CALIFORNIA DEPARTMENT OF
CORRECTIONS AND REHABILITATION
Review Report
HEALTHCARE DELIVERY SYSTEM

STEVE WESTLY
California State Controller

August 2006

STEVE WESTLY
California State Controller
August 2, 2006
Robert Sillen, Receiver
California Prison Receivership
1731 Technology Drive, Suite 700
San Jose, CA 95110
Dear Mr. Sillen:
Enclosed is the State Controller’s Office (SCO) report of its fiscal review of the California
Department of Corrections and Rehabilitation’s (CDCR) inmate healthcare delivery system,
now under your receivership.
My office conducted this review to ensure that CDCR healthcare expenditures are legal,
necessary, reasonable, and made for valid goods purchased or services performed. During this
review, the SCO focused primarily on the department’s expenditures for medical services
provided by outside contractors, such as hospitals, specialty-care physicians, and laboratories.
In recent years, the department has increasingly relied upon outside contractors to provide a
broad array of healthcare services to inmates. According to the CDCR’s accounting records,
expenditures for contracted services increased from $153 million in fiscal year (FY) 2000-01
to a projected $821 million in FY 2005-06, an increase of $668 million, or 437%.
My office found evidence strongly suggesting that waste, abuse, and management deficiencies
are rampant in the department’s expenditures and oversight of contracted healthcare services.
In addition, despite previous audit recommendations by the Office of the Inspector General and
the Bureau of State Audits, the CDCR has not implemented appropriate control measures to
provide oversight over contract expenditures.
I hope that this review will be of assistance to you as you institute reforms to this very
important program.
Should you have questions, please contact Jeffrey V. Brownfield, Chief, Division of Audits,
at (916) 324-1696.
Sincerely,
/s/
STEVE WESTLY
State Controller
cc: James Tilton, Acting Secretary
Department of Corrections and Rehabilitation
300 Capitol Mall, Suite 1850, Sacramento, CA 95814 X P.O. Box 942850, Sacramento, CA 95250
Phone: (916) 445-2636 X Fax: (916) 445-6379 X Web Address: www.sco.ca.gov X E-Mail: steve@sco.ca.gov

California Department of Corrections and Rehabilitation

Healthcare Delivery System

Contents
Review Report
Summary of Findings ........................................................................................................

1

Introduction .......................................................................................................................

5

Overview of the CDCR’s Inmate Healthcare Delivery System .....................................

6

Review Scope and Methodology.......................................................................................

6

Analysis of the CDCR’s Inmate Healthcare Expenditures............................................

7

Findings...................................................................................................................................

9

Contract Management ......................................................................................................

9

Utilization Management.................................................................................................... 20
Internal Control Over Payments...................................................................................... 25
Recommendations .................................................................................................................. 30
Appendix A—Comparison of Healthcare Budget and Expenditures ............................... 32
Appendix B—Comparison of Expenditures for Contracted Services............................... 33
Appendix C—Comparison of Total Healthcare Expenditures
and Contracted Services Expenditures....................................................... 34
Appendix D—List of Acronyms............................................................................................ 35

Steve Westly • California State Controller

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Healthcare Delivery System

Review Report
Summary of
Findings

In April 2006, the State Controller’s Office (SCO) initiated a fiscal
review of the California Department of Corrections and Rehabilitation’s
(CDCR) budget and spending practices for its healthcare delivery
system. Expenditures increased from $676 million in FY 2000-01 to
$1.05 billion in FY 2004-05, an increase of $377 million (56%). The
CDCR, in February 2006, projected another $198 million increase in
inmate healthcare expenditures, bringing the estimated total to
$1.25 billion for FY 2005-06. Between February 28, 2006, and April 30,
2006, the department’s accounting records reflected another increase in
expenditure projection of $230 million, for a total of $1.48 billion.
Despite significant increases in State spending, concerns continue to
exist over the adequacy of medical care being provided to inmates. These
concerns have led to lawsuits alleging substandard medical care and
eventually resulted in the unprecedented appointment of a federal
receiver to assume total control of the CDCR’s inmate healthcare
delivery system.
In February 2006, a federal court-appointed Correctional Expert found,
among other things, millions of dollars in unpaid bills, some of which
have been outstanding for as long as four years. In addition, some of the
invoices could not be paid because services were performed without
contracts. Such conditions raised further questions over the integrity and
soundness of the CDCR’s spending practices.
The SCO initiated this fiscal review to ensure that CDCR healthcare
expenditures are legal, necessary, reasonable, and for valid goods
purchased or services performed. Contracted services with outside
hospitals, physicians, and other private healthcare providers accounted
for all of the increases in inmate healthcare expenditures from fiscal year
(FY) 2000-01 to FY 2005-06. This review therefore primarily focuses on
CDCR’s system of internal controls governing the processes and
procedures for procuring and awarding its medical service contracts and
payments for services.
Following is a summary of the SCO’s findings.
Finding 1—The CDCR has not developed a comprehensive systemwide policy to manage its medical service contracts. Consequently,
the department’s contract management efforts are fragmented and
inadequate to provide proper oversight over contract payments.
When State prisons’ staff members find evidence suggesting that
contractors may be engaging in abusive contract practices, such matters
are not always properly and promptly addressed. For example, a State
prison manager found that a contractor inflated its billings by over 28%
by supplying the CDCR with an inaccurate, or possibly false,
subcontractor’s rate schedule. The prison staff adjusted the contractor’s
billings and brought the matter of contract overcharge to the attention of
her counterpart at another State prison that also utilizes the contractor’s
services. The staff at the other prison has yet to take action to adjust the
contractor’s invoices and continues to pay the contractor at inflated rates.
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Under a regionwide contract, this contractor is providing services to six
other State prisons, which apparently are also paying the inflated rates. If
the contractor’s billing practices are consistent at all State prisons, then
the contractor has overcharged the CDCR by an estimated $418,000
during the first 10 months of FY 2005-06. Moreover, despite being made
aware of this issue and other contract performance concerns, CDCR
headquarters has failed to take action for approximately three years and
has issued a new contract to the same contractor effective July 1, 2006.
Finding 2—The CDCR’s contract negotiation process is deficient,
resulting in the prison system continuing to pay significantly more
for medical services than other major purchasers of healthcare
services.
The SCO found that CDCR continues to pay more than other major
purchasers of healthcare services for the same inpatient and outpatient
services. For example, in a prior audit, the Bureau of State Audits (BSA)
found that CDCR was paying a hospital 4.16 times what Medicare would
pay for the same inpatient care. The contract was renegotiated at the
CDCR’s request. However, under the old contract, the department on
average paid the hospital $2,789 per day. Under the new contract, the
CDCR is paying an average of $3,994 per day, or 43.2% more.
Given the nature of the patient population and the locations of many of
the institutions, the CDCR is in a poor bargaining position to negotiate
favorable rates with hospitals, medical groups, and other medical
professionals. The DGS Management Memo 05-04 requiring competitive
bidding and the chaos and confusion that followed the release of the
memo, further hampered the CDCR’s contract negotiation efforts.
However, the SCO found that the CDCR compounded its difficulties by
failing to properly use available information and practices to minimize
the State’s healthcare costs.
Finding 3—Despite a previous audit recommendation to the
contrary, the CDCR’s contracts continue to pay hospitals based on a
percentage of the hospital’s billed charges, which leads to
overpayments or billing abuses.
BSA’s July 2004 report recommended that the CDCR consider
negotiating contract terms based on hospital costs rather than on hospital
charges for outpatient services, pharmaceuticals, and supplies. The
CDCR’s contracts continue to stipulate that the department shall pay the
hospitals based on a percentage of the hospital’s billed charges, which in
turn has led to overpayments or billing abuses. For example, the CDCR
paid a hospital $12,379.50 (billed charges totaling $40,255 @ 30%) for
drugs provided to an inmate with cancer. The SCO’s analysis of the
Medi-Cal Program formulary files found that Medi-Cal would pay only
$300 to $400 for the same drugs.

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Finding 4—An opportunity for significant State savings has been
delayed for years due to protests and objections raised by a
contractor who is financially benefitting from the delay.
The CDCR currently has about 150 inmates who need dialysis treatment.
Most of these inmates are transported outside the institutions three times
a week for dialysis treatment. Each treatment costs, on average, more
than $400 plus the costs for inmate transportation and custody while
outside of the prisons. After years of deliberation, the CDCR, in August
2003, initiated a process to solicit competitive bids for contractors to
perform dialysis services on-site at the State prisons. One provider, who
provides the dialysis treatments under a statewide contract issued on a
sole-source basis, was awarded the new contract to begin an on-site
treatment program at two of three State prisons. As this provider is
currently providing dialysis treatments off-site at substantially higher
rates than it will be able to charge under the new contract awarded by the
competitive bid process, there is little financial incentive to implement
the on-site dialysis program expeditiously. Even though the contract was
executed on November 15, 2005, the program is still not operational as
of July 2006.
Finding 5—At least two of the four prison acute-care hospitals are
functioning at a fraction of their capacity, resulting in increased
costs of contracted services and the need for outside hospital
services.
At considerable expense, the CDCR built four acute-care hospitals. The
SCO auditors visited two of the four hospitals and found both to be
functioning at a fraction of their capacity. The department has
encountered difficulties in recruiting and retaining qualified medical
personnel to staff the various hospital functions. The problem is
compounded by the fact that the hospitals do not have adequate
equipment, supplies, and support services such as anesthesia service for
their surgery rooms. In addition, decisions made by CDCR management
also severely curtail inpatient and outpatient services performed at the
prison hospitals. All but seven acute-care beds at one prison hospital
have been de-commissioned, while over 90% of the acute-care beds at
another prison hospital are being used by inmates with long-term needs.
Major surgeries performed at one prison hospital declined from 291
cases in 2000 to eight in 2004 and eight in 2005. At the other prison
hospital, only one of the two operating rooms is functioning, at a very
limited capacity. The other operating room has not been functional since
the hospital was built in 1993 due to a lack of proper equipment,
supplies, and inadequate staffing. Therefore, instead of treating inmates
from other State prisons, as they were designed to do, the two hospitals
are sending their own prison patients to outside hospitals at significantly
higher costs, sometimes for minor surgeries.

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Finding 6—CDCR’s utilization management process is ineffective in
ensuring that services are necessary and consistent with prescribed
guidelines or that contractors’ charges are appropriate.
The utilization management (UM) nurses at the CDCR are the first-level
reviewers of requests for services. Their function is to ensure
contractors’ compliance with prescribed guidelines and review
contractors’ invoices to verify that charges are appropriate for services
performed. Some UM nurses informed SCO auditors that they never
received any training concerning review guidelines, protocols, and
procedures, and that their heavy workloads limit the scope of their
reviews. The UM nurses also said that they are often reluctant to
question the judgment and decisions of outside specialists, despite the
fact that the specialists may have financial incentives to make referrals.
In some cases, the State prison’s management circumvented the
utilization review process. Therefore, the UM nurses’ review and
monitor efforts are not always effective. For example, after a significant
increase in the contracted rates, one hospital’s in-patient days increased
from 2,111 days in FY 2004-05 to 2,928 days for the first 11 months of
FY 2005-06, an increase of 38.7% in utilization. Total hospital
expenditures were expected to increase from $2,712,831 in FY 2004-05
to a projected $8,097,468 in FY 2005-06, an increase of 298%. The SCO
selected a limited sample of in-patient cases for review and found
evidence suggesting that some hospital stays were not necessary. For
example, a UM nurse’s review note shows that an inmate did not meet
the criteria for hospital stay. Without explanation, the inmate was
hospitalized for three days at a cost of $10,200 or $3,400 per day.
Finding 7—Some decisions regarding medical treatment are made
based on legal considerations rather than on what is medically
necessary and appropriate.
Some medical staff members at the State prisons believe that inmates are
prone to file lawsuits that could, regardless of the outcome of the cases,
blemish their records. Therefore, they sometimes make referrals knowing
that the cases do not need to be referred to an outside facility. In addition,
prison management is sometimes reluctant to authorize in-house services
after weighing the potential fiscal impact of lawsuits against questions
about the competency of the prison’s medical staff and the adequacy of
prison facilities and equipment. Making patient treatment decisions
based on legal considerations rather than medical necessity could
significantly increase the costs of inmate healthcare.
Finding 8—Internal control at State prisons is ineffective to identify
and prevent overpayments or billing abuses.
Many Health Care Cost and Utilization (HCCUP) analysts interviewed
told SCO auditors they have had little or no training on the criteria to
review contractors’ charges. Also, some HCCUP analysts said their
heavy workloads precluded them from thoroughly reviewing the
contractors’ charges. In some cases in which the HCCUP analyst
identified practices suggesting possible overcharge, the contractors were
paid anyway due to the ambiguity in contract terms. In addition, some
HCCUP analysts said they cannot determine the reasonableness of the
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hospitals’ charges when the hospitals are reimbursed based on a
percentage of the amount billed. As a result, contractors have inflated
their charges by billing at a higher level for services than what they
should have charged. For example, one urologist was paid more than
$2,000 per hour, apparently by billing on a per-patient basis using billing
codes for one hour of consultation, when in actuality he spent much less
time with the patients. Also, the SCO found that some contractors billed
based on a per-patient basis when the contract terms specify
reimbursement at hourly rates, resulting in much higher charges.

Introduction

In April 2006, the State Controller’s Office (SCO) initiated a fiscal
review of the California Department of Corrections and Rehabilitation’s
(CDCR) budget and spending practices for its healthcare delivery
system. At the time the audit was initiated, the total inmate population
was approximately 170,000; this number represented an increase of
10,000, or 6% over the approximately 160,000 inmates in FY 2000-01.
During the same period, inmate healthcare expenditures increased
significantly, from $676 million in FY 2000-01 to $1.05 billion in FY
2004-05, an increase of $384 million (57%). Moreover, the CDCR
projected another $198 million increase in inmate healthcare
expenditures, bringing the estimated total to $1.25 billion for FY
2005-06, a total increase of $584 million, or 86%. On a per capita basis,
the average annual cost for each inmate increased from $4,225 in FY
2000-01 to $7,412 (projected amount) in FY 2005-06, a total increase of
$584 million, or 86%. A summary of the department’s inmate healthcare
budget, as prescribed in the Budget Act and healthcare expenditures for
FY 2000-01 to FY 2005-06, is provided as Appendix A of this report.
Despite significant increases in State spending, widespread concerns
continue to exist over the adequacy of medical care being provided to
inmates. These concerns led to lawsuits alleging substandard medical
care and eventually resulted in the unprecedented appointment of a
federal receiver (Receiver) to assume total control over the CDCR’s
inmate healthcare delivery system. Under a federal court order dated
February 14, 2006, the Receiver assumed office effective April 17, 2006.
In addition, in February 2006, a federal court-appointed Correctional
Expert found serious deficiencies in the CDCR’s process of negotiating
and managing its contracts for medical services. Among other issues
identified, the Correctional Expert found millions of dollars in unpaid
bills, some of which have been outstanding for as long as four years. In
addition, some of the invoices could not be paid because services were
performed without contracts. Further complicating matters, the CDCR
was ordered by the federal court to pay this backlog of claims within 60
days. In order for the SCO pay these claims in accordance with the court
order, the SCO was required to temporarily reassign staff resources and
expend extraordinary efforts to meet the prescribed timeframe. Such
conditions raise further questions over the integrity and soundness of the
CDCR’s spending practices.
The SCO fiscal review was initiated to ensure that CDCR healthcare
expenditures are legal, necessary, reasonable, and for valid goods
purchased or services performed.
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Overview of the
CDCR’s Inmate
Healthcare
Delivery System

As of March 31, 2006, the CDCR had a total of 170,475 adults
incarcerated in State prisons, camps, community correctional centers,
and State mental hospitals. To provide inmates with needed medical care,
the CDCR operates various medical facilities, including general acute
care hospitals, correctional treatment centers, skilled nursing facilities,
and outpatient housing units. Because it cannot provide all of the
necessary healthcare services, the CDCR contracts with medical service
providers—such as hospitals, specialty-care physicians, and
laboratories—in the community. In addition, to address the chronic
shortage of medical staff in various classifications, the CDCR in recent
years has significantly expanded the use of registries to obtain various
medical services. Such registries provide, at contracted rates, the services
of medical personnel such as physicians, pharmacists, and nurses to
perform many of the duties that are normally handled by the prisons’
own medical staff.

Review Scope
and Methodology

Based on an analysis of the CDCR’s inmate healthcare expenditures
(discussed in the following section of this report), the SCO focused on
the department’s expenditures for contracted services. According to its
accounting records, the CDCR’s expenditures for contracted services
represent approximately 55.5% of its total healthcare expenditures
($821 million of $1.48 billion) for FY 2005-06. Past audits by the Office
of the Inspector General (OIG) and the Bureau of State Audits (BSA)
have disclosed internal control deficiencies in CDCR processes and
procedures for managing its healthcare contracts that could lead to
improper payments.
The SCO performed the following procedures.
• Reviewed pertinent statutes, regulations, and written policies and
procedures regarding the CDCR’s healthcare delivery system.
• Reviewed and analyzed the CDCR’s healthcare budget and
expenditures from FY 2000-01 to FY 2005-06.
• Reviewed previous audit reports issued by the Office of the Inspector
General (OIG) and the Bureau of State Audits (BSA).
• Interviewed responsible officials at CDCR headquarters, including
staff at the Health Care Services Division and other CDCR staff
responsible for accounting, auditing, budgeting, contract service,
personnel, and information technology functions.
• Conducted site visits of four CDCR prisons: California Medical
Facility in Vacaville; California State Prison, Corcoran; California
Substance Abuse and Treatment Facility in Corcoran; and Richard J.
Donovan Correctional Facility in San Diego. Total FY 2004-05
expenditures for these four prisons was $206.6 million, or 19.5% of
the department’s $1.06 billion in inmate healthcare expenditures for
the year.
• Interviewed staff members at the four State prisons visited including,
but not limited to, chief medical officers, physicians/surgeons,
pharmacists, nurses, Utilization Management (UM) nurses, and
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Health Care Cost and Utilization Program (HCCUP) analysts.
HCCUP analysts are responsible for reviewing and analyzing the
institutions’ healthcare expenditures and the invoices submitted by
contractors to ensure compliance with terms specified in the contracts.
• Sampled, on a limited basis, previously paid invoices to evaluate the
effectiveness of internal controls over payment processing and to
determine whether payments were for services that are necessary,
reasonable, and services actually performed.

Analysis of the
CDCR’s Inmate
Healthcare
Expenditures

As previously noted, the CDCR’s inmate healthcare expenditures
increased from $676 million in FY 2000-01 to $1.05 billion in FY
2004-05, an increase of $377 million (56%) over four years. Over the
same period, the inmate population was constant, ranging between
160,000 and 164,000. During FY 2005-06, inmate population increased
by approximately 7,000.
Total inmate healthcare expenditures continued to escalate during FY
2005-06. According to its accounting records, as of February 28, 2006,
the CDCR’s projected inmate healthcare expenditure was $1.25 billion
compared to a budget of $1.05 billion per the 2005 Budget Act. Between
February 28, 2006, and April 30, 2006, the department’s expenditure
projection increased by another $230 million, for a total of $1.48 billion
in FY 2005-06. It should be noted that this figure significantly
understates the total cost of inmate healthcare, as it does not include the
costs for transporting inmates to facilities outside State prisons for
medical care or costs for guarding inmates while they are outside of the
prisons. Two of the institutions visited by the SCO during our review
incurred well over $3 million each in unbudgeted overtime costs beyond
their normal medical transportation and guard costs.
Increased costs for contracted services with outside hospitals, physicians,
and other private healthcare providers accounted for all of the increases
in inmate healthcare expenditures in recent years. Appendix B provides a
summary of the CDCR’s healthcare expenditures, by object code, for
contracted services from FY 2000-01 through FY 2005-06. Total costs
for contract services increased from $153 million in FY 2000-01 to a
projected $821 million (April 2006 projection) for FY 2005-06, an
increase of $668 million (437%). In FY 2000-01, contracted services
represented 22.7% ($153 million to $676 million) of the CDCR’s total
inmate healthcare expenditures, whereas the ratio increased to 55.4%
($821 million to $1.48 billion) in FY 2005-06 (see Appendix C).
Previous audits have repeatedly identified deficiencies in the CDCR’s
processes and procedures for procuring and managing its medical service
contracts. In October 2002, the Office of the Inspector General (OIG)
found that the department lacks a comprehensive statewide policy for
managing its medical service contracts. In April 2004, the BSA reported
that the department did not seek competitive bids for most of its contracts
for medical services, overpaid medical-service charges, and may have
made payments for nonexistence services.

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In another report, issued in July 2004, the BSA found that the department
paid some hospitals two to eight times the amounts Medicare would have
paid the same hospitals for the same inpatient service, and that certain
contract provisions have resulted in the department paying higher
amounts then necessary for inpatient and outpatient healthcare. In FY
2002-03, the audit period of BSA’s July 2004 report, the CDCR’s annual
costs for contract services was $239 million in comparison to the
projected $821 million for FY 2005-06, an increase of $582 million
(244%) in three years.
Given this drastic increase in contracted expenditures, it is imperative
that CDCR implement appropriate internal control measures to ensure
that contracts are executed in the State’s best interest and that payments
are proper, legal, and for services actually rendered. Therefore, the SCO
primarily focused on internal controls over the CDCR’s processes and
procedures for managing medical contracts and payments for medical
contracts during this fiscal review.
This analysis was prepared based on data contained in the CDCR’s
accounting records. The SCO did not perform audit procedures to verify
the accuracy of the department’s accounting data.

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Findings
The results of the SCO fiscal review presented here are broadly classified into three sections: contract
management, utilization management, and internal control over payments.

CONTRACT
MANAGEMENT

CDCR prisons have the authority to award services or purchase goods
costing less than $5,000 without going through the CDCR Office of
Business Services (OBS). The State prisons have authority to award
contracts of up to $50,000 through competitive bids. For contract
services valued between $50,000 and $75,000, the prisons are required to
submit a bid proposal package to OBS, which reviews the bid package
and awards the contract. For contracts valued over $75,000 that are not
specifically exempted, the CDCR must solicit competitive bids from
outside service organizations through the Department of General
Services (DGS). The bid proposal packages are submitted to the DGS for
review before being submitted for a statewide bidding process.
The Division of Correctional Health Care Services (DCHCS) and OBS
are responsible for preparing the criteria for bid solicitation. The DCHCS
establishes the Scope of Work and maximum acceptable compensation
rates for contracts. The OBS reviews the bids for compliance with
applicable State guidelines. Through this process, the CDCR enters into
statewide or regional master contracts with various medical providers at
specified rates.
The master contract serves as a tool that enables the State prisons to
obtain services at pre-established rates rather than having to negotiate
rates with each individual contractor. Once a master contract is in place,
the institution can execute a Notice to Proceed (NTP) to commit funds
based on the anticipated level of services at contracted rates. Contractors
are not to perform any services until the NTPs are executed and funds are
encumbered (committed) by the CDCR’s Regional Accounting Office.
For many of the registry services, the CDCR uses the competitive-bid
process to enter into multiple contracts with different medical registries
for the same services. After submitting competitive bids, each registry is
ranked; the ranking order establishes contact priority based on the rates
submitted. When requesting services, State prisons are to first contact the
registry with the lowest rate. If that registry is unable or unwilling to
provide the necessary services, the State prison is to contact the registry
with the next lowest contract rates. State prison staff members stated that
they often had to contact several registries before locating a registry that
could deliver the needed services.

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FINDING 1—
CDCR has not
developed a
comprehensive systemwide policy to manage
its medical service
contracts

Healthcare Delivery System

The CDCR has not developed a comprehensive system-wide policy to
manage its medical service contracts. Consequently, the
department’s contract management efforts are fragmented and
inadequate to provide proper oversight over contract payments.
In its October 2002 report, the OIG noted that the CDCR’s medical
service contract costs have increased 82%, from $92 million in FY
1997-98 to $168 million in FY 2001-02; the OIG recommended that the
CDCR adopt statewide policies and procedures for contract management.
Since the release of the OIG report, CDCR’s cost of medical service
contracts have increased even more drastically, to a projected
$821 million in FY 2005-06, an increase of $653 million (389%) over
five years.
According to an OIG follow-up report issued April 2006, the CDCR
established a health contract services unit to assist the State prisons with
their medical service contract needs. The contract issues discussed in
later sections of this report reveal that the efforts of the health contract
services unit are clearly inadequate to address the institutions’ contract
needs. Moreover, from a statewide policy and procedure standpoint, the
SCO found little evidence to suggest that CDCR headquarters has taken
appropriate measures to provide proper oversight over contract
expenditures. Specifically, the SCO found the following.
1. Information that strongly suggests contractors may have
engaged in abusive contract practices and that these issues have
not been properly and promptly addressed. Most of the State
prisons’ contractors provide services to multiple institutions under
statewide or region-wide contracts. When a contractor engages in an
abusive practice at a State prison, it is very likely that the same
abusive practice exists at other State prisons. The SCO found that
efforts to identify and address contract and billing abuses vary
significantly, based on each State prison staff’s volition. Moreover,
when prison staff members do identify potentially abusive practices,
such information is not always properly and promptly communicated
to headquarters or other affected State prisons to prevent further
abuse. For example, the CDCR entered into a region-wide contract
with a medical provider for laboratory services at eight State prisons.
The contract stipulates that, when the contractor uses a subcontractor
to provide the laboratory service, the contractor shall be reimbursed
the actual costs of laboratory tests as shown in the subcontractor’s
published price schedule. The contract further states that “billed
charges for Send Out Testing will be disclosed on all invoices to
CDC” and “Contractor will supply the (CDCR) with a copy of the
subcontractor’s rate schedule.” The laboratory staff at the Substance
Abuse Treatment Facility (SATF) suspected that the contractor had
inflated the subcontractor’s rates by supplying CDCR with an
inaccurate, or possibly false, subcontractor rate schedule. According
to the SATF laboratory staff, they knew that the rates were inflated
because the subcontractor had the prior contract with the institution
and the rates submitted by the new contractor for the subcontractor’s
services were significantly higher than what the institution has paid
in the past.

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The SATF laboratory staff provided the following additional
information to SCO auditors.
• Despite specific contract requirements, the contractor refused to
provide the SATF laboratory staff with invoices from the
subcontractor to substantiate the rates charged. The SATF
laboratory staff contacted the subcontractor directly and found
that almost all of the contractor’s rates exceeded the
subcontractor’s actual charges. For example, the contractor
charged $250 for HCV Genotype tests, but paid the subcontractor
only $135. The SATF laboratory staff then adjusted all of the
contractor’s invoices based on the rates furnished by the
subcontractor. The adjustments totaled $36,550 of the $129,160
(28.3%) of the contractor’s charges during FY 2004-05. While the
contractor complained about the adjustments, it did nothing to
refute them.
• The SATF laboratory staff brought the matter of contractor
overcharges to the attention of the laboratory staff at California
State Prison, Corcoran (CSP-Corcoran), who have yet to take
action to adjust the contractor’s billings. Moreover, the SATF
laboratory staff indicated that six other State prisons are also
continuing to pay the contractor at inflated rates. For the first 10
months of FY 2005-06, the seven State prisons (including CSPCorcoran) paid a total of $1.48 million to the contractor. If the
contractor’s billing practices at the seven other institutions are
consistent with its practices at SATF, the contractor has
overcharged the CDCR by an estimated $418,000 ($1.48 million
@ 28.3%) during the first 10 months of FY 2005-06.
• The contractor repeatedly provided SATF with inaccurate test
results of hepatitis C. The SATF laboratory staff found that
inmates previously tested positive for hepatitis C will often test
negative when the same contractor runs the test at a later date.
The contractor suggests that the test results vary based on
antibody levels. The SATF laboratory staff questions this
explanation because any antibody in an inmate’s system would
mean he or she has been infected with hepatitis C. Inaccurate test
results resulted in inmates who did not have hepatitis C being
given medication and inmates who did have hepatitis C not
receiving necessary medication. The SATF laboratory staff
further noted that many physicians have repeatedly raised
concerns about the inaccuracy of test results and routinely
requested that a university hospital repeat the tests of the
contractor, thus duplicating the costs of laboratory services.
• The contractor does not provide the State prison with timely test
results. The contract stipulates that any laboratory results
revealing conditions that require immediate attention will be
communicated by telephone and will be followed by written
notification within three working days. According to the SATF
laboratory staff, it almost always takes the contractor seven days
or more to deliver the results.

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• The SATF laboratory staff worked with a staff member at CDCR
headquarters for more than five months to replace the contractor.
However, the headquarters staff member left the department in
2003 and there has since been little action to pursue this issue.
The SATF laboratory staff recently learned that CDCR
headquarters renewed its contract with the contractor in question
for three years effective July 1, 2006.
2. Excessive delays in contract processing and procurement of
medical equipment and supplies resulted in unnecessary
expenditures, compromised services, and raised health and
safety concerns. State prison staff members interviewed told SCO
auditors that it often takes months—sometimes over a year—to
process a contract through CDCR headquarters and the DGS. The
problem is further compounded by the CDCR’s inability to meet the
competitive bid requirement imposed under DGS Management
Memo 05-04. In the absence of contracts, some State prisons
continued to request services without contracts, while other prisons
discontinued services altogether. The prisons also encountered
similar delays in procurement of medical equipment and supplies
that often resulted in unnecessary higher costs. Some examples
include:
• SATF staff, on February 28, 2005—seven months before the
contract expiration date of September 30, 2005—requested
contract renewals for four specialties (cardiology, radiology,
urology, and pathology) at the same rates as the previous
contracts. The State prison was notified by headquarters staff on
September 30, 2005, that the contracts would not be renewed
because of DGS Management Memo 05-04 abolishing the
exemption of physicians, medical groups, and hospitals from the
State’s competitive bidding requirement. All of the clinics were
closed for the entire month of October 2005. In an e-mail note
dated September 30, 2005, a headquarters contract staff member
told SATF staff, “If this will help, your institution is not the only
one impacted.” Later, headquarters staff instructed SATF staff
members to continue using the specialists because headquarters
intended to secure emergency contract extensions. However, DGS
rejected the contract extension requests because they were not
considered emergencies. As of March 31, 2006, the CDCR still
has no contract in place for three of the four specialties
(cardiology, urology and pathology). The same doctors continued
to provide services, but they could not be paid until a federal court
order was issued in April 2006 mandating payments. However,
instead of seeing inmates at the prison, the cardiologist and the
urologist can now see inmate-patients only at the community
hospital that has a contract with CDCR; this situation has led to
increased transportation and custody costs. With respect to
radiology, headquarters directed SATF to use a statewide contract
that doubled the rates the institution was paying the local
provider. This issue is discussed further in under Finding 2 of this
report.

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• A contracted podiatrist for SATF was called to active duty in Iraq
for at least six months. Despite the fact that some diabetic patients
needed regular podiatry care, the institution waited for his return
before any service could be provided. During the podiatrist’s
absence, the institution made only one outside podiatry referral.
• The former chief medical officer at CSP-Corcoran presented a
proposal suggesting that the State could generate significant
savings by acquiring equipment to perform liver biopsies in-house
at various institutions. The former chief medical officer offered to
train staff at other institutions to operate the equipment as well.
The CDCR’s records suggest that, to have a liver biopsy
performed outside of the State prison would cost the department
about $2,500 plus the costs of custody and transportation. After
approximately 18 months, in the summer of 2005 the department
finally acquired 10 machines at a cost of about $100,000. During
FY 2005-06, 178 liver biopsies were performed in-house at CSPCorcoran that led to more than $400,000 (178 @ $2,500 plus the
costs of custody and transportation) in savings for this one State
prison. However, the department has yet to facilitate training for
use of this equipment at other State prisons. Most of the machines
are still sitting idle and, presumably, other prisons are having
outside facilities to perform liver biopsies at substantial cost. If
the idle machines were in use, the CDCR would save an estimated
$3.6 million in contracted medical services annually.
• It has taken approximately nine months to acquire the necessary
parts to repair the oxygen system for one of the two surgery
rooms (the other is not functional) at CSP-Corcoran. The repair
equipment has been received, but the State prison still awaits a
maintenance worker to make the repairs. In the meantime, the
medical staff has been using and continues to use oxygen tanks in
the operating room.
• At CSP-Corcoran, the prison’s machine to ventilate toxic fumes
arising from mixing oncology drugs failed to function for
approximately 3-½ years. The new ventilation machine was not
installed until May 2006. In the meantime, the oncologist initially
mixed the drugs in the hospital’s restrooms, exposing the staff to
toxic fumes. After several staff filed worker’s compensations
claims, the prison’s management directed the oncologist to cease
this practice. The drugs were then mixed in the prison’s parking
lot until the new ventilation machine was installed.

Steve Westly • California State Controller

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California Department of Corrections and Rehabilitation

FINDING 2—
CDCR’s contract
negotiation process is
deficient

Healthcare Delivery System

The CDCR’s contract negotiation process is deficient, resulting in
the prison system continuing to pay significantly more than other
major purchasers of healthcare services.
After the two BSA reports in 2004, CDCR took action to implement
some of the audit recommendations. The department’s effort was
hampered in part by difficulties in recruiting physicians and other
medical professionals. Given the nature of the patient population and the
locations of many of the State prisons, the CDCR is in a poor bargaining
position to recruit staff and negotiate favorable rates with hospitals,
medical groups, and other medical professionals. In addition, the
issuance of DGS Management Memo 05-04 and the ensuing chaos and
confusion regarding implementation of the competitive bidding
requirement for physicians, medical groups, and hospitals further
hampered the department’s contract negotiation efforts.
However, the SCO review found that CDCR compounded its problems
by failing to properly use available information to minimize the State’s
healthcare costs. For example, in its July 2004 report, the BSA
recommended that the CDCR obtain relevant data to estimate the
hospitals’ costs for use as a tool in contract negotiations and for
monitoring the reasonableness of payments. The CDCR did not do so. As
a result, in its efforts to implement the prior audit recommendations,
CDCR often ended up paying even more to the medical providers after
renegotiating its contracts. Some examples are noted below.
1. CDCR initiated action to renegotiate contracts that resulted in
the department paying considerably more to the contractor. In
its April 2004 report, BSA found that CDCR generally paid less
when it was able to negotiate per diem, or daily fees, for specific
services or outcomes, regardless of the actual charges. In its July
2004 audit, the BSA found that the CDCR was paying this particular
hospital, on average, 4.16 times what Medicare would pay for the
same inpatient care. According to officials from a hospital operated
by the Tenet Healthcare Corporation (Tenet), the CDCR approached
the hospital to renegotiate its contract for a per diem rate effective
July 1, 2005. Based on payment data, the CDCR paid the hospital, on
average, $2,789 per day in FY 2004-05 under the old contract; it paid
an average of $3,994 per day in FY 2005-06 under the new contract,
an increase of 43.2% over the previous year. In one case involving
an inmate hospitalized from June 30, 2005, to July 5, 2005, the
hospital invoice was split into two billings. The June 30 stay was
billed and paid at a rate of $1,493, while the remaining four days
were billed and paid using the new contract rate of $3,700, for a total
of $14,800. Had the contract remained unchanged, CDCR would
have paid $5,972 instead of $14,800. In amending the contract that
pays the hospital more, the CDCR evidently failed to fully consider
its current costs in arriving at the new contract rates.

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2. The CDCR contracted for rates well above what providers
obtained from other purchasers of healthcare services. A HCCUP
analyst raised objections with the CDCR about the department
contracting for rates that exceed a hospital’s usual and customary
rates. Usual and customary rates are hospitals’ published rates for
various services and supplies. In actual practice, the hospitals are
willing to accept considerably less than the usual and customary
rates. However, the department paid more than the usual and
customer rates. The HCCUP analyst cited an example of a
rehabilitation hospital that manually changed an invoice from
$14,969.06 (usual and customary rate) to $21,312.06 (contract rate.)
In an e-mail response, a contract manager at CDCR headquarters
stated, “What’s really unfortunate is that EVERY hospital we are
negotiating is ending up two to three times higher.”
3. A prison was compelled to use the services of a contractor whose
rate, negotiated under a statewide contract, was twice the rate of
a local provider the prison was using. Subsequent to the BSA’s
April 2004 audit report, the DGS issued Management Memo 05-04
requiring competitive bids for CDCR’s medical contracts. CDCR
encountered difficulties in recruiting medical providers—especially
those with specialties—to submit competitive bids, and many
institutions were forced to continue using the specialists to provide
services without contracts. For example, one prison’s contracts with
a radiologist expired on September 30, 2005. The prison’s request to
renew the contract at the same rates as in the previous contract was
rejected because it did not meet the competitive bid requirement.
CDCR headquarters directed the prison’s staff to contract with
another provider through a statewide contract at rates that doubled
the prison’s cost for radiology services. The competitive bid
requirement originated from the BSA’s legitimate concerns about the
CDCR’s inability to determine the reasonableness of contract costs.
The fact that the department is paying twice the rate of what the
institution was able to obtain for the services of a local provider
would appear to be contrary to the purpose and intent of the BSA
recommendation.
4. Some contractors may have been able to generate significant
profits through their contracts with the CDCR with relatively
little effort. The CDCR awarded contracts to a provider for various
services (oncology, physician, nursing, tele-medicine). For oncology,
the negotiated contract rate is $315 per hour. However, an oncologist
whom the contractor formerly employed as a subcontractor decided
to directly contract with CDCR at much lower rates of $210 per hour
at one prison and $175 per hour at another prison. Presumably, the
lower rates are still higher than what the contractor was paying the
oncologist, who otherwise would have no incentive to directly
contract with CDCR. Therefore, the contractor apparently was
generating at least $105 to $140 per hour in profits simply by making
arrangements for the oncologist to provide services at the State
prisons. Working out of his personal residence, the provider has
contracts totaling approximately $91 million with various State
prisons.

Steve Westly • California State Controller

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California Department of Corrections and Rehabilitation

FINDING 3—
CDCR pays hospitals
based on percentage of
hospital’s billed
charges

Healthcare Delivery System

Despite a previous audit recommendation to the contrary, the CDCR
continues to pay hospitals based on a percentage of their billed
charges; such a practice leads to overpayments or billing abuses.
BSA’s July 2004 report recommended that CDCR consider negotiating
contract terms based on hospital costs rather than hospital charges for
outpatient services, pharmaceutical, and supplies. However, the
department continues to pay hospitals based on a percentage of the
hospital’s billed charges. Most HCCUP analysts interviewed told SCO
auditors that they have not received any training nor have they been
provided any guidelines on what constitute appropriate charges. This
practice could lead to overpayments or billing abuses, as in many cases
the institutions’ staff cannot determine the reasonableness of the
hospitals’ charges. Some examples include the following.
1. A hospital billed CDCR $20,742.50 for administering two dosages of
“Immune Globulin 1GM” to an inmate with cancer on December 10,
2004, and another $20,512.50 for one dosage of the same drug on
December 15, 2004. Under the contract with the hospital, CDCR is
to pay 30% of the invoice amount; the department paid the hospital
$12,379.50 ($20,742.50 + $20,512.50 @ 30%) for the drug
administered during those two days. According to the hospital’s
charge master listing, which reports the hospital’s rates for services,
supplies, and pharmaceuticals, the price for “Immune Globulin
10GM” is $1,648. Presumably, the charge for 1 GM of the same drug
is far less than for 10 GM. In the Medi-Cal Program formulary files,
the Medi-Cal payments for 5 GM and 10 GM of Immune Globulin
were limited to $518.75 and $1,037.50, respectively, as of
September 1, 2004. This pattern suggests that Medi-Cal would only
pay a little more than $100 for 1 GM of Immune Globulin while the
CDCR paid $12,379.50 for three such dosages.
2. The CDCR directly reimburses a contract orthopedic surgeon for
surgeries performed on inmates at a local community hospital. The
hospital, besides billing the department for all support services,
routinely charges another $5,600 for each surgery performed by the
surgeon by listing the same procedure code for the surgery. When
the HCCUP analyst questioned the charges, hospital staff members
said the additional charge is for the use of their facilities and is not a
duplication of the cost of the surgery. A review of the hospital’s
invoices disclosed that the hospital already included charges for all
of its services and facilities (i.e., anesthesiologist, pharmaceuticals,
medical supplies, recovery room, etc.) in its billings. Moreover, our
review of invoices from another hospital revealed that that hospital
does not impose a charge above and beyond all of its services and
facilities. However, as the contract with the hospital in question does
not contain a provision defining what constitute allowable charges
for billing purposes, neither the HCCUP analyst nor her supervisor
could determine whether the additional $5,600 charge per surgery
was reasonable or appropriate. Later, the prison reimbursed the
hospital 70% of billed charges after being told by a utilization
manager at headquarters that the charges were allowable. From a
control standpoint, it is not prudent to have ambiguity in contract
language that affords the hospital discretion in determining what to
charge and the amount to charge.
Steve Westly • California State Controller

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Healthcare Delivery System

3. A Tenet-operated hospital billed the CDCR $699 and $2,440 for an
inmate’s emergency room visit on May 3, 2005. In accordance with
the contract terms, the CDCR paid $454 and $1,586, which
represented 65% of the billed amounts. According to the Medicare
Physician Guide, Medicare payments for the same procedure codes
were $62.08 and $193.51, respectively. In this instance, the CDCR
paid the hospital 7.3 to 8.2 times more than what Medicare would
have paid for the same procedures.
4. Some HCCUP analysts told SCO auditors that they don’t bother to
review hospital charges because of their workload and because they
have no basis by which to determine the reasonableness of the
hospitals’ charges anyway. Hospitals could easily err in the billings.
For example, an invoice from one hospital shows $39,408 for 24
units of respiratory therapy for one inmate, when in actuality the
charge should have been for 24 hours (1 unit) of therapy. In another
case, the hospital billed $124,720 for drugs provided to an inmate
during his hospital stay because of a coding error. In both instances,
the HCCUP analyst caught the errors and, after discussion with the
hospital staff, adjusted the billings. However, an HCCUP analyst
who does not bother to review hospital charges may not have
detected these errors and would have paid the inflated invoices.

FINDING 4—
Opportunity for
significant State savings
delayed for years

An opportunity for significant State savings has been delayed for
years due to protests and objections raised by a contractor who is
financially benefiting from the delay.
The CDCR currently has about 150 inmates who need dialysis treatment.
Except for those at California Medical Facility, which has a dialysis
treatment facility, inmates at other institutions are transported outside the
institutions three times a week for dialysis treatment. For over 10 years,
Colonial Medical Group, Inc. (Colonial) has provided the treatments
under a statewide contract that was issued on a sole-source basis. The
current contract is effective through June 30, 2008, with a cancellation
clause allowing each party to terminate the contract with a written
notification.
Based on recent cost data at SATF and CSP-Corcoran, each dialysis
treatment costs, on average, more than $400 plus costs of inmate
transportation and custody while outside of the prisons. The practice of
regularly transporting inmates outside of State prison also raises public
safety concerns. Clearly, if there is a better and less costly alternative, it
is to the department’s best interests to vigorously pursue it. After years of
deliberation, the CDCR, in August 2003, initiated a process to solicit
competitive bids for contractors to perform dialysis services on-site at the
State prisons.
After almost three years, the on-site dialysis treatment program has yet to
be implemented at the State prisons because of discrepancies in contract
licensing requirements, bid protests, and lawsuits. Furthermore, even
after contracts were finally awarded to two successful bidders (Colonial
and American Correctional Solution) in November 2005, the program
still is not operational as of July 15. 2006, with Colonial raising new
concerns in June 2006 that could further delay program implementation.
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Healthcare Delivery System

Following is a chronology of events relative to this issue.
August 7, 2003

Invitation for Bid (IFB) advertised.

October 27, 2003

Due to discrepancies in licensing issues, all six bids
were rejected.

January 8, 2004

Re-bid issued.

January 30, 2004

Intent to Award was posted. American Correctional
Solution (ACS), the next lowest bidder, was selected.
The current contractor, Colonial, was the highest
bidder. Colonial filed a bid protest that was rejected
by DGS on March 16, 2004.

April 1, 2004

Contract approved and sent to ACS on April 2, 2004.

April 16, 2004

Bid package for on-site dialysis services at Wasco
State Prison (WSP) released.

May 27, 2004

Bids were opened. ACS was the lowest bidder.

June 1, 2004

Award letter sent to ACS. Colonial filed a protest
that was rejected by DGS on June 15, 2004.

July 13, 2004

CDCR notified ACS that the already-executed
contract for on-site services at SATF and CSPCorcoran is void because ACS is not licensed to
perform the services for which it submitted its bid.
The department based it decision on consultation
with the Medical Board of California. CDCR also
rescinded the award letter for WSP.

October 4, 2004

IFBs for on-site dialysis services were issued for
three sites: SATF, WSP, and Kern Valley State
Prison (KVSP).

January 11, 2005

Bids were opened for all three sites. Colonial was the
lowest qualified bidder for SATF and WSP while
ACS was the lowest qualified bidder for KVSP.

February 9, 2005

Intent to Award issued to Colonial and ACS.

February 23, 2005

Two disqualified bidders filed bid protests.

April 18, 2005

Awards were made to the lowest qualified bidders, as
DGS dismissed both bid protests.

May 17, 2005

After one of the disqualified bidders filed a Petition
for Writ of Mandate, the CDCR legal office
instructed the contract staff to wait until a decision
had been made by the department in consultation
with DGS and the Attorney General’s Office.

October 24, 2005

A decision was made to proceed with the contracts.

November 15, 2005

Contract with Colonial for on-site dialysis services at
SATF and WSP was finalized effective
November 15, 2005, to September 30, 2008.
Contract with ACS for KVSP also was finalized for
the same duration.

April 27, 2006

A superior court judge rejected the disqualified
bidder’s Petition for Writ of Mandate.

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Healthcare Delivery System

The SCO did not assess the reasonableness of the department’s decisions
and actions relative to the bid protests and legal challenges made by the
bidders. However, it should be noted that Colonial, which is currently
providing dialysis treatments at substantially higher rates than it will be
able to under the new contract awarded by the competitive bid process,
has little financial incentive to implement the on-site program
expeditiously. Even though the contract was executed on November 15,
2005, the program is still not operational as of July 2006. Staff members
at SATF were told that the program would be operational by August
2006. In early June 2006, Colonial raised new concerns about inadequate
professional medical staff at SATF and refused to name a medical
director until the State prison hires more staff members. Apparently,
ACS does not share the same concerns as Colonial; it indicated that it
was ready to proceed with the program at KVSP. As Colonial and ACS
are to use the same subcontractor to perform the on-site dialysis services
at the institutions, it is not clear why one provider would have concerns
about the adequacy of medical staffing while the other does not.
However, even though there is nothing in the original bid submitted or
the contract awarded stipulating that additional staff members are
needed, CDCR headquarters prohibited ACS from proceeding with
implementation of the on-site program at KVSP. The project was placed
on hold until the court-appointed receiver’s office started making
inquiries recently. On July 13, 2006, ACS was given approval to proceed
with the program at KVSP. ACS has prepared an implementation plan
projecting that the program will be operational by September 5, 2006.
Colonial still has its two projects on hold and the State is continuing to
incur higher costs for inmate dialysis treatments.
Before initiating the competitive bid process for the dialysis contract,
SATF was instructed by CDCR headquarters to purchase supplies for the
dialysis machines, pending the outcome of the competitive bidding
process. The institution purchased 32 cases of syringes (500 units per
case), which are currently stored at its warehouse. These syringes have
become obsolete because of the excessive delay in program
implementation and SATF is now confronted with finding a way to
dispose of them without incurring considerable expense.

Steve Westly • California State Controller

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California Department of Corrections and Rehabilitation

Healthcare Delivery System

UTILIZATION
MANAGEMENT

Given the high cost of obtaining medical care at outside facilities, it is far
less expensive for inpatient and outpatient services to be performed by
State medical staff at State facilities. In the absence of qualified State
medical staff, the CDCR could reduce its costs by having contracted
medical personnel perform the procedures at State facilities. To ensure
that services—especially those referred to outside facilities—are
medically necessary and in accordance with appropriate standards of
care, the CDCR employs a utilization management (UM) process that
provides for four levels of review. The process begins with the UM
nurse, who is designated as the first-level reviewer. The UM nurse
reviews requests for services based on established review criteria and
reviews invoices to verify that charges are appropriate for services
performed. The chief medical officer or the chief physician and/or
surgeon is the second-level reviewer, evaluating any requests the UM
nurse is unable to approve per program guidelines. The Medical
Authorization Subcommittee is the third level of review; it considers
requests that do not meet criteria, appeals, and complex cases. The fourth
and final level of review and appeal is that of the Health Care Review
Subcommittee.

FINDING 5—
Need for outside
hospital services
increased

The CDCR’s need for outside hospital services increased, as at least
two of the department’s four acute-care hospitals are functioning at
a fraction of their capacity, resulting in increased costs for
contracted services.
At considerable expense, the CDCR built four acute-care hospitals; these
hospitals are located in California Medical Facility (CMF), CSPCorcoran, California Institution for Men, and California Men’s Colony.
The department’s intent was to save money by having the hospitals
provide inpatient and outpatient medical services to the inmates
incarcerated in those State prisons, as well as to inmates at other prisons.
The SCO auditors visited the hospitals at CMF and CSP-Corcoran and
found that both hospitals are operating at only a fraction of their
capacity. Meanwhile, the amount of contracted healthcare services has
increased. The department has encountered difficulties in recruiting and
retaining qualified medical personnel to staff the various hospital
functions. The problem is compounded by the fact that the hospitals do
not have adequate equipment, supplies, and needed supportive services
such as anesthesia service for their surgery rooms. In addition, decisions
made by CDCR management to convert the prison hospitals’ acute-care
beds for other uses also severely curtail inpatient and outpatient services
performed at the prison hospitals. Therefore, instead of treating inmates
from other State prisons, the two hospitals are sending the inmates from
their own prisons to outside hospitals, sometimes for minor surgeries.
Specifically, the SCO found that:
1. The number of surgeries has declined significantly at CMF. Major
surgeries performed at the prison hospital declined from 291 in 2000
to eight in 2004 and eight in 2005. Minor surgeries remained fairly
constant, at 760 in 2000 to 679 in 2005. Of the 679 minor surgeries
performed at CMF in 2005, 104 were for pain management and 404
were for minor procedures such as colonoscopies.

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Healthcare Delivery System

2. CSP-Corcoran staff could not provide data separated by major and
minor surgeries. Available data show that the prison hospital
completed 1,075 in-house surgery cases during 2003, compared with
958 in-house surgery cases during 2005. The prison hospital has two
operating rooms. According to the medical staff, one of the operating
rooms is functioning at a very limited capacity and the other one has
not been functional since the hospital was built in 1993, due to a lack
of proper equipment and supplies and inadequate staffing.
3. One of the explanations for the decline in surgeries performed at
CMF is the lack of acute-care beds. Citing nurse shortages, CDCR
management in 2004 de-commissioned all but seven of its 72 acutecare beds over the strong objections of the medical staff at the prison
hospital. According to medical staff at the hospital, it would be very
expensive to reconvert these beds to acute-care beds because current
licensing requirements are much more stringent. Most of the beds are
now being used for inmates with long-term care needs. At CSPCorcoran, the chief medical officer estimates that between 90% to
95% of the prison hospital’s 52 licensed acute-care beds are now
being used by inmates with long-term needs. Consequently, inmates
with acute-care needs must be redirected to outside facilities at
significantly higher costs to the State.
4. At CMF, contract services increased from $12.6 million in FY
2000-01 to a projected $54.2 million in FY 2005-06. At CSPCorcoran, contract services increased from $6.7 million to a
projected $19.7 million over the same period.

FINDING 6—
CDCR’s utilization
management process
is ineffective

CDCR’s utilization management process is ineffective in ensuring
that services are necessary and consistent with prescribed guidelines
or that contractors’ charges are appropriate.
The Utilization Management (UM) nurses at the CDCR are the first-level
reviewers of requests for services; they ensure contractors’ compliance
with prescribed guidelines and review contractors’ invoices to verify that
charges are appropriate for services performed. Some UM nurses
interviewed told SCO auditors that they never received any training
concerning review guidelines, protocols, and procedures, and that their
heavy workloads limit the scope of their reviews. The UM nurses also
said that they are often reluctant to question the judgment and decisions
of specialists, despite the fact that the specialists may have financial
incentives to make referrals. In some cases, the State prison’s
management could circumvent the utilization review process. Therefore,
the UM nurses’ review and monitor efforts are not always effective.
Specifically, the SCO found that:
1. After a significant increase in the contracted rates, as disclosed under
Finding 2 of this report, the Tenet-operated hospital’s in-patient days
increased from 2,111 days in FY 2004-05 to 2,928 days for the first
11 months of FY 2005-06, an increase of more than 38.7% in
utilization. According to a “Monthly Budget Plan” prepared by the
State prison’s staff, total expenditures for this hospital were expected
to increase from $2,712,831 in FY 2004-05 to a projected
$8,097,468 in FY 2005-06, an increase of 298%. The SCO auditors
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Healthcare Delivery System

selected a limited sample of the in-patient cases for review and found
that:
• A UM nurse’s review note shows that an inmate did not meet the
criteria for hospital stay; however, she left a note indicating “No
further Action?” in the inmate’s medical file. This inmate was
hospitalized for three days in May 2006. The prison’s staff could
not provide any documentation or explanation justifying the
deviation from established criteria. The total hospital charges
were $10,200 at $3,400 per day.
• Another inmate was also hospitalized for three days in May 2006.
The UM nurse’s note indicated that the inmate met the criteria for
hospital admittance on the first day only and requested that the
inmate be immediately discharged. Therefore, the inmate should
have stayed at the hospital for two days at most. However,
hospital records should that the inmate was discharged a day later,
resulting in an additional $3,400 charge for the extra day. Neither
the file at the State prison nor the hospital could explain the delay
in the discharge of this inmate.
• An inmate was admitted to the hospital on April 1, 2006,
complaining of chest pain. The UM nurse’s note stated, “it is
doubtful that it is cardiac” and yet the inmate was retained in the
telemetry unit for two days. On the fourth day, a cardiologist
ordered a myocardial perfusion scan (MPS). The MPS and
laboratory test results were negative and a physician note stated,
“there was nothing further to do for this patient.” In fact, on the
fifth day, the cardiologist’s note stated, “patient claims to have
shooting chest pain but was watching TV without apparent
problem.” The inmate was not discharged until the seventh day,
April 7, 2006, and the institution incurred $25,060 in hospital
charges for the inmate’s seven-day stay.
• An inmate was kept at the hospital for two extra days after he was
discharged on May 14, 2006, because the prison hospital’s
infirmary had no bed space. The two additional days cost another
$6,800.
• The attending physicians’ review notes were either incomplete or
could not be located for the sample cases selected by SCO
auditors.
2. At one of the State prisons, the chief medical officer (CMO)
overrode the UM nurse’s objections and approved a contract
physician’s request to refer an inmate to a hospital that is supposed
to be used for emergency services only. In a memorandum dated
February 2, 2006, the UM nurse noted that the prescribed procedures
were prearranged; however, the institution’s contract with the
hospital stipulated that it is to provide urgent/emergency services
only. Apparently, the deviation from prescribed procedures occurred
to accommodate the referring contract physician, who has hospital
privileges only at the hospital that is to provide urgent/emergency
services.
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3. The same CMO also specifically exempted one contracted physician
from the UM nurse’s review. In response to SCO auditors’ questions,
the CMO stated that the contracted specialist has been working at the
facility for years and in the past has had personality conflicts with
the UM staff. The contracted specialist believes that his decisions
should not be questioned by less experienced medical staff as long as
he follows applicable medical standards governing his specialty. This
rationale does not appear to be justifiable as, presumably, other
contacted specialists who are subjected to the UM review process are
also required to follow applicable medical standards governing their
specialties. This rationale is also contrary to the purpose and intent of
the UM review process, which was established, in part, to provide
the necessary checks and balances against unnecessary and excessive
referrals by individuals for financial gain.
4. A contracted ophthalmologist informed the SCO auditors that she
sometimes performs work that results from a State prison’s
contracted optometrist’s workload overflow. The contract rate for the
optometrist is $67.50 per hours, whereas the ophthalmologist was
regularly paid more than $400 per hour, and as much as $580 per
hour in some instances, by charging on a per-patient basis.

FINDING 7—
Decisions regarding
medical treatment
are made based on
legal considerations

During interviews, most of the State prison’s medical staff acknowledged
to the SCO auditors that an increasing tendency exists to refer inmates to
outside facilities to avoid litigation. Medical staff members believe that
inmates are prone to file lawsuits that could, regardless of the outcome of
the cases, blemish their records. Therefore, they sometimes make
referrals knowing that the cases do not need to be referred to an outside
facility. In addition, the State prison’s management is sometimes
reluctant to authorize in-house services after weighing the potential fiscal
impact of lawsuits against questions about the competency of the
prison’s medical staff and the adequacy of the prison’s facilities and
equipment.
The scope of the SCO fiscal review does not include evaluation of
medical necessity, as such an evaluation would require special medical
expertise. However, the following two cases suggest that medical
decisions were influenced by legal considerations to avoid litigation, to
the detriment of cost-effective patient care.
1. An inmate serving a life sentence was stabbed while in a State
prison. He became a quadriplegic, and the State already spent
considerable sums on his medical care and rehabilitation costs. At
the insistence of his family, the inmate continues to receive services/
treatments that are deemed unnecessary or excessive by the prison’s
medical staff.
• Around-the-clock nursing care by contract registry nurses
assigned solely to him. The inmate’s nursing care was $312,559
for FY 2004-05 and $238,402 for the first ten months of FY
2005-06.

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• Specially ordered catheters. The inmate’s family demanded
special catheters that cost $441.20 for a box of 100; other
inmates’ catheters range between $13.60 and $131 for a box of
100. CSP-Corcoran’s medical staff members believe that a
permanent catheter shunt is most appropriate under the
circumstances. At the insistence of the inmate’s family, who feel
he needs regular human contact, the inmate’s catheter is replaced
twice daily.
• Unnecessary special treatment. The inmate was transported by
ambulance to the University of California at Davis Hospital for
treatment of a kidney stone because he expressed dissatisfaction
with the local urologists. Despite concerns raised by the
institution’s medical staff as to its necessity, CDCR headquarters
authorized the special treatment. The ambulance ride cost $8,237
for the initial visit and $7,421 for a follow-up visit.
2. On June 4, 2006, an inmate with a history of self-mutilation was sent
to a community hospital for a minor surgical procedure despite the
fact that the State prison has an acute care hospital. The prison
hospital’s chief surgeon said he could perform the surgical procedure
at the prison hospital immediately. However, the State prison’s
management, citing the lack of an anesthesiologist that could result
in lawsuits, sent the inmate to a community hospital. The hospital
performed the procedure and admitted the inmate until June 6, 2006,
at a total cost of $3,726. The inmate, upon discharge from the
community hospital, again needed the same surgical procedure and
was transported to another community hospital, where he waited for
hours in the emergency room. When the community hospital would
not admit the inmate, he was transported back to the State prison,
where the chief surgeon performed the procedure using local
anesthesia. According to the chief surgeon, it was a very simple
procedure, which he completed in approximately 15 minutes.

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California Department of Corrections and Rehabilitation

INTERNAL
CONTROL OVER
PAYMENTS

Healthcare Delivery System

After medical services are completed, the contractor who performed
them sends an invoice to the CDCR’s regional accounting office (RAO)
for payment processing. Upon receipt, the RAO is to review the invoice
to ensure that a contract is in place and, if a payment discount is
available, take measures to ensure expeditious processing of the invoice.
The invoice is then forwarded by the RAO to a contract manager at the
State prison for review. Generally, the contract managers are the State
prisons’ HCCUP analysts, whose job it is to monitor the contractor’s
performance to ensure compliance with all contract provisions.
The HCCUP analysts’ specific duties include:
• signing invoices for approval to pay;
• ensuring that the contractor is performing services in accordance with
the contract requirements;
• monitoring the use of the contract (i.e., availability of funds);
• verifying that invoices correspond to services provided;
• evaluating contract performance; and
• initiating amendments as needed.
Upon receipt of the invoice, the HCCUP analyst forwards it to the
contract monitor for review and approval. The contract monitors are
typically the supervisors and managers who oversee the delivery of
healthcare services (e.g., chief medical officers, pharmacy managers,
laboratory managers, director of nursing, etc.). The contract monitor is to
verify that the services were appropriate and are supported with
appropriate documentation, such timesheets, sign-in logs, etc. After the
invoice is approved and signed, the contract monitor returns the invoice
to the HCCUP analyst for review and approval. After the contract
monitor and the HCCUP analyst approve the invoice, it is returned to the
RAO, which prepares a claim schedule for payment processing. Invoices
that offer discount are paid directly through the RAO’s office’s revolving
fund to ensure that payments are made within the discount period.

FINDING 8—
State prisons’ internal
control is ineffective

Internal controls at State prisons are ineffective in identifying and
preventing overpayments and billing abuses.
The HCCUP analysts at State prisons are responsible for ensuring that
the contractors’ charges are reasonable and consistent with the terms of
the contracts. Many HCCUP analysts interviewed told SCO auditors that
they have had little or no training on what to look for in their review of
contractors’ charges. Some HCCUP analysts said they do not have the
time to thoroughly review the contractors’ charges. In some cases in
which the HCCUP analyst identified practices suggesting possible
overcharge, the contractors were paid anyway due to the ambiguity in
contract terms. In addition, as discussed in Finding 3 of this report, some
HCCUP analysts said they cannot determine the reasonableness of the
hospitals’ charges when the hospitals are reimbursed based on a
percentage of the amount billed.

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The SCO auditors selected a limited sample of invoices for review and
identified evidence suggesting possible overpayments or billing abuse at
each of the four State prisons visited. Specifically, the SCO found that:
1. Contractors may have inflated their charges by billing at a higher
level for services than what they should have charged. CDCR
contracts allow some providers to bill the department on a perpatient basis that assigns a reimbursement rate for each procedure
performed under the Current Procedural Terminology (CPT) codes
instead of an hourly rate. Different CPT codes are assigned to each
medical procedure (i.e., office visit) depending on the extent or the
level of services performed. The SCO review found that some
contractors have inflated their charges by billing at a higher level
than those for actual services performed. Some examples include:
• An urologist under contract with two State prisons bills based on
CPT codes. The prisons' records show he was paid $400,000 for
making occasional clinical visits to the two State prisons during
FY 2004-05. According to gate logs, the urologist made, in total,
78 clinical visits ($5,128 per visit) to the two State prisons and
typically spent three to six hours during his visits. The CPT codes
he used appear to be appropriate for higher levels of services than
the actual services he performed. For example, in July 2004, the
urologist spent a total of 21.1 hours over five days (an average of
a little more than four hours per day) at the prisons. Further
review of data revealed that he used CPT 99244 for most
diagnostic consultations and CPT 99223 for in-patient hospital
evaluations. According to the guidelines, CPT 99244 is to be used
for consultations in which the physician typically spends 60
minutes face-to-face with the patient and CPT 99223 is to be used
for initial hospital care whereby the physician typically spends 70
minutes at the patient’s bedside. Based on these guidelines, the
urologist should have worked approximately 73 hours instead of
21.1 hours in July 2004. The urologist was paid $42,922 for 21.1
hours of work in July 2004, or $2,036 per hour.
In August 2004, at the instruction of a former chief medical
officer, both State prisons reduced the urologist’s billings to
reflect the CPT code for 30 minutes instead of 60 minutes. The
urologist was notified of this action and he did not contest it. No
adjustments were made to amounts previously paid and, even at
reduced rates, the urologist would still be paid at about $1,000 per
hour. Furthermore, the urologist continues to bill using the
original procedure codes. Therefore, unless the prison staff takes
action to adjust the amounts billed, he will continue to be paid
inflated rates. Such adjustments are not always made—the SCO
found at least one instance in which the urologist’s invoice was
not adjusted, for April 2006.
• On July 7, 2005, an ophthalmologist billed for 33 patients, 20 of
them under CPT 99244. According to guidelines, CPT 99244 is a
comprehensive examination that entails the physician spending
about 60 minutes face-to-face with the patient. The prison’s gate
log shows that on July 7, 2005, the ophthalmologist spent eight
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hours at the prison, or saw about four patients per hour. It would
appear that a lower-level procedure code, such as CPT 99241—
which calls for a 15-minute examination—would be more
appropriate. The ophthalmologist was paid $4,679.70 for July 7,
2005, or $580 per hour.
The HCCUP analyst at the State prison told SCO auditors that she
has previously raised questions about the appropriateness of the
contractor’s charges but was told by management that the charges
are allowable under the contract. However, the prison’s contract
with the ophthalmologist expired in September 2005, and she
continues to provide services while billing based on CPT codes.
Meanwhile, under a statewide contract, the State prison has issued
a Notice to Proceed to another provider, for ophthalmologist
services at $170 per hour, with an effective date of November 21,
2005. According to the new contractor, the State prison has not
requested services under the new contract. When SCO auditors
questioned why the prison would use a provider without a
contract instead of a provider with contract—and apparently at a
lower rate—the prison’s staff said that the new contractor could
not provide the services because of a lack of staff resources, an
assertion disputed by the new contractor, who said he was told
that the prison was working with another contractor and was in no
need of immediate services.
2. Contractors billed based on CPT codes when the contract terms
specify reimbursement at hourly rates. Some contracts specify that
the providers are to be paid at hourly rates for clinical services,
including minor procedures that are normally performed during an
office visit. The contracts allow the contractors to use CPT codes
only for those procedures not rendered during regular clinical visits.
However, some contractors ignored the hourly rate provision and
billed exclusively based on CPT codes. For example:
• According to a contract, effective October 1, 2002, to
September 30, 2004, between an orthopedic surgeon and two
State prisons, the provider was to be paid at $175 per hour for
clinical services and at rates based on CPT codes for surgical
procedures. However, the surgeon used CPT codes for all of his
billings, including clinical services. For example, in August and
September 2004, the surgeon held seven clinics during which no
surgical procedures were performed. Had he been paid at $175
per hour as specified under his contract, he would have received
approximately $9,000. In actuality, because he used rates based
on CPT codes, he was paid $28,124.50 (more than $4,000 per
day), which is approximately $19,000 in overpayment. However,
instead of requiring the surgeon to comply with the terms of his
contract, in February 2005, five months after the contact had
expired, the CDCR retroactively amended the contract and
eliminated the $175 hourly rate for clinical services citing a prior
verbal agreement between CDCR headquarters and the contractor.

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During FY 2004-05, the surgeon was paid $1.48 million for
providing clinical and surgical services to inmates at the two State
prisons. A review of his billings revealed that he may also have
been billing at higher levels of services than actual services
provided. Based on his invoices from July 2004 through
September 2004, the surgeon sees between 15 and 30 patients per
clinical visit and bills all patient visits using CPT 99205 and
99215. CPT 99205 is for 60-minute consultations and CPT 99215
is for 40-minute follow-ups. One of the surgeon’s billings shows
that he saw 35 patients—14 at CPT 99205 and 21 at CPT 99215
during one prison visit. The 35 procedures should require
approximately 30 hours to complete, which is not possible to
accomplish in one visit.
• A contract between a surgeon and a State prison specifies that the
surgeon is to be reimbursed at $100 per hour for clinical services,
and at rates based on CPT codes for procedures not rendered
during scheduled clinics. However, the surgeon instead bills and
is paid in accordance with rates based on CPT codes for all of his
services in violation of contract terms. Over a five-month period,
the surgeon made nine clinical visits to the prison. The prison has
no record showing how long the surgeon actually stayed at the
prison. However, even if he had worked eight hours per day
during each of his visits, he should have been paid a total of only
$7,200, based on the rate specified in his contract. Instead, at rates
based on CPT codes, he was paid $21,390, an overpayment of
$14,190.
3. The owner of a pharmacy registry, acting as the chief pharmacist for
one of the State prisons, regularly schedules overtime for himself and
his employees. Due to the chronic shortage of pharmacists, two State
prisons contracted with a pharmacy registry to staff its pharmacy
operations; the owner of the registry serves as the chief pharmacist
for one of the State prisons. The contract between the pharmacy
registry and the prisons stipulates that, “CDC shall only pay overtime
to contractor for unanticipated events, such as an institution
emergency after a regular work schedule greater than 8 hours or
lock-down at time and one-half the hourly rate.” In actual practice,
the contractor and his staff routinely scheduled overtime that resulted
in total monthly charges (including regular hours and overtime)
ranging between $22,000 and $33,000 for each pharmacist. The
pharmacists also charge stand-by (on call) hours at an overtime rate
of $148 per hour, even though no provision exists in the contract
authorizing such payments.
4. A State prison could not produce evidence to support a contract
physician’s monthly charges or that the physician met the contract
requirement of being board-certified. A physician registry provided
three physicians to a prison at a rate of $200 per hour under a
statewide contract. Under the terms of the contract, the physicians
must be board-certified physicians, as the contractor is to provide
internal medicine to high-risk inmates and those with chronic
illnesses. The contract rate of $200 per hour is significantly higher
than the rates the State prison could obtain through the local registry,
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presumably because of the board-certification requirement.
However, two of the three physicians were not listed as boardcertified according to the American Board Certification Web site.
When asked, the prison’s chief medical officer told SCO auditors to
check with the owner of the registry for an explanation. It is the
CDCR’s responsibility to ensure that physicians fully meet contract
requirements regarding qualification. In addition, for one of the two
physicians who are not listed as board-certified, the prison could not
produce any documentation such as timesheets or personal gate logs
to support a monthly charge of $33,572 (167.86 hours at $200 per
hour). Further review of documents found that the names of some
inmates listed on the contractor invoices—whom the physician had
supposedly seen—did not appear on the appointment logs, and that
the medical charts of two inmates reviewed did not contain evidence
showing that the physician had actually treated the inmates. The
SCO auditors then provided the State prison administrators with the
names of the inmates, as they appeared on the contractor’s invoices,
and requested evidence verifying that services had been provided to
those inmates. The prison’s staff could not locate any such evidence,
which raised questions concerning the legitimacy of the monthly
charge.

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Healthcare Delivery System

Recommendations
The SCO recognizes that the Receiver has initiated action to revamp the CDCR’s healthcare delivery
system. The SCO also recognizes that the Receiver, working with the staff of CDCR and other state
departments such as DGS, is in the process of developing processes and procedures to improve and
streamline the State’s contracting process relative to CDCR’s medical contracts. As a part of this reform
effort, the Receiver should consider the following measures.

Recommendation 1

Explore means to minimize the State prisons’ reliance on outside
contract services by improving and expanding the State prisons’
capabilities to deliver needed medical services in-house. Consideration
should be given to:
• Recruiting and retaining sufficient and competent medical staff.
Review medical staff compensation levels to ensure that salaries are
sufficient to attract qualified staff members and are commensurate
with staff members’ professional responsibilities.
• Modernizing the prisons’ facilities to provide sufficient space, proper
equipment, and adequate supplies to enable the prison staff to carry
out essential functions.
• Employing modern technology to promote operational efficiency in
various aspects (i.e., inmate medical records, pharmaceutical
prescription system, etc.) of the healthcare delivery system and
functions.

Recommendation 2

Improve the CDCR’s contract management system by:
• Recruiting and retaining individuals who are familiar with contracting
and administrative practices of the healthcare industry. Establish a
compensation level sufficient to attract a highly qualified team of
professional healthcare administrators to manage the various critical
functions.
• Adopting, when appropriate, the contracting practices of other major
purchasers of healthcare services and developing appropriate contract
language patterned after that of other major purchasers.
• Establishing a system that would provide accurate, reliable, and
timely data concerning expenditures trends, utilization patterns, and
other relevant information relative to the State prisons’ healthcare
operations. The CDCR should utilize such data as well as data from
healthcare providers in contract negotiations and contract
management.
• Streamlining the contracting approval process by eliminating
unnecessary or redundant procedures and prescribing a timeframe for
each step of the contract review process.
• Developing a policy to immediately and appropriately address
situations in which the State prisons’ staff find evidence suggesting
that a contractor may have engaged in abusive billing practices and to
ensure that these practices are not extended to other prisons.
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California Department of Corrections and Rehabilitation

Recommendation 3

Healthcare Delivery System

Improve the utilization management (UM) process by:
• Reviewing and evaluating the current UM processes and, when
appropriate, making modifications to ensure that services performed
are necessary, appropriate, and in accordance with appropriate
standards of care.
• Reviewing current staffing levels at the State prisons, especially with
respect to UM nurses, to evaluate the adequacy of staff resources to
carry out the functions of the UM process. Review the level at which
UM nurses are compensated and make adjustments if appropriate. If
staff resources are deficient, the CDCR should hire additional staff.
• Clearly defining the functions and responsibilities of each individual
involved in the UM process.
• Disseminating the UM guidelines to all staff engaged in the UM
function and ensuring that staff obtain appropriate training.
• Periodically conducting additional training sessions to disseminate
changes in policies and procedures, emphasizing the need to adhere to
established guidelines, providing a forum in which to exchange ideas
and identify and address common issues/problems.

Recommendation 4

Strengthen internal control over payment by:
• Reviewing and evaluating current payment review procedures and,
when appropriate, making modifications to ensure that contractors’
charges are reasonable, in compliance with contractual terms, and for
actual services performed.
• Reviewing current staffing levels at the State prisons and regional
accounting offices, especially that of HCCUP analysts, to evaluate the
adequacy of staff resources assigned to the payment review and
payment processing functions. If staff resources are deficient, the
CDCR should hire additional staff. Review the level at which HCCUP
analysts are compensated and make adjustments if appropriate.
• Clearly defining the functions and responsibilities of each individual
involved in the payment review function.
• Providing semi-annual training to HCCUP analysts to disseminate
changes in policies and procedures and providing a forum in which to
exchange ideas and identify and address common issues/problems.
• Requesting that the CDCR’s audit staff in the Program and Fiscal
Audit Branch (PFAB) develop plans to audit a sample of paid medical
invoices to ensure that the reviews by HCCUP analysts are effective
in preventing overpayments. A report summarizing the results of the
PFAB audits should be published on a quarterly basis. Audit findings
should be promptly addressed.
• Initiating action to recoup overpayment from contractors and, if
evidence suggest intentional abuse, referring the matter to the
Attorney General’s Office for consideration of legal action against the
contractor.
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Appendix A—

Comparison of Healthcare Budget and Expenditures
California Department of Corrections and Rehabilitation
Comparison of Healthcare Budget and Expenditures
From Fiscal Year 2000-01 through Fiscal Year 2005-06
FY 2000-01

Appropriations (Per Budget Act)
Expenditures
Variance

FY 2001-02

FY 2002-03

FY 2003-04

FY 2004-05

FY 2005-06

$ 585,080,000 $ 663,783,000 $ 835,879,000 $ 907,098,000 $ 940,763,000 $1,037,722,000
675,603,403
796,773,467
878,940,830
967,821,280
1,052,375,309
1,481,424,818 *
$ (90,523,403) $ (132,990,467) $ (43,061,830) $ (60,723,280) $ (111,912,309) $ (443,732,818)

Source: Budget Act, Governor’s Budget, and CDCR’s accounting records.
* Projected amount, as reflected in CDCR’s accounting records, as of April 30, 2006.

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California Department of Corrections and Rehabilitation

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Appendix B—

Comparison of Expenditures for Contracted Services
California Department of Corrections and Rehabilitation
Comparison of Expenditures for Contracted Services
From Fiscal Year 2000-01 through Fiscal Year 2005-06

Object Code

FY 2000-01

FY 2001-02

FY 2002-03

FY 2003-04

FY 2004-05

FY 2005-06
Projected
Amount *

3 26 413
3 26 413 01
3 26 413 02
3 26 413 06
3 26 413 07
3 26 413 08

HEALTH & MEDICAL-EXT SVS
$
66,778 $
683,456 $
155,390 $
319,441 $
631,670 $ 6,255,513
HEALTH & MED: CONSULTANT-IN-HOUSE
12,096,752
12,956,099
12,499,975
13,132,632
10,486,409
32,236,078
HEALTH & MED: CONTRACTUAL/EXT
90,807,388
112,465,416
135,780,430
157,508,621
171,420,940
392,058,560
HELATH & MED: REGISTRY
28,866,076
46,790,567
63,821,922
74,550,198
89,237,744
314,622,539
HEALTH & MED: CONSULTANT - COM
21,659,871
25,987,723
25,896,954
32,348,491
38,227,184
71,491,611
HEALTH & MED: LAB - BLOOD BANK
89,440
155,444
190,371
120,976
119,760
4,132,747
TOTAL
$ 153,586,305 $ 199,038,705 $ 238,345,042 $ 277,980,359 $ 310,123,707 $ 820,797,048

3 26 413 01
3 26 413 02

Costs for services of contracted physicians, dentists, etc., provided within the institution.
Includes the community hospital services contracts. Also includes other contracted technical services, such as lab, x-ray, and private ambulance transportation
contracts.
Registry services costs, such as nursing and pharmacy.
Contracted physician services, dental care, therapy services, etc., costs for services provided outside the institution in a community facility.
Costs for lab work/tests, blood and blood-related products purchased from blood banks.

3 26 413 06
3 26 413 07
3 26 413 08

Source: CDCR accounting records
* Projected amount, as reflected in CDCR’s accounting records, as of April 30, 2006.

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Appendix C—

Comparison of Total Healthcare Expenditures and Contracted Services Expenditures
California Department of Corrections and Rehabilitation
Comparison of Total Healthcare Expenditures and Contracted Services Expenditures
From Fiscal Year 2000-01 through Fiscal Year 2005-06

Total healthcare expenditures
Total contracted services expenditures
Ratio

FY 2000-01

FY 2001-02

FY 2002-03

FY 2003-04

FY 2004-05

$ 675,603,403
$ 153,586,305
22.7%

$ 796,773,467
$ 199,038,705
25%

$ 878,940,830
$ 238,345,042
27.1%

$ 967,821,280
$ 277,980,359
28.7%

$1,052,375,309
$ 310,123,707
29.5%

FY 2005-06

$1,481,424,818 *
$ 820,797,048
55.4%

Source: Budget Act, Governor’s Budget, and CDCR’s accounting records.
* Projected amount, as reflected in CDCR’s accounting records, as of April 30, 2006.

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Appendix D—

List of Acronyms

ACS

American Correctional Solution

BSA

Bureau of State Audits

CDC

California Department of Corrections

CDCR

California Department of Corrections and Rehabilitation

CMF

California Medical Facility

CMO

Chief Medical Officer

CPR

California Prison Receivership

CPT

Current Procedural Terminology

CSP-Corcoran

California State Prison, Corcoran

DCHCS

Division of Correctional Health Care Services

DGS

Department of General Services

FY

Fiscal Year

HCCUP

Health Care Cost and Utilization Program

IFB

Invitation to Bid

KVSP

Kern Valley State Prison

MPS

Myocardial Perfusion Scan

NTP

Notice to Proceed

OBS

Office of Small Business

OIG

Office of the Inspector General

RAO

Regional Accounting Office

SATF

Substance Abuse Treatment Facility

SCO

State Controller’s Office

UM

Utilization Management

WSP

Waco State Prison

Steve Westly • California State Controller 35

State Controller’s Office
Division of Audits
Post Office Box 942850
Sacramento, California 94250-5874
http://www.sco.ca.gov

S06-PRS-900