MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
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: April 10, 2023
RE: Post-Acquisition Compliance Gap Assessment — Lakeview Medical Associates, P.C. Legacy Arrangements
MATTER NO.: 1010-00003
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I. Executive Summary
Arbor Health Technologies Inc. ("AHT") has engaged Calderwood & Harkness LLP to conduct a comprehensive compliance gap assessment of the physician compensation arrangements, medical director agreements, and office leases assumed by AHT in connection with its acquisition of substantially all assets of Lakeview Medical Associates, P.C. ("Lakeview"). The purpose of this memorandum is to identify specific compliance gaps arising under the federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b) (the "AKS"), and the Physician Self-Referral Law, 42 U.S.C. § 1395nn (the "Stark Law"), and to set forth remediation recommendations with associated timelines and priority classifications.
The acquisition of Lakeview's assets closed on August 15, 2022, at an asset purchase price of $11.4 million. The transaction was handled by Westbrook Hale LLP (Elena Marchetti, partner) as AHT's general outside counsel. Importantly, healthcare regulatory due diligence in connection with the transaction was limited in scope. Westbrook Hale expressly deferred to Calderwood & Harkness LLP on healthcare regulatory and compliance aspects, but Calderwood & Harkness was not engaged for pre-closing due diligence and was retained only post-closing pursuant to AHT Board Resolution No. 2023-01-004, adopted January 24, 2023.
This memorandum covers the following legacy Lakeview arrangements assumed by AHT at closing:
• Fourteen (14) physician agreements, consisting of twelve (12) W-2 employed physician agreements and two (2) independent contractor agreements, spanning multiple specialties including primary care, orthopedics, gastroenterology, and cardiology;
• Three (3) medical director agreements, with annual stipends of $45,000, $60,000, and $72,000, respectively (aggregate annual stipend obligation of $177,000); and
• Two (2) office leases for clinic space at 75 Belmont Street, Worcester, MA 01605 (the "Worcester Clinic") and 310 Main Street, Suite 2A, Shrewsbury, MA 01545 (the "Shrewsbury Clinic").
This memorandum is part of the broader self-assessment engagement authorized by AHT Board Resolution No. 2023-01-004 and cross-references the gap assessment report prepared by Grayson Whitaker & Associates LLP (report reference: GW-AHT-2022-Final, dated December 12, 2022, prepared under the direction of Carolyn Fitch, Principal). The Grayson Whitaker report identified several Lakeview legacy arrangements among its seventeen (17) "high-risk" and twenty-three (23) "moderate-risk" findings across AHT's portfolio of healthcare arrangements.
The compliance significance of the Lakeview arrangements is heightened by the scale of Lakeview's participation in federal healthcare programs. Prior to the acquisition, Lakeview's annual revenue was approximately $18.2 million, of which approximately $10.9 million (approximately 60%) was attributable to Medicare and Medicaid reimbursement. This substantial federal healthcare program participation subjects all Lakeview physician compensation arrangements, medical director agreements, and office leases to full scrutiny under both the Stark Law and the AKS.
Key Finding: Our review has identified multiple compliance gaps across the Lakeview legacy arrangements. These gaps include, but are not limited to: (i) the absence of contemporaneous fair market value ("FMV") substantiation for physician compensation, medical director stipends, and rental rates; (ii) expired agreement terms creating holdover arrangements with informal, undocumented modifications that undermine compliance with applicable Stark Law exceptions and AKS safe harbors; (iii) compensation formulas in physician employment agreements that fail to satisfy the Stark Law requirement that compensation not be determined in a manner that takes into account the volume or value of referrals; (iv) vague and non-specific duty descriptions in medical director agreements that undermine commercial reasonableness defenses; and (v) writing requirement gaps arising from informal modifications to compensation terms during holdover periods. Critically, several of these gaps existed at the time of the acquisition and were carried forward post-closing when AHT assumed the arrangements without amendment.
We note in particular that the arrangements involving Dr. Vivian Chao, former managing partner of Lakeview, warrant heightened attention. Dr. Chao transitioned to the role of AHT Regional Medical Director (Central Massachusetts) following the acquisition and currently receives both W-2 employment compensation and a separate medical director stipend of $72,000 per year. The aggregate compensation structure, the overlap between her employment duties and medical director duties, and her historical role as Lakeview's managing partner create a risk profile that requires priority remediation.
The balance of this memorandum sets forth our detailed findings organized by arrangement type, together with specific remediation recommendations and a priority timeline.
II. Background
A. The Lakeview Acquisition
Lakeview Medical Associates, P.C. was a Massachusetts professional corporation organized under M.G.L. c. 156A, operating as a fourteen-physician multi-specialty group practice with clinic locations in Worcester and Shrewsbury, Massachusetts. Lakeview's former Employer Identification Number was 04-3782145. The practice encompassed multiple clinical specialties, including primary care (internal medicine and family medicine), orthopedics, gastroenterology, and related ancillary services.
On August 15, 2022, AHT completed its acquisition of substantially all assets of Lakeview pursuant to the terms of an Asset Purchase Agreement dated June 3, 2022 (the "APA"). The aggregate purchase price was $11.4 million, allocated among tangible assets, intangible assets (including patient records, goodwill, and the Lakeview trade name), and assumed contractual obligations. The acquired assets included, without limitation, the following categories of contractual arrangements that are the subject of this memorandum:
• Existing physician employment agreements for twelve (12) W-2 employed physicians;
• Independent contractor agreements for two (2) physicians providing clinical services;
• Three (3) medical director agreements with physician medical directors;
• Two (2) office lease agreements for clinical space in Worcester and Shrewsbury, Massachusetts; and
• Certain ancillary service joint venture interests (not addressed in this memorandum).
The Lakeview integration represents one of the most significant acquisitions in AHT's recent expansion into the Central Massachusetts market and is the proximate trigger for the broader Calderwood & Harkness compliance self-assessment engagement authorized by the AHT Board of Directors. At the time of closing, Lakeview's physician complement consisted of twelve W-2 employed physicians and two independent contractor physicians. Three medical director agreements were assumed, with annual stipends of $45,000, $60,000, and $72,000, respectively. Two office leases were assumed for the Worcester Clinic at 75 Belmont Street, Worcester, MA 01605, and the Shrewsbury Clinic at 310 Main Street, Suite 2A, Shrewsbury, MA 01545.
B. Due Diligence Context
Westbrook Hale LLP, with offices at 100 Summer Street, Suite 2200, Boston, MA 02110, served as AHT's transaction counsel for the Lakeview acquisition. Elena Marchetti, a partner in Westbrook Hale's corporate and M&A practice group, led the transaction team. The due diligence conducted by Westbrook Hale appropriately addressed corporate, employment, tax, and general M&A matters, including standard representations and warranties, indemnification provisions, and closing conditions. However, healthcare regulatory due diligence was limited in scope. In particular, no independent FMV analysis of physician compensation levels, medical director stipends, or lease terms was commissioned prior to closing. Additionally, no Stark Law compliance certifications or AKS safe harbor compliance certifications were obtained from Lakeview or its physicians as a condition to closing.
It is our understanding, based on discussions with Ms. Yamamoto and review of the transaction files, that Westbrook Hale identified the need for healthcare regulatory diligence and deferred to Calderwood & Harkness LLP for that purpose. However, Calderwood & Harkness was not formally retained for pre-closing healthcare regulatory due diligence, and no such diligence was conducted prior to the August 15, 2022 closing date. The absence of pre-closing healthcare regulatory due diligence is a significant contributing factor to the compliance gaps identified in this memorandum.
Following the closing, AHT engaged Grayson Whitaker & Associates LLP to conduct a gap assessment of AHT's healthcare arrangements broadly, including both legacy AHT arrangements and newly assumed Lakeview arrangements. Carolyn Fitch, Principal at Grayson Whitaker, delivered the final gap assessment report (reference: GW-AHT-2022-Final) on December 12, 2022. The Grayson Whitaker report identified a total of forty (40) flagged arrangements across AHT's portfolio, classified as seventeen (17) "high-risk" and twenty-three (23) "moderate-risk." Several Lakeview legacy arrangements were included among both risk tiers. The specific mapping of Lakeview arrangements to Grayson Whitaker findings is set forth in Appendix B to this memorandum.
Additionally, Halsted Accounting Group LLP, AHT's independent auditor, flagged in its fiscal year 2022 management letter (prepared by Ronald Desmond, Engagement Partner) that certain physician compensation arrangements may require FMV substantiation. Several of the arrangements identified by Halsted were Lakeview legacy arrangements, further reinforcing the urgency of the remediation efforts described herein.
C. Regulatory Framework
The analysis in this memorandum is governed by two principal federal statutes and their implementing regulations, as well as applicable Massachusetts state law. We summarize the applicable regulatory framework below.
Stark Law (42 U.S.C. § 1395nn). The Physician Self-Referral Law, commonly known as the Stark Law, prohibits a physician from making referrals for designated health services ("DHS") to an entity with which the physician (or an immediate family member of the physician) has a financial relationship, unless the financial relationship satisfies one of the enumerated statutory or regulatory exceptions. The Stark Law is a strict liability statute — there is no intent requirement. If a financial relationship exists that does not satisfy an applicable exception, all claims for DHS arising from the prohibited referral are non-payable and, if already paid, must be refunded. The Stark Law exceptions most relevant to the Lakeview legacy arrangements are:
• Employment exception (42 C.F.R. § 411.357(c)): Permits bona fide employment relationships where compensation is consistent with FMV, is not determined in a manner that takes into account the volume or value of referrals (except as permitted for productivity bonuses based on personally performed services), and is commercially reasonable even if no referrals were made.
• Personal services arrangements exception (42 C.F.R. § 411.357(d)): Requires a writing signed by the parties, specification of services, a term of at least one year (or compliance with holdover provisions), compensation set in advance at FMV, compensation not varying with the volume or value of referrals, and commercial reasonableness.
• Fair market value exception (42 C.F.R. § 411.357(l)): A catch-all exception requiring, among other things, a writing, FMV compensation, and commercial reasonableness.
• Space rental exception (42 C.F.R. § 411.357(a)): Applies to office lease arrangements and requires a writing, specification of premises, a term of at least one year, rental charges set in advance at FMV, and rental charges not determined based on the volume or value of referrals.
• Equipment rental exception (42 C.F.R. § 411.357(b)): Applies to equipment lease arrangements with requirements parallel to the space rental exception.
The CMS Final Rule on Stark Law Modernization, published at 85 Fed. Reg. 77492 and effective January 19, 2021 (the "Stark Modernization Rule"), introduced several modifications relevant to this analysis, including revised holdover provisions, clarified writing requirements, and updated compensation terms. Among other things, the Stark Modernization Rule permits holdover arrangements to satisfy certain exceptions provided all other requirements of the applicable exception continue to be met and the arrangement is on substantially the same terms and conditions as the expired agreement.
Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)). The AKS prohibits the knowing and willful solicitation, receipt, offer, or payment of remuneration (including any kickback, bribe, or rebate) in exchange for, or to induce, referrals of items or services payable under federal healthcare programs. Unlike the Stark Law, the AKS is an intent-based statute, though the requisite intent standard is satisfied if "one purpose" of the remuneration is to induce referrals. Violations of the AKS give rise to criminal penalties (fines up to $100,000 per violation and imprisonment up to ten years), civil monetary penalties under 42 U.S.C. § 1320a-7a, and exclusion from federal healthcare programs. AKS violations also constitute per se false claims under the False Claims Act, 31 U.S.C. § 3729(a)(1)(A)-(B), following the 2010 Affordable Care Act amendment. The AKS safe harbors most relevant to the Lakeview arrangements include:
• Employment safe harbor (42 C.F.R. § 1001.952(i)): Protects bona fide employment relationships.
• Personal services and management contracts safe harbor (42 C.F.R. § 1001.952(d)): Requires a writing signed by the parties, specification of services, a term of at least one year, aggregate compensation set in advance at FMV, compensation not varying with the volume or value of referrals, and services that do not involve counseling or promotion of unlawful activity.
• Space rental safe harbor (42 C.F.R. § 1001.952(b)): Requires a writing signed by the parties, specification of premises, a term of at least one year, aggregate rental charges set in advance and consistent with FMV, rented space not exceeding that which is reasonably necessary, and rental charges not determined based on the volume or value of referrals.
• Equipment rental safe harbor (42 C.F.R. § 1001.952(c)): Parallel requirements to the space rental safe harbor.
The OIG Final Rule on AKS Safe Harbor Modernization, published at 85 Fed. Reg. 77684 and effective January 19, 2021, introduced updated safe harbor provisions that are relevant to the analysis of several Lakeview arrangements.
Massachusetts State Anti-Kickback Law. Massachusetts General Laws Chapter 175H, Section 3 (M.G.L. c. 175H, § 3) prohibits certain kickback arrangements in connection with healthcare services rendered in the Commonwealth. This statute is applicable to all Lakeview clinic locations in Worcester and Shrewsbury and provides an independent basis for enforcement distinct from federal law.
D. Key Personnel
The following individuals are referenced throughout this memorandum and are relevant to the analysis and remediation of the Lakeview legacy arrangements:
• Dr. Vivian Chao: Former managing partner of Lakeview Medical Associates, P.C. Following the acquisition, Dr. Chao transitioned to the role of AHT Regional Medical Director (Central Massachusetts). She is currently subject to both a W-2 employment agreement and a separate medical director agreement with an annual stipend of $72,000. Dr. Chao's dual-role compensation structure is addressed in detail in Section V.E of this memorandum.
• Dr. Nathan Ellsworth: Chief Executive Officer, Arbor Health Technologies Inc.
• Patricia Yamamoto: General Counsel, Arbor Health Technologies Inc.
• Derek Huang: Chief Compliance Officer, Arbor Health Technologies Inc.
• Northbridge Valuation Advisors LLC (Sandra Kilpatrick, Managing Director; 1600 Market Street, Suite 2800, Philadelphia, PA 19103): Retained by AHT in February 2023 to prepare independent FMV opinions for physician compensation, medical director stipends, and lease arrangements. The Lakeview legacy arrangements are within the scope of the Northbridge engagement, as set forth in the scope memorandum transmitted to Ms. Kilpatrick in February 2023.
III. Physician Employment Agreements — 12 W-2 Employed Physicians
A. Overview of Agreements
AHT assumed twelve (12) physician employment agreements in the Lakeview acquisition. These agreements cover a multi-specialty physician complement including primary care physicians (internal medicine and family medicine), orthopedists, and gastroenterologists. The original Lakeview employment agreements were executed at various dates between 2015 and 2021, reflecting a range of contract vintages and compensation structures.
Upon the closing of the acquisition on August 15, 2022, AHT assumed these employment agreements without amendment. The physicians continued to render clinical services under the legacy Lakeview contract terms, and no transition agreements or amended and restated employment agreements were executed at closing. No FMV opinions were obtained at the time of assumption for any of the twelve agreements. The absence of any contemporaneous FMV analysis at the point of assumption is a threshold compliance concern, as discussed below.
B. Compliance Gap: Absence of FMV Substantiation
The Stark Law employment exception, 42 C.F.R. § 411.357(c), is the primary exception upon which AHT relies (or would need to rely) for the twelve employed physician arrangements. Among its requirements, the employment exception mandates that compensation paid to the employed physician must be "consistent with fair market value" and must not be "determined in a manner that takes into account the volume or value of referrals by the referring physician." Fair market value, as defined in the Stark regulations at 42 C.F.R. § 411.351, means the value in arm's-length transactions, consistent with the general market value of the subject transaction. In the context of physician compensation, FMV is typically substantiated through independent valuation opinions benchmarked against nationally recognized compensation survey data, such as MGMA DataDive, SullivanCotter Physician Compensation and Productivity Survey, and AMGA Medical Group Compensation and Productivity Survey.
None of the twelve legacy employment agreements are accompanied by contemporaneous FMV opinions or benchmark analyses establishing that compensation levels met FMV at the time of their execution by Lakeview or at the time of their assumption by AHT. This is a significant gap. While contemporaneous FMV opinions are not strictly required by statute or regulation, they are widely recognized as the gold standard for demonstrating compliance and are expected by the OIG, CMS, and the Department of Justice in any enforcement context.
AHT's current median total compensation levels, as reflected in its internal compensation data, are approximately $278,000 per year for primary care physicians and approximately $412,000 per year for specialists. Several Lakeview legacy agreements contain total compensation packages — including base salary, productivity bonuses, benefits, and other forms of compensation — that have not been benchmarked against current MGMA or SullivanCotter data to determine whether they fall within FMV ranges. Without such benchmarking, AHT cannot affirmatively demonstrate that the compensation paid under the assumed Lakeview agreements is consistent with FMV.
Remediation: Northbridge Valuation Advisors LLC has been engaged to provide independent FMV opinions for all fourteen Lakeview physician arrangements (twelve employed physicians and two independent contractors). Upon receipt of the Northbridge opinions, compensation adjustments may be required for any arrangements where current compensation levels are found to exceed FMV. Until FMV opinions are received, AHT should document its reliance on interim measures, including internal benchmarking against MGMA and SullivanCotter data, to support a good-faith FMV defense.
C. Compliance Gap: Expired Terms and Holdover Issues
Five (5) of the twelve (12) employment agreements had initial terms that expired prior to the acquisition closing date of August 15, 2022. These five agreements continued on a month-to-month "holdover" basis without formal renewal or extension. The specific expiration dates for the five holdover agreements range from 2019 to early 2022.
Under the Stark Law Modernization Final Rule (85 Fed. Reg. 77492), holdover arrangements may satisfy the employment exception if the arrangement otherwise meets all requirements of the exception, including the writing requirement. The holdover must be on the same terms and conditions as the expired agreement. However, our review has identified a critical issue: in at least three (3) of the five (5) holdover arrangements, compensation adjustments were made informally — specifically, annual salary increases were implemented — without executing written amendments to the underlying employment agreements. These informal modifications were reflected in payroll records and communicated to the physicians verbally or via email, but no formal written instrument memorializing the changes was executed.
This creates a gap in the writing requirement applicable to the Stark employment exception. Under the regulatory framework, any modification to the terms of a holdover arrangement — including compensation adjustments — must be reflected in a writing that satisfies the applicable exception's requirements. An informal compensation increase during a holdover period could be viewed as creating a new arrangement that does not satisfy the employment exception's writing requirement, thereby causing the entire arrangement to fall outside the protection of the exception for the period during which the non-compliant modification was in effect.
Under the prior regulatory framework predating the Stark Modernization Rule, such informal modifications during holdover were even more problematic, as the holdover provisions were narrower in scope and less forgiving of deviations from the expired agreement's terms.
Remediation: AHT should execute amended and restated employment agreements for all twelve employed physicians, using AHT's revised physician employment agreement template developed as part of this engagement. All compensation terms must be documented in writing, and the amended agreements must be supported by FMV opinions from Northbridge. For the five holdover agreements, the amended and restated agreements will serve to cure the writing requirement gaps and establish new, compliant agreement terms going forward. The retroactive exposure for the holdover period is addressed in Section VII below.
D. Compliance Gap: Non-Compliant Compensation Formulas
Four (4) of the twelve (12) employment agreements contain productivity-based compensation formulas tied to "collections" or "net receipts" that raise significant Stark Law compliance concerns. These formulas do not incorporate appropriate guardrails to ensure that compensation is not determined in a manner that takes into account the volume or value of referrals, as required by the Stark employment exception at 42 C.F.R. § 411.357(c).
Specifically, our review has identified two distinct categories of non-compliant compensation formulas:
First, two (2) agreements include bonus provisions calculated as a percentage of revenue from ancillary services — specifically, laboratory and diagnostic imaging services — ordered by the employed physician. Under these provisions, the physician receives a quarterly or annual bonus equal to a stated percentage of the revenue generated by laboratory tests and imaging studies that the physician ordered for his or her patients. Laboratory services and diagnostic imaging services are DHS under the Stark Law (42 C.F.R. § 411.351). A bonus directly tied to the revenue generated by a physician's orders for DHS is the paradigmatic example of compensation "determined in a manner that takes into account the volume or value of referrals." These provisions directly implicate the "volume or value" prohibition and cannot be sustained under the employment exception.
Second, two (2) additional agreements use a revenue-sharing formula that does not distinguish between DHS and non-DHS revenue. Under these formulas, the physician's total compensation includes a variable component calculated as a percentage of aggregate practice revenue attributable to the physician's panel or service line, without any mechanism to exclude or carve out revenue from DHS. While the Stark employment exception permits productivity bonuses based on services personally performed by the physician (42 C.F.R. § 411.357(c)(2)), and CMS has acknowledged that productivity measures such as work Relative Value Units ("wRVUs") are generally acceptable, revenue-sharing formulas that blend DHS and non-DHS revenue do not satisfy this standard because they inherently incorporate the value of referrals for DHS.
Remediation: AHT should restructure the compensation formulas in all four affected agreements to base productivity bonuses exclusively on services personally performed by the physician, using a wRVU-based methodology or another methodology that does not take into account the volume or value of referrals for DHS. All ancillary service revenue-sharing components must be eliminated. The restructured formulas should be incorporated into the amended and restated employment agreements using AHT's revised physician employment agreement template.
E. Compliance Gap: Missing Restrictive Covenant and Referral Independence Provisions
Our review has identified that several of the legacy Lakeview employment agreements lack representations regarding referral independence and do not contain AKS-compliant provisions that are standard in AHT's current employment agreement template. Specifically, the following provisions are absent from multiple agreements:
• A representation by the physician that he or she will exercise independent medical judgment in making referral decisions and that referrals will not be influenced by the physician's compensation arrangement with AHT;
• An acknowledgment that the physician's compensation is not intended to induce referrals of patients or items or services payable by federal healthcare programs;
• A compliance certification obligating the physician to comply with applicable federal and state healthcare laws, including the AKS and Stark Law; and
• An agreement to cooperate with AHT's compliance program, including participation in compliance training and reporting of potential compliance issues.
While the AKS employment safe harbor (42 C.F.R. § 1001.952(i)) does not expressly require such provisions, the absence of referral independence representations and compliance provisions weakens AHT's defense in the event of an AKS inquiry or investigation. A bona fide employment relationship is a prerequisite for safe harbor protection, and the inclusion of standard referral independence and compliance provisions is an important indicator of bona fide intent.
Remediation: Incorporate standard referral independence representations and compliance provisions from AHT's revised employment agreement template into all amended and restated Lakeview physician employment agreements.
F. Summary Table: 12 Employment Agreement Gaps
The following table summarizes the compliance gaps identified for each of the twelve legacy Lakeview physician employment agreements. Physician identifiers are used in lieu of names to preserve confidentiality within this work product.
As reflected in the table above, eight (8) of the twelve agreements are classified as High priority due to the presence of multiple concurrent compliance gaps, including holdover with informal modifications, non-compliant compensation formulas, and the absence of FMV substantiation. The remaining four (4) are classified as Moderate priority. All twelve require remediation.
IV. Independent Contractor Agreements — 2 Physicians
A. Overview
In addition to the twelve employed physicians, AHT assumed two (2) independent contractor agreements in the Lakeview acquisition. These agreements govern the provision of clinical services by one cardiologist and one gastroenterologist at AHT's Worcester Clinic. The cardiologist's independent contractor agreement was originally executed in 2018, and the gastroenterologist's agreement was originally executed in 2019. Both physicians were retained by Lakeview to provide specialty clinical services on a part-time or as-needed basis and continued to provide services under the legacy contract terms following AHT's assumption of the agreements at closing.
B. Compliance Gap: Personal Services Exception/Safe Harbor Analysis
The applicable Stark Law exception for the two independent contractor arrangements is the personal services arrangements exception at 42 C.F.R. § 411.357(d). This exception requires that the arrangement satisfy all of the following conditions:
(i) The arrangement is set out in writing, signed by the parties, and specifies the services covered by the arrangement;
(ii) The arrangement covers all of the services to be provided by the physician (or the physician's immediate family member) to the entity, or the arrangement is one of multiple arrangements that collectively cover all such services, with each arrangement satisfying the remaining requirements;
(iii) The aggregate services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement;
(iv) The term of the arrangement is for at least one year (or the arrangement satisfies the holdover provisions);
(v) The compensation to be paid over the term of the arrangement is set in advance, does not exceed fair market value, and is not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties; and
(vi) The services to be performed under the arrangement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.
The AKS personal services safe harbor at 42 C.F.R. § 1001.952(d) imposes substantially similar requirements.
Both independent contractor agreements are currently on month-to-month holdover, as the original terms of both agreements have expired. The cardiologist's agreement expired in 2021 and the gastroenterologist's agreement expired in 2022. Neither agreement was formally renewed, and both continue on an informal month-to-month basis.
Beyond the holdover issue, our review has identified the following specific gaps in each agreement:
Cardiologist Agreement (LV-IC-001): This agreement does not contain a written specification of the services to be provided or the hours/schedule of service. The agreement states only that the physician will provide "cardiology consultation services as requested by the practice." This vague description fails to satisfy the personal services exception's requirement that the arrangement "specify the services covered by the arrangement." Additionally, no FMV certification or supporting documentation accompanies the agreement. The physician is compensated on a per-diem rate that was established at the inception of the agreement in 2018 and has not been adjusted or benchmarked since that date.
Gastroenterologist Agreement (LV-IC-002): This agreement specifies "clinical services as reasonably requested" without defining the scope, schedule, or expected volume of services. The physician is compensated under a percentage-of-collections formula, pursuant to which the physician receives a stated percentage of collections attributable to services rendered by the physician. A collections-based compensation formula raises significant volume-or-value concerns because the physician's compensation is directly tied to the volume of services ordered and rendered. No FMV certification or supporting documentation accompanies this agreement.
C. Compliance Gap: Independent Contractor Classification Risk
Independent of the Stark and AKS analysis, AHT should evaluate whether the classification of these two physicians as independent contractors — rather than W-2 employees — is appropriate under applicable IRS and Massachusetts state law standards. The IRS uses a multi-factor test examining behavioral control, financial control, and the type of relationship between the parties. Under Massachusetts law, the independent contractor classification is subject to the "ABC test" set forth in M.G.L. c. 149, § 148B, which creates a presumption of employment status that can only be rebutted if all three statutory factors are satisfied.
Our preliminary review indicates that both physicians work exclusively (or nearly exclusively) at AHT clinic locations, are subject to scheduling determined by AHT, and use AHT-provided equipment and facilities. These factors create significant risk that the physicians would be classified as employees rather than independent contractors under both federal and state law standards. Misclassification carries independent consequences under tax law, employment law, and benefits law, and is collateral to the AKS and Stark analysis. However, if the physicians are reclassified as employees, the applicable Stark exception would shift from the personal services arrangements exception to the employment exception, requiring a different compliance framework.
D. Remediation Recommendations
We recommend the following remediation actions for the two independent contractor arrangements:
1. Convert holdover arrangements to AHT's revised independent contractor agreement template. New agreements should be executed with fixed terms of at least one year, satisfying the term requirements of both the Stark personal services exception and the AKS personal services safe harbor.
2. Obtain FMV opinions from Northbridge Valuation Advisors for the compensation terms of both arrangements. If the per-diem rate (LV-IC-001) or the percentage-of-collections formula (LV-IC-002) is found to exceed FMV, compensation must be adjusted accordingly.
3. Define the service scope, schedule, and hours with specificity. Each agreement must clearly specify the services to be provided, the expected hours or schedule, and any reporting or documentation requirements. Vague "as requested" or "as reasonably requested" descriptions are insufficient.
4. Evaluate whether reclassification to W-2 employment is appropriate. Given the behavioral control and exclusivity factors identified above, AHT should consult with its employment counsel to determine whether reclassification is warranted. If reclassified, the physicians should be transitioned to AHT's revised physician employment agreement template and analyzed under the Stark employment exception framework.
5. Eliminate the percentage-of-collections formula in the gastroenterologist agreement (LV-IC-002) and replace it with compensation set in advance at FMV, such as a fixed hourly rate or per-session rate that does not vary with the volume or value of referrals.
V. Medical Director Agreements — 3 Arrangements
A. Overview
AHT assumed three (3) medical director agreements in the Lakeview acquisition. These agreements establish part-time medical director roles for three physicians who serve (or, in one case, served during Lakeview's operation) in clinical and administrative oversight capacities. The aggregate annual stipend obligation under the three agreements is $177,000, broken down as follows:
• Agreement MD-001: Annual stipend of $45,000.
• Agreement MD-002: Annual stipend of $60,000.
• Agreement MD-003 (Dr. Vivian Chao): Annual stipend of $72,000.
Dr. Vivian Chao's medical director agreement (MD-003) warrants particular scrutiny because Dr. Chao also serves as AHT's Regional Medical Director (Central Massachusetts) under a separate W-2 employment agreement. The dual-role compensation structure is analyzed in Section V.E below.
B. Compliance Gap: FMV and Commercial Reasonableness
None of the three medical director agreements are supported by contemporaneous FMV opinions. At no point during the life of the Lakeview arrangements — either at original execution or at renewal — was an independent valuation obtained to substantiate the medical director stipends. No FMV analysis was conducted at the time AHT assumed the agreements.
The broader medical director compensation analysis being conducted as part of this engagement (addressed in the separate Medical Director FMV memorandum, Calderwood & Harkness ref. 1010-00003-MDA) has identified that AHT's mean medical director effective hourly rate across its portfolio is $501.28 per hour, a figure that is above the 90th percentile for multiple specialties according to available benchmark data. The Lakeview medical director agreements must be evaluated in the context of these concerning portfolio-wide findings.
Our analysis of the effective hourly rates for each of the three Lakeview medical director agreements reveals rates that significantly exceed available benchmark data:
Agreement MD-001 ($45,000/year): No time logs, duty reports, or other documentation of hours worked in the medical director capacity were found in the acquired Lakeview records. Without any documentation of hours performed, it is impossible to calculate an effective hourly rate or to assess whether the stipend is consistent with FMV and commercially reasonable. The complete absence of contemporaneous time records is itself a significant compliance concern, as it prevents AHT from demonstrating that meaningful services were performed in exchange for the stipend.
Agreement MD-002 ($60,000/year): Sporadic time logs were located in the acquired records, indicating that the medical director performed approximately four to six (4–6) hours of medical director duties per month. At these levels, the effective hourly rate ranges from $833 per hour (at 6 hours/month) to $1,250 per hour (at 4 hours/month). Both figures dramatically exceed available benchmark data for medical director compensation across all specialties.
Agreement MD-003 — Dr. Vivian Chao ($72,000/year): Time records indicate that Dr. Chao performed approximately six to eight (6–8) hours of medical director duties per month. At these levels, the effective hourly rate ranges from $750 per hour (at 8 hours/month) to $1,000 per hour (at 6 hours/month). As with Agreement MD-002, these rates significantly exceed available benchmark data.
Under both the Stark personal services arrangements exception (42 C.F.R. § 411.357(d)) and the AKS personal services safe harbor (42 C.F.R. § 1001.952(d)), compensation must be set at FMV and must be commercially reasonable even if no referrals are made. Effective hourly rates at the levels identified above raise serious concerns that the medical director stipends exceed FMV and are not commercially reasonable in relation to the duties actually performed.
C. Compliance Gap: Vague Duty Descriptions
All three medical director agreements contain generic, boilerplate duty descriptions that lack the specificity necessary to support a commercial reasonableness defense. The duty descriptions in the three agreements are substantially similar and include language such as:
• "Oversee clinical quality at the practice";
• "Supervise staff as needed";
• "Serve as liaison between the physicians and the practice management";
• "Provide guidance on clinical protocols"; and
• "Attend meetings as requested."
None of the three agreements specifies measurable deliverables, required meeting attendance (by frequency, duration, or subject matter), specific reporting obligations, protocol development responsibilities, peer review duties, or any other concrete expectations against which performance can be evaluated. The absence of specific duty descriptions creates several compliance concerns:
First, vague duties undermine AHT's ability to demonstrate that the medical director role is commercially reasonable — that is, that a reasonable entity would pay the stipend amount for the duties described, independent of any referral relationship with the medical director.
Second, vague duties create risk that the medical director arrangement is being used as a vehicle for disguised referral compensation. In enforcement actions involving medical director arrangements, the OIG and CMS have consistently focused on whether the medical director role entails genuine, documented administrative duties, or whether it serves primarily as a mechanism to compensate a referring physician for the value of his or her referrals.
Third, the absence of measurable deliverables makes it difficult to demonstrate that the medical director actually performed services commensurate with the stipend paid, further undermining the commercial reasonableness defense.
D. Compliance Gap: Expired Terms
All three medical director agreements had original terms of one year. All three terms expired prior to the acquisition, with the earliest expiration occurring in 2019. Following expiration, the agreements continued on an informal holdover basis without written renewals or extensions. At the time of AHT's assumption of the agreements on August 15, 2022, all three agreements had been in holdover for periods ranging from approximately one year to approximately four years.
Under the Stark holdover provisions, as modified by the Stark Modernization Rule, a holdover arrangement can satisfy the personal services arrangements exception only if the arrangement otherwise meets all requirements of the exception and the holdover is on the same terms and conditions as the expired agreement. Our review has not identified any documented changes to stipend amounts during the holdover periods. However, the absence of time records for one agreement (MD-001) and the sporadic nature of time records for the other two (MD-002 and MD-003) make it impossible to confirm that the scope of duties remained consistent throughout the holdover periods. Any informal expansion or contraction of duties without written documentation would violate the holdover provisions.
E. Dr. Vivian Chao — Dual-Role Compensation Analysis
Dr. Vivian Chao's compensation arrangements require separate and heightened analysis due to the following factors:
Dual compensation streams. Dr. Chao currently receives compensation under two separate agreements: (1) a W-2 employment agreement pursuant to which she provides clinical and administrative services as AHT Regional Medical Director (Central Massachusetts), and (2) the medical director agreement (MD-003), which provides an annual stipend of $72,000. Under Stark Law principles, the total aggregate compensation paid to Dr. Chao must be consistent with FMV and commercially reasonable when considered as a whole. An arrangement that individually passes FMV review may nonetheless be non-compliant if, when aggregated with other compensation from the same entity, the total compensation exceeds FMV.
Role transition concerns. Dr. Chao's transition from Lakeview managing partner to AHT Regional Medical Director raises questions about whether the medical director stipend reflects compensation for genuine, additional administrative duties, or whether it represents a continuation of historical compensation structures designed to maintain Dr. Chao's total compensation at or near her pre-acquisition levels. If the stipend was structured to bridge a gap between Dr. Chao's pre-acquisition managing partner compensation and her post-acquisition employment compensation, it could be viewed as lacking commercial reasonableness.
Duty overlap. Our review indicates that the medical director duties described in Dr. Chao's agreement (MD-003) substantially overlap with the responsibilities that would reasonably be expected of a Regional Medical Director under the employment agreement. Both roles involve clinical quality oversight, staff supervision, and administrative coordination. The duty descriptions in the two agreements are not sufficiently distinct to demonstrate that Dr. Chao is performing separate, non-overlapping functions in each role. This overlap raises questions about whether AHT is paying twice for the same set of duties, which would undermine the commercial reasonableness defense for the medical director stipend.
Referral significance. As the most senior physician in the Central Massachusetts region and the former managing partner of the Lakeview practice, Dr. Chao is a significant referral source for AHT. Her visibility within the organization and the community, combined with the above-FMV effective hourly rate of her medical director stipend, creates a heightened enforcement risk.
Remediation: We recommend one of two approaches. The preferred approach is to consolidate Dr. Chao's compensation into a single employment arrangement that reflects the aggregate value of all clinical and administrative services she provides, including any medical director duties. The consolidated compensation should be supported by a comprehensive FMV opinion from Northbridge that considers the totality of Dr. Chao's responsibilities. Alternatively, if AHT determines that a separate medical director agreement is necessary for organizational or operational reasons, the employment agreement and the medical director agreement must contain clearly delineated, non-overlapping duty descriptions, and separate FMV opinions must be obtained for each arrangement. Under either approach, total aggregate compensation must fall within FMV ranges supported by benchmark data.
F. Remediation Recommendations for All 3 Medical Director Agreements
Based on the compliance gaps identified above, we recommend the following remediation actions for all three Lakeview medical director agreements:
1. Execute new medical director agreements using AHT's revised independent contractor/medical director agreement template, thereby eliminating the holdover status of all three agreements.
2. Specify minimum and maximum hours per month for medical director duties, with a mandatory contemporaneous time reporting requirement. Time logs should be maintained on a monthly basis and should describe the specific activities performed, the date and duration of each activity, and the deliverable (if any) produced.
3. Define measurable duties and deliverables with specificity, including required meeting attendance (by frequency and subject matter), protocol development and review responsibilities, incident review and reporting obligations, peer review participation, quality metric reporting, and other concrete administrative functions.
4. Obtain FMV opinions from Northbridge Valuation Advisors for all three medical director arrangements, based on the revised duty descriptions and hour commitments.
5. Align stipend amounts with FMV ranges supported by nationally recognized benchmark data (e.g., SullivanCotter, AMGA, Medical Group Management Association). Where current stipends exceed FMV, reduce stipend amounts to fall within the FMV range.
6. Establish fixed terms of at least one year with clear renewal and termination provisions, satisfying the term requirements of both the Stark personal services exception and the AKS personal services safe harbor.
VI. Office Lease Agreements — 2 Leases
A. Overview
AHT assumed two (2) office lease agreements in the Lakeview acquisition, covering the two clinic locations operated by the Lakeview practice:
• Worcester Clinic: 75 Belmont Street, Worcester, MA 01605 (the "Worcester Lease")
• Shrewsbury Clinic: 310 Main Street, Suite 2A, Shrewsbury, MA 01545 (the "Shrewsbury Lease")
Both leases are between AHT, as successor tenant to Lakeview, and third-party landlords. The leases were assigned to AHT at closing pursuant to the terms of the APA and applicable landlord consent provisions.
These leases are relevant under the Stark Law and the AKS because they may involve referral relationships between AHT and the landlords or other tenants in the same buildings. In particular, if a landlord is a physician or an entity owned by a physician who refers patients to AHT (or vice versa), the lease arrangement constitutes a "financial relationship" under the Stark Law and must satisfy the space rental exception. Similarly, if the lease arrangement involves remuneration that could be construed as inducing or rewarding referrals, it must satisfy the AKS space rental safe harbor. Even in the absence of a direct referral relationship with the landlord, maintaining leases that satisfy applicable exceptions and safe harbors is an essential component of AHT's overall compliance posture, particularly given the scrutiny to which healthcare real estate arrangements are subject.
B. Compliance Gap: Stark Space Rental Exception Analysis (42 C.F.R. § 411.357(a))
The Stark space rental exception at 42 C.F.R. § 411.357(a) permits lease arrangements between a physician (or physician entity) and a DHS entity if the following conditions are met:
(i) The lease arrangement is set out in writing, is signed by the parties, and specifies the premises covered by the lease;
(ii) The term of the lease is at least one year;
(iii) The space rented or leased does not exceed that which is reasonable and necessary for the legitimate business purposes of the lease and is used exclusively by the lessee when being used by the lessee (except that the lessee may make payments for the use of space consisting of common areas);
(iv) The rental charges over the term of the lease are set in advance, are consistent with fair market value, and are not determined using a formula based on the volume or value of referrals or other business generated between the parties; and
(v) The lease would be commercially reasonable even if no referrals were made between the parties.
Our analysis of the two Lakeview leases under the space rental exception has identified the following gaps:
Worcester Lease: The original term of the Worcester Lease expired in June 2021. Since that date, the lease has continued on a holdover basis, as permitted under the holdover provisions of the lease itself and under Massachusetts landlord-tenant law. However, in January 2022, the landlord and Lakeview (as the then-current tenant) agreed to an upward adjustment of the monthly rental rate. This rental adjustment was not memorialized in a formal written amendment to the lease; rather, it was reflected in correspondence between Lakeview's practice manager and the landlord's property management company. The informal nature of this modification during the holdover period creates two distinct compliance issues: (a) the arrangement may fail the writing requirement of the space rental exception because the modified rental term is not set forth in a signed writing specifying the rental charges, and (b) the arrangement may fail the "set in advance" requirement because the rental adjustment was implemented informally without prospective documentation.
Shrewsbury Lease: The original term of the Shrewsbury Lease expires in December 2023. At the time of AHT's assumption of the lease on August 15, 2022, the lease was within its initial term, and its terms were facially compliant with the space rental exception. However, no FMV analysis of the rental rate was obtained either by Lakeview during the lease term or by AHT at the time of assumption. Without an independent appraisal or market analysis demonstrating that the rental rate is consistent with FMV, AHT cannot affirmatively demonstrate compliance with the FMV requirement of the space rental exception. The Shrewsbury Lease's term expiration in December 2023 creates an upcoming inflection point at which AHT must either renew the lease, negotiate a new lease, or vacate the premises.
C. Compliance Gap: AKS Space Rental Safe Harbor Analysis (42 C.F.R. § 1001.952(b))
The AKS space rental safe harbor at 42 C.F.R. § 1001.952(b) imposes requirements that are substantially parallel to the Stark space rental exception, with certain additional specificity requirements. The safe harbor requires:
(i) A written agreement signed by the parties;
(ii) The agreement specifies the premises covered by the lease;
(iii) If the lease is intended to provide the lessee with access to the premises for periodic intervals of time rather than on a full-time basis, the lease specifies exactly the schedule, precise length, and exact rent for such intervals;
(iv) The term of the lease is at least one year;
(v) The aggregate rental charge is set in advance, is consistent with FMV in arm's-length transactions, and is not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties;
(vi) The aggregate space rented does not exceed that which is reasonably necessary for the legitimate business purposes of the rental; and
(vii) The agreement meets applicable requirements of the AKS.
The Worcester Lease's holdover status and informal rent adjustment create safe harbor compliance issues that parallel the Stark analysis set forth above. The absence of a formal written amendment documenting the rental adjustment, and the failure to establish the adjusted rental rate in advance through a signed writing, prevent the Worcester Lease from satisfying the safe harbor requirements.
Additionally, our review has identified a deficiency common to both leases: neither lease specifies the precise premises rented with sufficient particularity. Both leases describe the leased premises in general terms (e.g., "office suite" or "clinic space") without specifying square footage, common area allocations, exclusive versus shared use designations, or the exact location of the leased premises within the building. The AKS safe harbor requires that the agreement "specify the premises" covered by the lease, and regulatory guidance from the OIG has emphasized the importance of precision in premises descriptions, particularly where shared-use or part-time arrangements are involved. While the Lakeview leases appear to be full-time, exclusive-use arrangements, the absence of a precise premises description creates unnecessary risk.
D. Compliance Gap: Missing FMV Substantiation for Rental Rates
No independent appraisal or market analysis of the rental rates under either lease was obtained by Lakeview prior to the acquisition or by AHT at the time of assumption. The absence of FMV substantiation for rental rates is a gap that parallels the absence of FMV opinions for physician compensation and medical director stipends, and it arises from the same root cause: the limited scope of healthcare regulatory due diligence conducted prior to closing.
Northbridge Valuation Advisors LLC has been engaged to provide independent FMV opinions for both leases as part of the broader FMV scope of the Northbridge engagement. A scope memorandum requesting FMV analyses for the Worcester and Shrewsbury leases was transmitted to Sandra Kilpatrick in February 2023. The Northbridge analysis is expected to include a comparison of the leased premises' rental rates to comparable market rents for similar medical office space in the Worcester and Shrewsbury markets, taking into account factors such as location, condition, build-out, parking, and lease terms.
E. Remediation Recommendations
We recommend the following remediation actions for the two Lakeview office leases:
Worcester Lease:
1. Negotiate and execute a new lease agreement or, at minimum, a formal written amendment to the existing lease on AHT's revised office space lease template. The new lease or amendment must satisfy all requirements of both the Stark space rental exception and the AKS space rental safe harbor.
2. Obtain an independent FMV appraisal of the rental rate from Northbridge Valuation Advisors. If the current rental rate exceeds FMV, negotiate a reduction to bring the rate within the FMV range.
3. Specify the leased premises with particularity, including exact square footage, common area allocation, exclusive versus shared use designation, and a floor plan or premises diagram attached as an exhibit to the lease.
4. Establish a fixed lease term of at least one year with clearly defined renewal options and rent escalation provisions.
5. Ensure that the rental rate is not adjusted based on the volume or value of referrals or other business generated between the parties.
Shrewsbury Lease: