The first weeks of Pennsylvania’s medical marijuana program have not been without their hurdles.
While the rollout moved fast, growers have been slow to come online — as of this month, only one grower/processor out of a possible 12 was supplying product to nine dispensaries statewide. As a result, and as any amateur economist could have predicted, demand quickly outpaced supply, prompting shortages at dispensaries across the Commonwealth and a handful to close until reinforcements arrived. (One dispensary expected 60 patients in the first weeks of the program and got 100 on the first day, state officials told The Incline.)
Additionally, prices remain relatively high and selection relatively limited, some argue.
At the helm of this ship sits the Pennsylvania Department of Health, the organization tasked with leading Pennsylvania’s regulation of this previously uncharted industry here.
And now with the program entering Phase Two in a matter of days, we talked with a DOH representative and a pair of lawyers for the commercial cannabis industry about the growing pains — quite literally — seen thus far and the changes that lie ahead. Here’s what they told us.
What caused the recent supply shortages?
Simply put, the shortages seen at dispensaries around the state earlier this month — shortages that have reportedly since been rectified — were the result of sales commencing before there was enough market-ready medication on hand for the number of patients prepared to buy it.
April Hutcheson, director of communications with the Department of Health, said it takes licensed grower/processors no less than 16 weeks from the time the state authorizes them to begin growing to the time they’re ready to start shipping products to retailers. And that’s assuming those grows aren’t sidetracked and that the product isn’t held up in quality testing conducted by the state.
Pennsylvania’s first approved grow operation, Cresco Yeltrah in Jefferson County, got underway in mid-October, meaning its first batch of product was ready just as Pennsylvania’s dispensaries were preparing to open their doors in February.
“I think dispensaries weren’t quite sure what to expect,” Hutcheson said of the initial demand in speaking with The Incline by phone on Monday. “One dispensary thought they’d get about 60 patients in first month and got 100 on the first day.”
At the time, Cresco Yeltrah was the sole supplier of medication to all of Pennsylvania. Another grower/processor, White Haven’s Standard Farms, has since begun to ship product as well, Hutcheson said, helping to alleviate any shortfalls.
State agencies like the DOH say that as more approved growers begin shipping their products in the coming weeks and months, those choke points will be further diminished. In the meantime, patient enrollments in the program continue to accumulate and before long, experts say, Pennsylvania’s medical marijuana program could be among the largest in the country.
Could the rollout have been handled differently?
Yes and no.
It’s natural to wonder why the state approved so many patients — roughly 7,000 of them as of this month — and opened nearly a dozen dispensaries in February before more producers were ready to meet the need. (There are 13 additional dispensaries approved to begin sales as soon as next month, Hutcheson added.)
The answer is a case study in market forces — and in not putting the cart before the horse, said Judy Cassel, a Harrisburg-based lawyer whose clients include licensed medical marijuana growers.
Cassel said building demand and pinpointing that demand was a crucial first step from a commercial standpoint. At the end of the day, Pennsylvania’s medical marijuana program remains dependent on commercial enterprise and private sector companies to survive. The survival of those companies, in turn, depends on the program being at least financially viable for them.
“What happened was because the DOH was very focused on getting the program out in the quickest, most efficient way possible, you had growers and physicians and patients all getting ready at same time,” Cassel said.
“But if you waited to certify patients until the product is ready, demand could be so low that the product just withers on the vine,” Cassel said.
“You put plants in the ground and nobody’s there to buy the product, those plants die and you don’t get to write that off. That’s hundreds of thousands of dollars out the window, potentially. I agree with the way DOH did it.”
So as Cassel sees it, allowing demand to initially outpace supply isn’t the worst scenario.
Steve Schain, a cannabis industry lawyer with the Hoban Law Group in Philadelphia, agreed and added, “Pennsylvania’s program is built to last, and to have short-term pains which will benefit the overall program, it’s really just a hiccup. The issue is creating a strong foundation for growers to grow and dispensaries to sell.”
Schain continued: “Being a Monday morning quarterback, you could have licensed grows first and then let them become functional and then licensed dispensaries. But it’s very easy to say ‘shoulda, coulda, woulda.’ And Pennsylvania is to be lauded for the speed with which it did all this following the statue being passed…”
Gov. Tom Wolf signed Act 16, the legislation legalizing medical marijuana in Pennsylvania, into law in April of 2016.
What about the high prices?
There’s been another short term effect from the supply pinch here — however fleeting authorities insist that pinch has been and will be — and that’s on pricing.
Medical marijuana prices remain high in Pennsylvania and at times wildly inconsistent.
According to Philly.com, less than two weeks after the program launched, one registered medical cannabis patient in central Pennsylvania paid more than $700 for legal products, while another estimated her bill to be close to $1,000.
Part of this owes to the constraints mentioned above and to the highly processed forms of the drug exclusively available here costing more to produce and purchase.
Compounding the issue, though, is the fact that medical marijuana is paid for out-of-pocket, with insurance companies hesitant to cover a drug that the federal government still considers illegal.
That federal prohibition has broader ripple effects as well — for both companies and consumers.
Not only have licensed marijuana producers and distributors in states like Colorado been shunned by banks desperate for their business but fearful of violating a federal law that prohibits them from accepting “dirty money,” these producers and distributors are also still required to pay federal taxes on sales of what the national government deems an illegal narcotic. (Street dealers are also required to pay income taxes on illicit drug proceeds, although it’s unclear how many of them do.)
For licensed marijuana businesses, meanwhile, payment of federal taxes comes with a catch.
“People have to realize that unlike most businesses, growers do not get to deduct their regular operating expenses,” Cassel explained. “If I’m a grower and seeds cost me $100,000 and sales are $200,000, I’m allowed to deduct the cost of seeds but not the lights or rent or labor.”
She added, “If the federal government legalized marijuana, [medical marijuana] prices in Pennsylvania would come down automatically.”
In Harrisburg, state officials have said they trust market forces to keep the price of medical marijuana in Pennsylvania “fair and affordable.”
Hutcheson reiterated this in her conversation with The Incline, adding, “Keep in mind that the medical marijuana program is a market-based program, meaning growers set wholesale prices and dispensaries set retail prices.”
Hutcheson went on to explain that the DOH monitors for price gouging and can put a cap on pricing if it feels it’s wildly out of sync with what’s happening in comparable states and markets. But at this point that has yet to happen, and Hutcheson said the DOH expects prices to fall — or at least stabilize — as the nascent program continues to mature.
When Phase Two of Pennsylvania’s medical marijuana program launches next month, a new wave of applications for grower/processors and dispensaries will commence.
The state has 13 grower/processor permits and roughly two dozen dispensary permits still available under Act 16, which gave the health department permission to issue 25 grower/processor permits and 50 dispensary permits in total.
Regulations for this next wave of applications will be released Friday morning and applications will be made available April 5, The Morning Call reports.
Phase Two will also mark the beginning of a new clinical research component, with licensed growers/processors (“Clinical Registrants” under the law) able to partner with accredited medical schools (“Academic Clinical Research Centers”) for the study of marijuana as medicine.
“Clinical registrants” are the entities that will grow, process and dispense medical marijuana, while “Academic Clinical Research Centers” will study the effectiveness of certain strains and forms of the drug in treating specified medical conditions.
University of Pittsburgh School of Medicine has already entered into a such a partnership, although a spokesperson declined to identify the grower/processor involved. Additionally, Penn Medicine, Drexel University and the University of the Sciences have all expressed an interest in becoming “Academic Clinical Research Centers” under the law, the Daily Pennsylvanian reports.
For officials, all of this means a reinforcing of Pennsylvania’s market after a fast and occasionally glitchy rollout.
With Phase One coming to an end, Hutcheson said 26,000 patients have registered to participate in the medical marijuana program, with 9,000 certified by a physician and 7,000 already cardholders.
In the next phase, she expects an even smoother transition as production ramps up, more patients are brought into the fold and as the existing market structure is fleshed out. Marijuana stocks remain volatile, however, and likely will amid mixed messaging from the White House on the subject of legal pot.
Regardless, companies and states like Pennsylvania say they’re forging ahead.
“What we’re preparing for is the next phase of the market, so as our patient numbers continue to increase, and they’re increasing at a good amount each week and each day, we’re able to meet the need,” Hutcheson said. “We know of a potential one million patients with one of the qualifying conditions under the program and we needed to build the infrastructure, which we did in the first phase, to be able to bring it up to scale in the second.”