Utah takes a rare insurance misstep
An administrative agency has again found itself at odds with free-market innovation. In this case, Utah’s Department of Insurance has demanded that a popular new web based human resources platform named Zenefits (which we use here at R Street) cease operation in the state unless it accedes to the Department’s demands.
Zenefits operates an online human resources platform and doesn’t charge its customers anything. It makes money by serving as an insurance broker for these same customers. Under Utah’s ruling, Zenefits can only continue to operate in the state if it starts charging more for its services. The Department, helpfully, has even given Zenefits a list of prices it should begin imposing on customers who currently don’t directly pay the company a dime.
What makes this scenario bizarre is that Utah is, more often than not, a paragon of reasonability when it comes to insurance regulation. In fact, according to R Street’s yearly insurance regulatory report card, Utah ranks among the nation’s best jurisdictions to buy and sell insurance.
The problem is political, structural and interpretive.
A group of Utah insurance brokers, apparently unable to modernize their business models, managed to get the ear of the Commissioner and request that he act to build a palisade around them to prevent competition. It worked and now the citizens of Utah are about to be denied the benefits of modernization and a tool that a lot of businesses find useful.
Structurally, statutes that were promulgated many decades ago and meant to address one set of concerns are susceptible to being applied with anti-competitive results. The evolving state of business was totally unknowable when the statute was adopted.
In the case of Zenefits, the particular statute in question is known as an “Anti-Rebating Statute.” Forty-eight states and the District of Columbia have an Anti-Rebating Statute, many of which are based upon a model promulgated by the National Association of Insurance Commissioners.
As originally conceived, the purpose of a statute to prevent rebating was to preclude insurers from offering services outside of the terms of an insurance policy because of a fear that an insurer might pose an insolvency risk by incentivizing their product beyond the scope of state regulated rating structures. In other words, regulators did not wish to see insurers return crucial policyholder protection dollars (surplus) to their insured in the form of off-the-books benefits. Furthermore, there’s some fear that brokers might use the statutes to offer various kinds of questionable kickbacks.
If applied in the spirit of its enactment, Anti-Rebating Statutes could potentially be in the best tradition of what state-based insurance regulation is intended to accomplish: thriving and reliably solvent marketplaces.
If there ever was a good reason for Anti-Rebating Statutes, however, that day has probably passed. There are plenty of ways to monitor insurer solvency without outright banning a practice that benefits consumers. Common practices like policy dividends from mutual insurers and accident avoidance checks provide post-premium discounts already and haven’t resulted in anyone’s solvency being endangered. There are plenty of ways to modify producer conduct without straightforwardly banning something that consumers really want to have.
Interpretively, the Utah Department is reading its Anti-Rebating Statute in such a manner that Zenefits’ willingness to offer an online HR portal for free is prohibited. As Zenefits and other companies with a similar business model expand nationally, Utah finds itself in a minority, protectionist position and ultimately it will be left behind.
As market-oriented as Utah is in so many matters it is surprising to see that rather than introducing legislation in the 2015 session to modernize (okay, repeal) the “anti-rebating” laws to promote regulated competition, we see the Department clinging to outmoded legislation that now benefits the few at the expense of the many.
The fix would not be difficult if the will existed. It’s not too late, and the Department still has some time before the introduction of the legislative session to work with the industry to accommodate a new “disruptive technology.”
