Monthly Archives: August 2015

Reconsideration Update 10

Disclosure: Short EXAS

As promised in my previous post, you may now download Cable Car’s public comment in response to statements made at the Public Meeting in July. Comments are normally available only through a FOIA request, but in the interest of transparency I wanted to share my views more broadly. I believe Kevin Conroy made several statements at the Public Meeting that are not accurate and deserve a public accounting. The comment letter discusses the legal basis for the reconsideration request, claims regarding compliance and cost-effectiveness, and additional cost analyses. Exact Sciences shareholders can take comfort in the fact that the company has impressive operating leverage, irrespective of the Medicare payment rate. The incremental cost per test in recent months appears to be less than $100.

Following the preliminary determination on the reconsideration request expected sometime in September, there will be an additional 30-day comment period before the 2016 fee schedule is finalized.

CMS Panel

This morning, CMS convened the first meeting of an advisory panel on Clinical Laboratory Diagnostic Tests. Steve Phurrough, the CMS Medical Officer who asked Conroy several questions at the Public Meeting that are addressed in my letter, chairs the panel but is not a voting member.

The panel was established under the Protecting Access to Medicare Act (PAMA), which is also changing the rate-setting process for the clinical lab fee schedule beginning in 2017. Since the PAMA rulemaking is not yet complete, the purpose of this initial meeting was to provide input into the new codes for 2016 that were discussed at the Public Meeting in July. The panel’s recommendations are advisory and non-binding.

The bulk of today’s debate involved highly technical, controversial determinations regarding the most comparable tests, from a methodological standpoint, to use for several new test codes. Cost-effectiveness concerns were not mentioned at all.

Disappointingly, the panel’s brief discussion (starts at 1:26:30) of code G0464 resulted in an 11-0 vote, with 1 abstention (likely the representative from the Mayo clinic) from the 12 panel members present, in favor of maintaining the current crosswalk. More accurately, there was no discussion. The panel did not discuss their reasoning at all; the only comment was from one individual who questioned why code 81315 had no connection to colon cancer and such a high reimbursement level before voting to include it in the crosswalk anyway.

The panel members are all very well-respected scientific experts, but it does not appear that they devoted much, if any, deliberation to the substance of the reconsideration request. In particular, despite asking many clarifying questions regarding the most appropriate factors to consider for other tests, in the case of G0464 there was no debate whatsoever about the appropriateness of considering a test’s purpose, rather than its methodology, in assigning a crosswalk.

It is unclear whether or not the panel had the opportunity to review the reconsideration request in full or the further comment letter. As the panel’s recommendation is non-binding, I strongly urge CMS to take all available information into account in reaching its determination.


Is your high water mark net or gross of fees?

Cable Car does not deduct previously earned incentive fees from the high water mark. Most of the industry does.

A few recent conversations with current and prospective clients reminded me to clarify one area in which Cable Car’s standard fee structure is differentiated in favor of clients. Cable Car already offers qualified and non-US clients an unusually aligned fee model, with no management fee and a 30% incentive fee. This performance-based fee is typically crystallized quarterly, subject to a high water mark of previous performance.

The way in which the high water mark is calculated can have a material impact on the net returns received by clients. For example, suppose a $100,000 investment had gross returns of 20% during a period, for a gross account value of $120,000. After deducting a 30% incentive fee, the client’s net return would be 14%, for a balance of $114,000.

In this example, Cable Car’s high water mark for future periods would be $120,000, the gross amount before fees. By contrast, many hedge funds calculate the high water mark only after deducting the performance fee. The high water mark for these funds would be $114,000.

Cable Car Calculation Example

Period Starting Value Gross Return Fee Ending Value New HWM
1 100,000 20,000 6,000 114,000 120,000
2 114,000 2,000 - 116,000 120,000
3 116,000 (10,000) - 106,000 120,000
4 106,000 24,000 3,000 127,000 130,000

Industry Standard Example

Period Starting Value Gross Return Fee Ending Value New HWM
1 100,000 20,000 6,000 114,000 114,000
2 114,000 2,000 600 115,400 115,400
3  115,400  (10,000) - 105,400 115,400
4 105,400 24,000 4,200 125,200 125,200

With the same $36,000 in gross returns over 4 periods, Cable Car’s total incentive compensation would be only $9,000, versus the headline figure of $10,800 under a fee structure with net compounding.

For a concentrated and relatively volatile strategy, Cable Car’s approach limits the risk to clients that performance fees are crystallized at inopportune times. Cable Car is not compensated until it has “earned back” the prior incentive fee. In practice, this means that for positive gross returns, the total incentive fee over a long period of time may be significantly less than the headline fee as a proportion of the gross returns earned in the account. Depending on the actual pattern of returns and timing of fees, a 0/30 model may offer a significant long-run discount when compared to the traditional 2/20 fee model. Due to the effect of compounding as an investment grows, the absence of management fees under this structure results in the potential for significantly better net returns for clients over time.

For example calculations, questions, or comments, please don’t hesitate to contact Cable Car for more details. Depending on client needs, management fees may be more appropriate in the future to support investments in additional infrastructure as the firm grows. Cable Car’s fee structure is negotiable for large, long-term capital commitments.

(click to expand)

What fees does Cable Car charge?

For US investors who are not qualified clients, Cable Car charges a flat annual management fee equal to 3% of the account value, billed daily in arrears by the custodian.

For non-US investors and qualified clients, Cable Car waives the management fee and charges a 30% incentive fee, computed quarterly by the custodian on the net profit and loss in the account and subject to a high water mark of previous performance.

Please see Item 5 in the firm’s brochure on Form ADV for more information.

Management fee Incentive fee
Non-Qualified 3% None
Qualified None 30%