1010-00003 · Arbor Health Technologies Inc · Self-Assessment & Risk Analysis

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT This memorandum is a privileged and confidential attorney-client communication and attorney work product. It is intended solely for the use of the individuals and entities to whom it is addressed. This memorandum is not intended to be and should not be used as a substitute for legal advice in specific situations. Distribution, copying, or disclosure of this memorandum or its contents to any person or entity other than the addressees, without the prior written consent of Calderwood & Harkness LLP, is strictly prohibited.

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 Christopher Aiken, Senior Associate, Calderwood & Harkness LLP Amy Whitfield, Associate, Calderwood & Harkness LLP

DATE: May 22, 2023

RE: Stark Law Indirect Compensation Arrangement Analysis and Anti-Kickback Statute Management Contract Safe Harbor Analysis — ConnectiCare Physicians Network, LLC Management Services Arrangements

MATTER NO.: 1010-00003

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I. EXECUTIVE SUMMARY

This memorandum analyzes the management services arrangements ("MSAs") between Arbor Health Technologies Inc. ("AHT") and nine independently owned physician practices in Strathmore Mutual Insurance, Connecticut metropolitan area, administered through ConnectiCare Physicians Network, LLC ("CPN"), under the federal Physician Self-Referral Law (the "Stark Law," 42 U.S.C. § 1395nn) and the Anti-Kickback Statute (the "AKS," 42 U.S.C. § 1320a-7b(b)). This analysis was undertaken at the request of AHT's General Counsel and Chief Compliance Officer in response to the compliance gap assessment delivered by Grayson Whitaker & Associates LLP (Report No. GW-AHT-2022-Final, dated December 12, 2022), which identified the CPN management services arrangements as among seventeen high-risk arrangements requiring dedicated legal review. Calderwood & Harkness LLP ("C&H") was engaged to conduct this review as part of a broader enterprise-wide regulatory compliance remediation effort.

CPN is a Connecticut limited liability company that serves as the contractual vehicle through which AHT provides management services — including billing, coding, revenue cycle management, practice management consulting, credentialing support, administrative staffing functions, and information technology infrastructure (including deployment of the proprietary ArborConnect electronic health record and practice management platform) — to nine independently owned physician practices, each of which has entered into a separate MSA with CPN. AHT wholly owns and controls CPN.

Under the current MSA structure, each managed practice pays AHT, through CPN, a management fee equal to fifteen percent (15%) of collected net revenue. In fiscal year 2022 ("FY2022"), the aggregate collected net revenue across all nine managed practices totaled approximately $31.53 million, yielding aggregate management fee revenue to AHT of approximately $4.73 million (calculated as $31.53 million × 15%).

The critical compliance concern identified in this analysis is that several of the nine managed practices refer patients to AHT-owned ancillary services — specifically, in-office clinical laboratory services, diagnostic imaging services, and physical therapy services provided at AHT-branded clinic locations. These referrals create an unbroken chain of financial relationships between the referring physicians employed by or associated with the managed practices and AHT as the entity furnishing designated health services ("DHS"). This chain triggers the Stark Law's "indirect compensation arrangement" analysis under 42 C.F.R. § 411.354(c). Additionally, the percentage-of-revenue fee structure raises serious concerns under both the Stark Law indirect compensation arrangement provisions and the AKS management contracts safe harbor at 42 C.F.R. § 1001.952(d).

Our principal conclusions are as follows:

1. Stark Law — Indirect Compensation Arrangement. The CPN management services arrangements, as currently structured, likely constitute non-compliant indirect compensation arrangements under the Stark Law. An unbroken chain of financial relationships exists between the referring physicians in the managed practices and AHT, the entity furnishing DHS. The percentage-based management fee creates a structure in which aggregate compensation varies, or may be deemed to take into account, the volume or value of referrals, and AHT possesses actual knowledge of the referral relationship.

2. Stark Law — Exception Unavailability. The percentage-based fee formula presents a significant obstacle to satisfying the indirect compensation arrangement exception at 42 C.F.R. § 411.357(p), the fair market value exception at 42 C.F.R. § 411.357(l), and other potentially applicable Stark Law exceptions. The absence of an independent fair market value ("FMV") appraisal for the 15% management fee compounds this deficiency.

3. Anti-Kickback Statute — Safe Harbor Non-Compliance. The management contracts safe harbor at 42 C.F.R. § 1001.952(d) is not fully satisfied. Most critically, the 15% of collected net revenue fee is not "set in advance" within the meaning of the safe harbor, and the fee methodology does not adequately insulate compensation from variation with the volume or value of referrals.

4. Restructuring Recommended. We recommend prompt restructuring of the management fee formula, independent FMV substantiation, implementation of referral tracking and monitoring safeguards, compliance training, and evaluation of voluntary self-disclosure under the CMS Self-Referral Disclosure Protocol ("SRDP") and the OIG Self-Disclosure Protocol ("SDP").

The analysis and recommendations set forth below should be considered in conjunction with the companion memoranda prepared by C&H as part of this engagement, including the Stark Law Compliance Assessment Memorandum, the AKS Compliance Assessment Memorandum, and the Connecticut Referral Fee Prohibition Memorandum.

II. SCOPE AND METHODOLOGY

A. Scope of Review

This memorandum addresses all nine MSAs between AHT (through CPN) and the independently owned Hartford-area physician practices. The analysis is limited to the federal Stark Law and AKS implications of these arrangements and provides a brief overview of relevant Connecticut state law considerations. A detailed state-law analysis is contained in the companion Connecticut Referral Fee Prohibition Memorandum. This memorandum does not address compliance issues related to AHT's other contractual arrangements with physicians, hospitals, or other referral sources, which are covered in separate workstreams within the broader C&H engagement.

B. Documents Reviewed

In preparing this memorandum, C&H reviewed the following documents and materials:

1. Individual Management Services Agreements between CPN and each of the nine managed practices (executed copies and any amendments), specifically:

a. MSA with Hartford Primary Care Associates, P.C. (executed March 1, 2020) b. MSA with Farmington Valley Internal Medicine, LLC (executed April 15, 2020) c. MSA with Greater Hartford Cardiology Group, P.C. (executed June 1, 2020) d. MSA with Glastonbury Family Physicians, P.C. (executed July 1, 2020) e. MSA with West Hartford Orthopedic Associates, LLC (executed September 15, 2020) f. MSA with Avon Specialty Medical Group, P.C. (executed November 1, 2020) g. MSA with New Britain Gastroenterology Associates, P.C. (executed January 15, 2021) h. MSA with Wethersfield Women's Health, P.C. (executed March 1, 2021) i. MSA with Bloomfield Medical Partners, LLC (executed May 1, 2021)

2. CPN Operating Agreement and organizational documents, including the Articles of Organization filed with the Connecticut Secretary of State and all amendments thereto.

3. AHT financial records reflecting management fee revenue received from CPN and through CPN from each managed practice for FY2021 and FY2022.

4. Referral data and reports documenting patient referrals from the managed practices to AHT-owned ancillary services (clinical laboratory, diagnostic imaging, and physical therapy), extracted from the ArborConnect platform and AHT's billing and claims systems.

5. ArborConnect licensing agreements, platform documentation, integration specifications, and deployment records for the managed practices.

6. The Grayson Whitaker & Associates LLP compliance gap assessment report (GW-AHT-2022-Final, dated December 12, 2022), including supporting workpapers and appendices provided by the engagement principal, Carolyn Fitch.

7. AHT organizational chart showing the CPN reporting structure, ownership hierarchy, and management chain.

8. AHT FY2022 Medicare cost report data, payer mix reports, and ancillary services revenue breakdowns.

9. Halsted Accounting Group LLP FY2022 management letter (engagement partner: Ronald Desmond), containing observations regarding FMV substantiation requirements for certain AHT arrangements.

10. AHT Compliance Program documentation, including the Code of Conduct, policies and procedures, and compliance training records.

C. Interviews Conducted

C&H conducted interviews with the following individuals during the course of this review:

• Derek Huang, Chief Compliance Officer, AHT — interviewed on February 8, 2023 and March 14, 2023 regarding the compliance program structure, referral monitoring capabilities, and the Grayson Whitaker gap assessment findings.

• Patricia Yamamoto, General Counsel, AHT — interviewed on February 8, 2023 regarding the history and business rationale of the CPN arrangements, the MSA negotiation process, and the ArborConnect integration decisions.

• AHT Finance Team Members (Jennifer Caldwell, VP of Finance, and Robert Tran, Controller) — interviewed on February 22, 2023 regarding the management fee calculations, revenue flows, collection methodologies, and financial reporting for the CPN arrangements.

• Michael Szabo, CPN Operational Lead — interviewed on March 3, 2023 regarding the scope and delivery of management services to the nine managed practices, staffing allocations, ArborConnect deployment, and operational interactions with the managed practice physicians.

D. Legal Framework Applied

This memorandum applies the following legal authorities:

• The Stark Law, 42 U.S.C. § 1395nn, and its implementing regulations at 42 C.F.R. § 411.350 et seq.

• The Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), and the safe harbor regulations at 42 C.F.R. § 1001.952.

• The CMS Final Rule on Stark Law Modernization, 85 Fed. Reg. 77492 (Dec. 2, 2020), effective January 19, 2021 (the "2021 Stark Modernization Rule").

• The OIG/HHS Final Rule on AKS Safe Harbor Modernization, 85 Fed. Reg. 77684 (Dec. 2, 2020), effective January 19, 2021 (the "2021 AKS Safe Harbor Rule").

• Relevant OIG Advisory Opinions, Fraud Alerts, and Compliance Guidance publications, as cited throughout.

• Connecticut General Statutes § 20-7a(d), the state referral fee prohibition (addressed in summary form, with detailed analysis in the companion memorandum).

E. Cross-Reference to Companion Memoranda

This memorandum should be read in conjunction with the following companion memoranda prepared as part of the C&H engagement:

• Stark Law Compliance Assessment Memorandum (Matter No. 1010-00003-01)

• AKS Compliance Assessment Memorandum (Matter No. 1010-00003-02)

• Connecticut Referral Fee Prohibition Memorandum (Conn. Gen. Stat. § 20-7a(d)) (Matter No. 1010-00003-03)

• CMS Self-Referral Disclosure Protocol Evaluation Memorandum (Matter No. 1010-00003-04)

• OIG Self-Disclosure Protocol Evaluation Memorandum (Matter No. 1010-00003-05)

• Memorandum to Northbridge Valuation Advisors re: FMV Opinion Scope (transmitted separately by Miriam Calloway to Sandra Kilpatrick, May 10, 2023)

III. FACTUAL BACKGROUND

A. AHT Corporate and Operational Overview

Arbor Health Technologies Inc. ("AHT") is a Delaware corporation headquartered at 200 Concord Avenue, Suite 400, Cambridge, Massachusetts 02138 (EIN: 84-3291057; NPI: 1497253810). AHT operates a multi-state healthcare platform that combines clinical operations with health information technology.

On the clinical side, AHT operates twenty-three (23) outpatient clinics (branded as "Arbor Health Clinics") across four states: fourteen (14) in Massachusetts, four (4) in Connecticut, three (3) in Rhode Island, and two (2) in New Hampshire. These clinics provide primary care, specialty care in cardiology, orthopedics, and gastroenterology, and ancillary services including in-office clinical laboratory testing, diagnostic imaging (MRI, CT, ultrasound, and X-ray), and physical therapy. The ancillary services are operated directly by AHT and are integrated into AHT's clinic operations. AHT bills Medicare, Medicaid, and commercial payers for these ancillary services under AHT's provider numbers.

On the technology side, AHT develops and licenses ArborConnect, a proprietary electronic health record ("EHR") and practice management software-as-a-service ("SaaS") platform. ArborConnect is both deployed internally across AHT's own clinics and licensed to external physician practices. As of the end of FY2022, forty-two (42) external physician practices — distinct from the nine CPN managed practices that are the subject of this memorandum — maintained active ArborConnect subscription licenses, generating approximately $8.9 million in annual subscription revenue. The ArborConnect platform includes clinical documentation, order entry, scheduling, billing, coding, revenue cycle management, analytics, and population health management modules.

In FY2022, AHT reported net revenue of approximately $214.3 million, of which approximately sixty-one percent (61%), or $130.7 million, was derived from Medicare and Medicaid (federal health care programs), and approximately thirty-nine percent (39%), or $83.6 million, was derived from commercial payer contracts. This substantial federal healthcare program revenue places virtually all of AHT's clinical operations and referral relationships squarely within the scope of both the Stark Law and the AKS.

AHT is a portfolio company of Ridgeline Capital Partners Fund IV, L.P. ("Ridgeline Fund IV"), a healthcare-focused private equity fund managed by Ridgeline Capital Advisors LLC. Ridgeline Fund IV acquired a seventy-two percent (72%) equity stake in AHT in January 2021 for approximately $185 million. Two Ridgeline designees serve on the AHT Board of Directors: Claudia Sorrento, Managing Director of Ridgeline Capital Advisors LLC, and Marcus Whitmore, Principal of Ridgeline Capital Advisors LLC. The remaining equity is held by AHT management and founder stockholders. As discussed in Section VIII.H below, Ridgeline Capital has indicated an interest in a potential exit or sale process anticipated in late 2024, which heightens the urgency of compliance remediation to ensure the CPN arrangements can withstand due diligence scrutiny.

AHT employs one hundred forty-seven (147) physicians as W-2 employees and maintains thirty-eight (38) independent contractor and medical director arrangements with non-employee physicians. AHT's total employee headcount is approximately 1,340 across clinical, administrative, and technology functions.

B. ConnectiCare Physicians Network, LLC — Structure and Operations

ConnectiCare Physicians Network, LLC ("CPN") is a Connecticut limited liability company located at 55 Asylum Street, 7th Floor, Hartford, Connecticut 06103. CPN was formed in 2019 as a purpose-built entity to serve as the contractual vehicle through which AHT provides management services to independently owned physician practices in Strathmore Mutual Insurance, Connecticut metropolitan area. CPN does not directly employ any physicians and does not itself furnish clinical services to patients.

CPN is wholly owned and controlled by AHT. Under the CPN Operating Agreement, AHT is the sole member and manager of CPN. AHT appoints all officers of CPN, directs all operational and strategic decisions, and receives all distributable earnings of CPN. CPN's financial results are consolidated into AHT's financial statements. For all practical purposes, CPN functions as an operating division of AHT, structured as a separate legal entity for contracting convenience and state-law compliance purposes. The CPN Operational Lead, Michael Szabo, reports to AHT's Vice President of Practice Operations, who in turn reports to AHT's Chief Operating Officer.

The management services provided by AHT through CPN to the managed practices include the following:

• Billing and Coding Services. CPN, utilizing AHT's centralized revenue cycle management team, performs professional fee billing and coding for each managed practice, including charge capture, claims submission, denial management, and appeals processing.

• Revenue Cycle Management. Beyond billing and coding, CPN provides comprehensive revenue cycle oversight, including payer contract analysis, fee schedule optimization, patient collections, accounts receivable management, and financial reporting.

• Practice Management and Operational Consulting. CPN provides strategic and operational consulting to the managed practices, including workflow optimization, staffing analysis, patient access and scheduling optimization, and quality improvement support.

• IT Infrastructure and Support. CPN deploys and maintains AHT's proprietary ArborConnect EHR and practice management platform at each managed practice site. This includes hardware provisioning, software licensing, implementation, training, ongoing technical support, system upgrades, data migration, and interoperability configuration. CPN also provides general IT infrastructure support, including network management, cybersecurity, and HIPAA-compliant data storage.

• Credentialing Support. CPN assists managed practice physicians with payer credentialing, re-credentialing, and privileging processes.

• Administrative Staffing Functions. CPN provides or coordinates certain administrative staffing functions for the managed practices, including front-desk staffing support, medical records management, and compliance administrative assistance.

Each of the nine managed practices has entered into a separate, individually negotiated MSA with CPN (with AHT as the effective counterparty). The managed practices are independently owned professional entities — organized as professional corporations ("P.C.") or limited liability companies ("LLC") under Connecticut law — and the physicians practicing within these entities are not W-2 employees of AHT. The managed practice physicians retain full clinical autonomy and independent medical judgment in patient care decisions, and the MSAs contain provisions expressly preserving this clinical independence.

C. Management Fee Structure

Under each of the nine MSAs, the managed practice pays CPN (and, through CPN, AHT) a management fee equal to fifteen percent (15%) of the managed practice's collected net revenue. "Collected net revenue" is defined in the MSAs as the gross revenue actually collected by the managed practice from all sources (including Medicare, Medicaid, commercial payers, and patient self-pay) during each applicable measurement period, net of refunds, contractual adjustments, and bad debt write-offs.

The management fee is calculated and invoiced on a monthly basis, based on actual collections during the preceding calendar month. Payment is due within thirty (30) days of invoice. In practice, CPN's revenue cycle management team calculates the collected net revenue for each managed practice and generates the monthly invoice, which is reviewed and approved by the CPN Operational Lead before distribution to the managed practice.

In FY2022, the aggregate collected net revenue across all nine managed practices was approximately $31.53 million, and the aggregate management fee revenue paid to AHT through CPN was approximately $4.73 million (i.e., $31.53 million × 15%). The management fee revenue is recorded in AHT's financial statements as management services revenue within the CPN operating segment.

The percentage-based fee structure is a central focus of this analysis because it means that the management fee fluctuates directly and proportionally with the managed practices' revenue. To the extent that a managed practice's revenue includes collections attributable to services ordered by or referred by the managed practice's physicians — including referrals to AHT-owned ancillary services — the management fee varies with that revenue. This creates a structural linkage between the management fee and referral activity that is highly relevant to both the Stark Law indirect compensation arrangement analysis and the AKS management contracts safe harbor analysis.

D. Referral Patterns — Managed Practices to AHT Ancillary Services

The factual predicate that elevates the CPN arrangements from a routine management services relationship to a significant regulatory concern is the referral of patients by managed practice physicians to AHT-owned ancillary services for designated health services. Several of the nine managed practices regularly refer patients to AHT clinic locations for the following categories of DHS:

• In-office clinical laboratory services provided at AHT Arbor Health Clinic locations in Hartford, West Hartford, Farmington, and Glastonbury. These services include routine blood work, urinalysis, metabolic panels, lipid panels, and other CLIA-waived and moderate-complexity laboratory testing.

• Diagnostic imaging services provided at AHT Arbor Health Clinic locations, including MRI, CT, ultrasound, X-ray, and fluoroscopy services.

• Physical therapy services provided at AHT Arbor Health Clinic locations, including evaluation and management of musculoskeletal conditions, post-surgical rehabilitation, and sports medicine rehabilitation.

Each of these service categories constitutes "designated health services" within the meaning of the Stark Law. See 42 C.F.R. § 411.351 (defining DHS to include, inter alia, clinical laboratory services, radiology and certain other imaging services, and physical therapy services).

These referrals generate revenue for AHT that is separate from and in addition to the management fee revenue. AHT bills Medicare, Medicaid, and commercial payers for these ancillary services under AHT's provider numbers. The referring physician — i.e., the managed practice physician who orders or refers the patient for the ancillary service — is identified on the claim as the ordering or referring provider.

Based on the referral data extracted from the ArborConnect platform and AHT's billing systems, the aggregate referral activity from the nine managed practices to AHT-owned ancillary services in FY2022 was as follows:

These referral volumes are not uniform across the nine managed practices. The practices with the highest referral volumes to AHT ancillary services are Greater Hartford Cardiology Group, P.C. (primarily imaging referrals), West Hartford Orthopedic Associates, LLC (imaging and physical therapy referrals), and Hartford Primary Care Associates, P.C. (laboratory and imaging referrals). A detailed breakdown by practice is provided in Appendix B.

Notably, the $5.325 million in ancillary services revenue generated by referrals from managed practice physicians exceeds the $4.73 million in management fee revenue that AHT receives from the same managed practices. This revenue dynamic underscores the economic significance of the referral relationship and its potential to influence the incentive structure of the arrangements.

It is also important to note that the ArborConnect platform, which is deployed at each managed practice as part of the management services, includes order entry functionality that may facilitate the channeling of referrals to AHT ancillary services. Specifically, the platform's referral management module contains pre-populated provider directories and default referral routing settings that may, depending on configuration, prioritize AHT-owned ancillary service locations. Michael Szabo confirmed in his interview that the default referral destinations within ArborConnect at managed practice sites are configured to include AHT clinic locations, though he stated that managed practice physicians are free to override these defaults and refer to any provider. The implications of this integration are analyzed further in Section VI.B.

The managed practice physicians are "referring physicians" within the meaning of the Stark Law, 42 U.S.C. § 1395nn(h)(7), to the extent they make referrals for DHS, and AHT is the "entity" furnishing DHS. The question, therefore, is whether a "financial relationship" — specifically, an indirect compensation arrangement — exists between these referring physicians and AHT that would trigger the Stark Law prohibition.

E. Grayson Whitaker Gap Assessment Findings

In October 2022, AHT retained Grayson Whitaker & Associates LLP, a health care regulatory consulting firm, to conduct a comprehensive compliance gap assessment of AHT's physician arrangements, referral relationships, and operational compliance infrastructure. The engagement principal was Carolyn Fitch, a partner at Grayson Whitaker with extensive experience in health care regulatory compliance.

Grayson Whitaker delivered its final gap assessment report (Report No. GW-AHT-2022-Final) on December 12, 2022. The report identified a total of one hundred twelve (112) physician arrangements across AHT's operations, of which seventeen (17) were classified as "high risk" based on a multi-factor scoring methodology that considered the presence of referral relationships, compensation methodology, FMV documentation, contractual safeguards, and regulatory exposure. The CPN management services arrangements were among the seventeen high-risk arrangements identified.

With respect to the CPN arrangements specifically, the Grayson Whitaker report flagged the following concerns:

1. Percentage-Based Fee Structure Linked to Referral-Influenced Revenue. The 15% of collected net revenue fee structure creates a direct relationship between AHT's management fee revenue and the managed practices' overall collections, which include collections influenced by referral activity to AHT-owned ancillary services.

2. Absence of Documented FMV Analysis. The report noted that AHT had no documentation in its files — no independent appraisal, no internal memorandum, no market benchmarking study — establishing that the 15% management fee rate represents fair market value for the scope of management services actually provided by CPN.

3. Absence of Referral Tracking Safeguards. The MSAs contain no provisions restricting, monitoring, or tracking referrals from managed practice physicians to AHT-owned ancillary services. No compliance certifications, anti-referral covenants, or independent medical judgment representations are included in the current MSA templates.

4. Potential Stark Law Indirect Compensation Arrangement Issues. The report specifically identified the risk that the chain of financial relationships — from AHT through CPN to the managed practices and then to the referring physicians — could constitute an "indirect compensation arrangement" under 42 C.F.R. § 411.354(c), with the percentage-based fee varying with the volume or value of referrals.

The Grayson Whitaker report recommended that AHT engage experienced health care regulatory counsel to conduct a detailed legal analysis of the CPN arrangements under the Stark Law and AKS and to develop a remediation plan. That recommendation is the genesis of the present memorandum.

IV. STARK LAW ANALYSIS

A. Overview of Stark Law Prohibition and Referral Relationship

The Stark Law, formally the Physician Self-Referral Law, prohibits a physician from making a "referral" for "designated health services" to an entity with which the physician (or an immediate family member of the physician) has a "financial relationship," unless an exception applies. 42 U.S.C. § 1395nn(a)(1). If a referral is made in violation of the Stark Law, the entity furnishing the DHS may not present or cause to be presented a claim to Medicare (or any other payer) for the referred services, and any amounts collected must be refunded. 42 U.S.C. § 1395nn(a)(1)(B), (g)(1)-(2). The Stark Law is a strict liability statute — no intent to violate the law is required, and even inadvertent violations trigger its prohibitions and penalties.

A "financial relationship" under the Stark Law includes both (a) an ownership or investment interest in the entity furnishing DHS and (b) a compensation arrangement (direct or indirect) between the referring physician and the entity. 42 U.S.C. § 1395nn(a)(2); 42 C.F.R. § 411.354(a). The DHS categories relevant to the CPN arrangements include clinical laboratory services (42 C.F.R. § 411.351), radiology and certain other imaging services (including MRI, CT, and ultrasound), and physical therapy services, all of which are enumerated DHS categories.

In the CPN context, the "referring physicians" are the physicians employed by or associated with the nine managed practices who order or refer patients for clinical laboratory, diagnostic imaging, or physical therapy services. The "entity furnishing DHS" is AHT, which operates the Arbor Health Clinics where these ancillary services are provided and which bills Medicare and other federal health care programs for these services under AHT's provider identification numbers.

The central question in this analysis is whether a "financial relationship" exists between these referring physicians and AHT. As set forth below, we conclude that the CPN management services arrangements create an "indirect compensation arrangement" under 42 C.F.R. § 411.354(c) between the referring physicians and AHT, and that this indirect compensation arrangement does not currently satisfy any applicable Stark Law exception.

B. Direct vs. Indirect Compensation Arrangement Analysis

The Stark Law distinguishes between direct and indirect compensation arrangements, and the distinction is critical here.

Direct Compensation Arrangement. A direct compensation arrangement exists when there is a compensation arrangement between the referring physician (or the physician organization in which the referring physician is a member or employee) and the entity furnishing DHS, without any intervening persons or entities. 42 C.F.R. § 411.354(a)(1). In the CPN context, the managed practice physicians do not have any direct employment, consulting, medical directorship, or other contractual arrangement with AHT. The MSAs are between CPN (as AHT's subsidiary) and the managed practice entities (the P.C. or LLC), not individual physicians. Therefore, a direct compensation arrangement between the referring physicians and AHT likely does not exist.

We note, however, that the managed practice entities — as the contracting counterparties under the MSAs — do have a direct compensation arrangement with CPN (and, through CPN, with AHT). If the managed practice entity is a "physician organization" as defined under 42 C.F.R. § 411.351, and the referring physician is a member of or employed by that physician organization, then CMS could potentially characterize the MSA relationship as creating a direct compensation arrangement between the physician organization and AHT. However, the more natural and analytically appropriate framework for this multi-layered relationship is the indirect compensation arrangement analysis, which we address below.

Indirect Compensation Arrangement. An indirect compensation arrangement exists when three conditions are met:

(1) Between the referring physician (or a member of the referring physician's immediate family) and the entity furnishing DHS, there exists an unbroken chain of any number (but not fewer than one) of persons or entities that have financial relationships (as defined at 42 C.F.R. § 411.354(a)) between them (i.e., each party in the chain has a financial relationship with the party adjacent to it in the chain);

(2) The referring physician (or immediate family member) receives aggregate compensation from the person or entity in the chain with which the referring physician (or immediate family member) has a direct financial relationship that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS; and

(3) The entity furnishing DHS has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician (or immediate family member) receives aggregate compensation that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS.

42 C.F.R. § 411.354(c)(2). Each of these three elements is analyzed below as applied to the CPN arrangements.

C. Unbroken Chain of Financial Relationships

The first element of the indirect compensation arrangement test requires an unbroken chain of financial relationships between the referring physician and the entity furnishing DHS. We identify the following chain:

Link 1: AHT → CPN. AHT is the entity furnishing DHS through its clinic-based ancillary services. CPN is a Connecticut LLC wholly owned and controlled by AHT. The relationship between AHT and CPN constitutes both an ownership/investment interest (AHT is the sole member of CPN) and a compensation arrangement (management fee revenue flows from the managed practices through CPN to AHT). This link constitutes a "financial relationship" under 42 C.F.R. § 411.354(a).

Link 2: CPN → Managed Practice Entity. CPN has entered into an MSA with each of the nine managed practice entities. Under each MSA, CPN provides management services to the managed practice, and the managed practice pays CPN a management fee equal to 15% of collected net revenue. This constitutes a "compensation arrangement" under 42 C.F.R. § 411.354(c) — specifically, the exchange of remuneration (management services in one direction, management fees in the other) between two parties. This link constitutes a "financial relationship."

Link 3: Managed Practice Entity → Referring Physician. Each managed practice entity compensates its physicians through employment agreements, shareholder/partner distributions, profit-sharing arrangements, or other compensation mechanisms. The physicians practicing within each managed practice entity receive compensation from the practice entity for their professional services. This constitutes a "compensation arrangement" between the managed practice entity and the referring physician, and therefore a "financial relationship" under the Stark Law.

Taken together, these three links form an unbroken chain of financial relationships running from AHT (entity furnishing DHS) through CPN and the managed practice entities to the referring physicians. Each link in the chain involves a "financial relationship" as defined under 42 C.F.R. § 411.354(a). The first element of the indirect compensation arrangement test is therefore satisfied.

The following diagram illustrates the chain:

AHT (Entity Furnishing DHS) → [ownership/compensation] → CPN → [compensation/MSA] → Managed Practice Entity → [compensation/employment] → Referring Physician

↑ DHS Referrals flow back from Referring Physician to AHT ↑

A more detailed visual representation is provided in Appendix C.

D. Does Aggregate Compensation Vary with Volume or Value of Referrals?

The second element of the indirect compensation arrangement test requires that the referring physician receive "aggregate compensation" from the person or entity in the chain with which the referring physician has a direct financial relationship (here, the managed practice entity) that "varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS." 42 C.F.R. § 411.354(c)(2)(ii).

This element is the most analytically complex and the most consequential for the CPN arrangements. The analysis proceeds on two levels: (1) whether the management fee paid by the managed practice to CPN/AHT varies with the volume or value of DHS referrals, and (2) whether the compensation received by the referring physician from the managed practice entity varies with, or takes into account, such referrals.

1. Management Fee Variation with Referral Volume

The 15% of collected net revenue management fee is directly proportional to the managed practice's total collections. If referrals from managed practice physicians to AHT-owned ancillary services increase, and if those referrals generate downstream revenue that flows back to the managed practice in any form — or if the increased referral activity is correlated with increased patient volume or higher-acuity services at the managed practice that increase the practice's own collections — then the management fee to AHT increases correspondingly. Even if the referral revenue does not flow directly through the managed practice's collections (because AHT bills for and collects the ancillary services revenue separately), the referral relationship may indirectly influence the managed practice's revenue. For example, a managed practice that refers patients for AHT laboratory services may see increased patient retention, increased visit frequency, or increased revenue from evaluation and management services associated with the laboratory referrals.

Moreover, the structural reality is that AHT has a financial interest in both the management fee (which increases with managed practice revenue) and the ancillary services revenue (which is generated by referrals from managed practice physicians). This dual revenue stream creates an incentive for AHT to encourage referrals and creates a circumstance in which the overall economic relationship between the parties takes into account referral activity.

2. Physician Compensation Variation

The more technically precise question under the second element is whether the referring physician's aggregate compensation from the managed practice entity varies with, or takes into account, the volume or value of referrals. This depends on how each managed practice compensates its physicians. If physicians are compensated based on a share of practice profits, a percentage of collections, a productivity-based formula (wRVU-based or collection-based), or any other methodology tied to practice revenue, then the management fee — which reduces the practice's net income — becomes a factor that links physician compensation to the management fee and, by extension, to referral activity.

Specifically, if a managed practice physician's compensation increases when the practice's revenue increases, and if the management fee (which is deducted from revenue) is lower as a percentage of total revenue when referral-related activities increase certain revenue components (or higher when they decrease), the physician's compensation can be said to be influenced by the referral dynamic, even if the influence is attenuated. Under the Stark Law's broad "takes into account" language, even indirect or attenuated linkages may be sufficient to satisfy this element.

3. 2021 Stark Modernization Rule Considerations

The 2021 Stark Modernization Rule (85 Fed. Reg. 77492) introduced important revisions to the indirect compensation arrangement framework. CMS refined the definition to clarify that the "varies with, or takes into account" standard focuses on the physician's aggregate compensation from the entity with which the physician has a direct financial relationship — here, the managed practice entity, not AHT. CMS also introduced a distinction between "unit-based compensation" and other forms of compensation, clarifying that certain unit-based compensation arrangements — such as per-service, per-unit, per-patient, or percentage-based formulas — are deemed not to take into account the volume or value of referrals if they meet certain conditions, including that the compensation is FMV and does not vary during the term of the arrangement based on referrals. See 42 C.F.R. § 411.354(d)(2)-(3).

However, the unit-based compensation safe harbor in the Modernization Rule is designed primarily for direct compensation arrangements between physicians and entities, not for the multi-layered structure present in the CPN arrangements. The relevant question for the indirect compensation arrangement analysis remains whether the physician's aggregate compensation from the managed practice "varies with, or takes into account" referral volume to AHT. The Modernization Rule did not eliminate the risk that a percentage-based management fee — which creates a systematic linkage between practice revenue and AHT's economic benefit — satisfies the "takes into account" standard.

CMS's preamble to the Modernization Rule acknowledged that the agency has long been concerned about percentage-based compensation in the context of referral relationships, and stated that "compensation based on a percentage of revenues raises concerns because it may increase as the volume or value of a physician's referrals increases." 85 Fed. Reg. at 77524. While CMS was discussing the "set in advance" requirement in the context of exceptions rather than the threshold indirect compensation arrangement test, the underlying logic is directly applicable here.

4. Conclusion on Volume/Value Element

We conclude that the second element of the indirect compensation arrangement test is likely satisfied in the CPN context. The percentage-based management fee creates a structural linkage between AHT's compensation and managed practice revenue that is influenced, directly or indirectly, by referral activity. To the extent that managed practice physicians are compensated in a manner that is affected by the management fee and overall practice revenue, their aggregate compensation "varies with, or takes into account" the volume or value of referrals to AHT. Even under the most favorable reading of the Modernization Rule, the current fee structure does not provide sufficient insulation to prevent this conclusion.

E. Knowledge Requirement

The third element of the indirect compensation arrangement test requires that the entity furnishing DHS (AHT) have "actual knowledge of, or act[] in reckless disregard or deliberate ignorance of, the fact that the referring physician receives aggregate compensation that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS." 42 C.F.R. § 411.354(c)(2)(iii).

This element is clearly satisfied in the CPN context. AHT has actual knowledge that managed practice physicians refer patients to AHT-owned ancillary services. AHT operates the ancillary services, employs or contracts with the clinical personnel who provide the services, bills Medicare and other payers for the services, and identifies the managed practice physicians as the ordering or referring providers on the claims. AHT has access to comprehensive referral data through the ArborConnect platform, which is deployed at both the managed practice sites and the AHT ancillary service locations and which tracks orders, referrals, and clinical workflows across the entire network.

Furthermore, AHT is aware of the percentage-based management fee structure (AHT designed and negotiated the MSA terms), knows that the management fee varies with managed practice revenue, and has access to data showing the referral patterns from managed practices to AHT ancillary services. The Grayson Whitaker gap assessment report — which AHT commissioned and received — explicitly identified the referral-linked revenue concern. AHT therefore has actual knowledge of all the facts necessary to satisfy the knowledge element. There is no plausible argument that AHT lacks knowledge of, or is in reckless disregard or deliberate ignorance of, the relevant facts.

F. Conclusion on Indirect Compensation Arrangement

Based on the foregoing analysis, we conclude that the CPN management services arrangements likely constitute "indirect compensation arrangements" under 42 C.F.R. § 411.354(c)(2) as to each managed practice physician who makes referrals to AHT for DHS. All three elements of the test are satisfied:

1. An unbroken chain of financial relationships exists between each referring physician and AHT (through the managed practice entity and CPN).

2. The referring physicians receive aggregate compensation from their managed practice entities that varies with, or takes into account, the volume or value of referrals to AHT, due to the percentage-based management fee structure and the managed practices' compensation methodologies.

3. AHT has actual knowledge of the referral relationship and the compensation dynamics.

The existence of an indirect compensation arrangement means that AHT's furnishing of DHS pursuant to referrals from managed practice physicians is prohibited under the Stark Law, 42 U.S.C. § 1395nn(a)(1), unless an applicable exception is satisfied. Any claims submitted to Medicare for DHS referred by managed practice physicians during the period in which a non-excepted indirect compensation arrangement existed are potentially in violation of the Stark Law and subject to refund, denial, and civil monetary penalties. See 42 U.S.C. § 1395nn(g); 42 C.F.R. § 411.353.

G. Applicable Stark Law Exceptions

Having concluded that the CPN arrangements likely constitute indirect compensation arrangements under the Stark Law, we next analyze whether any available exception can shelter these arrangements from the Stark Law prohibition.

1. Indirect Compensation Arrangement Exception — 42 C.F.R. § 411.357(p)

The regulations provide a specific exception for indirect compensation arrangements at 42 C.F.R. § 411.357(p). To qualify, the arrangement must satisfy each of the following requirements:

(a) The compensation received by the referring physician under the arrangement is fair market value for services and items actually provided, not taking into account the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS.

(b) The compensation is not determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS.

(d) The arrangement covers identifiable items or services, is commercially reasonable even if no referrals were made, and serves a legitimate business purpose.

Application to the CPN Arrangements:

Fair Market Value. The 15% management fee rate has not been substantiated by an independent FMV appraisal. As noted in the Grayson Whitaker gap assessment report and confirmed through our review of AHT's files, AHT has no documentation — no formal appraisal, no internal benchmarking analysis, no market comparable study — establishing that a 15% of collected net revenue management fee represents fair market value for the scope of management services provided by CPN to the managed practices.

AHT retained Northbridge Valuation Advisors LLC in February 2023, with Sandra Kilpatrick as the engagement principal, to prepare FMV opinions for certain AHT physician compensation arrangements. However, the CPN management fee has not yet been included in the Northbridge engagement scope. As discussed in Section VIII.B below, we recommend that the CPN management fee be added to the Northbridge valuation scope immediately.

Without FMV substantiation, AHT cannot demonstrate compliance with this element of the exception. Moreover, even if an FMV appraisal is obtained, the appraisal must support the specific 15% rate relative to the specific scope of services provided. Industry benchmarks for physician practice management fees vary widely, typically ranging from 4% to 15% of collections depending on the breadth and intensity of services provided. The 15% rate employed in the CPN arrangements is at the upper end of this range and will require robust justification based on the comprehensive scope of services that CPN actually provides.

Volume or Value. This element presents the most significant obstacle. As analyzed in Section IV.D, the percentage-of-collected-net-revenue fee methodology creates a compensation structure that varies with, or may be deemed to take into account, the volume or value of referrals. The management fee increases as managed practice revenue increases, and managed practice revenue may be influenced by referral patterns to AHT-owned ancillary services. Under the Stark Law's broad interpretation of "takes into account," this methodology is likely viewed as inconsistent with the exception requirement.

CMS has stated that percentage-based compensation is not per se impermissible under the Stark Law, but has repeatedly emphasized that such compensation raises heightened concerns when there is a referral relationship between the parties. In the 2021 Stark Modernization Rule, CMS declined to create a blanket safe harbor for percentage-based compensation and stated that the permissibility of such arrangements depends on the specific facts and circumstances, including whether the compensation is at FMV and whether the percentage methodology is structured to avoid correlation with referral activity. See 85 Fed. Reg. at 77523-25. In the CPN context, where there is a demonstrated referral flow from managed practice physicians to AHT ancillary services, the percentage-based methodology is particularly vulnerable to challenge.

Writing Requirement. The MSAs are in writing and signed by authorized representatives of CPN and the managed practice entities. This element appears to be satisfied, subject to confirmation that all MSAs have been properly executed and that any amendments or modifications are also in writing.

Commercial Reasonableness. The management services provided by CPN — billing, coding, revenue cycle management, practice management, IT infrastructure, credentialing, and administrative staffing — are genuine services that independently owned physician practices commonly need and obtain through management services arrangements. The arrangement appears to be commercially reasonable on its face, in the sense that the managed practices have a legitimate business need for these services and the arrangement serves an identifiable business purpose independent of any referral relationship. However, a formal commercial reasonableness determination should be documented, ideally as part of the Northbridge FMV engagement.

Assessment. The indirect compensation arrangement exception at 42 C.F.R. § 411.357(p) is likely not satisfied under the current CPN fee structure. The principal deficiencies are (1) the absence of FMV substantiation for the 15% management fee, and (2) the percentage-based fee methodology that may be deemed to take into account the volume or value of referrals. Even if the FMV deficiency is cured through a Northbridge appraisal, the structural concern regarding the percentage-based methodology remains unless the fee formula is restructured.

2. Fair Market Value Exception — 42 C.F.R. § 411.357(l)

The fair market value exception provides that compensation resulting from an arrangement between an entity and a physician (or a group of physicians) for the provision of items or services is not a "compensation arrangement" for Stark Law purposes if the arrangement meets certain requirements, including that the arrangement is set out in writing, the compensation is set in advance, consistent with FMV, and does not take into account the volume or value of referrals or other business generated between the parties. 42 C.F.R. § 411.357(l).

This exception presents the same obstacles as the indirect compensation arrangement exception. The "set in advance" requirement is inconsistent with a percentage-based fee that fluctuates with actual collections. CMS has interpreted "set in advance" to mean that the compensation terms are established in the agreement before the services are provided, such that the aggregate compensation can be objectively determined at the time of contracting. 42 C.F.R. § 411.354(d)(1). While a fixed percentage could be argued to be "set in advance" in the sense that the percentage rate (15%) is fixed, CMS has indicated that a percentage-of-revenue methodology may not satisfy the "set in advance" requirement when the underlying revenue base is variable and influenced by referral activity. Moreover, the FMV requirement remains unmet in the absence of an independent appraisal.

Assessment. The fair market value exception at 42 C.F.R. § 411.357(l) is likely not satisfied for the same reasons that the indirect compensation arrangement exception is not satisfied.

3. Value-Based Enterprise Exceptions — 42 C.F.R. § 411.357(aa)

The 2021 Stark Modernization Rule introduced new exceptions for "value-based arrangements" between participants in a "value-based enterprise." 42 C.F.R. § 411.357(aa). A "value-based enterprise" is defined as two or more participants collaborating to achieve at least one value-based purpose. A "value-based purpose" includes coordinating and managing the care of a target patient population, improving the quality of care for a target patient population, appropriately reducing costs to or growth in expenditures of payors without reducing the quality of care for a target patient population, or transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs. 42 C.F.R. § 411.351.

For this exception to apply, the CPN arrangement would need to be restructured as a bona fide "value-based arrangement" between AHT and the managed practices, operating within a "value-based enterprise" with a defined target patient population and at least one value-based purpose. The current MSAs do not contain value-based arrangement terms. The management services relationship is structured as a traditional fee-for-service management arrangement, not as a value-based collaboration. There is no defined target patient population, no quality metrics, no cost-efficiency targets, and no shared accountability for care outcomes.

Preliminary Assessment. The value-based enterprise exceptions are unlikely to apply to the CPN arrangements in their current form. While it is theoretically possible to restructure the arrangements to qualify as value-based arrangements — for example, by defining a target patient population (e.g., the Medicare beneficiaries served by the managed practices), establishing shared quality and cost targets, and restructuring the fee formula to incorporate value-based components — such a restructuring would represent a fundamental reconceptualization of the CPN model and would require extensive negotiation with the managed practices. We do not recommend pursuing this avenue as the primary compliance remedy, though it may merit consideration as a longer-term strategic option, particularly if AHT intends to develop a clinically integrated network or accountable care organization model in Connecticut.

H. Stark Law Risk Summary for CPN Arrangements

In summary, the CPN management services arrangements present significant Stark Law risk. The arrangements constitute indirect compensation arrangements under 42 C.F.R. § 411.354(c) as to each managed practice physician who refers patients for DHS to AHT-owned ancillary services. Referrals from these physicians to AHT are potentially prohibited under 42 U.S.C. § 1395nn(a)(1) because no applicable Stark Law exception is fully satisfied under the current arrangement structure.

The consequences of Stark Law non-compliance are severe. Claims for DHS furnished pursuant to non-compliant referrals must be refunded to Medicare, and AHT faces exposure to civil monetary penalties of up to $15,000 per service, as well as potential treble damages under the False Claims Act, 31 U.S.C. § 3729 et seq., to the extent that AHT knowingly submitted claims for DHS in violation of the Stark Law. See 42 U.S.C. § 1395nn(g); United States ex rel. Drakeford v. Tuomey, 792 F.3d 364 (4th Cir. 2015) (affirming $237 million False Claims Act judgment based on Stark Law violations). Additionally, AHT could face exclusion from federal health care programs, which would be existential given that Medicare and Medicaid represent 61% of AHT's net revenue.

The primary obstacle to exception compliance is the 15% percentage-based management fee, which creates a compensation methodology that varies with, or takes into account, the volume or value of referrals. Restructuring the fee formula, as recommended in Section VIII.A, is the essential first step toward Stark Law compliance.

V. ANTI-KICKBACK STATUTE ANALYSIS

A. Overview of AKS Prohibition

The federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), prohibits any person from knowingly and willfully offering, paying, soliciting, or receiving any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward any person for referring an individual for the furnishing of, or recommending the purchase, lease, or ordering of, any item or service for which payment may be made in whole or in part under a federal health care program (including Medicare and Medicaid).

The term "remuneration" is broadly defined to include "transfers of anything of value." 42 U.S.C. § 1320a-7a(i)(6); see also United States v. Greber, 760 F.2d 68, 69 (3d Cir. 1985). Courts have consistently applied the "one purpose" test, holding that if even one purpose of the remuneration is to induce or reward referrals, the AKS is violated, regardless of whether there are other legitimate purposes. See, e.g., United States v. Kats, 871 F.2d 105 (9th Cir. 1989); United States v. McClatchey, 217 F.3d 823, 834-35 (10th Cir. 2000).

Violations of the AKS are felonies, punishable by imprisonment of up to ten years and fines of up to $100,000 per violation, as well as exclusion from participation in federal health care programs. 42 U.S.C. § 1320a-7b(b); 42 U.S.C. § 1320a-7(b)(7). The AKS also provides the basis for civil monetary penalties under 42 U.S.C. § 1320a-7a and for liability under the False Claims Act, 31 U.S.C. § 3729, because a claim resulting from a kickback arrangement is deemed a "false or fraudulent claim" under 42 U.S.C. § 1320a-7b(g).

Unlike the Stark Law, the AKS requires scienter — the statute applies only when remuneration is offered, paid, solicited, or received "knowingly and willfully." However, courts and enforcement authorities have interpreted this standard broadly, and the required mental state does not require specific knowledge that the conduct violates the AKS; rather, it requires only that the defendant acted with knowledge that the conduct was unlawful in some general sense. See 42 U.S.C. § 1320a-7b(h) (providing that a person need not have actual knowledge of the AKS or specific intent to commit a violation).

The AKS applies to the CPN arrangements because AHT's net revenue includes $130.7 million in Medicare and Medicaid revenue (61% of $214.3 million in FY2022), and the managed practice physicians may also generate referrals for items and services reimbursable under federal health care programs. The management services provided by AHT through CPN, and the management fees paid by the managed practices to CPN/AHT, constitute "remuneration" within the meaning of the AKS. The question

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT This memorandum is a privileged and confidential attorney-client communication and attorney work product. It is intended solely for the use of the individuals and entities to whom it is addressed. This memorandum is not intended to be and should not be used as a substitute for legal advice in specific situations. Distribution, copying, or disclosure of this memorandum or its contents to any person or entity other than the addressees, without the prior written consent of Calderwood & Harkness LLP, is strictly prohibited.
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 Christopher Aiken, Senior Associate, Calderwood & Harkness LLP Amy Whitfield, Associate, Calderwood & Harkness LLP
DATE: May 22, 2023
RE: Stark Law Indirect Compensation Arrangement Analysis and Anti-Kickback Statute Management Contract Safe Harbor Analysis — ConnectiCare Physicians Network, LLC Management Services Arrangements
MATTER NO.: 1010-00003
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I. EXECUTIVE SUMMARY
This memorandum analyzes the management services arrangements ("MSAs") between Arbor Health Technologies Inc. ("AHT") and nine independently owned physician practices in Strathmore Mutual Insurance, Connecticut metropolitan area, administered through ConnectiCare Physicians Network, LLC ("CPN"), under the federal Physician Self-Referral Law (the "Stark Law," 42 U.S.C. § 1395nn) and the Anti-Kickback Statute (the "AKS," 42 U.S.C. § 1320a-7b(b)). This analysis was undertaken at the request of AHT's General Counsel and Chief Compliance Officer in response to the compliance gap assessment delivered by Grayson Whitaker & Associates LLP (Report No. GW-AHT-2022-Final, dated December 12, 2022), which identified the CPN management services arrangements as among seventeen high-risk arrangements requiring dedicated legal review. Calderwood & Harkness LLP ("C&H") was engaged to conduct this review as part of a broader enterprise-wide regulatory compliance remediation effort.
CPN is a Connecticut limited liability company that serves as the contractual vehicle through which AHT provides management services — including billing, coding, revenue cycle management, practice management consulting, credentialing support, administrative staffing functions, and information technology infrastructure (including deployment of the proprietary ArborConnect electronic health record and practice management platform) — to nine independently owned physician practices, each of which has entered into a separate MSA with CPN. AHT wholly owns and controls CPN.
Under the current MSA structure, each managed practice pays AHT, through CPN, a management fee equal to fifteen percent (15%) of collected net revenue. In fiscal year 2022 ("FY2022"), the aggregate collected net revenue across all nine managed practices totaled approximately $31.53 million, yielding aggregate management fee revenue to AHT of approximately $4.73 million (calculated as $31.53 million × 15%).
The critical compliance concern identified in this analysis is that several of the nine managed practices refer patients to AHT-owned ancillary services — specifically, in-office clinical laboratory services, diagnostic imaging services, and physical therapy services provided at AHT-branded clinic locations. These referrals create an unbroken chain of financial relationships between the referring physicians employed by or associated with the managed practices and AHT as the entity furnishing designated health services ("DHS"). This chain triggers the Stark Law's "indirect compensation arrangement" analysis under 42 C.F.R. § 411.354(c). Additionally, the percentage-of-revenue fee structure raises serious concerns under both the Stark Law indirect compensation arrangement provisions and the AKS management contracts safe harbor at 42 C.F.R. § 1001.952(d).
Our principal conclusions are as follows:
1. Stark Law — Indirect Compensation Arrangement. The CPN management services arrangements, as currently structured, likely constitute non-compliant indirect compensation arrangements under the Stark Law. An unbroken chain of financial relationships exists between the referring physicians in the managed practices and AHT, the entity furnishing DHS. The percentage-based management fee creates a structure in which aggregate compensation varies, or may be deemed to take into account, the volume or value of referrals, and AHT possesses actual knowledge of the referral relationship.
2. Stark Law — Exception Unavailability. The percentage-based fee formula presents a significant obstacle to satisfying the indirect compensation arrangement exception at 42 C.F.R. § 411.357(p), the fair market value exception at 42 C.F.R. § 411.357(l), and other potentially applicable Stark Law exceptions. The absence of an independent fair market value ("FMV") appraisal for the 15% management fee compounds this deficiency.
3. Anti-Kickback Statute — Safe Harbor Non-Compliance. The management contracts safe harbor at 42 C.F.R. § 1001.952(d) is not fully satisfied. Most critically, the 15% of collected net revenue fee is not "set in advance" within the meaning of the safe harbor, and the fee methodology does not adequately insulate compensation from variation with the volume or value of referrals.
4. Restructuring Recommended. We recommend prompt restructuring of the management fee formula, independent FMV substantiation, implementation of referral tracking and monitoring safeguards, compliance training, and evaluation of voluntary self-disclosure under the CMS Self-Referral Disclosure Protocol ("SRDP") and the OIG Self-Disclosure Protocol ("SDP").
The analysis and recommendations set forth below should be considered in conjunction with the companion memoranda prepared by C&H as part of this engagement, including the Stark Law Compliance Assessment Memorandum, the AKS Compliance Assessment Memorandum, and the Connecticut Referral Fee Prohibition Memorandum.
II. SCOPE AND METHODOLOGY
A. Scope of Review
This memorandum addresses all nine MSAs between AHT (through CPN) and the independently owned Hartford-area physician practices. The analysis is limited to the federal Stark Law and AKS implications of these arrangements and provides a brief overview of relevant Connecticut state law considerations. A detailed state-law analysis is contained in the companion Connecticut Referral Fee Prohibition Memorandum. This memorandum does not address compliance issues related to AHT's other contractual arrangements with physicians, hospitals, or other referral sources, which are covered in separate workstreams within the broader C&H engagement.
B. Documents Reviewed
In preparing this memorandum, C&H reviewed the following documents and materials:
1. Individual Management Services Agreements between CPN and each of the nine managed practices (executed copies and any amendments), specifically:
a. MSA with Hartford Primary Care Associates, P.C. (executed March 1, 2020) b. MSA with Farmington Valley Internal Medicine, LLC (executed April 15, 2020) c. MSA with Greater Hartford Cardiology Group, P.C. (executed June 1, 2020) d. MSA with Glastonbury Family Physicians, P.C. (executed July 1, 2020) e. MSA with West Hartford Orthopedic Associates, LLC (executed September 15, 2020) f. MSA with Avon Specialty Medical Group, P.C. (executed November 1, 2020) g. MSA with New Britain Gastroenterology Associates, P.C. (executed January 15, 2021) h. MSA with Wethersfield Women's Health, P.C. (executed March 1, 2021) i. MSA with Bloomfield Medical Partners, LLC (executed May 1, 2021)
2. CPN Operating Agreement and organizational documents, including the Articles of Organization filed with the Connecticut Secretary of State and all amendments thereto.
3. AHT financial records reflecting management fee revenue received from CPN and through CPN from each managed practice for FY2021 and FY2022.
4. Referral data and reports documenting patient referrals from the managed practices to AHT-owned ancillary services (clinical laboratory, diagnostic imaging, and physical therapy), extracted from the ArborConnect platform and AHT's billing and claims systems.
5. ArborConnect licensing agreements, platform documentation, integration specifications, and deployment records for the managed practices.
6. The Grayson Whitaker & Associates LLP compliance gap assessment report (GW-AHT-2022-Final, dated December 12, 2022), including supporting workpapers and appendices provided by the engagement principal, Carolyn Fitch.
7. AHT organizational chart showing the CPN reporting structure, ownership hierarchy, and management chain.
8. AHT FY2022 Medicare cost report data, payer mix reports, and ancillary services revenue breakdowns.
9. Halsted Accounting Group LLP FY2022 management letter (engagement partner: Ronald Desmond), containing observations regarding FMV substantiation requirements for certain AHT arrangements.
10. AHT Compliance Program documentation, including the Code of Conduct, policies and procedures, and compliance training records.
C. Interviews Conducted
C&H conducted interviews with the following individuals during the course of this review:
• Derek Huang, Chief Compliance Officer, AHT — interviewed on February 8, 2023 and March 14, 2023 regarding the compliance program structure, referral monitoring capabilities, and the Grayson Whitaker gap assessment findings.
• Patricia Yamamoto, General Counsel, AHT — interviewed on February 8, 2023 regarding the history and business rationale of the CPN arrangements, the MSA negotiation process, and the ArborConnect integration decisions.
• AHT Finance Team Members (Jennifer Caldwell, VP of Finance, and Robert Tran, Controller) — interviewed on February 22, 2023 regarding the management fee calculations, revenue flows, collection methodologies, and financial reporting for the CPN arrangements.
• Michael Szabo, CPN Operational Lead — interviewed on March 3, 2023 regarding the scope and delivery of management services to the nine managed practices, staffing allocations, ArborConnect deployment, and operational interactions with the managed practice physicians.
D. Legal Framework Applied
This memorandum applies the following legal authorities:
• The Stark Law, 42 U.S.C. § 1395nn, and its implementing regulations at 42 C.F.R. § 411.350 et seq.
• The Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), and the safe harbor regulations at 42 C.F.R. § 1001.952.
• The CMS Final Rule on Stark Law Modernization, 85 Fed. Reg. 77492 (Dec. 2, 2020), effective January 19, 2021 (the "2021 Stark Modernization Rule").
• The OIG/HHS Final Rule on AKS Safe Harbor Modernization, 85 Fed. Reg. 77684 (Dec. 2, 2020), effective January 19, 2021 (the "2021 AKS Safe Harbor Rule").
• Relevant OIG Advisory Opinions, Fraud Alerts, and Compliance Guidance publications, as cited throughout.
• Connecticut General Statutes § 20-7a(d), the state referral fee prohibition (addressed in summary form, with detailed analysis in the companion memorandum).
E. Cross-Reference to Companion Memoranda
This memorandum should be read in conjunction with the following companion memoranda prepared as part of the C&H engagement:
• Stark Law Compliance Assessment Memorandum (Matter No. 1010-00003-01)
• AKS Compliance Assessment Memorandum (Matter No. 1010-00003-02)
• Connecticut Referral Fee Prohibition Memorandum (Conn. Gen. Stat. § 20-7a(d)) (Matter No. 1010-00003-03)
• CMS Self-Referral Disclosure Protocol Evaluation Memorandum (Matter No. 1010-00003-04)
• OIG Self-Disclosure Protocol Evaluation Memorandum (Matter No. 1010-00003-05)
• Memorandum to Northbridge Valuation Advisors re: FMV Opinion Scope (transmitted separately by Miriam Calloway to Sandra Kilpatrick, May 10, 2023)
III. FACTUAL BACKGROUND
A. AHT Corporate and Operational Overview
Arbor Health Technologies Inc. ("AHT") is a Delaware corporation headquartered at 200 Concord Avenue, Suite 400, Cambridge, Massachusetts 02138 (EIN: 84-3291057; NPI: 1497253810). AHT operates a multi-state healthcare platform that combines clinical operations with health information technology.
On the clinical side, AHT operates twenty-three (23) outpatient clinics (branded as "Arbor Health Clinics") across four states: fourteen (14) in Massachusetts, four (4) in Connecticut, three (3) in Rhode Island, and two (2) in New Hampshire. These clinics provide primary care, specialty care in cardiology, orthopedics, and gastroenterology, and ancillary services including in-office clinical laboratory testing, diagnostic imaging (MRI, CT, ultrasound, and X-ray), and physical therapy. The ancillary services are operated directly by AHT and are integrated into AHT's clinic operations. AHT bills Medicare, Medicaid, and commercial payers for these ancillary services under AHT's provider numbers.
On the technology side, AHT develops and licenses ArborConnect, a proprietary electronic health record ("EHR") and practice management software-as-a-service ("SaaS") platform. ArborConnect is both deployed internally across AHT's own clinics and licensed to external physician practices. As of the end of FY2022, forty-two (42) external physician practices — distinct from the nine CPN managed practices that are the subject of this memorandum — maintained active ArborConnect subscription licenses, generating approximately $8.9 million in annual subscription revenue. The ArborConnect platform includes clinical documentation, order entry, scheduling, billing, coding, revenue cycle management, analytics, and population health management modules.
In FY2022, AHT reported net revenue of approximately $214.3 million, of which approximately sixty-one percent (61%), or $130.7 million, was derived from Medicare and Medicaid (federal health care programs), and approximately thirty-nine percent (39%), or $83.6 million, was derived from commercial payer contracts. This substantial federal healthcare program revenue places virtually all of AHT's clinical operations and referral relationships squarely within the scope of both the Stark Law and the AKS.
AHT is a portfolio company of Ridgeline Capital Partners Fund IV, L.P. ("Ridgeline Fund IV"), a healthcare-focused private equity fund managed by Ridgeline Capital Advisors LLC. Ridgeline Fund IV acquired a seventy-two percent (72%) equity stake in AHT in January 2021 for approximately $185 million. Two Ridgeline designees serve on the AHT Board of Directors: Claudia Sorrento, Managing Director of Ridgeline Capital Advisors LLC, and Marcus Whitmore, Principal of Ridgeline Capital Advisors LLC. The remaining equity is held by AHT management and founder stockholders. As discussed in Section VIII.H below, Ridgeline Capital has indicated an interest in a potential exit or sale process anticipated in late 2024, which heightens the urgency of compliance remediation to ensure the CPN arrangements can withstand due diligence scrutiny.
AHT employs one hundred forty-seven (147) physicians as W-2 employees and maintains thirty-eight (38) independent contractor and medical director arrangements with non-employee physicians. AHT's total employee headcount is approximately 1,340 across clinical, administrative, and technology functions.
B. ConnectiCare Physicians Network, LLC — Structure and Operations
ConnectiCare Physicians Network, LLC ("CPN") is a Connecticut limited liability company located at 55 Asylum Street, 7th Floor, Hartford, Connecticut 06103. CPN was formed in 2019 as a purpose-built entity to serve as the contractual vehicle through which AHT provides management services to independently owned physician practices in Strathmore Mutual Insurance, Connecticut metropolitan area. CPN does not directly employ any physicians and does not itself furnish clinical services to patients.
CPN is wholly owned and controlled by AHT. Under the CPN Operating Agreement, AHT is the sole member and manager of CPN. AHT appoints all officers of CPN, directs all operational and strategic decisions, and receives all distributable earnings of CPN. CPN's financial results are consolidated into AHT's financial statements. For all practical purposes, CPN functions as an operating division of AHT, structured as a separate legal entity for contracting convenience and state-law compliance purposes. The CPN Operational Lead, Michael Szabo, reports to AHT's Vice President of Practice Operations, who in turn reports to AHT's Chief Operating Officer.
The management services provided by AHT through CPN to the managed practices include the following:
• Billing and Coding Services. CPN, utilizing AHT's centralized revenue cycle management team, performs professional fee billing and coding for each managed practice, including charge capture, claims submission, denial management, and appeals processing.
• Revenue Cycle Management. Beyond billing and coding, CPN provides comprehensive revenue cycle oversight, including payer contract analysis, fee schedule optimization, patient collections, accounts receivable management, and financial reporting.
• Practice Management and Operational Consulting. CPN provides strategic and operational consulting to the managed practices, including workflow optimization, staffing analysis, patient access and scheduling optimization, and quality improvement support.
• IT Infrastructure and Support. CPN deploys and maintains AHT's proprietary ArborConnect EHR and practice management platform at each managed practice site. This includes hardware provisioning, software licensing, implementation, training, ongoing technical support, system upgrades, data migration, and interoperability configuration. CPN also provides general IT infrastructure support, including network management, cybersecurity, and HIPAA-compliant data storage.
• Credentialing Support. CPN assists managed practice physicians with payer credentialing, re-credentialing, and privileging processes.
• Administrative Staffing Functions. CPN provides or coordinates certain administrative staffing functions for the managed practices, including front-desk staffing support, medical records management, and compliance administrative assistance.
Each of the nine managed practices has entered into a separate, individually negotiated MSA with CPN (with AHT as the effective counterparty). The managed practices are independently owned professional entities — organized as professional corporations ("P.C.") or limited liability companies ("LLC") under Connecticut law — and the physicians practicing within these entities are not W-2 employees of AHT. The managed practice physicians retain full clinical autonomy and independent medical judgment in patient care decisions, and the MSAs contain provisions expressly preserving this clinical independence.
C. Management Fee Structure
Under each of the nine MSAs, the managed practice pays CPN (and, through CPN, AHT) a management fee equal to fifteen percent (15%) of the managed practice's collected net revenue. "Collected net revenue" is defined in the MSAs as the gross revenue actually collected by the managed practice from all sources (including Medicare, Medicaid, commercial payers, and patient self-pay) during each applicable measurement period, net of refunds, contractual adjustments, and bad debt write-offs.
The management fee is calculated and invoiced on a monthly basis, based on actual collections during the preceding calendar month. Payment is due within thirty (30) days of invoice. In practice, CPN's revenue cycle management team calculates the collected net revenue for each managed practice and generates the monthly invoice, which is reviewed and approved by the CPN Operational Lead before distribution to the managed practice.
In FY2022, the aggregate collected net revenue across all nine managed practices was approximately $31.53 million, and the aggregate management fee revenue paid to AHT through CPN was approximately $4.73 million (i.e., $31.53 million × 15%). The management fee revenue is recorded in AHT's financial statements as management services revenue within the CPN operating segment.
The percentage-based fee structure is a central focus of this analysis because it means that the management fee fluctuates directly and proportionally with the managed practices' revenue. To the extent that a managed practice's revenue includes collections attributable to services ordered by or referred by the managed practice's physicians — including referrals to AHT-owned ancillary services — the management fee varies with that revenue. This creates a structural linkage between the management fee and referral activity that is highly relevant to both the Stark Law indirect compensation arrangement analysis and the AKS management contracts safe harbor analysis.
D. Referral Patterns — Managed Practices to AHT Ancillary Services
The factual predicate that elevates the CPN arrangements from a routine management services relationship to a significant regulatory concern is the referral of patients by managed practice physicians to AHT-owned ancillary services for designated health services. Several of the nine managed practices regularly refer patients to AHT clinic locations for the following categories of DHS:
• In-office clinical laboratory services provided at AHT Arbor Health Clinic locations in Hartford, West Hartford, Farmington, and Glastonbury. These services include routine blood work, urinalysis, metabolic panels, lipid panels, and other CLIA-waived and moderate-complexity laboratory testing.
• Diagnostic imaging services provided at AHT Arbor Health Clinic locations, including MRI, CT, ultrasound, X-ray, and fluoroscopy services.
• Physical therapy services provided at AHT Arbor Health Clinic locations, including evaluation and management of musculoskeletal conditions, post-surgical rehabilitation, and sports medicine rehabilitation.
Each of these service categories constitutes "designated health services" within the meaning of the Stark Law. See 42 C.F.R. § 411.351 (defining DHS to include, inter alia, clinical laboratory services, radiology and certain other imaging services, and physical therapy services).
These referrals generate revenue for AHT that is separate from and in addition to the management fee revenue. AHT bills Medicare, Medicaid, and commercial payers for these ancillary services under AHT's provider numbers. The referring physician — i.e., the managed practice physician who orders or refers the patient for the ancillary service — is identified on the claim as the ordering or referring provider.
Based on the referral data extracted from the ArborConnect platform and AHT's billing systems, the aggregate referral activity from the nine managed practices to AHT-owned ancillary services in FY2022 was as follows:
These referral volumes are not uniform across the nine managed practices. The practices with the highest referral volumes to AHT ancillary services are Greater Hartford Cardiology Group, P.C. (primarily imaging referrals), West Hartford Orthopedic Associates, LLC (imaging and physical therapy referrals), and Hartford Primary Care Associates, P.C. (laboratory and imaging referrals). A detailed breakdown by practice is provided in Appendix B.
Notably, the $5.325 million in ancillary services revenue generated by referrals from managed practice physicians exceeds the $4.73 million in management fee revenue that AHT receives from the same managed practices. This revenue dynamic underscores the economic significance of the referral relationship and its potential to influence the incentive structure of the arrangements.
It is also important to note that the ArborConnect platform, which is deployed at each managed practice as part of the management services, includes order entry functionality that may facilitate the channeling of referrals to AHT ancillary services. Specifically, the platform's referral management module contains pre-populated provider directories and default referral routing settings that may, depending on configuration, prioritize AHT-owned ancillary service locations. Michael Szabo confirmed in his interview that the default referral destinations within ArborConnect at managed practice sites are configured to include AHT clinic locations, though he stated that managed practice physicians are free to override these defaults and refer to any provider. The implications of this integration are analyzed further in Section VI.B.
The managed practice physicians are "referring physicians" within the meaning of the Stark Law, 42 U.S.C. § 1395nn(h)(7), to the extent they make referrals for DHS, and AHT is the "entity" furnishing DHS. The question, therefore, is whether a "financial relationship" — specifically, an indirect compensation arrangement — exists between these referring physicians and AHT that would trigger the Stark Law prohibition.
E. Grayson Whitaker Gap Assessment Findings
In October 2022, AHT retained Grayson Whitaker & Associates LLP, a health care regulatory consulting firm, to conduct a comprehensive compliance gap assessment of AHT's physician arrangements, referral relationships, and operational compliance infrastructure. The engagement principal was Carolyn Fitch, a partner at Grayson Whitaker with extensive experience in health care regulatory compliance.
Grayson Whitaker delivered its final gap assessment report (Report No. GW-AHT-2022-Final) on December 12, 2022. The report identified a total of one hundred twelve (112) physician arrangements across AHT's operations, of which seventeen (17) were classified as "high risk" based on a multi-factor scoring methodology that considered the presence of referral relationships, compensation methodology, FMV documentation, contractual safeguards, and regulatory exposure. The CPN management services arrangements were among the seventeen high-risk arrangements identified.
With respect to the CPN arrangements specifically, the Grayson Whitaker report flagged the following concerns:
1. Percentage-Based Fee Structure Linked to Referral-Influenced Revenue. The 15% of collected net revenue fee structure creates a direct relationship between AHT's management fee revenue and the managed practices' overall collections, which include collections influenced by referral activity to AHT-owned ancillary services.
2. Absence of Documented FMV Analysis. The report noted that AHT had no documentation in its files — no independent appraisal, no internal memorandum, no market benchmarking study — establishing that the 15% management fee rate represents fair market value for the scope of management services actually provided by CPN.
3. Absence of Referral Tracking Safeguards. The MSAs contain no provisions restricting, monitoring, or tracking referrals from managed practice physicians to AHT-owned ancillary services. No compliance certifications, anti-referral covenants, or independent medical judgment representations are included in the current MSA templates.
4. Potential Stark Law Indirect Compensation Arrangement Issues. The report specifically identified the risk that the chain of financial relationships — from AHT through CPN to the managed practices and then to the referring physicians — could constitute an "indirect compensation arrangement" under 42 C.F.R. § 411.354(c), with the percentage-based fee varying with the volume or value of referrals.
The Grayson Whitaker report recommended that AHT engage experienced health care regulatory counsel to conduct a detailed legal analysis of the CPN arrangements under the Stark Law and AKS and to develop a remediation plan. That recommendation is the genesis of the present memorandum.
IV. STARK LAW ANALYSIS
A. Overview of Stark Law Prohibition and Referral Relationship
The Stark Law, formally the Physician Self-Referral Law, prohibits a physician from making a "referral" for "designated health services" to an entity with which the physician (or an immediate family member of the physician) has a "financial relationship," unless an exception applies. 42 U.S.C. § 1395nn(a)(1). If a referral is made in violation of the Stark Law, the entity furnishing the DHS may not present or cause to be presented a claim to Medicare (or any other payer) for the referred services, and any amounts collected must be refunded. 42 U.S.C. § 1395nn(a)(1)(B), (g)(1)-(2). The Stark Law is a strict liability statute — no intent to violate the law is required, and even inadvertent violations trigger its prohibitions and penalties.
A "financial relationship" under the Stark Law includes both (a) an ownership or investment interest in the entity furnishing DHS and (b) a compensation arrangement (direct or indirect) between the referring physician and the entity. 42 U.S.C. § 1395nn(a)(2); 42 C.F.R. § 411.354(a). The DHS categories relevant to the CPN arrangements include clinical laboratory services (42 C.F.R. § 411.351), radiology and certain other imaging services (including MRI, CT, and ultrasound), and physical therapy services, all of which are enumerated DHS categories.
In the CPN context, the "referring physicians" are the physicians employed by or associated with the nine managed practices who order or refer patients for clinical laboratory, diagnostic imaging, or physical therapy services. The "entity furnishing DHS" is AHT, which operates the Arbor Health Clinics where these ancillary services are provided and which bills Medicare and other federal health care programs for these services under AHT's provider identification numbers.
The central question in this analysis is whether a "financial relationship" exists between these referring physicians and AHT. As set forth below, we conclude that the CPN management services arrangements create an "indirect compensation arrangement" under 42 C.F.R. § 411.354(c) between the referring physicians and AHT, and that this indirect compensation arrangement does not currently satisfy any applicable Stark Law exception.
B. Direct vs. Indirect Compensation Arrangement Analysis
The Stark Law distinguishes between direct and indirect compensation arrangements, and the distinction is critical here.
Direct Compensation Arrangement. A direct compensation arrangement exists when there is a compensation arrangement between the referring physician (or the physician organization in which the referring physician is a member or employee) and the entity furnishing DHS, without any intervening persons or entities. 42 C.F.R. § 411.354(a)(1). In the CPN context, the managed practice physicians do not have any direct employment, consulting, medical directorship, or other contractual arrangement with AHT. The MSAs are between CPN (as AHT's subsidiary) and the managed practice entities (the P.C. or LLC), not individual physicians. Therefore, a direct compensation arrangement between the referring physicians and AHT likely does not exist.
We note, however, that the managed practice entities — as the contracting counterparties under the MSAs — do have a direct compensation arrangement with CPN (and, through CPN, with AHT). If the managed practice entity is a "physician organization" as defined under 42 C.F.R. § 411.351, and the referring physician is a member of or employed by that physician organization, then CMS could potentially characterize the MSA relationship as creating a direct compensation arrangement between the physician organization and AHT. However, the more natural and analytically appropriate framework for this multi-layered relationship is the indirect compensation arrangement analysis, which we address below.
Indirect Compensation Arrangement. An indirect compensation arrangement exists when three conditions are met:
(1) Between the referring physician (or a member of the referring physician's immediate family) and the entity furnishing DHS, there exists an unbroken chain of any number (but not fewer than one) of persons or entities that have financial relationships (as defined at 42 C.F.R. § 411.354(a)) between them (i.e., each party in the chain has a financial relationship with the party adjacent to it in the chain);
(2) The referring physician (or immediate family member) receives aggregate compensation from the person or entity in the chain with which the referring physician (or immediate family member) has a direct financial relationship that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS; and
(3) The entity furnishing DHS has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician (or immediate family member) receives aggregate compensation that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS.
42 C.F.R. § 411.354(c)(2). Each of these three elements is analyzed below as applied to the CPN arrangements.
C. Unbroken Chain of Financial Relationships
The first element of the indirect compensation arrangement test requires an unbroken chain of financial relationships between the referring physician and the entity furnishing DHS. We identify the following chain:
Link 1: AHT → CPN. AHT is the entity furnishing DHS through its clinic-based ancillary services. CPN is a Connecticut LLC wholly owned and controlled by AHT. The relationship between AHT and CPN constitutes both an ownership/investment interest (AHT is the sole member of CPN) and a compensation arrangement (management fee revenue flows from the managed practices through CPN to AHT). This link constitutes a "financial relationship" under 42 C.F.R. § 411.354(a).
Link 2: CPN → Managed Practice Entity. CPN has entered into an MSA with each of the nine managed practice entities. Under each MSA, CPN provides management services to the managed practice, and the managed practice pays CPN a management fee equal to 15% of collected net revenue. This constitutes a "compensation arrangement" under 42 C.F.R. § 411.354(c) — specifically, the exchange of remuneration (management services in one direction, management fees in the other) between two parties. This link constitutes a "financial relationship."
Link 3: Managed Practice Entity → Referring Physician. Each managed practice entity compensates its physicians through employment agreements, shareholder/partner distributions, profit-sharing arrangements, or other compensation mechanisms. The physicians practicing within each managed practice entity receive compensation from the practice entity for their professional services. This constitutes a "compensation arrangement" between the managed practice entity and the referring physician, and therefore a "financial relationship" under the Stark Law.
Taken together, these three links form an unbroken chain of financial relationships running from AHT (entity furnishing DHS) through CPN and the managed practice entities to the referring physicians. Each link in the chain involves a "financial relationship" as defined under 42 C.F.R. § 411.354(a). The first element of the indirect compensation arrangement test is therefore satisfied.
The following diagram illustrates the chain:
AHT (Entity Furnishing DHS) → [ownership/compensation] → CPN → [compensation/MSA] → Managed Practice Entity → [compensation/employment] → Referring Physician
↑ DHS Referrals flow back from Referring Physician to AHT ↑
A more detailed visual representation is provided in Appendix C.
D. Does Aggregate Compensation Vary with Volume or Value of Referrals?
The second element of the indirect compensation arrangement test requires that the referring physician receive "aggregate compensation" from the person or entity in the chain with which the referring physician has a direct financial relationship (here, the managed practice entity) that "varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS." 42 C.F.R. § 411.354(c)(2)(ii).
This element is the most analytically complex and the most consequential for the CPN arrangements. The analysis proceeds on two levels: (1) whether the management fee paid by the managed practice to CPN/AHT varies with the volume or value of DHS referrals, and (2) whether the compensation received by the referring physician from the managed practice entity varies with, or takes into account, such referrals.
1. Management Fee Variation with Referral Volume
The 15% of collected net revenue management fee is directly proportional to the managed practice's total collections. If referrals from managed practice physicians to AHT-owned ancillary services increase, and if those referrals generate downstream revenue that flows back to the managed practice in any form — or if the increased referral activity is correlated with increased patient volume or higher-acuity services at the managed practice that increase the practice's own collections — then the management fee to AHT increases correspondingly. Even if the referral revenue does not flow directly through the managed practice's collections (because AHT bills for and collects the ancillary services revenue separately), the referral relationship may indirectly influence the managed practice's revenue. For example, a managed practice that refers patients for AHT laboratory services may see increased patient retention, increased visit frequency, or increased revenue from evaluation and management services associated with the laboratory referrals.
Moreover, the structural reality is that AHT has a financial interest in both the management fee (which increases with managed practice revenue) and the ancillary services revenue (which is generated by referrals from managed practice physicians). This dual revenue stream creates an incentive for AHT to encourage referrals and creates a circumstance in which the overall economic relationship between the parties takes into account referral activity.
2. Physician Compensation Variation
The more technically precise question under the second element is whether the referring physician's aggregate compensation from the managed practice entity varies with, or takes into account, the volume or value of referrals. This depends on how each managed practice compensates its physicians. If physicians are compensated based on a share of practice profits, a percentage of collections, a productivity-based formula (wRVU-based or collection-based), or any other methodology tied to practice revenue, then the management fee — which reduces the practice's net income — becomes a factor that links physician compensation to the management fee and, by extension, to referral activity.
Specifically, if a managed practice physician's compensation increases when the practice's revenue increases, and if the management fee (which is deducted from revenue) is lower as a percentage of total revenue when referral-related activities increase certain revenue components (or higher when they decrease), the physician's compensation can be said to be influenced by the referral dynamic, even if the influence is attenuated. Under the Stark Law's broad "takes into account" language, even indirect or attenuated linkages may be sufficient to satisfy this element.
3. 2021 Stark Modernization Rule Considerations
The 2021 Stark Modernization Rule (85 Fed. Reg. 77492) introduced important revisions to the indirect compensation arrangement framework. CMS refined the definition to clarify that the "varies with, or takes into account" standard focuses on the physician's aggregate compensation from the entity with which the physician has a direct financial relationship — here, the managed practice entity, not AHT. CMS also introduced a distinction between "unit-based compensation" and other forms of compensation, clarifying that certain unit-based compensation arrangements — such as per-service, per-unit, per-patient, or percentage-based formulas — are deemed not to take into account the volume or value of referrals if they meet certain conditions, including that the compensation is FMV and does not vary during the term of the arrangement based on referrals. See 42 C.F.R. § 411.354(d)(2)-(3).
However, the unit-based compensation safe harbor in the Modernization Rule is designed primarily for direct compensation arrangements between physicians and entities, not for the multi-layered structure present in the CPN arrangements. The relevant question for the indirect compensation arrangement analysis remains whether the physician's aggregate compensation from the managed practice "varies with, or takes into account" referral volume to AHT. The Modernization Rule did not eliminate the risk that a percentage-based management fee — which creates a systematic linkage between practice revenue and AHT's economic benefit — satisfies the "takes into account" standard.
CMS's preamble to the Modernization Rule acknowledged that the agency has long been concerned about percentage-based compensation in the context of referral relationships, and stated that "compensation based on a percentage of revenues raises concerns because it may increase as the volume or value of a physician's referrals increases." 85 Fed. Reg. at 77524. While CMS was discussing the "set in advance" requirement in the context of exceptions rather than the threshold indirect compensation arrangement test, the underlying logic is directly applicable here.
4. Conclusion on Volume/Value Element
We conclude that the second element of the indirect compensation arrangement test is likely satisfied in the CPN context. The percentage-based management fee creates a structural linkage between AHT's compensation and managed practice revenue that is influenced, directly or indirectly, by referral activity. To the extent that managed practice physicians are compensated in a manner that is affected by the management fee and overall practice revenue, their aggregate compensation "varies with, or takes into account" the volume or value of referrals to AHT. Even under the most favorable reading of the Modernization Rule, the current fee structure does not provide sufficient insulation to prevent this conclusion.
E. Knowledge Requirement
The third element of the indirect compensation arrangement test requires that the entity furnishing DHS (AHT) have "actual knowledge of, or act[] in reckless disregard or deliberate ignorance of, the fact that the referring physician receives aggregate compensation that varies with, or takes into account, the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS." 42 C.F.R. § 411.354(c)(2)(iii).
This element is clearly satisfied in the CPN context. AHT has actual knowledge that managed practice physicians refer patients to AHT-owned ancillary services. AHT operates the ancillary services, employs or contracts with the clinical personnel who provide the services, bills Medicare and other payers for the services, and identifies the managed practice physicians as the ordering or referring providers on the claims. AHT has access to comprehensive referral data through the ArborConnect platform, which is deployed at both the managed practice sites and the AHT ancillary service locations and which tracks orders, referrals, and clinical workflows across the entire network.
Furthermore, AHT is aware of the percentage-based management fee structure (AHT designed and negotiated the MSA terms), knows that the management fee varies with managed practice revenue, and has access to data showing the referral patterns from managed practices to AHT ancillary services. The Grayson Whitaker gap assessment report — which AHT commissioned and received — explicitly identified the referral-linked revenue concern. AHT therefore has actual knowledge of all the facts necessary to satisfy the knowledge element. There is no plausible argument that AHT lacks knowledge of, or is in reckless disregard or deliberate ignorance of, the relevant facts.
F. Conclusion on Indirect Compensation Arrangement
Based on the foregoing analysis, we conclude that the CPN management services arrangements likely constitute "indirect compensation arrangements" under 42 C.F.R. § 411.354(c)(2) as to each managed practice physician who makes referrals to AHT for DHS. All three elements of the test are satisfied:
1. An unbroken chain of financial relationships exists between each referring physician and AHT (through the managed practice entity and CPN).
2. The referring physicians receive aggregate compensation from their managed practice entities that varies with, or takes into account, the volume or value of referrals to AHT, due to the percentage-based management fee structure and the managed practices' compensation methodologies.
3. AHT has actual knowledge of the referral relationship and the compensation dynamics.
The existence of an indirect compensation arrangement means that AHT's furnishing of DHS pursuant to referrals from managed practice physicians is prohibited under the Stark Law, 42 U.S.C. § 1395nn(a)(1), unless an applicable exception is satisfied. Any claims submitted to Medicare for DHS referred by managed practice physicians during the period in which a non-excepted indirect compensation arrangement existed are potentially in violation of the Stark Law and subject to refund, denial, and civil monetary penalties. See 42 U.S.C. § 1395nn(g); 42 C.F.R. § 411.353.
G. Applicable Stark Law Exceptions
Having concluded that the CPN arrangements likely constitute indirect compensation arrangements under the Stark Law, we next analyze whether any available exception can shelter these arrangements from the Stark Law prohibition.
1. Indirect Compensation Arrangement Exception — 42 C.F.R. § 411.357(p)
The regulations provide a specific exception for indirect compensation arrangements at 42 C.F.R. § 411.357(p). To qualify, the arrangement must satisfy each of the following requirements:
(a) The compensation received by the referring physician under the arrangement is fair market value for services and items actually provided, not taking into account the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS.
(b) The compensation is not determined in a manner that takes into account the volume or value of referrals or other business generated by the referring physician for the entity furnishing DHS.
(c) The arrangement is set out in writing, signed by the parties, and specifies the services covered by the arrangement.
(d) The arrangement covers identifiable items or services, is commercially reasonable even if no referrals were made, and serves a legitimate business purpose.
Application to the CPN Arrangements:
Fair Market Value. The 15% management fee rate has not been substantiated by an independent FMV appraisal. As noted in the Grayson Whitaker gap assessment report and confirmed through our review of AHT's files, AHT has no documentation — no formal appraisal, no internal benchmarking analysis, no market comparable study — establishing that a 15% of collected net revenue management fee represents fair market value for the scope of management services provided by CPN to the managed practices.
AHT retained Northbridge Valuation Advisors LLC in February 2023, with Sandra Kilpatrick as the engagement principal, to prepare FMV opinions for certain AHT physician compensation arrangements. However, the CPN management fee has not yet been included in the Northbridge engagement scope. As discussed in Section VIII.B below, we recommend that the CPN management fee be added to the Northbridge valuation scope immediately.
Without FMV substantiation, AHT cannot demonstrate compliance with this element of the exception. Moreover, even if an FMV appraisal is obtained, the appraisal must support the specific 15% rate relative to the specific scope of services provided. Industry benchmarks for physician practice management fees vary widely, typically ranging from 4% to 15% of collections depending on the breadth and intensity of services provided. The 15% rate employed in the CPN arrangements is at the upper end of this range and will require robust justification based on the comprehensive scope of services that CPN actually provides.
Volume or Value. This element presents the most significant obstacle. As analyzed in Section IV.D, the percentage-of-collected-net-revenue fee methodology creates a compensation structure that varies with, or may be deemed to take into account, the volume or value of referrals. The management fee increases as managed practice revenue increases, and managed practice revenue may be influenced by referral patterns to AHT-owned ancillary services. Under the Stark Law's broad interpretation of "takes into account," this methodology is likely viewed as inconsistent with the exception requirement.
CMS has stated that percentage-based compensation is not per se impermissible under the Stark Law, but has repeatedly emphasized that such compensation raises heightened concerns when there is a referral relationship between the parties. In the 2021 Stark Modernization Rule, CMS declined to create a blanket safe harbor for percentage-based compensation and stated that the permissibility of such arrangements depends on the specific facts and circumstances, including whether the compensation is at FMV and whether the percentage methodology is structured to avoid correlation with referral activity. See 85 Fed. Reg. at 77523-25. In the CPN context, where there is a demonstrated referral flow from managed practice physicians to AHT ancillary services, the percentage-based methodology is particularly vulnerable to challenge.
Writing Requirement. The MSAs are in writing and signed by authorized representatives of CPN and the managed practice entities. This element appears to be satisfied, subject to confirmation that all MSAs have been properly executed and that any amendments or modifications are also in writing.
Commercial Reasonableness. The management services provided by CPN — billing, coding, revenue cycle management, practice management, IT infrastructure, credentialing, and administrative staffing — are genuine services that independently owned physician practices commonly need and obtain through management services arrangements. The arrangement appears to be commercially reasonable on its face, in the sense that the managed practices have a legitimate business need for these services and the arrangement serves an identifiable business purpose independent of any referral relationship. However, a formal commercial reasonableness determination should be documented, ideally as part of the Northbridge FMV engagement.
Assessment. The indirect compensation arrangement exception at 42 C.F.R. § 411.357(p) is likely not satisfied under the current CPN fee structure. The principal deficiencies are (1) the absence of FMV substantiation for the 15% management fee, and (2) the percentage-based fee methodology that may be deemed to take into account the volume or value of referrals. Even if the FMV deficiency is cured through a Northbridge appraisal, the structural concern regarding the percentage-based methodology remains unless the fee formula is restructured.
2. Fair Market Value Exception — 42 C.F.R. § 411.357(l)
The fair market value exception provides that compensation resulting from an arrangement between an entity and a physician (or a group of physicians) for the provision of items or services is not a "compensation arrangement" for Stark Law purposes if the arrangement meets certain requirements, including that the arrangement is set out in writing, the compensation is set in advance, consistent with FMV, and does not take into account the volume or value of referrals or other business generated between the parties. 42 C.F.R. § 411.357(l).
This exception presents the same obstacles as the indirect compensation arrangement exception. The "set in advance" requirement is inconsistent with a percentage-based fee that fluctuates with actual collections. CMS has interpreted "set in advance" to mean that the compensation terms are established in the agreement before the services are provided, such that the aggregate compensation can be objectively determined at the time of contracting. 42 C.F.R. § 411.354(d)(1). While a fixed percentage could be argued to be "set in advance" in the sense that the percentage rate (15%) is fixed, CMS has indicated that a percentage-of-revenue methodology may not satisfy the "set in advance" requirement when the underlying revenue base is variable and influenced by referral activity. Moreover, the FMV requirement remains unmet in the absence of an independent appraisal.
Assessment. The fair market value exception at 42 C.F.R. § 411.357(l) is likely not satisfied for the same reasons that the indirect compensation arrangement exception is not satisfied.
3. Value-Based Enterprise Exceptions — 42 C.F.R. § 411.357(aa)
The 2021 Stark Modernization Rule introduced new exceptions for "value-based arrangements" between participants in a "value-based enterprise." 42 C.F.R. § 411.357(aa). A "value-based enterprise" is defined as two or more participants collaborating to achieve at least one value-based purpose. A "value-based purpose" includes coordinating and managing the care of a target patient population, improving the quality of care for a target patient population, appropriately reducing costs to or growth in expenditures of payors without reducing the quality of care for a target patient population, or transitioning from health care delivery and payment mechanisms based on the volume of items and services provided to mechanisms based on the quality of care and control of costs. 42 C.F.R. § 411.351.
For this exception to apply, the CPN arrangement would need to be restructured as a bona fide "value-based arrangement" between AHT and the managed practices, operating within a "value-based enterprise" with a defined target patient population and at least one value-based purpose. The current MSAs do not contain value-based arrangement terms. The management services relationship is structured as a traditional fee-for-service management arrangement, not as a value-based collaboration. There is no defined target patient population, no quality metrics, no cost-efficiency targets, and no shared accountability for care outcomes.
Preliminary Assessment. The value-based enterprise exceptions are unlikely to apply to the CPN arrangements in their current form. While it is theoretically possible to restructure the arrangements to qualify as value-based arrangements — for example, by defining a target patient population (e.g., the Medicare beneficiaries served by the managed practices), establishing shared quality and cost targets, and restructuring the fee formula to incorporate value-based components — such a restructuring would represent a fundamental reconceptualization of the CPN model and would require extensive negotiation with the managed practices. We do not recommend pursuing this avenue as the primary compliance remedy, though it may merit consideration as a longer-term strategic option, particularly if AHT intends to develop a clinically integrated network or accountable care organization model in Connecticut.
H. Stark Law Risk Summary for CPN Arrangements
In summary, the CPN management services arrangements present significant Stark Law risk. The arrangements constitute indirect compensation arrangements under 42 C.F.R. § 411.354(c) as to each managed practice physician who refers patients for DHS to AHT-owned ancillary services. Referrals from these physicians to AHT are potentially prohibited under 42 U.S.C. § 1395nn(a)(1) because no applicable Stark Law exception is fully satisfied under the current arrangement structure.
The consequences of Stark Law non-compliance are severe. Claims for DHS furnished pursuant to non-compliant referrals must be refunded to Medicare, and AHT faces exposure to civil monetary penalties of up to $15,000 per service, as well as potential treble damages under the False Claims Act, 31 U.S.C. § 3729 et seq., to the extent that AHT knowingly submitted claims for DHS in violation of the Stark Law. See 42 U.S.C. § 1395nn(g); United States ex rel. Drakeford v. Tuomey, 792 F.3d 364 (4th Cir. 2015) (affirming $237 million False Claims Act judgment based on Stark Law violations). Additionally, AHT could face exclusion from federal health care programs, which would be existential given that Medicare and Medicaid represent 61% of AHT's net revenue.
The primary obstacle to exception compliance is the 15% percentage-based management fee, which creates a compensation methodology that varies with, or takes into account, the volume or value of referrals. Restructuring the fee formula, as recommended in Section VIII.A, is the essential first step toward Stark Law compliance.
V. ANTI-KICKBACK STATUTE ANALYSIS
A. Overview of AKS Prohibition
The federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b), prohibits any person from knowingly and willfully offering, paying, soliciting, or receiving any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward any person for referring an individual for the furnishing of, or recommending the purchase, lease, or ordering of, any item or service for which payment may be made in whole or in part under a federal health care program (including Medicare and Medicaid).
The term "remuneration" is broadly defined to include "transfers of anything of value." 42 U.S.C. § 1320a-7a(i)(6); see also United States v. Greber, 760 F.2d 68, 69 (3d Cir. 1985). Courts have consistently applied the "one purpose" test, holding that if even one purpose of the remuneration is to induce or reward referrals, the AKS is violated, regardless of whether there are other legitimate purposes. See, e.g., United States v. Kats, 871 F.2d 105 (9th Cir. 1989); United States v. McClatchey, 217 F.3d 823, 834-35 (10th Cir. 2000).
Violations of the AKS are felonies, punishable by imprisonment of up to ten years and fines of up to $100,000 per violation, as well as exclusion from participation in federal health care programs. 42 U.S.C. § 1320a-7b(b); 42 U.S.C. § 1320a-7(b)(7). The AKS also provides the basis for civil monetary penalties under 42 U.S.C. § 1320a-7a and for liability under the False Claims Act, 31 U.S.C. § 3729, because a claim resulting from a kickback arrangement is deemed a "false or fraudulent claim" under 42 U.S.C. § 1320a-7b(g).
Unlike the Stark Law, the AKS requires scienter — the statute applies only when remuneration is offered, paid, solicited, or received "knowingly and willfully." However, courts and enforcement authorities have interpreted this standard broadly, and the required mental state does not require specific knowledge that the conduct violates the AKS; rather, it requires only that the defendant acted with knowledge that the conduct was unlawful in some general sense. See 42 U.S.C. § 1320a-7b(h) (providing that a person need not have actual knowledge of the AKS or specific intent to commit a violation).
The AKS applies to the CPN arrangements because AHT's net revenue includes $130.7 million in Medicare and Medicaid revenue (61% of $214.3 million in FY2022), and the managed practice physicians may also generate referrals for items and services reimbursable under federal health care programs. The management services provided by AHT through CPN, and the management fees paid by the managed practices to CPN/AHT, constitute "remuneration" within the meaning of the AKS. The question

MEMORANDUM

MATTER NO.: 1010-00003

I. EXECUTIVE SUMMARY

II. SCOPE AND METHODOLOGY

III. FACTUAL BACKGROUND

IV. STARK LAW ANALYSIS

V. ANTI-KICKBACK STATUTE ANALYSIS

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