How rescheduling marijuana would impact insurance
Rescheduling could make the cannabis industry more approachable for insurance companies and other financial service providers.
In a letter to the Drug Enforcement Administration, the Department of Health & Human Services has recommended moving marijuana from a Schedule I to Schedule III substance under the Controlled Substance Act.
Cannabis trade publications are heralding the move as historic, as it would allow for more robust research on marijuana, and could make insurers and financial services providers more willing to work with these businesses.
There would have been less exuberance around the rescheduling recommendation three to four years ago, according to Ian Stewart, regional managing partner of Wilson Elser’s Los Angeles office and co-chair of the firm’s national cannabis law practice.
“At that time, everyone was uniformly saying the only reasonable option was to deschedule completely and regulate marijuana like alcohol. Allow the states to have primary control, but have a federal regulatory structure that sits on top,” Stewart says. “Over the past year or two, it became clear that there is not going to be a fix from Congress any time soon, and therefore rescheduling isn’t looking too bad.”
He explains Schedule III is far better than Schedule II, which is contained in several federal statutes such as section 280E of the federal tax code. Section 280E prohibits companies “from deducting otherwise ordinary business expenses from gross income associated with the ‘trafficking’ of Schedule I or II substances, as defined by the Controlled Substances Act,” according to the National Cannabis Industry Association.
“Schedule III does fix that problem. Cannabis companies would be able to take all standard business deductions and profitability will go way up,” Stewart says.
In addition to leveling up the profitability of these companies, moving marijuana from a Schedule I drug should give carriers motivation to give the industry another look. An influx of capacity, reinsurers and additional excess limits are all probable, Stewart says, adding the Bermuda market and London syndicates are also likely to give the industry another look as well.
However, these changes will not be occurring overnight. If the DEA approves the rescheduling, which Stewart says is likely to occur before the 2024 election, it would still have to go through the federal rule-making process.
What the insurance industry can expect
As a Schedule III substance, marijuana would be handled using a prescription drug model. Stewart points out this would be unworkable with state adult use and medical statutes. As such, certain carve-outs or oversight by the FDA would be necessary.
“The FDA doesn’t have the capacity or the desire to police the entire cannabis industry. It is just impossible,” he says. “They can’t do it and they don’t want to do it, but that is going to be their directive unless there are some carve-outs in the federal regulatory plan.”
Rescheduling would also open up interstate commerce, which would shake up the nature of each state’s market and bring new risks into play. Stewart says regulatory differences between states could mean that a product that is in compliance when it is loaded onto a truck in California could potentially be out of compliance when it is unloaded in Nevada.
So what does that mean for carriers?
“Increased uncertainty and risk,” Stewart says. “I think there are going to be lawsuits coming out of this change in the short term.”
States will also have to address issues around workers’ comp and reimbursement for medical marijuana should rescheduling occur, according to Julie Schum, a partner in the Chicago office of Quintairos, Prieto, Wood & Boyer, P.A.
While some states allow for workers’ comp reimbursement for medical marijuana costs, many more expressly prohibit it or have left it up to carriers to decide. Many states that prohibit or left the question open pointed to the Schedule I status, and the conflict between state and federal law, as the reason why.
“All of those states that have been relying on the federal conflict to punt the issue, so to speak, are actually going to have to deal with it,” Schum says.
She explains the most powerful impact rescheduling would have is for those claims that can’t be settled or resolved because of prohibitive Medicare set aside (MSA). Covering the cost of opioids for the life of an injured worker can cause MSAs to balloon into the half-a-million dollar range.
“You get these MSAs that are for $400,000-$500,000 and it is just not feasible,” Schum says. “It is too much money and it delays finding a resolution for these cases.”
Medical marijuana can help workers’ comp carriers manage these costs, she says.
“I had a case when the MSA was $550,000. We transitioned the person to medical cannabis and the MSA dropped to $100,000,” Schum previously told PropertyCasualty360.com. “We upped the settlement by roughly $50,000 to account for the cost of cannabis for the rest of their life. So $150,000 as opposed to $550,000.”
Related: