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An Audit Report on

Management of
Correctional Managed
Health Care Contracts
November 2004
Report No. 05-012

Lawrence F. Alwin, CPA
State Auditor

An Audit Report on

Management of Correctional Managed Health Care
Contracts
SAO Report No. 05-012
November 2004

Overall Conclusion
Deficiencies in the Correctional Managed Health
Care Committee’s (Committee) management of
inmate health care and potential conflicts of
interest between the Committee and university
providers could indicate that a separate committee
is no longer critical to the management of contracts
for inmate health care.
The contracts between the Committee and
university providers do not ensure that the interests
of the State are protected or that university
providers are held accountable for the cost-efficient
delivery of quality services. Furthermore, the
Committee does not provide sufficient fiscal
oversight of the funds appropriated to provide
health care to prison inmates. In fiscal year 2004,
these funds totaled approximately $330 million.
Without sufficient fiscal oversight, the Committee
cannot ensure that state funds are spent
appropriately, nor can it support its requests for
funding.

Inmate Health Care in Texas
In 1994, the State implemented a
managed health care plan for prison
inmates to reduce the cost of providing
legally mandated health care. The
Correctional Managed Health Care
Committee (Committee) was
subsequently established and charged
with developing and administering
managed care. Currently, the
Department of Criminal Justice
(Department) contracts with the
Committee, which in turn contracts with
university health care providers.
The University of Texas Medical Branch
at Galveston covers the southern and
eastern parts of the state and provides
health care to approximately 77 percent
of prison inmates. The Texas Tech
University Health Sciences Center covers
the western part of the State and
provides health care to approximately
23 percent of prison inmates.
In the 2004-2005 biennium,
approximately $330 million per year was
appropriated to the Department for the
health care of an estimated 150,000
inmates.

Key Points
A separate committee may no longer be critical to the management of contracts
for inmate health care.
The current structure and duties of the Committee may not be essential to the
management of contracts for inmate health care. Many of the Committee’s contractual
duties are actually performed by either the Department of Criminal Justice (Department)
or university providers. The Committee includes two representatives from each university
provider, two employees from the Department, and three public members. In addition, in
fiscal year 2003, the Committee had five full-time staff members and expenditures of
approximately $636,000. Of that amount, 92 percent was spent on salaries and benefits for
the Committee’s staff.
There are still potential conflicts of interest in the relationships between the Committee
and university providers. These potential conflicts may make contract provisions difficult
to enforce and may contribute to a lack of fiscal oversight. We first reported similar issues
in January 1998 (see An Audit Report on Managed Health Care at the Texas Department of
Criminal Justice, SAO Report No. 98-013).

This audit was conducted in accordance with Texas Government Code, Sections 321.0131 and 321.0132.
For more information regarding this report, please contact Nicole Guerrero, Audit Manager, at (512) 936-9500.

An Audit Report on
Management of Correctional Managed Health Care Contracts
SAO Report No. 05-012

The Committee’s contracts for inmate health care lack necessary provisions to
ensure accountability and the appropriateness of expenditures.
The contracts between the Committee and university providers lack basic provisions such
as those for the evaluation of contractor performance, remedies for nonperformance, and
financial reporting requirements. In addition, because the Committee does not require
university providers to maintain or report complete, detailed financial records, we were
unable to determine whether the current appropriations amount represents the true cost
of providing inmate health care.
The contracts between the Committee and university providers also do not specify
allowable and unallowable costs. As a result, the University of Texas Medical Branch at
Galveston (UTMB, the university provider serving approximately 77 percent of inmates) has
spent state funds it received to provide inmate health care services on items that are not
allowable under state law but that may be allowable using UTMB’s local funds. These
items include food and gifts for employees, flowers, and moving expenses for newly hired
employees. In addition, we found expenses that UTMB allocated to its contract with the
Committee but did not appropriately allocate among the various entities for which it
provides health care services. UTMB provides health care services to other entities,
including the Texas Youth Commission and several federal prisons and county jails.

The Committee’s monitoring of funds appropriated for inmate health care is not
sufficient to ensure that funds are spent appropriately.
From fiscal year 2001 through fiscal year 2003, the Committee paid university providers a
total of $15.7 million above the agreed-upon rate as a “loss reimbursement” without
reviewing sufficient documentation to determine whether university providers had actually
incurred financial losses. In addition, the Committee has not reported complete and
accurate information regarding its finances to state decision makers. While the Committee
has consistently held available ending balances in each of the past eight fiscal years, it has
not reported all of these balances. The available ending balance was as high as $31.8
million at the end of fiscal year 2000.

Summary of Management’s Response
Management’s response indicates that it concurs with and plans to implement most of our
recommendations. However, many of the responses provided information that warranted
an auditor follow-up comment. The full text of management’s responses can be found in
Appendix 6.

Summary of Information Technology Review
Because both the Committee’s financial accounts and UTMB’s financial accounts for fiscal
year 2004 were maintained in PeopleSoft, we reviewed access controls, input controls, and
change management processes for the PeopleSoft financial systems at UTMB. UTMB
implemented the PeopleSoft financial system in September 2003 (at the beginning of fiscal
year 2004). We did not identify any reportable issues regarding the PeopleSoft financial
system at UTMB. We reviewed this system only as it related to correctional managed

ii

An Audit Report on
Management of Correctional Managed Health Care Contracts
SAO Report No. 05-012

health care accounts. Although we also reviewed data from prior years, we did not test
the prior financial reporting system. We relied on previous audit work we had performed
on UTMB’s prior financial reporting system. That work had determined that the data from
the prior system was reliable. We did not audit UTMB’s automated pharmacy system
because that system is scheduled for replacement soon.

Summary of Objectives, Scope, and Methodology
The objectives of this audit were to determine whether:
¾ Procurement processes are sufficient to ensure that the best contractors are fairly and

objectively selected.
¾ Contract provisions are sufficient to hold contractors accountable for delivery of quality

services and prevent the inappropriate or inefficient use of public funds.
¾ The methods that are used to establish contractor reimbursement are sufficient to

ensure that the State pays a fair and reasonable price for services.

¾ Contractor oversight is sufficient to ensure that contractors consistently provide quality

services and that public funds are spent effectively and efficiently.

The scope of our audit included the review of correctional managed health care contract
provisions for the 2002-2003 and 2004-2005 biennia. We reviewed expenditures and cost
allocation systems at UTMB that were related to the managed health care appropriation.
Our review of financial data covered the period from September 1995 through May 2004. At
the Department, we reviewed monitoring program processes and results from September
2002 through May 2004. We did not perform any financial audit work at the Texas Tech
Health Sciences Center or at the Department.
Our methodology included reviewing the accuracy of the Committee’s financial data;
verifying the reported costs of inmate health care; interviewing staff of the Committee,
UTMB, Texas Tech Health Sciences Center, the Department, and the Legislative Budget
Board; and reviewing the contracts between the Committee and the Department and
between the Committee and university providers.

iii

An Audit Report on
Management of Correctional Managed Health Care Contracts
SAO Report No. 05-012

Recent SAO Work
Number

Product Name

Release Date

05-002

An Audit Report on Contract Administration in the Department of Criminal Justice’s
Community Justice Assistance Division

September 2004

03-048

A Review of State Entities' Preparedness for Compliance with the Health Insurance
Portability and Accountability Act

August 2003

03-025

An Audit Report on Compliance with Benefits Proportional by Fund Requirements at
20 State Entities

March 2003

02-070

An Audit Report on State Entity Management of Travel Advance and Petty Cash Funds

August 2002

02-039

A Review of State Entity Compliance with the Public Funds Investment Act

May 2002

02-022

An Audit Report on Procurement Card Processes and Controls

February 2002

02-013

An Audit Report on the Accuracy of Criminal Justice Information System Data at the
Department of Public Safety and the Department of Criminal Justice

December 2001

02-012

An Audit Report on Department of Criminal Justice Standards and Reporting Related
to Retirement Credit for Custodial Officers

December 2001

01-036

An Audit Report on Performance Measures at 12 State Entities - Fiscal Year 2001

August 2001

01-035

An Audit Report on 19 Agencies' Compliance with Historically Underutilized Business
Requirements

August 2001

01-019

An Audit Report on Correctional Officer Staffing at the Department of Criminal
Justice

February 2001

00-043

An Audit Report on Compliance with Revised Historically Underutilized Business
Requirements

August 2000

00-033

A Report on State Entities' Compliance with the Public Funds Investment Act

July 2000

00-031

An Audit Report on Construction and Maintenance at the Department of Criminal
Justice

June 2000

00-555

The 1999 Statewide Single Audit Report

May 2000

00-015

A Review of Department of Criminal Justice Inmate Transportation

February 2000

iv

Contents
Detailed Results
Chapter 1

A Separate Committee May No Longer Be Critical to the
Management of Contracts for Inmate Health Care...................... 1
Chapter 2

The Committee’s Contracts For Inmate Health Care Lack
Necessary Provisions to Ensure Accountability and the
Appropriateness of Expenditures .......................................... 6
Chapter 3

The Committee’s Monitoring of Funds Appropriated for
Inmate Health Care Is Not Sufficient to Ensure That Funds Are
Spent Appropriately ......................................................... 14
Chapter 4

The Committee Does Not Report Detailed Financial
Information to State Decision Makers .................................... 21

Appendices
Appendix 1

Objectives, Scope, and Methodology..................................... 27
Appendix 2

Correctional Managed Health Care Timeline............................ 30
Appendix 3

Texas Incarceration Facilities Map........................................ 31
Appendix 4

Trends in the Costs of Certain Drugs ..................................... 32
Appendix 5

Financial Information Compiled by the Committee.................... 36

Detailed Results
Chapter 1

A Separate Committee May No Longer Be Critical to the Management
of Contracts for Inmate Health Care
Although the Correctional Managed Health Care Committee (Committee) played a
significant part in moving inmate health care to a managed care system, there are
indications that, as it is currently structured, the Committee may no longer be critical
to the management of contracts for inmate health care. Specifically, the composition
of the Committee and its staff and the Committee’s operating structure may make it
difficult for the Committee to carry out its responsibility to administer the inmate
managed care program. Chapters 2 and 3 discuss the deficiencies in the Committee’s
contract management.
Half of the current Committee members are employed by university providers, which
may make it difficult for the Committee to effectively and independently manage its
contracts. The Committee is responsible for negotiating contracts between the

Department of Criminal Justice (Department) and the Committee and between the
Committee and university providers.1 To be effective and independent, the
Committee must be able to resolve conflicts regarding the needs of the university
providers, the Department, and the inmates. The current university providers are the
University of Texas Medical School at Galveston (UTMB) and the Texas Tech
Health Sciences Center (Texas Tech).
By statute, the Committee includes nine members: two from UTMB, two from Texas
Tech, two from the Department, and three from the public. Two of the public
members must be physicians. This requirement has the potential to cause a conflict
of interest because many physicians in Texas are likely to have ties to one of the
university providers. Furthermore, one of the physician public members resigned in
August 2001 and has not yet been replaced. This leaves the Committee with eight
members, four of whom are representatives of university providers. One of these four
members is the Committee chair. (Appendix 2 includes a time line of important
events and changes over the history of the correctional managed health care system.)
The composition of the Committee’s staff and its operating structure may contribute to
the Committee’s lack of fiscal oversight of university providers. The Committee’s four

current staff members are charged with the day-to-day management of the contracts
with university providers. However, these staff members—an executive director, an
assistant director, a chief financial officer, and an administrative technician—
maintain that the staff is not structured to perform detailed fiscal monitoring. Instead,
they compile high-level information from the university providers for the Committee
members’ use. Consequently, the Committee does not have sufficient information to
determine the accuracy of the costs reported by university providers. Statute requires

1

Currently, the Department of Criminal Justice contracts with the Committee, which, in turn, contracts with the university
providers.

An Audit Report on Management of Correctional Managed Health Care Contracts
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November 2004
Page 1

the Committee to set a per-inmate-per-day capitation rate based on the true cost of
providing inmate health care (see Chapter 2-B).
As Table 1 shows, many of the Committee’s contractual responsibilities are actually
performed by either the Department or the university providers. The Committee’s
staff members are not required to have a medical background or medical knowledge.
This means that any disputes of a medical nature must be resolved by the
Department’s and university providers’ medical directors. Committee staff members
attend some of the meetings regarding the provision of inmate health care, but they
do not play a significant role in the monitoring process (see Chapter 3-B). The
Committee’s fiscal year 2003 expenditures totaled approximately $636,000. Of that
amount, 92 percent (or $584,095) was spent on five full-time staff members’ salaries
and benefits. In September 2003, the Committee’s four current staff members
received salary increases of approximately 3 percent.
Table 1: Many of the responsibilities assigned to the Committee in the contract between the Committee and the Department are
actually performed by the Department or university providers. The contracts between the Committee and university providers
primarily assign the Committee responsibilities that relate to billing for services and the payment of funds, functions which are
performed by the Committee’s staff.

Contractual Responsibilities of the Correctional Managed Health Care Committee
Responsibility

Function Performed By

Provide a uniform level of health care consistent with the
accepted national standards of care.

University providers perform this function.

Implement and monitor correctional managed health care
services for inmates confined in institutions.

The Department and university providers perform this function.

Perform fiscal oversight, appropriation formulation, and
budget allocation.

The Committee is responsible for performing this function, but its
fiscal oversight is not sufficient (see Chapter 3-A). Committee
staff formulates information that the Department then
incorporates into its appropriation request and budget.

Determine the capitation rates, which reflect the true cost
of correctional health care and cost-containment studies.

The Committee determines a capitation rate, but its monitoring
procedures do not provide assurance that rates reflect the true
cost of services (see Chapter 2-B).

Provide health care services to support private corrections
facilities and state jails.

UTMB provides health care in most private corrections facilities
and in state jails.

Review and respond to inmate grievances in a timely
manner.

The Department and university providers perform this function.

Ensure that university providers properly allocate
expenditures and segregate funding sources for Department
and non-Department programs.

The Committee is responsible for performing this function;
however, its monitoring of the allocation of expenditures is not
sufficient (see Chapter 3-A).

Establish procedures for monitoring the quality of care
delivered by the health care providers and enforce
compliance with the contract provisions.

The Department has developed procedures for monitoring the
quality of health care. University providers monitor the quality
of care. The Department also has mechanisms for participating in
the process to monitor quality of care. Contract disputes of a
medical nature are resolved among the various medical directors
(see Chapter 3-B).

Develop written procedures for monitoring the correctional
health care system and for monitoring operational results
and overall performance or compliance.

The Department has developed written procedures for monitoring
the provision of health care. A member of the Committee’s staff
co-chairs the policy and procedure committee (see Chapter 3-B).

Operationally, the Committee is closely tied to UTMB, which may compromise the
Committee staff’s ability to monitor its contract with UTMB. For example:

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Page 2

ƒ

The Committee maintains its funds in two accounts at UTMB, and the funds it
uses to make quarterly payments for inmate health care are held in UTMB’s bank
accounts (see Chapter 3-A). The Committee relies on UTMB’s accounting
department to maintain its accounting records.

ƒ

The Committee relies on the university providers and the Department’s legal
departments to review (on its behalf) the Committee’s contracts with university
providers.

ƒ

Committee staff members are paid by UTMB’s payroll system and participate in
the same retirement system as UTMB employees.

Other entities that contract for inmate managed care contract directly with the health
care provider. To provide health care for youth incarcerated in Texas Youth

Commission (TYC) facilities, TYC contracts directly with the same university
providers that the Committee contracts with. There is not an intermediate entity
between TYC and the university providers. In addition, UTMB has other contracts to
provide health care to individuals incarcerated in some county and federal facilities
across the state, and these contracts do not include an intermediate entity such as the
Committee.
Alternative options for managing inmate health care contracts include (1) allowing
the Department to contract directly with university providers or (2) appropriating the
funds for inmate health care directly to university providers themselves.
Implementing either of these options would require increasing the amount of fiscal
and program oversight authority the Department has over university providers’
contracts and the provision of inmate health care.
Recommendations
To carry out its responsibilities independently and effectively, the Committee should:
ƒ

Perform all of its contractual requirements, including monitoring the financial
aspects of the contract and mediating disputes concerning medical issues.

ƒ

Separate its accounting and payroll functions from UTMB.

Management’s Response
ƒ

The CMHCC agrees with this recommendation, including enhancing the
monitoring of the financial aspects of the contract. The CMHCC however, notes
that it is already involved in mediating disputes concerning medical issues as the
Chair of the CMHCC oversees regular medical directors meetings where such
issues are discussed and mediated. In addition, the TDCJ Medical Director is
also a member of the CMHCC. To the extent that the medical directors cannot
reach a consensus through this mechanism, such issues can be brought to the full
CMHCC body for decisions. This process is clearly outlined in the CMHCC’s
contracts.

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Action: Management will develop and present for approval by the full CMHCC
a written plan to enhance the financial monitoring responsibilities of the
CMHCC’s staff. The plan will be incorporated into the contracts for the FY
2006-2007 biennium.
Responsibility: Executive Director, CMHCC
Timeline: Development of a written plan to enhance the financial monitoring
responsibilities of the CMHCC will begin immediately. A final plan will be fully
implemented not later than the next contract cycle on September 1, 2005.
Auditor’s Follow-Up Comment
The process for resolving conflicts outlined in the Committee’s contracts calls for
conflicts to be resolved between the parties up to and including the level of the
medical directors. Any disputes that cannot be resolved by the medical directors are
referred to the executive director of the Committee, who is not a physician. If the
executive director cannot resolve the dispute, then he has the option of referring it to
the full committee. As mentioned in Chapter 1, half of the current committee is
composed of representatives of the university providers. This could potentially leave
the Department at a disadvantage, especially in disputes of a medical nature.
Management’s Response (continued)
ƒ

The CMHCC does not agree that it is necessary to separate its accounting and
payroll functions from UTMB in order to manage its responsibilities. As an
alternative, the CMHCC does agree that it can take actions to better document
that the CMHCC operates independently of UTMB. The CMHCC’s accounts are
maintained separately by UTMB. Payments to and from those accounts are
authorized only by duly authorized representatives of the CMHCC. Staff of the
CMHCC, while paid through the UTMB payroll systems, are organizationally
responsible to the full CMHCC. As outlined in statute, the CMHCC hires an
administrator, who in turn is authorized to employ additional personnel as
necessary to fulfill the committee’s duties. Costs for the operation of the
CMHCC are paid from funds appropriated for correctional health care. Short of
creating a new and separate accounting and payroll function for the CMHCC
alone, the perception of a conflict of interest would exist regardless of which
partner agency provided administrative support for the CMHCC.
Action: The CMHCC will develop a memorandum of understanding between the
CMHCC and UTMB that clearly documents the operational procedures for
providing administrative support for the CMHCC. The MOU will clearly specify
that CMHCC staff work for the CMHCC and are independent of UTMB.
Responsibility: Executive Director, CMHCC
Timeline: An MOU will be developed and put in place not later than February 1,
2005.

An Audit Report on Management of Correctional Managed Health Care Contracts
SAO Report No. 05-012
November 2004
Page 4

Auditor’s Follow-Up Comment
The Committee’s accounts at UTMB are separate from other university accounts but
are reported as part of UTMB’s annual financial report (see Chapter 4). These
accounts are held outside the State Treasury. UTMB has some level of oversight for
these accounts; UTMB accounting staff provided us with information on the balances
and transactions in these accounts during the course of our audit. As the Committee
mentions, the funds used to pay for the operation of the Committee are appropriated
to the Department. The services are provided by UTMB and Texas Tech, not the
Department. The action proposed by the Committee does not resolve the issue about
conflicts of interest, as the service provider would still be handling the Committee’s
funds.

An Audit Report on Management of Correctional Managed Health Care Contracts
SAO Report No. 05-012
November 2004
Page 5

Chapter 2

The Committee’s Contracts for Inmate Health Care Lack Necessary
Provisions to Ensure Accountability and the Appropriateness of
Expenditures
The contracts between the Committee and university providers do not ensure that the
interests of the State are protected or that university providers are held accountable
for the cost-efficient delivery of quality services. The contracts lack basic provisions
such as the evaluation of contractor performance, remedies for nonperformance, and
financial reporting requirements.
Furthermore, because the Committee does not require university providers to
maintain or report complete, detailed financial records, we were unable to determine
whether the current appropriations amount represents the true cost of inmate health
care. In addition, the contracts do not specify allowable and unallowable costs. As a
result, UTMB spent state funds it received to provide health care services to prison
inmates on items that are not allowable under state law but that may be allowable
using UTMB’s local funds.
In January 1998, we reported this same issue regarding the lack of contract
provisions (see An Audit Report on Managed Health Care at the Texas Department
of Criminal Justice, SAO Report No. 98-013). Several of the provisions that were
missing from the contracts for the 1996–1997 biennium were also missing from the
contracts for the 2002–2003 and 2004–2005 biennia.
Chapter 2-A

The Committee’s Contracts Lack Basic Provisions to Hold
University Providers Accountable
The Committee’s contracts for inmate health care for the 2002–2003 and 2004–2005
biennia are not sufficient to protect the State’s interests and hold university providers
accountable for the cost-efficient delivery of quality services. The contracts lack
basic provisions such as:
ƒ

Clearly defined performance measures.

ƒ

Methods of evaluating contractor performance.

ƒ

Sanctions for contractor nonperformance.

ƒ

Financial reporting requirements.

ƒ

Right-to-audit provisions, which are required by the Texas Government Code,
Sections 2262.003 (a)(1) and (2).

Contracting best practices require that contracts include provisions to hold
contractors accountable for providing the intended services at the best price. Without
these provisions, state funds are at risk of not being spent as intended, and the State
may not have recourse against contractors for their poor performance.

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November 2004
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In addition to not incorporating sound provisions into contracts, the Committee did
not execute contracts with the Department and university providers in a timely
manner. Without an executed contract in place, the Committee risks not having legal
recourse if there are problems with a university provider’s performance. With a
contract amount in excess of $500 million, the UTMB contract is monetarily the
largest contract of the two university provider contracts. However:
ƒ

The contract with UTMB for the 2002–2003 biennium was not signed until
approximately 9.5 months after the contract for the previous biennium expired.
There was no amendment executed to extend the prior contract; consequently, the
Committee and UTMB operated without an executed contract during this 9.5month period.

ƒ

The contract with UTMB for the 2004–2005 biennium was not signed until
almost two months after the extension on the previous contract had expired.

One way to ensure that a contract protects the State’s interests is to have adequate
review by legal counsel. However, the Committee’s contracts did not show clear
evidence of review and approval by the Department’s or university providers’ legal
counsel. The UTMB contract was initialed by individuals who the Committee’s
assistant director stated were part of UTMB’s legal counsel, but there was no
signature line or other evidence signifying to whom the initials belonged. Contracts
should show evidence of legal review and approval to ensure that they are legally
sound and protect entities’ interests.
Furthermore, the Committee does not seek out its own legal counsel to review the
contracts before execution. Instead, it relies on the legal counsel at the Department
and university providers to review the contracts. This creates a risk that the legal
counsels will ensure that their own entities’ interests are protected but not necessarily
protect the Committee’s interests.
Recommendations
The Committee should:
ƒ

ƒ

Include the following provisions in its contracts with university providers:

Œ

Methods for evaluating contractor performance, including clearly defined
performance measures

Œ

Sanctions for contractor non-performance

Œ

Financial reporting requirements

Œ

Right-to-audit provisions

Make efforts to renew the contracts on a timely basis to avoid periods of contract
lapses. It should consider financial sanctions (such as a reduction of the contract
amount based on the number of days the contract has lapsed) to encourage
university providers to sign contracts in a timely manner.

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November 2004
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ƒ

Include in its contracts evidence of legal review or approval.

Management’s Response
ƒ

The CMHCC agrees with this recommendation and will revise its contracts for
the next biennium to reflect these recommendations.
Action: CMHCC will review the current contract documents and develop better
defined performance measures and evaluations of performance, adopt sanctions
for non-performance and include more detailed financial reporting requirements
and right-to-audit provisions in its contracts for the FY 2006-2007 biennium.
Responsibility: Executive Director, CMHCC
Timeline: New contract documents for the FY 2006-2007 biennium will be
drafted and developed in time for implementation September 1, 2005.

ƒ

The CMHCC agrees with this recommendation and will take action to encourage
the execution of the contracts in a timely manner.
Action: The process of contract renewal for the next cycle of contracts will be
initiated not later than February 1, 2005 in order to provide sufficient time to
review and negotiate the terms of the contracts prior to September 1, 2005.
Should circumstances beyond the control of the CMHCC delay execution of the
contracts by September 1, 2005, properly executed contract extensions will be
put in place to insure that there is no lapse in contract coverage.
Responsibility: Executive Director, CMHCC
Timeline: Contract discussions and changes will be initiated by February 1,
2005 and final execution of the contracts will be sought prior to September 1,
2005.

ƒ

The CMHCC agrees to require that evidence of legal review be included on the
actual contract documents. Legal counsel from each partner agency already
participates in the contract review and approval process; however there is not a
standardized documentation of these reviews.
Action: The CMHCC will amend the contract signature blocks to require a
formal acknowledgement of legal review to be documented on the contract. In
addition, the CMHCC will request a legal review of the contracts by the Office of
Attorney General, in lieu of hiring a separate counsel for the Committee.
Responsibility: Executive Director, CMHCC
Timeline: The legal reviews will be documented on the contract documents
beginning with the next cycle of contracts, to be implemented not later than
September 1, 2005.

An Audit Report on Management of Correctional Managed Health Care Contracts
SAO Report No. 05-012
November 2004
Page 8

Chapter 2-B

The Committee’s Contracts Lack Financial Controls to Determine
the Actual Costs of Inmate Care and Ensure that Funds Are Spent
Appropriately
The Committee’s contracts with university providers do not require university
providers to maintain or report complete, detailed financial information. Without
these requirements, the Committee cannot meet its statutory requirement to develop a
capitation rate that reflects the true costs of inmate managed care.
We were unable to determine whether the current appropriation amount represents
the true cost of inmate health care because (1) UTMB allocated unallowable
expenses to its contract with the Committee, (2) there are inaccuracies in the
allocation of other expenses (see Chapter 3-A), and (3) there is a potential for
inaccurate allocation of payroll costs. This also prevents the Committee from
ensuring that the State receives the services it pays for and that state funds are spent
as intended. (The Committee’s inadequate monitoring of university providers, which
is discussed in Chapter 3, also prevents the Committee from ensuring that university
providers spend funds as intended.)
Determining the capitation rate and the actual costs of providing health care.

Statute
requires the Committee to determine a capitation rate that reflects the true cost of
providing correctional managed health care. However, without detailed financial
information from university providers, the Committee cannot determine the true cost.
Instead, it backs into the capitation rate by taking the annual appropriation amount
and dividing it by a number that is equal to the projected prison population for the
year. The capitation rate for fiscal year 2004 was $5.77 per inmate per day for
UTMB and $5.27 per inmate per day for Texas Tech. However, these rates may not
represent the true cost of inmate health care because they are not based on verified
cost information. In addition, the Committee’s calculation allows the Committee to
accumulate reserves due to the “population lag,” which is the difference between the
budgeted population and the actual population of the prison system (see Chapter
4-A).
Furthermore, the Committee does not require university providers to track the cost of
care per inmate, so there is no way to determine the cost of a specific service or the
cost of an individual inmate’s care. As they are currently reported, the costs for
correctional managed health care are a combination of salaries and benefits, capital
equipment, travel, “telemedicine,” pharmacy expenses, off-site costs (such as
UTMB’s Hospital Galveston and other private hospitals), and indirect overhead of 5
to 6 percent of reported costs.

Allowable and unallowable costs.

The contracts between the Committee and university
providers do not specify what are allowable and unallowable costs. We found that
UTMB spent state funds it received to provide health care to inmates on items that
were unreasonable or not allowable under state law (but these items may be
allowable if they are paid for using UTMB’s local funds). These expenditures
included food and gifts for employees, flowers, and moving expenses for newly hired
employees.
We tested 228 judgmentally selected expenditures from fiscal years 2002 and 2003
that were included in UTMB’s costs to provide inmate health care and found that
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17.5 percent of the expenditures in our sample were unreasonable or would not have
been allowable under state law. The expenditures in this sample totaled $2,266,072,
and the errors we found accounted for 2.5 percent of this amount. We also tested 42
judgmentally selected expenditures from fiscal year 2004 and found that 11.9 percent
of the expenditures in our sample were unreasonable or would not have been
allowable under state law. The expenditures in that sample totaled $8,660,342, and
the errors we found accounted for 0.14 percent of this amount. The unreasonable or
unallowable expenditures included:
ƒ

$14,353 for a conference and banquet.

ƒ

$7,040 and $5,000 for moving expenses for two newly hired employees.

ƒ

$1,705 for pocket calculators used as gifts for employees who attended training.

ƒ

$215 for a UTMB employee and spouse to take a new UTMB doctor and his
family out to dinner (tip included).

ƒ

$1,466 for an employee retirement party.

Payroll records.

The Committee’s contracts with university providers do not require
university providers to keep detailed payroll records that would allow them to
accurately allocate payroll costs to their contracts with the Committee. Salaries and
benefits constituted approximately 54 percent of the costs for inmate health care that
UTMB reported in fiscal year 2003. However, without detailed payroll records, the
accuracy of this percentage cannot be determined. We first identified this issue in
our January 1998 report (see An Audit Report on Managed Health Care at the Texas
Department of Criminal Justice, SAO Report No. 98-013).

The accuracy of UTMB’s reported costs is questionable because UTMB contracts
with other criminal justice organizations (such as county jails, federal prisons, and
TYC facilities) to provide inmate health care. Some of these other facilities are
located near Department prisons, and they often share UTMB staff members;
therefore, there is no way to track the actual hours worked at each facility. (See the
map in Appendix 3 for co-located facilities.)
Each shared staff member who is involved in providing health care is assigned a
payroll allocation percentage, but these allocation percentages do not reflect detailed
actual time. (Actual time worked is not recorded, except as an aggregate amount of
work time versus sick time or leave time.) For example, a staff member who is
assigned to work four days a week at a state prison and one day a week at a county
jail might have 80 percent of his payroll cost allocated to the care of inmates at the
state prison. However, if the county jail is short of staff, the employee may actually
work only one day at the state prison and four days at the county jail. Under these
circumstances, the staff member’s payroll cost would still be allocated to the various
entities based on the preset allocations (80 percent to the state prison and 20 percent
to the county jail). The preset allocations can be changed, but this rarely happens.
Recommendations
The Committee’s contracts with university providers should include:
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ƒ

Financial reporting requirements that include reporting the actual costs of
providing inmate health care.

ƒ

Definitions of allowable and unallowable costs.

ƒ

Requirements to maintain detailed payroll records that track actual time spent
providing health care at Department facilities.

Management’s Response
ƒ

The CMHCC agrees to include in its contracts more detailed reporting of health
care expenditures from the universities and to take steps to validate the accuracy
of the information it receives.
Action: The CMHCC will meet with the financial staff of each of the three
partner agencies and develop requirements and common formats for a more
detailed financial reporting of expenditures from the universities. This revised
reporting process will be developed not later than February 2005 and all FY
2005 reporting will be revised to reflect the more detailed reporting
requirements.
The revised reporting formats will subsequently be incorporated into the
contracts for FY 2006-2007. The CMHCC will also develop additional
procedures designed to validate the accuracy of information it receives from the
university providers. Development of the procedures will consider the costeffectiveness of such practices as requiring periodic risk assessments and
independent audits to be performed and submitted to the CMHCC, requiring
specific items to be verified and approved by the university’s internal auditors,
and/or direct review and auditing of financial transactions by the CMHCC.
In addition, the CMHCC will initiate an immediate review of the losses reported
by the university providers to ascertain the true extent of such losses reported for
FY 2004 and FY 2005. Such a review will include a correction of reported
expenses to disallow any expenses determined to be inappropriate and to account
for any inaccuracies in allocation of costs between programs.
Responsibility: Executive Director, CMHCC
Timeline: Revised financial reporting formats and requirements will be
developed and be put into place by February 2005. The revised reporting
formats and requirements will be included in the next contracts for FY 20062007 to be effective September 1, 2005. A more detailed review of reported FY
2004 losses shall be initiated immediately and completed prior to any final
adjustments for loss reimbursements are settled.

ƒ

Payments to the university providers are made on a capitated basis, represent
funds earned by the universities and are considered by the universities as local
funds. As such, rules applicable to university local funds apply. However, the
CMHCC agrees to include in its future contracts, expenditure restrictions on
certain expenses that could be considered unallowable, including food and gifts
for employees and flowers. The CMHCC specifically does not agree however,
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that funds earned by the university should be restricted from paying for moving
expenses of newly hired professional staff. The recruitment and retention of
professional medical staff takes place in an extremely competitive environment.
One of the reasons the universities were asked to become involved in
correctional health care is their enhanced flexibility to legally utilize such
measures to recruit and retain medical staff. Paying for moving expenses for a
physician to relocate is an industry standard practice necessary to insure
qualified professionals are available to provide health care services.
Action: The CMHCC will work with the university providers and TDCJ to
identify expenses that will not be reimbursed under the contracts. Such
restrictions will be included in the next contracts for FY 2006-2007. In addition,
as a part of the review of FY 2004/2005 losses detailed above, the list of
restricted expenses will be used to correct FY 2004 and FY 2005 financial
reports.
Responsibility: Executive Director, CMHCC
Timeline: A listing of restricted expenses will be developed and included as a
part of the revised financial reporting requirements to be effective not later than
February 2005. The restrictions will be incorporated into the FY 2006-2007
contracts to be effective September 1, 2005.
Auditor’s Follow-Up Comment
Even though the funds paid to the university providers are considered local funds
once they are earned and can be used as the university providers wish, there should
be some consideration given to the appearance of spending funds on expenses that
are not directly related to inmate health care and that would be a violation of state
statutes if general revenue funds were used. In addition, since fiscal year 2001, the
Committee paid the university providers $17.6 million above the capitation rate for
“loss reimbursement” (see Chapter 3). The cost information used to support these
payments and to calculate the next year’s capitation rate included these unallowable
costs. If the Committee chooses to allow the university providers to spend
correctional managed health care funds on moving expenses for newly hired
employees, these amounts should not be used to support loss reimbursement
payments or to calculate the capitation rate.
Management’s Response (continued)
ƒ

The CMHCC agrees with this recommendation and will include such
requirements in its contracts for the FY 2006-2007 biennium. Allocations of
payroll costs between contracts are being made on a budgeted hour basis;
however time reporting systems allowing for the adjustment of those allocations
based on actual hours or other such validation systems for time reporting
allocations will need to be developed.
Action: The CMHCC will include in our FY 2006-2007 contracts requirements
for maintenance of detailed payroll allocation and time-keeping records for any
employees providing services for multiple contracts. In addition, the CMHCC,
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working with the university providers, will develop procedures that call for
periodic validation of such allocations.
Responsibility: Executive Director, CMHCC
Timeline: The requirements will be incorporated into the FY 2006-2007
contracts to be effective not later than September 1, 2005.

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Chapter 3

The Committee’s Monitoring of Funds Appropriated for Inmate Health
Care Is Not Sufficient to Ensure that Funds Are Spent Appropriately
The Committee does not provide sufficient fiscal oversight of the funds appropriated
for inmate health care. Without monitoring how these funds are spent, the
Committee cannot ensure that the funds are spent appropriately, nor can it support its
requests for funding. For example, from fiscal year 2001 through fiscal year 2003,
the Committee paid university providers a total of $15.7 million above the agreedupon rate as a “loss reimbursement” without requesting or reviewing detailed
supporting documentation to determine whether university providers had actually
incurred financial losses. The fiscal year 2004 appropriation for correctional
managed health care was approximately $330 million, which represented about 13
percent of the Department’s total appropriation.
The Committee relies on the Department to monitor inmates’ access to care and on
university providers themselves to monitor quality of care. Statute limits the
Department to monitoring only access to care. In addition, although statute requires
the Committee to oversee the quality-of-care monitoring program, this is actually
done by the Department and not by the Committee. Given the limitations of the
statute, the Department does a good job of monitoring, but increases in authority and
resources available to monitor inmate health care may improve the accountability of
university providers.
Chapter 3-A

The Committee’s Financial Monitoring Is Insufficient to Ensure that
Funds Are Spent Appropriately
The Committee does not provide sufficient fiscal oversight of the funds appropriated
for inmate health care. The structure of the Committee and the potential for
conflicting loyalties on the part of its staff may contribute to the lack of fiscal
oversight (see Chapters 1 and 2). The Committee’s staff has indicated that they focus
on whether the contracted services are provided, not on how the university providers
spend the funds they receive for providing inmate health care. Committee staff also
stated that, as a result, they do not see the need to perform a detailed analysis of
university providers’ costs for providing health care to inmates.
To ensure that the State receives the best value and that inmates receive the health
care mandated by the courts, it is necessary for the Committee to monitor and
evaluate the costs that university providers charge against their contracts. Monitoring
is especially important when university providers report that they are operating at a
loss and request additional funding. In addition, as mentioned in Chapter 2, the
Committee is statutorily required to develop a capitation rate that is a true reflection
of the cost of providing inmate health care.
Loss reimbursement payments were made without supporting documentation.

From
fiscal year 2001 through fiscal year 2003, the Committee paid university providers
$15.7 million above the established capitation rate as a “loss reimbursement” without
reviewing any documentation to substantiate that the university providers had
incurred financial losses. At the end of the third quarter of fiscal year 2004, the
Committee paid university providers an additional $1.9 million as a loss
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reimbursement, again without reviewing sufficient supporting documentation. At a
minimum, the Committee should have reviewed a detailed list of expenditures
allocated to the contracts, and it should have gained some assurance from periodic
testing that this information was accurate.
Furthermore, the Committee does not review expenditures that university providers
allocate to their contracts with the Committee. The Committee’s chief financial
officer stated that the Committee is not familiar with university providers’ methods
for allocating costs and is not concerned with these methods as long as services are
being provided to the inmates.
Costs were not allocated as required by the contract. The contract between the
Committee and UTMB requires UTMB to allocate costs among its various clients.
From fiscal years 2002 through fiscal year 2004, however, we found expenditures
that UTMB had allocated to its contract with the Committee but that it should have
allocated among its various correctional managed health care clients (TYC facilities
and several county jails and federal prisons). These expenditures included:

ƒ

$23,000 per month for two months of rent for the Galveston offices of
correctional managed health care.

ƒ

$1,165 for carpeting for the Galveston finance department office.

ƒ

$5,301 for database access for the central pharmacy.

ƒ

$9,000 for a quarterly payment for data modules.

One exception to this issue is UTMB’s process for allocating costs for the central
pharmacy that serves all of UTMB’s managed health care clients. While the
Committee does not monitor the allocation of costs for pharmacy services, we found
that those costs were appropriately allocated. In addition, we compared the costs for
59 randomly selected drugs and 7 judgmentally selected high-cost drugs from
UTMB’s drug utilization report and compared them with the pharmacy’s purchasing
invoices. The pricing for these drugs was generally reliable. (See Appendix 4 for
trend analysis of the costs of HIV and hepatitis C drugs.)
Additional examples of the Committee’s lack of fiscal oversight include the
following:
ƒ

The Committee receives only a very high-level summary report of university
providers’ costs and does not require university providers to submit supporting
documentation. The Committee then combines the quarterly summary reports
from each university provider into an overall report that contains information
regarding on-site expenses, off-site expenses, pharmacy services, and indirect
expenses. (See Appendix 5 for an example of the combined report.)

ƒ

The Committee does not audit university providers’ financial information;
instead, it relies on university providers’ internal audit departments. However,
university providers’ internal audit departments do not audit this information.

ƒ

The Committee does not properly monitor the financial accounts that UTMB
maintains on the Committee’s behalf to determine whether funds are received
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and transferred properly and in a timely manner. The Committee has access
rights to UTMB’s accounting system, but it reviews information on its financial
accounts only on a quarterly basis. At the end of the second quarter of fiscal year
2004, the Committee’s agency fund account had a negative balance of
$12,267,293 due to the erroneous double-booking of a general ledger transaction.
The Committee did not detect and correct this error until about three months
later.
ƒ

As noted in Chapter 2, 17.5 percent of the fiscal year 2002 and fiscal year 2003
expenditures we tested and 11.9 percent of fiscal year 2004 expenditures we
tested were unreasonable or unallowable.

Recommendations
The Committee should:
ƒ

Increase its monitoring of the financial aspects of its contracts with university
providers.

ƒ

Ensure that Committee staff review the detailed financial records of university
providers on a monthly basis and provide more detailed information to the
Committee at its quarterly meetings to enable the Committee to make more
informed financial decisions.

ƒ

Ensure that Committee staff provide for a periodic audit of university providers’
financial records related to correctional managed health care.

Management’s Response
ƒ

The CMHCC agrees to increase its monitoring activities related to the financial
aspects of the contracts. Historically, the CMHCC has focused on insuring that
the services called for in the contracts were delivered and because the university
providers are state institutions with individual accountability to the Legislature,
has relied on those individual institutions to exercise financial oversight of funds
they earned under the contracts. The CMHCC will work with the Legislature
during the appropriations process to better define financial monitoring
expectations.
Action: The CMHCC will review the responsibilities of its staff to incorporate
increased financial monitoring of the university provider contracts. The
monitoring activities will include the collection, review and analysis of
supporting levels of detail for information provided by the universities and
provisions for the periodic validation of reported data.
Responsibility: Executive Director, CMHCC
Timeline: Preliminary revised financial monitoring activities will be put in place
not later than February 2005, and further refined by the end of FY 2005 so as to
be in place for the FY 2006-2007 biennium contracts.

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Auditor’s Follow-Up Comment
The contract for inmate health care is in excess of $330 million a year. Our concern
is whether this amount reflects the true cost of inmate health care. Even when one
entity of the state contracts with another, there should be procedures in place to
ensure that services are provided in a cost-efficient manner. It would be difficult, if
not impossible, to ensure financial accountability without monitoring the transactions
associated with the contract.
Management’s Response (continued)
ƒ

The CMHCC agrees with this recommendation. CMHCC staff will work with the
university providers to develop access to detailed financial records for review
and analysis on a monthly basis. Reports on the financial monitoring and an
increased level of detail on the financial status of the university providers will be
provided to the members of the CMHCC at their quarterly meetings.
Action: The CMHCC staff will work with the university providers to develop
monthly detailed financial records for review and analysis. In addition, the
CMHCC staff will develop a revised financial reporting process that will provide
the members of the CMHCC with increased detail on the financial status of the
university providers, including key expenditures and allocations of cost.
Responsibility: Executive Director, CMHCC
Timeline: A preliminary revised financial reporting process will be put in place
not later than February 2005. Revised financial reporting requirements will be
incorporated into the FY 2006-2007 biennium contracts.

ƒ

The CMHCC agrees to consider and develop procedures designed to validate the
accuracy of information it receives from the university providers and will include
such procedures in its contracts for FY 2006-2007.
Action: The CMHCC staff, with input from the university providers and TDCJ,
will develop procedures to provide for periodic auditing of the university
provider’s financial records. Development of the procedures will consider the
cost-effectiveness of such practices as requiring periodic risk assessments and
independent audits to be performed and submitted to the CMHCC, requiring
specific items to be verified and approved by the university’s internal auditors,
and/or direct review and auditing of financial transactions by the CMHCC.
Responsibility: Executive Director, CMHCC
Timeline: The revised procedures will be incorporated into the contracts for the
FY 2006-2007 biennium to be effective not later than September 1, 2005.

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Chapter 3-B

The Committee Relies on the Department and University Providers
to Monitor the Health Care Provided to Inmates
Statute requires the Committee to establish a procedure for monitoring the quality of
care delivered by the health care providers. The monitoring of the quality of health
care provided to inmates is primarily performed by the university providers
themselves. The Department’s monitoring activities are limited by statute to
investigating medical grievances, ensuring access to care, and conducting periodic
operational reviews of the health care provided at its prison units. The Department’s
Health Services Division (Division) gathers information about the quality of care
and, given its budgetary constraints, does a good job of monitoring the health care
provided to inmates.
The Committee’s enabling statute charges the Department and university providers
with cooperating in monitoring the quality of care and reporting the results of
monitoring to the Committee. The Committee is responsible for monitoring and
developing reports on general quality-of-care issues. However, reports on quality-ofcare issues are actually developed by the Department and university providers. We
did not evaluate the monitoring of quality of care that university providers perform.
The university providers are responsible for self-monitoring access to care;
monitoring quality of care via their operational performance evaluation system; and
conducting peer reviews, credential reviews, and utilization management.
The Division is responsible for performing periodic audits of its prison units to
ensure access to care and for monitoring and tracking infectious diseases. The
Division also monitors and tracks (1) Step II grievances (grievances that are appealed
because they are not settled at the prison unit level) that concern health care issues
and (2) complaints about health care it receives from the patient liaison and the
ombudsman processes (complaints from third parties). The Division reports that it
handles approximately 500 Step II grievances and 1,000 patient liaison complaints
per month. Grievances or complaints regarding the quality of care are forwarded to
the university providers, who are responsible for responding. Responses to Step II
grievances must be made within 45 days.
The Division has two units that monitor health care:
ƒ

The Office of Clinical Services/Professional Standards is responsible for the
majority of the Division’s monitoring. The Division monitors approximately 110
prison facilities throughout the state. There are only seven nurses (all Department
employees) who provide statewide coverage. The health care facility at each
prison unit is audited at least once every two years. These audits are scheduled
around the accreditation audits of the American Correctional Association (ACA)
and National Commission on Correctional Health Care (NCCHC), which occur
every three years. Records are reviewed to ascertain compliance with
accreditation standards, Division policies and procedures, and other regulatory
requirements. The audit results are reported to the facility management team,
which must submit a corrective action plan within 30 days. A low score results
in the unit’s receiving another audit and additional technical assistance.
Each health care facility self-monitors during the two years between
ACA/NCCHC visits, and the Division reviews the self-monitoring reports.
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Special investigations are also conducted based on allegations that the Division
receives. Teams of nurses and investigators make unannounced visits to
investigate.
The Quality Improvement Program is a statewide mechanism for monitoring both
access to care and quality-of-care indicators. Facilities send weekly self-reported
data to the Division about their access to care performance. Patients are required
to be physically seen (for triage) within 48–72 hours (depending on whether it is
a weekday or weekend) for a routine sick call complaint. If indicated, a physician
is required to see the inmate within seven days of the sick call submission. There
are nine access-to-care indicators that are measured. Facilities must score at least
80 percent on these indicators. If they do not, the nurse monitors will investigate
and the unit must submit access-to-care data to the Division for 4–8 weeks or
until its scores improve. The nurse monitors assigned to each facility review the
self-reported information and look for trends among the indicators that are
measured. Quality Improvement nurses also visit each facility once or twice a
year to verify self-reported data.
ƒ

The Preventative Medicine Department monitors diseases such as tuberculosis,
hepatitis, HIV, AIDS, and sexually transmitted diseases. In addition, the
Preventative Medicine Department obtains, maintains, and reports statistical data
on inmate infectious diseases, investigates food borne illnesses, and conducts
continuing medical education training. It also coordinates employee health care
programs (such as programs for occupational exposures and industrial medical
screening).

The Division also has several committees that meet periodically to monitor health
care issues. These committees include:
ƒ

The Monitoring and Consolidation Committee, which discusses monitoring
results, including scores from the access-to-care monitoring.

ƒ

The Quality Assurance Committee, which discusses medical issues found in
monitoring and the results of monitoring visits.

ƒ

The Quality Control Committee, which discusses inmate grievance and patient
liaison statistics.

Other monitoring activities include those of medical review committees, which are
joint efforts among various parties. Examples of these committees follow:
ƒ

The Morbidity and Mortality Committee is a joint committee of health care
clinicians that reviews the circumstances and records of each inmate death. The
committee then makes a determination about whether a referral to the university
provider’s peer review committee or a utilization review is necessary.

ƒ

The Pharmacy and Therapeutics Committee is a joint committee that develops
and manages the drug formulary, publishes disease management guidelines, and
conducts studies of drug usage and efficacy. In addition, this committee ensures
consistency among the university providers.

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ƒ

The System Leadership Council is a joint committee that evaluates quality and
process issues that are problematic statewide.

ƒ

The Health Services Policy and Procedure Committee is a joint committee. One
of the co-chairs of this committee is a member of the Correctional Managed
Health Care Committee staff. This committee meets to discuss and implement
new policies or revise existing policies.

Management’s Response
While there are no recommendations offered by the audit team on this section dealing
with monitoring, the CMHCC believes it is important to point out that the heading
and text of this chapter indicates that the CMHCC relies on the Department and
university providers to monitor health care. In response, we would point out that the
statute establishing the CMHCC specifies this precise arrangement. In fact section
501.150 of the Government Code is entitled “Quality of Care Monitoring by the
Department and Health Care Providers.” It expressly requires that “the clinical and
professional resources of the health care providers shall be used to the greatest
extent feasible.” It defines the role of TDCJ in monitoring and requires TDCJ and
the universities to cooperate in monitoring. We would further point out that the
department and the university providers operate within a framework established by
the CMHCC partnership to facilitate such cooperation and report results of these
monitoring efforts to the full Committee.
Auditor’s Follow-Up Comment
The statute establishing the Committee also includes language that identifies
responsibilities for the Committee in overseeing the monitoring of access to care and
quality of care performed by the Department and the university providers. As
mentioned above, the Committee is responsible for monitoring and developing
reports on general quality-of-care issues and should oversee the monitoring
performed by the Department and by the university providers.

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Chapter 4

The Committee Does Not Report Detailed Financial Information to
State Decision Makers
The Committee did not report the available fund balances it held at the end of each of
the first three quarters in fiscal year 2004 to the Office of the Governor and the
Legislative Budget Board (LBB), although this reporting is required by the General
Appropriations Act. The available fund balances totaled $3.9 million, $2.7 million,
and $1.98 million at the end of each of the first three quarters, respectively, in fiscal
year 2004. In addition, the Committee has had available fund balances each fiscal
year since 1996. This balance was as much as $31.8 million in fiscal year 2000.
Although the Committee reported a portion of its available balances to the
Legislature—and these funds were reappropriated for the following years—the
Committee did not report the entire balance available each year. We were unable to
find any evidence that the Committee has the authority to carry these excess funds
forward from one biennium to the next.
The Committee’s financial information is not readily available to the Legislature
because UTMB maintains the Committee’s funds. Because of this, the Committee’s
annual financial information is reported as part of the University of Texas System’s
Annual Financial Report (AFR), and it is not distinguishable from UTMB’s funds.
Furthermore, the Committee has earned $3.2 million in interest since fiscal year 1998
because its funds are held outside the State Treasury. The Committee has not
reported this interest to the Office of the Governor or the LBB.
Chapter 4-A

The Committee Has Not Reported Available Funds
In our analysis of the Committee’s fiscal year 2004 financial transactions (through
August 2004), we noted that there were available cash balances
Unexpended Balance Authority
of $3.9 million, $2.7 million, and $1.98 million at the end of first,
The General Appropriations Act (78th
second, and third quarters, respectively. However, the
Legislature) defines “unexpended
Committee did not report these balances to the Office of the
balance” as the unobligated balance
Governor and LBB as required by Rider 48, page V-22, the
remaining in an appropriation “that has
not been set apart by the incurring of an
General Appropriations Act (78th Legislature). Specifically,
obligation, commitment, or indebtedness
Rider 48 requires the Committee “to report to the Governor and
by the state agency authorized to spend
the LBB all monies held in reserve for the Committee by [the
the appropriation.” The funds for inmate
health care are appropriated to the
university providers].”
Department, which then takes out the
funding for its Health Services Division
and passes the remainder to the
Committee in quarterly payments.

The Department's riders in the General
Appropriations Act do not specifically
grant unexpended balance authority for
the funds in the Department’s inmate
health care strategies. We did not
identify any other statute that grants
unexpended balance authority or
appropriates available fund balances to
the Committee.

In addition, the Committee had a balance of $3.2 million at the
end of fiscal year 2003, and it has had fund balances as high as
$31.8 million since 1996 (see Table 2). Although the Committee
did report some available reserves in prior years and these
reported reserves were reappropriated as funding for subsequent
years, it did not report its entire available balances. We were
unable to determine whether the Committee has unexpended
balance authority to carry these funds forward (see text box).

The Committee receives financial information from UTMB that
notes the available fund balances, but it did not use this information to report the
available fund balances as required. The Committee’s quarterly reports to the LBB
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state that university providers “report that they have no reserves.” The Committee
asserts that the available fund balances we identified are not “reserves” because these
funds are budgeted to be paid out during the year. According to the Committee, these
funds are available because of “population lags.” The capitation rate—the rate per
inmate per day that is used to calculate how much to pay university providers each
quarter—is based on the estimated prison population. If the actual prison population
is less than what is estimated for the quarter, the Committee does not pay university
providers all the funds set aside for that quarter, thus creating available fund
balances. The Committee does report the amount of these funds, called “population
lag” funds, in its quarterly report, but it is not clear on the report that these are
available reserves. As a result of the lack of accurate fiscal information, the
Legislature, the Office of the Governor, and the LBB do not receive sufficient
information to make decisions about the budget for inmate health care.
The Committee asserts that after the appropriations are transferred to UTMB—which
then holds these funds for the Committee—the funds are no longer considered
General Revenue and are subject to UTMB’s authority to carry forward other
university funds. However, the Committee’s arrangement with UTMB regarding the
Committee’s funds does not actually transfer ownership of the funds. By not
appropriately returning the unexpended funds at the end of the fiscal year to the
Department for lapsing purposes, the Committee does not allow the State Treasury
full use of all available funds.
Table 2: Although the Committee reported some available reserves in prior years and these reported reserves were
reappropriated as funding for subsequent years, it did not report its entire available balances.

Correctional Managed Health Care Committee Fund Balances
FY 1996

FY 1997

FY 1998

FY 1999

FY 2000

FY 2001

FY 2002

$18,959,365

$22,341,341

$17,091,257

$21,111,930

$31,104,750

$24,146,367

$10,508,981

$2,821,991

Committee
Fund
Balance

$0

$0

$655,077

$631,553

$693,135

$212,460

$318,219

$387,393

Total
Ending
Fund
Balance

$18,959,365

$22,341,341

$17,646,334

$21,743,483

$31,797,885

$24,358,827

$10,827,200

$3,209,384

N/A

to the 19981999
biennium

N/A

to the 20002001
biennium

N/A

to the 20022003
biennium

Agency
Fund
Balance

Funds
Reappropriated

$12,000,000

$19,100,000

FY 2003

$11,265,354

Source: The University of Texas Medical Branch at Galveston accounting system and Committee records.

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November 2004
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N/A

—

Recommendations
The Committee should:
ƒ

Report its available balances (including funds from population lag) to the LBB
and the Office of the Governor as required by the General Appropriations Act.

ƒ

Identify and return all unobligated funds at the end of each fiscal year to the
Department so that these funds can be deposited into the State Treasury and
lapsed as appropriate.

Management’s Response
ƒ

The CMHCC agrees to clarify its reporting of available balances as
recommended, however it does not agree that it has not reported funds as
required by rider 48. As the audit report points out, population lag funds were
reported in our quarterly reports, but were not specifically identified as reserves.
The funds identified as “population lag” result from differences between the
budgeted populations and the actual population experienced by TDCJ. The
funds are budgeted for use by the university providers, but are paid to them on
the basis of actual population. Because the funds are budgeted to cover a
projected population over the course of a full year, slower growth at the
beginning of the year may result in funds not being paid out at that time.
Conversely, faster growth in later months would require that these funds be used
to pay the universities. The Committee’s reports have identified these funds as
separate from reserves because they have been budgeted, and may be required to
meet the contractual obligations.
Action: The CMHCC will revise its reporting format to clarify the status of all
balances on hand to include any obligated funds, population lag funds or other
funds available.
Responsibility: Executive Director, CMHCC
Timeline: A revised reporting format will be used on the ending FY 2004 and all
FY 2005 quarterly financial reports, effective immediately.

Auditor’s Follow-Up Comment
It is our understanding that the intent of rider 48 was to identify any excess funds that
could be reappropriated or used for other purposes. Calling these funds “population
lag funds” rather than “reserve funds” does not change the fact that they are excess
funds, and these excess funds have been held by UTMB for the Committee (outside
of the State Treasury) for the last four biennia.

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Management’s Response (continued)
ƒ

The CMHCC will seek direction from the Legislature on this issue. The
Committee has, since the inception of the program, been permitted to carry
unobligated funds at the end of a fiscal year forward to the next fiscal year. All
such funds have been used to fund the correctional health care program,
including any interest earned by the funds. However, should the Legislature
determine that any unobligated funds should be lapsed at the end of each year;
arrangements to do so can be made within the current operating structure.
Action: The CMHCC will seek legislative direction on the issue of carry-forward
authority.
Responsibility: Executive Director, CMHCC
Timeline: Clarification will be sought for FY 2005 during the 2005 Legislative
appropriations process.

Chapter 4-B

Details of the Committee’s Financial Status Are Not Readily
Available
The Committee’s annual financial information is reported to the Comptroller of
Public Accounts (Comptroller’s Office) in the University of Texas System’s AFR,
which summarizes the Committee’s financial data within the UTMB component of
the AFR. The Committee’s financial information is included in the primary
university fund and, as it is reported, cannot be readily identified. The Department’s
Legislative Appropriations Request includes two strategies that contain the
appropriations requests for inmate health care. These two strategies include the
Committee’s operating funds and funds for the Department’s Health Services
Division.
The Committee has earned more than $3 million in interest income on the bank
account balances that UTMB has held on the Committee’s behalf since fiscal year
1998. In fiscal year 2000, the annual interest income was as much as $971,525. The
Committee has not reported any of this financial information to the LBB or the
Comptroller’s Office. Because these funds are held outside the State Treasury and are
not reported in a separate AFR, they are not available for the State’s use.
The Committee asserts that its enabling legislation allows it to report its annual
financial information within the University of Texas System’s AFR. However, Texas
Government Code, Section 501.148 (c), states that “the Committee may contract with
an individual for financial consulting services.” This allows the Committee the
option to use other accounting services. The Committee should adhere to the
financial reporting requirements and guidelines prescribed in statute and by the
Comptroller’s Office. These include the following:
ƒ

Texas Government Code, Section 2101.011, requires state agencies to annually
report their financial activities to the Office of the Governor, the Comptroller’s
Office, the State Auditor’s Office, and the LBB. By definition (see Texas

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Government Code, Section 403.013), the statutorily created Committee is a state
agency and, therefore, is required to prepare and submit an AFR.
ƒ

The Comptroller’s Office’s reporting requirements include a requirement to
submit a detailed statement of all assets, liabilities, and fund balances, including
a summary by source of all revenues collected or accruing through the reporting
agency.

Including the Committee’s annual financial information in the University of Texas
System’s AFR does not provide complete and useful information regarding the
Committee’s finances. The LBB needs this financial information to assist the
Legislature in budgetary decision making. Assuming the University of Texas
System’s AFR does include the specific amounts associated with the Committee, the
current reporting structure does not appropriately match appropriations (sources of
funds as reported in the LAR) with the financial reporting (uses of funds as reported
in the AFR) for comparison purposes.
Recommendations
The Committee should:
ƒ

Prepare complete and accurate AFRs and provide them to the LBB, the
Comptroller’s Office, the State Auditor’s Office, and the Office of the Governor.

ƒ

Ensure that its AFRs comply with all of the reporting requirements specified by
the Comptroller’s Office for annual financial reporting by all state agencies and
institutions of higher education.

ƒ

Ensure that its AFRs follow the requirements set forth in Texas Government
Code, Section 2101.011, including requirements to identify sources of funds and
provide detailed expenditure information.

Management’s Response
The CMHCC will seek legislative direction on this issue. It has been the position of
the CMHCC that for financial reporting purposes, it is a reporting component of
UTMB. For eleven fiscal years the annual financial reporting requirements have
been met by incorporating the Committee’s data within UTMB’s reporting. The
CMHCC does not have a separate appropriation---its funds are included within the
TDCJ appropriation. The CMHCC has never been assigned a separate agency
number or designation by the Comptroller. If however, it is the will of the
Legislature for the CMHCC to report as a separate state agency, the CMHCC will do
so.
Action: The CMHCC will seek Legislative direction on the issue of annual financial
reporting during the appropriations process.
Responsibility: Executive Director, CMHCC

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Timeline: Clarification will be sought for FY 2005 during the 2005 Legislative
appropriations process.
Auditor’s Follow-Up Comment
Because the funds are appropriated to the Department, another option would be for
the Committee’s funds to be held by the Department and reported as part of the
Department’s AFR. This would also ensure that any unspent funds are returned to
the State Treasury. Reporting the Committee’s finances within UTMB’s annual
financial report creates a potential for a conflict of interest on the part of the
Committee as mentioned in Chapter 1.

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Appendices
Appendix 1

Objectives, Scope, and Methodology
Objectives
The objectives of this audit were to determine whether:
ƒ

Procurement processes are sufficient to ensure that the best contractors are fairly
and objectively selected.

ƒ

Contract provisions are sufficient to hold contractors accountable for delivery of
quality services and prevent the inappropriate or inefficient use of public funds.

ƒ

The methods that are used to establish contractor reimbursement are sufficient to
ensure that the State pays a fair and reasonable price for services.

ƒ

Contractor oversight is sufficient to ensure that contractors consistently provide
quality services and that public funds are spent effectively and efficiently.

Scope
The scope of our audit included a review of correctional managed health care
contract provisions for the 2002–2003 and 2004–2005 biennia. We reviewed
expenditures and cost allocation systems from September 2001 through June 2004 at
the University of Texas Medical Branch at Galveston (UTMB) as they related to the
managed health care appropriation. The period of our review of financial data was
from September 1995 through May 2004. At the Department of Criminal Justice
(Department), we reviewed monitoring program processes and results from
September 2002 through May 2004. We did not perform any financial work at the
Texas Tech Health Sciences Center (Texas Tech) or at the Department.

Methodology
Information collected included the following:
ƒ

Information from interviews with members and staff of the Correctional
Managed Health Care Committee (Committee)

ƒ

Information from interviews with the Department board chairman, executive
management, and staff

ƒ

Information from interviews with medical and administrative staff of UTMB’s
correctional managed health care program

ƒ

Information from interviews with Texas Tech’s correctional managed health care
staff conducted to gain an understanding of their processes

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ƒ

Information from interviews with management and staff of the Legislative
Budget Board and the Comptroller of Public Accounts

ƒ

Documentary evidence such as:

Œ

Organizational charts

Œ

Contracts between the Committee and the Department and between the
Committee and university providers

Œ

Payroll, revenue, and expenditure data provided by the Committee and
UTMB

Œ

Various management reports from the Committee, the Department, and
university providers

Œ

Prior audit reports relating to inmate health care issued by the State Auditor’s
Office and the Department’s Internal Audit Division

Œ

Recommendations from the Texas Performance Review and the Sunset
Advisory Commission relating to inmate health care

Œ

Articles and reports about inmate health care from national publications
including the American Correctional Association and the Council of State
Governments

Œ

Audit reports about inmate health care from other states

Procedures and tests conducted included the following:
ƒ

Reviewed the governance of the managed health care system by attending
meetings of the Committee and interviewing Committee members and staff,
Department staff, UTMB correctional managed health care staff, and medical
department staff at the Texas Youth Commission

ƒ

Reviewed the contracts between the Committee and the Department and between
the Committee and university providers to determine whether they met state
contracting requirements and best practices for contracting

ƒ

Reviewed the monitoring duties and processes of the Committee, the
Department, and university providers

ƒ

Analyzed costs associated with inmate health care, including trends in the
balances in the Committee’s accounts held at UTMB

ƒ

Reviewed costs allocated to inmate health care by selecting a judgmental sample
of expenditures and evaluating the supporting documentation to determine
reasonableness and compliance with state law and opinions issued by the Office
of the Attorney General

ƒ

Reviewed allocations of costs among UTMB’s correctional health care business
partners to determine whether costs were appropriately allocated

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ƒ

Reviewed the results of the Department’s monitoring of access to care

Criteria used included the following:
ƒ

State Auditor’s Office contracting model

ƒ

Draft of the Texas Building and Procurement Commission’s Contract
Management Guide

ƒ

The Department’s Health Services Division’s policies and procedures

ƒ

The Committee’s policies and procedures

ƒ

The Committee’s enabling statutes

ƒ

Other standards and criteria identified during fieldwork

Project Information
This audit was conducted in accordance with generally accepted government auditing
standards. Fieldwork was conducted from April 2004 to September 2004. The
following members of the State Auditor’s staff performed this audit:
ƒ

Sandra Donoho, MPA, CISA, CIA, Project Manager

ƒ

Robert Kiker, Assistant Project Manager

ƒ

Brianna Lehman

ƒ

Sherry Sewell, CGAP

ƒ

Stephanie Sherrill

ƒ

Rene Valadez

ƒ

Leslie Ashton, CPA, QC Reviewer

ƒ

Nicole Guererro, MBA, Audit Manager

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Appendix 2

Correctional Managed Health Care Time Line
ƒ

Texas Performance Review’s Against the Grain recommends
managed health care for Texas prisons.

ƒ

73rd Legislature, 1993.

ƒ

September 1994.

ƒ

December 1994. The House Corrections Committee completes its interim charge
to study the implementation of correctional managed health care.

ƒ

74th Legislature, 1995.

ƒ

January 1996.

January 1993.

Senate Bill 378 establishes the Managed Health Care
Advisory Committee with six members—two from the Department of Criminal
Justice and two from each of the university providers.
The transition to managed health care is completed.

House Bill 1567 changes the name of the Managed Health
Care Advisory Committee to the Correctional Managed Health Care Advisory
Committee and extends its authority to contract with other entities.
Psychiatric services are included in correctional managed health

care.
ƒ

December 1996. The House Corrections Committee completes a second interim
charge to study the implementation of correctional managed health care.

ƒ

January 1998.

ƒ

July 1998.

ƒ

76th Legislature, 1999.

The State Auditor’s Office releases its report on managed health
care (An Audit Report on Managed Health Care at the Texas Department of
Criminal Justice, SAO Report No. 98-013).
The Sunset Advisory Committee releases its report recommending
changes to the Correctional Managed Health Care Advisory Committee.

Senate Bill 371 incorporates the Sunset Advisory
Committee’s recommendations and continues the Correctional Managed Health
Care Advisory Committee as the Correctional Managed Health Care Committee.
It also adds three public members to the Committee, two of whom must be
licensed to practice medicine in Texas.

Source: The Correctional Managed Health Care Committee’s Committee Member
Training and Orientation Material, July 2002

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Appendix 3

Texas Incarceration Facilities Map
This map shows the locations of facilities managed by correctional entities that
contract with the University of Texas Medical Branch at Galveston to provide health
care to inmates. The correctional entities include the Department of Criminal Justice,
the Texas Youth Commission, the Federal Bureau of Prisons, and several county
jails. The circles indicate areas where facilities are located close enough to share
health care staff.

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Appendix 4

Trends in the Costs of Certain Drugs
The cost of drugs to treat HIV infections and hepatitis C are decreasing, but at a
slower rate than the cost of all drugs prescribed is decreasing.
The majority of the cost of drugs for inmates are attributable to HIV patients (the cost
of these drugs represented 45 percent of all inmate drug costs in fiscal year 2003, or
$12.6 million). The cost of HIV drugs has decreased from $15.7 million in fiscal
year 2001 to $12.6 million in fiscal year 2003.
The cost of hepatitis C drugs has risen from $151,107 in fiscal year 1998 to $1.5
million in fiscal year 2003. The increase in fiscal year 2003 represents a 6.24 percent
increase from fiscal year 2002 (or an $89,757 increase).
Figure 1 compares trends in the costs of HIV and hepatitis C drugs.
Figure 1

Comparison of HIV and Hepatitis C Drug Costs
$45
$40

Drug Costs (in millions)

$35

Drug Cost
HIV Cost
HEP C Cost

$30
$25
$20
$15
$10
$5
$0
1998

1999

2000

2001

2002

Fiscal Year
Source: Unaudited information from university providers was analyzed to determine these trends.

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2003

The cost of hepatitis C drugs is declining at UTMB and increasing at Texas Tech.
Drug costs are lower at UTMB due to public health pricing. UTMB qualifies for
Public Health Services pricing, which is lower than non–Public Health Services
pricing. Texas Tech does not qualify for these lower drug prices. Figure 2 compares
trends in UTMB’s and Texas Tech’s costs for hepatitis C drugs per inmate (not just
inmates with hepatitis C).
Figure 2

Universities’ Hepatitis C Drug Costs per Inmate per Day
$0.050
$0.045

UTMB HC $ PT Day
TT HC $ PT Day

$0.040

Cost per Day

$0.035
$0.030
$0.025
$0.020
$0.015
$0.010
$0.005
$0.000
1998

1999

2000

2001

2002

2003

Fiscal Year

Source: Unaudited information from university providers was analyzed to determine these trends.

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The cost of HIV drugs is declining. Figure 3 shows the cost of HIV drugs per inmate
(not just inmates with HIV). The daily costs for HIV, non-HIV, and total drug costs
(per patient) have all decreased from fiscal year 2001 through fiscal year 2003, with
the HIV drug costs decreasing at a slower rate.
Figure 3

Drug Costs per Day - All Inmates
$0.90
HIV Cost PT Day
$0.80

Total Cost PT Day
Non- HIV Cost PT Day

$0.70
$0.60

Cost per Day

$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
1998

1999

2000

2001

2002

2003

Fiscal Year
Source: Unaudited information from university providers was analyzed to determine these trends.

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Figure 4 shows that the costs of HIV drugs is declining at UTMB and increasing at
Texas Tech. Drug costs are higher at Texas Tech because UTMB qualifies for Public
Health Services, but Texas Tech does not.
Figure 4

HIV Drug Cost per HIV Inmate Day

$140

UTMB Cost Day HIV PT
TT Cost Day HIV PT

$120

Dollars per Day

$100

$80

$60

$40

$20

$0
1998

1999

2000

2001

2002

2003

Fiscal Year
Source: Unaudited information from university providers was analyzed to determine these trends.

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Appendix 5

Financial Information Compiled by the Committee
Below is a reproduction of the financial information that the Correctional Managed Health Care
Committee compiled for inmate health care provided by both UTMB and Texas Tech in the third
quarter of fiscal year 2004.

COMBINED UTMB & TTUHSC FY 2004 Third Quarter

Population Served

Medical
Services

Private
Prisons

Mental Health
Services

Total

137,466

10,692

148,158

148,158

Revenue
Capitation Payments
State Reimbursement Benefits
Other Misc Revenue

$215,441,827
$23,133,965
$142,134

$6,113,749
$0
$0

$28,089,041
$4,599,090
$0

Total Revenue

$238,717,926

$6,113,749

$81,912,865
$20,915,602
$9,852,429
$924,073
$16,703,748
$305,901
$919,513
$359,841
$54,278
$131,948,250

$2,629,440
$599,877
$562,244
$0
$0
$33,153
$0
$13,912
$0

$21,539,896
$5,314,125
$491,555
$212,121
$0
$64,451
$0
$140,046
$31,103

$3,838,626

$27,793,297

$106,082,201
$26,829,604
$10,906,228
$1,136,194
$16,703,748
$403,505
$919,513
$513,799
$85,381
$163,580,173

$3,456,476
$786,141
$16,258,044
$4,092,724
$0
$14,284
$0
$659,022

$0
$0
$351,331
$0
$0
$0
$0
$0

$0
$0
$0
$0
$0
$0
$0
$0

$3,456,476
$786,141
$16,609,375
$4,092,724
$0
$14,284
$0
$659,022

$25,266,69

$351,331

$0

$25,618,022

$16,123,551
$13,693,594
$54,155,563
$2,454,814

$0
$534,580
$0
$151,986

$0
$0
$0
$0

$16,123,551
$14,228,174
$54,155,563
$2,606,800

$86,427,522

$686,566

$0

$87,114,088

$9,633,028

$295,204

$1,656,296

$11,584,528

Total Expenses

$253,275,492

$5,171,727

$29,449,593

$287,896,812

Revenue - Expenses

($14,557,566)

$942,022

$3,238,538

($10,377,006)

$32,688,131

$249,644,617
$27,733,055
$142,134
$277,519,806

Expenses
Onsite Services
Salaries
Benefits
Operating (M&O)
Professional Services
Contracted Units/Services
Travel
Telemedicine
Capital Equip/Depreciation
Estimated IBNR
Subtotal Onsite Expenses
Pharmacy Services
Salaries
Benefits
Operating (M&O)
Professional Services
Contracted Units/Services
Travel
Capital Equip/Depreciation
Estimated IBNR
Subtotal Pharmacy Expenses
Offsite Services
University Professional Services
Freeworld Provider Services
UTMB or TTUHSC Hospital
Estimated IBNR
Subtotal Offsite Expenses
Indirect Expenses

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Appendix 6

Management’s Response

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Copies of this report have been distributed to the following:

Legislative Audit Committee
The Honorable David Dewhurst, Lieutenant Governor, Joint Chair
The Honorable Tom Craddick, Speaker of the House, Joint Chair
The Honorable Steve Ogden, Senate Finance Committee
The Honorable Thomas “Tommy” Williams, Member, Texas Senate
The Honorable Talmadge Heflin, House Appropriations Committee
The Honorable Brian McCall, House Ways and Means Committee

Office of the Governor
The Honorable Rick Perry, Governor

Correctional Managed Health Care Committee
Dr. Ben Raimer, Chair
Mr. Elmo Cavin, Member
Ms. Jeannie Frazier, Member
Dr. James Griffin, Member
Dr. Lannette Linthicum, Member
Mr. Ed Owens, Member
Dr. Patti Patterson, Member
Mr. E. J. Pederson, Member
Mr. Allen Hightower, Managed Health Care Administrator

This document is not copyrighted. Readers may make additional copies of this report as
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