What happened

Shares of OPKO Health (NASDAQ:OPK) suffered a free fall today, losing as much as 23%. The drop occurred after the company announced that a crucial Medicare Administrative Contractor issued a draft local coverage determination (LCD) for the highly anticipated 4Kscore diagnostic test. That's a mouthful, but the implications are simple.

If the draft LCD is finalized, then the 4Kscore product would not be covered by Medicare. If it's not covered by the government insurance program, then the product's market potential -- viewed as a significant determinant in OPKO Health's future -- will be severely diluted. 

The draft LCD is subject to a comment period until July 5 -- and the company has pledged to submit comments in an attempt to rescue the product's potential. But as of 11:11 a.m. EDT, the stock had settled to a 18.4% loss.

A finger pointing to a chart showing losses on a touchscreen.

Image source: Getty Images.

So what

The 4Kscore test is used to help influence treatment decisions regarding the diagnosis of prostate cancer in men. If a man has an elevated level of prostate specific antigen (PSA) in his blood, then it may be necessary to conduct a tissue biopsy to determine the next steps in treatment, if any. But biopsies are invasive and expensive, and using PSA levels as the sole metric to determine if a biopsy is required has led to many unnecessary procedures.

That's where the 4Kscore test comes in. It's used after reading PSA levels and before a biopsy, has robust accuracy rates, and has been included in various cancer and urology guidelines in the United States and Europe since 2015. Investors thought it could represent a billion-dollar market opportunity, but it's been off to a slow commercial start.

Today's news doesn't help the product's prospects. That's especially true considering the Medicare Administrative Contractor that issued the draft LCD is Novitas. It handles nearly all of OPKO Health's Medicare reimbursement requests for 4Kscore tests, as both the company's diagnostic lab and Novitas' jurisdiction are in New Jersey. Losing coverage under Medicare would be a significant setback for the diagnostic test. 

Now what

Investors can expect OPKO Health to vigorously fight for a positive LCD recommendation from Novitas, but it may be more complicated than that. The decision to recommend noncoverage for the 4Kscore test was made to sync up with recommendations from another major Medicare Administrative Contractor, as reported in the company's annual filing earlier this year. In other words, this situation could be a little more complicated than simply changing minds during the current comment period. Given the company's history of struggles, investors should continue to avoid this stock.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.