1010-00003 · Arbor Health Technologies Inc · Correspondence

letter-to-pinnacle-re-lab-interface-cme.docx DOCUMENT Funds

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PRIVILEGED AND CONFIDENTIAL

CALDERWOOD & HARKNESS LLP Attorneys at Law One Federal Street, 30th Floor Boston, Massachusetts 02110 Telephone: (617) 455-8200 Facsimile: (617) 455-8201 www.calderwoodharkness.com

Matter Number: 1010-00003

May 22, 2023

VIA CERTIFIED MAIL — RETURN RECEIPT REQUESTED AND VIA ELECTRONIC MAIL

Pinnacle Laboratory Services Inc. 1200 Warwick Avenue, Suite 110 Warwick, Rhode Island 02886

Attention: President and Chief Executive Officer

Re: Preferred Laboratory Agreement dated June 15, 2020 between Arbor Health Technologies Inc. and Pinnacle Laboratory Services Inc. — Compliance Concerns and Request for Restructuring Discussions

Dear Sir or Madam:

I. Introduction and Purpose of This Letter

This firm serves as healthcare regulatory counsel to Arbor Health Technologies Inc. ("AHT"), a Delaware corporation headquartered at 200 Concord Avenue, Suite 400, Cambridge, Massachusetts 02138. AHT operates twenty-three (23) outpatient clinics branded as "Arbor Health Clinics" across the Commonwealth of Massachusetts, the State of Connecticut, the State of Rhode Island, and the State of New Hampshire. Through these clinics, AHT provides a broad range of healthcare services, including primary care, specialty care, and ancillary services encompassing in-office laboratory testing, diagnostic imaging, and physical therapy.

AHT has engaged Calderwood & Harkness LLP to conduct a comprehensive self-assessment of its physician compensation arrangements, referral relationships, and vendor contracts under the federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b (the "AKS"), and the Physician Self-Referral Law, commonly known as the Stark Law, 42 U.S.C. § 1395nn. This self-assessment is being undertaken proactively as part of a broader initiative to enhance AHT's corporate compliance program and to ensure that all of AHT's business relationships conform to applicable federal and state healthcare fraud and abuse laws.

We are writing on behalf of AHT to bring to Pinnacle Laboratory Services Inc.'s ("Pinnacle") attention certain compliance concerns identified during this self-assessment that relate to the Preferred Laboratory Agreement dated June 15, 2020 (the "Agreement") and, more broadly, to the overall commercial relationship between AHT and Pinnacle. Specifically, this letter addresses three distinct compliance concerns:

1. The provision by Pinnacle of an electronic laboratory interface to AHT at no cost;

2. Pinnacle's sponsorship of continuing medical education ("CME") events for AHT physicians; and

3. An ownership and investment interest held by a family member of AHT's Chief Executive Officer in Pinnacle.

We wish to emphasize at the outset that this letter is not an accusation of wrongdoing by Pinnacle. Rather, AHT is writing in a spirit of cooperation and transparency to share the substance of its compliance findings and to initiate good-faith discussions aimed at restructuring certain elements of the parties' relationship so as to bring them into full compliance with applicable law. AHT values its relationship with Pinnacle and seeks to preserve a productive and lawful working partnership. AHT believes that the compliance concerns identified herein can be resolved through collaborative restructuring, and we look forward to engaging with Pinnacle toward that end.

II. Background of the Relationship

A. The Preferred Laboratory Agreement

AHT and Pinnacle entered into the Preferred Laboratory Agreement effective June 15, 2020. Under the Agreement, AHT clinics located in Rhode Island and southeastern Massachusetts refer outpatient clinical laboratory testing to Pinnacle. The referral relationship encompasses a range of clinical laboratory services, including routine blood chemistry panels, hematology, urinalysis, microbiology, and specialty testing, all of which are ordered by AHT's employed and contracted physicians in the ordinary course of patient care.

The total referral volume generated by AHT and directed to Pinnacle during fiscal year 2022 was approximately $1.65 million. This figure represents a material revenue stream for Pinnacle and reflects the significance of the referral relationship to both parties. For context, AHT's fiscal year 2022 net revenue was $214.3 million, of which approximately sixty-one percent (61%), or approximately $130.7 million, was derived from reimbursements under the Medicare and Medicaid programs. As discussed in greater detail below, clinical laboratory testing constitutes a "designated health service" under the Stark Law, 42 U.S.C. § 1395nn(h)(6), and the substantial Medicare and Medicaid payor mix underscores the applicability of both the Stark Law and the AKS to the parties' arrangement.

B. The Electronic Laboratory Interface

Under or in connection with the Agreement, Pinnacle provides AHT with an electronic laboratory interface that facilitates the electronic ordering of laboratory tests and the electronic receipt of test results. This interface is integrated into AHT's proprietary electronic health records and practice management software-as-a-service platform known as "ArborConnect." The interface enables AHT's clinicians to order laboratory tests directly from within the ArborConnect platform, to transmit specimen identification and patient demographic data electronically to Pinnacle, and to receive and incorporate test results into patient records seamlessly and in real time.

The estimated fair market value of the electronic laboratory interface, based on comparable commercial licensing arrangements for laboratory information system integration services, is approximately $120,000 per year. Since the inception of the interface, AHT has paid no consideration whatsoever for this service. As of the date of this letter, AHT's total payments to Pinnacle for the electronic laboratory interface stand at zero dollars ($0).

C. CME Event Sponsorship

During fiscal year 2022, Pinnacle sponsored four (4) continuing medical education events for AHT physicians. These events included speaker honoraria, venue costs, educational materials, and associated expenses. The total value of these CME sponsorships in FY2022 was $86,000. The sponsorship was provided in the context of the ongoing referral relationship described above, in which AHT physicians generate significant clinical laboratory referrals to Pinnacle.

D. Ownership Interest of Dr. Karen Ellsworth

Dr. Karen Ellsworth, a licensed physician who is not employed by AHT and who maintains an independent medical practice, holds a 4.2% passive equity interest in Pinnacle Laboratory Services Inc. (EIN: 05-6138290). Dr. Karen Ellsworth is the spouse of Dr. Nathan Ellsworth, who serves as the Chief Executive Officer of AHT. Dr. Nathan Ellsworth, in his capacity as CEO, exercises authority and influence over AHT's laboratory referral relationships, vendor selection processes, and operational decisions affecting which laboratories receive referrals from AHT clinics. The significance of this ownership interest from a compliance perspective is discussed at length in Section V of this letter.

III. Compliance Concern No. 1 — No-Cost Electronic Laboratory Interface

A. Stark Law Analysis — Non-Monetary Remuneration Exception

The Stark Law, 42 U.S.C. § 1395nn(a), prohibits a physician from making referrals for designated health services — which expressly include clinical laboratory services — to an entity with which the physician (or an immediate family member of the physician) has a financial relationship, unless a specific statutory or regulatory exception applies. A violation of the Stark Law results in strict liability; no proof of intent is required. Where a referral is made in violation of the Stark Law, the entity receiving the referral may not bill Medicare or Medicaid for the referred services, and any amounts collected must be refunded. Moreover, violations may trigger liability under the False Claims Act, 31 U.S.C. § 3729, as well as civil monetary penalties and exclusion from federal healthcare programs.

A "financial relationship" under the Stark Law includes both ownership or investment interests and compensation arrangements. 42 U.S.C. § 1395nn(a)(2); 42 C.F.R. § 411.354. A "compensation arrangement" encompasses any arrangement involving "remuneration" between a physician (or an immediate family member of a physician) and an entity. 42 U.S.C. § 1395nn(h)(1). The term "remuneration" is defined broadly and includes any transfer of items or services for free or for other than fair market value. 42 C.F.R. § 411.351.

The provision of the electronic laboratory interface by Pinnacle to AHT at no cost constitutes "remuneration" from Pinnacle to AHT within the meaning of the Stark Law. To the extent that AHT physicians have ownership interests in, or compensation arrangements with, AHT — as they do through employment agreements, productivity-based compensation arrangements, and equity participation — the no-cost interface potentially creates a chain of financial relationships between the referring physicians and Pinnacle that implicates the Stark Law's referral prohibition.

The Stark Law provides a limited exception for non-monetary compensation. Under 42 C.F.R. § 411.357(k), non-monetary compensation from an entity to a physician (or a physician organization such as a group practice) is permitted provided that the aggregate value of such non-monetary compensation does not exceed an annual limit set by the Centers for Medicare & Medicaid Services ("CMS"), which is adjusted annually for inflation. For calendar year 2023, this annual limit is $459.

The estimated fair market value of the electronic laboratory interface provided by Pinnacle to AHT is approximately $120,000 per year. This figure exceeds the $459 annual non-monetary compensation threshold by a factor of more than 260 times. The magnitude of this excess is not marginal — it is extraordinary, and it conclusively precludes reliance on the non-monetary compensation exception to protect this arrangement.

Other Stark Law exceptions could theoretically be invoked to protect the provision of the electronic laboratory interface, but each would require material changes to the current arrangement. For example:

(a) The fair market value exception under 42 C.F.R. § 411.357(l) permits compensation arrangements in which compensation is set in advance, is consistent with fair market value, and does not take into account the volume or value of referrals. However, this exception requires that AHT actually pay fair market value for the interface — which it currently does not.

(b) The personal services exception under 42 C.F.R. § 411.357(d) requires, among other elements, that the arrangement be set out in writing, that the term be at least one year, that the compensation be set in advance and consistent with fair market value, and that the compensation not take into account the volume or value of referrals. Again, no payment is currently being made by AHT.

In the current structure, where Pinnacle provides the interface to AHT at no charge, neither of these exceptions is satisfied, and no other Stark Law exception appears available to protect the arrangement.

B. Anti-Kickback Statute Analysis

The federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration — directly or indirectly, overtly or covertly, in cash or in kind — in order to induce or reward the referral of individuals for the furnishing of, or the arranging for the furnishing of, any item or service for which payment may be made in whole or in part under a federal healthcare program. Violations of the AKS are punishable by up to ten years of imprisonment and fines of up to $100,000 per violation, as well as exclusion from federal healthcare programs and civil monetary penalties.

Under the "one purpose" test, as articulated by the United States Court of Appeals for multiple circuits and codified in the Patient Protection and Affordable Care Act at 42 U.S.C. § 1320a-7b(h), a person need not have a primary or sole intent to violate the AKS. Rather, if even one purpose of a payment or benefit is to induce or reward referrals, the arrangement may violate the statute.

The provision of a $120,000-per-year electronic laboratory interface at no cost to AHT — in the context of $1.65 million in annual referral volume flowing from AHT to Pinnacle, all of which involves services payable in substantial part by Medicare and Medicaid — creates a significant risk that the no-cost interface could be viewed as remuneration intended to induce or reward laboratory referrals. The substantial value of the interface, its integration into the very workflow through which AHT clinicians order tests from Pinnacle, and the absence of any consideration flowing from AHT to Pinnacle for the interface all heighten this risk.

The AKS safe harbor for electronic health records items and services, formerly codified at 42 C.F.R. § 1001.952(y), was established under the 2006 final rule and subsequently extended. However, this safe harbor expired on December 31, 2021, pursuant to the terms established in the 2020 final rule. While the regulatory landscape may continue to evolve, as of the date of this letter, the EHR safe harbor is no longer in effect, and its availability cannot be relied upon. Moreover, even when the safe harbor was operational, certain conditions would not have been satisfied if the interface were provided exclusively or primarily to generate laboratory referrals for Pinnacle. Among other requirements, the safe harbor required that the donor not take into account the volume or value of referrals in determining the eligibility of a recipient for the EHR technology, a condition that warrants scrutiny in an arrangement where the technology is integral to a preferred referral arrangement.

No other AKS safe harbor clearly protects the provision of the electronic laboratory interface at no cost. The absence of safe harbor protection does not automatically establish an AKS violation, but it does mean that the arrangement is subject to evaluation under the totality of the circumstances, including the parties' intent. Given the substantial value of the interface and the magnitude of the referral relationship, AHT's compliance assessment has concluded that this arrangement poses unacceptable risk under the AKS.

C. Recommended Restructuring

In light of the foregoing analysis, AHT respectfully requests that the parties negotiate a fair market value license fee or subscription fee for the electronic laboratory interface. Converting the arrangement from a no-cost provision to a commercially reasonable, fair market value transaction is essential to addressing the compliance concerns identified above.

AHT has retained Northbridge Valuation Advisors LLC, an independent healthcare valuation firm, to conduct a fair market value appraisal of the electronic laboratory interface. This appraisal will consider comparable licensing and integration service fees in the clinical laboratory marketplace, the scope and functionality of the interface, and all other factors relevant to determining fair market value in accordance with CMS guidance and established valuation methodologies.

The license arrangement should be documented in a separate written agreement, distinct from the Preferred Laboratory Agreement, with a term of at least one year, compensation set in advance and not varying based on the volume or value of referrals, and aggregate compensation that is consistent with fair market value and commercially reasonable in the absence of referrals. Structuring the arrangement in this manner will enable the parties to satisfy the requirements of the Stark Law fair market value exception (42 C.F.R. § 411.357(l)) or the personal services exception (42 C.F.R. § 411.357(d)), as well as the AKS personal services and management contracts safe harbor (42 C.F.R. § 1001.952(d)).

AHT is prepared to pay fair market value for the interface and to execute a properly structured agreement promptly upon completion of the independent appraisal and mutual agreement on terms.

IV. Compliance Concern No. 2 — CME Event Sponsorship

A. Description of Sponsorship Activity

As noted above, Pinnacle sponsored four (4) continuing medical education events for AHT physicians during fiscal year 2022, at a total cost of $86,000. These events were provided in the context of the ongoing referral relationship in which AHT physicians — the same physicians who attend and benefit from the sponsored educational programs — generate significant clinical laboratory referrals to Pinnacle. While the educational content of these events may have been substantively valuable and clinically relevant, the structural relationship between the sponsoring entity and the referring physicians raises concerns that AHT's compliance self-assessment has identified as requiring remediation.

B. AKS and Stark Law Concerns

CME sponsorship by a clinical laboratory that receives referrals from the physicians who benefit from the sponsored education raises concerns under both the AKS and the Stark Law.

Under the AKS, the sponsorship could be viewed as remuneration provided to AHT physicians — either directly or through their employer, AHT — in exchange for, or as a reward for, laboratory referrals to Pinnacle. The Office of Inspector General of the U.S. Department of Health and Human Services ("OIG") has repeatedly expressed concern about arrangements in which entities that benefit from referrals fund educational or other programs for referring physicians. In its Special Advisory Bulletin on the Offering of Gifts and Other Inducements to Beneficiaries (August 2002) and in various advisory opinions, the OIG has emphasized that arrangements in which a referral source receives economic benefits — including educational subsidies — from an entity to which it refers business are inherently suspect, particularly when the sponsorship is not structured at arm's length, when the educational programming is not conducted through an independent accredited body, or when the sponsorship is disproportionate to legitimate educational purposes. The OIG's 2003 Compliance Program Guidance for Pharmaceutical Manufacturers, while directed at the pharmaceutical industry, sets forth principles regarding educational support that are instructive by analogy in the laboratory context.

Under the Stark Law, the CME sponsorship constitutes an additional form of remuneration flowing from Pinnacle to AHT and its physicians. When combined with the no-cost electronic laboratory interface discussed in Section III above, the total non-monetary remuneration from Pinnacle to AHT in fiscal year 2022 aggregated to approximately $206,000 — consisting of $120,000 for the interface and $86,000 for CME sponsorship. This combined figure exceeds the $459 calendar year 2023 non-monetary compensation limit under 42 C.F.R. § 411.357(k) by a factor of more than 448 times. The sheer magnitude of this excess underscores the gravity of the compliance exposure and the urgent need for restructuring.

C. Recommended Restructuring

AHT requests that the CME sponsorship arrangement be separated from the laboratory referral relationship. Going forward, AHT proposes one of two alternatives:

(a) discontinuation of Direct Sponsorship. Pinnacle should discontinue direct CME sponsorship of AHT physician events. AHT would assume responsibility for funding its own continuing education programs for its clinicians, as is appropriate for a healthcare organization of AHT's size and resources.

(b) Restructuring Through an Independent Accredited CME Organization. Alternatively, if Pinnacle wishes to continue supporting continuing medical education as part of its commitment to advancing clinical laboratory science, any such funding should be provided through an independent, accredited continuing medical education organization — accredited by the Accreditation Council for Continuing Medical Education ("ACCME") — with no direct link to the Pinnacle-AHT referral relationship. Funding provided through an ACCME-accredited organization must comply with the ACCME Standards for Integrity and Independence in Accredited Continuing Education (formerly the Standards for Commercial Support).

Under either alternative, any future educational support must be structured so that Pinnacle has no control over speaker selection, content development, or attendee selection, and the support must not be conditioned on referral volume, referral growth, or the continuation of the Preferred Laboratory Agreement. The decoupling of CME sponsorship from the referral relationship is essential to ensuring that the educational support cannot be characterized as remuneration intended to induce or reward referrals.

As a complementary internal measure, AHT will revise its internal Gifts, Meals, and Entertainment Policy and its Vendor and Third-Party Arrangement Policy to impose heightened restrictions on vendor-sponsored CME that is linked to referral relationships. These revised policies will require prospective review and approval by AHT's Chief Compliance Officer for any vendor-funded educational program involving a vendor with whom AHT has a referral or purchasing relationship.

V. Compliance Concern No. 3 — Dr. Karen Ellsworth's 4.2% Passive Equity Interest in Pinnacle

A. Nature of the Concern

Our compliance self-assessment has identified that Dr. Karen Ellsworth, a licensed physician (MD) who maintains an independent medical practice and is not employed by AHT, holds a 4.2% passive equity interest in Pinnacle Laboratory Services Inc. (EIN: 05-6138290). Dr. Karen Ellsworth is the spouse of Dr. Nathan Ellsworth, who serves as the Chief Executive Officer of AHT.

Under the Stark Law, "immediate family member" is defined to include, among others, a husband or wife. 42 C.F.R. § 411.351. An ownership or investment interest held by the immediate family member of a physician creates a "financial relationship" between the physician and the entity in which the interest is held. 42 U.S.C. § 1395nn(a)(2). Accordingly, Dr. Karen Ellsworth's 4.2% equity interest in Pinnacle creates a financial relationship between Dr. Nathan Ellsworth and Pinnacle for purposes of the Stark Law.

Dr. Nathan Ellsworth, as a physician serving as AHT's Chief Executive Officer, occupies a position from which he may himself be in a position to make or influence referrals for designated health services, including clinical laboratory testing, or his role may create an organizational financial relationship between AHT (and its employed and contracted physicians) and Pinnacle through the chain of influence. As CEO, Dr. Nathan Ellsworth exercises authority over AHT's laboratory referral relationships, vendor selection processes, strategic partnerships, and operational decisions that determine which laboratories receive referrals from AHT clinics. The combination of Dr. Karen Ellsworth's ownership interest in Pinnacle and Dr. Nathan Ellsworth's position of authority at AHT creates a compliance concern of significant magnitude.

B. Stark Law Ownership/Investment Exception Analysis

The Stark Law provides several exceptions for ownership and investment interests that, if satisfied, would permit referrals notwithstanding the existence of a financial relationship. However, our analysis indicates that none of the available ownership exceptions apply to the current arrangement:

(a) Publicly Traded Securities and Mutual Funds. The Stark Law provides an exception for ownership or investment interests in publicly traded securities and mutual funds. 42 C.F.R. § 411.356(a). However, Pinnacle Laboratory Services Inc. is a privately held Rhode Island corporation. Its equity interests are not publicly traded, and this exception is therefore inapplicable.

(b) Rural Provider Exception. The Stark Law provides an exception for ownership or investment interests in entities located in rural areas, as defined by CMS. 42 C.F.R. § 411.356(c)(1). Pinnacle is located in Warwick, Rhode Island, which is part of the Providence-Warwick metropolitan statistical area and is not classified as a rural area for purposes of this exception. This exception is therefore inapplicable.

(c) Hospital Ownership Exception. The exception under 42 C.F.R. § 411.356(c)(3) applies to physician ownership in hospitals and is not relevant to a clinical laboratory.

(d) Other Exceptions. No other Stark Law ownership or investment interest exception appears to cover Dr. Karen Ellsworth's 4.2% passive equity interest in the context of referrals flowing from AHT to Pinnacle. We have considered the full range of regulatory exceptions and have been unable to identify one that would apply to the current facts.

Absent an applicable exception, the existence of Dr. Karen Ellsworth's ownership interest — imputed to Dr. Nathan Ellsworth as her spouse — renders referrals from AHT (to the extent influenced or directed by Dr. Nathan Ellsworth) to Pinnacle for designated health services potentially impermissible under the Stark Law.

C. AKS Analysis

Under the AKS, the investment interest safe harbor at 42 C.F.R. § 1001.952(a) provides protection for certain investment interests in entities meeting specified conditions. For investments in entities with substantial operations (the so-called "large entity" safe harbor), the entity must have more than $50 million in undepreciated net tangible assets, among other requirements. For investments in smaller entities (the "small entity" safe harbor), the entity must satisfy a series of conditions including, among others, that no more than forty percent (40%) of the entity's investment interests are held by investors who are in a position to make or influence referrals, and that the entity's returns on investment are not correlated with or tied to referral volume.

Based on the information available to AHT, Pinnacle does not appear to qualify for either the large entity or small entity investment interest safe harbor given its private ownership structure and the apparent concentration of investors who are in a position to make or influence referrals. The existence of Dr. Nathan Ellsworth's spouse's equity interest, combined with the referral relationship generating $1.65 million in annual revenue to Pinnacle, raises concerns about whether the referral pattern is influenced, or could be perceived to be influenced, by the anticipated return on Dr. Karen Ellsworth's investment.

D. Recommended Actions

AHT is taking the following internal steps to address this conflict of interest through its compliance program:

(i) AHT has required Dr. Nathan Ellsworth to disclose his spouse's ownership interest in Pinnacle as part of AHT's annual conflict of interest disclosure process, and will document this disclosure in AHT's conflict of interest files.

(ii) AHT will implement enhanced referral independence policies requiring that all decisions regarding laboratory referral relationships, vendor selection, and contract renewal with Pinnacle be made independently of Dr. Nathan Ellsworth's authority, with appropriate recusal procedures. Laboratory referral decisions will be delegated to a committee composed of AHT's Chief Medical Officer, Chief Operating Officer, and Chief Compliance Officer, none of whom have any financial relationship with Pinnacle.

(iii) AHT will implement ongoing monitoring of the referral relationship between AHT and Pinnacle to ensure that referral patterns are clinically appropriate and are not influenced by the investment interest.

In addition to these internal measures, AHT respectfully recommends that the parties discuss whether Dr. Karen Ellsworth's 4.2% equity interest in Pinnacle should be divested in order to eliminate the conflict entirely, or whether other structural measures can be implemented on Pinnacle's end to mitigate the compliance risk. AHT recognizes that Dr. Karen Ellsworth is not a party to the Preferred Laboratory Agreement and that any decision regarding divestiture of her interest is ultimately a matter between Dr. Karen Ellsworth and Pinnacle. Nonetheless, AHT believes that a candid discussion of this issue is warranted given the compliance implications for both parties.

Finally, AHT requests Pinnacle's cooperation in documenting the nature, terms, and historical and projected returns on Dr. Karen Ellsworth's 4.2% equity interest, including the date of acquisition, the consideration paid, the form of the interest (e.g., common stock, preferred stock, membership interest), any distribution history, and any redemption or transfer restrictions. This information is necessary to facilitate a complete compliance analysis under both the Stark Law and the AKS and to support the development of appropriate structural safeguards.

VI. Summary of Requested Restructuring Actions

For the convenience of Pinnacle's officers and counsel, we summarize below the three areas requiring restructuring discussions:

1. Electronic Laboratory Interface. The no-cost provision of the electronic laboratory interface must be converted to a fair market value license or subscription arrangement. The fair market value will be established by an independent appraisal conducted by Northbridge Valuation Advisors LLC. The license arrangement must be documented in a separate written agreement meeting the requirements of an applicable Stark Law exception (e.g., the fair market value exception under 42 C.F.R. § 411.357(l) or the personal services exception under 42 C.F.R. § 411.357(d)) and an applicable AKS safe harbor (e.g., the personal services and management contracts safe harbor under 42 C.F.R. § 1001.952(d)). Compensation must be set in advance, consistent with fair market value, and must not take into account the volume or value of referrals.

2. CME Sponsorship. Direct CME sponsorship by Pinnacle that is linked to the referral relationship must be discontinued, or alternatively restructured so that any future educational support is provided through an independent, ACCME-accredited continuing medical education organization with no referral-conditioned elements. Any CME support arrangement must be entirely separate from the Preferred Laboratory Agreement, with no nexus to referral volume or the continuation of the parties' commercial relationship.

3. Dr. Karen Ellsworth's Equity Interest. Pinnacle is requested to cooperate in the disclosure, documentation, and analysis of Dr. Karen Ellsworth's 4.2% passive equity interest in Pinnacle. The parties should discuss potential divestiture of the interest or the implementation of structural safeguards sufficient to mitigate the compliance risk. AHT is concurrently implementing internal recusal procedures and referral independence mechanisms to ensure that AHT's laboratory referral decisions are made independently of Dr. Nathan Ellsworth's authority and without reference to any investment interest held by his immediate family members.

VII. Proposed Next Steps and Timeline

AHT proposes that the parties schedule a meeting — in person at a mutually convenient location or by videoconference — within thirty (30) days of the date of this letter to discuss the proposed restructuring measures described herein. AHT's representatives for this discussion will include Patricia Yamamoto, General Counsel of AHT; Derek Huang, Chief Compliance Officer of AHT; and counsel from Calderwood & Harkness LLP. AHT encourages Pinnacle to include its own legal counsel and compliance personnel in the meeting so that the parties may engage in a substantive and productive dialogue.

AHT's goal is to reach agreement on restructured terms and to execute amended or new agreements within ninety (90) days of the date of this letter — that is, on or before August 20, 2023. AHT recognizes that the issues presented are complex and that Pinnacle may require time to consult with its own advisors, and AHT is willing to discuss a reasonable adjustment to this timeline if necessary. However, AHT believes that the compliance risks identified herein are sufficiently serious to warrant prompt action, and AHT is committed to resolving these matters as expeditiously as possible.

AHT wishes to emphasize its strong desire to maintain a productive and compliant working relationship with Pinnacle. The purpose of this letter and of the proposed restructuring discussions is to preserve and strengthen the parties' relationship by placing it on a sound legal footing. AHT believes that the restructuring measures described herein are achievable and that they will benefit both parties by reducing compliance risk and providing a more transparent and defensible contractual framework.

AHT notes, however, that if the parties are unable to reach agreement on a compliant restructuring within a reasonable timeframe, AHT may need to evaluate the continuation of the Preferred Laboratory Agreement and the broader commercial relationship in light of AHT's compliance obligations under federal and state law. AHT's Board of Directors and Compliance Committee have a fiduciary obligation to ensure that AHT's business relationships conform to applicable healthcare fraud and abuse laws, and AHT cannot maintain arrangements that expose the organization, its physicians, and its patients to regulatory risk.

VIII. Confidentiality and Privilege

This letter is written at the direction of AHT's General Counsel, Patricia Yamamoto, and Chief Compliance Officer, Derek Huang, in connection with a privileged compliance self-assessment being conducted under the oversight of AHT's Board of Directors and Compliance Committee. The legal analyses referenced herein are protected by the attorney-client privilege and the work product doctrine, and nothing in this letter constitutes a waiver of those protections.

AHT is sharing the substance of its compliance concerns with Pinnacle in order to facilitate good-faith restructuring discussions and to fulfill its obligation to address identified compliance risks proactively. However, AHT does not waive the attorney-client privilege or work product protection over any internal legal memoranda, analyses, communications, or other materials prepared in connection with the self-assessment. This letter sets forth AHT's compliance concerns and proposed remediation steps but does not purport to disclose the entirety of AHT's legal analysis or the full scope of the self-assessment.

Pinnacle is respectfully requested to treat this letter and its contents as confidential and to limit disclosure to Pinnacle's officers, directors, legal counsel, and compliance personnel who have a need to know in order to evaluate and respond to the matters raised herein. AHT requests that Pinnacle not disclose this letter or its contents to any third party without AHT's prior written consent, except to the extent required by applicable law or regulation.

IX. No Admission

Nothing in this letter should be construed as an admission by AHT of any violation of federal or state law, including but not limited to the Anti-Kickback Statute, the Stark Law, the False Claims Act, or any analogous state statute or regulation. AHT is undertaking this self-assessment and the proposed remediation measures proactively and in good faith as part of a comprehensive corporate compliance program enhancement. AHT's identification of compliance concerns and its initiation of restructuring discussions with Pinnacle reflect AHT's commitment to operating in full compliance with applicable law and should not be interpreted as an acknowledgment that any violation has occurred.

AHT looks forward to Pinnacle's prompt response and cooperative engagement on these important compliance matters. AHT believes that a timely and constructive dialogue will serve the interests of both parties and will result in a stronger, more sustainable business relationship.

Please direct all correspondence and communications regarding the matters raised in this letter to:

Calderwood & Harkness LLP One Federal Street, 30th Floor Boston, Massachusetts 02110

Attention: Christopher Aiken, Senior Associate, or Miriam Calloway, Partner

Matter Number: 1010-00003 Telephone: (617) 455-8200

Email: caiken@calderwoodharkness.com / mcalloway@calderwoodharkness.com

We thank you for your attention to this matter and look forward to hearing from you at your earliest convenience.

Very truly yours,

CALDERWOOD & HARKNESS LLP

By: ________

Christopher Aiken Senior Associate

Reviewed and Approved:

By: ________

Miriam Calloway Partner

cc:

Patricia Yamamoto, General Counsel, Arbor Health Technologies Inc.

Derek Huang, Chief Compliance Officer, Arbor Health Technologies Inc.

Dr. Nathan Ellsworth, Chief Executive Officer, Arbor Health Technologies Inc.

Miriam Calloway, Partner, Calderwood & Harkness LLP

Enclosures: None.

PRIVILEGED AND CONFIDENTIAL
CALDERWOOD & HARKNESS LLP Attorneys at Law One Federal Street, 30th Floor Boston, Massachusetts 02110 Telephone: (617) 455-8200 Facsimile: (617) 455-8201 www.calderwoodharkness.com
Matter Number: 1010-00003
May 22, 2023
VIA CERTIFIED MAIL — RETURN RECEIPT REQUESTED AND VIA ELECTRONIC MAIL
Pinnacle Laboratory Services Inc. 1200 Warwick Avenue, Suite 110 Warwick, Rhode Island 02886
Attention: President and Chief Executive Officer
Re: Preferred Laboratory Agreement dated June 15, 2020 between Arbor Health Technologies Inc. and Pinnacle Laboratory Services Inc. — Compliance Concerns and Request for Restructuring Discussions
Dear Sir or Madam:
I. Introduction and Purpose of This Letter
This firm serves as healthcare regulatory counsel to Arbor Health Technologies Inc. ("AHT"), a Delaware corporation headquartered at 200 Concord Avenue, Suite 400, Cambridge, Massachusetts 02138. AHT operates twenty-three (23) outpatient clinics branded as "Arbor Health Clinics" across the Commonwealth of Massachusetts, the State of Connecticut, the State of Rhode Island, and the State of New Hampshire. Through these clinics, AHT provides a broad range of healthcare services, including primary care, specialty care, and ancillary services encompassing in-office laboratory testing, diagnostic imaging, and physical therapy.
AHT has engaged Calderwood & Harkness LLP to conduct a comprehensive self-assessment of its physician compensation arrangements, referral relationships, and vendor contracts under the federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b (the "AKS"), and the Physician Self-Referral Law, commonly known as the Stark Law, 42 U.S.C. § 1395nn. This self-assessment is being undertaken proactively as part of a broader initiative to enhance AHT's corporate compliance program and to ensure that all of AHT's business relationships conform to applicable federal and state healthcare fraud and abuse laws.
We are writing on behalf of AHT to bring to Pinnacle Laboratory Services Inc.'s ("Pinnacle") attention certain compliance concerns identified during this self-assessment that relate to the Preferred Laboratory Agreement dated June 15, 2020 (the "Agreement") and, more broadly, to the overall commercial relationship between AHT and Pinnacle. Specifically, this letter addresses three distinct compliance concerns:
1. The provision by Pinnacle of an electronic laboratory interface to AHT at no cost;
2. Pinnacle's sponsorship of continuing medical education ("CME") events for AHT physicians; and
3. An ownership and investment interest held by a family member of AHT's Chief Executive Officer in Pinnacle.
We wish to emphasize at the outset that this letter is not an accusation of wrongdoing by Pinnacle. Rather, AHT is writing in a spirit of cooperation and transparency to share the substance of its compliance findings and to initiate good-faith discussions aimed at restructuring certain elements of the parties' relationship so as to bring them into full compliance with applicable law. AHT values its relationship with Pinnacle and seeks to preserve a productive and lawful working partnership. AHT believes that the compliance concerns identified herein can be resolved through collaborative restructuring, and we look forward to engaging with Pinnacle toward that end.
II. Background of the Relationship
A. The Preferred Laboratory Agreement
AHT and Pinnacle entered into the Preferred Laboratory Agreement effective June 15, 2020. Under the Agreement, AHT clinics located in Rhode Island and southeastern Massachusetts refer outpatient clinical laboratory testing to Pinnacle. The referral relationship encompasses a range of clinical laboratory services, including routine blood chemistry panels, hematology, urinalysis, microbiology, and specialty testing, all of which are ordered by AHT's employed and contracted physicians in the ordinary course of patient care.
The total referral volume generated by AHT and directed to Pinnacle during fiscal year 2022 was approximately $1.65 million. This figure represents a material revenue stream for Pinnacle and reflects the significance of the referral relationship to both parties. For context, AHT's fiscal year 2022 net revenue was $214.3 million, of which approximately sixty-one percent (61%), or approximately $130.7 million, was derived from reimbursements under the Medicare and Medicaid programs. As discussed in greater detail below, clinical laboratory testing constitutes a "designated health service" under the Stark Law, 42 U.S.C. § 1395nn(h)(6), and the substantial Medicare and Medicaid payor mix underscores the applicability of both the Stark Law and the AKS to the parties' arrangement.
B. The Electronic Laboratory Interface
Under or in connection with the Agreement, Pinnacle provides AHT with an electronic laboratory interface that facilitates the electronic ordering of laboratory tests and the electronic receipt of test results. This interface is integrated into AHT's proprietary electronic health records and practice management software-as-a-service platform known as "ArborConnect." The interface enables AHT's clinicians to order laboratory tests directly from within the ArborConnect platform, to transmit specimen identification and patient demographic data electronically to Pinnacle, and to receive and incorporate test results into patient records seamlessly and in real time.
The estimated fair market value of the electronic laboratory interface, based on comparable commercial licensing arrangements for laboratory information system integration services, is approximately $120,000 per year. Since the inception of the interface, AHT has paid no consideration whatsoever for this service. As of the date of this letter, AHT's total payments to Pinnacle for the electronic laboratory interface stand at zero dollars ($0).
C. CME Event Sponsorship
During fiscal year 2022, Pinnacle sponsored four (4) continuing medical education events for AHT physicians. These events included speaker honoraria, venue costs, educational materials, and associated expenses. The total value of these CME sponsorships in FY2022 was $86,000. The sponsorship was provided in the context of the ongoing referral relationship described above, in which AHT physicians generate significant clinical laboratory referrals to Pinnacle.
D. Ownership Interest of Dr. Karen Ellsworth
Dr. Karen Ellsworth, a licensed physician who is not employed by AHT and who maintains an independent medical practice, holds a 4.2% passive equity interest in Pinnacle Laboratory Services Inc. (EIN: 05-6138290). Dr. Karen Ellsworth is the spouse of Dr. Nathan Ellsworth, who serves as the Chief Executive Officer of AHT. Dr. Nathan Ellsworth, in his capacity as CEO, exercises authority and influence over AHT's laboratory referral relationships, vendor selection processes, and operational decisions affecting which laboratories receive referrals from AHT clinics. The significance of this ownership interest from a compliance perspective is discussed at length in Section V of this letter.
III. Compliance Concern No. 1 — No-Cost Electronic Laboratory Interface
A. Stark Law Analysis — Non-Monetary Remuneration Exception
The Stark Law, 42 U.S.C. § 1395nn(a), prohibits a physician from making referrals for designated health services — which expressly include clinical laboratory services — to an entity with which the physician (or an immediate family member of the physician) has a financial relationship, unless a specific statutory or regulatory exception applies. A violation of the Stark Law results in strict liability; no proof of intent is required. Where a referral is made in violation of the Stark Law, the entity receiving the referral may not bill Medicare or Medicaid for the referred services, and any amounts collected must be refunded. Moreover, violations may trigger liability under the False Claims Act, 31 U.S.C. § 3729, as well as civil monetary penalties and exclusion from federal healthcare programs.
A "financial relationship" under the Stark Law includes both ownership or investment interests and compensation arrangements. 42 U.S.C. § 1395nn(a)(2); 42 C.F.R. § 411.354. A "compensation arrangement" encompasses any arrangement involving "remuneration" between a physician (or an immediate family member of a physician) and an entity. 42 U.S.C. § 1395nn(h)(1). The term "remuneration" is defined broadly and includes any transfer of items or services for free or for other than fair market value. 42 C.F.R. § 411.351.
The provision of the electronic laboratory interface by Pinnacle to AHT at no cost constitutes "remuneration" from Pinnacle to AHT within the meaning of the Stark Law. To the extent that AHT physicians have ownership interests in, or compensation arrangements with, AHT — as they do through employment agreements, productivity-based compensation arrangements, and equity participation — the no-cost interface potentially creates a chain of financial relationships between the referring physicians and Pinnacle that implicates the Stark Law's referral prohibition.
The Stark Law provides a limited exception for non-monetary compensation. Under 42 C.F.R. § 411.357(k), non-monetary compensation from an entity to a physician (or a physician organization such as a group practice) is permitted provided that the aggregate value of such non-monetary compensation does not exceed an annual limit set by the Centers for Medicare & Medicaid Services ("CMS"), which is adjusted annually for inflation. For calendar year 2023, this annual limit is $459.
The estimated fair market value of the electronic laboratory interface provided by Pinnacle to AHT is approximately $120,000 per year. This figure exceeds the $459 annual non-monetary compensation threshold by a factor of more than 260 times. The magnitude of this excess is not marginal — it is extraordinary, and it conclusively precludes reliance on the non-monetary compensation exception to protect this arrangement.
Other Stark Law exceptions could theoretically be invoked to protect the provision of the electronic laboratory interface, but each would require material changes to the current arrangement. For example:
(a) The fair market value exception under 42 C.F.R. § 411.357(l) permits compensation arrangements in which compensation is set in advance, is consistent with fair market value, and does not take into account the volume or value of referrals. However, this exception requires that AHT actually pay fair market value for the interface — which it currently does not.
(b) The personal services exception under 42 C.F.R. § 411.357(d) requires, among other elements, that the arrangement be set out in writing, that the term be at least one year, that the compensation be set in advance and consistent with fair market value, and that the compensation not take into account the volume or value of referrals. Again, no payment is currently being made by AHT.
In the current structure, where Pinnacle provides the interface to AHT at no charge, neither of these exceptions is satisfied, and no other Stark Law exception appears available to protect the arrangement.
B. Anti-Kickback Statute Analysis
The federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration — directly or indirectly, overtly or covertly, in cash or in kind — in order to induce or reward the referral of individuals for the furnishing of, or the arranging for the furnishing of, any item or service for which payment may be made in whole or in part under a federal healthcare program. Violations of the AKS are punishable by up to ten years of imprisonment and fines of up to $100,000 per violation, as well as exclusion from federal healthcare programs and civil monetary penalties.
Under the "one purpose" test, as articulated by the United States Court of Appeals for multiple circuits and codified in the Patient Protection and Affordable Care Act at 42 U.S.C. § 1320a-7b(h), a person need not have a primary or sole intent to violate the AKS. Rather, if even one purpose of a payment or benefit is to induce or reward referrals, the arrangement may violate the statute.
The provision of a $120,000-per-year electronic laboratory interface at no cost to AHT — in the context of $1.65 million in annual referral volume flowing from AHT to Pinnacle, all of which involves services payable in substantial part by Medicare and Medicaid — creates a significant risk that the no-cost interface could be viewed as remuneration intended to induce or reward laboratory referrals. The substantial value of the interface, its integration into the very workflow through which AHT clinicians order tests from Pinnacle, and the absence of any consideration flowing from AHT to Pinnacle for the interface all heighten this risk.
The AKS safe harbor for electronic health records items and services, formerly codified at 42 C.F.R. § 1001.952(y), was established under the 2006 final rule and subsequently extended. However, this safe harbor expired on December 31, 2021, pursuant to the terms established in the 2020 final rule. While the regulatory landscape may continue to evolve, as of the date of this letter, the EHR safe harbor is no longer in effect, and its availability cannot be relied upon. Moreover, even when the safe harbor was operational, certain conditions would not have been satisfied if the interface were provided exclusively or primarily to generate laboratory referrals for Pinnacle. Among other requirements, the safe harbor required that the donor not take into account the volume or value of referrals in determining the eligibility of a recipient for the EHR technology, a condition that warrants scrutiny in an arrangement where the technology is integral to a preferred referral arrangement.
No other AKS safe harbor clearly protects the provision of the electronic laboratory interface at no cost. The absence of safe harbor protection does not automatically establish an AKS violation, but it does mean that the arrangement is subject to evaluation under the totality of the circumstances, including the parties' intent. Given the substantial value of the interface and the magnitude of the referral relationship, AHT's compliance assessment has concluded that this arrangement poses unacceptable risk under the AKS.
C. Recommended Restructuring
In light of the foregoing analysis, AHT respectfully requests that the parties negotiate a fair market value license fee or subscription fee for the electronic laboratory interface. Converting the arrangement from a no-cost provision to a commercially reasonable, fair market value transaction is essential to addressing the compliance concerns identified above.
AHT has retained Northbridge Valuation Advisors LLC, an independent healthcare valuation firm, to conduct a fair market value appraisal of the electronic laboratory interface. This appraisal will consider comparable licensing and integration service fees in the clinical laboratory marketplace, the scope and functionality of the interface, and all other factors relevant to determining fair market value in accordance with CMS guidance and established valuation methodologies.
The license arrangement should be documented in a separate written agreement, distinct from the Preferred Laboratory Agreement, with a term of at least one year, compensation set in advance and not varying based on the volume or value of referrals, and aggregate compensation that is consistent with fair market value and commercially reasonable in the absence of referrals. Structuring the arrangement in this manner will enable the parties to satisfy the requirements of the Stark Law fair market value exception (42 C.F.R. § 411.357(l)) or the personal services exception (42 C.F.R. § 411.357(d)), as well as the AKS personal services and management contracts safe harbor (42 C.F.R. § 1001.952(d)).
AHT is prepared to pay fair market value for the interface and to execute a properly structured agreement promptly upon completion of the independent appraisal and mutual agreement on terms.
IV. Compliance Concern No. 2 — CME Event Sponsorship
A. Description of Sponsorship Activity
As noted above, Pinnacle sponsored four (4) continuing medical education events for AHT physicians during fiscal year 2022, at a total cost of $86,000. These events were provided in the context of the ongoing referral relationship in which AHT physicians — the same physicians who attend and benefit from the sponsored educational programs — generate significant clinical laboratory referrals to Pinnacle. While the educational content of these events may have been substantively valuable and clinically relevant, the structural relationship between the sponsoring entity and the referring physicians raises concerns that AHT's compliance self-assessment has identified as requiring remediation.
B. AKS and Stark Law Concerns
CME sponsorship by a clinical laboratory that receives referrals from the physicians who benefit from the sponsored education raises concerns under both the AKS and the Stark Law.
Under the AKS, the sponsorship could be viewed as remuneration provided to AHT physicians — either directly or through their employer, AHT — in exchange for, or as a reward for, laboratory referrals to Pinnacle. The Office of Inspector General of the U.S. Department of Health and Human Services ("OIG") has repeatedly expressed concern about arrangements in which entities that benefit from referrals fund educational or other programs for referring physicians. In its Special Advisory Bulletin on the Offering of Gifts and Other Inducements to Beneficiaries (August 2002) and in various advisory opinions, the OIG has emphasized that arrangements in which a referral source receives economic benefits — including educational subsidies — from an entity to which it refers business are inherently suspect, particularly when the sponsorship is not structured at arm's length, when the educational programming is not conducted through an independent accredited body, or when the sponsorship is disproportionate to legitimate educational purposes. The OIG's 2003 Compliance Program Guidance for Pharmaceutical Manufacturers, while directed at the pharmaceutical industry, sets forth principles regarding educational support that are instructive by analogy in the laboratory context.
Under the Stark Law, the CME sponsorship constitutes an additional form of remuneration flowing from Pinnacle to AHT and its physicians. When combined with the no-cost electronic laboratory interface discussed in Section III above, the total non-monetary remuneration from Pinnacle to AHT in fiscal year 2022 aggregated to approximately $206,000 — consisting of $120,000 for the interface and $86,000 for CME sponsorship. This combined figure exceeds the $459 calendar year 2023 non-monetary compensation limit under 42 C.F.R. § 411.357(k) by a factor of more than 448 times. The sheer magnitude of this excess underscores the gravity of the compliance exposure and the urgent need for restructuring.
C. Recommended Restructuring
AHT requests that the CME sponsorship arrangement be separated from the laboratory referral relationship. Going forward, AHT proposes one of two alternatives:
(a) discontinuation of Direct Sponsorship. Pinnacle should discontinue direct CME sponsorship of AHT physician events. AHT would assume responsibility for funding its own continuing education programs for its clinicians, as is appropriate for a healthcare organization of AHT's size and resources.
(b) Restructuring Through an Independent Accredited CME Organization. Alternatively, if Pinnacle wishes to continue supporting continuing medical education as part of its commitment to advancing clinical laboratory science, any such funding should be provided through an independent, accredited continuing medical education organization — accredited by the Accreditation Council for Continuing Medical Education ("ACCME") — with no direct link to the Pinnacle-AHT referral relationship. Funding provided through an ACCME-accredited organization must comply with the ACCME Standards for Integrity and Independence in Accredited Continuing Education (formerly the Standards for Commercial Support).
Under either alternative, any future educational support must be structured so that Pinnacle has no control over speaker selection, content development, or attendee selection, and the support must not be conditioned on referral volume, referral growth, or the continuation of the Preferred Laboratory Agreement. The decoupling of CME sponsorship from the referral relationship is essential to ensuring that the educational support cannot be characterized as remuneration intended to induce or reward referrals.
As a complementary internal measure, AHT will revise its internal Gifts, Meals, and Entertainment Policy and its Vendor and Third-Party Arrangement Policy to impose heightened restrictions on vendor-sponsored CME that is linked to referral relationships. These revised policies will require prospective review and approval by AHT's Chief Compliance Officer for any vendor-funded educational program involving a vendor with whom AHT has a referral or purchasing relationship.
V. Compliance Concern No. 3 — Dr. Karen Ellsworth's 4.2% Passive Equity Interest in Pinnacle
A. Nature of the Concern
Our compliance self-assessment has identified that Dr. Karen Ellsworth, a licensed physician (MD) who maintains an independent medical practice and is not employed by AHT, holds a 4.2% passive equity interest in Pinnacle Laboratory Services Inc. (EIN: 05-6138290). Dr. Karen Ellsworth is the spouse of Dr. Nathan Ellsworth, who serves as the Chief Executive Officer of AHT.
Under the Stark Law, "immediate family member" is defined to include, among others, a husband or wife. 42 C.F.R. § 411.351. An ownership or investment interest held by the immediate family member of a physician creates a "financial relationship" between the physician and the entity in which the interest is held. 42 U.S.C. § 1395nn(a)(2). Accordingly, Dr. Karen Ellsworth's 4.2% equity interest in Pinnacle creates a financial relationship between Dr. Nathan Ellsworth and Pinnacle for purposes of the Stark Law.
Dr. Nathan Ellsworth, as a physician serving as AHT's Chief Executive Officer, occupies a position from which he may himself be in a position to make or influence referrals for designated health services, including clinical laboratory testing, or his role may create an organizational financial relationship between AHT (and its employed and contracted physicians) and Pinnacle through the chain of influence. As CEO, Dr. Nathan Ellsworth exercises authority over AHT's laboratory referral relationships, vendor selection processes, strategic partnerships, and operational decisions that determine which laboratories receive referrals from AHT clinics. The combination of Dr. Karen Ellsworth's ownership interest in Pinnacle and Dr. Nathan Ellsworth's position of authority at AHT creates a compliance concern of significant magnitude.
B. Stark Law Ownership/Investment Exception Analysis
The Stark Law provides several exceptions for ownership and investment interests that, if satisfied, would permit referrals notwithstanding the existence of a financial relationship. However, our analysis indicates that none of the available ownership exceptions apply to the current arrangement:
(a) Publicly Traded Securities and Mutual Funds. The Stark Law provides an exception for ownership or investment interests in publicly traded securities and mutual funds. 42 C.F.R. § 411.356(a). However, Pinnacle Laboratory Services Inc. is a privately held Rhode Island corporation. Its equity interests are not publicly traded, and this exception is therefore inapplicable.
(b) Rural Provider Exception. The Stark Law provides an exception for ownership or investment interests in entities located in rural areas, as defined by CMS. 42 C.F.R. § 411.356(c)(1). Pinnacle is located in Warwick, Rhode Island, which is part of the Providence-Warwick metropolitan statistical area and is not classified as a rural area for purposes of this exception. This exception is therefore inapplicable.
(c) Hospital Ownership Exception. The exception under 42 C.F.R. § 411.356(c)(3) applies to physician ownership in hospitals and is not relevant to a clinical laboratory.
(d) Other Exceptions. No other Stark Law ownership or investment interest exception appears to cover Dr. Karen Ellsworth's 4.2% passive equity interest in the context of referrals flowing from AHT to Pinnacle. We have considered the full range of regulatory exceptions and have been unable to identify one that would apply to the current facts.
Absent an applicable exception, the existence of Dr. Karen Ellsworth's ownership interest — imputed to Dr. Nathan Ellsworth as her spouse — renders referrals from AHT (to the extent influenced or directed by Dr. Nathan Ellsworth) to Pinnacle for designated health services potentially impermissible under the Stark Law.
C. AKS Analysis
Under the AKS, the investment interest safe harbor at 42 C.F.R. § 1001.952(a) provides protection for certain investment interests in entities meeting specified conditions. For investments in entities with substantial operations (the so-called "large entity" safe harbor), the entity must have more than $50 million in undepreciated net tangible assets, among other requirements. For investments in smaller entities (the "small entity" safe harbor), the entity must satisfy a series of conditions including, among others, that no more than forty percent (40%) of the entity's investment interests are held by investors who are in a position to make or influence referrals, and that the entity's returns on investment are not correlated with or tied to referral volume.
Based on the information available to AHT, Pinnacle does not appear to qualify for either the large entity or small entity investment interest safe harbor given its private ownership structure and the apparent concentration of investors who are in a position to make or influence referrals. The existence of Dr. Nathan Ellsworth's spouse's equity interest, combined with the referral relationship generating $1.65 million in annual revenue to Pinnacle, raises concerns about whether the referral pattern is influenced, or could be perceived to be influenced, by the anticipated return on Dr. Karen Ellsworth's investment.
D. Recommended Actions
AHT is taking the following internal steps to address this conflict of interest through its compliance program:
(i) AHT has required Dr. Nathan Ellsworth to disclose his spouse's ownership interest in Pinnacle as part of AHT's annual conflict of interest disclosure process, and will document this disclosure in AHT's conflict of interest files.
(ii) AHT will implement enhanced referral independence policies requiring that all decisions regarding laboratory referral relationships, vendor selection, and contract renewal with Pinnacle be made independently of Dr. Nathan Ellsworth's authority, with appropriate recusal procedures. Laboratory referral decisions will be delegated to a committee composed of AHT's Chief Medical Officer, Chief Operating Officer, and Chief Compliance Officer, none of whom have any financial relationship with Pinnacle.
(iii) AHT will implement ongoing monitoring of the referral relationship between AHT and Pinnacle to ensure that referral patterns are clinically appropriate and are not influenced by the investment interest.
In addition to these internal measures, AHT respectfully recommends that the parties discuss whether Dr. Karen Ellsworth's 4.2% equity interest in Pinnacle should be divested in order to eliminate the conflict entirely, or whether other structural measures can be implemented on Pinnacle's end to mitigate the compliance risk. AHT recognizes that Dr. Karen Ellsworth is not a party to the Preferred Laboratory Agreement and that any decision regarding divestiture of her interest is ultimately a matter between Dr. Karen Ellsworth and Pinnacle. Nonetheless, AHT believes that a candid discussion of this issue is warranted given the compliance implications for both parties.
Finally, AHT requests Pinnacle's cooperation in documenting the nature, terms, and historical and projected returns on Dr. Karen Ellsworth's 4.2% equity interest, including the date of acquisition, the consideration paid, the form of the interest (e.g., common stock, preferred stock, membership interest), any distribution history, and any redemption or transfer restrictions. This information is necessary to facilitate a complete compliance analysis under both the Stark Law and the AKS and to support the development of appropriate structural safeguards.
VI. Summary of Requested Restructuring Actions
For the convenience of Pinnacle's officers and counsel, we summarize below the three areas requiring restructuring discussions:
1. Electronic Laboratory Interface. The no-cost provision of the electronic laboratory interface must be converted to a fair market value license or subscription arrangement. The fair market value will be established by an independent appraisal conducted by Northbridge Valuation Advisors LLC. The license arrangement must be documented in a separate written agreement meeting the requirements of an applicable Stark Law exception (e.g., the fair market value exception under 42 C.F.R. § 411.357(l) or the personal services exception under 42 C.F.R. § 411.357(d)) and an applicable AKS safe harbor (e.g., the personal services and management contracts safe harbor under 42 C.F.R. § 1001.952(d)). Compensation must be set in advance, consistent with fair market value, and must not take into account the volume or value of referrals.
2. CME Sponsorship. Direct CME sponsorship by Pinnacle that is linked to the referral relationship must be discontinued, or alternatively restructured so that any future educational support is provided through an independent, ACCME-accredited continuing medical education organization with no referral-conditioned elements. Any CME support arrangement must be entirely separate from the Preferred Laboratory Agreement, with no nexus to referral volume or the continuation of the parties' commercial relationship.
3. Dr. Karen Ellsworth's Equity Interest. Pinnacle is requested to cooperate in the disclosure, documentation, and analysis of Dr. Karen Ellsworth's 4.2% passive equity interest in Pinnacle. The parties should discuss potential divestiture of the interest or the implementation of structural safeguards sufficient to mitigate the compliance risk. AHT is concurrently implementing internal recusal procedures and referral independence mechanisms to ensure that AHT's laboratory referral decisions are made independently of Dr. Nathan Ellsworth's authority and without reference to any investment interest held by his immediate family members.
VII. Proposed Next Steps and Timeline
AHT proposes that the parties schedule a meeting — in person at a mutually convenient location or by videoconference — within thirty (30) days of the date of this letter to discuss the proposed restructuring measures described herein. AHT's representatives for this discussion will include Patricia Yamamoto, General Counsel of AHT; Derek Huang, Chief Compliance Officer of AHT; and counsel from Calderwood & Harkness LLP. AHT encourages Pinnacle to include its own legal counsel and compliance personnel in the meeting so that the parties may engage in a substantive and productive dialogue.
AHT's goal is to reach agreement on restructured terms and to execute amended or new agreements within ninety (90) days of the date of this letter — that is, on or before August 20, 2023. AHT recognizes that the issues presented are complex and that Pinnacle may require time to consult with its own advisors, and AHT is willing to discuss a reasonable adjustment to this timeline if necessary. However, AHT believes that the compliance risks identified herein are sufficiently serious to warrant prompt action, and AHT is committed to resolving these matters as expeditiously as possible.
AHT wishes to emphasize its strong desire to maintain a productive and compliant working relationship with Pinnacle. The purpose of this letter and of the proposed restructuring discussions is to preserve and strengthen the parties' relationship by placing it on a sound legal footing. AHT believes that the restructuring measures described herein are achievable and that they will benefit both parties by reducing compliance risk and providing a more transparent and defensible contractual framework.
AHT notes, however, that if the parties are unable to reach agreement on a compliant restructuring within a reasonable timeframe, AHT may need to evaluate the continuation of the Preferred Laboratory Agreement and the broader commercial relationship in light of AHT's compliance obligations under federal and state law. AHT's Board of Directors and Compliance Committee have a fiduciary obligation to ensure that AHT's business relationships conform to applicable healthcare fraud and abuse laws, and AHT cannot maintain arrangements that expose the organization, its physicians, and its patients to regulatory risk.
VIII. Confidentiality and Privilege
This letter is written at the direction of AHT's General Counsel, Patricia Yamamoto, and Chief Compliance Officer, Derek Huang, in connection with a privileged compliance self-assessment being conducted under the oversight of AHT's Board of Directors and Compliance Committee. The legal analyses referenced herein are protected by the attorney-client privilege and the work product doctrine, and nothing in this letter constitutes a waiver of those protections.
AHT is sharing the substance of its compliance concerns with Pinnacle in order to facilitate good-faith restructuring discussions and to fulfill its obligation to address identified compliance risks proactively. However, AHT does not waive the attorney-client privilege or work product protection over any internal legal memoranda, analyses, communications, or other materials prepared in connection with the self-assessment. This letter sets forth AHT's compliance concerns and proposed remediation steps but does not purport to disclose the entirety of AHT's legal analysis or the full scope of the self-assessment.
Pinnacle is respectfully requested to treat this letter and its contents as confidential and to limit disclosure to Pinnacle's officers, directors, legal counsel, and compliance personnel who have a need to know in order to evaluate and respond to the matters raised herein. AHT requests that Pinnacle not disclose this letter or its contents to any third party without AHT's prior written consent, except to the extent required by applicable law or regulation.
IX. No Admission
Nothing in this letter should be construed as an admission by AHT of any violation of federal or state law, including but not limited to the Anti-Kickback Statute, the Stark Law, the False Claims Act, or any analogous state statute or regulation. AHT is undertaking this self-assessment and the proposed remediation measures proactively and in good faith as part of a comprehensive corporate compliance program enhancement. AHT's identification of compliance concerns and its initiation of restructuring discussions with Pinnacle reflect AHT's commitment to operating in full compliance with applicable law and should not be interpreted as an acknowledgment that any violation has occurred.
AHT looks forward to Pinnacle's prompt response and cooperative engagement on these important compliance matters. AHT believes that a timely and constructive dialogue will serve the interests of both parties and will result in a stronger, more sustainable business relationship.
Please direct all correspondence and communications regarding the matters raised in this letter to:
Calderwood & Harkness LLP One Federal Street, 30th Floor Boston, Massachusetts 02110
Attention: Christopher Aiken, Senior Associate, or Miriam Calloway, Partner
Matter Number: 1010-00003 Telephone: (617) 455-8200
Email: caiken@calderwoodharkness.com / mcalloway@calderwoodharkness.com
We thank you for your attention to this matter and look forward to hearing from you at your earliest convenience.
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Christopher Aiken Senior Associate
Reviewed and Approved:
By: ________
Miriam Calloway Partner
cc:
Patricia Yamamoto, General Counsel, Arbor Health Technologies Inc.
Derek Huang, Chief Compliance Officer, Arbor Health Technologies Inc.
Dr. Nathan Ellsworth, Chief Executive Officer, Arbor Health Technologies Inc.
Miriam Calloway, Partner, Calderwood & Harkness LLP
Enclosures: None.

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CALDERWOOD & HARKNESS LLP

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