D.C. Expands Medical Cannabis Program, Backs Off Gray Market Crackdown

The Washington, D.C., City Council removed proposed penalties on “gift” businesses, but the change only highlights the uncertainty and debate clouding District cannabis.

Last week, the Washington, D.C., City Council voted to expand its medical cannabis program by extending the eligibility of patients whose cards expired after March 2020. Patients with cards expiring after this date can now purchase medical cannabis through January 2022.

The move comes in response to a significant slowdown in medical cannabis sales during the pandemic. Council Chairman Phil Mendelson, who proposed the bill, says that more than half of all medical cannabis patient registrations have expired since spring 2020, in part due to a slowdown in government operations because of COVID-19. The new bill also doubled the amount of cannabis District patients are allowed to purchase each month up to eight ounces.

Included in Mendelson’s original proposal was a section penalizing “gift” businesses that skirt the law by selling legitimate items and providing cannabis for free. Dozens of such outfits have sprung up since cannabis was legalized in the District in 2015—many lease retail storefronts and pay taxes like any normal business. The original bill would have allowed these operators to face criminal charges and fines of up to $30,000.

After significant backlash, the suggested penalties were removed the day before vote. But the original proposal represents yet another example of the uneasy peace in the District’s cannabis industry, an undesirable situation created by a combination of Congressional interference and an inadequate medical program.

The District’s Gift Industry

Cannabis has been legal in D.C. since the passing of Initiative 71 (I-71), which went into effect in February 2015. But every year since, Republicans have stopped the District from spending money to set up its own adult-use industry. Thanks to Congressional oversight over D.C. spending, an annual amendment to the federal budget known as the Harris Rider – named after Rep. Andy Harris (R-MD) who created it – has prevented the formation of an adult-use industry in the capital.

To meet the untapped demand, cannabis entrepreneurs have created gifting businesses that sell everything from stickers to artwork to sneakers. In addition to these normal items, customers can receive a gift of cannabis flower, edibles or vape cartridges with each purchase. In the early days of I-71, these businesses were more underground, often run out of private restaurants or residences. Today, many operate their own storefronts and are difficult to distinguish from licensed dispensaries.

Should Gift Businesses Be Stopped?

Mendelson and other supporters of a crackdown on the gifting market believe it’s not only a threat to already-suffering licensed medical businesses, but a catalyst for violent crime in the District. His original bill claims “the products sold by illegal storefronts and delivery services are not traced or tested, putting patients who cannot afford to possess medical cannabis from a licensed dispensary at risk of ingesting contaminated products. Additionally, cannabis pop-ups have been associated with incidents of violence, including armed robberies and shootings, that endanger residents of the District.”

Earlier this year, D.C. Police Chief Robert Contee linked the gray market with violence in the District, calling “unlawful distribution of marijuana in communities” a “bad recipe for disaster.”

But grassroots cannabis advocates in D.C. believe these quasi-legal businesses are an important part of the industry, helping more people access cannabis during a time when both local and federal governments have failed them.  

“What I think they’re getting wrong is they’re looking at the gifting business as criminals, when actually they are the likely applicants for social equity and microbusiness licenses,” said Adam Eidinger, founder of the D.C. Marijuana Justice lobbying group that played an integral role in the passing of I-71 in 2014. 

In a phone interview, Eidinger told Cannabis Business Times and Cannabis Dispensary that his group suggested the council levy civil charges instead of the criminal penalties initially included in the proposal. He pointed at the District’s limited medical program as the reason for the thriving gift market: Despite a population comparable to the city of Denver, plus a significant tourism sector, D.C. has onlyseven licensed medical dispensaries.  

“They’re trying to somehow reward the medical cannabis industry in D.C., and there’s a glaring irony here – there were not enough licenses ever issued in the first place to meet the demand of District cannabis consumers,” said Eidinger. “That’s clearly the case when you have a top level of maybe 12,000 registered patients and probably 100,000 regular users in the D.C. area. Maybe 90% of the cannabis is coming from 90-plus brick and mortar gifting businesses scattered across D.C.”

Others in the cannabis industry believe the council wasn’t wrong for proposing action to fix the District’s broken market. 

“While Congress is to blame for DC’s gray market, District leaders and regulators must do everything within their power to address the situation,” said Steven Hawkins, CEO of the U.S. Cannabis Council nonprofit advocacy group and Executive Director of the Marijuana Policy Project. 

“The so-called gifting system is completely unregulated and untaxed. There are no standards, age restrictions or oversight,” added Hawkins via email. “The status quo is untenable.”

Will D.C. Be Allowed to Issue Adult-Use Licenses This Year?

With Democrats in control of Congress and the White House, there is more optimism than ever that 2021 will be the year the Harris Rider is finally left out of the federal budget, allowing the District to issue licenses for recreational cannabis businesses. Negotiations on the final budget are ongoing, but a preliminary House version from last month did not include the amendment.

In anticipation of the rider’s removal, the D.C. Council has scheduled another hearing on November 19 for public testimony on a pair of cannabis bills: one to further expand the medical program and another to establish plans for the cultivation, production and sale of cannabis to adults in the District. Both bills were also introduced by Chairman Mendelson.      

And while Congress has tied the hands of D.C. lawmakers for the moment, local advocates say the outrage over the early version of last week’s bill is a warning sign for District officials: create a fair and equitable adult-use industry or face the consequences.

“What we have here is a politician—namely Phil Mendelson—and a mayor, Mayor Bowser, who are completely out of touch with what residents are screaming for, which is low-barrier-to-entry licensing,” said Eidinger.

Only time and Congressional negotiations will tell exactly when they’ll get a chance to establish such a system. 

Tracking the Number of Registered Medical Patients by State: MAP

An overview of state medical cannabis markets by patient count, with commentary from Headset.

As more states allow for adult consumption of cannabis, it’s important to look at how full legalization is affecting medical cannabis markets. Currently, there are 39 states that have legalized medical cannabis, and 19 states that have legalized adult use. Besides South Dakota, every state that has legalized adult use had already legalized medical cannabis at an earlier date.

While the path to legalization—prohibition to medical to recreational—is standard, there are some significant differences and similarities between states that have transitioned from medical to adult use that are worth examining. In particular, we analyzed medical and adult-use sales numbers and looked at average basket size and category preferences in both medical and adult-use markets. 

Early on, states were slow to transition from medical to adult legalization. California, which in 1996 was the first state to approve medical use, didn’t approve adult use until 20 years later, in 2016. This transition has moved a lot faster in recent years, in states like Illinois, which  passed medical in 2013 and adult use in 2020. Generally speaking, states with relatively mature recreational markets share some distinctions that differ from newer recreational markets. 

But there are a lot of other factors at play that affect adult-use and medical markets. 

 

Sales in States That Recently Opened Recreational Markets 

To begin, we’ll look at Illinois and Michigan markets, as they have both made the transition from medical only to medical and adult use within the last two years. When adult-use markets open, they tend to grow at a rapid pace. Sales in Illinois, for example, grew by 226% from $39.2 million, when they first began in January 2020, to $127.8 million in July 2021. Over this same time period, Michigan’s total adult-use sales grew from only $9.8 million to $115.3 million, a whopping 1,077%.

As adult-use sales skyrocketed in both states, medical sales in Illinois have meanwhile remained fairly consistent, with a total increase of 35% from $23.4 million in January 2020 to $31.5 million in July 2021. Medical sales in Michigan grew by 75% over this time period—what would be considered a respectable, high growth rate in most industries, but a number that pales in comparison to the state’s colossal growth in adult-use sales.

It is clear that the introduction of adult-use sales leads to a decrease in medical sales proportionally. In July 2021, medical sales in Illinois reached an all-time low, accounting for only 20.9% of all sales (down from a high of 45.5%). Michigan medical sales have also steadily declined proportionally, accounting for only 27.7% of all sales in the state by July 2021 (down from a high of 73%). That being said, it’s certainly not the case that adult-use markets are making their medical counterparts irrelevant—remember in both of these markets, adult-use sales still grew respectively. 

Perhaps adult-use markets help legitimize cannabis and signal to more people with medical ailments that cannabis can help their condition. 

Sales in States with More Mature Recreational Markets

When looking at states that have recently entered the recreational space, we see a steady decline in proportional medical sales relative to adult-use sales. In more mature markets, however, the proportions of medical to adult-use sales stay pretty flat. For example, in Colorado, which introduced adult-use cannabis back in 2014, medical sales have accounted for 18 to 23% of total cannabis sales from January 2020 to July 2021. And in Oregon, which introduced adult use in 2015, medical sales have hovered between 8 and 12%.

Why Do Patients Still Use Medical Programs?

When looking at sales data, it’s clear that even though recreational sales trump medical sales, state medical programs are still alive and well. Besides the legitimacy factor—cannabis has medicinal properties that can help people in need—there are several other reasons why people would opt for medical over adult use and pay the expenditure for a medical card. 

  • ● Lower age limits: In states like Oregon and Colorado, the age limit for medical use is 18, while the age limit for adult use is 21. This may incentivize younger consumers to procure a medical card, so they can purchase from dispensaries.
  • ● Lower taxes: Medical cannabis purchases, in general, are taxed at appreciably lower rates than adult use. For example, in Colorado adult-use sales are subject to a 15% cannabis excise tax and any additional local taxes, whereas medical sales are subject to only a 2.9% state excise tax plus local taxes. In Oregon, medical purchases aren’t taxed at all, whereas recreational purchases are subject to a 17% excise tax and an additional 3% local municipal tax.
  • ● Higher-THC potency products: Some markets have higher product THC potency limits for medical products compared to recreational. In Washington, for example, a recreational edible is limited to 100mg THC per package and 10mg THC per serving, whereas a ‘High THC’ product available only to medical patients may contain up to 500mg THC per package and 50mg THC per serving.
  • ● More knowledgeable staff: Some markets require budtenders to have more training or experience in order to sell medical cannabis, as opposed to just selling recreational. For example, Washington has a program for cannabis retail employees to become certified medical marijuana consultants, which requires 20 hours of training. Medical patients who are perhaps newer to cannabis or are really dedicated to finding the right products to treat their condition, would welcome having more knowledgeable staff to guide them. 

Distinguishing Buying Patterns For Adult-Use Consumers VS. Medical Patients

In addition to sales numbers, through our research, we found other notable differences between medical and adult-use markets. Sales data suggests medical patients and adult-use customers have different general preferences across product categories, with medical patients more likely to purchase concentrates and adult-use customers more likely to purchase edibles and pre-rolls. 

This makes sense, as medical patients may need a product with higher intensity to help alleviate pain, whereas edibles and pre-rolls are portable and shareable, appealing to adult-use consumers who may be using cannabis more for fun and socialization than to treat ailments. Flower and vape pens, in contrast, are popular amongst both medical patients and adult-use consumers; we didn’t find any discernible differences for these categories.

Another trend we found is in basket size. Medical patients on average purchase more goods per transaction than adult-use customers. 

This makes sense because there are a lot of adult-use customers who just dabble in cannabis and perhaps want to visit dispensaries for the novelty of it, so they’re less likely to purchase a lot. Medical patients had to pay a fee to access their program and the money spent could signal they’re more committed to purchasing cannabis than adult-use consumers as a whole. A lot of medical patients find serious relief through cannabis and are therefore more likely to use cannabis consistently and purchase more products. Also, there are medical patients who have ailments that make it harder to visit dispensaries, so they’re more inclined to buy a lot of products at once, rather than making frequent trips.