This could potentially be a groundbreaking year for the marijuana industry.
In November, residents in up to a dozen states could be voting on whether or not to legalize recreational or medical marijuana. This comes after Pennsylvania and Ohio passed laws legalizing medical marijuana in their legislatures this spring. As it stands now, half of the country has legalized the use of medical marijuana, and four states (plus Washington, D.C.) allow for the sale of recreational marijuana to adults ages 21 and up.
Arguably just as exciting is the possibility that the U.S. Drug Enforcement Agency could reclassify medical marijuana in a matter of weeks. The Food and Drug Administration has already submitted its opinion to the DEA, with the DEA now conducting its own investigation into the safety of medical marijuana. If the agency were to reclassify medical marijuana as anything other than schedule 1, which means an illicit drug, medical marijuana could be prescribed by physicians, and insurers may even begin covering the substance.
But that isn't all. The good news just keeps streaming in for the cannabis industry.
Cut Medicare's expenditures with...medical marijuana?
Last week, Ashley Bradford and David Bradford, both of the Department of Public Administration and Policy at the University of Georgia, published findings that examined a possible correlation between medical marijuana prescription use in legal states between 2010 and 2013 and Medicare prescription use under Part D over the same timeframe. The authors' work can be found in the online journal Health Affairs.
What the study authors found was a correlation between medical marijuana prescription use and lower prescription drug use under Medicare for ailments commonly treated by medical marijuana in states where medical marijuana is legal. For instance, medical marijuana is often prescribed to treat anxiety, depression, nausea, seizures, sleep disorders, and spasticity associated with multiple sclerosis. In states where medical marijuana is legal, the authors found a marked reduction in Part D expenses for FDA-approved drugs to treat these ailments. Prescription drug use under Medicare Part D for ailments that medical marijuana isn't used for did not see a drop in these same medical marijuana-legal states.
What's more telling is the amount of money the authors calculated that medical marijuana saved Medicare Part D in 2013. Per their estimates, it was about $165 million. According to the authors' extrapolated estimates, they believe a nationwide legalization of medical marijuana would result in about $470 million saved annually by Part D.
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One final positive is that no marijuana overdoses have led to any deaths. The same can't be said for opioids, which are commonly prescribed as painkillers. Opioid overdoes, which include heroin, killed more than 28,000 people in 2014, and at least half of all of these deaths involved a prescription opioid, according to the Centers for Disease Control and Prevention. Thus, it's possible that if cannabis were incorporated into the care regimen for seniors, or all patients for that matter, it could reduce the costs for Medicare and Medicaid, as well as prevent unnecessary opioid-related overdose deaths.
Hold your horses
But before you get too excited that medical marijuana will save Medicare and Medicaid, keep a few things in mind.
First, saving money is great for Medicare Part D, but we're talking about $470 million in savings on an estimated $88 billion in drug spending for 2016, per the Kaiser Family Foundation. Don't get me wrong, saving money would be a good thing for the Medicare program, with the Hospital Insurance Trust expected to deplete its spare cash reserves by 2028. But we're really only talking about one-half of one percent based on 2016's spending estimates. With prescription drug costs seemingly rising by a mid-to-upper single-digit percentage each year, medical marijuana isn't going to be Medicare's white knight.
Secondly, we have no clue what the DEA is going to do with marijuana when it makes its ruling in the coming weeks. The DEA could decide to do nothing and leave it as an illicit schedule 1 substance. It could also de-schedule the drug completely, putting it on par with tobacco and alcohol, which seems like a longshot.
More reasonably, the DEA could reschedule medical cannabis as a schedule 2, 3, 4, or 5 drug, implying that a medical benefit exists, but suggesting that addiction to the substance exists, too. Labeling cannabis as a schedule 2 drug could prove to be a nightmare for the industry, with regulatory costs soaring. Schedule 2 means the FDA coming in and controlling package labeling, ensuring that manufacturing standards remain consistent, and potentially requiring medical marijuana companies to run clinical studies to support their claims that cannabis treats certain ailments. A rescheduling may be a victory in name only for the cannabis industry.
Finally, we still have federal restrictions on the cannabis industry, which are making life tough, if not impossible, for investors trying to take advantage of marijuana's growth. Lawmakers on Capitol Hill don't look anywhere near ready to change their tune on marijuana, which means inherent disadvantages for businesses involved in the cannabis industry will continue for the foreseeable future.
For starters, access to basic financial services is hit-and-miss. Only 3% of the nation's roughly 6,700 banks are currently willing to work with cannabis-based companies for fear of federal prosecution down the line. This means few businesses have access to business checking and savings accounts, or lines of credit to buy product and expand.
Additionally, marijuana businesses get the short end of the stick come tax time. IRS tax code 280E, in its simplest form, disallows businesses that sell illegal substances from taking normal business deductions. As long as the marijuana plant is considered an illicit substance on Capitol Hill, cannabis companies will be paying tax on their gross profits instead of net profits, thus forking over far more than they should in taxes. It's simply not an investor-friendly environment.
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Although things appear to be moving in the right direction for cannabis, you'd be wise as an investor to avoid the industry altogether until these inherent disadvantages disappear.
Sean Williams has no material interest in any companies mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.