Direct Contracting and ERISA Fiduciary Duty: What Self-Insured Employers Are Getting Wrong

Direct contracting is gaining traction. Employers are bypassing carriers to negotiate directly with hospitals, surgery centers, and physician groups — cutting out the middleman and, in theory, paying closer to actual cost. The savings are real: employers with mature direct contracts report 20–40% reductions on targeted services compared to their previous network rates (Health Rosetta, 2024).

But there's a compliance layer most employers skip entirely: ERISA.

If you sponsor a self-insured health plan, you are an ERISA plan fiduciary. That status doesn't disappear when you switch from a carrier-administered plan to a direct arrangement. In many ways, it becomes more visible — and more exposed.

What ERISA Actually Requires of Plan Fiduciaries

ERISA Section 404(a) sets the standard. Plan fiduciaries must act:

• Solely in the interest of plan participants and beneficiaries
• For the exclusive purpose of providing benefits and defraying reasonable plan expenses
• With the care, skill, prudence, and diligence of a prudent expert — not just a prudent layperson

That last point is the one employers underestimate. Courts interpret "prudent expert" to mean someone familiar with employee benefit plan management. Ignorance of the rules is not a defense.

The Department of Labor can — and does — investigate plan sponsors. Civil penalties under ERISA Section 502(l) run 20% of the recovered amount. Personal liability for plan fiduciaries is not capped.

Three Fiduciary Obligations That Direct Contracting Triggers

1. Prudent Selection and Monitoring of Service Providers

When you hire a TPA, a direct primary care provider, a center of excellence, or a reference-based pricing administrator to support your direct contract, you are selecting a service provider for an ERISA plan. That selection requires a documented, prudent process.

What this looks like in practice:

• Issuing a formal RFP and evaluating at least two or three providers on defined criteria
• Reviewing the provider's financial stability, credentials, and any conflict-of-interest disclosures
• Documenting the decision and the rationale in writing before executing a contract
• Establishing ongoing monitoring — quarterly or annual reviews of cost, quality, and access outcomes

Employers frequently sign a direct contract with a health system after an informal conversation with a hospital CFO. No RFP, no documented comparison, no monitoring framework. That process does not meet the prudent expert standard.

2. Identifying and Managing Conflicts of Interest

ERISA Section 406 prohibits certain transactions between the plan and parties in interest. It also requires fiduciaries to evaluate and manage conflicts when service providers have financial relationships that could affect their objectivity.

In a direct contracting context, conflicts surface in places employers don't expect:

• Your benefits broker receives commissions or consulting fees from the health system you're contracting with
• Your TPA has a preferred vendor relationship with the reference-based pricing firm you're evaluating
• A hospital CFO sits on your company's board, and your plan is negotiating with that hospital

None of these arrangements are automatically prohibited, but they must be disclosed, documented, and actively managed. Under the CAA 2021, brokers and consultants to ERISA plans are now required to disclose compensation exceeding $1,000 annually — direct or indirect. If your broker has a financial relationship with any party to your direct contract, you need that disclosure in writing before finalizing the arrangement.

3. Ensuring Reasonable Compensation

ERISA requires that plan expenses be reasonable. In a direct contract, you're setting the price — which means you own the analysis of whether that price is reasonable for plan participants.

This cuts both ways. If you negotiate a bundled rate for a hip replacement at $28,000 and the Medicare rate for the same procedure at the same facility is $18,000, you need a documented rationale for why that delta is reasonable. Medicare rates are not a ceiling — plenty of direct contracts legitimately price above Medicare — but the analysis needs to exist.

The same applies to administrative fees. If your TPA charges a per-member-per-month fee plus a percentage of savings, document how you evaluated that structure and why it represents reasonable compensation for services rendered.

The Plan Document Problem

Direct contracts almost always outpace plan document updates. An employer signs a direct contract with a regional health system in January. The plan document still references the carrier network from the prior year and says nothing about the direct arrangement or how benefits will be adjudicated under it.

This creates two problems:

First, the plan document governs. Under ERISA, participants are entitled to benefits as described in the plan document. If your plan document doesn't describe the direct contract arrangement, adjudicating claims under that arrangement creates legal exposure.

Second, the SPD must reflect how the plan actually works. Summary Plan Descriptions are legal documents. If your SPD says benefits are processed through a specific network and that network is no longer your primary arrangement, your SPD is inaccurate. You have 60 days to issue an SMM (Summary of Material Modification) when plan terms change materially.

Most employers with direct contracts are operating 6–18 months behind on plan document and SPD updates. That gap is a compliance liability.

What a Defensible Fiduciary Process Looks Like

You don't need to eliminate risk — ERISA doesn't require perfect outcomes. It requires a prudent process. Here's the minimum documentation every employer with a direct contract should maintain:

Decision Point	Required Documentation
Provider/health system selection	RFP, evaluation criteria, scoring, written rationale
Pricing and rate-setting	Benchmarking data (Medicare, FAIR Health, or actuarial analysis)
Broker/consultant compensation	CAA 2021 disclosure, signed acknowledgment
Conflict-of-interest review	Attestation from all service providers, internal review memo
Ongoing monitoring	Annual performance review, documented outcomes vs. benchmarks
Plan document alignment	Updated plan document and SPD, SMM filing dates

Keep this documentation in a fiduciary file separate from general HR records. If the DOL audits your plan, this file is what you hand them.

The Oversight Gap: Who's Actually Watching

Most HR directors assume their TPA is handling compliance. Most TPAs assume the employer's ERISA counsel is reviewing plan documents. Most ERISA counsel doesn't know the direct contract exists until there's a problem.

In a traditional fully-insured arrangement, the carrier absorbs most compliance risk. In a self-insured direct contracting arrangement, the employer holds it. That's the trade-off. The savings are real, but so is the accountability.

Assign a named fiduciary for your health plan — someone with the authority and knowledge to oversee plan administration. This can be the CFO, the VP of HR, or a benefits committee. Document the assignment. Define the scope of authority. Review it annually.

The Bottom Line

Direct contracting is a legitimate cost management strategy. The fiduciary obligations attached to it are not optional, and they're not complicated — but they require deliberate attention.

Do the RFP. Get the disclosures in writing. Update the plan document. Keep the file.

The employers who get into trouble aren't the ones making bad deals. They're the ones making good deals without the paperwork to prove the process was sound.