Two Steps Forward, One Step Back

When news broke that the Utah Department of Insurance found that popular new benefits company Zenefits was not in compliance with state insurance law, and would have to alter its operation or cease transacting business, there was an outcry from free marketers and Silicon Valley-types alike. At R Street, we were surprised by the department’s decision because Utah is otherwise such a great state to engage in the business of insurance.

Subsequently, the department has faced local scrutiny. Gov. Gary Herbert has signaled his willingness to seek reform and there is word of a legislative vehicle sponsored by state Rep. John Knotwell, R-Herriman, to amend the statute in question.

Since a political resolution to the department’s action appears to be in the works, it would be worthwhile to reflect on a few principles for regulating fast-moving, “disruptive” market actors:

• Tread lightly: Unless and until specific harms are experienced, the decision to regulate, or to enforce ill-fitting law in a novel context, should be weighed thoughtfully against the deleterious impact such measures could have on new market actors.

Utah already has crossed this threshold. By doing so, the Department of Insurance has necessitated a costly and contentious response by Zenefits.

Prospectively accounting for the need to tread lightly, policymakers should circumscribe the interpretive discretion of insurance regulators. They can do so by stating, explicitly, their intention to see particular statutes applied to the circumstances they are contemplating at the time the statute is promulgated.

• Strive for neutrality: Existing market participants enjoy the benefit of having familiarity with and, often, an impact on the laws that govern them. That reality doesn’t always pose a problem, but the significance of in-built structural advantages counsels for mindfulness of a statute’s original purpose.

For instance, in the case of anti-rebating statutes like the one Zenefits was deemed to have violated, the original purpose was twofold. First, statutes sought to ensure that insurer solvency was not compromised by the distribution of potentially rate-distorting ancillary benefits. Second, there was a desire to protect similarly situated consumers from illegally experiencing different treatment.

Zenefits’ alleged transgression is its willingness to offer a web-based human resources portal for free while also selling insurance benefits. The trouble is that the statute inadvertently inhibits a new model that bundles service without violating the purpose of the statute. As described by Joe Markland of Employee Benefit News:

If I buy the system, I get the HR and benefits parts whether I use them or not. One of the leading systems I know charges $5 (per employee per month) for its system. Without the HR, it is $5. With the HR, it is $5. The Utah Insurance laws treat these systems like they are different systems when they are not.

Legislative specificity goes hand-in-hand with neutral enforcement of the law, mindful of statutory purpose

The 21^st century is an age of wonders. Never before has the world experienced a pace of change like that experienced today. Inevitably, old regulatory models will struggle with fast-paced market innovations. Zenefits is just the latest firm to be frustrated by an old model. Fortunately, Utah has an opportunity to quickly address not only the confusion surrounding the statute in question, but also confusion on the part of its regulatory apparatus.

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