospice visits. The formula for the mixed caseload assumes the following: 14 15 1. 96 HCBS or Acute visits (48 members) = 120 NF visits (120 members) = 96 VD or Hospice visits (16 members) 2. The equivalency of the factors used in the mixed caseload formula are: HCBS or Acute: 96 / 48 = 2 NF: 96 / 120 = .8 VD or Hospice: 96 / 16 = 6 In order to calculate a mixed case load the following formula is used: (# of HCBS and Acute clients x 2) + (# of NF clients x .8) + (# of VD and Hospice clients x 6) = 96 or less As an example of the formula above: (30 HCBS x 2) + (22 NF x .8) + (3 VD x 6) = 95.6 60 + 17.6 + 18 = 95.6 Case management ratios will be reviewed annually to determine if adjustment is warranted. "Case manager" means a person who is either a degreed social worker, licensed registered nurse, or one with a minimum of two years experience in providing case management services to EPD or DD persons. Case managers shall not provide direct care services to members and shall not spend more than 15 % of their time on Title XIX activities other than case management. Staffing must be sufficient to cover case manager absenteeism, turnover and out-of-county members. The case manager shall make initial contact with the member within five days of enrollment, initial on-site contact with the member within 10 days of enrollment, and ensure initiation of necessary services and placement within an appropriate setting within 30 days of enrollment. The case manager shall also conduct periodic placement and service reviews every 30 days for ventilator dependent members (on-site), every 30 days for Adult Care Home, and every 90 days for HCBS (on-site) or acute care only members (telephone or on-site), and 180 days for members in an institutional setting (on-site). The case manager shall be responsible for determining placement based on member acuity with input from the member (or member's representative), the Primary Care Provider, the Program Contractor's Medical Director and/or the PAS. The case manager shall also develop and maintain the member's placement history, a cost-effective individualized service plan, and help resolve problems in the delivery of needed services. The case manager shall be responsible for the transition of and discharge planning for members transferred to another Program Contractor or disenrolled from the ALTCS program. Case management of ventilator dependent members shall be performed by a team consisting of a licensed registered nurse and a social worker. Case management of members requiring behavioral health services shall be performed by a behavioral health professional unless the case manager obtains an initial and quarterly consultation with a qualified behavioral health professional. The Program Contractor shall ensure complete, correct and timely entry of data related to placement history, cost effectiveness studies and service plans into the Client Assessment and Tracking System (CATS). "Timely" shall mean within 14 days of the event which gave rise to the transaction (e.g., service approval by the case manager, placement change). Unless the Program Contractor is currently transmitting data to CATS by tape, all data entry shall be on-line. If the Program Contractor is not currently on-line, it must have a systems interface in place so it 15 16 can update the case management information no less than twice per month. The acceptable reject rate of data is 5% for each submission. All rejects must be corrected prior to the next submission of data to CATS. The Program Contractor shall provide AHCCCSA a description of the internal monitoring of its case management program and shall include the results of this monitoring covering the previous 12 months. The Program Contractor shall include those findings where improvement was indicated and the steps it has taken to resolve deficiencies. Both the internal monitoring process and results will be evaluated by AHCCCSA during on-site reviews. AHCCCSA will generate a late placement report and send it to the Program Contractor on a quarterly basis. This report will list members enrolled with the Program Contractor who, according to the AHCCCSA CATS System, have not been placed within 30 days of enrollment with the Program Contractor. The Program Contractor will be requested to provide a written explanation of the reason the client has not been placed. If the reason for the non-placement is deemed valid, no action will be taken. If there is insufficient reason, or no long-term care services were provided, the Program Contractor will be paid for acute care services, case management services and administration only for each unplaced member retroactive to the date of enrollment. If late placement or initiation of service becomes a persistent problem with the Program Contractor, AHCCCSA reserves the right to impose sanctions for non-compliance. Even though the Program Contractor has up to 30 days to initiate services and place a new member, AHCCCSA's performance standard is two weeks. For future awards and contract renewals, AHCCCSA will evaluate the Program Contractor against the two-week standard. For details on Case Management requirements, see the AHCCCS Medical Policy Manual, Chapters 1200, 1500, 1600 and Appendix F. 10. PRE-ADMISSION SCREENING AND ANNUAL RESIDENT REVIEW (PASARR) The Program Contractor shall ensure members have the Preadmission Screening and Annual Resident Review (PASARR) Level I and, if needed, Level II screenings prior to admission to a nursing facility. Level I is the identification of members who are suspected of having mental illness or mental retardation. Level II determines whether nursing facility or specialized services are needed. Failure to have the proper PASARR screening prior to placement of members in a nursing facility may result in federal financial participation (FFP) being withheld from AHCCCSA. Should withholding of FFP occur, AHCCCSA will recoup the withheld amount from the Program Contractor's next capitation payment. The Program Contractor may, at its option, recoup the withholding from the nursing facility which admitted the member without the proper PASARR. 11. QUALITY MANAGEMENT/ UTILIZATION MANAGEMENT The Program Contractor shall maintain an AHCCCSA-approved internal quality management/ utilization management system and plan in accordance with ALTCS Rules, the AHCCCS Medical Policy Manual and federal regulations found at 42 CFR 434.34 and Part 456; this RFP document does not contain all the QM/UM requirements. The Program Contractor shall respond to quality of care issues in accordance with the time limits specified in AHCCCSA correspondence concerning the individual issues. The Program Contractor shall ensure all EPSDT eligible children receive services in accordance with the AHCCCS Medical Policy Manual, Chapter 400, including the required EPSDT screens. The Program Contractor shall participate in any annual study requested by AHCCCSA and shall cooperate in the collection of quality indicator data as needed, including chart reviews. AHCCCSA reserves the right to add required clinical indicators and set standards for compliance. The current ALTCS quality indicators are: 16 17 Influenza immunization among nursing facilities Sacral/ Coccygeal pressure ulcers Psychotherapeutic agents Hospitalization and emergency room utilization Activities of daily living Fractures related to falls The Program Contractor shall monitor activities related to the performance of the provider network. These activities shall include, but not be limited to, provider profiling in the areas of emergency room, hospital and pharmacy utilization. The Program Contractor shall share provider profiling and utilization information on a regular basis with individual providers. The Program Contractor shall comply with all other medical audit provisions as required by AHCCCS Rule R9-28-513. 12. QUALITY MANAGEMENT/ UTILIZATION MANAGEMENT REPORTS The Program Contractor shall submit the following periodic reports: REPORT: DUE DATE: QM/ UM Plan 45 days after contract effective date QM/ UM Plan Evaluation November 15, each year Quarterly Inpatient Showing Reports 15 days after the end of each quarter Submission of Plan of Correction 30 days after receipt of notice to correct AIDS/ HIV Notification Telephone as each case is identified or report all cases 30 days after the end of each quarter EPSDT Progress Report First day of each quarter Maternity Care Plan November 1, each year EPSDT Participation Plan November 1, each year Pregnancy Termination Report End of the month following pregnancy termination Behavioral Health Utilization Report 30 days after the end of each quarter Provider Affiliation Tape 30 days after the end of each quarter 13. DENIALS OF SERVICES REQUIRING PRIOR AUTHORIZATION When a service requiring prior authorization is denied, the Program Contractor shall ensure the member is notified of the reasons for the denial. This notification must be given to the member verbally or mailed to the member within three working days from the date the decision to deny is made. Chapter 300 of the AHCCCS Medical Policy Manual contains further detail on notification requirements. AHCCCSA reserves the right to change the notification requirements at any time during the term of this contract. 14. MEMBER HANDBOOK AND MEMBER COMMUNICATIONS All member informational materials (e.g. member handbooks, newsletters, brochures) prepared by the Program Contractor shall be approved by AHCCCSA prior to distribution to members. Information shall be provided in English and a second language when 200 members or 5% of the Program Contractor's enrolled population, whichever is greater, speak the same non-English language. The Program Contractor is solely responsible for determining the necessity of this second-language requirement. All written communications shall be written at the fourth grade level. Suggested reference material to determine whether this requirement is being met are: Fry Readability Index 17 18 PROSE, the Readability Analyst (Software developed by Education Activities, Inc.) Gunning FOG Index McLaughlin SMOG Index. When there are program or service changes, the Program Contractor will provide notification to the affected members at least 14 days before the change goes into effect. The Program Contractor shall produce and provide a Member Handbook to each member within 10 days of enrollment. The Member Handbook shall be prepared in accordance with AHCCCSA rules for printed information and shall explain, at a minimum, the following: a. A table of contents b. Covered and non-covered services c. Operations of the Program Contractor d. How to contact Member Services and a description of its function e. How to contact the case manager f. How to select and change PCPs g. Appointment procedures h. What to do in case of an emergency including names, addresses and telephone numbers for members to call for instructions. In a life-threatening situation, the member handbook should instruct members to use the emergency medical services (EMS) available and/or activate EMS by dialing 9-1-1. i. Out-of-county and out-of-state moves j. Grievance process and procedures k. Advance directives l. Contributions the member can make towards his or her own health m. How to obtain emergency transportation and medically necessary transportation. n. EPSDT services o. Maternity and family planning services p. Behavioral health services q. Coordination with Medicare and other potentially liable third parties r. For members with Medicare coverage: indicate Medicare additional covered services, services not generally covered by Medicare, reference to the Medicare handbook "Other Things You Should Know About Medicare" which describes dual coverage (Medicare/Medicaid, QMB's, etc.) s. Member's share of cost Regardless of the format chosen by the Program Contractor, the member handbook must be written in a type-style and size that can be easily read by members of varying degrees of visual impairment. At a minimum, the member handbook shall also contain the following questions and answers, along with the two paragraphs that follow. These items are required by HCFA: Q. What if I have questions, problems, or complaints about [Program Contractor ]? A. If you have a question or problem, please call ___________. If you have a specific complaint about your medical care, the Case Manager will help you. Q. What if I am not happy with the help given to me by the Case Manager? A. If you do not agree with the answer you receive, you may tell the Case Manager you want to file a written or oral grievance. The grievance must be filed no later than 35 days after the date of the action, decision, or incident. [Program Contractor name] will make a final decision within 45 days of getting your written grievance. A letter will be mailed to you stating our decision and the reason for the decision. The 18 19 letter will tell you how you can appeal the decision if you are still unsatisfied. You must let us know you want to appeal within 15 days of being notified of our decision. If you decide to appeal, we will send your request for appeal to AHCCCS. You will receive information from AHCCCS on how your appeal will be handled. AHCCCS will then decide if our decision was correct under the circumstances. 15. ENROLLMENT AND DISENROLLMENT AHCCCSA is responsible for enrolling and disenrolling ALTCS members and for providing notification of same to the Program Contractor. The effective date of enrollments and disenrollments with the Program Contractor is two days after the date the Program Contractor receives notification. Exceptions to the disenrollment policy are discussed in ALTCS Eligibility Policy and Procedures Manual, Chapter 1600. 16. REQUEST FOR CHANGE IN ENROLLMENT If a member moves out of the current Program Contractor's service area, the current Program Contractor may request a program contractor change by submitting a Program Contractor Change Request Form (DE-621) to the program contractor responsible for the member's new county of residence and request that the new program contractor agree to accept the member. If the new program contractor agrees to accept the member, the DE-621 will be sent to AHCCCSA for processing. If the new program contractor does not agree to accept the ALTCS member, the current program contractor may request AHCCCSA to review the request. AHCCCSA will make the final decision. The Program Contractor shall comply with all timelines as required in AHCCCS policy. For more detailed information, refer to the ALTCS Eligibility Policy and Procedures Manual, chapter 1600. 17. REPORTING CHANGES IN MEMBERS' CIRCUMSTANCES The ALTCS Member Change Report Form (7240T) provides the Program Contractor with a method for notifying the ALTCS eligibility offices and AHCCCSA of changes or corrections to the member's circumstances. This includes but is not limited to changes in residence, living arrangements, third party payers, share of cost, income or resources; a medical condition which could affect eligibility, or the member's death. See the ALTCS Eligibility Policy and Procedures Manual, chapter 1600. 18. OUT-OF-STATE PLACEMENT AND MEDICAL SERVICES The Program Contractor shall obtain prior written approval from AHCCCSA before placing a member in an institutional setting outside the state and notify AHCCCSA once placement has been completed. ALTCS members who are temporarily absent from Arizona are eligible for acute emergency services only. The Program Contractor shall report temporary absences from the state to the ALTCS eligibility office for a determination of continued eligibility. 19. ADVANCE DIRECTIVES 19 20 The Program Contractor shall specify in its contracts or agreements with each hospital, nursing facility, home health agency and hospice program that each provider comply with federal and state law on advance directives for adult members. At a minimum, the identified providers shall: a. Maintain written policies and provide written information for adult members regarding their ability to make decisions about medical care, including the right to accept or refuse medical care and the right to execute an advance directive b. Document whether or not the adult member has executed an advance directive c. Not condition the provision of care or discriminate against a member because of the member's decision to execute or not execute an advance directive d. Provide education for staff on issues concerning advance directives 20. STAFF REQUIREMENTS AND SUPPORT SERVICES The Program Contractor shall have in place the organizational, management and administrative systems capable of fulfilling all contract requirements. At a minimum, the following staff are required: a. A full-time ADMINISTRATOR to oversee the entire operation of the Program Contractor b. A MEDICAL DIRECTOR who is an Arizona-licensed physician. The Medical Director shall be actively involved in all major clinical program components of the Program Contractor. The Medical Director shall devote sufficient time to the Program Contractor's operations to ensure timely medical decisions, including after-hours consultation as needed c. A full-time FINANCIAL OFFICER to oversee the budget and accounting systems implemented by the Program Contractor d. A QUALITY MANAGEMENT/ UTILIZATION MANAGEMENT COORDINATOR who is an Arizona-licensed registered nurse, physician or physician's assistant e. A BEHAVIORAL HEALTH COORDINATOR who has a combination of a minimum of a bachelors degree in a behavioral health related field as well as a minimum of two years training and experience in actual behavioral health services delivery f. PRIOR AUTHORIZATION STAFF to authorize medical care 24 hours per day, 7 days per week. This staff shall be directly supervised by an Arizona-licensed registered nurse, physician or physician's assistant g. CONCURRENT REVIEW STAFF to conduct inpatient concurrent review. This staff shall consist of an Arizona-licensed registered nurse, physician, physician's assistant or an Arizona-licensed practical nurse experienced in concurrent review and under the direct supervision of a registered nurse, physician or physician's assistant. h. CASE MANAGEMENT COORDINATOR (OR MANAGER) or CASE MANAGERS to coordinate the provision of services to members in HCBS and institutional settings i. PROVIDER SERVICE STAFF to coordinate communications between the Program Contractor and its subcontractors. There shall be sufficient Provider Services staff to enable providers to receive prompt resolution to their problems or inquiries. j. CLAIMS ADMINISTRATOR and CLAIMS PROCESSORS to ensure the timely and accurate processing of original claims, claims correction letters, resubmissions and overall adjudication of claims k. ENCOUNTER PROCESSORS to ensure the timely and accurate processing and submission to AHCCCSA of encounter data and reports l. A GRIEVANCE COORDINATOR who will manage and adjudicate member and provider grievances m. CLERICAL AND SUPPORT STAFF as necessary to ensure proper functioning of the Program Contractor's operation. The Program Contractor shall inform AHCCCSA, Office of Managed Care, in writing within seven days of learning of an intended resignation in any of the following key positions. In addition, AHCCCSA may require the Program Contractor to provide a written plan for filling the vacant position, including expected timelines. 20 21 - Administrator - Medical Director - Financial Officer - Quality Management Coordinator - Case Management Coordinator - Claims Administrator - Behavioral Health Coordinator - Grievance Coordinator The Program Contractor shall ensure that all staff have appropriate training, education and experience to fulfill the requirements of the position. 21. MEDICAL DIRECTOR The Program Contractor shall have on staff a Medical Director who is currently licensed in Arizona as a Medical Doctor or Doctor of Osteopathic Medicine. The Medical Director shall be responsible for: a. The development, implementation and medical interpretation of medical policies and procedures to guide and support the provision of medical care to members. This includes, among others, policies pertaining to prior authorization, concurrent review, claims review, discharge planning, credentialling and referral management. b. Oversight of provider recruitment activities c. Reviewing all providers' applications and submit recommendations to those with contracting authority regarding credentialling and reappointment of all physicians prior to the physician's contracting (or renewal of contract) with the Program Contractor d. Oversight of provider profiling, including utilization management activities. Administration of all medical activities of the Program Contractor f. Continuous assessment and improvement of the quality of care provided to members (e.g. quality of care issues, quality indicators, annual medical study) g. The development and implementation of the quality management plan and serving as Chairperson of Quality Management Committee h. Oversight of provider education, inservice training and orientation i. Assuring that adequate staff and resources are available for the provision of proper medical care to members j. Attending quarterly ALTCS Medical Director meetings. During periods when the Medical Director is not available, the Program Contractor shall have adequate back-up physician staff to provide competent medical direction. 22. WRITTEN POLICIES, PROCEDURES AND JOB DESCRIPTIONS The Program Contractor shall develop and maintain written policies, procedures and job descriptions for each functional area of its health plan, consistent in format and style. The Program Contractor shall maintain written guidelines for developing, reviewing and approving all policies, procedures and job descriptions, as appropriate, in order to ensure all contract requirements are being met. All policies and procedures shall be reviewed at least annually to ensure that the Program Contractor's current practices reflect written policies. Review dates shall be documented on the policy. Reviewed policies shall be dated and signed by the Program Contractor's appropriate manager, coordinator, director or administrator. All medical and quality management policies must be approved and signed by the Contractor's Medical Director. 21 22 Job descriptions shall be reviewed at least annually to ensure that current duties performed by the employee reflect written requirements. Review dates shall be documented on the job descriptions. 23. PROVIDER MANUAL The Program Contractor shall develop, distribute and maintain a provider manual. The Program Contractor shall document the approval of the provider manual by its Administrator and Medical Director and shall maintain documentation which verifies that the provider manual is reviewed at least annually. The Program Contractor shall ensure that each provider (individual or group that submits claim and encounter data) is issued a copy of the provider manual. At a minimum, the provider manual must contain information on the following: a. A table of contents b. Introduction to the Program Contractor which explains its organization and administrative structure c. Provider responsibilities and the Program Contractor's expectation of the provider such as gatekeeping activities, etc. d. Overview of the Program Contractor's Provider Services department and function e. Listing and description of covered and non-covered services, requirements and limitations f. Emergency room utilization (appropriate and non-appropriate use of the emergency room) g. Behavioral health services h. The Program Contractor's policy regarding PCP assignments i. Referrals to specialists and other providers j. Grievance process and procedures k. Billing and encounter submission information - indicate which form, UB92, HCFA 1500, or Form C is to be used for services - indicate which fields are required for a claim to be considered acceptable by the Program Contractor. A completed sample of each form shall be included l. Program Contractor's written policies and procedures which affect the provider(s) and/or the provider network m. Claims re-submission policy and procedure n. Reimbursement rate o. Explanation of remittance advice p. Prior authorization procedures q. Claims medical review 24. NETWORK DEVELOPMENT The Program Contractor shall develop and maintain a provider network that is sufficient to provide all covered services to ALTCS members. It shall ensure covered services are provided promptly and are reasonably accessible in terms of location and hours of operation. There shall be sufficient professional and paramedical personnel for the provision of all covered services, including emergency medical care on a 24-hour-a-day, 7-day-a-week basis. The proposed network shall be sufficient to provide covered services within designated time and distance limits. If a service or setting is not available or is inadequate, the Offeror must submit with its proposal an action plan for the creation, recruitment or other activities designed to establish the service or setting. The Program Contractor shall develop and submit with the proposal its plan for the further development and expansion of Home and Community Based Services. This plan must address all HCBS services and settings as described in Section D, Paragraph 1, Covered Services and must be updated annually and submitted to AHCCCSA, Office of Managed Care no later than Oct. 31 each year. 22 23 25. NETWORK MANAGEMENT The Program Contractor shall have policies and procedures in place that pertain to all service specifications described in the AHCCCS Medical Policy Manual, Chapter 1200. These include, but are not limited to, policies on how the Program Contractor will: a. Communicate with the network regarding contractual and/or program changes and requirements b. Monitor and control network compliance with policies and rules of AHCCCSA and the Program Contractor c. Evaluate the quality of services delivered by the network d. Provide or arrange for medically necessary covered services should the network become temporarily insufficient within the contracted service area e. Monitor network capacity to ensure that there are sufficient providers to handle the volume of members f. Provide respite care g. Ensure service accessibility, including monitoring appointment procedures standards, appointment waiting times, and service provision standards h. Recruit, select, credential, re-credential and contract with providers in a manner that incorporates quality management, utilization, office audits and provider profiling i. Manage or share risk with providers j. Provide training for its providers and maintain records of such training k. Provide eligibility information and prior authorization 24 hours per day, 7 days per week. The Program Contractor shall comply with the provider network and staffing requirements described in the AHCCCS Medical Policy Manual, Chapter 600. The Program Contractor shall comply with medical policy and standards related to care coordination described in the AHCCCS Medical Policy Manual, Chapter 500. The Program Contractor shall submit monthly to AHCCCSA, Office of Managed Care, a report noting additions and deletions to the provider network. 26. PROVIDER REGISTRATION The Program Contractor shall ensure that all its subcontractors have registered with AHCCCSA as approved service providers and have received AHCCCS Provider ID Numbers. A Provider Participation Agreement must be signed with each provider who does not also participate as an AHCCCS FFS provider and retained in Contractor's files. The provider registration process must be completed in order for the Program Contractor to report services a subcontractor renders to enrolled members and for Contractor to be paid reinsurance. 27. NETWORK DEFICIENCIES The Program Contractor shall develop and maintain throughout the term of this contract a provider network sufficient to provide all ALTCS covered services and approved settings to members. In the event any network deficiency should occur, i.e. a covered service or setting becomes unavailable, the Program Contractor shall take immediate action to correct it. If the Program Contractor is unable to contract with a provider to remedy the deficiency within 30 days from the date the covered service or setting becomes unavailable, it shall promptly notify the ALTCS Manager, Office of Managed Care, of the circumstances making it unable to correct the network deficiency. Refer to Attachment B, Service Area Minimum Network Standards. 23 24 28. APPOINTMENT STANDARDS The Program Contractor shall have procedures in place that ensure: a. Emergency appointments the same day or within 24 hours of the member's phone call or other notification, or as medically appropriate b. Urgent care appointments within two days c. Routine care appointments within 21 days d. Routine dental appointments within 30 days For SPECIALTY REFERRALS, the Program Contractor shall be able to provide: a. Emergency appointments within 24 hours of referral b. Urgent care appointments within 3 days of referral c. Routine care appointments within 30 days of referral For BEHAVIORAL HEALTH SERVICES, the Program Contractor shall be able to provide appointments as follows: a. Emergency appointments within 24 hours of request b. Non-emergency appointments within 7 days of request If the Program Contractor needs to provide medically-necessary transportation to a member, the Program Contractor shall require its transportation provider to schedule the transportation so that the member arrives no sooner than one hour before the appointment and does not have to wait more than one hour after making the call to be picked up after the appointment. 29. FRAUD AND ABUSE The Program Contractor is responsible for reporting all cases of suspected fraud and abuse or inappropriate practices by subcontractors, members or employees. The Program Contractor shall provide written notification of such incidents to AHCCCSA, Internal Audit and Program Investigation Unit. The Program Contractor shall develop programs to detect and prevent fraud and abuse and shall cooperate with AHCCCSA as requested to investigate fraud and abuse cases. For a full description of the Program Contractor's responsibilities, see the AHCCCS Health Plans and Program Contractors - Policy for Prevention, Detection and Reporting of Fraud and Abuse which is available in the Bidders' Library and incorporated herein by reference. The AHCCCS policy on fraud and abuse is currently under review and will likely be revised to include more specific requirements regarding the prevention and detection of fraud and abuse. Upon contract award the Program Contractor shall participate in a fraud and abuse workgroup which will consist of representatives from acute care health plans, program contractors, AHCCCSA, the Attorney General's office, and the Health Care Financing Administration. The purpose of the workgroup is to explore ways to minimize the occurrence of fraud and abuse within the AHCCCS system and to recommend updates and revisions to the policy. The population served in the long-term care program is very vulnerable, particularly in the area of abuse. The Program Contractor shall develop specific controls to prevent and detect member abuse. 30. ON-SITE REVIEWS In accordance with AHCCCS Rule R9-28-513, AHCCCSA will conduct operational reviews at least once every three years for the purpose of, but not limited to, ensuring program compliance. The type and duration of the 24 25 review will be solely at the discretion of AHCCCSA. The reviews will identify areas where improvements can be made and make recommendations accordingly, monitor the Program Contractor's progress towards implementing mandated programs and provide the Program Contractor with technical assistance if necessary. Except in cases where advance notice is not possible or advance notice may render the review less useful, AHCCCSA will give the Program Contractor at least two weeks advance notice of the date of the on-site review. AHCCCSA may conduct a review in the event the Program Contractor undergoes a merger, reorganization, changes ownership or makes changes in three or more key staff positions within a 12-month period. In preparation for the reviews, the Program Contractor shall cooperate fully with AHCCCSA and the AHCCCSA Review Team by forwarding in advance such policies, procedures, job descriptions, contracts, records, logs and other material that AHCCCSA may request. Any documents not requested in advance by AHCCCSA shall be made available upon request of the Review Team during the course of the review. Program Contractor personnel as identified in advance shall be available to the Review Team at all times during AHCCCSA on-site review activities. While on-site, the Program Contractor shall provide the Review Team with work space, access to a telephone, electrical outlets and privacy for conferences. Certain documentation submission requirements may be waived at the discretion of AHCCCSA if the Program Contractor obtains NCQA accreditation. The Program Contractor must submit the entire NCQA report to AHCCCSA for such waiver consideration. The operations review is conducted by an AHCCCS review team comprised of staff from the Office of Managed Care, the Office of the Medical Director and Grievance and Appeals. The team will evaluate the Program Contractor's performance and compliance with AHCCCS policies, rules and the terms of this contract. The review will look at all aspects of operations including, but not limited to: Case management Quality management Utilization management Medical direction Grievance process Claims processing Encounter reporting Provider and member services Network management Executive and financial management Performance will be evaluated by reviewing case files, quality and utilization management plans, meeting minutes, policies, manuals, reports, handbooks and other relevant material. The Program Contractor will be furnished a draft copy of the Review Report and given an opportunity to comment on any review findings prior to AHCCCSA finalizing the report. Where there are outstanding deficiencies, the Program Contractor may be required to submit a corrective action plan without the opportunity to comment on the draft report. Recommendations made by the Review Team to bring the Program Contractor into compliance with federal, state, AHCCCS, and/or RFP requirements, must be implemented by the Program Contractor. AHCCCSA may conduct a follow-up review or require a corrective action plan to determine the Program Contractor's progress in implementing recommendations and achieving program compliance. Follow-up reviews may be conducted at any time after the initial review. The Program Contractor shall submit a corrective action plan to improve areas of non-compliance identified in the review. Once the corrective action plan is approved by AHCCCSA, it shall be implemented by the Program Contractor. Modifications to the corrective action plan must be agreed to by both parties. Review findings may be used in the scoring of subsequent bid proposals submitted by that Program Contractor. 31. OPERATIONAL AND FINANCIAL READINESS REVIEWS 25 26 AHCCCSA may conduct Operational and Financial Readiness Reviews on any or all offerors, either before award as part of the proposal evaluation, or after award to assess the new Program Contractor's readiness to provide contract services. A new Program Contractor will be permitted to commence operations only if the Readiness Review factors are met to AHCCCSA's satisfaction. 32. PATIENT TRUST ACCOUNT MONITORING The Program Contractor shall monitor trust fund accounts for institutionalized members to ensure that expenditures from a member's trust fund comply with federal and state regulations. Suspected incidents of fraud involving the management of these accounts must be reported in accordance with Section D, Paragraph 29, Fraud and Abuse. 33. FINANCIAL MANAGEMENT Both AHCCCSA and HCFA require specific financial management and reporting standards to protect the financial integrity of spending under the ALTCS program. In addition, financial information must be available for the Program Contractor to manage the program, to assess its own financial risk and to determine if members are receiving necessary services. At a minimum, the Program Contractor's system shall: a. Gather and report data on critical financial indicators (e.g., Incurred But Not Reported Claims) b. Establish and maintain a financial information base to support current operations c. Provide information regarding financial status, including all reporting mandated by law and accounting of HCBS expenditures, to internal management and AHCCCSA on a regular basis d. Make records available for independent audit e. Ensure that subcontractors are reimbursed promptly and correctly f. Monitor nursing facilities and other institutional patient trust accounts g. Monitor records in accordance with 42 CFR 483.10 In addition, the Program Contractor's financial management systems must meet specific standards established by HCFA. These are specified in 45 CFR, Part 74, which is incorporated herein by reference. 34. REQUIRED FINANCIAL REPORTS The Program Contractor shall comply with all financial reporting requirements contained in the Reporting Guide for Long-Term Care Program Contractors with the Arizona Health Care Cost Containment System. The Guide, which may be found in the Bidders' Library, contains a complete listing of all monthly, quarterly and annual reporting requirements including due dates for each report. 35. PERFORMANCE BOND OR BOND SUBSTITUTE The Program Contractor shall be required to provide a performance bond of standard commercial scope issued by a surety company doing business in this state, an irrevocable letter of credit, or a cash deposit to AHCCCSA for as long as the Program Contractor has AHCCCS-related liabilities of $50,000 or more outstanding, or 15 months following the termination date of this contract, whichever is later, to guarantee: (1) payment of the Program Contractor's obligations to providers, and (2) performance by the Program Contractor of its obligations under this contract. The performance bond shall be in a form acceptable to 26 27 AHCCCSA and payable to the Arizona Health Care Cost Containment System Administration, an agency of the State of Arizona. In the case of an irrevocable letter of credit the letter shall be issued by: a. A bank doing business in this state and insured by the Federal Deposit Insurance Corporation, or b. A savings and loan association doing business in this state and insured by the Federal Savings and Loan Insurance Corporation, or c. A credit union doing business in this state and insured by the National Credit Union Administration. In the event of a default by the Program Contractor, AHCCCSA shall, in addition to any other remedies it may have under this contract, obtain payment under the performance bond or substitute security for the purposes of the following: a. Paying any damages sustained by providers, contracted or otherwise, because of a breach of the Program Contractor's obligations under this contract, b. Reimbursing AHCCCSA for any payments made by AHCCCSA on behalf of the Program Contractor, and c. Reimbursing AHCCCSA for any extraordinary administrative expenses incurred by reason of a breach of the Program Contractor's obligations under this contract, including, but not limited to, expenses incurred after termination of this contract for reasons other than the convenience of the state by AHCCCSA. In the event AHCCCSA agrees to accept substitute security in lieu of the performance bond, irrevocable letter of credit or cash deposit, the Program Contractor agrees to execute any and all documents and perform any and all acts necessary to secure and enforce AHCCCSA's security interest in such substitute security including, but not limited to, security agreements and necessary UCC filings pursuant to the Arizona Uniform Commercial Code. In the event such substitute security is agreed to and accepted by AHCCCSA, the Program Contractor acknowledges that it has granted AHCCCSA a security interest in such substitute security to secure performance of its obligations under this contract. The Program Contractor is solely responsible for establishing the credit-worthiness of all forms of substitute security. AHCCCSA may, after written notice to the Program Contractor, withdraw its permission for substitute security, in which case the Program Contractor shall provide AHCCCSA with a form of security described above. 36. AMOUNT OF PERFORMANCE BOND The initial amount of the performance bond shall be equal to 110% of the total capitation payment expected to be paid in the month of November or as determined by AHCCCSA. This requirement must be satisfied by the Program Contractor no later than 15 days after notification by AHCCCSA of the amount required. Thereafter, AHCCCSA shall evaluate the enrollment statistics of the Program Contractor on a monthly basis. If there is an increase in capitation payment that exceeds 10% of the initial performance bond amount, AHCCCSA may require an increase in the amount of the performance bond. The Program Contractor shall have 15 days following notification by AHCCCSA to increase the amount of the performance bond. The performance bond amount that must be maintained after the contract term shall be the lesser of (a) the bond amount on the last day of the contract; or (b) the total amount of AHCCCS-related liabilities outstanding. 37. FINANCIAL VIABILITY CRITERIA AND PERFORMANCE MEASURES 27 28 AHCCCSA has established the following financial viability criteria and performance measures that the Program Contractor shall adhere to. These standards are subject to change as AHCCCSA deems appropriate: a. CURRENT RATIO Standard: At least 1.00 (Current assets divided by current liabilities) b. EQUITY PER MEMBER Standard: At least $2,000 (Equity, less on-balance sheet performance bond, divided by the number of members at the end of the period.) c. GROSS MEDICAL EXPENSES PERCENTAGE Standard: No more than 90% (Gross medical expenses divided by total revenue) d. TOTAL ADMINISTRATIVE COST PERCENTAGE Standard: No more than 8% (Total administrative expenses, excluding income taxes, divided by total revenue.) e. RECEIVED BUT UNPAID CLAIMS DAYS OUTSTANDING Standard: No more than 30 days (Received but unpaid claims divided by the average daily medical expenses for the period, net of sub-capitation expense) f. TOTAL MEDICAL CLAIMS DAYS OUTSTANDING Standard: No more than 90 days (Total medical claims liability divided by the average daily medical expenses for the period, net of sub-capitation expense) 38. ADVANCES, DISTRIBUTIONS AND LOANS The Program Contractor shall not, without the prior written approval of AHCCCSA, make any advances to a related party, or any distribution, loan or loan guarantee to any entity, including another fund or line of business within its organization. Requests for prior approval shall be submitted to the Office of Managed Care. 39. ACCUMULATED FUND DEFICIT The Program Contractor and its owners shall fund any accumulated fund deficit through capital contributions in a form acceptable to AHCCCSA within 60 days after receipt by AHCCCSA of the final audited financial statement. The amount of any accumulated fund deficit will be determined in accordance with the Program Contractor's annual audited financial statements. 40. HCBS ASSUMED MIX AND RECOUPMENT The Program Contractor's capitation rate is based in part on the assumed ratio ("mix") of HCBS member months to the total number of member months (i.e. HCBS + institutional). At the end of the contract year, AHCCCSA will compare the actual HCBS member months to the assumed HCBS percentage that was used to calculate the capitation rate for that year. If the Program Contractor's actual HCBS percentage is greater than the assumed percentage, AHCCCSA will recoup (or reimburse) the difference between the institutional capitation rate and the HCBS capitation rate for the number of member months which exceeded (or was less than) the assumed percentage. This reconciliation will be made in accordance with the following schedule: Percent in excess of assumed percentage: Amount to be recouped: 0 - .5 percentage points 0% of capitation overpayment 28 29 .51 - 1.99 percentage points 20% of capitation overpayment 2 or more percentage points 30% of capitation overpayment If the Program Contractor's actual HCBS percentage is less than the assumed percentage, AHCCCSA will reimburse a portion of the difference between the institutional rate and the HCBS capitation rate for the number of member months lower than the assumed percentage. This reimbursement will be made in accordance with the following schedule: Percent lower than assumed percentage: Amount to be reimbursed: 0 - .5 percentage points 0% of capitation underpayment .51 - 1.99 percentage points 20% of capitation underpayment 2 or more percentage points 30% of capitation underpayment The Program Contractor shall not exceed the statewide cap established by HCFA and shall not implement an HCBS waiting list without prior written approval from AHCCCSA. 41. HOSPITAL REIMBURSEMENT The Program Contractor shall reimburse hospitals for member care based on one of the following rate methods: a. AHCCCS Fee for Service Hospital Reimbursement Rate Inpatient: AHCCCS hospital-specific tiered per diem rates Outpatient: AHCCCS hospital-specific cost-to-charge ratio multiplied by allowed charges, OR: b. Subcontracted rate (The aggregate of subcontracted rates must not exceed what would have been paid had the AHCCCS Fee for Service Hospital Reimbursement rate been used.) Within seven days of subcontracting with a hospital, the Program Contractor shall submit a copy of the subcontract, including all rates, terms and conditions, to AHCCCSA, Office of Managed Care. This submittal shall include documentation that the negotiated rate will, when considered in the aggregate, be the same or less than what would have been paid under Paragraph a above. To aid in making this determination, the Program Contractor shall require their independent auditor to evaluate the reasonableness of their assumptions as part of the annual audit. The Program Contractor shall reimburse out of state hospitals at the lowest of the following rates for inpatient and outpatient services: a. Negotiated discounted rate, or b. Arizona average cost-to-charge ratio multiplied by allowed charges, or c. Medicaid rate in effect in the state in which the hospital is located at the time services are provided. The Program Contractor may conduct prepayment and postpayment medical reviews of all hospital claims. Inpatient tiered per diem rates and outpatient cost-to-charge ratios will be adjusted in accordance with ARS 36-2903.01 (J). For a more complete description of the guidelines for hospital reimbursement, refer to applicable statutes and rules, copies of which may be found in the Bidders' Library. 29 30 42. VENTILATOR DEPENDENT REIMBURSEMENT RATES The Program Contractor will be paid on a capitated basis for ventilator-dependent (VD) members. Two different capitation rates will be paid, one for members who are placed in Home and Community Based Services, the other for members who are placed in approved ALTCS institutional settings. These rates are set by AHCCCSA and are included on the capitation bid disk. In addition, each ventilator-dependent member shall have an annual evaluation by a pulmonologist to assess the prospects of weaning the member from dependency on the ventilator. A copy of this evaluation shall be promptly forwarded to AHCCCSA's ventilator-dependent coordinator. AHCCCSA will make capitation payments to the Program Contractor monthly in advance of the performance of services. The capitation rate paid each month will be the capitation rate for ventilator dependent members placed in Home and Community Based Services. On a quarterly basis, AHCCCSA will reimburse the Program Contractor the difference in capitation rates for those ventilator dependent members who were placed in institutions. For example: HCBS VD capitation rate: $ 5,000 Institutional VD capitation rate: $ 12,000 Institutional VD member months for quarter: 35 Additional capitation due Program Contractor: 35 x ($12,000 - $5,000) = $245,000 43. REINSURANCE Reinsurance is a stop-loss program provided by AHCCCSA to the Program Contractor for the partial reimbursement of covered inpatient facility medical services incurred for a member beyond an annual deductible. AHCCCSA is self-insured for the reinsurance program which has an initial deductible level and a subsequent coinsurance percentage. For dates of service after 10/1/96 (under regular reinsurance), the Program Contractor will be reimbursed at 75% of allowable charges over the following deductibles: Urban county, with Medicare Part A $12,000 Urban county, without Medicare $20,000 Rural county, with Medicare Part A $ 5,000 Rural county, without Medicare $ 9,000 Behavioral Health/Traumatic Brain Injury [To be determined] Regular reinsurance covers acute inpatient hospitalizations (i.e. anything billed on a UB92). Effective 10/1/96, members considered by the AHCCCS Office of the Medical Director (OMD) to be high-cost behavioral health or Traumatic Brain Injured will be covered under regular reinsurance. Services for these members must be approved in advance by OMD for the Program Contractor to qualify for reinsurance reimbursement. Services to members identified as being catastrophically eligible in accordance with OMD policies will be covered under a special catastrophic program instead of the regular reinsurance program. Catastrophic reinsurance coverage for transplants is limited to 85% of the AHCCCS contract amount for the transplant services rendered, or 85% of the Contractor-paid amount, whichever is lower. Catastrophic reinsurance for hemophiliacs is covered at 85% of the Contractor-paid amount. The AHCCCS contracted transplantation rates are available in the Bidders' Library. AHCCCSA uses inpatient encounter data to determine regular reinsurance benefits. Reimbursement for regular reinsurance benefits will be made to the Program Contractor monthly. AHCCCSA will also provide for a 30 31 reconciliation of reinsurance payments in the case where encounters used in the calculation of reinsurance benefits are subsequently adjusted or voided. Encounter data will not be used to determine catastrophic reinsurance benefits. However, this does not relieve the Program Contractor of the responsibility for submitting encounters for catastrophic reinsurance services. The Program Contractor must submit catastrophic reinsurance claims in accordance with the AHCCCS Reinsurance Policy/Procedure Manual. All catastrophic reinsurance claims shall be subject to medical review by AHCCCSA or its designee. Medical review on regular reinsurance cases will be determined based on statistically valid random sampling. The AHCCCS Office of the Medical Director will generate the sampling and will notify the Program Contractor of documentation needed for the retrospective medical review process to occur at the Program Contractor's offices. The results of the medical review sampling will be extrapolated to the Program Contractor's entire regular reinsurance reimbursement population. A partial recoupment of reinsurance reimbursements made to the Program Contractor may occur based on the results of the medical review sampling. 44. COORDINATION OF BENEFITS/THIRD PARTY LIABILITY COST AVOIDANCE - The Program Contractor shall cost-avoid all claims or services that are subject to third-party payment and may deny a service to a member if it knows that a third party (i.e. other insurer) will provide the service. However, if the third-party insurer requires the member to pay any co-payments or deductibles, the Program Contractor is responsible for making these payments, even if the services are provided outside of the Program Contractor's network. (The Program Contractor must decide whether it is more cost-effective to provide the service within its network or pay coinsurance and deductibles for a service outside its network. For continuity of care, the Program Contractor may also choose to provide the service within its network.) If the Program Contractor knows that the third party insurer will neither pay for nor provide the covered service, and the service is medically necessary, the Program Contractor shall not deny the service nor require a written denial letter. If the Program Contractor does not know whether a particular service is covered by the third party, and the service is medically necessary, the Program Contractor shall contact the third party and determine whether or not such service is covered rather than requiring the member to do so. The requirement to cost-avoid applies to all AHCCCS covered services. For pre-natal care and preventive pediatric services, AHCCCS may require the Program Contractor to provide such service and then coordinate payment with the potentially liable third party ("pay and chase"). In emergencies, the Program Contractor shall provide the necessary services and then coordinate payment with the third-party payer. The Program Contractor shall also provide medically necessary transportation so the member can receive third-party benefits. Further, if a service is medically necessary, the Program Contractor shall ensure that its cost avoidance efforts do not prevent a member from receiving such service. COST RECOVERIES - If the Program Contractor was not aware of third-party coverage at the time services were rendered or paid for, or was unable to cost avoid, the Program Contractor shall proceed as follows: The Program Contractor shall identify all potentially liable third parties and pursue reimbursement from them except in the following circumstances (unless referred to the Program Contractor by AHCCCS or AHCCCSA's authorized representative): Uninsured/underinsured motorist insurance First and third-party liability insurance Tortfeasors Adoption recovery Estate recovery Worker's Compensation
31 32 The Program Contractor shall, however, report any cases involving the above circumstances to AHCCCSA's authorized representative should the Program Contractor identify such a situation. See AHCCCS Rule R9-28-902, C and D. The Program Contractor shall cooperate with AHCCCSA's authorized representative in all collection efforts and is encouraged to contract with this representative to better facilitate overall third-party collections. As part of its efforts, the Program Contractor is responsible for performing all research and investigation and payment of lien-filing related costs for total plan cases. The Program Contractor may retain up to 100% of its third-party collections if all of the following conditions exist: 1. Total collections received do not exceed the total amount of the Program Contractor's financial liability for the member (total expenditures minus any member share of cost). 2. There are no payments made by AHCCCS related to fee-for-service, reinsurance or administrative costs (i.e. lien filing, etc.). 3. Such recovery is not prohibited by state or federal law REPORTING - The Program Contractor may be required to report case level detail of third-party collections and cost avoidance. The Program Contractor shall notify AHCCCSA's authorized representative within five working days of the identification of a third-party liability case with known reinsurance (often referred to as joint liability cases). The Program Contractor shall communicate any known change in health insurance information, including Medicare, to the ALTCS local office not later than 10 days from the date of discovery using the form designated in the ALTCS Eligibility Policy and Procedures Manual, Chapter 1600. 45. MEDICARE SERVICES and COST SHARING AHCCCS has members enrolled who are eligible for both Medicare and Medicaid services. These members are referred to as "dual eligibles" and include persons who are Qualified Medicare Beneficiaries (QMB) and non-QMB eligible persons. QMB eligible persons are entitled to all covered Medicaid services and, in addition, may receive the following Medicare services which are not covered by AHCCCS or differ in scope or limitation: Chiropractic services Inpatient psychiatric services Psychological services Inpatient and outpatient occupational coverage Respite services Any new services which are added to the Medicare program and which are not covered by AHCCCS For all dual eligible persons, the Program Contractor shall be responsible for providing all AHCCCS covered services and pay all Medicare coinsurance and deductibles for Medicare services which are covered by AHCCCS and provided on a fee-for-service basis within the Program Contractor's network. For QMB eligible persons, the Program Contractor shall be responsible for paying the Medicare coinsurance and deductibles for Medicare services not covered by AHCCCS described above which are provided on a fee-for-service basis. Since Medicaid is the payer of last resort, all Medicare covered services which are provided to dual eligibles who are not enrolled in a Medicare TEFRA Risk HMO shall be billed to Medicare or any other third party liability source. 32 33 If a dual eligible is enrolled with a Medicare TEFRA Risk HMO, Medicare will not reimburse the Program Contractor for Medicare covered services provided by the Program Contractor. Therefore, the Program Contractor shall refer the member to the Medicare TEFRA Risk HMO for all Medicare covered services and shall not be responsible for the payment of any Medicare copayments, deductibles or premiums assessed by the Medicare TEFRA Risk HMO. The Program Contractor shall be responsible for any Medicaid covered services not provided by the Medicare TEFRA Risk HMO. 46. MEMBER SHARE OF COST ALTCS members are required to contribute toward the cost of their care based on their income. Some members, either because of their limited income or the methodology used to determine the share of cost, do not have to pay a share of cost. Generally, only institutionalized ALTCS members currently have a share of cost. Effective 10/1/96, subject to adoption of administrative rule, the share of cost for members in an HCBS alternative residential setting will allow for a Personal Needs Allowance (PNA). This PNA will be the same as for institutional members. This will allow for a PNA equal to the institutional rate of 15% of the SSI maximum for an individual ($70.50 as of 1/96). This is a reduction from the current PNA rate of 300% of the SSI maximum ($1410 as of 1/96) for members residing in Alternative Residential Settings. A room and board amount as charged, not to exceed $800 per month, and all other share of cost deductions described in ARS 36-2932 (O) will be allowed. The Program Contractor receives monthly capitation payments which incorporate an assumed deduction for the share of cost which members contribute to the cost of care. The Program Contractor is responsible for collecting their members' share of cost. The Program Contractor has the option of collecting the share of cost or delegating this responsibility to the provider. The Program Contractor may transfer this responsibility to nursing facilities, Institutions for Mental Disease for those 65 years of age and older, or Inpatient Psychiatric Facilities for those under 21 years of age, and compensate these facilities net of the share of cost amount. If the Program Contractor delegates this responsibility to the provider, the provider contract must spell out complete details of both parties' obligations in share of cost collection. The Program Contractor must establish a process for collecting the share of cost from HCBS members. At the end of the contract year, AHCCCSA will compare actual Share of Cost assignment to the Share of Cost assignment assumed in the calculation of the capitation rate. Assumed Share of Cost will be fully reconciled to actual Share of Cost Assignment, and AHCCCSA will either recoup or refund the total difference, as applicable. This share of cost reconciliation may, at AHCCCSA's sole discretion, be performed more frequently than once per year. 47. MANAGEMENT SERVICES AND DISTRIBUTION OF FUNDS All proposed management services subcontracts, MIS subcontracts, corporate cost allocation plans, proposals to adjust management fees, and proposals for the distribution of funds which may affect plan equity must be approved in advance by AHCCCSA, Office of Managed Care. Cost allocation plans must be submitted with the proposed management fee agreement. AHCCCSA reserves the right to perform a thorough review of actual management fees charged and/or corporate allocations made. If the fees or allocations are determined to be unjustified or excessive, amounts may be subject to repayment to the Program Contractor. In addition, the Program Contractor may be placed on monthly financial reporting and financial sanctions may be imposed. 48. MANAGEMENT SERVICES SUBCONTRACTOR AUDITS 33 34 All management services subcontractors are required to have an annual financial audit. A copy of this audit shall be submitted to AHCCCSA, Office of Managed Care, within 120 days after the subcontractor's fiscal year end. 49. MERGER, REORGANIZATION AND CHANGE OF OWNERSHIP A proposed merger, reorganization or change in ownership of the Program Contractor shall require prior approval of AHCCCSA and a subsequent contract amendment. The Program Contractor must submit a detailed merger, reorganization and/or transition plan to AHCCCSA, Office of Managed Care, for AHCCCSA review. The purpose of the plan review is to ensure uninterrupted services to members, evaluate the new entity's ability to perform the contract requirements, ensure that services to members are not diminished and that major components of the organization and AHCCCS programs are not adversely affected by such merger, reorganization or change in ownership. 50. RELATED PARTY TRANSACTIONS Any proposed subcontract involving a related party or entity requires prior approval from AHCCCSA, Office of Managed Care. The minimum information required on ownership and control in related party transactions is set by federal law (42 CFR 455.100 through 455.106) and the Program Contractor shall disclose all required information, justify all related party transactions reported, and certify the accuracy and completeness of the disclosures made. The Program Contractor shall demonstrate that transactions occurring between the provider and a related party-in-interest are reasonable, will not adversely affect the fiscal soundness of the Program Contractor, and do not present a conflict of interest. 51. REQUESTS FOR INFORMATION AHCCCSA may, at any time during the term of this contract, request financial or other information from the Program Contractor. Upon receipt of such requests for information, the Program Contractor shall provide complete information as requested no later than 30 days after the receipt of the request unless otherwise specified in the request itself. 52. DATA MANAGEMENT The Program Contractor shall have the capability for all required technical interfaces with AHCCCSA. Refer to the AHCCCS Technical Interface Guidelines in the Bidder's Library for further information. A copy of these guidelines will be provided to the Program Contractor upon contract award. 53. DATA EXCHANGE REQUIREMENT The Program Contractor shall exchange data with AHCCCSA in accordance with the AHCCCS Technical Interface Guidelines. The Program Contractor is responsible for any incorrect data, delayed encounter data submission and any penalty applied due to error, omission, deletion, or erroneous insert caused by data it submitted. Any data that does not meet the standards required by AHCCCSA shall not be accepted by AHCCCSA. The Program Contractor is responsible for identifying any inconsistencies immediately upon receipt of data from AHCCCSA. If any unreported inconsistencies are subsequently discovered, the Program Contractor shall correct its records at its own expense. 34 35 AHCCCSA may require the Program Contractor to provide to AHCCCSA original evidence of service rendered and PCP assignments in a form appropriate for electronic data exchange. The Program Contractor shall be provided with a security code for use in all data transmissions. The Program Contractor agrees that by using its security code, it certifies that any data transmitted is accurate and truthful, to the best of its knowledge. 54. ENCOUNTER DATA REPORTING The accurate and timely reporting of encounter data is crucial to the success of the ALTCS program. AHCCCSA uses encounter data to: Pay reinsurance benefits Set fee-for-service and capitation rates Determine disproportionate share payments to hospitals Evaluate quality of care through quality indicators developed with encounter data The Program Contractor shall submit encounter data to AHCCCSA whenever a contract service has been performed and must be provided by electronic media. This requirement is a condition of the HCFA grant award. Formatting and specific requirements for encounter data are described in AHCCCS Encounter Reporting User Manual and AHCCCS Technical Interface Guidelines, copies of which may be found in the Bidders' Library. Data must be organized into the PMMIS AHCCCSA-supplied formats. The Encounter Record Submission Standards are included herein as Attachment C. Service codes have been established for all six alternative residential (HCBS) settings. The Program Contractor will be required to use these codes in CATS and with their Encounter reporting effective October 1, 1996. These six settings (and therefore the service codes) are considered to include Title XIX services as follows: Adult Care Home: Personal care and homemaker services. Supportive Residential Living: Personal care, homemaker and nursing services Adult Foster Care: Personal care and homemaker services; may include nursing services if the Adult Foster Care sponsor is a registered nurse. Level I Behavioral Health Facility: Personal care, homemaker, behavior management and nursing services. Level II Behavioral Health Facility: Personal care, homemaker and behavior management services. Unclassified Health Care Facility for Personal care, homemaker and nursing the Treatment of Brain Injured: services. 55. SPECIALTY CONTRACTS The Director of AHCCCSA may at any time negotiate or contract on behalf of the Program Contractor and AHCCCSA for specialized hospital and medical services such as organ transplants. If the Director has contracted for such specialized services, the Program Contractor may be required to include such services within its delivery networks and make contractual modifications necessary to carry out this section. Specialty contracts shall take precedence over all other contractual arrangements between the Program Contractor and its providers. If the Program Contractor's specialty contracts are less costly than those of AHCCCSA, AHCCCSA may allow the Program Contractor to continue using its specialty contractors. 35 36 56. SANCTIONS If the Program Contractor violates any provision stated in law, AHCCCS Rules, AHCCCS policies and procedures, or this contract, AHCCCSA may suspend, refuse to renew, or terminate this contract or any related subcontracts in accordance with the terms of this contract and applicable law and regulations, including AHCCCS Rule R9-28-607. AHCCCSA may, in addition to these remedies, impose sanctions in accordance with the provisions of this contract, applicable law and regulations. Written notice will be provided to the Program Contractor specifying the sanction to be imposed, the grounds for such sanction and either the length of suspension or the amount of payment to be withheld. 57. TERM OF CONTRACT and OPTION TO RENEW The term of this contract shall be 10/1/96 through 9/30/97. In addition, AHCCCSA reserves the sole option to extend the term of the contract, not to exceed a total contracting period of three years. The terms and conditions of any such contract extension shall remain the same as the original contract, as amended. Any contract extension shall be through contract amendment. During the term of this contract, the total contracting period may be increased through legislative action from three to five years. When AHCCCSA issues an amendment to extend the contract, the provisions of such extension will be deemed to have been accepted 60 days from the date of mailing by AHCCCSA, even if the extension has not been signed by the Program Contractor, unless within that time the Program Contractor notifies AHCCCSA in writing that it refuses to sign the extension or modification. AHCCCSA will then initiate contract termination proceedings. 58. GRIEVANCE PROCESS AND STANDARDS The Program Contractor shall have in place a written grievance policy for members and providers which defines their rights regarding any adverse action by the Program Contractor. This written policy shall be in accordance with applicable federal and state law and AHCCCS Rules and policies including, but not limited to, ALTCS Rules R9-28-802 through 804. Details of the AHCCCS grievance policy requirements and the Alternative Resolution Process are included herein as Attachment H. The Program Contractor shall maintain a complaint log pertaining to its program, services and provision of care. 59. QUARTERLY GRIEVANCE REPORT A Quarterly Grievance Report shall be submitted to AHCCCSA, Office of Grievance and Appeals and must be received no later than 45 days after the end of each quarter. 60. LEGISLATIVE ISSUES The Arizona Legislature will be considering several bills which will have an impact on AHCCCSA and Program Contractors. AHCCCSA reserves the right to incorporate additional services or programs prior to the award of this contract (through RFP amendment) or subsequent to the awarding of this contract (through contract amendment or a separate RFP). The proposed 1996 AHCCCS Omnibus Bill includes the following provisions: 36 37 a. INPATIENT HOSPITAL REIMBURSEMENT - Currently, AHCCCS health plans and program contractors may negotiate inpatient hospital reimbursement rates or default to the AHCCCS tiered per diem rate. Since AHCCCS wants to encourage more competitive rates, the default option will be removed in Maricopa and Pima counties and health plans and program contractors operating in those two counties will be required to negotiate inpatient hospital rates directly with at least one hospital in Maricopa or Pima county, as appropriate. b. ALTCS PREADMISSION SCREENING PROCESS - This would explicitly allow a physician to review ALTCS eligibility cases and make a final decision based on medical judgment. c. LUNG AND HEART/LUNG TRANSPLANTS - Various technical amendments to the October 1995 legislation which authorized these transplants and an extended eligibility process will be enacted. d. SUBMITTAL DATE FOR DISPROPORTIONATE SHARE (DSH) PAYMENT DATA - Currently, DSH payments are based on data received from the health plans and hospitals as of July 1, 1995. AHCCCSA is requesting that this date be changed to December 31 to allow the health plans and hospitals additional time to submit accurate and complete data. e. MEMBER FRAUD - Current AHCCCS statutes on member fraud will be amended to include criminal and civil penalties for anyone who aids and abets fraudulent activities. f. CONTRACT STATUTES - Maximum terms for ALTCS and acute care contracts would be extended to five years from the present four years (for acute) and three years (for ALTCS). Also, the term "Invitation For Bid" would be replaced by the more appropriate "Request For Proposal". g. EXTEND RULE-MAKING EXEMPTION - In 1994, the Legislature authorized a one-year exemption from rule-making so that AHCCCS could implement a Medicare/Medicaid dual eligible waiver and an on-reservation managed care pilot program waiver. Since HCFA has not approved these waivers, AHCCCS will request that the rule-making exemption be extended to June 30, 1997. h. EFFECTIVE DATE OF ENROLLMENT - Effective date of Program Contractor responsibility would be the date it received notification of the new member from AHCCCSA. Current effective date is two days after the date of notification. Other AHCCCS-related issues which may be introduced by interested parties will: - Use tobacco tax money for various reasons. Provide temporary financial assistance to Gila, Cochise, Pinal, and Santa Cruz counties and set up a legislative committee to explore permanent relief. - Authorize Supported Residential Living Centers as permanent settings under ALTCS. - Select two AHCCCS health plans in Maricopa County to provide Title XIX and general behavioral health and substance abuse services to AHCCCS eligible persons. [END OF SECTION D] 37 38 SECTION E - CONTRACT CLAUSES TABLE OF CONTENTS [TO BE REVISED FOR FINAL DRAFT] Advertising And Promotion Of Contract .................................... 36 Americans With Disabilities Act .......................................... 40 Applicable Law .......................................................... 34 Assignment And Delegation ................................................ 35 Audit .................................................................... 38 Authority ................................................................ 34 Changes .................................................................. 39 Compliance With Applicable Laws, Rules And Regulations .................. 35 Conflict Of Interest ..................................................... 40 Contract Interpretation And Amendment .................................... 34 Covenant Against Contingent Fees ......................................... 39 Disclosure Of Confidential Information ................................... 41 Disputes ................................................................. 39 Effective Date ........................................................... 38 General Indemnification .................................................. 35 Gratuities ............................................................... 36 Incorporation By Reference ............................................... 39 Indemnification -- Patent And Copyright .................................. 35 Insurance ................................................................ 38 No Guaranteed Quantities ................................................. 40 Non-Discrimination ....................................................... 38 Non-Exclusive Remedies ................................................... 38 Payments ................................................................. 35 Property Of The State .................................................... 36 Records .................................................................. 34 Relationship Of Parties .................................................. 35 Right Of Offset .......................................................... 37 Right To Assurance ....................................................... 36 Right To Inspect Plant Or Place Of Business .............................. 39 Severability ............................................................. 34 Subcontracts ............................................................. 35 Suspension Or Debarment .................................................. 37 Termination - Availability Of Funds ...................................... 37 Termination For Conflict Of Interest ..................................... 36 Termination For Convenience .............................................. 37 Termination For Default .................................................. 37 Third Party Antitrust Violations ......................................... 36 Transition Activities .................................................... 40 Type Of Contract ......................................................... 40 38 39 SECTION E - CONTRACT CLAUSES 1. APPLICABLE LAW Arizona Law - The law of Arizona applies to this contract including, where applicable, the Uniform Commercial Code, as adopted in the State of Arizona. Implied Contract Terms - Each provision of law and any terms required by law to be in this contract are a part of this contract as if fully stated in it. 2. AUTHORITY This contract is issued under the authority of the Contracting Officer who signed this contract. Changes to the contract, including the addition of work or materials, the revision of payment terms, or the substitution of work or materials, directed by an unauthorized state employee or made unilaterally by the Program Contractor are violations of the contract and of applicable law. Such changes, including unauthorized written contract amendments, shall be void and without effect, and the Program Contractor shall not be entitled to any claim under this contract based on those changes. 3. CONTRACT INTERPRETATION AND AMENDMENT No Parol Evidence - This contract is intended by the parties as a final and complete expression of their agreement. No course of prior dealings between the parties and no usage of the trade shall supplement or explain any term used in this contract. No Waiver - Either party's failure to insist on strict performance of any term or condition of the contract shall not be deemed a waiver of that term or condition even if the party accepting or acquiescing in the non-conforming performance knows of the nature of the performance and fails to object to it. Written Contract Amendments - The contract shall be modified only through a written contract amendment within the scope of the contract signed by the procurement officer on behalf of the State. 4. RECORDS Under ARS Section 35-214 and Section 35-215 the Program Contractor shall retain, and shall contractually require each subcontractor to retain all data and other records relating to the acquisition and performance of the contract for a period of five years after the completion of the contract. All records shall be subject to inspection and audit by the State at reasonable times. Upon request, the Program Contractor shall produce a copy of any or all such records. 5. SEVERABILITY The provisions of this contract are severable to the extent that any provision or application held to be invalid shall not affect any other provision or application of the contract which may remain in effect without the invalid provision or application. 6. RELATIONSHIP OF PARTIES 39 40 The Program Contractor under this contract is an independent contractor. Neither party to this contract shall be deemed to be the employee or agent of the other party to the contract. 7. ASSIGNMENT AND DELEGATION The Program Contractor shall not assign any right nor delegate any duty under this contract without prior written approval of the Contracting Officer, who will not unreasonably withhold such approval. 8. GENERAL INDEMNIFICATION The Program Contractor shall defend, indemnify and hold harmless the State from any claim, demand, suit, liability, judgment and expense (including attorney's fees and other costs of litigation) arising out of or relating to injury, disease, or death of persons or damage to or loss of property resulting from or in connection with the negligent performance of this contract by the Program Contractor, its agents, employees, and subcontractors or anyone for whom the Program Contractor may be responsible. The obligations, indemnities and liabilities assumed by the Program Contractor under this paragraph shall not extend to any liability caused by the negligence of the State or its employees. The Program Contractor's liability shall not be limited by any provisions or limits of insurance set forth in this contract. The State shall reasonably notify the Program Contractor of any claim for which it may be liable under this paragraph. 9. INDEMNIFICATION -- PATENT AND COPYRIGHT The Program Contractor shall defend, indemnify and hold harmless the State against any liability including costs and expenses for infringement of any patent, trademark or copyright arising out of contract performance or use by the State of materials furnished or work performed under this contract. The State shall reasonably notify the Program Contractor of any claim for which it may be liable under this paragraph. 10. SUBCONTRACTS All subcontracts entered into by the Program Contractor are subject to prior review and approval by AHCCCSA, Contracts and Purchasing, and shall incorporate by reference the terms and conditions of this contract. Each subcontract must contain verbatim all the provisions of Attachment A, Minimum Subcontract Provisions. In addition, each subcontract must contain the following: a. Full disclosure of the method and amount of compensation or other consideration to be received by the subcontractor. b. Identification of the name and address of the subcontractor. c Identification of the population, to include patient capacity, to be covered by the subcontractor. d. The amount, duration and scope of medical services to be provided, and for which compensation will be paid. e. The term of the subcontract including beginning and ending dates, methods of extension, termination and renegotiation. f. The specific duties of the subcontractor relating to coordination of benefits and determination of third-party liability. g. A description of the subcontractor's patient, medical and cost record keeping system. h. Specification that the subcontractor shall cooperate with quality assurance programs and comply with the utilization control and review procedures specified in 42 C.F.R. Part 456, as implemented by AHCCCSA. 40 41 i. A provision that the subcontractor agrees to identify Medicare and other third-party liability coverage and to seek such Medicare or third-party liability payment before submitting claims to the Contractor/ Program Contractor. j. A provision stating that a merger, reorganization or change in ownership of a subcontractor that is related to or affiliated with the Contractor/ Program Contractor shall require a contract amendment and prior approval of AHCCCSA. k. Procedures for enrollment or re-enrollment of the covered population. l. A provision that the subcontractor shall be fully responsible for all tax obligations, Worker's Compensation Insurance, and all other applicable insurance coverage obligations which arise under this subcontract, for itself and its employees, and that AHCCCSA shall have no responsibility or liability for any such taxes or insurance coverage. m. A provision that the subcontractor must obtain any necessary authorization from the Contractor or AHCCCSA for services provided to eligible and/or enrolled members. n. A provision that the subcontractor must comply with encounter reporting and claims submission requirements as described in the subcontract. 11. COMPLIANCE WITH APPLICABLE LAWS, RULES AND REGULATIONS The materials and services supplied under this contract shall comply with all applicable federal, state and local laws, and the Program Contractor shall maintain all applicable licenses and permits. 12. PAYMENTS The Program Contractor shall be paid as specified in the contract. Payment must comply with requirements of ARS Title 35. AHCCCSA reserves the option to make payments to the Program Contractor by wire or NACHA transfer and will provide the Program Contractor at least 30 days notice prior to the effective date of any such change. 13. ADVERTISING AND PROMOTION OF CONTRACT The Program Contractor shall not advertise or publish information for commercial benefit concerning this contract without the prior written approval of the Contracting Officer. 14. PROPERTY OF THE STATE Any materials, including reports, computer programs and other deliverables, created under this contract are the sole property of AHCCCSA. The Program Contractor is not entitled to a patent or copyright on those materials and may not transfer the patent or copyright to anyone else. The Program Contractor shall not use or release these materials without the prior written consent of AHCCCSA. 15. THIRD PARTY ANTITRUST VIOLATIONS The Program Contractor assigns to the State any claim for overcharges resulting from antitrust violations to the extent that those violations concern materials or services supplied by third parties to the Program Contractor toward fulfillment of this contract. 16. RIGHT TO ASSURANCE 41 42 If AHCCCSA, in good faith, has reason to believe that the Program Contractor does not intend to perform or continue performing this contract, the procurement officer may demand in writing that the Program Contractor give a written assurance of intent to perform. The demand shall be sent to the Program Contractor by certified mail, return receipt required. Failure by the Program Contractor to provide written assurance within the number of days specified in the demand may, at the State's option, be the basis for terminating the contract. 17. TERMINATION FOR CONFLICT OF INTEREST AHCCCSA may cancel this contract without penalty or further obligation if any person significantly involved in initiating, negotiating, securing, drafting or creating the contract on behalf of AHCCCSA is, or becomes at any time while the contract or any extension of the contract is in effect, an employee of, or a consultant to, any other party to this contract with respect to the subject matter of the contract. The cancellation shall be effective when the Program Contractor receives written notice of the cancellation unless the notice specifies a later time. 18. GRATUITIES AHCCCSA may, by written notice to the Program Contractor, immediately terminate this contract if it determines that employment or a gratuity was offered or made by the Program Contractor or a representative of the Program Contractor to any officer or employee of the State for the purpose of influencing the outcome of the procurement or securing the contract, an amendment to the contract, or favorable treatment concerning the contract, including the making of any determination or decision about contract performance. AHCCCSA, in addition to any other rights or remedies, shall be entitled to recover exemplary damages in the amount of three times the value of the gratuity offered by the Program Contractor. 19. SUSPENSION OR DEBARMENT AHCCCSA may, by written notice to the Program Contractor, immediately terminate this contract if it determines that the Program Contractor has been debarred, suspended or otherwise lawfully prohibited from participating in any public procurement activity. 20. TERMINATION FOR CONVENIENCE AHCCCSA reserves the right to terminate the contract in whole or in part at any time for the convenience of the State without penalty or recourse. The Contracting Officer shall give written notice by certified mail, return receipt requested, to the Program Contractor of the termination at least 90 days before the effective date of the termination. Upon receipt of the written notice, the Program Contractor shall stop all work and immediately notify all subcontractors to do the same. In the event of termination under this paragraph, all documents, data and reports prepared by the Program Contractor under the contract shall become the property of and be delivered to AHCCCSA. The Program Contractor shall be entitled to receive just and equitable compensation for work in progress, work completed and materials accepted before the effective date of the termination. 21. TERMINATION FOR DEFAULT AHCCCSA reserves the right to terminate the contract in whole or in part due to the failure of the Program Contractor to comply with any term or condition of the contract or to make satisfactory progress in performing the 42 43 contract. The Contracting Officer shall mail written notice of the termination and the reason(s) for it to the Program Contractor by certified mail, return receipt requested. Upon termination under this paragraph, all documents, data, and reports prepared by the Program Contractor under the contract shall become the property of and be delivered to AHCCCSA on demand. AHCCCSA may, upon termination of this contract, procure, on terms and in the manner that it deems appropriate, materials or services to replace those under this contract. The Program Contractor shall be liable for any excess costs incurred by AHCCCSA in re-procuring the materials or services. 22. TERMINATION - AVAILABILITY OF FUNDS Funds are not presently available for performance under this contract beyond the current fiscal year. No legal liability on the part of AHCCCSA for any payment may arise under this contract until funds are made available for performance of this contract. 23. RIGHT OF OFFSET AHCCCSA shall be entitled to offset against any amounts due the Program Contractor any expenses or costs incurred by AHCCCSA concerning the Program Contractor's non-conforming performance or failure to perform the contract. 24. NON-EXCLUSIVE REMEDIES The rights and the remedies of AHCCCSA under this contract are not exclusive. 25. AUDIT At any time during the term of this contract, the Program Contractor's or any subcontractor's books and records shall be subject to audit by AHCCCSA and, where applicable, the federal government, to the extent that the books and records relate to the performance of the contract or subcontracts. 26. NON-DISCRIMINATION The Program Contractor shall comply with State Executive Order No. 75-5, which mandates that all persons, regardless of race, color, religion, sex, national origin or political affiliation, shall have equal access to employment opportunities, and all other applicable federal and state laws, rules and regulations, including the Americans with Disabilities Act. The Program Contractor shall take positive action to ensure that applicants for employment, employees, and persons to whom it provides service are not discriminated against due to race, creed, color, religion, sex, national origin or disability. 27. EFFECTIVE DATE The effective date of this contract shall be the date that the Contracting Officer signs the award page (page 1) of this contract. 43 44 28. INSURANCE A certificate of insurance naming the State of Arizona and AHCCCSA as the "additional insured" must be submitted to AHCCCSA within 10 days of notification of contract award and prior to commencement of any services under this contract. This insurance shall be provided by carriers rated as "A+" or higher by the A.M. Best Rating Service. The following types and levels of insurance coverage are required for this contract: a. Commercial General Liability: Provides coverage of at least $1,000,000 for each occurrence for bodily injury and property damage to others as a result of accidents on the premises of or as the result of operations of the Program Contractor. b. Commercial Automobile Liability: Provides coverage of at least $1,000,000 for each occurrence for bodily injury and property damage to others resulting from accidents caused by vehicles operated by the Program Contractor. c. Workers Compensation: Provides coverage to employees of the Program Contractor for injuries sustained in the course of their employment. Coverage must meet the obligations imposed by federal and state statutes and must also include Employer's Liability minimum coverage of $100,000. Evidence of qualified self-insured status will also be considered. d. Professional Liability (if applicable): Provides coverage for alleged professional misconduct or lack of ordinary skills in the performance of a professional act of service. The above coverages may be evidenced by either one of the following: a. The State of Arizona Certificate of Insurance: This is a form with the special conditions required by the contract already pre-printed on the form. The Program Contractor's agent or broker must fill in the pertinent policy information and ensure the required special conditions are included in the Program Contractor's policy. b. The Acord form: This standard insurance industry certificate of insurance does not contain the pre-printed special conditions required by this contract. These conditions must be entered on the certificate by the agent or broker and read as follows: The State of Arizona and Arizona Health Care Cost Containment System are hereby added as additional insureds. Coverages afforded under this Certificate shall be primary and any insurance carried by the State or any of its agencies, boards, departments or commissions shall be in excess of that provided by the insured Program Contractor. No policy shall expire, be canceled or materially changed without 30 days written notice to the State. This Certificate is not valid unless countersigned by an authorized representative of the insurance company. 29. DISPUTES The exclusive manner for the Program Contractor to assert any claim, grievance, dispute or demand against AHCCCSA shall be in accordance with AHCCCS Rule R9-28-804(C). Pending the final resolution of any disputes involving this contract, the Program Contractor shall proceed with performance of this contract in accordance with AHCCCSA's instructions, unless AHCCCSA specifically, in writing, requests termination or a temporary suspension of performance. 30. RIGHT TO INSPECT PLANT OR PLACE OF BUSINESS 44 45 AHCCCSA may, at reasonable times, inspect the part of the plant or place of business of the Program Contractor or subcontractor which is related to the performance of this contract, in accordance with ARS Section 41-2547. 31. INCORPORATION BY REFERENCE This solicitation and all attachments and amendments, the Program Contractor's proposal, best and final offer accepted by AHCCCSA, and any approved subcontracts are hereby incorporated by reference into the contract. 32. COVENANT AGAINST CONTINGENT FEES The Program Contractor warrants that no person or agency has been employed or retained to solicit or secure this contract upon an agreement or understanding for a commission, percentage, brokerage or contingent fee. For violation of this warranty, AHCCCSA shall have the right to annul this contract without liability. 33. CHANGES AHCCCSA may at any time, by written notice to the Program Contractor, make changes within the general scope of this contract. If any such change causes an increase or decrease in the cost of, or the time required for, performance of any part of the work under this contract, the Program Contractor may assert its right to an adjustment in compensation paid under this contract. The Program Contractor must assert its right to such adjustment within 30 days from the date of receipt of the change notice. Any dispute or disagreement caused by such notice shall constitute a dispute within the meaning of Paragraph 29 (this Section), and be administered accordingly. 34. TYPE OF CONTRACT Firm Fixed-Price 35. AMERICANS WITH DISABILITIES ACT People with disabilities may request special accommodations such as interpreters, alternative formats or assistance with physical accessibility. Requests for special accommodations must be made with at least three days prior notice by calling (602) 417-4577. 36. WARRANTY OF SERVICES The Program Contractor warrants that all services provided under this contract will conform to the requirements stated herein. AHCCCSA's acceptance of services provided by the Program Contractor shall not relieve the Program Contractor from its obligations under this warranty. In addition to its other remedies, AHCCCSA may, at the Program Contractor's expense, require prompt correction of any services failing to meet the Program Contractor's warranty herein. Services corrected by the Program Contractor shall be subject to all of the provisions of this contract in the manner and to the same extent as the services originally furnished. 37. NO GUARANTEED QUANTITIES AHCCCSA does not guarantee the Program Contractor any minimum or maximum quantity of services or goods to be provided under this contract. 45 46 38. TRANSITION ACTIVITIES Upon the expiration of this contract, AHCCCSA anticipates a continued need for the services described herein. In the event the new contract is awarded to a different program contractor, the outgoing Program Contractor shall work closely with the incoming program contractor's personnel and AHCCCSA staff to ensure an efficient transfer of duties and responsibilities. All transition activities will be coordinated by AHCCCSA and a transition plan will be developed to facilitate the transfer. AHCCCSA reserves the right to determine which, if any, unfinished projects will remain with the outgoing Program Contractor for completion. 39. CONFLICT OF INTEREST The Program Contractor shall not undertake any work that represents a potential conflict of interest, or which is not in the best interest of AHCCCSA or the State without prior written approval by AHCCCSA. The Program Contractor shall fully and completely disclose any situation which may present a conflict of interest. If the Program Contractor is now performing or elects to perform during the term of this contract any services for any AHCCCS health plan, provider or Program Contractor or an entity owning or controlling same, the Program Contractor shall disclose this relationship prior to accepting any assignment involving such party 40. DISCLOSURE OF CONFIDENTIAL INFORMATION The Program Contractor shall not, without prior written approval from AHCCCSA, either during or after the performance of the services required by this contract, use, other than for such performance, or disclose to any person other than AHCCCSA personnel with a need to know, any information, data, material, or exhibits created, developed, produced, or otherwise obtained during the course of the work required by this contract. This nondisclosure requirement shall also pertain to any information contained in reports, documents, or other records furnished to the Program Contractor by AHCCCSA. [END OF SECTION E] 46 47 SECTION F - LIST OF ATTACHMENTS Attachment A - Subcontract provisions Attachment B - Service area minimum network standards Attachment C - Encounter record submission standards Attachment D - Management services subcontractor statement Attachment E - Sample letter of intent Attachment F - Instructions for preparing capitation disk Attachment G - Instructions for preparing nursing home network disk Attachment H - Grievance process and standards Attachment I - Service area maps Attachment J - Offeror's checklist 47 48 SECTION G - REPRESENTATIONS AND CERTIFICATIONS 1. CERTIFICATION OF ACCURACY OF INFORMATION PROVIDED By signing this offer the Offeror certifies, under penalty of law, that the information provided herein is true, correct and complete to the best of Offeror's knowledge and belief. Offeror also acknowledges that should investigation at any time disclose any misrepresentation or falsification, any subsequent contract may be terminated by AHCCCSA without penalty to or further obligation by AHCCCSA. 2. CERTIFICATION OF NON-COERCION By signing this offer the Offeror certifies, under penalty of law, that it has not made to any provider any requests or inducements not to contract with another potential program contractor in relation to this solicitation. 3. CERTIFICATION OF COMPLIANCE - ANTI-KICKBACK / LABORATORY TESTING By signing this offer, the Offeror certifies that it has not engaged and will not engage in any violation of the Medicare Anti-Kickback or the "Stark I" and "Stark II" laws governing related-entity and compensation therefrom. If the Offeror provides laboratory testing, it certifies that it has complied with and has sent to AHCCCSA simultaneous copies of the information required to be sent to the Health Care Financing Administration. (See 42 USC Sections 1320a-7b, PL 101-239, PL 101-432, and 42 CFR Section 411.361.) 4. AUTHORIZED SIGNATORY Authorized Signatory for ______________________________________________________ [OFFEROR'S Name] ______________________________________, ____________________________________ [INDIVIDUAL'S Name] [Title] is the person authorized to sign this contract on behalf of Offeror. 5. OFFEROR'S MAILING ADDRESS AHCCCSA should address all notices relative to this offer to the attention of: ________________________________________________________________________ Name Title ________________________________________________________________________ Address Telephone Number ________________________________________________________________________ City State ZIP 6. ORGANIZATION STRUCTURE 48 49 The Offeror must complete and return this questionnaire on organization structure. Include all items requested in this section. Make sure that each questionnaire item is completed and that full disclosure is made. When making attachments to this section, please refer to the question number and the item heading. a. ORGANIZATION CHART Attach a copy of the Offeror's staff organization chart, setting forth lines of authority, responsibility and communication which will pertain to this proposal. Provide an overall organizational chart and separate organizational charts for each functional area which includes the number of current or proposed full-time employees in each area. b. IF OTHER THAN A GOVERNMENT AGENCY, WHEN WAS YOUR ORGANIZATION FORMED? ___________________ c. LICENSE/CERTIFICATION Attach a list of all licenses and certifications (e.g. federal HMO status or State certifications) your organization maintains. Use a separate sheet of paper listing the license requirements and the renewal dates. Have any licenses in accordance with ARS Section 20-1065 et. seq., been denied, revoked or suspended within the past 10 years? Yes _____ No _____ If yes, please explain on a separate sheet. d. CIVIL RIGHTS COMPLIANCE DATA Has any federal or state agency ever made a finding of noncompliance with any civil rights requirements with respect to your program? Yes _____ No_____ If yes, please explain on a separate sheet. e. HANDICAPPED ASSURANCE Does your organization provide assurance that no qualified handicapped person will be denied benefits of or excluded from participation in a program or activity because the Offeror's facilities (including subcontractors) are inaccessible to or unusable by handicapped persons? (Note: Check local zoning ordinances for handicapped requirements). Yes____ No____ If yes, describe on a separate sheet how such assurance is provided. If no, describe how your organization is taking affirmative steps to provide assurance. f. PRIOR CONVICTIONS List on a separate sheet all felony convictions within the past 15 years of any key personnel (i.e., Administrator, financial officers, major stockholders or those with controlling interest, etc.). Failure to make full and complete disclosure shall result in the rejection of your proposal. g. FEDERAL GOVERNMENT SUSPENSION/EXCLUSION Has Offeror been suspended or excluded from any federal government programs for any reason? Yes_____ No_____ If yes, please explain on a separate sheet. 7. FINANCIAL PLANNING a. ORGANIZATIONAL STRUCTURE - The Offeror must describe the entity that is requesting to contract with AHCCCSA. An entity is defined as any unit, existing or to be formed, for which financial statements could be prepared in accordance with generally accepted accounting principles. Offeror's description of the entity shall include, at a minimum, the following: The date the entity was or will be formed and its legal status as an entity (i.e., Individual, Partnership, Corporation). Offeror's description should clearly identify the entity's relationship to any other organization. The name of accounting firm or individual who performed the audit, if entity is currently audited. Attach a copy of the most recent audited financial statements. If entity has not been audited within the last two years, or has never been audited, please attach a copy of the most recent annual unaudited financial statements. 49 50 Explanation of how the initial capitalization and performance bond requirements, as described in Section D of this solicitation, will be met. Description of the principal allocation techniques used or proposed to be used for allocating indirect costs (including administrative costs) reflected in the entity's financial statements. A list of the types of liability insurance covering your entity. Include the amount of coverage and the name and address of the carrier. A description of any suits, judgments, tax deficiencies, claims or any other contingencies pending against the Offeror. Indicate the assessed and expected financial impact for each item. The date and type of each bankruptcy if the Offeror or its owner(s) has ever filed bankruptcy b. RECEIVED BUT UNPAID CLAIMS (RBUCS) AND INCURRED BUT NOT RECEIVED (IBNRS) Describe the method to be used for evaluating the claims liability for claims received by the Offeror but not yet adjudicated. These claims are more commonly referred to by AHCCCSA as Received But Unpaid Claims (RBUCs). Describe the method to be used for evaluating the claims liability for IBNR claims. This description should address the frequency that projections are performed and major data sources used in the IBNR calculation. The description should also include how the Offeror will validate the accuracy of the IBNR amounts. The Offeror shall provide a copy of their IBNR procedures and a summary of their IBNR practices. These procedures and practices must adequately support Offeror's response to the above IBNR descriptions. c. CLAIMS PROCESSING SYSTEM - Describe in detail how you will assure encounter data is submitted to AHCCCSA within the standards established in Attachment C. Describe your claims processing system. Offeror's description shall include a description of: - Security and access controls to the processing system, both physical and software - Claim processor edit overrides available and the reporting and monitoring of the use of the overrides, including authorization procedures and procedures for the review of the reported over-rides. - Use of prior authorizations including authority to make changes to prior authorizations - Audit trails produced for claims adjustments. - Timelines for claims payments - Post-payment review of processed claims - Medical claims review - Remittance advice d. FINANCIAL PROJECTIONS - Offeror must submit prospective financial statements for each of the three years ending September 30, 1997, 1998, and 1999. Additionally, current program contractors responding to this solicitation must also submit prospective financial statements for the year ending September 30, 1996. The prospective financial statements shall include all applicable information on the Balance Sheet, the Statement of Revenue and Expenses and Changes in Plan Equity. Fields that are not completed on the financial projections will be assumed to be zero. The financial projections must be consistent with the service areas the Offeror has requested and the capitation rates bid by the Offeror for the requested areas. Assumptions used in preparing the financial projections should be clearly stated. e. WAS AN ACTUARIAL FIRM USED TO ASSIST IN DEVELOPING CAPITATION RATES? Yes_____ No_____ 50 51 If yes, what is name of actuary and actuarial firm?__________________________________________ f. DID A FIRM OR ORGANIZATION PROVIDE THE OFFEROR WITH ANY ASSISTANCE IN MAKING THIS OFFER (TO INCLUDE DEVELOPING CAPITATION RATES OR PROVIDING ANY OTHER TECHNICAL ASSISTANCE)? Yes_____ No_____ If yes, what is the name of this firm or organization? ________________________________________________________________________________ Name ________________________________________________________________________________ Address City State g. HAS THE OFFEROR CONTRACTED OR ARRANGED FOR MANAGEMENT INFORMATION SYSTEMS, SOFTWARE OR HARDWARE, FOR THE TERM OF THE CONTRACT? Yes_____ No_____ If yes, is the Management Information System being obtained from a vendor? Yes _____ No_____ If yes, please provide on a separate sheet the vendor's name, the vendor's background with AHCCCSA, the vendor's background with other HMOs, and the vendor's background with other Medicaid programs. 8. FINANCIAL DISCLOSURE STATEMENT Offeror must provide the following information as required by 42 CFR 455.103. This Financial Disclosure Statement shall be prepared as of 3/31/96. However, continuing offerors who have filed the required Financial Disclosure Statement within the last 12 months need not complete this section if no significant changes have occurred since the last filing. LIST THE NAME AND ADDRESS OF EACH PERSON WITH AN OWNERSHIP OR CONTROLLING INTEREST, AS DEFINED BY 42 CFR 455.101, IN THE ENTITY SUBMITTING THIS OFFER: Percent of Name Address Ownership or Control ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ LIST THE NAME AND ADDRESS OF EACH PERSON WITH AN OWNERSHIP OR CONTROL INTEREST IN ANY SUBCONTRACTOR IN WHICH THE DISCLOSING ENTITY HAS DIRECT OR INDIRECT OWNERSHIP OF 5% OR MORE: Percent of Name Address Ownership or Control ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Names of above persons who are related to one another as spouse, parent, child or sibling: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 51 52 LIST THE NAME OF ANY OTHER DISCLOSING ENTITY IN WHICH A PERSON WITH AN OWNERSHIP OR CONTROL INTEREST IN THE DISCLOSING ENTITY ALSO HAS AN OWNERSHIP OR CONTROL INTEREST: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ LIST THE OWNERSHIP OF ANY SUBCONTRACTOR WITH WHOM THE OFFEROR HAS HAD BUSINESS TRANSACTIONS TOTALING MORE THAN $25,000 DURING THE 12-MONTH PERIOD ENDING ON THE DATE OF THE REQUEST: Describe Ownership Type of Business Dollar Amount of Subcontractors Transaction with Provider of Transaction ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ LIST ANY SIGNIFICANT BUSINESS TRANSACTIONS, AS DEFINED IN 42 CFR 455.101, BETWEEN THE OFFEROR AND ANY WHOLLY-OWNED SUPPLIER OR BETWEEN THE OFFEROR AND ANY SUBCONTRACTOR DURING THE FIVE-YEAR PERIOD ENDING ON THE DATE OF THE OFFER: Describe Ownership Type of Business Dollar Amount of Subcontractors Transaction with Provider of Transaction ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ LIST THE NAME OF ANY PERSON WHO HAS OWNERSHIP OR CONTROL INTEREST IN THE OFFEROR, OR IS AN AGENT OR MANAGING EMPLOYEE OF THE OFFEROR AND HAS BEEN CONVICTED OF A CRIMINAL OFFENSE RELATED TO THAT PERSON'S INVOLVEMENT IN ANY PROGRAM UNDER MEDICARE, MEDICAID OR THE TITLE XX SERVICES PROGRAM SINCE THE INCEPTION OF THOSE PROGRAMS: Name Address Title ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ LIST NAME AND ADDRESS OF EACH CREDITOR WHOSE LOANS OR MORTGAGES EXCEED 5% OF TOTAL OFFEROR EQUITY AND ARE SECURED BY ASSETS OF THE OFFEROR'S COMPANY. Description Amount Name Address of Debt of Security ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 52 53 9. RELATED PARTY TRANSACTIONS OMC] LIST THE NAMES AND ADDRESSES OF THE BOARD OF DIRECTORS OF THE OFFEROR. Name/Title Address ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ LIST NAMES AND TITLES OF THE 10 HIGHEST COMPENSATED MANAGEMENT PERSONNEL INCLUDING BUT NOT LIMITED TO THE CHIEF EXECUTIVE OFFICER, THE CHIEF FINANCIAL OFFICER, BOARD CHAIRMAN, BOARD SECRETARY, AND BOARD TREASURER: Name Title ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ DESCRIBE TRANSACTIONS BETWEEN THE OFFEROR AND ANY RELATED PARTY IN WHICH A TRANSACTION OR SERIES OF TRANSACTIONS DURING ANY ONE FISCAL YEAR EXCEEDS THE LESSER OF $10,000 OR 2% OF THE TOTAL OPERATING EXPENSES OF THE DISCLOSING ENTITY. LIST PROPERTY, GOODS, SERVICES AND FACILITIES IN DETAIL NOTING THE DOLLAR AMOUNTS OR OTHER CONSIDERATION FOR EACH TRANSACTION AND THE DATE THEREOF. INCLUDE A JUSTIFICATION AS TO (1) THE REASONABLENESS OF THE TRANSACTION, (2) ITS POTENTIAL ADVERSE IMPACT ON THE FISCAL SOUNDNESS OF THE DISCLOSING ENTITY, AND (3) THAT THE TRANSACTION IS WITHOUT CONFLICT OF INTEREST: a) THE SALE, EXCHANGE OR LEASING OF ANY PROPERTY: Description of Name of Related Party Dollar Amount for Transaction and Relationship Reporting Period ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Justification: 53 54 ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ b) THE FURNISHING OF GOODS, SERVICES OR FACILITIES FOR CONSIDERATION: Description of Name of Related Party Dollar Amount for Transaction and Relationship Reporting Period ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Justification: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ c) DESCRIBE ALL TRANSACTIONS BETWEEN OFFEROR AND ANY RELATED PARTY WHICH INCLUDES THE LENDING OF MONEY, EXTENSIONS OF CREDIT OR ANY INVESTMENT IN A RELATED PARTY. THIS TYPE OF TRANSACTION REQUIRES REVIEW AND APPROVAL IN ADVANCE BY THE OFFICE OF THE DIRECTOR: Description of Name of Related Party Dollar Amount for Transaction and Relationship Reporting Period ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Justification: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ d) LIST THE NAME AND ADDRESS OF ANY INDIVIDUAL WHO OWNS OR CONTROLS MORE THAN 10% OF STOCK OR THAT HAS A CONTROLLING INTEREST (I.E.FORMULATES, DETERMINES OR VETOES BUSINESS POLICY DECISIONS): Has Controlling Owner Or Interest? 54 55 Name Address Controller Yes / No ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 10. OFFEROR'S ADMINISTRATIVE FUNCTIONS SUBCONTRACTORS Offeror must identify any organizational or administrative functions (e.g. claims processing, marketing, automated data processing, accounting) or key personnel (e.g. administrator, medical director, chief financial officer, etc.) which are subcontracted. Subcontractor's Name:___________________________________________________________ Address:________________________________________________________________________ Method Of Payment:______________________________________________________________ Function Performed:_____________________________________________________________ Estimated Value Of Contract: 10/1/96 - 9/30/97 $___________________ 10/1/97 - 9/30/98 $___________________ 10/1/98 - 9/30/99 $___________________ Subcontractor's Name:___________________________________________________________ Address:________________________________________________________________________ Method Of Payment:______________________________________________________________ Function Performed:_____________________________________________________________ Estimated Value Of Contract: 10/1/96 - 9/30/97 $___________________ 10/1/97 - 9/30/98 $___________________ 10/1/98 - 9/30/99 $___________________ Subcontractor's Name:___________________________________________________________ Address:________________________________________________________________________ Method Of Payment:______________________________________________________________ Function Performed:_____________________________________________________________ Estimated Value Of Contract: 10/1/96 - 9/30/97 $____________________ 10/1/97 - 9/30/98 $____________________ 10/1/98 - 9/30/99 $____________________ Subcontractor's Name:___________________________________________________________ Address:________________________________________________________________________ Method Of Payment:______________________________________________________________ Function Performed:_____________________________________________________________ 55 56 Estimated Value Of Contract: 10/1/96 - 9/30/97 $_____________________ 10/1/97 - 9/30/98 $_____________________ 10/1/98 - 9/30/99 $_____________________ 11. OFFEROR'S KEY PERSONNEL Indicate the names of the persons filling the following positions and the date (month/year) they began, or will begin, their staff assignment. In addition, the Offeror must attach detailed professional resumes for all key personnel to include, at a minimum, the following: Position: Name: Starting Date: # of AHCCCS hours per week Administrator Medical Director Financial Officer Quality Mgt. Coordinator Case Management Coordinator Claims Administrator Behavioral Health Coordinator Grievance Coordinator [END OF SECTION G] 56 57 SECTION H - INSTRUCTIONS TO OFFERORS TABLE OF CONTENTS 1. Proposal Content and Format..............................................59 2. AHCCCSA Bidders' Library.................................................59 3. Proprietary Information..................................................60 4. Prospective Offerors' Inquiries..........................................60 5. Prospective Offerors' Conference.........................................60 6. Federal Deadline for Signing Contract....................................61 7. Withdrawal of Proposal...................................................61 8. Amendments to RFP........................................................61 9. General Matters..........................................................61 10. Provider Network and Network Management..................................61 11. Capitation Rate................................ERROR! BOOKMARK NOT DEFINED. 12. Program Operations.......................................................63 13. Organization.............................................................64 14. Certificate of Insurance.................................................65 15. Data Management..........................................................65 16. Amendments...............................................................65 17. Submission of Initial Proposal On Most Favorable Terms...................66 18. Proposal Opening.........................................................66 19. Proposal Discussions.....................................................66 20. Best and Final Offers....................................................66 21. Award of Contract........................................................66 22. RFP Milestone Dates......................................................67 57 58 SECTION H - INSTRUCTIONS TO OFFERORS Note: This RFP document does not describe the entire ALTCS program in complete detail. The Offeror, therefore, is encouraged to make use of the Bidders' Library and review the material incorporated by reference throughout the document. See Paragraph 2 below. CONTINUING OFFERORS ONLY: For items below followed by an asterisk [*], a continuing ALTCS offeror must submit its proposal for that item only if its most recent operational/ financial review revealed deficiencies and the offeror's subsequent corrective action plan was not approved by AHCCCSA. The continuing offeror must also submit its proposal for that item if there have been significant changes since the last operational/ financial review. If the continuing offeror is deferring to its most recent operational/financial review to meet a requirement shown with an asterisk, it must be indicated by entering "PER REVIEW" in the "Offeror's Page #" column of the Offeror's Checklist. If the continuing offeror is proposing to expand into a new service area, it must submit the asterisked items for the new service area. 1. PROPOSAL CONTENT AND FORMAT The Offeror's proposal should present a detailed approach and plan for addressing each element identified and described in this RFP. The information must be presented in the order prescribed in Paragraphs 9 through 15 and again in the Offerors' Checklist (Attachment J). Proposals that merely paraphrase elements of this RFP or use such phrases as "will comply" or "standard techniques will be employed" may be deemed unresponsive. AHCCCSA will not provide any reimbursement for the cost of developing or submitting a proposal in response to this RFP. One original and five copies of each proposal shall be submitted in the format outlined below. Proposals received after the time and date indicated on the front page of this solicitation will not be considered. All proposals shall be organized as outlined in the checklist, forms and computer disks provided in this solicitation. The checklist will serve as the table of contents and the notes at the beginning of the checklist (Attachment J) give specific instructions for new and continuing offerors. The Offeror must indicate on the checklist the specific page numbers where material may be found on the individual items. All pages of the Offeror's proposal must be numbered consecutively, including attachments, appendices, exhibits, etc. The proposal must be submitted in three-ring loose-leaf binders with the "spine" of each binder clearly labeled to identify the Offeror, the contents of the binder, the inclusive page numbers of that binder, and the number of the binder within the series (e.g. "Vol. 2 of 4"). The binder containing the capitation and provider network computer disks must be clearly identified on the outside of the binder. Sealed proposals must be received at AHCCCSA no later than 3:00 pm, June 14, 1996. Erasures, interlineations or other modifications in the proposal shall be initialed in ink by the person authorized to sign the offer. AHCCCSA shall not reimburse the Offeror the cost of proposal preparation. 2. AHCCCSA BIDDERS' LIBRARY The Bidders' Library contains reference material on AHCCCS and ALTCS policies and performance requirements to assist the Offeror in preparing a thorough and realistic response to this solicitation. References are made throughout this solicitation to materials in the Bidders' Library and all such materials are 58 59 incorporated into the contract by reference. The Bidders' Library is located at 701 E. Jefferson, Phoenix, AZ. Please contact Mark Renshaw at (602) 417-4577 for further information and appointment times. The following documents are available for viewing or copying in the Bidders' Library: ALTCS Eligibility Policy and Procedure Manual AHCCCS Medical Policy Manual AHCCCS Encounter Reporting User Manual ALTCS Uniform Accounting and Reporting System and Guide for Audits of ALTCS Contractors and Providers AHCCCS Technical Interface Guidelines Statement of Requirements for ALTCS Quality Management Program Code of Federal Regulations (CFR), Titles 42 and 45 Arizona Revised Statutes ALTCS Rules AHCCCS Rules AHCCCS Fee-for-Service Capped Fee Schedule AHCCCS Policy for Prevention, Detection and Reporting of Fraud and Abuse AHCCCS Reinsurance Manual HCBS Cap Report Long-Term Care Placement Report Enrollment Report (last two years) Transplantation rates 3. PROPRIETARY INFORMATION All proposals shall become the property of AHCCCSA. The Offeror may designate certain information to be proprietary in nature by printing the word "proprietary" on top of each page for which nondisclosure is requested. Final determinations of nondisclosure rest with AHCCCSA; however, all portions of the Offeror's proposal, including those which are proprietary, may be provided to the HCFA and its evaluation contractor. 4. PROSPECTIVE OFFERORS' INQUIRIES Any questions related to this solicitation must be directed to Mark Renshaw, AHCCCS Contracts and Purchasing, 701 E. Jefferson, Phoenix, AZ 85034 All questions submitted in writing to AHCCCSA, Contracts and Purchasing, by April 19, 1996 will be combined and answered in a single RFP amendment shortly thereafter. The Offeror shall not contact or ask questions of other AHCCCSA staff unless authorized to do so by the Contracting Officer. Cite page, section and paragraph number when submitting questions 5. PROSPECTIVE OFFERORS' CONFERENCE A Prospective Offerors' Conference will be held on Monday, April 15, 1996 from 1-3 p.m. at the 701 E. Jefferson, 3rd Floor Gold Room. The purpose of this conference will be to clarify the contents of this solicitation, answer questions from prospective offerors, and offer general guidance on the required format of all proposals. Any doubt regarding the contents or requirements of this solicitation or any apparent omission or discrepancy should be presented at or before this conference. AHCCCSA will then determine the appropriate action necessary and issue a written amendment to the solicitation, if appropriate. 6. FEDERAL DEADLINE FOR SIGNING CONTRACT 59 60 The federal Health Care Financing Administration (HCFA) has imposed strict deadlines for finalization of contracts in order to qualify for federal financial participation. This contract, completed and signed by both parties, must be available for submission to HCFA prior to the beginning date of the contract term (Oct. 1, 1996), but in no case later than November 1, 1996. All public entity offerors must ensure that the approval of this contract is placed on appropriate agendas well in advance to ensure compliance with this deadline. Any withholding of federal funds caused by the Offeror's failure to comply with this requirement shall be borne in full by the Offeror. 7. WITHDRAWAL OF PROPOSAL At any time prior to the proposal due date and time, the Offeror (or designated representative) may withdraw its proposal. Telegraphic or mailgram withdrawals will not be considered. 8. AMENDMENTS TO RFP Amendments may be issued subsequent to the issue date of this solicitation. Receipt of solicitation amendments must be acknowledged by signing and returning the signature page of the amendment to AHCCCSA. [PARAGRAPHS 9 THROUGH 15 PERTAIN TO THE PROPOSAL REQUIREMENTS AS THEY APPEAR IN ATTACHMENT J, OFFEROR'S CHECKLIST:] 9. GENERAL MATTERS Complete and submit the Offeror's signature page (cover page of this document). Complete and submit the Offeror's Checklist. Review and understand the Certification of Non-coercion. 10. NETWORK Provider Network - The Offeror shall have in place an adequate network of providers capable of meeting all contract requirements. Attachment B lists the minimum network requirements by service area. The Offeror shall provide in its proposal information concerning its entire provider network for all service areas whether the proposal is for a continuing service area or an expansion of service areas. Submit both the nursing facility network disk and hard copy. A hard copy roster of the acute care, HCBS and behavioral health providers shall be submitted in the format listed below. Signed letters of intent or contract signature pages must accompany the provider listings as evidence of an agreement between the Offeror and provider. Attachment E, Sample Letter of Intent, is the only acceptable format for these letters. AHCCCSA may verify any or all submitted letters of intent or contracts. Nursing Facility Network - The nursing facility network disk screens contain the names of the nursing facilities listed alphabetically by county. See Attachment G and the network disk for detailed instructions. Acute care, HCBS and Behavioral Health - The Offeror shall submit a roster by county of acute care, HCBS and behavioral health providers for Contract Year 96-97. In addition to the roster, signed letters of intent or contract signature pages must be submitted in the same order as the names listed on the provider roster. The roster shall appear in the same order and use the same headings as the Sample Letter of Intent provider listing (Attachment E). For example, start with Acute Care Hospital which is #2 on the listed provider types in the Sample Letter of Intent and list all the hospitals for which letters of intent or contracts have been obtained. This should be followed by 60 61 Psychiatric Hospital which is #3 on the listed provider types in the Sample Letter of Intent. Continue the provider listing through Hospice Service Providers. Include the following information in the roster listing: provider name, address including street, city, state, and zip code and telephone number. Network Maps (Maricopa And Pima Counties Only) - The Offeror must demonstrate the ability to provide Primary Care Provider (PCP) and pharmacy services in metropolitan Phoenix and Tucson according to certain maximum travel distances. Attachment I to this solicitation consists of two maps (Phoenix and Tucson) each of which shows a geographical boundary. The Offeror's network must be such that a member residing within the boundary area would not have to travel more than five miles to see a PCP or pharmacy. A member residing outside the boundary area (but within the total area shown on the map) must not have to travel more than 10 miles to see such providers. (See Mapping Instructions which follow.) Mapping Instructions: The Offeror must use the maps provided (Attachment I) to indicate the location of each PCP and pharmacy in its proposed network for metropolitan Phoenix and Tucson. The Offeror should use color coded dots, red for PCP's and green for pharmacies. The Offeror may place one red dot in the zip code with a number indicating the number of proposed subcontracts for PCP's within that zip code. Similarly, the Offeror may place a green dot in the particular zip code with a number indicating the number of pharmacies proposed for that zip code area. Since the color on dots is not distinguishable when photocopied, the Offeror should place colored dots on not only the original but also on all five required copies, or supply colored copies. Network Development - The Program Contractor must develop and maintain an adequate provider network to provide all covered services. Where there is a deficiency in the provider network, identify the deficiency and submit your plan for correcting it. Submit a description of your current Home and Community Based Services program, as well as your plan for further developing these services. Address, at a minimum, the following areas: Attendant Care Personal Care Homemaker Adult Day Health Home Health Agency Services, including nursing and home health aide Group Respite as an alternative to Adult Day Health Environmental modifications Home-delivered meals Submit a separate description of your proposals for providing alternative residential settings to include, at a minimum: Adult Foster Care Adult Care Homes (pilot program) Supportive Residential Living (pilot program) Traumatic Brain Injury facilities Behavioral Health levels I and II Network Management - Submit a narrative description, or copies of your policies and procedures, indicating how you will meet the network management requirements specified in Section D, Paragraphs 24 through 28. The description must describe in detail the internal monitoring process pertaining to frequency, problem identification, corrective action plan, follow-up, sanctions and cause for provider termination. Provider manual - Submit one manual in a separate binder labeled "Provider Manual". 61 62 11. CAPITATION RATE Capitation is a fixed per member monthly payment to the Program Contractor for the provision of covered services to members. It is an actuarially sound amount to cover expected utilization and costs in a risk-sharing managed care environment. In addition, AHCCCSA offers reinsurance programs to protect the Program Contractor from unusual and unforeseen expenses. The Offeror must demonstrate that the capitation rates proposed are actuarially sound. That is, the Offeror, if awarded a contract, should be able to keep utilization at or below its proposed levels and to subcontract for unit costs that average at or below the amounts shown on its Capitation Rate Calculation Sheet disk. The Offeror may require assistance from an actuary to develop some of the fundamental assumptions for meeting the criteria defined above. To facilitate the preparation of its capitation proposals, AHCCCSA will provide the offeror with a copy of the Data Supplement Book, to be available April 15 or shortly thereafter. This book should not be used as the sole source of information in preparing the capitation proposal. The Offeror is solely responsible for research, preparation and documentation of its capitation proposal. The Offeror must submit its capitation proposal using the AHCCCSA capitation bid disk. Attachment F to this RFP contains detailed instructions for using the computer disk program. 12. PROGRAM OPERATIONS Medical Director - Submit the position description or a copy of the contract. Case Management Structure Plan - A new offeror, or a continuing offeror bidding on a new service area, must describe how it will meet ALTCS case management requirements. (See Section D, Paragraph 9, Case Management.) A continuing offeror must submit this case management plan if the 1994-96 case management services review indicated deficiencies and the subsequent corrective action plan was not approved by AHCCCSA. A continuing offeror must also submit its case management plan if there have been significant management or organizational changes since the last services review or plan submittal. The description shall include the number of case managers, how case management assignments are made and how protocols are communicated. Describe the monitoring process to ensure compliance with protocols of case management ratios, data entry, member contact timelines, member record content, placement decisions (including any preference for particular procedures), how case managers will coordinate with primary care physicians and prior authorization staff, how out-of-county clients will be managed and member transition to AHCCCS acute care health plans. Quality Management/ Utilization Management - A new offeror, or a continuing offeror bidding on a new service area, must submit a quality management plan addressing the requirements specified in the AHCCCS Medical Policy Manual. (Also see Section D, Paragraph 11, Quality Management/ Utilization Management.) This plan should include the Offeror's utilization management plan. Attach utilization management policies and procedures for (1) prior authorization and referral requirements, (2) clinical standards used, (3) restrictions on settings for care, and (4) the qualifications of individuals performing utilization management activities. A continuing offeror must submit the quality management plan if the 1994-96 case management services review indicated deficiencies and the subsequent corrective action plan was not approved by AHCCCSA. A continuing offeror must also submit its quality management plan if there have been significant management or organizational changes since the last services review or plan submittal. 62 63 Grievance and Appeals - The Offeror must submit specific information describing how it will meet the requirements outlined in Attachment H, Grievance Process and Standards. Member Transition and Program Contractor Changes policy - Submit relevant policies and procedures. Member Handbook and Communications - Submit a copy of the current or proposed member handbook. Behavioral Health Services - Submit the behavioral health services plan that includes, but is not limited to, referral process, treatment planning and coordination, staff and provider training in the identification of and screening for behavioral health needs, quality and utilization management. 13. ORGANIZATION Section G - Complete all questionnaire items and submit all materials required in Section G, including authorized signatory, functional organization chart, resumes of key personnel (submit position description if vacant), licenses, certifications, description of organizational entity, description of claims processing, RBUC/ IBNR method, financial projections, financial disclosure statements, administrative functions/ management/ MIS subcontractor statements and related party transactions. Financial Viability Standards - Calculate and submit the financial viability and performance measures based on your financial projections. Performance Bond or Bond Substitute - Submit your plan for meeting this requirement including the type of bond to be posted, source of funding and timeline for meeting the requirement. Patient Trust Account Policy and Procedure - Submit a copy of your policy for monitoring these accounts. TPL/ COB Procedures - Submit a copy of your policy that addresses third party liability requirements. Share of Cost Collection Policy - Submit copy of policy that describes the collection of the member's share of cost. Fraud and Abuse - Submit a copy of your policy pertaining to the prevention and detection of fraud and abuse. Model Subcontracts - Submit copies of the following model subcontracts: a. Contracts between related parties b. Subcontracts for full or partial risk, or withholds c. Contracts for management information systems or data management firms d. Primary care physicians e. Attendant Care and Home Health agencies f. Behavioral health providers g. Nursing facilities h. Alternative residential care facilities (described in Section D, Paragraph 1, Covered Services) i. Dental services 14. CERTIFICATE OF INSURANCE The Offeror shall submit a properly completed Certificate of Insurance in accordance with the requirements of Section E, Paragraph 28, Insurance. 63 64 15. DATA MANAGEMENT The Offeror shall submit a description of how it will meet the data management requirements specified in Section D, Paragraph 52, Data Management. If not currently able to meet requirements, submit an appropriate timeline for start-up. 16. AMENDMENTS The Offeror shall sign and submit with its offer all amendments to this solicitation. 17. SUBMISSION OF INITIAL PROPOSAL ON MOST FAVORABLE TERMS AHCCCSA reserves the right to award a contract without negotiation based solely on the price and terms of the proposal as initially submitted. The Offeror is therefore advised to submit its best offer initially. 18. PROPOSAL OPENING Proposals will be opened publicly immediately following the proposal due date and time. The name of each offeror will be read publicly and recorded, but no other information contained in the proposals will be disclosed. Proposals will not be available for public inspection until after contract award. 19. PROPOSAL DISCUSSIONS Discussions may be conducted with a responsible offeror who submits a proposal determined to be reasonably susceptible of contract award. As used here, "responsible offeror" means an offeror that has the capability to perform the contract requirements and also the integrity and reliability to assure good faith performance. In conducting discussions, there will be no disclosure of any information derived from competing proposals. AHCCCSA will have sole discretion in selecting proposal discussion items and such discussions may include interviews or be in writing. At the end of discussions, the offeror may be permitted the opportunity to revise its proposal for the purpose of obtaining its best and final offer. 20. BEST AND FINAL OFFERS If in the best interest of the State, AHCCCSA will issue a written request for a Best and Final Offer (BFO) setting forth the date, time and place for its submission. The purpose of the request for a BFO is to allow the Offeror an opportunity to resubmit bids for rate components not previously accepted by AHCCCSA. In addition, AHCCCSA will disclose to the Offeror which of its bid rate components are acceptable (within or below the actuarial rate range), and which are not acceptable (above the actuarial rate range). The BFO must be submitted on the computer disk provided by AHCCCSA. The Offeror whose final bid rate components fall below the bottom of the actuarial rate range will have its rates increased to the bottom of the component rate range. The Offeror whose final bid rate components are above the actuarial rate range will be offered a rate in the bottom half of the component rate range. If the Offeror does not submit a notice of withdrawal or a BFO, its immediate previous offer will be considered its best and final offer. The Offeror will not be allowed to adjust upward a previously accepted component rate bid. 64 65 21. AWARD OF CONTRACT Award will be made to the offeror whose proposal is determined to be the most advantageous to AHCCCSA based on the evaluation factors set forth in Section I of this RFP. Final capitation rates are subject to approval by HCFA. Notwithstanding any other provision of this solicitation, AHCCCSA expressly reserves the right to: a. Waive any immaterial mistake or informality; b. Reject any or all proposals, or portions thereof; and/or c. Reissue a Request for Proposals A response to this RFP is an offer to contract with AHCCCSA based upon the terms, conditions, scope of work and specifications of the RFP. Proposals do not become contracts unless and until they are accepted by the contracting officer. A contract is formed when the AHCCCSA Contracting Officer provides written notice of award to the successful offeror(s). The final contract consists of the terms and conditions of the RFP, amendments to the RFP, the Offeror's last BFO, and subsequent contract modifications, if any. 22. RFP MILESTONE DATES The following is the anticipated schedule of events regarding the solicitation process: Activity Date Solicitation issued 4/1/96 Offerors' Conference 4/8/96 RFP-related questions due (if any) 4/19/96 Technical Assistance Conference 5/6/96 Proposals due 6/14/96 Awards made 7/15/96 Contract term begins 10/1/96 [END OF SECTION H] 65 66 SECTION I - EVALUATION FACTORS SELECTION PROCESS AHCCCSA has developed a scoring process which is designed to evaluate fairly an offeror's ability to provide cost-effective, high quality contract services in a managed care setting. The following factors, weighted as shown, will be evaluated. Provider Network and Management 30% Program 30% Capitation 25% Organization 15% Provider Network and Capitation will be scored by county. Organization and Program will be scored in the aggregate for all counties bid by the Offeror. Contracts will be awarded to qualified Offerors whose proposals are deemed to be most advantageous to the State in accordance with [Section H, Paragraph 21.] AHCCCSA will consider its experience with continuing ALTCS Offerors and contracted health plans in evaluating their proposals in the areas of Provider Network, Program and Organization. The results of the most recent Operational and Financial Reviews performed by AHCCCSA through April 1996 will be used in the evaluation process. AHCCCSA may also conduct New Offeror Reviews. AHCCCSA reserves the right to waive immaterial defects or omissions in this solicitation or submitted proposals. ALL OF THE COMPONENTS LISTED BELOW WILL BE EVALUATED AGAINST CORRESPONDING STATUTES, AHCCCSA RULES, REGULATIONS, POLICIES AND THE REQUIREMENTS CONTAINED IN THIS RFP. THE OFFEROR'S CHECKLIST (ATTACHMENT J) CONTAINS RFP REFERENCES FOR EACH OF THESE ITEMS: PROVIDER NETWORK DEVELOPMENT AND MANAGEMENT The provider network will be evaluated and scored with reference to the Offeror's network development and network management. "Network development" is defined as the process of negotiating contractual relationships with a sufficient number of providers able to competently perform defined covered services within a given area in accordance with AHCCCS standards (e.g. appointment times). 1. Nursing facility network AHCCCSA will use the automated Nursing Facility Network Program to evaluate and score the nursing facility network. Within the program, the Offeror must indicate the nursing facilities for which it has signed letters of intent or contracts for Contract Year 96-97. The Offeror must submit the signed letters of intent and/or the contract signature pages for Contract Year 96-97 as part of its proposal. Extra consideration will be given for letters of intent or contracts that specify payment rates, share of cost collection agreements, and certain types of risk relationships. The share of cost collection agreement will be evaluated based on delineation of responsibility of both parties in the collection of the members' share of cost. Mere delegation of this responsibility to the provider will not result in any extra credit or consideration in the scoring process. The agreement must demonstrate due diligence on the part of both parties. The Offeror will receive extra consideration for entering risk-sharing agreements with its nursing homes. To receive extra consideration, the risk agreement must align the incentives of the Offeror and the nursing home in placing the member at the appropriate level of care, including moving the member to an HCBS setting if appropriate. The risk agreements must not encourage underutilization or violate any federal or state regulations. 66 67 2. Acute, HCBS, behavioral health network 3. HCBS development plan 4. Provider network deficiency plan - The Offeror's plan will be evaluated to determine if the Offeror has identified network deficiencies and has established an action plan to address the deficiencies. 5. Network management policies and procedures 6. Provider Manual CAPITATION RATE The Offeror must submit its capitation rate bid by county. The components of this rate bid that will be evaluated and scored are: 1. Nursing facility 2. HCBS 3. Acute care 3. Administration 4. Risk, contingencies and profit The components will be weighted for scoring based upon their relative importance to the overall program. The lowest bid for each component will receive the maximum allowable points. However, if a bid is below the actuarial rate range, the bid will be evaluated as if it is at the bottom of the acruarial rate range. No additional points will be given for bids below the actuarial rate range. Conversely, the highest bid (within or above the actuarial rate range) for each component will receive the least number of points. PROGRAM OPERATIONS 1. The Medical Director's job description and/or contract 2. Case management plan, policies and procedures 3. Quality Management/Utilization Management plans and policies 4. Grievance policies 5. Member transition policy which includes program contractor changes 6. Member handbook and communications policies and procedures 7. Behavioral health services plan and policies ORGANIZATION 1. Functional organization chart and resumes of key personnel 2. Claims and encounter processing system 3. RBUC/ IBNR methods 4. Financial projections 5. Financial viability standards based on the financial projections 6. Performance bond or bond substitute 7. Administrative cost allocation 8. Patient Trust Account policy and procedure - Evaluation will consider whether the Offeror has an active role in monitoring patient trust accounts. 9. TPL/COB policies and procedures - Evaluation will consider the Offeror's cost avoidance and cost recovery methods. 67 68 10. Share of Cost collection policy - Evaluation will consider whether the Offeror's and provider's responsibility in the collection of the member share of cost is clearly specified. 11. Fraud and abuse policy 12. Model subcontracts [END OF SECTION I] 68 EX-10.1.A.1 3 CONTRACT AMENDMENT 1 EXHIBIT (10.1)(a)(1) ARIZONA HEALTH COST CONTAINMENT SYSTEM ADMINISTRATION DIVISION OF BUSINESS AND FINANCE CONTRACT AMENDMENT Page 1 of 1 - -------------------------------------------------------------------------------- AMENDMENT NUMBER: CONTRACT NUMBER: EFFECTIVE DATE OF AMENDMENT: PROGRAM: 1 YH6-0012-06 10/1/96 ALTCS - -------------------------------------------------------------------------------- CONTRACTOR'S NAME AND ADDRESS: James Burns, CEO VENTANA HEALTH SYSTEMS 2510 W. DUNLAP, STE 100 PHOENIX, AZ 85021 - -------------------------------------------------------------------------------- PURPOSE OF AMENDMENT: To set capitation rates for Contract Year 96-97 - -------------------------------------------------------------------------------- THE CONTRACT REFERENCED ABOVE IS AMENDED AS FOLLOWS: The capitation rates (per member per month) effective 10/1/96 are as follows:
County Long-term care Vent. Vent. Acute Care only Dependent Dependent (Institutional) (HCBS) Apache 1,672.41 11,743.64 6,312.01 455.36 Gila 2,050.14 11,743.64 6,312.01 299.60 Greenlee 2,153.03 11,743.64 6,312.01 376.22 LaPaz 1,901.53 11,743.64 6,312.01 363.73 Mohave 1,778.26 11,743.64 6,312.01 319.89 Navajo 1,812.29 11,743.64 6,312.01 334.79 Santa Cruz 1,957.35 11,743.64 6,312.01 336.17
NOTE: Please sign, date and return both originals to: Mark Renshaw AHCCCS Contracts and Purchasing 701 E. Jefferson Phoenix, AZ 85034 - -------------------------------------------------------------------------------- EXCEPT AS PROVIDED FOR HEREIN, ALL TERMS AND CONDITIONS OF THE ORIGINAL CONTRACT REMAIN UNCHANGED AND IN FULL EFFECT. - --------------------------------------------------------------------------------
SIGNATURE OF AUTHORIZED REPRESENTATIVE: SIGNATURE OF AHCCCSA CONTRACTING OFFICER: James Burns Michael Veit TYPED NAME: TYPED NAME: JAMES BURNS MICHAEL VEIT TITLE: TITLE: CONTRACTS & PURCHASING CEO ADMINISTRATOR DATE: DATE: July 26, 1996 Jul 30 1996
EX-10.1.A.2 4 SOLICITATION AMENDMENT #1 1 EXHIBIT (10.1)(a)(2) ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION DIVISION OF BUSINESS AND FINANCE SOLICITATION AMENDMENT
==================================================================================================================== AMENDMENT NUMBER: SOLICITATION NUMBER EFFECTIVE DATE OF AMENDMENT: PROGRAM: 1 YH6-0012 October 1, 1996 OMC/ LTC ====================================================================================================================
OFFEROR'S NAME AND ADDRESS: Ventana Health Systems, Inc 2510 W. Dunlap Avenue, Suite #300 Phoenix, Arizona 85021 - -------------------------------------------------------------------------------- PURPOSE OF AMENDMENT: (1) To clarify which behavioral health and Traumatic Brain Injury costs are covered under reinsurance; (2) to amend the instructions for preparing the nursing home roster (Attachment G) to delete all references to a nursing home network diskette, which will not be used; (3) to change the date of the Technical Assistance Conference. - -------------------------------------------------------------------------------- THE SOLICITATION REFERENCED ABOVE IS AMENDED AS FOLLOWS: (1) Page 2 of this amendment contains a revision of Section D, Paragraph 43, Reinsurance. The changes are indicated as either deleted text (shown like this) or added text (shown like this). The purpose of the revision is to clarify that the only behavioral health/TBI costs which qualify for reinsurance are those identified as part of the institutional or HCBS setting, and which have been authorized in advance by AHCCCSA. No other ALTCS covered services (except for acute inpatient hospitalizations) qualify for reinsurance reimbursement. (2) Attachment G is replaced in its entirety by Attachment G (First Revision), attached hereto. There will be no nursing facility computer disk issued and offerors will use instead the county-by-county rosters included in the new Attachment G. All references to use or preparation of the nursing facility network disk are hereby deleted. (3) The Technical Assistance Conference, if necessary, originally scheduled for Monday, May 6, has been rescheduled for Friday, May 10 at 3 pm in the Arizona Room (701 E. Jefferson). NOTE TO OFFERORS: Please enter name and address above, complete signature block below and send a copy of this page only to: Mark Renshaw AHCCCSA, Contracts and Purchasing 701 E. Jefferson Phoenix, AZ 85034 ================================================================================ EXCEPT AS PROVIDED FOR HEREIN, ALL TERMS AND CONDITIONS OF THE ORIGINAL SOLICITATION REMAIN UNCHANGED AND IN FULL EFFECT. ================================================================================ SIGNATURE OF AUTHORIZED REPRESENTATIVE/SIGNATURE OF AHCCCSA CONTRACTING OFFICER: James A. Burns TYPED NAME: TYPED NAME: MICHAEL VEIT James A. Burns ================================================================================ TITLE: TITLE: CONTRACTS & PURCHASING Chief Executive Officer ADMINISTRATOR ================================================================================ DATE: DATE: 5-28-96 ================================================================================ 43. REINSURANCE 2 Reinsurance is a stop-loss program provided by AHCCCSA to the Program Contractor for the partial reimbursement of covered inpatient facility medical services incurred for a member beyond an annual deductible. AHCCCSA is self-insured for the reinsurance program which has an initial deductible level and a subsequent coinsurance percentage. For dates of service after 10/1/96 (under regular reinsurance), the Program Contractor will be reimbursed at 75% of allowable charges over the following deductibles:
Urban county, with Medicare Part A $12,000 Urban county, without Medicare $20,000 Rural county, with Medicare Part A $ 5,000 Rural county, without Medicare $ 9,000 Behavioral Health/ Traumatic Brain Injury 0 =======================================================
Regular reinsurance covers acute inpatient hospitalizations (i.e. anything billed on a UB92). Effective 10/1/96, however, members considered by the AHCCCS Office of the Medical Director (OMD) to be high-cost behavioral health or Traumatic Brain Injured (TBI) will also be covered under regular reinsurance. Placement into an institutional or HCBS setting for these members must be approved in advance by OMD for the Program Contractor to qualify for reinsurance reimbursement. Behavioral Health/ TBI reinsurance will cover the institutional or HCBS setting only. Acute care services and all other ALTCS services are not covered by reinsurance for this population. The Program Contractor will be reimbursed at 75% of allowable charges with no deductible. Services to members identified as being catastrophically eligible in accordance with OMD policies will be covered under a special catastrophic program instead of the regular reinsurance program. Catastrophic reinsurance coverage for transplants is limited to 85% of the AHCCCS contract amount for the transplant services rendered, or 85% of the Contractor-paid amount, whichever is lower. Catastrophic reinsurance for hemophiliacs is covered at 85% of the Contractor-paid amount. The AHCCCS contracted transplantation rates are available in the Bidders' Library. AHCCCSA uses inpatient encounter data to determine regular reinsurance benefits. Reimbursement for regular reinsurance benefits will be made to the Program Contractor monthly. AHCCCSA will also provide for a reconciliation of reinsurance payments in the case where encounters used in the calculation of reinsurance benefits are subsequently adjusted or voided. Encounter data will not be used to determine catastrophic reinsurance benefits. However, this does not relieve the Program Contractor of the responsibility for submitting encounters for catastrophic reinsurance services. The Program Contractor must submit catastrophic reinsurance claims in accordance with the AHCCCS Reinsurance Policy/Procedure Manual. All catastrophic reinsurance claims shall be subject to medical review by AHCCCSA or its designee. Medical review on regular reinsurance cases will be determined based on statistically valid random sampling. The AHCCCS Office of the Medical Director will generate the sampling and will notify the Program Contractor of documentation needed for the retrospective medical review process to occur at the Program Contractor's offices. The results of the medical review sampling will be extrapolated to the Program Contractor's entire regular reinsurance reimbursement population. A partial recoupment of reinsurance reimbursements made to the Program Contractor may occur based on the results of the medical review sampling. EX-10.1.A.3 5 SOLICITATION AMENDMENT #2 1 EXHIBIT (10.1)(a)(3) ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION DIVISION OF BUSINESS AND FINANCE SOLICITATION AMENDMENT
=================================================================================================================== AMENDMENT NUMBER: SOLICITATION NUMBER: EFFECTIVE DATE OF AMENDMENT: PROGRAM: 2 YH6-0012 October 1, 1996 OMC/ LTC ===================================================================================================================
OFFEROR'S NAME AND ADDRESS: Ventana Health Systems, Inc 2510 W. Dunlap Avenue, Suite #300 Phoenix, AZ 85021 - -------------------------------------------------------------------------------- PURPOSE OF AMENDMENT: (1) To answer questions from prospective offerors pertaining to the ALTCS RFP; (2) to make certain changes to the RFP text based on these questions. - -------------------------------------------------------------------------------- THE SOLICITATION REFERENCED ABOVE IS AMENDED AS FOLLOWS: This amendment has two purposes. The first is to make actual changes to the text of the RFP. The second is to answer questions from offerors in order to clarify existing text. The actual changes to the text are described on pages 2-3 of this amendment and are followed by the 30-page "ALTCS RFP Questions and Answers". Attached also are revised Attachments B (Minimum Network Standards), C (Encounter Submission Standards) and E (Sample Letter of Intent). NOTE TO OFFERORS: Please enter name and address above. A copy of this signature page only must be submitted with your proposal. - -------------------------------------------------------------------------------- EXCEPT AS PROVIDED FOR HEREIN, ALL TERMS AND CONDITIONS OF THE ORIGINAL SOLICITATION REMAIN UNCHANGED AND IN FULL EFFECT. - -------------------------------------------------------------------------------- SIGNATURE OF AUTHORIZED REPRESENTATIVE:SIGNATURE OF AHCCCSA CONTRACTING OFFICER: James A. Burns - -------------------------------------------------------------------------------- TYPED NAME: TYPED NAME: MICHAEL VEIT James A. Burns - -------------------------------------------------------------------------------- TITLE: TITLE: CONTRACTS & PURCHASING Chief Executive Officer ADMINISTRATOR - -------------------------------------------------------------------------------- DATE: DATE: MAY 6, 1996 5-28-96 - -------------------------------------------------------------------------------- 1 2 CHANGES TO THE RFP TEXT:
- ---------------------------------------------------------------------------------------------------------------------------------- RFP RFP PAGE PARA. OLD TEXT: NEW TEXT: PURPOSE OF CHANGE: - ---------------------------------------------------------------------------------------------------------------------------------- 15 D.9 The case manager shall make initial The case manager shall make To clarify that the five and ten contact with the member within five initial contact with the member day periods referred to here are days of enrollment, initial on-site within five working days of working days, not calendar contact with the member within 10 enrollment, initial on-site contact days. days of enrollment with the member within 10 working days of enrollment. - ---------------------------------------------------------------------------------------------------------------------------------- 19 D.14 [Program Contractor name] will make [Program Contractor name] will To make the RFP consistent a final decision within 45 days of make a final decision within 30 with AHCCCS Rules and getting your written grievance. days of getting your written or oral clarify that the member may file grievance. a grievance orally as well as in writing and that the Program Contractor must make a final decision on the grievance within 30 days, not 45. - ---------------------------------------------------------------------------------------------------------------------------------- 19 D.15 The effective date of enrollments The effective date of enrollment To correct an error in the RFP and disenrollments with the Program with the Program Contractor is regarding the disenrollment Contractor is two days after the date two days after notification to the effective date. the Program Contractor receives Program Contractor. notification. Disenrollment is effective the end of the month of discontinuance. - ---------------------------------------------------------------------------------------------------------------------------------- 24 D.28 For BEHAVIORAL HEALTH SERVICES, the For BEHAVIORAL HEALTH SERVICES, To change appointment Program Contractor shall be able to the Program Contractor shall be standards for behavioral health provide appointments as follows: able to provide appointments as services. a. Emergency appointments within follows: 24 hours of request a. Emergency appointments b. Non-emergency appointments within 24 hours of referral. within 7 days of request b. Behavioral Health Screening within seven days of referral for HCBS members. c. Non-emergency appointments for nursing home residents: within 30 days of referral. d. Non-emergency appointments for HCBS members: within 30 days of behavioral health screening. - ---------------------------------------------------------------------------------------------------------------------------------- 24 D.29 The Program Contractor is The Program Contractor is To delete the requirement of responsible for reporting all cases of responsible for reporting all cases reporting "inappropriate suspected fraud and abuse or of suspected fraud and abuse by practices" by subcontractors, inappropriate practices by subcontractors, members or members or employees. subcontractors, members or employees. employees. - ---------------------------------------------------------------------------------------------------------------------------------- 28 D.37a "Current ratio" is defined as
4 3
"Current assets divided by current "Current assets divided by current "current assets" consistent with liabilities" liabilities. Current assets include that used in the acute care any long-term investments that can program. be converted to cash within 24 hours without significant penalty (i.e., greater than 20%). - ----------------------------------------------------------------------------------------------------------------------------------
CHANGES TO THE RFP TEXT (CONT'D):
- ---------------------------------------------------------------------------------------------------------------------------------- 28 D.37b "Equity per member" is defined as "Equity per member" is defined as To make the definition of "equity "Equity, less on-balance sheet "Equity, divided by the number of per member" consistent with that performance bond, divided by the members at the end of the period." used in the acute care program. number of members at the end of the period." - ---------------------------------------------------------------------------------------------------------------------------------- Atch All Partial care services are required as Partial care services are required as To correct an error in the B "County-wide coverage" "Facility Location". See revised original RFP. Attachment B included herein. - ---------------------------------------------------------------------------------------------------------------------------------- Atch 2 (No reference) AHCCCSA reserves the right to To clarify that AHCCCSA may C change these sanction amounts during change sanction amounts should the term of the contract. circumstances warrant. - ---------------------------------------------------------------------------------------------------------------------------------- Atch 3 Current language makes no sanction See revised Attachment C included Attachment C has been revised to C exceptions for AHCCCS errors herein. clarify the program contractor's sanction liability. - ---------------------------------------------------------------------------------------------------------------------------------- Atch (No reference.) See revised Attachment E, Letter of All offerors must use the revised E Intent, enclosed herein. Letter of Intent which adds the entry "Summary of Terms Attached? Yes _____ No_____". If yes is checked, the offeror must attach documentation that addresses rates , share of cost collection and/or risk arrangements. The offeror may add this documentation for Letters of Intent that have already been completed prior to this amendment decision. - ----------------------------------------------------------------------------------------------------------------------------------
5 4 ALTCS RFP - QUESTIONS AND ANSWERS NOTE: Below the "Page #" in the left-hand column is the paragraph reference. "D.7", for example, means "Section D, Paragraph 7" of the RFP. "Def" refers to Section C, Definitions.
Page: Offeror: - ----- -------- 1 APIPA Q: Will the final contract document contain the RFP with a signature and rate page on top (like the current acute care contracts) or a separate written contract document that incorporates the RFP? A: The RFP document, when signed on the front page by both parties, becomes the contract, just as in the acute care contracts. Rates will be entered in Section B (page 2) of the RFP. 3 APIPA Q: What is meant by the term "recipient practices" in this definition of "abuse (by provider)"? Is Def "recipient" referring to provider actions, member actions, or both? A: This definition, taken verbatim from the Code of Federal Regulations, refers to actions taken by both providers and members, or "recipients". The term to be defined, then, should not have been limited to "abuse (by provider)", but rather "abuse". 3 APIPA Q: Is an Adult Care Home required to coordinate necessary ALTCS HCBS services as required in the Def definition of Adult Foster Care below? A: Refer to the AHCCCS Medical Policy Manual, Chapter 1200, Section 1230. 3 APIPA Q: Is an Adult Foster Care home required to provide personal care and/or custodial care services as Def required in the definition of Adult Care Home above? A: Refer to the AHCCCS Medical Policy Manual, Chapter 1200, Section 1230. 3 APIPA Q: What is the definition of "custodial care services"? Def A: This term is not included in the definition of Adult Foster Care. 3 APIPA Q: Is the definition of an "adult" to mean an individual 21 years of age or older for this type of Def facility? (Definitions: Adult Foster Care) A: Age 18 and over is considered an adult. 3 APIPA Q: What are the minimum certification requirements for "attendants" providing Attendant Care Def services to members? A: Refer to the AHCCCS Medical Policy Manual, Chapter 1200, Section 1240 and Chapter 1500, Section 1540. 3 APIPA Q: Will it be the program contractors' responsibility to "credential" Attendant Care providers for Def necessary certifications and experience? A: Yes. Refer to the AHCCCS Medical Policy Manual, Chapter 1200, Section 1240 and Chapter 1500, Section 1540. 3 APIPA Q: Please define "companionship" and indicate to what extent it is a covered service? (Definitions: Def Attendant Care) A: Refer to the AHCCCS Medical Policy Manual, Chapter 1200, Section 1240 and Chapter 1500, Section 1540. 4 APIPA Q: What is the definition of and/or required specifications to be a "contractor"? Is the term intended Def to be synonymous with "Program Contractor" (not defined)? A: We don't understand the purpose of your question. Please re-state it with reference to a real or likely misunderstanding of a solicitation provision. 4 APIPA Q: Please clarify that the definition of a "program contractor" is defined by the second sentence of the
6 5 def definition provided for the term "offeror". A: Your interpretation is correct; however, a program contractor may also be created by legislative mandate. 4 APIPA Q: Given that program contractors are required to initiate services within the timeframes outlined in Def this Request for Proposal, is it reasonable to require program contractors to have all third party benefits identified and contracted for purposes of cost avoidance prior to rendering services? Please comment and provide additional clarification. (Definitions: Cost Avoidance) A: Yes, if possible; it is not the intent of this provision to prevent or delay the delivery of services. 4 APIPA Q: Will AHCCCSA add "or one of its subcontractors" after "Program Contractor" in the second line? Def (Definitions: Cost Avoidance) A: We do not believe it is necessary. Our contract is with program contractors; it is their responsibility. 4 APIPA Q: In this definition, as presented, encounters submitted by providers for services rendered but denied Def payment by a program contractor for various administrative reasons in the normal course of claims processing would not be reported to AHCCCSA. Even if an encounter is denied, would not AHCCCSA want to receive information that a covered services was provided but denied for administrative reasons (i.e., a record do the occurrence of an encounter event), in order to more appropriately reflect utilization another databases for analysis and rate setting purposes, regardless of an encounter's payment status? (Definitions: Encounter) A: The definition of "encounter" includes all data of an encounter whether or not a financial liability was included. The definition states "It includes all services for which the program contractor incurred any financial liability." If there is financial liability associated with the event, it must be reported as an encounter. This language does not preclude the program contractor from reporting encounters of a non-covered service, no financial liability, alternative health care, covered by third party, etc. In fact, we encourage reporting these encounters for our use in quality management, utilization, quality indicators, rate setting, capitation and additional purposes. 4 APIPA Q: Please clarify that the "rules" as referred to in this definition are referenced in A.A.C. R9-28-3xx et Def seq.? (Definitions: Enrollment) A: These are addressed in A.A.C. Article 4, R9-28-402, R9-28-405. 4 APIPA Q: What is the definition of and requirements for a "registered provider"? Who performs the Def registration process and how is this information made available to program contractors? (Definitions: FFS) A: An AHCCCS registered provider is an entity (individual or organization) that has an active AHCCCS provider ID and provides AHCCCS covered services within the scope of practice as defined by federal, state and local law and regulations and AHCCCS policy for the provider type. If a provider's ID number is inactive, AHCCCS will not pay FFS claims or accept encounters for services that provider may render to AHCCCS members. A provider receives an AHCCCS provider ID number by submitting a completed AHCCCS provider registration application, other applicable required forms, and signed Provider Participation Agreement. The provider must meet all minimum requirements for the provider type including licensure and/or certification. The AHCCCS Provider Registration Unit performs the provider registration process and provides a monthly tape to the health plans and program contractors that contains information on AHCCCS registered providers. 4 APIPA Q: Please clarify that Home Delivered Meals would only be available to members receiving HCBS Def services in their own homes (i.e. not institutionalized or not residing in an HCBS approved alternative residential setting). A: Refer to the AHCCCS Medical Policy Manual, Chapter 1200, Section 1240.
7 6 4 APIPA Q: Please clarify that Homemaker Services, as defined here, may be performed through Attendant Def Care services described above. If not, please provide detail as to the distinctions in the services to be provided by these two (2) provider types. A: Refer to the AHCCCS Medical Policy Manual, Chapter 1200, Section 1240, and Chapter 1500, Section 1540. 5 MMCS Q: In the past, MMCS has allowed members to use their Medicare benefits with any Medicare Def approved hospice. Does this definition of Hospice now restrict the member's choice in only using a program contractor's approved network for hospice services? A: This definition only applies to situations where the hospice service is covered under Medicaid. This does not prevent a member from electing to use his or her Medicare hospice benefit. 6 APIPA Q: What is the definition of an "AHCCCS DMS"? (Definitions: PAS) Def A: AHCCCS DMS means Arizona Health Care Cost Containment System, the Division of Member Services. 6 APIPA Q: Is the term "member", as used in this definition of PAS, to refer to an individual initially applying Def for ALTCS program benefits (i.e. is performed as part of an initial application for ALTCS benefits in accordance with the terms of the last paragraph on page 9)? A: "Member" refers, in this circumstance, to "applicant or member". The PAS is used to determine initial (applicant) and ongoing (members) medical eligibility as specified in section D., pages 9 and 10. 7 APIPA Q: What is the definition of a "Primary Caregiver?" (Definitions: Respite Care) Def A: "Primary caregivers" refers to individuals who are the member's usual caregivers. This generally refers to non-paid family members and significant others involved in the member's care. 7 APIPA Q: What is the definition of the term "Fiscal Agent"? Is it meant to be synonymous with the term Def "Agent" as previously defined? (Definitions: Subcontractor) A: "Fiscal agent" refers to an agent authorized to commit or obligate funds on behalf of another. 7 APIPA Q: What is the definition of the term "Supportive Living Services"? (Definitions: Supportive Def Residential Living Center) A: Refer to the AHCCCS Medical Policy Manual, Chapter 1200, Section 1230. 9 APIPA Q: Please clarify the combination of conditions that would satisfy the word "either" in the second Intro. sentence. Would not pregnant individuals be first referred to apply for SOBRA benefits administered under the Acute Care Program? A: It is true that most AHCCCS eligible pregnant women would be covered under the acute care program. However, if a pregnant woman is determined to be at risk of institutionalization as determined by the PAS and meets all other ALTCS eligibility criteria, she could be found eligible for the ALTCS program and receive her ALTCS coverage through the program contractor. One of the Title XIX eligibility requirements is for an individual to be categorically related to the federal program; either as an aged individual (age 65), a disabled individual (which includes blindness), a dependent child (under age 18 or age 18 and a full time student expecting to graduate by age 19), a parent of a dependent child, or pregnant. These requirements apply both to the acute and long term care programs. 9 MMCS Q: Has the ALTCS definition of who we serve changed (e.g. pregnant)? Intro. A: See answer above. 9 APIPA Q: How are the circumstances of age and the conditions listed associated with "financial eligibility"? Intro. Please clarify that these circumstances represent separate eligibility requirements used in combination with the financial thresholds to determine eligibility for ALTCS Program benefits.
8 7 A: The ALTCS Financial Eligibility decision includes financial (income, resources) as well as non- financial eligibility requirements such as age 65 or older, disabled, blind, under 18 or pregnant, U.S. citizen, Arizona resident, having a social security number and assigning rights to third party payment sources. All of these requirements must be met; in addition, financial eligibility criteria and medical eligibility criteria must be met. See Chapter 1600 of the ALTCS Eligibility Policy and Procedures Manual. 9 APIPA Q: In and /or under what circumstances would AHCCCSA not perform an annual PAS evaluation? Or Intro. is this meant to refer to a PASARR? A: Annual PAS reassessments are not completed in certain circumstances. These are discussed in A.A.C. R9-28-305, Reassessments. 10 MMCS Q: Is 1996 expected to have a 13.8% growth? Intro. A: After further research on ALTCS historical enrollment data, AHCCCS has determined that the projected growth of the ALTCS EPD population is between 6-8% during the state fiscal year ending 6/30/96. 10 APIPA Q: What is the status of AHCCCSA's application to HCFA for the removal of the HCBS placements Intro. cap? Please confirm, if possible, the statement made at the Offeror's Conference that the CY 97 statewide HCBS cap may be set at 45%, up 5% from the current year. What HCBS rate cap should offerors use in preparing their bid responses? A: AHCCCSA has requested to have the HCBS cap eliminated; this request is still pending. At the Offeror's Conference, AHCCCSA staff indicated that, in the past, when requests to eliminate the cap have been made, HCFA has increased the cap 5%. If this occurs, then the new cap would be 45%. Offerors should use the HCBS percentage set for each county. 10 APIPA Q: The RFP states that the State has requested federal approval for removing the percentage cap Intro. entirely on HCBS placements. If this cap is removed, what impact will this decision have on the pre-determined HCBS placement distribution percentage noted on the capitation disk? A: None 10 TEMM Q: Does AHCCCSA view the growth and expansion of HCBS services as unlimited? What Intro. consideration has AHCCCSA given to HCBS reaching its maximum potential within given geographical areas? What consideration has AHCCCSA given to the limited resources in rural counties in establishing the HCBS percentages? A: AHCCCSA does not view the growth and expansion of services as unlimited. However, AHCCCSA believes that due to expanding network, alternative settings and the realignment of financial incentives, HCBS placement will experience growth. AHCCCSA will continue to monitor growth trends by geographic area to determine when HCBS placement may be reaching maximum potential. AHCCCSA recognized urban and rural differences when applying the percentage add-on to the HCBS placement distribution for capitation purposes. 11 APIPA Q: Is the term "Private Duty Nursing" to incorporate service availability of 24 hours per day, 7 days D.1 per week? If yes, is this required in all cases, or can a program contractor establish parameters in each case based on need? A: Yes, if services are cost effective. Refer to the AHCCCS Medical Policy Manual, Chapter 1200, Section 1240 and Chapter 1500, Section 1520. 11 CHS Q: Long-Term Care - HCBS Alternative Residential Settings: AHCCCS Rule R9-28-202 does not D.1 specifically refer to a Traumatic Brain Injury Treatment Facility. Can AHCCCSA clarify the exact facilities and locations referred to? If this is a "treatment facility," is it not an Institutional Setting, such as a Rehabilitation Institute? A: These are health care facilities with an unclassified license for the treatment of people with head
9 8 injuries. "Unclassified" is a catch-all term for any health care facility that does not fit into one specific ADHS licensure type (e.g., nursing care institution, adult care home). There are two known facilities in the Phoenix metropolitan area operated by NovaCare. We are not aware of any program contractors using these settings. 12 PHS Q: What are the quality management requirements of AHCCCSA for behavioral health services? D.2 A: Quality Management for program contractors is defined in Chapter 1000 of the AHCCCS Medical Policy Manual. 12 APIPA Q: Are members allowed to self-refer for behavioral health services? If so, is there a limitation as to D.2 how many times a member may self-refer (and for types of services, if applicable) for behavioral health services in a twelve (12) month period? A: Yes, members are allowed to self refer; there are no limits on Title XIX services. Should a member make repeated self-referrals that are not medically necessary, the case manager and behavioral health coordinator should make every attempt to educate the member. There should be clear tracking and documentation in such situations. 12 APIPA Q: Do all behavioral health services, regardless of referral source, require coordination through the D.2 member's ALTCS Case Manager? A: The case manager is responsible for knowing of and coordinating all services received. The program contractor must establish a system that includes case manager notification of any behavioral health service. 12 APIPA Q: Does AHCCCSA have available a copy of the standardized, initial HCBS members' behavioral D.2 heath screening tool to be used by program contractors? If so, will such a copy be available for review by offerors in the Bidders Library? Can a program contractor modify the tool to capture additional information, as warranted? A: There is no such screening tool. Program contractors must develop and use their own assessment tools at the initial assessments and reassessments. 12 APIPA Q: A behavioral health screen for HCBS members is required within seven days of referral. Does this D.2 refer to the referral for HCBS services or the referral specifically for behavioral health services? A: A behavioral health screen for HCBS members is required within seven days of referral for behavioral health services. A behavioral health screen within seven days is not required for members in nursing home facilities as the member is in a safe environment. The referral generated from that source, i.e. the PCP or other staff, indicates that the member has already been screened. Determination that services are needed is evidenced by the referral. For nursing home referrals, services must begin within thirty days. 13 APIPA Q: Is the log only for calls from members seeking information in the event of an emergency? D.6 A: The log is for members seeking emergency services. 14 CHS Q: Please clarify the difference between "medically necessary" institutional care and Respite Care. D.8 Currently, in the CATS coding for an HCBS member placed temporarily in a nursing home would be the respite code. Please clarify the period of institutionalization. The ALTCS Policy referring to Transitional Members states that the period of institutionalization may not exceed "90 days per admission", whereas the RFP states "90 days." A: Respite Care is for providing rest and relief for family members caring for the member who normally resides at home. An ALTCS-T member per the PAS no longer meets the criteria for the institutional level of care. The nursing facility (NF) revenue code for Respite Care is not to be used for ALTCS-T members unless it is for the purpose of respite. When an ALTCS-T member's condition changes and requires medically necessary NF services, the appropriate NF revenue code should be used. The 90 days is per admission as stated in the policy. 14-16 MMCS Q: For a continuing offeror, will ALTCS grant a short transition period (e.g. 60 days) to meet the
10 9 D.9 mandated caseload sizes? A: Offerors were made aware of this requirement more than five months before the beginning of Contract Year 96-97, which gives the continuing offeror adequate notice to meet this requirement 14-16 APIPA Q: Who will be performing the program contractor's annual case management ratio review? What D.9 tools and measurement criteria will be used in performing this review? A: Each contract year AHCCCSA staff reviews the appropriateness of the current case management ratios. Input from program contractors, data from other states, and overall case management performance are given consideration when determining if adjustments are warranted. 14-16 APIPA Q: Given that membership levels and service placements (levels of care and settings) may change D.9 monthly, would AHCCCSA approve changes in case management ratios by program contractors monthly to better serve members' needs, based on the information included in the Monthly Roster report? A: No. 14-16 APIPA Q: What is the definition of "case management" (not included in Section C - Definitions)? D.9 A: Refer to the AHCCCS Medical Policy Manual, Chapter 1600. 14-16 APIPA Q: If an Adult Care Home is considered to be an approved HCBS alternative residential setting D.9 (Section D definition), please provide information to justify a required service review every 30 days as opposed to 90 days for HCBS service settings. If the 30 days service review timeframe is appropriate for Adult Care Home placed members, how is the 60 day differential factored into the case management caseload sizes listed above? Is the 30 day service review timeframe also required for other defined approved HCBS alternative residential settings? A: The legislation for the pilot program requires on-site visits every 30 days by the case manager. 14-16 APIPA Q: Within what timeframe is a Case Manager required to obtain the initial behavioral health D.9 professional's consultation for a member requiring behavioral health services, in order to coordinate behavioral health services delivery? A: The case manager would not delay the delivery of any necessary behavioral health services if a behavioral health professional was not available for consultation at the time the service was identified and needed. Initial consultation should occur within at least 5 working days; however, consultation should occur sooner if the situation were urgent. 14-16 APIPA Q: What are the penalties AHCCCSA may impose if services are initiated between the 14 and 30 day D.9 service initiation standards? On its face this appears to be a contradiction - is it AHCCCSA's intent that services for potentially complex cases be initiated within 4 calendar days of the initial on-site contact, if it occurs on the 10th calendar day from enrollment (within standard)? For example, for on-site contacts that occur on a Friday preceding a Monday holiday, is it AHCCCSA's intent that a program contractor would only have one (1) calendar day to coordinate and initiate services? A: There will be no penalties. Future awards and contract renewals will evaluate program contractors against the two week standard. This is to encourage program contractors to see members and determine needs before the 10 days. Any cases that have complex needs may require services to be initiated expeditiously so that hospitalization and other high cost services can be prevented. 14-16 APIPA Q: How will the CATS 5% acceptable data error rate be monitored? What are the potential penalties D.9 if the error rate is exceeded? A: This standard does not apply to program contractors who enter data directly on the CATS. 14-16 APIPA Q: For current program contractors who are on-line with CATS, does AHCCCSA anticipate any D.9 system changes, interface modification or other requirements to CATS for CY97? A: The Technical Interface Guidelines were distributed to all current program contractors and are available in the bidders library.
11 10 14-16 APIPA Q: In reference to program contractors transmitting to CATS in lieu of using an on-line terminal will D.9 program contractors be required to continue using the on-line terminal or can they opt to develop some other data capture process and submit on tape? If so, what are the advantages and/or disadvantages of doing this? A: The program contractor should retain one terminal or PC with dial-in access to facilitate processing or reviewing of data exceptions encountered while processing the file transmission. Data exceptions are identified on an exception report that is created at the time the program contractor interface process attempts to apply the service plan and placement data to the ALTCS database. Maricopa County and DES/DDD benefit from the program contractor interface because it eliminated the need to enter the case management information twice, once for the CMP service plan and once for their internal use. Maricopa County and DES/DDD have an electronic link between the AHCCCS system and their systems. They receive their exception reports electronically immediately following the processing of their data transmissions. Therefore, they are able to identify and resolve data exceptions the day after their transmissions are processed. The primary disadvantage for the program contractor is the requirement that they develop a new application or modify existing applications to create the file for input to the program contractor interface. Additionally, program contractors need to consider how they will handle data exceptions that will result from the processing of their transmission file. 14-16 CHS Q: Please define AHCCCSA's method of establishing the program contractor's rate, per member per D.9 month, for Case Management. CHS has been unable to access the underlying calculations on the disk which was provided by AHCCCS. A: Assumption for HCBS mix, case load, salary, benefits and travel have been included in a calculation model which is available on the capitation bid disk (press F-1 when on the case management amount). 14-16 CHS Q: The paragraph describing case manager initial contact with the members states that, "the case D.9 manager shall make initial contact with the member within five days of enrollment, initial on-site contact with the member within 10 days of enrollment,...." Because the definition of "days" by the RFP in "calendar days, unless otherwise specified, "this conflicts with Chapter 1600 of the AHCCCS Manual which allows for "working days." If the intention is indeed "calendar days" , this will be even more problematic since there will be no more prospective notice of enrollment. A: The language should read "five working days" and "10 working days". 14-16 CHS Q: Late Placement Report: What mechanism will be used for evaluating the reason as to whether the D.9 explanation for the non-placement of a client is valid? What type of notice will the program contractor receive prior to retroactive adjustment, and what time frames will apply? A: AHCCCS will use its judgment in determining whether the explanation for non-placement of a client is valid. As examples, a valid reason might be a client who is uncooperative; an invalid reason might be a lengthy wait caused by an inadequate provider network. The program contractor will receive a late placement list quarterly and will have two weeks to respond to the notice. Retroactive adjustments will depend on the circumstances of each case. 14-16 TEMM Q: Will AHCCCS revise the AHCCCS Medical Policy Manual, Chapter 1200, 1500, 1600 and D.9 Appendix F to reflect the "AHCCCSA performance standard of two weeks" to initiate services during the term of this contract? If future awards and contract renewals are evaluated against "AHCCCSA's performance standard", at what point in time is this standard to begin? A: The appropriate policy manual sections will be revised. The standard is to begin October 1, 1996 and will be evaluated by the case management review process and other methods that are appropriate. 14-16 PINAL Q: Page 16, Paragraph 2, states: "timely entry of data related to placement history cost effectiveness D.9 studies and service plans into the Client Assessment and Tracking System (CATS). "Timely" shall mean within 14 days of the event which gave rise to the transaction (e.g. service approval by the
12 11 case manager, placement change)." AHCCCS Medical Policy Manual, Chapter 1600 ALTCS Case Management, Policy 1620, Case Management Responsibilities, Page 1620-21.H. states "The case manager is responsible to update information in the CATS (CA160, CA161, and CA165) within five working days of the reassessment." Please clarify which time line AHCCCSA requires of program contractors.? A: The RFP statement is correct. The policy manual will be revised. 14-16 PINAL Q: Page 14, AHCCCSA has increased allowable caseload sizes effective October 1, 1996. Can you D.9 describe what methodology AHCCCSA used to determine these caseload sizes? Were methodologies currently in use considered, such as the methodology described in the Spring 1996 issue of the Journal of Case Management, Volume 5, Number 1, "A Method to Determine Case Manager Caseloads in Long-Term Care", by Cynthia Zelff Massie? A: AHCCCS surveyed several state Medicaid agencies about their case management ratios for nursing facility and HCBS members. A review of literature related to case management ratios was also performed. At the operational reviews, AHCCCSA received feedback on caseload sizes from case managers during that portion of the review. AHCCCSA also reviewed data from case management service reviews regarding timeliness, quality of care issues and unmet needs by placement type. 16 APIPA Q: How and with what frequency will AHCCCSA monitor and review PASARR screening to D.10 determine potential FFP recoupments? A: AHCCCSA monitors the PASARR program annually. HCFA also monitors the PASARR program annually. FFP withholding could occur if inappropriate admission without the proper PASARR screening is identified during either of these reviews. Cases for withholding can also be referred by the Division of Developmental Disabilities and Arizona Department of Health Services. 16 PHS Q: (a) What is the status of the current ALTCS quality indicator project? (b) In regard to the listed D.11 quality indicators, what will be the program contractor's responsibilities and the time frames required? (c) What are the indicator descriptions for activities of daily living and fractures related to falls? A: (a) The Office of the Medical Director is currently in the process of revising timelines for the Quality Indicators and other Quality Management projects. (b & c). Refer to the June 1995 draft of the ALTCS E/PD Clinical Quality Indicators for PC responsibilities and descriptions of the indicators. 16 APIPA Q: For the current quality indicators listed in this paragraph, what are the applicable compliance D.11 standards or benchmarks for each that will be required to be maintained by program contractors? A: See above response. 17 MMCS Q: Why was the due date for the quarterly Behavioral Health Utilization Report moved from 60 days D.12 after the end of the quarter to 30 days after the end of the quarter? Does AHCCCS realize that this will negatively impact the accuracy of the reports because not all claims are received and processed within this timeframe? A: The requirements for this report are being developed. Reporting deadlines may be changed and will be determined at a later date. 17 PHS Q: Why is the provider affiliation tape listed as part of the QM/UM reporting requirements? D.12 A: AHCCCS administrative decision. 17 APIPA Q: Isn't AHCCCS under court order to require notice for more than just prior authorization denials? D.13 If yes, please describe the additional requirements, the status of the litigation, the applicability of the case to ALTCS program contractors and whether bid and/or capitation rate adjustments will be allowed or awarded based on notice requirements in addition to those specifically listed in the RFP.
13 12 A: Program contractors are required to comply with 42 CFR 431.200 et seq. The cases presently in litigation involve notifications pertaining to eligibility actions and to terminations, suspensions or reductions in services related to prior authorization decisions. AHCCCSA is currently in the process of responding to the court on these issues and will keep program contractors apprised of these developments. 18 APIPA Q: How will AHCCCSA monitor program contractors' successful implementation of the second D.14 language requirement for member communications? What standards and/or criteria will be applied? A: It is up to the program contractor to have knowledge of their members' needs regarding second language printing requirements. During review of member material and the operational and financial reviews, AHCCCSA will ask the program contractor how it determines the need for material to be presented in a second language. 18 TEMM Q: Will the "14 days before the change goes into effect" notification requirement be waived by D.14 AHCCCS if the program contractor is not notified by AHCCCS of program or service changes within 30 days before the change goes into effect? A: Except for unusual circumstances, such as emergency legislation, AHCCCSA may waive the 14 day notification requirement if AHCCCSA has failed to notify the program contractors of a program or service change in a timely fashion. AHCCCSA will impose an appropriate notification date for these situations. 18 TEMM Q: The statement "[Program Contractor name] will make a final decision within 45 days of getting D.14 your written grievance" contradicts R9-28-802.B.4, which states "a final decision shall be rendered by the program contractor on all grievances within 30 days of filling" and R9-28-802.B.2, which states "all grievances shall be filed orally or in writing."? Please clarify. A: The Rule citations addressed in your question are correct. All grievances must be adjudicated within 30 days of filing, unless the grievant agrees to an extension. Member grievances may be filed orally or in writing. The sentence is changed to read "[Program Contractor name] will make a final decision within 30 days of getting your written or oral grievance." 20 PHS Q: Where is the documentation to be kept related to whether or not the adult member has executed D.19 advance directives? What is the definition of an adult member? A: The member's case record from the applicable institution should contain this information. An adult member is anyone 18 and older. 20 MMCS Q: How does AHCCCS define concurrent review activities? D.20 A: Any activities performed by concurrent review staff that are necessary to determine the appropriateness of stay in an inpatient hospital setting. 20 MMCS Q: Since JCAHO mandates hospitals to perform discharge planning, can this function be delegated? D.20 A: Yes, but the program contractor is ultimately responsible for those activities. Discharge planning can be delegated to hospital staff; however, any delegated activities must be monitored to assure appropriate D/C planning. The program contractor must assure that the CM or other designated staff are involved with the discharge planning process. 20 MMCS Q: May a program contractor subcontract UR/concurrent review functions? D.20 A: Yes; however, it cannot be to an entity that would have a conflict of interest, (e.g., hospital). There must be a process in place to monitor any of these delegated activities. 20 MMCS Q: For which populations is the program contractor responsible for concurrent review (i.e., ALTCS D.20 members without Medicare and/or TPL, all ALTCS members regardless of primary payer)? A: The program contractor is responsible for concurrent review of any member for whom the program contractor has the primary payment responsibility. When there is another primary payer, the case manager or other designated staff need to be involved to ensure a safe and appropriate discharge
14 13 plan. 22 CHS Q: Please clarify whether the Provider Manual must be sent to out-of-network providers. Many times D.23 an out-of-network provider only provides a service one time, and the provider would not even be interested in receiving the provider Manual. A: The Provider Manual must be sent to all contracted providers only. 23 PHS Q: "The proposed network shall be sufficient to provide covered services within designated time and D.24 distance limits." Where are these limits defined? A: The distance limits pertain to Pima and Maricopa counties only. This requirement is stated on page 62, in the last sentence of the second paragraph under "Network Maps". Appointment standards are stated in Section D, Paragraph 28. 23 APIPA Q: For an offeror's proposed network, what are the designated time and distance limits, by county, for D.24 the provision of covered services as referred to at the end of the first paragraph? A: See above response. 23 APIPA Q: Please confirm that monthly provider network changes will be required to be submitted to D.25 AHCCCSA in addition to the quarterly network tape changes submitted, as referenced in paragraph 12, page 17 (provider affiliation tape). If so, what medium (tape, hard copy) will be required for these monthly submissions? Also when will the monthly provider network changes report submission be due at AHCCCSA (not listed in paragraph 12, page 17)? A: The reporting mechanism for the monthly submission will be discussed at a future program contractor meeting in order to obtain program contractor input on this report. The format, medium and submission due dates will be established during this discussion. The provider affiliation tape will continue to be submitted quarterly. 23 CHS Q: Previous reporting requirements for network changes were required quarterly. If there are no D.25 additional additions or deletions to the network within a month, is a report required, or is this report required only if there are additions/deletions? A: See above response. 23 PHS Q: We currently submit a listing of the provider network on the quarterly provider affiliation network D.25 report. Is the monthly report a change of policy and if so, what is the reporting mechanism? A: See above response. 24 CHS Q: Please clarify why the program contractor must require a copy of the Provider Participation D.26 Agreement, since AHCCCS maintains copies of all of these agreements at the time that they assign a Provider number, and any subcontractor that the program contractor uses must have a Provider Number. The program contractor may not be aware if the provider is an AHCCCS Fee-for-Service provider or not. A: It is the program contractor's responsibility to ensure all subcontractors have a current AHCCCS Provider ID number. The second sentence of Section 26 is deleted and replaced with the sentence "The program contractor shall retain a copy of each subcontractors' AHCCCSA Provider Participation Agreement." 24 MMCS Q: This clause states that "The program contractor shall develop and maintain a provider network D.27 sufficient to provide all ALTCS covered services and approved settings..." Does this mean that each program contractor must provide and/or have a contract for all approved settings regardless of level of need and/or cost? A: The program contractor shall develop and maintain a provider network sufficient to provide all ALTCS covered services and settings. The program contractor shall make every effort to contract for all approved settings and services. This paragraph also requires the program contractor to report the circumstances making it unable to correct the network deficiency. 24 MMCS Q: How does the requirement that all non-emergency behavioral health appointments be provided
15 14 D.28 within 7 days reconcile with the requirement on page 12, #2 , that states that the behavioral health screening for HCBS members must be performed within seven days of referral. Does the standard also apply to nursing facility residents? Does the screening satisfy the requirement for an appointment? Does the requirement that treatment begin within 30 days of the referral continue to apply? A: Page 24, Paragraph 28, Appointment Standards, behavioral health services, b. Non-emergency appointments is incorrect. It should read: For BEHAVIORAL HEALTH SERVICES, the Program Contractor shall be able to provide appointments as follows: a. Emergency appointments within 24 hours of referral. b. Behavioral Health Screening within seven days of referral for HCBS members. c. Non-emergency appointments for nursing home residents: within 30 days of referral. d. Non-emergency appointments for HCBS members: within 30 days of behavioral health screening. The screening does NOT satisfy the requirement for an appointment UNLESS an additional service is provided by a behavioral health professional. For example if a psychiatrist does the screening and determines that medication is required and provides a prescription at that time, then the first service has been delivered. 24 CHS Q: Behavioral Health Services, b. Non-emergency appointments. It is unreasonable to have a higher D.28 standard for non-emergency behavioral health service appointments than for non-emergent Primary Care or Specialty appointments. There is not a wealth of Behavioral Health providers, such as psychiatrists or counselors, particularly in the rural areas, and their schedules are as busy as other specialists or primary care providers? A: See above response. 24 APIPA Q: What are the appointment standards for pregnant members? D.28 A: Refer to the AHCCCS Medical Policy Manual, Chapter 400, Section 410. 24 APIPA Q: What is the legal basis to require the reporting of "inappropriate practices by subcontractors, D.29 members or employees?" This far exceeds any statutory or regulatory authority that we are familiar with and violates the spirit of a rational approach to the appropriate responsibilities toward fraud and abuse between AHCCCSA and its contractors. The problems raised by this wording include what is or is not an appropriate practice that must be reported, how do program contractors train employees on the requirement, how can program contractors comply with this requirement which will mandate that each provider, member and employee be viewed with suspicion, and yet still respond to the needs of each with a customer service orientation. Please give serious consideration to deleting this phrase or replacing it with "a pattern of inappropriate practices by a subcontractor, member or employee that would likely constitute fraud or abuse." A: The phrase "or inappropriate practices" is hereby deleted. The amended sentence will read: "The Program Contractor is responsible for reporting all cases of suspected fraud and abuse by subcontractors, members, or employees." 24 TEMM Q: Since AHCCCSA requires the program contractor to forward copies in advance of the review of D.30 requested policies, procedures, job descriptions, contracts, records, logs and other material and requires program contractor personnel to be available at all times during the review, can AHCCCSA (except in the cases noted in the RFP) give the program contractor more advanced notice than two weeks? A: AHCCCSA may request specific documents to be forwarded prior to the review. In most cases, AHCCCSA asks for very few documents to be forwarded in advance and asks only that these
16 15 documents be available during the review. The requested items are documents that the program contractors should have developed. AHCCCSA will give at least two weeks notice. When there are problems with scheduling, AHCCCSA will work with the program contractors to try to reschedule. 24 TEMM Q: What scoring methodology is applied to the review finding if they are used in subsequent bid D.30 proposals? A: The results of the Operational and Financial Reviews are evaluated to assess the program contractors' compliance with AHCCCSA contract requirements, policies, rules and regulations as contained on the review report. 26 APIPA Q: What will be the RFP response evaluation weight given to an offeror's Operational and Financial D.31 Readiness Review (OFRR) when these reviews may not be performed for all offerors (both new and continuing)? How is this possible scoring weight built into the evaluation criteria and scoring formula delineated in Section I - Evaluation Factors Selection Process? A: The Operational and Financial Readiness Reviews may be conducted to assess a new program contractor. A new program contractor is considered to be an offeror who is bidding on ALTCS for the first time or a continuing offeror who is bidding on a county where they currently are not the program contractor. Therefore, it is not necessary to perform readiness reviews on all offerors. The purpose of the readiness review is to determine whether the new program contractor is ready to provide services by October 1, 1996. The readiness review is not factored into the RFP scoring. 26 APIPA Q: If OFRRs are to be performed, please confirm that they would occur in the timeframe between the D.31 response submission date (6/14/96) and the planned contracts award date (7/15/96). A: If the Operational and Financial Readiness Reviews are performed, they will occur between 6/17/96 and 9/30/96. Although AHCCCSA reserves the right to conduct the reviews of new offerors before the contract award, the readiness reviews are usually conducted after award. 26 APIPA Q: Please define "AHCCCSA's satisfaction" with regards to new offerors. What criteria and D.31 standards will be used and required to be met to measure such "satisfaction"? To what extent will AHCCCSA require demonstrated abilities to satisfy AHCCCSA versus commitments or promises? A: AHCCCSA uses an evaluation tool similar to the Operational and Financial Review tool to assess the offeror's ability to operate as a program contractor. The evaluation includes a review of the provider network, provider network management processes, program operations such as staffing, case management procedures, claims processing, behavioral health program, etc. During this review AHCCCSA will verify that all actions proposed to be done (in the offeror's proposal) have in fact been done. 26 APIPA Q: 33. c. Please confirm that the reporting to AHCCCSA on "a regular basis" will follow the terms D.33 outlined in paragraph 34 following. A: Yes, regular basis refers to the reporting guidelines identified in the Reporting Guide for Long-Term Care Program Contractors with the Arizona Long Term Care System effective 10/1/96. 26 APIPA Q: 33 f. Please define the term "other institutional" as used in this requirement. D.33 A: For example, Arizona State Hospital. 27 APIPA Q: Can AHCCCSA define or provide examples of a reorganization that applies here? D.34 A: Your question does not correspond to this RFP citation. 27 APIPA Q: What types of substitute security will be acceptable? What criteria will be used to evaluate D.35 whether a bond substitute is sufficient? A: Performance bond guidelines (effective March 1, 1995) were distributed to all acute care and long term care contractors. The guidelines clearly identify acceptable substitute securities. A copy of the guidelines is available in the Bidder's Library.
17 16 28 APIPA Q: Please clarify that the "month of November" referred to means "November 1996"? D.36 A: "month of November" refers to November 1996. 28 APIPA Q: In reference to the phrase "or as determined by AHCCCSA" in the first sentence, by what other D.36 criteria will AHCCCSA use to reasonably determine the performance bond amount? A: At this time, AHCCCS uses the November capitation payment as the basis to determine the initial amount of the performance bond for all contractors. However, AHCCCS reserves the right to modify this requirement at any time during the term of the contract. 28 YCLTC Q: Can a Resolution of the Yavapai County Board of Supervisor Pledging to Provide Financial D.36 Backing as an ALTCS Program Contractor, passed and adopted on June 14, 1993, meet the requirements for Performance Bond Substitute? A: If the resolution passed and adopted June 14, 1993 has no expiration or is not tied to a particular contract or contract cycle, and it is the intention of the County to continue to pledge and provide financial backing, the resolution can be used to meet the performance bond requirement. 28 APIPA Q: Under what circumstances may AHCCCSA "deem appropriate" to change financial viability D.37 criteria and performance measures? Would all changes be consistently applied to all program contractors? A: There are many factors which could cause a change in the viability standards. For example, equity per member generally represents approximately one month of capitation. This standard could change if capitation rates were significantly increased or decreased. Changes in viability factors would be consistently applied if appropriate. At the current time, the standards are consistent for all contractors. However, depending on the change it may be appropriate to recognize factors such as urban/rural differences or program size. 28 APIPA Q: 37. a. Current Ratio: Will AHCCCSA consider changing the definition of this ratio to make it D.37 consistent with the Acute definition which allows contractors to include as current assets any long term investments that can be converted to cash within 24 hours without significant penalty (i.e. greater than 20%)? A: Yes, both definitions are identical. "Current assets" include any long-term investments that can be converted to cash within 24 hours without significant penalty (i.e. greater than 20%). 2 APIPA Q: 37. b. Equity Per Member: Will AHCCCSA consider changing the definition of this measure to D.37 make it consistent with the current measure and the Acute measure which does not require contractors to reduce the equity amount by the balance of the on-balance sheet performance bond? A: Both definitions are identical. AHCCCSA will continue to take performance bonds into account when considering approval for distributions of equity. 28 PINAL Q: Equity per member is defined by AHCCCS as "equity, less on-balance sheet performance bond, D.37 divided by the number of members at the end of the period." Did the definition of equity per member change since the last contract period? A: See above response. 28 APIPA Q: 37. c. Total Administrative Cost Percentage: I) This measure has remained the same since the D.37 prior RFP, yet AHCCCSA continues to increase the administrative requirement of program contractors (i.e. program contractors must establish a process for collecting the share of costs from HCBS members). Will AHCCCSA consider increasing this percentage in light of the current program requirements? II) In addition, will AHCCCSA please clarify the proper expense classification of case management costs. Are case management costs to be classified as administrative or program expenses? A: The administrative standard will remain 8 %. As identified in the Reporting Guide for Long-Term Care Program Contractors with the Arizona Long Term Care System effective October 1, 1996, case management costs are considered administrative expenses.
18 17 28 APIPA Q: 37. d. Please define/delineate the expenses includable in the term "Total Administrative Expenses". D.37 A: As identified in the Reporting Guide for Long-Term Care Program Contractors with the Arizona Long Term Care System effective October 1, 1996, administrative expenses are identified as Compensation, Case Management, Data Processing, Management Fees, Insurance, Interest Expense, Occupancy (Rent/Utilities), Depreciation and Other. Others may include but are not limited to legal fees, audit fees, bank fees and other expenses associated with the overall management and operation of the Program Contractor. 28 PINAL Q: According to AHCCCS, what is the definition of performance bond, and what purpose does it D.37 serve? A: Please refer to page 27 paragraph 35 of this solicitation for performance bond definition and purpose. You may also refer to Performance Bond Guidelines available in the Bidder's Library. 28 PINAL Q: What is the purpose for the additional $2,000 equity per member above the performance bond D.37 requirement of 110% of the December 1994 capitation payment? A: Equity per member is used to provide additional financial assurances. As stated on page 28 paragraph 36, initial performance bond amounts shall be based on capitation payments expected to be paid in the month of November or as determined by AHCCCSA. This has been clarified to indicate November 1996. 28 PINAL Q: Do these requirements reflect what is stated in ARS 36-2952 which states that "...If there are any D.37 unexpected monies remaining in the fund at the end of any fiscal year, the county shall carry over such monies to the next fiscal year to be used only to provide services pursuant to this article or to pay all or any part of the county's share of the total nonfederal part of the actual costs of the Arizona Long-Term Care System? A: Yes. 28 PINAL Q: Although we realize the wisdom in maintaining a reasonable amount of member equity, how is D.37 reasonable member equity determined? A: Equity per member is calculated as approximately one month's capitation per member. 28 PINAL Q: Total Administrative Cost Percentage as defined by AHCCCS is "total administrative expenses, D.37 excluding income taxes, divided by total revenue". The standard is set at "no more than 8%." In previous years, AHCCCS has determined administrative costs according to the percent of HCBS clients served. ALTCS programs serving a higher percent of HCBS clients were given a higher capitation rate in the administrative line item to cover additional expenses. If this will continue to be the practice for determining acceptable administrative expenses, it seems that uniformly applying the 8% standard might be misleading. For example, programs capitated at 8 percent due to a higher HCBS mix who spend 8 percent on administrative costs will not appear as favorable in this areas as programs capitated at 7 percent, but who are also spending 8 percent on administrative costs. When evaluating financial viability criteria for the total administrative cost percentage, how will AHCCCS adjust for these differences? A: Offerors will be evaluated on their ability to meet the standard. 28 APIPA Q: For organizations with multiple lines of AHCCCS business, will it be necessary for indirect cost D.38 allocation methodologies to be approved in advance by AHCCCS' Office of Managed Care prior to the contract start date? A: Yes. 28 APIPA Q: Upon receipt by AHCCCS' Office of Managed Care, what are the approval turnaround timeframes D.38 and requirements to be met? What information should be included in such a request? A: Approval for distributions, advances or loaning of equity funds requires approval from the Director of AHCCCS which is generally accomplished within two weeks from the date of receipt of the request. Information to include in the request will vary depending on the type of request. For
19 18 example, requests for a loan would require at minimum the amount, the reason for the loan, terms and interest rates. If the program contractor is unclear what to include in a particular request, it should contact the AHCCCS Office of Managed Care prior to submitting the request for approval . 28 APIPA Q: Is prior approval needed for a distribution of profits or equity in excess of requirements to a D.38 program contractor's owners? If so, what criteria will be used? A: Yes, prior approval is required for all distributions of equity or profit. Criteria may include, but not be limited to, amount of total equity, existence of outstanding loans and compliance with other viability standards. 29 MMCS Q: Is the HCBS cap expected to increase by the same % each subsequent year of the contract? D.40 A: HCBS percentage will be reevaluated each subsequent year of the contract, and may not increase at the same ratio or "by the same amount." 29 APIPA Q: Under what circumstances, when a program contractor exceeds its contracted (assumed) HCBS D.40 percentage, will a program contractor be reimbursed amounts, rather than having amounts recouped? A: Never. Based on the recoupment/reimbursement schedule on page 29 of the RFP, a program contractor would not be reimbursed when it exceeds the assumed HCBS mix. Reimbursement only occurs when the program contractor's mix is below the assumed mix per the schedule on page 29 of the RFP. 29 CHS Q: Please define AHCCCSA's method of assigning the HCBS percentage to the program contractors. D.40 Can the reconciliation be accomplished every six months, and can it be done within thirty days of the end of the period? A: HCBS percentage was calculated on a county specific basis using actual placement year to date as of January 1996. A percentage to accommodate growth trends and alternative settings was added. Reconciliation's will be completed at the end of the contract period when CATS data is considered to be complete. 29 TEMM Q: Please define AHCCCSA's methodology for calculating the assumed ratio "mix" of HCBS D.40 member months. A: See above response. 29 APIPA Q: Program contractors are not allowed to enter into hospital reimbursement arrangements that when, D.41 in the aggregate, the subcontracted rates exceed what would have been paid had the AHCCCS Fee For Service Hospital Reimbursement rate been used. In light of the fact that AHCCCSA's Fee for Service Hospital Reimbursement rates will not be made available until after the RFP submission deadline, how will the State address the potential situation that a prospective bidder has unknowingly subcontracted with a hospital or nursing facility a reimbursement package that in the aggregate exceeds the AHCCCS Fee For Service Hospital reimbursement rate and this subcontract was included as part of the program contractor's RFP response? A: Program contractors may not reimburse a hospital more, in the aggregate, than what AHCCCS would pay, in the aggregate, under the hospital tiered per diem system. The inpatient hospital rates will be adjusted effective 10/1/96 for inflation and length of stay, as was done 10/1/95. These new rates will not be available prior to the proposal due date of 6/14/96. Therefore, offerors should use caution in developing their contracts with hospitals. 29 APIPA Q: What is anticipated at the time this question is answered regarding AHCCCSA's "disentanglement" D.41 legislation? How will this section change in response? Will bidders be allowed a bid or program change in response to the likely impact of the legislation? Please view this question generally and in light of a Program contractor in a rural county that uses a Maricopa or Pima County hospital for tertiary services. A: SB 1283 (AHCCCS Omnibus) which addresses disentanglement legislation is effective 10/1/97. Implementation of this legislation will be handled through a contract amendment if necessary.
20 19 29 TEMM Q: Are hospital contracts which reimburse the hospital at the tiered per diems for inpatient services D.41 and AHCCCS specific cost-to-charge ratio required to be submitted to the AHCCCSA, Office of Managed Care? If hospital contracts are approved by AHCCCSA, Contracts and Purchasing, in compliance with Section E, Paragraph 10, Subcontracts, are they also required to be submitted to the Office of Managed Care? A: All contracts should be submitted to the AHCCCSA, Contracts and Purchasing Office. 30 APIPA Q: Based on the language contained in this paragraph and the verbal answer provided at the Offerors D.42 Conference, please confirm that the Ventilator Dependent member capitation rates are not open or subject to the bidding process under this solicitation. A: Ventilator Dependent rates have been set by AHCCCSA and are not open or subject to the bidding process under this solicitation. 30 APIPA Q: Please define the term "approved ALTCS institutional settings" as referred to in this paragraph. D.42 A: Refer to Chapter 1200 of the AHCCCS Medical Policy Manual. 30 APIPA Q: Please confirm that the cost for a Ventilator Dependent member's annual pulmonologist evaluation D.42 is to be borne by the program contractor. A: That is correct. 30 CHS Q: The Ventilator Dependent Reimbursement capitation rates do not appear to include any allocation D.42 for risk, when assessed against actual costs for services for non-Medicare covered clients. For example, in reviewing costs for our previous institutional vent-dependent client, the costs for institutional, acute, and administration were at $12,000. Our current HCBS vent-dependent client has a secondary insurance, but the costs, would be approximately $6,000 if there were no secondary insurance. As a small plan, there are not enough vent-dependent clients to "spread" the risk. If no adjustment is possible, can AHCCCSA allow plans to receive reinsurance after some monthly deductible for services that are not normally covered by reinsurance? A: To determine capitation rates for ventilator dependent clients, AHCCCS reviewed current rates paid, surveyed all existing contractors and reviewed past encounter analyses. AHCCCS is currently conducting an additional encounter study to verify rates established. At this time, AHCCCS is not considering a reinsurance program for ventilator dependent clients. 30 CHS Q: Can the reconciliation be accomplished every month, and can it be done within thirty days of the D.42 end of the period? A: The ventilator dependent reconciliation for placement will be conducted on a quarterly basis. 30 TEMM Q: The first sentence indicates "the Program Contractor will be paid on a capitated basis for ventilator D.42 dependent members, however R9-28-710.D stipulates "Program contractors shall be paid on a fee- for-service basis for approved services rendered to ventilator dependent individuals." Please clarify. A: AHCCCSA will request a rule change to allow for the capitation of ventilator dependent members in all counties; however, the RFP provision takes effect 10/1/96 regardless of the status of the rule change request. 30 TEMM Q: Placement data is required to be entered in CATS by the program contractor for each member. D.42 Since the placement data is available to AHCCCSA on ventilator dependent clients, why are all ventilator dependent clients reimbursed at the Home and Community Based Services capitation rate instead of the actual placement capitation rate? If AHCCCSA cannot reimburse the program contractor on the actual placement of the ventilator dependent client, can the reconciliation of capitation rake place on a monthly versus a quarterly basis due to the potential impact on the program contractor?. A: The AHCCCS system is not currently programmed to accept two rates (HCBS and Institutional) for ventilator dependent clients. AHCCCSA will continue to reconcile for placement of ventilator
21 20 dependent clients on a quarterly basis. 30 PINAL Q: According to the capitation rates set by AHCCCS, the average HCBS costs for ventilator D.42 dependent members should be $5,000 per month, and for institutional members, $12,000 per month. During the 1995-96 contract year, Pinal County Long-Term Care served two ventilator dependent members at an average cost of $1,594 per day, or $48,458 per month during their status as ventilator dependent members. Additionally, $90,000 was reimbursed through reinsurance for acute care expenses incurred during the thirty days prior to achieving ventilator dependent status. Given the difference between our actual costs of $48,458 per monthly and the $12,000 per month for institutional ventilator dependent clients given in the ALTCS RFP, we have the following questions: How did AHCCCS determine the monthly capitation rates for ventilator dependent members?. Will these members be reinsurable? Does the monthly amount include all services, or only certain categories of service as determined by AHCCCS? A: To determine ventilator dependent capitation rates, AHCCCS reviewed current rates paid, surveyed all existing contractors and reviewed past encounter analysis. AHCCCSA is currently conducting an additional encounter study to verify the rates established. Ventilator Dependent clients are eligible for regular acute inpatient hospitalization reinsurance. For more information on reinsurance coverage please refer to the AHCCCS Reinsurance Policy/Procedure Manual. The rates established by AHCCCSA for ventilator dependent clients include all services. 30-31 PHS Q: What will be the procedure and time frames for approval of services and reinsurance for behavioral D.43 health/TBI clients? A: AHCCCS staff is currently developing the policy and procedures for this process. 30-31 APIPA Q: (1) When will AHCCCSA determine the deductible for Behavioral Health/Traumatic Brain Injury D.43 (BH/TBI)? (2) If the deductible is determined after the bids are due, will bidders be allowed to adjust their rates accordingly? Please specify what services are and are not included under the BH/TBI category. (3) What criteria will the OMD use to (One) approve or deny services in this category; and (Two) determine what is or is not subject to reinsurance? (4) What is the timeframe in which the OMD will respond? (5) Also, will retrospective approval be given? In as many instances, whether behavioral health services are "high cost" is not known until after treatment has been initiated. (6) Is the AHCCCSA suggesting here that a program contractor as the OMD for authorization at the onset of any behavioral health or traumatic brain injury service to preserve a claim for reinsurance? (7) What steps will AHCCCSA take here to avoid the confusion and inconsistencies that were experienced with the sick newborn deferred liability system? A: (1) There is no deductible - please see Amendment #1. (2) N/A; see above. (3-5) AHCCCSA is in the process of developing a policy that will address these issues. The policy will be available on or before 5/20/96. (6) This reinsurance is related to placement only. OMD should be notified of placement of members in high cost settings. (7) The policy that is being developed will contain detailed information in order to avoid any confusion. 30-31 APIPA Q: Please define the term "catastrophically eligible" (not defined in Section C - Definitions). What D.43 are the Office of the Medical Director Manual cites for the special catastrophic program? A: Catastrophic coverage is defined in R9-22-101, Rules, Definition, "catastrophic coverage limitation" and R9-22-503, Reinsurance, J-1.2.3. Catastrophic coverage is defined in the AHCCCSA Reinsurance Policy and Procedure Manual. Currently, major organ transplants and hemophilia are considered catastrophic.
22 21 30-31 APIPA Q: What will be the frequency and duration of the retrospective medical review process for regular D.43 HCBS reinsurance cases? A: Quarterly audits or until claims are submitted in the system. In the event a Program Contractor has no claims submitted for the contract year, a site visit will be scheduled to review the program. 30-31 APIPA Q: What formula and associated variables will be used in extrapolating the sample results to the D.43 program contractor's regular ALTCS reinsurance reimbursable population? A: A random sample (25%) of claims meeting the reinsurance threshold. A case is opened for a member with the first hospitalization and would continue for any additional hospitalizations that member would have. If a case is initiated during one quarter (continue hospitalization), but the member is not discharged until the second or third quarter, all medical documentation and claims for that hospitalization are reviewed. 30-31 APIPA Q: Will the extrapolation of the sampling results and possible partial reimbursement be applied only D.43 to the test period under review? A: See pages 2-16, Chapter 2, Section 9 of the AHCCCSA Reinsurance Policy/Procedure Manual. 30-31 APIPA Q: Will identified recoupable amounts be effected through a monthly capitation payment adjustment D.43 or another means? A: Amounts will be recouped through adjustments to capitation payments. 30-31 MMCS Q: (1) What is the process by which program contractors must obtain prior authorization for D.43 potentially high cost behavioral health/TBI individuals? (2) Will the process accommodate placements that must be done on an emergency basis? (3) Please explain how the following will be handled: A member is receiving behavioral health services at a level that is not expected to reach the reinsurance threshold. A change in condition occurs and the member requires additional services that will likely reach the threshold. The program contractor requests and receives approval from AHCCCS to include the individual in the reinsurance program. (4) Will the costs incurred prior to the approval be considered "allowable" for the purposed of reinsurance? (5) Will all cost be included in the reinsurance rate, in other words, are all behavioral health costs for services and settings counted including Level I, Level II, facilities for persons with TBI, all behavioral health procedure codes, medications, IMD, specialized behavioral health nursing facility units, adult care home for persons with TBI, crisis services, etc.? (6) Will reinsurance for BH/TBI be based on encounter data or will there be some other reporting mechanism? (7) Will periodic approval be required in order to maintain a person in the BH/TBI reinsurance program after initial approval has been granted? (8) What is the intent of AHCCCS by requiring prior authorization for reinsurance for expensive services or settings? (9) When AHCCCS reviews a request for inclusion in the reinsurance program, what criteria will be used in the decision-making process? (10) In other words, will AHCCCS utilize purely financial criteria or will it use clinical criteria? A: (1) This will be covered in the TBI policy that will be released on or before 5/20/96. (2) Yes, OMD will accommodate these placements that must be done on an emergency basis. (3-5) This will be covered in the TBI policy. (6) It is anticipated that the data will be reported manually similar to the catastrophic reinsurance method. The policy will detail the submission requirements. (7) This will be covered in the TBI policy. (8) The purpose of prior authorization is to reduce risk that may be incurred as this service has the potential for being high cost. (9) This will be covered in the TBI policy. (10) This will be covered in the TBI policy .
23 22 31-32 APIPA Q: Does AHCCCSA mean "deny authorization and/or reimbursement for a service" when the RFP D.44 states "deny a service?" What is the legal authority for denying authorization for a medically necessary covered service because of the existence of other coverage? On page 32, first full paragraph, what if the their party insurer refused to divulge or respond in a timely manner on whether the service is covered? In the paragraph just above Cost Recoveries, is it correct to assume that the obligation to transport for third party benefits extends only to trips for ALTCS covered services? A: "May deny a service" is an option which may be used in order to coordinate benefits. The program contractor may deny the provision of services, including the payment. Authorization means that a service is necessary. Services cannot be denied if it jeopardizes the member's health. AHCCCS is the payer of last resort pursuant to ARS 36-2903.G. Provision of transportation to coordinate benefits applies to all covered services. 31-32 APIPA Q: Please identify AHCCCSA's authorized representative for third party collections? D.44 A: Health Management Systems, Inc., and its corporate affiliate, HHL Financial Services, Inc. 31-32 APIPA Q: Please provide detail, on a pro-forma or model, basis of an acceptable third party collections D.44 subcontract with AHCCCSA's authorized representative. A: This is available in Bidder's Library. 31-32 APIPA Q: Under what circumstances and frequency will a program contractor be required to report case level D.44 detail of third party collections and cost avoidance (i.e. as per the terms of paragraph 34)? Does AHCCCSA have any specific reporting format to be used? A: Specific reporting requirements are to be determined. 33 APIPA Q: Will AHCCCSA notify program contractors of any new Medicare services which are not covered D.45 by AHCCCSA? A: As AHCCCSA becomes aware of new Medicare services not covered by ALTCS, Program Contractors will be notified. 33 APIPA Q: Please provide a listing of all Medicare TEFRA Risk HMO's in Arizona by county, if available. D.45 A: We regret we don't have this information available. 33 CHS Q: Please define the difference in scope or limitation of inpatient psychiatric services, psychological D.45 services, inpatient and outpatient occupational coverage, or respite services for QMB eligible persons versus Medicaid services, or refer to the specific citation which describes those services. A: For information on the scope of inpatient psychiatric services, refer to Section 1812(c) and (e), 1861(c) and (f), and additional information contained in Part A Coverage--Inpatient Psychiatric Hospital Services. Copies of these documents labeled as items #2, #3, #5 and #13 are in the binder labeled "Medicare/Social Security Act" in the Bidder's Library. For information on psychological services, refer to Section 1832(a)(2)(B)(iii), 1861(b)(4) and additional information contained in Part B Benefits--Psychiatrists and Psychologists, Part B Benefits--Qualified Psychologist and Clinical Social Worker Services, and Inpatient Hospital Coverage--Psychologist and Physical Therapists. Copies of these documents labeled as items #1, #3, #8, #9 and #11 are in the binder labeled "Medicare Social Security Act" in the Bidder's Library. For Information on inpatient and outpatient occupational coverage, refer to Section 1832(a)(2)(C), 1861(g) and (p), 1833(g) and additional information contained in Inpatient Hospital Coverage--Psychologist and Physical Therapist, Inpatient Hospital Coverage--Coverage Issues-Occupational Therapy, and Part A Coverage--Other Diagnostic and Therapeutic Items or Services. Copies of these documents labeled as items #1, #4, #6, #7, #11, #12 and #14 are in the binder labeled "Medicare/Social Security Act" in the Bidder's Library. The document, Part B Benefits--Mental Health Services and (and Partial Hospitalization Coverage) which provides information on psychiatric services, psychological services and occupational therapy services are labeled as item #10 are in the binder labeled
24 23 "Medicare/Social Security Act" in the Bidder's Library. The sole reference we located regarding respite is provided under Respite Care in the section on Hospice Services. A copy of this information is labeled as item #15, and is in the binder labeled Medicare/Social Security Act" in the Bidder's Library. 33 PHS Q: What does inpatient and outpatient occupational coverage mean? D.45 A: See above response. 33 PINAL Q: Paragraph 5, states: "If a dual eligible is enrolled with a Medicare TEFRA Risk HMO, Medicare D.45 will not reimburse the Program Contractor for Medicare covered services provided by the Program Contractor. Therefore the Program Contractor shall refer the member to the Medicare TEFRA risk HMO for all Medicare Covered services and shall not be responsible for the payment of any Medicare copayments, deductibles or premiums assessed by the Medicare TEFRA Risk HMO. The Program Contractor shall be responsible for any Medicaid covered services not provided by the Medicare TEFRA Risk HMO." Currently program contractors are responsible for deductibles and Co-Pays. Please explain this shift in policy and who is responsible for the deductibles and co-pays. PCLTC's concerns that the TEFRA Risk HMO and its providers will not provide services if they don't received the co-payment. A: AHCCCS is requesting clarification from HCFA at this time regarding deductible and co-pays. As soon as there is a definitive ruling on this issue, AHCCCS will notify all offerors. 33 APIPA Q: Please confirm the verbal statement made at the Offerors Conference that the last sentence of the D.46 first paragraph, "The Program Contractor must establish a process for collecting the share of cost from HCBS members." , refers only to those HCBS members residing in alternative residential settings. A: The sentence quoted generally refers to those HCBS members residing in alternate residential settings. However, if an HCBS member has an "income only trust" and therefore actually has more income than the $1,410.00 income maximum, he or she may have a share of cost. Example: Mrs. Brown has monthly income of $1,800 per month. Allowable deductions include $1,410 personal needs allowance if in her own home, $50 medical insurance premium $ 1800 - 1410 monthly income deductions - 50 ------- $ 340 share of cost If this member resided in an alternative residential setting, the Share of cost would be: $ 70.50 personal needs allowance 700.00 room and board charge 50.00 medical insurance -------- $820.50 deductions $1800.00 monthly income - 820.50 -------- $ 979.50 share of cost 33 APIPA Q: Are program contractors to consider the "actual share of cost assignment" to be the amount as D.46 shown as the share of cost by member per the monthly Member Roster report? A: Yes. 33 APIPA Q: Will the potential recoupment of amounts identified from the annual share of cost reconciliation be D.46 accomplished through a capitation payment adjustment? A: Share of cost recoupment will be made through deductions to capitation payments. 33 APIPA Q: How often will AHCCCSA change/adjust a member's assumed share of cost during a (12) month D.46 period, or is the assumed share of cost an average per member per month by county? A: The share of cost on the capitation rate calculation sheets (CRCS) will be reviewed annually.
25 24 33 APIPA Q: Will AHCCCSA please provide the details, formula, etc. of its share of cost reconciliation D.46 procedure? What date will be utilized? A: The reconciliation is completed by county and compares actual Share of Cost assignments (dollars) for the contract year divided by total member months (not including ventilator dependent) for the contract year. This amount is compared to the Share of Cost assumption used in the capitation rate and will result in either a recoupment or refund of the difference. As indicated in the RFP, the reconciliation will occur at the end of the contract year, or more frequently if deemed necessary by AHCCCSA. 33 APIPA Q: How will AHCCCSA be providing the HCBS share of cost information to program contractors? D.46 Will the HCBS share of cost be provided on the daily member roster the same as the current share of cost information, with a separate action code define the change or update? A: The share of cost for HCBS members will be included on the ALTCS Member Roster as is currently being done for institutionalized members. The possible need for any specific coding different from what is in place will be considered. 33 APIPA Q: Will the share of cost be adjusted if a member is HCBS and then, due to medical necessity, D.46 becomes institutionalized during the month, or vice versa? How will a program contractor receive the changes related to this potential share of cost adjustment? A: Yes, changes in the member's living arrangement (placement) may cause a change in the member's share of cost. Anytime a change in the member's circumstances requires an adjustment to the member's share of cost, this change is done prospectively and is reflected on the program contractor's Member Roster. 33 APIPA Q: Is it correct to presume that the implementation of any HCBS share of cost will occur monthly and D.46 that is may also change monthly as it presently does for institutionalized members? A: Yes, share of cost is always assessed for a monthly amount, and changes in the member's circumstances may require a change in the member's share of cost. Generally, these are changes in the member's placement, member's income, or in the share of cost allowable deductions. Elements affecting the share of cost are discussed in more detail in the ALTCS Eligibility Policy and Procedures Manual, Chapter 1600. 33 TEMM Q: Please define AHCCCSA's methodology for calculating the assumed deduction for share of cost D.46 A: Actual Share of Cost (SOC) assignments for the period 10/95 through 1/96 were divided by total member months for the same time period. A cost of living adjustment was also applied. 33 MMCS Q: Program contractors must establish process for collecting SOC from HCBS members - Are we D.46 correct I assuming you are speaking about alternative residential settings R&B only? A: Yes. 34 APIPA Q: The definition of "Management Services Subcontractor" on page 5 extends the requirement for D.47 approval to a contract for "any administrative service" needed to fulfill the program contractor's obligations. We can understand the need to know of and approve all of this information as it related to securing a contract through this bid process. However, such a requirement could become burdensome for both AHCCCSA and Program contractors after contracts are awarded. would AHCCCSA consider limiting the approval requirement to contracts above a threshold amount, say $5,000 annually, or to contracts directly related to management of the program contractor or some specific requirement(s) under Section D of the RFP? A: All management services contracts as defined in the RFP must be submitted to AHCCCSA for approval. 34 APIPA Q: What types of financial sanctions may be imposed by AHCCCSA resulting from implementation D.47 of this paragraph? A: Sanctions are determined on a case-by-case basis. See p.36, paragraph 56 of the RFP.
26 25 34 PINAL Q: "All management services subcontractors are required to have an annual financial audit. A copy of D.48 this audit shall be submitted to AHCCCSA, Office of Managed Care, within 120 days after the subcontractor's fiscal year." What exactly is AHCCCS requiring in this section? Does AHCCCS require an independent audit performed by an independent accountant not affiliated with the program contractor? Will AHCCCS accept compiled or reviewed financial statements? Furthermore, are there standards specific to AHCCCS that must be included in the audit? Must every management service subcontractor have an audit or are there income criteria that would determine who must have the audit conducted? A: AHCCCSA is requiring a certified financial audit. The audit may be conducted by the same firm that completes the offeror's financial audit, but should not be an employee of the offeror. AHCCCSA will not accept compiled or reviewed financial statements. If services billed by the management services subcontractor are less than $50,000 annually, AHCCCSA will waive the requirement for an audit. 35 APIPA Q: Will AHCCCSA consider adding the words "or agreed to by the Administration and Program D.51 Contractor" at the end of the sentence? A: No. 35 APIPA Q: Please describe the data exchange penalties referred to in this paragraph? D.53 A: At this time, the only penalties related to the data exchange requirements include those for data validation studies and pended encounters. However, as indicated in Section D, Paragraph 56 of the RFP, AHCCCS may sanction Program Contractors for any non-compliance with data exchange requirements. ` 35 APIPA Q: Please define the term "contract services". Is the term to be synonymous with "encounters" or D.54 more all encompassing such as "covered services"? A: At this time, the only penalties related to the data exchange requirements are for data validation studies and pended encounters. However, as indicated in the RFP, AHCCCS may sanction Program Contractors for any non-compliance with data exchange requirements. 36 APIPA Q: In those cases where AHCCCSA will require program contractors to use a specialty contractor, D.55 will AHCCCSA commit to program contractor input in advance into the need for and selection of a specialty contractor? Is cost the only basis upon which a program contractor does not have to sue a mandated specialty contractor? A: This section now pertains solely to organ transplants. In the future it may include other situations. As long as the services that the Program Contractor are able to contract for are equivalent, cost would be the predominant consideration. Quality of care concerns and past performance by a provider would also be considered. 36 APIPA Q: Are sanctions determined on a case-by-case basis per occurrence, or does AHCCCSA have D.56 specified sanctions for specific types of contract "non-compliance" with delineated AHCCCSA standards? If so, please identify such sanctions and their frequency of applications, amounts imposed, etc. A: Sanctions are determined on a case-by-case basis. 37 APIPA Q: With regards to the second paragraph, a contract clause that makes failure to timely sign a contract D.57 as grounds for termination is inconsistent with AHCCCSA's stated historical and continuing contracting philosophy of collaboration, partnership and fairness. This is especially true when there is no obligation on AHCCCSA to discuss proposed modifications upon renewal with a program contractor. Consequently, we strongly suggest removal of this section in its entirety. At a minimum, we suggest deletion of the words "or modification" from the second paragraph and the addition of a sentence that says the Administration and a program contractor may mutually agree to extend a contract while formal contract extensions and the terms thereof are being discussed.
27 26 A: In law and in public policy, the state always reserves the right to unilaterally amend or terminate its contracts for any reason and the contractor has the related right to present a claim for appropriate compensation. In most situations, however, AHCCCSA solicits contractor input and agreement before amending any contract. 37 APIPA Q: Based on this paragraph, is it AHCCCSA's intent that any amendments to this contract are to be D.57 accepted by program contractor without any potential prior negotiation to reach mutually acceptable concurrence of the times and expectations to be included? A: See above response. 37 APIPA Q: In the last paragraph beginning "Other AHCCCS related issues ... will ...", please explain the D.60 potential use of tobacco tax monies for various reasons. Would the use of these Moines be restricted to specific disease states, transplants, rate codes or have any qualifying restrictions? Would these monies be provided based on membership levels in the counties of Cochise, Gila, Pinal and Santa Cruz? Would these monies be provided in addition to the capitation rate and how much would a program contractor receive such monies? Is there a potential for other counties to be considered for relief, related to tobacco tax monies funding? A: When the RFP was prepared, AHCCCS did not know whether any new tobacco tax legislation would be passed by the legislature. The legislative session ended April 20 and the legislature passed HB. 2508, a new premium sharing program funded with tobacco tax monies that will impact the AHCCCS acute care program. It is not available to ALTCS eligible persons. The premium sharing program will be designed by a special legislative committee for non-AHCCCS, uninsured residents of the United States and Arizona who have income up to 300% of the federal poverty level. Individuals who choose to enroll in the premium sharing program must pay a still- undetermined amount to contribute to the cost of the premiums. It is envisioned that services for this new population will be provided by AHCCCS acute care health plans. If the legislative committee decides to proceed with the cost sharing program and it is implemented on October 1, acute care contract amendments will be issued. In SB 1060, the legislature provided $1 million in financial relief to four counties (Gila, Pinal, Santa Cruz and Pinal) in a direct appropriation to assist them with their contributions to the ALTCS program. Money is not available to AHCCCS or the program contractors. 37 APIPA Q: 60. h. Effective Date of Enrollment: D.60h (1) will AHCCCSA provide prospective bidders with the historical cost experience of new members up until they became the responsibility of the program contractors? (2) Assuming the Legislature does not address the proposed change to the effective date of enrollment prior to the RFP submission deadline, will AHCCCSA provide guidance as to how prospective bidders should address this situation in their capitation proposals? For example, should prospective bidders build their capitation proposal under the assumption that the effective date for program contractors for new members will be the date of notification or two days after the date of notification. (3) Assuming the Legislature does change the effective date of enrollment for program contractors to the date of notification subsequent to the RFP submission deadline and prospective bidders were instructed to prepare their bids assuming the effective date of enrollment for Program contractors would continue to be two days after the date of notification, what is the AHCCCSA's plan for incorporating this change into the bid process? Will prospective bidders be allowed to adjust their previously submitted bids? A: Offerors should develop their capitation proposals under the assumption that the effective date for program contractors will continue to be two days after the date of notification. 40 APIPA Q: Will AHCCCSA consider requiring both parties to sign to modify the contract by amendment? E.3 A: Since the state reserves the right to unilaterally amend the contract, signing by both parties is not required. 41 APIPA Q: Will AHCCCSA concur adding "or as otherwise provided under this Agreement" to the end of this E.7 clause?
28 27 A: Since no "otherwise provided" provision appears in the RFP, adding the terminology you're recommending would serve no purpose. 41 APIPA Q: Please delete "or anyone for whom the Program Contractor may be responsible." This clause is E.8 overly broad, vague and unnecessary given the list of those from who AHCCCSA is protected by the other terms in the indemnification. A: If the program contractor is "responsible" for a person's performance under this contract, that person's performance should certainly come under the purview of the general indemnification clause. We do not agree that it is overly broad, vague or unnecessary. 41 APIPA Q: For clarification add "by Program Contractor" between "performed" and "under." E.9 A: Your recommended revision would distort the meaning of this paragraph. Work performed by subcontractors is also included within the meaning of "work performed". 41 APIPA Q: 10. g. What is meant by a "description" of a subcontractor's patient, medical and cost E.10 recordkeeping systems, in terms of level of detail? A: The description must be sufficient to allow AHCCCSA to determine whether it is adequate to meet federal, state and contract requirements. 41 APIPA Q: 10. j. Is it to be assumed that a related party is one that receives $25,000 or more in payments for E.10 services provided in a (12) month period, as per 42 CFR 455.100 et seq.? A: The "$25,000 or more in payments" provision is unrelated to the definition of a "related party." Please see Section C, Definitions. 42 APIPA Q: Please define the term "NACHA". E.12 A: NACHA" stands for "National Automated Clearing House Association". A NACHA transfer is a wire transfer routed through an administrative service (NACHA) to the payee's bank. 44 APIPA Q: Will AHCCCSA provide an opportunity to cure a default? If so, will it commit to one in the E.21 contract? A: The purpose of this paragraph is only to define a right reserved to the state, not to describe a process precedent to the exercise of that right. 44 APIPA Q: Will AHCCCSA consider making this provision to the program contractor, as well? E.24 A: Yes. 44 APIPA Q: Will AHCCCSA provide advance written notice of its intent to offset? E.25 A: Yes. 46 APIPA Q: Please clarify that this is a monthly, capitated payment contract based on an amount per member E.34 per month payment mechanism, rather than a "Firm Fixed Price" contract, as presently stated per this paragraph.? A: The term "firm, fixed-price" used in this paragraph is correct. A firm, fixed-price contract is one in which the compensation is stated and agreed to by the parties ("firm") and the price or prices stated are not subject to automatic adjustment (e.g. indexing, escalation, COL increases) during the term of the contract ("fixed-price"). All of our capitated contracts are firm, fixed-price contracts. 46 APIPA Q: Will AHCCCSA commit to requiring itself to request correction in writing? E.36 A: The manner of requiring correction of services will depend on the circumstances of each case. 47 APIPA Q: Please add that the requirements of this paragraph do not apply to summary data as described in E.40 ALTCS Rule 9-28-514. A: That is correct. The restrictions upon disclosure of information do not apply to summary data and other reports which do not identify individuals by name.
29 28 49 APIPA Q: The Offerors Mailing Address is not included on the Section J checklist. For Section J purposes, G.5 where in an offerors response would AHCCCSA prefer to have this item located (e.g. Part I - General Matters)? A: The Offerors Mailing Address is included in Section G. The completion of Section G is a required submission on the Offeror's Checklist under "V. Organization". 50 APIPA Q: 7. d. Financial Projections: G.7 (1) Will AHCCCSA please provide an acceptable reporting format for the required financial projections? (2) Can the required financial projections be prepared on a combined service area basis or are separate projections be prepared on a combined service area basis or are separate projections required for each service area bid? A: AHCCCS will not provide a format for financial projections. Financial projections should include a balance sheet, statement of revenues and expenses, and changes in plan equity as defined by the Reporting Guide for Long-Term Care Program Contractors with the Arizona Long Term Care System effective October 1, 1996, available in the Bidder's Library. Financial statements may be prepared on a combined service area basis. 52 APIPA Q: For the purpose of submitting an appropriate Financial Disclosure Statement, is a change in G.8 corporate form, as opposed to an operational reorganization which occurred between the most recent fiscal year end date and 3/31/96, be considered a "significant change" requiring preparation of a 3/31/96 Financial Disclosure Statement for a continuing offeror? A: A change of this nature would be considered significant. The offeror should prepare a 3/31/96 Financial Disclosure Statement. 54 APIPA Q: If a continuing offeror has filed a "Related Party Transactions" form with its most recent annual G.9 Financial Disclosure Statement, is it necessary to prepare and resubmit this information, or may the information be considered communicated as through the instructions for paragraph e.8 above? A: If a continuing offeror has filed a financial disclosure statement including related party transactions within the last twelve months and has not undergone significant changes, a new related party transaction form need not be submitted. However, if the offeror has undergone a significant change and is submitting a disclosure statement for the period ended 3/31/96, a related party transaction form for the same time period should be submitted. 54 APIPA Q: How far back in the past should bidders report related party transaction under this paragraph? G.9 A: Twelve months; same requirement in G8, Financial Disclosure Statement. 60 MMCS Q: Is 4-19-96 the last possible date for questions or just for questions to be answered in the H.4 amendment? A: Just for questions to be answered in the amendment. After that date, written questions will be answered individually. A question that results in any change or significant clarification to the solicitation will be communicated to all prospective offerors by an amendment to the RFP. 61-63 APIPA Q: Please confirm, clarify and provide examples of the subcontracting risk arrangements AHCCCSA H.10 would like included, as discussed verbally at the Offerors Conference. A: An example of a risk arrangement contract between a program contractor and a nursing facility that would qualify for extra consideration follows: Program contractor provides a financial incentive to the nursing facility to identify members to the program contractor's case manager that can be stepped down from the current level of care or discharged from the facility into an HCBS setting. 61-63 APIPA Q: Please confirm that a Letter of Intent will have an equal evaluation weight as to a signed contract H.10 in the network scoring process, as discussed at the Offerors Conference. A: The letter of intent will have the same weight as a signed contract in the network scoring process.
30 29 61-63 APIPA Q: Please confirm that only one copy of an offerors Provider Manual is required to be submitted to H.10 satisfy the instructions of this RFP. (i.e. that one original and five copies are required; however, only one Provider Manual is requested). A: Only one copy of the offeror's Provider Manual is required. 63 APIPA Q: Please confirm from the Offerors Conference that hard copies of an offerors CRCS by county are H.11 to be included in the submitted copies, in addition to the one (1) capitation bid disk. A: Offerors are required to submit hard copies of their capitation bid by county. Please see Attachment F, Page F-1, last sentence of the first paragraph. 63 APIPA Q: What is meant by "clinical standards used" and "restrictions on settings for care"? H.12 A: "Clinical standards used" refers to the clinical standards that would be used for establishing utilization management policies and procedures. "Restrictions on settings for care" refers to the need to identify in utilization management policies and procedures any restriction of services based upon settings for care. 66 YCLTC Q: For counties that have first right of refusal and no competitive bids, why must they go through Best H.20 and Final Offer process? Why not offer the mid-point rate and avoid the costly negotiation process? A: Best and Final Offers (BFO's) are at the sole discretion of the AHCCCSA. As indicated in this solicitation, BFO's are an opportunity for the offeror to resubmit rate components not previously accepted by AHCCCSA. If the offeror has made an acceptable bid on all components, or is willing to accept the components set at the lower half of the actuarial rate range, the offeror need not submit a BFO if one is offered. 67 VHS Q: On Paragraph 1, entitled "Nursing facility network," the second sub-paragraph states that "Extra consideration will be given for letters of intent that specify payment rates, share cost collection agreements, and certain types of risk relationships." It is not clear how respondents to the RFP should document these "extra consideration" items since the Sample Letter of Intent (Attachment E of the RFP) contains language specifying that no alterations to the Letter of Intent are permitted. A: Your suggestion has been adopted for use and has been incorporated in the revised Attachment E, Letter of Intent, included herein. All offerors shall submit the revised Letter of Intent which includes the entry "Summary of Terms Attached? Yes _____ No_____". If yes is checked, the offeror must attach documentation that addresses rates, share of cost collection and/or risk arrangements. The offeror may add this documentation for Letters of Intent that have already been completed prior to this amendment decision. 67 PINAL Q: The offeror must submit the signed letters of intent and/or the contract signature pages for Contract Year 96-97 as part of its proposal. PCLTC has many contracts which only need to be renewed for 1996-97, do we need the letters of intent for renewable contracts? A: Yes. 67 TEMM Q: Please clarify the statement "extra consideration....given for letters of intent or contracts that specify payment rates, share of cost collection agreements, and certain types of risk relationships." What does "extra consideration" mean? Please provide examples. A: "Extra consideration" refers to the points awarded in the scoring process. For example, a letter of intent or contract for nursing facilities with specific payment rates, share of cost collection agreements, and risk arrangements will be awarded more points. Atch B PHS Q: Why are partial care services required county wide versus facility location? A: This was an error and has been corrected. Please see the revised Attachment B in this amendment. Atch B MMCS Q: (1) Partial Care: Please explain why AHCCCS has determined partial care to be county-wide vs. facility location?
31 30 (2) Behavior Management: Can the fact that the program contractor provides county-wide personal care, also satisfy the requirement of providing county-wide behavioral management (behavior management = personal care)? (3) How will county-wide coverage be scored? (4) Pharmacy: Gila Bend - There are no pharmacies in Gila Bend to my knowledge. A: (1) Partial Care should be listed as "Facility Location" on all applicable pages of Attachment B. (2) No. While behavioral management and personal care are essentially the same services, the services providers are not. You must have the capability of providing behavior management, with providers that meet the qualifications for behavior management providers, in approved service settings (including home) county-wide. (3) The offeror must indicate if the service is county wide. If the service cannot be established county wide, the Program Contractor must explain as described on page 62, "Network Development" (4) There is no pharmacy in Gila Bend, so this requirement is deleted. Nevertheless, the offeror must have a pharmacy system capable of providing medication to outlying areas of the service area. Atch B APIPA Q: Attachment B refers to a network disk. Please confirm that the network disk requirement has been deleted and that the paper roster referenced on page 62 (Section H) is the only network requirement, along with the amended Attachment G. Will AHCCCSA also be modifying the Section J checklist to reflect this change? Atch B A: The network disk requirement has been deleted. A completed paper roster for the nursing facility network, revised Attachment G and the roster described on page 62, "Acute care, HCBS and Behavioral Health" are the required submission for the provider network. Attachment J, Offeror's Checklist, has been revised to reflect this change and is included in this amendment. Atch C CHS Q: In some cases, pends can be a result of AHCCCS systems limitations. In those instances, the program contractors work with AHCCCS staff to try to correct the pended encounter. There should be no sanctions in these instances, as long as the program contractor has made every effort to try to correct the pended encounter. Please clarify if additional language can be inserted to this effect? Atch C A: See revised Attachment C, included herein. Atch F PHS Q: What is the formula used to calculate the PMPM cost from the Annualized Units per 1,000 -------------------------- member x Unit Cost? ------ A: PMPM is calculated as follows: Annualized Units multiplied by Unit Cost divided by 12,000 = PMPM. Atch F PHS Q: How was the HCBS percentage derived and how will this percentage be determined in subsequent years? A: HCBS percentage was calculated on a county-specific basis using year-to-date information as of January 1996. A percentage to accommodate growth trends and alternative settings was added. HCBS percentage in the subsequent contract years will be reevaluated and revised accordingly. Atch F APIPA Q: In the main worksheet of the bidding section of the capitation disk, AHCCCSA provided the following, pre-determined factors: -- HCBS and Institutional Placement Distribution Percentages -- Case Management Per Member Per Month (PMPM) -- Patient Share of Cost (PSOC) PMPM -- Vent Dependent Capitation PMPM (Home and Institutional) Would AHCCCSA please define how these factors were calculated? What assumptions, variables, were used in calculating these factors? Atch F A: HCBS and Institutional Percentage: This percentage was calculated on a county specific basis using actual placements year to date as of January 1996. A percentage to accommodate growth trends and alternative settings was added.
32 31 Case Management PMPM: Assumptions for HCBS mix, case load, salary, benefits and travel have been included in a calculation model which is available on the capitation bid disk (press F-1 when on the case management amount). Ventilator Dependent: To determine capitation rate for ventilator dependent clients AHCCCS reviewed current rates paid, surveyed all existing contractors and reviewed past encounter analysis. AHCCCSA is currently conducting an additional encounter study to verify the rates established. Atch F APIPA Q: Do the HCBS placement distribution percentages noted on the capitation disk represent the federal cap? If not, what are the federal cap percentages for HCBS placements and would AHCCCSA please explain the rationale for setting the HCBS placement distribution percentages at rates different from the federal cap percentages? A: The HCBS placement distribution does not represent the federal cap. The federal cap is currently 40% with a request to lift the cap entirely. AHCCCSA did not set the HCBS placement at the federal cap as it would be difficult for the majority of contractors to achieve. There is no requirement from HCFA to establish capitation rates at the federal cap. Atch F YCLTC Q: Is the "surgical services" line item required or can data be included in Specialists and Primary Care Physician line items? A: Offerors should use the designated line items whenever possible. Atch F YCLTC Q: In the Acute & HCBS worksheets, can projections be net of Medicare/TPL and then eliminate the need for Medicare/TPL projections (i.e., Line 18 Acute). A: Acute and HCBS costs should be reported gross of Medicare/TPL. Atch F YCLTC Q: Under "Case Management Assumptions", why were projections used for HCBS mix but not for total number? We have seen a 4% increase in the last two months and anticipate growth that would allow for at least one additional case management position over assumption level, as well as increasing supervision from .9 to full-time. If this can be demonstrated at time of Best & Final Offer, will we be able to adjust Case Management line item? Atch F A: For purposes of the capitation bid disk, AHCCCSA will not revise the enrollment amount used in the case management calculation. Atch TEMM Q: Please provide examples of the types of agreements between nursing facilities and program G contractors which would qualify for "extra credit or consideration in the scoring process." A: Two examples of an agreement between a nursing facility and a program contractor related to the collection of share of cost that would qualify for extra consideration follows: Example #1: Program contractor has delegated the share of cost collection function to the nursing facility. After unsuccessful attempts by the facility to collect the share of cost from the member, the program contractor agrees to send written notification to the member. The notification is expected to reasonably increase the probability of the collection of the member share of cost. Example # 2: The program contractor has retained the share of cost collection function. After unsuccessful attempts to collect share of cost from the member, the nursing facility agrees to perform specified procedures that are expected to increase the probability of the collection of the member share of cost. Atch I PINAL Q: Paragraph one states, The Offeror must submit the signed letters of intent and/or the contract signature pages for Contract Year 96-97 as part of its proposal. PCLTC has many contracts which only need to be renewed for 1996-97, do we need the letters of intent for renewable contracts? Atch I A: Yes. Atch J PHS Q: On the Check List (Page J-2), V. Organization-Financial Disclosure Statement does not have an *. However, on page 52 #8, it states "continuing offers who have filed the required financial disclosure statements within the last 12 months need to complete this section if no significant
33 32 changes have occurred since the last filing. Is the disclosure statement required? A: If the offeror has filed a financial disclosure statement within the last 12 months and has not had a significant change, the offeror is not required to complete a financial disclosure statement as of 3/31/96. APIPA Q: Will there be unique numeric plan ID numbers assigned to each county for the ALTCS members, or would existing plan ID numbers be utilized if a program contractor is a continuing offeror with existing ALTCS members? A: Existing plan ID numbers will be used if a program contractor is a continuing offeror with existing ALTCS members. YCLTC Q: Could following RFP FORMS be provided on disk to facilitate completion by using word processors? Section G - Representation and Certifications; Attachment D - Management Services Subcontractor Statement; Attachment G - Nursing Facility Network Roster; Attachment J - Offeror's Checklist. A: Subject to availability of staff, AHCCCSA will provide this or any other available text on disk (Word 6.0 for Windows) at a charge of $25. per disk. AHCCCSA makes no warranties of compatibility regarding any material provided on disk. All such requests may be submitted to Mark Renshaw, Contracts and Purchasing, and must be received by COB May 10, 1996. Amdt APIPA Q: Will AHCCCSA please clarify the reinsurance program for Behavioral Health/Traumatic Brain #1 Injury (BH/TBI) members? A: This will be covered in the TBI policy. APIPA Q: Are the acute costs incurred for BH/TBI members covered under regular reinsurance? A: Acute care costs that would normally occur under regular reinsurance would be covered. APIPA Q: How are prospective bidders to factor in BH/TBI reinsurance (non-acute) for institutionalized BH/TBI members on the capitation disk? The capitation disk as presented does not include an area to address reinsurance on the institutional worksheet, only on the HCBS worksheet. A: There is no reinsurance for institutional services. BH/TBI costs should be included on the HCBS worksheet. TEMM Q: Please clarify "acute care services and all other ALTCS services are not covered by reinsurance for this population." A: Members with behavioral health/TBI qualify for reinsurance reimbursement under the regular reinsurance program for acute inpatient TEMM Q: Do acute inpatient hospitalizations for the behavioral health/TBI qualify for reinsurance reimbursement? A: Acute care costs that would normally occur under regular reinsurance would be covered.
34 EX-10.1.A.4 6 SOLICITATION AMENDMENT #3 1 EXHIBIT (10.1)(a)(4) ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM ADMINISTRATION DIVISION OF BUSINESS AND FINANCE SOLICITATION AMENDMENT Page 1 of 2 ================================================================================
AMENDMENT NUMBER: SOLICITATION NUMBER: EFFECTIVE DATE OF AMENDMENT: PROGRAM: 3 YH6-0012 October 1, 1996 OMC/LTC ==================================================================================
OFFEROR'S NAME AND ADDRESS: Ventana Health Systems, Inc 2510 W. Dunlap Avenue, Suite #300 Phoenix, Arizona 85021 ================================================================================ PURPOSE OF AMENDMENT: To make various changes to the solicitation and to advise offerors regarding new policy. ================================================================================ THE SOLICITATION REFERENCED ABOVE IS AMENDED AS FOLLOWS: (1) Section D, Paragraph 43, Reinsurance, of the RFP, refers to policies under development regarding high-cost behavioral health and traumatic brain-injured members. These draft policies have been approved by the Office of the Medical Director and are incorporated by reference into the RFP. A copy of the policies are enclosed with this amendment. - -------------------------------------------------------------------------------- (2) Section D, Paragraph 54, Encounter Data Reporting, includes an incomplete list of services for "Level I Behavioral Health Facility" and "Level II Behavioral Health Facility". The complete list of services is as follows: Level I Behavioral Health Facility: Personal care, homemaker, behavior management, partial care and nursing services. Level II Behavioral Health Facility: Personal care, homemaker, behavior management, partial care and nursing services.
- -------------------------------------------------------------------------------- (3) Section D, Paragraph 57, Term of Contract and Option to Renew, second sentence, is changed from "three years" to "five years" as a result of recent legislation which extends the maximum total contracting period for ALTCS contracts. - -------------------------------------------------------------------------------- (4) An addendum to Attachment F (Instructions for Preparing the Capitation Disk) to reflect the new Behavioral Health/TBI policy is included as page 2 of this amendment. - -------------------------------------------------------------------------------- (5) Amendment #2, page 25 contains the following question which was answered incorrectly. The correct answer is as follows: APIPA Q: Please define the term "contract services". Is the term to be synonymous with "encounters" or more all encompassing such as "covered services"? A: The term "contract services" is synonymous with "covered services". - -------------------------------------------------------------------------------- (6) Attachment J, Offeror's Checklist, was added to the RFP for the convenience of offerors. If a requirement is stated anywhere in the RFP text, this statement takes precedence over an apparent omission of that requirement in the Offeror's Checklist. ================================================================================ EXCEPT AS PROVIDED FOR HEREIN, ALL TERMS AND CONDITIONS OF THE ORIGINAL SOLICITATION REMAIN UNCHANGED AND IN FULL EFFECT. ================================================================================ SIGNATURE OF AUTHORIZED REPRESENTATIVE: SIGNATURE OF AHCCCSA CONTRACTING OFFICER: James A. Burns ======================================= ======================================== TYPED NAME: TYPED NAME: MICHAEL VEIT James A. Burns ======================================= ======================================== TITLE: Chief Executive Officer TITLE: CONTRACTS & PURCHASING ADMINISTRATOR ======================================= ======================================== DATE: 5-28-96 DATE: ======================================= ========================================
2 Page 2 of 2 ADDENDUM TO ATTACHMENT F (INSTRUCTIONS FOR PREPARING THE CAPITATION DISK): TBI/BH EXPENSES AND REINSURANCE As indicated in the new AHCCCS policy included with this amendment (AMPM, Chapter 1200, Policy # 1250), program contractors are provided reinsurance coverage for specific services and settings for Traumatic Brain Injured and high-cost behavioral health (TBI/BH) members. Offerors should refer to the following to incorporate expenses and reinsurance into their capitation bids. NURSING FACILITY WORKSHEET - Offerors should not enter any expenses for those members considered to be TBI/BH and possibly eligible for reinsurance coverage on the Nursing Facility worksheet. Facility related expenses for these members will be reported on the HCBS Worksheet. HCBS WORKSHEET - Offerors should use lines #10 and #11 to report TBI/BH related expenses for those members eligible for the TBI/BH specific reinsurance. Expenses reported on these two lines should include all institutional or HCBS expenses anticipated for OMD-approved TBI/BH members. This amount should be a total facility, own home or approved residential setting per member per month cost. Do not include acute care services which should be recorded on the Acute Care worksheet. Offerors should provide written documentation to support assumptions used for lines #10 and #11. Assumptions must be detailed enough to support the per member per month cost calculations for lines #10 and #11. A projected offset for reinsurance revenue should be entered on the reinsurance line. This is a deduction to the overall HCBS per member per month cost. This line item is for TBI/BH related reinsurance only. Offerors should prepare written documentation including utilization assumptions which correspond to the assumptions used to calculate cost on lines #10 and #11. Refer to Amendment #1 for deductible and percentage coverage amounts. ACUTE CARE WORKSHEET - Expenses for TBI/BH members should be blended in with the acute expenses for all other acute care services. --------------- EX-10.2 7 SECURED CONVERTIBLE TERM LOAN AGREEMENT 1 EXHIBIT 10.2 SECURED CONVERTIBLE TERM LOAN AGREEMENT Dated: September 30, 1996 $3,000,000 MANAGED CARE SOLUTIONS, INC. (the "Borrower") and BLUE CROSS AND BLUE SHIELD OF TEXAS, INC. ("BCBSTX") 2 SECURED CONVERTIBLE TERM LOAN AGREEMENT This Secured Convertible Term Loan Agreement (the "Agreement") is made and entered into as of the 30th day of September, 1996 between Managed Care Solutions, Inc., a Delaware corporation ("MCS"), and Blue Cross and Blue Shield of Texas, Inc., a Texas group hospital services company ("BCBSTX"). RECITAL This Agreement is being entered into to provide a secured convertible term loan from BCBSTX to MCS in the maximum principal amount of $3,000,000 (the "Loan"). As hereinafter provided, the Loan shall be convertible into shares of common stock of MCS. AGREEMENTS In consideration of the mutual representations, warranties, and covenants set forth herein, and in consideration of the Loan made hereunder to or for the benefit of MCS by BCBSTX, the parties hereto agree as follows: ARTICLE I DEFINITIONS As used herein: "Accounts", "Chattel Paper", "Contracts", "Contract Rights", "Documents", "Equipment", "Fixtures", "General Intangibles", "Goods", "Instruments", "Inventory", "Investment Property" and "Account Debtor" shall have the same respective meanings as are given to those terms in the Uniform Commercial Code as in effect in the State of Arizona. "AHC" means Arizona Health Concepts, Inc., an Arizona corporation, which is a wholly-owned Subsidiary of the Borrower. "Bankruptcy Law" means any law referred to in clause (i) of Section 7.1.7 hereof. "Benova" means Benova Managed Care Solutions, LLC, a New York limited liability company, 65% of the equity interest of which is owned by the Borrower. "Business Plan" means the Business Plan dated July 16, 1996 delivered to BCBSTX by the Borrower prior to Closing. "CHCI" means Community Health Choice of Illinois, Inc., a Delaware corporation, which is 49% owned by the Borrower. "CHCI Note" means the promissory note made by CHCI payable to the order of the Borrower with an outstanding principal amount on the date of this Agreement of $2,000,000. 3 "Closing" means the closing referred to in Section 3.1. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute thereto. "Collateral" means the collateral referred to in Section 4.1 securing the Loan. "Collateral Coverage Ratio" means a ratio of Eligible Assets to the outstanding balance of the Loan at the time of determination equal to at least 150%. "Collateral Documents" means Pledge Agreement, Security Agreement and all financing statements required by the Security Agreement. "Consolidated Tangible Net Worth" means, at any time, the excess of the shareholders' equity of the Borrower over the unamortized goodwill of the Borrower and other intangible assets of the Borrower. "Controlled Group" means all members of a Controlled Group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Current Account" means any Eligible Account which has been rendered to the Account Debtor thereunder and does not remain unpaid for 90 days past the invoice date thereof. "Eligible Account" means an Account owing to Borrower so long as it continues to meet the following requirements: (i) it is genuine and in all respects what it purports to be; (ii) it is owned by the Borrower; and the Borrower has the right to subject it to a security interest in favor of BCBSTX and it is subject to a first priority perfected security interest in favor of BCBSTX and to no other claim, lien, security interest or encumbrance whatsoever, other than Permitted Liens; (iii) it arises from (A) the performance of services by the Borrower and such services have been fully performed and acknowledged and accepted by the Account Debtor thereunder or (B) the sale or lease of Goods by the Borrower, and such Goods have been completed in accordance with the Account Debtor's specifications, if any, and delivered to and accepted by the Account Debtor, such Account Debtor has not refused to accept any of the Goods, and has not returned or offered to return any of the Goods, or has not refused to accept any of the services, which are the subject of such Account, and the Borrower has possession of shipping and delivery receipts evidencing delivery of such Goods; (iv) it is a valid, legally enforceable and unconditional obligation of the Account Debtor thereunder, and is not subject to setoff, counterclaim, credit, 2 4 allowance or adjustment by such Account Debtor, or to any claim by such Account Debtor denying liability thereunder in whole or in part; (v) it does not arise out of a contract or order which fails in any material respect to comply with the requirements of applicable law; (vi) the Account Debtor thereunder is not a director, officer, employee or agent of the Borrower or a Subsidiary; (vii) it is not an Account with respect to which the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless the Borrower assigns its right to payment of such Account to BCBSTX pursuant to, and in full compliance with, the Assignment of Claims Act of 1940, as amended; (viii) it is not an Account with respect to which the Account Debtor is located in a state which requires the Borrower, as a precondition to commencing or maintaining an action in the courts of that state, either to (A) receive a certificate of authority to do business and be in good standing in such state or (B) file a notice of business activities report or similar report with such state's taxing authority, unless (x) the Borrower has taken one of the actions described in clauses (A) or (B); (y) the failure to take one of the actions described in either clause (A) or (B) may be cured retroactively by the Borrower at its election if (z) the Borrower has proven, to BCBSTX's satisfaction, that it is exempt from any such requirements under any such state's laws; (xi) it is an Account which arises out of a transaction made in the ordinary course of Borrower's business; (x) the Account Debtor is a resident or citizen of, and is located within, the United States of America; (xi) it is not an Account with respect to which the Account Debtor's obligation to pay is conditional upon the Account Debtor's approval of the Goods or services or is otherwise subject to any repurchase obligation or return right, as with sales made on a bill-and-hold, guaranteed sale, sale on approval, sale or return or consignment basis; and (xii) it is not an Account (A) with respect to which any representation or warranty contained in this Agreement is untrue or (B) which violates any of the covenants of the Borrower contained in this Agreement. "Eligible Assets" means (A) 80% of the amount of any Current Account, (B) 60% of the book value of any machinery and equipment, (C) 50% of the book value of purchased software, (D) 75% of the outstanding principal amount of the CHIC Note, (E) 95% of the amount of any certificate of deposit or letter of credit issued by a national or state bank having capital and surplus of at least $500,000,000 and (F) such portion of any other assets of the Borrower, 3 5 including the capital stock of any Subsidiary, as shall be agreed upon by BCBSTX and the Borrower on any Valuation Date, provided, however, that if the Borrower and BCBSTX are unable to mutually agree upon a valuation for this purpose of the stock of Ventana, then such stock shall be valued at its book value and 90% of such value shall be an Eligible Asset. "ERISA" means the Employee Retirement Income Security Act of 1974. "Event of Default" means an Event of Default under Section 7.1. "Financial Statements" means the consolidated balance sheets of the Borrower and its Subsidiaries as of May 31, 1996 and May 31, 1995 and as of August 31, 1996 and August 31, 1995 and consolidated statements of operations and cash flows of the Borrower and its Subsidiaries for the twelve and three months, respectively, ended on such dates. "Indebtedness" means, as to the Borrower or any Subsidiary, all items of indebtedness, obligation or liability, whether matured or unmatured, liquidated or unliquidated, direct or contingent, joint or several, including, but without limitation: (i) All indebtedness guaranteed, directly or indirectly, in any manner, or endorsed (other than for collection or deposit in the ordinary course of business) or discounted with recourse; (ii) All indebtedness in effect guaranteed, directly or indirectly, through agreements, contingent or otherwise: (1) to purchase such indebtedness; or (2) to purchase, sell or lease (as lessee or lessor) property, products, materials or supplies or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such indebtedness or to assure the owner of the indebtedness against loss; or (3) to supply funds to or in any other manner invest in the debtor; (iii) All indebtedness secured by (or for which the holder of such indebtedness has a right, contingent or otherwise, to be secured by) any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance upon property owned or acquired subject thereto, whether or not the liabilities secured thereby have been assumed; and (iv) All indebtedness incurred as the lessee of goods or services under leases that, in accordance with generally accepted accounting principles, should not be reflected on the lessee's balance sheet. Notwithstanding the foregoing, "Indebtedness" shall not be deemed to include amounts due participants under certificates issued by health maintenance organizations in the ordinary course of business unless the amount due under any such certificate has been finally determined and remains unpaid for a period of more than 30 days after such final determination. "Insolvency Law" means any law referred to in clause (ii) of Section 7.1.7. 4 6 "Laws" means all ordinances, statutes, rules, regulations, orders, injunctions, writs or decrees of any government or political subdivision or agency thereof, or any court or similar entity established by any thereof. "Loan" means the secured convertible term loan referred to in the Recital of this Agreement and represented by the Note. "MCSA" means Managed Care Solutions of Arizona, Inc., an Arizona corporation, which is a wholly-owned Subsidiary of the Borrower. "Note" means the 8% Convertible Note issued to BCBSTX, referred to in Section 2.4 hereof, evidencing the Loan in the form attached hereto as Exhibit A, as such note shall be amended, modified, extended, renewed or restated from time to time. "Obligations" means the obligation of the Borrower: (i) To pay the principal of and interest on the Note in accordance with the terms thereof and to satisfy all of its other indebtedness, liabilities or obligations to BCBSTX, whether hereunder or otherwise, whether now existing or hereafter incurred, matured or unmatured, direct or contingent, joint or several, including any extensions, modifications, renewals thereof and substitutions therefor (including amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code (or any successor statute)); (ii) To repay to BCBSTX all amounts advanced by BCBSTX hereunder on behalf of the Borrower, including, but without limitation, advances for liens, taxes, levies, insurance, rent, repairs to or maintenance or storage of any of the Collateral; and (iii) To reimburse BCBSTX, on demand, for all of BCBSTX's expenses and costs, including the reasonable fees and expenses of its counsel, in connection with enforcement of this Agreement and the documents required hereunder, including, without limitation, any proceeding brought to enforce payment of any of the obligations referred to in the foregoing paragraphs (i) and (ii). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" means: (i) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business that are not yet due and payable; (ii) Pledges or deposits made in the ordinary course of business to secure payment of workmen's compensation, or to participate in any fund in 5 7 connection with workmen's compensation, unemployment insurance, old-age pensions or other social security programs; (iii) Liens of mechanics, materialmen, warehousemen, carriers, or other like liens, securing obligations incurred in the ordinary course of business that are not yet due and payable; (iv) Good faith pledges or deposits made in the ordinary course of business to secure performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, not in excess of ten percent (10%) of the aggregate amount due thereunder, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business; (v) Encumbrances consisting of zoning restrictions, easements or other restrictions on the use of real property, none of which materially impairs the use of such property by the Borrower or any Subsidiary in the operation of its business, and none of which is violated in any material respect by existing or proposed structures or land use; (vi) Liens in favor of BCBSTX; (vii) Existing liens, if any, set forth or described on Exhibit D hereto; (viii) The following, if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings, so long as levy and execution thereon have been stayed and continue to be stayed and they do not, in the aggregate, materially detract from the value of the property of the Borrower or any Subsidiary, or materially impair the use thereof in the operation of its business and so long as the Borrower shall have established a reserve in its financial statements in an amount equal to any such claim: (a) Claims or liens for taxes, assessments or charges due and payable and subject to interest or penalty; (b) Claims, liens and encumbrances upon, and defects of title to, real or personal property, including any attachment of personal or real property or other legal process prior to adjudication of a dispute on the merits; (c) Claims or liens of mechanics, materialmen, warehousemen, carriers, or other like liens; and (d) Adverse judgments on appeal; and 6 8 (ix) Rights of third parties in deposits required by applicable law or regulations to be maintained by the Borrower and any of its Subsidiaries in order to conduct their respective businesses in any jurisdiction. "Person" means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, joint venture, court or government or political subdivision or agency thereof. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Pledge Agreement" means the pledge agreement dated September 30, 1996 entered into between the Borrower and BCBSTX in connection with the Loan, which pledge agreement shall be substantially in the form of Exhibit B hereto. "Pledged Stock" means all of the issued and outstanding capital stock of, and equity interests in, AHC, MCSA, Ventana and CHCI which is now owned or hereafter at any time acquired by the Borrower and all of the issued and outstanding voting capital stock of any corporation which is hereafter at any time acquired by the Borrower and all interest in Benova owned now or hereafter at any time acquired by the Borrower and any interest in any other partnership interest, limited liability company interest or joint venture interest which may hereafter be acquired by the Borrower. "Potential Default" means an event or condition which, but for the lapse of time or giving of notice, or both, would constitute an Event of Default. "Rate" means the Rate referred to in Section 2.7.1. "Records" means correspondence, memoranda, tapes, discs, papers, books and other documents, or transcribed information of any type, whether expressed in ordinary or machine language. "Security Agreement" means the security agreement dated September 30, 1996 entered into between the Borrower and BCBSTX in connection with the Loan, which security agreement shall be substantially in the form of Exhibit C hereto. "Subsidiary" means any corporation of which more than fifty percent (50%) of the outstanding voting securities shall, at the time of determination, be owned directly, or indirectly through one or more intermediaries, by the Borrower. For purposes of this Agreement, the term Subsidiary shall include Benova except that references to the corporate nature of Benova shall relate to its existence as a limited liability company. 7 9 "Third Party Financing" means any financing from a third party whether in the form of an Indebtedness for borrowed money, funded debt, sale and leaseback, convertible debt, private placement of common stock, preferred stock, or other equity or hybrid security, but excludes any other obligations incurred in the ordinary course of business, including, without limitation, renewals or extensions of existing Indebtedness and interest thereon, accounts payable, accrued medical claims, risk pool payables and accrued expenses. "Valuation Date" means the last business day of each March, June, September and December. In addition, BCBSTX shall have the right to designate two additional Valuation Dates in any fiscal year. "Ventana" means Ventana Health Systems, Inc., an Arizona corporation, which is a wholly-owned Subsidiary of the Borrower. "Warrant" means the warrant certificate issued to BCBSTX, referred to in Section 2.8 hereof, evidencing the right granted to BCBSTX in connection with the Loan to purchase shares of common stock of the Borrower, which Warrant shall be in the form attached hereto as Exhibit E. "WGB Convertible Note" means the 8% convertible unsecured note issued to Malcolm McDougal Brown and Richard C. Jelinek, trustees u/a dated 12/20/93 with William Gardner Brown, grantor known as the William Gardner Brown 1993 GST Trust on the date hereof which is convertible into common stock, $.01 par value per share, on the same basis as the Note. "WGB Warrant" means the Warrant issued to Malcolm McDougal Brown and Richard C. Jelinek, trustees u/a dated 12/20/93 with William Gardner Brown, grantor known as the William Gardner Brown 1993 GST Trust on the date hereof to purchase 10,000 shares of common stock, $.01 par value per share, of the Borrower, on the same basis as the Warrant. Interpretation. In this Agreement, unless the context otherwise requires: (i) The terms "hereby," "hereof," "hereto," "hereunder," "herein" and any similar terms used herein refer to this Agreement, and the term "hereafter" shall mean after, and the term "heretofore" shall mean before the date of this Agreement; (ii) Words contemplating the singular number shall mean and include the plural number and vice versa; (iii) Any headings preceding the text of the several Sections and Paragraphs of this Agreement, and any table of contents or marginal notes appended to copies hereof, shall be solely for the convenience of reference and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect; 8 10 (iv) Sections and Paragraphs mentioned by number only are the respective Sections and Paragraphs of this Agreement so numbered; and (v) As previously disclosed to BCBSTX by the Borrower, AHC has a negative net worth, and without the investment of additional funds, AHC may be unable to satisfy its obligations as they become due. To the extent any representation, warrant, covenant or default in this Agreement would be breached or violated due to the financial condition of AHC or its business, such representation, warranty, covenant or default shall be deemed not to apply to AHC. ARTICLE II THE LOAN 2.1 General Terms. Subject to the terms hereof, BCBSTX will lend the Borrower the principal sum of $3,000,000 on a term basis. 2.2 Disbursement of the Loan. BCBSTX will wire transfer the proceeds of the Loan at Closing to the Borrower's bank account as shall be designated by Borrower at least 24 hours prior to Closing. 2.3 Use of Loan Proceeds. Proceeds of the Loan will be used by the Borrower to satisfy existing Indebtedness, provide working capital and finance expansion. 2.4 The Note. At the time of the making of the Loan, the Borrower will execute and deliver the Note to BCBSTX. 2.5 Payments of Principal. The principal of the Loan shall be repaid as follows: 2.5.1 The principal amount of the Loan shall be due and payable on September 30, 1999 unless (i) the Loan is automatically extended as provided in Clause 2.5.2 below in which event the principal amount of the Loan shall be due and payable on the date to which the Loan is automatically extended pursuant to Clause 2.5.2 below, or (ii) BCBSTX otherwise agrees to an extension of the Loan; and 2.5.2 (i) In the event that on September 30, 1999 no Default or Potential Default, including a failure to pay interest due notwithstanding that the applicable grace period has not expired, exists under this Agreement, the date on which the principal of the Loan shall be repaid shall be, without any action on behalf of BCBSTX, automatically extended to September 30, 2000 and (ii) in the event that on September 30, 2000 no Default or Potential Default, including a failure to pay interest due notwithstanding that the applicable grace period has not expired, exists under this Agreement, the date on which the principal of the Loan shall be repaid shall be, without any action on behalf of BCBSTX, automatically extended to September 30, 2001. Prior to any automatic extension becoming effective, the 9 11 Borrower shall deliver a certificate of an officer of the Borrower to the effect that all conditions precedent to such automatic extension have been satisfied. 2.5.3 The Borrower shall be entitled to prepay the Loan, in whole or in part, at any time upon delivery of not less than 45 days nor more than 60 days prior written notice to BCBSTX of the date fixed for payment. 2.6 Conversion Rights. BCBSTX shall have the right, at any time and from time to time prior to payment of the Loan in full, to convert the Note into shares of common stock of the Borrower as more fully set forth in the Note. 2.7 Interest Rate and Payments of Interest. 2.7.1 Interest on the Loan shall be paid as follows: (1) Interest on the principal balance of the Loan, from time to time outstanding, and on all other Obligations arising under this Agreement, will be payable at a rate (the "Rate") equal to eight percent (8%) per annum, shall be compounded monthly and be payable on September 30, 1999; (2) If the Loan is extended as provided in Section 2.5.2, interest accruing after September 30, 1999 shall be compounded monthly and be payable on September 30, 2000 and interest accruing after September 30, 2000 shall be compounded monthly and be payable on September 30, 2001; (3) If the Loan is prepaid either in whole or in part, interest on any principal balance being prepaid to the prepayment date shall be due on such date; (4) If the Loan is converted into common stock of the Borrower as provided in Section 2.6 and in the Note, all unpaid interest accrued on the Loan to the conversion date shall be due on such date; and (5) At any time an Event of Default shall occur under this Agreement all unpaid interest accrued on the Loan to the date such Event of Default occurred shall be immediately due and payable. 2.7.2 If, at any time, the Rate shall be deemed by any competent court of law, governmental agency or tribunal to exceed the maximum rate of interest permitted by any applicable Laws, then, for such time as the Rate would be deemed excessive, its application shall be suspended and there shall be charged instead the maximum rate of interest permissible under such Laws. 10 12 2.8 Warrant. The Borrower shall deliver to BCBSTX the Warrant granting BCBSTX the right to purchase 100,000 shares of common stock (subject to anti-dilution protection) at a price equal to $4.45 per share. The Warrant shall be subject to the terms and conditions set forth in the certificate evidencing the Warrant and shall be exercisable on or before September 30, 2001. 2.9 Payment to BCBSTX. All sums payable to BCBSTX hereunder shall be paid directly to BCBSTX in immediately available funds. BCBSTX shall send the Borrower statements of all amounts due hereunder, which statements shall be considered correct and conclusively binding on the Borrower unless the Borrower notifies BCBSTX to the contrary within 30 days of its receipt of any statement which it deems to be incorrect. ARTICLE III CONDITIONS PRECEDENT The obligation of BCBSTX to make the Loan hereunder is subject to the following conditions precedent: 3.1 Documents Required for the Closing. The Borrower shall have delivered to BCBSTX, prior to the disbursement of the Loan (the "Closing") the following: 3.1.1 The Note; 3.1.2 The Warrant; 3.1.3 The Pledge Agreement duly executed by the Borrower together with the certificates representing (i) all shares of capital stock of the Subsidiaries, (ii) 49% of the shares of capital stock of CHCI, (iii) evidence, if any, representing the Borrower's interest in Benova and (iv) the CHCI Note pledged under the Pledge Agreement, duly endorsed in blank or with appropriate instruments of assignment; 3.1.4 A certificate of the Borrower's chief financial officer confirming compliance on the date of Closing of the provisions of Section 4.1 establishing the Collateral required to be maintained hereunder and the Collateral Coverage Ratio. 3.1.5 The Security Agreement; 3.1.6 The financing statements required by the Security Agreement and the Pledge Agreement; 3.1.7 A copy of the resolutions of the Borrower's board of directors authorizing the execution, delivery and performance of this Agreement, the Note, the Warrant, the Pledge Agreement, the Security Agreement, the other Collateral Documents and each other document to be delivered pursuant hereto, certified as of the date of the Closing by the Borrower's Secretary or Assistant Secretary; 11 13 3.1.8 A copy, certified as of the most recent date practicable by the Secretary of State of Delaware, of the Borrower's articles of incorporation, together with a certificate dated the date of the Closing of the Borrower's Secretary to the effect that such articles of incorporation have not been amended since the date of the aforesaid certification by the Secretary of State of Delaware; 3.1.9 A copy of the Borrower's bylaws certified as of the date of the Closing by the Borrower's Secretary or Assistant Secretary; 3.1.10 A certificate of the Borrower's Secretary or Assistant Secretary dated the date of the Closing as to the incumbency and signatures of the officers of the Borrower signing this Agreement, the Note, the Warrant, the Collateral Documents, and each other document to be delivered by the Borrower pursuant hereto; 3.1.11 Copies of certificates, as of the most recent dates practicable, of the Secretary of State of Delaware respecting the Borrower and the Secretaries of State of each state in which the Borrower is qualified as a foreign corporation as to the good standing of the Borrower and indicating that all franchise taxes due have been paid; 3.1.12 Copies, certified as of the most recent date practicable by the Secretary of State of Arizona, of the articles of incorporation of such Subsidiary, together with a certificate dated the date of the Closing of the Secretary of such Subsidiary to the effect that such articles of incorporation have not been amended since the date of the aforesaid certification by the Secretary of State of Delaware; 3.1.13 Copies of the bylaws of each Subsidiary, certified as of the date of the Closing by the Secretary or Assistant Secretary of such Subsidiary; 3.1.14 Copies of certificates, as of the most recent dates practicable, of the Secretaries of State of each state in which a Subsidiary is organized and each state in which a Subsidiary is qualified as a foreign corporation, as to the good standing of such Subsidiary and indicating that all franchise taxes have been paid; 3.1.15 Copies of certificates of authority as of the most recent dates practicable from the insurance department of each other state in which any Subsidiary is conducting a business requiring such Subsidiary to be licensed by such state; 3.1.16 Written opinions of Bell, Boyd & Lloyd, Chicago, Illinois, and Laird, Scheck, Lindfors and Smyth, the Borrower's counsels, dated the date of the Closing and addressed to BCBSTX, substantially in the forms set forth in Exhibits F and G hereto, covering such other matters incident to the transactions contemplated by this Agreement as BCBSTX may reasonably request; 12 14 3.1.17 A certificate, dated the date of the Closing, signed by the President or a Vice President of the Borrower, to the effect that no event or change referred to in Section 3.2 has occurred, the representation and warranties set forth within Section 5.1 are true as of the date of the Closing and with respect to such other matters as BCBSTX may reasonably request; and 3.1.18 A Lock-up letter from James A. Burns. 3.1.19 Copies of non-compete agreements between the Company and each of the following employees of the Company in a form approved by BCBSTX: James A. Burns Rhonda Brede Richard M. Jelinek Michael J. Kennedy Jill Paterson David Bryant 3.2 Certain Events. At the time of the Closing: 3.2.1 No Event of Default or Potential Default shall have occurred and be continuing; 3.2.2 No material adverse change shall have occurred in the financial condition of the Borrower and its Subsidiaries, taken as a whole, since August 31, 1996, the date of the most recent financial statements delivered to BCBSTX prior to the Closing; and 3.2.3 No event shall have occurred which would cause any of the Collateral Documents not to be in full force and effect. 3.3 Legal Matters. At the time of the Closing, all legal matters incidental to the Loan shall be reasonably satisfactory to Haynes & Boone, counsel to BCBSTX. 3.4 Board Approval. Prior to the time of the Closing, BCBSTX's Board of Directors shall have authorized the Loan. 13 15 ARTICLE IV SECURITY 4.1 Security. 4.1.1 As security for the prompt satisfaction of all Obligations, the Borrower shall in (1) the Borrower Security Agreement grant BCBSTX a lien upon and security interest in, all of the assets of the Borrower, including the following, wherever located, whether now owned or hereafter acquired, together with all replacements therefor and proceeds (including, but without limitation, insurance proceeds) thereof: (a) Accounts; (b) Chattel Paper; (c) Contracts; (d) Contract Rights; (e) Documents; (f) Equipment; (g) Fixtures; (h) General Intangibles; (i) Instruments; (j) Inventory; (k) Investment Property; (l) the Pledged Stock; (m) the CHCI Note; (n) rights as seller of Goods and rights to returned or repossessed Goods; (o) all Records pertaining to any other Collateral; and (p) any and all other assets of the Borrower, and (2) the Pledge Agreement pledge to BCBSTX all of the Pledged Stock and the CHCI Note. 4.1.2 Realization by BCBSTX on the pledge of all of the issued and outstanding shares of common stock of Ventana in the event BCBSTX elects to exercise its remedies under the Pledge Agreement if an Event of Default occurs is subject to the receipt of the consent of the Arizona Health Care Cost Containment System Administration. The Borrower agrees to take any commercially reasonable actions requested by BCBSTX to assist BCBSTX in obtaining such consent. 4.1.3 The Borrower shall maintain Collateral subject to the foregoing lien which Collateral shall consist of Eligible Assets having a value sufficient to satisfy the Collateral Coverage Ratio. 4.1.4 Subject to the following sentence, the Borrower shall have the right on any Valuation Date to require BCBSTX to release its security interest in, and lien on, any tangible and/or intangible assets of the Borrower, provided that BCBSTX shall not be required to release such assets if after giving effect to such release the Coverage Ratio on such Valuation Date would not be satisfied. The Borrower shall have the right to designate the assets to be released, provided, however, that the capital stock of Ventana pledged under this Agreement shall not be released so long as the Note is outstanding or any other Obligation is owed by the Borrower to BCBSTX. 4.1.5 If on any Valuation Date, Eligible Assets are not subject to a lien in favor of BCBSTX pursuant to the Security Agreement or the Pledge Agreement sufficient to satisfy the Collateral Coverage Ratio, the Borrower shall immediately pledge additional Eligible Assets to BCBSTX to ensure that the Collateral Coverage Ratio is satisfied. 14 16 4.2 Priority of Liens. The foregoing liens shall be first and prior liens except for Permitted Liens. ARTICLE V REPRESENTATIONS AND WARRANTIES. 5.1 To induce BCBSTX to enter into this Agreement, the Borrower represents and warrants to BCBSTX as follows: 5.1.1 The Borrower is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware and has all power (corporate and other) necessary to carry on its business as now being conducted and to own, lease and operate its properties. The Borrower is duly licensed, qualified and authorized to conduct its business in Arizona and in all other jurisdictions in which the character and location of the assets owned by it or the nature of the business transacted by it requires licensing, qualification or authorization; 5.1.2 The authorized equity securities of the Borrower consist of 10,000,000 shares of common stock, par value $.01 per share, of which 4,364,712 shares are issued and outstanding. The Borrower has no obligation or commitment to issue any equity securities of the Borrower except for 1,032,000 shares of common stock, $.01 par value per share, issuable under the Borrower's Stock Option Plan, 984,273 shares of which are subject to outstanding options, 300,000 shares of such common stock issuable under the terms of the Borrower's Stock Purchase Plan and the shares issuable upon conversion of the WGB Convertible Note and WGB Warrant. The Borrower owns directly all of the outstanding shares of common stock of AHC, MCSA and Ventana. In addition, the Borrower owns 49% of the outstanding capital stock of Community Health Choice of Illinois, Inc. and a 65% interest in Benova. The authorized capital stock of AHC consists of 500,000 shares of common stock, $10.00 par value, of which on the date of this Agreement 1 share is issued and outstanding. The authorized capital stock of MCSA consists of 2,000,000 shares of common stock, no par value, of which on the date of this Agreement 1 share is issued and outstanding. The authorized capital stock of Ventana consists of 2,000,000 shares of common stock, no par value, of which on the date of this Agreement 1 share is issued and outstanding. The authorized capital stock of CHCI consists of 102 shares of class A common stock, no par value, of which, on the date of this Agreement, 102 shares are issued and outstanding and 98 shares of class B common stock, no par value, of which, on the date of this Agreement, 98 shares are issued and outstanding. The Borrower owns the 98 shares of the class B common stock of CHCI or 49% of the outstanding shares of capital stock of CHCI. The Borrower also owns a 65% interest in Benova. All of the outstanding shares of such Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable, except for the shares of CHCI which have not as yet been paid, and are owned by the Borrower, directly free and clear of all claims, liens, encumbrances 15 17 and charges of any kind (except to the extent created by the Collateral Documents); and there are no existing options, calls or commitments of any character relating to any shares of capital stock of any such Subsidiary. Each Subsidiary and CHCI is duly organized and validly existing under the laws of its State of incorporation, and has all power (corporate and other) necessary to carry on its business as now being conducted, and to own, operate and lease its properties. Ventana, AHC and MCSA possess all necessary rights, privileges, licenses, franchises and authorizations necessary to carry on their business as now being conducted. Neither the Borrower nor any Subsidiary is in violation of any law, statute, rule, governmental regulation or order, which violation might have a material adverse effect on the business, financial condition or consolidated earnings of the Borrower. 5.1.3 Neither the Borrower nor any Subsidiary is in default with respect to any of its existing Indebtedness, and the making and performance of this Agreement, the Note, the Warrant and the Collateral Documents will not (immediately, or with the passage of time or the giving of notice, or both): (1) Violate or conflict with the articles of incorporation or bylaws of the Borrower, or violate any Laws binding upon the Borrower or any Subsidiary or their properties; (2) Violate or conflict with or result in a material breach of any of the terms or conditions of or constitute a default under any material contract, agreement, commitment, indenture, mortgage, note, bond, license, permit, or other instrument or obligation to which the Borrower or any Subsidiary is a party or by which any property or assets of any of them may be bound or affected; (3) Violate any order, writ, injunction or decree of any court, administrative agency or governmental body; or (4) Result in the creation or imposition of any security interest in, or lien or encumbrance upon, any of the assets of the Borrower or any Subsidiary, except in favor of BCBSTX; 5.1.4 The Borrower has the power and authority to enter into and perform this Agreement, the Note, the Warrant and the Collateral Documents, and to incur the obligations herein and therein provided for, and has taken all corporate action necessary to authorize the execution, delivery, and performance of this Agreement, the Note, the Warrant and the Collateral Documents to be delivered by the Borrower; 16 18 5.1.5 This Agreement and the Collateral Documents are, and the Note and the Warrant when delivered will be, valid, binding obligations, enforceable in accordance with their respective terms; 5.1.6 Except as otherwise set forth in Exhibit D to this Agreement or in the consolidated financial statements at and for the fiscal year ended May 31, 1996 of the Borrower and the Subsidiaries, there are no actions, suits, investigations or proceedings pending other than actions, suits, investigations or proceedings which are of a nature generally encountered by the Borrower and/or Subsidiaries in the ordinary course of their businesses in any court or before or by any federal, state, municipal or other governmental or non-governmental department, commission, board, bureau, agency, or instrumentality, or to the knowledge of the Borrower, threatened against the Borrower or any Subsidiary which seek $50,000 or more in compensatory or punitive damages or the eventual outcome of which, if decided adversely to the Borrower or any Subsidiary, could have a material adverse effect on the condition, financial or otherwise, results of operations, business or prospects, of either the Borrower and its Subsidiaries, taken as a whole; and the aggregate damages sought in all such actions, suits or proceedings not disclosed because they seek less than $25,000 in compensatory or punitive damages does not exceed the aggregate of $200,000; and there are no other proceedings, actions or other matters pending before any insurance department to which the Borrower, or any Subsidiary is a party; 5.1.7 Except as otherwise set forth in Exhibit D to this Agreement, there is no pending order, stipulation or other direction from any court, agency, department or other body with jurisdiction over the Borrower or any Subsidiary, that would materially restrict the Borrower's or any Subsidiary's ability to carry on their respective businesses in the manner in which they were carried on during the periods covered by the Financial Statements; 5.1.8 Except as otherwise set forth in Exhibit D hereto, the Borrower and each Subsidiary have good and marketable title to all of their assets, subject to no security interest, encumbrance or lien, or claim of any third person except for Permitted Liens; 5.1.9 The consolidated balance sheet at May 31, 1996 of the Borrower and its Subsidiaries and the consolidated statements of operations and cash flows for the twelve-month period ended May 31, 1996, reported on by Price Waterhouse LLP, and the unaudited Financial Statements of the Borrower and its Subsidiaries, at and for the three-month period ended August 31, 1996, reported upon by the chief financial officer of the Borrower, all of which have been furnished to BCBSTX, present fairly in all material respects their respective consolidated and individual financial positions, results of operations and changes in financial position at and for the dates and periods indicated, in conformity with generally accepted accounting principles applied on a consistent basis. The unaudited financial statements reflect all adjustments (which consist only of 17 19 normal recurring accruals) necessary for a fair presentation in all material respects of financial position and results of operations at the respective dates and for the period; 5.1.10 Except where the failure to file or the inadequacy of a filing would not have a materially adverse effect on financial condition, results of operations, business or prospects of the Borrower or any Subsidiary, all reports and statements required by any law to be filed by or for the Borrower or any Subsidiary with any governmental authority relating to or as a result of any business conducted by the Borrower or any Subsidiary have been timely filed and are accurate and complete in all material respects, and no material deficiency in any such filing has been asserted by any such authority; 5.1.11 Except as otherwise set forth in Exhibit D to this Agreement, at the date hereof, the Borrower has no material Indebtedness of any nature including, but without limitation, liabilities for tax and interest or penalties relating thereto, and the Borrower does not know and has no reasonable ground to know any basis for the assertion against it or any Subsidiary at the date hereof, or at the date hereof of any material Indebtedness; 5.1.12 (i) Except where failure to file, pay or accrue would not have a materially adverse impact on the condition of the Borrower or any Subsidiary, financial or otherwise, the Borrower and each Subsidiary has duly filed all tax returns and other reports required by law to be filed by them with all proper federal, state and local taxing authorities, and has paid or accrued all taxes, assessments or deficiencies called for by such returns and reports or claimed to be due by any such taxing authority; (ii) the federal, state and local income, franchise and premium tax returns for the Borrower and each Subsidiary for all taxable years ended prior to the dates set forth on Exhibit D to this Agreement have been examined by the Internal Revenue Service or other taxing authority, and no proposed additional taxes, interest or penalties have been asserted for the years examined; (iii) there are no agreements, waivers or other arrangements providing for extensions of time for the assessment or collection of any material unpaid tax against the Borrower, or any Subsidiary, nor are there any actions, suits, proceedings, investigations or claims now pending against the Borrower or any Subsidiary, or any matters under discussion with any federal, state or local authority by any of them, relating to any material amount of unpaid and allegedly owing tax, and (iv) neither the Borrower nor any Subsidiary has any knowledge of any additional assessment or deficiency contemplated by any federal, state or local authority in a materially important amount in connection with any taxes not provided for on their respective books; 5.1.13 Except as otherwise disclosed in Exhibit D hereto, or except to the extent that the failure to comply would not materially interfere with the conduct of the business of the Borrower or any Subsidiary, the Borrower and each Subsidiary has complied with all applicable Laws with respect to: (1) any restrictions, 18 20 specifications, or other requirements pertaining to products, including the insurance products, that the Borrower or any Subsidiary sell or to the services each performs; (2) the conduct of their respective businesses; and (3) the use, maintenance, and operation of the real and personal properties owned or leased by them in the conduct of their respective businesses; 5.1.14 No representation or warranty by the Borrower contained herein or in any certificate or other document furnished by the Borrower pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary to make such representation or warranty not misleading in light of the circumstances under which it was made; 5.1.15 Each consent, approval or authorization of, or filing, registration or qualification with, any Person which is required to be obtained or effected by the Borrower or any Subsidiary in connection with the execution and delivery of this Agreement, the Note, the Warrant and the Collateral Documents or the undertaking or performance of any obligation hereunder or thereunder has been duly obtained or effected, except for the consent of the Arizona Health Care Cost Containment Administration required prior to any change in ownership of MCSA or Ventana; 5.1.16 Except as otherwise described on Exhibit D hereto, neither the Borrower nor any Subsidiary has a material lease, contract or commitment of any kind (such as employment agreements; collective bargaining agreements; powers of attorney; distribution arrangements; patent license agreements; contracts for future purchase or delivery of goods or rendering of services; bonus, pension and retirement plans; or accrued vacation pay, insurance and welfare agreements); all parties' (including the Borrower and the Subsidiaries) to all such material leases, contracts and other commitments to which the Borrower or any Subsidiary is a party have complied with the provisions of such leases, contracts and other commitments; no party is in default under any thereof and no event has occurred which, but for the giving of notice or the passage of time, or both, would constitute a default; 5.1.17 Neither the Borrower nor any Subsidiary has made any agreement or has taken any action which may cause anyone to become entitled to a commission or finder's fee as a result of the making of the Loan; 5.1.18 Each member of the Controlled Group has fulfilled its obligations under the minimum funding standards under ERISA and the Code with respect to each Plan and is in compliance in all material respects with the applicable provisions of ERISA and the Code, and has not incurred any liability to the PBGC or a plan under Title IV of ERISA; 5.1.19 Except as disclosed in the Exhibit D, the Borrower has no direct or indirect subsidiaries other than AHC, MCSA, Ventana and CHCI and has no 19 21 ownership interest, directly or indirectly in any other corporation, trust, partnership or other entity, except for a 65% interest in Benova; and 5.1.19 The Borrower is the sole owner of all of the outstanding shares of common stock of AHC, MCSA and Ventana, and owns 49% of the outstanding shares of common stock of CHCI, in each case, except for the shares of CHCI, free and clear of any claims, liens, charges or encumbrances whatsoever, and has good and marketable title to such shares. 5.2 Survival. All of the representations and warranties set forth in Section 5.1 shall survive until all Obligations are satisfied in full, regardless of any investigation made by BCBSTX or on its behalf. ARTICLE VI COVENANTS The Borrower does hereby covenant and agree with BCBSTX that, so long as any of the Obligations remain unsatisfied (except for the covenant of the Borrower set forth in Section 6.1.18, shall continue in the event BCBSTX elects to convert the outstanding principal balance of the Note at any time in its entirety for common stock, $.01 par value per share, of the Borrower for a period of one year following conversion), it will comply and it will cause its Subsidiaries to comply, with the following covenants: 6.1 Affirmative Covenants of Borrower. 6.1.1 The Borrower will use the proceeds of the Loan only for the purposes set forth in Section 2.3. 6.1.2 The Borrower will furnish BCBSTX: (1) as soon as available and in any event by the August 31 following the end of each fiscal year of the Borrower, a consolidated and consolidating balance sheet of the Borrower and its Subsidiaries and consolidated and consolidating statements of operations and cash flows of the Borrower and its Subsidiaries for such year, setting forth in each case in comparative form corresponding figures from the preceding fiscal year, all in reasonable detail and satisfactory in scope to BCBSTX, all reported on by Price Waterhouse LLP or other independent certified public accountants of nationally recognized standing as having been prepared in accordance with generally accepted accounting principles applied on a consistent basis; (2) as soon as available and in any event no later than such statement is filed by any Subsidiary with a state insurance department or other state agency, a copy of any statement or report 20 22 required to be filed with such insurance department or state agency in the form filed; (3) as soon as available and in any event within 60 days after the end of each quarter of each fiscal year of the Borrower (other than the quarter ending May 31), a consolidated balance sheet of the Borrower and its Subsidiaries, and the related consolidated statements of operations and cash flows, and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to the fairness of presentation, generally accepted accounting principles, and consistency by the chief financial officer of the Borrower; (4) simultaneously with the delivery of each set of financial statements referred to in clause (1) above, a certificate of the chief financial officer of the Borrower setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 6.1.15 and 6.1.16 on the date of such financial statements and, simultaneously with the delivery of each set of financial statements referred to in clauses (1), (2) and (3) above a certificate stating whether there exists on the date of such certificate any Event of Default and, if any Event of Default exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (5) from time to time such additional information regarding the financial position or business of the Borrower and the Subsidiaries as BCBSTX shall reasonably request; and (6) The Borrower shall provide BCBSTX with a copy of each filing it makes with the Securities and Exchange Commission pursuant to Section 12 of the Securities Exchange Act of 1934 within 15 days of the date such report is filed with the Securities and Exchange Commission. The obligation to deliver annual and quarterly financial statements set forth above may be satisfied by the Company by delivering copies of the Company's Annual Report on Form 10-K or Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. 6.1.3 The Borrower and the Subsidiaries shall maintain accounting Records in a manner that is sufficient, in all material respects, to reflect fairly the transactions, resources and obligations of the respective companies, and to 21 23 provide information that is adequate for the preparation of financial statements and other required financial data presenting fairly in all material respects the financial position, results of operations, changes in financial position and other required financial information of the respective companies, in conformity with generally accepted accounting principles. 6.1.4 The Borrower and its Subsidiaries will maintain their Equipment and other properties in good condition and repair (normal wear and tear excepted), and will pay and discharge or cause to be paid and discharged when due, the cost of repairs to or maintenance of the same, and will pay or cause to be paid all rental or mortgage payments due on such real estate. The Borrower hereby agrees that, in the event it or any Subsidiary fails to pay or cause to be paid any such payment, BCBSTX may do so and be reimbursed by the Borrower therefor, such payment by BCBSTX to constitute an Obligation under this Agreement. 6.1.5 The Borrower and its Subsidiaries will maintain, or cause to be maintained, public liability insurance and fire and extended coverage insurance on all material assets owned by them, all in such form and amounts as are consistent with industry practices and with such insurers as may reasonably be satisfactory to BCBSTX. Such policies shall contain a provision whereby they cannot be cancelled except after 30 days' written notice to BCBSTX. Such policies shall name BCBSTX as an additional insured and as a lender loss payee. The Borrower will furnish to BCBSTX such evidence of insurance as BCBSTX may require. The Borrower hereby agrees that, in the event it or any Subsidiary fails to pay or cause to be paid the premium on any such insurance, BCBSTX may do so and be reimbursed by the Borrower therefor, such payment by BCBSTX to constitute an Obligation under this Agreement. The Borrower hereby assigns to BCBSTX any returned or unearned premiums that may be due the Borrower upon cancellation of any such policies for any reason whatsoever effective upon the occurrence of an Event of Default, irrevocably, and directs the insurers to pay BCBSTX any amounts so due. Upon the occurrence of an Event of Default, BCBSTX is hereby appointed the Borrower's attorney-in-fact (without requiring BCBSTX to act as such) to endorse any check which may be payable to the Borrower to collect such returned or unearned premiums or the proceeds of such insurance, and any amount so collected may be applied by BCBSTX toward satisfaction of any of the Obligations. 6.1.6 The Borrower and its Subsidiaries will pay or cause to be paid when due, all taxes, assessments and charges or levies imposed upon them or on any of their property or which any of them is required to withhold and pay over, except where contested in good faith by appropriate proceedings with adequate reserves therefor having been set aside on their books, but the Borrower and each Subsidiary shall pay or cause to be paid all such taxes, assessments, charges or levies forthwith whenever foreclosure on any lien that attaches (or security therefor) appears imminent. 22 24 6.1.7 The Borrower and its Subsidiaries will, when requested so to do, make available for inspection by duly authorized representatives of BCBSTX their Records, and will furnish BCBSTX any information regarding their business affairs and financial condition within a reasonable time after written request therefor. 6.1.8 The Borrower and its Subsidiaries will take all necessary steps to preserve their corporate existence, franchises, licenses and certificates of authority and to comply with all present and future Laws, applicable to them in the operation of their respective businesses, and all material agreements to which they are subject. 6.1.9 The Borrower and its Subsidiaries will keep accurate and complete Records of their respective assets consistent with sound business practices. 6.1.10 The Borrower and its Subsidiaries will give immediate notice to BCBSTX of: (1) any suit or proceeding in which any of them is a party if an adverse decision therein would require them to pay over more than $50,000 or deliver assets the value of which exceeds such sum (whether or not the claim is considered to be covered by insurance); and (2) the institution of any other suit or proceeding involving any of them that might materially and adversely affect their operations, financial condition, property or business. 6.1.11 The Borrower and its Subsidiaries will pay when due (or within applicable grace periods) all Indebtedness (other than intercompany Indebtedness from or to the Borrower and any affiliates of the Borrower), except when the amount thereof is being contested in good faith by appropriate proceedings and with adequate reserves therefor being set aside on the books of the Borrower and its Subsidiaries. If default be made by the Borrower or any Subsidiary in the payment of any principal (or installment thereof) of, or interest on, any such Indebtedness, BCBSTX shall have the right, in its discretion, to pay such interest or principal for the account of the Borrower or such Subsidiary and be reimbursed by the Borrower therefor. Any such payment by BCBSTX shall be deemed an Obligation hereunder. 6.1.12 The Borrower and its Subsidiaries will notify BCBSTX immediately if any of them becomes aware of the occurrence of any Event of Default or of any Potential Default, or of the failure of the Borrower or any Subsidiary to observe any of their respective undertakings hereunder. 6.1.13 The Borrower and its Subsidiaries will notify BCBSTX thirty (30) days in advance of any change in the location of any of their executive offices or of the establishment of any new executive office or the discontinuance of any existing executive office. 23 25 6.1.14 The Borrower will furnish BCBSTX, if and when the Borrower or any Subsidiary (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice, in each case within five days of its receipt. 6.1.15 The Borrower shall maintain a positive Consolidated Tangible Net Worth of at least $4,500,000 at all times the Loan or any portion thereof is outstanding. 6.1.16 The Borrower for each fiscal quarter shall have quarterly consolidated revenues determined in accordance with generally accepted accounting principles of at least $12,000,000, provided that in the event the provider contract between AHC and the State of Arizona is terminated for any reason, such quarterly consolidated revenues so determined shall be at least $8,000,000. 6.1.17 The Borrower will use commercially reasonable efforts, subject to reasonable business judgment, to conduct its business in the manner contemplated by the Business Plan. 6.1.18 The Borrower shall permit a representative of BCBSTX to attend and observe each meeting of its Board of Directors and each meeting of any committee thereof. The Borrower shall provide BCBSTX with the same notice of the place and time of each such meeting as is provided to Borrower's directors. BCBSTX shall designate to the Borrower the person who is to receive such notice. All costs and expenses incurred by BCBSTX in attending any such meeting shall be borne by BCBSTX. If BCBSTX converts the outstanding balance of the Note at any time in its entirety into common stock, $.01 par value per share, of the Borrower, the Borrower agrees to use its best efforts to cause the nomination and election of one person designated by BCBSTX to serve as a director of the Borrower commencing within 30 days of such request of the Borrower's stockholders held after such conversion of the Note. 6.1.19 The Borrower shall, at BCBSTX's request, at any time and from time to time, execute and deliver to BCBSTX such financing statements and other documents and do such acts as BCBSTX may deem necessary in order to establish and maintain valid, attached and perfected security interests in the Collateral in favor of BCBSTX, free and clear of all liens (other than Permitted Liens), claims and rights of third parties whatsoever. 24 26 6.2 Negative Covenants of Borrower. 6.2.1 Neither the Borrower nor any Subsidiary will, without the consent of BCBSTX, mortgage, pledge, grant or permit to exist a security interest in or lien upon any of its assets of any kind, now owned or hereafter acquired except for Permitted Liens. 6.2.2 Neither the Borrower nor any Subsidiary will become liable, directly or indirectly, as guarantor or otherwise for any obligation of any other Person, except for the endorsement of commercial paper for deposit or collection in the ordinary course of business or as otherwise contemplated by this Agreement and surety bonds issued in the ordinary course of business. 6.2.3 The Borrower will not declare, without the consent of BCBSTX, or pay any dividends, or make any other payment or distribution on account of its capital stock, except that dividends may be paid to the Borrower by any Subsidiary. 6.2.4 Neither the Borrower nor any Subsidiary will make any loan or advance to any officer, shareholder, director or employee of the Borrower or any Subsidiary, except for temporary advances in the ordinary course of business. 6.2.5 The Borrower will not, without the consent of BCBSTX, (i) redeem, purchase or retire any of its capital stock and no Subsidiary will issue, redeem, purchase or retire any of its capital stock and (ii) except for the WGB Convertible Note and the WGB Warrant, neither the Borrower nor any Subsidiary will grant or issue any warrant, right or option pertaining to the capital stock of the Borrower or other security convertible into the capital stock of the Borrower. 6.2.6 Neither the Borrower nor any Subsidiary will prepay any Indebtedness for borrowed money (except the Obligations), or enter into or modify any agreement as a result of which the terms of payment of any of the foregoing Indebtedness are waived or modified. 6.2.7 Neither the Borrower nor any Subsidiary will furnish BCBSTX any certificate or other document that will contain any untrue statement of a material fact or that will omit to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. 6.2.8 Without the consent of BCBSTX, the Borrower shall not engage in any transaction outside of the ordinary course of the Borrower's business with any of its affiliates. 6.2.9 Without the consent of BCBSTX, the Borrower will not permit its Subsidiaries to issue any capital stock or any rights, warrants or options to purchase capital stock to any Person other than the Borrower, and if such capital 25 27 stock is issued to the Borrower, the certificates representing such shares shall be delivered to BCBSTX pursuant to the terms of the Pledge Agreement. BCBSTX does hereby covenant and agree with the Borrower as follows: 6.3 Negative Covenants of BCBSTX. 6.3.1 For so long as no Event of Default has occurred and is continuing under this Agreement, for a period of one (1) year following the final payment of the Note, BCBSTX will not agree to employ any employee of the Borrower for a period of one year following the termination of such employee's employment with the Borrower, without the Borrower's consent. 6.3.2 For so long as no Event of Default has occurred and is continuing under this Agreement, for a period of one (1) year following the final payment of the Note, BCBSTX will not disclose or otherwise directly benefit from competition with the Borrower any confidential information disclosed to it by the Borrower or otherwise divert any corporate opportunity rightfully belonging to the Borrower to its own benefit. ARTICLE VII DEFAULT 7.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default hereunder: 7.1.1 The Borrower shall fail to pay any installment of principal of the Loan or any other Obligation when due and such failure shall continue for a period of five days; 7.1.2 The Borrower shall fail to pay any installment of interest on the Loan or any other Obligation hereunder when due and such failure shall continue for a period of five days; 7.1.3 The Borrower or any Subsidiary shall fail to observe or perform any other obligation to be observed or performed by them hereunder or under any of the Collateral Documents, and such failure shall continue for 30 days after: (1) notice of such failure from BCBSTX; or (2) BCBSTX is notified of such failure or should have been so notified pursuant to the provisions of Article VI, whichever is earlier; 7.1.4 The Borrower or any Subsidiary shall fail to pay any Indebtedness (other than intercompany Indebtedness from or to the Borrower and any affiliates of the Borrower) and such failure shall continue beyond any applicable grace period, or the Borrower or any Subsidiary shall suffer to exist any other default under any agreement binding upon the Borrower or any Subsidiary unless, in either instance, the Borrower or such Subsidiary shall have commenced an 26 28 appropriate action or proceeding challenging in good faith its obligation to make such payment or to perform under such agreement and any action by the holder of such Indebtedness to enforce payment thereof or of the other party to such agreement to require performance or obtain damages under such agreement shall have been effectively suspended, enjoined or otherwise stayed pending a determination in the Borrower's or the Subsidiary's action or proceeding. Such action or proceeding shall be diligently pursued by the Borrower or the Subsidiary or the Borrower shall have otherwise posted a bond (any reimbursement obligations under which shall be subordinate to all rights of BCBSTX hereunder) or additional Collateral in either case in a form and amount satisfactory to BCBSTX; 7.1.5 Any financial statement, representation, warranty or certificate made or furnished by the Borrower or any Subsidiary to BCBSTX in connection with this Agreement, or as inducement to BCBSTX to enter into this Agreement, or in any separate statement or document to be delivered hereunder to BCBSTX, shall be materially false, incorrect, or incomplete when made; 7.1.6 The Borrower or any Subsidiary (other than AHC) shall fail to pay its debts as they mature, or shall make an assignment for the benefit of its, or any of its, creditors; 7.1.7 (i) an order, judgment or decree is entered under the bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law ("Bankruptcy Law") adjudicating the Borrower or any Subsidiary (other than AHC) bankrupt or insolvent or (ii) an order, judgment or decree is entered pursuant to the insurance or other laws of any state for the purpose of liquidating, rehabilitating, reorganizing, or conserving any Subsidiary (the "Insolvency Law"); 7.1.8 The Borrower or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator, rehabilitator, conservator or similar official, of the Borrower or any Subsidiary (other than AHC) of any substantial part of the assets of the Borrower or any Subsidiary (other than AHC) or if the Borrower commences a voluntary case under Bankruptcy Law or any Subsidiary or state commences a proceeding for the purpose of liquidating, rehabilitating, reorganizing, or conserving any Subsidiary under the Insolvency Law, whether now or hereafter in effect; 7.1.9 A petition or application referred to in Section 7.1.8 is filed, or any such proceedings are commenced, against the Borrower or any Subsidiary (other than AHC) and the Borrower or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order for the relief is entered in an involuntary case against the Borrower or any Subsidiary (other than AHC) under any Bankruptcy Law or Insolvency Law, as the case may be, as now 27 29 or hereafter constituted, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition or application in any such proceedings, and any such order, judgment or decree remains unstayed and in effect for more than 60 calendar days; 7.1.10 Any order, judgment or decree is entered in any proceedings against the Borrower or Ventana decreeing the dissolution or liquidation of the Borrower or Ventana and such order, judgment or decree remains unstayed; 7.1.11 The Borrower or any Subsidiary shall suffer final nonappealable judgments for payment of money aggregating in excess of $50,000 and shall not discharge the same when due unless, pending further proceedings, execution has not been commenced or if commenced has been effectively stayed; 7.1.12 The validity or enforceability of this Agreement, the Note, the Warrant or the Collateral Documents shall be contested by the Borrower, or the Borrower shall deny that it has any or further liability or obligation hereunder or thereunder. 7.2 Acceleration. Immediately and without notice upon the occurrence of an Event of Default specified in the foregoing paragraphs 7.1.1, 7.1.2, 7.1.3, 7.1.4 or 7.1.5, or at the option of BCBSTX, but only upon notice to the Borrower, upon the occurrence of any other Event of Default, all Obligations, whether hereunder or otherwise, shall immediately become due and payable without further action of any kind. 7.3 Remedies. After any acceleration, as provided for in Section 7.2, BCBSTX shall have, in addition to the rights and remedies given it by this Agreement and the Collateral Documents, all those allowed by all applicable Laws, including, but without limitation, the Uniform Commercial Code as enacted in any jurisdiction in which any Collateral may be located. Without limiting the generality of the foregoing, BCBSTX may immediately, without demand of performance and without other notice (except as specifically required by this Agreement or the Collateral Documents) or demand whatsoever to the Borrower, all of which are hereby expressly waived, and without advertisement, sell at public or private sale or otherwise realize upon, in Phoenix, Arizona, or elsewhere, the whole or, from time to time, any part of the Collateral, or any interest which the Borrower may have therein. After deducting from the proceeds of sale or other disposition of the Collateral all expenses (including all reasonable expenses for legal services), BCBSTX shall apply such proceeds toward the satisfaction of the Obligations. Any remainder of the proceeds after satisfaction in full of the Obligations shall be distributed as required by applicable Laws. Notice of any sale or other disposition shall be given to the Borrower at least five days before the time of any intended public sale or of the time after which any intended private sale or other disposition of the Collateral is to be made, which the Borrower hereby agrees shall be reasonable notice of such sale or other disposition. The Borrower agrees to assemble, or to cause to be assembled, at its own expense, the Collateral at such place or places as BCBSTX shall designate. At any such sale or other disposition, BCBSTX may, to the extent permissible under applicable Laws, purchase the whole or any part of the Collateral, free from any right of redemption on the part of the Borrower, which right is 28 30 hereby waived and released. Without limiting the generality of any of the rights and remedies conferred upon BCBSTX under this paragraph, BCBSTX may, to the full extent permitted by applicable Laws: 7.3.1 Enter upon the premises of the Borrower, exclude therefrom the Borrower or any affiliate thereof, and take immediate possession of the Collateral, either personally or by means of a receiver appointed by a court of competent jurisdiction, using all necessary force to do so; 7.3.2 At BCBSTX's option, use, operate, manage and control the Collateral in any lawful manner; 7.3.3 Collect and receive all rents, income, revenue, earnings, issues and profits therefrom; and 7.3.4 Maintain, repair renovate, alter or remove the Collateral as BCBSTX may determine in its discretion. ARTICLE VIII RIGHT OF FIRST REFUSAL 8.1 Underwritten Public Offering. The Borrower agrees that prior to its or any Subsidiary's entering into an agreement to file a registration statement and effect an underwritten public offering, the Borrower will arrange a meeting with a representative of the underwriters it or its Subsidiary has chosen and representatives of BCBSTX. Following this meeting, the Borrower will or will cause such Subsidiary to offer BCBSTX the opportunity to purchase directly the number of shares of stock in the Borrower or such Subsidiary then contemplated to be included in the offering at the price which, in the case of the Borrower, is equal to the bona fide estimate of the underwriters of the price to the public and, in the case of any Subsidiary, is equal to the mid-point in the range the underwriters recommend for use in the registration statement for such public offering less their usual commission. Thus, in the case of a Subsidiary, if the underwriters contemplate a 1,000,000 share offering, plus a green shoe of 150,000 shares, at a price of $10 - $12, with an underwriting commission of 7%, BCBSTX will be given the opportunity to purchase 1,150,000 shares at 10.23 ($11.00 - .07 times $11.00). The mechanics and legal documentation of the Borrower's or Subsidiary's obligation to offer BCBSTX the right to purchase shares (including the form of stock purchase agreement which will be in a form containing appropriate representations and warranties as are customary in this type of transaction) will be mutually agreed between the Borrower or the Subsidiary and BCBSTX. If BCBSTX does not choose to purchase such shares, the Borrower or the Subsidiary may enter into an agreement with the underwriters in customary form and complete an offering even though the offering may be for fewer shares and at a lower price than originally contemplated; provided that if the public offering price is less than two-thirds (2/3) in the case of the Borrower the bona fide estimate of the underwriter referred to above and in the case of the Borrower or two-thirds (2/3) of the mid-point of the filing range referred to above, the Borrower will again offer BCBSTX the opportunity to purchase such shares at such public offering price in accordance with the foregoing provisions of this Section 8.1. 29 31 8.2 Loans. Prior to incurring any Third Party Financing, the Borrower will, or will cause any Subsidiary to, offer to BCBSTX the opportunity to provide the Borrower funds on the same terms and conditions which it believes are available from a Third Party Financing. The mechanics of this right of first refusal will be mutually agreed upon in the same in spirit as those described for an underwritten public offering so that the Borrower or the Subsidiary is not indirectly blocked from negotiating with a third party. For example, BCBSTX agrees that if the Borrower or the Subsidiary intends to borrow money from a bank, after exploratory discussions with representative bankers, the Borrower or the Subsidiary will describe to BCBSTX the approximate terms and conditions offered by the bank. If BCBSTX wishes to make the loan on substantially the same terms and conditions which the Borrower or a Subsidiary has described, it will be given the opportunity to make the loan. If, however, BCBSTX does not wish to make the loan, the Borrower or the Subsidiary will be free for a reasonable time to negotiate in good faith and conclude a bank loan agreement with an unrelated bank on substantially the same terms and conditions -- it being understood that the amount of the loan may be different, the interest rate may be slightly higher, and the other terms may be slightly different from those originally anticipated by the Borrower or the Subsidiary. 8.3 Joint Ventures. The Borrower directly or through its Subsidiaries intends to enter into partnerships, limited liability companies and joint ventures with providers and other third parties who offer strategic or financial resources in connection with the Borrower's business plan. Current examples include Benova, Inc. and CHCI. The Borrower or any Subsidiary proposing to engage in any such transaction will negotiate in good faith with BCBSTX, offering to BCBSTX the opportunity to be its strategic partner, if appropriate, and the provider of funds in each of the future joint venture opportunities presented. Neither the Borrower nor any Subsidiary will initiate any such negotiation without first negotiating with BCBSTX. 8.4 Sale or Merger of the Borrower. The rights of first refusal contemplated herein and described in the preceding Sections 8.1, 8.2 and 8.3 will not prevent the Borrower or a Subsidiary from merging with or being acquired by another unrelated company, subject in each case to BCBSTX's right to offer the economic and strategic equivalent of any merger or acquisition offer. 8.5 Term. The rights of first refusal contemplated herein and described in the preceding Sections 8.1, 8.2 and 8.3 shall be in effect and enforceable by BCBSTX until the earlier of (i) one year after the conversion of the Note or (ii) payment of the Loan in full, in cash. ARTICLE IX MISCELLANEOUS 9.1 Construction. The provisions of this Agreement shall be in addition to those of any pledge or security agreement, note or other evidence of liability held by BCBSTX, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent BCBSTX from enforcing any or all other notes, guaranty, pledge or security agreements in accordance with their respective terms. 30 32 9.2 Further Assurance. From time to time, the Borrower will execute and deliver to BCBSTX such additional documents and will provide such additional information as BCBSTX may reasonably require to carry out the terms of this Agreement and be informed of the Borrower's status and affairs. 9.3 Enforcement and Waiver by BCBSTX. BCBSTX shall have the right at all times to enforce the provisions of this Agreement and the Collateral Documents in strict accordance with the terms hereof and thereof, notwithstanding any conduct or custom on the part of BCBSTX in refraining from so doing at any time or times. The failure of BCBSTX at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or as having in any way or manner modified or waived the same. All rights and remedies of BCBSTX are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy. 9.4 Expenses. The Borrower and BCBSTX shall each pay their own respective expenses incurred in connection with the negotiation and execution of this Agreement. 9.5 Notices. Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, by an established and reputable overnight express delivery service or by facsimile transmission, as follows, unless such address is changed by written notice hereunder: If to the Borrower: Managed Care Solutions, Inc. 2510 West Dunlap Avenue Suite 300 Phoenix, Arizona 85021 Attention: President 31 33 with a copy to: Bell, Boyd & Lloyd Three First National Plaza 70 West Madison Street, Suite 3300 Chicago, Illinois 60602 Attention: William G. Brown, Esq. If to BCBSTX: Blue Cross and Blue Shield of Texas, Inc. 901 South Central Expressway Richardson, Texas 75080 Attention: Michael Lewis with a copy to: Haynes and Boone, LLP 901 Main Street Suite 3100 Dallas, Texas 75202-3789 Attention: Sue P. Murphy 9.6 Waiver and Release by the Borrower. To the maximum extent permitted by applicable laws, the Borrower releases BCBSTX and its officers, attorneys, agents and employees from all claims for loss or damage caused by any act or omission on the part of any of them except for its gross negligence or willful misconduct. 9.7 Satisfaction Requirement. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any party, the determination of such satisfaction shall be made by such party in its sole and exclusive judgment exercised in good faith in a commercially reasonable manner. 9.8 Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Arizona applicable to contracts made and to be performed in that state applicable to agreements made and to be in that state without regard to conflict of laws provisions. 9.9 Binding Effect, Assignment and Entire Agreement. This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of BCBSTX. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed on behalf of each party. 9.10 Severability. If any provision of this Agreement shall be held invalid under any applicable Laws, such invalidity shall not affect any other provision of this Agreement 32 34 that can be given effect without the invalid provision, and, to this end the provisions hereof are severable. 9.11 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument. 33 35 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. MANAGED CARE SOLUTIONS, INC. By: /s/ James Burns -------------------------------- President BLUE CROSS AND BLUE SHIELD OF TEXAS, INC. By: /s/ Michael R. Lewis -------------------------------- Senior Vice President 34 EX-10.3 8 SECURED CONVERTIBLE TERM LOAN AGREEMENT 1 EXHIBIT 10.3 SECURED CONVERTIBLE TERM LOAN AGREEMENT Dated: September 30, 1996 $300,000 MANAGED CARE SOLUTIONS, INC. (the "Borrower") and MALCOLM MCDOUGAL BROWN AND RICHARD C. JELINEK, TRUSTEES U/A DATED 12/20/93 WITH WILLIAM GARDNER BROWN, GRANTOR KNOWN AS THE WILLIAM GARDNER BROWN 1993 GST TRUST ("WGB Trust") 2 SECURED CONVERTIBLE TERM LOAN AGREEMENT This secured loan agreement (the "Agreement") is made and entered into as of the 30th day of September, 1996 between Managed Care Solutions, Inc., a Delaware corporation ("MCS"), and Malcolm McDougal Brown and Richard C. Jelinek, trustees u/a dated 12/20/93 with William Gardner Brown, grantor known as the William Gardner Brown 1993 GST Trust (the "WGB Trust"). RECITAL This Agreement is being entered into to provide the following secured convertible term loan from the WGB Trust to MCS in the maximum principal amount of $300,000 (the "Loan"). As hereinafter provided, the Loan shall be convertible into shares of common stock of MCS. AGREEMENTS In consideration of the mutual representations, warranties, and covenants set forth herein, and in consideration of the Loan made hereunder to or for the benefit of the WGB Trust by MCS, the parties hereto agree as follows: ARTICLE I DEFINITIONS As used herein: "AHC" means Arizona Health Concepts, Inc., an Arizona corporation, which is a wholly-owned Subsidiary of the Borrower. "Bankruptcy Law" means any law referred to in clause (i) of Section 6.1.7 hereof. "Closing" means the closing referred to in Section 3.1. "Event of Default" means an Event of Default under Section 6.1. "Indebtedness" means, as to the Borrower or any Subsidiary, all items of indebtedness, obligation or liability, whether matured or unmatured, liquidated or unliquidated, direct or contingent, joint or several, including, but without limitation: (i) All indebtedness guaranteed, directly or indirectly, in any manner, or endorsed (other than for collection or deposit in the ordinary course of business) or discounted with recourse; (ii) All indebtedness in effect guaranteed, directly or indirectly, through agreements, contingent or otherwise: (1) to purchase such indebtedness; 3 or (2) to purchase, sell or lease (as lessee or lessor) property, products, materials or supplies or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such indebtedness or to assure the owner of the indebtedness against loss; or (3) to supply funds to or in any other manner invest in the debtor; (iii) All indebtedness secured by (or for which the holder of such indebtedness has a right, contingent or otherwise, to be secured by) any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance upon property owned or acquired subject thereto, whether or not the liabilities secured thereby have been assumed; and (iv) All indebtedness incurred as the lessee of goods or services under leases that, in accordance with generally accepted accounting principles, should not be reflected on the lessee's balance sheet. Notwithstanding the foregoing, "Indebtedness" shall not be deemed to include amounts due participants under certificates issued by health maintenance organizations in the ordinary course of business unless the amount due under any such certificate has been finally determined and remains unpaid for a period of more than 30 days after such final determination. "Insolvency Law" means any law referred to in clause (ii) of Section 6.1.7. "Laws" means all ordinances, statutes, rules, regulations, orders, injunctions, writs or decrees of any government or political subdivision or agency thereof, or any court or similar entity established by any thereof. "Loan" means the convertible term loan referred to in the Recital of this Agreement and represented by the Note. "Note" means the convertible note issued to the WGB Trust, referred to in Section 2.4 hereof, evidencing the Loan in the form attached hereto as Exhibit A, as such note shall be amended or restated from time to time. "Obligations" means the obligation of the Borrower: (i) To pay the principal of and interest on the Note in accordance with the terms thereof and to satisfy all of its other indebtedness, liabilities and obligations to the WGB Trust, whether hereunder or otherwise, whether now existing or hereafter incurred, matured or unmatured, direct or contingent, joint or several, including any extensions, modifications, renewals thereof and substitutions therefor (including amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code (or any successor statute)); (ii) To repay to the WGB Trust all amounts advanced by the WGB Trust hereunder on behalf of the Borrower; and 2 4 (iii) To reimburse the WGB Trust, on demand, for all of the WGB Trust's expenses and costs, including the reasonable fees and expenses of its counsel, in connection with enforcement of this Agreement and the documents required hereunder, including, without limitation, any proceeding brought to enforce payment of any of the obligations referred to in the foregoing paragraphs (i) and (ii). "Person" means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, joint venture, court or government or political subdivision or agency thereof. "Potential Default" means an event or condition which, but for the lapse of time or giving of notice, or both, would constitute an Event of Default. "Rate" means the Rate referred to in Section 2.7.1. "Subsidiary" means any corporation of which more than fifty percent (50%) of the outstanding voting securities shall, at the time of determination, be owned directly, or indirectly through one or more intermediaries, by the Borrower. For purposes of this Agreement, the term Subsidiary shall include Benova Managed Care Solutions, LLC, a New York limited liability company, 65% of the equity interest of which is owned by the Borrower, except that references to the corporate nature of Benova shall relate to its existence as a limited liability company. "Ventana" means Ventana Health Systems, Inc., an Arizona corporation, which is a wholly-owned Subsidiary of the Borrower. "Warrant" means the warrant certificate issued to the WGB Trust, referred to in Section 2.8 hereof, evidencing the right granted to the WGB Trust in connection with the Loan to purchase shares of common stock of the Borrower, which Warrant shall be in the form attached hereto as Exhibit B. Interpretation. In this Agreement, unless the context otherwise requires: (i) The terms "hereby," "hereof," "hereto," "hereunder," "herein" and any similar terms used herein refer to this Agreement, and the term "hereafter" shall mean after, and the term "heretofore" shall mean before the date of this Agreement; (ii) Words contemplating the singular number shall mean and include the plural number and vice versa; (iii) Any headings preceding the text of the several Sections and Paragraphs of this Agreement, and any table of contents or marginal notes appended to copies hereof, shall be solely for the convenience of reference and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect; 3 5 (iv) Sections and Paragraphs mentioned by number only are the respective Sections and Paragraphs of this Agreement so numbered; and (v) As previously disclosed to the WGB Trust by the Borrower, AHC has a negative net worth, and without the investment of additional funds, AHC may be unable to satisfy its obligations as they become due. To the extent any representation, warrant, covenant or default in this Agreement would be breached or violated due to the financial condition of AHC or its business, such representation, warranty, covenant or default shall be deemed not to apply to AHC. ARTICLE II THE LOAN 2.1 General Terms. Subject to the terms hereof, the WGB Trust will lend the Borrower the principal sum of $300,000 on a term basis. 2.2 Disbursement of the Loan. The WGB Trust will wire transfer the proceeds of the Loan at Closing to the Borrower's bank account as shall be designated by Borrower at least 24 hours prior to Closing. 2.3 Use of Loan Proceeds. Proceeds of the Loan will be used by the Borrower to satisfy existing Indebtedness, provide working capital and finance expansion. 2.4 The Note. At the time of the making of the Loan, the Borrower will execute and deliver the Note to the WGB Trust. 2.5 Payments of Principal. The principal of the Loan shall be repaid as follows: 2.5.1 The principal amount of the Loan shall be due and payable on September 30, 1999 unless (i) the Loan is automatically extended as provided in Clause 2.5.2 below in which event the principal amount of the Loan shall be due and payable on the date to which the Loan is automatically extended pursuant to Clause 2.5.2 below, or (ii) the WGB Trust otherwise agrees to an extension of the Loan; and 2.5.2 (i) In the event that on September 30, 1999 no Default or Potential Default exists under this Agreement, the date on which the principal of the Loan shall be repaid shall be, without any action on behalf of the WGB Trust, automatically extended to September 30, 2000 and (ii) in the event that on September 30, 2000 no Default or Potential Default exists under this Agreement, the date on which the principal of the Loan shall be repaid shall be, without any action on behalf of the WGB Trust, automatically extended to September 30, 2001. Prior to any automatic extension becoming effective, the Borrower shall deliver a certificate of an officer of the Borrower to the effect that all conditions precedent to such automatic extension have been satisfied. 4 6 2.5.3 The Borrower shall be entitled to prepay the Loan, in whole or in part, at any time upon delivery of not less than 45 days nor more than 60 days prior written notice to the WGB Trust of the date fixed for payment. 2.6 Conversion Rights. The WGB Trust shall have the right, at any time and from time to time prior to payment of the Loan in full, to convert the Note into shares of common stock of the Borrower as more fully set forth in the Note. 2.7 Interest Rate and Payments of Interest. 2.7.1 Interest on the Loan shall be paid as follows: (1) Interest on the principal balance of the Loan, from time to time outstanding, and on all other Obligations arising under this Agreement, will be payable at a rate (the "Rate") equal to eight percent (8%) per annum, shall be payable monthly on the last day of the month for which such interest was earned with the final payment of interest being due on September 30, 1999 or such later date to which the Loan is extended pursuant to the terms hereof; (2) If the Loan is extended as provided in Section 2.5.2, interest accruing after September 30, 1999 shall be payable monthly and be payable on the last day of the month for which such interest was earned with the final payment of interest being due on September 30, 1999 or such later date to which the Loan is extended pursuant to the terms hereof; (3) If the Loan is prepaid either in whole or in part, interest on any principal balance being prepaid to the prepayment date shall be due on such date; (4) If the Loan is converted into common stock of the Borrower as provided in Section 3.6 and in the Note, all unpaid interest accrued on the Loan to the conversion date shall be due on such date; and (5) At any time an Event of Default shall occur under this Agreement all unpaid interest accrued on the Loan to the date such Event of Default occurred shall be immediately due and payable. 2.7.2 If, at any time, the Rate shall be deemed by any competent court of law, governmental agency or tribunal to exceed the maximum rate of interest permitted by any applicable Laws, then, for such time as the Rate would be deemed excessive, its application shall be suspended and there shall be charged instead the maximum rate of interest permissible under such Laws. 5 7 2.8 Warrant. The Borrower shall deliver to the WGB Trust the Warrant granting the WGB Trust the right to purchase 10,000 shares of common stock (subject to anti-dilution protection) at a price equal to $4.45 per share. The Warrant shall be subject to the terms and conditions set forth in the certificate evidencing the Warrant and shall be exercisable on or before September 30, 2001. 2.9 Payment to the WGB Trust. All sums payable to the WGB Trust hereunder shall be paid directly to the WGB Trust in immediately available funds. The WGB Trust shall send the Borrower statements of all amounts due hereunder, which statements shall be considered correct and conclusively binding on the Borrower unless the Borrower notifies the WGB Trust to the contrary within 30 days of its receipt of any statement which it deems to be incorrect. ARTICLE III CONDITIONS PRECEDENT The obligation of the WGB Trust to make the Loan hereunder is subject to the following conditions precedent: 3.1 Documents Required for the Closing. The Borrower shall have delivered to the WGB Trust, prior to the disbursement of the Loan (the "Closing") the following: 3.1.1 The Note; 3.1.2 The Warrant; and 3.1.3 A copy of the resolutions of the Borrower's board of directors authorizing the execution, delivery and performance of this Agreement, the Note, and the Warrant. 3.2 Certain Events. At the time of the Closing: 3.2.1 No Event of Default or Potential Default shall have occurred and be continuing; 3.2.2 No material adverse change shall have occurred in the financial condition of the Borrower and its Subsidiaries, taken as a whole, since August 31, 1996, the date of the most recent financial statements delivered to the WGB Trust prior to the Closing; and 3.2.3 No event shall have occurred which would cause any of the Collateral Documents not to be in full force and effect. 3.3 Legal Matters. At the time of the Closing, all legal matters incidental to the Loan shall be reasonably satisfactory to Haines & Boone, counsel to the WGB Trust. 6 8 3.4 Board Approval. Prior to the time of the Closing, the WGB Trust's Board of Directors shall have authorized the Loan. ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 To induce the WGB Trust to enter into this Agreement, the Borrower represents and warrants to the WGB Trust as follows: 4.1.1 The Borrower is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware and has all power (corporate and other) necessary to carry on its business as now being conducted and to own, lease and operate its properties. The Borrower is duly licensed, qualified and authorized to conduct its business in Arizona and in all other jurisdictions in which the character and location of the assets owned by it or the nature of the business transacted by it requires licensing, qualification or authorization; 4.1.2 Neither the Borrower nor any Subsidiary is in default with respect to any of its existing Indebtedness, and the making and performance of this Agreement, the Note, and the Warrant (immediately, or with the passage of time or the giving of notice, or both): (1) Violate or conflict with the articles of incorporation or bylaws of the Borrower, or violate any Laws binding upon the Borrower or any Subsidiary or their properties; (2) Violate or conflict with or result in a material breach of any of the terms or conditions of or constitute a default under any material contract, agreement, commitment, indenture, mortgage, note, bond, license, permit, or other instrument or obligation to which the Borrower is a party or by which any of its property or assets are bound or affected; or (3) Violate any order, writ, injunction or decree of any court, administrative agency or governmental body. 4.1.3 The Borrower has the power and authority to enter into and perform this Agreement, the Note and the Warrant, and to incur the obligations herein and therein provided for, and has taken all corporate action necessary to authorize the execution, delivery, and performance of this Agreement, the Note and the Warrant to be delivered by the Borrower; 4.1.4 This Agreement, the Note and the Warrant when delivered will be, valid, binding obligations, enforceable in accordance with their respective terms; 7 9 4.1.5 Except as otherwise set forth in Exhibit C to this Agreement or in the consolidated financial statements at and for the fiscal year ended May 31, 1996 of the Borrower and the Subsidiaries, there are no actions, suits, investigations or proceedings pending other than actions, suits, investigations or proceedings which are of a nature generally encountered by the Subsidiaries in the ordinary course of their businesses in any court or before or by any federal, state, municipal or other governmental or non-governmental department, commission, board, bureau, agency, or instrumentality, or to the knowledge of the Borrower, threatened against the Borrower or any Subsidiary which seek $50,000 or more in compensatory or punitive damages or the eventual outcome of which, if decided adversely to the Borrower or any Subsidiary, could have a material adverse effect on the condition, financial or otherwise, results of operations, business or prospects, of either the Borrower and its Subsidiaries, taken as a whole; and the aggregate damages sought in all such actions, suits or proceedings not disclosed because they seek less than $25,000 in compensatory or punitive damages does not exceed the aggregate of $200,000; and there are no other proceedings, actions or other matters pending before any insurance department to which the Borrower, or any Subsidiary is a party; 4.1.6 Except as otherwise set forth in Exhibit C to this Agreement, there is no pending order, stipulation or other direction from any court, agency, department or other body with jurisdiction over the Borrower or any Subsidiary, that would materially restrict the Borrower's or any Subsidiary's ability to carry on their respective businesses in the manner in which they were carried on during the periods covered by the Financial Statements; 4.1.7 No representation or warranty by the Borrower contained herein or in any certificate or other document furnished by the Borrower pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary to make such representation or warranty not misleading in light of the circumstances under which it was made; and 4.1.8 Each consent, approval or authorization of, or filing, registration or qualification with, any Person which is required to be obtained or effected by the Borrower or any Subsidiary in connection with the execution and delivery of this Agreement, the Note and the Warrant or the undertaking or performance of any obligation hereunder or thereunder has been duly obtained or effected. 4.2 Survival. All of the representations and warranties set forth in Section 4.1 shall survive until all Obligations are satisfied in full, regardless of any investigation made by the WGB Trust or on its behalf. 8 10 ARTICLE V COVENANTS The Borrower does hereby covenant and agree with the WGB Trust that, so long as any of the Obligations remain unsatisfied, it will comply and it will cause its Subsidiaries to comply, with the following covenants: 5.1 Affirmative Covenants of Borrower. 5.1.1 The Borrower will use the proceeds of the Loan only for the purposes set forth in Section 2.3. 5.1.2 The Borrower and its Subsidiaries will, when requested so to do, make available for inspection by duly authorized representatives of the WGB Trust their Records, and will furnish the WGB Trust any information regarding their business affairs and financial condition within a reasonable time after written request therefor. 5.1.3 The Borrower and its Subsidiaries will take all necessary steps to preserve their corporate existence, franchises, licenses and certificates of authority and to comply with all present and future Laws, applicable to them in the operation of their respective businesses, and all material agreements to which they are subject. 5.1.4 The Borrower and its Subsidiaries will pay when due (or within applicable grace periods) all Indebtedness due third Persons, except when the amount thereof is being contested in good faith by appropriate proceedings and with adequate reserves therefor being set aside on the books of the Borrower and its Subsidiaries. If default be made by the Borrower or any Subsidiary in the payment of any principal (or installment thereof) of, or interest on, any such Indebtedness, the WGB Trust shall have the right, in its discretion, to pay such interest or principal for the account of the Borrower or such Subsidiary and be reimbursed by the Borrower therefor. Any such payment by the WGB Trust shall be deemed an Obligation hereunder. 5.1.5 The Borrower and its Subsidiaries will notify the WGB Trust immediately if any of them becomes aware of the occurrence of any Event of Default or Potential Default, or of the failure of the Borrower or any Subsidiary to observe any of their respective undertakings hereunder. 9 11 5.2 Negative Covenants of Borrower. 5.2.1 Neither the Borrower nor any Subsidiary will furnish the WGB Trust any certificate or other document that will contain any untrue statement of a material fact or that will omit to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished. ARTICLE VI DEFAULT 6.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default hereunder: 6.1.1 The Borrower shall fail to pay any installment of principal of the Loan or any other Obligation when due and such failure shall continue for a period of five days; 6.1.2 The Borrower shall fail to pay any installment of interest on the Loan or any other Obligation hereunder when due and such failure shall continue for a period of five days; 6.1.3 The Borrower or any Subsidiary shall fail to observe or perform any other obligation to be observed or performed by them hereunder or under any of the Collateral Documents, and such failure shall continue for 30 days after: (1) notice of such failure from the WGB Trust; or (2) the WGB Trust is notified of such failure or should have been so notified pursuant to the provisions of Article VI, whichever is earlier; 6.1.4 The Borrower or any Subsidiary shall fail to pay any Indebtedness due any third Person and such failure shall continue beyond any applicable grace period, or the Borrower or any Subsidiary shall suffer to exist any other default under any agreement binding upon the Borrower or any Subsidiary unless, in either instance, the Borrower or such Subsidiary shall have commenced an appropriate action or proceeding challenging in good faith its obligation to make such payment or to perform under such agreement and any action by the holder of such Indebtedness to enforce payment thereof or of the other party to such agreement to require performance or obtain damages under such agreement shall have been effectively suspended, enjoined or otherwise stayed pending a determination in the Borrower's or the Subsidiary's action or proceeding. Such action or proceeding shall be diligently pursued by the Borrower or the Subsidiary or the Borrower shall have otherwise posted a bond (any reimbursement obligations under which shall be subordinate to all rights of the WGB Trust hereunder) or additional Collateral in either case in a form and amount satisfactory to the WGB Trust; 10 12 6.1.5 Any financial statement, representation, warranty or certificate made or furnished by the Borrower or any Subsidiary to the WGB Trust in connection with this Agreement, or as inducement to the WGB Trust to enter into this Agreement, or in any separate statement or document to be delivered hereunder to the WGB Trust, shall be materially false, incorrect, or incomplete when made; 6.1.6 The Borrower or any Subsidiary (other than AHC) shall admit its inability to pay its debts as they mature, or shall make an assignment for the benefit of its, or any of its, creditors; 6.1.7 (i) an order, judgment or decree is entered under the bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law ("Bankruptcy Law") adjudicating the Borrower or any Subsidiary (other than AHC) bankrupt or insolvent or (ii) an order, judgment or decree is entered pursuant to the insurance or other laws of any state for the purpose of liquidating, rehabilitating, reorganizing, or conserving any Subsidiary (the "Insolvency Law"); 6.1.8 The Borrower or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator, rehabilitator, conservator or similar official, of the Borrower or any Subsidiary (other than AHC) of any substantial part of the assets of the Borrower or any Subsidiary (other than AHC) or if the Borrower commences a voluntary case under Bankruptcy Law or any Subsidiary or state commences a proceeding for the purpose of liquidating, rehabilitating, reorganizing, or conserving any Subsidiary under the Insolvency Law, whether now or hereafter in effect; 6.1.9 A petition or application referred to in Section 7.1.2 is filed, or any such proceedings are commenced, against the Borrower or any Subsidiary (other than AHC) and the Borrower or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order for the relief is entered in an involuntary case against the Borrower or any Subsidiary (other than AHC) under any Bankruptcy Law or Insolvency Law, as the case may be, as now or hereafter constituted, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition or application in any such proceedings, and any such order, judgment or decree remains unstayed and in effect for more than 60 calendar days; 6.1.10 Any order, judgment or decree is entered in any proceedings against the Borrower or Ventana decreeing the dissolution or liquidation of the Borrower or Ventana and such order, judgment or decree remains unstayed; 6.1.11 The Borrower or any Subsidiary shall suffer final nonappealable judgments for payment of money aggregating in excess of $50,000 and shall not 11 13 discharge the same within a period of 30 days or when due, whichever is later, unless, pending further proceedings, execution has not been commenced or if commenced has been effectively stayed; 6.1.12 The validity or enforceability of this Agreement, the Note or the Warrant shall be contested by the Borrower, or the Borrower shall deny that it has any or further liability or obligation hereunder or thereunder. 6.2 Acceleration. Immediately and without notice upon the occurrence of an Event of Default specified in the foregoing paragraphs 6.1.1, 6.1.2, 6.1.3, 6.1.4 or 6.1.5, or at the option of the WGB Trust, but only upon notice to the Borrower, upon the occurrence of any other Event of Default, all Obligations, whether hereunder or otherwise, shall immediately become due and payable without further action of any kind. 6.3 Remedies. After any acceleration, as provided for in Section 7.2, the WGB Trust shall have, in addition to the rights and remedies given it by this Agreement and the Collateral Documents, all those allowed by all applicable Laws, including, but without limitation, the Uniform Commercial Code as enacted in any jurisdiction in which any Collateral may be located. Without limiting the generality of the foregoing, the WGB Trust may immediately, without demand of performance and without other notice (except as specifically required by this Agreement or the Collateral Documents) or demand whatsoever to the Borrower, all of which are hereby expressly waived, and without advertisement, sell at public or private sale or otherwise realize upon, in Phoenix, Arizona, or elsewhere, the whole or, from time to time, any part of the Collateral, or any interest which the Borrower may have therein. After deducting from the proceeds of sale or other disposition of the Collateral all expenses (including all reasonable expenses for legal services), the WGB Trust shall apply such proceeds toward the satisfaction of the Obligations. Any remainder of the proceeds after satisfaction in full of the Obligations shall be distributed as required by applicable Laws. Notice of any sale or other disposition shall be given to the Borrower at least five days before the time of any intended public sale or of the time after which any intended private sale or other disposition of the Collateral is to be made, which the Borrower hereby agrees shall be reasonable notice of such sale or other disposition. The Borrower agrees to assemble, or to cause to be assembled, at its own expense, the Collateral at such place or places as the WGB Trust shall designate. At any such sale or other disposition, the WGB Trust may, to the extent permissible under applicable Laws, purchase the whole or any part of the Collateral, free from any right of redemption on the part of the Borrower, which right is hereby waived and released. Without limiting the generality of any of the rights and remedies conferred upon the WGB Trust under this paragraph, the WGB Trust may, to the full extent permitted by applicable Laws: 6.3.1 Enter upon the premises of the Borrower, exclude therefrom the Borrower or any affiliate thereof, and take immediate possession of the Collateral, either personally or by means of a receiver appointed by a court of competent jurisdiction, using all necessary force to do so; 6.3.2 At the WGB Trust's option, use, operate, manage and control the Collateral in any lawful manner; 12 14 6.3.3 Collect and receive all rents, income, revenue, earnings, issues and profits therefrom; and 6.3.4 Maintain, repair renovate, alter or remove the Collateral as the WGB Trust may determine in its discretion. ARTICLE VII MISCELLANEOUS 7.1 Construction. The provisions of this Agreement shall be in addition to those of any pledge or security agreement, note or other evidence of liability held by the WGB Trust, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent the WGB Trust from enforcing any or all other notes, guaranty, pledge or security agreements in accordance with their respective terms. 7.2 Enforcement and Waiver by the WGB Trust. The WGB Trust shall have the right at all times to enforce the provisions of this Agreement in strict accordance with the terms hereof and thereof, notwithstanding any conduct or custom on the part of the WGB Trust in refraining from so doing at any time or times. The failure of the WGB Trust at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or as having in any way or manner modified or waived the same. All rights and remedies of the WGB Trust are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy. 7.3 Expenses. The Borrower and the WGB Trust shall each pay their own respective expenses incurred in connection with the negotiation and execution of this Agreement. 7.4 Notices. Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by certified mail, postage prepaid, return receipt requested, by an established and reputable overnight express delivery service or by facsimile transmission, as follows, unless such address is changed by written notice hereunder: If to the Borrower: Managed Care Solutions, Inc. 2510 West Dunlap Avenue Suite 300 Phoenix, Arizona 85021 Attention: President If to the WGB Trust: Malcolm McDougal Brown, Trustee 13 15 1275 N. Green Bay Road Lake Forest, Illinois 60045 7.5 Waiver and Release by the Borrower. To the maximum extent permitted by applicable laws, the Borrower releases the WGB Trust and its officers, attorneys, agents and employees from all claims for loss or damage caused by any act or omission on the part of any of them except for its gross negligence or willful misconduct. 7.6 Satisfaction Requirement. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to any party, the determination of such satisfaction shall be made by such party in its sole and exclusive judgment exercised in good faith in a commercially reasonable manner. 7.7 Applicable Law. The laws of the State of Arizona applicable to contracts made and to be performed in that state shall govern the construction of this Agreement and the rights and remedies of the parties hereto without regard to conflict of laws provisions. 7.8 Binding Effect, Assignment and Entire Agreement. This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of the WGB Trust. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed on behalf of each party. 7.9 Severability. If any provision of this Agreement shall be held invalid under any applicable Laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end the provisions hereof are severable. 7.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument. 14 16 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. MANAGED CARE SOLUTIONS, INC. By /s/ Michael Kennedy -------------------------------- Vice President MALCOLM MCDOUGAL BROWN AND RICHARD C. JELINEK, TRUSTEES U/A DATED 12/20/93 WITH WILLIAM GARDNER BROWN, GRANTOR KNOWN AS THE WILLIAM GARDNER BROWN 1993 GST TRUST By /s/ Malcolm McDougal Brown -------------------------------- Malcolm McDougal Brown, Trustee and By /s/ Richard Jelinek -------------------------------- Richard C. Jelinek, Trustee 15 EX-10.4 9 OFFICE LEASE 1 Exhibit 10.4 OFFICE LEASE by and between PIVOTAL SIMON OFFICE XVI, L.L.C., FORMERLY KNOWN AS PIVOTAL SIMON POINTE, L.L.C., an Arizona limited liability company, "LANDLORD" and MANAGED CARE SOLUTIONS, INC., a Delaware corporation, "TENANT" SEPTEMBER 30, 1996 POINTE CORRIDOR CENTRE I 7600 NORTH 16TH STREET PHOENIX, ARIZONA 85020 2 TABLE OF CONTENTS
Page 1. BASIC PROVISIONS................................................. 1 2. LEASED PREMISES; NO ADJUSTMENTS.................................. 2 3. LEASE TERM; COMMENCEMENT DATE.................................... 3 4. SECURITY DEPOSIT................................................. 4 5. RENT; RENT TAX; ADDITIONAL RENT.................................. 4 6. OPERATING COSTS.................................................. 5 7. CONDITION, REPAIRS AND ALTERATIONS............................... 8 8. SERVICES......................................................... 9 9. LIABILITY AND PROPERTY INSURANCE................................. 10 10. RECONSTRUCTION.................................................. 13 11. WAIVER OF SUBROGATION........................................... 14 12. LANDLORD'S RIGHT TO PERFORM TENANT OBLIGATIONS.................. 14 13. DEFAULT AND REMEDIES............................................ 15 14. LATE PAYMENTS................................................... 17 15. ABANDONMENT AND SURRENDER....................................... 17 16. INDEMNIFICATION AND EXCULPATION................................. 17 17. ENTRY BY LANDLORD............................................... 18 18. SUBSTITUTE PREMISES............................................. 18 19. ASSIGNMENT AND SUBLETTING....................................... 19 20. USE OF LEASED PREMISES AND RUBBISH REMOVAL...................... 21
3 21. SUBORDINATION AND ATTORNMENT....................................... 22 22. ESTOPPEL CERTIFICATE............................................... 23 23. SIGNS.............................................................. 23 24. PARKING............................................................ 23 25. LIENS.............................................................. 24 26. HOLDING OVER....................................................... 24 27. ATTORNEYS' FEES.................................................... 24 28. RESERVED RIGHTS OF LANDLORD........................................ 24 29. EMINENT DOMAIN..................................................... 25 30. NOTICES............................................................ 26 31. RULES AND REGULATIONS.............................................. 26 32. ACCORD AND SATISFACTION............................................ 26 33. BANKRUPTCY OF TENANT............................................... 26 34. HAZARDOUS MATERIALS................................................ 28 35. MISCELLANEOUS...................................................... 30
2 4 1. BASIC PROVISIONS 1.1 Date: September 30, 1996 1.2 Landlord: Pivotal Simon Office XVI, L.L.C., formerly known as Pivotal Simon Pointe, L.L.C., an Arizona limited liability company 1.3 Landlord's Address: c/o Pivotal Group, Inc. 2525 East Camelback Road, Suite 650 Phoenix, Arizona 85016 Attention: Mr. J. Jahm Najafi 1.4 Tenant: Managed Care Solutions, Inc., a Delaware corporation 1.5 Tenant's Address: (a) Prior to Commencement Managed Care Solutions, Inc. Date: 2510 W. Dunlap, Suite 300 Phoenix, Arizona 85021 (b) Subsequent to Commencement Date: Managed Care Solutions, Inc. 7600 North 16th Street Suite 150 Phoenix, Arizona 85020 Attn: President With a copy to: Managed Care Solutions, Inc. 7600 North 16th Street Suite 150 Phoenix, Arizona 85020 Attn: Chief Financial Officer
1.6 Project: The parcel of real estate commonly known as the Pointe Corridor Centre, located in Phoenix, Maricopa County, Arizona, legally described on Exhibit "A" attached hereto and incorporated herein by this reference, together with the office buildings now or hereafter situated thereon, the landscaping, parking facilities and all other improvements and appurtenances thereto. 1.7 Property: The parcel of real estate located in Phoenix, Maricopa County, Arizona, legally described on Exhibit "B" attached hereto and incorporated herein by this reference, together with the office buildings now or hereafter situated thereon, the landscaping, parking facilities and all other improvements and appurtenances thereto. 3 5 1.8 Building: That certain office building known as Pointe Corridor Centre I located at 7600 North 16th Street, Phoenix, Maricopa County, Arizona 85020, and situated on the Property. 1.9 Leased Premises: 28,922 rentable (26,293 usable) square feet of office space located on the first floor of the Building and commonly known as Suite 130A, as outlined on the Floor Plan attached hereto as Exhibit "C". 1.10 Permitted Use: General office use. 1.11 Lease Term: Five (5) years. 1.12 Commencement Date and Expiration Date: See Articles 1.11 and 3. 1.13 Annual Basic Rent:
Rental Rate Annual Monthly per Rentable Lease Year Basic Rent Basic Rent Square Foot 1 $484,443.50 $40,370.29 $16.75 2 498,904.50 41,575.38 17.25 3 513,365.50 42,780.46 17.75 4 527,826.50 43,985.54 18.25 5 542,287.50 45,190.63 18.75
1.14 Security Deposit: See Article 4. 1.15 Base Year Costs: 1997 calendar year actual Operating Costs per rentable square foot adjusted to 95% occupancy. 1.16 Building Hours: 7:00 a.m. to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 12:00 p.m. on Saturday, excluding recognized federal, state or local holidays. 1.17 Parking Spaces: 35 covered reserved parking spaces at $10.00 per space, per month. 79 uncovered unreserved parking spaces on a first come, first served basis, at no charge. All such spaces shall be in parking areas adjacent to the Building, including the parking lot north of Belmont Street. 4 6 1.18 Parking Charge: See 1.17 above. 1.19 Guarantors: Not applicable. 1.20 Broker: Lee & Associates, Benchmark Realty Advisors and Roc Corporate Partners, L.L.C. 1.21 Exhibits: A = Legal Description of the Project B = Legal Description of the Property C = Floor Plan D = Memorandum of Commencement Date E = Reserved Covered Parking License F = Intentionally Omitted G = Non-Exclusive Unreserved Parking License H = As Is; Tenant's Allowance I = Building Rules and Regulations J = Intentionally Omitted K = Janitorial Services 1.22 Riders: 1 = Option to Extend 2 = Rights of First Opportunity and Expansion Options 2. LEASED PREMISES; NO ADJUSTMENTS 2.1 Leased Premises. Landlord hereby leases to Tenant, and Tenant hereby leases and accepts from Landlord, the Leased Premises, upon the terms and conditions set forth in this Lease and any modifications, supplements or addenda hereto (the "Lease"), including the Basic Provisions of Article 0 which are incorporated herein by this reference, together with the nonexclusive right to use, in common with Landlord and others, the Building Common Areas (defined below) and the Project Common Areas (defined below). For the purposes of this Lease, the term "Building Common Areas" means common hallways, corridors, walkways and footpaths, foyers and lobbies, bathrooms and janitorial closets, electrical and telephone closets, landscaped areas, and such other areas within or adjacent to the Building which are subject to or are designed or intended solely for the common enjoyment, use and/or benefits of the tenants of the Building. The term "Project Common Areas" means common walkways, footpaths, driveways, parking areas, service areas, landscaped areas, and such other areas within or adjacent to the Project which are subject to or are designed or intended solely for the common enjoyment, use and/or benefits of the tenants of the Project. 2.2 Square Footage. The Annual Basic Rent at the Commencement Date (as hereinafter defined) is based on the Leased Premises containing the rentable square footage set forth in Article 0 above, which square footage has been precisely determined by Landlord and approved by Tenant prior to the Commencement Date. No adjustments to Annual Basic Rent or any other charge shall be made if the actual size of the Leased Premises is greater or smaller than that set forth in Article 1.9. For the purpose of this Lease, Landlord and Tenant agree that the usable square footage of the Leased Premises is 26,293. 2.3 Condition of Leased Premises. The Leased Premises shall be delivered to Tenant in a clean, broom-swept condition. All furniture and movable personal property of the previous tenant shall have been removed except the following: 5 7 (i) All computer raised flooring and ramps; (ii) All overstanding electrical apparatus; (iii) All supplemental HVAC systems and related equipment; and (iv) All fire and life safety systems. All existing permanent built-in and above-the-ceiling improvements shall remain in the Leased Premises and together with the items described in clauses (i)-(iv) above (the "Existing Improvements") shall be delivered to Tenant in an "as is" and "where is" condition, without any representation or warranty whatsoever. Landlord hereby disclaims all express and implied warranties with respect to the Existing Improvements, including the implied warranties of habitability, merchantability and fitness or suitability for any particular purpose. Landlord shall, at its sole cost and expense, without any deduction from the Tenant Improvement Allowance or Additional Allowance (each defined in Exhibit "H") perform any and all work necessary to cause all base building systems serving the Leased Premises (as distinguished from the Existing Improvements), including HVAC, plumbing, electrical and mechanical, serving the Leased Premises to be in good working condition on the Commencement Date; provided, however, that Landlord may deduct from the Tenant Improvement Allowance or Additional Allowance the cost of any work performed by Landlord to the base building systems which is necessitated by changes made to the Leased Premises by Tenant. 3. LEASE TERM; COMMENCEMENT DATE 3.1 Lease Term. The Lease Term shall begin on the Commencement Date and shall be for the period set forth in Article 0 above, plus any period of less than one (1) month between the Commencement Date and the first day of the next succeeding calendar month, unless sooner terminated in accordance with the further provisions of this Lease. 3.2 Commencement Date. Subject to Force Majeure, the Commencement Date shall mean January 6, 1997; provided,however, that in the event that the existing tenant of the Leased Premises shall not have vacated the Leased Premises on or before September 30, 1996, the Commencement Date shall be extended by the number of days between September 30, 1996 and the date on which the existing tenant vacates the Leased Premises. Notwithstanding any provision of this Lease to the contrary, Tenant shall have access to the Leased Premises for the five (5) business days immediately preceding the Commencement Date (the "Occupancy Date"). 3.3 Memorandum of Commencement Date and Expiration Date. Landlord and Tenant shall, within ten (10) days after the Commencement Date, execute a declaration in the form of Exhibit "D" attached hereto specifying the Commencement Date and the Expiration Date. 3.4 Delay in Commencement Date. In the event Landlord shall be unable, for any reason, to deliver possession of the Leased Premises to Tenant on the Commencement Date, Landlord shall not be liable for any loss or damage occasioned thereby, nor shall such inability affect the validity of this Lease or the obligations of Tenant. In such event, Tenant shall not be obligated to pay Annual Basic Rent or Additional Rent until the Commencement Date. In the event Landlord shall not have delivered possession of the Leased Premises to Tenant within thirty (30) days after the Commencement Date, and if such failure to deliver possession was (a) caused solely by the fault or neglect of Landlord, and (b) not caused by any fault 6 8 or neglect of Tenant or due to additional time required to plan for and install other work for Tenant beyond the amount of time which would have been required if only building standard improvements had been installed, then, as its sole and exclusive remedy for Landlord's failure to deliver possession of the Leased Premises in a timely manner, Tenant shall have the right to terminate this Lease by delivering written notice of termination to Landlord at any time within thirty (30) days after the expiration of such thirty (30) day period. Such termination shall be effective thirty (30) days after receipt by Landlord of Tenant's notice of termination unless Landlord shall, prior to the expiration of such thirty (30) day period, deliver possession of the Leased Premises to Tenant. Upon a termination of this Lease pursuant to the provisions of this Article 0, the parties shall have no further obligations or liabilities to the other and Landlord shall promptly return any monies previously deposited or paid by Tenant. 3.5 Lease Year. Each "Lease Year" shall be a period of twelve (12) consecutive calendar months, the first Lease Year beginning on the Commencement Date or on the first day of the calendar month next succeeding the Commencement Date if the Commencement Date is not on the first day of a calendar month. Each Lease Year after the first Lease Year shall begin on the calendar day next succeeding the expiration of the immediately preceding Lease Year. 7 9 4. SECURITY DEPOSIT Tenant shall pay to Landlord, concurrent with the execution of this Lease by Tenant, a security deposit in an amount equal to the sum of (i) three (3) monthly installments of the average amount of Annual Basic Rent payable during the initial Lease Term (i.e., $128,341.37) and (ii) the Additional Allowance, if any, as security for the performance by Tenant of its obligations under this Lease (the "Security Deposit"). In addition, if during the first year of the Lease Term, Tenant exercises an expansion right or a right of opportunity (each as described on Rider "2"), within five (5) days after the exercise thereof, the amount of the Security Deposit shall be increased by any Tenant Improvement Allowance granted by Landlord to Tenant in connection with the exercise of such option or right in excess of Four Dollars ($4.00) per usable square foot. The Security Deposit shall be in the form of cash or a certificate of deposit which Tenant shall be caused to be issued to Landlord by a federally insured financial institution reasonably acceptable to Landlord. All interest that accrues on the Security Deposit shall be held for the benefit of Tenant. In addition, upon the expiration of the thirtieth (30th) month of the Lease Term, provided that there has not been an Event of Default, or an event which with the lapse of time or the delivery of notice, or both, would constitute an Event of Default, then the amount of the Security Deposit shall decrease by sixty-seven percent (67%) and upon receipt of written request by Tenant, Landlord shall return to Tenant an amount equal to sixty-seven percent (67%) of the Security Deposit then held by Landlord, plus interest accrued on such amount. Any increase in the Security Deposit attributable to the exercise of any right of opportunity or expansion option, shall be due and payable within five (5) days after the execution of the supplement to this Lease described in Rider "2". The failure by Tenant to deliver to Landlord any portion of the Security Deposit when due, which failure is not cured within five (5) days after written notice thereof by Landlord to Tenants shall constitute an Event of Default. Any unapplied portion of the Security Deposit shall be returned to Tenant after the expiration or earlier termination of this Lease, provided that Tenant shall have fully performed all of its obligations contained in this Lease. The Security Deposit, in the reasonable determination of Landlord, may be retained by Landlord as and for its full damages or may be applied in reduction of any loss and/or damage sustained by Landlord by reason of the occurrence of any breach, nonperformance or default by Tenant under this Lease without the waiver of any other right or remedy available to Landlord at law, in equity or under the terms of this Lease. If any portion of the Security Deposit is so used or applied, Tenant shall, within thirty (30) days after written notice from Landlord, deposit with Landlord immediately available funds in an amount sufficient to restore the Security Deposit to its then required amount, and Tenant's failure to do so shall be a breach of this Lease. Tenant acknowledges and agrees that in the event Tenant shall file a voluntary petition pursuant to the Bankruptcy Code or any successor thereto, or if an involuntary petition is filed against Tenant pursuant to the Bankruptcy Code or any successor thereto, then Landlord may apply the Security Deposit towards those obligations of Tenant to Landlord which accrued prior to the filing of such petition. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer the Security Deposit to Landlord's successor in interest, whereupon Landlord shall be released from liability by Tenant for the return of such deposit or the accounting therefore. 8 10 5. RENT; RENT TAX; ADDITIONAL RENT 5.1 Payment of Rent. Tenant shall pay to Landlord the Annual Basic Rent set forth in Article 1.13 above, subject to adjustment as provided herein. The Annual Basic Rent shall be paid in equal monthly installments, on or before the first day of each and every calendar month during the Lease Term, in advance, without notice or demand and, except as set forth in this Lease, without abatement, deduction or set-off. The Annual Basic Rent for the first full month of the Lease Term shall be paid upon execution of this Lease. Notwithstanding the foregoing, Landlord acknowledges that Tenant has previously paid to Landlord the sum of Seven Thousand Seven Hundred Sixty Four and No/100 Dollars ($7,764.00) in connection with this Lease, which amount Landlord and Tenant agree shall be applied to the first monthly payment of Annual Basic Rent due and payable by Tenant. If the Commencement Date is other than the first day of a calendar month, the payment for the partial month following the Commencement Date shall be prorated and shall be payable on the first day of the first full calendar month of the Lease Term. All payments requiring proration shall be prorated on the basis of a thirty (30) day month. In addition, all payments to be made under this Lease shall be paid in lawful money of the United States of America to Landlord or its agent at the address set forth in Article 0 above, or to such other person or at such other place as Landlord may from time to time designate in writing. 5.2 Rent Tax. In addition to the Annual Basic Rent and Additional Rent, Tenant shall pay to Landlord, together with the monthly installments of Annual Basic Rent and payments of Additional Rent, an amount equal to any governmental taxes, including, without limitation, any sales, rental, occupancy, excise, use or transactional privilege taxes assessed or levied upon Landlord with respect to the amounts paid by Tenant to Landlord hereunder, as well as all taxes assessed or imposed upon Landlord's gross receipts or gross income from leasing the Leased Premises to Tenant, including, without limitation, transaction privilege taxes, education excise taxes, any tax now or hereafter imposed by the City of Phoenix, the State of Arizona, any other governmental body, and any taxes assessed or imposed in lieu of or in substitution of any of the foregoing taxes. Such taxes shall not, however, include any franchise, gift, estate, inheritance, conveyance, transfer or net income tax assessed against Landlord. 5.3 Additional Rent. In addition to Annual Basic Rent, all other amounts to be paid by Tenant to Landlord pursuant to this Lease (including amounts to be paid by Tenant pursuant to Article 0 below and parking charges to be paid by Tenant pursuant to Exhibits "E", and "G"), if any, shall be deemed to be Additional Rent, whether or not designated as such, and shall be due and payable within fifteen (15) days after receipt by Tenant of Landlord's statement. Landlord shall have the same remedies for the failure to pay Additional Rent as for the nonpayment of Annual Basic Rent. 6. OPERATING COSTS 6.1 Tenant's Obligation. The Annual Basic Rent does not include amounts attributable to any increase in the amount of Taxes (defined below) or amounts attributable to any increase in the cost of the use, management, repair, service, insurance, condition, operation and maintenance of the Building and the Project. Therefore, in order that the Annual Basic Rent payable throughout the Lease Term shall reflect any such increases, Tenant shall pay to Landlord, in accordance with the further provisions of this Article 0, an amount per rentable square foot of the Leased Premises equal to the difference between the Operating Costs (as hereinafter defined) per rentable square foot and the Base Year Costs. Tenant acknowledges that the Base Year Costs do not constitute a representation by Landlord as to the Operating Costs per rentable square foot that may be incurred during any subsequent calendar year. 9 11 6.2 Landlord's Estimate. Landlord shall furnish Tenant its reasonable good faith estimate of the Operating Costs per rentable square foot for each calendar year commencing with the Commencement Date. In addition, Landlord may, annually, furnish Tenant a revised estimate of Operating Costs should Landlord anticipate any increase in Operating Costs from that set forth in a prior estimate. Commencing with the first month to which an estimate applies, Tenant shall pay, in addition to the monthly installments of Annual Basic Rent, an amount equal to one-twelfth (1/12th) of the product of the rentable square footage of the Leased Premises multiplied by the difference (but not less than zero (0)), if any, between such estimate and the Base Year Costs; provided, however, if less than ninety-five percent (95%) of the rentable area of the Building shall be occupied by tenants during the period covered by such estimate, the estimated Operating Costs for such period shall be, for the purposes of this Article 0, increased to an amount reasonably determined by Landlord to be equivalent to the Operating Costs that would be incurred if occupancy would be at least ninety-five percent (95%) during the entire period. Within one hundred twenty (120) days after the expiration of each calendar year, Landlord shall deliver to Tenant a statement of the actual Operating Costs for such calendar year. If the actual Operating Costs for such calendar year are more or less than the estimated Operating Costs, a proper adjustment shall be made; provided, however, if less than ninety-five percent (95%) of the rentable area of the Building shall have been occupied by tenants at any time during such period, the actual Operating Costs for such period shall be, for the purposes of this Article 0, increased to an amount reasonably determined by Landlord, by applying generally accepted accounting principles, consistently applied, to be equivalent to the Operating Costs that would have been incurred had such occupancy been at least ninety-five (95%) during the entire period. Any excess amounts paid by Tenant shall be refunded to Tenant with such statement. Any deficiency between the estimated and actual Operating Costs shall be paid by Tenant to Landlord concurrently with the monthly installment of Annual Basic Rent next due. Any amount owing for a fractional calendar year in the first or final Lease Years of the Lease Term shall be prorated. 6.3 Operating Costs - Defined. For the purposes of this Lease, "Operating Costs" shall mean all costs and expenses accrued, paid or incurred by Landlord, or on Landlord's behalf, in respect of the use, management, repair, service, insurance, condition, operation and maintenance of the Project including, but not limited to the following: (a) Salaries, wages and benefits of all persons who perform duties in connection with landscaping, janitorial and general cleaning services, security services and any and all other employees engaged by or on behalf of Landlord; (b) Payroll taxes, workmen's compensation, uniforms and related expenses for such employees; (c) The cost of all charges for oil, gas, steam, electricity, any alternate source of energy, heat, ventilation, air-conditioning, refrigeration, water, sewer service, trash collection, pest control and all other utilities, together with any taxes on such utilities; (d) The cost of painting the Building Common Areas; (e) The cost of all charges for rent, casualty, liability, fidelity and other insurance maintained by Landlord, including any deductible amounts incurred with respect to an insured loss; (f) The cost of all supplies (including cleaning supplies), tools, materials, equipment and personal property, the rental thereof and sales, transaction privilege, excise and other taxes thereon; 10 12 (g) Depreciation of hand tools and other moveable equipment; (h) The cost of all charges for window and other cleaning, janitorial, security, refuse, lot sweeping and pest control services; (i) The cost of charges for independent contractors; (j) The cost of repairs and replacements made by Landlord at its expense and the fees and other charges for maintenance and service agreements; (k) The cost of exterior and interior landscaping; (l) Costs relating to the operation and maintenance of all real property and improvements appurtenant to the Project, including, without limitation, all parking areas, service areas, walkways and landscaping; (m) The cost of alterations and improvements made by reason of the laws and requirements of any public authorities or the requirements of insurance bodies imposed after the Commencement Date, unless such alterations and improvements are due to Landlord's failure to construct the Building and/or Project in compliance with such requirements and provided that any such costs shall be amortized with interest over the useful life of the alteration or improvement; (n) All management fees and other charges for management services and overhead costs (excluding travel and related expenses), whether provided by an independent management company, Landlord or an affiliate of Landlord, not to exceed, however, the then prevailing range of rates charged in comparable office buildings in the Phoenix, Arizona metropolitan area; (o) The cost of any capital improvements or additions which improve the comfort available to tenants of the Project, provided, however, that any such costs shall be amortized with interest over the useful life of the improvement or addition and such improvements shall be approved by tenants leasing a majority of the square footage of the Building; (p) The cost of any capital improvements or additions which are intended to enhance the safety of the Project (unless such improvements or additions are due to Landlord's failure to construct the Building and/or Project in compliance with applicable safety requirements) or reduce (or avoid increases in) Operating Costs, provided, however, that any such costs shall be amortized with interest over the useful life of the improvement or addition; (q) The cost of licenses and permits, inspection fees and reasonable legal, accounting and other professional fees and expenses; (r) Taxes (as hereinafter defined); (s) Costs relating to the use, management, repair, service, insurance, condition, operation and maintenance of the Project Common Areas in an amount equal to a fraction, the numerator of which is the rentable square footage of the Building and the denominator of which is the rentable square footage of all buildings in the Project; 11 13 (t) Costs of monitoring and maintaining good internal air quality in the Building and regularly inspecting, monitoring, maintaining and repairing the Building's air quality systems, hiring outside consultants to investigate and identify the sources of any suspected internal air quality problems that may be identified, remedying any such problems, modifying, renovating or encapsulating any portion of the Building, or systems or components thereof reasonably required in order to continuously and efficiently maintain reasonably acceptable internal air quality in the Building and comply with any and all local, state and federal regulations, or real estate industry standards relating to internal air quality; (u) Costs of operating and maintaining an on-site property management office; and (v) All other charges properly allocable to the use, management, repair, service, insurance, operation and maintenance of the Project in accordance with generally accepted accounting principles. 6.4 Operating Costs - Exclusions. Excluded from Operating Costs shall be the following: (a) depreciation, except to the extent expressly included pursuant to Article 0 above; (b) interest on and amortization of debts, except to the extent expressly included pursuant to Article 0 above; (c) leasehold improvements, including redecorating made for tenants of the Building; (d) brokerage commissions and advertising expenses for procuring tenants for the Building or the Property; (e) refinancing costs; (f) the cost of any repair, replacement or addition which would be required to be capitalized under general accepted accounting principles, except to the extent expressly included pursuant to Article 0 above; (g) the cost of any item included in Operating Costs under Article 0 above to the extent that such cost is reimbursed or paid directly by an insurance company, condemnor, a tenant of the Project or any other party; (h) the cost of any item included in Operating Costs under Article 0 above to the extent that such cost is attributable solely to the use, management, repair, service, insurance, condition, operation or maintenance of other office buildings in the Project; (i) the cost of any item included in Operating Costs under Article 0 above to the extent that such cost is attributable solely to the use, management, repair, service, insurance, condition, operation or maintenance of the Project Common Areas, to the extent such cost is paid by tenants of other office buildings in the Project; (j) expenses incurred by Landlord to resolve disputes, enforce or negotiate lease terms with prospective or existing tenants or in connection with any financing, sale or syndication of the Project; (k) costs, penalties or fines incurred by Landlord due to Landlord's violation of any federal, state, or local law or regulation except as set forth in Article 6.3(m), (l) any interest or penalties due to late payment by Landlord of any of the Operating Costs, except to the extent such interest on penalty is caused by Tenant's failure to comply with any of Tenant's obligations under the Lease; (m) expenses for any item or service not provided to Tenant but provided exclusively to certain other tenants in the Building; (n) salaries of employees above the grade of building superintendent or building manager; (o) Landlord's general corporate overhead and administrative expenses except as set forth in Articles 6.3(a), (b), (n) and (u); and (p) fees paid to affiliates of Landlord in excess of the fair market value of such services provided in exchange therefore. 6.5 Taxes - Defined. For the purposes of this Lease, "Taxes" shall mean and include all real property taxes and personal property taxes, general and special assessments, foreseen as well as unforeseen, which are levied or assessed upon or with respect to the Project, any improvements, fixtures, equipment and other property of Landlord, real or personal, located on the Project and used in connection with the operation of all or any portion of the Project, as well as any tax, surcharge or assessment which shall be levied or assessed in addition to or in lieu of such real or personal property taxes and assessments. Taxes shall also include any expenses incurred by Landlord in contesting the amount or validity of any real or personal property taxes and assessments. Taxes shall not, however, include any franchise, gift, estate, inheritance, conveyance, transfer or income tax assessed against Landlord. 12 14 6.6 Waiver. The failure by Landlord to furnish Tenant with a statement of Operating Costs within two (2) years after the date such statement is due shall constitute a waiver by Landlord of its right to require Tenant to pay excess Operating Costs per rentable square foot. The failure by Tenant to complete the inspection permitted in Article 0 below within two (2) years after receipt by Tenant of a statement of Operating Costs shall be deemed a waiver of Tenant's right to require Landlord to refund to Tenant any overpayment by Tenant of Operating Costs paid pursuant to such statement. 6.7 Inspection Rights. Landlord shall, if requested by Tenant, furnish Tenant any and all reasonable backup information and documentation pertaining to any component Operating Costs. Tenant or its authorized agent shall have the right, within two (2) years after receipt of Landlord's itemized statement of Operating Costs, upon ten (10) days prior written notice to Landlord, to inspect, at Landlord's main accounting offices, Landlord's books and records regarding Operating Costs. Landlord agrees to maintain its books and records at its main accounting offices for a minimum of two (2) years following the expiration of each accounting year to which such books and records pertain. In the event Tenant's audit shall disclose that Landlord has overstated Tenant's pro rata share of Operating Costs by three percent (3%) or more during any two (2) accounting years, then Landlord shall pay for the reasonable costs of the audit. Any refund due Tenant shall be payable in any event. 7. CONDITION, REPAIRS AND ALTERATIONS 7.1 Condition. The respective obligations of Landlord and Tenant with respect to the condition of the Leased Premises are set forth on Exhibit H to this Lease. 7.2 Alterations and Improvements. Tenant may place partitions and fixtures and may make improvements and other alterations to the interior of the Leased Premises at Tenant's expense, provided, however, that prior to commencing any structural work or any other work costing in excess of Twenty Thousand and No/100 Dollars ($20,000.00), Tenant shall first obtain the written consent of Landlord to the proposed work, including the plans, specifications, the proposed architect and/or contractor(s) for such alterations and/or improvements and the materials used in connection with such alterations, including, without limitation, paint, carpeting, wall or window coverings and the use of carpet glues and other chemicals for installation of such materials. At least ten (10) days prior to the commencement of any construction in the Leased Premises, Tenant shall deliver to Landlord copies of the plans and specifications for the contemplated work and shall identify the contractor(s) selected by Tenant to perform such work. Landlord may, as a condition to consenting to such work, require that Tenant provide security adequate in Landlord's judgment so that the improvements or other alterations to the Leased Premises will be completed in a good, workmanlike and lien free manner. All such improvements or alterations must conform to and be in substantial accordance in quality and appearance with the quality and appearance of the improvements in the remainder of the Building. All such improvements shall be the property of Landlord, unless otherwise agreed to in writing by Landlord. Prior to the commencement of such work, Tenant shall provide Landlord with evidence that Tenant's contractor has procured worker's compensation, liability and property damage insurance (naming Landlord as an additional insured) in a form and in an amount approved by Landlord, and evidence that Tenant's architect and/or contractor has procured the necessary permits, certificates and approvals from the appropriate governmental authorities. Tenant acknowledges and agrees that any review by Landlord of Tenant's plans and specifications and/or right of approval exercised by Landlord with respect to Tenant's architect and/or contractor is for Landlord's benefit only and Landlord shall not, by virtue of such review or right of approval, be deemed to make any representation, warranty or acknowledgment to Tenant or to any other person or 13 15 entity as to the adequacy of Tenant's plans and specifications or as to the ability, capability or reputation of Tenant's architect and/or contractor. 7.3 Tenant's Obligations. Tenant shall, at Tenant's sole cost and expense, maintain the Leased Premises in a clean, neat and sanitary condition and shall keep the Leased Premises and every part thereof in good condition and repair except where the same is required to be done by Landlord. Tenant hereby waives all rights to make repairs at the expense of Landlord as provided by any law, statute or ordinance now or hereafter in effect. All of Tenant's alterations and/or improvements are the property of the Landlord, unless otherwise agreed to in writing by Landlord, and Tenant shall, upon the expiration or earlier termination of the Lease Term, surrender the Leased Premises, including Tenant's alterations and/or improvements, to Landlord, janitorial clean and in the same condition as when received, ordinary wear and tear excepted. Except as set forth in Article 0 below, Landlord has no obligation to construct, remodel, improve, repair, decorate or paint the Leased Premises or any improvement thereon or part thereof. Tenant shall pay for the cost of all repairs to the Leased Premises not required to be made by Landlord and shall be responsible for any redecorating, remodeling, alteration and painting during the Lease Term as Tenant deems necessary. Tenant shall pay for any repairs to the Leased Premises, the Building, the Property and/or the Project made necessary by any negligence or carelessness of Tenant, its employees or invitees. 7.4 Landlord's Obligations. Landlord shall (a) make all necessary repairs to the exterior walls, exterior doors, windows and corridors of the Building and Building Common Areas, (b) keep the Building, the Building Common Areas and the Project Common Area in a clean, neat and attractive condition, and (c) keep the Building equipment such as elevators, plumbing, heating, air conditioning and similar Building equipment in good repair, but Landlord shall not be liable or responsible for breakdowns or interruptions in service when reasonable efforts are made to restore such service. 7.5 Removal of Alterations. Upon the expiration or earlier termination of this Lease, Tenant shall remove from the Leased Premises all movable trade fixtures and other movable personal property, and shall promptly repair any damage to the Leased Premises, the Building, the Property and/or the Project caused by such removal. All such removal and repair shall be entirely at Tenant's sole cost and expense. Immediately upon any termination of this Lease, Landlord may require that Tenant remove from the Leased Premises any alterations, additions, improvements, trade fixtures, equipment, shelving, cabinet units or movable furniture (and other personal property) designated by Landlord to be removed provided that Landlord shall have advised Tenant in Landlord's written consent to such alteration or improvement that Tenant may be required to remove the alteration or improvement upon the expiration or earlier termination of this Lease. In such event, Tenant shall, in accordance with the provisions of Article 0 above, complete such removal (including the repair of any damage caused thereby) entirely at its own expense and within fifteen (15) days after notice from Landlord. All repairs required of Tenant pursuant to the provisions of this Article 0 shall be performed in a manner satisfactory to Landlord, and shall include, but not be limited to, repairing plumbing, electrical wiring and holes in walls, restoring damaged floor and/or ceiling tiles, repairing any other cosmetic damage, and cleaning the Leased Premises. 7.6 No Abatement. Tenant's covenants and obligations under this Lease, including without limitation, Tenant's obligation to pay Annual Basic Rent and Additional Rent, shall not be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted to make pursuant to the terms of this Lease or by any other tenant's Lease or are required by law to be made in and to any portion of the Leased Premises, the Building, the Property or the Project. Landlord shall, nevertheless, use reasonable efforts to minimize any interference with Tenant's business in the Leased Premises. 14 16 8. SERVICES 8.1 Climate Control. Landlord shall provide reasonable climate control to the Leased Premises during the Building Hours as is suitable for the comfortable use and occupation of the Leased Premises, excluding, however, air conditioning or heating for electronic data processing or other equipment requiring extraordinary climate control. 8.2 Janitorial and Other Services. Landlord shall make janitorial and cleaning services available to the Leased Premises as set forth in Exhibit "K" at least five (5) evenings per week, except recognized federal, state or local holidays. Tenant shall pay to Landlord, within five (5) days after receipt of Landlord's bill, the reasonable costs incurred by Landlord for extra cleaning in the Leased Premises required because of (a) misuse or neglect on the part of Tenant, its employees or invitees, (b) use of portions of the Leased Premises for special purposes requiring greater or more difficult cleaning work than office areas, (c) interior glass partitions or unusual quantities of glass surfaces, (d) non-building standard materials or finishes installed by Tenant or at its request, and (e) removal from the Leased Premises of refuse and rubbish of Tenant in excess of that ordinarily accumulated in general office occupancy or at times other than Landlord's standard cleaning times. Landlord shall also furnish elevator service during the Building Hours to be used by Tenant in common with others. At least one elevator shall remain in service during all other hours. Landlord shall make day porter service available to Tenant in common with others as typically available in comparable office buildings in the Phoenix, Arizona metropolitan area. 8.3 Electricity. Landlord shall, at all times, furnish reasonable amounts of electric current as required for normal and usual lighting purposes and for office machines and equipment such as personal computers, typewriters, adding machines, copying machines, calculators and similar machines and equipment normally utilized in general office use. Tenant's use of electric energy in the Leased Premises shall not at any time exceed the capacity of any of the risers, piping, electrical conductors and other equipment in or serving the Leased Premises. In order to insure that such capacity is not exceeded and to avert any possible adverse effect on the Building's electric system, Tenant shall not, without Landlord's prior written consent in each instance, connect appliances, machines using current in excess of 120 volts or heavy-duty equipment other than ordinary office equipment to the Building's electric system or make any alterations or additions to the Building's electric system. Should Landlord grant such consent, all additional risers, piping and electrical conductors and other equipment therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant within thirty (30) days after receipt of Landlord's bill. 8.4 Water. Landlord shall furnish cold and heated water for drinking and lavatory purposes to the Building Common Areas and the Leased Premises (but only to the extent described in the Tenant Improvement Plans). Cost of water used in the Leased Premises shall be paid by Tenant. 8.5 Light Bulbs. Landlord shall perform such replacement of lamps, fluorescent tubes and lamp ballasts in the Leased Premises and in the Building as may be required from time to time. If the lighting fixtures in the Leased Premises are other than those furnished at the beginning of the Lease Term, Tenant shall pay Landlord's charge for replacing the lamps, lamp ballasts and fluorescent tubes in such lighting fixtures within ten (10) days after receipt of Landlord's bill. 8.6 Heat Generating Equipment. Whenever heat generating machines or equipment used in the Leased Premises affect the temperature otherwise maintained by the climate control system (as determined by an engineer reasonably acceptable to both Landlord and Tenant), Landlord shall have the right to install 15 17 supplementary air-conditioning units in the Leased Premises and the cost thereof, including the cost of installation, operation and maintenance shall be paid by Tenant to Landlord within thirty (30) days after receipt by Tenant of Landlord's statement. 8.7 Separate Meters. Landlord may install separate meters for the Leased Premises to register the usage of all or any one of the utilities serving the Leased Premises at Landlord's sole cost and expense (subject to reimbursement as an Operating Cost) and in such event, Tenant shall pay for the actual cost of utility usage as metered (a) during other than Building Hours, or (b) which is in excess of that usage customary for general office use within the Building. 8.8 Additional Services. Tenant shall pay to Landlord, monthly as billed, as Additional Rent, Landlord's actual cost for services furnished by Landlord to Tenant in excess of that agreed to be furnished by Landlord pursuant to this Article 0, including, but not limited to (a) any utility services utilized by Tenant during other than Building Hours or for computers, data processing equipment or other electrical equipment in excess of the amounts of electric current used for general office use within the Project, and (b) climate control in excess of that agreed to be furnished by Landlord pursuant to Article 0 above or provided at times other than Building Hours. In the event that Landlord shall not have installed separate meters, Landlord shall bill Tenant for such climate control services at an initial rate of Five and No/100 Dollars ($5.00) per hour, per zone of the Leased Premises. 8.9 Interruptions in Service. Landlord does not warrant that any of the foregoing services or any other services which Landlord may supply will be free from interruption. Tenant acknowledges that any one or more of such services may be suspended by reason of accident, repairs, inspections, alterations or improvements necessary to be made, or by strikes or lockouts, or by reason of operation of law, or by causes beyond the reasonable control of Landlord. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of Annual Basic Rent or Additional Rent by reason of any disruption of the services to be provided by Landlord pursuant to this Lease unless (i) the cause of the disruption is within Landlord's reasonable control and is due to Landlord's negligence; and (ii) such disruption has a material adverse effect on Tenant's business; and (iii) such disruption continues for three (3) consecutive business days. 16 18 9. LIABILITY AND PROPERTY INSURANCE 9.1 Liability Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of commercial general liability insurance for personal injury (including wrongful death) and damage to property covering (a) any occurrence in the Leased Premises, (b) any act or omission by Tenant, by any subtenant of Tenant, or by any of their respective invitees, agents, servants or employees anywhere in the Leased Premises or the Project, (c) the business operated by Tenant and by any subtenant of Tenant in the Leased Premises, and (d) the contractual liability of Tenant to Landlord pursuant to the indemnification provisions of Article 0 below, which coverage shall not be less than One Million and No/100 Dollars ($1,000,000.00) per occurrence and Two Million and No/100 Dollars ($2,000,000.00) combined single limit. If Landlord shall so request, Tenant shall increase the amount of such liability insurance to the amount then customary for premises and uses similar to the Leased Premises and Tenant's use thereof. The liability policy or policies shall contain an endorsement naming Landlord, its partners or members (as applicable), Landlord's lender and management agent and any persons, firms or corporations designated by Landlord in written notice to Tenant as additional insureds, and shall provide that the insurance carrier shall have the duty to defend and/or settle any legal proceeding filed against Landlord seeking damages based upon bodily injury or property damage liability even if any of the allegations of such legal proceedings are groundless, false or fraudulent. 9.2 Property Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of insurance with "Special Form Coverage," including coverage for vandalism or malicious mischief, insuring the Tenant Improvements as defined on Exhibit H hereto and Tenant's alterations and/or improvements made pursuant to Article 0 above and Tenant's stock in trade, furniture, personal property, fixtures, equipment and other items in the Leased Premises, with coverage in an amount equal to the full replacement cost thereof. 9.3 Worker's Compensation Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of worker's compensation insurance with an insurance carrier and in amounts approved by the Industrial Commission of the State of Arizona. 9.4 Business Interruption Insurance. Tenant shall, during the Lease Term, keep in full force and effect, a policy or policies of business interruption insurance in an amount equal to twelve (12) monthly installments of Annual Basic Rent and Additional Rent payable to Landlord, together with the taxes thereon, insuring Tenant against losses sustained by Tenant as a result of any cessation or interruption of Tenant's business in the Leased Premises for any reason. 9.5 Insurance Requirements. Each insurance policy and certificate thereof obtained by Tenant pursuant to this Lease shall contain a clause that the insurer will provide Landlord, its partners and any persons, firms or corporations designated by Landlord with at least thirty (30) days prior written notice of any material change, non-renewal or cancellation of the policy. Each such insurance policy shall be with an insurance company authorized to do business in the State of Arizona and reasonably acceptable to Landlord. Certified copies of all insurance policies evidencing the coverage under each such policy, as well as a certified copy of the required additional insured endorsement(s) shall be delivered to Landlord prior to commencement of the Lease Term. Each such policy shall provide that any loss payable thereunder shall be payable notwithstanding (a) any act, omission or neglect by Tenant or by any subtenant of Tenant, or (b) any occupation or use of the Leased Premises or any portion thereof by Tenant or by any subtenant of Tenant for purposes more hazardous than permitted by the terms of such policy or policies, or (c) any foreclosure or other action or proceeding taken by any mortgagee or trustee pursuant to any provision of any mortgage or 17 19 deed of trust covering the Leased Premises, the Building, the Property or the Project, or (d) any change in title or ownership of the Property. All insurance policies required pursuant to this Article 0 shall be written as primary policies, not contributing with or in excess of any coverage which Landlord may carry. Tenant shall procure and maintain all policies entirely at its own expense and shall, at least twenty (20) days prior to the expiration of such policies, furnish Landlord with certified copies of replacement policies or renewal certificates for existing policies in conformance with Accord Form No. 27 (March 1993). Tenant shall not do or permit to be done anything which shall invalidate the insurance policies maintained by Landlord or the insurance policies required pursuant to this Article 0 or the coverage thereunder. If Tenant or any subtenant of Tenant does or permits to be done anything which shall increase the cost of any insurance policies maintained by Landlord, then Tenant shall reimburse Landlord for any additional premiums attributable to any act or omission or operation of Tenant or any subtenant of Tenant causing such increase in the cost of insurance. Any such amount shall be payable as Additional Rent within five (5) days after receipt by Tenant of a bill from Landlord. All policies of insurance shall name both Landlord and Tenant (and/or such other party or parties as Landlord may require) as insureds and shall be endorsed to indicate that the coverage provided shall not be invalid due to any act or omission on the part of Landlord. 9.6 Co-Insurance. If on account of the failure of Tenant to comply with the provisions of this Article 0, Landlord is deemed a co-insurer by its insurance carrier, then any loss or damage which Landlord shall sustain by reason thereof shall be borne by Tenant, and shall be paid by Tenant within five (5) days after receipt of a bill therefor. 9.7 Adequacy of Insurance. Landlord makes no representation or warranty to Tenant that the amount of insurance to be carried by Tenant under the terms of this Lease is adequate to fully protect Tenant's interests. If Tenant believes that the amount of any such insurance is insufficient, Tenant is encouraged to obtain, at its sole cost and expense, such additional insurance as Tenant may deem desirable or adequate. Tenant acknowledges that Landlord shall not, by the fact of approving, disapproving, waiving, accepting, or obtaining any insurance, incur any liability for or with respect to the amount of insurance carried, the form or legal sufficiency of such insurance, the solvency of any insurance companies or the payment or defense of any lawsuit in connection with such insurance coverage, and Tenant hereby expressly assumes full responsibility therefor and all liability, if any, with respect thereto. 9.8 Self-Insurance. Tenant shall have the right to self-insure for the liability insurance, the property insurance and the business interruption insurance required by Articles 0, 0 and 9.4, respectively, subject to the requirements of this Article 0: (a) For purposes of this Article 0, "self-insurance" shall mean that Tenant is itself acting as though it were the insurance company providing the insurance required under the provisions of this Article 0 and Tenant shall pay any amounts due in lieu of insurance proceeds as required under the provisions of this Lease, which amounts shall be treated as insurance proceeds for all purposes under this Lease. (b) All amounts which Tenant pays or is required to pay and all losses or damages resulting from risks for which Tenant has elected to self-insure shall be subject to the waiver of subrogation provisions in Article 0 below and shall not limit Tenant's indemnification obligations set forth in Article 0 below. (c) Tenant's right to self-insure and to continue to self-insure is conditioned upon and subject to: 18 20 (i) The Tenant having a net worth, calculated in accordance with generally accepted accounting principles, consistently applied, of at least One Hundred Million Dollars ($100,000,000.00). (ii) The Tenant providing an audited financial statement, prepared in accordance with generally accepted accounting principles, consistently applied, to Landlord on or before the date which is thirty (30) days prior to the upcoming annual anniversary of the Commencement Date which establishes and confirms that Tenant has the required net worth, unless events occur that make it apparent that such net worth has diminished below the required level (such as the bankruptcy of Tenant), in which event Tenant shall not be permitted to continue to self-insure; and (iii) The Tenant maintaining appropriate loss reserves which are actuarially derived in accordance with accepted standards of the insurance industry and accrued (i.e., charged against earnings) or otherwise funded. (d) In the event that Tenant elects to self-insure and an event or claim occurs for which a defense and/or coverage would have been available from the insurance company Tenant shall: (i) undertake the defense of any such claim, including a defense of Landlord, at Tenant's sole cost and expense, and (ii) use its own funds to pay any claim or replace any property or otherwise provide the funding which would have been available from insurance proceeds but for such election by Tenant to self-insure. (e) In the event Tenant has the right and elects that it will not operate its business in the Leased Premises after the Leased Premises are damaged or destroyed, Landlord shall have the right to determine that the self-insurance proceeds either be paid to Landlord: (i) for restoration of the Leased Premises in accordance with Article 0 below and Tenant's liability and obligations under this Lease shall continue in full force and effect, or (ii) to terminate this Lease in accordance with the provisions of Article 0 below. (f) Tenant shall provide Landlord and Superior Mortgagee (defined below) or Superior Lessor (defined below) with certificates of self-insurance specifying the extent of self-insurance coverage hereunder and containing a waiver of subrogation provision reasonably satisfactory to Landlord. Any insurance coverage provided by Tenant shall be for the benefit of Landlord, the Superior Mortgagee and the Superior Lessor as their respective interests may appear. 9.9 Landlord's Insurance. (a) Landlord, shall, at all times from and after the Commencement Date, as a component of Operating Expenses, maintain in effect commercial general liability insurance covering (a) any occurrence in the Project (other than within the Leased Premises), (b) any act or omission by Landlord, or its agent, servants, contractors or employees, anywhere in the Project (other than within the Leased Premises), and (c) the contractual liability of Landlord to Tenant pursuant to the indemnification provisions of Article 17.1 19 21 below, which coverage shall not be less than Two Million and No/100 Dollars ($2,000,000.00), combined single limit, per occurrence. (b) Landlord shall, at all times from and after the Commencement Date, maintain in effect a policy or policies of "Special Risk" or "Special Peril" insurance insuring the Building with coverage in an amount not less than ninety percent (90%) of the replacement cost thereof (exclusive of the cost of excavations, foundations and footings) from time to time during the Lease Term. Landlord reserves the right to maintain a reasonable deductible in connection with such insurance. (c) Landlord's obligation to carry the insurance required in this Article 0 may be brought within the coverage of any so called blanket policy or policies of insurance carried and maintained by Landlord, provided that the coverage afforded will not be reduced or diminished by reason of the use of such blanket policy of insurance. Landlord shall have the right to self-insure for the liability and casualty insurance required by Article 9.9(a) and (b), provided that Landlord shall have a net worth, calculated in accordance with the generally accepted accounting principles, consistently applied, of at least One Hundred Million and No/100 Dollars ($100,000,000.00). In the event that Landlord elects to self-insure in accordance with the provisions of this Article 9.9(c), Landlord shall give Tenant written notice of such election, accompanied by appropriate evidence demonstrating that Landlord is entitled to self-ensure in accordance with the provisions of this Article 9.9(c). 10. RECONSTRUCTION 10.1 Insured Damage. In the event the Leased Premises are damaged during the Lease Term by fire or other perils covered by Landlord's insurance, Landlord shall: (a) Subject to Force Majeure, within a period of ninety (90) days after receipt by Landlord of insurance proceeds and the adjustment of the loss with the Superior Mortgagee and/or the Superior Lessor, as the case may be, and its insurer, and provided there is not then in existence of an Event of Default, commence repair, reconstruction and restoration of the Leased Premises and prosecute the same diligently to completion, in which event this Lease shall continue in full force and effect. (b) (i) In the event of a partial or total destruction of either the Leased Premises, the Building, or the Project during the last two (2) years of the Lease Term, Landlord shall have the option to terminate this Lease upon giving written notice to Tenant within sixty (60) days after such destruction. For purposes of this Article 0, "partial destruction" shall be deemed destruction to an extent of at least thirty-three and one-third percent (33.33%) of the then full replacement cost of the Leased Premises, the Building, or the Project as of the date of destruction. (ii) In the event of a partial or total destruction of either the Leased Premises or the Building during the last two (2) years of the Lease Term, Tenant shall have the option to terminate this Lease upon giving written notice to Landlord within sixty (60) days after such destruction. For purposes of this Article 0, "partial destruction" shall be deemed destruction to an extent of at least thirty-three and one-third percent (33.33%) of the then full replacement cost of the Leased Premises or the Building as of the date of destruction. (c) In the event that Superior Mortgagee shall require that insurance proceeds be applied against the principal balance due on the Superior Mortgage (defined below), then Landlord may, at Landlord's option and upon one hundred twenty (120) days written notice to Tenant, elect to terminate this Lease. 20 22 10.2 Uninsured Damage. In the event the Leased Premises, the Building or the Project shall be damaged as a result of any casualty not covered by Landlord's insurance, to any extent whatsoever, Landlord may, subject to Force Majeure, within ninety (90) days following the date of the casualty, commence repair, reconstruction or restoration of the Leased Premises, in which event this Lease shall continue in full force and effect, or within such ninety (90) day period elect not to so repair, reconstruct or restore the Leased Premises, the Building or the Project, as the case may be, in which event this Lease shall cease and terminate. In either event, Landlord shall give Tenant written notice of Landlord's intention within such ninety (90) day period. 10.3 Reconstruction. In the event of any reconstruction of the Leased Premises, the Building or the Project pursuant to this Article 0, such reconstruction shall be in conformity with all city, county, state and federal ordinances, rules and regulations then in existence, as the same may be interpreted and enforced. Notwithstanding that all reconstruction work shall be performed by Landlord's contractor unless Landlord shall otherwise agree in writing, Landlord's obligation to reconstruct the Leased Premises shall be only to the comparable condition of the Leased Premises immediately prior to the Commencement Date. Landlord's obligation to repair and reconstruct the Leased Premises shall be limited to the amount of net proceeds of insurance received by Landlord, subject to reduction pursuant to Article 0 above. Any extra expenses incurred by Landlord in the reconstruction of the Leased Premises, the Building or any other portion of the Project as a result of the violation by Tenant of the terms and conditions set forth in Article 0 below shall be borne by Tenant. Tenant, at Tenant's sole cost and expense, shall be responsible for the repair and restoration of all items of the Tenant Improvements or Tenant's improvements and/or alterations installed pursuant to Article 0 and the replacement of Tenant's stock in trade, trade fixtures, furniture, furnishings and equipment. Tenant shall commence the installation of fixtures, equipment and merchandise promptly upon delivery to Tenant of possession of the Leased Premises and shall diligently prosecute such installation to completion. 10.4 Termination. Upon any termination of this Lease under any of the provisions of this Article 0, Landlord and Tenant each shall be released without further obligations to the other coincident with the surrender of possession of the Leased Premises to Landlord, except for items which have previously accrued and remain unpaid. In the event of termination, all proceeds from Tenant's property insurance coverage and covering the Tenant Improvements or Tenant's improvements and/or alterations installed pursuant to Article 0 and that would, except for the casualty, have become the property of Landlord pursuant to Article 0, but excluding proceeds for trade fixtures, merchandise, signs and other removable personal property, shall be disbursed and paid to Landlord. 10.5 Abatement. In the event of repair, reconstruction and restoration of the Leased Premises, the Minimum Annual Rental and Additional Rent shall be abated proportionately with the degree to which Tenant's use of the Leased Premises is impaired commencing from the date of destruction and continuing during the period of such repair, reconstruction or restoration. Tenant shall continue the operation of Tenant's business at the Leased Premises during any such period to the extent reasonably practicable from the standpoint of prudent business management. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Leased Premises, or the building of which the Leased Premises are a part, Tenant's personal property or for any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. 10.6 Conflict. Landlord and Tenant acknowledge and agree that the provisions of this Article 10 are the result of arms' length negotiations between Landlord and Tenant and that in the event of any conflict between the provisions of this Article 10 and any statutory or common law rights of termination which may 21 23 arise by reason of any partial or total destruction of the Leased Premises, including the provisions of A.R.S. Section 33-343, the provisions of this Article 10 shall prevail. 11. WAIVER OF SUBROGATION Landlord and Tenant each hereby waive their respective rights and the subrogation rights of their respective insurers against the other and any other tenants of space in the Building, the Property or the Project, as well as their respective members, officers, employees, agents, authorized representatives and invitees, with respect to any claims including, but not limited to, claims for injury to any persons, and/or damage to the Leased Premises and/or any fixtures, equipment, personal property, furniture, improvements and/or alterations in or to the Leased Premises, which are caused by or result from (a) risks or damages required to be insured against under this Lease, or (b) risks and damages which are insured against by insurance policies maintained by Tenant from time to time. Landlord and Tenant each shall obtain for the other from their respective insurers under each policy required by this Lease a waiver of all rights of subrogation which such insurers of Tenant and Landlord might otherwise have against Tenant or Landlord, as applicable. 12. LANDLORD'S RIGHT TO PERFORM TENANT OBLIGATIONS Unless otherwise provided herein, all covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense. If Tenant shall fail to pay any sum of money, other than Annual Basic Rent, required to be paid by it hereunder, and such failure shall continue for ten (10) days after notice thereof by Landlord, or Tenant shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for thirty (30) days after notice thereof by Landlord, Landlord may (but shall not be obligated to do so) without waiving or releasing Tenant from any of Tenant's obligations, make any such payment or perform any such other act on behalf of Tenant. All sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the greater of (a) fourteen percent (14%) per annum or (b) the rate of interest per annum publicly announced, quoted or published, from time to time, by Bank One, Arizona, NA, at its Phoenix, Arizona office as its "prime rate" plus four (4) percentage points, from the date of such payment by Landlord until reimbursement in full by Tenant (the "Default Rate"), shall be payable to Landlord as Additional Rent with the next monthly installment of Annual Basic Rent; provided, however, in no event shall the Default Rate exceed the maximum rate (if any) permitted by applicable law. 13. DEFAULT AND REMEDIES 13.1 Event of Default. The occurrence of any one or more of the following events will constitute an "Event of Default" on the part of Tenant: (a) Failure to pay any installment of Annual Basic Rent, any Additional Rent or any other sum required to be paid by Tenant under this Lease when due, and such failure shall continue for seven (7) days after written notice thereof by Landlord to Tenant; (b) Failure to perform any of the other covenants or conditions which Tenant is required to observe and perform (except failure in the payment of Annual Basic Rent, Additional Rent or any other monetary obligation contained in this Lease) and such failure shall continue for thirty (30) days (or such shorter period of time as may be specified by Landlord in the event of an emergency) after written notice thereof by Landlord to Tenant, provided that if such default is other than the payment of money and cannot be 22 24 cured within such thirty (30) day period, then an Event of Default shall not have occurred if Tenant, within such thirty (30) day period, commences curing of such failure and diligently in good faith prosecutes the same to completion and furnishes evidence thereof to Landlord within thirty (30) days thereafter; (c) If any warranty, representation or statement made by Tenant to Landlord in connection with this Lease is or was materially false or misleading when made or furnished; (d) The occurrence of an Event of Default under any other agreement between Landlord and Tenant; (e) Intentionally Omitted; (f) Intentionally Omitted; (g) The levy of a writ of attachment or execution or other judicial seizure of substantially all of Tenant's assets or its interest in this Lease, such attachment, execution or other seizure remaining undismissed or discharged for a period of sixty (60) days after the levy thereof; (h) The filing of any petition by or against Tenant to declare Tenant a bankrupt or to delay, reduce or modify Tenant's debts or obligations, which petition is not discharged within sixty (60) days after the date of filing; (i) The filing of any petition or other action taken to reorganize or modify Tenant's or any Guarantor's capital structure, which petition is not discharged within sixty (60) days after the date of filing; (j) If Tenant shall be declared insolvent according to law; (k) A general assignment by Tenant for the benefit of creditors; (l) The appointment of a receiver or trustee for Tenant or all or any of their respective property, which appointment is not discharged within sixty (60) days after the date of filing; (m) The filing by Tenant of a voluntary petition pursuant to the Bankruptcy Code or any successor thereto or the filing of an involuntary petition against Tenant pursuant to the Bankruptcy Code or any successor legislation, which petition is not discharged within sixty (60) days after the date of filing; or (n) The occurrence of an Event of Default under Articles 19.1, 0 or 0. 13.2 Remedies. Upon the occurrence of an Event of Default under this Lease by Tenant, Landlord may, without prejudice to any other rights and remedies available to a landlord at law, in equity or by statute, exercise one or more of the following remedies, all of which shall be construed and held to be cumulative and non-exclusive: (a) Terminate this Lease and re-enter and take possession of the Leased Premises, in which event, Landlord is authorized to make such repairs, redecorating, refurbishments or improvements to the Leased Premises as may be necessary in the reasonable opinion of Landlord acting in good faith for the purposes of reletting the Leased premises and the costs and expenses incurred in respect of such repairs, redecorating and refurbishments and the expenses of such reletting (including brokerage commissions) shall be paid by Tenant to Landlord within five (5) days after receipt of Landlord's statement; 23 25 or (b) Without terminating this Lease, re-enter and take possession of the Leased Premises; or (c) Without such re-entry, recover possession of the Leased Premises in the manner prescribed by any statute relating to summary process, and any demand for Annual Basic Rent, re-entry for condition broken, and any and all notices to quit, or other formalities of any nature to which Tenant may be entitled, are hereby specifically waived to the extent permitted by law; or (d) Without terminating this Lease, Landlord may relet the Leased Premises as Landlord may see fit without thereby voiding or terminating this Lease, and for the purposes of such reletting, Landlord is authorized to make such repairs, redecorating and refurbishments or improvements to the Leased Premises as may be necessary in the reasonable opinion of Landlord acting in good faith for the purpose of such reletting, and if a sufficient sum is not realized from such reletting (after payment of all costs and expenses of such repairs, redecorating and refurbishments and expenses of such reletting (including brokerage commissions) and the collection of rent accruing therefrom) each month to equal the Annual Basic Rent and Additional Rent payable hereunder, then Tenant shall pay such deficiency each month within five (5) days after receipt of Landlord's statement; or (e) Landlord may declare immediately due and payable the present value of the remaining installments of Annual Basic Rent and Additional Rent (utilizing the discount rate of the Federal Reserve Bank situated nearest to the location of the Building at the time of Landlord's declaration plus one (1) percentage point), and such amount, less the present value of the fair rental value of the Leased Premises for the remainder of the Lease Term (utilizing the discount rate of the Federal Reserve Bank situated nearest to the location of the Building at the time of Landlord's declaration plus one (1) percentage point) shall be paid by Tenant within five (5) days after receipt of Landlord's statement. Landlord shall not by re-entry or any other act, be deemed to have terminated this Lease, or the liability of Tenant for the total Annual Basic Rent and Additional Rent reserved hereunder or for any installment thereof then due or thereafter accruing, or for damages, unless Landlord notifies Tenant in writing that Landlord has so elected to terminate this Lease. In no event shall Tenant be responsible to Landlord for any special or consequential damages. After the occurrence of an Event of Default, the acceptance of Annual Basic Rent or Additional Rent, or the failure to re-enter by Landlord shall not be deemed to be a waiver of Landlord's right to thereafter terminate this Lease and exercise any other rights and remedies available to it, and Landlord may re-enter and take possession of the Leased Premises as if no Annual Basic Rent or Additional Rent had been accepted after the occurrence of an Event of Default. Upon an Event of Default, Tenant shall also pay to Landlord all costs and expenses incurred by Landlord, including court costs and attorneys' fees, in retaking or otherwise obtaining possession of the Leased Premises, removing and storing all equipment, fixtures and personal property on the Leased Premises and otherwise enforcing any of Landlord's rights, remedies or recourses arising as a result of an Event of Default. 13.3 Additional Remedies. All of the remedies given to Landlord in this Lease in the event Tenant commits an Event of Default are in addition to all other rights or remedies available to a landlord at law, in equity or by statute, including, without limitation, the right to seize and sell all goods, equipment and personal property of Tenant located in the Leased Premises and apply the proceeds thereof to all due and unpaid Annual Basic Rent, Additional Rent and other amounts owing under the Lease. All rights, options and remedies available to Landlord shall be construed and held to be cumulative, and no one of them shall be exclusive of the other. 13.4 Interest on Past Due Amounts. In addition to the late charge described in Article 0 below, if any installment of Annual Basic Rent or Additional Rent is not paid within thirty (30) days of the date when due, it shall bear interest at the Default Rate; provided, however, this provision shall not relieve Tenant from any default in the making of any payment at the time and in the manner required by this Lease; and provided, further, in no event shall the Default Rate exceed the maximum rate (if any) permitted by applicable law. 24 26 13.5 Landlord Default. In the event Landlord should neglect or fail to perform or observe any of the covenants, provisions or conditions contained in this Lease on its part to be performed or observed, and such failure continues for thirty (30) days after written notice of default (or if more than thirty (30) days shall be required because of the nature of the default, if Landlord shall fail to commence the curing of such default within such thirty (30) day period and proceed diligently thereafter), then Landlord shall be responsible to Tenant for any actual damages sustained by Tenant as a result of Landlord's breach, but not special or consequential damages. Should Tenant give written notice to Landlord to correct any default, Tenant shall give similar notice to the holder of any mortgages or deeds of trust against the Building or the lessor of any ground lease, and prior to any cancellation of this Lease, the holder of such mortgage or deed of trust and/or the lessor under such ground lease shall be given a reasonable period of time to correct or remedy such default. If and when such holder of such mortgage or deed of trust and/or the lessor under any such ground lease has made performance on behalf of Landlord, the default of Landlord shall be deemed cured. 14. LATE PAYMENTS Tenant hereby acknowledges that the late payment by Tenant to Landlord of any monthly installment of Annual Basic Rent, any Additional Rent or any other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Such costs include but are not limited to processing, administrative and accounting costs. Accordingly, if any monthly installment of Annual Basic Rent, any Additional Rent or any other sum due from Tenant shall not be received by Landlord within five (5) days after the date when due, Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount or Two Hundred and No/100 Dollars ($200.00), whichever is greater. Tenant acknowledges that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payments by Tenant. With respect to any late payment by Tenant that is subject to a late charge, the acceptance of payment in full of all amounts past due and the applicable late charge by Landlord shall constitute a waiver of Tenant's default with respect to such overdue amount, and shall prevent Landlord from exercising any of the other rights and remedies available to Landlord with respect to that particular default by Tenant. Nothing contained in this Article 0 shall be deemed to condone, authorize, sanction or grant to Tenant an option for the late payment of Annual Basic Rent, Additional Rent or any other sum due hereunder. 15. ABANDONMENT AND SURRENDER 15.1 Abandonment. Tenant shall not abandon the Leased Premises at any time during the Lease Term. No act or thing done by Landlord or by any agent or employee of Landlord during the Lease Term shall be deemed an acceptance of a surrender of the Leased Premises unless such acceptance is expressed in writing and duly executed by Landlord. Unless Landlord so agrees in writing, the delivery of the key to the Leased Premises to any employee or agent of Landlord shall not operate as a termination of this Lease or as a surrender of the Leased Premises. 15.2 Surrender. Tenant shall, upon the expiration or earlier termination of this Lease, peaceably surrender the Leased Premises, including any Tenant Improvements and Tenant's improvements and/or alterations installed pursuant to Article 0, in a janitorial clean condition and otherwise in as good condition as when Tenant took possession, except for (i) reasonable wear and tear subsequent to the last repair, replacement, restoration, alteration or renewal; (ii) loss by fire or other casualty, and (iii) loss by condemnation. If Tenant shall abandon the Leased Premises, any personal property and fixtures belonging to Tenant and left in the Leased Premises shall be deemed abandoned and, at Landlord's option, title shall pass to Landlord under this Lease as by a bill of sale. Landlord may, however, if it so elects, remove all or any part 25 27 of such personal property from the Leased Premises and the costs incurred by Landlord in connection with such removal, including storage costs and the cost of repairing any damage to the Leased Premises, the Building and/or the Project caused by such removal shall be paid by Tenant within five (5) days after receipt of Landlord's statement. Upon the expiration or earlier termination of this Lease, Tenant shall surrender to Landlord all keys to the Leased Premises and shall inform Landlord of the combination of any vaults, locks and safes left on the Leased Premises. The obligations of Tenant under this Article 0 shall survive the expiration or earlier termination of this Lease. Tenant shall indemnify Landlord against any loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding Tenant founded on such delay. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Leased Premises for the express purpose of arranging a meeting with Landlord for a joint inspection of the Leased Premises. 16. INDEMNIFICATION AND EXCULPATION 16.1 Indemnification. Tenant shall indemnify, protect, defend and hold Landlord harmless from and against, and shall be responsible for, all claims, damages, losses, costs, liens, encumbrances, liabilities and expenses, including reasonable attorneys', accountants' and investigators' fees and court costs (collectively, the "Claims"), arising in whole or in part from Tenant's use of all or any part of the Leased Premises, the Building and/or the Project or the conduct of Tenant's business or from any activity, work or thing done, permitted or suffered by Tenant or by any invitee, servant, agent, employee or subtenant of Tenant in the Leased Premises, the Building and/or the Project, and shall further indemnify, protect, defend and hold Landlord harmless from and against, and shall be responsible for, all Claims arising in whole or in part from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease or arising in whole or in part from any act, neglect, fault or omission by Tenant or by any invitee, servant, agent, employee or subtenant of Tenant anywhere in the Leased Premises, the Building and/or the Project. In case any action or proceeding is brought against Landlord to which this indemnification shall be applicable, Tenant shall pay all Claims resulting therefrom and shall defend such action or proceeding, if Landlord shall so request, at Tenant's sole cost and expense, by counsel reasonably satisfactory to Landlord. The obligations of Tenant under this Article 0 shall survive the expiration or earlier termination of this Lease. Except for the negligence or willful misconduct of Tenant, its employees, agents, servants, contractors, subtenants and assignees, or a breach of this Lease by Tenant or Tenant's employees, agents, contractors or servants, subtenants or assignees Landlord hereby indemnifies and agrees to hold Tenant harmless for, from and against any and all liability, claims, demands, damages, expenses, fees (including attorney's fees), fines, penalties, suits, procedures, actions and causes of action of any and every kind or nature which either (i) arise from, or in connection with, any negligence or willful misconduct of the Landlord except in connection with the Leased Premises to the extent covered by the insurance maintained or required to be maintained by Tenant pursuant to Article 0; or (ii) result from any default, breach, violation or non-performance of this Lease or any provision of this Lease by Landlord. 16.2 Exculpation. Neither Landlord nor its agents or employees shall be liable for (i) any injury or damage to persons or property resulting from any cause, including, but not limited to, fire, explosion, falling plaster, steam, gas, electricity, sewage, odor, noise, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein, or from the roof of any structure on the Property or the Project, or from any streets or subsurfaces on or adjacent to the Building, the Property or the Project, or from any other place or resulting from dampness or any other causes whatsoever, (ii) any defects in the Leased Premises, the Building and/or the Project, nor shall Landlord be liable for the negligence or misconduct, including, but not limited to, criminal acts, by maintenance or other personnel or contractors serving the Leased Premises, the Building and/or the Project, other tenants or third parties, unless caused by 26 28 the negligence or wilful misconduct of Landlord, its agents or employees. All property of Tenant kept or stored on the Project shall be so kept or stored at the risk of Tenant only, and Tenant shall indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, any Claims arising out of damage to the same, including subrogation claims by Tenant's insurance carriers, unless such damage shall be caused by the willful act or gross neglect of Landlord and through no fault of Tenant. None of the events or conditions set forth in this Article 0 shall be deemed a constructive or actual eviction or result in a termination of this Lease, nor shall Tenant be entitled to any abatement or reduction of Annual Basic Rent or Additional Rent by reason thereof. Tenant shall give prompt notice to Landlord with respect to any defects, fires or accidents which Tenant observes in the Leased Premises, the Building and/or the Project. 17. ENTRY BY LANDLORD Landlord reserves and shall at any and all times have the right, with prior notice to Tenant, to enter the Leased Premises, to inspect the same, to supply janitorial service and other services to be provided by Landlord to Tenant hereunder, to submit the Leased Premises to prospective purchasers or tenants, to post notices of non-responsibility, and to alter, improve or repair the Leased Premises and any portion of the Building of which the Leased Premises are a part, without abatement of Annual Basic Rent or Additional Rent, and may for that purpose erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, always providing that access into the Leased Premises shall not be blocked thereby, and further providing that the business of Tenant shall not be interfered with unreasonably. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all the doors in, upon or about the Leased Premises, excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open such doors in an emergency in order to obtain entry to the Leased Premises, and any entry to the Leased Premises obtained by Landlord by any such means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Leased Premises or an eviction of Tenant from all or any portion of the Leased Premises. Nothing in this Article 0 shall be construed as obligating Landlord to perform any repairs, alterations or maintenance except as otherwise expressly required elsewhere in this Lease. 18. SUBSTITUTE PREMISES 18.1 Relocation of Leased Premises. Landlord may, before or after the Commencement Date, request by notice to Tenant, to substitute for the Leased Premises other office space in the Project (the "Substitute Premises") designated by Landlord, provided that the Substitute Premises shall contain at least the same useable area as the Leased Premises and have a configuration substantially similar to the Leased Premises. Tenant shall not be relocated by Landlord without Tenant's prior written consent to such request. Landlord's notice shall be accompanied by a plan of the Substitute Premises. In the event that Tenant shall consent to relocation, Tenant shall vacate and surrender the Leased Premises and shall occupy the Substitute Premises promptly (and, in any event, not later than fifteen (15) days) after Landlord has substantially completed the work to be performed by Landlord in the Substitute Premises pursuant to Article 0 below. Tenant shall pay the same Annual Basic Rent and Additional Rent with respect to the Substitute Premises as was payable with respect to the Leased Premises. This Lease shall remain in full force and effect and the Substitute Premises shall thereafter be deemed to be the Leased Premises. 18.2 Compensation to Tenant. In the event Tenant shall have consented to relocation to Substitute Premises, Tenant shall not be entitled to any compensation for any inconvenience or interference with Tenant's business, nor any abatement or reduction of Annual Basic Rent or Additional Rent, but Landlord shall, at Landlord's expense perform the following: 27 29 (a) Furnish and install in the Substitute Premises fixtures, equipment, improvements, appurtenances and leasehold improvements at least equal in kind and quality to those contained or to be contained in the Leased Premises at the time such notices of substitution is given by Landlord; (b) Provide personnel to perform, under Tenant's direction, the moving of Tenant's personal property and trade fixtures from the Leased Premises to the Substitute Premises; (c) Promptly reimburse Tenant for Tenant's actual and reasonable out-of-pocket costs incurred in connection with the relocation of any telephone or other communications equipment from the Leased Premises to the Substitute Premises; and (d) Promptly reimburse Tenant for any other actual and reasonable out-of-pocket costs incurred by Tenant in connection with Tenant's move from Leased Premises to the Substitute Premises, provided such costs are approved by Landlord in advance which approval shall not be unreasonably withheld. Tenant shall cooperate with Landlord so as to facilitate the performance by Landlord of its obligations under this Article 0 and the prompt surrender by Tenant of the Leased Premises. Without limiting the generality of the preceding sentence, Tenant shall provide Landlord promptly any approvals or instructions and any plans or specifications or any other information reasonably requested by Landlord, and Tenant shall perform promptly in the Substitute Premises any work to be performed therein by Tenant to prepare the same for Tenant's occupancy. 19. ASSIGNMENT AND SUBLETTING 19.1 Consent of Landlord Required. Tenant shall not transfer or assign this Lease or any right or interest hereunder, or sublet the Leased Premises or any part thereof, without first obtaining Landlord's prior written consent, which consent Landlord may not unreasonably withhold, delay or qualify. No transfer or assignment (whether voluntary or involuntary, by operation of law or otherwise) or subletting shall be valid or effective without such prior written consent. Should Tenant attempt to make or allow to be made any such transfer, assignment or subletting, except as aforesaid, or should any of Tenant's rights under this Lease be sold or otherwise transferred by or under court order or legal process or otherwise, then, and in any of the foregoing events Landlord may, at its option, treat such act as an Event of Default by Tenant. Should Landlord consent to a transfer, assignment or subletting, such consent shall not constitute a waiver of any of the restrictions or prohibitions of this Article 0, and such restrictions or prohibitions shall apply to each successive transfer, assignment or subletting hereunder, if any. 19.2 Deemed Transfers. For the purposes of this Article 0, an assignment shall be deemed to include the following: (a) if Tenant is a partnership, a withdrawal or change (voluntary, involuntary, by operation of law or otherwise) of any of the partners thereof, a purported assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by operation of law or otherwise) by any partner thereof of such partner's interest in Tenant, or the dissolution of the partnership; (b) if Tenant consists of more than one person, a purported assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by operation of law or otherwise) from one person unto the other or others; (c) if Tenant (or a constituent partner of Tenant) is a corporation, any dissolution, merger, consolidation or reorganization of Tenant (or such constituent partner), or any change in the ownership (voluntary, involuntary, by operation of law, creation of new stock or otherwise) of fifty percent (50%) or more of its capital stock from the ownership existing on the date set forth 28 30 in Article 0 above; (d) if Tenant is an unincorporated association, a purported assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by operation of law or otherwise) of any interest in such unincorporated association; or (e) if Tenant is a limited liability company, a withdrawal or change of any of the members thereof, a purported assignment, transfer, mortgage or encumbrance (voluntary, involuntary, by operation of law or otherwise) by any member of such member's interest in Tenant, or the dissolution of the limited liability company; or (f) the sale of fifty percent (50%) or more in value of the assets of Tenant. Notwithstanding the foregoing, Landlord hereby acknowledges and consents to Tenant's right, without further approval from Landlord but only after written notice to Landlord to sublease the Premises or assign its interest in this Lease (i) to a corporation that directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with Tenant; (ii) in the event of the merger or consolidation of Tenant with another corporation; (iii) in the event of a sale or transfer of all or substantially all of the stock of Tenant or substantially all of Tenant's assets; or (iv) in the event of a private placement by Tenant of its shares pursuant to applicable federal and state securities acts (collectively, the "PERMITTED TRANSFERS"). No Permitted Transfer shall relieve Tenant of its liability under this Lease and Tenant shall remain liable to Landlord for the payment of all Annual Basic Rent, Additional Rent and Operating Costs and under performance of all covenants and conditions of this Lease applicable to Tenant. The provisions of Articles 19.4 and 19.5 shall not be applicable to a Permitted Transfer. 19.3 Delivery of Information. If Tenant wishes at any time to assign this Lease or sublet the Leased Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord: (a) the name of the proposed subtenant or assignee; (b) the nature of the proposed subtenant's or assignee's business to be carried on in the Leased Premises; (c) the terms and the provisions of the proposed sublease or assignment; and (d) such financial information as Landlord may reasonably request concerning the proposed subtenant or assignee. Tenant's failure to comply with the provisions of this Article 0 shall entitle Landlord to withhold its consent to the proposed assignment or subletting. 19.4 Recapture. If Tenant seeks to assign its interest in this Lease Landlord may, at its option, upon written notice (the "ASSIGNMENT RECAPTURE NOTICE"), to Tenant within thirty (30) days after Landlord's receipt of the information specified in Article 0 above, elect to recapture the Leased Premises, and within sixty (60) days after notice of such election has been given to Tenant, this Lease shall terminate unless Tenant shall, within fifteen (15) days after delivery of the Assignment Recapture Notice to Tenant, deliver to Landlord written notice withdrawing its notification delivered pursuant to Article 0. If Tenant seeks to sublet all or any portion of the Leased Premises, Landlord may, at Landlord's option, upon notice to Tenant (the "SUBLEASE RECAPTURE NOTICE") within thirty (30) days after Landlord's receipt of Tenant's notification delivered pursuant to Article 0, elect to recapture such portion of the Leased Premises as Tenant seeks to sublet, and within sixty (60) days after notice of such election has been given to Tenant, this Lease shall terminate as to the portion of the Leased Premises recaptured, unless within fifteen (15) days after delivery to Tenant of the Sublease Recapture Notice, Tenant delivers to Landlord written notice withdrawing its notification delivered pursuant to Article 0. If all or a portion of the Leased Premises is recaptured by Landlord pursuant to this Article 0, Tenant shall promptly execute and deliver to Landlord a termination agreement setting forth the termination date with respect to the Leased Premises or the recaptured portion thereof, and prorating the Annual Basic Rent, Additional Rent and other charges payable hereunder to such date. If Landlord does not elect to recapture as set forth above, Tenant may thereafter enter into a valid assignment or sublease with respect to the Leased Premises, provided that Landlord consents thereto pursuant to this Article 0, and provided further, that (a) such assignment or sublease is executed within ninety (90) days after Landlord has given its consent, (b) Tenant pays all amounts then owed to Landlord under this Lease, (c) there is not in existence an Event of Default as of the effective date of the assignment or sublease, (d) there have been no material changes with respect to the financial condition of the proposed subtenant or assignee or 29 31 the business such party intends to conduct in the Leased Premises, and (e) a fully executed original of such assignment or sublease providing for an express assumption by the assignee or subtenant of all of the terms, covenants and conditions of this Lease is promptly delivered to Landlord. 19.5 Adjustment to Rental. In the event Tenant assigns its interest in this Lease or sublets the Leased Premises, the Annual Basic Rent set forth in Article 1.13 above, as adjusted, shall be increased effective as of the date of such assignment or subletting by an amount equal to one-half (1/2) of the difference, if any, between the Annual Basic Rent payable pursuant to this Lease, as adjusted, and the rent and other consideration payable by any such assignee or sublessee pursuant to such assignment or sublease. Notwithstanding the foregoing, in no event shall the Annual Basic Rent after any such assignment or subletting be less than the Annual Basic Rent specified in Article 1.13 above, as adjusted. 19.6 No Release from Liability. Landlord may collect Annual Basic Rent and Additional Rent from the assignee, subtenant, occupant or other transferee, and apply the amount so collected, first to the monthly installments of Annual Basic Rent, then to any Additional Rent and other sums due and payable to Landlord, and the balance, if any, to Landlord, but no such assignment, subletting, occupancy, transfer or collection shall be deemed a waiver of Landlord's rights under this Article 0, or the acceptance of the proposed assignee, subtenant, occupant or transferee. Notwithstanding any assignment, sublease or other transfer (with or without the consent of Landlord), Tenant shall remain primarily liable under this Lease and shall not be released from performance of any of the terms, covenants and conditions of this Lease. 19.7 Landlord's Expenses. If Landlord consents to an assignment, sublease or other transfer by Tenant of all or any portion of Tenant's interest under this Lease, Tenant shall pay or cause to be paid to Landlord, a transfer fee to reimburse Landlord for administrative expenses and for legal, accounting and other out of pocket expenses incurred by Landlord, which fee shall not exceed Five Hundred and No/100 Dollars ($500.00). 19.8 Assumption Agreement. If Landlord consents to an assignment, sublease or other transfer by Tenant of all or any portion of Tenant's interest under this Lease, Tenant shall execute and deliver to Landlord, and cause the transferee to execute and deliver to Landlord, an instrument in the form and substance acceptable to Landlord in which (a) the transferee adopts this Lease and assumes and agrees to perform, jointly and severally with Tenant, all of the obligations of Tenant hereunder, (b) Tenant acknowledges that it remains primarily liable for the payment of Annual Basic Rent, Additional Rent and other obligations under this Lease, (c) Tenant subordinates to Landlord's statutory lien, contract lien and security interest, any liens, security interests or other rights which Tenant may claim with respect to any property of transferee and (d) the transferee agrees to use and occupy the Leased Premises solely for the purpose specified in Article 0 and otherwise in strict accordance with this Lease. 19.9 Withholding Consent. Without limiting the grounds for withholding consent which may be reasonable, it shall be reasonable for Landlord to withhold consent if the proposed assignee or subtenant is a tenant in default of such tenant's lease (or the termination by such assignee or subtenant of such lease to sublease from Tenant will be a default under same) in a building in the Phoenix metropolitan area owned by Landlord or by an affiliate of Landlord or any of Landlord's constituent partners or principals; or if the proposed assignee or subtenant is a governmental or quasi-governmental entity, agency, department or any subdivision thereof; or if the use by the proposed assignee or subtenant would violate the terms of this Lease, or any restrictive use covenant or exclusive rights granted by Landlord; or if the nature of the proposed assignee or subtenant or its business would not be consistent with the operation of a first class, institutional grade office building; or if the proposed assignee or subtenant does not intend to occupy the Premises for its 30 32 own use, or if the proposed assignee or subtenant is an existing tenant of the Project or the adjoining Pointe Corporate Centre located at 7500 North Dreamy Draw Street, Phoenix, Arizona, or is a prospective tenant of the Project or the adjoining project with whom Landlord or its broker are in active negotiations. 20. USE OF LEASED PREMISES AND RUBBISH REMOVAL 20.1 Use. The Leased Premises are leased to Tenant solely for the Permitted Use set forth in Article 0 above and for no other purpose whatsoever. Tenant shall not use or occupy or permit the Leased Premises to be used or occupied, nor shall Tenant do or permit anything to be done in or about the Leased Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect any casualty or other insurance on the Building, the Property, the Project or any of their respective contents, or make void or voidable or cause a cancellation of any insurance policy covering the Building, the Property, the Project or any part thereof or any of their respective contents. Tenant shall not do or permit anything to be done in or about the Leased Premises, the Building and/or the Project which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building, the Property or the Project or injure or annoy them. Tenant shall not use or allow the Leased Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Leased Premises, the Building and/or the Project. In addition, Tenant shall not commit or suffer to be committed any waste in or upon the Leased Premises, the Building and/or the Project. Tenant shall not use the Leased Premises, the Building and/or the Project or permit anything to be done in or about the Leased Premises, the Building and/or the Project which will in any way conflict with any matters of record, or any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated, and shall, at its sole cost and expense, promptly comply with all matters of record and all laws, statutes, ordinances and governmental rules, regulations and requirements now in force or which may hereafter be in force and with the requirements of any Board of Fire Underwriters or other similar body now or hereafter constituted, foreseen or unforeseen, ordinary as well as extraordinary, relating to or affecting the condition, use or occupancy of the Project, excluding structural changes not relating to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission by Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any matters of record, or any law, statute, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact between Landlord and Tenant. In addition, Tenant shall not place a load upon any floor of the Leased Premises which exceeds the load per square foot which the floor was designed to carry, nor shall Tenant install business machines or other mechanical equipment in the Leased Premises which cause noise or vibration that may be transmitted to the structure of the Building. 20.2 Rubbish Removal. Tenant shall keep the Leased Premises clean, both inside and outside, subject, however, to Landlord's obligation as set forth in Article 0 above. Tenant shall not burn any materials or rubbish of any description upon the Leased Premises. Tenant shall keep all accumulated rubbish in covered containers. In the event Tenant fails to keep the Leased Premises in the proper condition, Landlord may cause the same to be done for Tenant and Tenant shall pay the expenses incurred by Landlord on demand, together with interest at the Default Rate, as Additional Rent. Tenant shall, at its sole cost and expense, comply with all present and future laws, orders and regulations of all state, county, federal, municipal governments, departments, commissions and boards regarding the collection, sorting, separation, and recycling of waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse and trash into such categories as provided by law. Each separately sorted category of waste products, garbage, refuse and trash shall be placed in separate receptacles reasonably approved by Landlord. Such separate receptacles may, at Landlord's option, be removed from the Leased Premises in accordance with a collection schedule prescribed by law. Landlord reserves the right to refuse to collect or accept from Tenant any waste 31 33 products, garbage, refuse or trash that is not separated and sorted as required by law, and to require Tenant to arrange for such collection at Tenant's sole cost and expense using a contractor satisfactory to Landlord. Tenant shall pay all costs, expenses, fines, penalties or damages that may be imposed on Landlord or Tenant by reason of Tenant's failure to comply with the provisions of this Article 0, and, at Tenant's sole cost and expense, Tenant shall indemnify, defend and hold Landlord and Landlord's agents and employees harmless (including legal fees and expenses) from and against, and shall be responsible for, all actions, claims, liabilities and suits arising from such noncompliance, utilizing counsel reasonably satisfactory to Landlord. 21. SUBORDINATION AND ATTORNMENT 21.1 Subordination. This Lease and all rights of Tenant hereunder shall be, at the option of Landlord, subordinate to (a) all matters of record, (b) all ground leases, overriding leases and underlying leases (collectively referred to as the "leases") of the Building, the Property or the Project now or hereafter existing, (c) all mortgages and deeds of trust (collectively referred to as the "mortgages") which may now or hereafter encumber or affect the Building, the Property or the Project, and (d) all renewals, modifications, amendments, replacements and extensions of leases and mortgages and to spreaders and consolidations of the mortgages, whether or not leases or mortgages shall also cover other lands, buildings or leases. The provisions of this Article 0 shall be self-operative and no further instruments of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord, the lessor under any lease or the holder of any mortgage or any of their respective assigns or successors in interest may reasonably request to evidence such subordination. Any lease to which this Lease is subject and subordinate is called a "Superior Lease" and the lessor under a Superior Lease or its assigns or successors in interest is called a "Superior Lessor". Any mortgage to which this Lease is subject and subordinate is called a "Superior Mortgage" and the holder of a Superior Mortgage is called a "Superior Mortgagee". If Landlord, a Superior Lessor or a Superior Mortgagee requires that such instruments be executed by Tenant, Tenant shall execute and deliver such instruments within ten (10) days after request therefor. Tenant waives any right to terminate this Lease because of any foreclosure proceedings. Tenant hereby irrevocably constitutes and appoints Landlord (and any successor Landlord) as Tenant's attorney-in-fact, with full power of substitution coupled with an interest, to execute and deliver to any Superior Lessor or Superior Mortgagee any documents required to be executed by Tenant for and on behalf of Tenant if Tenant shall have failed to do so within ten (10) days after request therefore. 21.2 Attornment. If any Superior Lessor or Superior Mortgagee (or any purchaser at a foreclosure sale) succeeds to the rights of Landlord under this Lease, whether through possession or foreclosure action, or the delivery of a new lease or deed (a "Successor Landlord"), provided that such Superior Lessor or Superior Mortgagee shall have executed and delivered to Tenant a Non-Disturbance Agreement in a form reasonably acceptable to Landlord and Tenant, Tenant shall attorn to and recognize such Successor Landlord as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment. 32 34 22. ESTOPPEL CERTIFICATE Tenant shall, whenever requested by Landlord, within twenty (20) days after written request by Landlord, execute, acknowledge and deliver to Landlord a statement in writing certifying: (a) that this Lease is unmodified and in full force and effect, (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect); (b) the dates to which Annual Basic Rent, Additional Rent and other charges are paid in advance, if any; (c) that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults if any are claimed; (d) that Tenant has paid Landlord the Security Deposit, (e) the Commencement Date and the scheduled expiration date of the Lease Term, (f) the rights (if any) of Tenant to extend or renew this Lease or to expand the Leased Premises and (g) the amount of Annual Basic Rent, Additional Rent and other charges currently payable under this Lease. In addition, such statement shall provide such other information and facts Landlord may reasonably require. Any such statement may be relied upon by any prospective or existing purchaser, ground lessee or mortgagee of all or any portion of the Property, as well as by any other assignee of Landlord's interest in this Lease. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord; (ii) that there are no uncured defaults in Landlord's performance hereunder; (iii) that Tenant has paid to Landlord the Security Deposit; (iv) that not more than one month's installment of Annual Basic Rent or Additional Rent has been paid in advance; (v) that the Commencement Date and the scheduled expiration date of the Lease Term are as stated therein, (vi) that Tenant has no rights to extend or renew this Lease or to expand the Leased Premises, (vii) that the Annual Basic Rent, Additional Rent and other charges are as set forth therein and (viii) that the other information and facts set forth therein are true and correct. 23. SIGNS Landlord shall retain absolute control over the exterior appearance of the Building and the exterior appearance of the Leased Premises as viewed from the public halls. Tenant shall not install, or permit to be installed, any drapes, shutters, signs, lettering, advertising, or any items that will in any way, in the sole opinion of Landlord, adversely alter the exterior appearance of the Building or the exterior appearance of the Leased Premises as viewed from the public halls or the exterior of the Building. Notwithstanding the foregoing, Landlord shall install, at Tenant's sole cost and expense, letters or numerals at or near the entryway to the Leased Premises provided Tenant obtains Landlord's prior written consent as to size, color, design and location. All such letters or numerals shall be in accordance with the criteria established by Landlord for the Building. In addition, Tenant's name and suite number shall be identified on the Building directory. Notwithstanding any provision of this Article 23 to the contrary, subject to governmental restrictions, Tenant shall have the right to display its corporate signage in each location utilized as of June 11, 1996 by Colonial Penn and on the monument sign located along 16th Street. Tenant shall reimburse Landlord for all costs and expenses incurred by Landlord in installing such signage. 33 35 24. PARKING 24.1 Parking Facility. Landlord shall provide, operate and maintain parking accommodations (the "Parking Accommodations"), together with necessary access, having a capacity adequate in Landlord's opinion to accommodate the requirements of the Building and the Project. All spaces allocated to Tenant pursuant to Article 0 shall be in parking areas adjacent to the Building, including the parking lot north of Belmont Street. No storage of vehicles or parking for more than twenty-four (24) hours shall be allowed without Landlord's prior written consent. Subject to the terms of the Reserved Covered Parking License in the form attached hereto as Exhibit "E" and Unreserved Parking License in the form attached as Exhibit "G", as applicable, Landlord shall have the right to establish, and from time to time change, alter and amend, and to enforce against all users of the Parking Accommodations, such reasonable requirements and restrictions as Landlord deems necessary and advisable for the proper operation and maintenance of the Parking Accommodations, including, without limitation, designation of particular areas for reserved, visitor and/or employee parking, and establishment of a reasonable rental charge for the use of the Parking Accommodations by tenants of the Building, the Project and/or the general public, as a part of the Rules and Regulations of the Building referenced in Article 31 hereof. Landlord and Tenant acknowledge that Landlord is involved in litigation regarding the parking lot north of Belmont Street (Maricopa County Civil Action No. CV 96-08708). Landlord represents and warrants that notwithstanding such litigation throughout the Lease Term, as same may be extended, Tenant shall have the non-exclusive right to use such parking lot in common with others, subject to and in accordance with the terms and conditions set forth in this Lease. 24.2 Parking Passes. Tenant is hereby allocated the number of reserved covered, reserved uncovered and unreserved parking passes designated in Article 0 hereof, entitling holders to park in either reserved covered, reserved uncovered or unreserved parking spaces, as the case may be, located in the Parking Accommodations as designated by Landlord from time to time for use by Tenant, its employees and licensees, and for which Tenant shall pay the monthly charges set forth in Article 1.18 hereof. Landlord and Tenant shall execute, prior to the Commencement Date a Reserved Covered Parking License in the form attached hereto as Exhibit "E" and Unreserved Parking License in the form attached as Exhibit "G", as applicable. The unreserved parking spaces shall be available to Tenant, its employees and licensees on a "first come, first serve" basis. Holders of parking passes shall not be entitled to park in visitor parking spaces so designated by Landlord, or in any other parking spaces other than those designated by Landlord for use by holders of parking passes. 25. LIENS Tenant shall keep the Leased Premises free and clear of all mechanic's and materialmen's liens. If, because of any act or omission (or alleged act or omission) of Tenant, any mechanics', materialmen's or other lien, charge or order for the payment of money shall be filed or recorded against the Leased Premises, the Property, the Project or the Building, or against any other property of Landlord (whether or not such lien, charge or order is valid or enforceable as such), Tenant shall, at its own expense, cause the same to be canceled or discharged of record within thirty (30) days after Tenant shall have received written notice of the filing thereof, or Tenant may, within such thirty (30) day period, furnish to Landlord, a bond pursuant to A.R.S. Section 33-1004 (or any successor statute) and satisfactory to Landlord and all Superior Lessors and Superior Mortgagees against the lien, charge or order, in which case Tenant shall have the right to contest, in good faith, the validity or amount thereof. 34 36 26. HOLDING OVER It is agreed that the date of termination of this Lease and the right of Landlord to recover immediate possession of the Leased Premises thereupon is an important and material matter affecting the parties hereto and the rights of third parties, all of which have been specifically considered by Landlord and Tenant. In the event of any continued occupancy or holding over of the Leased Premises without the express written consent of Landlord beyond the expiration or earlier termination of this Lease or of Tenants right to occupy the Leased Premises, whether in whole or in part, or by leaving property on the Leased Premises or otherwise, this Lease shall be deemed a monthly tenancy and Tenant shall pay two (2) times the Annual Basic Rent then in effect, in advance at the beginning of the hold-over month(s), plus any Additional Rent or other charges or payments contemplated in this Lease, and any other costs, expenses, damages, liabilities and attorneys' fees incurred by Landlord on account of Tenant's holding over. 27. ATTORNEYS' FEES Tenant shall pay to Landlord all amounts for costs (including reasonable attorneys' fees) incurred by Landlord in connection with any breach or default by Tenant under this Lease or incurred in order to enforce or interpret the terms or provisions of this Lease. Such amounts shall be payable within five (5) days after receipt by Tenant of Landlord's statement. In addition, if any action shall be instituted by either of the parties hereto for the enforcement or interpretation of any of their respective rights or remedies in or under this Lease, the prevailing party shall be entitled to recover from the losing party all costs incurred by the prevailing party in such action and any appeal therefrom, including reasonable attorneys' fees to be fixed by the court. 28. RESERVED RIGHTS OF LANDLORD Landlord reserves the following rights, exercisable without liability to Tenant for damage or injury to property, persons or business and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession or giving rise to any claim: (a) To name the Building, the Property and the Project and to change the name or street address of the Building, the Property or the Project after ninety (90) days prior notice to Tenant; (b) To install and maintain all signs on the exterior and interior of the Building, the Property and the Project; (c) To designate all sources furnishing sign painting and lettering; (d) During the last ninety (90) days of the Lease Term, if Tenant has vacated the Leased Premises, to decorate, remodel, repair, alter or otherwise prepare the Leased Premises for re-occupancy, without affecting Tenant's obligation to pay Annual Basic Rent; (e) To have pass keys to the Leased Premises and all doors therein, excluding Tenant's vaults and safes; (f) On reasonable prior notice to Tenant, to exhibit the Leased Premises to any prospective purchaser, mortgagee, or assignee of any mortgage on the Building, the Property or the Project and to others 35 37 having interest therein at any time during the Lease Term, and to prospective Tenants during the last six (6) months of the Lease Term; (g) To take any and all measures, including entering the Leased Premises for the purposes of making inspections, repairs, alterations, additions and improvements to the Leased Premises or to the Building (including, for the purposes of checking, calibrating, adjusting and balancing controls and other parts of the Building systems) as may be necessary or desirable for the operation, improvement, safety, protection or preservation of the Leased Premises or the Building, or in order to comply with all laws, orders and requirements of governmental or other authorities, or as may otherwise be permitted or required by this Lease; provided, however, that Landlord shall endeavor (except in an emergency) to minimize interference with Tenant's business in the Leased Premises; (h) To relocate various facilities within the Building and on the Property and/or the Project if Landlord shall determine such relocation to be in the best interest of the development of the Building, the Property and/or the Project, provided, that such relocation shall not materially restrict access to the Leased Premises; (i) To change the nature, extent, arrangement, use and location of the Building Common Areas and the Project Common Areas; (j) To make alterations or additions to and to build additional stories on the Building and to build additional buildings or improvements on the Property and on the Project; and (k) To install vending machines of all kinds in the Building, and to receive all of the revenue derived therefrom. Landlord further reserves the exclusive right to the roof of the Building. No easement for light, air, or view is included in the leasing of the Leased Premises to Tenant. Accordingly, any diminution or shutting off of light, air or view by any structure which may be erected on the Property, the Project or other properties in the vicinity of the Building shall in no way affect this Lease or impose any liability upon Landlord. Notwithstanding the foregoing, and subject to governmental restrictions, Tenant may install upon the roof of the Building an antenna or satellite dish. Such satellite dish shall be screened from view and shall not be visible from the streets and roadways adjacent to the Project. The satellite dish shall be installed and maintained by Tenant at its sole cost and expense and shall be operated in a manner that does not unreasonably interfere with the business being conducted by other tenants of the Building. Tenant agrees to use any specified roofing contractor required to comply with the existing roof warranties. Tenant shall be liable for any damage to the roof caused by the installation, maintenance, repair or operation of the satellite dish. 36 38 29. EMINENT DOMAIN 29.1 Taking. If the whole of the Building is lawfully and permanently taken by condemnation or any other manner for any public or quasi-public purpose, or by deed in lieu thereof, this Lease shall terminate as of the date of vesting of title in such condemning authority and the Annual Basic Rent and Additional Rent shall be pro rated to such date. If any part of the Building, Property or Project is so taken, or if the whole of the Building is taken, but not permanently, then this Lease shall be unaffected thereby, except that (a) Landlord may terminate this Lease by notice to Tenant within thirty (30) days after the date of vesting of title in the condemning authority, and (b) if twenty percent (20%) or more of the Leased Premises shall be permanently taken and the remaining portion of the Leased Premises shall not be reasonably sufficient for Tenant to continue operation of its business, Tenant may terminate this Lease by notice to Landlord within thirty (30) days after the date of vesting of title in such condemning authority. This Lease shall terminate on the one hundred twentieth (120th) day after receipt by Landlord of such notice, by which date Tenant shall vacate and surrender the Leased Premises to Landlord. The Annual Basic Rent and Additional Rent shall be pro rated to the earlier of the termination of this Lease or such date as Tenant is required to vacate the Leased Premises by reason of the taking. If this Lease is not terminated as a result of a partial taking of the Leased Premises, the Annual Basic Rent and Additional Rent shall be equitably adjusted according to the rentable area of the Leased Premises and Building remaining. 29.2 Award. In the event of a taking of all or any part of the Building, the Property or the Project, all of the proceeds or the award, judgment, settlement or damages payable by the condemning authority shall be and remain the sole and exclusive property of Landlord, and Tenant hereby assigns all of its right, title and interest in and to any such award, judgment, settlement or damages to Landlord. Tenant shall, however, have the right, to the extent that the same shall not reduce or prejudice amounts available to Landlord, to claim from the condemning authority, but not from Landlord, such compensation as may be recoverable by Tenant in its own right for relocation benefits, moving expenses, and damage to Tenant's personal property and trade fixtures. 30. NOTICES Any notice or communication given under the terms of this Lease shall be in writing and shall be delivered in person, sent by any public or private express delivery service or deposited with the United States Postal Service or a successor agency, certified or registered mail, return receipt requested, postage pre-paid, addressed as set forth in the Basic Provisions, or at such other address as a party may from time to time designate by notice hereunder. Notice shall be effective upon delivery. The inability to deliver a notice because of a changed address of which no notice was given or a rejection or other refusal to accept any notice shall be deemed to be the receipt of the notice as of the date of such inability to deliver or rejection or refusal to accept. Any notice to be given by Landlord may be given by the legal counsel and/or the authorized agent of Landlord. 37 39 31. RULES AND REGULATIONS Tenant shall abide by all rules and regulations (the "Rules and Regulations") of the Building and the Project imposed by Landlord, as attached hereto as Exhibit "I" or as may hereafter be issued by Landlord. Such Rules and Regulations are imposed to enhance the cleanliness, appearance, maintenance, order and use of the Leased Premises, the Building and the Property, and the proper enjoyment of the Building, the Property and the Project by all tenants and their clients, customers and employees. The Rules and Regulations may be changed from time to time upon ten (10) days notice to Tenant. Breach of the Rules and Regulations, by Tenant shall constitute an Event of Default if such breach is not fully cured within ten (10) days after written notice to Tenant by Landlord. Landlord shall not be responsible to Tenant for nonperformance by any other tenant, occupant or invitee of the Building, the Property or the Project of any Rules or Regulations. 32. ACCORD AND SATISFACTION No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment of Annual Base Rent and Additional Rent (jointly called "Rent" in this Article 0), shall be deemed to be other than on account of the earliest stipulated Rent due and not yet paid, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or to pursue any other remedy in this Lease. No receipt of money by Landlord from Tenant after the termination of this Lease, after the service of any notice relating to the termination of this Lease, after the commencement of any suit, or after final judgment for possession of the Leased Premises, shall reinstate, continue or extend the Lease Term or affect any such notice, demand, suit or judgment. 33. BANKRUPTCY OF TENANT 33.1 Chapter 7. If a petition is filed by, or an order for relief is entered against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of Tenant elects to assume this Lease for the purpose of assigning it, the election or assignment, or both, may be made only if all of the terms and conditions of Articles 0 and 0 below are satisfied. If the trustee fails to elect to assume this Lease for the purpose of assigning it within sixty (60) days after appointment, this Lease will be deemed to have been rejected. To be effective, an election to assume this Lease must be in writing and addressed to Landlord and, in Landlord's business judgment, all of the conditions hereinafter stated, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied. Landlord shall then immediately be entitled to possession of the Premises without further obligation to Tenant or the trustee, and this Lease will be terminated. Landlord's right to be compensated for damages in the bankruptcy proceeding, however, shall survive. 33.2 Chapters 11 and 13. If Tenant files a petition for reorganization under Chapters 11 or 13 of the Bankruptcy Code or a proceeding that is filed by or against Tenant under any other chapter of the Bankruptcy Code is converted to a Chapter 11 or 13 proceeding and Tenant's trustee or Tenant as a debtor-in-possession fails to assume this Lease within sixty (60) days from the date of the filing of the petition or the conversion, the trustee or the debtor-in-possession will be deemed to have rejected this Lease. To be effective, an election to assume this Lease must be in writing and addressed to Landlord and, in Landlord's business judgment, all of the following conditions, which Landlord and Tenant acknowledge to be commercially reasonable, must have been satisfied: (a) The trustee or the debtor-in-possession has cured or has provided to Landlord adequate assurance, as defined in this Article 0, that; 38 40 (1) The trustee will cure all monetary defaults under this Lease within ten (10) days from the date of the assumption; and (2) The trustee will cure all non-monetary defaults under this Lease within thirty (30) days from the date of the assumption. (b) The trustee or the debtor-in-possession has compensated Landlord, or has provided to Landlord adequate assurance, as defined in this Article 0, that within ten (10) days from the date of the assumption Landlord will be compensated for any pecuniary loss it incurred arising from the default of Tenant, the trustee, or the debtor-in-possession as recited in Landlord's written statement of pecuniary loss sent to the trustee or the debtor-in-possession. For purposes of this Lease, pecuniary loss shall include all attorneys' fees and court costs incurred by Landlord in connection with any bankruptcy proceeding filed by or against Tenant. (c) The trustee or the debtor-in-possession has provided Landlord with adequate assurance of the future performance of each of Tenant's obligations under the Lease; provided, however, that: (1) If not otherwise required by the terms of this Lease, the trustee or the debtor-in- possession will also pay in advance, on each day that the Annual Basic Rent is payable, one-twelfth of Tenant's estimated annual obligations under the Lease for the Additional Rent. (2) From and after the date of the assumption of this Lease, the trustee or the debtor- in-possession will pay the Annual Basic Rent and Additional Rent as provided in Article 0 above. (3) The obligations imposed upon the trustee or the debtor-in-possession will continue for Tenant after the completion of bankruptcy proceedings. (d) Landlord has determined that the assumption of the Lease will not: (1) Breach any provisions in any other lease, mortgage, financing agreement, or other agreement by which Landlord is bound relating to the Property; or (2) Disrupt, in Landlord's judgment, the tenant mix of the Building or the Project or any other attempt by Landlord to provide a specific variety of Tenants in the Building or the Project that, in Landlord's judgment, would be most beneficial to all of the tenants of the Building and the Project and would enhance the image, reputation, and profitability of the Building and the Project. (e) For purposes of this Article 0 "adequate assurance" means that: (1) Landlord will determine that the trustee or the debtor-in-possession has, and will continue to have, sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that the trustee or the debtor-in-possession will have sufficient funds to fulfill Tenant's obligations under this Lease and to keep the Leased Premises properly staffed with sufficient employees to conduct a fully operational, actively promoted business on the Leased Premises; and (2) An order will have been entered segregating sufficient cash payable to Landlord and/or a valid and perfected first lien and security interest will have been granted in property of 39 41 Tenant, trustee, or debtor-in-possession that is acceptable for value and kind to Landlord, to secure to Landlord the obligation of the trustee or debtor-in-possession to cure the monetary or non-monetary defaults under this Lease within the time periods set forth above. 33.3 Landlord's Right to Terminate. In the event that this Lease is assumed by a trustee appointed for Tenant or by Tenant as debtor-in-possession under the provisions of Article 0 above and, thereafter, Tenant is either adjudicated a bankrupt or files a subsequent petition for arrangement under chapter 11 of the Bankruptcy Code, then Landlord may terminate, at its option, this Lease and all Tenant's rights under it, by giving written notice of Landlord's election to terminate. 33.4 Assignment by Trustee. If the trustee or the debtor-in-possession has assumed the Lease, under the terms of Article 0 or 0 above, and elects to assign Tenant's interest under this Lease or the estate created by that interest to any other person, that interest or estate may be assigned only if Landlord acknowledges in writing that the intended assignee has provided adequate assurance, as defined in this Article 0, of future performance of all of the terms, covenants, and conditions of this Lease to be performed by Tenant. 33.5 Adequate Assurance. For the purposes of this Article 0 "adequate assurance of future performance" means that Landlord has ascertained that each of the following conditions has been satisfied: (1) The assignee has submitted a current financial statement, audited by a certified public accountant, that shows a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by the assignee of Tenant's obligations under this Lease; (2) If requested by Landlord, the assignee will obtain guarantees, in form and substance satisfactory to Landlord from one or more persons who satisfy Landlord's standards of creditworthiness; (3) Landlord has obtained all consents or waivers from any third party required under any lease, mortgage, financing arrangement or other agreement by which Landlord is bound, to enable Landlord to permit the assignment; (4) When, pursuant to the Bankruptcy Code, the trustee or the debtor-in-possession is obligated to pay reasonable use and occupancy charges for the use of all or part of the Leased Premises, the charges will not be less than the Annual Basic Rent and Additional Rent. 33.6 Consent of Landlord. Neither Tenant's interest in the Lease nor any estate of Tenant created in the Lease will pass to any trustee, receiver, assignee for the benefit of creditors, or any other person or entity, or otherwise by operation of law under the laws of any state having jurisdiction of the person or property of Tenant unless Landlord consents in writing to the transfer. Landlord's acceptance of Annual Basic Rent or Additional Rent or any other payments from any trustee, receiver, assignee, person, or other entity will not be deemed to have waived, or waive, the need to obtain Landlord's consent or Landlord's right to terminate this Lease for any transfer of Tenant's interest under this Lease without that consent. 40 42 34. HAZARDOUS MATERIALS 34.1 Hazardous Materials Laws. "Hazardous Materials Laws" means any and all federal, state or local laws, ordinances, rules, decrees, orders, regulations or court decisions (including the so-called "common-law") relating to hazardous substances, hazardous materials, hazardous waste, toxic substances, environmental conditions on, under or about the Premises, or soil and ground water conditions, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended, 42 U.S.C. Section 9601, et seq., the Resource Conversation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., any amendments to the foregoing, and any similar federal, state or local laws, ordinances, rules, decrees, orders or regulations. 34.2 Hazardous Materials. "Hazardous Materials" means any chemical, compound, material, substance or other matter that: (i) is a flammable explosive, asbestos, radioactive material, nuclear medicine material, drug, vaccine, bacteria, virus, hazardous waste, toxic substance, petroleum product, or related injurious or potentially injurious material, whether injurious or potentially injurious by itself or in combination with other materials; (ii) is controlled, designated in or governed by any Hazardous Materials Law; (iii) gives rise to any reporting, notice or publication requirements under any Hazardous Materials Law; or (iv) gives rise to any liability, responsibility or duty on the part of Tenant or Landlord with respect to any third person under any Hazardous Materials Law. 34.3 Use. Tenant shall not allow any Hazardous Material to be used, generated, released, stored or disposed of on, under or about, or transported from, the Leased Premises, the Building or the Project, unless: (i) such use is specifically disclosed to and approved by Landlord in writing prior to such use; and (ii) such use is conducted in compliance with the provisions of this Article 0. Landlord may approve such use subject to reasonable conditions to protect the Leased Premises, the Building or the Project, and Landlord's interests. Landlord may withhold approval if Landlord determines that such proposed use involves a material risk of a release or discharge of Hazardous Materials or a violation of any Hazardous Materials Laws or that Tenant has not provided reasonable assurances of its ability to remedy such a violation and fulfill its obligations under this Article 0. 34.4 Compliance With Laws. Tenant shall strictly comply with, and shall maintain the Leased Premises in compliance with, all Hazardous Materials Laws. Tenant shall obtain and maintain in full force and effect all permits, licenses and other governmental approvals required for Tenant's operations on the Leased Premises under any Hazardous Materials Laws and shall comply with all terms and conditions thereof. At Landlord's request, Tenant shall deliver copies of, or allow Landlord to inspect, all such permits, licenses and approvals. Tenant shall perform any monitoring, investigation, clean-up, removal and other remedial work (collectively, "Remedial Work") required as a result of any release or discharge of Hazardous Materials affecting the Leased Premises, the Building or the Project, or any violation of Hazardous Materials Laws by Tenant or any assignee or sublessee of Tenant or their respective agents, contractors, employees, licensees, or invitees. Landlord shall have the right to intervene in any governmental action or proceeding involving any Remedial Work, and to approve performance of the work, in order to protect Landlord's interests. 34.5 Compliance With Insurance Requirements. Tenant shall comply with the requirements of Landlord's and Tenant's respective insurers regarding Hazardous Materials and with such insurers' recommendations based upon prudent industry practices regarding management of Hazardous Materials. 41 43 34.6 Notice; Reporting. Tenant shall notify Landlord, in writing, within two (2) days after any of the following: (a) a release or discharge of any Hazardous Material, whether or not the release or discharge is in quantities that would otherwise be reportable to a public agency; (b) Tenant's receipt of any order of a governmental agency requiring any Remedial Work pursuant to any Hazardous Materials Laws; (c) Tenant's receipt of any warning, notice of inspection, notice of violation or alleged violation, or Tenant's receipt of notice or knowledge of any proceeding, investigation of enforcement action, pursuant to any Hazardous Materials Laws; or (d) Tenant's receipt of notice or knowledge of any claims made or threatened by any third party against Tenant or the Leased Premises, the Building or the Project, relating to any loss or injury resulting from Hazardous Materials. Tenant shall deliver to Landlord copies of all test results, reports and business or management plans required to be filed with any governmental agency pursuant to any Hazardous Materials Laws. 34.7 Termination; Expiration. Upon the termination or expiration of this Lease, Tenant shall remove any equipment, improvements or storage facilities utilized in connection with any Hazardous Materials and shall, clean up, detoxify, repair and otherwise restore the Leased Premises to a condition free of Hazardous Materials. 34.8 Indemnity. Tenant shall protect, indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, any and all claims, costs, expenses, suits, judgments, actions, investigations, proceedings and liabilities arising out of or in connection with any breach of any provisions of this Article 0 or directly or indirectly arising out of the use, generation, storage, release, disposal or transportation of Hazardous Materials by Tenant or any sublessee or assignee of Tenant, or their respective agents, contractors, employees, licensees, or invitees, on, under or about the Leased Premises, the Building or the Project during the Lease Term or Tenant's occupancy of the Leased Premises, including, but not limited to, all foreseeable and unforeseeable consequential damages and the cost of any Remedial Work. Neither the consent by Landlord to the use, generation, storage, release, disposal or transportation of Hazardous Materials nor the strict compliance with all Hazardous Material Laws shall excuse Tenant from Tenant's indemnification obligations pursuant to this Article 0. The foregoing indemnity shall be in addition to and not a limitation of the indemnification provisions of Article 0 of this Lease. Tenant's obligations pursuant to this Article 0 shall survive the termination or expiration of this Lease. 34.9 Assignment; Subletting. If Landlord's consent is required for an assignment of this Lease or a subletting of the Leased Premises, Landlord shall have the right to refuse such consent if the possibility of a release of Hazardous Materials is materially increased as a result of the assignment or sublease or if Landlord does not receive reasonable assurances that the new tenant has the experience and the financial ability to remedy a violation of the Hazardous Materials Laws and fulfill its obligations under this Article 0. 34.10 Entry and Inspection; Cure. Landlord and its agents, employees and contractors, shall have the right, but not the obligation, to enter the Leased Premises at all reasonable times to inspect the Leased Premises and Tenant's compliance with the terms and conditions of this Article 0, or to conduct investigations and tests. No prior notice to Tenant shall be required in the event of an emergency, or if Landlord has reasonable cause to believe that violations of this Article 0 have occurred, or if Tenant consents at the time of entry. In all other cases, Landlord shall give at least twenty-four (24) hours prior notice to Tenant. Landlord shall have the right, but not the obligation, to remedy any violation by Tenant of the provisions of this Article 0 or to perform any Remedial Work which is necessary or appropriate as a result of any governmental order, investigation or proceeding. Tenant shall pay, upon demand, as Additional Rent, all costs incurred by Landlord in remedying such violations or performing all Remedial Work, plus interest thereon at the Default Rate from the date of demand until the date received by Landlord. 42 44 34.11 Event of Default. The release or discharge of any Hazardous Material or the violation of any Hazardous Materials Law shall constitute an Event of Default by Tenant under this Lease. In addition to and not in lieu of the remedies available under this Lease as a result of such Event of Default, Landlord shall have the right, without terminating this Lease, to require Tenant to suspend its operations and activities on the Leased Premises until Landlord is satisfied that appropriate Remedial Work has been or is being adequately performed and Landlord's election of this remedy shall not constitute a waiver of Landlord's right thereafter to pursue the other remedies set forth in this Lease. 34.12 Representation and Warranty by Landlord. To Landlord's knowledge, which knowledge is based solely on that certain Phase I Environmental Site Assessment of Pointe Corporate Center, Pointe Corridor Centre I and Pointe Corridor Centre II, Phoenix, Arizona (WT Job No. 2185JF187) prepared by Western Technologies Inc., Landlord has received no written notice that there are Hazardous Materials present in the Building or Project in violation of any Hazardous Materials Laws. Subject to the receipt of written notice by Landlord of the breach of the foregoing warranty and the expiration of the applicable cure periods set forth in Article 12.5, Landlord shall indemnify, defend and hold Tenant harmless for, from and against any loss, cost, damage, fine, penalty, claim or expense (including reasonable attorneys' fees) incurred or sustained by Tenant as a result of the breach by Landlord of any Hazardous Materials Laws. 35. MISCELLANEOUS 35.1 Entire Agreement, Amendments. This Lease and any Exhibits and Riders attached hereto and forming a part hereof, set forth all of the covenants, promises, agreements, conditions and understandings between Landlord and Tenant concerning the Leased Premises and there are no covenants, promises, agreements, representations, warranties, conditions or understandings either oral or written between them other than as contained in this Lease. Except as otherwise provided in this Lease, no subsequent alteration, amendment, change or addition to this Lease shall be binding unless it is in writing and signed by both Landlord and Tenant. 35.2 Time of the Essence. Time is of the essence of each and every term, covenant and condition of this Lease. 35.3 Binding Effect. The covenants and conditions of this Lease shall, subject to the restrictions on assignment and subletting, apply to and bind the heirs, executors, administrators, personal representatives, successors and assigns of the parties hereto. 35.4 Recordation. Neither this Lease nor any memorandum hereof shall be recorded by Tenant. At the sole option of Landlord, Tenant and Landlord shall execute, and Landlord may record, a short form memorandum of this Lease in form and substance satisfactory to Landlord. 35.5 Governing Law. This Lease and all the terms and conditions thereof shall be governed by and construed in accordance with the laws of the State of Arizona. 35.6 Defined Terms and Paragraph Headings. The words "Landlord" and "Tenant" as used in this Lease shall include the plural as well as the singular. Words used in masculine gender include the feminine and neuter. If there is more than one Tenant, the obligations in this Lease imposed upon Tenant shall be joint and several. The paragraph headings and titles to the paragraphs of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 43 45 35.7 Representations and Warranties. (a) Tenant represents and warrants to Landlord as follows: (i) Tenant has been duly organized, is validly existing, and is in good standing under the laws of its state of incorporation and is qualified to transact business in Arizona. All necessary action on the part of Tenant has been taken to authorize the execution, delivery and performance of this Lease and of the other documents, instruments and agreements, if any, provided for herein. The persons who have executed this Lease on behalf of Tenant are duly authorized to do so; (ii) This Lease constitutes the legal, valid and binding obligation of Tenant, enforceable against Tenant in accordance with its terms, subject, however, to bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally, general principles of equity, whether enforceability is considered in a proceeding in equity or at law, and to the qualification that certain waivers, procedures, remedies and other provisions of this Lease may be unenforceable under or limited by applicable law, however, none of the foregoing shall prevent the practical realization to Landlord of the benefits intended by this Lease; (iii) To the best of its knowledge, there are no suits, actions, proceedings or investigations pending, or to the best of its knowledge, threatened against or involving Tenant before any court, arbitrator or administrative or governmental body which might reasonably result in any material adverse change in the contemplated business, condition or operations of Tenant; (iv) To the best of its knowledge, Tenant is not, and the execution, delivery and performance of this Lease and the documents, instruments and agreements, if any, provided for herein will not result in any breach of or default under any other document, instrument or agreement to which Tenant is a party or by which Tenant is subject or bound; (v) To the best of its knowledge, Tenant has obtained all required licenses and permits, both governmental and private, to use and operate the Leased Premises in the manner intended by this Lease. (b) Landlord represents and warrants to Tenant as follows: (i) Landlord has been duly organized, is validly existing, and is in good standing under the laws of its state of formation and is qualified to transact business in Arizona. All necessary action on the part of Landlord has been taken to authorize the execution, delivery and performance of this Lease and of the other documents, instruments and agreements, if any, provided for herein. The persons who have executed this Lease on behalf of Landlord are duly authorized to do so; (ii) This Lease constitutes the legal, valid and binding obligation of Landlord, enforceable against Landlord in accordance with its terms, subject, however, to bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting the rights of creditors generally, general principles of equity, whether enforceability is considered in a proceeding in equity or at law, and to the qualification that certain waivers, procedures, remedies and other provisions of this Lease may be unenforceable under or limited by applicable law, however, none of the foregoing shall prevent the practical realization to Tenant of the benefits intended by this Lease; 44 46 35.8 No Waiver. The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the obligations of this Lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. 35.9 Severability. If any clause or provision of this Lease is or becomes illegal or unenforceable because of any present or future law or regulation of any governmental body or entity effective during the Lease Term, the intention of the parties is that the remaining provisions of this Lease shall not be affected thereby. 35.10 Exhibits. If any provision contained in an Exhibit, Rider or Addenda to this Lease is inconsistent with any other provision of this Lease, the provision contained in this Lease shall supersede the provisions contained in such Exhibit, Rider or Addenda, unless otherwise provided. 35.11 Fair Meaning. The language of this Lease shall be construed to its normal and usual meaning and not strictly for or against either Landlord or Tenant. Landlord and Tenant acknowledge and agree that each party has reviewed and revised this Lease and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply to the interpretation of this Lease, or any Exhibits, Riders or amendments hereto. 35.12 No Merger. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation of this Lease shall not work as a merger and shall, at Landlord's option, either terminate any or all existing subleases or subtenancies, or operate as an assignment to Landlord of any or all of such subleases or subtenancies. 35.13 Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty and other causes beyond the reasonable control of Tenant or Landlord shall excuse the performance of the applicable party hereunder for the period of any such prevention, delay, or stoppage, except (unless otherwise stated herein) the obligations imposed with regard to Annual Basic Rent, Operating Costs, Additional Rent and other charges to be paid by Tenant pursuant to this Lease. 35.14 Government Energy or Utility Controls. In the event of the imposition of federal, state or local governmental controls, rules, regulations or restrictions on the use or consumption of energy or other utilities during the Lease Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation of any governmental control, rule, regulation or restriction between Landlord and Tenant, the reasonable interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance, including the right of entry into the Leased Premises to effect compliance. 35.15 Shoring. If any excavation or construction is made adjacent to, upon or within the Building, or any part thereof, Tenant shall afford to any and all persons causing or authorized to cause such excavation or construction license to enter onto the Leased Premises for the purpose of doing such work as such persons shall deem necessary to preserve the Building or any portion thereof from injury or damage and to support the same by proper foundations, braces and supports without any claim for damages, indemnity or abatement of Annual Basic Rent or Additional Rent or for a constructive or actual eviction of Tenant. 45 47 35.16 Transfer of Landlord's Interest. The term "Landlord" as used in this Lease, insofar as the covenants or agreements on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners of Landlord's interest in this Lease at the time in question. Upon any transfer or transfers of such interest, the Landlord herein named (and in the case of any subsequent transfer, the then transferor) shall thereafter be relieved of all liability for the performance of any covenants or agreements on the part of the Landlord contained in this Lease. 35.17 Limitation on Landlord's Liability. If Landlord becomes obligated to pay Tenant any judgment arising out of any failure by the Landlord to perform or observe any of the terms, covenants, conditions or provisions to be performed or observed by Landlord under this Lease, Tenant shall be limited in the satisfaction of such judgment solely to Landlord's interest in the Building and the Property or any proceeds arising from the sale thereof and no other property or assets of Landlord or the individual partners, directors, officers or shareholders of Landlord or its constituent partners shall be subject to levy, execution or other enforcement procedure whatsoever for the satisfaction of any such money judgment. 35.18 Brokerage Fees. Tenant warrants and represents that it has not dealt with any realtor, broker or agent in connection with this Lease except the Broker identified in Article 0 above. Tenant shall indemnify, defend and hold Landlord harmless from and against, and shall be responsible for, any cost, expense or liability (including the cost of suit and reasonable attorneys' fees) for any compensation, commission or charges claimed by any other realtor, broker or agent in connection with this Lease or by reason of any act of Tenant. 35.19 Intentionally Omitted. 35.20 Continuing Obligations. All obligations of Lessee hereunder not fully performed as of the expiration or earlier termination of this Lease shall survive the expiration or earlier termination of this Lease, including, without limitation, all payment obligations with respect to Annual Basic Rent, Additional Rent and all obligations concerning the condition of the Premises. 35.21 Consent of Landlord and Tenant. Whenever in this Lease the approval or consent of any party is required or desired, unless otherwise expressly provided, such party shall not withhold or delay its approval or consent unreasonably. 35.22 Quiet Possession. So long as there is not in existence an Event of Default, Tenant may quietly have, hold and enjoy the Leased Premises during the Lease Term, subject, however, to the matters referred to in Article 0. The provisions of this Article 0 shall not extend to any disturbance, act or condition brought about by any tenant in the Building. 46 48 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the date and year first above written. LANDLORD: Pivotal Simon Office XVI, L.L.C., an Arizona limited liability company, formerly known as Pivotal Simon Pointe, L.L.C. By: Pivotal Group II, L.L.C., an Arizona limited liability company, its Administrative Member By: Jahm Najafi, Trustee of the Jahm Najafi Trust dated July 30, 1996, its Member By: Jahm Najafi ------------------------ Name: Jahm Najafi Its: Trustee TENANT: MANAGED CARE SOLUTIONS, INC., a Delaware corporation By: Michael Kennedy --------------------------------- Name: Michael Kennedy Its: CFO and Assistant Secretary Witness for purposes of Power of Attorney: Kippy Knight Schader By: James A. Burns - ----------------------------- ----------------------------------- Witness Name: James A. Burns Name: Kippy Knight Shader Its: President If Tenant is a CORPORATION, the authorized officers must sign on behalf of the corporation and indicate the capacity in which they are signing. The Lease must be executed by the president or vice-president and the secretary or assistant secretary, unless the bylaws or a resolution of the board of directors shall 47 49 otherwise provide, in which event, the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease. 48 50 RIDER "1" Rider 1 to Lease dated September 30, 1996 between Pivotal Simon Office XVI, L.L.C., formerly known as Pivotal Simon Pointe, L.L.C., an Arizona limited liability company ("Landlord"), and Managed Care Solutions, Inc., a Delaware corporation ("Tenant"). 1. Option to Extend. Provided that Tenant is not in breach or default of any of the terms, conditions, covenants, obligations or provisions of the Lease to which this Rider is attached, and that no event shall have occurred or state of facts exists which if continued uncured will, with the lapse of time or the delivery of notice, or both, constitute an Event of Default, then Tenant shall have, and is hereby granted, the option to extend the Initial Term for one (1) additional period of five (5) years. Except as set forth in Section 0 of this Rider, Tenant's occupancy of the Leased Premises during the Renewal Term shall be governed by all of the terms, conditions, covenants and provisions of the Lease to which this Rider is attached except that Tenant shall have no further option to extend the Initial Term after the expiration of the Renewal Term. If Tenant desires to exercise its option to extend the Initial Term, it must give Landlord notice in writing ("Option Notice") of its intent to do so at least eight (8) months, but not more than twenty-four (24) months prior to the expiration of the Initial Term. For the purposes of the Lease to which this Rider is attached, the phrase "Lease Term" shall be deemed to refer to the Initial Term and the Renewal Term to the extent applicable. 2. Amendment to Basic Provisions. (a) Lease Term. Article 1.11 of the Lease entitled "Lease Term" is hereby deleted and replaced with the following: 1.11 Lease Term. (a) Initial Term: Five (5) years; (b) Renewal Term: Five (5) years. (b) Annual Basic Rent. Article 1.13 of the Lease entitled "Annual Basic Rent" is hereby deleted and replaced with the following: 1.13 Annual Basic Rent. (a) Initial Term:
Rental Rate Annual Monthly per Rentable Lease Year Basic Rent Basic Rent Square Foot ---------- ---------- ---------- ------------ 1 $484,443.50 $40,370.29 $16.75 2 498,904.50 41,575.38 17.25 3 513,365.50 42,780.46 17.75 4 527,826.50 43,985.54 18.25 5 542,287.50 45,190.63 18.75
Rider 1 - 1 51 (b) Renewal Term: Landlord and Tenant shall have thirty (30) days after Landlord receives the Option Notice within which to agree on the Annual Basic Rental for the Renewal Term based upon ninety-five percent (95%) of the "THEN FAIR MARKET RENTAL VALUE OF THE PREMISES" as defined below. If the parties agree on the Annual Basic Rental for the Renewal Term within thirty (30) days, they shall amend this Lease by stating the Annual Basic Rental for the Renewal Term. 3. Calculation of Fair Market Rental Value of the Premises: (a) If they are unable to agree on the Annual Basic Rental for the Renewal Term within the thirty (30) day period, then the Annual Basic Rental shall be ninety-five percent (95%) of the "THEN FAIR MARKET RENTAL VALUE OF THE PREMISES" as determined in accordance with this Rider. (b) The "THEN FAIR MARKET RENTAL VALUE OF THE PREMISES" means what a landlord under no compulsion to lease the Premises and a tenant under no compulsion to lease the Premises, would determine as rent for the Renewal Term, as of the commencement of the Renewal Term, taking into consideration the use permitted under the Lease, the quality, size, shape, design and location of the Premises within the Building, taking into account concessions and all other relevant factors. The then fair market rental value of the Premises for the first year of the Renewal Term will not be less than the Annual Basic Rental and Parking Charge payable during the last year of the Initial Term. (c) Within seven (7) days after the expiration of the fifteen (15) day period set forth in Subsection 1.12 above, Landlord and Tenant shall each appoint a real estate broker with at least ten (10) full years full-time commercial brokerage experience in the area in which the Premises are located to appraise the then fair market rental value of the Premises. If either the Landlord or the Tenant does not appoint an broker within ten (10) days after the other has given notice of the name of its broker, the single broker appointed shall be the sole broker and shall set the then fair market rental value of the Premises. If two (2) brokers are appointed pursuant to this paragraph, they shall meet promptly and attempt to set the then fair market rental value of the Premises. If they are unable to agree within the thirty (30) days after the second broker has been appointed, they shall attempt to elect a third broker meeting the qualifications stated in this paragraph within ten (10) days after the last day the two (2) brokers are given to set the then fair market rental value of the Premises. If they are unable to agree on the third broker, either the Landlord or Tenant may petition the presiding civil court judge of the Maricopa County Superior Court for the selection of a third broker who meets the qualifications stated in this paragraph. Tenant and Landlord shall each bear one-half (1/2) of the cost of appointing the brokers and of paying the broker's fees. (d) Within thirty (30) days after the selection of the third broker, a majority of the brokers shall set the then fair market rental value of the Premises. If a majority of the brokers are unable to set the then fair market rental value of the Premises within thirty (30) days after selection of the third broker, the three (3) appraisals shall be averaged and the average shall be the then fair market rental value of the Premises. The broker(s) determination of the fair rental value of the Premises shall contemplate an Annual Basic Rent that increases over the Renewal Term. 4. Definitions. Capitalized terms used in this Rider without definition shall have the definition assigned to such terms in the Lease to which this Rider is attached, unless the context requires otherwise. Rider 1 - 2 52 5. Full Force and Effect. Except as specifically modified by this Rider, the Lease to which this Rider is attached remains in full force and effect. JN MK - --------------------------- ---------------------------- Landlord's Initials Tenant's Initials Rider 1 - 3 53 RIDER "2" Rider 2 to Lease dated May ____, 1996 between Pivotal Simon Office XVI L.L.C., formerly known as Pivotal Simon Pointe, an Arizona limited liability company ("Landlord"), and Managed Care Solutions, Inc., a Delaware corporation ("Tenant"). Rider 2 - 1 54 EXHIBIT 10.4 1. Terms and Conditions of Right of First Opportunity to Lease and Expansion Options. Tenant's right to exercise the rights of opportunity to lease and/or expansion options described in this Rider "2" shall be conditioned on the following: (i) there is not then in existence an Event of Default (notice thereof having been given and any applicable cure period having expired), (ii) there shall not have been three (3) or more Events of Default prior to Tenant's exercise of the right of first refusal to lease, right of first opportunity to lease, or expansion option, as applicable, (iii) the originally named Tenant or the tenant pursuant to a Permitted Transfer (as defined in Article 0 of the Lease to which this Rider is attached) shall be in occupancy of all of the Leased Premises, and (iv) there has not occurred a material adverse change in Tenant's financial condition from and after the date Tenant executed the Lease. Tenant's rights to exercise any of the rights and options described herein shall also be subject to any rights of first refusal or opportunity existing prior to the date of this Lease, which rights are more particularly described on Annex 1 to this Rider. If a right of first opportunity or option to expand is exercised by Tenant on or before September 30, 1997, the additional space leased by Tenant shall be occupied by Tenant upon the same terms and conditions contained in the Lease with respect to the Leased Premises, including Annual Basic Rent, Lease Term, renewal option and Tenant Improvement Allowance (but not the Additional Allowance); provided, however, the Tenant Improvement Allowance shall be reduced on a straight-line basis (e.g., one-sixtieth (1/60th) each month) commencing on the Commencement Date. If Tenant exercises a right of first opportunity or expansion option after September 30, 1997, unless otherwise set forth below, such additional space shall be leased for a term of not less than three (3) years and at otherwise prevailing fair-market rental rates, terms and conditions determined in accordance with the provisions of Paragraph 3 of Rider "1". In the event that Tenant expands the Leased Premises by exercise of any right of opportunity to lease or expansion option, the number of covered reserved and uncovered reserved parking spaces to which Tenant is entitled shall expand proportionately (i.e. the ratio of parking spaces to square footage leased by Tenant), unless the lease supplement between Landlord and Tenant in connection with such expansion provides for a lower ratio of parking spaces. 2. Right of First Opportunity to Lease. In the event all or any portion of the space in Suites 100A, 110, 145 and 240 (collectively, the "ADDITIONAL SPACE") (as more particularly described on the floor plan attached hereto as Annex 3) is not then leased or occupied or all renewal rights held by the current tenant of any portion of the Additional Space shall have expired without exercise thereof, prior to Landlord offering the Additional Space for lease, Landlord shall deliver to Tenant written notice (the "OPPORTUNITY PROPOSAL NOTICE") which Opportunity Proposal Notice shall set forth the Base Year Costs, Annual Basic Rent, Additional Rent and Tenant Improvement Allowance at which Landlord intends to market the Additional Space. Tenant shall have an option (the "OPTION") exercisable by written notice to Landlord within thirty (30) days after receipt of the Opportunity Proposal Notice to lease all of the Additional Space upon the terms and conditions contained in the Opportunity Proposal Notice. Promptly after Tenant exercises the Option, Landlord and Tenant shall exercise supplement agreement to the Lease to which this Rider is attached, in a form satisfactory to Landlord and Tenant, incorporating the Additional Space as part of the Lease Premises. If Tenant does not timely exercise the Option, or if Landlord and Tenant do not execute a supplemental agreement to this Lease within thirty (30) days after notice by Tenant to Landlord of its election to exercise the Option, the Option shall be deemed waived and Landlord may lease the Additional Space to third parties provided that the Annual Basic Rent, Additional Rent and tenant improvement allowance is at least ninety-five percent (95%) of the Annual Basic Rent and Additional Rent set forth in the Opportunity Proposal Notice. Prior to entering into a lease with a third party for all or any 55 portion of the Additional Space, Landlord shall provide Tenant with notice of the material terms of such Lease. In the event that the Base Year Costs, Annual Basic Rent, Additional Rent and Tenant Improvement Allowance contained in the lease between Landlord and any third party to whom Landlord proposes to lease the applicable Additional Space are not at least ninety-five percent (95%) of the Base Year Costs, Annual Basic Rent, Additional Rent and Tenant Improvement Allowance set forth in the Opportunity Proposal Notice, Tenant shall have five (5) business days to lease the Additional Space on the terms and conditions set forth in the lease between Landlord and such third party. In the event Tenant does not agree to lease the Additional Space within such five (5) business day period, Tenant shall have no further rights of opportunity with respect to such Additional Space. 3. Expansion Rights. (a) Expansion Right No. 1. Tenant shall have and is hereby granted an option to lease approximately twelve thousand twenty-nine (12,029) rentable square feet comprising Suite 200 on the second floor of the Building (the "EXPANSION SPACE NO. 1") (as more particularly described on the floor plan attached hereto as Annex 4) for a lease term to commence not later than February 1, 1997 and terminating on the Expiration Date. If Tenant desires to exercise its option to lease the Expansion Space No. 1, it must give Landlord notice of its intent to do so (the "EXPANSION NOTICE NO. 1") no later than October 1, 1996. Promptly after receipt by Landlord of the Expansion Notice No. 1, Landlord and Tenant shall enter into a supplemental agreement to the Lease to which this Rider is attached, in a form satisfactory to Landlord and Tenant, incorporating the Expansion Space No. 1 into the Leased Premises. If Landlord and Tenant do not execute a supplemental agreement to the Lease to which this Rider is attached within thirty (30) days after notice by Tenant to Landlord of its election to exercise the Expansion Right No. 1, the expansion right shall be deemed waived. (b) Expansion Right No. 2. Tenant shall have and is hereby granted an option to lease Suite 100A located on the first floor of the Building (the "EXPANSION SPACE NO. 2") (as more particularly described on the floor plan attached hereto as Annex 5) for a term to commence sixty (60) days after the date the existing tenant vacates Suite 100A, subject to the following terms and conditions: (i) Tenant shall have furnished Landlord written notice exercising such option, (ii) within thirty (30) days of delivery of such notice Landlord and Tenant shall have executed a supplement to the Lease, in a form satisfactory to Landlord and Tenant, incorporating Suite 100A into the Leased Premises, and (iii) Landlord shall, within thirty (30) days after execution of such supplement to the Lease to which this Rider is attached, have entered into an agreement pursuant to which the existing tenant of Suite 100A agrees to relocate to other space within the Building. (c) Expansion Right No. 3. Tenant shall have and is hereby granted an option to lease all or any portion of the space in Suites 110 and 240 (the "EXPANSION SPACE NO. 3") as more particularly described on the floor plan attached hereto as Annex 6) for a term to commence on the date the applicable existing tenants vacate all or such portion of Suites 110 and 240, respectively, as the case may be. Tenant's exercise of its option to lease all or any portion of the Expansion Space No. 3 shall be subject to the following terms and conditions: (i) Tenant shall have furnished Landlord written notice exercising such option, (ii) within thirty (30) days after delivery of such notice Landlord and Tenant shall have executed a 56 supplement to the Lease to which this Rider is attached, in a form satisfactory to Landlord and Tenant, incorporating all or such portion of Suite 110 and 240 into the Leased Premises, (iii) Landlord shall, within thirty (30) days after execution of such supplement to the Lease, have entered into an agreement pursuant to which the existing tenants of all or such portion of Suites 110 and 240 agree to relocate to other space within the Building, and (iv) Tenant shall reimburse Landlord for all reasonable costs and expenses (including reasonable attorneys' fees) incurred by Landlord in connection with relocating such tenants to other space within the Building. 4. Landlord shall use commercially reasonable efforts to relocate tenants occupying space subject to any of the rights of opportunity to lease and/or expansion options described in this Rider "2", so as to make such space available for offer to Tenant pursuant to the terms hereof. 5. Definitions. Capitalized terms used in this Rider without definition shall have the definition assigned to such terms in the Lease to which this Rider is attached, unless the context requires otherwise. 6. Full Force and Effect. Except as specifically modified by this Rider, the Lease to which this Rider is attached remains in full force and effect. JN MK - ----------------------------- ---------------------------------- Landlord's Initials Tenant's Initials EX-21 10 MANAGED CARE SOLUTIONS SUBSIDIARIES 1 Exhibit 21 MANAGED CARE SOLUTIONS SUBSIDIARIES
State of Ownership Subsidiary Incorporation % - ---------- ------------- --------- Arizona Health Concepts, Inc. Arizona 100% Managed Care Solutions of Arizona, Inc. Arizona 100% Ventana Health Systems, Inc. Arizona 100% Community Health USA, Inc. Arizona 100% Benova Managed Care Solutions, LLC New York 65%
EX-27 11 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 6-MOS MAY-31-1997 JUN-01-1996 NOV-30-1996 1 6,957,000 2,356,000 6,851,000 1,406,000 0 16,583,000 5,954,000 1,256,000 30,590,000 16,068,000 3,505,000 0 7,000 44,000 10,966,000 30,590,000 35,101,000 35,101,000 0 36,662,000 0 0 131,000 (1,457,000) (50,000) (1,407,000) 0 0 0 (1,407,000) (0.32) (0.32)
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