Hundreds of Missouri cannabis businesses may have beat the odds to win their medical licenses in 2019 due to a “flawed” application and evaluation process that “lacked consistency and transparency,” according to a state audit released Feb. 18.
State Auditor Scott Fitzpatrick determined that the Missouri Division of Cannabis Regulation (DCR) did not properly set up its blind scoring system to award 348 medical cannabis licenses more than six years ago.
Among 2,257 applicants, the DCR awarded 192 dispensary, 86 manufacturing, 60 cultivation and 10 testing laboratory licenses, with the majority of these awardees now serving the state’s $1.5 billion marketplace that expanded to adult-use sales in 2023. They received a first-mover advantage for the 2023 launch.
The 77-page state audit included a sample size of 67 license applications – roughly 3% of the overall pool – which Fitzpatrick said documents how the DCR allowed applicants to create their own unique identifiers during the scoring process. This resulted in 18% of applicants basing their identifiers on their company’s name, allowing graders/reviewers to “potentially deduce the applicant’s identity” in what was supposed to be a blind scoring process, according to the audit.
This means, based on the audit’s sample size, roughly 405 of the 2,257 applicants (18%) were not penalized for violating redaction rules, Fitzpatrick determined.
Roughly 83% of the applicants who based their identifiers on their company’s name ended up winning licenses, compared to 15% over the overall population of applicants, according to the audit.
This means, based on the audit’s sample size, roughly 336 of the 348 licenses awarded were to businesses that circumvented the blind scoring rules, according to the audit.
But this likely isn’t the case.
The audit’s sample size was heavily skewed toward including a higher percentage of license winners than what the DCR actually awarded because the state auditor’s office didn’t randomly select all of the 67 applications to include in the audit. In other words, the audit’s sample size wasn’t reflective of the overall pool (more on this below).
Still, Fitzpatrick stood behind the results.
“What was meant to be a blind scoring process was able to be circumvented by applicants who provided indications of their identity throughout their applications, and the numbers show applicants who did that won licenses at a greatly increased rate compared to those who followed the rules and remained anonymous,” Fitzpatrick said in a press release announcing the audit. “These sorts of issues undermine the confidence applicants and taxpayers have in the legitimacy of the license-granting process.”
Fitzpatrick also determined that the audit revealed myriad scoring inconsistencies and deficiencies that contributed to $12.5 million in legal challenges and costs that the DCR incurred from 2020 to 2023, with unsuccessful applicants’ appeals to the scoring process resulting in 68 additional licenses being awarded.
The state auditor also pointed to a section of the audit claiming that Wise Health Solutions (WHS), which the DCR contracted to evaluate the applications, discouraged its graders from taking notes that documented the rationale for their grading decisions. According to the audit, a WHS manual guided graders to “Adhere to this axiom: Say it and forget it, write it and regret it.”
In a 23-page response, the Missouri Department of Health and Human Services (DHSS), which encompasses the DCR, discounted the report’s findings and defended the division’s application process. DHSS Director Sarah Willson and DCR Director Amy Moore signed the response.
They called the state auditor’s office’s claim, that the licensing process lacked consistency and transparency, contradictory to the state’s Administrative Hearing Commission (AHC), which it called a “neutral and competent factfinder” that repeatedly found the application scoring system processes and results to be “consistent and fair.”
“In its review of the initial medical marijuana licensing system, the [state auditor’s office] has failed to appropriately consider the more extensive, more expert, and more unbiased review by the AHC of the very same processes,” the DHSS and DCR directors wrote in the response. “In doing so, the [state auditor’s office] has reached unsupportable conclusions directly in conflict with AHC results, irresponsibly renewing allegations long resolved in DHSS’s favor.”
An 'Unrepresentative Sample'
The DHSS response also targeted the audit’s sample of 67 applications, calling it too small and a biased reflection of the 2,257 applications that were scored in 2019.
Moreover, the DHSS response notes that of the 67 applications reviewed in the audit, 42 were randomly selected and 25 were selected judgmentally by Fitzpatrick’s office.
“This is an unrepresentative sample, and more than a third of the small sample was cherry-picked rather than selected at random,” the DHSS and DCR directors wrote. “Data-based conclusions are generally unreliable when based on unrepresentative samples.”
To Willson and Moore’s point, of the 67 applications included in the audit, 35 (52%) were denied a license, while 32 (48%) were approved, meaning the sample was heavily skewed toward including more awardees.
In reality, 85% of the state’s 2,257 applications were denied, while 15% were approved for licensure.
This means that Fitzpatrick’s office more than likely overstated its determination that 18% of applicants based their unique identifiers on their company’s name because the audit’s sample wasn’t reflective of the actual pool.
While the auditor’s report gave the state’s licensed cannabis program a “fair” rating, Fitzpatrick said there were significant issues with the application process that “cast a shadow over the program.”
The state auditor also claimed that DHSS officials were “uncooperative” with his office throughout the audit, and that their response contained “derogatory and inflammatory language” meant to discount the report’s findings.
“I was surprised and disappointed by the adversarial tone the department took with our audit team and the repeated attempts agency officials made to undermine the legitimacy of this report,” he said. “An audit is meant to be a helpful tool to enhance government efficiency, and I am confident our report found several areas where the department can and should improve. I sincerely hope they will change their attitude and view this report as the beneficial roadmap it is meant to be.”
Among the audit’s recommendations was for the DCR to improve its oversight and monitor procedures through inventory inspections to prevent and discourage diversion into the unregulated market.
The state auditor’s office’s report concluded that Metrc, the state’s track-and-trace system provider that serves the majority of state-legal programs, was not well-equipped to identify purchases over the state’s legal transaction quantity limits in real time. In other words, the report found that adult-use customers could purchase more than what’s allowed under law, leading to an “increased risk of diversion and a public safety concern,” according to the report.
Willson and Moore said in their response that the claims of “inadequate” market oversight stem from the state auditor’s office’s “lack of regulatory expertise” and understanding of the cannabis program.
“The [state auditor’s office] is inappropriately fixated on physical inspections as the primary mechanism for detecting and preventing diversion of marijuana product,” the DHSS and DCR directors wrote. “Seed-to-sale data analysis is the gold standard for detecting inversion and diversion throughout states with a regulated marijuana market.”
The directors also said that while the DHSS welcomes constructive input on how to better administer its programs, the report’s findings are neither helpful nor constructive because the state auditor’s office is “determined to make findings that substitute speculative inferences” for facts that are well-established.
Willson and Moore wrote, “The [state auditor’s office] has not understood basic concepts of the medical marijuana facility licensing system required by rule and law, and has reached inaccurate and unsupported conclusions about DHSS’s oversight of licensed cannabis facilities, and has ignored numerous attempts by DHSS to clarify the [state auditor’s office] understanding, even to the point of ignoring documentary evidence showing that purported facts in the [state auditor’s office’s] report are false.”
