Zenefits was reportedly one of the fastest-growing companies in Silicon Valley, a region famous for giving birth to companies that undergo tremendous growth spurts. The startup, which distributes free administrative software to businesses and works as a health insurance broker, was dealt a serious blow last fall when a BuzzFeed News investigation revealed that the company had not been obtaining licenses necessary to sell insurance in individual states. Yesterday, the company announced that its chief executive, Parker Conrad, had stepped down and that it was making regulatory compliance a priority.
Zenefits is just the latest example of a high-flying startup trying to revolutionize the health-care space, only to discover along the way that Silicon Valley's philosophy of disruptive innovation can be more difficult to apply to health care than in the digital world. Silicon Valley's taglines usually involve transforming an industry and changing the world. But in health care, where life and death can hang in the balance, less thrilling matters such as licensing procedures can be everything. What Zenefits' tumult shows is how easy it is to break longstanding rules while trying to change how an industry works with outside-the-box thinking.
In an email to employees, David Sacks, the company's chief operating officer, who is taking the helm, said the company's problems with licensing requirements were serious and were being tackled. But he acknowledged that the problems went deeper.
"Our culture and tone have been inappropriate for a highly regulated company," Sacks wrote. "Zenefits’ company values were forged at a time when the emphasis was on discovering a new market, and the company did that brilliantly. Now we have moved into a new phase of delivering at scale and needing to win the trust of customers, regulators, and other stakeholders."
According to BuzzFeed's investigation published in November, Zenefits was acting as a middleman in the insurance industry but failed to comply with legal requirements that people who sell health insurance policies be licensed in states where they sell it.
For example, BuzzFeed reported that it was two years after the company launched that it created a system to track whether its sales representatives had licenses in states, and reported that former employees said management was less concerned with the requirement than meeting sales quotas. Washington state regulators were looking into whether the company was operating legally, according to BuzzFeed.
The company had previously run into resistance when the state of Utah in 2014 sent a violation letter to the company, alleging that the free software it provided — a key part of its disruptive strategy — amounted to an illegal kickback. The ban on Zenefits' free software was later reversed by passage of a law.
It's just the latest example of an exciting Silicon Valley health-care company running afoul of legal requirements.
After successfully creating tremendous excitement about a secretive new product that was supposed to change the world, blood testing company Theranos has also gotten tangled up in questions from regulators. A Wall Street Journal investigation revealed that the company had been reduced to using just one of its hundreds of proprietary finger prick blood tests. Last month, regulators from the Centers for Medicare and Medicaid Services sent a letter to Theranos warning that deficiencies in its California laboratory posed "immediate jeopardy" to public health. The company was granted an extension on its timeline to respond to that letter.
All this goes to show the complexity of bringing the kind of tactics that have made America's tech industry a world leader to health care. When lives hang in the balance, there are far more rules than when creating new gadgets.
Zenefits appears to be publicizing its embrace of a strategy less rhetorically exciting than changing the world, but every bit as important in health care:
“Zenefits’ goal is to create best-in-class compliance,” Sacks said in a news release. “We are committed to having robust administrative and technical controls in place that ensure strict and total compliance.”
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