The Contradictions of Marijuana
It’s an industry that could soon be worth upwards of $40 billion per year, yet its key participants can’t get hold of either a bank loan or a credit card. Welcome to the paradox that is the legal marijuana business.
Marijuana (cannabis) is a divisive substance; scourge of society and red hot investment; illicit high and essential medication; crime and cure. Whatever your opinion, the drug is already big business, and on the cusp of even bigger things.
“This is a murky and historic time period,” said Steve Gormley, chief business development officer at OSL Holdings, which offers financial management and financing for cultivators and dispensaries of legal marijuana across the United States.
“Just like the alcohol industry three or four years before prohibition was repealed, there are potentially enormous rewards, but without federal backing there is a higher risk level,” he said.
It’s already legal to cultivate and sell marijuana for medicinal purposes in 27 states, and for recreational use in four plus the District of Colombia. Yet at the federal level, the drug is still rated as a Schedule I illegal substance, alongside the likes of heroin and cocaine.
But Gormley believes that with more than half of states permitting some kind of legal trade and 11 more likely to follow suit in the very near future, the tipping point has been reached, and decriminalization is “inevitable” in the next five to seven years.
Barred from Banking
Until that day comes, cultivators, dispensaries and other marijuana businesses find themselves cut off from the banking system. Funding the production and sale of a Schedule I drug, regardless of its legality in certain states, skirts too dangerously close to money laundering for any mainstream banks to go near the industry.
Credit unions offer one source of finance, while companies like OSL also attract investment from high net worth individuals and other investors with the appetite for high risk, high reward opportunities. But on a day-to-day basis, many marijuana cultivators and dispensaries have little choice but to operate as cash businesses, escalating the risk of theft.
“These operators can be carrying tens of thousands of dollars in cash and product, and the location of facilities is made public by the states, adding to the risk,” said Matt Gunther, an insurance agent at Seattle-based specialist broker Cannarisk.
Gunther noted, however, that recent legislation in some states will now permit third-party vendors to offer armored transportation services, reducing the risk of theft and allowing cultivators to transfer some risk to the security firms.
Gormley said that the absence of banks could also present some operators with problems when it comes to selling their businesses to acquirers after years of self-reporting.
“In a cash-only environment, states in which marijuana is legal have to rely on the retail operators and cultivators to report their own earnings and furnish sales receipts. Underreporting of revenue is common, but some operators who may want to go corporate in the future might not have accurate sales figures to create
stable valuation metrics for their potential acquirers,” he said.
“More savvy operators who have a view on being acquired by a major multinational and developing a brand need to follow the letter of the law and pay their taxes so that they are in a position to present a genuine valuation on their business.”
The risk landscape will improve significantly for marijuana businesses if and when the drug is eventually downgraded to Schedule II.
“Just like the alcohol industry three or four years before prohibition was repealed, there are potentially enormous rewards, but without federal backing there is a higher risk level.” – Steve Gormley, chief business development officer, OSL Holdings
“That’s when banks and institutional money will come off the sidelines in the U.S. and invest directly in retail cultivation, where all the money is,” said Gormley. “The floodgates will open and the banks will be in a mad dash to get involved. It’s a huge business and they are all investigating how to position themselves to capitalize on a nascent industry — a Greenfield, if you pardon the pun.”
But it’s not just banks that have so far steered clear of the sector. While a handful of insurance carriers do service the legal marijuana sector (and the number is slowly growing) the majority of major insurers do not. And industry insurance buyers were dealt a blow in May of this year when the Lloyd’s market — until recently a key provider of specialist coverage for the sector — instructed its underwriters to cease insuring the industry until marijuana is decriminalized at the federal level.
The market’s self-imposed ban is comprehensive, extending to crop, property and liability cover for those who grow, distribute or sell any form of marijuana, as well as cover for banking or related services provided to these operations.
A Lloyd’s spokesperson told Risk & Insurance® that as long as marijuana is listed as a Schedule I drug under U.S. federal law, Lloyd’s is concerned about impeding federal anti-money laundering (AML) laws, adding: “Lloyd’s will continue to monitor developments under U.S. law and will reconsider this position if and when the conflict of laws is resolved.”
Insurers are also wary of the lack of loss data and legal precedents stemming from the marijuana business. “In other industries, insurance agents create risk management strategies to properly indemnify their clients from loss interpreted and measured in case law. Marijuana commerce-related risks are completely unchartered with no precedent,” said Gunther.
“Marijuana commerce-related risks are completely unchartered with no precedent.” — Matt Gunther, insurance agent, Cannarisk
From heightened theft risk to public health concerns, there is little or no loss history in the marijuana industry, and insurance buyers are at the mercy of a small band of wary, first-mover insurers offering limited capacity, low limits, high deductibles and inflated premiums.
The lurking giant of a risk that scares insurers the most, Gunther said, is the public liability risk posed by carcinogens. While both medical and recreational marijuana must undergo extensive testing before being cleared for human consumption in states in which the drug is legal, Gunther said the industry has “all the right variables in place for class-action lawsuits.”
“There don’t seem to be clear studies on whether years of consumption can lead to lung cancer or inhalation diseases of some sort. With legal structures in place, plants are tracked from seed to sale, and it is easy to find where a certain plant was produced.
“Information is public so law firms could easily collect the necessary statistics they need to file a class-action lawsuit — it could be the tobacco industry all over again, but without the hoops of filing subpoenas to do so,” he said.
Gunther noted that some of this risk is transferred from cultivators to the third-party laboratories tasked with carrying out the tests on marijuana products, but the potential for laboratories to make mistakes still exists and the industry as a whole is potentially exposed.
“Getting insurers to provide product liability coverage has been extremely difficult. The policies aren’t priced as accurately as they probably could be, but we don’t expect them to be with uncertainty over what the loss future entails,” he said.
“Marijuana businesses will continue to pay higher premiums until losses and precedents become more established.”
Weed and the Workplace
Workers’ compensation coverage is also proving elusive for many cultivators due to the high perceived risk of explosion at certain facilities.
“Here in Washington State, we have a state-funded workers’ compensation system, but finding private sector carriers in other states who accept workers’ compensation has been one of our biggest challenges,” Gunther said.
While the cultivation of cannabis plants carries no more risk than most manufacturing endeavors, the extraction of chemical concentrates can be dangerous if done with butane-powered machinery, he said. The risk of explosion can, however, be mitigated or reduced by using alternative fuels such as CO2 or solvent-free means, as well as by implementing proper ventilation and safety protocols.
The problem for insurers, said Gunther, once again lies in a lack of loss data.
“[Insurers] may be influenced by what they learn from the hysteria-leaning media, which isn’t always the facts. But there is a big opportunity for workers’ compensation carriers to come into this industry and we wish they would do so more aggressively,” he said, adding that private sector carriers could potentially learn more about these risk exposures through collaboration with state-funded insurers.
Indeed, as more is learned about marijuana risks and more carriers enter the market, conditions should improve for cultivators and dispensaries, but education is vital, and brokers and the marijuana companies themselves both have a role to play.
If Gormley is correct, and federal legalization is an inevitability, it won’t be long before the banks open their doors to the sector, and insurers won’t be far behind.
“Lloyd’s’ exit certainly hasn’t held back other carriers,” said Gunther. “A handful do exist and more are entering the arena. It is just a matter of time.”
Doxing: Are You Prepared?
Cyber insurance experts have warned corporate risk managers to expect more so-called “organizational doxing” attacks, such as those recently suffered by Ashley Madison and Sony.
In a doxing attack, hackers steal sensitive personal or corporate information, then publish the information online.
“Employees are a company’s weakest link.” —Alessandro Lezzi, team leader and underwriter, international technology, media and business service, Beazley
Doxing hacks can be perpetrated by corporations or state-funded organizations seeking to disrupt a company’s business, or by cyber gangs seeking to extort money under the threat of publishing data. In the case of Ashley Madison — an adultery dating website whose members’ details were leaked online — the motive for the doxing attack appears to be based on moral grounds.
Regardless of the reason, the financial and reputation repercussions for victims can be severe. Three Ashley Madison customers whose details were exposed have since committed suicide, and the company now faces a class-action liability suit from scores of clients.
“If someone is motivated to take down a competitor, one way they might do it is hacking that competitor and posting confidential information as a form of corporate warfare or espionage,” said Sarah Stephens, partner and head of cyber, technology, and media E&O at broker JLT.
The methods used by doxing hackers to steal the information are essentially the same as used in phishing or whaling scams, typically relying on employees responding to a fake email infected with malware.
According to Alessandro Lezzi, team leader and underwriter, international technology, media and business service at Lloyd’s underwriter Beazley, senior executives are most at risk of being targeted, as hackers may use embarrassing personal details against them to extort money, as well as potentially hacking sensitive corporate information from their email accounts.
“Our advice to clients is that 100 percent security is unobtainable, so this could happen to anyone,” Lezzi warned. “Companies are coming under attack all the time, and it only takes one to get through. The most important risk management objective is to be ready.”
“Our advice to clients is that 100 percent security is unobtainable, so this could happen to anyone.” — Alessandro Lezzi, team leader and underwriter, international technology, media and business service, Beazley
It is vital, he said, that companies put crisis response plans in place to allow them to minimize the fallout of a potential doxing breach. These plans can often be developed with the help of insurers and brokers, and a response service is usually included in specialist data breach policies.
“The forensic, legal and crisis management services offered under insurance policies in the wake of an attack often mean more to the client than the cover itself,” said Lezzi.
“You need a lot of coordination as fast as possible between the different departments within a company. Lots of people need to be involved — from compliance and legal to IT to crisis management — and the plan needs to have been tested.”
While broadly worded cyber policies should cover the cost of crisis management and forensic investigation, as well as any liability claims that arise from the data breach, Stephens said, it may be hard to quantify the financial impact of the leaking of sensitive corporate data or information that may damage a company’s business or reputation.
The financial impact of a cyber attack is “a very difficult loss to value, and that’s why many insurers shy away from it.” — Sarah Stephens, partner and head of cyber, technology, and media E&O, JLT
“The insurance industry hasn’t done a great job of creating broad coverage for financial losses stemming from this kind of risk, although there are some products out there — primarily in the Lloyd’s market — that do address future lost revenue or immediate loss of attraction in the few months after a data breach,” she said.
This coverage, Stephens said, is often very carefully worded and requires certain triggers to be met within a short indemnity period.
“But it’s a very difficult loss to value, and that’s why many insurers shy away from it,” she added. “You could argue, for example, that Target’s disappointing performance in the quarter immediately following its data breach may have had as much to do with a failed expansion into Canada as the breach itself.”
Stephens and Lezzi both said the frequency of doxing attacks is likely to increase, and while it is virtually impossible to make a company’s network impregnable, the most effective form of defense is to educate staff on the evolving risk of cyber-attack.
“Employees are a company’s weakest link,” Lezzi said. “You’d be surprised how many employees fall for phishing emails — one client was tested with a fake scam and 50 percent of employees responded to the email,” he said.
“It is important to train employees about this type of attack and how to manage confidential information. They also need to be taught what to do and who to speak to in the event of an attack.”
It’s all in the Code: Five Essential Characteristics of HCPCS that Influence Outcomes
Payers are no stranger to codes. Claim and policy administration systems are filled with them. Moreover, whether designating claim type, feature, branch office, policy term, type of injury, or another classification, their use facilitates consistency and understanding. Codes also guide clinical and financial decision-making. At the foundation of medical cost management are three code sets. The International Statistical Classification of Diseases and Related Health Problems (ICD) diagnostic and procedure codes, ICD-10-CM and ICD-10-PCS respectively, are used to classify diseases, disorders, injuries, infections, and symptoms. National Drug Codes (NDCs) help ensure claimants received the correct strength, dosage form, and type of medication. Their use also helps pharmacists recognize the difference between products that may look or sound alike. Yet another useful code set is the Healthcare Common Procedure Coding System (HCPCS) created to identify services, products, and procedures rendered for the condition. It is on this code set we will focus.
When processing ancillary benefits in workers’ compensation and auto no-fault, HCPCS can determine whether the item is considered medically necessary and therefore, available to the claimant and otherwise related to the compensable condition. Codes can also affect the reimbursement amount. Thus, if a coding error is made, there can be significant adverse impacts to payers and claimants alike. For example, the vendor could stop supplying the item based on insufficient reimbursement, or the payer could deny the product or service completely. Both are detrimental to the claimant or overall claim outcomes. Coding errors may also result in claim leakage if applied incorrectly or misunderstood in the review process. It is therefore essential that payers be mindful of five essential characteristics of HCPCS.
#1 – HCPCS are generic
Like pharmaceuticals, there are many different providers and manufacturers of similar durable medical equipment (DME) items. However, HCPCS are not specific to brand and usually hundreds of different products can fall under the same HCPCS. In addition, some codes include certain services, such as evaluations and fitting fees, whereas some codes do not. For example, some health HCPCS rarely indicate the actual services being provided in the home, such as wound care or home infusion, but instead simply indicate an RN or LPN visit.
#2 – Unit of measure influences coding
Some supply codes have very specific units of measure, which can result in HCPCS quantities that are not whole numbers and can result in mathematical errors or rounding. For example, HCPCS code A4450 has a unit of measure of ‘per 18 square inches’ and is assigned to a roll of tape that is 2 inches by 5.4 yards, equaling 388.8 square inches. The quantity for this HCPCS code would therefore be 21.6. Additionally, some HCPCS codes specify ‘per pair’ or ‘each,’ so understanding the actual supply is important to determine the appropriate quantity.
# 3 – Sometimes, there is not a specific code
Centers for Medicare and Medicaid Services (CMS) has created a number of miscellaneous codes that have generic definitions and can be used when no other CPT or HCPCS code matches the description of the product or service provided. Miscellaneous codes can be easily abused either unintentionally due to lack of time and knowledge, or intentionally by a provider seeking a higher reimbursement rate. This is because miscellaneous codes typically do not carry a fee schedule due to their versatility and, therefore, may be reimbursed at higher amounts than a non-miscellaneous code. For example, K0108 defines a ‘wheelchair component or accessory, not otherwise specified;’ however, most wheelchair parts have a specific code outside of this one which could be more appropriate while also carrying a lower allowable amount.
#4 – Supplemental modifiers are useful
A supplemental modifier or identifier is a billing value that further clarifies the HCPCS/CPT code by telling the payer more about the billed product or service. Their application influences reimbursement because fee schedules largely differ depending on which modifier is reported. A rental (RR) for example, does not warrant the same reimbursement as a purchase (NU) yet both a purchase and rental of the same product carry the same HCPCS. Consider the following codes, K0001 = ‘STANDARD WHEELCHAIR’, K0001 RR = ‘STANDARD WHEELCHAIR’ that has been rented, and K0001 NU = ‘STANDARD WHEELCHAIR’ that has been purchased. Depending on the fee schedule, reimbursement could be $45 or $500.
Modifiers are also useful because they can define the unit of measure. By default, a HCPCS with a modifier of ‘RR’ is a rental per month. However, in some cases a provider may bill for a device daily and therefore interpret the fee schedule as daily rather than monthly. In this scenario, the provider may bill with a daily unit of measure, billing a quantity of 30 instead of the allowable amount of one. For devices that are rented daily, such as a negative pressure wound therapy device or continuous passive motion device, it is important to understand the unit of measure being used (monthly or daily) and be mindful that the daily billing exceeds the monthly allowable.
# 5 – The diagnosis influences allowable amounts
Some HCPCS change based on the diagnosis of the injured person and therefore, the allowable amount may fluctuate. For example, depth-inlay shoes are coded as an Orthotic (L – code) if the patient does not have a diabetic diagnosis and is using the shoes for orthopedic reasons. The same depth-inlay shoe may be used for a diabetic patient, but it would warrant an A-code, which can have a higher reimbursement level.
The use of coding assists claims professionals in compensability decisions, guides clinical decision-making, informs point-of-sale utilization controls, influences claim handling policies and procedures, and provides a valuable data point in statistical and analytics models. Moreover, their use facilitates better clinical and financial claim management in terms of payments that are more accurate, greater processing efficiency and consistency, and improved clinical management as a result of better understanding the medical condition(s) associated with the claim and the various therapies in use. Remaining mindful of the aforementioned five essential characteristics of HCPCS can therefore not only mitigate claim leakage but also achieve a better outcome.