On Oct. 6, 2016, the Arizona Department of Health Services’ (DHS) offices hosted a long-awaited event that was likely more familiar to Phoenix Suns fans than regulatory officials: a big-ticket lottery. With roughly 20 people in attendance, representatives from the CPA firm Henry & Horne took turns selecting lottery balls, determining who would receive nine of the state’s 31 newly-issued certificates to open and operate medical marijuana dispensaries. While several individuals left the offices with the right to open a new business, many more left cursing their luck.
Will chance continue to rule the Wild West of medical marijuana?
Neither medical marijuana nor the lottery system is anything new in the state: Arizona voters passed Prop. 203 on Nov. 2, 2010, permitting residents with specified conditions to be treated with marijuana for personal use. The first (and only other) lottery for medical marijuana dispensary certificates occurred on Aug. 7, 2012.
While the 2012 lottery drew 433 applicants for roughly 97 certificates, October’s lottery drew 747 applicants for just 31 new certificates, per the Phoenix New Times.
The lottery was the final step of an application process the DHS implemented through a series of rules made effective in Aug. of 2007.
First, pursuant to R9-17-102, interested parties must pay a $5,000 application fee. Rule R9-17-303 explains that applicants that are not selected for certificates are refunded $1,000 if they submitted a complete application that complied with applicable laws and regulations; otherwise, the application fee is nonrefundable.
Next, the DHS sorts applicants based on the proposed location of the dispensary. Applicants are put into groups determined by the state’s Community Health Analysis Areas (CHAAs), which are geographic areas designated by the DHS based on population size. Cities like Phoenix, Scottsdale and Tucson each contain several CHAAs, while less-populated areas—like the northwestern corner of the state—may only have one CHAA for a large swath of land.
After sorting the applicants into their respective CHAAs, the DHS generates “scores” for each application by determining the number of registry ID cards issued to qualifying patients within 10 miles of the proposed dispensary location, and then determining how many dispensaries are already operating within 10 miles of that location, to ensure dispensary services reach the highest number of qualified patients. If multiple applicants have a tie or score within a margin of 0.1 percent of one another, the DHS conducts a lottery like the one held in October.
While these rules may seem fair enough, they depend on the information provided in each application packet.
One of the most important factors, judging by the DHS’ formula, is the proposed location for the dispensary. Nevertheless, the DHS does not require applicants to own or have a leased space to be granted a certificate. Rather, under R9-17-304, applicants need only to have a signed letter from a property owner certifying that the proposed location is in compliance with local zoning restrictions.
While potentially splitting hairs, the DHS’ FAQs explain why the distinction is important: within the first three years of receiving a dispensary certificate, a dispensary may move to a different location than the one proposed in the application. The new location simply must be within the CHAA for which the certificate was issued.
Thus, even though the DHS does not release the locations of where medical marijuana patients with ID cards reside, applicants may use simple statistics, such as population size compared with the locations of existing dispensaries, in an attempt to determine a prime location for a proposed dispensary. Applicants could then presumably list a location best suited for the DHS’ score calculations without any true intention of opening a dispensary at that site, later going through the process of moving the dispensary to another location within the same CHAA.
Outside of the potential for abuse in Arizona’s current application formula, the tiebreaking lottery may also pose issues for the DHS if other states’ decisions are any indication.
In Nov. 2014, Administrative Law Judge (ALJ) W. David Watkins ordered Florida’s Department of Health to alter its method of awarding medical marijuana grower permits after ruling the state’s lottery system was arbitrary and, thus, an invalid exercise of delegated legislative authority. Judge Watkins specifically stated, “by definition, ‘lottery’ is a device whereby value is allotted by chance, or where result is reached by means in which human choice or will has no part.” He continued, “arbitrary selection of dispensing organizations … is not supported by logic, reason or facts,” and added, “[Florida’s Department of Health] can recruit or engage expertise … to evaluate aspects that are harder to judge, such as technical methods and business models.”
It is important to contrast a major difference in Florida’s lottery compared to Arizona’s lottery: Florida applicants simply needed to pass a low set of benchmarks for suitability before being placed in the lottery with all other suitable applicants; Arizona’s DHS evaluates applications in a more nuanced manner before using the lottery as a pseudo-tiebreaker.
Additionally, an administrative order from an ALJ in Florida is not binding on the Arizona DHS. Even so, the Arizona DHS may unwittingly be paralleling itself with Judge Watkins’ language in the media.
The Pew Charitable Trusts reports that Tom Salow—the individual responsible for licensing for the Arizona DHS—stated, “We stress that we’re not doing a merit-based process. We’re doing it by chance.”
So, what happens next? Most likely, nothing anytime soon.
Arizona law affirmatively allows a private right of action if an agency takes an arbitrary or capricious action against a party; however, the harmed party must notify the director of the agency—in this case, Dr. Cara M. Christ—within 10 days of the arbitrary or capricious action. Thus, any complaints from the most recent lottery must have been lodged with Dr. Christ by Oct. 16, 2016.
Given the DHS has only issued two batches of certificates in the six years since Arizona legalized its medical marijuana program, any major disputes may still be several years away. For the time being, it appears that Arizona is content with the tradition of keeping the West wild.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should the DHS reconsider its use of lotteries in awarding dispensary certificates, or is the DHS’ system of a qualified lottery the best way to ensure competency while fighting cronyism?
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