PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This memorandum was prepared by Calderwood & Harkness LLP at the direction of counsel for Arbor Health Technologies Inc. and is protected by the attorney-client privilege and the work-product doctrine. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and Arbor Health Technologies Inc.
MEMORANDUM
TO: Patricia Yamamoto, General Counsel, Arbor Health Technologies Inc. Derek Huang, Chief Compliance Officer, Arbor Health Technologies Inc.
FROM: Miriam Calloway, Partner, Calderwood & Harkness LLP Joel Strauss, Partner, Calderwood & Harkness LLP Christopher Aiken, Senior Associate, Calderwood & Harkness LLP Amy Whitfield, Associate, Calderwood & Harkness LLP
DATE: June 15, 2023
RE: Anti-Kickback Statute Compliance Assessment — Arbor Health Technologies Inc.
C&H Matter No.: 1010-00003
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I. EXECUTIVE SUMMARY
Calderwood & Harkness LLP ("C&H" or the "Firm") has prepared this memorandum to present the results of a comprehensive assessment of the physician compensation arrangements, referral relationships, and vendor contracts maintained by Arbor Health Technologies Inc. ("AHT" or the "Company") under the federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b) (the "AKS"), and applicable regulatory safe harbors codified at 42 C.F.R. § 1001.952. This memorandum constitutes privileged attorney work product and is intended solely for the use of AHT's General Counsel and Chief Compliance Officer in connection with AHT's internal compliance program and remediation efforts.
This engagement was authorized by AHT Board Resolution No. 2023-01-004, adopted on January 24, 2023, following the delivery of a compliance gap assessment report prepared by Grayson Whitaker & Associates LLP (Report No. GW-AHT-2022-Final, dated December 12, 2022). The Grayson Whitaker report identified seventeen (17) "high-risk" and twenty-three (23) "moderate-risk" arrangements within AHT's operations requiring further legal review. The engagement was formally opened on January 30, 2023, and this memorandum represents the Firm's final work product.
The scope of C&H's assessment encompasses all forty (40) arrangements flagged in the Grayson Whitaker report, as well as a supplemental review of AHT's one hundred forty-seven (147) W-2 employed physician arrangements and thirty-eight (38) independent contractor and medical director arrangements. The assessment also addresses several specific high-risk relationships that emerged during the course of our review, including the Meridian Diagnostics per-scan facility access fee, the Pinnacle Laboratory Services no-cost electronic laboratory interface and CME sponsorship program, above-fair-market-value medical director compensation, and structural issues in the ConnectiCare Physicians Network management services arrangements.
This memorandum is limited to AKS analysis. A companion Stark Law Compliance Assessment Memorandum, prepared concurrently, addresses the physician self-referral issues implicated by many of the same arrangements. The AKS and Stark Law operate independently, and compliance with one does not assure compliance with the other. Accordingly, both memoranda should be read together to obtain a complete picture of AHT's regulatory risk profile.
Summary of Principal Findings. Our assessment has identified multiple arrangements that present material risk of AKS violation. The arrangements of greatest concern are as follows:
1. Meridian Diagnostics Per-Scan Facility Access Fee. The per-scan fee structure ($185 per scan, generating $777,000 in FY2022) creates compensation that varies directly with the volume of imaging referrals from AHT physicians to Meridian. This arrangement cannot satisfy the space rental or equipment rental safe harbors and presents the highest individual AKS risk among all arrangements reviewed.
2. Pinnacle Laboratory Services — No-Cost Electronic Lab Interface and CME Sponsorship. Pinnacle provides AHT with a laboratory interface valued at approximately $120,000 per year at no charge, and sponsored $86,000 in CME events for AHT physicians in FY2022. These transfers of value from a significant referral recipient to AHT and its physicians constitute remuneration that, under the "one purpose" test, could be viewed as inducement to maintain the referral relationship. No applicable safe harbor protects either arrangement.
3. Above-FMV Medical Director Compensation. Across AHT's thirty-eight (38) independent contractor and medical director arrangements, the effective average hourly compensation rate of $501.28 per hour exceeds the 90th percentile for comparable positions according to MGMA and SullivanCotter benchmark data. Twenty-two (22) of these arrangements are classified as high-risk. Above-FMV compensation to physicians who are in a position to refer patients to AHT creates a strong inference that one purpose of the compensation is to induce referrals.
4. ConnectiCare Physicians Network MSA Arrangements. The percentage-based management fee structure (15% of collected net revenue), combined with the flow of ancillary service referrals from managed practices to AHT-owned services, creates a financial relationship that may fail the "one purpose" test despite potential technical compliance with the management contracts safe harbor.
5. Dr. Karen Ellsworth's 4.2% Equity Interest in Pinnacle Laboratory Services. The spousal relationship between Dr. Karen Ellsworth and AHT CEO Dr. Nathan Ellsworth, combined with the laboratory's referral relationship with AHT, creates an indirect inducement concern and significant conflict of interest.
6. Lakeview Legacy Arrangements. Multiple physician employment agreements, medical director agreements, and office leases assumed in the August 2022 acquisition of Lakeview Medical Associates lack FMV substantiation and may contain compensation formulas that do not satisfy AKS safe harbor requirements.
Federal Healthcare Program Revenue at Risk. AHT reported $214.3 million in net revenue for fiscal year 2022, of which approximately sixty-one percent (61%), or $130.7 million, derives from Medicare and Medicaid reimbursements. An AKS violation rendering any portion of this revenue subject to False Claims Act liability, civil monetary penalties, treble damages, or — most critically — exclusion from federal healthcare programs would pose an existential threat to the Company. The urgency of remediation cannot be overstated.
Detailed findings and remediation recommendations for each arrangement category are set forth in Sections IV through XII below, with a consolidated summary of findings, risk tiers, and the recommended remediation roadmap presented in Sections XV and XVI.
II. BACKGROUND AND SCOPE
A. Arbor Health Technologies Inc. — Corporate and Operational Overview
Arbor Health Technologies Inc. is a Delaware corporation headquartered at 200 Concord Avenue, Suite 400, Cambridge, Massachusetts 02138. The Company operates a network of twenty-three (23) outpatient clinics (branded as "Arbor Health Clinics") across four states in the northeastern United States: fourteen (14) clinics in Massachusetts, four (4) clinics in Connecticut, three (3) clinics in Rhode Island, and two (2) clinics in New Hampshire.
AHT's clinical service lines include primary care, specialty care (including cardiology, orthopedics, and gastroenterology), and ancillary services encompassing in-office laboratory testing, diagnostic imaging, and physical therapy. In addition to its clinical operations, AHT has developed and operates a proprietary electronic health record and practice management software-as-a-service ("SaaS") platform marketed under the brand name "ArborConnect." ArborConnect is currently licensed to forty-two (42) external physician practices, generating approximately $8.9 million in annual subscription revenue.
As of the date of this memorandum, AHT employs approximately 1,340 individuals across its clinical and administrative operations. The Company maintains one hundred forty-seven (147) W-2 employed physician relationships and thirty-eight (38) independent contractor and medical director arrangements. AHT's employer identification number ("EIN") is 84-3291057. Its organizational National Provider Identifier ("NPI") is 1497253810, and its lead Provider Transaction Access Number ("PTAN") is 27MA4891.
AHT's senior leadership includes Dr. Nathan Ellsworth, Chief Executive Officer; Patricia Yamamoto, General Counsel; and Derek Huang, Chief Compliance Officer. Both Ms. Yamamoto and Mr. Huang have been actively involved throughout the course of this engagement, and we have had the benefit of their institutional knowledge and cooperation in obtaining the documentation and information necessary to complete this assessment.
B. Ownership and PE Sponsor
AHT is a portfolio company of Ridgeline Capital Partners Fund IV, L.P. ("Ridgeline Fund IV" or "Ridgeline"), a Delaware limited partnership managed by Ridgeline Capital Advisors LLC, based in Greenwich, Connecticut. Ridgeline acquired a seventy-two percent (72%) controlling equity stake in AHT in January 2021 for an aggregate purchase price of $185 million through a leveraged buyout transaction.
Ridgeline designates two members to the AHT Board of Directors: Claudia Sorrento, Managing Director of Ridgeline Capital Advisors LLC, and Marcus Whitmore, Principal of Ridgeline Capital Advisors LLC. Both Ms. Sorrento and Mr. Whitmore have been briefed by AHT management on the compliance risk profile discussed in this memorandum.
Ridgeline has expressed concern about AHT's compliance risk exposure in connection with a potential exit or sale process that the fund anticipates pursuing in late 2024, consistent with the fund's investment horizon. AKS and Stark Law compliance are recognized as material due diligence considerations for any prospective acquirer of a healthcare services company, and the remediation program recommended in this memorandum is designed, in part, to position AHT favorably for such a transaction. See Section XIII.C below for a further discussion of PE sponsor exit considerations.
C. Lakeview Medical Associates Acquisition
On August 15, 2022, AHT acquired substantially all of the assets of Lakeview Medical Associates, P.C. ("Lakeview"), a Massachusetts professional corporation, for a total purchase price of $11.4 million pursuant to an asset purchase agreement. The Lakeview acquisition is significant to this assessment because (i) it resulted in the assumption of multiple physician compensation arrangements, medical director agreements, and office leases that had not been evaluated for AKS compliance, and (ii) the post-acquisition integration process served as the proximate trigger for AHT's decision to engage in the broader compliance self-assessment that is the subject of this memorandum.
The Lakeview acquisition brought fourteen (14) physicians into the AHT network: twelve (12) as W-2 employed physicians and two (2) as independent contractors. AHT also assumed three (3) medical director agreements with annual stipends of $45,000, $60,000, and $72,000, respectively, as well as two (2) office leases — one for a clinic located at 75 Belmont Street, Worcester, Massachusetts 01605, and one for a clinic located at 310 Main Street, Suite 2A, Shrewsbury, Massachusetts 01545.
Prior to the acquisition, Lakeview reported annual revenue of approximately $18.2 million, of which approximately $10.9 million (approximately 60%) was attributable to Medicare and Medicaid reimbursements. Dr. Vivian Chao, Lakeview's former managing partner, transitioned to AHT as Regional Medical Director for Central Massachusetts.
The Lakeview acquisition was handled by Westbrook Hale LLP (Elena Marchetti, Partner), which served as transactional counsel. Westbrook Hale deferred to Calderwood & Harkness on healthcare regulatory aspects of the transaction. However, the regulatory diligence conducted at the time of the acquisition was limited in scope, and certain AKS compliance issues that should have been identified and addressed as conditions to closing were instead carried forward into the post-acquisition integration process without resolution. This gap in pre-acquisition regulatory diligence is itself a finding of this assessment.
D. Pre-Engagement Compliance Gap Assessment
In October 2022, AHT retained Grayson Whitaker & Associates LLP ("Grayson Whitaker"), a Bethesda, Maryland-based healthcare compliance consulting firm, to conduct an initial compliance gap assessment. The engagement was led by Carolyn Fitch, Principal at Grayson Whitaker. The resulting report (designated GW-AHT-2022-Final) was delivered on December 12, 2022, and identified seventeen (17) arrangements classified as "high-risk" and twenty-three (23) arrangements classified as "moderate-risk," for a total of forty (40) arrangements requiring legal review under the AKS and Stark Law.
The Grayson Whitaker report provided a valuable operational baseline for C&H's legal analysis, and the arrangement classifications contained therein are cross-referenced in Appendix C to this memorandum. While the Grayson Whitaker report identifies compliance gaps and assigns risk classifications, it does not constitute a legal opinion and does not purport to provide legal analysis of the AKS, the Stark Law, or applicable safe harbors and exceptions. That legal analysis is the purpose of this memorandum and its companion Stark Law memorandum.
Following delivery of the Grayson Whitaker report, the AHT Board of Directors authorized the engagement of Calderwood & Harkness LLP on January 24, 2023, pursuant to Board Resolution No. 2023-01-004.
E. Auditor Observations
In connection with AHT's FY2022 financial statement audit, Halsted Accounting Group LLP ("Halsted"), with principal offices in Providence, Rhode Island, issued a management letter that included an observation regarding certain physician compensation arrangements. Specifically, Ronald Desmond, engagement partner at Halsted, noted that AHT may require independent fair market value substantiation for several physician compensation arrangements, particularly those assumed in the Lakeview acquisition, and certain medical director agreements where compensation levels appeared to exceed applicable benchmarks. While the Halsted management letter did not reach any legal conclusions, its observations are consistent with the findings of this assessment and underscore the need for the FMV valuation work described below.
F. FMV Valuation Engagement
At C&H's recommendation, AHT retained Northbridge Valuation Advisors LLC ("Northbridge"), a Philadelphia, Pennsylvania-based healthcare valuation firm, in February 2023 to prepare independent fair market value opinions for physician compensation arrangements, office lease rates, and equipment rental arrangements. The engagement is led by Sandra Kilpatrick, Managing Director at Northbridge.
The scope of the Northbridge engagement encompasses fifty-two (52) physician compensation arrangements (consisting of the thirty-eight (38) independent contractor and medical director arrangements and the fourteen (14) Lakeview legacy employment agreements), the two (2) Lakeview legacy office leases, and the Meridian Diagnostics facility access fee arrangement. At the time of initial analysis, the Northbridge FMV opinions were pending; opinions have subsequently been received for a number of the arrangements, and the results are incorporated into the analysis below to the extent available. Remaining opinions are expected to be delivered by July 15, 2023.
The Northbridge FMV opinions are essential to the remediation program. Without independent FMV substantiation, AHT cannot demonstrate that its physician compensation arrangements satisfy the safe harbor requirement that compensation be "consistent with fair market value" — a requirement common to the employment safe harbor, the personal services and management contracts safe harbor, the space rental safe harbor, and the equipment rental safe harbor.
G. Scope of This Memorandum
The scope of C&H's AKS compliance assessment, and accordingly the scope of this memorandum, encompasses the following:
• All forty (40) arrangements identified in the Grayson Whitaker gap assessment report (GW-AHT-2022-Final);
• All one hundred forty-seven (147) W-2 physician employment arrangements, analyzed for compliance with the AKS employment safe harbor;
• All thirty-eight (38) independent contractor and medical director arrangements, analyzed for compliance with the AKS personal services and management contracts safe harbor;
• The Meridian Diagnostics LLC facility access fee arrangement, analyzed for compliance with the space rental and equipment rental safe harbors;
• The Pinnacle Laboratory Services Inc. arrangements, including the no-cost electronic laboratory interface, CME sponsorship, and Dr. Karen Ellsworth's equity interest, analyzed for applicable safe harbor compliance and "one purpose" test risk;
• The Cobalt Ridge Group management services arrangements, analyzed for compliance with the management contracts safe harbor;
• The Covenant Health Plans Inc. value-based arrangement, analyzed for compliance with the new value-based arrangement safe harbors;
• Office space leases, with particular focus on the Lakeview legacy leases, analyzed for compliance with the space rental safe harbor;
• Equipment access arrangements, analyzed for compliance with the equipment rental safe harbor; and
• ArborConnect SaaS platform licensing arrangements with external physician practices, analyzed for AKS risk where referral relationships exist between licensees and AHT.
We note for the record that AHT has no prior OIG enforcement actions, corporate integrity agreements, or pending OIG advisory opinion requests. This clean enforcement history is a favorable factor in the overall risk assessment and in any future voluntary disclosure analysis.
III. LEGAL FRAMEWORK
A. The Anti-Kickback Statute — 42 U.S.C. § 1320a-7b(b)
The federal Anti-Kickback Statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration — including any kickback, bribe, or rebate — directly or indirectly, overtly or covertly, in cash or in kind, in order to induce or reward the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service reimbursable under a federal healthcare program, or for the purchase, lease, or order of, or the recommendation to purchase, lease, or order, any good, facility, service, or item reimbursable under a federal healthcare program. 42 U.S.C. § 1320a-7b(b)(1)–(2).
The statute is notable for its breadth and its bilateral application. It applies equally to the party offering or paying the remuneration (the "offeror") and to the party soliciting or receiving the remuneration (the "recipient"). Both sides of a prohibited transaction are subject to criminal and civil liability.
Criminal Penalties. A violation of the AKS constitutes a felony offense punishable by imprisonment for up to ten (10) years, a fine of up to $100,000 per violation, or both. 42 U.S.C. § 1320a-7b(b).
Civil Enforcement Under the Civil Monetary Penalties Law. The Office of Inspector General of the U.S. Department of Health and Human Services ("OIG") may impose civil monetary penalties of up to $100,000 per violation, an assessment of up to three times the amount of remuneration involved, and exclusion from participation in all federal healthcare programs. 42 U.S.C. § 1320a-7a(a)(7).
False Claims Act Liability. Critically, Congress has established an explicit nexus between the AKS and the False Claims Act ("FCA"), 31 U.S.C. §§ 3729–3733. Under 42 U.S.C. § 1320a-7b(g), enacted as part of the Patient Protection and Affordable Care Act of 2010, a claim that includes items or services resulting from a violation of the AKS "constitutes a false or fraudulent claim for purposes of" the FCA. This provision eliminates any argument that an AKS-tainted claim is not "false" within the meaning of the FCA and exposes the violating party to FCA treble damages and per-claim penalties — which, at current inflation-adjusted rates, range from $11,803 to $23,607 per claim. The volume of claims generated by AHT's operations, multiplied by these per-claim penalties and treble damages, creates an exposure figure that could be measured in the hundreds of millions of dollars.
B. The "One Purpose" Test
Under prevailing federal circuit court authority, the AKS is violated if "one purpose" of a payment is to induce or reward referrals, even if the arrangement also has other legitimate business purposes. The seminal formulation of this standard provides that a financial arrangement violates the AKS if even one purpose — as opposed to the sole purpose, the primary purpose, or the predominant purpose — of the remuneration is to compensate for past or future referrals. See, e.g., United States v. Greber, 760 F.2d 68, 69 (3d Cir. 1985); United States v. Kats, 871 F.2d 105, 108 (9th Cir. 1989); United States v. McClatchey, 217 F.3d 823, 835 (10th Cir. 2000).
The "one purpose" test has profound implications for AHT's arrangements. It means that a physician compensation arrangement, a lease, or a services agreement that is commercially reasonable and at fair market value can still violate the AKS if the evidence supports a finding that one purpose of the arrangement is to induce or reward referrals. FMV compensation and commercial reasonableness are necessary conditions for safe harbor compliance, but they are not sufficient to preclude an AKS violation where referral-inducing intent can be inferred from the circumstances.
This standard should be contrasted with the Stark Law's strict-liability, intent-irrelevant framework, under which a violation occurs whenever the technical elements of the statute are not satisfied, regardless of whether the parties had any intent to induce referrals. The AKS, by contrast, requires proof of intent — but the "one purpose" test sets the intent threshold at a level that is easily reached in practice, particularly where circumstantial evidence of referral-inducing purpose is present.
C. The Intent Element
The AKS requires that the defendant act "knowingly and willfully" in offering, paying, soliciting, or receiving remuneration to induce referrals. However, the statutory definition of "knowing and willful" is more expansive than a layperson might assume. Under 42 U.S.C. § 1320a-7b(h), enacted as part of the Affordable Care Act, a person need not have actual knowledge of the AKS or specific intent to commit a violation of the statute. Rather, acts committed in deliberate ignorance or reckless disregard of the prohibition satisfy the requisite intent standard.
This lowered intent threshold is directly relevant to AHT. The Company has now been placed on notice — through the Grayson Whitaker report, through the Halsted management letter, and through this memorandum — that certain of its arrangements present material AKS risk. A failure to evaluate these arrangements for compliance or to restructure arrangements with known deficiencies could itself establish the requisite "knowing and willful" conduct through evidence of deliberate ignorance or reckless disregard. Conversely, a good-faith compliance program, timely remediation of identified deficiencies, and proactive FMV substantiation efforts will serve as evidence negating the intent element in the event that any arrangement is subsequently challenged.
D. "Remuneration" — Broad Definition
The AKS's definition of "remuneration" is exceptionally broad. It encompasses any transfer of value, whether direct or indirect, whether in cash or in kind. The OIG has consistently interpreted "remuneration" to include not only cash payments but also below-fair-market-value lease rates, above-fair-market-value compensation, the provision of free goods or services, sponsored events, discounted or free technology, equity interests, management fees, and any other economic benefit conferred upon a person who is in a position to generate or influence referrals.
Examples of "remuneration" relevant to this assessment include:
• Above-FMV physician compensation (medical director stipends at $501.28/hour effective average);
• Below-FMV facility rental rates or, conversely, below-FMV charges to tenants;
• Per-scan facility access fees that vary with referral volume (Meridian Diagnostics);
• No-cost electronic laboratory interfaces provided by a referral recipient (Pinnacle Laboratory);
• CME event sponsorship funded by a referral recipient (Pinnacle Laboratory);
• Equity interests in a referral recipient held by persons connected to the referral source (Dr. Karen Ellsworth's Pinnacle equity interest); and
• Percentage-based management fees paid by practices that refer to the management company's affiliated ancillary services (ConnectiCare MSA arrangements).
E. Safe Harbors — 42 C.F.R. § 1001.952
Recognizing that the AKS's broad prohibition could sweep in many legitimate business arrangements, Congress directed the OIG to promulgate regulatory safe harbors that define payment and business practices that, although potentially capable of inducing referrals, are not treated as criminal offenses or as the basis for an exclusion action if all elements of the applicable safe harbor are met. These safe harbors are codified at 42 C.F.R. § 1001.952.
A safe harbor provides absolute protection from AKS prosecution if every element of the safe harbor is satisfied. Importantly, however, the failure to satisfy a safe harbor does not mean that an arrangement necessarily violates the AKS. It simply means that the arrangement is not immunized from scrutiny and must be evaluated on its facts and circumstances under the statute, including application of the "one purpose" test.
The safe harbors relevant to this assessment are as follows:
1. Employment — § 1001.952(i). Protects amounts paid by an employer to an employee in a bona fide employment relationship, provided the employment relationship satisfies applicable tax and labor law standards, compensation is paid for services actually rendered, and compensation is not determined in a manner that takes into account the volume or value of referrals.
2. Personal Services and Management Contracts — § 1001.952(d). Protects compensation paid under a personal services or management contract, subject to detailed requirements regarding written agreements, specified services, minimum term, FMV compensation set in advance, and the prohibition on volume-or-value-based compensation.
3. Space Rental — § 1001.952(b). Protects rental payments for the use of office space, subject to requirements regarding written agreements, specified premises, minimum term, FMV rental charges set in advance, and the prohibition on volume-or-value-based rental.
4. Equipment Rental — § 1001.952(c). Protects rental payments for the use of equipment, with requirements parallel to the space rental safe harbor.
5. Referral Services — § 1001.952(f). Protects certain referral services, subject to specific conditions.
6. Investment Interests — Small Entity — § 1001.952(a)(2). Protects certain investment interests in small entities, subject to conditions regarding investor referral obligations, marketing to investors, and entity size and revenue thresholds.
7. Value-Based Arrangements — §§ 1001.952(ee), (ff), (gg). Three new safe harbors for value-based arrangements, effective January 19, 2021, protecting (i) care coordination arrangements, (ii) value-based arrangements with substantial downside financial risk, and (iii) value-based arrangements with full financial risk, respectively.
Each safe harbor is analyzed in detail in the relevant substantive section of this memorandum as applied to specific AHT arrangements.
F. 2020 AKS Safe Harbor Modernization
On November 20, 2020, the OIG published a Final Rule modernizing the AKS safe harbors to accommodate value-based care delivery models. The Final Rule was published at 85 Fed. Reg. 77684 and became effective on January 19, 2021. The rule introduced three new safe harbors for value-based arrangements, as referenced above, which are designed to protect remuneration exchanged among participants in a "value-based enterprise" ("VBE") that is pursuing defined "value-based purposes" for a specified "target patient population."
These new safe harbors are directly relevant to AHT's arrangement with Covenant Health Plans Inc., which includes value-based payment incentive bonuses tied to quality metrics. The analysis of the Covenant arrangement's eligibility for the care coordination arrangements safe harbor is set forth in Section IX below.
G. Relationship Between AKS and Stark Law
The AKS and the Stark Law (42 U.S.C. § 1395nn) are frequently analyzed together because both address financial relationships between physicians and entities to which they refer. However, the two statutes operate independently, and compliance with one does not assure compliance with the other.
Several key distinctions bear emphasis. First, the Stark Law is a strict liability statute — a violation occurs whenever the technical elements of the statute are satisfied, regardless of intent — whereas the AKS requires proof of "knowing and willful" conduct. Second, the Stark Law applies only to referrals for "designated health services" paid for by Medicare (and, under certain state laws, Medicaid), whereas the AKS applies to any item or service reimbursable by any federal healthcare program. Third, the Stark Law exceptions and the AKS safe harbors, while addressing similar types of arrangements, have different elements and are not coextensive; an arrangement may satisfy a Stark exception while failing to satisfy the corresponding AKS safe harbor, or vice versa.
Of particular importance to AHT, an AKS violation renders resulting claims "false or fraudulent" under the False Claims Act — a linkage established by 42 U.S.C. § 1320a-7b(g). There is no analogous statutory provision automatically converting a Stark Law violation into an FCA violation, though the Department of Justice has pursued FCA claims based on Stark violations under other theories. This means that the AKS violation pathway to FCA liability is more direct and potentially more expansive than the Stark Law pathway.
Given AHT's federal healthcare program revenue of $130.7 million (61% of total net revenue), the consequences of an AKS violation — criminal prosecution, civil monetary penalties of up to $100,000 per violation with treble damages, FCA liability with per-claim penalties, and exclusion from federal healthcare programs — are severe. Exclusion alone would eliminate the majority of AHT's revenue and would, for all practical purposes, end the Company's ability to operate.
IV. ANALYSIS OF PHYSICIAN EMPLOYMENT ARRANGEMENTS
A. W-2 Employed Physicians (147 Physicians)
1. Employment Safe Harbor — 42 C.F.R. § 1001.952(i). The AKS employment safe harbor protects amounts paid by an employer to an employee who has a bona fide employment relationship with the employer for employment in the furnishing of any item or service for which payment may be made, in whole or in part, under a federal healthcare program. The safe harbor requires that the employment relationship satisfy applicable tax and labor law standards and that the employee's compensation satisfy three conditions: (i) the compensation must be paid for services actually rendered; (ii) the compensation must be consistent with fair market value in arms-length transactions; and (iii) the compensation must not be determined in a manner that takes into account the volume or value of referrals by the referring party. 42 C.F.R. § 1001.952(i).
The employment safe harbor is the most commonly relied-upon AKS safe harbor in the healthcare industry, and it provides the primary framework for analyzing AHT's compensation arrangements with its 147 W-2 employed physicians. Unlike the personal services and management contracts safe harbor applicable to independent contractors, the employment safe harbor does not require a written agreement for a minimum term of one year, does not require that services be specified in advance, and does not require that compensation be "set in advance." These relaxed requirements reflect the statutory recognition that employment relationships are inherently different from independent contractor relationships and are less likely to be structured as vehicles for referral inducement.
However, the employment safe harbor does retain the critical requirement that compensation not be determined in a manner that takes into account the volume or value of referrals. This requirement applies even in the employment context and is the primary focus of our analysis.
2. Compensation Structures. AHT's employed physicians are compensated under a base salary plus productivity bonus structure. For purposes of this analysis, we reviewed the compensation data for all 147 employed physicians, organized by specialty. The median total compensation figures are as follows:
• Primary care physicians: Median total compensation of approximately $278,000 per year.
• Specialty care physicians (cardiology, orthopedics, gastroenterology): Median total compensation of approximately $412,000 per year.
Productivity bonuses are calculated based on work relative value units ("wRVUs") generated by the individual physician. The wRVU-based productivity bonus model is a widely accepted compensation methodology in the healthcare industry and is generally regarded as consistent with the employment safe harbor, provided that the wRVU calculation captures only services personally performed by the physician and does not incorporate the volume or value of services referred to others (including referred ancillary services such as laboratory testing, diagnostic imaging, and physical therapy).
The critical distinction is between productivity measured by the physician's own personal service production (which is permissible under the safe harbor) and productivity measured by the total revenue generated by the physician's referrals (which would violate the safe harbor prohibition on volume-or-value-of-referrals-based compensation). Where a physician's bonus formula includes revenue from ancillary services that the physician ordered but that were performed by others, the bonus arguably takes into account the "volume or value of referrals" and may not satisfy the employment safe harbor.
3. Findings. The majority of AHT's 147 employed physician arrangements appear to fit within the employment safe harbor. The standard AHT physician employment agreement template uses a wRVU-based productivity bonus formula that captures only personally performed services and does not incorporate ancillary service revenue. For physicians operating under this standard template, the safe harbor analysis is straightforward: the physicians maintain bona fide employment relationships; their compensation is paid for services actually rendered; their base salaries and productivity bonuses fall within recognized FMV ranges per MGMA and SullivanCotter benchmark data; and their compensation is not determined in a manner that takes into account the volume or value of referrals.
However, we identified a subset of employment arrangements — particularly certain pre-acquisition agreements and legacy arrangements from the Lakeview acquisition — that contain bonus formulas incorporating components tied to overall practice revenue, which would include revenue from ancillary services generated by the physician's referrals. Specifically, some of these agreements use the phrase "net collections" or "practice revenue" as the denominator or multiplier in the bonus calculation without explicitly excluding revenue from referred designated health services. Under these formulas, a physician who generates more laboratory, imaging, or physical therapy referrals will receive a higher bonus, creating a direct financial incentive for referrals that may cause the arrangement to fall outside the employment safe harbor.
Recommendation: AHT should restructure all physician employment agreements that contain bonus formulas potentially tied to referred service revenue. All employment agreements should be updated to use the revised AHT physician employment agreement template, which calculates productivity bonuses solely on the basis of personally performed wRVUs and expressly excludes revenue from referred designated health services. The revised template should also include an explicit AKS compliance certification provision. For the majority of arrangements already conforming to the standard template, no action is required beyond periodic review and recertification.
B. Lakeview Legacy Employment Agreements (14 Physicians)
1. Pre-Acquisition Deficiencies. The fourteen (14) physicians acquired through the Lakeview Medical Associates transaction on August 15, 2022 — twelve (12) employed physicians and two (2) independent contractors — present particular AKS compliance concerns. These physicians' compensation arrangements were carried forward from the pre-acquisition Lakeview entity without FMV re-evaluation at the time of closing. This was a missed opportunity to identify and remediate AKS compliance issues as a condition of the acquisition.
Our review of the Lakeview legacy employment agreements reveals the following deficiencies:
First, several of the agreements lack any documentation substantiating that the compensation terms were established at fair market value. Lakeview does not appear to have obtained independent FMV valuations for any of its physician compensation arrangements during the relevant period. While the absence of FMV substantiation does not by itself mean that the compensation was above or below FMV, it deprives AHT of the ability to demonstrate safe harbor compliance.
Second, several of the Lakeview agreements contain compensation formulas referencing "net collections" without excluding revenue derived from referred ancillary services. As discussed above, this formulation creates a bonus structure that arguably takes into account the volume or value of referrals, which may cause these arrangements to fail the employment safe harbor.
Third, the Lakeview pre-acquisition annual revenue was approximately $18.2 million, of which approximately $10.9 million (60%) was attributable to Medicare and Medicaid reimbursements. This substantial federal healthcare program revenue share means that any AKS violation affecting Lakeview-derived operations carries significant exposure.
2. Post-Acquisition Status. Since the August 2022 closing, the fourteen Lakeview physician arrangements have continued under their original terms during the integration period. No amendments or replacement agreements have been executed. FMV opinions from Northbridge Valuation Advisors are pending for all fourteen arrangements and, once received, will provide the basis for restructuring.
Recommendation: AHT should amend or replace all fourteen (14) Lakeview legacy employment agreements using the revised AHT physician employment agreement template with AKS and Stark-compliant compensation methodology. Each agreement should be supported by an independent FMV opinion from Northbridge Valuation Advisors. The replacement agreements should eliminate any bonus formulas tied to practice revenue or net collections and should instead adopt wRVU-based productivity bonus calculations consistent with the employment safe harbor. This action is classified as a short-term priority (60–90 days).
V. ANALYSIS OF INDEPENDENT CONTRACTOR AND MEDICAL DIRECTOR ARRANGEMENTS
A. Overview of 38 Arrangements
AHT maintains thirty-eight (38) independent contractor and medical director arrangements across its twenty-three-clinic network. These arrangements cover a range of specialties and geographic locations and are designed to provide medical oversight, quality assurance, peer review, regulatory compliance assistance, and administrative leadership at the clinic level.
The annual stipend range across the thirty-eight arrangements spans from $25,000 to $110,000 per year. The aggregate annual medical director compensation across all thirty-eight arrangements totals $1.92 million. Based on the documented time commitments in the existing agreements, the mean medical director hours per month is 8.4 hours, yielding an effective average hourly rate of:
$1,920,000 ÷ (38 physicians × 8.4 hours/month × 12 months) = $1,920,000 ÷ 3,830.4 hours = $501.28 per hour
This effective average hourly rate is significant because, as discussed below, it substantially exceeds recognized FMV benchmarks for medical director services across virtually all specialties.
B. Personal Services and Management Contracts Safe Harbor — 42 C.F.R. § 1001.952(d)
Because independent contractor and medical director arrangements do not qualify for the employment safe harbor (which is limited to bona fide employer-employee relationships under applicable tax and labor law standards), these arrangements must be analyzed under the personal services and management contracts safe harbor, which imposes more rigorous requirements.
The personal services and management contracts safe harbor requires that each of the following six elements be satisfied:
1. The arrangement must be set out in a written agreement signed by the parties;
2. The agreement must specify the services to be provided by the contractor;
3. If the agreement provides for services on a periodic, sporadic, or part-time basis, the agreement must specify exactly the schedule of such intervals, their precise length, and the exact charge for such intervals;
4. The term of the agreement must be for not less than one year;
5. The aggregate compensation paid over the term of the agreement must be set in advance, consistent with fair market value in arms-length transactions, and not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under a federal healthcare program; and
6. The aggregate services contracted for must not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.
Each element is analyzed below as applied to AHT's medical director arrangements.
C. Safe Harbor Analysis — Element-by-Element
1. Written Agreement and Specified Services. Our review of all thirty-eight (38) agreements reveals significant variation in the specificity of duty descriptions. Approximately fourteen (14) agreements contain only vague duty descriptions such as "provide medical direction as needed," "oversee clinical quality," or "advise on medical matters." These vague descriptions are insufficient to satisfy the safe harbor requirement that the agreement specify the services to be provided. If the services are not clearly defined, there is no basis for determining whether the compensation is reasonable for the services actually rendered — and no basis for rebutting an inference that the compensation is remuneration for referrals rather than for bona fide services.
The remaining twenty-four (24) agreements contain more specific but still potentially deficient duty listings. While these agreements describe categories of duties such as chart review, protocol development, and staff training, they generally do not include measurable deliverables, specific time allocations for each duty category, or reporting requirements. This lack of specificity undermines both the safe harbor analysis and the commercial reasonableness analysis.
Recommendation: AHT should standardize all medical director agreements using a revised template that includes detailed duty descriptions specifying: (i) administrative responsibilities (e.g., attendance at governance meetings, review and approval of clinical protocols, participation in credentialing committees); (ii) quality oversight responsibilities (e.g., quarterly chart review of a specified number of records, incident review and root cause analysis, patient safety reporting); (iii) peer review responsibilities; (iv) compliance responsibilities (e.g., participation in compliance committee meetings, review of compliance reports); and (v) specific deliverables (e.g., quarterly quality reports, annual protocol reviews). Each duty category should include an estimated time allocation.
2. Term. Multiple agreements are currently operating on a month-to-month holdover basis, having expired without formal renewal. Several additional agreements have terms of less than one year. The three Lakeview legacy medical director agreements ($45,000, $60,000, and $72,000 annual stipends) were assumed in the August 2022 acquisition without execution of new agreements and continue under their original (now-expired) terms.
An arrangement that has reverted to month-to-month status after the expiration of its initial term does not satisfy the one-year minimum term requirement of the personal services safe harbor. While some commentators have argued that holdover provisions in expired agreements may preserve safe harbor protection, the safer position — and the position adopted by the OIG — is that a new written agreement with a minimum one-year term must be executed.
Recommendation: AHT should execute new fixed-term agreements with a minimum term of one year for all thirty-eight (38) medical director arrangements. No medical director arrangement should operate on a month-to-month or holdover basis. Agreements should include a defined term with clear renewal provisions.
3. Compensation Set in Advance and Consistent with FMV. This element represents the most significant AKS risk area for AHT's medical director arrangements. The effective average hourly rate of $501.28 per hour is flagged as exceeding the 90th percentile for medical director compensation across multiple specialties, based on widely recognized benchmark data sources including the Medical Group Management Association ("MGMA") and SullivanCotter physician compensation surveys.
To place this figure in context, the following FMV benchmark ranges for medical director services are illustrative (based on 2022 survey data):
The effective average hourly rate of $501.28 exceeds the 90th percentile for all of these specialties. While individual arrangements may vary and some specialty-specific rates may be supportable, the portfolio-wide average is a clear outlier.
Above-FMV compensation to physicians who are in a position to generate referrals to AHT creates a strong inference under the "one purpose" test that one purpose of the compensation is to induce those referrals. This is precisely the type of circumstantial evidence that the OIG, the Department of Justice, and qui tam relators rely upon in AKS enforcement actions. The inference is particularly strong where, as here, the compensated physicians also maintain referral relationships with AHT — that is, they refer patients to AHT-owned clinics, ancillary services, or affiliated practices.
Northbridge Valuation Advisors FMV opinions, which were pending at the time of C&H's initial analysis and have subsequently been received for a majority of the arrangements, are expected to confirm that the majority of medical director arrangements exceed FMV when measured on an hourly basis. Preliminary Northbridge results indicate that twenty-six (26) of the thirty-eight (38) arrangements exceed the Northbridge-determined FMV range for the applicable specialty and geographic market.
Recommendation: AHT should restructure medical director compensation to align with FMV ranges as determined by Northbridge Valuation Advisors. In some cases, the appropriate remediation will be to increase documented hours where the physician's actual duties justify additional time commitment — if, for example, a physician is actually performing 15 hours per month of legitimate medical director duties but the agreement specifies only 8 hours, the agreement should be amended to reflect the actual time commitment, which would reduce the effective hourly rate. In other cases, the appropriate remediation will be to reduce the stipend to a level that, at the documented hours, falls within the FMV range. In all cases, the goal is to ensure that the effective hourly rate is within the FMV range for the applicable specialty and geographic market.
4. Volume or Value of Referrals. AHT's medical director arrangements generally use a fixed annual stipend structure. A fixed stipend does not, by its terms, vary with the volume or value of referrals and therefore technically satisfies the safe harbor requirement that compensation not be "determined in a manner that takes into account the volume or value of referrals."
However, as discussed above, the safe harbor requirement that compensation be "consistent with fair market value" works in tandem with the volume-or-value prohibition. Where fixed compensation is set at a level above FMV, the excess compensation — i.e., the amount above what would be paid in an arms-length transaction for the services actually rendered — can be characterized as remuneration for referrals rather than for services. In this sense, above-FMV fixed compensation raises the same inference of referral-inducing intent as explicitly volume-based compensation.
5. Commercial Reasonableness. Several of AHT's medical director arrangements lack documentation supporting the legitimate business need for medical director services at the compensated level. In some cases, the clinical operation supervised by the medical director is relatively small (e.g., a single-physician clinic), raising the question of whether a separately compensated medical director position is commercially reasonable.
The concern is that some medical director positions function as compensated sinecures — nominal positions created primarily to provide a vehicle for compensating physicians who are valuable referral sources, rather than to meet a genuine operational need. While medical director services can and do serve important functions in quality oversight, regulatory compliance, and clinical governance, the commercial reasonableness of each position must be documented and supportable on its own merits.
Recommendation: Each medical director agreement should be accompanied by a commercial reasonableness memorandum prepared by clinic management and reviewed by the Compliance Department, documenting: (i) the legitimate business purpose of the medical director position; (ii) the specific operational needs addressed by the position; (iii) the expected time commitment and deliverables; (iv) the qualifications required; and (v) the basis for concluding that the arrangement is commercially reasonable independent of any referral relationship.
D. Lakeview Legacy Medical Director Agreements (3 Agreements)
The three medical director agreements assumed in the Lakeview acquisition merit specific attention. These agreements carry annual stipends of $45,000, $60,000, and $72,000, respectively. One of the three agreements compensates Dr. Vivian Chao, who has transitioned to the AHT Regional Medical Director role for Central Massachusetts.
These agreements were assumed without AKS-compliant restructuring at the time of the acquisition. The agreements suffer from the same deficiencies identified in the broader medical director portfolio — vague duty descriptions, expired terms, and absence of FMV substantiation — but also present the additional concern that the compensation terms were established by a prior entity (Lakeview) under unknown circumstances and without the benefit of independent valuation.
Recommendation: The three Lakeview legacy medical director agreements should be incorporated into AHT's company-wide medical director restructuring. New agreements should be executed using the revised template, supported by Northbridge FMV opinions, and accompanied by commercial reasonableness memoranda.
E. Risk Assessment and Remediation Recommendations
Based on the foregoing analysis, the risk assessment for AHT's medical director arrangements is as follows:
• HIGH risk: Twenty-two (22) of thirty-eight (38) arrangements, characterized by effective hourly rates exceeding the 75th percentile benchmark with insufficient duty documentation and/or absent FMV substantiation.
• MODERATE risk: Sixteen (16) of thirty-eight (38) arrangements, characterized by effective hourly rates within or marginally above benchmark ranges but with documentation deficiencies that prevent full safe harbor compliance.
Priority Action Items:
1. Obtain and apply Northbridge FMV opinions to all thirty-eight (38) arrangements.
2. Execute revised independent contractor/medical director agreement templates incorporating detailed duty descriptions, one-year minimum terms, FMV-compliant compensation, and AKS compliance provisions.
3. Prepare commercial reasonableness memoranda for all positions.
4. Implement prospective hours tracking and require monthly time logs documenting hours spent and duties performed.
5. Institute annual recertification of FMV and commercial reasonableness for all medical director arrangements.
VI. ANALYSIS OF MERIDIAN DIAGNOSTICS FACILITY ACCESS FEE ARRANGEMENT
A. Arrangement Description
Pursuant to a Services Agreement dated March 1, 2021 (the "Meridian Agreement"), AHT provides facility access to Meridian Diagnostics LLC ("Meridian") at four AHT clinic locations in Connecticut. Under the arrangement, Meridian deploys mobile MRI and advanced diagnostic imaging equipment and services at the AHT clinic sites, and AHT physicians refer patients to Meridian for imaging studies. In exchange for access to the AHT facilities, Meridian pays AHT a per-scan facility access fee of $185 for each scan performed at an AHT site.
In fiscal year 2022, Meridian performed 4,200 scans at AHT facilities, generating total facility access fees of $777,000 (4,200 scans × $185 per scan) paid by Meridian to AHT. During the same period, AHT physicians generated approximately $2.8 million in total referrals to Meridian for diagnostic imaging services.
Meridian Diagnostics LLC is organized as a Delaware limited liability company with principal offices at 88 Trumbull Street, Hartford, Connecticut 06103. Its EIN is 82-4019673. Meridian's ownership consists of Dr. Franklin Osei (60% ownership, managing member, practicing radiologist) and Gerald Pratt (40% ownership, non-physician investor). Meridian is represented by Linden & Pryor LLP, specifically Thomas Beckett, Partner, at 750 Main Street, Suite 1400, Hartford, Connecticut 06103.
B. AKS Concerns
The Meridian per-scan facility access fee arrangement presents the highest individual AKS risk among all arrangements reviewed in this assessment. The fundamental concern is structural: the per-scan fee creates a direct financial correlation between the volume of imaging referrals from AHT physicians to Meridian and the compensation flowing from Meridian back to AHT.
The mechanism operates as follows:
1. AHT physicians refer patients to Meridian for MRI and advanced diagnostic imaging;
2. Meridian performs the scans at AHT facilities using Meridian's mobile equipment;
3. For each scan performed, Meridian pays AHT a $185 facility access fee;
4. Therefore, the more patients AHT physicians refer to Meridian, the more scans Meridian performs, and the more facility access fees AHT receives.
This creates a circular financial incentive in which AHT derives direct, volume-proportional financial benefit from its physicians' referrals to Meridian. Under the "one purpose" test, the per-scan facility access fee could be viewed as remuneration paid by Meridian to AHT — at least in part — to induce AHT physicians to refer patients to Meridian for imaging services. The $2.8 million in total referral volume relative to $777,000 in facility access fees underscores the referral-driven nature of the relationship and the magnitude of the financial flow between the parties.
Moreover, the arrangement benefits both parties in a manner that reinforces the referral relationship: AHT benefits from the per-scan fees, and Meridian benefits from the referral volume. Each party's financial interest is aligned with maximizing referral volume — precisely the dynamic that the AKS is designed to prohibit.
C. Space Rental Safe Harbor — 42 C.F.R. § 1001.952(b)
The space rental safe harbor is the most natural safe harbor under which to evaluate the Meridian arrangement, since Meridian's payments to AHT are denominated as compensation for the use of AHT's facility space. However, the arrangement cannot satisfy this safe harbor.
The space rental safe harbor requires, among other elements, that:
1. The lease be in writing and signed by the parties;
2. The lease specify the premises covered by the lease;
3. If the lease is for periodic, sporadic, or part-time use, the lease specify exactly the schedule of such intervals, their precise length, and the exact rental charge for such intervals;
4. The term of the lease be for not less than one year;
5. The aggregate rental charge be set in advance, be consistent with fair market value in arms-length transactions, and not be determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties; and
6. The aggregate space rented not exceed that which is reasonably necessary.
Element 5 Failure: The per-scan facility access fee of $185 per scan is, by definition, determined by the volume of scans performed — which is directly correlated with the volume of referrals from AHT physicians to Meridian. The aggregate rental charge is not "set in advance" in the sense contemplated by the safe harbor because the total amount varies based on the number of scans. In FY2022, the total was $777,000 (at 4,200 scans); in a year with higher referral volume, the total would be proportionally higher, and vice versa. This is precisely the type of volume-based compensation that the safe harbor is designed to exclude.
The space rental safe harbor does not accommodate per-use or per-procedure fee structures. The aggregate rental charge must be fixed — either as a flat monthly or annual rate, or as a rate per unit of time (e.g., per hour or per day) with a fixed schedule. A per-scan fee, by contrast, varies with the volume of procedures performed, which in turn varies with the volume of referrals. This arrangement fundamentally fails the space rental safe harbor.
D. Equipment Rental Safe Harbor — 42 C.F.R. § 1001.952(c)
To the extent the Meridian arrangement could be characterized as involving the rental of equipment (since Meridian deploys its mobile MRI equipment at AHT facilities), the equipment rental safe harbor imposes substantially identical requirements to the space rental safe harbor, including the requirement that the aggregate rental charge be set in advance, be consistent with FMV, and not be determined in a manner that takes into account the volume or value of referrals.