Exhibit 10.22
AMENDED AND RESTATED
SERVICES AGREEMENT
AMONG
FLAGSHIP HEALTH, P.A.,
FLAGSHIP HEALTH II, P.A.
and
PHYSICIANS QUALITY CARE, INC.
TABLE OF CONTENTS
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Page
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1. APPOINTMENT OF PQC; RETENTION OF CLINICAL AUTHORITY........................1
1.1 Appointment and Authority.............................................1
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1.2 Retention of Authority................................................2
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2. OBLIGATIONS OF MEDICAL GROUP...............................................2
2.1 Physician Personnel...................................................2
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2.2 Credentialing of Medical Group Physicians.............................2
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2.3 Employment and Engagement of Medical Group Physicians.................2
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(a) General..........................................................2
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(b) Pods.............................................................3
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(c) Form of Agreements...............................................3
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(d) Medical Group Physician Qualifications...........................3
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2.4 Licensing and Accreditation...........................................3
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2.5 Supervision and Direction of Clinical Staff...........................4
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2.6 Liability Insurance...................................................4
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2.7 Medical Records.......................................................4
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2.8 Assignment of Intellectual Property...................................5
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3. OBLIGATIONS OF PQC.........................................................5
3.1 General...............................................................5
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3.2 Facilities............................................................5
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3.3 Equipment and Office Furnishings......................................6
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3.4 Personnel and Payroll.................................................6
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3.5 Borrowings............................................................6
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3.6 Supplies and Inventory................................................7
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3.7 Contracts.............................................................7
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3.8 Budgets...............................................................8
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(a) General Preparation Principles...................................8
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(b) Approval of Budgets..............................................8
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(c) Reporting.......................................................10
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3.9 Preparation of Tax Returns...........................................10
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3.10 Charges..............................................................10
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3.11 Billing and Collection...............................................10
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3.12 Payment of Accounts and Indebtedness.................................10
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3.13 Power of Attorney for Billing and Payment of Accounts................11
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3.14 Other Xxxxxxxx and Charges...........................................12
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3.15 Insurance............................................................12
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3.16 Other Administrative Services........................................13
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3.17 Development of Integrated Health Services............................13
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3.18 Advertising and Public Relations.....................................14
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4. MANAGEMENT FEE; FINANCIAL ARRANGEMENTS....................................14
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5. TERM AND TERMINATION......................................................14
5.1 Term.................................................................14
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5.2 Termination on Default...............................................14
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5.3 Effect of Termination................................................15
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6. JOINT POLICY BOARD; CERTAIN PROVISIONS REGARDING GOVERNANCE OF
MEDICAL GROUP.................................................................16
6.1 Joint Policy Board...................................................16
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(a) Representation..................................................16
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(b) Authority and Responsibility....................................17
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(c) ................................................................18
(d) ................................................................19
(e) ................................................................19
(f) Voting; Procedures..............................................20
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6.2 Medical Advisory Board...............................................21
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6.3 The President of Medical Group.......................................21
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6.4 The Medical Director of Medical Group................................23
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6.5 Operating Manager....................................................24
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7. INTELLECTUAL PROPERTY.....................................................24
8. RESTRICTIVE COVENANTS.....................................................24
8.1 Noncompetition.......................................................24
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8.2 Ancillary Enterprise.................................................25
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8.3 Non-solicitation of Employees and Patients...........................25
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8.4 Enforcement of Medical Group Physician Employment Agreements.........25
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8.5 Remedies.............................................................25
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9. MISCELLANEOUS.............................................................26
9.1 Exclusivity..........................................................26
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9.2 Names; Trademarks....................................................26
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9.3 Independent Contractors..............................................26
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9.4 [Reserved]...........................................................26
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9.5 Severability.........................................................26
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9.6 Waiver...............................................................26
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9.7 Notices..............................................................27
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9.8 Entire Agreement.....................................................27
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9.9 Amendment............................................................27
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9.10 Successors and Assigns...............................................27
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9.11 Governing Law........................................................27
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9.12 Headings.............................................................27
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9.13 No Obligation to Third Parties.......................................27
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9.14 Contract Modifications for Prospective Legal Events..................28
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9.15 Availability of Certain Documents....................................28
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9.16 Gender...............................................................29
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APPENDIX A.....................................................................1
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APPENDIX B.....................................................................1
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SCHEDULE B-1...................................................................8
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APPENDIX C.....................................................................1
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APPENDIX D.....................................................................1
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EXHIBIT A......................................................................1
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FLAGSHIP HEALTH, P.A.
FLAGSHIP HEALTH II, P.A.
SERVICES AGREEMENT
This Agreement (this "Agreement") is made as of November 30, 1996, and
amended and restated as of July 31, 1997, by and among Physicians Quality Care,
Inc., a Delaware corporation ("PQC"), Flagship Health II, P.A., a Maryland
Professional corporation ("Flagship II") and Flagship Health, P.A., a Maryland
professional association ("Flagship I" and collectively with Flagship II,
"Medical Group"). (All capitalized terms not defined below in this Agreement
shall have the meanings set forth in Appendix A or B attached hereto.)
WHEREAS, Medical Group has entered into a business arrangement with
PQC in order to help effectuate the parties' mutual vision of establishing a
high quality, competitive, cost-effective health care delivery system, as part
of which Medical Group and PQC will work together to enhance the efficiency of
the business aspects of Medical Group's practice, to promote the quality of care
and patient satisfaction, and to create sufficient economies of scale to permit
Medical Group to undertake risk-based managed care obligations;
WHEREAS, Medical Group engages in the provision of medical and
surgical services through its physicians (each a "Medical Group Physician" and
collectively the "Medical Group Physicians"), who currently practice in a number
of divisions (each a "Pod"), each of which may have one (1) or more Practice
Locations; and
WHEREAS, Medical Group wishes to retain PQC to provide or arrange for
comprehensive management, administrative and other support services to manage
Medical Group and each Pod in order better to serve its patients, enhance
efficiency, and improve financial results of operation of the Medical Group's
activities.
NOW, THEREFORE, in consideration of the mutual covenants and premises
herein contained, the parties hereby agree as follows:
1. APPOINTMENT OF PQC; RETENTION OF CLINICAL AUTHORITY
1.1 Appointment and Authority. Medical Group hereby appoints and
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engages PQC as Medical Group's sole and exclusive business manager and PQC
accepts such appointment and engagement on and subject to the terms and
conditions set forth in this Agreement. Subject to the terms of this Agreement,
including applicable requirements of consultation and prior approval of the
Joint Policy Board, PQC shall have the authority and responsibility to: (i)
manage all business operations of Medical Group in an efficient and cost-
effective manner; (ii) provide or arrange for such services in any manner as
PQC, in the exercise of its reasonable business judgment, deems appropriate to
meet the day-to-day requirements of the business functions of Medical Group; and
(iii) negotiate and execute, on behalf of Medical Group, all contracts that, in
the exercise of PQC's reasonable business judgment, are necessary and
appropriate for the business and affairs of Medical Group, subject, in the case
of Payor Contracts, to the approval of the Joint Policy Board.
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1.2 Retention of Authority. Notwithstanding anything to the contrary
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in this Agreement, Medical Group will have exclusive authority and control over
the provision of medical services, including all diagnoses, treatment and
ethical determinations with respect to patients. All diagnoses, treatments,
procedures and other medical and professional services shall be provided and
performed exclusively by or under the supervision of a physician employed or
otherwise engaged by Medical Group who meets the qualifications set forth in
this Agreement. It is acknowledged that PQC is not authorized nor qualified to
engage in any activity that constitutes the practice of medicine. To the
extent, if any, that any act or service of PQC under this Agreement is
determined to constitute the practice of medicine, the performance of such act
or service by PQC shall be deemed waived and excused by Medical Group.
2. OBLIGATIONS OF MEDICAL GROUP
2.1 Physician Personnel. Medical Group, subject to oversight by the
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Medical Advisory Board, shall be solely responsible for all determinations with
respect to an individual physician concerning the recruitment, hiring,
termination, Credentialing, training and supervision of such physician. PQC
shall not exercise any control over nor have any responsibility for Medical
Group Physicians or other Clinical Staff (as defined in Section 2.5) with
respect to the provision of clinical services.
2.2 Credentialing of Medical Group Physicians. Medical Group,
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through the Medical Advisory Board, shall credential its physicians in
conformity with the requirements imposed under state and federal law and by the
terms of any third party payment agreement to which the Medical Group is bound.
Medical Group shall assure that each Medical Group Physician at all times is:
(i) duly licensed to practice medicine by the applicable state within the
Geographic Area (as defined in Section 10.10 of Appendix A); and (ii) a member
in good standing of the medical staffs of hospitals designated from time to time
by the Joint Policy Board or as may be necessary in connection with the
participation in one (1) or more Payor Contracts negotiated on Medical Group's
behalf by PQC. No physician other than those Medical Group Physicians who meet
the requirements and qualifications of this Agreement, including without
limitation Section 2.3, shall be permitted: (a) to use or occupy the Pod
Practice Locations, except as approved by the Joint Policy Board; or (b) except
as may be required to assure appropriate medical care (e.g., locum tenens
coverage), to render services to patients of Medical Group. New physicians may
be employed by Medical Group, or physician groups or practices may be acquired
by Medical Group, subject to approval of the Joint Policy Board and the Medical
Advisory Board.
2.3 Employment and Engagement of Medical Group Physicians.
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(a) General. During the term of this Agreement, Medical Group,
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through its Pods, shall operate and maintain a full-time
practice of medicine providing primary care, medical and
surgical specialty services and such other services as are
agreed upon by the Joint Policy Board and PQC. Medical
Group shall engage a sufficient number of Medical Group
Physicians to provide services to patients of Medical Group
during the normal office hours of the Practice Locations
and to provide
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after hours coverage for all patients of Medical Group
whether on an inpatient or outpatient basis (it being
agreed that the practice patterns in effect as of the
Effective Date are acceptable to PQC and Medical Group);
provided, however, that a Pod may close its practice to new
patients for such period as the Joint Policy Board and
Medical Advisory Board may determine to be necessary in the
event the Pod has reached capacity.
(b) Pods. Each Medical Group Physician hired or otherwise
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engaged by Medical Group shall be a member of a Pod and
shall provide services at the Practice Locations associated
with that Pod.
(c) Form of Agreements. Medical Group shall maintain
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employment agreements with all Medical Group Physicians
(individually, an "Employment Agreement"). Such Employment
Agreements shall be in substantially the form attached
hereto as Annex A-1 with respect to Medical Group
Physicians who are assigned to a Pod that was created prior
to July 31, 1997 (each a "Founding Pod"), and in
substantially the form attached hereto as Annex A-2 with
respect to Medical Group Physicians who are assigned to a
Pod that is created on or after July 31, 1997 (each an
"Additional Pod"), in each case with such changes as may be
agreed upon by PQC and Medical Group and approved by the
Joint Policy Board. Except as otherwise expressly provided
in this Agreement, Medical Group shall not amend any
Employment Agreements nor waive any rights thereunder
without the prior written approval of PQC. Except as
otherwise expressly provided in this Agreement, Medical
Group shall not offer, agree to or amend any salary,
benefit or other compensation terms with a Medical Group
Physician except as expressly approved by PQC in writing.
(d) Medical Group Physician Qualifications. Medical Group
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shall assure that each Medical Group Physician meets at all
times each of the qualifications set forth in the approved
form of Employment Agreement (subject to any exceptions
that are approved by PQC and the Joint Policy Board in
connection with individual Employment Agreements) and to
any other qualifications reasonably established by the
Medical Advisory Board and PQC. In the event that any
disciplinary, malpractice or other actions are initiated
against any Medical Group Physician, the Medical Group,
through the Medical Advisory Board, shall immediately
inform PQC of such action and shall inform PQC of the
underlying facts and circumstances.
2.4 Licensing and Accreditation. Medical Group, through the Medical
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Advisory Board, shall ensure that all Medical Group Physicians maintain such
licenses and certifications as are reasonably necessary for the provision of
medical services by Medical Group and all Medical Group Physicians in a manner
that complies with all laws and applicable third-party payor requirements.
Medical Group shall obtain and maintain such
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additional licenses and accreditation as the Medical Advisory Board and PQC
mutually determine are advisable. Medical Group shall conduct its medical
practice in compliance with all applicable laws and all applicable contractual
requirements.
2.5 Supervision and Direction of Clinical Staff. (As used in this
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Agreement, the term "Clinical Staff" shall mean nurses and any other non-
physician clinical personnel and shall not include Medical Group Physicians or
any other physician.) Medical Group Physicians shall supervise and direct the
Clinical Staff. Medical Group shall assure that all Clinical Staff members
perform only those duties permitted by applicable law and regulation to be
performed by such personnel, and only under such supervision and in such a
manner as permitted by applicable law and regulation.
2.6 Liability Insurance. Medical Group shall assure that each
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Medical Group Physician maintains in effect a policy of professional liability
insurance in accordance with the Medical Group Physician's employment agreement.
Medical Group shall maintain in effect a policy of comprehensive general
liability and professional liability insurance in the minimum amount of
$1,000,000 per occurrence or claim and $3,000,000 annual aggregate, or such
greater amount as is required by the Joint Policy Board or by law, to cover
Medical Group, Medical Group Physicians and Clinical Staff. In addition,
Medical Group shall maintain in effect (i) comprehensive general liability
insurance with limits and a deductible reasonably determined by PQC and the
Joint Policy Board and (ii) property damage insurance covering all Practice
Locations and equipment with limits and deductibles reasonably determined by PQC
and the Joint Policy Board. Each such policy shall name PQC as an additional
insured. As set forth in Section 3.15, PQC shall be responsible for
administering Medical Group's insurance policies required under this
Section 2.6.
2.7 Medical Records. Medical Group, through its Pods, shall maintain
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and cause each Medical Group Physician to maintain accurate and complete patient
records in accordance with all applicable laws and regulations. Such records
shall be maintained by Medical Group in a manner sufficient to enable PQC, on
behalf of Medical Group, to xxxx and collect for the services provided by
Medical Group and Medical Group Physicians. Subject to the requirements of
applicable law, Medical Group shall permit PQC to access the patient records to
perform its duties under this Agreement, including, without limitation, billing
and collection services. All patient medical records relating to services
rendered by Medical Group and Medical Group Physicians shall be and remain the
property of Medical Group.
Medical Group hereby grants to PQC the exclusive right to develop and
commercialize any statistical data base or other quality assurance, utilization
review or medical management data base or software program derived from Medical
Group's medical records (collectively, "Medical Data") and agrees to include in
all patient consent forms a mutually agreeable provision permitting the
commercialization of such Medical Data; provided, however, that PQC shall in all
events delete or otherwise disguise any patient identifying information such as
the name or street address of a patient and comply with all applicable laws
concerning patient confidentiality. If PQC determines to commercialize any
Medical Data derived solely from medical records of Medical Group, then PQC
shall offer to Medical Group a right of first refusal to participate in the
effort to commercialize such Medical Data on terms consistent with those set
forth in Section 3.17 with respect to the
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development of Integrated Health Services. If PQC determines to commercialize
any Medical Data derived from both Medical Group and other PQC-managed physician
practices, PQC shall offer to Medical Group and the other PQC-managed practices
a right of first refusal to participate in the effort to commercialize such
Medical Data. The terms of such commercialization between PQC, on one hand, and
the Medical Group and the other PQC-managed practices (the "Physicians' Share"),
on the other hand, shall be consistent with those set forth in Section 3.17 with
respect to the development of Integrated Health Services. Prior to entering
into any arrangement to commercialize such Medical Data with the Medical Group
and other PQC-managed practices acting jointly, PQC shall solicit the advice of
the Medical Advisory Board, which may make a recommendation to PQC's National
Medical Advisory Board, concerning an allocation of Physicians' Share of
revenue, expenses, profits and losses from such commercialization between
Medical Group and any other medical group or entity also contributing data,
software or other resources to the commercialization effort. Such allocation
shall be made in a manner that is fair and not inconsistent with PQC's
legitimate business objectives and its obligations to its shareholders. The
recommendation, if any, of the National Medical Advisory Board shall be
considered by PQC in reaching its determination concerning any commercialization
of Medical Data and the allocation of proceeds thereof, but ultimate decision-
making authority with respect to such commercialization and any recommended
allocation of proceeds thereof shall remain exclusively within the discretion of
the Board of Directors of PQC and Medical Group shall have no right to any
allocation of proceeds except and to the extent, if any, authorized by the Board
of Directors of PQC after consultation as set forth in this Section 2.7.
2.8 Assignment of Intellectual Property. Medical Group hereby
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assigns to PQC (i) any Intellectual Property rights that Medical Group acquires
or develops during the term of this Agreement and (ii) agrees to cause each
Medical Group Physician to assign to PQC such Intellectual Property rights as
may be specified in, and subject to the terms of, the applicable employment
agreement, as the case may be.
3. OBLIGATIONS OF PQC
3.1 General. Subject to Medical Group's control of the practice of
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medicine, PQC shall have authority and responsibility to conduct, supervise and
manage the day-to-day business operation of Medical Group and shall be
responsible for providing the services set forth in this Section 3 to Medical
Group. All services, facilities, furniture, fixtures and equipment provided by
PQC under this Agreement shall be in a manner consistent with community
standards for a medical practice of similar size. Notwithstanding anything in
this Agreement to the contrary, the parties realize that development of
appropriate reporting systems for financial and utilization information and
similar tools designed to support the efficient management and development of
Medical Group should be a collaborative process between the parties, and
accordingly the parties agree to work together to develop such tools,
particularly during the initial months following the Effective Date.
3.2 Facilities. PQC shall arrange for Medical Group to use the
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premises at the locations listed on Schedule 2 which may be amended by PQC from
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time to time (collectively, the "Practice Locations"), subject to the terms of
any leases for the premises entered into from time to time by Medical Group or
PQC, as the case may be, and subject to
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approval of the Joint Policy Board. PQC shall provide or arrange for routine
maintenance and cleaning services for the Practice Locations required to cause
the Practice Locations to satisfy the standard set forth in Section 3.1.
3.3 Equipment and Office Furnishings. PQC shall arrange for Medical
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Group to have use of such equipment and office furnishings reasonably deemed
necessary by PQC, in consultation with the Joint Policy Board, for the operation
of Medical Group at each Practice Location (the "Equipment") in a manner
consistent with community standards for a medical practice of similar
characteristics. PQC shall arrange for reasonable and necessary repair and
maintenance of the Equipment. In connection with PQC's obligation hereunder,
Medical Group shall notify PQC immediately upon becoming aware of any Equipment
in need of repair.
3.4 Personnel and Payroll. PQC shall arrange for the provision to
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Medical Group of all administrative personnel deemed necessary by PQC, in
consultation with the Joint Policy Board, for the operation of Medical Group
(the "Administrative Staff"). PQC shall also arrange for the provision to
Medical Group of all Clinical Staff reasonably deemed necessary by PQC, in
consultation with Medical Group and the Joint Policy Board, for the efficient,
professional operation of Medical Group. All members of the Clinical Staff
shall be employees of Medical Group. All members of the Administrative Staff on
the Effective Date shall be employees of Medical Group. Subject to the
provisions of Section 2.5 and this Section and in consultation with Medical
Group and the Joint Policy Board, PQC shall be responsible for recruiting,
hiring, discharging and determining the compensation, benefits and conditions of
employment of the Administrative Staff and Clinical Staff. PQC shall perform
all payroll and payroll accounting transactions for the Administrative Staff,
the Clinical Staff and the Medical Group Physicians. Any member of the
Administrative Staff and Clinical Staff may, upon assignment by PQC following
consultation with the affected Pods, provide services to more than one (1) Pod.
If any Medical Group Physician is dissatisfied with the services of any employee
who provides services for such Medical Group Physician at a Practice Location,
PQC, after consultation with the Joint Policy Board, shall in good faith
determine whether the performance of that employee could be brought to
acceptable levels through counsel and assistance, or whether the employment of
such employee should be terminated. If PQC determines to retain such employee
and the Medical Group Physician is still dissatisfied with such employee's
services after a two (2) month period, PQC shall either relocate such employee
or otherwise cease to use such employee unless PQC reasonably determines that
such termination may expose Medical Group to liability.
3.5 Borrowings.
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(a) All borrowings of Medical Group shall be subject to prior
approval by the Joint Policy Board. Upon receipt of such
approval to borrow funds on behalf of Medical Group, PQC
shall arrange for such borrowing on behalf of Medical Group
on terms approved by the Joint Policy Board pursuant to
Section 6. 1(b)(i) and in accordance with the Practice
Expense definition set forth provisions in Section 10.27 of
Appendix A. In addition to or in lieu of the foregoing, and
subject always to prior
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approval by the Joint Policy Board, PQC may make loans to
Medical Group from time to time to fund capital
expenditures or working capital of the Medical Group, in
each case on such terms and conditions as are agreed upon
by the parties and the Joint Policy Board. The making of
any such loan shall be at the sole discretion of PQC
provided that PQC shall commit to fund loans for working
capital purposes of the Medical Group in an amount
determined from time to time by the Joint Policy Board
which amount shall not exceed $1,000,000.
(b) In the event that during the Fiscal Periods ended December
31, 1997 and December 31, 1998, Medical Group does not
receive distributions with respect to a Founding Pod under
Appendix B hereto equal to the full Baseline Amount (as
defined in Section 10.2 of Appendix A) (minus the amount
necessary to pay all Deductible Expenses) due to (a) a
failure by PQC to assist Medical Group in establishing
additional revenue sources from services other than
professional services so as to increase Practice Revenues,
or (b) such other cause as may be approved by the Joint
Policy Board, PQC shall loan to Medical Group with respect
to the Founding Pods an amount not to exceed an aggregate
of $1,000,000 at any one time outstanding on a non-interest
bearing basis to cover such shortfalls in Baseline Amount,
and in no event shall PQC Direct Expenses be included in
determining whether a shortfall in Baseline Amount exists
(the "Loan"). The Loan shall be carried on the balance
sheet of Medical Group and shall be repaid in successive
Fiscal Periods from the first available dollars of Net
Margin allocable to Medical Group with respect to the
Founding Pods. In the event PQC undertakes a public
offering of securities at any time prior to which the Loan
has been repaid in full, the parties agree to consider in
good faith whether interest on the Loan should be assessed
at a fair market interest rate in order to comply with then
applicable health care laws.
3.6 Supplies and Inventory. PQC shall be responsible for all
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inventory systems of Medical Group at each Practice Location and for the
ordering, purchasing and maintenance of all supplies and inventory necessary for
the operation of Medical Group. All drugs shall be purchased and maintained by
Medical Group or, at PQC's discretion and to the extent consistent with
applicable law, on behalf of Medical Group by PQC.
3.7 Contracts. PQC shall negotiate and administer contracts for
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equipment, materials, supplies and data processing services for the Medical
Group and for each Pod. PQC shall seek, review, evaluate and negotiate Payor
Contracts on behalf of Medical Group. Medical Group agrees to enter into and be
bound by all such Payor Contracts negotiated on its behalf by PQC; provided,
however, that any such Payor Contract must be approved in advance by the Joint
Policy Board in the manner contemplated by Section 6.1. The Payor Contracts
listed on Schedule 3.7 shall be deemed to be approved by the Joint Policy Board.
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If required by applicable law, such contracts will be entered into in the name
of Medical Group. PQC shall arrange for administrative support appropriate to
fulfill reporting requirements under Payor Contracts, such as eligibility
verification and financial and utilization reporting.
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3.8 Budgets.
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(a) General Preparation Principles.
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(i) PQC, acting through the Operating Manager in cooperation with a
Physician representative (the "Representative") of the Pod, shall
have responsibility for the preparation of budgets for each Pod (a
"Pod Budget").
(ii) Each Pod Budget shall consist of an operating budget (revenues and
expenses) and an annual capital expenditures budget, prepared on an
accrual basis of accounting and in conformity with generally accepted
accounting principles.
(iii) PQC shall prepare, with input from the Joint Policy Board, budget
guidelines ("Budget Guidelines") that PQC shall then follow in the
preparation of each Pod Budget. Examples of possible Budget
Guidelines include but are not limited to the following:
(A) each Pod Budget shall be constructed on management
policies that enable the Pod to achieve its financial
goals (profit from operations);
(B) each Pod Budget shall provide specific detail sufficient
for the Pod Physicians and PQC to evaluate and prioritize
changes in programs and capital expenditures;
(C) each Pod Budget period shall be for a twelve (12) month
period ending December 31 or, for the initial Pod Budget
for each newly formed Pod, such shorter period ending
December 31 as is appropriate; and
(D) each Pod Budget shall be prepared on a pre-physician
compensation, pre-management fee and pre-tax basis.
(iv) PQC shall prepare the initial Pod Budgets for each Pod using
available historical financial information. PQC shall follow the
Budget Guidelines and identify budget preparation assumptions that
deviate from the acquired medical group's historical financial
information. Subsequent Pod Budgets shall be prepared in a similar
manner by PQC (on the basis of the prior year's results) and take
into account deviations from the Pod Budget that occurred in the
prior year.
(b) Approval of Budgets. The Joint Policy Board shall have the
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responsibility for and authority to approve each Pod Budget. PQC
shall submit each Pod Budget to the Joint Policy Board for approval
on a timely basis. Once approved in accordance with this Section
3.8(b),
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all of PQC, Pod and Pod Physicians shall be bound by the terms of the
approved Pod Budget for the following twelve (12) month period or
such lesser period as may be provided for in the Budget Guidelines,
subject only to any modifications suggested by PQC and/or Pod
Physicians and approved by the Joint Policy Board. At any point
during a Fiscal Period, including for example if the actual Physician
Pod Practice Revenues less actual Physician Pod Practice Expenses is
below budgeted levels for such Physician Pod or if there is an actual
or projected negative Net Margin the Joint Policy Board may review
the budgets for such Physician Pod and make such changes to such
budgets, including the aggregate Pod Distributions (as defined in
Section 3 of Appendix A to the Employment Agreements), as the Joint
Policy Board deems to be appropriate. All capital and operating
budgets, and changes thereto, also shall be subject to the approval
of PQC. The Joint Policy Board shall not unreasonably withhold its
approval of a Pod Budget but if such approval is not forthcoming, the
following process shall prevail so that the Pod may remain open to
treat patients:
(i) If, prior to the commencement of any budget period, the Joint Policy
Board has not yet approved the Pod Budget, then PQC and Medical Group
will work diligently in good faith to obtain such approval. Until
such approval is obtained, the following procedures shall apply:
(A) as to any disputed line items, the immediately preceding
budget period's Pod Budget shall be controlling until such
time, if any, as agreement is reached on the amounts to be
allocated to such disputed line items, except that:
(1) non-recurring extraordinary items shall not be
continued from the Pod Budget for the immediately
preceding budget period;
(2) if items such as lease payments or payroll taxes are
subject to an automatic increase, such increases
shall be effective at the increased rate; and
(3) for items such as personnel salaries, the total
salary number shall be adjusted to take into account
changes in the number and classifications of
personnel members employed or contracted; and
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(B) as to any line items which are not in dispute, the
new Pod Budget submitted by PQC shall be effective
for the new budget period.
(c) Reporting. PQC shall establish and administer the accounting
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procedures and control for Medical Group and the Pods in
accordance with generally accepted accounting principles. PQC
shall have the responsibility to prepare and submit to each Pod
and to the Joint Policy Board as soon as practicable after the
end of each month, but in any event within forty-five (45) days
of the end of each month, management reports designed to convey
Pod and Medical Group financial performance for the month and
on a year-to-year basis. PQC shall design the management
reports to highlight actual financial performance and actual to
budget variances in the Pod's financial performance.
Additionally, PQC shall from time to time attempt to identify,
discuss with the Joint Policy Board and implement appropriate
management intervention to counter adverse financial trends.
3.9 Preparation of Tax Returns. PQC shall prepare any and all
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required tax returns of Medical Group but shall not have responsibility for
preparation of individual tax returns or other tax returns (e.g., IRS forms W-
2s, 5500s, etc.) for any Medical Group Physician or for any entity of which such
Medical Group Physician was a shareholder, partner, member, or employee prior to
the date of execution of this Agreement.
3.10 Charges. PQC shall advise Medical Group on the establishment,
-------
maintenance and revision of a schedule of charges for physician services,
ancillary services, supplies, medication and all other services rendered by
Medical Group through each Pod. Revisions to the fee schedule of a Pod must be
approved by the Joint Policy Board.
3.11 Billing and Collection. PQC shall provide or arrange for such
----------------------
billing and collection services as are reasonably necessary to attempt to
collect in a timely manner all Practice Revenues, including without limitation
all allowable charges resulting from Medical Group's provision of all billable
items and services.
3.12 Payment of Accounts and Indebtedness.
------------------------------------
(a) PQC shall review the payables of Medical Group and shall cause
payment of any undisputed amounts thereof to be made out of the
funds of Medical Group. In addition to billing, collecting and
payment services, PQC shall manage the cash and cash equivalents
of Medical Group.
(b) All Practice Revenues shall be deposited in one or more bank
accounts maintained in the name of and owned by Medical Group
(collectively, the "Medical Group Account") but managed solely
by PQC in accordance with the terms of this Agreement and the
applicable Pod's budgets. A separate Medical Group Account shall
be established for
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the Founding Pods (the "Founding Pod Medical Group Account") and
the Additional Pods (the "Additional Pod Medical Group
Account"). The bank in which the Medical Group Account is
maintained shall be federally insured and shall be selected by
PQC subject to approval by the Joint Policy Board. A
representative of PQC shall be the authorized signatory for the
Medical Group Account. Medical Group hereby appoints the Medical
Group Shareholder as an additional authorized signatory for the
Medical Group Account. Medical Group covenants that it will not
permit any funds to be withdrawn from the Medical Group Account
except as authorized by PQC in accordance with the terms of this
Agreement.
3.13 Power of Attorney for Billing and Payment of Accounts. Medical
-----------------------------------------------------
Group hereby exclusively authorizes PQC to take the following actions for and on
behalf of and in the name of Medical Group throughout the term of this Agreement
and thereafter in accordance with Section 5:
(a) xxxx, in Medical Group's name, under its provider number
when obtained and on its behalf, and until such time as
Medical Group has obtained its provider number, xxxx, in
the Medical Group Physicians, names under their respective
provider numbers and on their behalf, all claims (including
co-payments due from patients) for reimbursement or
indemnification from all other Payors, fiscal
intermediaries or patients for all covered items and
services provided by Medical Group or by the Medical Group
Physicians to patients;
(b) take possession of and endorse in the name of the Medical
Group Physicians or Medical Group, all cash, notes, checks,
money orders, insurance payments, and any other instruments
received as payment of accounts receivable (and Medical
Group will cause an individual Medical Group Physician who
receives any payments for the benefit of Medical Group
directly, to deliver such amounts promptly to PQC for
deposit in the Founding Pod Medical Group Account or the
Additional PQC Medical Group Account, as the case may be,
and Medical Group covenants to transfer and deliver
promptly to PQC for deposit in the applicable Medical Group
Account, all funds received by Medical Group from patients
or Payors for medical services), all such funds to be
deposited directly into a Medical Group Account and to be
applied in a manner consistent with this Agreement;
(c) deposit all collections directly into the applicable
Medical Group Account and to make withdrawals from such
Medical Group Account for such purposes as are permitted by
this Agreement;
(d) in Medical Group's name and on its behalf, and in the
Medical Group Physicians' names and on behalf of each of
them, as necessary, collect and receive all accounts
receivable generated by such xxxxxxxx and
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claims for reimbursement, place such accounts for
collection, settle and compromise claims and institute
legal action for the recovery of accounts (it being agreed
that Medical Group shall write-off amounts of uncollected
xxxxxxxx at the request of a Medical Group Physician to the
extent contemplated in the Employment Agreement); Medical
Group shall cooperate fully with PQC in facilitating such
collections and in collecting accounts receivable
transferred to PQC for deposit in the Medical Group Account
by Medical Group, including endorsement of checks and
delivery to PQC of all revenues in whatever form, received
from patients or Payors on their behalf, and completion of
all forms necessary for the collection of said monies; and
(e) sign checks on behalf of Medical Group and make withdrawals
from the Medical Group Accounts for payments specified in
this Agreement and as requested from time to time by
Medical Group.
In addition to the foregoing, Medical Group, to the extent not
prohibited by law, hereby grants to PQC an exclusive power of attorney and
appoints PQC its exclusive true and lawful attorney in fact to take each of the
actions specified in Sections (a) through (e) above for and on behalf of and in
the name of Medical Group throughout the term of this Agreement and thereafter
in accordance with Section 5.
Upon request of PQC, Medical Group shall, and shall cause each of the
Medical Group Physicians to, execute and deliver to PQC and to each financial
institution wherein Medical Group or PQC maintains an account, such additional
documents or instruments (including one (1) or more powers of attorney naming
PQC as its or their, as the case may be, exclusive true and lawful attorney in
fact) as may be necessary or desirable to evidence or effect the authority or
the power of attorney or both granted to PQC pursuant to this Section.
3.14 Other Xxxxxxxx and Charges. PQC shall serve as Medical Group's
--------------------------
exclusive billing agent. Medical Group covenants that neither it nor any
Medical Group Physician shall xxxx or submit a statement of charges to, or enter
into any agreement or, except in the event of an emergency, any undertaking
with, any patient, third person or entity for the provision of items and
services (with or without consideration), nor shall it make any surcharge for
care without the prior written authorization and approval of PQC.
3.15 Insurance. PQC, on behalf of Medical Group, shall negotiate,
---------
obtain, and maintain with such licensed insurance companies as are reasonably
acceptable to the Joint Policy Board the policies of general liability, fire and
property insurance that satisfy the requirements of Section 2.6. PQC shall
furnish certificates of insurance to Medical Group evidencing the coverage set
forth in this section upon request by Medical Group. Subject to approval by the
Joint Policy Board, PQC may arrange for a group professional liability insurance
policy covering Medical Group Physicians that would satisfy Medical Group's
obligations under 2.6. The liability insurance coverage maintained as of the
date of this Agreement by PQC with respect to its own operations is set forth on
Schedule 3.15. PQC shall advise the Joint Policy Board of any material decrease
-------- ----
in the amount or scope of such insurance coverage.
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3.16 Other Administrative Services. In addition to the business and
-----------------------------
administrative services specifically described above in this Section 3, PQC
shall be responsible for providing all other administrative services necessary
to the business operations of Medical Group, including without limitation human
resource services, administrative support for Medical Group's recruitment
efforts, management information systems (including development on a uniform data
base across all Pods), accounting services and systems, and advertising, sales
and marketing services.
3.17 Development of Integrated Health Services. Neither PQC nor any
-----------------------------------------
Affiliate shall provide Integrated Health Services in the Geographic Area unless
PQC gives Medical Group the option to be the exclusive provider of these
services, as provided in this Section. To that end, if PQC or one (1) of its
Affiliates proposes to provide any Integrated Health Service in the Geographic
Area, PQC shall notify Medical Group and the Joint Policy Board of the nature of
the service and the terms upon which PQC or its Affiliate proposes to provide
the service, and the Joint Policy Board, on behalf of Medical Group, shall have
forty-five (45) days during which to elect to participate in the provision of
such Integrated Health Service in the Geographic Area on such terms as are
mutually acceptable to the Joint Policy Board and PQC. Any such proposal shall
specify the proposed manner in which the net revenues (meaning all receipts from
such Integrated Health Services less all expenses attributable to such
Integrated Health Services, determined in accordance with generally accepted
accounting principles) shall be allocated between Medical Group and PQC, but to
the extent permitted by law in any event such proposal shall offer to Medical
Group the right to receive an allocation to the Variable Distribution Pool (as
defined in the Employment Agreements) of at least fifty percent (50%) of the net
revenues attributable to such Integrated Health Service provided that as a
condition thereof Medical Group shall agree that a percentage of any net loss
attributable to such Integrated Health Service equal to the percentage of net
revenues attributable to such Integrated Health Service shall be offset against
amounts otherwise allocable to Medical Group under Appendix B in any one (1) or
more Fiscal Periods thereafter occurring. PQC agrees to use its reasonable
efforts to structure any proposal for the provision of Integrated Health
Services in the Geographic Region in a manner so that the allocation to Medical
Group contemplated by the forgoing sentence is in accordance with applicable
law. Medical Group shall not agree to participate in any Integrated Health
Service or fail to elect to participate in such Integrated Health Service except
as approved by and on such terms as have been approved by the Joint Policy
Board. If Medical Group does not elect to participate in such Integrated Health
Service in the Geographic Area within such forty-five (45) day period, PQC may,
but shall not be obligated to, provide such Integrated Health Service directly
or through another Affiliate or subsidiary (but in no event through or with any
outside third party without the prior consent of the Joint Policy Board) and
Medical Group shall have no right to participate in the revenues or income from
such Integrated Health Service; provided, however, that PQC shall not directly
-------- -------
or indirectly provide such Integrated Health Service if within such forty-five
(45) day period the Medical Advisory Board reasonably determines and notifies
PQC that the provision of such services have not been determined to be
clinically efficacious, are clinically dangerous, or would otherwise adversely
affect the reputation of PQC and/or Medical Group as to quality of care and;
provided, further, that PQC shall not directly or indirectly provide any
-------- -------
Integrated Health Services in the Geographic Area if all of the PQC
Representatives on the
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Joint Policy Board voted against Medical Group participating in such Integrated
Health Service.
3.18 Advertising and Public Relations. PQC shall design and
--------------------------------
implement local public relations and advertising programs, subject to approval
by the Joint Policy Board. In the event that there is any adverse incident
involving Medical Group or any Medical Group Physician or patient, any public
statement and announcement by or on behalf of Medical Group or any Medical Group
Physician shall be approved in advance by PQC.
4. MANAGEMENT FEE; FINANCIAL ARRANGEMENTS
In consideration for the services furnished by PQC to Medical Group
under this Agreement and in order to encourage the cost-effective management of
the Medical Group, PQC shall be entitled to receive, and Medical Group hereby
agrees to pay PQC, an aggregate management fee calculated under the formulas set
forth in Appendix B-1 with respect to the Founding Pods and B-2 with respect to
the Additional Pods hereto.
5. TERM AND TERMINATION
5.1 Term. The term of this Agreement shall commence on the date
----
first written above and shall continue until the date forty (40) years
thereafter, unless terminated earlier in accordance with this Agreement. After
the expiration of the initial forty (40) year term, this Agreement shall
automatically renew for successive forty (40) year terms unless sooner
terminated in accordance with the provisions hereof.
5.2 Termination on Default.
----------------------
(a) Either party shall be entitled to terminate this Agreement
if the other party fails to perform in any material respect
any material obligation required of it hereunder, and such
default continues for sixty (60) days after the giving of
written notice by the nondefaulting party, specifying the
nature and extent of such default; provided, however, that
-------- -------
the non-defaulting party shall not be entitled to terminate
this Agreement if the defaulting party commences the cure of
such default within the first sixty (60) day period and
thereafter diligently and in good faith continues to cure
such default until completion.
(b) Termination at election of PQC. PQC shall be entitled to
terminate this Agreement upon written notice to Medical
Group if:
(i) a law firm with a nationally recognized expertise in health
care law and acceptable to PQC and the Joint Policy Board
renders an opinion to PQC, with a copy provided to the Joint
Policy Board, stating that a material provision of this
Agreement is in violation of applicable law, and the parties
do not agree to amend this Agreement pursuant to Section
9.14 hereof to cure such violation; or
-14-
(ii) any court or regulatory agency enters an order finding a
material provision of this Agreement is in violation of
applicable laws and the parties do not agree to amend this
Agreement pursuant to Section 9.14 hereof to cure such
violation; or
(iii) PQC is prevented by Medical Group or any person under the
Medical Group's direction or control, from entering any
material portion of the Pod Practice Locations considered on
any aggregate basis, and such inability to enter such
premises continues for more than forty-eight (48) hours
after notice thereof to the Joint Policy Board.
(c) Termination by Medical Group. Notwithstanding Section
5.2(a), Medical Group may terminate this Agreement (if and
only if such termination has been approved by the Joint
Policy Board) for the reasons set forth below:
(i) upon written notice to PQC of the failure of PQC to remit
any funds or make any payments required under this Agreement
when due and continued failure to remit those funds or make
the payment after thirty (30) days notice of such failure to
PQC unless the amount of such payment is being contested in
good faith; or
(ii) a law firm with a nationally recognized expertise in health
care law and acceptable to PQC and the Joint Policy Board
renders an opinion to the Medical Group, with a copy
provided to the Joint Policy Board, stating that a material
provision of this Agreement is in violation of applicable
law, and the parties do not agree to amend this Agreement
pursuant to Section 9.14 hereof to cure such violation; or
(iii) any court or regulatory agency enters an order finding a
material provision of this Agreement is in violation of
applicable laws, and the parties do not agree to amend this
Agreement pursuant to Section 9.14 hereof to cure such
violation.
Medical Group shall take appropriate action to terminate this
Agreement pursuant to this Section (c) if recommended by the Joint
Policy Board.
5.3 Effect of Termination. Upon termination of this Agreement pursuant
---------------------
to this Section 5:
(a) PQC and Medical Group shall cooperate and continue to perform
their obligations under this Agreement as may be necessary to
ensure the provision of proper care to patients under
treatment, consistent with applicable law concerning
continuation of benefits under Payor Contracts, until
appropriate alternative arrangements are made.
-15-
(b) Medical Group and PQC shall cooperate to ensure the
appropriate billing and collection for all health care items
and services provided by Medical Group prior to the effective
date of termination, and any proceeds of such xxxxxxxx or
collections shall be retained by Medical Group and/or paid to
PQC in accordance with the terms of this Agreement.
(c) Any amounts due and owing to PQC under any loan to Medical
Group shall become immediately due and payable, subject to
offset for amounts owed hereunder by PQC to Medical Group.
(d) Medical Group shall reimburse PQC for all drug and
pharmaceutical inventory retained by Medical Group following
termination to the full extent of funds advanced by PQC for
the purchase of such inventory pursuant to Section 3.6.
(e) Provisions of this Agreement shall survive any termination if
so provided herein or if necessary or desirable fully to
accomplish the purposes of such provision.
(f) PQC shall use its reasonable efforts to have Medical Group
continue to participate in any Payor Contracts with respect to
which PQC and not Medical Group is the contracting party.
6. JOINT POLICY BOARD; CERTAIN PROVISIONS REGARDING GOVERNANCE OF MEDICAL
GROUP
6.1 Joint Policy Board. Medical Group and PQC shall establish and
------------------
maintain the Joint Policy Board, which shall have the representation,
responsibility and authority described below.
(a) Representation. For purposes of this Agreement, "Physician
--------------
Members" means only those Medical Group Physicians whose
Employment Agreement permits them to share in Net Revenues as
provided in Appendix B-1 or B-2 and, for purposes of this
Section 6.1, such other non-physician healthcare providers
that are employees of Medical Group as the Joint Policy Board
shall designate from time to time. The Joint Policy Board
shall consist of nine (9) individuals: four (4) elected by
plurality vote of the Physician Members (the "Medical Group
Representatives"), at least one of whom must be a primary
care physician and at least one of whom shall be a
specialist; four (4) appointed by PQC (the "PQC
Representatives"), and the President of Medical Group (who
shall serve ex-officio with vote). Each Medical Group
Representative shall be a physician selected until June 30,
2000 for a one year term and thereafter for a three (3) year
term by Physician Members; provided, however, that new
members of the Joint Policy Board shall be selected as of
July 31, 1997 (the "Effective Date"); that
-16-
with respect to the 12 month period ending on the first
anniversary of the Effective Date two (2) of the Medical
Group Representatives shall be selected by the Founding Pods
and two (2) of the Medical Group Representatives shall be
selected by the Additional Pods; that with respect to the
next succeeding twelve month period, the Medical Group
Representatives shall include at least two (2) Physician
Member assigned to a Founding Pod and at least two (2)
Physician Member assigned to an Additional Pod and, in each
case, selected by the Physician Members of the Founding and
Additional Pods voting as a single group; and that with
respect to any period beginning on or after the second
anniversary of the Effective Date, the Medical Group
Representatives shall be any Physician Member meeting the
above criteria selected by the Founding and Additional Pods
voting as a single group. Each Medical Group Representative
may serve an unlimited number of terms and shall serve until
a successor is selected. The PQC Representatives shall be
appointed from time to time by PQC and shall include the
chief operating officer of Medical Group. The Medical Group
Representatives shall select, from among the physicians who
are members of the Joint Policy Board, the Chair of the Joint
Policy Board. The Medical Director shall be provided with
notice of and shall be entitled to attend meetings of the
Joint Policy Board but shall not be entitled, unless the
Medical Director is also a Medical Group Representative or a
PQC Representative, to vote on any matter before the Joint
Policy Board.
(b) Authority and Responsibility. The Joint Policy Board shall be
----------------------------
responsible for periodically reviewing and making any
appropriate recommendations to PQC and the Board of Directors
of Medical Group regarding the operations of Medical Group,
and, to the extent expressly provided in this Agreement,
shall have the right to approve certain decisions by Medical
Group and PQC. Any amendment of this Agreement that would
limit or otherwise materially diminish the authority or
responsibility of the Joint Policy Board, including without
limitation any changes to this Section 6 or Appendices B-1 or
B-2, shall require the prior approval of the Joint Policy
Board. In addition, the following actions shall require the
affirmative vote of a majority of the members of the Joint
Policy Board:
(i) approval of all budgets and borrowings pursuant to Section
6.1;
(ii) approval of the number and type of physicians required for
the efficient operation of Medical Group;
(iii) review and approval of all advertising and other marketing of
the services performed by Medical Group;
-17-
(iv) approval of Integrated Health Services and the scope of
those services to be provided by Medical Group as
contemplated by Section 3.17;
(v) approval of the formation, maintenance and/or termination of
relationships with institutional health care providers and
payors, including Payor Contracts in accordance with Section
3.7;
(vi) approval of all contracts material to Medical Group,
including all amendments to real property leases in effect
as of the date of this Agreement, and all the terms of and
amendments to real property leases entered into after such
date governing the space utilized by any Medical Group
Physician;
(vii) consideration and determination of non-clinical matters
raised by Medical Group Physicians;
(viii) approval of fee schedules and charges;
(ix) approval of business and strategic plans;
(x) approval of the Operating Manager;
(xi) approval of Medical Group's termination of a Medical Group
Physician on the basis of disability;
(xii) approval of any change in the Baseline Amount (as defined in
Section 10.2) to reflect the addition or termination of
Medical Group Physicians; and
(xiii) approval of the modification or waiver of the restrictive
covenants applicable to any Medical Group Physician.
The Joint Policy Board may consult with Medical Group, PQC and any
Medical Group Physician before taking any action specified in this Section
6.1(b), but, except as otherwise provided in this Agreement, neither the
recommendations of Medical Group, PQC nor any Medical Group Physician shall be
binding on the Joint Policy Board. Any determination of the Joint Policy Board
pursuant to (i), (ii), (iii), (iv), (v), (vi), (xii) and (xiii) shall not be
effective unless approved by the Medical Group Shareholder.
(c) Certain Matters Requiring Supermajority Approval.
------------------------------------------------
Notwithstanding anything in Section 6.1(b) to the contrary,
approval of any action with respect to the following matters
shall require the approval of two thirds of the members of
the Joint Policy Board (including during the first two years
after the Effective Date at least one (1) Medical Group
Representative from a Founding Pod and at least (1) Medical
Group Representative from an Additional Pod and thereafter,
at least one Physician Representative):
-18-
(i) changes in existing physician practice patterns;
(ii) any reimbursement contract providing for compensation to
Medical Group at below market rates;
(iii) the addition of new physicians; and
(iv) any significant budgetary changes or any material changes
in the governance or financial provisions of this Agreement
following a Change in Control Transaction.
(d) Certain Matters Regarding Medical Advisory Board Recommendation.
---------------------------------------------------------------
Notwithstanding anything in this Section 6.1 to the contrary, the
Joint Policy Board shall not be authorized to take any action with
respect to the following matters unless requested by the Medical
Advisory Board:
(i) referrals of patients' accounts to collection agencies and
development and execution of courtesy and write-off
policies;
(ii) technical procedures pursued by a Medical Group Physician
(as long as appropriate credential requirements are
satisfied);
(iii) non-monetary aspects of quality assurances and
credentialing decisions, including dismissal for quality
assurance reasons of any healthcare professional; and
(iv) the determination for quality assurance or credentialing
reasons to terminate any Employment Agreement in the form
attached hereto as Exhibit A-2 pursuant to Sections
8(c)(i), (B), (C), (D), (E), (F), (G), (K) or (L) of such
Employment Agreement; provided, however, that a
determination that termination of an Employment Agreement
pursuant to Sections 8(c)(i)(C), (F), (G), (K) or (L) of
such Employment Agreement is in the best interests of
Medical Group for any other reason, including the
reputation, financial results or financial condition of
Medical Group, may be made by the Joint Policy Board
without recommendation by the Medical Advisory Board.
(e) Medical Advisory Board Recommendations Regarding New Physicians.
---------------------------------------------------------------
(i) Notwithstanding anything in this Section 6.1 to the contrary,
the Joint Policy Board shall not authorize the employment of any
additional physicians (other than in connection with the merger of
a physician group into Medical Group) unless the Joint Policy Board
shall have sought the recommendation of the Medical Advisory Board
whether the addition of such physicians is advisable on the basis
of the reputation and ability of the proposed physician and the
compatibility of such physician with the existing Medical Group
Physicians with the same
-19-
area of practice. In making its recommendation to the Joint Policy
Board, the Medical Advisory Board shall consult with Medical Group
Physicians in similar practice areas as the proposed additional
physician. If the Medical Advisory Board recommends the physician,
the Joint Policy Board shall be free to approve an Employment
Agreement with such physician. If the Medical Advisory Board
recommends that a physician not be approved by the Joint Policy
Board, the Medical Advisory Board must recommend to the Joint
Policy Board, within six months of the initial request by the Joint
Policy Board, another physician with the same speciality or
practice area and whose Baseline Net Adjusted Xxxxxxxx would be
comparable to the physician proposed by the Joint Policy Board who
is prepared to become a Medical Group Physician. The Medical
Advisory Board shall act expeditiously in considering whether to
recommend any physician to the Joint Policy Board. If the Medical
Advisory Board fails to make such a recommendation within the six
month period, the Joint Policy Board shall be free to offer
employment to the physician originally proposed to the Medical
Advisory Board if Medical Advisory Board recommended against such
physician on the basis of lack of compatibility with existing
Medical Group Physicians or the Medical Advisory Board made no
determination.
(ii) Notwithstanding anything in this Section 6.1 to the contrary,
the Joint Policy Board shall not authorize the employment of any additional
physicians in connection with the merger of a physician group into Medical
Group unless the Joint Policy Board shall have sought the recommendation of
the Medical Advisory Board whether the addition of such physicians is
advisable on the basis of the reputation and ability of the proposed
physician(s) and the compatibility of such physician(s) with the existing
Medical Group Physicians with the same area of practice. The Medical
Advisory Board must make a recommendation to approve or reject the
employment of such physician(s) within 30 days of being advised of the
proposed transaction. In reaching its recommendation, the Medical Advisory
Board shall only consider the reputation and ability of the proposed
physicians and the compatibility of such physicians with the existing
Medical Group Physicians with the same area of practice. The Medical
Advisory Board may consult with Medical Group Physicians in similar
practice areas as the proposed additional physician. If the Medical
Advisory Board recommends the physician(s) or fails to make a
recommendation with the thirty-day period, the Joint Policy Board shall be
free to approve Employment Agreement(s) with such physician(s).
(f) Voting; Procedures.
------------------
(i) Each Medical Group Representative shall have one (1) vote and
shall have the right to grant his proxy to another Medical Group
Representative. Each of the PQC Representatives and the President
of Medical Group shall have one (1) vote and shall
-20-
have the right to grant his proxy to another member of the Joint
Policy Board. Except as provided in clause (c)(ii) below, no
action of the Joint Policy Board shall be effective unless
authorized by a majority (or, in the case of matters set forth in
Sections 6.1(c), by two-thirds) of the members of the Joint
Policy Board. A quorum of the Joint Policy Board shall consist of
at least three (3) Medical Group Representatives and three (3)
PQC Representatives, present in person or by proxy; provided,
however, that if a meeting is called and a quorum cannot be
obtained within thirty (30) days of notice of such meeting, then
the quorum requirement shall be automatically reduced for the
first meeting thereafter to a majority of the members of the
Joint Policy Board, present in person or by proxy.
(ii) The Joint Policy Board shall meet from time to time when a
meeting is called by the chair or by three (3) or more members of
the Joint Policy Board upon at least five (5) days' written
notice to the other members of the Joint Policy Board, which
notice requirement may be waived with respect to any member of
the Joint Policy Board by the attendance at such meeting. The
Joint Policy Board may also hold meetings by telephone or act by
written consent according to procedures established by the Joint
Policy Board. Minutes shall be kept of all formal actions taken
by the Joint Policy Board. The Joint Policy Board may appoint a
secretary who is not a member of the Joint Policy Board.
6.2 Medical Advisory Board. A Medical Advisory Board shall be
----------------------
established, which shall be responsible for: (i) providing medical advice to
Medical Group on managed care contracting, including oversight of all
utilization review, risk management, and peer review functions required by any
Payor Contract; (ii) developing and disseminating, subject to Medical Group's
approval, medical protocols and quality and outcome measures for Medical Group
and the Physicians; (iii) advising Medical Group with respect to the number and
qualifications of physicians required for the efficient operation of Medical
Group's practice; (iv) overseeing the recruitment by Medical Group and
credentialing of new physicians; and (v) whether to recommend that the Joint
Policy Board consider the matters set forth in Section 6.1(d). The Medical
Advisory Board shall consist of seven (7) members. The members of the Medical
Advisory Board shall be the Medical Director of Medical Group and six (6) other
licensed physicians elected by a plurality vote of the Physician Members, of
whom three (3) shall be primary care physicians and three (3) shall be engaged
in a specialist practice. The Medical Director of Medical Group shall act as
chair of the Medical Advisory Board.
6.3 The President of Medical Group.
------------------------------
(a) Medical Group shall appoint, in the manner set forth in (b)
below, a physician to act as President of Medical Group who shall
work in
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conjunction with PQC in order to implement the policies
established by the Joint Policy Board. Such individual shall also
be an employee of PQC. Subject to the direction and supervision
of the Medical Group Shareholder, the duties of the President
shall include, without limitation:
(i) interfacing with representatives from the national corporate
offices of PQC;
(ii) implementing the business and strategic plans of Medical Group
and overseeing the business operation of Medical Group; and
(iii) working with PQC representatives in negotiating and interfacing
with Payors and other regulatory agencies.
The Medical Group Shareholder shall determine the salary and fringe
benefits of the President.
(b) Subject to the By-Laws of Medical Group (which shall not be
amended to reduce the rights of the Medical Group Physicians
under this section without the prior consent of a majority of the
Physician Members), the Physician Members shall nominate by
plurality vote three (3) candidates, who shall be Physician
Members, for the position of President, and the Medical Group
Shareholder shall select one (1) candidate from among such
nominees to be President. In the event that there is a vacancy in
the position of President at any time for any reason, the Medical
Group Shareholder shall have the authority to appoint a person to
serve as interim President until another person is duly appointed
in accordance with the above specified procedures. The President
shall serve part-time in this capacity until such time as his
responsibilities warrant full-time employment status.
Notwithstanding the foregoing, the President shall be a Medical
Group Physician active in the practice of medicine, until such
time as the President's responsibilities warrant full-time
employment status with the Medical Group. Medical Group may
remove the President at any time in the event that the employment
agreement between the President and PQC is terminated, but in
such event the position of President may be filled by Medical
Group Shareholder for an interim period only until a successor to
the position of President has been appointed in accordance with
the provisions of this Section 6.3(b). Medical Group shall assist
in the development of procedures for the nomination, appointment
and replacement of the President in such a manner as to ensure a
smooth transition period in the medical practice of any
individual who assumes the position of the President.
-22-
6.4 The Medical Director of Medical Group.
-------------------------------------
(a) Medical Group shall hire and appoint a physician to act as Medical
Director to provide guidance and advice to Medical Group on clinical
issues. The duties of the Medical Director shall include, without
limitation:
(i) interfacing with the National Medical Advisory Board of PQC and
representing Medical Group on the PQC National Medical Advisory Board;
(ii) chairing the Medical Advisory Board;
(iii) providing medical advice on managed care contracting by Medical Group;
(iv) leading the development and dissemination of medical protocols, quality
and outcome measures; and
(v) overseeing the recruitment and credentialing of new physicians.
The Medical Group Shareholder shall determine the salary and fringe benefits of
the Medical Director.
(b) Subject to the By-Laws of Medical Group (which shall not be amended to
reduce the rights of the Medical Group under this Section without the
prior consent of a majority of Physician Members), the Physician Members
shall nominate by plurality vote three (3) candidates who shall be
Physician Members for the position of Medical Director, and the Medical
Group Shareholder shall select one (1) candidate from among such nominees
to be Medical Director. In the event that there is a vacancy in the
position of Medical Director at any time for any reason, the Medical
Group Shareholder shall have the authority to appoint a person to serve
as interim Medical Director until another person is duly appointed in
accordance with the above specified procedures. The Medical Director
shall serve part-time in this capacity until such time as his
responsibilities warrant full-time employment status. Notwithstanding the
foregoing, the Medical Director shall be a Medical Group Physician active
in the practice of medicine, until such time as the Medical Director's
responsibilities warrant full-time employment status with the Medical
Group. Medical Group shall assist in the development of procedures for
the nomination, appointment and replacement for the Medical Director in
such a manner as to ensure a smooth transition period in the medical
practice of any individual who assumes the position of the Medical
Director. The Physician Members shall have the right to remove the
Medical Director upon a two-thirds (2/3) vote of all Physician Members,
but in such event the position of
-23-
Medical Director may be filled only in accordance with the provisions of
this Section 6.4(b).
6.5 Operating Manager. Subject to the reasonable approval of the Joint
-----------------
Policy Board, PQC shall retain a full-time non-physician employee to serve as an
operating manager (the "Operating Manager"). The Operating Manager shall manage
and administer all of the day-to~day business transactions necessary for the
operation of Medical Group. PQC shall determine the salary and fringe benefits
of the Operating Manager, who shall be an employee of PQC. At the direction,
supervision and control of PQC, the Operating Manager shall implement the
policies established by Medical Group and the Joint Policy Board and shall
generally perform the duties and have the responsibilities of an administrator.
7. INTELLECTUAL PROPERTY
Medical Group acknowledges that PQC will continually develop Intellectual
Property and that Medical Group may have access to and use Intellectual Property
during the term of this Agreement. Medical Group agrees that, except as
required for the proper operation of the medical practice in accordance with
applicable law and the terms of this Agreement, it will not, directly or
indirectly, use or disclose any Intellectual Property. Medical Group
understands and agrees that this restriction will continue to apply after the
termination of this Agreement for any reason.
Medical Group agrees that all Intellectual Property to which it has access
as a result of its relationship with PQC under this Agreement is and shall
remain the sole and exclusive property of PQC. Except as required for the
proper operation of the medical practice in accordance with applicable law and
the terms of this Agreement, Medical Group will not copy any documents, tapes or
other media containing Intellectual Property ("Documents"). Medical Group will
return to PQC immediately after this Agreement terminates, and at such other
times as may be specified by PQC, all Documents and copies of Documents.
Medical Group shall use its best efforts to assure that all Medical Group
Physicians and other employees and agents of Medical Group are aware of and
comply with the restrictions on disclosure and use of Intellectual Property set
forth in this Section. (For purposes of this Section, references to PQC shall
be deemed to refer to PQC and any Affiliates.)
8. RESTRICTIVE COVENANTS
The parties recognize that the services to be provided by PQC hereunder
shall be feasible only if Medical Group operates an active medical practice to
which the physicians associated with Medical Group devote their full time and
attention. Accordingly, the parties hereto agree as follows:
8.1 Noncompetition. During the term of this Agreement, Medical Group
--------------
shall not, without the prior written consent of PQC, establish, operate or
provide physician or other medical services at any medical office, clinic or
other health care facility providing services similar to those provided by
Medical Group, PQC or any Affiliate of PQC, within the Geographic Area.
-24-
8.2 Ancillary Enterprise. During the term of this Agreement, except as
--------------------
permitted by this Agreement, Medical Group shall not provide any of the
additional services that have been approved by the Joint Policy Board and PQC as
"Integrated Health Services" or any other services provided by PQC. For two
(2) years after termination of this Agreement, except as permitted by this
Agreement, Medical Group shall not provide any of the additional services that
have been approved by the Joint Policy Board and PQC as "Integrated Health
Services" or any other services provided by PQC, within fifteen (15) miles of
any Pod Practice Location.
8.3 Non-solicitation of Employees and Patients. During the term of this
------------------------------------------
Agreement and for a two (2) year period thereafter, Medical Group shall not
recruit, solicit or induce or attempt to induce, any employee or employees of
PQC to terminate their employment with, or otherwise cease their relationship
with, PQC. During the term of this Agreement and for a one (1) year period
thereafter, Medical Group shall not solicit, attempt to divert or to take away,
the business or patronage of any of the patients, clients, customers or
accounts, or prospective patients, clients, customers or accounts of PQC or any
of its Affiliates.
8.4 Enforcement of Medical Group Physician Employment Agreements. Medical
------------------------------------------------------------
Group shall enforce the Employment Agreements of Medical Group Physicians,
including, without limitation, restrictive covenants and liquidated damages
provisions contained in such agreements. In the event that, after a request by
PQC, Medical Group does not pursue any remedy that may be available to it by
reason of a breach or default of the restrictive covenants and liquidated
damages provisions or any other provision of any Employment Agreement, upon the
request of PQC, and Medical Group shall assign to PQC such causes of action and
any other rights it has related to such breach or default and shall cooperate
with and provide reasonable assistance to PQC with respect thereto.
8.5 Remedies. PQC and Medical Group acknowledge and agree that a remedy
--------
at law for any breach or attempted breach of the provisions of this Section 8
shall be inadequate, and, therefore, either party shall be entitled to specific
performance and injunctive or other equitable relief in the event of any such
breach or attempted breach, in addition to any other rights or remedies
available to either party at law or in equity or under the Employment
Agreements, including without limitation provisions thereunder relating to the
repurchase by the Medical Group and/or the Medical Group Physicians of certain
assets. Each party hereto waives any requirement for the securing or posting of
any bond in connection with the obtaining of any such injunctive or other
equitable relief. If any provision of this Section 8 relating to the
restrictive period, scope of activity and the territory described therein shall
be declared by a court of competent jurisdiction to exceed the maximum time
period, scope of activity restricted or geographical area such court deems
reasonable and enforceable under applicable law, the time period, scope of
activity restricted and area of restriction held reasonable and enforceable by
the court shall thereafter be the restrictive period, scope of activity
restricted and the territory applicable to such provision of this Section 8.
The invalidity or non-enforceability of any provision of this Section 8 in any
respect shall not affect the validity or enforceability of the remainder of this
Section 8 or of any other provisions of this Agreement.
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9. MISCELLANEOUS
9.1 Exclusivity. During the term of this Agreement, PQC shall be the
-----------
exclusive provider to Medical Group of the types of services to be provided
under this Agreement by PQC (the "Management Services"). During the Term,
Medical Group shall not establish, operate, or provide medical services or
practice medicine at a medical office, clinic or other health care facility
anywhere except at offices, clinics and facilities at which PQC is the exclusive
provider of Management Services; provided, however, that the Medical Group may
provide (i) services at hospital and other facilities unaffiliated with PQC so
long as PQC retains the sole right to provide Management Services in connection
with all activities conducted by Medical Group at such hospitals and other
facilities and (ii) the services set forth on Schedule 9.1. Except in
connection with any Integrated Health Services which PQC is permitted to provide
itself or through an Affiliate pursuant to Section 3.8 or except as two-thirds
of the members of the Joint Policy Board shall otherwise approve, neither PQC
nor any Affiliate may, during the term of this Agreement, provide to any other
person or entity which is located or doing business in the Maryland Area, the
management or other services to be provided by PQC pursuant to this Agreement or
any medical or other medical related services of the type provided by Medical
Group or Clinical Associates on the Effective Date, including the management of
capitated contracts. If during the term of this Agreement, either PQC or any
Affiliate proposes to establish an IPA in the Maryland Area, the terms set forth
in Appendix E shall apply to such IPA unless another arrangement is approved by
two-thirds of the members of the Joint Policy Board. For purposes of this
Section 9.1, "Maryland Area" means the state of Maryland and the following
counties in the Commonwealth of Pennsylvania: .
9.2 Names; Trademarks. Medical Group and the Pods shall conduct their
-----------------
professional practice under the name or names mutually agreed upon by PQC and
Medical Group and subject to the terms of applicable trademark licenses between
PQC and Medical Group.
9.3 Independent Contractors. For the purpose of this Agreement and for
-----------------------
all services to be provided hereunder, each party will be, and will be deemed to
be, independent contractors and not (except to the limited extent provided in
Sections 3.7, 3.13 and 3.14) employees or agents of the other party.
9.4 [Reserved]
--------
9.5 Severability. If any provision of this Agreement is found by a court
------------
of competent jurisdiction to be void, invalid or unenforceable, the same will
either be reformed to comply with applicable law or stricken if not so
conformable, so as not to affect the validity or enforceability of the remainder
of this Agreement.
9.6 Waiver. Failure of either party to enforce a right under this
------
Agreement will not act as a waiver of that right or the ability to later assert
that right relative to the particular situation involved.
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9.7 Notices. Any notice required to be given pursuant to the terms and
-------
provisions of this Agreement shall be in writing and shall be sent by certified
mail, return receipt requested, postage prepaid or by reputable overnight
delivery service, to PQC and Medical Group at their respective places of
business as designated from time to time by the parties and to the Joint Policy
Board at the address of its Chair. Notices shall be effective the second day
after mailing (in the case of certified mail) or the first day after mailing (in
the case of overnight delivery). A copy of any notice given to Medical Group
shall be addressed to the President of Medical Group with a copy to PQC.
9.8 Entire Agreement. This Agreement, together with all appendices,
----------------
schedules and exhibits attached hereto, constitutes the entire agreement among
the parties pertaining to the subject matter hereof and supersedes all prior and
contemporary agreements, understandings, negotiations, and discussion, whether
oral or written, of the parties respecting the subject matter hereof. All
appendices, schedules and exhibits attached hereto are hereby made a part of
this Agreement.
9.9 Amendment. Except as specifically provided elsewhere in this
---------
Agreement, no change or modification of this Agreement shall be valid unless the
same shall be in writing and signed by an authorized officer of Medical Group
and PQC and shall have been approved by the Joint Policy Board. Except as
specifically provided elsewhere in this Agreement, no waiver of any material
provision of this Agreement shall be valid unless the same shall be in writing
and signed by an authorized officer of Medical Group and PQC and shall have been
approved by the Joint Policy Board.
9.10 Successors and Assigns. PQC shall have the right to assign its rights
----------------------
and obligations under this Agreement to any entity controlled by, controlling or
under common control with PQC. Except as set forth in the prior sentence,
neither PQC nor Medical Group may assign its rights or delegate its obligations
under this Agreement without the prior written consent of the other party. This
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective transferees, successors and assigns.
9.11 Governing Law. This Agreement will be construed and enforced in
-------------
accordance with the laws of the State of Maryland. Each of the parties hereto
submits to the exclusive jurisdiction of the United States federal district
courts seated in that state and agrees that process may be served upon it if it
cannot otherwise be served in such state by registered or certified mail
addressed as provided for notices under this Agreement.
9.12 Headings. Headings in this Agreement are inserted for convenience
--------
only and are not to be considered in construing the provisions hereof.
9.13 No Obligation to Third Parties. Except as expressly set forth in this
------------------------------
Section 9.13, none of the obligations and duties of PQC or Medical Group under
this Agreement shall in any way or in any manner be deemed to create any
obligation of PQC or of the Medical Group to, or any rights in, any person or
entity not a party to this Agreement. Notwithstanding the foregoing, in
accordance with and subject to the terms of the provisions of the Employment
Agreements between the Medical Group Physicians and Medical Group, the Medical
Group Physicians are hereby made third party beneficiaries of and may enforce
-27-
the obligations of PQC hereunder (as the same may be amended from time to time
in accordance with the provisions of Section 9.9 hereof) by any means, at law or
in equity, all in accordance with any procedural requirements set forth in the
said Employment Agreements; it being expressly agreed that this Agreement may be
amended by the parties in accordance with Section 9.9 without the consent of the
Medical Group Physicians. In the event that a dispute arises between PQC and
Medical Group, or between PQC, Medical Group and a Medical Group Physician, that
is not to be resolved by the Joint Policy Board under this Agreement or the
Employment Agreements, the parties to the dispute shall submit the dispute to
binding arbitration in Baltimore, Maryland. Each of PQC and Medical Group (in
the case of a dispute between PQC and Medical Group) or PQC and the Medical
Group Physician (in the case of a dispute between PQC or Medical Group and a
Medical Group Physician) shall select, within 30 days of the notice of the other
party's's election to arbitrate, one arbitrator, who shall not be affiliated
with PQC, Medical Group or any Medical Group Physician. Each of the arbitrators
so selected shall select, within 10 days of their selection, select a third
arbitrator. Each of the parties to the arbitration shall present their case to
the arbitrators within 30 says of the selection of the final arbitrator. All
disputes shall be settled by the vote of a majority of the arbitrators. The
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association.
9.14 Contract Modifications for Prospective Legal Events. In the event (a)
---------------------------------------------------
any state or federal laws or regulations, now existing or enacted or promulgated
after the Effective Date are interpreted by judicial decision, a regulatory
agency, or legal counsel with a nationally recognized expertise in the field of
law in question in such a manner as to indicate that this Agreement or any
provision hereof may be in violation of such laws or regulations, or (b) the
Financial Accounting Standards Board, Emerging Issues Task Force or other
applicable accounting standard setting entity promulgates standards or issues a
consensus that would prevent PQC from consolidating for financial statement
presentation purposes all Practice Revenues of Medical Group on PQC's
consolidated financial statements, then PQC shall propose to the Joint Policy
Board and Medical Group for their approval such amendments to this Agreement as
necessary to conform the Agreement to all applicable law and preserve the
underlying economic and financial arrangements between PQC and Medical Group
without substantial economic detriment to either PQC or Medical Group. Any such
amendment approved by the Joint Policy Board and Medical Group shall be binding
upon Medical Group, and Medical Group hereby consents to any such amendment. To
the extent any act or service required of PQC should be construed or deemed, by
any governmental authority, agency or court, to constitute the practice of
medicine by PQC, the performance of said act or service by PQC shall be deemed
waived and forever unenforceable and the provisions of this Section 9.14 shall
be applicable. To the fullest extent permitted by law, Medical Group hereby
waives and agrees not to assert illegality as a defense to the enforcement of
this Agreement or any provision hereof, instead, any such purported illegality
shall be resolved pursuant to the terms of this Section 9.14.
9.15 Availability of Certain Documents. The parties agree, to the extent
---------------------------------
required by law necessary to permit receipt of reimbursement for services by
Medical Group, to make available to the Secretary of Health and Human Services,
the Comptroller General of the General Accounting Office, or their authorized
representatives, any books, documents and
-28-
records in their possession relating to the nature and extent of the costs of
services hereunder for a period of four (4) years after the provision of such
services.
9.16 Gender. References herein to the masculine shall be deemed to refer
------
to the feminine or neuter gender as the context may require.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first written above.
FLAGSHIP HEALTH, P.A. PHYSICIANS QUALITY CARE, INC.
("PQC")
By: By:
-------------------------------- ------------------------------
Xxxxx X. Xxxxxxx, M.D. Xxxxxxx X. Xxxxx
President Chief Executive Officer
FLAGSHIP HEALTH II, P.A.
By:
--------------------------------
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APPENDIX A
-----------
DEFINITIONS
10.1. As used in this Agreement, the following terms shall have the
meanings set forth below:
10.2. "Affiliate" or "Affiliates" means with respect to any person, a
--------- ----------
person that directly or indirectly through one (1) or more intermediaries
controls, or is controlled by or is under common control with, such person.
10.3. "Baseline Amount" means with respect to the Founding Pods the sum of
---------------
Eight Million, Four Thousand, Six Hundred Fifty Six Dollars ($8,004,656). The
Baseline Amount shall be adjusted from time to time as determined by the Joint
Policy Board and Medical Group (i) to reflect the addition of new Physicians to
the Founding Pods or the termination or resignation of any Medical Group
Physician included in a Founding Pod or (ii) to reflect such other factors as
PQC and the Joint Policy Board shall mutually agree to be appropriate, in
consultation with the Medical Group Compensation Committee, as appropriate.
10.4. "Baseline Net Adjusted Xxxxxxxx" with respect to each Medical Group
------------------------------
Physician in an Additional Pod shall mean initially the amount set forth as the
Baseline Net Adjusted Xxxxxxxx in an appendix to the Medical Group Physician's
employment agreement with Medical Group, which amount is based upon such
physician's estimated Net Adjusted Xxxxxxxx as an employee of Clinical
Associates for the fiscal year ended June 30, 1997. PQC shall have the right to
adjust such initial Baseline Net Adjusted Xxxxxxxx amount to reflect such
physician's actual Net Adjusted Xxxxxxxx as an employee of Clinical Associates
for the fiscal year ended June 30, 1997 as soon as such information is
available. Baseline Net Adjusted Xxxxxxxx for a Medical Group Physician shall
also be adjusted by PQC for changes in practice patterns (i.e., weekly hours
worked, part time status), which changes shall be notified by Medical Group and
the Medical Group Physician to PQC immediately; provided that Baseline Net
Adjusted Xxxxxxxx shall be adjusted back in the event that the practice patterns
of the physicians return to their original status. PQC shall be entitled to
review each Medical Group Physician's Baseline Net Adjusted Xxxxxxxx at the end
of each Fiscal Year. PQC shall be entitled, without the approval of the Joint
Policy Board, to reduce the Baseline Net Adjusted Xxxxxxxx of Medical Group
Physicians engaged in a primary care practice (including OB/GYN) to reflect the
Net Adjusted Xxxxxxxx of such Medical Group Physicians in the event that average
fee for service collections for such primary care Medical Group Physicians as a
percentage of fee for service xxxxxxxx declines by more than 5% compared to the
percentage realized by such primary care Medical Group Physicians for the year
ended June 30, 1997; provided, however, that the amount of such reduction shall
only be equal to the excess of the actual percentage decline over 5%. PQC shall
also be entitled, without the approval of the Joint Policy Board, to reduce the
Baseline Net Adjusted Xxxxxxxx of Medical Group Physicians engaged in a
specialist practice to reflect then current Net Adjusted Xxxxxxxx for such
Medical Group Physicians in the event that average fee for service collections
for such specialist Medical Group Physicians as a percentage of fee for service
xxxxxxxx declines by more than 5% compared to the percentage realized by such
specialist Medical Group
A-1
Physicians for the year ended June 30, 1997; provided, however, that the amount
of such reduction shall only be equal to the excess of the actual percentage
decline over 5%.
10.5. "Book Value" means the value of an asset, after deduction for any
----------
depreciation or amortization, reflected on a balance sheet prepared in
accordance with generally accepted accounting principles.
10.6. "Change in Control Transaction" means any transaction or series of
-----------------------------
related transactions pursuant to which a single person or entity or a group of
entities under common control acquire more than 50% of the capital stock of PQC;
provided, however, that a Change in Control Transaction shall not be deemed to
have occurred if Xxxx Capital, Inc or its affiliates acquires 50% or more of the
outstanding capital stock of PQC or becomes entitled to exercise or exercises
management control of PQC pursuant to the terms of PQC's Articles of
Incorporation.
10.7. "Deductible Expenses" with respect to any Fiscal Period shall mean,
-------------------
when used with respect to any Pod, an amount equal to (i) any income tax Medical
Group is required to pay or withhold with respect to Medical Group Physicians
assigned to such Pod, (ii) the cost of any pension and any other benefits not
included in Practice Expenses, in each case that are provided to such Medical
Group Physicians and (iii) any Discretionary Expenses; provided, however, that
the parties agree and understand that Deductible Expenses may include items that
are not deductible for income tax purposes, and PQC makes no representation as
to the deductibility of such items for purposes of income tax liabilities of any
Medical Group Physician or Medical Group.
10.8. "Discretionary Expenses" means, during the Fiscal Period ended
----------------------
December 31, 1996, any increase in actual staffing or other expenses, including
Physician Pod Practice Expenses, above the levels set forth in Appendix D to
this Agreement, subject to adjustment in successive Fiscal Periods pursuant to
approval by the Joint Policy Board as part of the budgetary process contemplated
in Appendix A to the form of Employment Agreement attached hereto. With respect
to any Fiscal Period commencing after December 31, 1996, Discretionary Expenses
means any personnel, operating and other expenses, including Physician Pod
Practice Expenses, over and above the standard levels developed by the Joint
Policy Board and approved by PQC and included in a Pod's annual operating
budget, as adjusted from time to time in accordance with Appendix B attached
hereto or the terms of any Employment Agreement. In addition, "Discretionary
Expenses" shall include for a given Pod any liability for federal, state, local
or other taxes attributable to the merger into Medical Group (or attributable to
taxable periods preceding the merger) of any entity owned by one or more Medical
Group Physicians practicing in such Pod; provided, however that there shall be
excluded any such tax liability if and to the extent that Medical Group or PQC
has received payment from the Physician Members of the applicable Pod pursuant
to the indemnification provisions of any agreement of merger pursuant to which
the said merger has occurred; and provided, further that if any such
Discretionary Expense arises prior to an initial public offering of PQC stock,
the Joint Policy Board may recommend to PQC that it consider taking steps to
finance such taxes or otherwise stage the imposition of such Discretionary
Expenses over a period of three years, which recommendation shall be subject to
the Board of Directors of PQC.
A-2
10.9. "Effective Date" means July 31, 1997.
--------------
10.10. "Fiscal Period" means the twelve (12) month or shorter period
-------------
ending on December 31 of each year.
10.11. "Geographic Area" means the states of Maryland, Delaware,
---------------
Pennsylvania (including all areas within a 15 mile radius of Philadelphia),
Virginia, West Virginia, and the District of Columbia
10.12. "Gross Margin" means, for any Fiscal Period, the excess (or
------------
deficit) of Practice Revenues over Practice Expenses.
10.13. "Including" or "to include" any item shall mean containing or to
--------- ----------
contain such item as part of a whole, without any implied exclusion of other
items.
10.14. "Incremental Amount" means the excess, if any, of Net Adjusted
------------------
Xxxxxxxx attributable to a Medical Group Physician over the Market Compensation
for such physicians. "Market Compensation" means an amount equal to twice the
average compensation of physicians with a similar practice in the Baltimore
metropolitan area as reported by a standardized reporting source selected by the
Joint Policy Board.
10.15. "Integrated Health Services" means any business that Medical Group
--------------------------
or PQC establishes in the Geographic Area, whether directly or through a
subsidiary, that (i) provides medical or medical related services that are not
traditionally performed by physicians or physician practices at medical offices
(it being agreed that in-office laboratory and other ancillary services
performed by the Medical Group Physicians on the Effective Date of this
Agreement shall be deemed to be medical services and are not Integrated Health
Services) and (ii) are determined to be Integrated Health Services by PQC,
Medical Group, and the Joint Policy Board.
10.16. "Intellectual Property" means all (i) patents, patent applications,
---------------------
patent disclosures and all related continuation, continuation-in-part,
divisional, reissue, re-examination, utility model, certificate of invention and
design patents, registrations and applications for registrations, (ii)
trademarks, services marks, trade dress, logos, trade names and corporate names
and registration and applications for registration thereof, (iii) copyrights and
registrations and applications for registration thereof, (iv) mask works and
registrations and applications for registration thereof, (v) computer software,
data and documentation, (vi) trade secrets and confidential business
information, whether patentable or non-patentable and whether or not reduced to
practice, know-how, clinical product and service processes and techniques,
research and development information, medical protocols, copyrightable works,
financial, marketing and business data, pricing and cost information, business
and marketing plans and customer and supplier lists and information, (vii) other
proprietary rights relating to the foregoing (including, without limitations,
remedies against infringement thereof and rights of protection of interest
therein under the laws of all jurisdictions) and (viii) copies and tangible
embodiments thereof; provided, however, that there is excluded from the
definition of "Intellectual Property" any information (a) previously known to or
under development by a Medical Group Physician and listed on an Appendix to his
Employment Agreement, (b)
A-3
generally known in the health care industry, or (c) obtained by a Medical Group
Physician from a third party lawfully possessing such Intellectual Property
10.17. "Medical Group Shareholder" means the individual or individuals in
-------------------------
whose name the shares of Medical Group have been issued.
10.18. "Net Adjusted Xxxxxxxx" shall have the meaning set forth in
---------------------
Schedule 10.18 attached hereto, as such schedule shall be amended from time to
--------------
time by the Joint Policy Board.
10.19. "Net Margin" means, for any Fiscal Period, the excess (or deficit)
----------
of Gross Margin less the sum of (i) the Baseline Amount, and (ii) PQC Direct
Expenses.
10.20. "Non-Established Physician" shall mean any Medical Group Physician
-------------------------
assigned to an Additional Pod (i) who did not have an established practice that
is merged into the Medical Group, (ii) listed in Schedule B-2, or (iii) whose
------------
Baseline Net Adjusted Xxxxxxxx would be less than the Market Compensation (as
defined in 10.13) for such physician; provided, however, that a Medical Group
Physician shall cease to be a Non-Established Physician on the basis of clauses
(i) or (ii) above at such time as the Joint Policy Board determines to be
appropriate.
10.21. "Payor" shall mean any insurer, health maintenance organization,
-----
preferred provider organization, self-insured employer, labor union or other
organization or entity that arranges for the delivery of health care services to
enrollees or patients, including the Medicare and Medicaid programs and
including independent practice associations, physician-hospital organizations,
medical groups and other licensed providers.
10.22 "Payor Contracts" shall mean the contracts, agreements and
---------------
arrangements between Medical Group and Payors for the provision of health care
items and services.
10.23. "Physician Draw" shall mean, with respect to each Physician, for
--------------
each Fiscal Period (prorated for any partial Fiscal Periods) the amount of cash
to be advanced to Physician on a bi-weekly or monthly basis as an interim
payment of, in the case of the Founding Pods, the portion of Gross Margin and
Net Margin due to Physician hereunder, and in the case of the Additional Pods,
the Available Amount. Physician Draw shall be subject to change from time to
time in accordance with the provisions of Appendix B hereof. For purposes of the
Fiscal Period commencing January 1, 1996, the Physician Draw shall be, for each
Physician, the amount set forth on Schedule B-1 attached to this Agreement.
10.24. "Pod Physician" shall mean, with respect to a Pod, all Medical
-------------
Group Physicians who are assigned to the Pod.
10.25. "Pod Practice" or "Pod" shall mean, with respect to a Pod, the
------------ ---
medical practice of Medical Group as conducted through the Pod: (i) a Pod
Practice Location, or (ii) a group of Pod Practice Locations, or (iii) a
functional line of business such as a laboratory, and in the case of clause (ii)
or (iii), as approved by the Joint Policy Board to function as a distinct
reporting unit within Medical Group.
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10.26. "Pod Practice Locations" shall mean, with respect to a Pod, all
----------------------
Practice Locations assigned to the Pod.
10.27. "PQC Direct Expenses" or "Direct Expenses" shall mean all actual
------------------- ---------------
direct expenses of PQC incurred in connection with providing management services
to Medical Group under this Agreement calculated in accordance with generally
accepted accounting principles, including rent, utilities, cleaning, and other
occupancy costs attributable to PQC's Baltimore office or any other office in
the Geographic Area maintained for the purpose of supporting one (1) or more Pod
Practice Locations (together with PQC's Baltimore office, the "Area Offices");
salary and benefit expense for PQC's employees providing services to benefit any
one (1) or more of the Pod Practice Locations; depreciation and amortization of
equipment located at the Area Offices except depreciation and amortization with
respect to the assets initially acquired by PQC or Medical Group from Medical
Group Physicians on their practices; telephone, facsimile, and similar
communication charges (including the cost of any so-called tie-line from the
Area Offices to the office housing the principal central computer system for
physician practice sites managed by PQC or any of its affiliates); maintenance
and repair costs for the Area Offices and equipment located therein; insurance
related to the Area Offices and PQC's employees based in any such office or any
one (1) or more of the Pod Practice Locations; professional services (including
legal and accounting) related directly to the Area Offices or any of the Pod
Practice Locations; office supplies used by PQC's Area Offices or any of PQC's
employees located at any of the Pod Practice Locations; and other expenses
incurred by PQC with the consent of the Joint Policy Board.
10.28. "Practice Expenses" shall mean, with respect to a Pod, the
-----------------
following expenses:
(a) Salaries, fringe benefits, and employment taxes and insurance (or self
insured losses) of all Administrative Staff and Clinical Staff (as defined in
Sections 3.4 and 2.5 of this Agreement) and physicians who are not Medical Group
Physicians, whether employees or independent contractors, working at or for the
direct benefit of the Pod Practice Locations; and employment taxes and expenses
for a standard package of health and disability insurance approved by the
parties prior to the Effective Date and for up to $50,000 of term life insurance
coverage for Pod Physicians;
(b) The direct cost (excluding any general and administrative overhead of PQC)
of any other management, administrative or professional services provided at or
in connection with the Pod Practice that are incurred by PQC or Medical Group,
including management, billing and collections, business office consultation,
accounting and legal services for the Pod Practice;
(c)
(i) The cost of capital (including actual interest on indebtedness
incurred by or on behalf of Medical Group but only to the extent actual interest
is incurred from a third party other than Xxxx Capital), to finance or refinance
obligations of Medical Group related to the Pod Practice, to purchase medical or
nonmedical equipment for the Pod Practice (other than those assets, if any,
purchased by PQC as part of the initial acquisition of
A-5
the medical practice that served as the basis of the Pod) or to provide working
capital or finance new ventures of Medical Group related to the Pod Practice;
(ii) depreciation and amortization charges to be paid to PQC, the amounts
of which shall be set forth in the Pod Budget or for costs of capital described
in Section 10.27(e)(i) of this Appendix A, or, if in excess of the budgeted
amount, is agreed upon by PQC and the Joint Policy Board (expressly excluding
any depreciation and amortization charges relating to assets, if any, purchased
by PQC as part of the initial acquisition of the medical practice that served as
the basis of the Pod;
(d) Occupancy costs attributed be the Pod Practice (whether principal,
interest, depreciation, taxes or rent) incurred in obtaining, improving,
developing, leasing, operating, maintaining; replacing and preserving office
space and equipment for the Pod Practice, including janitorial services, refuse
disposal and medical waste disposal;
(e) Direct costs incurred in obtaining, leasing, operating, maintaining and
replacing computer systems and software located at the Pod Practice Locations,
including billing systems, outcomes reporting systems and financial reporting
systems and the cost of so-called tielines;
(f) All utilities, including but not limited to telephone service (including
business calls on cellular telephones), answering services, electricity, heat,
water, and sewer that are used at the Pod Practice Locations;
(g) Postage, facsimile, collection and credit verification costs incurred for
the Pod Practice;
(h) Pharmaceuticals, x-ray and laboratory expenses (both in-house and other)
for the Pod Practice;
(i) Medical supplies for the Pod Practice;
(j) All office supplies for the Pod Practice;
(k) Copying charges for the Pod Practice;
(l) Professional journals and books, professional dues and memberships, and
magazine and newspaper subscriptions for the Pod Practice;
(m) Continuing Medical Education expenses for the Pod Physicians, within
guidelines approved by the Joint Policy Board;
(n) Direct advertising, accounting and legal expenses incurred in connection
with the Pod Practice;
(o) Insurance expenses, including but not limited to (1) general liability,
fire, and property for each Pod Practice Location and (2) professional liability
insurance for Pod
A-6
Physicians and for Clinical Staff while providing services in connection with
the Pod Practice; provided, that, in the event that PQC causes Pod R to change
professional liability insurance carriers, Practice Expenses shall not include
the cost of coverage to the extent, but only to the extent, that the aggregate
cost of the new professional liability policy and the nose and/or tail coverage
exceeds the cost of the professional liability coverage maintained by the
physicians in Rod R on the Effective Date;
(p) Any casualty losses suffered by Medical Group that are related to the Pod
Practice to the extent that such losses are not reimbursed by any third party
responsible therefor or through insurance;
(q) A pro rata share calculated on the basis of the ratio of the number of Pod
Physicians to the number of Medical Group Physicians or such other reasonable
allocation methodology as PQC may develop from time to time and as may be
approved by the Joint Policy Board, of expenses incurred by PQC and included
within a budget approved by the Joint Policy Board for Medical Group as a whole
(excluding any corporate-related general and administrative overhead of PQC),
for example, Medical Group-wide management information system expenses,
malpractice costs for Medical Group as a whole (as opposed to individual
physicians), accounting and pension plan services, Medical Group tax return
preparation, and providing or arranging for other necessary administrative,
accounting and legal services. Overhead of Medical Group and PQC included in
Practice Expenses shall be allocated by PQC and the Joint Policy Board among the
Additional and Founding Pods in an equitable manner that (i) does not penalize
the Additional Pods for (a) the higher historical overhead expenses of the
Founding Pods compared to Pod R and (b) increased overhead expense incurred by
Medical Group to improve the profitability of the Founding Pods and (ii) does
not penalize the Founding Pods for increased overhead expense due to the
Additional Pods.
(r) With respect to Pod R, 100% (subject to the limitations set forth in
Section 7.5(a) of the Merger Agreement between Flagship II, Clinical Associates
and PQC) of any Damages (as defined in the Merger Agreement ) arising out of, or
relating to, the conduct of the business of Clinical Associates prior to August
1, 1997, except to the extent that PQC recovers such Damages pursuant to Article
VII of the Merger Agreement.
29. "Practice Revenues" with respect to a Pod, the amount equal to all
-----------------
revenues of Medical Group attributable to the Pod Practice or assigned by the
Pod Physicians pursuant to their Employment Agreements with the Medical Group,
net of federal, state and local income taxes of Medical Group, adjustments for
uncollectible accounts, Medicare, Medicaid and other contractual allowances,
discounts, workers' compensation adjustments, professional courtesies and other
reductions in collections, including: (a) all professional fees and other
charges actually recorded each month on an accrual basis of accounting under
generally accepted accounting principles as a result of medical services
rendered by Medical Group through the Pod and the Pod Physicians, whether
rendered in an outpatient or inpatient setting; (b) the technical component of
fees earned with respect to services rendered by Medical Group through the
Medical Group Pod (including all fees for technical and ancillary services and
all facility fees and similar charges); (c) all collections from managed care
organizations and Payors, or payments made in respect of enrollees of such
managed care organizations or
A-7
Payors, including payments made periodically on a per member basis for the
partial or total medical needs of a subscribing member, and any co-payments and
incentive bonuses, management fees and other amounts received and fees paid in
respect of services provided by or through the Pod as a result of a capitation
plan or risk-sharing arrangement; (d) grants, fees and other payments in
connection with basic or clinical research conducted by Pod Physicians or under
grant programs, whether publicly or privately funded, including grants or
programs for the care of special patient populations; (e) consulting fees of Pod
Physicians, including without limitation honoraria, witness fees and like
amounts; (f) fees and payments for workers compensation evaluations or
independent medical examinations; (g) all coordination of benefits, patient co-
payments or deductibles and third-party liability recoveries; and (h) any other
revenues from the practice of medicine or provision of health care items and
services of any kind, except to the extent that the parties may otherwise agree
in writing). With respect to Pod R, Practice Revenues shall also include,
without duplication of the foregoing, all revenues earned with respect to Pod R
from sources of revenue that were included in the revenues of Clinical
Associates prior to the Closing Date. Notwithstanding the foregoing, Practice
Revenues shall not include any income unrelated to any of the foregoing items
that is personal to a Pod Physician and unrelated to the provision of health
care or ancillary services (e.g., personal dividend or trust income), and
provided further that the Joint Policy Board may approve in writing the
retention by a Pod Physician of limited honoraria and similar amounts.
X-0
XXXXXXXX X-0
------------
FINANCIAL ARRANGEMENTS
FOUNDING PODS
-------------
1. General. As set forth in greater detail below and subject to all of the
-------
conditions and provisions hereof, the parties agree that the aggregate
compensation to be paid to PQC for services rendered under this Agreement with
respect to the Founding Pods shall equal the sum of (1) all PQC Direct Expenses
which are incurred in connection with the provision of services to Medical Group
and (2) additional compensation equal to fifty percent (50%) of Net Margin of
the Founding Pods. This Appendix B-1 also provides for the priority of
application of Practice Revenues of the Founding Pods to various categories of
expenditures.
2. Application of Practice Revenues of the Founding Pods.
-----------------------------------------------------
Practice Revenues of the Founding Pods shall be applied to expenses and other
required distributions under this Agreement in the following order of priority:
(a) Step 1 - Practice Revenues of the Founding Pods shall be applied to pay
--- ------
Practice Expenses of the Founding Pods.
(b) Step 2 - Any Gross Margin attributable to the Founding Pods remaining
--- ------
after Step 1 above shall next be applied to payment of (i) the Baseline Amount
(minus the amount necessary to pay all Deductible Expenses of the Founding Pods)
and (b) PQC Direct Expenses on a proportional basis equal to the ratio of (i)
the Baseline Amount to (ii) PQC Direct Expenses as approved by the Joint Policy
Board for the then current Fiscal Period or in the absence of approval of a
budget for the then current Fiscal Period, in the ratio set forth on Schedule B-
1 attached to this Agreement. By way of example only and not as a limitation,
if the Baseline Amount is $12 million and budgeted PQC Direct Expenses allocated
to the Founding Pods are $1 million, then under this Step 2 12/13ths or 92.31%
of each dollar of Gross Margin shall be allocated to Medical Group for payment
of the Baseline Amount and the remaining 1/13th or 7.69% of each dollar of Gross
Margin shall be allocated to PQC.
(c) Step 3 - After completion of Step 2, any remaining Net Margin
--- ------
attributed to the Founding Pods shall be allocated fifty percent (50%) to
Medical Group for distribution to the Medical Group Physicians in the Founding
Pods and fifty percent (50%) to PQC as additional compensation hereunder.
Subject to review by the Joint Policy Board, PQC shall calculate the amounts
of Gross Margin and Net Margin to be allocated to each of Medical Group and PQC
under this Section 2. If the Gross Margin is negative in any Fiscal Period,
such negative amount shall constitute Practice Expenses of the Founding Pods for
the next following Fiscal Period. In the event Net Margin is negative in the
Fiscal Periods ending December 31, 1997 or December 31, 1998, PQC may be
obligated to make a loan to Medical Group in accordance with the provisions of
Section 3.5 of the Agreement.
B-1
3. Payment of Physician Draw. On a bi-weekly basis, PQC shall distribute to
-------------------------
Medical Group from the Founding Pod Medical Group Account referred to in Section
3.12 of this Agreement an amount equal to one twenty-sixth of the budgeted
aggregate Physician Draw (minus the amount necessary to pay all Deductible
Expenses) for distribution by Medical Group; provided, however, if (a) at any
time during a Fiscal Period, PQC determines that the amount of Practice Revenues
allocated to the payment of aggregate Physician Draw under this Appendix B-1 for
any Fiscal Period may be less than ninety-five percent (95%) of the budgeted
aggregate Physician Draw of Medical Group Physicians in the Founding Pods for
such Fiscal Period, or (b) if PQC or the Joint Policy Board determines (1) the
aggregate Practice Expenses of a Founding Pod for such Fiscal Period will exceed
the aggregate budgeted Practice Expenses of such Founding Pod for such Fiscal
Period, or (2) the aggregate Practice Revenues of a Founding Pod will be less
than the aggregate budgeted Practice Revenues of such Founding Pod, PQC may, and
upon direction from the Joint Policy Board, shall, reduce the aggregate
Physician Draw in such manner as PQC determines to be appropriate. Subject to
the provisions of Section 3.5 of this Agreement, the aggregate Physician Draw of
Medical Group Physicians in the Founding Pods shall be adjusted to reflect the
addition of new Medical Group Physicians to a Founding Pod or the termination or
resignation of any Medical Group Physician assigned to a Founding Pod or to
reflect such other factors as PQC and the Joint Policy board shall mutually
agree to be appropriate. PQC may, but shall not be required to, advance money
to the Compensation Pool as defined in Appendix A to the Employment Agreement to
fund such Physician Draw.
4. Payment of Variable Distribution Pool. Within forty-five (45) days of the
-------------------------------------
end of each of the first three (3) calendar quarters in each Fiscal Period, PQC
shall advise Medical Group's Compensation Committee (as defined in Employment
Agreements) of the amount (the "Variable Distribution"), if any, of Net Margin
allocable to Medical Group under Section 2 of this Appendix B-1 that has not
been used, or is not reasonably anticipated by PQC to be needed for Medical
Group to fund, all amounts required to be funded by Section 3. PQC shall
disburse to Medical Group from the Founding Pod Medical Group Account referred
to in Section 3.12 of this Agreement the amount of the Variable Distribution,
which shall be distributed to the Medical Group Physicians in the Founding Pods
in such manner consistent with law as is described in Section 4 of Appendix A to
the Employment Agreements.
5. Annual Reconciliation of Distributions. Within sixty (60) days after the
--------------------------------------
end of each year, PQC shall (i) total and report Practice Revenues and Practice
Expenses for each of the Founding Pods, (ii) total and report aggregate Practice
Revenues for all Founding Pods and aggregate Practice Expenses for all Founding
Pods, (iii) total and report PQC Direct Expenses, (iv) total and report all
amounts advanced as Physician Draws and Variable Distributions with respect to
the Founding Pods, (v) total and report the level of Gross Margin, whether
positive or negative, and (vi) total and report the level of Net Margin, whether
positive or negative (taking into account any adjustments necessary in the event
that distributions during the said Fiscal Period or any prior Fiscal Periods
have resulted in an over-advancement or under-advancement of funds). Each
Founding Pod, as a Discretionary Expense of its Medical Group Physicians, may
inspect Medical Group's books and records and PQC's books and records in order
to verify the amount and proper calculation of the sums to be determined
hereunder. PQC may not charge any Pod or Physician Member any access or similar
fee in connection with any request to review books and records. If such
B-2
independent accounting presents a report identifying a departure in such
financial reports from generally accepted accounting principles, which departure
has had a material adverse effect on the revenues allocated to Physician Group,
PQC shall reimburse the Physician Members for the cost of such report.
6. Distribution in Event of Actual or Anticipated Negative Gross Margin. In
--------------------------------------------------------------------
the event that for any calendar quarter, Gross Margin is a negative number or in
the event either party gives notice to the other that there is reason to believe
Gross Margin may be a negative number, PQC shall promptly propose a remedial
plan of action to the Joint Policy Board and the parties agree to cooperate in
good faith in order to implement such remedial plan or such other corrective
action as shall be approved by the Joint Policy Board. At PQC's sole
discretion, PQC may elect to advance working capital funds to Medical Group in
such amounts and at such times, and from time to time, as PQC shall determine
necessary to satisfy aggregate Practice Expenses for all Founding Pods, such
advances to be treated as loans, the repayment of which shall be required in
accordance with the definition of "Practice Expenses" in Section 10.27 of
Appendix A hereto. In the event PQC shall elect not to make advances sufficient
to satisfy aggregate Practice Expenses for all Founding Pods and Medical Group
has not otherwise satisfied Practice Expenses from its own resources, either
party shall have the right to terminate this Agreement upon thirty (30) days'
written notice.
7. Manner of Payment of Final Reconciliation. Within seventy (70) days after
-----------------------------------------
the end of the Fiscal Period, Medical Group and PQC shall make such payments, if
any, to each other as may be required under the provisions of this Appendix B-1.
Medical Group covenants to distribute any amounts to the Medical Group
Physicians in a manner that complies with all applicable law.
8. Manner of Payment of PQC Direct Expenses and Compensation to PQC. PQC
----------------------------------------------------------------
shall arrange for the payment of PQC Direct Expenses and the compensation to PQC
itself in accordance with the terms of this Appendix and is hereby authorized to
make withdrawals from the Founding Pod Medical Group Account for such amounts at
the time or times that the amounts become due. Medical Group hereby authorizes
PQC to make such withdrawals from the Founding Pod Medical Group Account for
accrued but unpaid PQC Direct Expenses and compensation owed to PQC under the
provisions of this Appendix B-1 after termination of this Agreement.
B-3
APPENDIX B-2
------------
FINANCIAL ARRANGEMENTS
ADDITIONAL PODS
---------------
1. General. As set forth in greater detail below and subject to all of the
-------
conditions and provisions hereof, the parties agree that the aggregate
compensation to be paid to PQC for services rendered under the Agreement with
respect to the Additional Pods shall be the aggregate of the amounts determined
in paragraphs 2, 3, 4, 5, 6 and 7 below.
A Revenue Flow table is attached as Schedule B-2.
Practice Revenue Attributable to Net Adjusted Xxxxxxxx.
2. Pod R Specialists. Net Adjusted Xxxxxxxx with respect to Physicians with
-----------------
specialists practice (a specialist being a physician at least 80% of whose
xxxxxxxx are derived from a specialist practice, excluding OB/GYN and mental
health) in Pod R on the Effective Date ("Net Adjusted Specialists Xxxxxxxx") for
any Fiscal Year shall, except as provided in Section 4 of this Appendix B-2, be
allocated between PQC and Medical Group in the following order of priority:
(a) Step 1 - Net Adjusted Specialist Xxxxxxxx shall be allocated to the
------
Additional Pod Medical Group Account until an amount equal to the Baseline
Net Adjusted Xxxxxxxx for Medical Group Physicians with specialist
practices in Pod R on the Effective Date has been allocated to the
Additional Pod Medical Group Account.
(b) Step 2 - The next $3 million (or any lesser amount, if there shall not be
------
$3 million of additional Net Adjusted Specialist Xxxxxxxx) of Net Adjusted
Specialist Billing shall be allocated 35% to PQC as compensation for its
services and 65% to the Additional Pod Medical Group Account.
(c) Step 3 - Any Net Adjusted Specialist Xxxxxxxx that remains unallocated
------
after Steps 1 and 2, shall be allocated 20% to PQC as compensation for its
services and 80% to the Additional Pod Medical Group Account.
3. Other Physicians. Net Adjusted Xxxxxxxx with respect to primary care
----------------
physicians and any physicians with specialist practices who is not subject to
paragraph 2 or 4 ("Net Adjusted Physician Xxxxxxxx") for any Fiscal Year shall,
except as provided in Section 4 of this Appendix B-2, shall be allocated between
PQC and Medical Group in the following order of priority:
(a) Step 1 - Net Adjusted Physician Billing shall be allocated to Additional
------
Pod Medical Account until an amount equal to the Baseline Adjusted Net
Xxxxxxxx for primary care Group Medical Physicians and Group Medical
Physicians with specialist practices who are not subject to paragraphs 2
or 4 has been allocated to the Additional Pod Medical Group Account.
B-4
(b) Step 2 - Any Net Adjusted Physician Billing not allocated in Step 1 shall
------
be allocated 20% to PQC as compensation for its services under this
Agreement and 80% to the Additional Pod Medical Group Account.
4. Non-Established Physicians. With respect to any Non-Established Physician,
--------------------------
20% (unless a different percentage is approved by the Joint Policy Board) of the
Incremental Amount with respect to such physician shall be allocated to PQC as
compensation for its services under this Agreement and the remaining Net
Adjusted Xxxxxxxx with respect to such Medical Group Physician (less the
compensation payable to the Non-Established Physician under the Non-Established
Physician's employment agreement with Medical Group) shall be allocated to the
Additional Pod Medical Group Account.
Practice Revenue Not Attributable to Net Adjusted Xxxxxxxx.
5. Revenue not included in Net Adjusted Xxxxxxxx. Any Practice Revenues of
----------------------------------------------
the Additional Pods for any fiscal year that are not included in Net Adjusted
Xxxxxxxx ("Other Revenues") shall be allocated to Additional Pod Medical Group
Account, provided, however, if Practice Expenses are less than [__% to be
included based upon historical Net Adjusted Xxxxxxxx] ("Historical Overhead") of
Practice Revenue, PQC shall be allocated an amount equal to 50% of (x) Other
Revenue multiplied by (y) the difference between Historical Overhead and
Overhead for such fiscal year. Overhead shall be calculated in the manner set
forth on Schedule B-2(b).
Ancillary Revenue
6. Laboratory Services. Net Margin from centralized laboratory services
--------------------
(which for purposes of this paragraph 6 shall mean revenue from laboratory
ancillary services less (i) direct expenses of such laboratory ancillary
services and (ii) an allocation of overhead of the Medical Group, which
allocation, or the methodology used to make such allocation, shall be approved
by the Joint Policy Board) attributable to Additional Pods will be allocated 80%
to PQC and 20% to the Additional Pods Medical Group Account.
7. Non- Laboratory Ancillary Services. Net Margin from incremental non-
-----------------------------------
laboratory ancillary services other than the non-laboratory ancillary services
listed in Schedule 10.17 (which for purposes of this paragraph 7 shall mean
--------------
revenue of non-laboratory ancillary services less (i) direct expenses from such
non-laboratory ancillary services and (ii) an allocation of Medical Group
overhead, which allocation, or the methodology used to make such allocation,
shall be approved by the Joint Policy Board) will be allocated 50% to PQC and
50% in the aggregate to the Found Pod Medical Group Account and the Additional
Pod Medical Group Account.
B-5
Certain Practice Expenses
8. Certain Expense Not Practice Expenses. Expenses of administrative staff
--------------------------------------
and support services included within Clauses (a) and (b) of the definition of
Practice Expenses shall not be deemed to be Practice Expense of Pod R to the
extent, but only to the extent, that the costs of such administrative staff and
support services are in excess of historical levels for Clinical Associates and
such increase in costs is specifically attributable to (x) services performed by
such administrative staff for Pods other than Pod R and not to the addition of
physicians to Pod R or change in the market costs for such services or labor
rates or (y) additional support services to which Pod R, acting reasonably,
shall have objected at the time their implementation was proposed by PQC.
Medical Group Account
9. Allocation of Net Adjusted Xxxxxxxx to Medical Group Account. Amounts
-------------------------------------------------------------
allocable to the Additional Pod Medical Group Account pursuant to paragraphs 2,
3, 4, 5, 6 and 7 (to the extent the allocation in made to the Additional Pods)
shall first be used to pay all Practice Expenses of the Additional Pods. Any
amount remaining after the payment of Practice Expenses shall be available for
distribution to Medical Group Physicians in the Additional Pods.
10. Payment of Physician Draw. On a monthly basis, PQC shall distribute to
-------------------------
Medical Group from the Additional Pod Medical Group Account referred to in
Section 3.12 of this Agreement an amount equal to one twelfth of the budgeted
aggregate Physician Draw of Medical Group Physicians in the Additional Pods
(minus the amount necessary to pay all Deductible Expenses) for distribution by
Medical Group; provided, however, if (a) at any time during a Fiscal Period, PQC
determines that the amount of Net Adjusted Xxxxxxxx allocated to the Medical
Group pursuant to this Appendix B-2 net of Practices Expenses (the "Available
Amount") for any Fiscal Period may be less than ninety-five percent (95%) of the
budgeted aggregate Physician Draw for such Fiscal Period with respect to the
Medical Group Physicians in the Additional Pods, or (b) if PQC or the Joint
Policy Board determines (1) the aggregate Practice Expenses of an Additional Pod
for such Fiscal Period will exceed the aggregate budgeted Practice Expenses for
such Additional Pod for such Fiscal Period, or (2) the aggregate Net Adjusted
Xxxxxxxx allocable to the Medical Group with respect to an Additional Pod will
be less than the aggregate budgeted Net Adjusted Xxxxxxxx allocable to the
Medical Group with respect to such Additional Pod, PQC may, and upon direction
from the Joint Policy Board, shall, reduce the aggregate Physician Draw with
respect to the Additional Pods in such manner as PQC determines to be
appropriate. Subject to the provisions of Section 3.5 of this Agreement, the
aggregate Physician Draw with respect to the Additional Pods shall be adjusted
to reflect the addition of new Medical Group Physicians to an Additional Pod or
the termination or resignation of any Medical Group Physician from an Additional
Pod or to reflect such other factors as PQC and the Joint Policy board shall
mutually agree to be appropriate. PQC may, but shall not be required to,
advance money to the Compensation Pool as defined in Appendix A to the
Employment Agreement to fund such Physician Draw.
B-6
11. Payment of Variable Distribution Pool. Within forty-five (45) days of
-------------------------------------
the end of each of the first three (3) calendar quarters in each Fiscal Period,
PQC shall advise Medical Group's Compensation Committee (as defined in
Employment Agreements) of the amount (the "Variable Distribution"), if any, of
the Available Amount that has not been used, or is not reasonably anticipated by
PQC to be needed for Medical Group to fund, all amounts required to be funded by
paragraph 8. PQC shall disburse to Medical Group from the Additional Pod
Medical Group Account referred to in Section 3.12 of this Agreement the amount
of the Variable Distribution, which shall be distributed to the Medical Group
Physicians in the Additional Pod in such manner consistent with law as is
described in Section 4 of Appendix A to the Employment Agreements.
12. Annual Reconciliation of Distributions. Within sixty (60) days after the
--------------------------------------
end of each year, PQC shall (i) total and report Net Adjusted Xxxxxxxx and
Practice Expenses for each Additional Pod, (ii) total and report aggregate Net
Adjusted Xxxxxxxx and Practice Expenses for all Additional Pods, (iii) total and
report all amounts advanced as Physician Draws and Variable Distributions with
respect to the Additional Pods. Each Additional Pod, as a Discretionary Expense
of its Medical Group Physicians, may inspect Medical Group's books and records
and PQC's books and records in order to verify the amount and proper calculation
of the sums to be determined hereunder. PQC may not charge any Pod or Physician
Member any access or similar fee in connection with any request to review books
and records. If such independent accounting presents a report identifying a
departure in such financial reports from generally accepted accounting
principles, which departure has had a material adverse effect on the revenues
allocated to Physician Group, PQC shall reimburse the Physician Members for the
cost of such report.
13. Manner of Payment of Final Reconciliation. Within seventy (70) days
-----------------------------------------
after the end of the Fiscal Period, Medical Group and PQC shall make such
payments, if any, to each other as may be required under the provisions of this
Appendix B-2. Medical Group covenants to distribute any amounts to the
Physicians in a manner that complies with all applicable law.
14. Manner of Payment of Compensation to PQC. PQC shall arrange for the
----------------------------------------
payment of the compensation to PQC itself in accordance with the terms of this
Appendix B-2 and is hereby authorized to make withdrawals from the Medical Group
Account for such amounts at the time or times that the amounts become due.
Medical Group hereby authorizes PQC to make such withdrawals from the Additional
Pod Medical Group Account for compensation owed to PQC under the provisions of
this Appendix B-2 after termination of this Agreement.
B-7
SCHEDULE B-1
------------
I. Name of Physician Physician Draw for Fiscal Period Ending
----------------- ---------------------------------------
December 31, 1996
-----------------
[See Section 6 of Appendix A to the Employment Agreements with the Physician
Members.]
II. Ratio of Baseline Amount to budgeted PQC Direct Expenses
B-8
APPENDIX C
----------
LIST OF PHYSICIANS
------------------
Name of Pod Partner Physicians Employed Physicians
------------- ------------------ -------------------
Pod A
Pod B
Pod C
Pod D
Pod E
Pod F
Pod G
Pod H
Pod I
Pod J
Pod K
Pod L
Pod M
Pod N
Pod O
Pod P
Pod Q
Pod R
C-1
APPENDIX D
----------
[Discretionary Expense Xxxxxx]
X-0
APPENDIX E
----------
IPA Arrangements
In the event that PQC or any of its Affiliates propose the establishment of an
IPA network in the Maryland Area, PQC shall be required to obtain the approval
of two-thirds of the members of the Joint Policy Board with respect to the
structure, governance and, subject to the agreements in this Appendix E,
financial arrangements of the IPA network, including whether the Medical Group
Physicians will participate in such IPA network. PQC and Medical Group agree
that the following financial arrangements are acceptable to Medical Group and
the Medical Group Physicians. PQC shall be entitled to a fee (other than with
respect to the Medical Group Physicians) of up to 10% of the aggregate revenue
of the IPA network (provided that such a fee is reflective of market rates for
IPA management fees at the time that the IPA network is established), which fee
PQC shall not be required to share with Medical Group or any Medical Group
Physician; the Medical Group Physicians shall be entitled to participate in the
IPA network on a full capitated dollar basis; and residual profits of the IPA
network (in excess of the 10% fee) that are retained by PQC shall be allocated
50% to PQC and 50% to Medical Group.
D-2
EXHIBIT A
---------
E-1
