Why Utah is demanding an insurance startup charge its customers more money

Utah Governor Gary Herbert has an inducement problem.
Utah Governor Gary Herbert has an inducement problem.
Image: (AP Photo/Rick Bowmer
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Zenefits, a startup that uses free human resources software to help market its insurance brokerage business, has been banned in the state of Utah for not charging enough money.

It’s the latest case of regulation clashing with a disruptive business idea, à la Uber or bitcoin, where well-intentioned rules become a proxy for protecting incumbent businesses.

In Utah, as in many states, it is against the law for insurance brokers to give rebates, kickbacks, or other inducements to potential customers in exchange for their business. You can see the problem this is trying to solve: If a company is getting a kickback from its broker, that may make it more susceptible to choosing bad insurance for its employees. The goal is that have firms buying insurance based on the quality of insurance, not any extraneous factor.

In the case of Zenefits, Utah’s top insurance regulator, Todd Kiser, says that the company’s free software counts as “an inducement and indirect rebate” to use the firm as an insurance broker, in violation of the state’s law, even though customers don’t need to buy its insurance products to use the software. So for now, if Zenefits wants to keep operating in Utah, it needs to start charging for its free service.

In other circumstances, the company might endorse Kiser’s analysis, which goes out of its way to note all the advantages that come with uniting HR services from payroll to health insurance in one web portal. But in this case, those advantages are being treated as a bribe, not a consumer benefit.

Zenefits says that this is the wrong analysis, even under Utah law: How can something be a rebate or inducement if you don’t need to do anything to get it? The company’s take is that traditional insurance brokers, often reliant on paper forms and fax machines, just don’t like the competition that Zenefits’ online services provide. Its CEO makes a point of noting that Kiser himself ran an insurance brokerage before his current job.

The company says that if Utah Governor Gary Herbert, who is trying to attract more tech firms to his state, doesn’t overturn the ban, it will fight this ruling in the courts. Other states with similar concerns have declined to shutter Zenefits’ business, and New York recently ruled that insurance brokers offering free wellness software aren’t in violation of inducement bans there.