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

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT

MEMORANDUM

FROM: Miriam Calloway, Partner, and Christopher Aiken, Senior Associate Calderwood & Harkness LLP One Federal Street, 30th Floor Boston, MA 02110

TO: Patricia Yamamoto, General Counsel, and Derek Huang, Chief Compliance Officer Arbor Health Technologies Inc. 200 Concord Avenue, Suite 400 Cambridge, MA 02138

DATE: May 19, 2023

RE: Medical Director and Independent Contractor Compensation — Fair Market Value and Commercial Reasonableness Analysis

MATTER NO.: 1010-00003

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I. Executive Summary

This memorandum presents our analysis of all thirty-eight (38) medical director and independent contractor arrangements currently maintained by Arbor Health Technologies Inc. ("AHT" or the "Company") for compliance with the federal Anti-Kickback Statute ("AKS"), 42 U.S.C. § 1320a-7b(b), and the Physician Self-Referral Law ("Stark Law"), 42 U.S.C. § 1395nn. Our analysis focuses in particular on the fair market value ("FMV") and commercial reasonableness requirements that are central to the applicable safe harbors and exceptions under each statute. This memorandum is intended to be read in conjunction with the Master Arrangement Inventory & Risk Scoring Matrix and the companion memoranda referenced in Section IX below.

This memorandum constitutes one component of the comprehensive regulatory self-assessment engagement authorized by AHT Board Resolution No. 2023-01-004, adopted January 24, 2023. The Board authorized this engagement in response to the compliance gap assessment report prepared by Grayson Whitaker & Associates LLP (Report No. GW-AHT-2022-Final, dated December 12, 2022), which identified seventeen (17) high-risk and twenty-three (23) moderate-risk physician compensation arrangements warranting immediate legal review and remediation. The Grayson Whitaker report served as the catalyst for AHT's engagement of this firm and for the broader self-assessment initiative now underway.

Scope. Our analysis encompasses all 38 independent contractor and medical director agreements maintained by AHT across the Company's twenty-three (23) outpatient clinics in Massachusetts (14 clinics), Connecticut (4 clinics), Rhode Island (3 clinics), and New Hampshire (2 clinics). This universe of arrangements includes three (3) medical director agreements assumed by AHT in the Lakeview Medical Associates, P.C. asset acquisition, which closed on August 15, 2022, at a purchase price of $11.4 million. The Lakeview legacy arrangements are integrated into our analysis and are also addressed in a separate Lakeview Legacy Compliance Gap Memorandum being prepared concurrently.

Key Findings. Our analysis reveals that the effective average hourly compensation rate across the 38 arrangements is $501.28 per hour. This figure is derived from the aggregate annual compensation of $1.92 million divided by total documented annual hours of approximately 3,830.4 hours (based on AHT's own records reflecting an average of 8.4 hours per month per arrangement). This effective rate exceeds the 90th percentile for medical director compensation across all major physician specialties represented in AHT's arrangement portfolio, as measured by both the MGMA Physician Compensation and Production Survey (2022 edition) and the SullivanCotter Physician Compensation and Productivity Survey (2022 edition). The degree to which the effective rate exceeds established benchmarks presents significant compliance risk under both the AKS personal services safe harbor and the Stark Law personal services exception.

The magnitude of AHT's regulatory exposure is underscored by the Company's substantial dependence on federal healthcare program reimbursement. AHT's fiscal year 2022 net revenue totaled $214.3 million, of which approximately 61%, or $130.7 million, was derived from Medicare and Medicaid reimbursements. Any enforcement action under the Stark Law or AKS implicating this revenue stream could result in material financial liability, including False Claims Act treble damages, civil monetary penalties, and potential exclusion from federal healthcare programs.

To support this self-assessment, AHT, at our recommendation, has commissioned independent FMV opinions from Northbridge Valuation Advisors LLC (Managing Director: Sandra Kilpatrick). Northbridge was engaged in February 2023 to prepare arrangement-specific FMV opinions for all 38 independent contractor and medical director agreements analyzed herein, as well as the 14 Lakeview legacy physician employment agreements and certain other physician compensation arrangements and related-party transactions (52 total physician arrangements, plus 2 office leases and the Meridian facility fee). Northbridge's preliminary findings, referenced throughout this memorandum where available, are consistent with our conclusion that substantial restructuring is required.

Recommendation. Based on our analysis, we recommend the immediate restructuring of compensation, hours documentation, and duty descriptions across substantially all 38 arrangements. Our detailed recommendations, set forth in Section VIII below, are designed to bring each arrangement into compliance with the applicable AKS safe harbor and Stark Law exception requirements before the anticipated delivery of final Northbridge FMV opinions in June 2023. Timely remediation is critical not only for regulatory compliance but also for transaction readiness in connection with Ridgeline Capital Partners Fund IV, L.P.'s anticipated exit process in late 2024.

II. Background

A. AHT's Physician Workforce and Arrangement Structure

AHT currently operates twenty-three (23) outpatient clinics under the "Arbor Health Clinics" brand, providing a range of primary care, specialty care, and ancillary services across four New England states. The Company employs one hundred forty-seven (147) physicians as W-2 employees across these clinic sites. The clinical services offered by AHT's employed physicians span primary care (internal medicine and family medicine), cardiology, orthopedics, and gastroenterology. In addition, AHT operates several ancillary service lines at its clinic locations, including in-office laboratory services, diagnostic imaging (including X-ray, ultrasound, and certain advanced imaging modalities), and physical therapy. These ancillary services constitute "designated health services" under the Stark Law, a classification that is central to the regulatory risk analysis presented in this memorandum.

In addition to its W-2 employed physician workforce, AHT maintains independent contractor or medical director arrangements with thirty-eight (38) physicians who are not W-2 employees of the Company. These 38 arrangements are the subject of this memorandum. The arrangements serve range stated functions within AHT's organizational structure, including:

• Clinical medical directorship for specific clinic sites, in which the medical director is responsible for overseeing clinical operations, quality of care, and clinical policy at one or more AHT clinic locations;

• Specialty-specific medical directorship, in which a physician provides quality oversight and clinical leadership for a particular specialty line of service (e.g., cardiology, orthopedics) across multiple AHT clinics;

• Compliance-related clinical oversight, in which a physician is engaged to provide clinical input on regulatory compliance, peer review, credentialing, or utilization review functions; and

• Independent contractor clinical services, in which a physician provides part-time clinical services at AHT clinic locations on an independent contractor basis, typically in a specialty where AHT has not yet hired a full-time employed physician.

The arrangements have developed organically over time, reflecting AHT's growth from a smaller regional practice to a multi-state clinic network. As discussed further below, this organic growth has resulted in significant inconsistency in contract terms, duty descriptions, compensation structures, and documentation practices across the arrangement portfolio.

AHT is a portfolio company of Ridgeline Capital Partners Fund IV, L.P. ("Ridgeline Fund IV"), a private equity fund managed by Ridgeline Capital Advisors LLC. Ridgeline Fund IV acquired a 72% controlling equity stake in AHT in January 2021 for approximately $185 million. Ridgeline's board designees, Claudia Sorrento (Managing Director) and Marcus Whitmore (Principal), have participated in the Board-level discussions surrounding this self-assessment engagement and have expressed concern about the compliance risk exposure associated with AHT's physician compensation arrangements, particularly in connection with a potential exit or sale transaction that Ridgeline anticipates pursuing in late 2024. The investor-driven urgency surrounding the remediation timeline is addressed further in Section VII.C of this memorandum.

B. Lakeview Medical Associates Acquisition — Assumed Arrangements

On August 15, 2022, AHT acquired substantially all of the assets of Lakeview Medical Associates, P.C. ("Lakeview"), a fourteen-physician multi-specialty group practice located in Worcester, Massachusetts. The acquisition was structured as an asset purchase at a total purchase price of $11.4 million. Lakeview's former managing partner, Vivian Chao, M.D., transitioned to AHT following the acquisition and now serves as AHT's Regional Medical Director for Central Massachusetts in a W-2 employment capacity.

Prior to the acquisition, Lakeview generated annual revenue of approximately $18.2 million, of which approximately 60% ($10.9 million) was attributable to Medicare and Medicaid reimbursements. This revenue profile mirrors AHT's own payor mix and further underscores the regulatory significance of the acquired arrangements.

Among the assets assumed in the Lakeview acquisition were three (3) medical director agreements with non-employed physicians, carrying annual stipends of $45,000, $60,000, and $72,000, respectively. These three agreements are included in the universe of 38 arrangements analyzed in this memorandum. Notably, these agreements were among those specifically identified in the Grayson Whitaker gap assessment report as requiring immediate review due to the absence of FMV substantiation at the time of assumption.

The Lakeview acquisition was led by Westbrook Hale LLP (partner Elena Marchetti), which served as AHT's corporate transaction counsel. During the acquisition process, Westbrook Hale deferred to Calderwood & Harkness on healthcare regulatory compliance matters, including the assessment of assumed physician arrangements. However, at the time of closing, the decision was made to assume the three medical director agreements in their existing form and to conduct FMV analysis post-closing as part of the broader integration process. As discussed further below, FMV opinions were not obtained for these arrangements at the time of assumption — a gap that Northbridge Valuation Advisors is now addressing.

Dr. Chao's Regional Medical Director arrangement is separately structured as a W-2 employment arrangement and is not among the 38 independent contractor/medical director agreements analyzed in this memorandum. However, Dr. Chao's supervisory role with respect to the Lakeview legacy medical directors is noted, and coordination with Dr. Chao regarding the restructuring of these arrangements is addressed in our recommendations at Section VIII.F below.

C. Regulatory Framework Overview

The physician compensation arrangements at issue in this memorandum are subject to two principal federal healthcare regulatory regimes, each of which imposes independent requirements with respect to FMV and commercial reasonableness. These requirements are also informed by interpretive guidance from the Centers for Medicare & Medicaid Services ("CMS"), the Office of Inspector General of the Department of Health and Human Services ("OIG"), and relevant case law. We summarize the key statutory and regulatory provisions below.

Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)). The AKS is a criminal statute that prohibits the knowing and willful offering, payment, solicitation, or receipt of any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward referrals of items or services reimbursable by federal healthcare programs, including Medicare and Medicaid. A violation of the AKS constitutes a felony, punishable by fines of up to $100,000 per violation, imprisonment of up to ten (10) years, or both. In addition, the OIG may impose civil monetary penalties of up to $100,000 per violation and may seek exclusion from participation in federal healthcare programs. The AKS requires proof of intent ("knowing and willful"), though courts have interpreted this scienter requirement with varying degrees of strictness. Importantly, a violation of the AKS also gives rise to liability under the False Claims Act ("FCA"), 31 U.S.C. §§ 3729–3733, because a claim submitted in connection with an arrangement that violates the AKS is deemed a "false or fraudulent claim" under 42 U.S.C. § 1320a-7b(g).

AKS Personal Services and Management Contracts Safe Harbor (42 C.F.R. § 1001.952(d)). The AKS provides statutory exceptions ("safe harbors") under which certain payment practices are shielded from prosecution. The personal services and management contracts safe harbor, codified at 42 C.F.R. § 1001.952(d), is the safe harbor most directly applicable to medical director and independent contractor arrangements. To qualify for this safe harbor, an arrangement must satisfy all of the following elements:

(i) The arrangement is set forth in a writing signed by the parties;

(ii) The writing covers all of the services to be provided by the contractor;

(iii) If the arrangement is intended to provide for services on a periodic, sporadic, or part-time basis, the writing specifies exactly the schedule of such intervals, their precise length, and the exact charge for such intervals;

(iv) The term of the agreement is for not less than one year;

(v) The aggregate compensation paid to the contractor over the term of the agreement is set in advance, is consistent with fair market value in arms-length transactions, and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid, or other federal healthcare programs; and

(vi) The services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.

The safe harbor was updated by the AKS Safe Harbor Modernization Final Rule (85 Fed. Reg. 77684, effective January 19, 2021), which, among other changes, provided additional flexibility regarding the requirement that the schedule of services be specified "exactly." Nevertheless, the core FMV and non-referral-based compensation requirements remain unchanged and are the focus of our analysis.

Physician Self-Referral Law (Stark Law) (42 U.S.C. § 1395nn). The Stark Law prohibits a physician from making referrals for "designated health services" ("DHS") payable by Medicare (or, in certain states, Medicaid) to an entity with which the physician or an immediate family member has a "financial relationship" (including a compensation arrangement), unless an applicable exception is met. Unlike the AKS, the Stark Law is a strict liability statute — no intent to violate the law is required. Where a referral is made in violation of the Stark Law, the entity is prohibited from submitting, and Medicare is prohibited from paying, any claim for the referred DHS. Penalties for Stark Law violations include denial of payment, refund of amounts collected, civil monetary penalties of up to $15,000 per service (or up to $100,000 per scheme), False Claims Act liability (with treble damages), and potential exclusion from federal healthcare programs.

DHS categories include, among others, clinical laboratory services, radiology and certain other imaging services, and physical therapy services — all of which are provided by AHT at its clinic locations and all of which are the subject of physician referrals from the medical directors and independent contractors at issue in this memorandum.

Stark Law Personal Services Exception (42 C.F.R. § 411.357(d)). The Stark Law personal services exception is the primary exception applicable to medical director and independent contractor arrangements. Its requirements include:

(i) The arrangement is set out in writing, is 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;

(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;

(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 (except in the case of qualifying value-based arrangements);

(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; and

(vii) The arrangement meets a holdover provision permitting continuation for up to six (6) months following the expiration of the agreement, on the same terms, provided the holdover is necessitated by circumstances beyond the parties' control.

CMS Stark Law Modernization Final Rule (85 Fed. Reg. 77492, effective January 19, 2021). This rulemaking introduced several significant clarifications and updates to the Stark Law regulatory framework. Most relevant to this analysis, CMS confirmed that FMV and commercial reasonableness are distinct requirements — an arrangement may satisfy FMV but fail commercial reasonableness, or vice versa. CMS defined "commercially reasonable" as meaning that an arrangement "furthers a legitimate business purpose of the parties to the arrangement and is on terms that are sensible, considering the particular circumstances, when the arrangement is not conditioned on the physician's referral of patients to a particular provider, practitioner, or supplier." CMS also updated the holdover provisions, permitting holdover for up to six (6) months on the same terms following expiration of an arrangement, provided the arrangement otherwise satisfied the applicable exception prior to expiration.

Stark Law FMV Exception (42 C.F.R. § 411.357(l)). This alternative exception is available for certain compensation arrangements and requires, among other things, that the arrangement is in writing, signed by the parties, and covers only identifiable items or services, and that the compensation paid is consistent with fair market value and does not take into account the volume or value of referrals. While this exception provides an alternative pathway, it does not relieve the FMV requirement and therefore does not cure the core deficiency identified in this memorandum.

OIG Compliance Guidance. The OIG's Compliance Program Guidance for Individual and Small Group Physician Practices (65 Fed. Reg. 59434) and numerous OIG Advisory Opinions have specifically identified medical director compensation arrangements as a frequent area of enforcement concern. The OIG has cautioned that medical director arrangements may be used as vehicles to compensate physicians for referrals under the guise of administrative services, particularly where duties are vaguely defined, hours are not documented, or compensation exceeds FMV.

State Laws. The arrangements are also subject to state anti-kickback and self-referral laws in each state in which AHT operates. Relevant state laws include the Massachusetts anti-kickback statute (M.G.L. c. 175H, § 3) and the Connecticut referral fee prohibition (Conn. Gen. Stat. § 20-7a(d)). The state-law analysis is addressed in separate companion memoranda but is referenced herein as applicable.

D. Information Reviewed

In preparing this memorandum, we have reviewed and relied upon the following documents and information sources:

1. All 38 independent contractor and medical director agreements maintained by AHT, including executed agreements, amendments, addenda, side letters, and any renewal letters or extension notices;

2. AHT physician time logs and duty descriptions, where available, for physicians serving under the 38 arrangements (noting that many arrangements lack contemporaneous time documentation);

3. AHT internal compensation schedules for all physician arrangements, including the physician compensation grid maintained by AHT's finance department;

4. The Grayson Whitaker & Associates LLP compliance gap assessment report (Report No. GW-AHT-2022-Final, dated December 12, 2022), including all supporting schedules and appendices;

5. The Halsted Accounting Group LLP FY2022 management letter (engagement partner Ronald Desmond), which flagged certain physician compensation arrangements as requiring FMV substantiation and recommended that AHT obtain independent FMV opinions;

6. Preliminary data and draft analysis provided by Northbridge Valuation Advisors LLC (Managing Director: Sandra Kilpatrick) pursuant to the February 2023 FMV opinion engagement;

7. MGMA Physician Compensation and Production Survey, 2022 edition, including medical director compensation data by specialty, geographic region, and organizational type;

8. SullivanCotter Physician Compensation and Productivity Survey, 2022 edition, including medical director-specific hourly rate data by specialty and region;

9. AHT organizational charts, clinic staffing models, and regional management structure documentation;

10. AHT referral data for fiscal year 2022, including physician-level referral volumes to AHT ancillary services (laboratory, diagnostic imaging, physical therapy);

11. Lakeview Medical Associates, P.C. asset purchase agreement and ancillary transaction documents (prepared by Westbrook Hale LLP);

12. AHT Board minutes and resolutions relevant to the self-assessment engagement, including Board Resolution No. 2023-01-004;

13. Correspondence and communications with Ridgeline Capital Partners regarding compliance risk exposure; and

14. Applicable federal and state statutes, regulations, and guidance documents as cited throughout this memorandum.

III. Detailed Inventory of 38 Medical Director / Independent Contractor Arrangements

A. Summary Statistics

The following summary statistics describe the aggregate characteristics of the 38 independent contractor and medical director arrangements maintained by AHT as of the date of this memorandum:

The effective average hourly rate of $501.28 is calculated by dividing the aggregate annual compensation of $1,920,000 by the total annual hours of 3,830.4 (computed as 38 arrangements × 8.4 hours per month × 12 months). As discussed in detail in Section IV below, this effective rate exceeds the 90th percentile for medical director compensation across all major physician specialties represented in AHT's arrangement portfolio. We note that the 8.4 hours-per-month average is based on AHT's internal records, which in many cases reflect estimates rather than contemporaneous time documentation. The absence of reliable contemporaneous time logs is itself a significant compliance deficiency, as discussed further below.

B. Geographic and Specialty Distribution

The 38 arrangements are distributed across AHT's four-state operational footprint as follows:

The Massachusetts arrangements include the three (3) Lakeview legacy medical director agreements assumed in the August 2022 asset acquisition.

The specialty distribution of the 38 arrangements reflects AHT's clinical service lines and encompasses the following categories:

• Primary care medical directors (internal medicine and family medicine): These physicians serve as clinical medical directors for individual AHT clinic sites and are responsible for general clinical oversight, quality assurance, and policy compliance. This is the largest category of arrangement.

• Cardiology quality oversight directors: Physicians providing specialty-specific quality oversight for AHT's cardiology service line across multiple clinic locations, including review of diagnostic protocols, clinical outcomes, and peer review activities.

• Orthopedic medical directors: Physicians overseeing AHT's orthopedic service line at designated clinic sites, including surgical referral protocols, physical therapy coordination, and outcomes monitoring.

• Gastroenterology oversight directors: Physicians providing quality and clinical oversight for AHT's gastroenterology services, including endoscopy referral protocols and clinical pathway management.

• Ancillary services oversight directors (laboratory, imaging, physical therapy): Physicians providing medical directorship for AHT's in-office ancillary service lines, including laboratory medical directorship (required by CLIA), diagnostic imaging oversight, and physical therapy program direction.

A critical observation arising from the specialty distribution analysis is that many of the physicians serving as medical directors under these arrangements also generate significant referral volume to AHT-owned ancillary services — specifically, in-office laboratory, diagnostic imaging, and physical therapy. Because these ancillary services constitute DHS under the Stark Law, the referral relationship between the medical director and the entity to which the referral is made (AHT) creates a financial relationship that must be protected by a Stark Law exception. The combination of this referral relationship with the compensation concerns identified in this memorandum materially heightens both AKS and Stark Law exposure.

C. Lakeview Legacy Medical Director Agreements

As noted in Section II.B above, AHT assumed three (3) medical director agreements in connection with the Lakeview Medical Associates asset acquisition on August 15, 2022. The relevant details of these agreements are as follows:

These three agreements were among the arrangements specifically identified in the Grayson Whitaker gap assessment report as requiring immediate review. The principal concerns with these arrangements include: (i) the absence of independent FMV opinions at the time of assumption (Westbrook Hale LLP, which led the Lakeview transaction, did not obtain FMV opinions for the assumed physician arrangements); (ii) inadequate hours documentation, making it impossible to verify the effective hourly rate on a retrospective basis; and (iii) duty descriptions that are materially vague and fail to distinguish medical director responsibilities from clinical duties.

While the absolute stipend amounts for the Lakeview legacy arrangements are moderate relative to the overall portfolio (ranging from $45,000 to $72,000), they nonetheless require FMV substantiation on an hourly-rate basis. If documented hours are as low as those observed across AHT's broader medical director portfolio, the effective hourly rates for these arrangements could also exceed applicable benchmarks. Northbridge Valuation Advisors is preparing FMV opinions for these three arrangements as part of the broader engagement.

Dr. Vivian Chao's Regional Medical Director arrangement (W-2 employment) is not included in the 38 arrangements analyzed herein. However, Dr. Chao's supervisory role over the Central Massachusetts clinic network, which includes the Lakeview legacy clinic and its associated medical directors, is relevant to the commercial reasonableness analysis of the Lakeview legacy arrangements, as discussed in Section V.C below.

D. Arrangement-by-Arrangement Categorization

A comprehensive arrangement-by-arrangement inventory is presented in Appendix A, which sets forth the following information for each of the 38 arrangements in tabular format: Arrangement ID, physician name and specialty, clinic location(s), annual stipend, contracted monthly hours (where stated in the agreement), documented monthly hours (per AHT records, where available), effective hourly rate, applicable risk tier from the Master Arrangement Inventory & Risk Scoring Matrix, applicable statutes (AKS, Stark, or both), safe harbor/exception compliance status, and recommended action.

We note at the outset that a significant number of the 38 agreements do not specify hourly commitments at all, and many that do specify hours lack contemporaneous time-logging to verify actual hours worked. This documentation gap is itself a compliance deficiency that frustrates both FMV analysis and safe harbor/exception compliance, as discussed in detail throughout this memorandum.

For purposes of remediation prioritization, we have categorized the 38 arrangements into three risk tiers based on a composite assessment of FMV compliance, documentation adequacy, referral relationships, and contract term deficiencies:

Tier 1 — Highest Risk (estimated 14 arrangements). Tier 1 encompasses arrangements that exhibit multiple concurrent deficiencies presenting the most acute compliance risk. An arrangement is classified as Tier 1 if it satisfies all of the following criteria: (i) the effective hourly rate exceeds the 90th percentile for the applicable physician specialty based on MGMA and SullivanCotter benchmark data; (ii) there is an absence of documented duties or contemporaneous time logs sufficient to verify the scope and hours of medical director services actually provided; and (iii) the physician maintains a referral relationship with AHT involving DHS — specifically, the physician refers patients to AHT-owned laboratory, diagnostic imaging, or physical therapy services. These 14 arrangements represent the highest enforcement priority and are the primary candidates for potential voluntary self-disclosure, as analyzed in the companion CMS SRDP and OIG SDP Evaluation Memoranda.

Tier 2 — Elevated Risk (estimated 16 arrangements). Tier 2 encompasses arrangements that present significant but somewhat less acute compliance risk than Tier 1. An arrangement is classified as Tier 2 if it satisfies one or more of the following criteria: (i) the effective hourly rate exceeds the 75th percentile for the applicable physician specialty; (ii) documentation of duties is inadequate (vague or generic duty descriptions); or (iii) time-logging is incomplete or inconsistent. Tier 2 arrangements require restructuring but are less likely to be candidates for voluntary self-disclosure in the near term, assuming prompt remediation.

Tier 3 — Moderate Risk (estimated 8 arrangements). Tier 3 encompasses arrangements where the effective hourly rate falls within established benchmark ranges for the applicable specialty and geographic market, but where technical contract deficiencies create compliance risk. Common Tier 3 deficiencies include: agreements operating in holdover beyond their initial term without formal renewal, absence of FMV certification provisions in the agreement, failure to specify the schedule of services with sufficient specificity, or failure to include standard AKS and Stark compliance representations. These arrangements can generally be brought into full compliance through execution of the Revised Independent Contractor / Medical Director Agreement Template without requiring compensation adjustments.

The following table summarizes the tier distribution:

IV. Fair Market Value Analysis

A. FMV Legal Standard

Under both the AKS personal services safe harbor and the Stark Law personal services exception, physician compensation must be consistent with FMV. This requirement is a cornerstone of the regulatory framework governing physician compensation arrangements and reflects the fundamental policy objective of ensuring that payments to physicians are commensurate with the legitimate value of services they provide, rather than serving as disguised remuneration for referrals.

The Stark Law regulations define FMV at 42 C.F.R. § 411.351 as follows:

Fair market value means the value in arm's-length transactions, consistent with the general market value of the subject transaction. With respect to the rental of equipment, fair market value means the value in arm's-length transactions of rental property for general commercial purposes (not taking into account its intended use). With respect to the rental of office space, fair market value means the value in arm's-length transactions of rental property for general commercial purposes (not taking into account its proximity to the lessor or any other provider of DHS). With respect to compensation for services, fair market value is the compensation that would be included in a service agreement negotiated between a willing buyer and a willing seller, with neither party being under compulsion to enter into the arrangement, and with both parties having reasonable knowledge of the relevant facts at the time of the agreement.

The CMS Stark Law Modernization Final Rule (85 Fed. Reg. 77492, effective January 19, 2021) provided further clarification of the FMV standard. Significantly, CMS confirmed that FMV must be assessed at the time the parties enter the arrangement and that FMV must be determined "without regard to the volume or value of referrals or other business generated by the referring physician for the entity furnishing the DHS." CMS also emphasized that while survey data (such as MGMA and SullivanCotter) may serve as useful benchmarks, FMV is ultimately a facts-and-circumstances determination and no single data source is dispositive.

The OIG has been equally clear that compensation exceeding FMV may be viewed as potential remuneration intended to induce or reward referrals. In numerous Advisory Opinions, fraud alerts, and compliance guidance documents, the OIG has cautioned that above-market compensation for medical director services is a hallmark of arrangements that may implicate the AKS, particularly where the physician maintains a referral relationship with the paying entity.

The importance of FMV substantiation was reinforced in the AHT context by Halsted Accounting Group LLP (engagement partner Ronald Desmond), which flagged in its FY2022 management letter that certain AHT physician compensation arrangements lacked adequate FMV substantiation and recommended that AHT obtain independent FMV opinions. This recommendation was consistent with the Grayson Whitaker gap assessment findings and contributed to the Board's decision to authorize the self-assessment engagement.

B. Benchmark Data Sources and Methodology

Our FMV analysis relies on three principal data sources, each of which is widely recognized as authoritative in healthcare compensation benchmarking:

MGMA Physician Compensation and Production Survey (2022 edition). The MGMA survey is the industry-standard benchmark for physician compensation across all specialties and practice settings. It reports compensation data at multiple percentile levels (25th, 50th/median, 75th, and 90th) and includes specific data on medical director compensation, broken down by specialty, geographic region (including New England/Northeast), practice size, and organizational type. The MGMA survey is widely cited by CMS, the OIG, and valuation professionals as a primary FMV reference.

SullivanCotter Physician Compensation and Productivity Survey (2022 edition). The SullivanCotter survey is a complementary benchmark source that provides medical director-specific compensation data, including hourly rate data by specialty, region, and organizational type. SullivanCotter's medical director compensation module is particularly useful because it separately identifies compensation for administrative/medical director duties as distinct from clinical compensation, enabling a more precise comparison with AHT's medical director stipend arrangements.

Northbridge Valuation Advisors LLC FMV Opinions. At Calderwood & Harkness's recommendation, AHT engaged Northbridge Valuation Advisors LLC in February 2023 to prepare independent, arrangement-specific FMV opinions for all 38 independent contractor/medical director agreements analyzed in this memorandum, as well as an additional 14 Lakeview legacy physician employment agreements, 2 office leases, and the Meridian facility fee arrangement (52 total physician arrangements plus ancillary arrangements). Northbridge's Managing Director, Sandra Kilpatrick, is leading the engagement. Northbridge's preliminary data and draft analysis have been shared with us and are referenced in this memorandum where available. Final Northbridge opinions are anticipated for delivery by June 2023.

Methodology. Our FMV analysis compares the effective hourly rate for each arrangement against specialty-specific benchmark ranges derived from the MGMA and SullivanCotter surveys, adjusted for the following factors:

• Geographic market adjustment: Compensation benchmarks are calibrated to the New England/Northeast region, which generally commands higher physician compensation levels than national averages, reflecting the higher cost of living and competitive labor market in the Boston, Hartford, Providence, and Manchester metropolitan areas;

• Organizational size adjustment: Benchmarks are adjusted for AHT's organizational size (23 clinics, 147 employed physicians, $214.3 million in revenue), which is generally consistent with large multi-specialty group practice benchmarks;

• Scope of duties adjustment: Where the medical director agreement specifies duties that are atypical or unusually broad in scope (e.g., multi-site oversight, regulatory compliance functions), we consider whether an upward adjustment to the benchmark range is warranted; and

• Specialty-specific adjustment: Compensation benchmarks vary significantly by physician specialty, reflecting differences in clinical earning potential and opportunity cost. Our analysis applies specialty-specific benchmarks for each arrangement.

Notwithstanding these adjustments, the effective hourly rates observed across the AHT arrangement portfolio substantially exceed the adjusted benchmark ranges for virtually all arrangements, as demonstrated in the analysis below.

C. Effective Hourly Rate Analysis

Aggregate Calculation. As noted in Section III.A, the aggregate annual compensation across all 38 arrangements is $1,920,000, and the total annual hours documented across all arrangements (based on AHT's internal records) is approximately 3,830.4 hours. The resulting effective average hourly rate is:

$1,920,000 ÷ 3,830.4 hours = $501.28 per hour

Benchmark Comparison by Specialty. The following table compares the $501.28 effective average hourly rate to the 90th percentile hourly rate ranges for medical director compensation across the major specialties represented in AHT's arrangement portfolio, as reported by MGMA and SullivanCotter (2022 editions):

As this comparison demonstrates, the effective average hourly rate of $501.28 exceeds the 90th percentile for all major specialties represented in the AHT medical director portfolio. Even for the highest-compensated specialties — orthopedics and cardiology — the AHT effective rate exceeds the upper end of the 90th percentile range by approximately $25 to $125 per hour. For primary care medical directors, the AHT effective rate exceeds the 90th percentile by approximately $160 to $225 per hour, representing a premium of approximately 50–80% above the highest benchmark.

Distribution Analysis. While the portfolio-wide effective average rate is $501.28, the individual arrangement effective rates vary significantly across the 38 arrangements. This variation is driven primarily by differences in documented hours rather than differences in stipend amounts. The following general observations emerge from the distribution analysis:

• Several arrangements with relatively modest annual stipends (e.g., $25,000–$40,000) but minimal documented monthly hours (e.g., 2–4 hours per month) produce effective hourly rates exceeding $700 per hour and in some cases exceeding $800 per hour. These arrangements present the most acute FMV risk.

• A smaller number of arrangements with higher stipends (e.g., $80,000–$110,000) but more substantial documented monthly hours (e.g., 12–20 hours per month) produce effective hourly rates that fall closer to — though in most cases still above — the applicable benchmark ranges.

• No arrangement in the current portfolio has an effective hourly rate that falls at or below the 50th percentile for the applicable specialty, which would represent the most defensible FMV position.

The detailed arrangement-by-arrangement effective hourly rate analysis, with specific benchmark comparisons for each arrangement, is presented in Appendix A.

Root Cause Analysis. Our analysis indicates that the primary driver of above-FMV effective hourly rates across the AHT arrangement portfolio is insufficient documented hours of medical director service, rather than excessive stipend amounts in absolute terms. While certain stipends are elevated (particularly those at the upper end of the range, $90,000–$110,000), the more pervasive problem is that the contracted and documented hours of service are too few to support the stipend amounts on an hourly-rate basis.

This finding has important implications for the remediation strategy. In many cases, the most effective remediation approach may be to require (and rigorously document) substantially more hours of legitimate medical director service, rather than (or in addition to) reducing the stipend amount. However, this approach is only viable where there is a legitimate, commercially reasonable need for additional medical director hours — an assessment that must be made on an arrangement-by-arrangement basis. Where additional hours cannot be justified, stipend reductions will be necessary.

D. Specific FMV Deficiencies Identified

Beyond the overarching concern about above-benchmark effective hourly rates, our review has identified several specific categories of FMV-related deficiencies across the 38 arrangements:

Arrangements Lacking Any Stated Hourly Commitment. Approximately eleven (11) of the 38 agreements do not specify any minimum or expected number of hours to be devoted to medical director duties. These agreements typically provide for a fixed annual or monthly stipend in exchange for medical director services described only in general terms, without any quantification of the time commitment expected. The absence of a stated hourly commitment makes it impossible to establish the effective hourly rate on the face of the contract and creates an inherent risk that the physician is being compensated for something other than — or in excess of — the services actually provided.

Arrangements with Stated Hours but No Contemporaneous Time-Logging. Approximately nineteen (19) of the 38 agreements specify an expected number of monthly hours but lack any system for contemporaneous time-logging or verification of actual hours worked. In these arrangements, AHT has no reliable mechanism for determining whether the physician is actually devoting the contracted hours to medical director duties or whether the stated hours are merely estimates. The absence of contemporaneous time documentation significantly weakens the FMV defense because it prevents AHT from demonstrating, in response to a government inquiry, that the compensation paid was commensurate with the services actually rendered.

Arrangements Where Documented Hours Produce Above-90th-Percentile Rates. Approximately twenty-two (22) of the 38 arrangements have documented hours (either contractually stated or estimated by AHT) that are sufficiently low that the resulting effective hourly rate exceeds the 90th percentile for the applicable physician specialty, regardless of which specialty benchmark is applied. These arrangements present the most direct FMV compliance risk and form the core of the Tier 1 remediation priority.

Arrangements Where Absolute Stipend Amounts Exceed Benchmarks. Approximately nine (9) of the 38 arrangements have annual stipend amounts that exceed the 75th percentile for the applicable specialty even when a reasonable estimate of monthly hours (e.g., 10–15 hours) is assumed. For these arrangements, the FMV concern extends beyond inadequate hours documentation to the absolute level of the stipend itself, and stipend reductions (in addition to improved hours documentation) will likely be necessary.

Lakeview Legacy Arrangements. The three Lakeview legacy arrangements ($45,000, $60,000, and $72,000 annual stipends) present moderate FMV risk. While the absolute stipend amounts are within a range that could be defensible depending on the hours and scope of duties, the current absence of hours documentation prevents any determination of whether the effective hourly rates are within FMV ranges. Northbridge is preparing FMV opinions for all three arrangements, and our remediation recommendations for these agreements are set forth in Section VIII.F.

E. Northbridge Preliminary FMV Ranges

Northbridge Valuation Advisors LLC has provided preliminary FMV range data for certain specialties and arrangement types as part of its ongoing engagement. While the final Northbridge opinions are not anticipated until June 2023, the preliminary data provides useful directional guidance for the remediation planning process.

Northbridge's valuation methodology employs a blended approach incorporating:

• Income approach (market-based hourly rate method): Under this approach, Northbridge identifies the market hourly rate for medical director services by specialty and geography, based on survey data (MGMA, SullivanCotter, and proprietary Northbridge databases), and multiplies this rate by the projected reasonable hours of medical director service. The projected hours are based on an assessment of the scope of duties described in the agreement, the size and complexity of the clinic or service line overseen, and the time that a reasonably competent physician would be expected to devote to those duties.

• Market approach (comparable transactions): Under this approach, Northbridge analyzes comparable medical director compensation arrangements from its proprietary transaction database, adjusting for differences in specialty, geography, organizational size, and scope of duties.

• Reasonableness cross-check: Northbridge applies an additional reasonableness analysis that considers the physician's clinical opportunity cost (i.e., the clinical income the physician forgoes by devoting time to medical director duties) and the overall compensation relationship between the physician and AHT.

Based on the preliminary Northbridge data, the following general conclusions can be stated: for the majority of the 38 arrangements, compensation will need to be restructured either by reducing the stipend amount or by documenting — and verifying through contemporaneous time logs — substantially greater hours of legitimate medical director service in order to bring the effective hourly rate within a defensible FMV range. Northbridge's preliminary analysis is consistent with our own benchmark comparison analysis and reinforces the conclusion that the current arrangement portfolio presents significant FMV risk.

The final Northbridge opinions, anticipated for delivery by June 2023, will provide arrangement-specific FMV ranges that will serve as the basis for the individual restructuring conversations with affected physicians. We strongly recommend that no restructured compensation terms be finalized until the Northbridge opinions are in hand, to ensure that the revised terms are defensible based on independent third-party valuation.

V. Commercial Reasonableness Analysis

A. Commercial Reasonableness Legal Standard

As clarified by the CMS Stark Law Modernization Final Rule (85 Fed. Reg. 77492), commercial reasonableness is a separate and distinct requirement from FMV. An arrangement may be priced at FMV and still fail the commercial reasonableness test, or vice versa. The Stark Law personal services exception at 42 C.F.R. § 411.357(d) requires that the aggregate services contracted for be "reasonable and necessary for the legitimate business purposes of the arrangement." CMS has stated that an arrangement is commercially reasonable if it "furthers a legitimate business purpose of the parties" and "makes commercial sense" when considered independently of the referral relationship between the parties.

The commercial reasonableness inquiry asks whether AHT would enter into a particular medical director arrangement for a legitimate business reason even if the physician generated no referrals to AHT. This is an objective test that examines the arrangement from the perspective of a reasonable healthcare entity operating in the same or similar market. If the only plausible explanation for the arrangement is to compensate the physician for referrals, the arrangement fails the commercial reasonableness test regardless of whether the compensation is set at FMV.

The OIG has consistently identified medical director arrangements as a frequent area of commercial reasonableness concern. In its compliance guidance and in numerous Advisory Opinions, the OIG has observed that medical director arrangements may serve as vehicles for disguised referral compensation where: (i) the described duties are nominal, vague, or non-specific; (ii) the physician does not actually perform meaningful medical director work; (iii) the duties described in the agreement are duplicative of responsibilities already encompassed within the physician's employment or other arrangement with the entity; or (iv) the arrangement serves no legitimate business purpose that could not be fulfilled through existing employed physician or administrative roles.

B. Duty Description Deficiencies

Our review of the 38 agreements reveals significant inconsistency and vagueness in the description of medical director duties across the arrangement portfolio. Of the 38 agreements, we estimate that approximately twenty-nine (29) contain duty descriptions that are materially deficient for purposes of establishing commercial reasonableness. The common deficiencies include:

Generic, non-specific duty descriptions. Many agreements describe the medical director's duties in conclusory terms such as "provide medical direction and oversight for clinic operations," "ensure quality of clinical services," or "serve as medical director for the clinic." These descriptions do not identify specific tasks, deliverables, activities, or measurable outcomes. They do not distinguish among the types of medical director roles (site-level clinical direction, specialty quality oversight, ancillary services oversight) and do not provide sufficient specificity to permit verification that the physician is actually performing the described duties.

Failure to distinguish medical director duties from clinical duties. Several agreements fail to draw a clear distinction between the duties the physician is expected to perform in a medical director capacity and the duties inherent in the physician's clinical practice. This ambiguity creates risk that the medical director stipend is being paid for clinical services that are separately compensated or that are inherent in the physician's practice, rather than for genuine administrative or oversight functions.

Absence of deliverable requirements. None of the 38 agreements currently require the medical director to produce specific deliverables such as written quality reports, meeting minutes, policy review memoranda, peer review documentation, or other tangible work product. The absence of deliverable requirements makes it difficult to demonstrate that the physician is performing meaningful medical director work and contributes to the inference that the arrangement lacks commercial substance.

Absence of performance metrics. The agreements do not establish measurable performance expectations or evaluation criteria for the medical director's administrative contributions. Without performance metrics, there is no mechanism for AHT to evaluate whether the medical director's services are contributing value to the organization and no basis for continuing or adjusting the arrangement.

Overlap with other roles. As discussed in Section V.C below, certain medical director duties described in the agreements overlap with responsibilities assigned to other AHT personnel, including employed physicians, Regional Medical Directors, clinical department chairs, and administrative staff. This overlap raises questions about whether the arrangement serves a genuine, non-duplicative business purpose.

C. Duplicative Arrangements and Overlapping Roles

Our review has identified several categories of potential duplication and role overlap that undermine the commercial reasonableness of certain arrangements:

Multiple medical directors at a single clinic site. We have identified instances in which the same AHT clinic site is served by two or more medical directors with overlapping or indistinguishable duty descriptions. In these cases, it is unclear what distinct function each medical director performs that could not be performed by a single medical director or by the clinic's employed physicians and administrative staff. The existence of multiple medical directors at a single site, without clear differentiation of responsibilities, creates a strong inference that at least one of the arrangements lacks a legitimate, independent business purpose.

Overlap with Regional Medical Directors and department chairs. AHT's organizational structure includes Regional Medical Directors (such as Dr. Vivian Chao for Central Massachusetts) and clinical department chairs who are W-2 employees with defined quality oversight, compliance, and clinical leadership responsibilities. In certain cases, the duties described in independent contractor medical director agreements overlap substantially with the responsibilities of these employed positions. For example, where a Regional Medical Director is responsible for "overseeing clinical quality across all clinics in the region," and an independent contractor medical director at a specific clinic within that region is also responsible for "overseeing clinical quality at the clinic," the question arises whether the independent contractor arrangement is necessary or whether its functions are already being performed by the Regional Medical Director.

Overlap with Chief Compliance Officer functions. Certain agreements describe medical director duties that include compliance-related functions such as "oversight of regulatory compliance at the clinic" or "ensuring compliance with applicable laws and regulations." These functions overlap with the responsibilities of AHT's Chief Compliance Officer, Derek Huang, and his compliance team. While physician input into compliance activities may be appropriate and even necessary in certain contexts (e.g., clinical compliance matters requiring medical judgment), the agreements do not clearly delineate the boundary between the medical director's compliance role and the CCO's compliance role.

Assessment. Based on our review, we estimate that approximately six to eight (6–8) of the 38 arrangements present questionable commercial reasonableness because the described duties are either duplicative of other roles within AHT's organizational structure or are so minimal in scope that the arrangement does not appear to further a legitimate business purpose independent of the physician's referral relationship with AHT. These arrangements should be prioritized for review and potential termination or consolidation, as discussed in our recommendations at Section VIII.E.

D. Referral Correlation Concern

As noted in Section III.B, many of the physicians serving as medical directors under the 38 arrangements also generate significant referral volume to AHT-owned ancillary services, including in-office laboratory, diagnostic imaging, and physical therapy. These ancillary services are DHS under the Stark Law, meaning that the referrals from these physicians to AHT are subject to the Stark Law's prohibition unless a valid exception applies.

While the existence of a referral relationship does not, by itself, invalidate a medical director arrangement — indeed, the Stark Law contemplates that physicians who have financial relationships with entities may refer DHS to those entities, provided an exception is met — the combination of multiple risk factors creates a profile that government enforcement authorities would likely view with heightened scrutiny. Specifically, the combination of: (i) compensation that exceeds FMV on an effective hourly rate basis; (ii) vaguely defined and minimally documented medical director duties; and (iii) a substantial referral relationship involving DHS creates a pattern that the OIG has repeatedly identified as indicative of potential kickback arrangements disguised as legitimate service contracts.

The significance of this risk is amplified by AHT's revenue profile. With 61% of AHT's FY2022 net revenue ($130.7 million of $214.3 million) attributable to Medicare and Medicaid reimbursements, the volume of claims potentially implicated by a Stark Law violation is substantial. Under the False Claims Act, each claim submitted in connection with a non-compliant Stark Law referral constitutes a separate false claim, exposing AHT to treble damages and per-claim penalties that could aggregate to significant financial liability.

Our referral correlation analysis, based on AHT's FY2022 referral data, indicates that a meaningful subset of the Tier 1 arrangements involves physicians who are among AHT's highest-volume referral sources for ancillary services. While we do not suggest that referral volume alone is evidence of a kickback arrangement, the correlation between high referral volume and above-FMV medical director compensation warrants careful scrutiny and is a factor that government investigators would be expected to examine closely.

VI. Analysis Under AKS Safe Harbors and Stark Law Exceptions

A. AKS Personal Services and Management Contracts Safe Harbor (42 C.F.R. § 1001.952(d))

The personal services and management contracts safe harbor is the primary AKS safe harbor applicable to AHT's medical director and independent contractor arrangements. Protection under this safe harbor requires satisfaction of all statutory elements. We have assessed each of the 38 arrangements against these elements, with the following aggregate findings:

Written agreement signed by the parties. This element is satisfied by all 38 arrangements. Each arrangement is memorialized in a written agreement signed by both AHT and the physician. However, we note that several agreements are outdated, having been executed years ago without subsequent amendment or renewal to reflect changes in duties, hours, or compensation. Additionally, approximately seven (7) arrangements are currently operating in holdover status (i.e., the initial term has expired without formal renewal), which, while not a per se failure of the "written agreement" element, raises questions about the continued viability of the safe harbor protection for those arrangements.

Writing specifies services to be provided. This element is deficient in approximately twenty-nine (29) of the 38 arrangements. As discussed in Section V.B, the duty descriptions in these agreements are generic an

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED ATTORNEY WORK PRODUCT
MEMORANDUM
FROM: Miriam Calloway, Partner, and Christopher Aiken, Senior Associate Calderwood & Harkness LLP One Federal Street, 30th Floor Boston, MA 02110
TO: Patricia Yamamoto, General Counsel, and Derek Huang, Chief Compliance Officer Arbor Health Technologies Inc. 200 Concord Avenue, Suite 400 Cambridge, MA 02138
DATE: May 19, 2023
RE: Medical Director and Independent Contractor Compensation — Fair Market Value and Commercial Reasonableness Analysis
MATTER NO.: 1010-00003
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I. Executive Summary
This memorandum presents our analysis of all thirty-eight (38) medical director and independent contractor arrangements currently maintained by Arbor Health Technologies Inc. ("AHT" or the "Company") for compliance with the federal Anti-Kickback Statute ("AKS"), 42 U.S.C. § 1320a-7b(b), and the Physician Self-Referral Law ("Stark Law"), 42 U.S.C. § 1395nn. Our analysis focuses in particular on the fair market value ("FMV") and commercial reasonableness requirements that are central to the applicable safe harbors and exceptions under each statute. This memorandum is intended to be read in conjunction with the Master Arrangement Inventory & Risk Scoring Matrix and the companion memoranda referenced in Section IX below.
This memorandum constitutes one component of the comprehensive regulatory self-assessment engagement authorized by AHT Board Resolution No. 2023-01-004, adopted January 24, 2023. The Board authorized this engagement in response to the compliance gap assessment report prepared by Grayson Whitaker & Associates LLP (Report No. GW-AHT-2022-Final, dated December 12, 2022), which identified seventeen (17) high-risk and twenty-three (23) moderate-risk physician compensation arrangements warranting immediate legal review and remediation. The Grayson Whitaker report served as the catalyst for AHT's engagement of this firm and for the broader self-assessment initiative now underway.
Scope. Our analysis encompasses all 38 independent contractor and medical director agreements maintained by AHT across the Company's twenty-three (23) outpatient clinics in Massachusetts (14 clinics), Connecticut (4 clinics), Rhode Island (3 clinics), and New Hampshire (2 clinics). This universe of arrangements includes three (3) medical director agreements assumed by AHT in the Lakeview Medical Associates, P.C. asset acquisition, which closed on August 15, 2022, at a purchase price of $11.4 million. The Lakeview legacy arrangements are integrated into our analysis and are also addressed in a separate Lakeview Legacy Compliance Gap Memorandum being prepared concurrently.
Key Findings. Our analysis reveals that the effective average hourly compensation rate across the 38 arrangements is $501.28 per hour. This figure is derived from the aggregate annual compensation of $1.92 million divided by total documented annual hours of approximately 3,830.4 hours (based on AHT's own records reflecting an average of 8.4 hours per month per arrangement). This effective rate exceeds the 90th percentile for medical director compensation across all major physician specialties represented in AHT's arrangement portfolio, as measured by both the MGMA Physician Compensation and Production Survey (2022 edition) and the SullivanCotter Physician Compensation and Productivity Survey (2022 edition). The degree to which the effective rate exceeds established benchmarks presents significant compliance risk under both the AKS personal services safe harbor and the Stark Law personal services exception.
The magnitude of AHT's regulatory exposure is underscored by the Company's substantial dependence on federal healthcare program reimbursement. AHT's fiscal year 2022 net revenue totaled $214.3 million, of which approximately 61%, or $130.7 million, was derived from Medicare and Medicaid reimbursements. Any enforcement action under the Stark Law or AKS implicating this revenue stream could result in material financial liability, including False Claims Act treble damages, civil monetary penalties, and potential exclusion from federal healthcare programs.
To support this self-assessment, AHT, at our recommendation, has commissioned independent FMV opinions from Northbridge Valuation Advisors LLC (Managing Director: Sandra Kilpatrick). Northbridge was engaged in February 2023 to prepare arrangement-specific FMV opinions for all 38 independent contractor and medical director agreements analyzed herein, as well as the 14 Lakeview legacy physician employment agreements and certain other physician compensation arrangements and related-party transactions (52 total physician arrangements, plus 2 office leases and the Meridian facility fee). Northbridge's preliminary findings, referenced throughout this memorandum where available, are consistent with our conclusion that substantial restructuring is required.
Recommendation. Based on our analysis, we recommend the immediate restructuring of compensation, hours documentation, and duty descriptions across substantially all 38 arrangements. Our detailed recommendations, set forth in Section VIII below, are designed to bring each arrangement into compliance with the applicable AKS safe harbor and Stark Law exception requirements before the anticipated delivery of final Northbridge FMV opinions in June 2023. Timely remediation is critical not only for regulatory compliance but also for transaction readiness in connection with Ridgeline Capital Partners Fund IV, L.P.'s anticipated exit process in late 2024.
II. Background
A. AHT's Physician Workforce and Arrangement Structure
AHT currently operates twenty-three (23) outpatient clinics under the "Arbor Health Clinics" brand, providing a range of primary care, specialty care, and ancillary services across four New England states. The Company employs one hundred forty-seven (147) physicians as W-2 employees across these clinic sites. The clinical services offered by AHT's employed physicians span primary care (internal medicine and family medicine), cardiology, orthopedics, and gastroenterology. In addition, AHT operates several ancillary service lines at its clinic locations, including in-office laboratory services, diagnostic imaging (including X-ray, ultrasound, and certain advanced imaging modalities), and physical therapy. These ancillary services constitute "designated health services" under the Stark Law, a classification that is central to the regulatory risk analysis presented in this memorandum.
In addition to its W-2 employed physician workforce, AHT maintains independent contractor or medical director arrangements with thirty-eight (38) physicians who are not W-2 employees of the Company. These 38 arrangements are the subject of this memorandum. The arrangements serve range stated functions within AHT's organizational structure, including:
• Clinical medical directorship for specific clinic sites, in which the medical director is responsible for overseeing clinical operations, quality of care, and clinical policy at one or more AHT clinic locations;
• Specialty-specific medical directorship, in which a physician provides quality oversight and clinical leadership for a particular specialty line of service (e.g., cardiology, orthopedics) across multiple AHT clinics;
• Compliance-related clinical oversight, in which a physician is engaged to provide clinical input on regulatory compliance, peer review, credentialing, or utilization review functions; and
• Independent contractor clinical services, in which a physician provides part-time clinical services at AHT clinic locations on an independent contractor basis, typically in a specialty where AHT has not yet hired a full-time employed physician.
The arrangements have developed organically over time, reflecting AHT's growth from a smaller regional practice to a multi-state clinic network. As discussed further below, this organic growth has resulted in significant inconsistency in contract terms, duty descriptions, compensation structures, and documentation practices across the arrangement portfolio.
AHT is a portfolio company of Ridgeline Capital Partners Fund IV, L.P. ("Ridgeline Fund IV"), a private equity fund managed by Ridgeline Capital Advisors LLC. Ridgeline Fund IV acquired a 72% controlling equity stake in AHT in January 2021 for approximately $185 million. Ridgeline's board designees, Claudia Sorrento (Managing Director) and Marcus Whitmore (Principal), have participated in the Board-level discussions surrounding this self-assessment engagement and have expressed concern about the compliance risk exposure associated with AHT's physician compensation arrangements, particularly in connection with a potential exit or sale transaction that Ridgeline anticipates pursuing in late 2024. The investor-driven urgency surrounding the remediation timeline is addressed further in Section VII.C of this memorandum.
B. Lakeview Medical Associates Acquisition — Assumed Arrangements
On August 15, 2022, AHT acquired substantially all of the assets of Lakeview Medical Associates, P.C. ("Lakeview"), a fourteen-physician multi-specialty group practice located in Worcester, Massachusetts. The acquisition was structured as an asset purchase at a total purchase price of $11.4 million. Lakeview's former managing partner, Vivian Chao, M.D., transitioned to AHT following the acquisition and now serves as AHT's Regional Medical Director for Central Massachusetts in a W-2 employment capacity.
Prior to the acquisition, Lakeview generated annual revenue of approximately $18.2 million, of which approximately 60% ($10.9 million) was attributable to Medicare and Medicaid reimbursements. This revenue profile mirrors AHT's own payor mix and further underscores the regulatory significance of the acquired arrangements.
Among the assets assumed in the Lakeview acquisition were three (3) medical director agreements with non-employed physicians, carrying annual stipends of $45,000, $60,000, and $72,000, respectively. These three agreements are included in the universe of 38 arrangements analyzed in this memorandum. Notably, these agreements were among those specifically identified in the Grayson Whitaker gap assessment report as requiring immediate review due to the absence of FMV substantiation at the time of assumption.
The Lakeview acquisition was led by Westbrook Hale LLP (partner Elena Marchetti), which served as AHT's corporate transaction counsel. During the acquisition process, Westbrook Hale deferred to Calderwood & Harkness on healthcare regulatory compliance matters, including the assessment of assumed physician arrangements. However, at the time of closing, the decision was made to assume the three medical director agreements in their existing form and to conduct FMV analysis post-closing as part of the broader integration process. As discussed further below, FMV opinions were not obtained for these arrangements at the time of assumption — a gap that Northbridge Valuation Advisors is now addressing.
Dr. Chao's Regional Medical Director arrangement is separately structured as a W-2 employment arrangement and is not among the 38 independent contractor/medical director agreements analyzed in this memorandum. However, Dr. Chao's supervisory role with respect to the Lakeview legacy medical directors is noted, and coordination with Dr. Chao regarding the restructuring of these arrangements is addressed in our recommendations at Section VIII.F below.
C. Regulatory Framework Overview
The physician compensation arrangements at issue in this memorandum are subject to two principal federal healthcare regulatory regimes, each of which imposes independent requirements with respect to FMV and commercial reasonableness. These requirements are also informed by interpretive guidance from the Centers for Medicare & Medicaid Services ("CMS"), the Office of Inspector General of the Department of Health and Human Services ("OIG"), and relevant case law. We summarize the key statutory and regulatory provisions below.
Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)). The AKS is a criminal statute that prohibits the knowing and willful offering, payment, solicitation, or receipt of any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward referrals of items or services reimbursable by federal healthcare programs, including Medicare and Medicaid. A violation of the AKS constitutes a felony, punishable by fines of up to $100,000 per violation, imprisonment of up to ten (10) years, or both. In addition, the OIG may impose civil monetary penalties of up to $100,000 per violation and may seek exclusion from participation in federal healthcare programs. The AKS requires proof of intent ("knowing and willful"), though courts have interpreted this scienter requirement with varying degrees of strictness. Importantly, a violation of the AKS also gives rise to liability under the False Claims Act ("FCA"), 31 U.S.C. §§ 3729–3733, because a claim submitted in connection with an arrangement that violates the AKS is deemed a "false or fraudulent claim" under 42 U.S.C. § 1320a-7b(g).
AKS Personal Services and Management Contracts Safe Harbor (42 C.F.R. § 1001.952(d)). The AKS provides statutory exceptions ("safe harbors") under which certain payment practices are shielded from prosecution. The personal services and management contracts safe harbor, codified at 42 C.F.R. § 1001.952(d), is the safe harbor most directly applicable to medical director and independent contractor arrangements. To qualify for this safe harbor, an arrangement must satisfy all of the following elements:
(i) The arrangement is set forth in a writing signed by the parties;
(ii) The writing covers all of the services to be provided by the contractor;
(iii) If the arrangement is intended to provide for services on a periodic, sporadic, or part-time basis, the writing specifies exactly the schedule of such intervals, their precise length, and the exact charge for such intervals;
(iv) The term of the agreement is for not less than one year;
(v) The aggregate compensation paid to the contractor over the term of the agreement is set in advance, is consistent with fair market value in arms-length transactions, and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid, or other federal healthcare programs; and
(vi) The services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any state or federal law.
The safe harbor was updated by the AKS Safe Harbor Modernization Final Rule (85 Fed. Reg. 77684, effective January 19, 2021), which, among other changes, provided additional flexibility regarding the requirement that the schedule of services be specified "exactly." Nevertheless, the core FMV and non-referral-based compensation requirements remain unchanged and are the focus of our analysis.
Physician Self-Referral Law (Stark Law) (42 U.S.C. § 1395nn). The Stark Law prohibits a physician from making referrals for "designated health services" ("DHS") payable by Medicare (or, in certain states, Medicaid) to an entity with which the physician or an immediate family member has a "financial relationship" (including a compensation arrangement), unless an applicable exception is met. Unlike the AKS, the Stark Law is a strict liability statute — no intent to violate the law is required. Where a referral is made in violation of the Stark Law, the entity is prohibited from submitting, and Medicare is prohibited from paying, any claim for the referred DHS. Penalties for Stark Law violations include denial of payment, refund of amounts collected, civil monetary penalties of up to $15,000 per service (or up to $100,000 per scheme), False Claims Act liability (with treble damages), and potential exclusion from federal healthcare programs.
DHS categories include, among others, clinical laboratory services, radiology and certain other imaging services, and physical therapy services — all of which are provided by AHT at its clinic locations and all of which are the subject of physician referrals from the medical directors and independent contractors at issue in this memorandum.
Stark Law Personal Services Exception (42 C.F.R. § 411.357(d)). The Stark Law personal services exception is the primary exception applicable to medical director and independent contractor arrangements. Its requirements include:
(i) The arrangement is set out in writing, is 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;
(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;
(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 (except in the case of qualifying value-based arrangements);
(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; and
(vii) The arrangement meets a holdover provision permitting continuation for up to six (6) months following the expiration of the agreement, on the same terms, provided the holdover is necessitated by circumstances beyond the parties' control.
CMS Stark Law Modernization Final Rule (85 Fed. Reg. 77492, effective January 19, 2021). This rulemaking introduced several significant clarifications and updates to the Stark Law regulatory framework. Most relevant to this analysis, CMS confirmed that FMV and commercial reasonableness are distinct requirements — an arrangement may satisfy FMV but fail commercial reasonableness, or vice versa. CMS defined "commercially reasonable" as meaning that an arrangement "furthers a legitimate business purpose of the parties to the arrangement and is on terms that are sensible, considering the particular circumstances, when the arrangement is not conditioned on the physician's referral of patients to a particular provider, practitioner, or supplier." CMS also updated the holdover provisions, permitting holdover for up to six (6) months on the same terms following expiration of an arrangement, provided the arrangement otherwise satisfied the applicable exception prior to expiration.
Stark Law FMV Exception (42 C.F.R. § 411.357(l)). This alternative exception is available for certain compensation arrangements and requires, among other things, that the arrangement is in writing, signed by the parties, and covers only identifiable items or services, and that the compensation paid is consistent with fair market value and does not take into account the volume or value of referrals. While this exception provides an alternative pathway, it does not relieve the FMV requirement and therefore does not cure the core deficiency identified in this memorandum.
OIG Compliance Guidance. The OIG's Compliance Program Guidance for Individual and Small Group Physician Practices (65 Fed. Reg. 59434) and numerous OIG Advisory Opinions have specifically identified medical director compensation arrangements as a frequent area of enforcement concern. The OIG has cautioned that medical director arrangements may be used as vehicles to compensate physicians for referrals under the guise of administrative services, particularly where duties are vaguely defined, hours are not documented, or compensation exceeds FMV.
State Laws. The arrangements are also subject to state anti-kickback and self-referral laws in each state in which AHT operates. Relevant state laws include the Massachusetts anti-kickback statute (M.G.L. c. 175H, § 3) and the Connecticut referral fee prohibition (Conn. Gen. Stat. § 20-7a(d)). The state-law analysis is addressed in separate companion memoranda but is referenced herein as applicable.
D. Information Reviewed
In preparing this memorandum, we have reviewed and relied upon the following documents and information sources:
1. All 38 independent contractor and medical director agreements maintained by AHT, including executed agreements, amendments, addenda, side letters, and any renewal letters or extension notices;
2. AHT physician time logs and duty descriptions, where available, for physicians serving under the 38 arrangements (noting that many arrangements lack contemporaneous time documentation);
3. AHT internal compensation schedules for all physician arrangements, including the physician compensation grid maintained by AHT's finance department;
4. The Grayson Whitaker & Associates LLP compliance gap assessment report (Report No. GW-AHT-2022-Final, dated December 12, 2022), including all supporting schedules and appendices;
5. The Halsted Accounting Group LLP FY2022 management letter (engagement partner Ronald Desmond), which flagged certain physician compensation arrangements as requiring FMV substantiation and recommended that AHT obtain independent FMV opinions;
6. Preliminary data and draft analysis provided by Northbridge Valuation Advisors LLC (Managing Director: Sandra Kilpatrick) pursuant to the February 2023 FMV opinion engagement;
7. MGMA Physician Compensation and Production Survey, 2022 edition, including medical director compensation data by specialty, geographic region, and organizational type;
8. SullivanCotter Physician Compensation and Productivity Survey, 2022 edition, including medical director-specific hourly rate data by specialty and region;
9. AHT organizational charts, clinic staffing models, and regional management structure documentation;
10. AHT referral data for fiscal year 2022, including physician-level referral volumes to AHT ancillary services (laboratory, diagnostic imaging, physical therapy);
11. Lakeview Medical Associates, P.C. asset purchase agreement and ancillary transaction documents (prepared by Westbrook Hale LLP);
12. AHT Board minutes and resolutions relevant to the self-assessment engagement, including Board Resolution No. 2023-01-004;
13. Correspondence and communications with Ridgeline Capital Partners regarding compliance risk exposure; and
14. Applicable federal and state statutes, regulations, and guidance documents as cited throughout this memorandum.
III. Detailed Inventory of 38 Medical Director / Independent Contractor Arrangements
A. Summary Statistics
The following summary statistics describe the aggregate characteristics of the 38 independent contractor and medical director arrangements maintained by AHT as of the date of this memorandum:
The effective average hourly rate of $501.28 is calculated by dividing the aggregate annual compensation of $1,920,000 by the total annual hours of 3,830.4 (computed as 38 arrangements × 8.4 hours per month × 12 months). As discussed in detail in Section IV below, this effective rate exceeds the 90th percentile for medical director compensation across all major physician specialties represented in AHT's arrangement portfolio. We note that the 8.4 hours-per-month average is based on AHT's internal records, which in many cases reflect estimates rather than contemporaneous time documentation. The absence of reliable contemporaneous time logs is itself a significant compliance deficiency, as discussed further below.
B. Geographic and Specialty Distribution
The 38 arrangements are distributed across AHT's four-state operational footprint as follows:
The Massachusetts arrangements include the three (3) Lakeview legacy medical director agreements assumed in the August 2022 asset acquisition.
The specialty distribution of the 38 arrangements reflects AHT's clinical service lines and encompasses the following categories:
• Primary care medical directors (internal medicine and family medicine): These physicians serve as clinical medical directors for individual AHT clinic sites and are responsible for general clinical oversight, quality assurance, and policy compliance. This is the largest category of arrangement.
• Cardiology quality oversight directors: Physicians providing specialty-specific quality oversight for AHT's cardiology service line across multiple clinic locations, including review of diagnostic protocols, clinical outcomes, and peer review activities.
• Orthopedic medical directors: Physicians overseeing AHT's orthopedic service line at designated clinic sites, including surgical referral protocols, physical therapy coordination, and outcomes monitoring.
• Gastroenterology oversight directors: Physicians providing quality and clinical oversight for AHT's gastroenterology services, including endoscopy referral protocols and clinical pathway management.
• Ancillary services oversight directors (laboratory, imaging, physical therapy): Physicians providing medical directorship for AHT's in-office ancillary service lines, including laboratory medical directorship (required by CLIA), diagnostic imaging oversight, and physical therapy program direction.
A critical observation arising from the specialty distribution analysis is that many of the physicians serving as medical directors under these arrangements also generate significant referral volume to AHT-owned ancillary services — specifically, in-office laboratory, diagnostic imaging, and physical therapy. Because these ancillary services constitute DHS under the Stark Law, the referral relationship between the medical director and the entity to which the referral is made (AHT) creates a financial relationship that must be protected by a Stark Law exception. The combination of this referral relationship with the compensation concerns identified in this memorandum materially heightens both AKS and Stark Law exposure.
C. Lakeview Legacy Medical Director Agreements
As noted in Section II.B above, AHT assumed three (3) medical director agreements in connection with the Lakeview Medical Associates asset acquisition on August 15, 2022. The relevant details of these agreements are as follows:
These three agreements were among the arrangements specifically identified in the Grayson Whitaker gap assessment report as requiring immediate review. The principal concerns with these arrangements include: (i) the absence of independent FMV opinions at the time of assumption (Westbrook Hale LLP, which led the Lakeview transaction, did not obtain FMV opinions for the assumed physician arrangements); (ii) inadequate hours documentation, making it impossible to verify the effective hourly rate on a retrospective basis; and (iii) duty descriptions that are materially vague and fail to distinguish medical director responsibilities from clinical duties.
While the absolute stipend amounts for the Lakeview legacy arrangements are moderate relative to the overall portfolio (ranging from $45,000 to $72,000), they nonetheless require FMV substantiation on an hourly-rate basis. If documented hours are as low as those observed across AHT's broader medical director portfolio, the effective hourly rates for these arrangements could also exceed applicable benchmarks. Northbridge Valuation Advisors is preparing FMV opinions for these three arrangements as part of the broader engagement.
Dr. Vivian Chao's Regional Medical Director arrangement (W-2 employment) is not included in the 38 arrangements analyzed herein. However, Dr. Chao's supervisory role over the Central Massachusetts clinic network, which includes the Lakeview legacy clinic and its associated medical directors, is relevant to the commercial reasonableness analysis of the Lakeview legacy arrangements, as discussed in Section V.C below.
D. Arrangement-by-Arrangement Categorization
A comprehensive arrangement-by-arrangement inventory is presented in Appendix A, which sets forth the following information for each of the 38 arrangements in tabular format: Arrangement ID, physician name and specialty, clinic location(s), annual stipend, contracted monthly hours (where stated in the agreement), documented monthly hours (per AHT records, where available), effective hourly rate, applicable risk tier from the Master Arrangement Inventory & Risk Scoring Matrix, applicable statutes (AKS, Stark, or both), safe harbor/exception compliance status, and recommended action.
We note at the outset that a significant number of the 38 agreements do not specify hourly commitments at all, and many that do specify hours lack contemporaneous time-logging to verify actual hours worked. This documentation gap is itself a compliance deficiency that frustrates both FMV analysis and safe harbor/exception compliance, as discussed in detail throughout this memorandum.
For purposes of remediation prioritization, we have categorized the 38 arrangements into three risk tiers based on a composite assessment of FMV compliance, documentation adequacy, referral relationships, and contract term deficiencies:
Tier 1 — Highest Risk (estimated 14 arrangements). Tier 1 encompasses arrangements that exhibit multiple concurrent deficiencies presenting the most acute compliance risk. An arrangement is classified as Tier 1 if it satisfies all of the following criteria: (i) the effective hourly rate exceeds the 90th percentile for the applicable physician specialty based on MGMA and SullivanCotter benchmark data; (ii) there is an absence of documented duties or contemporaneous time logs sufficient to verify the scope and hours of medical director services actually provided; and (iii) the physician maintains a referral relationship with AHT involving DHS — specifically, the physician refers patients to AHT-owned laboratory, diagnostic imaging, or physical therapy services. These 14 arrangements represent the highest enforcement priority and are the primary candidates for potential voluntary self-disclosure, as analyzed in the companion CMS SRDP and OIG SDP Evaluation Memoranda.
Tier 2 — Elevated Risk (estimated 16 arrangements). Tier 2 encompasses arrangements that present significant but somewhat less acute compliance risk than Tier 1. An arrangement is classified as Tier 2 if it satisfies one or more of the following criteria: (i) the effective hourly rate exceeds the 75th percentile for the applicable physician specialty; (ii) documentation of duties is inadequate (vague or generic duty descriptions); or (iii) time-logging is incomplete or inconsistent. Tier 2 arrangements require restructuring but are less likely to be candidates for voluntary self-disclosure in the near term, assuming prompt remediation.
Tier 3 — Moderate Risk (estimated 8 arrangements). Tier 3 encompasses arrangements where the effective hourly rate falls within established benchmark ranges for the applicable specialty and geographic market, but where technical contract deficiencies create compliance risk. Common Tier 3 deficiencies include: agreements operating in holdover beyond their initial term without formal renewal, absence of FMV certification provisions in the agreement, failure to specify the schedule of services with sufficient specificity, or failure to include standard AKS and Stark compliance representations. These arrangements can generally be brought into full compliance through execution of the Revised Independent Contractor / Medical Director Agreement Template without requiring compensation adjustments.
The following table summarizes the tier distribution:
IV. Fair Market Value Analysis
A. FMV Legal Standard
Under both the AKS personal services safe harbor and the Stark Law personal services exception, physician compensation must be consistent with FMV. This requirement is a cornerstone of the regulatory framework governing physician compensation arrangements and reflects the fundamental policy objective of ensuring that payments to physicians are commensurate with the legitimate value of services they provide, rather than serving as disguised remuneration for referrals.
The Stark Law regulations define FMV at 42 C.F.R. § 411.351 as follows:
Fair market value means the value in arm's-length transactions, consistent with the general market value of the subject transaction. With respect to the rental of equipment, fair market value means the value in arm's-length transactions of rental property for general commercial purposes (not taking into account its intended use). With respect to the rental of office space, fair market value means the value in arm's-length transactions of rental property for general commercial purposes (not taking into account its proximity to the lessor or any other provider of DHS). With respect to compensation for services, fair market value is the compensation that would be included in a service agreement negotiated between a willing buyer and a willing seller, with neither party being under compulsion to enter into the arrangement, and with both parties having reasonable knowledge of the relevant facts at the time of the agreement.
The CMS Stark Law Modernization Final Rule (85 Fed. Reg. 77492, effective January 19, 2021) provided further clarification of the FMV standard. Significantly, CMS confirmed that FMV must be assessed at the time the parties enter the arrangement and that FMV must be determined "without regard to the volume or value of referrals or other business generated by the referring physician for the entity furnishing the DHS." CMS also emphasized that while survey data (such as MGMA and SullivanCotter) may serve as useful benchmarks, FMV is ultimately a facts-and-circumstances determination and no single data source is dispositive.
The OIG has been equally clear that compensation exceeding FMV may be viewed as potential remuneration intended to induce or reward referrals. In numerous Advisory Opinions, fraud alerts, and compliance guidance documents, the OIG has cautioned that above-market compensation for medical director services is a hallmark of arrangements that may implicate the AKS, particularly where the physician maintains a referral relationship with the paying entity.
The importance of FMV substantiation was reinforced in the AHT context by Halsted Accounting Group LLP (engagement partner Ronald Desmond), which flagged in its FY2022 management letter that certain AHT physician compensation arrangements lacked adequate FMV substantiation and recommended that AHT obtain independent FMV opinions. This recommendation was consistent with the Grayson Whitaker gap assessment findings and contributed to the Board's decision to authorize the self-assessment engagement.
B. Benchmark Data Sources and Methodology
Our FMV analysis relies on three principal data sources, each of which is widely recognized as authoritative in healthcare compensation benchmarking:
MGMA Physician Compensation and Production Survey (2022 edition). The MGMA survey is the industry-standard benchmark for physician compensation across all specialties and practice settings. It reports compensation data at multiple percentile levels (25th, 50th/median, 75th, and 90th) and includes specific data on medical director compensation, broken down by specialty, geographic region (including New England/Northeast), practice size, and organizational type. The MGMA survey is widely cited by CMS, the OIG, and valuation professionals as a primary FMV reference.
SullivanCotter Physician Compensation and Productivity Survey (2022 edition). The SullivanCotter survey is a complementary benchmark source that provides medical director-specific compensation data, including hourly rate data by specialty, region, and organizational type. SullivanCotter's medical director compensation module is particularly useful because it separately identifies compensation for administrative/medical director duties as distinct from clinical compensation, enabling a more precise comparison with AHT's medical director stipend arrangements.
Northbridge Valuation Advisors LLC FMV Opinions. At Calderwood & Harkness's recommendation, AHT engaged Northbridge Valuation Advisors LLC in February 2023 to prepare independent, arrangement-specific FMV opinions for all 38 independent contractor/medical director agreements analyzed in this memorandum, as well as an additional 14 Lakeview legacy physician employment agreements, 2 office leases, and the Meridian facility fee arrangement (52 total physician arrangements plus ancillary arrangements). Northbridge's Managing Director, Sandra Kilpatrick, is leading the engagement. Northbridge's preliminary data and draft analysis have been shared with us and are referenced in this memorandum where available. Final Northbridge opinions are anticipated for delivery by June 2023.
Methodology. Our FMV analysis compares the effective hourly rate for each arrangement against specialty-specific benchmark ranges derived from the MGMA and SullivanCotter surveys, adjusted for the following factors:
• Geographic market adjustment: Compensation benchmarks are calibrated to the New England/Northeast region, which generally commands higher physician compensation levels than national averages, reflecting the higher cost of living and competitive labor market in the Boston, Hartford, Providence, and Manchester metropolitan areas;
• Organizational size adjustment: Benchmarks are adjusted for AHT's organizational size (23 clinics, 147 employed physicians, $214.3 million in revenue), which is generally consistent with large multi-specialty group practice benchmarks;
• Scope of duties adjustment: Where the medical director agreement specifies duties that are atypical or unusually broad in scope (e.g., multi-site oversight, regulatory compliance functions), we consider whether an upward adjustment to the benchmark range is warranted; and
• Specialty-specific adjustment: Compensation benchmarks vary significantly by physician specialty, reflecting differences in clinical earning potential and opportunity cost. Our analysis applies specialty-specific benchmarks for each arrangement.
Notwithstanding these adjustments, the effective hourly rates observed across the AHT arrangement portfolio substantially exceed the adjusted benchmark ranges for virtually all arrangements, as demonstrated in the analysis below.
C. Effective Hourly Rate Analysis
Aggregate Calculation. As noted in Section III.A, the aggregate annual compensation across all 38 arrangements is $1,920,000, and the total annual hours documented across all arrangements (based on AHT's internal records) is approximately 3,830.4 hours. The resulting effective average hourly rate is:
$1,920,000 ÷ 3,830.4 hours = $501.28 per hour
Benchmark Comparison by Specialty. The following table compares the $501.28 effective average hourly rate to the 90th percentile hourly rate ranges for medical director compensation across the major specialties represented in AHT's arrangement portfolio, as reported by MGMA and SullivanCotter (2022 editions):
As this comparison demonstrates, the effective average hourly rate of $501.28 exceeds the 90th percentile for all major specialties represented in the AHT medical director portfolio. Even for the highest-compensated specialties — orthopedics and cardiology — the AHT effective rate exceeds the upper end of the 90th percentile range by approximately $25 to $125 per hour. For primary care medical directors, the AHT effective rate exceeds the 90th percentile by approximately $160 to $225 per hour, representing a premium of approximately 50–80% above the highest benchmark.
Distribution Analysis. While the portfolio-wide effective average rate is $501.28, the individual arrangement effective rates vary significantly across the 38 arrangements. This variation is driven primarily by differences in documented hours rather than differences in stipend amounts. The following general observations emerge from the distribution analysis:
• Several arrangements with relatively modest annual stipends (e.g., $25,000–$40,000) but minimal documented monthly hours (e.g., 2–4 hours per month) produce effective hourly rates exceeding $700 per hour and in some cases exceeding $800 per hour. These arrangements present the most acute FMV risk.
• A smaller number of arrangements with higher stipends (e.g., $80,000–$110,000) but more substantial documented monthly hours (e.g., 12–20 hours per month) produce effective hourly rates that fall closer to — though in most cases still above — the applicable benchmark ranges.
• No arrangement in the current portfolio has an effective hourly rate that falls at or below the 50th percentile for the applicable specialty, which would represent the most defensible FMV position.
The detailed arrangement-by-arrangement effective hourly rate analysis, with specific benchmark comparisons for each arrangement, is presented in Appendix A.
Root Cause Analysis. Our analysis indicates that the primary driver of above-FMV effective hourly rates across the AHT arrangement portfolio is insufficient documented hours of medical director service, rather than excessive stipend amounts in absolute terms. While certain stipends are elevated (particularly those at the upper end of the range, $90,000–$110,000), the more pervasive problem is that the contracted and documented hours of service are too few to support the stipend amounts on an hourly-rate basis.
This finding has important implications for the remediation strategy. In many cases, the most effective remediation approach may be to require (and rigorously document) substantially more hours of legitimate medical director service, rather than (or in addition to) reducing the stipend amount. However, this approach is only viable where there is a legitimate, commercially reasonable need for additional medical director hours — an assessment that must be made on an arrangement-by-arrangement basis. Where additional hours cannot be justified, stipend reductions will be necessary.
D. Specific FMV Deficiencies Identified
Beyond the overarching concern about above-benchmark effective hourly rates, our review has identified several specific categories of FMV-related deficiencies across the 38 arrangements:
Arrangements Lacking Any Stated Hourly Commitment. Approximately eleven (11) of the 38 agreements do not specify any minimum or expected number of hours to be devoted to medical director duties. These agreements typically provide for a fixed annual or monthly stipend in exchange for medical director services described only in general terms, without any quantification of the time commitment expected. The absence of a stated hourly commitment makes it impossible to establish the effective hourly rate on the face of the contract and creates an inherent risk that the physician is being compensated for something other than — or in excess of — the services actually provided.
Arrangements with Stated Hours but No Contemporaneous Time-Logging. Approximately nineteen (19) of the 38 agreements specify an expected number of monthly hours but lack any system for contemporaneous time-logging or verification of actual hours worked. In these arrangements, AHT has no reliable mechanism for determining whether the physician is actually devoting the contracted hours to medical director duties or whether the stated hours are merely estimates. The absence of contemporaneous time documentation significantly weakens the FMV defense because it prevents AHT from demonstrating, in response to a government inquiry, that the compensation paid was commensurate with the services actually rendered.
Arrangements Where Documented Hours Produce Above-90th-Percentile Rates. Approximately twenty-two (22) of the 38 arrangements have documented hours (either contractually stated or estimated by AHT) that are sufficiently low that the resulting effective hourly rate exceeds the 90th percentile for the applicable physician specialty, regardless of which specialty benchmark is applied. These arrangements present the most direct FMV compliance risk and form the core of the Tier 1 remediation priority.
Arrangements Where Absolute Stipend Amounts Exceed Benchmarks. Approximately nine (9) of the 38 arrangements have annual stipend amounts that exceed the 75th percentile for the applicable specialty even when a reasonable estimate of monthly hours (e.g., 10–15 hours) is assumed. For these arrangements, the FMV concern extends beyond inadequate hours documentation to the absolute level of the stipend itself, and stipend reductions (in addition to improved hours documentation) will likely be necessary.
Lakeview Legacy Arrangements. The three Lakeview legacy arrangements ($45,000, $60,000, and $72,000 annual stipends) present moderate FMV risk. While the absolute stipend amounts are within a range that could be defensible depending on the hours and scope of duties, the current absence of hours documentation prevents any determination of whether the effective hourly rates are within FMV ranges. Northbridge is preparing FMV opinions for all three arrangements, and our remediation recommendations for these agreements are set forth in Section VIII.F.
E. Northbridge Preliminary FMV Ranges
Northbridge Valuation Advisors LLC has provided preliminary FMV range data for certain specialties and arrangement types as part of its ongoing engagement. While the final Northbridge opinions are not anticipated until June 2023, the preliminary data provides useful directional guidance for the remediation planning process.
Northbridge's valuation methodology employs a blended approach incorporating:
• Income approach (market-based hourly rate method): Under this approach, Northbridge identifies the market hourly rate for medical director services by specialty and geography, based on survey data (MGMA, SullivanCotter, and proprietary Northbridge databases), and multiplies this rate by the projected reasonable hours of medical director service. The projected hours are based on an assessment of the scope of duties described in the agreement, the size and complexity of the clinic or service line overseen, and the time that a reasonably competent physician would be expected to devote to those duties.
• Market approach (comparable transactions): Under this approach, Northbridge analyzes comparable medical director compensation arrangements from its proprietary transaction database, adjusting for differences in specialty, geography, organizational size, and scope of duties.
• Reasonableness cross-check: Northbridge applies an additional reasonableness analysis that considers the physician's clinical opportunity cost (i.e., the clinical income the physician forgoes by devoting time to medical director duties) and the overall compensation relationship between the physician and AHT.
Based on the preliminary Northbridge data, the following general conclusions can be stated: for the majority of the 38 arrangements, compensation will need to be restructured either by reducing the stipend amount or by documenting — and verifying through contemporaneous time logs — substantially greater hours of legitimate medical director service in order to bring the effective hourly rate within a defensible FMV range. Northbridge's preliminary analysis is consistent with our own benchmark comparison analysis and reinforces the conclusion that the current arrangement portfolio presents significant FMV risk.
The final Northbridge opinions, anticipated for delivery by June 2023, will provide arrangement-specific FMV ranges that will serve as the basis for the individual restructuring conversations with affected physicians. We strongly recommend that no restructured compensation terms be finalized until the Northbridge opinions are in hand, to ensure that the revised terms are defensible based on independent third-party valuation.
V. Commercial Reasonableness Analysis
A. Commercial Reasonableness Legal Standard
As clarified by the CMS Stark Law Modernization Final Rule (85 Fed. Reg. 77492), commercial reasonableness is a separate and distinct requirement from FMV. An arrangement may be priced at FMV and still fail the commercial reasonableness test, or vice versa. The Stark Law personal services exception at 42 C.F.R. § 411.357(d) requires that the aggregate services contracted for be "reasonable and necessary for the legitimate business purposes of the arrangement." CMS has stated that an arrangement is commercially reasonable if it "furthers a legitimate business purpose of the parties" and "makes commercial sense" when considered independently of the referral relationship between the parties.
The commercial reasonableness inquiry asks whether AHT would enter into a particular medical director arrangement for a legitimate business reason even if the physician generated no referrals to AHT. This is an objective test that examines the arrangement from the perspective of a reasonable healthcare entity operating in the same or similar market. If the only plausible explanation for the arrangement is to compensate the physician for referrals, the arrangement fails the commercial reasonableness test regardless of whether the compensation is set at FMV.
The OIG has consistently identified medical director arrangements as a frequent area of commercial reasonableness concern. In its compliance guidance and in numerous Advisory Opinions, the OIG has observed that medical director arrangements may serve as vehicles for disguised referral compensation where: (i) the described duties are nominal, vague, or non-specific; (ii) the physician does not actually perform meaningful medical director work; (iii) the duties described in the agreement are duplicative of responsibilities already encompassed within the physician's employment or other arrangement with the entity; or (iv) the arrangement serves no legitimate business purpose that could not be fulfilled through existing employed physician or administrative roles.
B. Duty Description Deficiencies
Our review of the 38 agreements reveals significant inconsistency and vagueness in the description of medical director duties across the arrangement portfolio. Of the 38 agreements, we estimate that approximately twenty-nine (29) contain duty descriptions that are materially deficient for purposes of establishing commercial reasonableness. The common deficiencies include:
Generic, non-specific duty descriptions. Many agreements describe the medical director's duties in conclusory terms such as "provide medical direction and oversight for clinic operations," "ensure quality of clinical services," or "serve as medical director for the clinic." These descriptions do not identify specific tasks, deliverables, activities, or measurable outcomes. They do not distinguish among the types of medical director roles (site-level clinical direction, specialty quality oversight, ancillary services oversight) and do not provide sufficient specificity to permit verification that the physician is actually performing the described duties.
Failure to distinguish medical director duties from clinical duties. Several agreements fail to draw a clear distinction between the duties the physician is expected to perform in a medical director capacity and the duties inherent in the physician's clinical practice. This ambiguity creates risk that the medical director stipend is being paid for clinical services that are separately compensated or that are inherent in the physician's practice, rather than for genuine administrative or oversight functions.
Absence of deliverable requirements. None of the 38 agreements currently require the medical director to produce specific deliverables such as written quality reports, meeting minutes, policy review memoranda, peer review documentation, or other tangible work product. The absence of deliverable requirements makes it difficult to demonstrate that the physician is performing meaningful medical director work and contributes to the inference that the arrangement lacks commercial substance.
Absence of performance metrics. The agreements do not establish measurable performance expectations or evaluation criteria for the medical director's administrative contributions. Without performance metrics, there is no mechanism for AHT to evaluate whether the medical director's services are contributing value to the organization and no basis for continuing or adjusting the arrangement.
Overlap with other roles. As discussed in Section V.C below, certain medical director duties described in the agreements overlap with responsibilities assigned to other AHT personnel, including employed physicians, Regional Medical Directors, clinical department chairs, and administrative staff. This overlap raises questions about whether the arrangement serves a genuine, non-duplicative business purpose.
C. Duplicative Arrangements and Overlapping Roles
Our review has identified several categories of potential duplication and role overlap that undermine the commercial reasonableness of certain arrangements:
Multiple medical directors at a single clinic site. We have identified instances in which the same AHT clinic site is served by two or more medical directors with overlapping or indistinguishable duty descriptions. In these cases, it is unclear what distinct function each medical director performs that could not be performed by a single medical director or by the clinic's employed physicians and administrative staff. The existence of multiple medical directors at a single site, without clear differentiation of responsibilities, creates a strong inference that at least one of the arrangements lacks a legitimate, independent business purpose.
Overlap with Regional Medical Directors and department chairs. AHT's organizational structure includes Regional Medical Directors (such as Dr. Vivian Chao for Central Massachusetts) and clinical department chairs who are W-2 employees with defined quality oversight, compliance, and clinical leadership responsibilities. In certain cases, the duties described in independent contractor medical director agreements overlap substantially with the responsibilities of these employed positions. For example, where a Regional Medical Director is responsible for "overseeing clinical quality across all clinics in the region," and an independent contractor medical director at a specific clinic within that region is also responsible for "overseeing clinical quality at the clinic," the question arises whether the independent contractor arrangement is necessary or whether its functions are already being performed by the Regional Medical Director.
Overlap with Chief Compliance Officer functions. Certain agreements describe medical director duties that include compliance-related functions such as "oversight of regulatory compliance at the clinic" or "ensuring compliance with applicable laws and regulations." These functions overlap with the responsibilities of AHT's Chief Compliance Officer, Derek Huang, and his compliance team. While physician input into compliance activities may be appropriate and even necessary in certain contexts (e.g., clinical compliance matters requiring medical judgment), the agreements do not clearly delineate the boundary between the medical director's compliance role and the CCO's compliance role.
Assessment. Based on our review, we estimate that approximately six to eight (6–8) of the 38 arrangements present questionable commercial reasonableness because the described duties are either duplicative of other roles within AHT's organizational structure or are so minimal in scope that the arrangement does not appear to further a legitimate business purpose independent of the physician's referral relationship with AHT. These arrangements should be prioritized for review and potential termination or consolidation, as discussed in our recommendations at Section VIII.E.
D. Referral Correlation Concern
As noted in Section III.B, many of the physicians serving as medical directors under the 38 arrangements also generate significant referral volume to AHT-owned ancillary services, including in-office laboratory, diagnostic imaging, and physical therapy. These ancillary services are DHS under the Stark Law, meaning that the referrals from these physicians to AHT are subject to the Stark Law's prohibition unless a valid exception applies.
While the existence of a referral relationship does not, by itself, invalidate a medical director arrangement — indeed, the Stark Law contemplates that physicians who have financial relationships with entities may refer DHS to those entities, provided an exception is met — the combination of multiple risk factors creates a profile that government enforcement authorities would likely view with heightened scrutiny. Specifically, the combination of: (i) compensation that exceeds FMV on an effective hourly rate basis; (ii) vaguely defined and minimally documented medical director duties; and (iii) a substantial referral relationship involving DHS creates a pattern that the OIG has repeatedly identified as indicative of potential kickback arrangements disguised as legitimate service contracts.
The significance of this risk is amplified by AHT's revenue profile. With 61% of AHT's FY2022 net revenue ($130.7 million of $214.3 million) attributable to Medicare and Medicaid reimbursements, the volume of claims potentially implicated by a Stark Law violation is substantial. Under the False Claims Act, each claim submitted in connection with a non-compliant Stark Law referral constitutes a separate false claim, exposing AHT to treble damages and per-claim penalties that could aggregate to significant financial liability.
Our referral correlation analysis, based on AHT's FY2022 referral data, indicates that a meaningful subset of the Tier 1 arrangements involves physicians who are among AHT's highest-volume referral sources for ancillary services. While we do not suggest that referral volume alone is evidence of a kickback arrangement, the correlation between high referral volume and above-FMV medical director compensation warrants careful scrutiny and is a factor that government investigators would be expected to examine closely.
VI. Analysis Under AKS Safe Harbors and Stark Law Exceptions
A. AKS Personal Services and Management Contracts Safe Harbor (42 C.F.R. § 1001.952(d))
The personal services and management contracts safe harbor is the primary AKS safe harbor applicable to AHT's medical director and independent contractor arrangements. Protection under this safe harbor requires satisfaction of all statutory elements. We have assessed each of the 38 arrangements against these elements, with the following aggregate findings:
Written agreement signed by the parties. This element is satisfied by all 38 arrangements. Each arrangement is memorialized in a written agreement signed by both AHT and the physician. However, we note that several agreements are outdated, having been executed years ago without subsequent amendment or renewal to reflect changes in duties, hours, or compensation. Additionally, approximately seven (7) arrangements are currently operating in holdover status (i.e., the initial term has expired without formal renewal), which, while not a per se failure of the "written agreement" element, raises questions about the continued viability of the safe harbor protection for those arrangements.
Writing specifies services to be provided. This element is deficient in approximately twenty-nine (29) of the 38 arrangements. As discussed in Section V.B, the duty descriptions in these agreements are generic an

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