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

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CALDERWOOD & HARKNESS LLP Counselors at Law One Federal Street, 30th Floor Boston, Massachusetts 02110

MEMORANDUM

TO: Patricia Yamamoto, Esq., General Counsel, Arbor Health Technologies Inc. Derek Huang, Chief Compliance Officer, Arbor Health Technologies Inc.

FROM: Miriam Calloway, Partner, Calderwood & Harkness LLP Christopher Aiken, Senior Associate, Calderwood & Harkness LLP Amy Whitfield, Associate, Calderwood & Harkness LLP

DATE: June 15, 2023

RE: Comprehensive Stark Law (Physician Self-Referral Law) Compliance Assessment — Arbor Health Technologies Inc.

MATTER NO.: 1010-00003

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I. EXECUTIVE SUMMARY

This memorandum presents the results of Calderwood & Harkness LLP's ("Calderwood & Harkness" or "we") comprehensive assessment of the physician compensation arrangements, in-office ancillary services, and referral relationships of Arbor Health Technologies Inc. ("AHT" or the "Company") under the federal Physician Self-Referral Law, 42 U.S.C. § 1395nn (the "Stark Law"), and its implementing regulations at 42 C.F.R. § 411.350 et seq. This assessment was conducted pursuant to the engagement described below and is intended to provide AHT's management, General Counsel, and Chief Compliance Officer with a detailed analysis of the Company's current compliance posture, a prioritized identification of deficiencies and associated risks, and actionable remediation recommendations.

Calderwood & Harkness was retained by AHT on January 30, 2023, pursuant to AHT Board Resolution No. 2023-01-004 (adopted January 24, 2023), to conduct this assessment. The engagement was prompted by the delivery of the Grayson Whitaker & Associates LLP compliance gap assessment report (Report No. GW-AHT-2022-Final, dated December 12, 2022), which identified seventeen (17) high-risk and twenty-three (23) moderate-risk physician compensation and referral arrangements requiring detailed legal review. That gap assessment was itself commissioned by AHT's Board Compliance Committee following the Company's acquisition of substantially all of the assets of Lakeview Medical Associates, P.C. ("Lakeview"), a fourteen-physician multi-specialty group practice in Worcester, Massachusetts, on August 15, 2022. The integration of Lakeview's legacy physician agreements, medical director arrangements, and office leases into AHT's existing operational framework served as the proximate trigger for the board-level decision to authorize this self-assessment.

The scope of our assessment encompasses all physician financial relationships currently maintained by AHT, including: (i) all 147 W-2 employed physician relationships across AHT's 23 outpatient clinic locations; (ii) 38 independent contractor and medical director arrangements (exclusive of Lakeview legacy arrangements); (iii) 14 Lakeview legacy physician agreements and 3 assumed Lakeview medical director agreements; (iv) the Meridian Diagnostics LLC mobile MRI facility access fee arrangement; (v) the Pinnacle Laboratory Services Inc. preferred laboratory agreement and related matters (including the no-cost electronic laboratory interface, continuing medical education sponsorships, and the equity interest held by Dr. Karen Ellsworth, spouse of AHT's CEO); (vi) the ConnectiCare Physicians Network, LLC management services arrangements; (vii) the Covenant Health Plans Inc. value-based payment incentive arrangements; and (viii) AHT's in-office ancillary services operations (clinical laboratory, diagnostic imaging, and physical therapy services) across all 23 clinic locations.

The significance of this assessment cannot be overstated. AHT reported $214.3 million in net revenue for fiscal year 2022, of which approximately 61%, or $130.7 million, derives from Medicare and Medicaid reimbursements. The entirety of this federally funded revenue is subject to the Stark Law's absolute prohibition on the submission of claims for designated health services ("DHS") furnished pursuant to non-compliant physician referral relationships. Unlike the federal Anti-Kickback Statute, the Stark Law is a strict liability statute requiring no showing of intent. A technical failure to satisfy even one element of an otherwise applicable exception renders the underlying referral prohibited and all resulting claims potentially subject to denial, refund, civil monetary penalties, and False Claims Act liability.

Our assessment has identified multiple categories of exception non-compliance across AHT's physician compensation and referral arrangements. The most significant findings are as follows:

• Medical Director/Independent Contractor Compensation (HIGH RISK): The effective average hourly compensation rate across AHT's 38 medical director arrangements is $501.28 per hour, which exceeds the 90th percentile for multiple physician specialties based on MGMA and SullivanCotter benchmark data. This rate, combined with low mean documented hours (8.4 hours per month) and generic duty descriptions, creates a substantial fair market value ("FMV") failure that undermines the personal services arrangements exception, the fair market value exception, and the employment exception.

• Meridian Diagnostics Facility Access Fee (HIGH RISK): The per-scan ($185/scan) facility access fee paid by Meridian Diagnostics LLC to AHT is a per-unit-of-service payment structure that varies directly with the volume of referrals. This structure is fundamentally inconsistent with all available Stark Law exceptions for space rental, equipment rental, and fair market value arrangements.

• Pinnacle Laboratory Services Relationship (HIGH RISK): Multiple independent Stark Law issues exist, including a no-cost electronic laboratory interface valued at approximately $120,000 per year (far exceeding the non-monetary compensation exception threshold), directed CME sponsorships totaling $86,000, and a 4.2% equity interest in Pinnacle held by Dr. Karen Ellsworth, the spouse of AHT CEO Dr. Nathan Ellsworth.

• Lakeview Legacy Arrangements (HIGH RISK): The 14 physician agreements, 3 medical director agreements, and 2 office leases assumed in the August 2022 acquisition contain numerous deficiencies, including absent FMV documentation, compensation formulas based on total practice collections rather than personally performed services, expired and unsigned agreements, and a below-market-rent lease with a landlord who is also a referral source.

• ConnectiCare MSA Indirect Compensation (MODERATE-HIGH RISK): AHT's percentage-of-revenue management services arrangements with nine independently owned physician practices create indirect compensation arrangement concerns when combined with referral patterns from managed practice physicians to AHT-owned ancillary services.

• Employment Agreement Deficiencies (MODERATE RISK): Certain pre-2021 employment agreements contain productivity bonus formulas that incorporate total RVUs (including those attributable to DHS referrals) rather than wRVUs limited to personally performed services. Additionally, 29 employment agreements lack contemporaneous FMV substantiation, and 11 agreements are operating under expired terms without compliant holdover provisions.

Specific remediation recommendations are set forth within each analytical section of this memorandum and consolidated in the remediation roadmap at Section XIII. We recommend that AHT prioritize the restructuring of the Meridian facility access fee arrangement, the medical director compensation arrangements, and the Pinnacle laboratory relationship, as these represent the highest-risk exposures with the most significant financial consequences.

This memorandum should be read in conjunction with the following companion work product prepared by Calderwood & Harkness as part of this engagement: (i) Anti-Kickback Statute Compliance Assessment Memorandum (Matter No. 1010-00003); (ii) Massachusetts and Connecticut State Referral Law Analysis Memoranda (Matter Nos. 1010-00003 and 1010-00003); (iii) CMS Self-Referral Disclosure Protocol Evaluation Memorandum (Matter No. 1010-00003); and (iv) standalone detailed memoranda addressing the Meridian Diagnostics, Pinnacle Laboratory Services, ConnectiCare management services, medical director FMV analysis, and Lakeview legacy arrangements (Matter Nos. 1010-00003 through 1010-00003).

II. BACKGROUND

A. Arbor Health Technologies Inc. — Corporate and Operational Overview

Arbor Health Technologies Inc. is a Delaware corporation headquartered at 200 Concord Avenue, Suite 400, Cambridge, Massachusetts 02138. The Company's Employer Identification Number is 84-3291057, its organizational National Provider Identifier is 1497253810, and its lead CMS Provider Transaction Access Number is 27MA4891.

AHT operates 23 outpatient clinics branded as "Arbor Health Clinics" across four states in the northeastern United States: fourteen (14) clinic locations in the Commonwealth of Massachusetts, four (4) in Connecticut, three (3) in Rhode Island, and two (2) in New Hampshire. Through these clinic locations, the Company delivers primary care, specialty care (including cardiology, orthopedics, and gastroenterology), and ancillary services encompassing in-office clinical laboratory testing, diagnostic imaging (X-ray and ultrasound), and physical therapy. The Company employs approximately 1,340 individuals across clinical and administrative functions, including 147 W-2 employed physicians, and maintains 38 independent contractor and medical director arrangements.

In addition to its clinical operations, AHT develops and licenses ArborConnect, a proprietary electronic health record ("EHR") and practice management software-as-a-service ("SaaS") platform. As of the date of this memorandum, ArborConnect is deployed internally across all 23 AHT clinic locations and is licensed externally to 42 independent physician practices, generating approximately $8.9 million in annual subscription revenue. The ArborConnect platform is relevant to several aspects of this Stark Law assessment, including the Pinnacle Laboratory Services electronic laboratory interface and the ConnectiCare management services arrangement infrastructure.

AHT is a portfolio company of Ridgeline Capital Partners Fund IV, L.P. ("Ridgeline Fund IV"), which holds a 72% equity stake in the Company. Ridgeline Fund IV acquired its interest in AHT in January 2021 for approximately $185 million. The general partner of Ridgeline Fund IV is Ridgeline Capital Advisors LLC, a private equity advisory firm headquartered at 400 Steamboat Road, Suite 300, Greenwich, Connecticut 06830. Ridgeline Capital Advisors LLC designates two members to AHT's Board of Directors: Claudia Sorrento, Managing Director, and Marcus Whitmore, Principal. The private equity ownership structure is relevant to this assessment for two reasons: first, the anticipated exit or sale process (currently projected for late 2024) creates an imperative for healthcare regulatory compliance remediation, as comprehensive compliance diligence is standard in transactions involving PE-backed healthcare companies; and second, the board-level governance dynamics and the role of investor-designated directors in compliance oversight are relevant to the effectiveness of AHT's compliance program.

AHT's executive leadership team includes Dr. Nathan Ellsworth, Chief Executive Officer; Patricia Yamamoto, Esq., General Counsel; and Derek Huang, Chief Compliance Officer. As discussed in detail in Section VIII of this memorandum, Dr. Nathan Ellsworth's spouse, Dr. Karen Ellsworth, holds a 4.2% passive equity interest in Pinnacle Laboratory Services Inc., a fact that has direct Stark Law implications for AHT's referral relationship with Pinnacle.

B. Financial Profile and Payer Mix

For fiscal year 2022, AHT reported consolidated net revenue of $214.3 million. Of this total, approximately 61%, or $130.7 million, is attributable to Medicare and Medicaid reimbursements. The remaining 39%, or approximately $83.6 million, is attributable to commercial payer reimbursements.

AHT's largest commercial payer is Covenant Health Plans Inc. ("Covenant"), headquartered at 500 Boylston Street, 12th Floor, Boston, Massachusetts 02116. In fiscal year 2022, Covenant accounted for approximately $38.6 million in revenue, representing approximately 18% of AHT's total net revenue. This figure includes $2.1 million in value-based incentive bonuses received from Covenant, which are analyzed under the Stark Law's value-based enterprise exceptions in Section XI of this memorandum.

The substantial concentration of AHT's revenue in Medicare and Medicaid reimbursements — more than three-fifths of total net revenue — underscores the materiality of Stark Law compliance exposure for the Company. Because the Stark Law governs referrals for DHS "payable by Medicare" (and, through the Medicaid corollary at 42 U.S.C. § 1396b(s), by Medicaid), the overwhelming majority of AHT's revenue base is potentially implicated by any deficiency in the Company's compliance with the statute's exception requirements. A single physician financial relationship that fails to satisfy all elements of an applicable Stark Law exception can render every referral made by that physician (or to that physician's employer entity) for Medicare- or Medicaid-payable DHS a "prohibited referral," resulting in a corresponding obligation to refund all amounts received for DHS furnished pursuant to such referrals.

C. Lakeview Medical Associates Acquisition

On August 15, 2022, AHT completed the acquisition of substantially all of the assets of Lakeview Medical Associates, P.C. ("Lakeview"), a Massachusetts professional corporation (EIN: 04-3782145) that operated as a fourteen-physician multi-specialty group practice in Worcester, Massachusetts. The acquisition price was $11.4 million. The transaction was negotiated and documented by Westbrook Hale LLP, AHT's general outside transactional counsel, under the direction of Elena Marchetti, Partner, with offices at 100 Summer Street, Suite 2200, Boston, Massachusetts 02110.

In connection with the acquisition, AHT assumed the following arrangements: (i) fourteen (14) physician agreements, consisting of twelve (12) employment agreements and two (2) independent contractor agreements; (ii) three (3) medical director agreements, with annual compensation of $45,000, $60,000, and $72,000, respectively; and (iii) two (2) office lease agreements for Lakeview's clinical facilities at 75 Belmont Street, Worcester, Massachusetts 01605 and 310 Main Street, Suite 2A, Shrewsbury, Massachusetts 01545.

Prior to the acquisition, Lakeview generated annual revenue of approximately $18.2 million, of which approximately $10.9 million (approximately 60%) was attributable to Medicare and Medicaid reimbursements. This payer mix is substantially consistent with AHT's own Medicare/Medicaid concentration.

Dr. Vivian Chao, Lakeview's former managing partner, transitioned to the role of AHT Regional Medical Director for Central Massachusetts following the closing of the acquisition. Dr. Chao's compensation arrangements, including her $72,000 legacy medical director agreement and her new AHT Regional Medical Director compensation, are analyzed in detail in Section X of this memorandum.

The integration of Lakeview's legacy arrangements into AHT's operational and compliance framework was the proximate trigger for the Company's decision to commission both the initial Grayson Whitaker gap assessment and the comprehensive legal assessment presented in this memorandum. As discussed below, the assumed Lakeview arrangements present several significant Stark Law compliance deficiencies that have been operating unremediated since the August 2022 closing — a period of approximately ten months as of the date of this memorandum.

D. Prior Compliance Assessment

In October 2022, approximately two months after the Lakeview acquisition closing, AHT retained Grayson Whitaker & Associates LLP ("Grayson Whitaker"), a healthcare compliance consulting firm headquartered at 4700 River Road, Suite 220, Bethesda, Maryland 20816, to conduct an initial internal compliance gap assessment of the Company's physician compensation and referral arrangements. The engagement was led by Carolyn Fitch, Engagement Principal.

Grayson Whitaker delivered its final report (Report No. GW-AHT-2022-Final) on December 12, 2022. The report identified a total of forty (40) arrangements requiring further legal review, categorized as follows: seventeen (17) arrangements classified as "high-risk" based on preliminary indicators of potential Stark Law exception non-compliance, and twenty-three (23) arrangements classified as "moderate-risk" based on documentation deficiencies, missing FMV substantiation, or structural features warranting closer examination. The Grayson Whitaker report provided a valuable preliminary risk stratification that informed the scope and prioritization of Calderwood & Harkness's subsequent legal assessment. However, as a compliance consulting report, it did not constitute legal analysis and did not provide conclusions regarding whether specific arrangements satisfied or failed to satisfy the elements of particular Stark Law exceptions.

In addition to the Grayson Whitaker assessment, AHT's external auditor, Halsted Accounting Group LLP ("Halsted"), headquartered at 225 Dyer Street, Suite 800, Providence, Rhode Island 02903 (Engagement Partner: Ronald Desmond, CPA), flagged in its fiscal year 2022 management letter that certain of the Company's physician compensation arrangements may require fair market value substantiation. Specifically, Halsted noted the absence of contemporaneous FMV documentation for a subset of physician employment agreements and expressed concern that the medical director compensation levels appeared elevated relative to industry benchmarks. While Halsted's management letter did not constitute a legal assessment, its observations corroborated the concerns identified by Grayson Whitaker and underscored the urgency of remedial action.

We note that AHT has no prior enforcement actions by the U.S. Department of Health and Human Services Office of Inspector General ("OIG"), the Department of Justice ("DOJ"), or the Centers for Medicare and Medicaid Services ("CMS") related to Stark Law or Anti-Kickback Statute compliance. The Company has not entered into a Corporate Integrity Agreement and has no pending OIG Advisory Opinion requests. This clean enforcement history is a favorable factor, though it does not diminish the significance of the deficiencies identified in this memorandum.

AHT adopted its Compliance Committee Charter on April 15, 2021, approximately three months after the Ridgeline Capital acquisition. The Charter was amended on October 30, 2022, following the Lakeview acquisition, to expand the Committee's oversight responsibilities to include acquisition integration compliance review. The Compliance Committee is chaired by Derek Huang, Chief Compliance Officer, and includes Patricia Yamamoto, General Counsel; Dr. Nathan Ellsworth, CEO; and one Ridgeline Capital board designee (currently Marcus Whitmore, Principal).

E. Valuation Support

At Calderwood & Harkness's recommendation, AHT retained Northbridge Valuation Advisors LLC ("Northbridge"), headquartered at 1600 Market Street, Suite 2800, Philadelphia, Pennsylvania 19103, in February 2023 to prepare independent fair market value opinions for the Company's physician compensation arrangements, office lease rates, and equipment rental arrangements. The engagement is led by Sandra Kilpatrick, Managing Director, ASA, CBA.

The scope of Northbridge's engagement encompasses FMV opinions for: (i) all 52 physician compensation arrangements requiring FMV substantiation, consisting of the 38 non-Lakeview independent contractor and medical director arrangements and the 14 Lakeview legacy employment agreements; (ii) the two Lakeview office leases (Worcester and Shrewsbury); and (iii) the Meridian Diagnostics LLC facility access fee arrangement. Northbridge is employing a multi-method valuation approach, including market benchmarking against MGMA Physician Compensation and Production Survey data, SullivanCotter Physician Compensation and Productivity Survey data, and comparable transaction analysis where applicable.

As of the date of this memorandum, several of the Northbridge FMV opinions are in draft form, and others remain pending. Our analysis below incorporates preliminary FMV observations from the Northbridge engagement where available, with the understanding that final conclusions may require updating upon delivery of the completed FMV opinions.

III. APPLICABLE LEGAL FRAMEWORK

A. The Stark Law — Overview (42 U.S.C. § 1395nn)

The federal Physician Self-Referral Law, commonly known as the "Stark Law" after its original sponsor, former Congressman Fortney "Pete" Stark, is codified at 42 U.S.C. § 1395nn and implemented through detailed regulations at 42 C.F.R. § 411.350 et seq. The Stark Law is a strict liability statute — unlike the federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)), which requires proof of knowing and willful conduct, the Stark Law requires no showing of intent, knowledge, or willfulness. A technical failure to satisfy any element of an applicable exception renders the underlying physician referral prohibited, regardless of the parties' good faith, the absence of any intent to induce referrals, or the clinical appropriateness of the services ordered.

The Stark Law imposes two complementary prohibitions. First, the statute prohibits a physician from making a "referral" for "designated health services" ("DHS") payable by Medicare (or, through the Medicaid corollary at 42 U.S.C. § 1396b(s), by Medicaid) to an "entity" with which the physician (or an "immediate family member" of the physician) has a "financial relationship," unless a specific statutory or regulatory exception applies. 42 U.S.C. § 1395nn(a)(1). Second, the statute prohibits the entity furnishing DHS pursuant to a prohibited referral from presenting or causing to be presented a claim or billing to Medicare (or Medicaid) for such services. 42 U.S.C. § 1395nn(a)(1)(B).

The term "financial relationship" encompasses two distinct categories: (1) ownership or investment interests, which include equity, debt, or other financial interests in an entity, whether held directly or indirectly through intermediary entities; and (2) compensation arrangements, which include any arrangement involving remuneration between a physician (or an immediate family member) and an entity. 42 U.S.C. § 1395nn(a)(2). Compensation arrangements may be direct (where remuneration passes directly between the referring physician and the DHS entity) or indirect (where an unbroken chain of financial relationships connects the referring physician and the DHS entity, as discussed in greater detail below).

The term "referral" is broadly defined under the Stark Law regulations at 42 C.F.R. § 411.351 to include not only the traditional concept of a physician directing a patient to another provider for services, but also the request or order for, or the certification or recertification of the need for, any DHS. This broad definition captures virtually any clinical order or request by a physician that results in the furnishing of DHS by an entity with which the physician has a financial relationship.

The term "immediate family member" is defined at 42 U.S.C. § 1395nn(a)(2) and 42 C.F.R. § 411.351 to include a physician's spouse, among other family members. This definition is directly relevant to the Pinnacle Laboratory Services analysis set forth in Section VIII, as Dr. Karen Ellsworth, the spouse of AHT CEO Dr. Nathan Ellsworth, holds a 4.2% equity interest in Pinnacle.

B. Designated Health Services (DHS)

The Stark Law's referral prohibition applies only to referrals for "designated health services," which are specifically enumerated at 42 U.S.C. § 1395nn(h)(6) and 42 C.F.R. § 411.351. The ten categories of DHS are as follows:

1. Clinical laboratory services;

2. Physical therapy services;

3. Occupational therapy services;

4. Radiology services, including magnetic resonance imaging ("MRI"), computerized axial tomography ("CT") scans, and ultrasound services;

5. Radiation therapy services and supplies;

6. Durable medical equipment and supplies;

7. Parenteral and enteral nutrients, equipment, and supplies;

8. Prosthetics, orthotics, and prosthetic devices and supplies;

9. Home health services;

10. Outpatient prescription drugs; and

11. Inpatient and outpatient hospital services.

AHT directly provides several categories of DHS through its 23 outpatient clinic locations, specifically: (i) clinical laboratory services (in-house laboratory testing capabilities); (ii) diagnostic imaging and radiology services (X-ray and ultrasound); and (iii) physical therapy services. In addition, AHT's employed and contracted physicians refer patients to external providers of DHS, most notably: (iv) Meridian Diagnostics LLC, which provides diagnostic imaging and MRI services; and (v) Pinnacle Laboratory Services Inc., which provides clinical laboratory testing services. Each of these DHS categories is subject to the Stark Law's referral prohibition, and each referral relationship must be covered by a valid exception for the resulting claims to be properly submitted to Medicare or Medicaid.

C. Compensation Arrangement Defined — Direct and Indirect

The Stark Law and its implementing regulations recognize two categories of compensation arrangements: direct compensation arrangements and indirect compensation arrangements. The distinction between these categories is critical to the analysis of several AHT arrangements, particularly the ConnectiCare management services arrangements and the Meridian facility access fee structure.

Direct Compensation Arrangement. A direct compensation arrangement exists under 42 C.F.R. § 411.354(a) when remuneration passes directly between the referring physician (or the physician's immediate family member) and the DHS entity, without any intervening persons or entities. A physician employment agreement in which the employer is also the entity furnishing DHS is the most common example of a direct compensation arrangement. All of AHT's employed physician relationships constitute direct compensation arrangements because AHT both employs the physicians and furnishes DHS (laboratory, imaging, physical therapy) at its clinic locations.

Indirect Compensation Arrangement. An indirect compensation arrangement exists under 42 C.F.R. § 411.354(c) when three conditions are satisfied: (i) an unbroken chain of persons or entities exists between the referring physician and the DHS entity, with each link in the chain involving a financial relationship (either a compensation arrangement or an ownership or investment interest); (ii) the referring physician receives, at some point in the chain, aggregate compensation that varies with, or takes into account, the volume or value of the physician's referrals to the DHS entity; and (iii) the DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician receives aggregate compensation that varies with, or takes into account, the volume or value of referrals. The indirect compensation arrangement framework is of particular significance to AHT's ConnectiCare management services arrangements, in which an unbroken chain of financial relationships connects the managed practice physicians (who may refer patients for DHS) through the managed practice entities and the management services agreements to AHT (the DHS entity furnishing ancillary services).

D. Applicable Stark Law Exceptions

The Stark Law establishes a framework under which physician financial relationships are presumptively prohibited absent satisfaction of a specific statutory or regulatory exception. Each exception contains multiple elements, all of which must be satisfied for the exception to protect a given arrangement. The following exceptions are relevant to AHT's physician financial relationships and are analyzed in detail in the substantive sections of this memorandum:

Employment Exception (42 C.F.R. § 411.357(c)). This exception protects compensation paid to a physician by an employer pursuant to a bona fide employment relationship. The exception requires that: (i) the employment is for identifiable services; (ii) the compensation is consistent with FMV for services actually rendered (not taking into account the volume or value of referrals except for productivity bonuses based on services personally performed by the physician); (iii) the compensation is provided pursuant to an agreement that would be commercially reasonable even if no referrals were made to the employer; and (iv) the compensation does not exceed fair market value. This exception is the primary exception applicable to AHT's 147 employed physician relationships.

Personal Services Arrangements Exception (42 C.F.R. § 411.357(d)). This exception protects compensation paid under an arrangement for the provision of personal services. The exception requires: (i) a written arrangement signed by the parties; (ii) specification of the services to be provided; (iii) a term of at least one year (or a compliant holdover arrangement); (iv) aggregate compensation set in advance, consistent with FMV, and not determined in a manner that takes into account the volume or value of referrals; and (v) the services must be reasonable and necessary for the legitimate business purposes of the arrangement. This exception is the primary exception applicable to AHT's 38 independent contractor and medical director arrangements.

Fair Market Value Exception (42 C.F.R. § 411.357(l)). This exception protects arrangements for the provision of items or services where the compensation is consistent with FMV. The exception requires a written arrangement, compensation consistent with FMV and not determined in a manner that takes into account the volume or value of referrals, and commercial reasonableness. This exception may serve as an alternative to the personal services arrangements exception for certain AHT arrangements.

Space Rental Exception (42 C.F.R. § 411.357(a)). This exception protects lease arrangements for the rental of office space. The exception requires: (i) a written lease signed by the parties; (ii) a term of at least one year; (iii) specification of the leased premises; (iv) exclusive use of the leased premises by the lessee during the lease term (where premises are used part-time, the lease must specify the schedule and duration of use); (v) rental charges set in advance, consistent with FMV, and not determined based on the volume or value of referrals; and (vi) commercial reasonableness. This exception is directly relevant to the Meridian facility access fee arrangement and the Lakeview office leases.

Equipment Rental Exception (42 C.F.R. § 411.357(b)). This exception mirrors the space rental exception in its essential requirements but applies to the rental of equipment rather than office space. The exception requires a written lease, a term of at least one year, specification of the leased equipment, rental charges set in advance at FMV and not determined based on the volume or value of referrals, and commercial reasonableness.

In-Office Ancillary Services Exception (42 C.F.R. § 411.355). This exception permits physicians to refer for DHS that are furnished within the physician's office or the group practice's office, subject to specific supervision, location, and billing requirements. The exception is analyzed in detail in Section VI of this memorandum.

Indirect Compensation Arrangement Exception (42 C.F.R. § 411.357(p)). This exception protects indirect compensation arrangements where: (i) the compensation received by the referring physician is not determined in a manner that takes into account the volume or value of referrals; (ii) the compensation is FMV for services or items actually provided; and (iii) the arrangement is commercially reasonable and set out in writing. This exception is relevant to the ConnectiCare management services arrangement analysis.

Ownership/Investment Interest Exceptions (42 C.F.R. § 411.356). These exceptions protect certain ownership or investment interests, including interests in publicly traded securities, hospitals, and rural providers. These exceptions have limited applicability to AHT's arrangements but are relevant to the analysis of Dr. Karen Ellsworth's equity interest in Pinnacle Laboratory Services.

Value-Based Enterprise (VBE) Exceptions (42 C.F.R. § 411.357(aa)). Added by the CMS Stark Law Modernization final rule (85 Fed. Reg. 77,492, effective January 19, 2021), these exceptions establish three tiers of protection for compensation arrangements entered into as part of a value-based enterprise, with increasing flexibility corresponding to increasing levels of financial risk assumed by the physician participants. These exceptions are relevant to the Covenant Health Plans value-based payment incentive arrangement analysis.

Non-Monetary Compensation Exception (42 C.F.R. § 411.357(k)). This exception permits a DHS entity to provide non-monetary compensation to a referring physician if the aggregate value of the compensation does not exceed $459 per year (for calendar year 2023), as adjusted annually. This threshold is relevant to the Pinnacle Laboratory Services analysis.

E. CMS Stark Law Modernization — 2021 Final Rule

On December 2, 2020, CMS published a final rule modernizing and updating the Stark Law regulations, effective January 19, 2021, at 85 Fed. Reg. 77,492 (the "2021 Final Rule" or the "Stark Modernization Rule"). The 2021 Final Rule represented the most significant revision to the Stark Law regulatory framework since the original Phase I regulations and introduced several changes that are directly relevant to this assessment.

The key provisions of the 2021 Final Rule applicable to AHT include:

• Revised Definitions of Fair Market Value and Commercial Reasonableness. The 2021 Final Rule clarified that "fair market value" means the value in arm's-length transactions, consistent with the general market value, and that "commercial reasonableness" means that the arrangement furthers a legitimate business purpose of the reasonable parties to the arrangement and is on similar terms and conditions as like arrangements. Significantly, CMS confirmed that an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties, but emphasized that the analysis is objective and arrangement-specific.

• Value-Based Enterprise Exceptions. As noted above, the 2021 Final Rule created three new exception tiers for value-based arrangements, providing significant new flexibility for physician compensation structures tied to quality metrics and cost reduction. These exceptions are analyzed in the context of the Covenant Health Plans arrangement in Section XI.

• Group Practice Special Rules. The 2021 Final Rule modified certain group practice requirements under 42 C.F.R. § 411.352, including relaxing certain overhead allocation and profit distribution rules.

• Limited Remuneration to a Physician Exception. The 2021 Final Rule created a new exception for limited remuneration to a physician (aggregate compensation not exceeding $5,000 per calendar year), providing additional flexibility for low-value arrangements.

• Cybersecurity Technology Donation Exception. The 2021 Final Rule established a new exception at 42 C.F.R. § 411.357(bb) for donations of cybersecurity technology and related services. While potentially relevant to certain technology arrangements, this exception is limited to cybersecurity technology and does not extend to general health information technology such as laboratory interfaces.

• Electronic Health Records Exception (Revised). The 2021 Final Rule made the EHR donation exception permanent (it had previously been subject to a sunset provision) and revised its requirements, including maintaining the 15% recipient contribution requirement.

The applicability of these modernized provisions to specific AHT arrangements is addressed in the relevant analytical sections below.

F. Consequences of Non-Compliance

The consequences of Stark Law non-compliance are severe and multi-faceted, reflecting Congress's intent to establish a bright-line prohibition with strict enforcement mechanisms:

Denial of Claims. CMS may deny payment for any DHS furnished pursuant to a prohibited referral. 42 U.S.C. § 1395nn(a)(1)(B). Because the Stark Law is a strict liability statute, the denial applies regardless of the clinical appropriateness of the services or the intent of the parties.

Refund Obligation. The entity furnishing DHS pursuant to a prohibited referral is required to refund to CMS any amounts collected from the Medicare program for such services. 42 U.S.C. § 1395nn(g)(2). This refund obligation extends retroactively to all DHS claims submitted during the period of non-compliance.

60-Day Repayment Rule. Under the Affordable Care Act's 60-day repayment provision, 42 U.S.C. § 1320a-7k(d), an entity that has received an overpayment from the Medicare or Medicaid program is required to report and return the overpayment within 60 days of identifying the overpayment. Failure to do so may result in the overpayment being treated as an obligation under the False Claims Act, 31 U.S.C. § 3729 et seq. The identification of Stark Law violations in this memorandum may trigger the 60-day clock for certain arrangements, a matter analyzed in detail in the companion CMS Self-Referral Disclosure Protocol Evaluation Memorandum (Matter No. 1010-00003).

Civil Monetary Penalties. Any person who presents or causes to be presented a claim for DHS furnished pursuant to a prohibited referral is subject to civil monetary penalties of up to $15,000 per service, plus an assessment of up to three times the amount claimed. 42 U.S.C. § 1395nn(g)(3)–(4).

Exclusion. A physician or entity that enters into a circumvention scheme or arrangement designed to circumvent the Stark Law's prohibition may be excluded from participation in all federal healthcare programs. 42 U.S.C. § 1395nn(g)(4).

False Claims Act Liability. The submission of claims for DHS furnished pursuant to a prohibited referral, where the submitting entity knows or should know that the claims are false, may give rise to liability under the False Claims Act, 31 U.S.C. § 3729 et seq., which provides for treble damages, per-claim penalties (currently $13,946 to $27,894 per false claim), and exposure to qui tam whistleblower actions.

CMS Self-Referral Disclosure Protocol (SRDP). Recognizing that Stark Law violations frequently arise from technical non-compliance rather than fraudulent intent, CMS established the Self-Referral Disclosure Protocol as a voluntary disclosure mechanism through which entities can report actual or potential Stark Law violations and negotiate a resolution with CMS. The SRDP may be available as a remediation pathway for certain of the deficiencies identified in this memorandum.

IV. ANALYSIS OF PHYSICIAN EMPLOYMENT ARRANGEMENTS

A. Overview of AHT Employed Physician Population

AHT currently employs 147 physicians as W-2 employees across its 23 outpatient clinic locations. This employed physician population spans multiple clinical specialties, including primary care (internal medicine and family medicine), cardiology, orthopedics, gastroenterology, and several other medical and surgical subspecialties. Of these 147 employed physicians, 133 are "legacy" AHT physicians whose employment relationships predate the Lakeview acquisition, and 14 are former Lakeview physicians whose agreements were assumed in connection with the August 15, 2022 asset acquisition. The 14 Lakeview legacy physicians are analyzed separately in Section X of this memorandum due to the distinct deficiency profile of the assumed arrangements.

All 147 employed physicians are in a position to refer patients for DHS provided by AHT, including clinical laboratory services, diagnostic imaging (X-ray and ultrasound), and physical therapy at AHT's clinic locations. Each of these referral relationships constitutes a direct compensation arrangement between the referring physician and AHT (as the DHS entity), because AHT both pays compensation to the physician and furnishes the DHS for which the referral is made. Accordingly, each physician employment relationship must satisfy the employment exception at 42 C.F.R. § 411.357(c) in its entirety for the resulting DHS referrals to be lawful under the Stark Law.

Based on data provided by AHT's human resources and finance departments, the median total compensation for AHT's employed primary care physicians is approximately $278,000 per year, and the median total compensation for AHT's employed specialist physicians is approximately $412,000 per year. These medians are assessed against MGMA and SullivanCotter benchmark data in the Northbridge FMV analysis.

B. Employment Exception Analysis (42 C.F.R. § 411.357(c))

We have analyzed AHT's 133 non-Lakeview employed physician relationships against each element of the employment exception, as follows:

Requirement 1: Bona Fide Employment Relationship. The employment exception requires that the physician be a bona fide employee of the entity. A bona fide employment relationship is generally established where the employer issues a W-2 form to the physician, withholds applicable employment taxes, and exercises sufficient control over the physician's work to satisfy the common-law employer-employee test. Based on our review of payroll records, tax filings, and a representative sample of employment agreements, all 133 non-Lakeview employed physicians receive W-2 compensation, are subject to AHT's employment policies, and work under employment agreements that provide AHT with supervisory and administrative control consistent with bona fide employment. We have identified no instances in which a physician classified as a W-2 employee would more properly be characterized as an independent contractor. This element is satisfied for the reviewed population.

Requirement 2: Compensation Consistent with Fair Market Value. The employment exception requires that the compensation paid to the physician be consistent with the FMV of the services actually rendered by the physician, without taking into account the volume or value of referrals (except as permitted for productivity bonuses based on personally performed services, as discussed under Requirement 3). As noted in Section II.E, Northbridge Valuation Advisors has been retained to provide independent FMV opinions for physician compensation arrangements where contemporaneous substantiation is absent. Based on preliminary data, the median AHT PCP compensation of $278,000 per year and the median specialist compensation of $412,000 per year appear to fall within general FMV ranges for the relevant specialties and geographic market (northeastern United States), though this observation is subject to specialty-specific validation upon completion of the Northbridge opinions. However, as discussed below, approximately 29 employment agreements lack any contemporaneous FMV documentation, which, while not per se a Stark Law violation, substantially weakens the evidentiary record available to demonstrate FMV compliance in the event of a government inquiry or audit.

Requirement 3: Compensation Not Determined in a Manner That Takes into Account the Volume or Value of Referrals. This is the most critical and nuanced element of the employment exception as applied to AHT's compensation structures. The Stark Law permits productivity bonuses that are based on "services personally performed" by the physician, but prohibits compensation formulas that take into account the volume or value of referrals for DHS. 42 U.S.C. § 1395nn(e)(2); 42 C.F.R. § 411.357(c)(2)(ii). In practice, this means that a wRVU-based productivity bonus is permissible if the wRVUs used in the bonus calculation are limited to services personally performed by the physician — i.e., the evaluation and management ("E/M") services, procedures, and other services for which the physician is the rendering provider. However, a productivity bonus that incorporates "total RVUs" — including RVUs attributable to DHS that the physician ordered but did not personally perform (such as imaging studies performed by a radiologic technologist or laboratory tests performed by a lab technician) — is impermissible because it effectively ties the physician's compensation to the volume of referrals for DHS.

Our review of AHT's employment agreements has identified a significant subset of pre-2021 agreements that contain productivity bonus formulas referencing total practice RVUs, total billed charges, or similar metrics that include RVUs or revenue attributable to DHS referrals. These formulas were in place prior to the 2021 Stark Modernization Rule's revisions and have not been updated. The specific number and identity of affected agreements is documented in the Master Arrangement Inventory (Appendix A), but we estimate that approximately 18 to 22 employment agreements contain problematic bonus formulas.

Requirement 4: Compensation Commercially Reasonable Even Absent Referrals. The employment exception requires that the compensation arrangement be commercially reasonable even if the physician made no referrals to the employer. This element tests whether the physician's services — standing alone — justify the compensation paid, independent of the value of any referrals the physician might make. For the vast majority of AHT's employed physicians, the services personally performed (patient encounters, procedures, care management) are of sufficient scope and value to satisfy this element. However, for the small number of physicians whose compensation is heavily weighted toward productivity bonuses tied to total RVUs (including DHS referral-generated RVUs), the commercial reasonableness of the arrangement absent referrals becomes more questionable, as a significant portion of the physician's compensation may be attributable to referral-driven revenue rather than personally performed services.

Requirement 5: Written, Signed Agreement. The employment exception requires a written employment arrangement. Our review indicates that all 133 non-Lakeview employed physicians have written employment agreements on file. However, as discussed below, 11 of these agreements have expired their initial terms and the physicians continue working without executed renewals, raising questions about compliance with the writing requirement during the holdover period.

C. Identified Deficiencies — Employment Arrangements

Based on our comprehensive review of AHT's non-Lakeview employed physician agreements, we have identified the following categories of deficiencies:

Compensation Formula Issues. As discussed above, an estimated 18 to 22 pre-2021 employment agreements contain productivity bonus formulas that include total RVUs, total practice revenue, or other metrics that incorporate RVUs or revenue attributable to DHS referrals (such as imaging orders and laboratory test orders) rather than limiting the productivity bonus calculation to wRVUs for services personally performed by the physician. This is a direct threat to the employment exception's requirement that compensation not be determined in a manner that takes into account the volume or value of referrals. If the employment exception fails on this basis, every referral made by the affected physician for DHS payable by Medicare constitutes a prohibited referral, and every resulting claim is potentially subject to denial, refund, and penalties. We note that the volume and value prohibition applies to the manner in which compensation is determined, not merely to the aggregate amount of compensation. Thus, even if the total compensation paid is within FMV ranges, the inclusion of referral-linked RVUs in the bonus formula itself constitutes a structural exception failure.

Missing FMV Documentation. Approximately 29 of the 133 non-Lakeview employment agreements (approximately 22%) lack contemporaneous FMV substantiation for the compensation terms at the time the agreements were executed or last amended. While the Stark Law does not expressly require a formal FMV opinion as a precondition to satisfying the employment exception, the absence of contemporaneous FMV documentation significantly weakens AHT's ability to demonstrate compliance in the event of a government audit or enforcement inquiry. CMS and OIG have consistently emphasized the importance of contemporaneous FMV documentation as evidence that the parties considered and verified FMV at the time the arrangement was established. As noted above, Halsted Accounting Group flagged this deficiency in its FY2022 management letter.

Holdover Issues. Eleven (11) employment agreements have expired their initial contractual terms, and the physicians continue to provide services and receive compensation under the expired agreements without executed renewal agreements or amendments. Prior to the 2021 Stark Modernization Rule, the Stark Law regulations contained a specific "holdover" provision allowing arrangements to continue for up to six months following expiration of the initial term, provided that the arrangement was on the same terms and conditions as the expired agreement and the holdover was not the result of the failure of either party to make a good faith attempt to renew the arrangement. The 2021 Final Rule modified the holdover provisions to allow indefinite holdover periods for certain exceptions, provided that the original arrangement complied with all applicable exception requirements at the time it expired and the holdover arrangement continues on the same terms and conditions. However, for the holdover provision to apply, the underlying agreement must have been compliant with all exception elements at the time of its expiration. If the original agreement contained a non-compliant compensation formula (as discussed above), the holdover does not cure the deficiency — it merely extends the period of non-compliance.

Documentation Gaps. Several employment agreements lack specificity in describing the scope of clinical and administrative services to be performed by the physician. While the employment exception does not expressly require the same level of service specification as the personal services arrangements exception, the absence of detailed duty descriptions undermines the ability to demonstrate that compensation is for identifiable services actually rendered and that the arrangement is commercially reasonable.

D. Remediation Recommendations — Employment Arrangements

We recommend the following remediation actions for AHT's non-Lakeview employed physician arrangements:

1. Revise All Employment Agreements. AHT should adopt the revised physician employment agreement template prepared by Calderwood & Harkness (Exhibit 1 to this memorandum) and use it to amend or restate all existing employment agreements. The revised template includes: (i) productivity bonus formulas based exclusively on wRVUs for services personally performed by the physician, with explicit exclusion of referral-generated RVUs; (ii) FMV certification clauses requiring contemporaneous FMV substantiation at the time of execution and at each annual recertification; (iii) compliant holdover language consistent with the 2021 Final Rule's indefinite holdover provisions; and (iv) detailed service descriptions specifying the clinical, administrative, and quality improvement duties of the physician.

2. Obtain Northbridge FMV Opinions. For all 29 employment agreements currently lacking contemporaneous FMV substantiation, AHT should obtain Northbridge FMV opinions confirming that compensation is consistent with FMV as of the current date. Going forward, FMV substantiation should be obtained at the time of each new agreement, material amendment, or annual recertification.

3. Implement Annual Recertification Process. AHT should adopt the Revised Physician Compensation Policy prepared by Calderwood & Harkness (Exhibit 2) and implement an annual recertification process requiring each physician's compensation to be reviewed against current FMV benchmarks and documented in writing at least annually.

4. Priority. The RVU formula issues should be addressed immediately given that claims for DHS are currently being submitted on the basis of referrals from physicians whose compensation may take into account the volume or value of those referrals. Each day that these formulas remain in effect extends the period during which AHT may be submitting claims pursuant to prohibited referrals.

V. ANALYSIS OF INDEPENDENT CONTRACTOR AND MEDICAL DIRECTOR ARRANGEMENTS

A. Overview

AHT currently maintains 38 independent contractor and medical director arrangements (exclusive of the Lakeview legacy IC and medical director agreements analyzed in Section X). These arrangements span the Company's 23 clinic locations and encompass a range of clinical specialties. Under these arrangements, physicians provide medical directorship, clinical oversight, quality assurance, protocol development, and related administrative services to AHT in exchange for periodic stipend payments.

The annual stipend range across the 38 arrangements is $25,000 to $110,000 per year, with aggregate annual medical director compensation totaling approximately $1.92 million. The mean documented hours per month across the 38 arrangements is 8.4 hours, based on available time logs and agreement specifications. We note that many of the arrangements lack contemporaneous time documentation, and the 8.4-hour average is based on reported data that may overstate actual hours worked in some cases.

The effective average hourly compensation rate across the 38 arrangements can be computed as follows: $1,920,000 aggregate annual compensation divided by 3,830.4 aggregate annual hours (38 physicians × 8.4 hours per month × 12 months) equals approximately $501.28 per hour. This effective rate significantly exceeds the 90th percentile for medical director hourly compensation across multiple physician specialties, based on MGMA Medical Directorship Compensation Survey data and SullivanCotter survey data. We note that individual rates vary substantially across the 38 arrangements — some physicians receive hourly-equivalent rates well above $501.28, while others fall closer to benchmark medians. However, the aggregate picture is one of systematic above-market compensation for the documented level of services.

All 38 medical directors are in a position to refer patients for DHS provided by AHT clinics (clinical laboratory services, diagnostic imaging, and physical therapy). Indeed, many of the medical directors also see patients at AHT clinics in their clinical capacity, generating referrals for in-office ancillary DHS as a routine incident of their clinical practice. The combination of above-FMV compensation and active referral relationships creates a significant Stark Law compliance exposure.

B. Personal Services Arrangements Exception Analysis (42 C.F.R. § 411.357(d))

The primary Stark Law exception applicable to AHT's independent contractor and medical director arrangements is the personal services arrangements exception at 42 C.F.R. § 411.357(d). We have analyzed each element of this exception as applied to the 38 arrangements:

Written Agreement, Signed by the Parties. The personal services exception requires a written arrangement signed by the parties to the arrangement. Our review reveals that the status of written, signed agreements varies across the 38 arrangements. While the majority of arrangements are documented in written medical director agreements, several agreements have been identified with the following deficiencies: (i) three agreements were signed only by AHT and never countersigned by the physician; (ii) two agreements are evidenced only by unsigned draft documents or letter proposals that were never executed; and (iii) several agreements that were properly executed at inception have since been modified through informal email exchanges or verbal understandings without corresponding written amendments. Any arrangement lacking a fully executed written agreement fails this element of the personal services exception.

Specifying Services to Be Provided. The personal services exception requires that the arrangement specify the services to be provided by the physician. Our review indicates that many of AHT's medical director agreements contain only generic duty descriptions, such as "provide medical director services as needed," "oversee clinical quality," or "serve as medical director for the facility." These descriptions fail to provide the specificity required by the exception. CMS has consistently emphasized that the arrangement must identify with reasonable specificity the services that the physician will perform, and that vague or open-ended descriptions are insufficient. The lack of specific duty descriptions also undermines AHT's ability to demonstrate that the services are actually performed, that the compensation is for identifiable services, and that the arrangement is commercially reasonable.

Term of at Least One Year or Compliant Holdover. The personal services exception requires a term of at least one year or, under the 2021 Final Rule's revised holdover provisions, an arrangement that was compliant during its initial term and continues on the same terms and conditions following expiration. Our review identified nine (9) of the 38 arrangements that are currently operating on a month-to-month basis without compliant holdover provisions. These arrangements either had initial terms of less than one year (failing the minimum term requirement) or expired their initial terms without written renewal or amendment. Without a compliant term provision, the personal services exception cannot be satisfied.

Aggregate Compensation Set in Advance. The personal services exception requires that the aggregate compensation to be paid over the term of the arrangement be set in advance. For fixed stipend arrangements (e.g., $5,000 per month), this requirement is generally satisfied because the aggregate annual compensation is determinable at the inception of the arrangement. All 38 of AHT's medical director arrangements employ a fixed stipend structure, and we do not identify a deficiency on this element standing alone.

Compensation Consistent with Fair Market Value. The personal services exception requires that the aggregate compensation be consistent with FMV and not exceed FMV for the services provided. As noted above, the effective average hourly rate of $501.28 per hour raises significant FMV concerns. The MGMA Medical Directorship Compensation Survey and SullivanCotter data indicate that the 50th percentile hourly rate for medical director services typically falls in the range of $175 to $275 per hour (varying by specialty and geographic market), with the 90th percentile generally in the range of $350 to $425 per hour. An effective rate of $501.28 per hour exceeds even the 90th percentile, strongly suggesting that compensation is not consistent with FMV when measured against the documented hours of service. If the aggregate compens

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This memorandum was prepared by Calderwood & Harkness LLP at the direction of counsel for Arbor Health Technologies Inc. and is protected from disclosure by the attorney-client privilege and the work product doctrine. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
CALDERWOOD & HARKNESS LLP Counselors at Law One Federal Street, 30th Floor Boston, Massachusetts 02110
MEMORANDUM
TO: Patricia Yamamoto, Esq., General Counsel, Arbor Health Technologies Inc. Derek Huang, Chief Compliance Officer, Arbor Health Technologies Inc.
FROM: Miriam Calloway, Partner, Calderwood & Harkness LLP Christopher Aiken, Senior Associate, Calderwood & Harkness LLP Amy Whitfield, Associate, Calderwood & Harkness LLP
DATE: June 15, 2023
RE: Comprehensive Stark Law (Physician Self-Referral Law) Compliance Assessment — Arbor Health Technologies Inc.
MATTER NO.: 1010-00003
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I. EXECUTIVE SUMMARY
This memorandum presents the results of Calderwood & Harkness LLP's ("Calderwood & Harkness" or "we") comprehensive assessment of the physician compensation arrangements, in-office ancillary services, and referral relationships of Arbor Health Technologies Inc. ("AHT" or the "Company") under the federal Physician Self-Referral Law, 42 U.S.C. § 1395nn (the "Stark Law"), and its implementing regulations at 42 C.F.R. § 411.350 et seq. This assessment was conducted pursuant to the engagement described below and is intended to provide AHT's management, General Counsel, and Chief Compliance Officer with a detailed analysis of the Company's current compliance posture, a prioritized identification of deficiencies and associated risks, and actionable remediation recommendations.
Calderwood & Harkness was retained by AHT on January 30, 2023, pursuant to AHT Board Resolution No. 2023-01-004 (adopted January 24, 2023), to conduct this assessment. The engagement was prompted by the delivery of the Grayson Whitaker & Associates LLP compliance gap assessment report (Report No. GW-AHT-2022-Final, dated December 12, 2022), which identified seventeen (17) high-risk and twenty-three (23) moderate-risk physician compensation and referral arrangements requiring detailed legal review. That gap assessment was itself commissioned by AHT's Board Compliance Committee following the Company's acquisition of substantially all of the assets of Lakeview Medical Associates, P.C. ("Lakeview"), a fourteen-physician multi-specialty group practice in Worcester, Massachusetts, on August 15, 2022. The integration of Lakeview's legacy physician agreements, medical director arrangements, and office leases into AHT's existing operational framework served as the proximate trigger for the board-level decision to authorize this self-assessment.
The scope of our assessment encompasses all physician financial relationships currently maintained by AHT, including: (i) all 147 W-2 employed physician relationships across AHT's 23 outpatient clinic locations; (ii) 38 independent contractor and medical director arrangements (exclusive of Lakeview legacy arrangements); (iii) 14 Lakeview legacy physician agreements and 3 assumed Lakeview medical director agreements; (iv) the Meridian Diagnostics LLC mobile MRI facility access fee arrangement; (v) the Pinnacle Laboratory Services Inc. preferred laboratory agreement and related matters (including the no-cost electronic laboratory interface, continuing medical education sponsorships, and the equity interest held by Dr. Karen Ellsworth, spouse of AHT's CEO); (vi) the ConnectiCare Physicians Network, LLC management services arrangements; (vii) the Covenant Health Plans Inc. value-based payment incentive arrangements; and (viii) AHT's in-office ancillary services operations (clinical laboratory, diagnostic imaging, and physical therapy services) across all 23 clinic locations.
The significance of this assessment cannot be overstated. AHT reported $214.3 million in net revenue for fiscal year 2022, of which approximately 61%, or $130.7 million, derives from Medicare and Medicaid reimbursements. The entirety of this federally funded revenue is subject to the Stark Law's absolute prohibition on the submission of claims for designated health services ("DHS") furnished pursuant to non-compliant physician referral relationships. Unlike the federal Anti-Kickback Statute, the Stark Law is a strict liability statute requiring no showing of intent. A technical failure to satisfy even one element of an otherwise applicable exception renders the underlying referral prohibited and all resulting claims potentially subject to denial, refund, civil monetary penalties, and False Claims Act liability.
Our assessment has identified multiple categories of exception non-compliance across AHT's physician compensation and referral arrangements. The most significant findings are as follows:
• Medical Director/Independent Contractor Compensation (HIGH RISK): The effective average hourly compensation rate across AHT's 38 medical director arrangements is $501.28 per hour, which exceeds the 90th percentile for multiple physician specialties based on MGMA and SullivanCotter benchmark data. This rate, combined with low mean documented hours (8.4 hours per month) and generic duty descriptions, creates a substantial fair market value ("FMV") failure that undermines the personal services arrangements exception, the fair market value exception, and the employment exception.
• Meridian Diagnostics Facility Access Fee (HIGH RISK): The per-scan ($185/scan) facility access fee paid by Meridian Diagnostics LLC to AHT is a per-unit-of-service payment structure that varies directly with the volume of referrals. This structure is fundamentally inconsistent with all available Stark Law exceptions for space rental, equipment rental, and fair market value arrangements.
• Pinnacle Laboratory Services Relationship (HIGH RISK): Multiple independent Stark Law issues exist, including a no-cost electronic laboratory interface valued at approximately $120,000 per year (far exceeding the non-monetary compensation exception threshold), directed CME sponsorships totaling $86,000, and a 4.2% equity interest in Pinnacle held by Dr. Karen Ellsworth, the spouse of AHT CEO Dr. Nathan Ellsworth.
• Lakeview Legacy Arrangements (HIGH RISK): The 14 physician agreements, 3 medical director agreements, and 2 office leases assumed in the August 2022 acquisition contain numerous deficiencies, including absent FMV documentation, compensation formulas based on total practice collections rather than personally performed services, expired and unsigned agreements, and a below-market-rent lease with a landlord who is also a referral source.
• ConnectiCare MSA Indirect Compensation (MODERATE-HIGH RISK): AHT's percentage-of-revenue management services arrangements with nine independently owned physician practices create indirect compensation arrangement concerns when combined with referral patterns from managed practice physicians to AHT-owned ancillary services.
• Employment Agreement Deficiencies (MODERATE RISK): Certain pre-2021 employment agreements contain productivity bonus formulas that incorporate total RVUs (including those attributable to DHS referrals) rather than wRVUs limited to personally performed services. Additionally, 29 employment agreements lack contemporaneous FMV substantiation, and 11 agreements are operating under expired terms without compliant holdover provisions.
Specific remediation recommendations are set forth within each analytical section of this memorandum and consolidated in the remediation roadmap at Section XIII. We recommend that AHT prioritize the restructuring of the Meridian facility access fee arrangement, the medical director compensation arrangements, and the Pinnacle laboratory relationship, as these represent the highest-risk exposures with the most significant financial consequences.
This memorandum should be read in conjunction with the following companion work product prepared by Calderwood & Harkness as part of this engagement: (i) Anti-Kickback Statute Compliance Assessment Memorandum (Matter No. 1010-00003); (ii) Massachusetts and Connecticut State Referral Law Analysis Memoranda (Matter Nos. 1010-00003 and 1010-00003); (iii) CMS Self-Referral Disclosure Protocol Evaluation Memorandum (Matter No. 1010-00003); and (iv) standalone detailed memoranda addressing the Meridian Diagnostics, Pinnacle Laboratory Services, ConnectiCare management services, medical director FMV analysis, and Lakeview legacy arrangements (Matter Nos. 1010-00003 through 1010-00003).
II. BACKGROUND
A. Arbor Health Technologies Inc. — Corporate and Operational Overview
Arbor Health Technologies Inc. is a Delaware corporation headquartered at 200 Concord Avenue, Suite 400, Cambridge, Massachusetts 02138. The Company's Employer Identification Number is 84-3291057, its organizational National Provider Identifier is 1497253810, and its lead CMS Provider Transaction Access Number is 27MA4891.
AHT operates 23 outpatient clinics branded as "Arbor Health Clinics" across four states in the northeastern United States: fourteen (14) clinic locations in the Commonwealth of Massachusetts, four (4) in Connecticut, three (3) in Rhode Island, and two (2) in New Hampshire. Through these clinic locations, the Company delivers primary care, specialty care (including cardiology, orthopedics, and gastroenterology), and ancillary services encompassing in-office clinical laboratory testing, diagnostic imaging (X-ray and ultrasound), and physical therapy. The Company employs approximately 1,340 individuals across clinical and administrative functions, including 147 W-2 employed physicians, and maintains 38 independent contractor and medical director arrangements.
In addition to its clinical operations, AHT develops and licenses ArborConnect, a proprietary electronic health record ("EHR") and practice management software-as-a-service ("SaaS") platform. As of the date of this memorandum, ArborConnect is deployed internally across all 23 AHT clinic locations and is licensed externally to 42 independent physician practices, generating approximately $8.9 million in annual subscription revenue. The ArborConnect platform is relevant to several aspects of this Stark Law assessment, including the Pinnacle Laboratory Services electronic laboratory interface and the ConnectiCare management services arrangement infrastructure.
AHT is a portfolio company of Ridgeline Capital Partners Fund IV, L.P. ("Ridgeline Fund IV"), which holds a 72% equity stake in the Company. Ridgeline Fund IV acquired its interest in AHT in January 2021 for approximately $185 million. The general partner of Ridgeline Fund IV is Ridgeline Capital Advisors LLC, a private equity advisory firm headquartered at 400 Steamboat Road, Suite 300, Greenwich, Connecticut 06830. Ridgeline Capital Advisors LLC designates two members to AHT's Board of Directors: Claudia Sorrento, Managing Director, and Marcus Whitmore, Principal. The private equity ownership structure is relevant to this assessment for two reasons: first, the anticipated exit or sale process (currently projected for late 2024) creates an imperative for healthcare regulatory compliance remediation, as comprehensive compliance diligence is standard in transactions involving PE-backed healthcare companies; and second, the board-level governance dynamics and the role of investor-designated directors in compliance oversight are relevant to the effectiveness of AHT's compliance program.
AHT's executive leadership team includes Dr. Nathan Ellsworth, Chief Executive Officer; Patricia Yamamoto, Esq., General Counsel; and Derek Huang, Chief Compliance Officer. As discussed in detail in Section VIII of this memorandum, Dr. Nathan Ellsworth's spouse, Dr. Karen Ellsworth, holds a 4.2% passive equity interest in Pinnacle Laboratory Services Inc., a fact that has direct Stark Law implications for AHT's referral relationship with Pinnacle.
B. Financial Profile and Payer Mix
For fiscal year 2022, AHT reported consolidated net revenue of $214.3 million. Of this total, approximately 61%, or $130.7 million, is attributable to Medicare and Medicaid reimbursements. The remaining 39%, or approximately $83.6 million, is attributable to commercial payer reimbursements.
AHT's largest commercial payer is Covenant Health Plans Inc. ("Covenant"), headquartered at 500 Boylston Street, 12th Floor, Boston, Massachusetts 02116. In fiscal year 2022, Covenant accounted for approximately $38.6 million in revenue, representing approximately 18% of AHT's total net revenue. This figure includes $2.1 million in value-based incentive bonuses received from Covenant, which are analyzed under the Stark Law's value-based enterprise exceptions in Section XI of this memorandum.
The substantial concentration of AHT's revenue in Medicare and Medicaid reimbursements — more than three-fifths of total net revenue — underscores the materiality of Stark Law compliance exposure for the Company. Because the Stark Law governs referrals for DHS "payable by Medicare" (and, through the Medicaid corollary at 42 U.S.C. § 1396b(s), by Medicaid), the overwhelming majority of AHT's revenue base is potentially implicated by any deficiency in the Company's compliance with the statute's exception requirements. A single physician financial relationship that fails to satisfy all elements of an applicable Stark Law exception can render every referral made by that physician (or to that physician's employer entity) for Medicare- or Medicaid-payable DHS a "prohibited referral," resulting in a corresponding obligation to refund all amounts received for DHS furnished pursuant to such referrals.
C. Lakeview Medical Associates Acquisition
On August 15, 2022, AHT completed the acquisition of substantially all of the assets of Lakeview Medical Associates, P.C. ("Lakeview"), a Massachusetts professional corporation (EIN: 04-3782145) that operated as a fourteen-physician multi-specialty group practice in Worcester, Massachusetts. The acquisition price was $11.4 million. The transaction was negotiated and documented by Westbrook Hale LLP, AHT's general outside transactional counsel, under the direction of Elena Marchetti, Partner, with offices at 100 Summer Street, Suite 2200, Boston, Massachusetts 02110.
In connection with the acquisition, AHT assumed the following arrangements: (i) fourteen (14) physician agreements, consisting of twelve (12) employment agreements and two (2) independent contractor agreements; (ii) three (3) medical director agreements, with annual compensation of $45,000, $60,000, and $72,000, respectively; and (iii) two (2) office lease agreements for Lakeview's clinical facilities at 75 Belmont Street, Worcester, Massachusetts 01605 and 310 Main Street, Suite 2A, Shrewsbury, Massachusetts 01545.
Prior to the acquisition, Lakeview generated annual revenue of approximately $18.2 million, of which approximately $10.9 million (approximately 60%) was attributable to Medicare and Medicaid reimbursements. This payer mix is substantially consistent with AHT's own Medicare/Medicaid concentration.
Dr. Vivian Chao, Lakeview's former managing partner, transitioned to the role of AHT Regional Medical Director for Central Massachusetts following the closing of the acquisition. Dr. Chao's compensation arrangements, including her $72,000 legacy medical director agreement and her new AHT Regional Medical Director compensation, are analyzed in detail in Section X of this memorandum.
The integration of Lakeview's legacy arrangements into AHT's operational and compliance framework was the proximate trigger for the Company's decision to commission both the initial Grayson Whitaker gap assessment and the comprehensive legal assessment presented in this memorandum. As discussed below, the assumed Lakeview arrangements present several significant Stark Law compliance deficiencies that have been operating unremediated since the August 2022 closing — a period of approximately ten months as of the date of this memorandum.
D. Prior Compliance Assessment
In October 2022, approximately two months after the Lakeview acquisition closing, AHT retained Grayson Whitaker & Associates LLP ("Grayson Whitaker"), a healthcare compliance consulting firm headquartered at 4700 River Road, Suite 220, Bethesda, Maryland 20816, to conduct an initial internal compliance gap assessment of the Company's physician compensation and referral arrangements. The engagement was led by Carolyn Fitch, Engagement Principal.
Grayson Whitaker delivered its final report (Report No. GW-AHT-2022-Final) on December 12, 2022. The report identified a total of forty (40) arrangements requiring further legal review, categorized as follows: seventeen (17) arrangements classified as "high-risk" based on preliminary indicators of potential Stark Law exception non-compliance, and twenty-three (23) arrangements classified as "moderate-risk" based on documentation deficiencies, missing FMV substantiation, or structural features warranting closer examination. The Grayson Whitaker report provided a valuable preliminary risk stratification that informed the scope and prioritization of Calderwood & Harkness's subsequent legal assessment. However, as a compliance consulting report, it did not constitute legal analysis and did not provide conclusions regarding whether specific arrangements satisfied or failed to satisfy the elements of particular Stark Law exceptions.
In addition to the Grayson Whitaker assessment, AHT's external auditor, Halsted Accounting Group LLP ("Halsted"), headquartered at 225 Dyer Street, Suite 800, Providence, Rhode Island 02903 (Engagement Partner: Ronald Desmond, CPA), flagged in its fiscal year 2022 management letter that certain of the Company's physician compensation arrangements may require fair market value substantiation. Specifically, Halsted noted the absence of contemporaneous FMV documentation for a subset of physician employment agreements and expressed concern that the medical director compensation levels appeared elevated relative to industry benchmarks. While Halsted's management letter did not constitute a legal assessment, its observations corroborated the concerns identified by Grayson Whitaker and underscored the urgency of remedial action.
We note that AHT has no prior enforcement actions by the U.S. Department of Health and Human Services Office of Inspector General ("OIG"), the Department of Justice ("DOJ"), or the Centers for Medicare and Medicaid Services ("CMS") related to Stark Law or Anti-Kickback Statute compliance. The Company has not entered into a Corporate Integrity Agreement and has no pending OIG Advisory Opinion requests. This clean enforcement history is a favorable factor, though it does not diminish the significance of the deficiencies identified in this memorandum.
AHT adopted its Compliance Committee Charter on April 15, 2021, approximately three months after the Ridgeline Capital acquisition. The Charter was amended on October 30, 2022, following the Lakeview acquisition, to expand the Committee's oversight responsibilities to include acquisition integration compliance review. The Compliance Committee is chaired by Derek Huang, Chief Compliance Officer, and includes Patricia Yamamoto, General Counsel; Dr. Nathan Ellsworth, CEO; and one Ridgeline Capital board designee (currently Marcus Whitmore, Principal).
E. Valuation Support
At Calderwood & Harkness's recommendation, AHT retained Northbridge Valuation Advisors LLC ("Northbridge"), headquartered at 1600 Market Street, Suite 2800, Philadelphia, Pennsylvania 19103, in February 2023 to prepare independent fair market value opinions for the Company's physician compensation arrangements, office lease rates, and equipment rental arrangements. The engagement is led by Sandra Kilpatrick, Managing Director, ASA, CBA.
The scope of Northbridge's engagement encompasses FMV opinions for: (i) all 52 physician compensation arrangements requiring FMV substantiation, consisting of the 38 non-Lakeview independent contractor and medical director arrangements and the 14 Lakeview legacy employment agreements; (ii) the two Lakeview office leases (Worcester and Shrewsbury); and (iii) the Meridian Diagnostics LLC facility access fee arrangement. Northbridge is employing a multi-method valuation approach, including market benchmarking against MGMA Physician Compensation and Production Survey data, SullivanCotter Physician Compensation and Productivity Survey data, and comparable transaction analysis where applicable.
As of the date of this memorandum, several of the Northbridge FMV opinions are in draft form, and others remain pending. Our analysis below incorporates preliminary FMV observations from the Northbridge engagement where available, with the understanding that final conclusions may require updating upon delivery of the completed FMV opinions.
III. APPLICABLE LEGAL FRAMEWORK
A. The Stark Law — Overview (42 U.S.C. § 1395nn)
The federal Physician Self-Referral Law, commonly known as the "Stark Law" after its original sponsor, former Congressman Fortney "Pete" Stark, is codified at 42 U.S.C. § 1395nn and implemented through detailed regulations at 42 C.F.R. § 411.350 et seq. The Stark Law is a strict liability statute — unlike the federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)), which requires proof of knowing and willful conduct, the Stark Law requires no showing of intent, knowledge, or willfulness. A technical failure to satisfy any element of an applicable exception renders the underlying physician referral prohibited, regardless of the parties' good faith, the absence of any intent to induce referrals, or the clinical appropriateness of the services ordered.
The Stark Law imposes two complementary prohibitions. First, the statute prohibits a physician from making a "referral" for "designated health services" ("DHS") payable by Medicare (or, through the Medicaid corollary at 42 U.S.C. § 1396b(s), by Medicaid) to an "entity" with which the physician (or an "immediate family member" of the physician) has a "financial relationship," unless a specific statutory or regulatory exception applies. 42 U.S.C. § 1395nn(a)(1). Second, the statute prohibits the entity furnishing DHS pursuant to a prohibited referral from presenting or causing to be presented a claim or billing to Medicare (or Medicaid) for such services. 42 U.S.C. § 1395nn(a)(1)(B).
The term "financial relationship" encompasses two distinct categories: (1) ownership or investment interests, which include equity, debt, or other financial interests in an entity, whether held directly or indirectly through intermediary entities; and (2) compensation arrangements, which include any arrangement involving remuneration between a physician (or an immediate family member) and an entity. 42 U.S.C. § 1395nn(a)(2). Compensation arrangements may be direct (where remuneration passes directly between the referring physician and the DHS entity) or indirect (where an unbroken chain of financial relationships connects the referring physician and the DHS entity, as discussed in greater detail below).
The term "referral" is broadly defined under the Stark Law regulations at 42 C.F.R. § 411.351 to include not only the traditional concept of a physician directing a patient to another provider for services, but also the request or order for, or the certification or recertification of the need for, any DHS. This broad definition captures virtually any clinical order or request by a physician that results in the furnishing of DHS by an entity with which the physician has a financial relationship.
The term "immediate family member" is defined at 42 U.S.C. § 1395nn(a)(2) and 42 C.F.R. § 411.351 to include a physician's spouse, among other family members. This definition is directly relevant to the Pinnacle Laboratory Services analysis set forth in Section VIII, as Dr. Karen Ellsworth, the spouse of AHT CEO Dr. Nathan Ellsworth, holds a 4.2% equity interest in Pinnacle.
B. Designated Health Services (DHS)
The Stark Law's referral prohibition applies only to referrals for "designated health services," which are specifically enumerated at 42 U.S.C. § 1395nn(h)(6) and 42 C.F.R. § 411.351. The ten categories of DHS are as follows:
1. Clinical laboratory services;
2. Physical therapy services;
3. Occupational therapy services;
4. Radiology services, including magnetic resonance imaging ("MRI"), computerized axial tomography ("CT") scans, and ultrasound services;
5. Radiation therapy services and supplies;
6. Durable medical equipment and supplies;
7. Parenteral and enteral nutrients, equipment, and supplies;
8. Prosthetics, orthotics, and prosthetic devices and supplies;
9. Home health services;
10. Outpatient prescription drugs; and
11. Inpatient and outpatient hospital services.
AHT directly provides several categories of DHS through its 23 outpatient clinic locations, specifically: (i) clinical laboratory services (in-house laboratory testing capabilities); (ii) diagnostic imaging and radiology services (X-ray and ultrasound); and (iii) physical therapy services. In addition, AHT's employed and contracted physicians refer patients to external providers of DHS, most notably: (iv) Meridian Diagnostics LLC, which provides diagnostic imaging and MRI services; and (v) Pinnacle Laboratory Services Inc., which provides clinical laboratory testing services. Each of these DHS categories is subject to the Stark Law's referral prohibition, and each referral relationship must be covered by a valid exception for the resulting claims to be properly submitted to Medicare or Medicaid.
C. Compensation Arrangement Defined — Direct and Indirect
The Stark Law and its implementing regulations recognize two categories of compensation arrangements: direct compensation arrangements and indirect compensation arrangements. The distinction between these categories is critical to the analysis of several AHT arrangements, particularly the ConnectiCare management services arrangements and the Meridian facility access fee structure.
Direct Compensation Arrangement. A direct compensation arrangement exists under 42 C.F.R. § 411.354(a) when remuneration passes directly between the referring physician (or the physician's immediate family member) and the DHS entity, without any intervening persons or entities. A physician employment agreement in which the employer is also the entity furnishing DHS is the most common example of a direct compensation arrangement. All of AHT's employed physician relationships constitute direct compensation arrangements because AHT both employs the physicians and furnishes DHS (laboratory, imaging, physical therapy) at its clinic locations.
Indirect Compensation Arrangement. An indirect compensation arrangement exists under 42 C.F.R. § 411.354(c) when three conditions are satisfied: (i) an unbroken chain of persons or entities exists between the referring physician and the DHS entity, with each link in the chain involving a financial relationship (either a compensation arrangement or an ownership or investment interest); (ii) the referring physician receives, at some point in the chain, aggregate compensation that varies with, or takes into account, the volume or value of the physician's referrals to the DHS entity; and (iii) the DHS entity has actual knowledge of, or acts in reckless disregard or deliberate ignorance of, the fact that the referring physician receives aggregate compensation that varies with, or takes into account, the volume or value of referrals. The indirect compensation arrangement framework is of particular significance to AHT's ConnectiCare management services arrangements, in which an unbroken chain of financial relationships connects the managed practice physicians (who may refer patients for DHS) through the managed practice entities and the management services agreements to AHT (the DHS entity furnishing ancillary services).
D. Applicable Stark Law Exceptions
The Stark Law establishes a framework under which physician financial relationships are presumptively prohibited absent satisfaction of a specific statutory or regulatory exception. Each exception contains multiple elements, all of which must be satisfied for the exception to protect a given arrangement. The following exceptions are relevant to AHT's physician financial relationships and are analyzed in detail in the substantive sections of this memorandum:
Employment Exception (42 C.F.R. § 411.357(c)). This exception protects compensation paid to a physician by an employer pursuant to a bona fide employment relationship. The exception requires that: (i) the employment is for identifiable services; (ii) the compensation is consistent with FMV for services actually rendered (not taking into account the volume or value of referrals except for productivity bonuses based on services personally performed by the physician); (iii) the compensation is provided pursuant to an agreement that would be commercially reasonable even if no referrals were made to the employer; and (iv) the compensation does not exceed fair market value. This exception is the primary exception applicable to AHT's 147 employed physician relationships.
Personal Services Arrangements Exception (42 C.F.R. § 411.357(d)). This exception protects compensation paid under an arrangement for the provision of personal services. The exception requires: (i) a written arrangement signed by the parties; (ii) specification of the services to be provided; (iii) a term of at least one year (or a compliant holdover arrangement); (iv) aggregate compensation set in advance, consistent with FMV, and not determined in a manner that takes into account the volume or value of referrals; and (v) the services must be reasonable and necessary for the legitimate business purposes of the arrangement. This exception is the primary exception applicable to AHT's 38 independent contractor and medical director arrangements.
Fair Market Value Exception (42 C.F.R. § 411.357(l)). This exception protects arrangements for the provision of items or services where the compensation is consistent with FMV. The exception requires a written arrangement, compensation consistent with FMV and not determined in a manner that takes into account the volume or value of referrals, and commercial reasonableness. This exception may serve as an alternative to the personal services arrangements exception for certain AHT arrangements.
Space Rental Exception (42 C.F.R. § 411.357(a)). This exception protects lease arrangements for the rental of office space. The exception requires: (i) a written lease signed by the parties; (ii) a term of at least one year; (iii) specification of the leased premises; (iv) exclusive use of the leased premises by the lessee during the lease term (where premises are used part-time, the lease must specify the schedule and duration of use); (v) rental charges set in advance, consistent with FMV, and not determined based on the volume or value of referrals; and (vi) commercial reasonableness. This exception is directly relevant to the Meridian facility access fee arrangement and the Lakeview office leases.
Equipment Rental Exception (42 C.F.R. § 411.357(b)). This exception mirrors the space rental exception in its essential requirements but applies to the rental of equipment rather than office space. The exception requires a written lease, a term of at least one year, specification of the leased equipment, rental charges set in advance at FMV and not determined based on the volume or value of referrals, and commercial reasonableness.
In-Office Ancillary Services Exception (42 C.F.R. § 411.355). This exception permits physicians to refer for DHS that are furnished within the physician's office or the group practice's office, subject to specific supervision, location, and billing requirements. The exception is analyzed in detail in Section VI of this memorandum.
Indirect Compensation Arrangement Exception (42 C.F.R. § 411.357(p)). This exception protects indirect compensation arrangements where: (i) the compensation received by the referring physician is not determined in a manner that takes into account the volume or value of referrals; (ii) the compensation is FMV for services or items actually provided; and (iii) the arrangement is commercially reasonable and set out in writing. This exception is relevant to the ConnectiCare management services arrangement analysis.
Ownership/Investment Interest Exceptions (42 C.F.R. § 411.356). These exceptions protect certain ownership or investment interests, including interests in publicly traded securities, hospitals, and rural providers. These exceptions have limited applicability to AHT's arrangements but are relevant to the analysis of Dr. Karen Ellsworth's equity interest in Pinnacle Laboratory Services.
Value-Based Enterprise (VBE) Exceptions (42 C.F.R. § 411.357(aa)). Added by the CMS Stark Law Modernization final rule (85 Fed. Reg. 77,492, effective January 19, 2021), these exceptions establish three tiers of protection for compensation arrangements entered into as part of a value-based enterprise, with increasing flexibility corresponding to increasing levels of financial risk assumed by the physician participants. These exceptions are relevant to the Covenant Health Plans value-based payment incentive arrangement analysis.
Non-Monetary Compensation Exception (42 C.F.R. § 411.357(k)). This exception permits a DHS entity to provide non-monetary compensation to a referring physician if the aggregate value of the compensation does not exceed $459 per year (for calendar year 2023), as adjusted annually. This threshold is relevant to the Pinnacle Laboratory Services analysis.
E. CMS Stark Law Modernization — 2021 Final Rule
On December 2, 2020, CMS published a final rule modernizing and updating the Stark Law regulations, effective January 19, 2021, at 85 Fed. Reg. 77,492 (the "2021 Final Rule" or the "Stark Modernization Rule"). The 2021 Final Rule represented the most significant revision to the Stark Law regulatory framework since the original Phase I regulations and introduced several changes that are directly relevant to this assessment.
The key provisions of the 2021 Final Rule applicable to AHT include:
• Revised Definitions of Fair Market Value and Commercial Reasonableness. The 2021 Final Rule clarified that "fair market value" means the value in arm's-length transactions, consistent with the general market value, and that "commercial reasonableness" means that the arrangement furthers a legitimate business purpose of the reasonable parties to the arrangement and is on similar terms and conditions as like arrangements. Significantly, CMS confirmed that an arrangement may be commercially reasonable even if it does not result in profit for one or more of the parties, but emphasized that the analysis is objective and arrangement-specific.
• Value-Based Enterprise Exceptions. As noted above, the 2021 Final Rule created three new exception tiers for value-based arrangements, providing significant new flexibility for physician compensation structures tied to quality metrics and cost reduction. These exceptions are analyzed in the context of the Covenant Health Plans arrangement in Section XI.
• Group Practice Special Rules. The 2021 Final Rule modified certain group practice requirements under 42 C.F.R. § 411.352, including relaxing certain overhead allocation and profit distribution rules.
• Limited Remuneration to a Physician Exception. The 2021 Final Rule created a new exception for limited remuneration to a physician (aggregate compensation not exceeding $5,000 per calendar year), providing additional flexibility for low-value arrangements.
• Cybersecurity Technology Donation Exception. The 2021 Final Rule established a new exception at 42 C.F.R. § 411.357(bb) for donations of cybersecurity technology and related services. While potentially relevant to certain technology arrangements, this exception is limited to cybersecurity technology and does not extend to general health information technology such as laboratory interfaces.
• Electronic Health Records Exception (Revised). The 2021 Final Rule made the EHR donation exception permanent (it had previously been subject to a sunset provision) and revised its requirements, including maintaining the 15% recipient contribution requirement.
The applicability of these modernized provisions to specific AHT arrangements is addressed in the relevant analytical sections below.
F. Consequences of Non-Compliance
The consequences of Stark Law non-compliance are severe and multi-faceted, reflecting Congress's intent to establish a bright-line prohibition with strict enforcement mechanisms:
Denial of Claims. CMS may deny payment for any DHS furnished pursuant to a prohibited referral. 42 U.S.C. § 1395nn(a)(1)(B). Because the Stark Law is a strict liability statute, the denial applies regardless of the clinical appropriateness of the services or the intent of the parties.
Refund Obligation. The entity furnishing DHS pursuant to a prohibited referral is required to refund to CMS any amounts collected from the Medicare program for such services. 42 U.S.C. § 1395nn(g)(2). This refund obligation extends retroactively to all DHS claims submitted during the period of non-compliance.
60-Day Repayment Rule. Under the Affordable Care Act's 60-day repayment provision, 42 U.S.C. § 1320a-7k(d), an entity that has received an overpayment from the Medicare or Medicaid program is required to report and return the overpayment within 60 days of identifying the overpayment. Failure to do so may result in the overpayment being treated as an obligation under the False Claims Act, 31 U.S.C. § 3729 et seq. The identification of Stark Law violations in this memorandum may trigger the 60-day clock for certain arrangements, a matter analyzed in detail in the companion CMS Self-Referral Disclosure Protocol Evaluation Memorandum (Matter No. 1010-00003).
Civil Monetary Penalties. Any person who presents or causes to be presented a claim for DHS furnished pursuant to a prohibited referral is subject to civil monetary penalties of up to $15,000 per service, plus an assessment of up to three times the amount claimed. 42 U.S.C. § 1395nn(g)(3)–(4).
Exclusion. A physician or entity that enters into a circumvention scheme or arrangement designed to circumvent the Stark Law's prohibition may be excluded from participation in all federal healthcare programs. 42 U.S.C. § 1395nn(g)(4).
False Claims Act Liability. The submission of claims for DHS furnished pursuant to a prohibited referral, where the submitting entity knows or should know that the claims are false, may give rise to liability under the False Claims Act, 31 U.S.C. § 3729 et seq., which provides for treble damages, per-claim penalties (currently $13,946 to $27,894 per false claim), and exposure to qui tam whistleblower actions.
CMS Self-Referral Disclosure Protocol (SRDP). Recognizing that Stark Law violations frequently arise from technical non-compliance rather than fraudulent intent, CMS established the Self-Referral Disclosure Protocol as a voluntary disclosure mechanism through which entities can report actual or potential Stark Law violations and negotiate a resolution with CMS. The SRDP may be available as a remediation pathway for certain of the deficiencies identified in this memorandum.
IV. ANALYSIS OF PHYSICIAN EMPLOYMENT ARRANGEMENTS
A. Overview of AHT Employed Physician Population
AHT currently employs 147 physicians as W-2 employees across its 23 outpatient clinic locations. This employed physician population spans multiple clinical specialties, including primary care (internal medicine and family medicine), cardiology, orthopedics, gastroenterology, and several other medical and surgical subspecialties. Of these 147 employed physicians, 133 are "legacy" AHT physicians whose employment relationships predate the Lakeview acquisition, and 14 are former Lakeview physicians whose agreements were assumed in connection with the August 15, 2022 asset acquisition. The 14 Lakeview legacy physicians are analyzed separately in Section X of this memorandum due to the distinct deficiency profile of the assumed arrangements.
All 147 employed physicians are in a position to refer patients for DHS provided by AHT, including clinical laboratory services, diagnostic imaging (X-ray and ultrasound), and physical therapy at AHT's clinic locations. Each of these referral relationships constitutes a direct compensation arrangement between the referring physician and AHT (as the DHS entity), because AHT both pays compensation to the physician and furnishes the DHS for which the referral is made. Accordingly, each physician employment relationship must satisfy the employment exception at 42 C.F.R. § 411.357(c) in its entirety for the resulting DHS referrals to be lawful under the Stark Law.
Based on data provided by AHT's human resources and finance departments, the median total compensation for AHT's employed primary care physicians is approximately $278,000 per year, and the median total compensation for AHT's employed specialist physicians is approximately $412,000 per year. These medians are assessed against MGMA and SullivanCotter benchmark data in the Northbridge FMV analysis.
B. Employment Exception Analysis (42 C.F.R. § 411.357(c))
We have analyzed AHT's 133 non-Lakeview employed physician relationships against each element of the employment exception, as follows:
Requirement 1: Bona Fide Employment Relationship. The employment exception requires that the physician be a bona fide employee of the entity. A bona fide employment relationship is generally established where the employer issues a W-2 form to the physician, withholds applicable employment taxes, and exercises sufficient control over the physician's work to satisfy the common-law employer-employee test. Based on our review of payroll records, tax filings, and a representative sample of employment agreements, all 133 non-Lakeview employed physicians receive W-2 compensation, are subject to AHT's employment policies, and work under employment agreements that provide AHT with supervisory and administrative control consistent with bona fide employment. We have identified no instances in which a physician classified as a W-2 employee would more properly be characterized as an independent contractor. This element is satisfied for the reviewed population.
Requirement 2: Compensation Consistent with Fair Market Value. The employment exception requires that the compensation paid to the physician be consistent with the FMV of the services actually rendered by the physician, without taking into account the volume or value of referrals (except as permitted for productivity bonuses based on personally performed services, as discussed under Requirement 3). As noted in Section II.E, Northbridge Valuation Advisors has been retained to provide independent FMV opinions for physician compensation arrangements where contemporaneous substantiation is absent. Based on preliminary data, the median AHT PCP compensation of $278,000 per year and the median specialist compensation of $412,000 per year appear to fall within general FMV ranges for the relevant specialties and geographic market (northeastern United States), though this observation is subject to specialty-specific validation upon completion of the Northbridge opinions. However, as discussed below, approximately 29 employment agreements lack any contemporaneous FMV documentation, which, while not per se a Stark Law violation, substantially weakens the evidentiary record available to demonstrate FMV compliance in the event of a government inquiry or audit.
Requirement 3: Compensation Not Determined in a Manner That Takes into Account the Volume or Value of Referrals. This is the most critical and nuanced element of the employment exception as applied to AHT's compensation structures. The Stark Law permits productivity bonuses that are based on "services personally performed" by the physician, but prohibits compensation formulas that take into account the volume or value of referrals for DHS. 42 U.S.C. § 1395nn(e)(2); 42 C.F.R. § 411.357(c)(2)(ii). In practice, this means that a wRVU-based productivity bonus is permissible if the wRVUs used in the bonus calculation are limited to services personally performed by the physician — i.e., the evaluation and management ("E/M") services, procedures, and other services for which the physician is the rendering provider. However, a productivity bonus that incorporates "total RVUs" — including RVUs attributable to DHS that the physician ordered but did not personally perform (such as imaging studies performed by a radiologic technologist or laboratory tests performed by a lab technician) — is impermissible because it effectively ties the physician's compensation to the volume of referrals for DHS.
Our review of AHT's employment agreements has identified a significant subset of pre-2021 agreements that contain productivity bonus formulas referencing total practice RVUs, total billed charges, or similar metrics that include RVUs or revenue attributable to DHS referrals. These formulas were in place prior to the 2021 Stark Modernization Rule's revisions and have not been updated. The specific number and identity of affected agreements is documented in the Master Arrangement Inventory (Appendix A), but we estimate that approximately 18 to 22 employment agreements contain problematic bonus formulas.
Requirement 4: Compensation Commercially Reasonable Even Absent Referrals. The employment exception requires that the compensation arrangement be commercially reasonable even if the physician made no referrals to the employer. This element tests whether the physician's services — standing alone — justify the compensation paid, independent of the value of any referrals the physician might make. For the vast majority of AHT's employed physicians, the services personally performed (patient encounters, procedures, care management) are of sufficient scope and value to satisfy this element. However, for the small number of physicians whose compensation is heavily weighted toward productivity bonuses tied to total RVUs (including DHS referral-generated RVUs), the commercial reasonableness of the arrangement absent referrals becomes more questionable, as a significant portion of the physician's compensation may be attributable to referral-driven revenue rather than personally performed services.
Requirement 5: Written, Signed Agreement. The employment exception requires a written employment arrangement. Our review indicates that all 133 non-Lakeview employed physicians have written employment agreements on file. However, as discussed below, 11 of these agreements have expired their initial terms and the physicians continue working without executed renewals, raising questions about compliance with the writing requirement during the holdover period.
C. Identified Deficiencies — Employment Arrangements
Based on our comprehensive review of AHT's non-Lakeview employed physician agreements, we have identified the following categories of deficiencies:
Compensation Formula Issues. As discussed above, an estimated 18 to 22 pre-2021 employment agreements contain productivity bonus formulas that include total RVUs, total practice revenue, or other metrics that incorporate RVUs or revenue attributable to DHS referrals (such as imaging orders and laboratory test orders) rather than limiting the productivity bonus calculation to wRVUs for services personally performed by the physician. This is a direct threat to the employment exception's requirement that compensation not be determined in a manner that takes into account the volume or value of referrals. If the employment exception fails on this basis, every referral made by the affected physician for DHS payable by Medicare constitutes a prohibited referral, and every resulting claim is potentially subject to denial, refund, and penalties. We note that the volume and value prohibition applies to the manner in which compensation is determined, not merely to the aggregate amount of compensation. Thus, even if the total compensation paid is within FMV ranges, the inclusion of referral-linked RVUs in the bonus formula itself constitutes a structural exception failure.
Missing FMV Documentation. Approximately 29 of the 133 non-Lakeview employment agreements (approximately 22%) lack contemporaneous FMV substantiation for the compensation terms at the time the agreements were executed or last amended. While the Stark Law does not expressly require a formal FMV opinion as a precondition to satisfying the employment exception, the absence of contemporaneous FMV documentation significantly weakens AHT's ability to demonstrate compliance in the event of a government audit or enforcement inquiry. CMS and OIG have consistently emphasized the importance of contemporaneous FMV documentation as evidence that the parties considered and verified FMV at the time the arrangement was established. As noted above, Halsted Accounting Group flagged this deficiency in its FY2022 management letter.
Holdover Issues. Eleven (11) employment agreements have expired their initial contractual terms, and the physicians continue to provide services and receive compensation under the expired agreements without executed renewal agreements or amendments. Prior to the 2021 Stark Modernization Rule, the Stark Law regulations contained a specific "holdover" provision allowing arrangements to continue for up to six months following expiration of the initial term, provided that the arrangement was on the same terms and conditions as the expired agreement and the holdover was not the result of the failure of either party to make a good faith attempt to renew the arrangement. The 2021 Final Rule modified the holdover provisions to allow indefinite holdover periods for certain exceptions, provided that the original arrangement complied with all applicable exception requirements at the time it expired and the holdover arrangement continues on the same terms and conditions. However, for the holdover provision to apply, the underlying agreement must have been compliant with all exception elements at the time of its expiration. If the original agreement contained a non-compliant compensation formula (as discussed above), the holdover does not cure the deficiency — it merely extends the period of non-compliance.
Documentation Gaps. Several employment agreements lack specificity in describing the scope of clinical and administrative services to be performed by the physician. While the employment exception does not expressly require the same level of service specification as the personal services arrangements exception, the absence of detailed duty descriptions undermines the ability to demonstrate that compensation is for identifiable services actually rendered and that the arrangement is commercially reasonable.
D. Remediation Recommendations — Employment Arrangements
We recommend the following remediation actions for AHT's non-Lakeview employed physician arrangements:
1. Revise All Employment Agreements. AHT should adopt the revised physician employment agreement template prepared by Calderwood & Harkness (Exhibit 1 to this memorandum) and use it to amend or restate all existing employment agreements. The revised template includes: (i) productivity bonus formulas based exclusively on wRVUs for services personally performed by the physician, with explicit exclusion of referral-generated RVUs; (ii) FMV certification clauses requiring contemporaneous FMV substantiation at the time of execution and at each annual recertification; (iii) compliant holdover language consistent with the 2021 Final Rule's indefinite holdover provisions; and (iv) detailed service descriptions specifying the clinical, administrative, and quality improvement duties of the physician.
2. Obtain Northbridge FMV Opinions. For all 29 employment agreements currently lacking contemporaneous FMV substantiation, AHT should obtain Northbridge FMV opinions confirming that compensation is consistent with FMV as of the current date. Going forward, FMV substantiation should be obtained at the time of each new agreement, material amendment, or annual recertification.
3. Implement Annual Recertification Process. AHT should adopt the Revised Physician Compensation Policy prepared by Calderwood & Harkness (Exhibit 2) and implement an annual recertification process requiring each physician's compensation to be reviewed against current FMV benchmarks and documented in writing at least annually.
4. Priority. The RVU formula issues should be addressed immediately given that claims for DHS are currently being submitted on the basis of referrals from physicians whose compensation may take into account the volume or value of those referrals. Each day that these formulas remain in effect extends the period during which AHT may be submitting claims pursuant to prohibited referrals.
V. ANALYSIS OF INDEPENDENT CONTRACTOR AND MEDICAL DIRECTOR ARRANGEMENTS
A. Overview
AHT currently maintains 38 independent contractor and medical director arrangements (exclusive of the Lakeview legacy IC and medical director agreements analyzed in Section X). These arrangements span the Company's 23 clinic locations and encompass a range of clinical specialties. Under these arrangements, physicians provide medical directorship, clinical oversight, quality assurance, protocol development, and related administrative services to AHT in exchange for periodic stipend payments.
The annual stipend range across the 38 arrangements is $25,000 to $110,000 per year, with aggregate annual medical director compensation totaling approximately $1.92 million. The mean documented hours per month across the 38 arrangements is 8.4 hours, based on available time logs and agreement specifications. We note that many of the arrangements lack contemporaneous time documentation, and the 8.4-hour average is based on reported data that may overstate actual hours worked in some cases.
The effective average hourly compensation rate across the 38 arrangements can be computed as follows: $1,920,000 aggregate annual compensation divided by 3,830.4 aggregate annual hours (38 physicians × 8.4 hours per month × 12 months) equals approximately $501.28 per hour. This effective rate significantly exceeds the 90th percentile for medical director hourly compensation across multiple physician specialties, based on MGMA Medical Directorship Compensation Survey data and SullivanCotter survey data. We note that individual rates vary substantially across the 38 arrangements — some physicians receive hourly-equivalent rates well above $501.28, while others fall closer to benchmark medians. However, the aggregate picture is one of systematic above-market compensation for the documented level of services.
All 38 medical directors are in a position to refer patients for DHS provided by AHT clinics (clinical laboratory services, diagnostic imaging, and physical therapy). Indeed, many of the medical directors also see patients at AHT clinics in their clinical capacity, generating referrals for in-office ancillary DHS as a routine incident of their clinical practice. The combination of above-FMV compensation and active referral relationships creates a significant Stark Law compliance exposure.
B. Personal Services Arrangements Exception Analysis (42 C.F.R. § 411.357(d))
The primary Stark Law exception applicable to AHT's independent contractor and medical director arrangements is the personal services arrangements exception at 42 C.F.R. § 411.357(d). We have analyzed each element of this exception as applied to the 38 arrangements:
Written Agreement, Signed by the Parties. The personal services exception requires a written arrangement signed by the parties to the arrangement. Our review reveals that the status of written, signed agreements varies across the 38 arrangements. While the majority of arrangements are documented in written medical director agreements, several agreements have been identified with the following deficiencies: (i) three agreements were signed only by AHT and never countersigned by the physician; (ii) two agreements are evidenced only by unsigned draft documents or letter proposals that were never executed; and (iii) several agreements that were properly executed at inception have since been modified through informal email exchanges or verbal understandings without corresponding written amendments. Any arrangement lacking a fully executed written agreement fails this element of the personal services exception.
Specifying Services to Be Provided. The personal services exception requires that the arrangement specify the services to be provided by the physician. Our review indicates that many of AHT's medical director agreements contain only generic duty descriptions, such as "provide medical director services as needed," "oversee clinical quality," or "serve as medical director for the facility." These descriptions fail to provide the specificity required by the exception. CMS has consistently emphasized that the arrangement must identify with reasonable specificity the services that the physician will perform, and that vague or open-ended descriptions are insufficient. The lack of specific duty descriptions also undermines AHT's ability to demonstrate that the services are actually performed, that the compensation is for identifiable services, and that the arrangement is commercially reasonable.
Term of at Least One Year or Compliant Holdover. The personal services exception requires a term of at least one year or, under the 2021 Final Rule's revised holdover provisions, an arrangement that was compliant during its initial term and continues on the same terms and conditions following expiration. Our review identified nine (9) of the 38 arrangements that are currently operating on a month-to-month basis without compliant holdover provisions. These arrangements either had initial terms of less than one year (failing the minimum term requirement) or expired their initial terms without written renewal or amendment. Without a compliant term provision, the personal services exception cannot be satisfied.
Aggregate Compensation Set in Advance. The personal services exception requires that the aggregate compensation to be paid over the term of the arrangement be set in advance. For fixed stipend arrangements (e.g., $5,000 per month), this requirement is generally satisfied because the aggregate annual compensation is determinable at the inception of the arrangement. All 38 of AHT's medical director arrangements employ a fixed stipend structure, and we do not identify a deficiency on this element standing alone.
Compensation Consistent with Fair Market Value. The personal services exception requires that the aggregate compensation be consistent with FMV and not exceed FMV for the services provided. As noted above, the effective average hourly rate of $501.28 per hour raises significant FMV concerns. The MGMA Medical Directorship Compensation Survey and SullivanCotter data indicate that the 50th percentile hourly rate for medical director services typically falls in the range of $175 to $275 per hour (varying by specialty and geographic market), with the 90th percentile generally in the range of $350 to $425 per hour. An effective rate of $501.28 per hour exceeds even the 90th percentile, strongly suggesting that compensation is not consistent with FMV when measured against the documented hours of service. If the aggregate compens

MEMORANDUM

MATTER NO.: 1010-00003

I. EXECUTIVE SUMMARY

II. BACKGROUND

III. APPLICABLE LEGAL FRAMEWORK

IV. ANALYSIS OF PHYSICIAN EMPLOYMENT ARRANGEMENTS

V. ANALYSIS OF INDEPENDENT CONTRACTOR AND MEDICAL DIRECTOR ARRANGEMENTS

Record

Parties

Dates

Amounts