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Dendreon's Medicare Coverage Conundrum

Stocks in this article: DNDN

SEATTLE ( TheStreet) -- The Dendreon (DNDN) drama continues.

The latest wicked twist hit Wednesday night after the Centers for Medicare and Medicaid Services, or CMS, said it had begun an evaluation process to determine national coverage of Dendreon's prostate cancer therapy Provenge.

Investors were already worried about Provenge reimbursement in the early days of the product's launch, so when the CMS news hit the tape, investors freaked out. Dendreon shares tumbled as much as 23% to $25 in Wednesday's after-hours trading session from their $32.33 close.

In early Thursday trading, Dendreon shares are down 10% to $29.12.

If you thought the tempest over Dendreon and insurance coverage of Provenge was going to end soon, I suggest grabbing a comfy chair, ordering another drink (or three) and settling in for a longer-than-expected wait.

Meantime, I'll try to answer the most pressing questions arising from Wednesday's surprising development:

What the heck is a National Coverage Determination?

Medicare is a health care insurance program for seniors administered by the federal government, but in fact, nearly all coverage and reimbursement decisions for products and services are made at the local level by states or private contractors that administer Medicare programs.

Sometimes, however, CMS chooses to unify coverage on a nationwide basis -- essentially telling all the individual Medicare providers how to cover a certain product or service. This top-down process is known as a National Coverage Determination (NCD).

Why is CMS starting an NCD for Provenge?

CMS almost never issues NCDs for cancer drugs, which is why investors were so surprised Wednesday.

From what I can surmise, there have been only three NCDs ever issued for cancer drugs -- Avastin and Erbitux (both for off-label uses) and another for the radio-immunotherapy drugs Bexxar and Zevalin. One additional and commonly cited NCD in the cancer arena is for the red blood cell stimulating drugs Epogen, Aranesp and Procrit.

The reasons for CMS wanting to place Provenge under an NCD are not clear, but a couple of guesses. Local Medicare providers may have asked for it because they want guidance from CMS on how to cover Provenge. Second, Provenge is not a run-of-the-mill cancer drug -- it's a cellular immunotherapy which stimulates the patient's own immune system to target and destroy cancer cells. Given the uniqueness of Provenge, CMS may think it best to coordinate coverage nationally.

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