NEW YORK (TheStreet) -- Foundation Medicine (FMI) was a big winner earlier when they announced Priority Health would be the first healthcare plan to cover its FoundationOne and FoundationOneHeme genetic cancer tests. There are two separate ways to analyze the impact of this news: What effect will it have on Foundation's bottom line? Does Priority Health's decision have any implications for the long-term prospects of Foundation?
In terms of the first question, the impact on Foundation's bottom line will be positive but not major, at least over the near term. Priority Health covers about 600,000 patients who now have reliable access to FoundationOne and FoundationOneHeme. One would expect that doctors and patients would both be more willing to use the test when coverage is guaranteed, which will naturally translate into higher volumes among patients with this plan.
Outside of the boost to volume, this also should increase the average realized price per test. This does not mean that the test costs more, but with coverage, Foundation has fewer tests that are generating no revenue. Currently when a healthcare plan refuses coverage, Foundation does not book any revenue from that test. In other words, there tests are "sold" but do not generate any revenue. As coverage expands, the proportion of zero revenue-generating tests decreases and this has the effect of increasing the average realized price.
While the effect on Foundation's near-term bottom line is certainly positive, I would not expect a hockey stick-like increase in sales as this is still only a relatively small number of patients. The reason Foundation's stock deservedly moved higher last week related to the implications for the long-term prospects. An aspect of the bear thesis on Foundation revolves around reimbursement. Bears believe insurance companies are unlikely or will be slow to pay for Foundation's cancer tests. While the decision of Priority Health does not guarantee other insurance plans will follow suit, it certainly shows that it is possible and is happening sooner than most expected.