Rule changes needed to sustain industry, Hawaii cannabis dispensaries say

Cure Oahu opened a new medical cannabis dispensary Thursday in Kapolei, the only one in West Oahu, where a large number of registered patients reside.

It is the company’s second Oahu location and Hawaii’s 18th dispensary overall, well below the number of retail outlets needed to serve the state’s 34,000-plus registered medical cannabis patients or to sustain the fledgling industry amid statutory constraints, according to a new report by the Hawaii Cannabis Industry Association.

The study says that approximately only a third of patients with “329 cards” statewide use licensed dispensaries and that the state’s medical cannabis program “is failing to meet its main policy objectives, which is leaving patients heavily reliant on the illicit market where cannabis is untested and unregulated.”

Hawaii’s medical cannabis dispensary program, launched in 2016, allows only eight licensees statewide: three on Oahu, two each on Hawaii island and Maui, and one on Kauai. Each licensee may operate only two retail outlets and two production centers, although the state Department of Health has the discretion to approve one additional retail or production site and has done so in several instances.

The law also allows registered patients to grow up to 10 plants.

“One of the things we’ve really been trying to address is lack of patient access,” said HICIA Executive Director Randy Gonce.

The industry group is proposing legislative changes that would expand geographic access by allowing up to three retail locations per licensee, with the possibility of two more with DOH approval.

Other changes recommended by HICIA would open the way for each licensee to operate up to three production centers, each limited to 5,000 plants, an increase from the current 3,000, with the possibility of an additional 2,500 plants with an OK from DOH.

The industry group also would like approval for wholesale transactions between licensees as “a supply chain safeguard should an individual licensee’s crop fail or other production disruptions occur,” the report says.

Another recommendation would redefine the term “medical cannabis production center” to include any series of structures located within the same secured property. Currently, for example, Gonce said two buildings — one for growing, the other for processing — on a single property count as the maximum two production centers.

The proposals are contained in House Bill 2260, introduced by Rep. Ryan Yamane (D, Mililani-Waipio Gentry-Waikele) and scheduled to be heard by the Committee on Health, Human Services and Homelessness at 9 a.m. Tuesday via videoconference.

In a statement to the Honolulu Star-Advertiser, the Health Department said its medical cannabis programs “keep patients and the public safe. We continue to work with dispensary licensees to ensure that Hawaii residents have access to medical cannabis while balancing the health and safety of patients and the public.”

At the end of 2021, there were 34,125 registered medical cannabis patients in Hawaii, up from 13,150 in 2015, according to DOH statistics. Over that span an average of 3,450 new patients were registered annually.

Oahu had the highest number of registered patients at 16,231, followed by Hawaii island (8,961), Maui (6,572) and Kauai (2,332).

Patients may claim more than one “debilitating condition” to qualify for medical cannabis, and “severe pain” was cited by 84% of patients, followed by post-traumatic stress disorder (16%), persistent muscle spasms (7%) and severe nausea or cancer (each at roughly 6%). Other conditions mentioned include glaucoma, rheumatoid arthritis, cachexia/wasting syndrome, seizures, HIV/AIDS, lupus, epilepsy, multiple sclerosis and ALS.

Fifty-eight percent of patients were male, and 42% were female, the latest data shows. The average age for male patients was 50.79, and for females, 49.1.

However, 10 of the registered patients were under the age of 10, with seizures the most commonly cited condition, and 40 were age 11 to 17. At the other end of the spectrum, 1,227 patients were age 76 or older, according to DOH data.

Hawaii began allowing medical cannabis registration for out-of-state patients in 2019, and at the end of 2021 there were 963 from 30 states and the District of Columbia.

An economic study prepared by Paul Brewbaker of TZ Economics that is included in the HICIA’s “2022 Status of Hawaii Cannabis Industry Report” says annual medical cannabis product sales leveled off at an estimated $50 million in 2021, up from $44 million in 2020 and just under $18.2 million in 2018, the first full year of dispensary operations.

The study estimated the industry’s economic impact in Hawaii in 2021 through “direct, indirect and induced economic activity” at $99 million, and said dispensaries provided the state with $2.25 million in general excise tax revenue and 781 jobs.

When the medical cannabis dispensary program began in 2016, winning the DOH lottery for a coveted license was seen by many as a “golden ticket,” Gonce said. “But this is Year Five, and no dispensary has gotten to that place and it doesn’t look like it’s going to happen anytime soon with the current program.”

The report says “a point of no return for some industry investors is approaching” in the face of large capital outlays, slowing growth in sales and patient registrations, and a heavy federal tax burden, namely IRS Section 280E, which prohibits dispensaries from writing off normal business expenses since marijuana remains illegal under federal drug laws.

“There were years when some of our dispensaries didn’t make any money but had to pay tons of taxes,” Gonce said.

Ty Cheng, president of the Aloha Green Cannibas Collection, which began operations in 2017 and has three dispensaries on Oahu, said the report dispels “the perception that a medical cannabis dispensary license is a profitable business in Hawaii.”

He said Aloha Green has yet to provide any return on investment to its initial investors “as we focus on reaching an economy of scale which allows us to compete against the illicit market. In the current regulatory regime, we forecast only a break-even scenario without repayment or dividends to investors until regulations change.”

Cheng, board chairman of HICIA, also said that when the medical dispensary program was first launched, “Hawaii regulators were overly focused on product diversion, security and testing rather than patient access and product mix, which led to higher operating costs and an unsustainable business model.”

“These security concerns were fueled by the historic ‘war on drugs’ thinking and have not materialized in the Hawaii market. We welcome the regulators and legislators’ refocus on patient access and product safety.”

The legislative recommendations proposed by HICIA to ramp up medical cannabis production and sales also are important to help dispensaries compete with illicit cannabis dealers, according to Gonce.

The group’s study says Hawaii dispensaries recorded about 13,000 monthly average unique patient encounters in 2021, meaning more than 20,000 other patients are either growing their own plants or, more likely, buying from the unregulated black market.

Gonce acknowledged that many patients choose that route because dispensary prices often are far more expensive, but for good reason.

“This medicine is of the highest, tested, regulated quality on the islands,” he explained.

As a registered patient himself, Gonce said, “I know for a fact that when I go to the dispensary, when I read the label, that it is exactly what it is and it’s tested, and I know the exact dosage that I get.”

But perhaps more critical to pricing, he said, is that restrictions on retail locations and plant counts are preventing licensees from reaching “economies of scale” that would put legitimate operations on a more competitive level with the black market, “which doesn’t have a single dime in overhead costs. They don’t have to build to code, they don’t have to do a yearly audit — they don’t have to do the things a dispensary does just to operate and to pay taxes and pay their employees.”