Charles A. and Marian L. Derby, et al. - Page 6

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          the physicians only when its insureds received medical services.            
          Consequently, the insurer bore the risk that a given patient                
          would require medical care costing more than the premiums that              
          patient had paid.                                                           
               In the fee-for-service environment, many doctors, including            
          petitioners, owned their own practices (alone or with partners)             
          and managed them independently, including hiring support staff,             
          purchasing equipment, and overseeing billing and collection.                
               In the mid-1980s, the phenomenon of managed care, in the               
          form of health maintenance organizations (HMOs), began to take              
          hold in the provision of medical services, especially in                    
          California.  Under managed care, HMOs, a form of health insurer,            
          would collect premiums from patients, but rather than pay                   
          physicians for services as rendered, HMOs would instead pay to a            
          primary care physician a fixed monthly capitation fee to manage             
          the care of each patient who selected that physician.  Thus,                
          under the HMO model of managed care, the risk of having a patient           
          whose medical care costs exceeded the premiums paid was in                  
          general shifted from insurers to physicians and other health care           
               The penetration of the HMO model was low at first, but it              
          became much more prevalent over time.  HMOs generally would not             
          contract directly with individual physicians; instead, they would           
          enter into agreements only with larger groups.  Physicians in the           

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