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Utah orders startup to raise prices so competitors are "treated fairly"

Utah's state capitol.
Utah's state capitol.
Jordan McAlister / Getty
  1. Utah insurance regulators are taking action against Zenefits, a technology startup that helps small businesses manage their human resource needs.
  2. Zenefits offers a free website that helps companies manage payroll, vacation time, health insurance, and so forth.
  3. Zenefits makes money if companies choose to purchase services such as health insurance through the website.
  4. But a Utah regulator says offering free access to its website violates state insurance laws, which make it illegal to offer companies "inducements" to purchase insurance.

Regulators say Zenefits giving away access to its website is unfair to other insurance brokers

In a November 20 letter to Zenefits, the Utah Insurance Department argued that the technology company's business model violated state law.

"The Utah Insurance Department has an important responsibility to maintain a fair, competitive insurance business environment for all licensees" — e.g. insurance brokers, wrote commissioner Todd Kiser. "Some of the main purposes of the Utah Insurance Code are to ensure not only that insurance consumers are protected and treated fairly, but that licensees are treated fairly within a financially healthy and adequate insurance market that is not only characterized by innovation, but also by fair conditions of competition for all insurance licensees."

Kiser says the regulations are also intended to ensure that companies choose insurance for their employees based on the objective merits of the insurance products being offered, instead of taking whatever insurance happens to be available on the Zenefits platform.

Zenefits is being asked to pay $50,000 to settle the charges

Kiser says he could charge Zenefits $97,000 based on the company's actions. However, he is offering Zenefits the opportunity to settle the charges for a mere $50,000.

Zenefits would also be required to start charging a "fair market value fee" to Utah employers using the Zenefits website.

Does this make any sense?

Not really.

Kiser claims he's in favor of innovation in the insurance market. But the rule he's enforcing effectively makes it illegal for insurance brokers who innovate to pass the savings on to consumers. That protects incumbent insurance brokers at the expense of employers and their employees.

Recent years have seen similar fights in other industries as well. For example, protectionist regulations in some states make it illegal for the electric car company Tesla to sell cars directly to consumers. That forces consumers to pay the markup charged by incumbent auto dealerships.