TEAM HEALTH INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 333-80337

TEAM HEALTH, INC.
(Exact name of registrant as it appears in its charter)

TENNESSEE 62-1562558
(State or other jurisdiction of (IRS Employer ID Number)
Incorporation or organization)

1900 WINSTON ROAD, KNOXVILLE, TN 37919
(Address of principal executive offices) (Zip Code)

(865) 693-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2). Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.

Common Stock, par value $.01 per share -- 9,712,310 shares as of February
18, 2005. Because the Company is privately held and there is no public trading
market for the Company's equity securities, the Company is unable to calculate
the aggregate market value of the voting and non-voting common equity held by
non-affiliates.

Documents Incorporated by Reference: Certain exhibits filed with the
Registrant's Registration Statements on Form S-4 (File No. 333-80337 as amended
and File No. 333-115824 as amended) is incorporated by reference into Part IV of
the Report on Form 10-K.
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PART I

ITEM 1. BUSINESS

OUR COMPANY

Terms used herein such as "we", "us" and "our" are references to Team
Health, Inc. and its affiliates ("Team Health"), as the context requires.

We are a national provider of outsourced physician staffing and
administrative services to hospitals and other healthcare providers in the
United States. Since our inception, we have focused primarily on providing
outsourced services to hospital emergency departments, which account for the
majority of our revenue. As a result of an acquisition on May 1, 2002, we are
also a provider of medical staffing to military treatment facilities. In
addition to providing physician staffing in various specialties within military
treatment facilities, we also provide to such facilities a broad array of
non-physician healthcare services, including specialty technical staffing,
para-professionals and nurse staffing on a permanent basis.

While we are a national company, our services are delivered through a
regional structure of operating offices located in key healthcare markets. The
responsibility for managing the customer and physician relationships and
healthcare services provided resides in these regional offices. The intent of
this regional operating model is to provide a localized presence in the markets
in which we operate, while providing the benefits of scale in centralized
administrative and other back office functions that accrue to a larger, national
company. Our operating models include comprehensive programs for emergency
medicine, radiology, anesthesiology, inpatient care, pediatrics and other
healthcare services, principally within hospital departments and other
healthcare treatment facilities, including military treatment facilities. We
primarily provide permanent staffing that enables management of hospitals and
other healthcare facilities to outsource their recruiting, hiring, payroll and
benefits functions. We recruit and hire or subcontract with healthcare
professionals who then provide professional services within the healthcare
facilities with which we contract. Currently, we provide permanent staffing,
management and administrative services to approximately 441 hospitals, imaging
centers, surgery centers, clinics and military treatment facilities in 42
states.

The range of physician and non-physician staffing and administrative
services that we provide includes the following:

- recruiting, scheduling and credentials coordination for clinical and
non-clinical medical professionals,

- administrative support services, such as payroll, insurance coverage,
continuing education services and management training, and

- coding, billing and collection of fees for services provided by medical
professionals.

Our historical focus has primarily been on providing outsourced services to
emergency departments, which accounted for approximately 66% of our net revenue
less provision for uncollectibles in 2004. The emergency departments that we
staff are generally located in larger hospitals with emergency departments whose
patient volumes are more than 15,000 patient visits per year. In higher volume
emergency departments, we believe our experience and expertise in such a complex
environment enables our hospital clients to provide high quality and efficient
physician and administrative services. In this type of environment we can
generate profitable margins, establish stable long-term relationships, obtain
attractive payer mixes and recruit and retain high quality physicians and other
providers and staff.

The provision of permanent healthcare staffing services to military
treatment facilities accounted for approximately 21% of our net revenue less
provision for uncollectibles in 2004. We significantly expanded our overall base
of business in 2002 by acquiring a provider of permanent healthcare staffing
services to military treatment facilities. This acquisition provided an entry
into a portion of the healthcare staffing market not previously served by us. At
the time of this acquisition in 2002, permanent staffing agreements existed on a
three-way basis to include a military hospital or clinic, a TRICARE (the U.S.
military healthcare payer system) Regional Managed Care Support Contractor
("MCSC"'), which functioned as the paying entity, and us. As discussed later,
the Tricare Program significantly changed in 2004 its contracting for healthcare
staffing that on an annual basis will have a material impact on our earnings and
cash flow. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Tricare Program."
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FEE-FOR-SERVICE BILLING SYSTEM

The majority of our fee-for-service patient visits are for the provision of
emergency care in hospital settings. Due to federal government regulations
governing the providing of such care, we are obligated to provide emergency care
regardless of the patient's ability to pay or whether or not the patient has
insurance or other third-party coverage for the cost of the services rendered.
While we attempt to obtain all relevant billing information at the time
emergency care services are rendered, there are numerous patient encounters
where such information is not available at time of discharge. In such cases
where detailed billing information relative to insurance or other third-party
coverage is not available at discharge, we attempt to obtain such information
from the patient or client hospital billing record information subsequent to
discharge to facilitate the collections process. Collections at the time of
rendering such services (emergency room discharge) are not significant.

Approximately 97% of our approximate six million fee-for-service patient
visits are billed on our automated IDX billing system. The entering of patient
data is principally manual in nature. We maintain within the IDX billing system
fee schedules that vary for the level of care rendered. In addition, within the
IDX billing system we maintain contractually agreed to in the case of commercial
and managed care insurance and reimbursement policy parameters in the case of
governmental payers to allow us to bill such payers at levels that are less than
the gross charges resulting from our fee schedules. Our IDX billing system
calculates the contractual allowances at the time of processing of third-party
payer remittances. The contractual allowance calculation within the IDX system
is used principally to determine the propriety of subsequent third-party payer
payments. The nature of emergency care services and the requirement to treat all
patients in need of such care and often times under circumstances where complete
and accurate billing information is not readily available at the time of
discharge, precludes the use of the IDX system to accurately determine
contractual allowances for financial reporting purposes. As a result, management
estimates its Net Revenue Less Provision, which is our revenue estimated to be
collected after considering our contractual allowance obligations and our
estimates of doubtful accounts, as further discussed in detail in the
Management's Discussion and Analysis section of this Form 10-K filing. The
determination of the difference between gross charges and estimated net
collections as to the allocation for financial reporting purposes between
contractual allowances and doubtful accounts is based on historical trended
factors such as actual adjudicated claims resulting in known contractual
allowances trends and actual uncollectible accounts receivable write-off
experience.

INDUSTRY OVERVIEW

According to the Centers for Medicare and Medicaid Services ("CMS"),
national healthcare spending in 2003 increased 7.8%, compared to an increase of
9.3% in 2002. Healthcare spending grew 3% faster than the overall economy as
measured by the growth of domestic product ("GDP"). The healthcare share of the
GDP increased from 14.9% in 2002 to 15.3% in 2003. Growth in public-sector
healthcare spending increased by 6.6% in 2003, and private-sector healthcare
spending increased by 8.6% in 2003. Hospital services have historically
represented the single largest component on this spending, accounting for
approximately 30.7% of total healthcare spending in 2003, an increase of 8.5%
from 2002.

In the increasingly complex healthcare regulatory, managed care and
reimbursement environment, healthcare facilities are under significant pressure
from the government and private payers to both improve the quality and reduce
the cost of care. In response, such healthcare facilities have increasingly
outsourced the staffing and management of multiple clinical areas to contract
management companies with specialized skills and a standardized model to improve
service, increase the overall quality of care and reduce administrative costs.
In addition, we believe the healthcare industry is continuing to experience an
increasing trend toward outpatient treatment rather than the traditional
inpatient treatment. Healthcare reform efforts in recent years have placed an
increasing emphasis on reducing the time patients spend in hospitals. As a
result, we believe the severity of illnesses and injuries treated in an
emergency department or other hospital setting is likely to continue to
increase.

Emergency Medicine. According to the American Hospital Association about
4,000 community hospitals in the United States operate emergency departments,
and approximately 83% of these hospitals outsource their physician staffing and
management for this department. In 2002, emergency department

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expenditures were approximately $75.0 billion, with emergency physician services
accounting for approximately $26.0 billion. In 2003, emergency departments
handled over 111 million patient visits an increase in emergency visits of 11.6%
in five years. According to the American College of Emergency Physicians, up to
50% of all hospital inpatient admissions originate in the emergency department.
In addition, the average number of patient visits per hospital emergency
department increased at a compounded annual growth rate of approximately 4%
between 1998 and 2002.

The market for outsourced emergency department medical and administrative
services is highly fragmented. Approximately 64% of the market is served by a
large number of small, local and regional physician groups. These local
providers often lack the depth of services and administrative and systems
infrastructure necessary to compete with national providers in the increasingly
complex healthcare business and regulatory environment.

Military Staffing. Permanent civilian staffing is used extensively in
military treatment facilities today. Industry sources project the military
permanent medical staffing market to increase from $572 million to at least $765
million over the next five years, representing a 6% compounded annual growth
rate. Military hospitals have been innovators and early adopters of permanent
staffing. Faced with insufficient staffing levels and the inability to
effectively recruit and retain sufficient numbers of physicians and nurses,
military hospitals were losing patients to more costly civilian hospitals. By
increasing staffing levels, the military has been able to leverage excess
facility space and "recapture" medical services, providing them on base at a
lower cost to the federal government.

The medical staffing market in governmental settings is expected to
experience continued growth due to the growth of military healthcare
expenditures coupled with the well-documented shortage of nurses and other
healthcare professionals. The key growth drivers of the governmental staffing
market are:

- government "Optimization" plan implementation. The government is
critically aware of the healthcare costs it bears when individuals
entitled to military healthcare go off base for healthcare treatments. As
such, it has implemented an "Optimization"' plan that seeks to recapture
this spending primarily through increased staffing levels of healthcare
providers on base. By recapturing medical services through augmented
military staffing, we estimate that the government has spent
approximately $500 million less in the community in 2003 and is targeting
to increase its savings by at least 10% per year,

- DOD Transformation has a renewed focus by the Secretary of Defense. As
the active duty fighting forces are stretched globally with the global
war on terrorism, the Secretary has made it a priority to offset an
increase in the amount of frontline troops by a decrease in active duty
and government employed staff in areas that do not require soldiers,
sailors, and airmen to accomplish military missions. One of the areas
targeted for reduction of such personnel is the medical staff directly
hired by the Department of Defense which numbers approximately 131,000
active duty and government employed staff. Over the next five years the
Department of Defense is targeting about 10,000 of the active duty
positions for conversion to civilian positions. The number of
beneficiaries requiring care inside the military system will not be
reduced and may increase as the optimization plans succeed, so the
government will need to either contract for additional healthcare
professionals or direct hire additional staff to help manage the overall
healthcare cost of the program, and

- The global war on terror presents additional healthcare professional
staffing opportunities. As military healthcare professionals are deployed
overseas in front line hospital units to support the fighting force, the
opportunity to provide staff in the military hospitals on the "home
front" creates the need for more contracted healthcare professionals. The
deployments typically last nine to twelve months for the military
healthcare professionals.

Radiology. Based on data from the American Medical Association and the
American College of Radiology, there are about 26,000 practicing radiologists,
and about 1,000 of them are retiring each year. Yet only about 700 residency and
fellowship grads finished training in 2003. The demand for radiologists is
estimated to be growing by approximately 5% a year due to an increasing
population and advancements in radiological procedures, while the supply of
radiologists is growing at a lower rate of 2-3% per year. The national shortage
of radiologists presents an advantage to a company like ours that has the
resources to

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effectively recruit in the current employment marketplace. The current market
for radiologists and their services has altered the traditional fee-for-service
compensation arrangement with a hospital. In today's market for radiology
services we more frequently are entering into cost-plus arrangements with
hospitals. These arrangements reduce our economic risk for such services in a
time of escalating professional compensation for radiologists in general. The
market for outsourced radiology services is highly fragmented and served by a
large number of small, local and, to a lesser extent, regional radiology groups.
Smaller radiology groups are often at a competitive disadvantage since they
often lack the capital, range of medical equipment, teleradiology night time
support and information systems required to meet the increasingly complex needs
of hospitals.

Anesthesiology. The American Society of Anesthesiologists estimates that
40 million anesthetics are administered each year in America and that 90%
involve an MD anesthesiologist ("MDA"). The net collected total revenue market
for anesthesiologist services is estimated to be $11.5 billion. This market is
served primarily by groups of physicians whose size ranges from 10-20 MDAs.
There are very few groups having in excess of 60 MDAs per group. The groups are
largely self-governed and many enjoy exclusive contracts with hospitals and
outpatient centers requiring anesthesia services. The majority of the groups
require various management services with most groups contracting out their
billing needs to third-party providers of such services. There is not a dominant
provider of management services to anesthesia groups. We believe that we are one
of the largest single providers of management services to anesthesia groups.

Inpatient Services (Hospitalist). According to the Society of Hospital
Medicine ("SHM"), a hospitalist is "a doctor whose primary professional focus is
the general medical care of hospitalized patients." A recent study by the SHM
indicates that hospitals employed 75% more hospitalists in 2003 than in 2002.
There are presently approximately 8,000 practicing hospitalists in the U.S., and
a recent analysis projects a hospitalist workforce of approximately 30,000 by
the end of the decade. According to a report published by Health Affairs in
2003, 46% of nationwide medical groups use hospitalists today to coordinate the
care of their hospital patients. An article in the January 2002 issue of the
Journal of the American Medical Association reported that the implementation of
hospitalist programs was associated with significant reductions in resource use,
usually measured as hospital costs (average decrease of 13.4%) or average length
of stay (average decrease of 16.6%). The December 2002 issue of the Annals of
Internal Medicine published a study that concluded that hospitalist-attended
patients have lower costs, shorter lengths of stay and better outcomes,
including higher survival rates.

There are several factors that portend continued growth of the hospitalist
model, including cost pressures on hospitals, physician groups and managed care
organizations; the increased acuity of hospitalized patients and the accelerated
pace of their hospitalizations; and the time pressures of primary care
physicians in the office. We believe there is potential for significant growth
in this service line over the coming years.

COMPETITIVE STRENGTHS

Leading Market Position. We believe we are among the largest national
providers of outsourced emergency physician staffing and administrative services
in the United States and a significant provider of healthcare staffing on a
permanent basis to military treatment facilities under the U.S. government's
TRICARE Program. We believe our ability to spread the cost of our corporate
infrastructure over a broad national contract and revenue base generates
significant cost efficiencies that are generally not available to smaller
competitors. As a full-service provider with a comprehensive understanding of
changing healthcare regulations and policies and the management information
systems that provide support to manage these changes, we believe we are well
positioned to maintain and grow our market share from other service providers.

The provision of healthcare staffing under the TRICARE Program changed
significantly in 2004. We believe our abilities and strengths in providing
outsourced permanent healthcare staffing to military treatment facilities were
significant factors in successfully competing for military staffing business
under the revised TRICARE Program.

Regional Operating Models Supported by a National Infrastructure. We
service our agreements from 14 regional management sites organized under eight
operating units, which allows us to deliver locally focused

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services with the resources and sophistication of a national provider. Our local
presence helps us foster community based relationships with healthcare
facilities, which we believe results in responsive service and high physician
retention rates. Our strong relationships in local markets enable us to
effectively market our services to both local hospital and military treatment
facility administrators, who generally are involved in making decisions
regarding contract awards and renewals. Our regional operating units are
supported by our national infrastructure, which includes integrated information
systems and standardized procedures that enable us to efficiently manage the
operations and billing and collections processes. We also provide each of our
regional management sites with centralized staffing support, purchasing
economies of scale, payroll administration, coordinated marketing efforts and
risk management. We believe our regional operating models supported by our
national infrastructure improve productivity and quality of care while reducing
the cost of care.

Significant Investment in Information Systems and Procedures. Our
proprietary information systems link our billing, collection, recruiting,
scheduling, credentials coordination and payroll functions among our regional
management sites, allowing our best practices and procedures to be delivered and
implemented nationally while retaining the familiarity and flexibility of a
regionally-based service provider. We have developed and maintain integrated,
advanced systems to facilitate the exchange of information among our operating
units and clients. These systems include our Lawson financial reporting system,
IDX Billing System and our TeamWorks(TM) physician database and software
package. As a result of these investments and the company-wide application of
best practices policies, we believe our average cost per patient billed and
average recruiting cost per physician and other healthcare professionals are
among the lowest in the industry. The strength of our information systems has
enhanced our ability to properly collect patient payments and reimbursements in
an orderly and timely fashion and has increased our billing and collections
productivity.

Ability to Recruit and Retain High Quality Physicians. A key to our
success has been our ability to recruit and retain high quality physicians to
service our contracts. While our local presence gives us the knowledge to
properly match physicians with hospitals and military treatment facilities, our
national presence and infrastructure enable us to provide physicians with a
variety of attractive client locations, advanced information and reimbursement
systems and standardized procedures. Furthermore, we offer physicians
substantial flexibility in terms of geographic location, type of facility,
scheduling of work hours, benefit packages and opportunities for relocation and
career development. This flexibility, combined with fewer administrative
burdens, improves physician retention rates and stabilizes our contract base. We
believe we have among the highest physician retention rates in the industry.

Experienced Management Team with Significant Equity Ownership. Our senior
management team has extensive experience in the outsourced physician staffing
and administrative services industry. Our Chief Executive Officer, H. Lynn
Massingale, M.D., has been with Team Health and its predecessor entity since its
founding in 1979. Our senior corporate and affiliate executives have an average
of over 20 years experience in the outsourced physician staffing and medical
services industries. Members of our management team have, with the inclusion of
performance-based options, an indirect fully diluted ownership interest of
approximately 18.4% of Team Health, Inc. As a result of its substantial equity
interest, we believe our management team has significant incentive to maintain
its existing client base through the continued provision of high quality
services to them and to continue to increase our revenue and profitability
through new growth.

BUSINESS STRATEGY

Increase Revenue from Existing Customers. We have a record of achieving
growth in revenue from our existing customer base. In 2004, net revenue less
provision for uncollectibles from same contracts, which consist of contracts
under management from the beginning of the period through the end of the
subsequent period, grew by approximately 4.2% on a year over year basis. We plan
to continue to grow revenue from existing customers by:

- capitalizing on increasing patient volumes,

- implementing enhanced point of service capture of demographic data to
result in improved billing and collection for services rendered,

5

- continuing to improve documentation of care delivered, thereby capturing
full reimbursement for services provided,

- implementing fee schedule increases, where appropriate,

- increasing the scope of services offered within contracted healthcare
facilities,

- capitalizing on our financial strength and resources with respect to
potential clients looking for financial stability, and

- increasing staffing levels and expanding services at current military
sites of service to recapture patients who receive services off base as a
result of military facilities outsourcing their staffing needs.

Capitalize on Outsourcing Opportunities to Win New Contracts. We believe
we are well positioned to capitalize on the growth of the overall healthcare
industry as well as the growth of the hospital outsourcing market and the
military permanent staffing market due to our:

- demonstrated ability to improve productivity, patient satisfaction and
quality of care while reducing overall cost to the healthcare facility,

- successful record of recruiting and retaining high quality physicians and
other healthcare professionals,

- national presence,

- sophisticated information systems and standardized procedures that enable
us to efficiently manage our core staffing and administrative services as
well as the complexities of the billing and collections process, and

- financial strength and resources.

Furthermore, we seek to obtain new contracts by:

- replacing competitors at hospitals that currently outsource their
services,

- obtaining new contracts from healthcare facilities that do not currently
outsource, and

- expanding our present base of military treatment facility contracts by
successfully competing for new staffing contracts.

During the past three years, we have been awarded 73 new outsourced
contracts, excluding contracts to service areas within military treatment
facilities with outsourced healthcare staffing. During 2004, all of our
contracts to service military treatment facilities were re-contracted.

Focus on Risk Management. Through our risk management staff, quality
assurance staff and medical directors, we conduct an aggressive risk management
program for loss prevention and early intervention. We have a proactive role in
promoting early reporting, evaluation and resolution of serious incidents that
may evolve into claims or suits. The risk management function is designed to
prevent or minimize medical professional liability claims and includes:

- incident reporting systems,

- tracking/trending the cause of accidents and claims,

- pre-hire risk evaluation and screening, semi-annual risk review for all
providers,

- risk management quality improvement programs,

- physician education and service programs, including peer review and
monitoring,

- loss prevention information such as audio tapes and risk alert bulletins,
and

- early intervention of potential professional liability claims and
pre-deposition review.

Pursue Selective Acquisitions. We intend to selectively explore small
strategic acquisitions in the fragmented outsourcing market. We have
successfully completed and integrated seven acquisitions (excluding the
acquisition of a military staffing company in 2002) in the past three years for
an aggregate purchase price of approximately $21.3 million. The acquisitions
that we may explore are limited by certain restrictions in our
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credit facilities. Under the credit facilities the cash consideration paid in
connection with acquisitions may not exceed $20 million per acquisition and $40
million for all acquisitions consummated in any fiscal year and we must
demonstrate pro forma compliance with our financial covenants after taking the
acquisitions into account.

CONTRACTUAL ARRANGEMENTS

In 2004, approximately 60% of our net revenue less provision for
uncollectibles was generated under fee-for-service arrangements and 37% from
hourly rate contracts. On a contract by contract basis, neither form of contract
requires any significant financial outlay, investment obligation or equipment
purchase by us other than the professional expenses associated with obtaining
and staffing the contracts.

Our contracts with hospitals generally have terms of three years. Our
present contracts with military treatment facilities are generally for one year.
Both types of contracts often include automatic renewal options under similar
terms and conditions unless either party gives notice of an intent not to renew.
While most contracts are terminable by either of the parties upon notice of as
little as 30 days, the average tenure of our existing hospital contracts is
approximately eight years. The military's TRICARE Program underwent significant
changes that began in June 2004. The principal change was that previously
existing healthcare staffing contracts under the TRICARE Program were
re-contracted during the period June 1, 2004 through November 1, 2004. The
re-contracting process was conducted by each military facility primarily through
a competitive bidding process resulting in a direct contracting relationship
between the military facility and the successful bidder.

Hospitals. We provide outsourced physician staffing and administrative
services to hospitals under fee-for-service contracts and flat-rate contracts.
Hospitals entering into fee-for-service contracts agree, in exchange for
granting exclusivity to us for such services, to authorize us to bill and
collect the professional component of the charges for such professional
services. Under the fee-for-service arrangements, we bill patients and third
party payers for services rendered. Depending on the underlying economics of the
services provided to the hospital, including its payer mix, we may also receive
supplemental revenue from the hospital. In a fee-for service arrangement, we
accept responsibility for billing and collection.

Under flat-rate contracts, the hospital performs the billing and collection
services of the professional component and assumes the risk of collectibility.
In return for providing the physician staffing and administrative services, the
hospital pays a contractually negotiated fee.

Military Treatment Facilities. Our present contracts to provide staffing
solutions to military treatment facilities provide such staffing on an hourly or
fee basis.

Physicians. We contract with physicians as independent contractors or
employees to provide services to fulfill our contractual obligations to our
hospital clients. We typically either pay physicians: (1) an hourly rate for
each hour of coverage provided at rates comparable to the market in which they
work; (2) a relative value unit ("RVU") based payment, or (3) a combination of
both a fixed rate and a RVU-based component. The hourly rate varies depending on
whether the physician is independently contracted or an employee. Independently
contracted physicians are required to pay a self-employment tax, social
security, and workers' compensation insurance premiums. In contrast, we pay
these taxes and expenses for employed physicians.

Our contracts with physicians generally have "evergreen" provisions and can
be terminated at any time under certain circumstances by either party without
cause, typically upon 180 days notice. In addition, we generally require the
physician to sign a non-compete and non-solicitation agreement. Although the
terms of our non-compete agreements vary from physician to physician, the
non-compete agreements generally have terms of two years after the termination
of the agreement. We also generally require our employed physicians to sign
similar non-compete agreements. Under these agreements, the physician is
restricted from divulging confidential information, soliciting or hiring our
employees and physicians, inducing termination of our agreements and competing
for and/or soliciting our clients. As of December 31, 2004, we had working
relationships with approximately 3,100 physicians, of which approximately 2,500
were independently contracted.

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Other Healthcare Professionals. We provide through contractual agreements,
para-professional providers, nurses, specialty technicians and administrative
support staff on a long-term contractual basis to military treatment facilities.
These healthcare professionals under our current military staffing contracts are
compensated for on an hourly fee basis. See "Risk factors -- Risks related to
our business -- We may not be able to successfully recruit and retain qualified
physicians to serve as our independent contractors or employees." As of December
31, 2004, we employed or contracted with approximately 3,100 other healthcare
professionals.

SERVICE LINES

We provide a full range of outsourced physician staffing and administrative
services in emergency medicine, radiology, anesthesiology, inpatient services,
pediatrics, and other departments of a hospital. We also provide a full range of
healthcare management services to military treatment facilities for the
beneficiaries of U.S. military personnel through the TRICARE program. In
addition to physician related services within a military treatment facility
setting, we also provide non-physician staffing services to military treatment
facilities, including such services as para-professional providers, nursing,
specialty technicians and administrative staffing. As hospitals and other
healthcare providers continue to experience pressure from managed care companies
and other payers to reduce costs while maintaining or improving the quality of
service, we believe hospitals and other contracting parties will increasingly
turn to a single-source with an established track record of success for
outsourced physician staffing and administrative services. As the outsourcing
trend continues, we believe our delivery platform of regional site management
supported by a national infrastructure will result in higher customer
satisfaction and a more stable contract base than many of our larger
competitors.

Emergency Department. We believe we are one of the largest providers of
outsourced physician staffing and administrative services for hospital emergency
departments in the United States. Approximately 66% of our net revenue less
provision for uncollectibles in 2004 came from hospital emergency department
contracts. As of December 31, 2004, we independently contracted with or employed
approximately 2,200 hospital emergency department physicians. We contract with
the hospital to provide qualified emergency physicians and other healthcare
providers for the hospital emergency department. In addition to the core
services of contract management, recruiting, credentials coordination, staffing
and scheduling, we provide our client hospitals with enhanced services designed
to improve the efficiency and effectiveness of the emergency department.
Specific programs like WaitLoss(TM) apply proven process improvement
methodologies to departmental operations. Physician documentation templates
promote compliance with federal documentation guidelines, enhance patient care
and risk management and allow for more accurate patient billing. By providing
these enhanced services, we believe we increase the value of services we provide
to our clients and improve client relations. Additionally, we believe these
enhanced services also differentiate us in sales situations and improve the
chances of being selected in a contract bidding process.

In the past three years, Team Health acquired 17 contracts as a result of
the acquisition of two hospital emergency department and physician groups. The
acquired hospital emergency department contracts were generally with hospitals
in large markets with an average patient volume exceeding 15,000 visits per
year. During this period we have also successfully negotiated 51 new outsourced
hospital emergency department contracts. These contracts have been obtained
either through direct selling or through a competitive bidding process initiated
by hospitals.

Partially offsetting the growth in the number of hospital emergency
department contracts attributed to acquisitions and direct sales are contract
terminations. In the past three years, 74 hospital emergency department
contracts in total were terminated. Contract terminations can be attributed to a
number of factors. The termination of a contract is principally due to either an
award of the contract to another source of provider staffing as a result of a
competitive bidding process or termination of the contract by us due to a lack
of an acceptable profit margin on fee-for-service patient volumes coupled with
inadequate contract subsidies. Additionally, to a much lesser extent contracts
may be terminated due to such conditions as a hospital facility closing due to
facility mergers or a hospital attempting to insource the service being provided
by us. In 2004, we experienced a net loss of five emergency department
contracts. During 2003 and 2004, we terminated a number of contracts due to the
cost of professional liability insurance affecting the profitability of certain
contracts on a localized market basis.

8

Radiology. We provide outsourced radiology physician staffing and
administrative services in the United States both on a fee-for-service basis, as
well as on a cost-plus basis with hospitals. We contract directly with
radiologists to provide radiology physician staffing and administrative
services. A typical radiology management team consists of clinical
professionals, board certified radiologists that are trained in all modalities,
and non-clinical professionals and support staff that are responsible for the
scheduling, purchasing, billing and collections functions. A smaller component
of our radiology business is our teleradiology support services. The customers
for these services are typically radiologists or radiology groups. The business
provides nighttime support to our customers from a centralized reading location.
As of December 31, 2004, we independently contracted with or employed
approximately 90 radiologists. We have traditionally focused on the
hospital-based radiology market, although we also maintain contracts with
outpatient diagnostic imaging centers.

Temporary Staffing. We provide temporary staffing (locum tenens) of
physicians and paraprofessionals to hospitals and other healthcare provider
organizations through our subsidiary Daniel and Yeager, Inc. ("Daniel and
Yeager"). Specialties placed through Daniel and Yeager include anesthesiology,
radiology and primary care among others. Revenues from our services are
generally derived from a standard contract rate based upon the type of service
provided.

Inpatient Services. We also provide outsourced physician staffing and
administrative services for inpatient services, which include hospitalist
services and house coverage services. Our inpatient services contracts with
hospitals are generally on a cost-plus or flat rate basis. As of December 31,
2004, we independently contracted with or employed approximately 170 inpatient
physicians.

Anesthesiology. We provide a wide range of management services to
anesthesiology practices on a fee basis including strategic management,
management information systems, third-party payer contracting, financial and
accounting support, benefits administration and risk management, scheduling
support, operations management and quality improvement services using
proprietary anesthesia management practice software. We also arrange for the
provision of billing and other management services on a management fee basis to
anesthesiologist practices. Our anesthesiologist services are organized under an
anesthesiologist operating unit known as "THAMS" (Team Health Anesthesiology
Management Services). THAMS currently provides management and/or billing
services to 16 integrated anesthesia practices whose members number
approximately 600 providers. Overall, we are able to offer essential services to
anesthesiologist groups that enable them to focus on the clinical practice of
medicine while leaving the day-to-day business management issues related to
their groups to us.

Pediatrics. We also provide outsourced pediatrics physician staffing and
administrative services for general and pediatric hospitals. These services
include pediatric emergency medicine and radiology, neonatal intensive care,
pediatric intensive care, urgent care centers, primary care centers, observation
units and inpatient services. As of December 31, 2004, we independently
contracted with or employed approximately 210 pediatric physicians providing
pediatric services in such settings. We have experienced net revenue and
contract growth in our outsourced pediatric physician staffing and
administrative services business due primarily to new contract sales and
acquisitions, and to a lesser extent, rate increases on existing contracts. We
also operate six after-hours and weekend pediatric services locations. During
2004, we opened one after-hours and weekend pediatric services location.

Primary Care Clinics and Occupational Medicine. We provide primary care
staffing and administrative services in stand-alone primary clinics and in
clinics located within the work-site of industrial clients. While such clinics
are not a major focus of our business, they are complementary to our hospital
client's interests. We generally contract with hospitals or industrial employers
to provide cost-effective, high quality primary care physician staffing and
administrative services.

Other Non-Physician Staffing Services. Other non-physician staffing
services, including such services as nursing, specialty technician and
administrative staffing are provided primarily in military treatment facilities.
These services are currently provided on an hourly contract basis. Revenues less
provision derived from such non-physician staffing services were approximately
12% of our revenues in 2004.

9

SERVICES

We provide a full range of outsourced physician and non-physician
healthcare professional staffing and administrative services for emergency
medicine, radiology, anesthesiology, inpatient services, pediatrics, and other
areas of healthcare facilities.

Our outsourced staffing and administrative services include:

- contract management,

- staffing,

- recruiting,

- credentials coordination,

- scheduling,

- payroll administration and benefits,

- information systems,

- consulting services,

- billing and collection,

- risk management,

- continuing education services, and

- management training.

Contract Management. Our delivery of services for a clinical area of a
healthcare facility is led by an experienced contract management team of
clinical and other healthcare professionals. The team includes a regional
medical director, an on-site medical director and a client services manager. The
medical director is a physician with the primary responsibility of managing the
physician component of a clinical area of the facility. The medical director
works with the team, in conjunction with the nursing staff and private medical
staff, to improve clinical quality and operational effectiveness. Additionally,
the medical director works closely with the regional operating unit operations
staff to meet the clinical area's ongoing recruiting and staffing needs.

Staffing. We provide a full range of staffing services to meet the unique
needs of each healthcare facility. Our dedicated clinical teams include
qualified, career-oriented physicians and other healthcare professionals
responsible for the delivery of high quality, cost-effective care. These teams
also rely on managerial personnel, many of whom have clinical experience, who
oversee the administration and operations of the clinical area. As a result of
our staffing services, healthcare facilities can focus their efforts on
improving their core business of providing healthcare services for their
communities as opposed to recruiting and managing physicians. We also provide
temporary staffing services of physicians and other healthcare professionals to
healthcare facilities on a national basis.

Recruiting. Many healthcare facilities lack the resources necessary to
identify and attract specialized, career-oriented physicians. We have a staff of
approximately 52 professionals dedicated to the recruitment of qualified
physicians. These professionals are regionally located and are focused on
matching qualified, career-oriented physicians with healthcare facilities.
Common recruiting methods include the use of our proprietary national physician
database, attending trade shows, placing website and professional journal
advertisements and telemarketing.

We have committed significant resources to the development of a proprietary
national physician database to be shared among our regional operating units.
This database is in operation at all operating units. The database uses the
American Medical Association master file, which we believe contains over
1,000,000 physicians as the initial data source on potential candidates.
Recruiters contact prospects through telemarketing, direct mail, conventions,
journal advertising and our internet site to confirm and update the information.
Prospects expressing interest in one of our practice opportunities provide more
extensive information on their

10

training, experience, and references, all of which is added to our database. Our
goal is to ensure that the practitioner is a good match with both the facility
and the community before proceeding with an interview.

Credentials Coordination. We gather primary source information regarding
physicians to facilitate the review and evaluation of physicians' credentials by
healthcare facility.

Scheduling. Our scheduling department assists medical directors in
scheduling physicians and other healthcare professionals within the clinical
area on a monthly basis.

Payroll Administration and Benefits. We provide payroll administration
services for the physicians and other healthcare professionals with whom we
contract to provide physician staffing and administrative services. Our clinical
employees benefit significantly by our ability to aggregate physicians and other
healthcare professionals to negotiate more favorable employee benefit packages
and to provide professional liability coverage at lower rates than many
hospitals or physicians could negotiate on a stand-alone basis. Additionally,
healthcare facilities benefit from the elimination of the overhead costs
associated with the administration of payroll and, where applicable, employee
benefits.

Information Systems. We have invested in advanced information systems and
proprietary software packages designed to assist hospitals in lowering
administrative costs while improving the efficiency and productivity of a
clinical area. These systems include TeamWorks(TM), a national physician
database and software package that facilitates the recruitment and retention of
physicians and supports our contract requisition, credentials coordination,
automated application generation, scheduling and payroll operations.

Consulting Services. We have a long history of providing outsourced
physician staffing and administrative services to healthcare facilities and, as
a result, have developed extensive knowledge in the operations of certain areas
of the facilities we service. As such, we provide consulting services to
healthcare facilities to improve the productivity, quality and cost of care
delivered by them. These services include:

- Process Improvement. We have developed a number of utilization review
programs designed to track patient flow and identify operating
inefficiencies. To rectify such inefficiencies, we have developed a Fast
Track system to expedite patient care in the hospital emergency
department and urgent care center by separating patients who can be
treated in a short period of time from patients who have more serious or
time-consuming problems. Fast Track patients, once identified through
appropriate triage categorization, are examined and treated in a separate
area of the hospital emergency department and urgent care center,
controlled by its own staff and operational system. We have substantial
experience in all phases of development and management of Fast Track
programs, including planning, equipping, policy and procedure
development, and staffing. In addition, we employ WaitLoss(TM), a
proprietary process improvement system designed to assist the hospital in
improving the efficiency and productivity of a department.

- Quality Improvement. We provide a quality improvement program designed
to assist a healthcare facility in maintaining a consistent level of high
quality care. It periodically measures the performance of the healthcare
facility, based on a variety of benchmarks, including patient volume,
quality indicators and patient satisfaction. This program is typically
integrated into our process improvement program to ensure seamless
delivery of high quality, cost-effective care.

- Managed Care Contracting. We have developed extensive knowledge of the
treatment protocols and related documentation requirements of a variety
of managed care payers. As a result, we often participate in the
negotiation of managed care contracts to make those managed care
relationships effective for patients, payers, physicians and hospitals.
We provide managed care consulting services in the areas of contracting,
negotiating, reimbursement analysis/projections, payer/hospital
relations, communications and marketing. We have existing managed care
agreements with health maintenance organizations, preferred provider
organizations and integrated delivery systems for commercial, Medicaid
and Medicare products. While the majority of our agreements with payers
continue to be traditional fee-for-service contracts, we are experienced
in providing managed, prepaid healthcare to enrollees of managed care
plans.

- Nursing Services. We maintain highly regarded, experienced nurse
consultants on our client support staff. These nurse consultants provide
assistance to nurse managers and medical directors of the client

11

healthcare facility on a variety of issues, including risk management and total
quality management. In addition, the nurse consultants are available to make
site visits to client facilities on request to assess overall operations,
utilization of personnel and patient flow.

Billing and Collection. Our billing and collection services are a critical
component of our business. Excluding the military staffing business which has
its own proprietary billing processes, our billing and collections operations
are concentrated in five core-billing facilities and operate on a uniform
billing system -- the IDX software system. The IDX system has proven to be a
powerful billing and accounts receivable software package with strong reporting
capabilities. We have interfaced a number of other software systems with the IDX
system to further improve productivity and efficiency. Foremost among these is
an electronic registration interface that has the capability of gathering
registration information directly from a hospital's management information
system. Additionally, we have invested in electronic submission of claims, as
well as electronic remittance posting. These programs have resulted in lower
labor and postage expenses. At the present time, approximately 97% of our
approximately six million fee-for-service annual patient visits are being
processed by one of the five billing facilities.

We also operate an internal collection agency. Substantially all collection
placements generated from our billing facilities are sent to the agency.
Comparative analysis has shown that the internal collection agency is more cost
effective than the use of outside agencies and improved the collectibility of
existing placements. Our advanced comprehensive billing and collection systems
allow us to have full control of accounts receivable at each step of the
process.

Risk Management. Through our risk management staff, quality assurance
staff and our medical directors, we conduct an aggressive risk management
program for loss prevention and early intervention. We have a proactive role in
promoting early reporting, evaluation and resolution of serious incidents that
may evolve into claims or suits. Our risk management function is designed to
prevent or minimize medical professional liability claims and includes:

- incident reporting systems,

- tracking/trending the cause of accidents and claims,

- pre-hire risk assessment and screening, semi-annual risk review for all
providers,

- risk management quality improvement programs,

- physician education and service programs, including peer review and
monitoring,

- loss prevention information such as audio tapes and risk alert bulletins,
and

- early intervention of potential professional liability claims and
pre-deposition review.

Continuing Education Services. Our internal continuing education services
are fully accredited by the Accreditation Council for Continuing Medical
Education. This allows us to grant our physicians and nurses continuing
education credits for both externally and internally developed educational
programs at a lower cost than if such credits were earned through external
programs. In addition to providing life support certification courses, we have
designed a series of client support seminars entitled Successful Customer
Relations for physicians, nurses and other personnel to learn specific
techniques for becoming effective communicators and delivering top-quality
customer service. These seminars help the clinical team sharpen its customer
service skills, further develop communication skills and provide techniques to
help deal with people in many critical situations.

SALES AND MARKETING

Contracts for outsourced physician staffing and administrative services are
generally obtained either through direct selling efforts or requests for
proposals. We have a team of seven sales professionals located throughout the
country. Each sales professional is responsible for developing sales and
acquisition opportunities for the operating unit in their territory. In addition
to direct selling, the sales professionals are responsible for working in
concert with the regional operating unit president and corporate development
personnel to respond to a request for proposal or take other steps to develop
new business relationships.

12

Although practices vary from healthcare facility to healthcare facility,
healthcare facilities generally issue a request for proposal with demographic
information of the facility department, a list of services to be performed, the
length of the contract, the minimum qualifications of bidders, the selection
criteria and the format to be followed in the bid. Supporting the sales
professionals is a fully integrated marketing campaign comprised of a
telemarketing program, internet website, journal advertising, and a direct mail
and lead referral program.

OPERATIONS

We currently operate through eight operating units with management located
at fourteen regional sites. Our regional sites are listed in the table below.
The operating units are managed semi-autonomously, in most cases by senior
physician leaders, and are operated as profit centers with the responsibility
for pricing new contracts, recruiting and scheduling physicians and other
healthcare professionals, marketing locally and conducting day-to-day
operations. The management of corporate functions such as accounting, payroll,
billing and collection, capital spending, information systems and legal are
centralized.

INSURANCE

We require the physicians with whom we contract to obtain professional
liability insurance coverage. For both our independently contracted and employed
physicians, we typically arrange the provision of claims-made coverage with per
incident and annual aggregate per physician limits and per incident and annual
aggregate limits for all corporate entities. These limits are deemed appropriate
by management based upon historical claims, the nature and risks of the business
and standard industry practice.

Beginning in 2003, we began providing for a significant portion of our
professional liability loss exposures through the use of a captive insurance
company and through greater utilization of self-insurance reserves. We base a
substantial portion of our provision for professional liability losses on
periodic actuarial estimates of such losses for periods subsequent to March 11,
2003. An independent actuary firm is responsible for preparation of the periodic
actuarial studies.

We are usually obligated to arrange for the provision of "tail" coverage
for claims against our physicians for incidents that are incurred but not
reported during periods for which the related risk was covered by claims-made
insurance. With respect to those physicians for whom we are obligated to provide
tail coverage, we accrue professional insurance expenses based on estimates of
the cost of procuring tail coverage.

We also maintain general liability, vicarious liability, automobile
liability, property and other customary coverages in amounts deemed appropriate
by management based upon historical claims and the nature and risks of the
business.

13

EMPLOYEES

As of December 31, 2004, we had approximately 5,800 employees, of which
approximately 3,600 were physicians and other healthcare professionals with
remaining employees working in billing and collections, operations and
administrative support functions. Our employees are not covered by any labor
agreements nor affiliated with any unions.

REGULATORY MATTERS

General. As a participant in the healthcare industry, our operations and
relationships with healthcare providers, such as hospitals, are subject to
extensive and increasing regulations by numerous federal and state governmental
entities, as well as local governmental entities. The management and clinical
services provided by us under contracts with hospitals and other clients include
(collectively, "Management Services"):

- the identification and recruitment of physicians and other healthcare
professionals for the performance of emergency medicine, radiology and
other services at hospitals, outpatient imaging facilities and other
facilities,

- utilization and review of services and administrative overhead,

- scheduling of staff physicians and other healthcare professionals who
provide clinical coverage in designated areas of healthcare facilities,
and

- administrative services such as billing and collection of fees for
professional services.

All of the above services are potentially subject to scrutiny and review by
federal, state and local governmental entities and are subject to the rules and
regulations promulgated by these governmental entities. Specifically, but
without limitation, the following laws and regulations may affect our operations
and contractual relationships:

State Laws Regarding Prohibition of Corporate Practice of Medicine and Fee
Splitting Arrangements. We currently provide outsourced physician staffing and
administrative services to healthcare facilities in 42 states. The laws and
regulations relating to our operations vary from state to state. The laws of
many states, including California, prohibit general business corporations, such
as us, from practicing medicine, controlling physicians' medical decisions or
engaging in some practices such as splitting professional fees with physicians.
In 2004, we derived approximately 10% of our net revenue less provision for
uncollectibles from services rendered in the state of California. The laws of
other states, including Florida, do not prohibit non-physician entities from
practicing medicine, but may retain a ban on some types of fee splitting
arrangements. In 2004, we derived approximately 17% of our net revenues less
provision for uncollectibles from services rendered in the state of Florida.

While we seek to comply substantially with existing applicable laws
relating to the corporate practice of medicine and fee splitting, we cannot
assure you that our existing contractual arrangements, including noncompetition
agreements with physicians, professional corporations and hospitals, will not be
successfully challenged in certain states as unenforceable or as constituting
the unlicensed practice of medicine or prohibited fee-splitting.

Debt Collection Regulation. Some of our operations are subject to
compliance with the federal Fair Debt Collection Practices Act and comparable
statutes in many states. Under the Fair Debt Collection Practices Act, a
third-party collection company is restricted in the methods it uses in
contacting consumer debtors and eliciting payments with respect to placed
accounts. Requirements under state collection agency statutes vary; however,
most require compliance similar to that required under the Fair Debt Collection
Practices Act. We believe that we are in substantial compliance with the Fair
Debt Collection Practices Act and comparable state statutes.

Anti-Kickback Statutes. We are subject to the federal healthcare fraud and
abuse laws including the federal anti-kickback statute. The federal
anti-kickback statute at section 1128B(b) of the Social Security Act ("SSA")
("Anti-Kickback Statute") prohibits the knowing and willful offering, payment,
solicitation or receipt of any bribe, kickback, rebate or other remuneration in
return for referring an individual to a person for the furnishing (or arranging
for the furnishing) of any item or service, or in return for the purchasing,
leasing,

14

ordering, or arranging for or recommending the purchasing, leasing, or ordering
of any good, facility, service, or item for which payment may be made, in whole
or in part, by a federal healthcare program. This fraud and abuse law defines
federal healthcare programs to include plans and programs that provide health
benefits, whether directly, through insurance, or otherwise, which are funded
directly by the United States government or any state healthcare program. These
programs include Medicare and Medicaid, and TRICARE (formerly the Civilian
Health and Medical Program of the Uniformed Services), among others. Violations
of the Anti-Kickback statute may result in civil and criminal penalties and
exclusion from participation in federal and state healthcare programs.

As authorized by Congress, the United States Department of Health and Human
Services has issued "safe harbor" regulations which describe some of the conduct
and business relationships immune from prosecution under the Anti-Kickback
Statute. The fact that a given business arrangement does not fall within one of
these "safe harbor" provisions does not render the arrangement illegal, but
business arrangements of healthcare service providers that fail to satisfy the
applicable safe harbor criteria are reviewed based upon a facts and
circumstances analysis to determine whether a violation may have occurred. Some
of the financial arrangements that we may maintain may not meet all of the
requirements for safe harbor protection. The authorities that enforce the
Anti-Kickback Statute may in the future determine that one or more of these
financial arrangements violate the Anti- Kickback Statute or other federal or
state laws. A determination that a financial arrangement violates the
Anti-Kickback Statute could subject us to liability under the Social Security
Act, including criminal and civil penalties, as well as exclusion from
participation in government programs such as Medicare and Medicaid or other
federal healthcare programs.

In addition, an increasing number of states in which we operate have laws
that prohibit some direct or indirect payments, similar to the Anti-Kickback
statute, if those payments are designed to induce or encourage the referral of
patients to a particular provider. Possible sanctions for violation of these
restrictions include exclusion from state funded healthcare programs, loss of
licensure, and civil and criminal penalties. Statutes vary from state to state,
are often vague, and have seldom been interpreted by courts or regulatory
agencies.

In order to obtain additional clarification on the federal Anti-Kickback
statute, a provider can obtain written interpretative advisory opinions from the
Department of Health and Human Services ("HHS") regarding existing or
contemplated transactions. Advisory opinions are binding as to the Department of
Health and Human Services but only with respect to the requesting party or
parties. The advisory opinions are not binding as to other governmental
agencies, e.g., the Department of Justice, and certain matters (e.g., whether
certain payments made in conjunction with conduct seeking to meet certain safe
harbor protection are at fair market value) are not within the purview of an
advisory opinion.

In 1998, the Office of Inspector General ("OIG") of HHS issued an advisory
opinion in which it concluded that a proposed management services contract
between a medical practice management company and a physician practice, which
provided that the management company would be reimbursed for the fair market
value of its operating services and its costs and paid a percentage of net
practice revenues, may constitute illegal remuneration under the federal
Anti-Kickback statute. The OIG's analysis focused on the marketing activities
conducted by the management company and concluded that the management services
arrangement described in the advisory opinion included financial incentives to
increase patient referrals, contained no safeguards against over utilization,
and included financial incentives that increased the risk of abusive billing
practices. We believe that our contractual relationships with hospitals and
physicians are distinguishable from the arrangement described in this advisory
opinion with regard to both the types of services provided and the risk factors
identified by the Inspector General. We provide outsourced physician staffing
and administrative services to hospitals and other healthcare providers through
contractual arrangements with physicians and hospitals. In some instances, we
may enter into a contractual arrangement that provides that, as compensation for
staffing a hospital department, we will receive a percentage of charges
generated by the physician services rendered to patients seeking treatment in
that department. However, the nature of our business distinguishes us from the
management company in the advisory opinion. We do not perform marketing or any
other management services for the hospital or the physicians by which we can
influence the number of patients who seek treatment at the hospital department
and thereby increase the compensation received by us from the hospital or paid
by us to physicians. Additionally, in any percentage compensation arrangement we
have with a hospital, the compensation paid to us by that hospital takes into
15

account only the professional services rendered by our physicians and does not
contain financial incentives to increase the referrals of patients by our
physicians to the hospital for hospital services. Nevertheless, we cannot assure
you that HHS will not be able to successfully challenge our arrangements under
the federal Anti-Kickback statute in the future.

Physician Self-Referral Laws. Our contractual arrangements with physicians
and hospitals may implicate the federal physician self-referral statute commonly
known as Stark II. In addition, a number of the states in which we operate have
similar prohibitions on physician self-referrals. In general, these state
prohibitions track Stark II's prohibitions and exceptions. Stark II prohibits
the referral of Medicare and (in certain contexts) Medicaid patients by a
physician to an entity for the provision of particular "designated health
services" if the physician or a member of such physician's immediate family has
a "financial relationship" with the entity.

Stark II provides that the entity which renders the "designated health
services" may not present or cause to be presented a claim for "designated
health services" furnished pursuant to a prohibited referral. A person who
engages in a scheme to circumvent Stark II's prohibitions may be fined up to
$100,000 for each applicable arrangement or scheme. In addition, anyone who
presents or causes to be presented a claim in violation of Stark II is subject
to payment denials, mandatory refunds, monetary penalties of up to $15,000 per
service, an assessment of up to three times the amount claimed, and possible
exclusion from participation in federal healthcare programs.

The term "designated health services" includes services commonly performed
or supplied by hospitals (including inpatient and outpatient hospital services)
or medical clinics to which we provide physician staffing. In addition, the term
"financial relationship" is broadly defined to include any direct or indirect
ownership or investment interest or compensation arrangement. There are a number
of exceptions to the self-referral prohibition, including exceptions for many of
the customary financial arrangements between physicians and providers, such as
employment contracts, leases, professional services agreements, non-cash gifts
having a value less than $300 and recruitment agreements. On January 4, 2001,
the Centers for Medicare & Medicaid Services ("CMS") issued a final rule,
subject to a comment period, intended to clarify parts of the Stark Law and some
of the exceptions to it. The majority of the regulations contained in this rule
became effective on or before January 4, 2002. On March 26, 2004, CMS issued an
interim final rule subject to a comment period intended to clarify the remaining
portions of the Stark Law. These rules, known as "phase two" of the Stark Law
rulemaking, became effective July 26, 2004. While these phase two rules help
clarify the requirements of the exceptions to the Stark Law, it is difficult to
determine fully their effect until the government begins enforcement of the
rules. Evolving interpretations of current laws and regulations, or the adoption
of new federal or state laws or regulations, could affect many of the
arrangements entered into by each of the hospitals with which we contract. In
addition, courts, Congress, and law enforcement authorities, including the OIG,
are increasing the scrutiny of arrangements between healthcare providers and
potential referral sources to ensure that the arrangements are not designed as a
mechanism to improperly pay for patient referrals and/or other business.

Additionally, we are subject to state statutes and regulations that
prohibit, among other things, payments for referral of patients and referrals by
physicians to healthcare providers with whom the physicians have a financial
relationship. Violations of these state laws may result in prohibition of
payment for services rendered, loss of licenses, fines, and criminal penalties.
State statutes and regulations also may require physicians or other healthcare
professionals to disclose to patients any financial relationship the physicians
or healthcare professionals have with a healthcare provider that is recommended
to the patients. These laws and regulations vary significantly from state to
state, are often vague, and, in many cases, have not been interpreted by courts
or regulatory agencies. Exclusions and penalties, if applied to us, could result
in significant loss of reimbursement to us, thereby significantly affecting our
financial condition.

Other Healthcare Fraud and Abuse Laws. For example, section 1128B(a)(3) of
SSA imposes criminal liability on individuals who or entities which, having
knowledge of the occurrence of any event affecting their initial or continued
right to a benefit or payment under a Federal health program, or the initial or
continued right to any such benefit or payment of any other individual in whose
behalf they have applied for or are receiving such benefit or payment, conceal
or fail to disclose such event with an intent fraudulently to secure such
benefit or payment either in a greater amount or quantity than is due or when no
such benefit or payment

16

is authorized. A violation of this section by a healthcare provider is a felony,
and may result in fines up to $25,000 and exclusion from participation in
federal healthcare programs.

The federal Civil False Claims Act imposes civil liability on individuals
and entities that submit or cause to be submitted false or fraudulent claims for
payment to the government. Violations of the Civil False Claims Act may include
treble damages and penalties of up to $11,000 per false or fraudulent claim.

In addition to actions being brought under the Civil False Claims Act by
government officials, the False Claims Act also allows a private individual with
direct knowledge of fraud to bring a "whistleblower" or qui tam suit on behalf
of the government against a healthcare provider for violations of the Civil
False Claims Act. In that event, the whistleblower is responsible for initiating
a lawsuit that sets in motion a chain of events that may eventually lead to the
recovery of money by the government. After the whistleblower has initiated the
lawsuit, the government must decide whether to intervene in the lawsuit and to
become the primary prosecutor. In the event the government declines to join the
lawsuit, the whistleblower plaintiff may choose to pursue the case alone, in
which case the whistleblower will have primary control over the prosecution,
although the government must be kept apprised of the progress of the lawsuit and
will still receive at least 70% of any recovered amounts. In return for bringing
a whistleblower suit on the government's behalf, the whistleblower plaintiff
receives a statutory amount of up to 30% of the recovered amount from the
government's litigation proceeds if the litigation is successful. Recently, the
number of whistleblower suits brought against healthcare providers has increased
dramatically.

In addition to the federal Civil False Claims Act, eleven states and the
District of Columbia have enacted false claims laws that allow these
jurisdictions to recover money which was fraudulently obtained by a healthcare
provider from the jurisdiction, such as Medicaid funds provided by the state.

In addition to the Civil False Claims Act, under the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"), there are five additional
federal criminal statutes: "Healthcare fraud," "False statements relating to
healthcare matters," "Theft or embezzlement in connection with healthcare,"
"Obstruction of criminal investigations of healthcare offenses," and "Laundering
of monetary instruments." These HIPAA criminal statutes ostensibly encompass
fraud against private payers. Violations of these statutes constitute felonies
and may result in fines, imprisonment, and/or exclusion from
government-sponsored programs. The "healthcare fraud" provisions of HIPAA
prohibit knowingly and willfully executing a scheme or artifice to defraud any
healthcare benefit program, including private payers. The "false statements"
provisions of HIPAA prohibit knowingly and willfully falsifying, concealing or
covering up a material fact by any trick, scheme or device or making any
materially false, fictitious or fraudulent statement in connection with the
delivery of or payment for healthcare benefits, items or services.

In addition to criminal and civil monetary penalties, healthcare providers
that are found to have defrauded the federal healthcare programs may be excluded
from participation in these programs. Providers that are excluded are not
entitled to receive payment under Medicare or other federal healthcare programs
for items or services provided to program beneficiaries. Exclusion for a minimum
of five years is mandatory for a conviction with respect to the delivery of a
healthcare item or service. The presence of aggravating circumstances in a case
can lead to a longer period of exclusion. The OIG also has the discretion to
exclude providers for certain conduct even absent a criminal conviction. Such
conduct includes participation in a fraud scheme, the payment or receipt of
kickbacks, and failing to provide services of a quality that meets
professionally recognized standards.

The federal government has made a policy decision to significantly increase
the financial resources allocated to enforcing the general fraud and abuse laws.
In addition, private insurers and various state enforcement agencies have
increased their level of scrutiny of healthcare claims in an effort to identify
and prosecute fraudulent and abusive practices in the healthcare area. We are
subject to these increased enforcement activities and may be subject to specific
subpoenas and requests for information.

Administrative Simplification. HIPAA mandates the adoption of standards
for the exchange of electronic health information in an effort to encourage
overall administrative simplification and enhance the effectiveness and
efficiency of the healthcare industry. Ensuring privacy and security of patient
information was one of the key factors behind the legislation.

17

In August 2000, HHS issued final regulations establishing electronic data
transmission standards that healthcare providers must use when submitting or
receiving certain healthcare data electronically. Most affected entities,
including us, were required to comply with these regulations by October 16, 2002
or request an extension to comply with these regulations by October 16, 2003
from CMS. We received confirmation from CMS of CMS's receipt of our request and
were therefore required to comply with these regulations by October 16, 2003. We
have completed the necessary actions to comply with these new standards and are
ready to convert electronic data into this new format as carriers notify us of
their ability to accept the format.

In December 2000, HHS issued final regulations concerning the privacy of
healthcare information which were subsequently clarified in August 2002. These
regulations regulate the use and disclosure of individuals' healthcare
information, whether communicated electronically, on paper or verbally. Most
affected entities, including us, were required to comply with these regulations
by April 2003. The regulations also provide patients with significant new rights
related to understanding and controlling how their health information is used or
disclosed. We have entered into business associate agreements with our
affiliated providers, including physicians, hospitals and other covered
entities, and have entered into business associate agreements with our vendors
and believe we are in substantial compliance with the final regulations
concerning the privacy of healthcare information.

In February 2003, CMS issued final regulations concerning the security of
electronic protected healthcare information and data. These regulations mandate
the use of certain administrative, physical and technical safeguards to protect
the confidentiality, integrity, and availability of electronic protected
healthcare information. Most affected entities, including us, are required to
comply with these regulations by April 21, 2005.

In April 2003, CMS issued interim final regulations relating to the
enforcement and imposition of penalties on entities that violate the HIPAA
administrative simplification standards. These regulations are the first
installment of enforcement regulations which, when issued in complete form, will
set forth procedural and substantive requirements for the enforcement and
imposition of penalties under HIPPA. Sanctions under the statute include
criminal penalties and civil sanctions. We have established a plan and engaged
the resources necessary to comply with the administrative simplification
requirements of HIPAA. At this time, we believe our operations are currently
conducted in substantial compliance with these HIPAA requirements. Based on the
existing and proposed administrative simplification HIPAA regulations, we
believe that the cost of our compliance with HIPAA will not have a material
adverse effect on our business, financial condition, or results of operations.

Related Laws and Guidelines. Because we perform services at hospitals,
outpatient facilities and other types of healthcare facilities, we and our
affiliated physicians may be subject to laws which are applicable to those
entities. For example, our operations are impacted by the Emergency Medical
Treatment and Active Labor Act of 1986 which prohibits "patient dumping" by
requiring hospitals and hospital emergency department physicians or urgent care
center physicians to provide care to any patient presenting to the hospital's
emergency department or urgent care center in an emergent condition regardless
of the patient's ability to pay. Many states in which we operate have similar
state law provisions concerning patient dumping.

In addition to the Emergency Medical Treatment and Active Labor Act of 1986
and its state law equivalents, significant aspects of our operations are subject
to state and federal statutes and regulations governing workplace health and
safety, dispensing of controlled substances and the disposal of medical waste.
Changes in ethical guidelines and operating standards of professional and trade
associations and private accreditation commissions such as the American Medical
Association and the Joint Commission on Accreditation of Healthcare
Organizations may also affect our operations. We believe our operations as
currently conducted are in substantial compliance with these laws and
guidelines.

BUSINESS RISKS

We Derive a Substantial Portion of Our Net Revenue Less Provision for
Uncollectibles ($207.5 Million in 2004) from Services Provided to the Department
of Defense Under the TRICARE Program. This Program Underwent Significant Change
in 2004 That Will on an Annual Basis Have a Material Impact on Our Revenues and
Profits. During 2004, the Company derived approximately $207.5 million of
revenue for all services rendered to military personnel and their dependents as
either a subcontractor under the TRICARE program administered by the Department
of Defense or through direct contracting with military treatment
18

facilities. The Company had historically provided its services principally
through subcontract arrangements with managed care organizations that contracted
directly with the TRICARE program. In 2004, the military subjected all of its
outsourced healthcare staffing to a re-bidding process with successful bidders
contracting directly with military treatment facilities.

The Department of Defense and its various military branches began on June
1, 2004, awarding contracts for the civilian positions that it required going
forward. The process of awarding healthcare staffing contracts by the government
varied by branch of the military and by military base location within the
various branches of the military. The award process included soliciting requests
for proposals from organizations that provide civilian healthcare staffing,
including the use of restrictive government or military approved vendor lists,
some of which did not include the Company. In other instances, the military
re-bid its business on a basis that was inclusive of existing providers, such as
the Company, without the use of restricted vendor lists. Furthermore, the
awarding of certain bids was restricted to small business or minority qualified
businesses for which the Company was not eligible to even bid for the contracts.

The annual revenue derived by the Company from the Tricare Program
contracts that was subject to re-bidding in 2004 was approximately $210.7
million. Based on the results of the military's re-bidding of all of its
healthcare staffing contracts in 2004, the Company was successful in either
retaining its previous staffing business or winning new staffing bids in the
approximate amount of $138.2 million, or 66% of its previous revenue. We
concluded that the results of such re-bidding would have a material adverse
impact on our revenues and cash flow in the future. In addition, due to the
reduced level of revenues and operating margins resulting from the re-bidding
process, the Company would experience a decline in its operating profit derived
from its military contracts.

The Company recorded a goodwill impairment loss of $73.2 million in 2004 as
a result of the re-bidding process.

We Could Be Subject to Professional Liability Lawsuits, Some of Which We
May Not Be Fully Insured Against or Reserved for. In recent years, physicians,
hospitals and other participants in the healthcare industry have become subject
to an increasing number of lawsuits alleging medical malpractice and related
legal theories such as negligent hiring, supervision and credentialing, and
vicarious liability for acts of their employees or independent contractors. Many
of these lawsuits involve large claims and substantial defense costs. Although
we do not engage in the practice of medicine or provide medical services nor
control the practice of medicine by our affiliated physicians or physician
groups or the compliance with regulatory requirements applicable to the
physicians and physician groups with which we contract, we have been involved in
this type of litigation, and cannot assure you that we will not become so
involved in the future. In addition, through our management of hospital
departments and provision of non-physician healthcare personnel, patients who
receive care from physicians or other healthcare providers affiliated with
medical organizations and physician groups with whom we have a contractual
relationship could sue us.

Prior to March 12, 2003, we had obtained professional liability insurance
from insurance companies to cover our professional liability loss exposures. Our
principal insurance policy in effect for such potential claims ended March 11,
2003. The insurance market for professional liability insurance coverage had
changed significantly since our last policy renewal. Several significant
insurance providers of such coverage have ceased to provide such coverage and
others announced substantial rate increases for such coverage. Because of our
significant volumes of patient visits, the number of insurance carriers in the
marketplace with the ability to provide such level of coverage for us became
increasingly more limited and, as a result, more costly. Effective March 12,
2003, we began insuring our professional liability risks principally through a
program of self-insurance reserves and a captive insurance company arrangement.
Under this program, we provide professional liability insurance to affiliated
physicians and other healthcare practitioners and establish reserves, using
actuarial estimates, for losses in respect of such insurance, as well as the
professional liability losses of Team Health and other corporate entities. These
losses are funded by our captive insurance company and, to the extent these
losses exceed the assets of our captive insurance company, may be funded by us.
The captive insurance company is subject to insurance regulatory laws and
regulations, including actuarially determined premiums and loss reserve
requirements. Under our current professional liability insurance program, our
exposure for claim losses under professional liability insurance policies
provided to affiliated physicians and other healthcare practitioners is limited
to the amounts of individual policy coverage limits but there is no

19

limit for aggregate claim losses incurred under all insurance provided to
affiliated physicians and other healthcare practitioners or for individual or
aggregate professional liability losses incurred by Team Health or other
corporate entities. While our provisions for professional liability claims and
expenses are determined through actuarial estimates, there can be no assurance
that such actuarial estimates will not be exceeded by actual losses and related
expenses in the future.

We could be liable for claims against our affiliated physicians for
incidents incurred but not reported during periods for which claims-made
insurance covered the related risk. Under generally accepted accounting
principles, the cost of professional liability claims, which includes costs
associated with litigating or settling claims, is accrued when the incidents
that give rise to the claims occur. The accrual includes an estimate of the
losses that will result from incidents, which occurred during the claims-made
period, but were not reported during that period. These claims are referred to
as incurred-but-not-reported claims ("IBNR"). With respect to those physicians
for whom we provide tail coverage, for periods prior to March 12, 2003, we have
acquired from a commercial insurance company tail coverage for IBNR claims. We
cannot assure you that claim losses for periods prior to March 12, 2003, will
not exceed the limits of available insurance coverage or reserves established by
us for any losses in excess of such insurance coverage limits.

Furthermore, for those portions of our professional liability losses that
are insured through commercial insurance companies, we are subject to the
"credit risk" of those insurance companies. While we believe our commercial
insurance company providers are currently creditworthy, there can be no
assurance that such insurance companies will remain so in the future.

The Reserves That We Have Established in Respect of Our Professional
Liability Losses Are Subject to Inherent Uncertainties and if a Deficiency is
Determined This May Lead to a Reduction in Our Net Earnings. We have established
reserves for losses and related expenses, which represent estimates involving
actuarial and statistical projections, at a given point in time, of our
expectations of the ultimate resolution and administration of costs of losses
incurred in respect of professional liability risks for the period on and after
March 12, 2003. We have also established a reserve for potential losses in
excess of commercial insurance aggregate coverage limits for the period prior to
March 12, 2003. Insurance reserves are inherently subject to uncertainty. Our
reserves are based on historical claims, demographic factors, industry trends,
severity and exposure factors and other actuarial assumptions calculated by an
independent actuary firm. In a study completed in April 2004, based on
information as of January 31, 2004, the independent actuary firm projected that
ultimate cumulative losses for the March 12, 2003 to December 31, 2004 period,
undiscounted, will be in the range of $94.3 million to $136.0 million. The
independent actuary firm will perform studies of projected ultimate losses at
least annually. We use the actuarial estimates to establish reserves. Our
reserves could be significantly affected should current and future occurrences
differ from historical claim trends and expectations. While claims are monitored
closely when estimating reserves, the complexity of the claims and wide range of
potential outcomes often hampers timely adjustments to the assumptions used in
these estimates. Actual losses and related expenses may deviate, perhaps
substantially, from the reserve estimates reflected in our financial statements.
If our estimated reserves are determined to be inadequate, we will be required
to increase reserves at the time of such determination, which would result in a
corresponding reduction in our net earnings in the period in which such
deficiency is determined. See "Management's discussion and analysis of financial
condition and results of operations -- Critical accounting policies and
estimates -- Insurance reserves" and Note 12 of the notes to our consolidated
financial statements.

We May Incur Substantial Costs Defending Our Interpretations of Government
Regulations and if We Lose, the Government Could Force Us to Restructure and
Subject Us to Fines, Monetary Penalties and Exclusion from Participation in
Government Sponsored Programs Such as Medicare and Medicaid. Our operations and
arrangements with healthcare providers are subject to extensive government
regulation, including numerous laws directed at preventing fraud and abuse, laws
prohibiting general business corporations, such as us, from practicing medicine,
controlling physicians' medical decisions or engaging in some practices such as
splitting fees with physicians, and laws regulating billing and collection of
reimbursement from governmental programs, such as the Medicare and Medicaid
programs. Of particular importance are:

- provisions of the Omnibus Budget Reconciliation Act of 1993, commonly
referred to as Stark II, that, subject to limited exceptions, prohibit
physicians from referring Medicare patients to an entity for the
provision of certain "designated health services" if the physician or a
member of such physician's

20

immediate family has a direct or indirect financial relationship
(including a compensation arrangement) with the entity,

- provisions of the Social Security Act, commonly referred to as the
"anti-kickback statute," that prohibit the knowing and willful offering,
payment, solicitation or receipt of any bribe, kickback, rebate or other
remuneration in return for the referral or recommendation of patients for
items and services covered, in whole or in part, by federal healthcare
programs, such as Medicare and Medicaid,

- provisions of the Health Insurance Portability and Accountability Act of
1996 that prohibit knowingly and willfully executing a scheme or artifice
to defraud any healthcare benefit program or falsifying, concealing or
covering up a material fact or making any material false, fictitious or
fraudulent statement in connection with the delivery of or payment for
healthcare benefits, items, or services,

- the federal False Claims Act that imposes civil and criminal liability on
individuals or entities that submit false or fraudulent claims for
payment to the government,

- reassignment of payment rules that prohibit certain types of billing and
collection practices in connection with claims payable by the Medicare
programs,

- similar state law provisions pertaining to anti-kickback, self-referral
and false claims issues,

- state laws that prohibit general business corporations, such as us, from
practicing medicine, controlling physicians' medical decisions or
engaging in some practices such as splitting fees with physicians,

- laws that regulate debt collection practices as applied to our internal
collection agency and debt collection practices,

- federal laws such as the Emergency Medical Treatment and Active Labor Act
of 1986 that require the hospital and emergency department or urgent care
center physicians to provide care to any patient presenting to the
emergency department or urgent care center in an emergent condition
regardless of the patient's ability to pay, and similar state laws, and

- state and federal statutes and regulations that govern workplace health
and safety.

Each of the above may have related rules and regulations which are subject
to interpretation and may not provide definitive guidance as to the application
of those laws, rules or regulations to our operations, including our
arrangements with hospitals, physicians and professional corporations.

We have structured our operations and arrangements with third parties in an
attempt to comply with these laws, rules and regulations based upon what we
believe are reasonable and defensible interpretations of these laws, rules and
regulations. However, we cannot assure you that the government will not
successfully challenge our interpretation as to the applicability of these laws,
rules and regulations as they relate to our operations and arrangements with
third parties.

In the ordinary course of business and like others in the healthcare
industry, we receive requests for information from government agencies in
connection with their regulatory or investigational authority. We review such
requests and notices and take appropriate action. We have been subject to
certain requests for information in the past and could be subject to such
requests for information in the future, which could result in significant
penalties, as well as adverse publicity. The results of any current or future
investigation or action could have a material adverse effect.

With respect to state laws that relate to the practice of medicine by
general business corporations and to fee splitting, while we seek to comply
substantially with existing applicable laws, we cannot assure you that state
officials who administer these laws will not successfully challenge our existing
organization and our contractual arrangements, including noncompetition
agreements with physicians, professional corporations and hospitals as
unenforceable or as constituting the unlicensed practice of medicine or
prohibited fee-splitting.

If federal or state government officials challenge our operations or
arrangements with third parties which we have structured based upon our
interpretation of these laws, rules and regulations, the challenge could
potentially disrupt our business operations and we may incur substantial defense
costs, even if we successfully defend our interpretation of these laws, rules
and regulations.
21

In the event regulatory action limited or prohibited us from carrying on
our business as we presently conduct it or from expanding our operations to
certain jurisdictions, we may need to make structural and organizational
modifications of our company and/or our contractual arrangements with
physicians, professional corporations and hospitals. Our operating costs could
increase significantly as a result. We could also lose contracts or our revenues
could decrease under existing contracts as a result of a restructuring.
Moreover, our financing agreements may also prohibit modifications to our
current structure and consequently require us to obtain the consent of the
holders of this indebtedness or require the refinancing of this indebtedness.
Any restructuring would also negatively impact our operations because our
management's time and attention would be diverted from running our business in
the ordinary course.

Although management is not aware of any inquiry, investigation, or notice
from any governmental entity indicating that we are in violation of any federal
or state laws, such laws are broadly worded and may be interpreted or applied by
prosecutorial, regulatory or judicial authorities in ways that we cannot
predict. Accordingly, we cannot assure you that our arrangements and business
practices will not be the subject of government scrutiny or be found to violate
applicable laws. We did receive in March 2004 a subpoena from the Department of
Health and Human Services Office of Inspector General ("OIG") located in
Concord, California requesting certain information for the period 1999 to
present relating to our billing practices. We have responded with information
pertaining to the request and are awaiting further response to such information
from the OIG.

If Governmental Authorities Determine That We Violate Medicare
Reimbursement Regulations, Our Revenues May Decrease and We May Have to
Restructure Our Method of Billing and Collecting Medicare Payments. The
Medicare Prescription Drug Improvement and Modernization Act of 2003 amended the
Medicare reassignment statute as of December 8, 2003 to permit our independent
contractor physicians to reassign their Medicare receivables to us. We have
begun to restructure our method of billing and collecting Medicare payments in
light of this new statutory reassignment exception. Under the new reassignment
arrangement, many of our independent contractor physicians now reassign their
Medicare receivables to us, so that Medicare carriers send payments for those
physicians' services directly to us.

In cases where we have not yet converted to the new reassignment
arrangement, we still use a "lockbox"' model which we implemented shortly after
notifying Medicare carriers of the details of our lockbox billing arrangements
in December 1997. For the lockbox arrangements still in effect, Medicare
carriers send payments for the physician services to a lockbox bank account
under the control of the physician. The physician, fulfilling his contractual
obligations to us, then directs the bank to transfer the funds in that bank
account into a company bank account. In return, we pay the physician an agreed
amount for professional services provided and provide management and
administrative services to or on behalf of the physician or physician group.

With respect to Medicare services that physicians employed by
physician-controlled professional corporations render, Medicare carriers send
payments for physician services to a group account under our control.

While we seek to comply substantially with applicable Medicare
reimbursement regulations, we cannot assure you that government authorities
would find that we comply in all respects with these regulations. Management is
not aware of any inquiry, investigation, or notice from any governmental entity
indicating that we are in violation of any of the Medicare laws regarding
Medicare Program payments. However, such laws are broadly worded and may be
interpreted or applied by prosecutorial, regulatory or judicial authorities in
ways that we cannot predict. Accordingly, we cannot assure you that our
arrangements and business practices will not be the subject of government
scrutiny or be found to violate applicable laws.

If Future Regulation Forces Us to Restructure Our Operations, Including Our
Arrangements with Physicians, Professional Corporations, Hospitals and Other
Facilities, We May Incur Additional Costs, Lose Contracts and Suffer a Reduction
in Revenue Under Existing Contracts and We May Need to Refinance Our Debt or
Obtain Debt Holder Consent. Legislators have introduced and may introduce in
the future numerous proposals into the United States Congress and state
legislatures relating to healthcare reform in response to various healthcare
issues. We cannot assure you as to the ultimate content, timing or effect of any
healthcare reform legislation, nor is it possible at this time to estimate the
impact of potential legislation. Further, although we exercise care in
structuring our arrangements with physicians, professional corporations,
hospitals
22

and other facilities to comply in all significant respects with applicable law,
we cannot assure you that: (1) government officials charged with responsibility
for enforcing those laws will not assert that we, or transactions into which we
have entered, violate those laws or (2) governmental entities or courts will
ultimately interpret those laws in a manner consistent with our interpretation.

The continual flux of healthcare rules and regulations at the federal,
state and local level could revise the future of our relationships with the
hospitals and physicians with whom we contract. In addition to the regulations
referred to above, aspects of our operations are also subject to state and
federal statutes and regulations governing workplace health and safety and, to a
small extent, the disposal of medical waste. Changes in ethical guidelines and
operating standards of professional and trade associations and private
accreditation commissions such as the American Medical Association and the Joint
Commission on Accreditation of Healthcare Organizations may also affect our
operations.

Accordingly, changes in existing laws and regulations, adverse judicial or
administrative interpretations of these laws and regulations or enactment of new
legislation could force us to restructure our relationships with physicians,
professional corporations, hospitals and other facilities. This could cause our
operating costs to increase significantly. A restructuring could also result in
a loss of contracts or a reduction in revenues under existing contracts.
Moreover, if these laws require us to modify our structure and organization to
comply with these laws, our financing agreements may prohibit such modifications
and require us to obtain the consent of the holders of such indebtedness or
require the refinancing of such indebtedness.

Laws and Regulations That Regulate Payments for Medical Services by
Government Sponsored Healthcare Programs Could Cause Our Revenues to
Decrease. Our affiliated physician groups derive a significant portion of their
net revenue less provision for uncollectibles from payments made by government
sponsored healthcare programs such as Medicare and state reimbursed programs.
There are increasing public and private sector pressures to restrain healthcare
costs and to restrict reimbursement rates for medical services. Any change in
reimbursement policies, practices, interpretations, regulations or legislation
that places limitations on reimbursement amounts or practices could
significantly affect hospitals, and consequently affect our operations unless we
are able to renegotiate satisfactory contractual arrangements with our hospital
clients and contracted physicians.

We believe that regulatory trends in cost containment will continue. We
cannot assure you that we will be able to offset reduced operating margins
through cost reductions, increased volume, the introduction of additional
procedures or otherwise. In addition, we cannot assure you that the federal
government will not impose reductions in the Medicare physician fee schedule in
the future. Any such reductions could reduce our revenues.

On November 2, 2004, Centers for Medicare and Medicaid Services ("CMS")
issued its updates to the physician fee schedule payment rates for 2005. The
2005 physician fee schedule payment rate updates mandated by the Medicare
Modernization Act, provide that the update to the conversion factor for
physicians' services for 2005 will increase by approximately 1.5%. As a result
of the legislative change, we estimate that we will realize an increase in such
revenues in 2005 from Medicare and other related revenue sources of
approximately $2.0 million.

In addition to the 1.5% increase provided as a result of the Medicare
Modernization Act, an additional 5% payment is provided starting in 2005 when a
hospital in located within a Physician Scarcity Are ("PSA"). This is estimated
to increase revenues in 2005 by $1.0 million.

The Outcome of an Ongoing Investigation of the Department of Health and
Human Services Office of Inspector General in Which We Are Involved Could Have a
Material Adverse Impact on Our Business and Financial Condition. On March 30,
2004, we received a subpoena from the Department of HHS Office of Inspector
General ("OIG"), located in Concord, California, requesting certain information
for the period 1999 to present relating to our billing practices. To date, we
have produced and delivered to the OIG certain requested information, and the
OIG has stayed further requests. We have learned in conversations with
representatives of the OIG and the United States Attorney for the Northern
District of California, the basis for the issuance of the subpoena is a
complaint filed in the United States District Court for the Northern District of
California ("Court") by an individual on behalf of the government. The identity
of the qui tam relator and portions of the qui tam complaint remain sealed by
the Court pending the government's

23

investigation. The portions of the complaint not under seal allege that the
Company engaged in certain billing practices that resulted in the Company's
receipt of duplicate payments for the same medical service and that the Company
misled certain providers about the entities that were performing their billing
services. Additionally, the portions of the complaint not under seal allege that
the Company terminated the employment of the individual who filed the complaint
in retaliation for that individual's bringing of these allegations to the
attention of the Company. The Company denies these allegations and does not
believe that any of its current or prior billing practices would form the basis
for a violation of federal law.

We are fully cooperating with the OIG in its request described herein and
have been producing and delivering to the OIG the requested documents. However,
due to lack of more specific information available to us at this time, we are
unable to ascertain the full scope of the government's inquiry or the qui tam
relator's complaint. We cannot predict the outcome of this investigation or suit
or their respective durations. If this investigation results in current or prior
billing practices being identified as violative of applicable laws or
regulations, results in penalties being imposed upon us, or results in an
adverse determination in the qui tam relator's complaint against us, the impact
could have a material adverse effect on our business and financial condition.

We Could Experience a Loss of Contracts With Our Physicians or Be Required
to Sever Relationships With Our Affiliated Professional Corporations in Order to
Comply With Antitrust Laws. Our contracts with physicians include contracts
with physicians organized as separate legal professional entities (e.g.
professional medical corporations) and as individuals. As such, the antitrust
laws deem each such physician/practice to be separate, both from Team Health and
from each other and, accordingly, each such physician/practice is subject to a
wide range of laws that prohibit anti-competitive conduct among separate legal
entities or individuals. A review or action by regulatory authorities or the
courts, which is negative in nature as to the relationship between us and the
physicians/practices we contract with, could force us to terminate our
contractual relationships with physicians and affiliated professional
corporations. Since we derive a significant portion of our revenues from these
relationships, our revenues could substantially decrease. Moreover, if any
review or action by regulatory authorities required us to modify our structure
and organization to comply with such action or review, the indenture and/or the
new credit facilities may not permit such modifications, thereby requiring us to
obtain the consent of the holders of such indebtedness or requiring the
refinancing of such indebtedness.

A Reclassification of Our Independent Contractor Physicians By Tax
Authorities Could Require Us to Pay Retroactive Taxes and Penalties. As of
December 31, 2004, we contracted with approximately 2,500 affiliated physicians
as independent contractors to fulfill our contractual obligations to clients.
Because we consider many of the physicians with whom we contract to be
independent contractors, as opposed to employees, we do not withhold federal or
state income or other employment related taxes, make federal or state
unemployment tax or Federal Insurance Contributions Act payments, except as
described below, or provide workers' compensation insurance with respect to such
affiliated physicians. Our contracts with our independent contractor physicians
obligate these physicians to pay these taxes. The classification of physicians
as independent contractors depends upon the facts and circumstances of the
relationship. In the event of a determination by federal or state taxing
authorities that the physicians engaged as independent contractors are
employees, we may be adversely affected and subject to retroactive taxes and
penalties. Under current federal tax law, a "safe harbor" from reclassification,
and consequently retroactive taxes and penalties, is available if our current
treatment is consistent with a long-standing practice of a significant segment
of our industry and if we meet certain other requirements. If challenged, we may
not prevail in demonstrating the applicability of the safe harbor to our
operations. Further, interested persons have proposed in the recent past to
eliminate the safe harbor and may do so again in the future.

Our practices with respect to the classification of our independent
contractors has periodically been reviewed by the Internal Revenue Service with
no adjustments or changes to our practices required as a result of such review.
The most recent review was completed by the Internal Revenue Service in
conjunction with the audit of our federal tax returns for 2000 and 2001.

We Are Subject to the Financial Risks Associated With Our Fee-for-Service
Contracts Which Could Decrease Our Revenue, Including Changes in Patient Volu