1010-00003 · Arbor Health Technologies Inc · State Law Analysis

connecticut-referral-fee-memo.docx DOCUMENT Funds

31 / 35 ← → ✕

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

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

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

DATE: May 5, 2023

RE: Applicability of Connecticut Referral Fee Prohibition (Conn. Gen. Stat. § 20-7a(d)) to AHT Connecticut Clinic Operations and ConnectiCare Physicians Network MSA Arrangements

MATTER NO.: 1010-00003

This memorandum constitutes attorney-client privileged communication and attorney work product prepared at the direction of counsel in anticipation of litigation and for the purpose of providing legal advice. This memorandum is strictly confidential and should not be disclosed to any person outside of Arbor Health Technologies Inc. without the express prior written consent of Calderwood & Harkness LLP. Disclosure of this memorandum to third parties may constitute a waiver of the attorney-client privilege and/or work product protection.

Right-click to update Table of Contents

I. EXECUTIVE SUMMARY

This memorandum analyzes the Connecticut referral fee prohibition statute, Conn. Gen. Stat. § 20-7a(d), and its applicability to two principal categories of Arbor Health Technologies Inc. ("AHT") operations in the State of Connecticut: (1) AHT's four Connecticut outpatient clinics, branded as "Arbor Health Clinics," which provide primary care, specialty care, and ancillary services to patients throughout the state; and (2) the management services arrangements operated through ConnectiCare Physicians Network, LLC ("CPN"), a Connecticut limited liability company through which AHT provides comprehensive practice management services to nine independently owned physician practices in the greater Hartford metropolitan area.

This memorandum supplements the comprehensive federal Anti-Kickback Statute ("AKS") and Physician Self-Referral Law ("Stark Law") analyses that have been separately issued as part of the broader engagement. Specifically, this analysis should be read in conjunction with the AKS Compliance Assessment Memorandum (Matter No. 1010-00003-AKS) and the ConnectiCare MSA Indirect Compensation Analysis (Matter No. 1010-00003-CPN), both of which address the federal dimensions of the same arrangements analyzed herein. The present memorandum addresses an additional and independent layer of state-law risk that operates outside the framework of federal safe harbors and exceptions and imposes obligations that, in certain material respects, are more restrictive than their federal counterparts.

Our principal conclusions are as follows:

First, the Connecticut referral fee prohibition set forth in Conn. Gen. Stat. § 20-7a(d) applies to AHT's Connecticut operations and imposes restrictions that are, in several critical respects, broader than the federal AKS. Most significantly, the Connecticut statute does not incorporate a safe harbor framework analogous to the regulatory safe harbors codified at 42 C.F.R. § 1001.952, does not limit its reach to referrals involving federal healthcare program beneficiaries, and does not require proof of the same specific intent element that characterizes federal AKS enforcement actions. Accordingly, arrangements that have been structured to satisfy federal AKS safe harbor requirements may nonetheless violate Connecticut state law.

Second, the statute prohibits the payment or receipt of any fee, commission, rebate, or other consideration—whether directly or indirectly—in exchange for referring or soliciting patients. This prohibition encompasses not only explicit cash payments for referrals but also indirect forms of remuneration, including below-market services, above-fair-market-value compensation, and percentage-based fees that are linked to referral volume or referral-driven revenue.

Third, several features of the CPN management fee structure and associated referral patterns between managed practices and AHT-owned ancillary services (laboratory, diagnostic imaging, and physical therapy) present material risk under Connecticut state law. The 15% of collected net revenue management fee creates a financial relationship between AHT and the managed practices, and the concurrent referral of patients from those managed practices to AHT-owned ancillary services creates a two-directional flow of remuneration and referrals that could be characterized as prohibited consideration for referrals under § 20-7a(d). This represents the single most significant Connecticut state-law risk identified in the course of the engagement.

Fourth, the Meridian Diagnostics LLC per-scan facility access fee arrangement, under which AHT receives $185 per scan from Meridian while AHT physicians simultaneously refer patients to Meridian for imaging services, presents elevated Connecticut state-law risk that is consistent with the concerns identified in the federal analysis.

Fifth, certain medical director arrangements at AHT's Connecticut clinics, where effective hourly compensation rates exceed fair market value benchmarks, present moderate-to-high risk under the Connecticut statute, as above-FMV compensation to physicians who are in a position to refer patients to AHT could be characterized as indirect consideration for referrals.

Based on these conclusions, we recommend restructuring of the CPN management fee formula, conversion of the Meridian per-scan facility access fee to a fixed monthly rental at fair market value, reduction of above-FMV medical director compensation to within benchmarked ranges, and implementation of referral isolation safeguards and Connecticut-specific compliance training. These recommendations are detailed in Section IX of this memorandum.

II. SCOPE AND ENGAGEMENT CONTEXT

This memorandum is issued as part of the comprehensive AKS/Stark Law self-assessment and remediation engagement authorized by AHT Board Resolution No. 2023-01-004, adopted on January 24, 2023, by the Board of Directors of Arbor Health Technologies Inc. That resolution directed AHT's General Counsel to retain outside counsel to conduct a thorough review of all physician compensation, referral, and management services arrangements across AHT's multi-state operations and to develop a remediation plan to address identified compliance deficiencies.

Calderwood & Harkness LLP was formally engaged pursuant to the Engagement Letter dated February 6, 2023, and the Supplemental Scope Letter dated February 28, 2023, which expanded the scope of the engagement to include state-law anti-kickback and referral fee prohibition analysis for each jurisdiction in which AHT operates clinical facilities or maintains management services arrangements—specifically, Massachusetts, Connecticut, Rhode Island, and New Hampshire.

The engagement was prompted by the independent gap assessment conducted by Grayson Whitaker & Associates LLP, a healthcare regulatory consulting firm retained by AHT's Audit Committee in the third quarter of 2022. The Grayson Whitaker assessment (Report Reference: GW-AHT-2022-Final, dated December 12, 2022) identified seventeen "high-risk" arrangements and twenty-three "moderate-risk" arrangements across AHT's operations. Several of the arrangements flagged in the Grayson Whitaker report involve Connecticut operations, including the CPN management services arrangements, certain Connecticut-based medical director agreements, and the Meridian Diagnostics facility access agreement.

The proximate trigger for the board-level compliance review was the acquisition of Lakeview Medical Associates, P.C. on August 15, 2022, which brought to AHT's attention certain pre-existing referral arrangements that had not been subject to rigorous compliance review prior to the acquisition. Although the Connecticut arrangements that are the subject of this memorandum pre-date the Lakeview acquisition, the board-level review encompassed all existing AHT arrangements across all jurisdictions.

This memorandum should be read in conjunction with the following companion work product documents, each of which addresses overlapping or related aspects of the arrangements analyzed herein:

• AKS Compliance Assessment Memorandum (Matter No. 1010-00003-AKS) — comprehensive analysis of all AHT arrangements under the federal Anti-Kickback Statute and applicable safe harbors;

• Stark Law Compliance Assessment Memorandum (Matter No. 1010-00003-Stark) — comprehensive analysis of physician self-referral compliance;

• ConnectiCare MSA Indirect Compensation Analysis (Matter No. 1010-00003-CPN) — detailed analysis of the CPN management services arrangements as indirect compensation arrangements under 42 C.F.R. § 411.354(c);

• Meridian Diagnostics AKS/Stark Analysis (Matter No. 1010-00003-Meridian) — analysis of the mobile MRI facility access arrangement;

• Medical Director Compensation — FMV and Commercial Reasonableness Analysis (Matter No. 1010-00003-MD) — fair market value and commercial reasonableness assessment of medical director stipends;

• Master Arrangement Inventory & Risk Scoring Matrix (Matter No. 1010-00003-Matrix) — comprehensive inventory and risk-tier classification of all AHT physician and vendor arrangements; and

• Massachusetts Anti-Kickback Law Memorandum (Matter No. 1010-00003-MA-AKS) — companion state-law analysis addressing M.G.L. c. 175H, § 3.

III. FACTUAL BACKGROUND

A. AHT's Connecticut Clinic Operations

Arbor Health Technologies Inc. is a Delaware corporation headquartered at 200 Concord Avenue, Suite 400, Cambridge, Massachusetts 02138 (EIN: 84-3291057; NPI: 1497253810). AHT was founded in 2009 and has grown through a combination of organic expansion and acquisitions to become a multi-state healthcare services platform operating twenty-three outpatient clinics across Massachusetts, Connecticut, Rhode Island, and New Hampshire.

Of these twenty-three clinics, four are located in the State of Connecticut, each operating under the "Arbor Health Clinics" brand. The Connecticut clinics are situated in Hartford, New Haven, Stamford, and Waterbury, and collectively provide a range of clinical services including primary care, specialty care (cardiology, orthopedics, and gastroenterology), and ancillary services (in-office laboratory testing, diagnostic imaging, and physical therapy). The clinics serve a diverse patient population that includes Medicare beneficiaries, Medicaid enrollees, and commercially insured patients.

AHT employs a total of 147 physicians on a W-2 basis across all of its clinic locations. A subset of these employed physicians provides services at the four Connecticut clinic locations. In addition to its employed physicians, AHT maintains thirty-eight independent contractor and medical director arrangements across its operations, a number of which involve physicians practicing in Connecticut. The precise number of Connecticut-based medical director arrangements and the associated compensation details are set forth in the Medical Director Compensation — FMV and Commercial Reasonableness Analysis memo and in the Master Arrangement Inventory & Risk Scoring Matrix.

For fiscal year 2022 ("FY2022"), AHT's consolidated net revenue was approximately $214.3 million. Of this total, approximately 61%, or $130.7 million, was derived from Medicare and Medicaid reimbursement, while the remaining approximately 39%, or $83.6 million, was attributable to commercial payer revenue. Among AHT's commercial payer relationships, the largest is with Covenant Health Plans Inc., which generated approximately $38.6 million in net revenue, representing approximately 18% of AHT's total net revenue. This revenue composition is significant because the Connecticut referral fee prohibition applies to all patient referrals regardless of payer source, meaning that the 39% of AHT's revenue attributable to commercial payers—which falls outside the scope of the federal AKS—is nonetheless subject to the Connecticut statute.

The Connecticut referral fee prohibition applies to AHT's Connecticut clinical operations regardless of AHT's state of incorporation. The statute governs the conduct of licensed health care providers and facilities operating within the State of Connecticut, and AHT's four Connecticut clinics are Connecticut-licensed facilities subject to the state's regulatory jurisdiction.

B. ConnectiCare Physicians Network, LLC — Structure and Operations

ConnectiCare Physicians Network, LLC ("CPN") is a Connecticut limited liability company with its principal office located at 55 Asylum Street, 7th Floor, Hartford, CT 06103. CPN was organized in 2017 as a vehicle through which AHT provides comprehensive practice management services to independently owned physician practices in Strathmore Mutual Insurance metropolitan area. As of the date of this memorandum, CPN maintains management services agreements ("MSAs") with nine independently owned physician practices.

The management services provided by AHT through CPN encompass a broad range of non-clinical operational support functions, including:

• Professional billing and collections services, including claims submission, denial management, and accounts receivable follow-up;

• Medical coding services, including ICD-10, CPT, and HCPCS Level II coding and audit support;

• Practice management consulting, including operational workflow analysis, scheduling optimization, and patient access improvement;

• Information technology infrastructure, including deployment and support of the ArborConnect electronic health record ("EHR") and practice management software-as-a-service ("SaaS") platform, hardware provisioning, network administration, and cybersecurity services;

• Human resources administration support, including credentialing, payer enrollment, and benefits administration coordination;

• Financial reporting and analytics, including monthly practice performance dashboards, benchmarking analyses, and annual budget preparation; and

• Regulatory compliance support, including HIPAA privacy and security compliance, OSHA compliance, and state licensure renewal coordination.

The management fee structure under the CPN MSAs is calculated as 15% of collected net revenue from each managed practice. This percentage-based fee is applied to the net collections of each practice—that is, to the actual amounts received by the practice after contractual adjustments, refunds, and write-offs—on a monthly basis. In FY2022, the aggregate collected net revenue of the nine managed practices was approximately $31.53 million (derived as $4.73 million ÷ 0.15), and AHT's aggregate management fee revenue from CPN was approximately $4.73 million.

A critical feature of the CPN arrangements, and one that gives rise to the most significant Connecticut state-law risk identified in this engagement, is the referral pattern between the managed practices and AHT-owned ancillary services. Several of the nine managed practices routinely refer patients to AHT-owned laboratory, diagnostic imaging, and physical therapy services for testing, imaging studies, and rehabilitation services. This creates an unbroken chain of financial relationships: AHT earns management fee revenue from the practices, and AHT simultaneously earns ancillary service revenue from patients referred by those same practices. Under the federal Stark Law, this referral chain is analyzed as an "indirect compensation arrangement" under 42 C.F.R. § 411.354(c), and the detailed analysis of that federal-law issue is set forth in the separate ConnectiCare MSA Indirect Compensation Analysis memorandum. Under Connecticut state law, however, the same referral pattern raises additional and distinct concerns that are the subject of the analysis in Section VI of this memorandum.

C. Meridian Diagnostics Relationship in Connecticut

Meridian Diagnostics LLC ("Meridian") is a Connecticut limited liability company with its principal office located at 88 Trumbull Street, Hartford, CT 06103. Meridian provides mobile MRI and advanced diagnostic imaging services to healthcare facilities throughout central Connecticut. Meridian is owned by Dr. Franklin Osei (60% ownership interest) and Gerald Pratt (40% ownership interest). Mr. Pratt is a non-physician investor who does not participate in the clinical operations of the entity.

Pursuant to a Services Agreement dated March 1, 2021 (the "Meridian Services Agreement"), Meridian provides mobile MRI services at four AHT clinic locations, including Connecticut locations. Under this arrangement, Meridian positions its mobile MRI unit at AHT clinic sites on scheduled days, and AHT physicians refer patients to Meridian for diagnostic imaging services as clinically appropriate.

In FY2022, AHT physicians generated approximately $2.8 million in referrals to Meridian for imaging services. In exchange for access to AHT's clinic facilities and patient flow, Meridian pays AHT a per-scan facility access fee of $185 per scan. In FY2022, approximately 4,200 scans were performed at AHT locations, yielding aggregate facility access fee payments from Meridian to AHT of approximately $777,000.

The per-scan fee structure of the Meridian arrangement is analyzed in detail in the separate Meridian Diagnostics AKS/Stark Analysis memorandum (Matter No. 1010-00003-Meridian). Under the federal analysis, the per-scan fee has been identified as presenting significant risk because it causes the rental payments to vary directly with the volume of referrals, which is inconsistent with both the Stark Law space rental exception (42 C.F.R. § 411.357(a)) and the AKS space rental safe harbor (42 C.F.R. § 1001.952(b)). This memorandum addresses the additional Connecticut state-law risk overlay applicable to the Meridian arrangement.

The fact that Meridian is organized under Connecticut law, maintains its principal office in Hartford, and provides imaging services at AHT's Connecticut clinic locations brings the arrangement squarely within the territorial scope of Conn. Gen. Stat. § 20-7a(d).

IV. STATUTORY FRAMEWORK: CONN. GEN. STAT. § 20-7a(d)

A. Text and Scope of the Prohibition

Connecticut General Statutes § 20-7a(d) establishes a broad prohibition on the payment or receipt of referral-linked remuneration by healthcare providers and facilities operating within the state. The statute provides, in pertinent part, that no person licensed to practice medicine or surgery, or any other licensed health care provider, and no health care facility, shall pay or receive, directly or indirectly, any fee, commission, rebate, or other consideration in exchange for referring or soliciting patients.

The prohibition is sweeping in its scope and is not limited to particular types of healthcare providers or particular categories of healthcare services. It applies to all Connecticut-licensed health care providers—including, without limitation, physicians, surgeons, nurses, physical therapists, and other allied health professionals—as well as to all health care facilities operating within the state. AHT's four Connecticut clinics are health care facilities operating within Connecticut, and AHT's employed and contracted physicians hold Connecticut medical licenses. Accordingly, both AHT as a facility operator and its individual Connecticut-licensed physicians are subject to the statute's prohibitions.

The prohibition encompasses both the payment and the receipt of prohibited remuneration. That is, both the payor and the recipient of consideration exchanged for referrals are potentially liable under the statute. This bilateral scope is significant because it means that, in the context of the CPN arrangements, both AHT (as the recipient of management fees from practices that refer to AHT ancillary services) and the managed practices (as the payors of fees to an entity whose affiliated services they patronize) could face exposure.

Critically, the statute's prohibition extends beyond direct cash payments to include "indirect" forms of consideration. This expansive language has been interpreted to capture a wide range of non-cash remuneration, including below-market services, free goods, above-fair-market-value compensation arrangements, and percentage-based fees linked to referral volume or referral-driven revenue. The inclusion of "indirect" remuneration is particularly relevant to the arrangements analyzed in this memorandum, because the management fee structure and facility access fee arrangements at issue do not involve direct, explicit payments for referrals but rather create financial structures in which remuneration and referrals flow in parallel, potentially creating an inference that the remuneration is, at least in part, consideration for the referrals.

B. Key Differences from the Federal Anti-Kickback Statute

An understanding of the differences between the Connecticut referral fee prohibition and the federal AKS is essential to the analysis in this memorandum, because AHT's existing compliance infrastructure has been designed primarily with reference to federal law. Several features of the Connecticut statute create risks that are not addressed by federal compliance measures.

No Safe Harbor Framework. Unlike the federal AKS (42 U.S.C. § 1320a-7b(b)), which is accompanied by an extensive set of regulatory safe harbors codified at 42 C.F.R. § 1001.952, Connecticut General Statutes § 20-7a(d) does not enumerate safe harbors. The federal safe harbors provide definitive protection for arrangements that satisfy each element of the applicable safe harbor—for example, the personal services and management contracts safe harbor (42 C.F.R. § 1001.952(d)), the space rental safe harbor (42 C.F.R. § 1001.952(b)), and the employment safe harbor (42 C.F.R. § 1001.952(i)). No parallel safe harbor framework exists under Connecticut law. As a result, arrangements that satisfy a federal AKS safe harbor are not automatically protected from liability under Connecticut law. This is the single most consequential structural difference between the two statutory frameworks, because it means that AHT cannot rely on its federal safe harbor compliance analyses as a shield against Connecticut state-law exposure.

No Intent Element Equivalent to the Federal "One Purpose" Test. Under the federal AKS, the government must prove that the defendant acted with the requisite intent—specifically, that remuneration was offered, paid, solicited, or received "knowingly and willfully" to induce or reward referrals. Federal courts have interpreted this intent element broadly under the "one purpose" test, holding that the AKS is violated if even one purpose of the remuneration is to induce referrals. See United States v. Greber, 760 F.2d 68, 69 (3d Cir. 1985); United States v. Borrasi, 639 F.3d 774, 782 (7th Cir. 2011). The Connecticut statute does not incorporate the same express intent requirement. Instead, the statutory focus is on whether the consideration was "in exchange for" referrals—a formulation that may be satisfied by demonstrating an objective nexus between the remuneration and the referral pattern, without requiring proof of subjective intent to induce referrals. While the precise contours of the Connecticut intent standard have not been definitively established in published case law, the statutory language suggests a lower prosecutorial burden than the federal AKS.

Broader Payer Coverage. The federal AKS is limited in scope to referrals involving "federal health care programs," as defined in 42 U.S.C. § 1320a-7b(f)—principally Medicare and Medicaid. Remuneration exchanged for referrals of patients covered by commercial insurance, self-pay patients, or other non-federal payer sources falls outside the federal AKS. By contrast, the Connecticut referral fee prohibition is not limited to any particular payer category. It applies to all patient referrals regardless of payer source—Medicare, Medicaid, commercial insurance, workers' compensation, and self-pay alike. This broader payer coverage is particularly significant for AHT, whose commercial payer revenue constitutes approximately 39% of its total net revenue, or approximately $83.6 million in FY2022. Among AHT's commercial payer relationships, Covenant Health Plans Inc. alone represents approximately $38.6 million, or 18% of AHT's total net revenue. Referrals involving commercially insured patients—which are beyond the reach of the federal AKS—are fully within the scope of the Connecticut statute.

Enforcement Mechanisms. Violations of Conn. Gen. Stat. § 20-7a(d) may result in professional disciplinary action by the Connecticut Department of Public Health ("DPH"), including formal reprimand, probation, suspension, or revocation of professional licenses. In addition, violations may give rise to civil monetary penalties and, in egregious cases, referral for criminal prosecution under applicable Connecticut criminal statutes. The enforcement posture of the Connecticut DPH with respect to referral fee violations has historically been less aggressive than federal OIG enforcement of the AKS; however, this lower enforcement frequency should not be confused with a lower level of legal risk, as the statutory exposure is clear and the consequences of a DPH enforcement action—particularly license revocation—could be existentially significant for individual practitioners and materially disruptive to AHT's clinical operations.

Relationship to Federal Law. Connecticut law operates as an entirely independent overlay on the federal AKS and Stark Law frameworks. Compliance with federal law does not guarantee compliance with state law, and compliance with state law does not guarantee compliance with federal law. AHT must satisfy the requirements of both frameworks independently. To the extent that AHT has historically relied on federal safe harbor compliance as the primary compliance benchmark for its Connecticut arrangements, that reliance is insufficient to address the state-law risk analyzed in this memorandum.

C. Judicial and Administrative Interpretations

The body of published judicial decisions interpreting Conn. Gen. Stat. § 20-7a(d) is relatively limited. Connecticut courts have not, to our knowledge, issued comprehensive opinions delineating the precise boundaries of the terms "consideration," "referral," and "in exchange for" as used in the statute. This interpretive scarcity creates meaningful uncertainty regarding the application of the statute to complex, multi-layered arrangements such as those maintained by AHT through CPN and with Meridian.

The Connecticut Department of Public Health has issued periodic interpretive guidance through advisory opinions, policy bulletins, and enforcement actions, but this guidance has generally addressed relatively straightforward factual scenarios—such as explicit fee-splitting arrangements between referring physicians and receiving specialists—rather than the more complex management services and facility access structures at issue here. We have reviewed available DPH advisory opinions and enforcement records and have not identified guidance that is directly on point for the CPN or Meridian arrangements. The absence of directly applicable guidance does not, however, reduce the legal risk; rather, it underscores the importance of conservative compliance postures in situations of interpretive ambiguity.

In the absence of comprehensive Connecticut-specific case law, courts and administrative tribunals interpreting § 20-7a(d) may look to analogous state referral fee prohibition cases from other jurisdictions for persuasive authority. Several states maintain referral fee prohibitions that are structurally similar to the Connecticut statute, including New York (N.Y. Educ. Law § 6509-a), New Jersey (N.J. Stat. Ann. § 45:9-22.5), and Illinois (225 ILCS 60/22.2). Decisions from these jurisdictions interpreting the scope of "consideration" and "referral" in analogous statutory contexts provide useful, if not binding, guidance.

Of particular relevance is the New York line of cases interpreting N.Y. Education Law § 6509-a, which prohibits the receipt of consideration for referrals in language substantially similar to the Connecticut statute. New York courts have interpreted the term "consideration" broadly to encompass not only direct cash payments but also indirect economic benefits, including below-market lease arrangements, above-FMV compensation, and shared revenue streams. See, e.g., In re Hasan, N.Y. Bd. for Prof. Med. Conduct (2008) (finding that above-FMV office rental subsidies provided to referring physicians constituted prohibited consideration for referrals). While New York decisions are not binding on Connecticut courts, they provide persuasive authority for the proposition that indirect economic benefits flowing between parties in a referral relationship may constitute prohibited "consideration" under a state referral fee prohibition statute.

Similarly, New Jersey courts have interpreted the state's patient brokering statute to reach arrangements where remuneration and referrals flow in parallel between the same parties, even where the remuneration is facially denominated as payment for legitimate services. See State v. Kim, 398 N.J. Super. 424 (App. Div. 2008). The New Jersey court's analysis is instructive because it demonstrates that courts applying state referral fee prohibitions are willing to look beyond the formal characterization of payments to examine the economic substance of the arrangement and the nexus between financial flows and referral patterns.

Based on the available interpretive authorities, we believe that the Connecticut statute should be read to encompass indirect forms of remuneration—including percentage-based management fees and per-unit facility access fees—where such remuneration flows between parties who are simultaneously in a referral relationship. While this interpretation has not been definitively established by Connecticut courts, it is consistent with the statutory text, the legislative purpose, and the weight of analogous authority from other jurisdictions.

D. Exceptions and Carve-Outs

Although Conn. Gen. Stat. § 20-7a(d) does not include a formal safe harbor framework, certain categories of arrangements have been recognized—through judicial interpretation, administrative practice, and statutory construction—as falling outside the scope of the prohibition. These exceptions are narrower and less well-defined than their federal counterparts, and their application to complex, multi-party arrangements requires careful analysis.

Employment Relationships. The statute has been interpreted to permit bona fide employment arrangements in which physicians are compensated for their professional services and not for the generation of referrals. Under this interpretation, a physician employed by a healthcare organization may receive compensation—including base salary, benefits, and performance-based incentives tied to personal productivity—without such compensation being characterized as a prohibited referral fee, provided that the compensation is for professional services rendered, is consistent with fair market value, and is not explicitly or implicitly conditioned on the volume or value of referrals to the employing entity or its affiliates. The contours of this employment exception are, however, narrower and less defined than the federal AKS employment safe harbor at 42 C.F.R. § 1001.952(i), which provides more detailed guidance on the elements required for protection. In particular, the Connecticut exception does not provide explicit guidance on the permissibility of productivity-based bonuses, quality incentives, or other variable compensation components that may correlate with referral volume as a practical matter even if not nominally tied to referrals.

Group Practice Arrangements. Compensation arrangements within a bona fide group practice for professional services rendered are generally not considered to constitute prohibited referral fees under the Connecticut statute. This exception is premised on the understanding that physicians practicing together in a unified group share a common economic enterprise and that internal revenue-sharing and compensation arrangements within the group are inherently different from referral fee arrangements between unaffiliated parties. However, the managed-practice model employed by AHT through CPN—in which AHT manages independent, separately owned practices for a percentage-based fee, and those practices refer patients to AHT-owned ancillary services—does not fit squarely within the group practice carve-out. The managed practices are not members of AHT's group practice; they are independently owned entities with their own tax identification numbers, corporate structures, and professional liability exposure. The CPN management relationship does not convert these independent practices into a single group practice for purposes of the Connecticut referral fee prohibition.

Legitimate Management Services. Payments of fair market value for genuinely rendered management services may fall outside the prohibition on the theory that such payments constitute consideration for services, not for referrals. This is the exception most directly relevant to the CPN arrangements. However, where the management fee is calculated as a percentage of revenue rather than as a fixed fee, and where the managed entity simultaneously refers patients to the management company's affiliated ancillary services, the arrangement presents heightened risk under the statute. The percentage-based fee structure creates a financial link between the volume of the managed practice's revenue (which may be influenced by referral patterns) and the management fee paid to AHT, potentially blurring the line between payment for management services and consideration for referrals. The risk is further elevated where the management company derives additional revenue from the referrals themselves through its ownership of the ancillary services to which patients are referred.

V. APPLICATION TO AHT CONNECTICUT CLINIC OPERATIONS

A. Employed Physician Arrangements

AHT's W-2 employed physicians at its four Connecticut clinic locations represent the lowest-risk category of arrangements under the Connecticut referral fee prohibition. These physicians are bona fide employees of AHT, compensated under employment agreements that specify base salaries, benefits, and, in certain cases, performance-based incentive compensation tied to personal clinical productivity, quality metrics, and patient satisfaction scores.

The median compensation for AHT's employed primary care physicians is approximately $278,000 per year, and the median compensation for AHT's employed specialists is approximately $412,000 per year. These compensation levels have been assessed against fair market value benchmarks by Northbridge Valuation Advisors, LLC, and the FMV opinions issued by Northbridge support the conclusion that AHT's employed physician compensation is generally within the range of fair market value for the relevant specialties and geographic markets. The Northbridge FMV opinions are addressed in detail in the Medical Director Compensation — FMV and Commercial Reasonableness Analysis memorandum.

To the extent that AHT's employed physician compensation is for professional services actually rendered, is consistent with fair market value, and is not explicitly or implicitly conditioned on the volume or value of referrals to AHT-owned ancillary services or to other providers, these arrangements are likely outside the scope of the Connecticut referral fee prohibition. The employment relationship itself is generally recognized as falling within the implied employment exception to the statute, and there is no indication in the materials reviewed to date that AHT's employed physician compensation has been structured as a mechanism for rewarding or incentivizing referrals.

Risk Level: Low. The employed physician arrangements present low risk under the Connecticut referral fee prohibition, provided that AHT's compensation methodology does not incorporate referral-based productivity bonuses that exceed fair market value or that are structured in a manner that effectively functions as referral incentives. We note, however, that certain AHT compensation plans include productivity-based components measured by work relative value units ("wRVUs") or collections, and to the extent that these metrics correlate with ancillary service referral volume, there is a theoretical risk that the productivity component could be characterized as indirect referral-linked compensation. We believe this risk is low given the prevailing industry acceptance of wRVU-based and collections-based productivity compensation, but we recommend ongoing monitoring to ensure that productivity incentives do not evolve into de facto referral incentives.

B. Independent Contractor and Medical Director Arrangements

AHT maintains thirty-eight independent contractor and medical director arrangements across its multi-state operations, a subset of which involves physicians who provide medical director services at AHT's Connecticut clinic locations. The medical director arrangements are the subject of detailed analysis in the Medical Director Compensation — FMV and Commercial Reasonableness Analysis memorandum, and the discussion here is limited to the Connecticut state-law overlay.

The medical director stipend range across all of AHT's medical director arrangements is $25,000 to $110,000 per year, with aggregate annual medical director compensation of approximately $1.92 million. The mean hours devoted to medical director duties across all arrangements is 8.4 hours per month. Based on these figures, the effective average hourly rate for medical director services is approximately $501.28 per hour. This effective hourly rate exceeds the 90th percentile compensation benchmark for medical director services in multiple specialties, as reported by MGMA, SullivanCotter, and other nationally recognized physician compensation survey sources.

Under Conn. Gen. Stat. § 20-7a(d), above-fair-market-value compensation paid to physicians who are simultaneously in a position to refer patients to AHT—or who do, in fact, refer patients to AHT-owned ancillary services—may be characterized as indirect "consideration" paid "in exchange for" referrals. This characterization is particularly compelling where the documented medical director duties do not justify the hours claimed or the payments made, creating an inference that the excess compensation serves as a form of referral-linked remuneration.

The Connecticut analysis mirrors the federal AKS analysis on this point but proceeds under a statutory framework that provides fewer defensive safe harbors. Under the federal AKS, a medical director arrangement may be protected by the personal services and management contracts safe harbor (42 C.F.R. § 1001.952(d)) if, among other requirements, the aggregate compensation is set in advance, is consistent with fair market value, and is not determined in a manner that takes into account the volume or value of referrals. Under Connecticut law, no comparable safe harbor exists, and the analysis turns on the more fundamental question of whether the compensation constitutes consideration for referrals—a question that is necessarily informed by the relationship between the compensation level, the fair market value of the services rendered, and the referral patterns of the physician.

Risk Level: Moderate to High. The Connecticut-based medical director arrangements present moderate-to-high risk under the Connecticut referral fee prohibition, particularly for those physicians whose compensation exceeds fair market value benchmarks and whose documented duties do not justify the hours or payments at issue. The risk is highest for medical directors who are among the most prolific referral sources to AHT-owned ancillary services, as the correlation between above-FMV compensation and high referral volume strengthens the inference that the compensation is, at least in part, consideration for referrals.

Recommendation: We recommend that AHT align its Connecticut medical director arrangements with the restructuring recommendations set forth in the Medical Director Compensation — FMV and Commercial Reasonableness Analysis memorandum. Specifically, effective hourly rates should be reduced to within the fair market value range established by Northbridge Valuation Advisors opinions and corroborated by independent benchmark data. Medical director duties and hours should be documented contemporaneously and rigorously, with monthly time logs submitted and reviewed by AHT's compliance office. The restructured arrangements should include contractual provisions expressly acknowledging that compensation is for medical director services rendered and is not conditioned on the volume or value of referrals.

C. In-Office Ancillary Services

AHT's four Connecticut clinics offer in-office ancillary services, including laboratory testing, diagnostic imaging, and physical therapy. Under the federal Stark Law, physician self-referrals to these ancillary services may be protected by the in-office ancillary services exception ("IOASE") set forth at 42 C.F.R. § 411.355(b), provided that the applicable supervision, location, and billing requirements are satisfied. The IOASE analysis for AHT's Connecticut clinics is addressed in the Stark Law Compliance Assessment Memorandum.

Under Connecticut state law, there is no parallel in-office ancillary services safe harbor. However, the Connecticut referral fee prohibition is generally focused on fee-splitting and referral fee arrangements between separate parties—that is, arrangements in which one party pays another party consideration in exchange for directing patients to the paying party. Where a single entity, such as AHT, refers patients internally to its own ancillary services provided at its own clinics by its own employees, there is no inter-party transfer of consideration and thus no transaction of the type that the statute is designed to prohibit. The "self-referral" within a single integrated entity does not involve the payment or receipt of a "fee, commission, rebate, or other consideration" between separate economic actors.

Risk Level: Low. The in-office ancillary services provided at AHT's Connecticut clinics present low risk under the Connecticut referral fee prohibition, as these arrangements involve internal referrals within a single entity rather than fee-splitting or referral fee arrangements between separate parties. This conclusion is, however, subject to the caveat that if AHT's compensation to the individual physicians who generate the ancillary service referrals is structured in a manner that effectively rewards them for referral volume (as discussed in Section V.A above), the individual physician compensation arrangement—rather than the ancillary service arrangement itself—could be the source of state-law risk.

VI. APPLICATION TO CONNECTICARE PHYSICIANS NETWORK MSA ARRANGEMENTS

A. Structure of the Referral Chain

The CPN management services arrangements create a complex, multi-directional web of financial relationships and referral patterns that is at the center of the Connecticut state-law analysis. The structure may be summarized as follows:

1. AHT provides comprehensive practice management services to nine independently owned physician practices in Strathmore Mutual Insurance area through the CPN entity.

2. Each managed practice pays AHT a management fee calculated as 15% of the practice's collected net revenue, aggregating to approximately $4.73 million in FY2022.

3. Several of the nine managed practices refer patients to AHT-owned ancillary services—specifically, AHT's laboratory, diagnostic imaging, and physical therapy operations—for testing, imaging studies, and rehabilitation services.

4. AHT earns ancillary service revenue from these referred patients, in addition to the management fee revenue it earns from the referring practices.

Under Conn. Gen. Stat. § 20-7a(d), the combination of these elements creates a two-directional flow of remuneration and referrals that may constitute prohibited consideration for referrals. Specifically, the management fee payments flow from the managed practices to AHT, while patient referrals flow from those same managed practices to AHT-owned ancillary services. The management fee can be characterized as "consideration" received by AHT from entities that refer patients to AHT, and conversely, the referral of patients to AHT ancillary services can be characterized as conduct that generates additional revenue for the entity (AHT) from which the managed practices receive management services. This creates a structural incentive for AHT to cultivate and reward referral relationships with the managed practices, and for the managed practices to refer patients to AHT ancillary services in order to maintain a favorable management relationship—precisely the type of incentive structure that the Connecticut referral fee prohibition is designed to prevent.

The structural risk is compounded by the fact that the management fee is not a fixed amount but rather a percentage of collected net revenue, which means that the management fee fluctuates with the volume of the managed practice's collections. To the extent that referrals to AHT ancillary services affect the managed practice's revenue—for example, by enabling the practice to bill for interpretation of laboratory or imaging results, or by facilitating higher patient volumes through coordinated care—the management fee may effectively correlate with referral activity.

B. Percentage-Based Fee Structure Risk

The 15% of collected net revenue management fee is the most significant source of Connecticut state-law risk in the CPN arrangements. The percentage-based fee is inherently variable: it rises and falls with the managed practice's collections, and it is not set as a fixed dollar amount in advance. This variability distinguishes the CPN management fee from a fixed monthly fee or annual retainer, which would be less susceptible to characterization as referral-linked remuneration.

Under the federal AKS, percentage-based compensation is not per se prohibited. The personal services and management contracts safe harbor at 42 C.F.R. § 1001.952(d) permits percentage-based compensation arrangements provided that the percentage is established in advance, is consistent with fair market value, and does not take into account the volume or value of referrals between the parties (other than referrals for the services covered by the agreement itself). When AHT's CPN management fees are assessed against the federal safe harbor, the percentage-based structure may be permissible under federal law if the other safe harbor elements are satisfied.

Connecticut law, however, does not provide an equivalent safe harbor. The Connecticut statute's prohibition on "indirect" consideration for referrals could capture a percentage-based management fee where the management company also benefits from referrals generated by the managed practices. In such circumstances, the percentage-based fee creates a financial mechanism through which AHT's management revenue is linked to the managed practices' collections, and the managed practices' referrals to AHT ancillary services generate additional revenue for AHT. The dual revenue stream—management fees from the practices and ancillary service revenue from the practices' referred patients—creates a structural financial incentive that may be viewed as indirect consideration for referrals, even if the management fee is facially characterized as payment for management services.

The risk is further heightened by the fact that the management fee percentage has remained constant at 15% since the inception of the CPN arrangements, without periodic renegotiation or adjustment to reflect changes in the scope or cost of management services actually provided. While a stable percentage might suggest that the fee is not responsive to referral volume, it also suggests that the fee has not been subjected to the type of rigorous, periodic fair market value reassessment that would be expected for a legitimate arms-length management services engagement.

Risk Level: High. The CPN percentage-based management fee structure represents the most significant Connecticut state-law risk identified in this engagement. The combination of a percentage-based fee, bidirectional financial flows, and parallel referral patterns creates a structural arrangement that is vulnerable to characterization as a prohibited referral fee arrangement under Conn. Gen. Stat. § 20-7a(d).

C. Referral Volume and Revenue Impact

A complete quantification of the referral volume from CPN-managed practices to AHT-owned ancillary services is necessary to assess the full magnitude of the Connecticut state-law risk. As of the date of this memorandum, the precise referral volumes have not been fully determined from the document production and referral tracking data obtained in the engagement. We have requested supplemental data from AHT's information technology department regarding the ArborConnect EHR referral tracking module, and we anticipate that this data will be available for analysis within the next thirty days. We will issue a supplemental memorandum addressing the quantified referral data when it becomes available.

Even absent precise quantification, however, the structural incentive created by the CPN arrangements is inherently problematic under Connecticut law. AHT earns revenue from two sources tied to the same managed practices: (a) the management fee, which is a function of the practice's collected net revenue; and (b) the ancillary service revenue, which is a function of the volume of patients referred by the practice to AHT's ancillary services. This dual revenue stream creates a financial interest for AHT in maintaining and expanding the referral relationships with the managed practices, regardless of the specific dollar amounts involved.

Under the Connecticut statute, the existence of the structural incentive may be sufficient to establish a violation, even if the actual referral volumes are relatively modest. The statute prohibits the payment or receipt of consideration "in exchange for" referrals; it does not require that the referrals reach any minimum volume threshold or generate any minimum revenue amount. Accordingly, even a single referral from a managed practice to an AHT ancillary service, where the managed practice is simultaneously paying a percentage-based management fee to AHT, could theoretically implicate the statute.

As a practical enforcement matter, however, the risk level is directly correlated with the magnitude of the referral volume and the associated revenue. Higher referral volumes and larger revenue streams increase the visibility of the arrangement to regulators and strengthen the inference that the financial relationships and referral patterns are interconnected.

D. Comparison to Federal Analysis

The CPN arrangements are analyzed under different, albeit overlapping, frameworks at the federal and state levels. Under the federal Stark Law, the CPN arrangements are characterized as "indirect compensation arrangements" under 42 C.F.R. § 411.354(c), because the referral chain passes through an intermediary entity (the managed practice) between the referring physician and AHT (the entity providing the designated health services). The Stark Law analysis requires that the compensation formula in the indirect compensation arrangement not vary with, or take into account, the volume or value of referrals. The detailed analysis of this federal requirement is set forth in the ConnectiCare MSA Indirect Compensation Analysis memorandum.

Under the federal AKS, the CPN management fee arrangement is assessed against the personal services and management contracts safe harbor at 42 C.F.R. § 1001.952(d). As noted above, the safe harbor permits percentage-based compensation under certain conditions, and the federal analysis focuses on whether those conditions are met.

Under Connecticut law, neither the Stark Law indirect compensation analysis nor the AKS management contracts safe harbor analysis provides protection. The Connecticut statute operates as a freestanding prohibition that must be satisfied independently of federal law. An arrangement that is fully compliant with the Stark Law indirect compensation requirements and fully within the AKS management contracts safe harbor could nonetheless violate Conn. Gen. Stat. § 20-7a(d) if it involves the payment or receipt of consideration in exchange for referrals.

Conclusion: Federal compliance does not insulate AHT from Connecticut state-law liability for the CPN arrangements. The CPN management fee structure must be assessed independently under the Connecticut statute, and the Connecticut analysis yields a materially different risk profile than the federal analysis. Specifically, the absence of a state-law safe harbor for percentage-based management fees, combined with the bidirectional financial flows and referral patterns, creates a level of risk under Connecticut law that exceeds the risk level identified under federal law (where safe harbor compliance may provide a complete defense).

VII. APPLICATION TO MERIDIAN DIAGNOSTICS ARRANGEMENT

A. Per-Scan Facility Access Fee Under Connecticut Law

The Meridian per-scan facility access fee arrangement presents a distinct category of Connecticut state-law risk. Under this arrangement, Meridian pays AHT $185 per scan for access to AHT clinic space at which Meridian positions its mobile MRI unit and provides diagnostic imaging services. In FY2022, approximately 4,200 scans were performed, generating $777,000 in facility access fee payments from Meridian to AHT. Concurrently, AHT physicians referred approximately $2.8 million in imaging services to Meridian during the same period.

Under the federal AKS and Stark Law analyses set forth in the Meridian Diagnostics AKS/Stark Analysis memorandum, the per-scan fee structure has been identified as presenting significant compliance risk. The per-scan fee causes the rental payments to vary directly with the volume of services provided at AHT's facilities, which is in turn driven by the volume of referrals from AHT physicians. This variable payment structure is inconsistent with the Stark Law space rental exception (42 C.F.R. § 411.357(a)), which requires rental payments to be set in advance and not determined in a manner that takes into account the volume or value of referrals, and with the AKS space rental safe harbor (42 C.F.R. § 1001.952(b)), which requires that aggregate rental payments be set in advance and be consistent with fair market value.

Under Conn. Gen. Stat. § 20-7a(d), the arrangement presents additional and independent state-law risk. The per-scan fee is paid by Meridian to AHT, and AHT physicians simultaneously refer patients to Meridian for imaging services. This creates a bidirectional flow: referrals flow from AHT to Meridian, and per-scan fee payments flow from Meridian to AHT. The per-scan fee could be characterized as consideration received by AHT "in exchange for" facilitating or inducing referrals to Meridian.

The characterization is strengthened by the volume-dependent nature of the per-scan fee. Because the total facility access fee payments increase in direct proportion to the number of scans performed—which is in turn a function of the number of patients referred by AHT physicians—the fee creates a direct financial incentive for AHT to increase referrals to Meridian. Each additional referral generates an additional $185 in facility access fee revenue for AHT. This per-unit economic incentive is precisely the type of referral-linked remuneration that the Connecticut statute is designed to prohibit.

Moreover, the arrangement involves a Connecticut-based entity (Meridian, organized under Connecticut law and headquartered in Hartford) providing services at AHT's Connecticut clinic locations to patients of AHT's Connecticut-licensed physicians. The arrangement is squarely within the territorial and jurisdictional scope of Conn. Gen. Stat. § 20-7a(d). Unlike arrangements that might involve cross-border referral patterns or services provided outside Connecticut, the Meridian arrangement is entirely situated within the state and is subject to the full force of the Connecticut referral fee prohibition.

B. Risk Level and Recommendation

Risk Level: High. The Meridian per-scan facility access fee arrangement presents high risk under Conn. Gen. Stat. § 20-7a(d), consistent with the elevated risk identified in the federal AKS and Stark Law analyses. The per-scan fee structure creates a direct, volume-dependent financial link between AHT's facility access revenue and the volume of referrals from AHT physicians to Meridian, and the arrangement is squarely within the scope of the Connecticut statute.

Recommendation: Consistent with the recommendations in the Meridian Diagnostics AKS/Stark Analysis memorandum, we recommend that AHT convert the per-scan facility access fee to a fixed monthly rental payment at fair market value. A fixed monthly rental would eliminate the volume-dependent component of the arrangement and would break the direct financial link between referral volume and rental revenue. We understand that a draft Restructured Facility Access Agreement has been prepared and transmitted to Meridian's counsel, Linden & Pryor LLP (attention: Thomas Beckett), and that negotiations regarding the transition to a fixed monthly rental are underway.

While a fixed monthly rental would substantially reduce the Connecticut state-law risk, we note that no formal safe harbor exists under Connecticut law for space rental arrangements. Accordingly, even a restructured fixed monthly rental must be rigorously documented as consistent with fair market value, commercially reasonable, and unrelated to referral patterns. AHT should obtain a Northbridge Valuation Advisors opinion or comparable independent appraisal supporting the fair market value of the proposed fixed monthly rental for the clinic space made available to Meridian.

In addition, the restructured agreement should include Connecticut state-law compliance representations and warranties, and AHT should implement internal protocols to ensure that referral decisions by AHT physicians with respect to Meridian imaging services are made on the basis of clinical judgment and patient convenience, without regard to the financial terms of the facility access arrangement.

VIII. INTERACTION WITH FEDERAL AKS AND STARK LAW ANALYSIS

A. Layered Compliance Obligations

AHT's Connecticut arrangements are subject to three overlapping and independently applicable regulatory frameworks:

1. Federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) and the accompanying regulatory safe harbors (42 C.F.R. § 1001.952), which prohibit the knowing and willful offer, payment, solicitation, or receipt of remuneration to induce or reward referrals of items or services reimbursable under federal healthcare programs;

2. Federal Physician Self-Referral Law (Stark Law) (42 U.S.C. § 1395nn) and the implementing regulations (42 C.F.R. § 411.350 et seq.), which prohibit physicians from referring Medicare patients for designated health services to entities with which the physician (or an immediate family member) has a financial relationship, unless an applicable exception is met; and

3. Connecticut State Referral Fee Prohibition (Conn. Gen. Stat. § 20-7a(d)), which prohibits the payment or receipt of any fee, commission, rebate, or other consideration in

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
FROM: Christopher Aiken, Senior Associate, and Amy Whitfield, Associate Calderwood & Harkness LLP One Federal Street, 30th Floor Boston, MA 02110
TO: Patricia Yamamoto, General Counsel, and Derek Huang, Chief Compliance Officer Arbor Health Technologies Inc. 200 Concord Avenue, Suite 400 Cambridge, MA 02138
DATE: May 5, 2023
RE: Applicability of Connecticut Referral Fee Prohibition (Conn. Gen. Stat. § 20-7a(d)) to AHT Connecticut Clinic Operations and ConnectiCare Physicians Network MSA Arrangements
MATTER NO.: 1010-00003
This memorandum constitutes attorney-client privileged communication and attorney work product prepared at the direction of counsel in anticipation of litigation and for the purpose of providing legal advice. This memorandum is strictly confidential and should not be disclosed to any person outside of Arbor Health Technologies Inc. without the express prior written consent of Calderwood & Harkness LLP. Disclosure of this memorandum to third parties may constitute a waiver of the attorney-client privilege and/or work product protection.
Right-click to update Table of Contents
I. EXECUTIVE SUMMARY
This memorandum analyzes the Connecticut referral fee prohibition statute, Conn. Gen. Stat. § 20-7a(d), and its applicability to two principal categories of Arbor Health Technologies Inc. ("AHT") operations in the State of Connecticut: (1) AHT's four Connecticut outpatient clinics, branded as "Arbor Health Clinics," which provide primary care, specialty care, and ancillary services to patients throughout the state; and (2) the management services arrangements operated through ConnectiCare Physicians Network, LLC ("CPN"), a Connecticut limited liability company through which AHT provides comprehensive practice management services to nine independently owned physician practices in the greater Hartford metropolitan area.
This memorandum supplements the comprehensive federal Anti-Kickback Statute ("AKS") and Physician Self-Referral Law ("Stark Law") analyses that have been separately issued as part of the broader engagement. Specifically, this analysis should be read in conjunction with the AKS Compliance Assessment Memorandum (Matter No. 1010-00003-AKS) and the ConnectiCare MSA Indirect Compensation Analysis (Matter No. 1010-00003-CPN), both of which address the federal dimensions of the same arrangements analyzed herein. The present memorandum addresses an additional and independent layer of state-law risk that operates outside the framework of federal safe harbors and exceptions and imposes obligations that, in certain material respects, are more restrictive than their federal counterparts.
Our principal conclusions are as follows:
First, the Connecticut referral fee prohibition set forth in Conn. Gen. Stat. § 20-7a(d) applies to AHT's Connecticut operations and imposes restrictions that are, in several critical respects, broader than the federal AKS. Most significantly, the Connecticut statute does not incorporate a safe harbor framework analogous to the regulatory safe harbors codified at 42 C.F.R. § 1001.952, does not limit its reach to referrals involving federal healthcare program beneficiaries, and does not require proof of the same specific intent element that characterizes federal AKS enforcement actions. Accordingly, arrangements that have been structured to satisfy federal AKS safe harbor requirements may nonetheless violate Connecticut state law.
Second, the statute prohibits the payment or receipt of any fee, commission, rebate, or other consideration—whether directly or indirectly—in exchange for referring or soliciting patients. This prohibition encompasses not only explicit cash payments for referrals but also indirect forms of remuneration, including below-market services, above-fair-market-value compensation, and percentage-based fees that are linked to referral volume or referral-driven revenue.
Third, several features of the CPN management fee structure and associated referral patterns between managed practices and AHT-owned ancillary services (laboratory, diagnostic imaging, and physical therapy) present material risk under Connecticut state law. The 15% of collected net revenue management fee creates a financial relationship between AHT and the managed practices, and the concurrent referral of patients from those managed practices to AHT-owned ancillary services creates a two-directional flow of remuneration and referrals that could be characterized as prohibited consideration for referrals under § 20-7a(d). This represents the single most significant Connecticut state-law risk identified in the course of the engagement.
Fourth, the Meridian Diagnostics LLC per-scan facility access fee arrangement, under which AHT receives $185 per scan from Meridian while AHT physicians simultaneously refer patients to Meridian for imaging services, presents elevated Connecticut state-law risk that is consistent with the concerns identified in the federal analysis.
Fifth, certain medical director arrangements at AHT's Connecticut clinics, where effective hourly compensation rates exceed fair market value benchmarks, present moderate-to-high risk under the Connecticut statute, as above-FMV compensation to physicians who are in a position to refer patients to AHT could be characterized as indirect consideration for referrals.
Based on these conclusions, we recommend restructuring of the CPN management fee formula, conversion of the Meridian per-scan facility access fee to a fixed monthly rental at fair market value, reduction of above-FMV medical director compensation to within benchmarked ranges, and implementation of referral isolation safeguards and Connecticut-specific compliance training. These recommendations are detailed in Section IX of this memorandum.
II. SCOPE AND ENGAGEMENT CONTEXT
This memorandum is issued as part of the comprehensive AKS/Stark Law self-assessment and remediation engagement authorized by AHT Board Resolution No. 2023-01-004, adopted on January 24, 2023, by the Board of Directors of Arbor Health Technologies Inc. That resolution directed AHT's General Counsel to retain outside counsel to conduct a thorough review of all physician compensation, referral, and management services arrangements across AHT's multi-state operations and to develop a remediation plan to address identified compliance deficiencies.
Calderwood & Harkness LLP was formally engaged pursuant to the Engagement Letter dated February 6, 2023, and the Supplemental Scope Letter dated February 28, 2023, which expanded the scope of the engagement to include state-law anti-kickback and referral fee prohibition analysis for each jurisdiction in which AHT operates clinical facilities or maintains management services arrangements—specifically, Massachusetts, Connecticut, Rhode Island, and New Hampshire.
The engagement was prompted by the independent gap assessment conducted by Grayson Whitaker & Associates LLP, a healthcare regulatory consulting firm retained by AHT's Audit Committee in the third quarter of 2022. The Grayson Whitaker assessment (Report Reference: GW-AHT-2022-Final, dated December 12, 2022) identified seventeen "high-risk" arrangements and twenty-three "moderate-risk" arrangements across AHT's operations. Several of the arrangements flagged in the Grayson Whitaker report involve Connecticut operations, including the CPN management services arrangements, certain Connecticut-based medical director agreements, and the Meridian Diagnostics facility access agreement.
The proximate trigger for the board-level compliance review was the acquisition of Lakeview Medical Associates, P.C. on August 15, 2022, which brought to AHT's attention certain pre-existing referral arrangements that had not been subject to rigorous compliance review prior to the acquisition. Although the Connecticut arrangements that are the subject of this memorandum pre-date the Lakeview acquisition, the board-level review encompassed all existing AHT arrangements across all jurisdictions.
This memorandum should be read in conjunction with the following companion work product documents, each of which addresses overlapping or related aspects of the arrangements analyzed herein:
• AKS Compliance Assessment Memorandum (Matter No. 1010-00003-AKS) — comprehensive analysis of all AHT arrangements under the federal Anti-Kickback Statute and applicable safe harbors;
• Stark Law Compliance Assessment Memorandum (Matter No. 1010-00003-Stark) — comprehensive analysis of physician self-referral compliance;
• ConnectiCare MSA Indirect Compensation Analysis (Matter No. 1010-00003-CPN) — detailed analysis of the CPN management services arrangements as indirect compensation arrangements under 42 C.F.R. § 411.354(c);
• Meridian Diagnostics AKS/Stark Analysis (Matter No. 1010-00003-Meridian) — analysis of the mobile MRI facility access arrangement;
• Medical Director Compensation — FMV and Commercial Reasonableness Analysis (Matter No. 1010-00003-MD) — fair market value and commercial reasonableness assessment of medical director stipends;
• Master Arrangement Inventory & Risk Scoring Matrix (Matter No. 1010-00003-Matrix) — comprehensive inventory and risk-tier classification of all AHT physician and vendor arrangements; and
• Massachusetts Anti-Kickback Law Memorandum (Matter No. 1010-00003-MA-AKS) — companion state-law analysis addressing M.G.L. c. 175H, § 3.
III. FACTUAL BACKGROUND
A. AHT's Connecticut Clinic Operations
Arbor Health Technologies Inc. is a Delaware corporation headquartered at 200 Concord Avenue, Suite 400, Cambridge, Massachusetts 02138 (EIN: 84-3291057; NPI: 1497253810). AHT was founded in 2009 and has grown through a combination of organic expansion and acquisitions to become a multi-state healthcare services platform operating twenty-three outpatient clinics across Massachusetts, Connecticut, Rhode Island, and New Hampshire.
Of these twenty-three clinics, four are located in the State of Connecticut, each operating under the "Arbor Health Clinics" brand. The Connecticut clinics are situated in Hartford, New Haven, Stamford, and Waterbury, and collectively provide a range of clinical services including primary care, specialty care (cardiology, orthopedics, and gastroenterology), and ancillary services (in-office laboratory testing, diagnostic imaging, and physical therapy). The clinics serve a diverse patient population that includes Medicare beneficiaries, Medicaid enrollees, and commercially insured patients.
AHT employs a total of 147 physicians on a W-2 basis across all of its clinic locations. A subset of these employed physicians provides services at the four Connecticut clinic locations. In addition to its employed physicians, AHT maintains thirty-eight independent contractor and medical director arrangements across its operations, a number of which involve physicians practicing in Connecticut. The precise number of Connecticut-based medical director arrangements and the associated compensation details are set forth in the Medical Director Compensation — FMV and Commercial Reasonableness Analysis memo and in the Master Arrangement Inventory & Risk Scoring Matrix.
For fiscal year 2022 ("FY2022"), AHT's consolidated net revenue was approximately $214.3 million. Of this total, approximately 61%, or $130.7 million, was derived from Medicare and Medicaid reimbursement, while the remaining approximately 39%, or $83.6 million, was attributable to commercial payer revenue. Among AHT's commercial payer relationships, the largest is with Covenant Health Plans Inc., which generated approximately $38.6 million in net revenue, representing approximately 18% of AHT's total net revenue. This revenue composition is significant because the Connecticut referral fee prohibition applies to all patient referrals regardless of payer source, meaning that the 39% of AHT's revenue attributable to commercial payers—which falls outside the scope of the federal AKS—is nonetheless subject to the Connecticut statute.
The Connecticut referral fee prohibition applies to AHT's Connecticut clinical operations regardless of AHT's state of incorporation. The statute governs the conduct of licensed health care providers and facilities operating within the State of Connecticut, and AHT's four Connecticut clinics are Connecticut-licensed facilities subject to the state's regulatory jurisdiction.
B. ConnectiCare Physicians Network, LLC — Structure and Operations
ConnectiCare Physicians Network, LLC ("CPN") is a Connecticut limited liability company with its principal office located at 55 Asylum Street, 7th Floor, Hartford, CT 06103. CPN was organized in 2017 as a vehicle through which AHT provides comprehensive practice management services to independently owned physician practices in Strathmore Mutual Insurance metropolitan area. As of the date of this memorandum, CPN maintains management services agreements ("MSAs") with nine independently owned physician practices.
The management services provided by AHT through CPN encompass a broad range of non-clinical operational support functions, including:
• Professional billing and collections services, including claims submission, denial management, and accounts receivable follow-up;
• Medical coding services, including ICD-10, CPT, and HCPCS Level II coding and audit support;
• Practice management consulting, including operational workflow analysis, scheduling optimization, and patient access improvement;
• Information technology infrastructure, including deployment and support of the ArborConnect electronic health record ("EHR") and practice management software-as-a-service ("SaaS") platform, hardware provisioning, network administration, and cybersecurity services;
• Human resources administration support, including credentialing, payer enrollment, and benefits administration coordination;
• Financial reporting and analytics, including monthly practice performance dashboards, benchmarking analyses, and annual budget preparation; and
• Regulatory compliance support, including HIPAA privacy and security compliance, OSHA compliance, and state licensure renewal coordination.
The management fee structure under the CPN MSAs is calculated as 15% of collected net revenue from each managed practice. This percentage-based fee is applied to the net collections of each practice—that is, to the actual amounts received by the practice after contractual adjustments, refunds, and write-offs—on a monthly basis. In FY2022, the aggregate collected net revenue of the nine managed practices was approximately $31.53 million (derived as $4.73 million ÷ 0.15), and AHT's aggregate management fee revenue from CPN was approximately $4.73 million.
A critical feature of the CPN arrangements, and one that gives rise to the most significant Connecticut state-law risk identified in this engagement, is the referral pattern between the managed practices and AHT-owned ancillary services. Several of the nine managed practices routinely refer patients to AHT-owned laboratory, diagnostic imaging, and physical therapy services for testing, imaging studies, and rehabilitation services. This creates an unbroken chain of financial relationships: AHT earns management fee revenue from the practices, and AHT simultaneously earns ancillary service revenue from patients referred by those same practices. Under the federal Stark Law, this referral chain is analyzed as an "indirect compensation arrangement" under 42 C.F.R. § 411.354(c), and the detailed analysis of that federal-law issue is set forth in the separate ConnectiCare MSA Indirect Compensation Analysis memorandum. Under Connecticut state law, however, the same referral pattern raises additional and distinct concerns that are the subject of the analysis in Section VI of this memorandum.
C. Meridian Diagnostics Relationship in Connecticut
Meridian Diagnostics LLC ("Meridian") is a Connecticut limited liability company with its principal office located at 88 Trumbull Street, Hartford, CT 06103. Meridian provides mobile MRI and advanced diagnostic imaging services to healthcare facilities throughout central Connecticut. Meridian is owned by Dr. Franklin Osei (60% ownership interest) and Gerald Pratt (40% ownership interest). Mr. Pratt is a non-physician investor who does not participate in the clinical operations of the entity.
Pursuant to a Services Agreement dated March 1, 2021 (the "Meridian Services Agreement"), Meridian provides mobile MRI services at four AHT clinic locations, including Connecticut locations. Under this arrangement, Meridian positions its mobile MRI unit at AHT clinic sites on scheduled days, and AHT physicians refer patients to Meridian for diagnostic imaging services as clinically appropriate.
In FY2022, AHT physicians generated approximately $2.8 million in referrals to Meridian for imaging services. In exchange for access to AHT's clinic facilities and patient flow, Meridian pays AHT a per-scan facility access fee of $185 per scan. In FY2022, approximately 4,200 scans were performed at AHT locations, yielding aggregate facility access fee payments from Meridian to AHT of approximately $777,000.
The per-scan fee structure of the Meridian arrangement is analyzed in detail in the separate Meridian Diagnostics AKS/Stark Analysis memorandum (Matter No. 1010-00003-Meridian). Under the federal analysis, the per-scan fee has been identified as presenting significant risk because it causes the rental payments to vary directly with the volume of referrals, which is inconsistent with both the Stark Law space rental exception (42 C.F.R. § 411.357(a)) and the AKS space rental safe harbor (42 C.F.R. § 1001.952(b)). This memorandum addresses the additional Connecticut state-law risk overlay applicable to the Meridian arrangement.
The fact that Meridian is organized under Connecticut law, maintains its principal office in Hartford, and provides imaging services at AHT's Connecticut clinic locations brings the arrangement squarely within the territorial scope of Conn. Gen. Stat. § 20-7a(d).
IV. STATUTORY FRAMEWORK: CONN. GEN. STAT. § 20-7a(d)
A. Text and Scope of the Prohibition
Connecticut General Statutes § 20-7a(d) establishes a broad prohibition on the payment or receipt of referral-linked remuneration by healthcare providers and facilities operating within the state. The statute provides, in pertinent part, that no person licensed to practice medicine or surgery, or any other licensed health care provider, and no health care facility, shall pay or receive, directly or indirectly, any fee, commission, rebate, or other consideration in exchange for referring or soliciting patients.
The prohibition is sweeping in its scope and is not limited to particular types of healthcare providers or particular categories of healthcare services. It applies to all Connecticut-licensed health care providers—including, without limitation, physicians, surgeons, nurses, physical therapists, and other allied health professionals—as well as to all health care facilities operating within the state. AHT's four Connecticut clinics are health care facilities operating within Connecticut, and AHT's employed and contracted physicians hold Connecticut medical licenses. Accordingly, both AHT as a facility operator and its individual Connecticut-licensed physicians are subject to the statute's prohibitions.
The prohibition encompasses both the payment and the receipt of prohibited remuneration. That is, both the payor and the recipient of consideration exchanged for referrals are potentially liable under the statute. This bilateral scope is significant because it means that, in the context of the CPN arrangements, both AHT (as the recipient of management fees from practices that refer to AHT ancillary services) and the managed practices (as the payors of fees to an entity whose affiliated services they patronize) could face exposure.
Critically, the statute's prohibition extends beyond direct cash payments to include "indirect" forms of consideration. This expansive language has been interpreted to capture a wide range of non-cash remuneration, including below-market services, free goods, above-fair-market-value compensation arrangements, and percentage-based fees linked to referral volume or referral-driven revenue. The inclusion of "indirect" remuneration is particularly relevant to the arrangements analyzed in this memorandum, because the management fee structure and facility access fee arrangements at issue do not involve direct, explicit payments for referrals but rather create financial structures in which remuneration and referrals flow in parallel, potentially creating an inference that the remuneration is, at least in part, consideration for the referrals.
B. Key Differences from the Federal Anti-Kickback Statute
An understanding of the differences between the Connecticut referral fee prohibition and the federal AKS is essential to the analysis in this memorandum, because AHT's existing compliance infrastructure has been designed primarily with reference to federal law. Several features of the Connecticut statute create risks that are not addressed by federal compliance measures.
No Safe Harbor Framework. Unlike the federal AKS (42 U.S.C. § 1320a-7b(b)), which is accompanied by an extensive set of regulatory safe harbors codified at 42 C.F.R. § 1001.952, Connecticut General Statutes § 20-7a(d) does not enumerate safe harbors. The federal safe harbors provide definitive protection for arrangements that satisfy each element of the applicable safe harbor—for example, the personal services and management contracts safe harbor (42 C.F.R. § 1001.952(d)), the space rental safe harbor (42 C.F.R. § 1001.952(b)), and the employment safe harbor (42 C.F.R. § 1001.952(i)). No parallel safe harbor framework exists under Connecticut law. As a result, arrangements that satisfy a federal AKS safe harbor are not automatically protected from liability under Connecticut law. This is the single most consequential structural difference between the two statutory frameworks, because it means that AHT cannot rely on its federal safe harbor compliance analyses as a shield against Connecticut state-law exposure.
No Intent Element Equivalent to the Federal "One Purpose" Test. Under the federal AKS, the government must prove that the defendant acted with the requisite intent—specifically, that remuneration was offered, paid, solicited, or received "knowingly and willfully" to induce or reward referrals. Federal courts have interpreted this intent element broadly under the "one purpose" test, holding that the AKS is violated if even one purpose of the remuneration is to induce referrals. See United States v. Greber, 760 F.2d 68, 69 (3d Cir. 1985); United States v. Borrasi, 639 F.3d 774, 782 (7th Cir. 2011). The Connecticut statute does not incorporate the same express intent requirement. Instead, the statutory focus is on whether the consideration was "in exchange for" referrals—a formulation that may be satisfied by demonstrating an objective nexus between the remuneration and the referral pattern, without requiring proof of subjective intent to induce referrals. While the precise contours of the Connecticut intent standard have not been definitively established in published case law, the statutory language suggests a lower prosecutorial burden than the federal AKS.
Broader Payer Coverage. The federal AKS is limited in scope to referrals involving "federal health care programs," as defined in 42 U.S.C. § 1320a-7b(f)—principally Medicare and Medicaid. Remuneration exchanged for referrals of patients covered by commercial insurance, self-pay patients, or other non-federal payer sources falls outside the federal AKS. By contrast, the Connecticut referral fee prohibition is not limited to any particular payer category. It applies to all patient referrals regardless of payer source—Medicare, Medicaid, commercial insurance, workers' compensation, and self-pay alike. This broader payer coverage is particularly significant for AHT, whose commercial payer revenue constitutes approximately 39% of its total net revenue, or approximately $83.6 million in FY2022. Among AHT's commercial payer relationships, Covenant Health Plans Inc. alone represents approximately $38.6 million, or 18% of AHT's total net revenue. Referrals involving commercially insured patients—which are beyond the reach of the federal AKS—are fully within the scope of the Connecticut statute.
Enforcement Mechanisms. Violations of Conn. Gen. Stat. § 20-7a(d) may result in professional disciplinary action by the Connecticut Department of Public Health ("DPH"), including formal reprimand, probation, suspension, or revocation of professional licenses. In addition, violations may give rise to civil monetary penalties and, in egregious cases, referral for criminal prosecution under applicable Connecticut criminal statutes. The enforcement posture of the Connecticut DPH with respect to referral fee violations has historically been less aggressive than federal OIG enforcement of the AKS; however, this lower enforcement frequency should not be confused with a lower level of legal risk, as the statutory exposure is clear and the consequences of a DPH enforcement action—particularly license revocation—could be existentially significant for individual practitioners and materially disruptive to AHT's clinical operations.
Relationship to Federal Law. Connecticut law operates as an entirely independent overlay on the federal AKS and Stark Law frameworks. Compliance with federal law does not guarantee compliance with state law, and compliance with state law does not guarantee compliance with federal law. AHT must satisfy the requirements of both frameworks independently. To the extent that AHT has historically relied on federal safe harbor compliance as the primary compliance benchmark for its Connecticut arrangements, that reliance is insufficient to address the state-law risk analyzed in this memorandum.
C. Judicial and Administrative Interpretations
The body of published judicial decisions interpreting Conn. Gen. Stat. § 20-7a(d) is relatively limited. Connecticut courts have not, to our knowledge, issued comprehensive opinions delineating the precise boundaries of the terms "consideration," "referral," and "in exchange for" as used in the statute. This interpretive scarcity creates meaningful uncertainty regarding the application of the statute to complex, multi-layered arrangements such as those maintained by AHT through CPN and with Meridian.
The Connecticut Department of Public Health has issued periodic interpretive guidance through advisory opinions, policy bulletins, and enforcement actions, but this guidance has generally addressed relatively straightforward factual scenarios—such as explicit fee-splitting arrangements between referring physicians and receiving specialists—rather than the more complex management services and facility access structures at issue here. We have reviewed available DPH advisory opinions and enforcement records and have not identified guidance that is directly on point for the CPN or Meridian arrangements. The absence of directly applicable guidance does not, however, reduce the legal risk; rather, it underscores the importance of conservative compliance postures in situations of interpretive ambiguity.
In the absence of comprehensive Connecticut-specific case law, courts and administrative tribunals interpreting § 20-7a(d) may look to analogous state referral fee prohibition cases from other jurisdictions for persuasive authority. Several states maintain referral fee prohibitions that are structurally similar to the Connecticut statute, including New York (N.Y. Educ. Law § 6509-a), New Jersey (N.J. Stat. Ann. § 45:9-22.5), and Illinois (225 ILCS 60/22.2). Decisions from these jurisdictions interpreting the scope of "consideration" and "referral" in analogous statutory contexts provide useful, if not binding, guidance.
Of particular relevance is the New York line of cases interpreting N.Y. Education Law § 6509-a, which prohibits the receipt of consideration for referrals in language substantially similar to the Connecticut statute. New York courts have interpreted the term "consideration" broadly to encompass not only direct cash payments but also indirect economic benefits, including below-market lease arrangements, above-FMV compensation, and shared revenue streams. See, e.g., In re Hasan, N.Y. Bd. for Prof. Med. Conduct (2008) (finding that above-FMV office rental subsidies provided to referring physicians constituted prohibited consideration for referrals). While New York decisions are not binding on Connecticut courts, they provide persuasive authority for the proposition that indirect economic benefits flowing between parties in a referral relationship may constitute prohibited "consideration" under a state referral fee prohibition statute.
Similarly, New Jersey courts have interpreted the state's patient brokering statute to reach arrangements where remuneration and referrals flow in parallel between the same parties, even where the remuneration is facially denominated as payment for legitimate services. See State v. Kim, 398 N.J. Super. 424 (App. Div. 2008). The New Jersey court's analysis is instructive because it demonstrates that courts applying state referral fee prohibitions are willing to look beyond the formal characterization of payments to examine the economic substance of the arrangement and the nexus between financial flows and referral patterns.
Based on the available interpretive authorities, we believe that the Connecticut statute should be read to encompass indirect forms of remuneration—including percentage-based management fees and per-unit facility access fees—where such remuneration flows between parties who are simultaneously in a referral relationship. While this interpretation has not been definitively established by Connecticut courts, it is consistent with the statutory text, the legislative purpose, and the weight of analogous authority from other jurisdictions.
D. Exceptions and Carve-Outs
Although Conn. Gen. Stat. § 20-7a(d) does not include a formal safe harbor framework, certain categories of arrangements have been recognized—through judicial interpretation, administrative practice, and statutory construction—as falling outside the scope of the prohibition. These exceptions are narrower and less well-defined than their federal counterparts, and their application to complex, multi-party arrangements requires careful analysis.
Employment Relationships. The statute has been interpreted to permit bona fide employment arrangements in which physicians are compensated for their professional services and not for the generation of referrals. Under this interpretation, a physician employed by a healthcare organization may receive compensation—including base salary, benefits, and performance-based incentives tied to personal productivity—without such compensation being characterized as a prohibited referral fee, provided that the compensation is for professional services rendered, is consistent with fair market value, and is not explicitly or implicitly conditioned on the volume or value of referrals to the employing entity or its affiliates. The contours of this employment exception are, however, narrower and less defined than the federal AKS employment safe harbor at 42 C.F.R. § 1001.952(i), which provides more detailed guidance on the elements required for protection. In particular, the Connecticut exception does not provide explicit guidance on the permissibility of productivity-based bonuses, quality incentives, or other variable compensation components that may correlate with referral volume as a practical matter even if not nominally tied to referrals.
Group Practice Arrangements. Compensation arrangements within a bona fide group practice for professional services rendered are generally not considered to constitute prohibited referral fees under the Connecticut statute. This exception is premised on the understanding that physicians practicing together in a unified group share a common economic enterprise and that internal revenue-sharing and compensation arrangements within the group are inherently different from referral fee arrangements between unaffiliated parties. However, the managed-practice model employed by AHT through CPN—in which AHT manages independent, separately owned practices for a percentage-based fee, and those practices refer patients to AHT-owned ancillary services—does not fit squarely within the group practice carve-out. The managed practices are not members of AHT's group practice; they are independently owned entities with their own tax identification numbers, corporate structures, and professional liability exposure. The CPN management relationship does not convert these independent practices into a single group practice for purposes of the Connecticut referral fee prohibition.
Legitimate Management Services. Payments of fair market value for genuinely rendered management services may fall outside the prohibition on the theory that such payments constitute consideration for services, not for referrals. This is the exception most directly relevant to the CPN arrangements. However, where the management fee is calculated as a percentage of revenue rather than as a fixed fee, and where the managed entity simultaneously refers patients to the management company's affiliated ancillary services, the arrangement presents heightened risk under the statute. The percentage-based fee structure creates a financial link between the volume of the managed practice's revenue (which may be influenced by referral patterns) and the management fee paid to AHT, potentially blurring the line between payment for management services and consideration for referrals. The risk is further elevated where the management company derives additional revenue from the referrals themselves through its ownership of the ancillary services to which patients are referred.
V. APPLICATION TO AHT CONNECTICUT CLINIC OPERATIONS
A. Employed Physician Arrangements
AHT's W-2 employed physicians at its four Connecticut clinic locations represent the lowest-risk category of arrangements under the Connecticut referral fee prohibition. These physicians are bona fide employees of AHT, compensated under employment agreements that specify base salaries, benefits, and, in certain cases, performance-based incentive compensation tied to personal clinical productivity, quality metrics, and patient satisfaction scores.
The median compensation for AHT's employed primary care physicians is approximately $278,000 per year, and the median compensation for AHT's employed specialists is approximately $412,000 per year. These compensation levels have been assessed against fair market value benchmarks by Northbridge Valuation Advisors, LLC, and the FMV opinions issued by Northbridge support the conclusion that AHT's employed physician compensation is generally within the range of fair market value for the relevant specialties and geographic markets. The Northbridge FMV opinions are addressed in detail in the Medical Director Compensation — FMV and Commercial Reasonableness Analysis memorandum.
To the extent that AHT's employed physician compensation is for professional services actually rendered, is consistent with fair market value, and is not explicitly or implicitly conditioned on the volume or value of referrals to AHT-owned ancillary services or to other providers, these arrangements are likely outside the scope of the Connecticut referral fee prohibition. The employment relationship itself is generally recognized as falling within the implied employment exception to the statute, and there is no indication in the materials reviewed to date that AHT's employed physician compensation has been structured as a mechanism for rewarding or incentivizing referrals.
Risk Level: Low. The employed physician arrangements present low risk under the Connecticut referral fee prohibition, provided that AHT's compensation methodology does not incorporate referral-based productivity bonuses that exceed fair market value or that are structured in a manner that effectively functions as referral incentives. We note, however, that certain AHT compensation plans include productivity-based components measured by work relative value units ("wRVUs") or collections, and to the extent that these metrics correlate with ancillary service referral volume, there is a theoretical risk that the productivity component could be characterized as indirect referral-linked compensation. We believe this risk is low given the prevailing industry acceptance of wRVU-based and collections-based productivity compensation, but we recommend ongoing monitoring to ensure that productivity incentives do not evolve into de facto referral incentives.
B. Independent Contractor and Medical Director Arrangements
AHT maintains thirty-eight independent contractor and medical director arrangements across its multi-state operations, a subset of which involves physicians who provide medical director services at AHT's Connecticut clinic locations. The medical director arrangements are the subject of detailed analysis in the Medical Director Compensation — FMV and Commercial Reasonableness Analysis memorandum, and the discussion here is limited to the Connecticut state-law overlay.
The medical director stipend range across all of AHT's medical director arrangements is $25,000 to $110,000 per year, with aggregate annual medical director compensation of approximately $1.92 million. The mean hours devoted to medical director duties across all arrangements is 8.4 hours per month. Based on these figures, the effective average hourly rate for medical director services is approximately $501.28 per hour. This effective hourly rate exceeds the 90th percentile compensation benchmark for medical director services in multiple specialties, as reported by MGMA, SullivanCotter, and other nationally recognized physician compensation survey sources.
Under Conn. Gen. Stat. § 20-7a(d), above-fair-market-value compensation paid to physicians who are simultaneously in a position to refer patients to AHT—or who do, in fact, refer patients to AHT-owned ancillary services—may be characterized as indirect "consideration" paid "in exchange for" referrals. This characterization is particularly compelling where the documented medical director duties do not justify the hours claimed or the payments made, creating an inference that the excess compensation serves as a form of referral-linked remuneration.
The Connecticut analysis mirrors the federal AKS analysis on this point but proceeds under a statutory framework that provides fewer defensive safe harbors. Under the federal AKS, a medical director arrangement may be protected by the personal services and management contracts safe harbor (42 C.F.R. § 1001.952(d)) if, among other requirements, the aggregate compensation is set in advance, is consistent with fair market value, and is not determined in a manner that takes into account the volume or value of referrals. Under Connecticut law, no comparable safe harbor exists, and the analysis turns on the more fundamental question of whether the compensation constitutes consideration for referrals—a question that is necessarily informed by the relationship between the compensation level, the fair market value of the services rendered, and the referral patterns of the physician.
Risk Level: Moderate to High. The Connecticut-based medical director arrangements present moderate-to-high risk under the Connecticut referral fee prohibition, particularly for those physicians whose compensation exceeds fair market value benchmarks and whose documented duties do not justify the hours or payments at issue. The risk is highest for medical directors who are among the most prolific referral sources to AHT-owned ancillary services, as the correlation between above-FMV compensation and high referral volume strengthens the inference that the compensation is, at least in part, consideration for referrals.
Recommendation: We recommend that AHT align its Connecticut medical director arrangements with the restructuring recommendations set forth in the Medical Director Compensation — FMV and Commercial Reasonableness Analysis memorandum. Specifically, effective hourly rates should be reduced to within the fair market value range established by Northbridge Valuation Advisors opinions and corroborated by independent benchmark data. Medical director duties and hours should be documented contemporaneously and rigorously, with monthly time logs submitted and reviewed by AHT's compliance office. The restructured arrangements should include contractual provisions expressly acknowledging that compensation is for medical director services rendered and is not conditioned on the volume or value of referrals.
C. In-Office Ancillary Services
AHT's four Connecticut clinics offer in-office ancillary services, including laboratory testing, diagnostic imaging, and physical therapy. Under the federal Stark Law, physician self-referrals to these ancillary services may be protected by the in-office ancillary services exception ("IOASE") set forth at 42 C.F.R. § 411.355(b), provided that the applicable supervision, location, and billing requirements are satisfied. The IOASE analysis for AHT's Connecticut clinics is addressed in the Stark Law Compliance Assessment Memorandum.
Under Connecticut state law, there is no parallel in-office ancillary services safe harbor. However, the Connecticut referral fee prohibition is generally focused on fee-splitting and referral fee arrangements between separate parties—that is, arrangements in which one party pays another party consideration in exchange for directing patients to the paying party. Where a single entity, such as AHT, refers patients internally to its own ancillary services provided at its own clinics by its own employees, there is no inter-party transfer of consideration and thus no transaction of the type that the statute is designed to prohibit. The "self-referral" within a single integrated entity does not involve the payment or receipt of a "fee, commission, rebate, or other consideration" between separate economic actors.
Risk Level: Low. The in-office ancillary services provided at AHT's Connecticut clinics present low risk under the Connecticut referral fee prohibition, as these arrangements involve internal referrals within a single entity rather than fee-splitting or referral fee arrangements between separate parties. This conclusion is, however, subject to the caveat that if AHT's compensation to the individual physicians who generate the ancillary service referrals is structured in a manner that effectively rewards them for referral volume (as discussed in Section V.A above), the individual physician compensation arrangement—rather than the ancillary service arrangement itself—could be the source of state-law risk.
VI. APPLICATION TO CONNECTICARE PHYSICIANS NETWORK MSA ARRANGEMENTS
A. Structure of the Referral Chain
The CPN management services arrangements create a complex, multi-directional web of financial relationships and referral patterns that is at the center of the Connecticut state-law analysis. The structure may be summarized as follows:
1. AHT provides comprehensive practice management services to nine independently owned physician practices in Strathmore Mutual Insurance area through the CPN entity.
2. Each managed practice pays AHT a management fee calculated as 15% of the practice's collected net revenue, aggregating to approximately $4.73 million in FY2022.
3. Several of the nine managed practices refer patients to AHT-owned ancillary services—specifically, AHT's laboratory, diagnostic imaging, and physical therapy operations—for testing, imaging studies, and rehabilitation services.
4. AHT earns ancillary service revenue from these referred patients, in addition to the management fee revenue it earns from the referring practices.
Under Conn. Gen. Stat. § 20-7a(d), the combination of these elements creates a two-directional flow of remuneration and referrals that may constitute prohibited consideration for referrals. Specifically, the management fee payments flow from the managed practices to AHT, while patient referrals flow from those same managed practices to AHT-owned ancillary services. The management fee can be characterized as "consideration" received by AHT from entities that refer patients to AHT, and conversely, the referral of patients to AHT ancillary services can be characterized as conduct that generates additional revenue for the entity (AHT) from which the managed practices receive management services. This creates a structural incentive for AHT to cultivate and reward referral relationships with the managed practices, and for the managed practices to refer patients to AHT ancillary services in order to maintain a favorable management relationship—precisely the type of incentive structure that the Connecticut referral fee prohibition is designed to prevent.
The structural risk is compounded by the fact that the management fee is not a fixed amount but rather a percentage of collected net revenue, which means that the management fee fluctuates with the volume of the managed practice's collections. To the extent that referrals to AHT ancillary services affect the managed practice's revenue—for example, by enabling the practice to bill for interpretation of laboratory or imaging results, or by facilitating higher patient volumes through coordinated care—the management fee may effectively correlate with referral activity.
B. Percentage-Based Fee Structure Risk
The 15% of collected net revenue management fee is the most significant source of Connecticut state-law risk in the CPN arrangements. The percentage-based fee is inherently variable: it rises and falls with the managed practice's collections, and it is not set as a fixed dollar amount in advance. This variability distinguishes the CPN management fee from a fixed monthly fee or annual retainer, which would be less susceptible to characterization as referral-linked remuneration.
Under the federal AKS, percentage-based compensation is not per se prohibited. The personal services and management contracts safe harbor at 42 C.F.R. § 1001.952(d) permits percentage-based compensation arrangements provided that the percentage is established in advance, is consistent with fair market value, and does not take into account the volume or value of referrals between the parties (other than referrals for the services covered by the agreement itself). When AHT's CPN management fees are assessed against the federal safe harbor, the percentage-based structure may be permissible under federal law if the other safe harbor elements are satisfied.
Connecticut law, however, does not provide an equivalent safe harbor. The Connecticut statute's prohibition on "indirect" consideration for referrals could capture a percentage-based management fee where the management company also benefits from referrals generated by the managed practices. In such circumstances, the percentage-based fee creates a financial mechanism through which AHT's management revenue is linked to the managed practices' collections, and the managed practices' referrals to AHT ancillary services generate additional revenue for AHT. The dual revenue stream—management fees from the practices and ancillary service revenue from the practices' referred patients—creates a structural financial incentive that may be viewed as indirect consideration for referrals, even if the management fee is facially characterized as payment for management services.
The risk is further heightened by the fact that the management fee percentage has remained constant at 15% since the inception of the CPN arrangements, without periodic renegotiation or adjustment to reflect changes in the scope or cost of management services actually provided. While a stable percentage might suggest that the fee is not responsive to referral volume, it also suggests that the fee has not been subjected to the type of rigorous, periodic fair market value reassessment that would be expected for a legitimate arms-length management services engagement.
Risk Level: High. The CPN percentage-based management fee structure represents the most significant Connecticut state-law risk identified in this engagement. The combination of a percentage-based fee, bidirectional financial flows, and parallel referral patterns creates a structural arrangement that is vulnerable to characterization as a prohibited referral fee arrangement under Conn. Gen. Stat. § 20-7a(d).
C. Referral Volume and Revenue Impact
A complete quantification of the referral volume from CPN-managed practices to AHT-owned ancillary services is necessary to assess the full magnitude of the Connecticut state-law risk. As of the date of this memorandum, the precise referral volumes have not been fully determined from the document production and referral tracking data obtained in the engagement. We have requested supplemental data from AHT's information technology department regarding the ArborConnect EHR referral tracking module, and we anticipate that this data will be available for analysis within the next thirty days. We will issue a supplemental memorandum addressing the quantified referral data when it becomes available.
Even absent precise quantification, however, the structural incentive created by the CPN arrangements is inherently problematic under Connecticut law. AHT earns revenue from two sources tied to the same managed practices: (a) the management fee, which is a function of the practice's collected net revenue; and (b) the ancillary service revenue, which is a function of the volume of patients referred by the practice to AHT's ancillary services. This dual revenue stream creates a financial interest for AHT in maintaining and expanding the referral relationships with the managed practices, regardless of the specific dollar amounts involved.
Under the Connecticut statute, the existence of the structural incentive may be sufficient to establish a violation, even if the actual referral volumes are relatively modest. The statute prohibits the payment or receipt of consideration "in exchange for" referrals; it does not require that the referrals reach any minimum volume threshold or generate any minimum revenue amount. Accordingly, even a single referral from a managed practice to an AHT ancillary service, where the managed practice is simultaneously paying a percentage-based management fee to AHT, could theoretically implicate the statute.
As a practical enforcement matter, however, the risk level is directly correlated with the magnitude of the referral volume and the associated revenue. Higher referral volumes and larger revenue streams increase the visibility of the arrangement to regulators and strengthen the inference that the financial relationships and referral patterns are interconnected.
D. Comparison to Federal Analysis
The CPN arrangements are analyzed under different, albeit overlapping, frameworks at the federal and state levels. Under the federal Stark Law, the CPN arrangements are characterized as "indirect compensation arrangements" under 42 C.F.R. § 411.354(c), because the referral chain passes through an intermediary entity (the managed practice) between the referring physician and AHT (the entity providing the designated health services). The Stark Law analysis requires that the compensation formula in the indirect compensation arrangement not vary with, or take into account, the volume or value of referrals. The detailed analysis of this federal requirement is set forth in the ConnectiCare MSA Indirect Compensation Analysis memorandum.
Under the federal AKS, the CPN management fee arrangement is assessed against the personal services and management contracts safe harbor at 42 C.F.R. § 1001.952(d). As noted above, the safe harbor permits percentage-based compensation under certain conditions, and the federal analysis focuses on whether those conditions are met.
Under Connecticut law, neither the Stark Law indirect compensation analysis nor the AKS management contracts safe harbor analysis provides protection. The Connecticut statute operates as a freestanding prohibition that must be satisfied independently of federal law. An arrangement that is fully compliant with the Stark Law indirect compensation requirements and fully within the AKS management contracts safe harbor could nonetheless violate Conn. Gen. Stat. § 20-7a(d) if it involves the payment or receipt of consideration in exchange for referrals.
Conclusion: Federal compliance does not insulate AHT from Connecticut state-law liability for the CPN arrangements. The CPN management fee structure must be assessed independently under the Connecticut statute, and the Connecticut analysis yields a materially different risk profile than the federal analysis. Specifically, the absence of a state-law safe harbor for percentage-based management fees, combined with the bidirectional financial flows and referral patterns, creates a level of risk under Connecticut law that exceeds the risk level identified under federal law (where safe harbor compliance may provide a complete defense).
VII. APPLICATION TO MERIDIAN DIAGNOSTICS ARRANGEMENT
A. Per-Scan Facility Access Fee Under Connecticut Law
The Meridian per-scan facility access fee arrangement presents a distinct category of Connecticut state-law risk. Under this arrangement, Meridian pays AHT $185 per scan for access to AHT clinic space at which Meridian positions its mobile MRI unit and provides diagnostic imaging services. In FY2022, approximately 4,200 scans were performed, generating $777,000 in facility access fee payments from Meridian to AHT. Concurrently, AHT physicians referred approximately $2.8 million in imaging services to Meridian during the same period.
Under the federal AKS and Stark Law analyses set forth in the Meridian Diagnostics AKS/Stark Analysis memorandum, the per-scan fee structure has been identified as presenting significant compliance risk. The per-scan fee causes the rental payments to vary directly with the volume of services provided at AHT's facilities, which is in turn driven by the volume of referrals from AHT physicians. This variable payment structure is inconsistent with the Stark Law space rental exception (42 C.F.R. § 411.357(a)), which requires rental payments to be set in advance and not determined in a manner that takes into account the volume or value of referrals, and with the AKS space rental safe harbor (42 C.F.R. § 1001.952(b)), which requires that aggregate rental payments be set in advance and be consistent with fair market value.
Under Conn. Gen. Stat. § 20-7a(d), the arrangement presents additional and independent state-law risk. The per-scan fee is paid by Meridian to AHT, and AHT physicians simultaneously refer patients to Meridian for imaging services. This creates a bidirectional flow: referrals flow from AHT to Meridian, and per-scan fee payments flow from Meridian to AHT. The per-scan fee could be characterized as consideration received by AHT "in exchange for" facilitating or inducing referrals to Meridian.
The characterization is strengthened by the volume-dependent nature of the per-scan fee. Because the total facility access fee payments increase in direct proportion to the number of scans performed—which is in turn a function of the number of patients referred by AHT physicians—the fee creates a direct financial incentive for AHT to increase referrals to Meridian. Each additional referral generates an additional $185 in facility access fee revenue for AHT. This per-unit economic incentive is precisely the type of referral-linked remuneration that the Connecticut statute is designed to prohibit.
Moreover, the arrangement involves a Connecticut-based entity (Meridian, organized under Connecticut law and headquartered in Hartford) providing services at AHT's Connecticut clinic locations to patients of AHT's Connecticut-licensed physicians. The arrangement is squarely within the territorial and jurisdictional scope of Conn. Gen. Stat. § 20-7a(d). Unlike arrangements that might involve cross-border referral patterns or services provided outside Connecticut, the Meridian arrangement is entirely situated within the state and is subject to the full force of the Connecticut referral fee prohibition.
B. Risk Level and Recommendation
Risk Level: High. The Meridian per-scan facility access fee arrangement presents high risk under Conn. Gen. Stat. § 20-7a(d), consistent with the elevated risk identified in the federal AKS and Stark Law analyses. The per-scan fee structure creates a direct, volume-dependent financial link between AHT's facility access revenue and the volume of referrals from AHT physicians to Meridian, and the arrangement is squarely within the scope of the Connecticut statute.
Recommendation: Consistent with the recommendations in the Meridian Diagnostics AKS/Stark Analysis memorandum, we recommend that AHT convert the per-scan facility access fee to a fixed monthly rental payment at fair market value. A fixed monthly rental would eliminate the volume-dependent component of the arrangement and would break the direct financial link between referral volume and rental revenue. We understand that a draft Restructured Facility Access Agreement has been prepared and transmitted to Meridian's counsel, Linden & Pryor LLP (attention: Thomas Beckett), and that negotiations regarding the transition to a fixed monthly rental are underway.
While a fixed monthly rental would substantially reduce the Connecticut state-law risk, we note that no formal safe harbor exists under Connecticut law for space rental arrangements. Accordingly, even a restructured fixed monthly rental must be rigorously documented as consistent with fair market value, commercially reasonable, and unrelated to referral patterns. AHT should obtain a Northbridge Valuation Advisors opinion or comparable independent appraisal supporting the fair market value of the proposed fixed monthly rental for the clinic space made available to Meridian.
In addition, the restructured agreement should include Connecticut state-law compliance representations and warranties, and AHT should implement internal protocols to ensure that referral decisions by AHT physicians with respect to Meridian imaging services are made on the basis of clinical judgment and patient convenience, without regard to the financial terms of the facility access arrangement.
VIII. INTERACTION WITH FEDERAL AKS AND STARK LAW ANALYSIS
A. Layered Compliance Obligations
AHT's Connecticut arrangements are subject to three overlapping and independently applicable regulatory frameworks:
1. Federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) and the accompanying regulatory safe harbors (42 C.F.R. § 1001.952), which prohibit the knowing and willful offer, payment, solicitation, or receipt of remuneration to induce or reward referrals of items or services reimbursable under federal healthcare programs;
2. Federal Physician Self-Referral Law (Stark Law) (42 U.S.C. § 1395nn) and the implementing regulations (42 C.F.R. § 411.350 et seq.), which prohibit physicians from referring Medicare patients for designated health services to entities with which the physician (or an immediate family member) has a financial relationship, unless an applicable exception is met; and
3. Connecticut State Referral Fee Prohibition (Conn. Gen. Stat. § 20-7a(d)), which prohibits the payment or receipt of any fee, commission, rebate, or other consideration in