Ancillary carriers shy away from cannabis industry for fear of regulatory violations
With 30 states as well as the District of Columbia passing laws that broadly legalize marijuana possession and production, the cannabis industry is growing at a rapid rate. In fact, legal weed sales in North America were projected to reach $10 billion by the end of 2017 — a 33% increase from 2016, according to a report from Arcview Market Research.
However, despite the massive growth, the cannabis industry fails to receive the same treatment as any other legal business in the United States when it comes to healthcare benefits for its employees. This is due, in part, by fear from insurance carriers to underwrite for these businesses and the inability for cannabis companies to receive tax write-offs for offering healthcare to their staff.
Mike Patton, benefits adviser and partner at Quandary Insurance out of Denver, Colo., says he has discovered a pattern of ancillary benefit carriers who also work as financial services firms will not underwrite cannabis companies.
“These carriers are regulated by [the Financial Industry Regulatory Authority] and deal in securities and investments in wealth management,” Patton says. “These firms are significantly more regulated.”
Despite that production and selling of marijuana is legal is specific states, if a wealth management firm is investigated by the Department of Justice and the use of federal money is dealt within the realm of federally illegal substances — such as cannabis — the DOJ has the authority to freeze that firms assets.
“When the DOJ freezes their assets they can theoretically freeze the investment assets of the people they are holding for,” Patton says. “So, it would look pretty bad if all of the clients whose wealth they manage are frozen because of a cannabis company.”
In an effort to steer ancillary carriers away from the cannabis industry, FINRA is advising financial services firms to not do business with these companies because of possible fraudulent activity.
One example of these alerts comes from FINRA’s notification of marijuana stock scams. In it they identify a California-based company, Medbox, and its CEO, Bruce Bedrick, of falsely touting record revenue numbers to investors and claiming to be a leader in the marijuana industry while some of its earnings came from sham transactions with a secret affiliate.
The Securities and Exchange Commission charged Medbox and its associated parties; however FINRA made sure to advise its regulated firms to, “warn investors not only about the potential for fraud in this arena, but also reiterate the risks of investing in thinly traded companies about which little is known.”
Fearing the possibility of falling into one of these scams, ancillary carriers are steering clear of the industry and as a result cannabis companies are looking to alternative ways to acquiring benefits for their employees.
Julio Torres, senior vice president of the western region of National Benefit Partners, out of Orange County, Calif., is providing elective benefit programs specifically for the cannabis industry.
By offering voluntary health benefits to cannabis employers along with other supplementary health plans such telehealth and express prescription benefits, Torres is offering voluntary plans to an industry that many carriers are avoiding at all cost.
“We work in a wholesale — revenue neutral — capacity with retail brokers,” Torres says. “If advisers are looking to tap into this profitable endeavor and have a quick-to-market solution, I want to connect with them.”
Because there is no revenue sharing, Torres says he is able to stay revenue neutral, meaning he does not take any profit away from the broker when organizing the elective benefit plan.
“The brokerage community lives off of commissions that are provided by the insurance companies,” Torres says. “We contract with a number of carriers on the wholesale side, meaning we get paid outside of the retail commission and compensation.”
Surprisingly high deductibles
Despite this alternative Torres provides, Patton says he chooses not to offer these micro plans to his clients because employees tend to misunderstand that they do not receive full healthcare coverage like what they would receive in a traditional plan.
“No matter how many times I explain it, employees of the groups don’t understand that they are not getting full health insurance,” Patton says. “Inevitably, one of those employees comes back furious because they have a really cheap policy with a $20,000 maximum payout and they don’t realize it.”
Chris Wolpert, managing member at Group Benefit Solutions in Seattle, Wash., says for the cannabis companies in his state, in order to sell or produce marijuana, the business is required to have the appropriate marijuana license.
This license then requires the employer to pay a 37% marijuana excise tax, which causes many employers to put benefits on the back burner in order to take what profits they make and dump it back into the business to expand.
“If these companies can put together a dental, vision, short term disability, long term disability, accident coverage plan for maybe $120 to $150 a month, that would be far more valuable to that group rather than sponsoring a health plan that could cost $300 to $600 per month,” Wolpert says.
This leads to the next obstacle for cannabis businesses, which is the inability to make their health plan offerings a tax write-off just like any other business in America.