S
T
I
D
U
A
E
T
A
T
S
F
O
E

A

U

It Needs to Improve Its Processes for
Contracting and Paying Medical Service
Providers as Well as for Complying
With the Political Reform Act and
Verifying the Credentials of Contract
Medical Service Providers

R
U
B

California State Auditor

California
Department of
Corrections and
Rehabilitation:

April 2007
2006-501

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CALIFORNIA STATE AUDITOR
ELAINE M. HOWLE

DOUG CORDINER

STATE AUDITOR

CHIEF DEPUTY STATE AUDITOR

April 19, 2007	

2006-501

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As requested by the court-appointed receiver, the Bureau of State Audits presents its audit report concerning the
California Department of Corrections and Rehabilitations’ (Corrections) processes for procuring medical registry
services, paying medical registry contractors, credentialing medical care providers, and identifying conflicts of interest
related to procuring the medical services.
This report concludes that Corrections improperly awarded nine contracts with a maximum amount of more than
$385 million using the competitive bid process, usually because it failed to correctly apply a 5 percent small business
preference. As a result, Corrections gave bidders a larger preference than allowed, causing some to incorrectly receive
higher-ranking positions in the hierarchy for responding to prisons’ service requests than they should have had.
Additionally, Corrections failed to provide complete justifications for awarding two noncompetitively bid contracts
with a total maximum amount of almost $80 million. Corrections could add certain key terms to its medical service
contracts to better protect the State’s interests. Specifically, some contracts did not provide sufficient assurance to
the State that contractors were insured against civil rights claims brought by inmates, and some contracts failed to
impose an obligation on the medical care service providers to inspect and monitor the quality of their performance.
Prisons failed to demonstrate that they follow the established hierarchy when requesting services. Prisons also did not
consistently ensure that rates charged on invoices agreed with contract terms, and both prisons and regional accounting
offices failed to ensure that they took advantage of discounts for prompt payment.
Further, Corrections’ oversight of its registry contractors’ compliance with the licensing and certification requirements
contained in its contracts is inadequate. Corrections’ credentialing unit did not always verify the credentials of certain
types of providers. Specifically, the credentialing unit did not verify the credentials of providers who treat inmates
outside of Corrections’ facilities or those acting in a supportive role such as pharmacists, laboratory technicians,
and physical therapists, rather than independently. The credentialing unit also sometimes verified the credentials of
providers after they had begun providing services to inmate patients. Finally, Corrections lacks adequate controls to
ensure that it complies with the Political Reform Act of 1974, which is the central conflict-of-interest law governing
the conduct of public officials in California.
Respectfully submitted,

ELAINE M. HOWLE
State Auditor

BUREAU OF STATE AUDITS

555 Capitol Mall, Suite 300, Sacramento, California 95814 Telephone: (916) 445-0255 Fax: (916) 327-0019 www.bsa.ca.gov

Contents
Summary	
Introduction	

1
11

Chapter 1 	
The California Department of Corrections and Rehabilitation
Did Not Follow Policies and Procedures When Contracting
for Medical Services, and Its Contracts Could Be Improved
to Protect the State’s Interests Better	
23
Recommendations	

48

Chapter 2 	
The California Department of Corrections and Rehabilitation
Did Not Always Monitor Medical Service Invoices Adequately,
Cannot Demonstrate Its Compliance With the Political
Reform Act, and Failed to Verify Credentials of Contracted
51
Providers Properly 	
Recommendations	

69

Appendix	
The California Department of Corrections and Rehabilitation
Could Strengthen Delivery of Medical Care to Inmates
by Adding Key Terms to Its Contracts With Medical Providers	 73
Response to the Audit
California Prison Health Care Receivership Corp.	

77

Summary
Audit Highlights . . .

Results in Brief

Our review of the California
Department of Corrections and
Rehabilitation’s (Corrections)
contracts for medical services
revealed the following:

he California Department of Corrections and
Rehabilitation (Corrections) is responsible for providing
adequate and timely medical care to the approximately
172,000 adult inmates in its prison population. Corrections’
Division of Correctional Health Care Services (division) is
responsible for delivering this care. However, Corrections’ health
care delivery system is being managed by a court-appointed
receiver, as a result of a lawsuit alleging that the medical services
provided to California inmates were “deliberately indifferent”
and thus violated their rights under the Eighth Amendment to
the U.S. Constitution, which protects individuals against “cruel
and unusual” punishment.

	 Corrections improperly
awarded nine of
18 competitively bid
contracts with a total
maximum amount of
more than $385 million.

	 Corrections did not
provide complete
justifications for awarding
two noncompetitively bid
contracts totaling almost
$80 million.

	 Some aspects of
Corrections’ treatment of
some medical providers
raises concerns about
whether they are, in fact,
treated more as employees
than independent
contractors, which may
expose the State to
potential liability and
penalties.

	 Only 16 of the 21
contracts we reviewed
contained terms that
meet the standard of
medical care called for in
Corrections’ regulations.

	 Many of the contracts we
reviewed did not contain
terms that Corrections
considers standard in
medical service contracts
to adequately protect
the confidentiality,
privacy, and handling of
inmate medical records
under the federal Health
Insurance Portability and
Accountability Act (HIPAA).

T

When a prison has a vacant medical staff position, or when
its medical staff are on long-term sick leave, Corrections uses
temporary medical providers that it hires through contracts
with medical registries. A medical registry supplies the
temporary medical providers, such as physicians, nurses, or
pharmacists. In awarding medical registry contracts, Corrections
issues an invitation for bids (IFB) seeking bids from medical
registries wishing to provide temporary medical care services.
For each IFB, Corrections awards multiple contracts to ensure
that it has adequate coverage when a need arises. In doing so, its
policy is to establish a hierarchy of medical registry contractors,
ranking them based on the hourly rate in their bids, with the
lowest responsible bidder receiving the highest rank. When
seeking a medical provider to provide a needed service, a prison
is required to contact the contractors in the order established in
the hierarchy until it finds one that is able to meet its needs.
Of the 18 competitively bid contracts in our sample, we found
that Corrections improperly awarded nine contracts with a total
maximum amount of more than $385 million. In these nine
contracts, it applied the small business preference—a 5 percent
preference given to small businesses bidding on state contracts—
incorrectly, giving the bidders a larger preference than allowed
and causing some of them to receive a higher rank in the
hierarchy than they should have had. Further, in awarding
contracts, Corrections used a cost threshold to limit the number
of registry contracts awarded. Registries whose bids were higher

continued on next page . . .

California State Auditor Report 2006-501	

	 Although all contracts
in our sample gave
Corrections the ability
to inspect and monitor
the quality of contractor
performance, only five
of the 21 contracts
imposed a similar
obligation on the medical
care service providers.

	 Corrections overpaid
registry contractors by
$4,050 for five invoices
because prisons did not
consistently ensure that
payment amounts agreed
with contract terms.

	 Corrections failed to
ensure that prisons
require their consultants
to complete statements
of economic interests or
to document why it was
appropriate for them not
to do so.

	 Corrections did not
verify the credentials
of providers who treat
inmates outside of
Corrections’ facilities
because it incorrectly
believed these reviews
were being conducted
by the Department of
Health Services.

	 Of the 22 physicians
and nurse practitioners
for which we requested
credentialing files,
Corrections was only
able to provide 12. Of
these 12, eight were
credentialed after they
had begun providing
services to inmate
patients.

than this threshold were excluded from the opportunity to
provide services. However, Corrections’ solicitation document
did not inform the bidders of its use of a cost threshold or
its methodology for calculating the threshold. In addition,
Corrections did not always apply the cost threshold properly
and as a result improperly awarded one contract and mistakenly
excluded another bidder from providing services.
Additionally, Corrections did not fully justify its reasons for
awarding two contracts, with a total maximum amount of
almost $600,000, when it received fewer than three bids, the
minimum number required by state law. When an agency
awards contracts despite receiving fewer than three bids, state
policy requires the agency to prepare a complete explanation,
including a justification of the reasonableness of the price, and
to retain this information in its contract files. For both contracts,
Corrections stated that its health care staff had determined that
the rates in the bids were fair and reasonable. However, when
we asked for documentation to support these determinations,
Corrections was unable to supply any.
Corrections also did not provide complete justifications for
awarding two of three noncompetitively bid contracts with a
total maximum amount of almost $80 million. One of these
contracts, with a maximum amount of almost $79 million, was
awarded in response to a federal court order giving Corrections
10 days to modify an existing contract with a contractor to
provide an hourly rate of pay adequate to attract certain medical
care providers who meet Corrections’ standards. However,
Corrections was unable to locate relevant documents related
to the development of the rates. Thus, Corrections could not
demonstrate to us that the contract rates it agreed to pay the
contractor and the minimum rates it recommends the contractor
pay its medical providers are reasonable or appropriate.
In addition, state policy generally prohibits contractors from
starting work until they receive a copy of the contract approved
by the Department of General Services (General Services).
However, we noted seven instances in which contractors
provided services totaling almost $20,000 before Corrections
obtained General Services’ final approval of the contracts.
The contracts in our sample generally contained the standard
terms and conditions required by state law and state policy.
They also generally included certain terms that Corrections has
determined are essential to contracting for medical services in a

	

California State Auditor Report 2006-501

prison setting, such as ones requiring all providers to have the
necessary licenses, permits, and certifications for the work they
are to perform. All the contracts contained terms indicating
that the medical providers are independent contractors rather
than Corrections’ employees. However, we found that some
aspects of Corrections’ treatment of these medical providers
raises concerns about whether they are, in fact, treated more as
employees than independent contractors. Potential liability and
penalties for misclassification of an employee include substantial
taxes, back pay, and reimbursement of expenses. Furthermore,
California does not make a distinction between intentional
and unintentional misclassification of an employee. Thus,
the responsibility for proper conduct and classification of an
independent contractor falls upon the employer.
In addition, the contracts were inconsistent in the way they
addressed the standard of care to be provided. The standard
of medical care called for in Corrections’ regulations is based
on medical necessity, meaning “health care services that are
determined by the attending physician to be reasonable and
necessary to protect life, prevent significant illness or disability,
or alleviate severe pain, and are supported by health outcome
data as being effective medical care.” The regulatory standard
also permits the cost-effectiveness of a treatment to be taken
into account. Only 16 of the 21 contracts in our sample
contained terms that appear to meet this standard of care. One
contract did not contain any terms that reflect the standard of
care set out in regulation. Further, some contracts contained
multiple, inconsistent terms related to the standard of care, and
some appeared to call for a standard of care that is higher than
that required by Corrections’ regulations. Although we do not
question the importance of providing high-quality medical care
to inmates, drafting contracts containing multiple terms that
may suggest differing standards of care creates an ambiguity
that may result in uncertainty on the part of the provider, and
potential disagreement among the contracting parties, about
just what is required under the contract.
Moreover, some contracts did not provide sufficient assurance
to the State that contractors were insured against legal claims
that might be brought by inmates, particularly claims that
inmates’ civil rights have been violated. Many of the contracts
we reviewed also did not contain terms that Corrections’
considers standard in medical service contracts that protect the
confidentiality, privacy, and handling of inmate medical records
adequately under the federal Health Insurance Portability

California State Auditor Report 2006-501	



and Accountability Act (HIPAA). In addition, although all the
contracts in our sample gave Corrections the ability to inspect
and monitor the quality of contractor performance, only five
of the 21 contracts imposed a similar obligation on the medical
care service providers to monitor and assess the quality of their
own performance. Given the importance of improving the
delivery of health care in California’s prisons and the extent to
which contractors are responsible for providing medical services,
we believe that these terms should be present in all medical
services contracts.
Although Corrections’ contracts with medical registries require
the prisons to contact contractors in sequence according to the
established hierarchy when they need temporary medical
services, and to document their attempts, the prisons could
not always demonstrate that they had done so. Specifically, for
22 of the 38 invoices we reviewed, prison staff could not provide
sufficient documentation to support their attempts to follow
the required hierarchy. In contrast, for 16 of the 38 invoices we
reviewed, the prisons were able to provide us with sufficient
documentation of their attempts to contact registries in
accordance with the hierarchy.
Additionally, prisons sometimes fail to monitor invoices for
medical services adequately, resulting in additional medical
costs to the State. Our review also found that prisons did not
ensure consistently that payment amounts agreed with contract
terms. For example, our review of 50 invoices found that some
registry contractors were overpaid by $4,050 for five invoices
totaling $458,356. In addition, prisons sometimes approved
payment for overtime, even though the contractors did not
comply with contract provisions requiring written approval of
overtime. Prisons and the regional accounting offices also failed
to ensure that they took advantage of discounts available for
prompt payment. We also found that contractors were owed late
payment penalties for three of the 50 invoices we reviewed.
Although individual percentages varied widely, the 12 medical
registry contractors in our sample that bill Corrections by the
hour paid their medical service providers, on average, 65 percent
of the hourly rate they received from Corrections. Contractors
had varying explanations for the percentages they pay. For
example, contractors supplying physician providers cited
overhead costs such as workers’ compensation, malpractice
insurance, and travel expenses, while a contractor working with
nurses indicated that he pays a lower hourly rate but reimburses

	

California State Auditor Report 2006-501

them for a portion of their housing and utility expenses.
Further, some contractors hire their providers as employees
while others employ them as independent contractors. Given
these many differences, we found it difficult to compare the
contractors and more fully explain the range of percentages.
The Political Reform Act of 1974 (political reform act) requires
state officials and employees with decision-making authority
to file statements of economic interests annually and upon
assuming or leaving a designated position. These statements
are intended to identify conflicts of interest that an individual
might have. Corrections lacks adequate controls to ensure that
it complies with the political reform act. Of the 124 employees
whose statements of economic interests we reviewed, seven
did not complete their statements correctly, 14 did not file
statements, and 78 filed their statements after the deadline.
Corrections also failed to ensure that prisons require their
consultants to complete statements of economic interests or
to document why it was appropriate for them not to do so.
Finally, Corrections’ oversight of its registry contractors’
compliance with licensing and certification requirements is
inadequate. Corrections’ credentialing unit, which performs
database searches to verify the credentials of certain types of
providers, did not always perform these searches. For example,
it did not verify the credentials of providers who treat inmates
outside of Corrections’ facilities because it believed these
reviews were being conducted by the Department of Health
Services (Health Services) as part of its licensing process for the
facilities. However, Health Services does not verify individual
credentials and instead simply reviews the facility’s process for
doing so. In addition, Corrections did not verify the credentials
of providers it considered to be working in a supportive role
such as pharmacists, laboratory technicians, and physical
therapists, rather than independently. Further, the credentialing
unit performed database searches for providers only when
prisons requested them. As a result, when we requested the
credentialing files for 22 physicians and nurse practitioners,
the credentialing unit was able to provide only 12 files. Of
these 12 providers, eight were credentialed after they had
begun providing services to inmate patients. Finally, Corrections
wastes time on some credentialing activities because it duplicates
database searches and reviews unnecessarily. Specifically,
if the provider moves to another prison, the unit performs
another search. For example, the credentialing unit verified the
credentials of one physician who worked at two prisons three

California State Auditor Report 2006-501	

times within a seven-month period. According to Corrections,
it must register prisons as separate eligible entities with the
U.S. Department of Health and Human Services for purposes of
querying the databases.
It is important to point out that many issues we identify in
this report also were identified in an audit report we issued
in April 2004. Specifically, the report identified deficiencies
hindering the effectiveness of Corrections’ contracting process,
including instances of prisons obtaining medical services
for inmates before receiving General Services’ approval and
prisons failing to document consistently their efforts to obtain
registry services. In addition, the report identified weaknesses in
Corrections’ processes for ensuring that it pays for valid medical
claims. Specifically, the report notes instances when the prisons’
analysts with the Health Care and Cost Utilization Program
(HCCUP) did not always identify discrepancies between contract
rates and medical charges on providers’ invoices—or even obtain
evidence that medical services actually were received, resulting
in overpayments to contractors. Further, Corrections did not
always ensure that contract discounts were taken and late
penalty payments were averted.

recommendations
To ensure that it protects the State’s interests and receives
the best possible services at the most competitive prices,
Corrections should:
•	 Ensure that staff receive proper training on bidding methods,
including the appropriate application of the small business
preference, so that bidders are awarded contracts in the
correct order.
•	 Notify potential bidders of its use of a cost threshold to
determine the awards to be made and its methodology for
calculating the threshold.
•	 Implement a quality control process to identify errors in the
ranking of bidders before awarding contracts.

	In

making these recommendations to Corrections, we understand that they would be
implemented at the direction of the court-appointed receiver. We do, however, expect
that if control and management of Corrections’ medical health care delivery system
is returned to it, that Corrections would then become responsible for implementing
these recommendations.

	

California State Auditor Report 2006-501

•	 Fully justify and document the reasonableness of its contract
costs when it receives fewer than three bids or when it
chooses to follow a noncompetitive process.
•	 Ensure that it establishes internal control processes that
prevent prisons from allowing contractors to perform services
before receiving General Services’ approval of the contract.
To ensure that there is no uncertainty surrounding the legal
status of contract employees, Corrections should seek expert
advice and legal counsel to determine whether its current
treatment of certain medical registry service providers is
such that those medical registry service providers should be
considered employees rather than independent contractors.
To ensure that Corrections’ contracts contain terms for standard
of care that meet its constitutional obligations as well as the
standard of care that a practicing physician would provide
if adhering to generally accepted ethical norms, Corrections
should seek legal and other expert advice to determine whether
the standard of care currently prescribed in state regulations
allows contracting physicians to provide medical care in a
manner consistent with the generally accepted standard of
care in the medical community. If the standard of care is not
consistent with the generally accepted standard of care in the
medical community, Corrections should revise its regulatory
standard to require that the standard of care called for in the
State’s prisons is, at a minimum, consistent with medical ethics
and with the State’s constitutional obligations.
To protect the State’s best interests, all contracts that Corrections
enters into with medical registries should meet these requirements:
•	 Require medical registries to submit proof that their insurance
company has agreed explicitly to insure them against civil
rights claims.
•	 Include Business Associate Agreements in all contracts
subject to HIPAA and amend existing contracts to include
those agreements.
•	 Require registry contractors to monitor and assess the quality
of services they provide under the contract.

California State Auditor Report 2006-501	



•	 Contain clear and consistent requirements related to the
standard of care called for under the contract. At a minimum,
this standard of care must meet the standard of care needed
in order to satisfy Corrections’ obligations under the
Plata v. Davis settlement agreement.
To improve its procedures and practices for requesting registry
services and paying for these services, Corrections should:
•	 Ensure that prison staff consistently follow procedures
requiring them to document their efforts to obtain services
from registry contractors.
•	 Ensure that prisons verify the services they receive from
registry contractors before authorizing payment of invoices.
•	 Establish a quality control process to ensure that prisons pay
rates that are consistent with the contract terms.
•	 Ensure that prisons obtain the necessary documentation for
the services they were unable to verify or seek reimbursement
from the registry contractors for the overpayments identified
in this report.
•	 Ensure that prison staff responsible for authorizing overtime
adhere to Corrections’ overtime policies and contract terms.
•	 Evaluate its prisons and regional accounting offices’ processes
for paying invoices and identify weaknesses that prevent it
from maximizing the discounts taken and complying with the
California Prompt Payment Act.
To ensure that it complies with the political reform act,
Corrections should:
•	 Establish an effective process for tracking whether its designated
employees, including consultants, have filed their statements
of economic interests timely.
•	 Review the statements of economic interests to ensure
their accurate completion and to identify potential conflicts
of interests.

	

California State Auditor Report 2006-501

To improve its oversight of registry contractors and their
providers who provide medical services to inmate patients,
Corrections should:
•	 Require the credentialing unit to verify the credentials of
contracted providers who work in non-Corrections’ facilities
or, at a minimum, verify that these facilities have a rigorous
process for verifying the credentials of their providers.
•	 Require the credentialing unit to determine whether the
credentials of those medical and allied health providers who
are performing services at prisons under registry contracts have
been verified. If not, the credentialing unit should verify them.
•	 Ensure that prisons request database searches from the
credentialing unit before allowing providers to perform services.
•	 Seek clarification from the U.S. Department of Health and
Human Services regarding the criteria for eligible entities and
whether all prisons can be combined into one eligible entity.

Agency Comments
The court-appointed receiver has indicated that he intends
to fully study the audit results and provide a realistic
strategy to remedy the deficiencies identified in the report. The
court‑appointed receiver also stated that he will respond to
the final report with a remedial plan within 60 days. n

California State Auditor Report 2006-501	



Blank page inserted for reproduction purposes only.

10	

California State Auditor Report 2006-501

Introduction
Background

T

he Division of Adult Institutions of the California
Department of Corrections and Rehabilitation
(Corrections) operates 33 state prisons and
38 conservation camps, oversees a variety of community
correctional facilities, and supervises parolees’
reentry into society. According to Corrections, on
June 30, 2006, the total inmate population was
Types of Facilities Used by Corrections to
Provide Health Care to Inmates
about 172,500, an increase of 5.1 percent from
the June 30, 2005, population. For fiscal year
General acute care hospitals—Provide 24-hour
2005– 06, Corrections’ budget of roughly $7 billion
inpatient care, including basic services such as
medical, nursing, surgical, anesthesia, laboratory,
included about $4.5 billion for its adult operations
radiology, pharmacy, and dietary.
and programs.
Correctional treatment centers—Provide
inpatient health care to inmates who do not
require acute care but need health care beyond
that normally provided in the community on an
outpatient basis.
Outpatient housing units—Typically house
inmates who do not require admission to a
licensed health care facility but need special
housing for security or protection.
Intermediate care facilities—Provide inpatient care
to inmates who need skilled nursing supervision and
supportive but not continuous care.
Skilled nursing facilities—Provide continuous
skilled nursing and supportive care to inmates on
an extended basis, including medical, pharmacy,
and dietary services and an activity program.
Hospices—Provide care to inmates who are
terminally ill.
Sources:  California Department of Corrections and
Rehabilitation; Title 2, Division 5 of the California
Code of Regulations.
Note:  All facilities, except outpatient housing
units, are licensed by the Department of
Health Services.

The U.S. Constitution and California laws require
Corrections to provide adequate and timely
medical care to inmates. Corrections authorizes
its Division of Correctional Health Care Services
(division) to deliver health care to adult inmates.
The division’s objective is to provide medical,
dental, and mental health care to the State’s
inmate population that is consistent with adopted
standards for the quality and scope of services
within a custodial environment. To provide health
care to inmates, Corrections operates six types
of facilities—four general acute care hospitals,
18 correctional treatment centers, 17 outpatient
housing units, an intermediate care facility, a
skilled nursing facility, and two hospices to provide
for inmates who are terminally ill. Additionally, it
contracts with the Department of Mental Health to
provide services for the California Medical Facility’s
Acute Psychiatric and Intermediate/Day Treatment
programs and the Salinas Valley State Prison’s
Psychiatric Program.

Corrections uses medical registry contracts to provide temporary
relief to prisons when they have vacant medical service staff
positions or their medical staff are on long-term sick leave. A
medical registry contractor typically coordinates the availability

California State Auditor Report 2006-501	

11

of providers—physicians, nurses, or pharmacists, for example—
when prisons have a need for the services. The Figure shows the
types of medical services provided to Corrections by medical
registry contractors in fiscal year 2005–06.

Figure
Registry Services Expenditures by Type
Fiscal Year 2005–06
X-ray/Laboratory Technician/
Diagnostic Services
$2 million (2%)
Physicians
$3.1 million (3%)
Miscellaneous Services*
$10.7 million (9%)

Pharmacists
$12.9 million (11%)

Nursing†
$64.1 million (52%)

Psychiatry/Psychology/
Psychiatric Technicians
$28.4 million (23%)

Total $121.2 million

Source: California Department of Corrections and Rehabilitation’s unaudited
expenditure data.
* Includes various service providers such as medical assistants, social workers, and
physical therapists.
†

Includes expenditures for the following nursing providers: nurse practitioners, licensed
vocational nurses, registered nurses, and certified nursing assistants.

Corrections’ registry contractor expenditures continue
to increase. According to its unaudited data, Corrections’
expenditures for registry contracts in fiscal year 2005–06 totaled
$121.2 million, 259 percent more than its fiscal year 2001–02
expenditures of $46.8 million.

federal court decisions
In August 2001, after two years of unsuccessful negotiation with
Corrections, the Prison Law Office, a nonprofit public interest
law firm, along with private counsel, filed a class action lawsuit
against Corrections and others in the federal District Court for
the Northern District of California.
12	

California State Auditor Report 2006-501

This lawsuit, Plata v. Davis (Plata), brought on behalf of 10 male
California inmates and other similarly situated inmates, alleged
that the medical services provided to inmates by Corrections
violated the inmates’ rights under the Eighth Amendment to the
U.S. Constitution (Eighth Amendment). The Eighth Amendment
protects individuals against “cruel and unusual” punishment.
In the landmark 1976 case of Estelle v. Gamble (Estelle), the
U.S. Supreme Court held that, under the Eighth Amendment,
an inmate’s right to be protected against cruel and unusual
punishment is violated when prison officials are “deliberately
indifferent” to the inmate’s serious medical needs. Subsequent
lawsuits across the country have applied the Supreme Court’s
decision in Estelle and have defined further the factual
circumstances under which state officials have been found to
have provided medical care that is deliberately indifferent to the
serious medical needs of inmates.

Corrections’ Obligations under Plata
•	 Corrections shall implement health care policies
and procedures, to be filed with the court, that
are designed to meet or exceed the minimum
level of care necessary to fulfill Corrections’
obligations under the Eighth Amendment.
•	 Corrections shall make all reasonable efforts
to secure the funding necessary to implement
these health care policies and procedures.
•	 Corrections shall implement the health care
policies and procedures at each prison pursuant
to a specified schedule.

The complaint filed in the Plata lawsuit alleged
that California officials violated the Eighth
Amendment by subjecting inmates to medical
care that was deliberately indifferent to their
serious medical needs, and that these allegedly
unconstitutional conditions had caused widespread
harm, including severe and unnecessary pain,
injury, and death. In June 2002 the parties to the
lawsuit reached a settlement in which Corrections
agreed to meet various conditions related to inmate
medical care. Some of the more significant terms of
that agreement are shown in the text box.

•	 Corrections shall implement various practices
or procedures at each institution, including a
requirement to have registered nurses staffed
at the emergency clinics 24 hours per day
every day.

The parties to the Plata settlement also agreed to
request that the court appoint experts to advise it
on the adequacy of Corrections’ implementation
of the policies and procedures designed to satisfy
Source: Plata settlement agreement dated
the terms and conditions of the settlement. In
June 2002.
June 2002 the federal district court appointed
several individuals to act as court-appointed
experts in this matter. In July 2004 these experts
submitted a report to the federal district court that described
an “emerging pattern of inadequate and seriously deficient
physician quality in CDC [Corrections] facilities.”
In May 2005, four years after the Plata lawsuit was filed, and
after meeting regularly with the parties to the Plata settlement,
the court conducted hearings to determine if it was necessary
	Later

Plata v. Schwarzenegger.

California State Auditor Report 2006-501	

13

to appoint an interim receiver. In February 2006 the court
appointed a receiver. The court order making the appointment
gave the receiver the authority to “provide leadership and
executive management of Corrections’ medical health care
delivery system with the goal of restructuring day-to-day
operations and developing, implementing, and validating a
new, sustainable system that provides constitutionally adequate
medical care to all members of the class action lawsuit as soon
as practicable.” To achieve those goals, the receiver has the duty
to control, oversee, supervise, and direct all administrative,
personnel, financial, contractual, legal, and other operational
functions of Corrections’ medical health care delivery system.
The court also appointed a correctional expert to investigate and
report to the receiver concerning the status of state contracts
relating to health care services and of contract payments
to service providers who provide health care services to
Corrections’ inmates.

STATE CONTRACTING PROCESS
The State has established policies, procedures, and guidelines
for agencies and departments to use when acquiring goods
and services. Competition is typically at the core of these
acquisitions to promote fairness, value, and the open disclosure
of public purchasing. State law and the policies, procedures,
and guidelines issued by the Department of General Services
(General Services)—the State’s contracting and procurement
oversight department—generally require agencies and
departments to use a competitive bidding process that gives
vendors an opportunity to submit price quotes or cost proposals
for purchases of goods and services valued at $5,000 or more,
with certain exceptions. California public policy strongly
favors competitive bidding, and contracts established without
competitive bidding are limited by either statute or state policy.

Bidding Methods Used Under the Competitive Bid Process
State policy recommends two bidding methods. In those
instances when agencies and departments request complex
services that require varying professional expertise, approaches,
and methods, the State recommends using the request for
proposals (RFP) method. Alternatively, in those instances when
	The

RFP method consists of a primary and secondary method. The secondary method
is used to request services that are complex, uncommon, or unique and that require
unusual, innovative, or creative techniques, methods, and approaches.

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agencies and departments request simple, common, or routine
services that may require personal or mechanical skills guided
by standard work methods, the State recommends the invitation
for bids (IFB) method. In their IFBs, agencies and departments
provide a clear statement of work that instructs bidders on what
they will do and how, when, and where they will work. Unlike
the RFP method, the IFB method does not rate or score the
bidders’ capabilities. Rather, the bidders must demonstrate that
they meet the IFB requirements and the contract is awarded to
the lowest responsible bidder. In addition, state policy allows
agencies and departments to award multiple contracts through
a bidding process when there is statutory authority to do so or
when a variety of services or locations are involved.
Corrections uses the IFB method when soliciting services from
medical registries that supply providers such as physicians, nurse
practitioners, and pharmacists. It invites competing bidders
to provide a bid price based on their hourly or daily rates and
Corrections’ estimate of hours for specific services needed at
either a single prison or a group of prisons and awards the
contract to the lowest responsible bidder. However, Corrections
also awards multiple contracts to ensure that it has adequate
coverage when a need arises. Corrections’ policy requires that
it establish a hierarchy of contractors based on the hourly rate
bid for services. It awards one contract to each bidder and uses
the hierarchy to identify the contractor’s position in each prison
(or group of prisons). For example, a bidder may be the primary
contractor (lowest responsible bidder) for one prison group
and the third contractor for another prison group. If a prison
contacts the primary contractor and the contractor is unable
to supply the requested services, the prison must contact the
secondary contractor (second lowest responsible bidder). This
process is repeated until the prison is able to find a contractor
to fill its service needs. Furthermore, Corrections’ policy
requires that its prisons follow this process each time they need
temporary medical services.

Exceptions to Competitive Bidding
With respect to contracts for goods or services (other than those
related to information technology and telecommunications),
state law allows limited exceptions to the competitive bidding
requirements, such as (1) when only one good or service can
meet the State’s needs and (2) when the good or service is
needed because of an emergency—that is, when immediate
acquisition is necessary for the preservation of public health,

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15

welfare, or safety or the protection of state property. State
law also gives General Services the authority to prescribe the
conditions under which a contract may be awarded without
competition and the methods and criteria used in determining
the reasonableness of contract costs. General Services exercises
its authority based on what it determines is in the best interest
of the State.

Only One Good or Service Can Meet the State’s Needs
Under certain circumstances, a department may need to
contract with a specific vendor whose goods or services are
unique in some way. General Services refers to contracts
awarded under this exception as noncompetitively bid
contracts. The State Contracting Manual describes the conditions
under which this type of procurement is appropriate, as
well as the need for departments to complete a contract cost
justification and to obtain the approval of General Services.
Typically, to award this type of contract, departments must show
that no other vendor in the marketplace can meet the State’s
needs. General Services also allows departments to request an
exemption for a specific category of contracts using its special
category noncompetitively bid contract request (SCR) process.
The SCR process requires departments to submit a written
application to General Services for approval.

Emergency Contracts
Emergency purchases can be made using a noncompetitively
bid contract or an emergency contract, which is another type
of contract that can be formed without competitive bidding.
When a department experiences an emergency involving public
health, welfare, or safety and consequently needs to purchase
goods or services immediately, it must justify that immediate
need. For example, the department must explain why the
situation warrants an emergency purchase and the consequences
that would arise from making the purchase through normal
procurement processes. General Services must review and
approve all emergency contracts.

state laws related to conflicts of interest
Various state laws establish the conflict-of-interest requirements
for public officials and for consultants and contractors who
do business with the State. The central conflict-of-interest law
governing public officials in California is the Political Reform
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Act of 1974 (political reform act). The political reform act
contains two core obligations related to public officials and
their personal financial interests. First, it requires designated
public officials to disclose certain financial interests by filing a
statement of economic interests. Second, it prohibits a public
official from making, participating in, or in any way attempting
to influence a governmental decision in which he or she has a
financial interest.
Under the political reform act, a contractor may be deemed to be
a public official for purposes of both the disclosure requirement
and the disqualification requirement if the contractor qualifies
as a consultant. A consultant is essentially someone who acts in
a decision-making capacity similar to that of a public official.
For example, a contractor who has the authority to enter
into a government contract or who performs essentially the
same duties as a public official would if he or she were in that
position is considered to be a consultant. In such cases, the
political reform act requires the contractor to disclose certain
financial interests and disqualifies the contractor from making
or participating in any governmental decision in which he or
she has a financial interest. A public official or a consultant has a
disqualifying financial interest if it is reasonably foreseeable that
the governmental decision will have a material financial effect
on that individual that is different from the effect the decision
will have on the public generally.
In addition to the political reform act, other provisions of
law, contained in Section 1090 of the Government Code,
prohibit public officials from making a government contract or
purchase when they have a financial interest in that contract.
The attorney general has opined that those who advise public
officials are also subject to this prohibition and must abstain
from advising public officials who are making contracts in
which those advisers have a financial interest. Finally, other
provisions of law, contained in the Public Contract Code, are
designed specifically to prevent and prohibit certain conflicts of
interest by current and former public employees in the public
contracting process. For example, Section 10410 prohibits an
officer or employee in state civil service from contracting on his
or her own behalf as an independent contractor with any state
agency to provide services or goods.

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17

a prior bureau of state audits’ report found
deficiencies in corrections’ medical services
contracts and claims
California Department of Corrections: It Needs to Ensure That All
Medical Service Contracts It Enters Are in the State’s Best Interest
and All Medical Claims It Pays Are Valid, a prior Bureau of
State Audits’ (bureau) report (2003-117 issued in April 2004),
identified deficiencies hindering the effectiveness of Corrections’
contracting process similar to those included in this report.
Specifically, we noted instances of prisons obtaining medical
services for inmates before receiving General Services’ approval
and prisons failing to document consistently their efforts
to obtain registry services. To correct these deficiencies, we
recommended that Corrections evaluate its contract processes
to identify ways to avoid allowing contractors to begin work
before General Services’ approval and to modify procedures to
require prisons to demonstrate their attempts to obtain services
from registry contractors. In addition, we identified weaknesses
in Corrections’ processes for ensuring that it pays for only
appropriate and valid medical claims. Specifically, our earlier
report notes instances when the prisons’ Health Care and Cost
Utilization Program (HCCUP) analysts did not always identify
discrepancies between contract rates and medical charges on
providers’ invoices—or even obtain evidence that medical
services actually were received, resulting in overpayments to
contractors. Further, Corrections did not always ensure that
contract discounts were taken and late penalty payments were
avoided. To correct these deficiencies, we recommended that
Corrections establish a quality control process that includes a
monthly review of a sample of invoices processed by the prisons’
HCCUP analysts; recover overpayments made to providers for
medical service charges; and evaluate its payment process to
identify weaknesses that prevent it from complying with the
California Prompt Payment Act.

Scope and methodology
The state auditor has the authority to audit contracts involving
the expenditure of public funds in excess of $10,000 entered
into by public entities, at the request of the public entity. The
court-appointed receiver requested that the bureau conduct an
audit of a variety of issues related to existing contracts between
Corrections and certain medical care providers. Specifically, the
receiver requested that the bureau review Corrections’ processes
for procuring medical registry services and its practices involving

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these services for fiscal year 2005–06 and to determine whether
the process is fair and adequate and complies with all applicable
laws and regulations; whether the language used in medical
registry contracts is adequate and complete and written in the
best interests of the State; and whether conflicts of interest exist
related to procuring the medical services.
Additionally, the bureau was asked to examine Corrections’
medical registry contracts and payment practices for fiscal
year 2005–06 and to determine whether contractors comply
with the terms and conditions of the contracts, and whether
Corrections’ accounting and payment practices for contracts
comply with laws, regulations, and industry practices. Finally,
the bureau was directed to review the medical registry contracts
and compare the rates Corrections pays contractors with the
amounts the contractors pay their medical care providers and to
determine whether the contractors and medical care providers
rendering services in the prisons meet all applicable licensing
and certification requirements.
To obtain an understanding of the State’s contracting process
for obtaining medical registry services, we reviewed relevant
laws, regulations, and policies and identified those that were
applicable and significant to the audit. In addition, we reviewed
Corrections’ policies and procedures. Finally, we interviewed
Corrections’ staff.
To assess Corrections’ process for procuring medical registry
services, we reviewed a sample of 21 original or amended
contracts approved in fiscal year 2005–06. We asked
Corrections’ contract staff to identify the types of medical
services provided by medical registry contractors. We then
asked the court‑appointed correctional expert to identify those
services covered under the Plata court order. Using Corrections’
Contracts database, we selected a random sample of contracts
by type of service, resulting in 13 registry contractors with
medical providers, such as physicians, nurses, pharmacists,
and lab technicians. We then randomly selected four contracts
related to three contractors specifically identified by the
court‑appointed correctional expert. Although we selected
random samples, they are not statistically valid, and therefore
it would be inappropriate to project our audit findings to
the entire population of Corrections’ contracts. To meet
U.S. Government Accountability Office data reliability standards,

California State Auditor Report 2006-501	

19

we assessed the reliability of Corrections’ Contracts database.
Based on our assessment, we found the data to be sufficiently
reliable for the purposes of our audit.
For each contract, we determined whether it was executed
in accordance with applicable state laws, regulations, and
policies. Additionally, we reviewed the contracts to determine
whether they contain language necessary to ensure adequate
protection to the State. To perform this review, we analyzed
our sample of contracts to determine whether they contained
the standard terms and conditions that generally are required
in most state contracts as well as the terms that Corrections
considers standard for contracting for medical care in prisons.
Although we reviewed the contracts in our sample for all of
these terms, we ultimately narrowed our evaluation to focus
more closely on terms that are tailored to providing quality
medical care in a fiscally sound way, because we believe that
these terms are most critical to protecting the State’s interests.
In addition to reviewing the contracts for these standard terms,
we reviewed them to determine whether they contained terms
that reflect generally accepted best practices for providing
medical care in a prison setting. Specifically, we attempted to
determine what terms a model contract for prisoner medical
care would contain if it were designed to provide medically
appropriate care in a way that was also fiscally sound. To gain an
understanding of what these best contracting practices might be,
we reviewed various studies and reports prepared on this issue
by public, private, and academic organizations. The Appendix
identifies the various studies and reports we reviewed and
summarizes their key findings.
To examine Corrections’ payment practices and determine
whether contractors comply with contract terms, we randomly
selected 44 invoices associated with our sample of contracts
from Corrections’ HCCUP database. Although we selected
a random sample, it is not statistically valid, and therefore it
would be inappropriate to project our audit findings to the
entire population of Corrections’ invoices. We assessed the
reliability of the data in Corrections’ HCCUP database to
ensure that the invoices were drawn from a complete set of data.
We documented Corrections’ internal controls for verifying
the accuracy and completeness of the data. However, we were
unable to reconcile the expenditure data in the database to

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Corrections’ financial reports. Based on our assessment, we
found the data contained in the database to be of undetermined
reliability for purposes of our audit. For three contracts in our
sample, we found that Corrections had neither received nor paid
any invoices. Therefore, we judgmentally selected six invoices,
to ensure that our sample included invoices for all selected
contractors. Our review of the invoices focused on determining
whether Corrections’ verification and authorization of the
payments was consistent with the contract terms, state law and
policies, and its own policies and procedures in effect during
fiscal year 2005–06.
To determine whether Corrections ensures that registry medical
care providers meet all applicable licensing and certification
requirements, we evaluated Corrections’ processes and controls.
In addition, we interviewed the contractors in our sample
to identify their processes for ensuring that their medical
care providers comply with their licensing and certification
requirements. Finally, we verified the licensing and certification
status for certain medical care providers.
To compare the difference between the rates Corrections pays
the contractors with the rates the contractors pay the medical
care providers, we interviewed the contractors and obtained
relevant documentation related to their invoices and payroll
records. We also interviewed the contractors in an attempt to
explain the differences between the rates.
To determine whether Corrections correctly identifies its
contractual relationships with registry contractors as independent
contractors or whether they are, in fact, employees, our legal
counsel reviewed contract language and information gathered
during interviews with the contractors regarding their contractual
relationships and their interactions with the prisons.
Lastly, to determine if conflicts of interest exist related to the
procurement of registry medical services, we reviewed the
statements of economic interests for certain individuals in
positions of trust (such as having contract or invoice approval
authority) and their medical consultants among headquarters
staff and nine prisons. Additionally, using information from
a national, federally funded database, we looked for potential
relationships between Corrections’ staff and registry contractors
and their medical providers. We also obtained listings from the
contractors of all employees providing medical services under

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21

the contracts in our sample and determined whether they are or
were state employees during the period between July 1, 2003, and
October 31, 2006, indicating a potential conflict of interest. During
our review we noted some potential conflicts of interest that have
been referred to our Investigations Division for further analysis. n

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Chapter 1
The California Department of
Corrections and Rehabilitation Did
Not Follow Policies and Procedures
When Contracting for Medical
Services, and Its Contracts Could
Be Improved to Protect the State’s
Interests Better
Chapter Summary

T

he California Department of Corrections and
Rehabilitation (Corrections) did not award properly
nine of 18 competitively bid contracts with a total
maximum amount of more than $385 million. State policy
allows Corrections to award contracts to multiple providers and
it ranks them according to their bids. However, because it did
not always apply correctly the small business preference or a
cost threshold it uses to limit the number of awards made for
registry contractors, it may have unfairly prevented contractors
from providing services or erroneously excluded bidders from
the opportunity to provide services. Additionally, Corrections
did not always follow state policies during its process of
competitively awarding contracts. For instance, it did not fully
justify its reasons for awarding two contracts, with maximum
amounts totaling almost $600,000, when it received fewer
than three bids, the minimum number required by the State. It
also did not provide complete justifications for awarding two of
three noncompetitively bid contracts with maximum amounts
totaling almost $80 million.
State policy generally prohibits contractors from starting work
before they receive a copy of the contract approved by the
Department of General Services (General Services) or, if exempt
from General Services’ approval, a copy of the contract approved
by Corrections. However, we noted seven instances in which
contractors provided services totaling almost $20,000 before
Corrections obtained General Services’ final approval of the
contracts. Further, our review of 21 contracts found problems
with the notice to proceed (NTP) process, by which Corrections

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23

monitors authorization of prison spending on its master
contracts. Specifically, we found that the contract unit’s lists of
NTPs were incomplete, preventing an accurate assessment of
available funds. An audit report we issued in April 2004 found
similar problems. Although Corrections’ recent elimination of
NTPs on future contracts eventually will remove this concern,
current master contracts must continue under the NTP process
until their contract terms expire.
Finally, we found that the contracts in our sample generally
contained the standard terms and conditions required by state
law or state policy. These contracts also generally included
certain terms that Corrections has determined are essential
to contracting for medical services in a prison setting. One
exception was that many of the contracts in our sample did not
contain required terms that protect the confidentiality, privacy,
and handling of inmate medical records adequately under the
federal Health Insurance Portability Accountability Act (HIPAA).
However, in looking beyond the legally required terms and
conditions to determine whether the contracts reflect generally
accepted best practices for medical care in a prison setting, we
found that certain key terms could be added or improved to
strengthen Corrections’ ability to protect the State’s interests
better. Specifically, contract terms related to the standard of
care were inconsistent across our sample, inconsistent within
the same contracts, and in some cases did not ensure the
minimum standard of medical care that must be met to protect
the constitutional rights of prisoners. Some contracts also did
not provide sufficient assurance to the State that contractors
were insured against civil rights claims that might be brought by
inmates. Finally, we found that most contracts did not impose
any significant obligations on contracting medical registries
to monitor or assess the quality of care provided under their
contracts with Corrections.

Corrections Did Not Always Comply With
Established Policies and Procedures For
Procuring Registry Services
Our review of 21 contracts for medical registry services found
that Corrections did not always follow established state
contracting policy. For example, it did not demonstrate that it
pays contractors the lowest possible, or even reasonable, rates.
In some cases, Corrections did not award contracts to the lowest
responsible bidders. It also did not justify costs adequately when
awarding contracts in situations when it did not obtain at least
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three competitive bids or when it used the noncompetitively
bid process. In a few instances, Corrections failed to obtain
General Services’ approval before allowing registry contractors
to provide services. In addition, Corrections’ method for
monitoring authorization for prison spending requires
improvement. These last two weaknesses are similar to those
discussed in a previous audit report issued in April 2004. Table 1
presents the results of our review of 21 contracts and highlights
the instances of noncompliance we found.

TABLE 1
Major Findings From Our Review of 21 Contracts

Number of Contracts
for Which Requirement
Is Applicable

Requirement

Number of Contracts
Not Meeting
Requirements

Percentage
of Contracts
Not Meeting
Requirements

The invitation for bids process requires
Corrections to award contracts to the lowest
responsible bidder.

18

9

50%

Generally, three competitive bids are required.
If fewer than three bids are received,
Corrections must provide an explanation as
to why it received fewer than three bids, must
justify the reasonableness of the price, and
must provide the names and addresses of
those notified of the contracting opportunity.

18

2

11

The noncompetitively bid process generally
requires Corrections to submit a contract cost
justification to the Department of General
Services.

3

2

67

State policy prohibits contractors from starting
work before receiving a copy of the formally
approved contract.

21

4

19

Sources: State Contracting Manual and the Department of Corrections and Rehabilitation’s contract files.

Corrections Did Not Always Award Contracts According to
State Policy or Its Own Policy
Corrections, in awarding contracts to multiple bidders for
medical registry services, did not always award the contracts
properly. As we discussed in the Introduction, Corrections uses
the invitation for bids (IFB) method to award registry contracts.
It awards contracts to the lowest responsible bidders, assigning
a rank that indicates the order in which contractors will be
contacted when temporary medical services are needed.

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Corrections failed to
limit the small business
preference to $50,000, as
state law and regulations
require, and gave bidders
a larger preference than
allowed, causing some
bidders to incorrectly
receive higher-ranking
positions.

As previously shown in Table 1, in nine of the 18 competitively
bid contracts Corrections awarded the contracts incorrectly,
which have a total maximum amount of more than
$385 million. Specifically, in awarding these nine contracts,
Corrections assigned incorrect hierarchy positions to bidders,
primarily because its practice was to apply the small business
preference—a 5 percent preference given to small businesses
bidding on state contracts—to the bidders’ hourly rate rather
than the bid price. As a result, for seven contracts Corrections
failed to limit the preference to $50,000, as state law and
regulations require, and for all nine contracts it gave bidders
a larger preference than allowed, causing some bidders to
incorrectly receive higher‑ranking positions. For example,
Corrections incorrectly ranked one bidder in the fourth
position for one prison when this bidder should have been
ranked fifth. According to a contract manager, Corrections
believes that it correctly applied the 5 percent preference to
bidders’ hourly rates because state law does not state that the
preference cannot be applied to the hourly rate. We disagree
because, in applying its method, Corrections exceeded the
prescribed preference limit. State law clearly limits the
preference to $50,000. Additionally, a purchasing manager
at General Services stated that any application of the small
business preference, other than to identify the net bid price,
could lead to an inaccurate application of the preference.
State policy allows Corrections to award contracts to multiple
bidders through a competitive process. State policy also requires
agencies and departments to present a clear, objective standard
for how awards will be made in their bid documents when
awarding multiple contracts through a bidding process that
involves a variety of services or locations. Corrections’ Division
of Correctional Health Care Services (division) establishes a
cost threshold that it uses to limit the number of awards made
for registry contracts. The division does not have any written
policies or procedures for determining this cost threshold.
However, according to the manager of the Health Care
Operations Support Section, the division calculates the cost
threshold by generally using one of three methods. The division
averages the bid amounts for each prison group, calculates a
standard deviation, and adds .50 of the standard deviation to
the average of the bid amounts. However, if it receives fewer
than four qualified bidders, the division averages the bid
amounts for each prison group, calculates a standard deviation,
	State

regulations define the net bid price as the verified price of a bid after all
adjustments described in the notification to prospective bidders have been made.

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and adds 1.0 standard deviation to the average of the bid
amounts. Finally, when it does not have historical expenditure
data to measure the bid amounts against, the division will use a
flat average and not apply a standard deviation.
Nine of the 21 contracts we reviewed were awarded using
this cost threshold as a means of limiting the number of
contracts awarded for a given IFB. However, Corrections’
solicitation document did not inform the bidders of its use
of a cost threshold or its methodology for calculating the
threshold. The manager of Central Medical Contracts within
the Plata Compliance Unit referred us to Corrections’ standard
language for multiple award contracts, which states that “the
State intends to award one or more agreements to the lowest
responsible bidder(s). The State reserves the right to award
either: (1) one agreement for all prisons, (2) one agreement per
geographic group, or (3) one agreement per prison and that
this determination will be based on what is in the best interests
of the State.” The manager also stated that all bid documents
include a statement that “the State is not required to award an
agreement and reserves the right to reject any and all bids and
to waive any immaterial deviations in the bid.” However, we do
not believe Corrections’ standard language provides bidders with
a clear, objective standard for how awards will be made.

Corrections did not
always apply the cost
threshold properly
and, as a result,
improperly awarded one
contract and excluded
another bidder from
the opportunity to
provide services.

Corrections also did not always apply the cost threshold
properly and, as a result, improperly awarded one contract
and excluded another bidder from the opportunity to provide
services. Specifically, it appears as though the excluded bidder
submitted a bid that was below Corrections’ cost threshold,
but its staff noted on the bid tabulation sheet that the bid was
above the cost threshold. Corrections could not provide an
explanation for this error. In contrast, Corrections improperly
awarded a contract even though the bid was above the
established cost threshold. According to a contract manager,
an analyst incorrectly applied the small business preference to
the bidder’s hourly rate. The effect of this error was to reduce the
bidder’s hourly rate below Corrections’ cost threshold, which
resulted in the award of the contract.
Finally, we found the division did not always calculate the cost
threshold using the methods it described to us. Specifically, we
reviewed 19 cost thresholds associated with various types of
services that were covered under nine contracts. Five of the 19
cost thresholds were not calculated using any of the division’s
three methods. Our re-calculation of these five cost thresholds

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using each of the three methods found that for four of the
thresholds Corrections’ use of an incorrect threshold caused
it to improperly award up to 33 contracts and to exclude up
to six bidders, depending on which of the three methods it
would have chosen. In addition, seven of the 19 cost thresholds
were calculated using Corrections’ method of averaging the
bid amounts, calculating a standard deviation, and adding a
1.0 standard deviation to the average bid amounts. However,
for five cost thresholds this method was inappropriate because
there were more than four qualified bidders. As a result,
Corrections improperly awarded up to 59 contracts, depending
on which of the other two methods it would have chosen. We
also found that Corrections used a flat average to determine
five cost thresholds. However, we were unable to determine if
its use of this method was appropriate because Corrections did
not provide documentation demonstrating that it did not have
historical expenditure data to measure the bid amounts against.
Because prisons are required to request services from contractors
based on their position in the hierarchy, it is particularly
important that Corrections correctly apply the small business
preference and its cost threshold. When it does not, Corrections
may be unfairly preventing contractors from providing registry
services or selecting contractors who do not meet its criteria.
Further, when it incorrectly awards contracts, Corrections risks
exposing itself to litigation. Although the California courts
have not awarded damages for lost profits to bidders who were
wrongfully denied a contract, they have allowed them to recover
their bid preparation costs.

Corrections’ Justifications for Awarding Two Competitively
Bid Contracts Were Incomplete
Corrections did not always retain complete justifications for
awarding contracts when receiving fewer than three bids. State
law requires a minimum of three competitive bids except in
certain circumstances, including when the agency advertises in
the California State Contracts Register and has solicited all known
potential contractors. State policy requires the agency to prepare
a complete explanation as to why fewer than three bids were
received, to provide a justification of the reasonableness of the
price, and to provide the names and addresses of the firms or
individuals specifically notified of the contracting opportunity.
The agency also must retain this information in its contract files.

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For two of the
18 competitively bid
contracts, with a
maximum total of almost
$600,000, Corrections
did not justify the
reasonableness of the
award amounts.

As shown in Table 1 on page 25, for two of 18 competitively
bid contracts, with a maximum total of almost $600,000,
Corrections did not receive three bids and did not justify the
reasonableness of the award amounts. For one contract, with
a maximum amount of more than $460,000, Corrections’ files
indicated that the winning bid was the same as a previous
contract and that the health care managers at two prisons had
determined that the rates were fair and reasonable. For the other
contract, with a maximum amount of more than $115,000,
Corrections received only two bids and awarded a contract to
each bidder, stating again that division health care staff had
determined that the rates were fair and reasonable. Although
Corrections advertised these two contracts in the California
State Contracts Register, it could not demonstrate that it solicited
all known potential contractors. One way that Corrections can
demonstrate that it has solicited all known potential contractors
is to compile a listing of all known contractors from its Health
Care Cost and Utilization Program (HCCUP) database and retain
copies of the letters sent to the contractors. Instead, Corrections
provided us with a list of potential bidders who were mailed bid
packages or who downloaded them from General Services’
Web site. Consequently, Corrections was not exempt from
complying with state policy requirements for awarding contracts
with fewer than three bids.
Further, Corrections’ contract staff members were unable to
provide us with documentation to support these determinations,
as state policy requires. When Corrections does not document
its justifications for awarding contracts when receiving less than
three bids, it is unable to demonstrate that it is protecting the
State’s interest by obtaining fair and reasonable rates.

Corrections Could Not Justify the Prices Contained in Two
Noncompetitively Bid Contracts
Corrections also did not retain justifications for the rates found
in two of three noncompetitively bid contracts we reviewed.
As we discussed in the Introduction, a noncompetitively bid
contract is a contract for goods or services or both in which
only a single business receives the opportunity to provide the
specified goods and/or services. The requirements for justifying
noncompetitively bid contracts are shown in the text box on the
following page.

California State Auditor Report 2006-501	

29

Requirements for Noncompetitively
Bid Contracts
State policy requires a justification for
noncompetitively bid contracts unless specifically
exempted by statute or policy. Further, it requires
that departments awarding noncompetitively bid
contracts provide a cost justification that addresses
the appropriateness or reasonableness of the
contract cost. The cost justification should include
the following information:
•	 Cost information (budget) in sufficient detail to
support and justify the cost.
•	 Cost information for similar services and
explanations for any differences between
the proposed services and similar services.
•	 Special factors affecting the costs under
the contract.
•	 Reasons why the department believes the
contract costs are appropriate.
Source:  Section 5.70 of the State Contracting Manual
issued by the Department of General Services.

We question the appropriateness and
reasonableness of Corrections’ costs for two of
three noncompetitively bid contracts we reviewed.
Corrections awarded one of these contracts, with a
maximum amount of almost $79 million, in response
to a federal court order related to the Plata v. Davis
(Plata) settlement filed on December 1, 2005. The
court order required Corrections to modify its existing
contract with this contractor within 10 business
days of the date of the order in a manner that
provides an hourly rate of compensation adequate
to attract physicians and mid-level providers who
meet Corrections’ standards. Corrections chose to
execute an emergency contract instead of modifying
its existing contract. In the agreement summary
found in the contract file, Corrections gave as its
basis for determining that the rates were reasonable
the explanation that the “contractor’s rates were
negotiated by Corrections’ Community Provider
Healthcare Network and have been determined to
be fair and reasonable.” However, we could find no
documentation in the contract file as to how the rates
were determined to be fair and reasonable.

Therefore, we contacted an assistant deputy director
in the division, who we were told had been involved in
the negotiations with the Plata court experts to determine the
rates. She stated that determining the rates was not a hard
and fast science given the urgency of the situation related
to problems with access to care and quality of care. She also
stated that the discussion of the proposed rate for this contract
took place in the context at the time of other emergency
contractors; and the reality that Corrections did not have
enough qualified physicians and continued to be unsuccessful
in hiring civil service or registry contract providers with its
current compensation structures. In addition, she stated that
she believed the Plata court experts may have completed some
type of informal survey of other medical organizations in
and out of California as the basis for their proposal. She later
stated that, according to one of the Plata experts, the experts’
rationale for the proposed rates was based, in part, on the
existing contract compensation rates already in effect, which
seemed inadequate to attract sufficient quantities of qualified
physicians. Further, she stressed that the experts’ proposal
	The

federal court refers to nurse practitioners and physician assistants in its discussion of
mid-level practitioners.

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California State Auditor Report 2006-501

served as the framework for the three-tiered rate structure used
in the emergency contracts. Finally, she stated that the Plata
court experts’ proposal was discussed in high-level meetings
with representatives from the Office of the Governor, Office
of the Attorney General, Corrections, and the departments of
Finance, General Services, and Personnel Administration.

Corrections could not
demonstrate that the
contract rates it agreed
to pay one contractor
were reasonable. In fact,
the rates were double
that of another registry
contractor providing
similar services.

The assistant deputy director agreed to try to locate relevant
documents related to the development of the rates. However,
the documents she gave us reiterated the emergency situation
that Corrections was in, but did not explain how the rates were
determined. For example, the assistant deputy director was unable
to locate a copy of an informal salary survey. Thus, Corrections
could not demonstrate to us that the contract rates it agreed to
pay the contractor and the minimum rates it recommends the
contractor pay its medical providers are reasonable or appropriate.
In fact, our review of the contract for another registry contractor
found that Corrections’ rates are more than double the rate the
other contractor receives for its physicians.
The other contract, which had a maximum amount of
$1 million, was subject to a process approved by General
Services and known as the special category noncompetitively
bid contract request process. Specifically, on July 29, 2005,
Corrections submitted an application to General Services
requesting an exemption from competitive bidding for
contracts related to certain hospitals with medical guarding
units and their associated staff physicians and medical
groups. On September 1, 2005, General Services approved
Corrections’ application. One of General Services’ conditions of
approval requires Corrections to follow the price analysis and
methodology described in its application and to include price
analyses and documentation when submitting the contracts to
General Services for approval. In its application, Corrections
stated that “it would use the relative value for physicians
(RVP) multiplied by the unit values and Medicare rates as the
benchmark for determining the reasonableness of its rates and
to justify prices for all medical groups, physicians, and various
specialties.” Corrections uses the RVP rates, which it computes
using its established regional conversion factors for procedures
in conjunction with a numerical value (called relative value

	In

the relative value system, values are provided for physician services contained in the
American Medical Association’s Physicians’ Current Procedure Terminology system,
as well as in Medicare’s Healthcare Common Procedure Coding System Level II
(National) Codes.

California State Auditor Report 2006-501	31

units) assigned to the procedure. In addition, Corrections stated
that it would continue to conduct and maintain market surveys
when considering new contracts.

We question whether
the division’s standard
RVP rates can reflect the
current market when
the regional conversion
factors were established
15 years ago.

Corrections received General Services’ approval for this
contract on January 25, 2006. However, it was unable to
produce documentation to support its calculation of the
Medicare benchmark, and no recent market surveys were
performed. The manager of the Health Care Operations Support
Section stated that at the time the contract was executed, the
division did not routinely perform a comparison to Medicare if
the rates were within the standard RVP rates. She also stated that
there was a belief that a market survey was not necessary as long
as the division was within the standard RVP rates. We question
whether the division’s standard RVP rates can reflect the current
market when the regional conversion factors were established
15 years ago. When Corrections does not justify and document the
reasonableness of the contract rates it agrees to pay, in accordance
with the methodology approved by General Services, it is unable to
demonstrate that the rates are appropriate and reasonable.

Corrections Has Paid Some Contractors for Services Provided
Before Their Contracts Were Approved by General Services
State policy generally prohibits contractors from starting work
before they receive a copy of the contract approved by General
Services or, if exempt from General Services’ approval, a copy
of the contract approved by Corrections. For contracts less than
$75,000, state law allows General Services to grant an exemption
from its approval if state agencies meet certain conditions.
Corrections has been granted this exemption. However, all
the contracts except one in our sample exceeded $75,000 and
therefore were subject to General Services’ approval.
For four of the contracts we reviewed, we noted seven instances
in which registry contractors were performing services at prisons
before Corrections obtained General Services’ final approval
of the contracts. In such instances, state policy dictates that
Corrections consider the contractor’s services as volunteer
work or notify the contractor of the process for pursuing
payment by filing a claim with the Victim Compensation and
Government Claims Board. The State has no legal obligation to
pay for the services unless and until the contract is approved.
However, we found that Corrections paid the contractors almost
$20,000 for these services once their contracts were approved
by General Services. When we asked the prisons why they

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California State Auditor Report 2006-501

approved invoices with charges for services occurring before
Corrections obtained General Services’ approval, three prisons
stated that they approved their invoices because the services
were within the contract terms. Further, another prison stated
that headquarters had told staff that if they needed services to
meet a court-ordered workload they did not need to wait for the
contract approval. When Corrections does not ensure that it
obtains proper approval before allowing contractors to perform
services, it exposes the State to potential litigation if General
Services does not approve the contract.

Corrections’ Method for Monitoring Authorization of Prison
Spending Still Requires Improvement
Corrections initiates master contracts with medical registries
that agree to provide services to two or more prisons. The
master contracts have an authorized maximum dollar amount.
To save processing time and costs, Corrections developed the
NTP, an internal document authorizing allocation of spending
authority for any prison choosing to use services covered
under a master contract. In our April 2004 audit report titled
California Department of Corrections: It Needs to Ensure That All
Medical Service Contracts It Enters Are in the State’s Best Interest
and All Medical Claims It Pays Are Valid, we found that the
NTPs issued for four master contracts exceeded the authorized
amount of the master contracts. In its 60-day response to this
audit, Corrections stated that it would train staff to follow the
guidelines outlined in its master contract procedures. Further,
in its six-month response to this audit, Corrections stated that
it would conduct random audits of master contracts to ensure
compliance with the procedures.
Until Corrections’
contracting staff
establishes an effective
process to periodically
reconcile the master
contracts and
outstanding NTPs, it
continues to run the
risk of issuing NTPs
that exceed the master
contract amount.

Of the 21 contracts in our sample, 17 were master contracts
with multiple NTPs issued to prisons. For 10 of the 17 master
contracts, the contracting unit’s lists of NTPs issued for the
master contracts were incomplete. For example, for one master
contract, the listing did not include five NTPs, totaling $566,400
and for another master contract, 12 NTPs for $6.4 million were
not included in the listing. When we brought these errors to
Corrections’ attention, its contracting unit staff informed us that
they experience errors when accessing data from the database.
Therefore, they may not always be aware of the correct amount
of the NTPs.

California State Auditor Report 2006-501	33

The total amount of NTPs that contracting staff issue for a
given contract should not exceed the master contract amount.
Fortunately, these errors were identified early and as a result did
not cause Corrections to exceed the master contract amounts.
On September 15, 2006, the deputy director of Corrections’
Health Care Administrative Branch, which resides within the
division, issued a memo stating that “effective August 28, 2006,
all master contracts in process and any future master contracts
no longer will require NTPs. Instead, staff will determine an
‘informal’ allocation of funding for each participating prison,
using the prisons’ historical utilization data, and will include
a list of all allocations in the contract request submitted to the
contracting unit.” However, according to the memo, master
contracts currently in effect must continue under the existing
NTP process until their contract terms expire. Thus, until
Corrections’ contracting staff establishes an effective process
to periodically reconcile the master contracts and outstanding
NTPs, it continues to run the risk of issuing NTPs that exceed
the master contract amount.

Corrections’ Medical Service Contracts
Generally Include Standard State Terms,
but Other Key Terms Could provide better
protection to the state
Corrections has significant legal obligations related to prisoners’
medical care. As discussed in the Introduction, consistent with
the terms of the Plata settlement agreement, Corrections must
develop and implement a plan for the medical treatment of
inmates that meets or exceeds Corrections’ legal obligations under
the U.S. Constitution. Among other things, this plan must include
specific practices related to staffing levels of registered nurses at
each prison as well as specific medical treatment protocols.
Many of the contracts
in our sample did not
contain the terms
Corrections considers
standard in medical
service contracts
that protect the
confidentiality, privacy,
and handling of
inmate medical records
adequately under HIPAA.

34	

In our review of a sample of 21 original or amended contracts
entered into between Corrections and contracting medical
registries between July 1, 2005, and June 30, 2006, we found
that these contracts generally contained the standard terms
and conditions required by state law or state policy. These
contracts also generally included certain terms that Corrections
has determined are essential to contracting for medical services
in a prison setting. One notable exception was that many of
the contracts in our sample did not contain terms Corrections
considers standard in medical service contracts that protect the
confidentiality, privacy, and handling of inmate medical records
adequately under HIPAA.
California State Auditor Report 2006-501

In looking beyond the legally required terms and conditions
to determine whether the contracts reflect generally accepted
best practices for medical care in a prison setting, we found that
certain key terms could be added or improved to strengthen
Corrections’ ability to provide better protection to the State’s
interests. Specifically, we found that the contract terms related
to the standard of care were inconsistent across our sample, were
sometimes inconsistent even within contracts, and in some cases
did not ensure the minimum standard of medical care that must
be met to protect the constitutional rights of prisoners. We also
found that some contracts did not provide sufficient assurance
to the State that contractors were insured against legal claims
that might be brought by inmates under the Eighth Amendment
to the U.S. Constitution (Eighth Amendment). Finally, we found
that most contracts did not impose any significant obligations
on contracting medical registries to monitor or assess the quality
of care provided under their contracts with Corrections.

Corrections’ Contracts for Prisoner Medical Services
Generally Contain Standard Terms Required in Most
State Contracts
State policy requires all state agencies to include certain standard
terms and conditions in their contracts, including Corrections’
contracts for medical services. These requirements generally
are designed to ensure that contractors doing business with
the State are aware of their legal obligations under various
state or federal laws. For example, all state contracts must
include provisions that require contractors to comply with
laws prohibiting discrimination in hiring and employment.
General Services, which is charged with oversight of state
contracting, has developed various templates for use by state
agencies that include these standard terms. In reviewing our
sample of 21 contracts, we found that they generally contained
the standard terms. Table 2 on the following page shows the
results of our review of those standard terms most closely related
to the specific objectives of this audit—namely, those that
ensure the timely and efficient delivery of medical services—and
describes the purpose of each contract term.
Although one contract in our sample did not include terms
stating that time was of the essence, we did not consider this
problematic because other terms in the contract imposed
sufficient obligations on the contractor related to timely
performance. Similarly, although some contracts did not contain
a severability clause, our legal counsel has advised us that this is

California State Auditor Report 2006-501	35

not problematic, because if any of these contracts were challenged
in court, a court likely would read that term into the contract and
interpret it as though it contained a severability clause.

Table 2
Standard State Contracting Terms

Category of Terms

Purpose of Term

Term Present in
Our Sample of
21 Contracts?

Prior approval required

Requires General Services to approve the contract before the
contractor may start work.

21

Amendment

Requires all contract changes to be in writing and signed.

21

Prohibition against assignment

Prohibits contractor from assigning work under the contract to
another party without consent of the State.

21

Holding State harmless

Absolves the State from any responsibility for damages or other
liability related to the performance of the contract.

21

Termination for cause

Allows the State to terminate the contract based on the
contractor’s failure to perform.

21

Independent capacity

Establishes that the contractor works as an independent contractor
and not as an officer or employee of the State.

21

Nondiscrimination clause

Prohibits the contractor from discrimination in hiring
and employment.

21

Conflict-of-interest certification

Prohibits conflicts of interest, consistent with various state laws.

21

Time is of the essence

Requires the contractor to perform the services under the contract
in the time specified.

20

Compensation for all work

Provides that the amount paid to the contractor is full payment
for services.

21

Severability

Provides that if a court finds some provisions of the contract illegal
or void, they will be removed from the contract and the remaining
provisions will remain in effect.

16*

Source: General Terms and Conditions for state contracts, issued by the Department of General Services.
* A court will likely read this term into a contract, so its absence is not significant.

Corrections’ Medical Contracts Generally Contain Standard
Terms Specific to Contracting for Services in a Prison Setting
In addition to the standard terms required by state policy in
all state contracts, Corrections has developed standard terms
and conditions that it includes in its contracts for the delivery
of medical services in the State’s prisons. For purposes of
our review, the standard terms and conditions required by
Corrections fell into two categories: (1) terms designed to ensure
that providers who associate with inmates are notified of, and
subject to, various laws related to associating with inmates and
(2) terms designed to ensure adequate and timely delivery of
services. As examples of contract terms related to associating
with inmates, the contracts prohibit a provider who works

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California State Auditor Report 2006-501

in a prison setting from giving or taking letters from inmates
without the prison warden’s permission or from encouraging
and/or assisting a prison inmate to escape. Examples of terms
related to the adequate and timely delivery of medical services
included terms that require a provider to have the appropriate
license, permit, or certification for the service called for under
the contract; terms that require minimum qualifications for
staff provided under the contract; terms that require minimum
staffing levels; terms that require participation in training and
orientation provided by Corrections; and terms that ensure the
appropriate management of confidential health information
under federal law. Table 3 shows the results of our review of
those Corrections’ terms that were related most closely to the
specific objectives of this audit—namely, those that ensure
timely and efficient delivery of medical services—and describes
the purpose of each contract term.

Table 3
Standard Terms Used in Corrections’ Contracts for Medical Services

Category of Terms

Purpose of Term

Term Present in
Our Sample of
21 Contracts?

Licenses/permits/certification
requirements

Requires applicable professional license, permits, and/or
certifications to perform the work called for under the contract.

21

Minimum qualifications

Specifies minimum staff qualifications.

21

Staffing levels

Specifies staffing levels.

21*

Cancellation

Authorizes the State to cancel work assignments when staff is
not needed.

18

Overtime rate allowances

Provides for overtime rate allowances.

16†

Overtime provisions consistent
with law

Prescribes legal requirements related to overtime.

16†

On-call/standby services

Requires contractor to be available during off-duty hours.

12‡

Orientation

Requires personnel to attend an orientation class conducted by
Corrections before reporting to work.

19

Inspections

Authorizes Corrections to inspect the contractor’s work.

20

Failure to perform

Authorizes Corrections to end the contract for failure to
provide services.

20

Agreement to protect privacy of
prisoner information consistent
with federal law

Prescribes legal requirements related to formalized Business
Associate Agreement requiring the contractor to meet its
obligations under HIPAA.

6

Source:  California Department of Corrections and Rehabilitation contracts.
*  Under these contracts, Corrections always retained the authority to ensure appropriate staffing levels.
† 

In the remaining five contracts in our sample, overtime provisions were not applicable.

‡ 

In the remaining nine contracts in our sample, on-call or standby was not applicable.

California State Auditor Report 2006-501	37

We found that, except for terms related to appropriate handling
of confidential medical information, the 21 contracts in our
sample generally contained these standard Corrections’ terms.
Where the terms were not present, we found that it was
generally appropriate to omit them because they would not
have applied to that particular type of contract. For example,
some contracts did not require the contractor to provide on-call
services 24 hours a day, seven days a week, but based on the
nature of the services provided under that particular contract,
such as physical therapy, that would not have been necessary.
With respect to staffing levels, none of the contracts in our
sample required a medical registry to meet a particular staffing
level within the prison setting where that registry provided
services. However, we do not believe that this is necessarily a
flaw in the individual contracts. Although achieving appropriate
staffing levels at prisons is critically important and is, in fact,
mandated by the Plata settlement, we believe it is Corrections’
responsibility, under the management of the receivership
established by federal court order, to develop and implement
effective strategies for ensuring adequate overall staffing levels
throughout the entire state prison system. We believe this goal
can be achieved best through effective overall management and
operations at the institutions and is not necessarily a goal that
can be accomplished through contract terms with individual
medical registries.
All but three of the contracts in our sample contained terms that
required Corrections to provide 24 hours’ notice to a medical
registry if services had been scheduled but were not needed for
a particular shift. Our legal counsel has advised us that in the
contracts in which this term is missing, a reviewing court would
likely find that reasonable notice would be an implied term of
the contract. However, litigation can be averted if the parties
define what constitutes reasonable notice in the contract.

Overtime Provisions for Contractors Are Consistent With State Law
As part of our review, we were asked to determine whether
the contract terms were consistent with applicable laws
related to the payment of overtime. Most of the contracts we
reviewed contained terms related to overtime, and the text box
summarizes those terms. We analyzed these provisions in light
of the applicable laws related to the payment of overtime and
found that they were consistent with those laws. However,
it is important to note that under state law, there is no legal

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California State Auditor Report 2006-501

Overtime Provisions for Corrections’
Medical Service Contractors
•	 Contractor must rotate staff to avoid
paying overtime.
•	 Corrections must pay overtime only for an
unanticipated event, such as a prison emergency
after a regular work schedule longer than eight
hours or a prison lockdown, at the rate of one
and one-half times the hourly rate.
•	 Payment of overtime is subject to written
approval from the chief medical officer or the
health care manager or designee; and proof of
authorization must be attached to the monthly
billing invoices to receive payment.
•	 Contractor must pay for any unauthorized
overtime worked by affected personnel.
•	 Contractor must guarantee that various
provisions of the California Labor Code have
been followed when providing personnel to
work. These provisions of state law prescribe the
requirements for overtime payments for most
workers paid on an hourly basis.

obligation to pay overtime to a contracting
physician who is paid more than $55 a day when
that physician works more than an eight-hour
day. Nonetheless, two of the three contracts we
reviewed that called for physician services required
Corrections to pay overtime for physicians.
Although the contract terms permit payment of
overtime only under the limited conditions shown
in the text box, routinely including these terms in
its contracts with physicians may not be fiscally
sound. Our review of 12 selected invoices related
to the contracts we reviewed did not find any in
which the physicians received overtime pay.

Some Contracts Lack Business Associate Agreements
That Ensure Compliance With Federal Requirements
Related to Privacy, Confidentiality, and Transfer of
Inmate Medical Records

Various state and federal laws, including the state
constitution, apply to the handling and protection
Source:  California Department of Corrections and
of medical records and generally protect the
Rehabilitation contracts.
confidentiality of medical information. In addition,
HIPAA imposes various obligations on certain
“covered entities” and the “business associates”
with whom they conduct business. Under HIPAA, Corrections
may act as a covered entity in the provision of medical care to
inmates and the various contractors with whom it does business
may act as “business associates.” As business associates, those
contractors are obligated to follow HIPAA, which imposes various
obligations related to the confidentiality and handling of prisoner
medical information. HIPAA also requires that a business associate
enter into a Business Associate Agreement that imposes specific
obligations designed to ensure compliance with HIPAA.
All the contracts in our sample required the contractor to comply
with state confidentiality laws. However, only six contained
the required Business Associate Agreement. An additional three
contracts contained a general requirement to comply with HIPAA
but did not include the necessary Business Associate Agreement.

	Although

the standard terms and conditions called for by Corrections require
compliance with HIPAA and also require a Business Associate Agreement when
contracting for medical services, the court-appointed receiver has indicated that he is
seeking clarification regarding the applicability of HIPAA in the State’s prisons.

California State Auditor Report 2006-501	39

Corrections’ Treatment of Its Independent Contractors Raises
Concerns About Whether They Are, in Fact, Employees
All the contracts in our sample contained terms that establish
that the medical registries act as independent contractors.
According to state law, an independent contractor is any
person who provides services for a specified compensation
and a specified result under the control of his or her principal.
The principal controls only the result of an independent
contractor’s work and not the means by which the independent
contractor accomplishes the result. That is, an independent
contractor’s work is largely independent of the control of the
entity for which the services are performed. The advantage to a
state agency of using independent contractors to perform work
is that the agency does not have to pay for various employee
taxes and benefits.
Case law regarding the distinction between an independent
contractor and an employee is varied, and there is no specific,
single definitive rule that determines a worker’s status. One
significant element that the courts have applied that establishes
a worker as an independent contractor appears to be the
degree of control the hiring person has over the manner and
means of accomplishing the result or performing the work.
However, in a recent appellate decision, the court held that even
in the absence of control by the principal over the details of
performing the tasks, an employee/employer relationship exists
if “the principal retains pervasive control over the operation as a
whole, the worker’s duties are an integral part of the operation,
and the nature of the work makes detailed control necessary.”
In addition to case law, we reviewed the 20 general factors
used by the U.S. Department of the Treasury, Internal Revenue
Service (IRS) to determine whether a worker is an employee
or an independent contractor. The IRS uses this test to
determine whether an individual is an employee for federal
tax withholding purposes. Although all the contracts in our
sample contained terms that indicate medical registries act as
independent contractors, we surveyed each of the contracting
medical registries in our sample to evaluate their relationship
with Corrections based on the IRS factors. Most of them noted
that they are not required to comply with specific instructions
from Corrections on how to perform their services. In addition,
half of the medical registries noted that they pay their workers
directly, rather than having them paid by Corrections, which
indicates a level of autonomy associated with that of an
independent contractor.

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California State Auditor Report 2006-501

Other factors, however, suggested a significant degree of control
by Corrections. For example, survey results also indicated that all
the respondents noted that the services provided by the medical
registries are an integral part of Corrections’ operations, and that
most respondents noted that there is a long and continuous
relationship between Corrections and the medical registry.
These factors suggest that the worker is subject to the employer’s
direction and control. Additionally, a continuing relationship
between a worker and an employer is another indication that
an employer/employee relationship exists. Further, most of
the survey respondents indicated that the nature of the work
requires that it be done on Corrections’ premises, and a majority
of respondents stated that Corrections furnishes the workers
with the necessary tools and materials. Again, the IRS considers
all these factors as further indications that an employer/
employee relationship exists.

Potential liability
and penalties for
misclassification of
an employee include
substantial taxes, back
pay, and reimbursement of
expenses.

Potential liability and penalties for misclassification of an
employee include substantial taxes, back pay, and reimbursement
of expenses. Furthermore, California does not make a distinction
between intentional and unintentional misclassification of
an employee. Thus, the responsibility for proper conduct and
classification of an independent contractor falls upon the employer.
Based on the survey results, there are several areas in which
Corrections appears to maintain a significant degree of control
over the manner and means of performing the work. However,
as we noted earlier, the IRS and the courts do not expressly
state a single, definitive rule regarding what constitutes an
independent contractor. Instead, the courts and the IRS make
each decision based on the totality of the circumstances. As
such, it is difficult to say whether medical registries would be
deemed independent contractors or Corrections’ employees.

Key Contract Terms Could Strengthen Corrections’ Delivery
of Medical Care to Inmates
As a result of our research into generally accepted best practices
for providing medical care in a prison setting, seven key contract
terms emerged as generally accepted best practices. Table 4 on
the following page shows the results of our review of sample
contracts to determine whether they contained these terms and
describes the purpose of each term. For example, all the contracts
in our sample contained terms that plainly state the rate and
schedule of payment, including the obligation to make prompt
payment in accordance with state law.

California State Auditor Report 2006-501	41

Table 4
Generally Recommended Contract Terms for
Providing Medical Care in a Prison Setting

Purpose of Term

Term Present in
Our Sample of
21 Contracts?

Standard of care

Defines the standard of medical care expected under the contract.

21

Insurance

Requires the contractor to be insured against liability.

Insurance coverage for civil rights
claims

Specifically requires the contractor to be insured against civil rights
claims filed by inmates that relate to the adequacy of medical care.

Prohibition of patient referral

Prohibits a contracting physician from referring a patient to an
entity in which he or she has a prohibited business interest.

1†

Monitor and access quality

Requires the contractor to monitor for effective and quality
performance.

5

Rate of payment and schedule
of payment including prompt
payment provisions

Prescribes the actual rate and schedule of payment and requires
prompt payment in accordance with state law.

Type of Term

21
Unclear*

21

Source:  Please refer to the Appendix.
* Although most of the contracts required the contractor to notify the insurance carrier that services were to be provided to
inmates, it is not clear that this would ensure coverage against civil rights claims.
†

This term was only relevant to three of the contracts in our sample and was present in only one contract. Although the other two
contracts did not contain an anti-self referral prohibition, other terms within the contract were sufficient to address this issue.

Contract Terms Related to the Standard of Care Are Inconsistent
and Sometimes Ambiguous
The American Medical Association (AMA) considers it a
recommended best practice for any contract between a medical
care provider and an organization for which that provider
provides medical services to state plainly the required standard of
care called for under the contract. The phrase standard of care is
understood within the medical community to refer to a diagnostic
and treatment process that a practicing clinician should follow
for a certain type of patient, illness, or clinical circumstance. In a
legal context, the phrase standard of care is the level at which the
average, prudent provider of medical care in a given community
would practice. Stated differently, the standard of care is how
similarly qualified practitioners would be expected to manage a
patient’s care under the same or similar circumstances.
In its Model Managed Care Contract for physicians, the AMA,
a national organization whose mission is to promote the art
and science of medicine and the betterment of public health,
recommends that any contract between a physician and a
managed care organization require that the standard of care

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California State Auditor Report 2006-501

for services to be provided by the physician be based on the
AMA’s definition of medical necessity. That definition calls
for a contracting physician to provide health care services
or procedures that “a prudent physician would provide to a
patient for the purpose of preventing, diagnosing, or treating
an illness, injury, disease or its symptoms in a manner that is
(a) in accordance with generally accepted standards of medical
practice; (b) clinically appropriate in terms of type, frequency,
extent, site, and duration; and (c) not primarily for the
economic benefit of the health plans and purchasers or for the
convenience of the patient, treating physician, or other health
care provider.” The AMA has published statements indicating
that it believes that medical necessity should rely on an
objective, prudent physician standard and that cost should not
be considered. This standard of care is known as the “prudent
physician” standard and is the standard applied in a medical
malpractice lawsuit when a patient claims to have received
negligent medical care.
An inmate who believes that he or she has received inadequate
medical care in a prison setting may seek relief under various
laws. One way to seek judicial relief is to claim that his or
her civil rights have been violated under the Civil Rights Act
of 1871, commonly known as a civil rights claim. To prevail
on a civil rights claim, the inmate must show that his or her
constitutional rights have been violated.
As we discussed in the Introduction, the constitutional
prohibition against cruel and unusual punishment is violated
in a prison setting when an inmate shows that he
or she had a serious medical need and that prison
Factors That May Lead to a Finding of
officials responded with deliberate indifference to
Deliberate Indifference
that need. A medical need is sufficiently serious
if the failure to treat the condition could result in
•	 Inadequate medical staffing.
further significant injury or the unnecessary and
•	 Inadequate organization and administration
of the medical care system, with few, if any,
wanton infliction of pain. Indications of a serious
written procedures.
medical need include the presence of a medical
•	 Inadequate access to the medical care system.
condition that significantly affects an individual’s
•	 Nonmedical personnel having discretion over
daily activities. The text box shows some factors
who has access to medical care.
the courts have considered in finding that medical
•	 Medication being dispensed by persons who are
care in a prison setting was deliberately indifferent.
not properly licensed.
The courts have held that contracting medical
th
services providers act on behalf of the State when
Source: Hoptowit v. Ray (9 Cir. 1982) 682 F.2d 1237.
they provide medical care in prisons. As such, they
are held to this same constitutional standard.

California State Auditor Report 2006-501	43

The courts have recognized that an apparent distinction
exists between the deliberate indifference standard required
to establish an Eighth Amendment violation and the prudent
physician or typical negligence standard. As one court noted,
the Eighth Amendment does not require that prison officials
provide the most desirable medical and mental health care; nor
should judges simply “constitutionalize” the standards set forth
by professional associations such as the AMA or the American
Public Health Association. As the Ninth Circuit Court of Appeals
has noted, “while poor medical treatment will at a certain point
rise to the level of constitutional violation, mere malpractice,
or even gross negligence does not suffice.” However, the courts
have advised that the Eighth Amendment does require that
prison officials “provide a system of ready access to adequate
medical care.”

Regulations adopted by
Corrections prescribe the
standard of care required
in California prisons and
provide that Corrections
shall “only provide medical
services for inmates which
are based on medical
necessity and supported by
outcome data as effective
medical treatment.”

Regulations adopted by Corrections prescribe the standard of
care required in California prisons and provide that Corrections
shall “only provide medical services for inmates which are based
on medical necessity and supported by outcome data as effective
medical treatment. In the absence of available outcome data
for a specific case, treatment will be based on the judgment of
the physician that the treatment is considered effective for the
purpose intended and is supported by diagnostic information
and consultations with appropriate specialists.” For the purposes
of these provisions, the term medically necessary means “health
care services that are determined by the attending physician to
be reasonable and necessary to protect life, prevent significant
illness or disability, or alleviate severe pain, and are supported
by health outcome data as being effective medical care.” By
regulation, the outcome data may be based on studies that take
cost-effectiveness into account.
Our legal counsel has advised us that this regulatory standard
is consistent in some respects with the standard of medical
necessity proposed by the AMA, in that it calls for health care
services that are determined by the attending physician to be
reasonable and necessary to protect life, prevent significant
illness or disability, or alleviate severe pain. This regulatory
standard takes cost-effectiveness into account, limits health
care services to those that prevent significant illness rather than
an illness, and also allows for pain treatment only to alleviate
severe pain, however, this regulatory standard may impose
a lower standard of care than the standard of care generally
expected of a prudent physician.

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California State Auditor Report 2006-501

However, the regulatory standard does appear to impose a
standard of care that is consistent with the obligations imposed
on prison officials under the Eighth Amendment. In particular,
the regulatory language that defines what constitutes severe pain
and significant illness or disability appears to be tied directly to
the Eighth Amendment standard. The regulations define “severe
pain” as “a degree of discomfort that significantly disables the
patient from reasonable independent function.” “Significant
illness and disability” means “any medical condition that causes
or may cause if left untreated a severe limitation of function or
ability to perform the daily activities of life or that may cause
premature death.” When considering what constitutes deliberate
indifference to an inmate’s serious medical needs under the
Eighth Amendment, the courts have stated that indications
of a serious medical need include the presence of a medical
condition that significantly affects an individual’s daily activities.
Accordingly, we believe that the regulatory standard adopted by
Corrections is aligned with the minimal standard of care required
to meet the State’s obligations under the Eighth Amendment.

Although all 21
contracts in our sample
contained terms related
to standard of care,
only 16 contained terms
that appear to meet the
legally required standard
contained in Corrections’
regulations.

At a minimum, we expected the contracts entered into by
Corrections for the medical care of inmates to contain terms
that reflect the substantive requirements of Corrections’
regulations. All 21 contracts in our sample contained terms
related to the standard of care. However, only 16 contained
terms that appear to meet the legally required standard
contained in regulation. Even then, the language used to
describe the standard of care in these 16 contracts varied widely.
For example, some contracts required the contractor to meet
the standard of care contained in the regulations, some referred
to “CDC [Corrections] standards,” some referred to “state law,”
and still others called for conformity with “CDC [Corrections]
facility policies and procedures.” Despite the many variations,
we considered all these terms to be essentially the same in that
they appeared to call for the legally required standard of care
set out in the regulations. In addition, four other contracts
contained terms that appear to have been drafted in an attempt
to be consistent with the standard of care set out in regulation,
but rather than requiring the contractor to meet that standard,
they required the contractor to provide medical care “necessary
to prevent death or permanent disability.” According to our
legal counsel, this language does not appear to meet the
minimum standard set out in regulation and appears to establish
a potentially lower standard of care. In addition, one contract
contained only a requirement that the contractor provide
services consistent with scope of practice and did not prescribe a
standard that was specific to a prison setting.

California State Auditor Report 2006-501	45

In addition to finding differences among contracts in the way
they describe the required standard of care, we noted that
many of the contracts in our sample contained multiple terms
related to the standard of care within the same contract. In
some cases, these terms appear to be inconsistent with one
another. For example, 14 of the 21 contracts contained terms
requiring contracting medical care providers to follow the legally
required standard in regulation and to follow generally accepted
professional standards or national standards. We do not in
any way question the value of following generally accepted
professional standards or national standards. However, because
it is not necessarily clear that Corrections’ regulatory standard
and the standard of care called for by professional or national
standards are the same, this inconsistency may create an ethical
dilemma and confusion on the part of medical care providers
and may even result in litigation.
In addition, we found a lack of consistency across our sample in
terms of the standard of care being required. For example, seven
of the 21 contracts in our sample included terms that call for
the contractor to meet national standards. The use of national
standards has been highly recommended. Although it may be a
good practice, it is inconsistent to require this standard of some
contracting medical service providers and not others.

Some contracts contained
terms related to the
standard of care that
were inconsistent with the
AMA’s recommendation
that contracting
physicians not obligate
themselves to standards
that are higher than the
law requires.

46	

We also found that some contracts contained terms related
to the standard of care that were inconsistent with the AMA’s
recommendations. The AMA recommends that a contracting
physician not obligate himself or herself to a standard of care
that is higher than that required by law. Specifically, the AMA
advises against agreeing to such terms as providing services
“according to the highest standard of competence,” “of optimum
quality,” or other standards that may be inconsistent with the
generally accepted standard of care for practicing physicians.
Several contracts we reviewed called for the provider to meet
Corrections’ standard of care and called for “high quality” or
even the “highest level of treatment within the scope of available
resources” as the standard of care. Although we do not in any
way question the importance of providing high-quality medical
care to inmates, drafting contracts containing multiple terms that
may suggest differing standards of care creates an ambiguity
that may result in uncertainty on the part of the provider, and
potential disagreement among the contracting parties, about just
what is required under the contract.

California State Auditor Report 2006-501

In light of the important legal obligations related to the standard
of care imposed on Corrections under the Plata settlement,
we believe it is imperative that all contracts contain clear,
consistent terms that, at a minimum, meet or exceed the State’s
obligations under the U.S. Constitution. These terms should
call for a standard of care that meets Corrections’ constitutional
obligations and that is consistent with the standard of care that
a practicing physician would provide if adhering to generally
accepted ethical norms.

Contract Terms Should Impose Clearer Obligations for
Contractors to Be Insured Against Civil Rights Claims
State policy recommends that all contractors who enter into
certain types of contracts with the State maintain specified
amounts of liability coverage. We found that all the contracts we
reviewed called for the recommended level of coverage. In the
prison context, however, it is important to ensure not only that
contractors have general and professional liability insurance, but
also that their coverage extends to protection against civil rights
claims. A likely basis for a lawsuit brought by a prisoner against
a medical care provider would be a claim that the inmate’s civil
rights were violated under the Eighth Amendment, so this is
important coverage for a medical registry and its providers.
Although some of the contracts contained terms requiring the
contractor to notify the insurance carrier that the contractor
regularly provides services to inmates, it is not clear that this term
necessarily would ensure that the contractor was insured against
civil rights claims. Our legal counsel has advised that a better
practice would be to require the contractor, to the extent feasible,
submit proof to Corrections that the insurance company has
agreed explicitly to insure it against civil rights claims.

Although Most Contracts With Physicians Lacked Terms Specific
to Patient Referrals, Their Conflict-of-Interest Terms Were
Sufficiently Broad to Address This Issue
As professionals, physicians are subject to specific requirements
related to conflicts of interest. In particular, federal and state
laws contain provisions that prohibit physicians from referring
patients to an entity in which they have a financial or business
interest. In our sample of 21 contracts, three called for physician
services. Of these, only one contract contained an explicit
reference requiring physicians under contract to comply with
these laws related to physician referrals. However, our legal
counsel has advised us that the other terms contained in those

California State Auditor Report 2006-501	47

contracts, namely those that address other conflict-of-interest
prohibitions, were broad enough to include this prohibition.
Therefore, we found the conflict-of-interest terms, which were
present in all contracts, adequate.

Although Many Contracts Require Corrections to Inspect and
Monitor Performance, Few Impose Obligations on Contractors
to Monitor or Assess Their Quality of Services
Although all the
contracts in our sample
enabled Corrections to
inspect and monitor the
quality of contractor
performance, only five
contracts imposed a
corresponding obligation
on the part of the medical
registries to monitor and
assess the quality of their
own performance.

Under the Plata agreement, Corrections is charged with
implementing a health care system for inmates that meets
or exceeds its obligations under the U.S. Constitution. It is
a generally accepted best practice for a health care provider
to have a process in place for assessing and monitoring the
quality of medical care it provides. Although all the contracts
in our sample enabled Corrections to inspect and monitor the
quality of contractor performance, only five contracts imposed
a corresponding obligation on the part of medical registries
to monitor and assess the quality of their own performance.
Given the importance of improving the delivery of health care
in California’s prisons and the extent to which contractors are
responsible for providing medical services, we believe these
terms should be present in all medical registries contracts.

Recommendations
To ensure that it protects the State’s interests and receives the best
possible services at the most competitive prices, Corrections should:
•	 Ensure that staff receive proper training on bidding methods,
including the appropriate application of the small business
preference, so that bidders are awarded contracts in the
correct order.
•	 Establish policies and procedures regarding the methodology
for determining the cost threshold used to limit the number
of awards made to registry contractors.
•	 Implement a quality control process to ensure staff calculate
the cost threshold correctly and retain documentation to
support their calculations in the contract files.
	In

making these recommendations to Corrections, we understand that they would be
implemented at the direction of the court-appointed receiver. We do, however, expect
that if control and management of Corrections’ medical health care delivery system is
returned to it, that Corrections would then become responsible for implementing these
recommendations.

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California State Auditor Report 2006-501

•	 Notify potential bidders of its use of a cost threshold to
determine the awards to be made and its methodology for
calculating the threshold.
•	 Implement a quality control process to identify errors in the
ranking of bidders before awarding contracts.
•	 Fully comply with state policy, including justifying and
documenting the reasonableness of its contract costs, when it
receives fewer than three bids or when it chooses to follow a
noncompetitive process.
•	 Retain documentation of its efforts to solicit all known
potential contractors when it advertises in the California State
Contracts Register.
•	 Adhere to the price analysis and methodology approved
by General Services when using the special category
noncompetitively bid request process. For example, it should
use Medicare rates as a benchmark for determining the
reasonableness of its rates paid to contractors.
•	 Reevaluate the regional conversion factors used to establish its
standard RVP rates.
•	 Conduct periodic market surveys.
•	 Ensure that it establishes internal control processes that
prevent prisons from allowing contractors to perform services
before receiving General Services’ approval of the contract.
To ensure that it minimizes the risk of authorizing prison
spending that exceeds its master contracts, Corrections should
ensure that contract staff periodically reconcile the master
contracts and outstanding NTPs and conduct random audits to
verify the reconciliation process.
To protect the best interests of the State, all contracts that
Corrections enters into with medical registries should meet these
requirements:
•	 Contain express provisions related to the required notice
period for cancellation.

California State Auditor Report 2006-501	49

•	 Include Business Associate Agreements in all contracts subject
to HIPAA and amend existing contracts to include those
agreements.
•	 Contain clear and consistent requirements related to the
standard of care called for under the contract. At a minimum
this standard of care must meet the standard of care needed
in order to satisfy Corrections’ obligations under the Plata
settlement agreement.
•	 Require medical registries to submit proof that their insurance
company has agreed explicitly to insure them against civil
rights claims.
•	 Require registry contractors to monitor and assess the quality
of services they provide under the contract.
To ensure that there is no uncertainty surrounding the legal
status of contract employees, Corrections should seek expert
advice and legal counsel to determine whether its current
treatment of certain medical registry service providers is
such that those medical registry service providers should be
considered employees rather than independent contractors.
To ensure that Corrections’ contracts contain terms for standard
of care that meet its constitutional obligations as well as the
standard of care that a practicing physician would provide
if adhering to generally accepted ethical norms, Corrections
should seek legal and other expert advice to determine whether
the standard of care currently prescribed in state regulations
allows contracting physicians to provide medical care in a
manner that is consistent with the generally accepted standard
of care in the medical community. If the standard of care is not
consistent with the generally accepted standard of care in the
medical community, Corrections should revise its regulatory
standard to require that the standard of care called for in the
State’s prisons is, at a minimum, consistent with medical ethics
and with the State’s constitutional obligations. n

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California State Auditor Report 2006-501

Chapter 2
The California Department of
Corrections and Rehabilitation
Did Not Always Monitor Medical
Service Invoices Adequately, Cannot
Demonstrate Its Compliance With
the Political Reform Act, and Failed
to Verify Credentials of Contracted
Providers Properly
Chapter summary

T

he prisons operated by the California Department of
Corrections and Rehabilitation (Corrections) could not
always demonstrate that they followed Corrections’ policy
requiring them to obtain services from registry contractors
in the hierarchy in which Corrections awarded the contracts.
Specifically, for 22 of the 38 invoices we reviewed that were
subject to this requirement, prison staff could not provide
sufficient documentation to support their attempts to follow
the required hierarchy.
In addition, prisons sometimes failed to monitor invoices for
medical services adequately, resulting in additional medical
costs to the State. For three of the 50 invoices we reviewed, the
prisons did not provide sufficient evidence that they verified
receipt of services before authorizing payment. Our review also
found that prisons did not ensure consistently that payment
amounts agreed with contract terms. Prisons also sometimes
approved payments for overtime, even though the contractors
did not comply with contract provisions requiring written
approval of overtime. Prisons and the regional accounting
offices also failed to ensure that they took advantage of
discounts available for prompt payment. It is important to point
out that many of the issues we identify in this report also were
identified in a previous audit report titled California Department
of Corrections: It Needs to Ensure That All Medical Service Contracts
It Enters Are in the State’s Best Interest and All Medical Claims It
Pays Are Valid, issued in April 2004.

California State Auditor Report 2006-501	

51

Although individual percentages varied widely, the 16 medical
registry contractors in our sample that bill Corrections by
the hour paid their medical service providers, on average,
65 percent of the hourly rate they received from Corrections.
Contractors had varying explanations for the percentages they
pay. For example, contractors supplying physician providers
cited overhead costs such as workers’ compensation, malpractice
insurance, and travel expenses, while a contractor working
with nurses indicated that he pays a lower hourly rate but
reimburses nurses for a portion of their housing and utility
expenses. Further, some contractors hire their providers as
employees while others employ them as independent contractors.
Given these many differences, we found it difficult to compare
the contractors and more fully explain the range of percentages.
Further, Corrections lacks adequate controls to ensure that it
complies with the Political Reform Act of 1974 (political reform
act). Of the 124 employees whose statements of economic
interests we reviewed, seven did not complete their statements
correctly, 14 did not file statements, and 78 filed their statements
after the deadline. Corrections also failed to ensure that prisons
require their consultants to complete statements of economic
interests or to document why it was appropriate not to do so.
Corrections does not provide any oversight to ensure that
contractors and providers adhere to the licensing and
credentialing requirement in its contract terms. Additionally,
Corrections’ credentialing unit, which is responsible for
performing database searches to verify the credentials of certain
types of providers, did not always perform these searches. For
example, it did not verify the credentials of providers who treat
inmates outside of Corrections’ facilities because it believed
these reviews were being conducted by the Department
of Health Services (Health Services) as part of its process for
licensing the facilities. However, Health Services does not
verify credentials of individual providers. It simply reviews the
facility’s process for doing so. In addition, Corrections failed to
verify the credentials of some providers because it considered
certain providers to be working in a supportive role rather
than independently, or the prisons failed to request such a
database search for their providers. Finally, Corrections wastes
time on some credentialing activities because it unnecessarily
duplicates the database searches and reviews.

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California State Auditor Report 2006-501

Corrections Did Not Always Monitor
Adequately the Medical Service Invoices of its
Registry Contractors
The State’s prisons did not always follow procedures requiring
them to obtain services from medical registry contractors
according to a specified hierarchy and to document their
attempts. Prisons also could not demonstrate that they
verified the receipt of services before authorizing invoices for
payment. Moreover, prisons did not adhere to the contract
terms specifying the rates to pay providers or ensure that they
had the appropriate approval before paying invoices containing
overtime. Finally, Corrections did not always take advantage of
all available discounts, or took discounts for the wrong amount.
Table 5 shows the prisons’ noncompliance with procedures and
contract terms for the invoices we reviewed.

Table 5
Corrections’ Noncompliance With Procedures
and Contract Terms Related to Invoicing

Procedure or Contract Term

Number
of Invoices
Subject to
Requirement

Number of
Invoices Not
Meeting
Requirement

Percentage
of Invoices
Not Meeting
Requirement

Prisons must demonstrate proper
use of hierarchy

38

22

58%

Prisons must have evidence
of receiving services before
making payment

50

3

6

Prisons must adjust invoices
according to the rates in the
contract terms

50

5

10

Prisons must ensure that they
pay overtime in accordance
with the contract terms

10

7

70

Prisons and regional accounting
offices must take advantage of
available discounts

30

14

47

Prisons and regional accounting
offices must adhere to the
California Prompt Payment Act

50

3

6

Sources:  California Department of Corrections and Rehabilitation contracts, invoices, and
other relevant records; Registry Contracts Usage policy; Health Care Cost and Utilization
Program Procedures Guide; and the State Administrative Manual.

California State Auditor Report 2006-501	

53

Prisons Did Not Always Follow Corrections’ Procedures and
Contract Terms for Using Registry Contractors
When prisons need to hire a service provider under a medical
registry contract, Corrections requires them to follow the
hierarchy outlined in the registries’ contracts. To avoid a breach
of contract, Corrections’ procedures require prisons to document
their attempts to obtain services from registry contractors,
including those attempts in which they fail to secure services.
The documentation is also necessary because the contract terms
allow Corrections to terminate a contract for nonperformance
when a registry contractor fails to provide requested services
three times.

One prison obtained
services from a registry
contractor that was
number 22 on the
hierarchy of 26 registries,
but was unable to locate
any documentation of its
attempts to contact the
21 registries ahead of
the one used.

For 22 of the 38 invoices we reviewed that were subject to the
hierarchy requirement, prisons did not provide us with sufficient
documentation to demonstrate that they followed the hierarchy
when obtaining services from registry contractors. For example,
one prison obtained services from a registry contractor that was
number 22 on the hierarchy of 26 registries. However, the prison
was unable to locate any documentation of its attempts to
contact the 21 registries ahead of the one used. According to the
prison’s correctional health services administrator, at the time
the services were used, the prison had only two supervisors for
obtaining the services of registry staff, training, and the overall
operation of its health care unit. He stated that the prison now
has the staff required to perform these functions and they are
following the hierarchy on a daily basis. In contrast, for 16 of
the 38 invoices we reviewed, the prisons were able to provide
us with sufficient documentation of their attempts to contact
registries in accordance with the hierarchy. For example,
one prison could clearly demonstrate its attempts to contact
12 registries before using the one chosen.
During our interviews with the 16 contractors in our sample,
a few commented on how prisons do not always follow the
hierarchy and as a result Corrections may be paying more for
services. Specifically, the contractors stated that the prisons send
their service requests to the contractors simultaneously instead
of sending the request to each contractor in turn, starting
with the primary contractor. The contractors’ statements are
consistent with Corrections’ policy that allows prisons to send
requests concurrently to all registries listed in the hierarchy.
The contractors also stated that, as a result of this practice, the
providers do not respond to the contractors with the lowest bid
but instead wait to be called by the contractors with the higher
bids because they can receive more money.

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California State Auditor Report 2006-501

When prisons do not consistently document their attempts to
contact registry providers in accordance with the hierarchy, they
expose the State to potential lawsuits from registry contractors
for breach of contract terms and they hinder Corrections’ ability
to terminate registry contractors for nonperformance.

Prisons Sometimes Fail to Monitor Invoices for Medical
Services Adequately
State policy requires contract managers to monitor contractors
to ensure that they perform services according to the quality,
quantity, objectives, time frames, and manner specified in the
contract. Contract managers also must review and approve
invoices before payment to substantiate the performance of the
work and to prevent the assessment of penalties.
As shown in Table 5 on page 53, for three of 50 invoices we
reviewed, prisons could not provide sufficient evidence of their
verifications that services were performed before they authorized
the payments. According to the deputy director of Corrections’
Health Care Administrative Operations Branch within its Division
of Correctional Health Care Services (division), Corrections is
drafting a departmentwide policy to remind prison medical staff
of the proper procedures for verifying registry contractors’ hours
before authorizing payment. The draft policy is undergoing
review by the Plata Support Division and the deputy director
anticipates its approval by April 2007.

Registry contractors were
overpaid by $4,050 on
five invoices because
HCCUP analysts did
not always identify and
adjust discrepancies
between contract rates
and charges shown on
the providers’ invoices.

Prisons also did not always identify and adjust discrepancies
between contract rates and charges shown on the providers’
invoices. Corrections’ Health Care Cost and Utilization
Program (HCCUP) is an integral part of the division’s efforts
to provide cost-effective health care to inmates. Each prison
has an assigned HCCUP analyst responsible for reviewing
invoices and adjusting them according to the rates shown in the
contracts and for ensuring that authorized medical staff approve
invoices for payment. However, our review of 50 invoices found
that some registry contractors were overpaid by $4,050 for five
invoices that totaled $458,346.
Specifically, one contract explicitly describes how to calculate
the contractor’s rate of compensation using a fee and coding
guide. However, the rates shown on four of the contractor’s
invoices that were paid by two prisons were higher than
the rates we calculated using the methodology stated in the
contract. When we asked the two prisons to explain the

California State Auditor Report 2006-501	

55

methodology they used to verify the rates, staff at both prisons
stated that they had never been provided with a copy of the
fee and coding guide. One prison stated that it received verbal
instructions from HCCUP headquarters’ staff on how to pay the
contractor’s invoice, and the other prison stated it has to rely on
the contractor to bill invoices correctly. Using the methodology
stated in the contract, we calculated that Corrections overpaid
the contractor a total of $3,890 for these four invoices. One
prison stated that the difference, according to the contractor,
was our omission of a geographic area factor when calculating
the rates. However, the contract does not include a geographic
area factor in the rate methodology. Moreover, if it was
Corrections’ intention to use a geographic area factor, we
would expect the contract to describe explicitly the appropriate
use of the factor, which can increase contractors’ rates between
6 percent and 29 percent.
HCCUP analysts also did not always ensure that registry
contractors adhered to the contract provisions for overtime.
According to Corrections’ contract terms, contractors are
responsible for rotating staff and providing relief staff to avoid
incurring overtime pay. However, Corrections will pay overtime
for unanticipated events, such as a prison emergency or
lockdown. When an unanticipated event occurs, the contractor
must obtain written approval for overtime from the prison’s
health care manager, chief medical officer, or designee and must
submit a copy of the written approval with the monthly invoice.

One prison paid a
contractor almost $2,300
for overtime on two
invoices even though
the contractor did not
provide the proper written
approvals for the overtime.

56	

Nevertheless, as previously shown in Table 5, we found that
prisons authorized seven invoices for payment even though
the registry contractors did not follow the contract’s overtime
provisions. For example, one prison paid a contractor almost
$2,300 for overtime on two invoices even though the
contractor did not provide the proper written approvals for the
overtime. The prison’s correctional health services administrator
stated that one staff person was not aware of the need to
submit written approval for overtime with invoices and was
not informed by the HCCUP analyst of the need to do so. She
further stated that training would be provided to the director
of nursing and the nursing department. In addition, another
prison paid a contractor $6,300 for overtime on two invoices but
could not demonstrate that any written approval was obtained.
The prison’s health care manager was unable to provide us with
copies of the written approvals for overtime because the prison
retains records for six months and then purges them. He stated
that the prison is changing its policy to reflect a two-year record
retention period.
California State Auditor Report 2006-501

Portion of Invoice Payment Process
Related to Securing Discounts and
Preventing Late Payments
•	 Regional accounting office (RAO) receives
invoice from the contractor or provider.
•	 RAO date-stamps the receipt of the invoice and
within three days forwards a copy to the prison
HCCUP analyst.
•	 HCCUP analyst date-stamps the receipt of the
invoices from the RAO.
•	 HCCUP analyst routes the invoice to the
appropriate invoice reviewer after calculating
the critical processing dates to comply with the
California Prompt Payment Act (CPPA).
•	 Invoice reviewer, such as the contract monitor
or utilization management nurse, routes the
invoice back to the HCCUP analyst upon
completion of his or her review, which should
allow sufficient time to comply with CPPA.
•	 HCCUP analyst applies the rate and discount
in accordance with the contract. The analyst
also codes the invoice with the appropriate
accounting information.
•	 HCCUP analyst routes the invoice to the health
care manager or designee for approval.
•	 HCCUP analyst forwards a copy of the invoice to
the RAO.
•	 RAO evaluates invoice for discounts and late
payment penalties and processes the payment.
Sources: HCCUP Procedure Guide, dated
November 1999. California Department of
Corrections’ Regional Accounting Office Accounts
Payable Desk Procedures, dated July 2004.

HCCUP analysts and regional accounting office
staff did not always ensure that contract discounts
were taken, that they were taken for the correct
amounts, and that invoices for medical services
were paid promptly. The State expects agencies
to take any discounts offered by its contractors or
vendors. Both the prisons’ HCCUP analysts and
the regional accounting offices are responsible for
ensuring that discounts are taken, as described
in the text box. However, we found 14 instances
in our sample totaling almost $480 in which
prisons either failed to take discounts or took
discounts for the wrong amounts. For example,
although one contract for providing services
to two prisons offered a 1 percent discount
for invoices paid within 30 days, the contractor’s
invoices stated that the discount was 0.05 percent
if invoices were paid within 20 days. According
to the regional accounting office, discounts were
not taken for the two invoices in our sample and
15 other invoices billed by this contractor between
August 29, 2005, and January 1, 2007, resulting
in lost discounts of $1,145. When we asked the
prison about the discrepancy and why it did not
take the contractual discount amount, it gave
no explanation. According to the contractor,
the discrepancy in the discount percentage on
the invoices was an error.

Finally, we also found that contractors were owed
roughly $500 in late payment penalties for three of
Note: A separate process exists for disputed invoices.
the 50 invoices we reviewed. The California Prompt
Payment Act (CPPA) requires state agencies to pay
properly submitted, undisputed invoices within
45 days of receipt or to automatically calculate
and pay the appropriate late payment penalty. Small businesses
generally receive the penalty regardless of the amount, but other
businesses do not receive the penalty unless the penalty amount
is greater than $75. It appears that the delays resulting in late
payments are attributed primarily to the prisons. For example,
Corrections owed one contractor late penalties of almost $410 for
two invoices that were overdue by 28 to 60 days. The payments
were late because the prison did not submit the invoices to the
regional accounting office until 57 days and 93 days after it
received them. Further, Corrections had to pay one contractor
$1,400 in late payment penalties because the prison did not

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Corrections had to pay
one contractor $1,400 in
late payment penalties
because the prison did
not notify the regional
accounting office until
almost two months after
receiving the invoice
that additional evidence
supporting the invoice
was needed from the
contractor.

notify the regional accounting office until almost two months
after receiving the invoice that additional evidence supporting
the invoice was needed from the contractor. To avoid the late
payment penalty, the CPPA requires Corrections to notify a
contractor that it is disputing an invoice, within 15 days of
receiving it.
Corrections’ failure to observe controls and ensure adequate
oversight of medical services invoices unnecessarily increases
costs, and may discourage contractors from wanting to do
business with the State. During our interviews with the
16 contractors in our sample, a few commented on how
Corrections does not pay them on time nor does it pay the
required late payment penalties.

MEDICAL REGISTRY CONTRACTORS BILLING
CORRECTIONS AT AN HOURLY RATE PAID THEIR
SERVICE PROVIDERS, ON AVERAGE, 65 PERCENT
OF FEES RECEIVED
Corrections awards contracts to a variety of medical registry
contractors to obtain temporary medical services in its prisons.
Our review of 21 contracts included 16 medical registry
contractors that coordinate staffing of medical professionals or
provide services directly for Corrections’ medical services needs.
Of these 16 contractors, 12 billed Corrections for medical services
at an hourly rate. These contractors paid their medical service
providers, on average, 65 percent of the hourly rate they received
from Corrections. Table 6 illustrates the average percentages paid
to the providers by the registry contractors we reviewed. However,
Table 6 does not include information for the remaining four
registry contractors, which billed Corrections using a daily rate
or fee-for-service rates, because either we were unable to present
this information without disclosing confidential data or we were
unable to present the data in a manner that would be meaningful.
The three contractors for physicians paid their providers
64 percent to 85 percent of the rate they received from
Corrections, with the average being 75 percent. The contractors
stated that the difference between the rates they billed
Corrections and the rates they paid their physicians includes
factors such as premiums for workers’ compensation and
malpractice insurance and travel expenses they must pay for

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the physicians. In addition, one contractor stated that he
incurred an unexpected increase in costs to advertise and recruit
physicians to meet Corrections’ medical service needs.

TABLE 6
Average Percentages of the Registry Contractors Rates
That Are Paid to Their Providers, by Provider Type
Number of
Contractors
Reviewed*

Average Percentage
of Contract Rate Paid
to Providers

Physicians

3

75%

Pharmacists and pharmacy technicians

3

72

Nurses†

4

57

Other‡

4

64

Provider Type

Sources: Contractor invoices, time sheets, and payroll records.
*	Number will not total 12 because two hourly contractors provide services in
multiple categories.
†	 Includes
‡

registered nurses and licensed vocational nurses.

Includes lab technicians, dieticians, physical therapists, and phlebotomists.

Similarly, the contractors paid their pharmacists or pharmacy
technicians 61 percent to 87 percent of the rates they received
from Corrections, with the average rate being 72 percent. The
contractors stated that the difference between the rates they
billed Corrections and the rates they paid their pharmacists
and pharmacy technicians includes employer costs such as
payroll taxes, employee benefits, and insurance premiums for
unemployment and workers’ compensation. One contractor
explained that contractors who choose to employ their providers
are at a disadvantage compared to competitors who hire
providers as independent contractors, because their competitors
may not carry all insurances and can come in with lower bids.
Finally, the four contractors who provide nursing services
paid their nurses 28 percent to 77 percent of the rates they
received from Corrections, with an average of 57 percent.
These contractors had similar explanations for the difference
in the rates they billed Corrections and the rates they paid
their providers. However, according to one contractor, he pays
some of his nurses at a lower hourly rate but also reimburses
them for a portion of their housing, utility, and water expenses.
Therefore, the contractor’s reimbursements would show up as an
operating expense rather than the amount paid to the nurses.

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Given the variety of
services and operating
costs associated with
those services, the varying
forms of compensation
paid to providers such
as living expenses, and
the varying employment
methods (employee versus
independent contractors),
we found it difficult to
compare the contractors
and more fully explain the
differences between
the rates the contractors
billed Corrections and the
rates paid to providers.

In our interviews and follow-up discussions with the contractors,
we attempted to isolate operating expenses, administrative and
overhead expenses, and profit to explain the difference between
the rates the contractors billed Corrections and the rates they
paid their providers. However, given the variety of services and
operating costs associated with those services, the varying forms
of compensation paid to providers such as living expenses,
and the varying employment methods (employee versus
independent contractors), we found it difficult to compare the
contractors and more fully explain the differences.

CORRECTIONS FAILS TO DEMONSTRATE THAT IT
complies FULLY WITH CERTAIN POLITICAL REFORM
ACT REQUIREMENTS
The political reform act is the central conflict-of-interest law
governing the conduct of public officials in California. The
legislative intent expressed in the act states that public officials,
whether elected or appointed, should perform their duties
in an impartial manner, free from bias caused by their own
financial interest or the financial interests of persons who have
supported them. The political reform act places certain duties
and responsibilities on Corrections to ensure that its designated
employees, including consultants, comply with the act’s
reporting and disclosure requirements. The political reform act
requires each designated employee to file an annual statement
disclosing reportable investments, business positions, interests
in real property and income (statement of economic interests).
The political reform act also requires Corrections to report
apparent violations to the appropriate agencies.
However, Corrections lacks adequate controls to ensure that
its designated employees are complying with this reporting
requirement. Specifically, Corrections does not have an effective
process to determine if its designated employees file the required
statements in a timely manner. For example, our review of
124 statements of economic interests found 78 designated
employees who filed their statements after the deadline. Sixteen
of these employees did not file statements within 30 days after
assuming their designated positions, and 21 did not file their
calendar year 2005 statements until January 2007—most likely
in response to our request.
In addition, during our audit we obtained information
that indicated that a contract employee who served as a
Pharmacist‑in-Charge at a Corrections’ prison might have

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violated the act by making governmental decisions in which he
benefited financially. Although the final resolution of this issue
rests with the Fair Political Practices Commission (commission)
and with the courts, we believe that this individual may have
made governmental decisions that had a direct impact on the
income he earned from his registry in violation of the act.
Accordingly, we have referred this matter to the commission for
further inquiry and possible enforcement action.

Corrections Could Not Demonstrate That All Employees
and Consultants Required to File Statements of Economic
Interests and Seek Approval Before Engaging in Outside
Employment Did So
As previously described, the political reform act prohibits a public
official from making, participating in, or in any way attempting
to influence a governmental decision in which he or she has
a financial interest. The political reform act requires each state
agency to adopt and promulgate a conflict-of-interest code, which
outlines the designated positions that make or participate in
making decisions that could have a material effect
on any financial interest and the specific types of
Duties and responsibilities of the agency’s
investments, business positions, interests in real
filing officer:
property, and sources of income that are reportable
for the designated positions. The code also should
•	 Supply the necessary forms and manuals
prescribed by the commission.
require designated employees to file statements
disclosing reportable investments, business
•	 Determine whether required documents have
been filed and, if so, whether they conform on
positions, interests in real property, and income
their face with the requirements.
(statement of economic interests). The political
•	 Notify promptly all persons and known
reform act requires each designated employee
committees who have failed to file a report or
to file an annual statement. The filing date for
statement in the form and time period required.
Corrections’ employees generally coincides with
•	 Report apparent violations of the political reform
act to the appropriate agencies.
the date set by the commission, which is primarily
responsible for administering and implementing the
•	 Compile and maintain a current list of all reports
and statements filed with the commission.
political reform act. Annual statements for calendar
year 2005 were due April 3, 2006. In addition,
Source: California Government Code, Section 81010.
the political reform act requires each designated
employee to file a statement within 30 days after
assuming office and each designated employee
who leaves office to file within 30 days of leaving the office. The
statements must be retained by the filing officer and made available
for public inspection.
We requested copies of the calendar year 2005 statements
as well as any statements for employees assuming or leaving
their positions in calendar year 2005 or 2006 for certain

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61

designated positions in Corrections’ headquarters and nine
prisons. These employees either have contract approval authority,
the ability to influence the outcome of contract negotiations or
payments, or are medical services staff. We received statements
of economic interests for 124 employees. Our review found that
seven employees did not complete their statements correctly.
For example, one employee did not complete the schedule of
reportable interests section of the statement and others did not
include the period covered or their positions.

Twelve employees at
one prison did not file a
statement of economic
interests, including four
associate wardens and
the chief medical officer.

In addition, we found that 14 employees did not file
statements. For example, 12 employees at one prison did not
file statements, including four associate wardens and the chief
medical officer. Further, 78 employees filed their statements after
the deadline. For example, 16 employees did not file statements
within 30 days after assuming their designated positions. Also,
21 employees did not file their calendar year 2005 statements until
January 2007, which was most likely in response to our request.
Finally, Corrections’ conflict-of-interest code also includes
consultants as designated employees and requires them
to disclose all investments; sources of income; interests in
real property; as well as any business entity in which they
are a director, officer, partner, trustee, employee, or hold
any position of management. Corrections allows its chief
executive officer to determine in writing that a particular
consultant may not be required to comply fully with the code’s
disclosure requirements. In these instances, the chief executive
officer’s written determination must include a description
of the consultant’s duties and, based upon that description,
a statement of the extent of the disclosure requirements.
Further, the determination is a public record and is to be made
available for public inspection. The prisons were asked to
provide copies of the disclosure statements for their health care
consultants or a copy of the chief executive officer’s written
determination. However, seven of the nine prisons did not
submit a copy of the statements for their health care consultants
or the chief executive officer’s written determinations.
According to a section chief in Corrections’ Office of Personnel
Services, the staff who are conflict-of-interest liaisons at these
prisons told her that they have very little to do with medical
registry staff and did not know the registry staff were subject to
the requirement to file a statement of economic interests.

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Even though Corrections
prohibits its employees
from engaging in other
employment or activities
that are inconsistent or
incompatible with their
employment at Corrections,
four pharmacists received
between $10,001
and $100,000 from
pharmacy‑related activities.

During our review of the designated employees’ statements of
economic interests, we noted that four pharmacists indicated
that they received additional income from pharmacy-related
activities. Specifically, the pharmacists received gross income
between $10,001 and $100,000 from working for hospitals
and a medical corporation or as a lecturer for pharmaceutical
companies. Corrections prohibits its employees from engaging
in other employment or activities that are inconsistent or
incompatible with their employment at Corrections. Moreover,
before engaging in any outside employment or activities, the
employee must submit a statement to his or her warden naming
the prospective employer and an outline of the proposed duties
or activities. The warden determines whether the employment or
activity falls in a prohibited class and notifies the employee of the
findings. We asked the wardens for a copy of their determinations
for the pharmacists. One warden sent us a determination that
was approved in February 2001. The second warden sent us
determinations for two pharmacists working at his prison, which
were prepared in response to our request. Finally, the third
warden sent us a determination that was approved in April 2006,
but later disapproved in March 2007.
Clearly, Corrections lacks adequate controls to ensure that it
complies with the duties and responsibilities outlined in the
political reform act for filing officers. For example, according to
a manager in its Office of Personnel Services, Corrections does
not have a database to track whether its designated employees
have filed their statements of economic interests. When
designated employees and consultants do not file statements
of economic interests or seek approval before engaging in
outside employment or activities, Corrections may be unaware
of conflicts of interest. Further, Corrections cannot ensure that
designated employees and consultants are aware that they
should remove themselves from making decisions that may pose
a conflict of interest. Finally, the consequences to designated
employees for not filing the statements or participating in
incompatible activities can include disciplinary action, civil
penalties, or criminal prosecution.

A Contract Pharmacist-in-Charge May Have Violated the
Political Reform Act When Selecting His Registry Corporation
From a List of Approved Providers
The political reform act is the central conflict-of-interest law
governing the conduct of public officials in California. The
legislative intent expressed in the act states that public officials,

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63

whether elected or appointed, should perform their duties in an
impartial manner, free from bias caused by their own financial
interest or the financial interests of persons who have supported
them. This act also applies to consultants when they act as
government decision-makers.

The Fair Political Practices Commission’s
Eight-Step Process
1.	 Is the individual a public official?
2.	 Is the public official making, participating in
making, or influencing a governmental decision?
3.	 Does the public official have one of the six
qualifying types of economic interests?
4.	 Is the economic interest directly or indirectly
involved in the governmental decision?
5.	 Will the governmental decision have a material
financial effect on the public official’s economic
interest?
6.	 Is it reasonably foreseeable that the economic
interest will be materially affected?
7.	 Is the potential effect of the governmental
decision on the public official’s economic
interest distinguishable from its effect on the
general public?
8.	 Despite a disqualifying conflict of interest, is the
public official’s participation legally required?
Source: Conflicts of Interest, California Attorney
General’s Office.

A violation of the act may subject an individual
to administrative remedies and civil or criminal
penalties. The commission, which administers and
enforces the administrative enforcement aspects
of this law, has developed an eight-step process, as
shown in the text box, for determining whether an
individual has violated the law.
During our audit, we obtained information
indicating that a contractor who served as a
Pharmacist-in-Charge at a Corrections prison might
have violated the act by making governmental
decisions in which he benefited financially. Under
the terms of his contract with Corrections, this
individual is required to comply with the act.
As part of his ongoing job duties as a contract
Pharmacist-in-Charge, he was required to ensure
that there were a sufficient number of pharmacists
on duty at the prison at any given time. To perform
this duty, the individual was required to call upon
pre-approved registry providers from a list that had
been established by Corrections. Corrections’ policy
required that he call upon these providers in a
prescribed order and that he document his attempts
to call upon these providers.

In addition to contracting directly with a prison to act as the
Pharmacist-in-Charge, this individual was the president of
a registry provider firm that was among those on the list of
approved providers that he called upon to cover gaps in
Corrections’ staffing. As the owner of the registry provider, he
billed Corrections for services provided by his registry provider
at an hourly rate. For each hour that he billed Corrections, he
retained profits above and beyond what he paid the individual
who worked for his firm.
Contrary to Corrections’ policy that required this individual
to document his attempts to call upon registry providers in
the required order, this individual was not able to provide
any documentation showing that he called these providers as
required. Specifically, this individual stated he kept records
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During the period
that we examined,
93 percent of the invoices
for pharmaceutical
registry services paid
by one prison were to
an individual’s registry
provider firm when the
same individual was
also working as the
Pharmacist-in-Charge at
that prison.

but these records have since been lost. We do know, however,
that he was able to call upon these registry providers without
significant review by others at the prison. During the period
that we examined, 93 percent of the invoices for pharmaceutical
registry services paid by the prison where this individual worked
were paid to this individual’s registry provider firm.
Although the final resolution of this issue rests with the
commission and with the courts, we believe that this individual
may have made governmental decisions that had a direct impact
on the income he earned from his registry in violation of the
political reform act. Accordingly, we have referred this matter to the
commission for further inquiry and possible enforcement action.

Corrections’ Credentialing Unit Often Failed
to Verify Properly the Credentials of Registry
Contractors’ Providers
Corrections’ contract language requires registry contractors
to monitor providers’ licensing and certification information
throughout the term of the contract. During our site visits
with 16 contractors, we asked their staff or management who
were knowledgeable about this monitoring their processes
for ensuring that medical providers properly maintain their
licenses and certifications. Most contractors stated that they
had processes to verify their medical providers’ licenses and
certifications as well as mechanisms to alert them when
licenses and certifications are due to expire. For example, four
contractors we visited use a database to notify them of their
providers’ license expiration dates, and one contractor maintains
a calendar with each provider’s license expiration date.
We noted differences in the type of information Corrections
requires contractors to submit to the prisons before providing
services. For example, one contract requires copies of the
providers’ licenses, while another requires the contractor to
verify providers’ status using the National Practitioner Data
Bank (NPDB) and copies of their licenses. A third contract
requires the contractor to provide proof of, among other
things, credentialing of the providers by Corrections’ Division
of Correctional Health Care Services. However, Corrections
does not provide any oversight to ensure that contractors and
providers adhere to these contract terms.
	

The National Practitioner Data Bank was established through Title IV of Public Law 99-660,
the Health Care Quality Improvement Act of 1986, as amended. The U.S. Department of
Health and Human Services is responsible for implementing the data bank.

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Corrections’ credentialing unit is responsible for performing
database searches for certain provider classifications. Specifically,
a December 2003 policy requires the credentialing unit to
perform a full check of all contractors who are physicians,
psychiatrists, psychologists, and dentists. In addition, to comply
with a Plata court order issued in December 2005, Corrections
expanded its credentialing process to include nurse practitioners
and physician assistants. The Plata court order requires that
Corrections verify the credentials and licensure of contract
physicians and mid-level providers, which the order defines as
nurse practitioners and physician assistants, on a provisional
basis within two business days for two specific contractors. The
final verification must take place within five business days.
Prisons must obtain a credentials verification disclosure form
for each provider requiring credentialing. On these forms,
the providers must disclose information such as name, Social
Security number, and address, as well as their professional
schools, degrees, and any licenses and certifications. The
prisons are to forward the forms to the credentialing unit.
The credentialing unit searches the databases of the appropriate
licensing boards, the American Medical Association (AMA), the
NPDB, and the Healthcare Integrity and Protection Data Bank
(HIPDB).10 Once all the information has been obtained, it is
placed in the provider’s credential file and, depending upon
the provider’s classification, is submitted to the chief medical
officer, chief psychiatrist, chief psychologist, chief dentist, or
their designee for review. The credentialing unit then informs
the prison whether the potential provider has been approved
or denied. In addition, the credentialing unit maintains a copy
of the provider’s file at headquarters and sends the prison the
original information.
However, the credentialing unit does not verify the status of
all providers who treat inmate patients. Although not stated
in a written policy, we found that Corrections’ credentialing
unit does not perform database searches for providers who treat
inmate patients outside of Corrections’ facilities. According
to Corrections’ former credentialing coordinator, who is now
the manager of the Plata Support Division’s Pre-Employment
Clearance Unit, it does not do so because these facilities must
be licensed before providing services to the community and, as
10	The

Healthcare Integrity and Protection Data Bank was established through the Health
Insurance Portability and Accountability Act of 1996, Section 221(a), Public Law 104-191.
The U.S. Department of Health and Human Services, Office of the Inspector General,
and the U.S. attorney general are responsible for implementing the data bank, which is
designed to combat fraud and abuse in health insurance and health care delivery.

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Corrections is relying
on the assumption
that Health Services
is verifying providers’
credentials when, in fact,
this may not be the case.

part of the licensing process, certain classifications of providers
already are verified by Health Services. According to the chief
of Health Services’ Licensing and Certification Program’s
State Facilities Unit, however, when Health Services licenses
a privately owned facility, it reviews the facility’s process for
verifying providers’ credentials but does not actually verify
the providers’ credentials. Therefore, Corrections is relying
on the assumption that Health Services is verifying providers’
credentials when, in fact, this may not be the case.
Moreover, we found that as a result of Corrections’ practice
it did not comply with the Plata court order. Specifically, as
previously mentioned, Corrections was to verify the licensure
and credentials of contract physicians for two specific
contractors within five business days. The physicians working
for one contractor performed the services outside of Corrections’
facilities. According to the prison’s medical contract analyst, the
prison did not submit a credentials verification disclosure form
for the physicians because the credentialing unit had stated
it was not necessary to credential off-site providers. Because
inmates are in Corrections’ custody, we believe Corrections has
a responsibility to verify the credentials of those providers who
work in non-Corrections’ facilities or, at a minimum, verify
that these facilities have a rigorous process for verifying the
credentials of their providers before sending inmate patients to
them for treatment.
The credentialing unit also does not perform database searches
of providers who it classifies as allied health professionals,
such as pharmacists, registered nurses, laboratory technicians,
radiological technicians, dietitians, and physical therapists,
despite the fact that information is also available for these
providers. According to the manager, the credentialing unit
does not verify these providers’ credentials because they work
in a supportive role rather than independently, as physicians
and nurse practitioners do. However, Corrections does not have
a policy that defines allied health professionals and identifies
those it excludes from the credentialing process. Further, the
credentialing unit’s actions are inconsistent with the guidance
given to prisons by the Division of Correctional Health Care
Services. Specifically, this guidance directs prisons to request
database clearances for pharmacists, nurse practitioners, and
psychiatric social workers as well as for those classifications
identified in the 2003 policy.

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Between 2004 and 2006,
one prison used two
registry pharmacists
whose licenses had been
placed on probationary
status for substance
abuse violations related
to controlled substances.

Corrections also does not have a departmentwide policy
directing the prisons to verify the credentials of these providers,
which creates confusion and the risk that providers will not
undergo any credentialing before performing services. For
example, one prison’s medical staff coordinator stated that
she credentials physicians, psychiatrists, psychologists, and
allied health professionals. However, the credentialing unit is
already responsible for credentialing physicians, psychiatrists,
and psychologists, and thus the medical staff coordinator is
unnecessarily duplicating this effort. In another example,
between 2004 and 2006, one prison used two registry
pharmacists whose licenses had been placed on probationary
status for substance abuse violations related to controlled
substances. These two pharmacists were hired as state
pharmacists at the same prison in January 2007. The prison
employing these pharmacists had no policy in place regarding
the hiring and retaining of providers with probationary licenses.
In addition, the credentialing unit does not have a policy
regarding the criteria the credentialing unit uses to approve or
deny potential providers. Further, although the manager stated
the unit was performing database searches on pharmacists until
September 2006, it was not aware of the pharmacists’ restricted
licenses. After we brought this issue to the manager’s attention,
the credentialing unit completed the verification of the
pharmacists’ credentials.
Further, the credentialing unit does not perform database searches
on all physicians and nurse practitioners who provide services
to inmate patients. The unit performs a search only after the
prisons submit a request. The credentialing unit will not perform
a database search if the prison does not request it. Of the 22
physicians and nurse practitioners we requested credentialing
files for, the credentialing unit was only able to provide files for
12. Furthermore, eight of the 12 providers were credentialed after
they had begun providing services to inmate patients.
Finally, we found that the credentialing unit’s database search
method is inefficient. Specifically, if the provider moves to
another prison, the unit performs another search. For example,
the credentialing unit verified the credentials of one physician
who worked at two prisons three times within a seven-month
period. Based on information provided to the manager by the
U.S. Department of Health and Human Services, she believes
that because each prison has its own formal peer review
process to further quality health care, federal law requires
Corrections to register them as separate eligible entities for

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purposes of querying the NPDB and HIPDB. She also stated the
Corrections’ management has not formally adopted a written
policy regarding her interpretation of federal law. This current
process appears unnecessary and a waste of time and money.
According to the manager, Corrections pays roughly $5 for each
report resulting from a database search. Thus, until Corrections
revisits this practice to determine if it can register as one eligible
entity, it will continue to incur duplicative costs.
According to a manager, the Plata Support Division has taken
or is taking actions to improve the credential verification of
contract medical providers. For example, it is exploring the
use of a Web-based Credential and Privilege Solution that will
allow the automation of not only initial verification but also the
constant license activity for medical service providers.

Recommendations11
To improve its procedures and practices for requesting registry
services and paying for these services, Corrections should:
•	 Ensure that prison staff consistently follow procedures
requiring them to document their efforts to obtain services
from registry contractors.
•	 Reevaluate its policy of allowing prisons to send out service
requests concurrently to all registry contractors listed in
the hierarchy.
•	 Ensure that prisons verify the services they receive from
registry contractors before authorizing payment of invoices.
•	 Continue to implement the draft of a departmentwide policy
reiterating the need for prison medical staff to adhere to
proper procedures for verifying registry contractors’ hours
before authorizing payment.
•	 Ensure that prisons obtain the necessary documentation for
the services they were unable to verify or seek reimbursement
from the registry contractors for the overpayments identified
in this report.
11	In

making these recommendations to Corrections, we understand that they would be
implemented at the direction of the court-appointed receiver. We do, however, expect
that if control and management of Corrections’ medical health care delivery system is
returned to it, that Corrections would then become responsible for implementing these
recommendations.

California State Auditor Report 2006-501	

69

•	 Establish a quality control process to ensure that prisons pay
rates that are consistent with contract terms.
•	 Ensure that prison staff responsible for authorizing overtime
adhere to Corrections’ overtime policies and contract terms.
•	 Evaluate its prisons and regional accounting offices’ processes
for paying invoices and identify weaknesses that prevent it from
maximizing the discounts taken and complying with the CPPA.
To ensure that it complies with the political reform act,
Corrections should:
•	 Establish an effective process for tracking whether its
designated employees, including consultants, have filed
their statements of economic interests timely.
•	 Review the statements of economic interests to ensure
their accurate completion and to identify potential conflicts
of interests.
•	 Ensure that the chief executive officer retains his or her
written determinations for consultants.
•	 Require wardens to enforce its policy prohibiting outside
employment or activities without seeking prior approval.
To improve its oversight of registry contractors and their
providers who provide medical services to inmate patients,
Corrections should:
•	 Require the credentialing unit to verify the credentials of
contracted providers who work in non-Corrections facilities
or, at a minimum, verify that these facilities have a rigorous
process for verifying the credentials of their providers.
•	 Establish a policy to define allied health professionals and
to identify professionals who will be credentialed by the
credentialing unit versus those credentialed by the prisons.
•	 Require the credentialing unit to determine whether the
credentials of those medical and allied health providers who
are performing services at prisons under registry contracts
have been verified. If not, the credentialing unit should
verify them.

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•	 Establish criteria to use when approving or denying potential
medical providers, including whether to hire registry
contractors with restricted licenses.
•	 Ensure that prisons request NPDB searches from the
credentialing unit before allowing providers to perform services.
•	 Seek clarification from the U.S. Department of Health and
Human Services regarding the criteria for eligible entities
and whether or not all prisons can be combined into one
eligible entity.

We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
government auditing standards. We limited our review to those areas specified in the audit
scope section of this report.
Respectfully submitted,

ELAINE M. HOWLE
State Auditor
Date:	 April 19, 2007	
Executive Staff: 	
	
	
	

Philip J. Jelicich, MBA, CPA, Deputy State Auditor
Sharon Reilly, Chief Counsel
Donna Neville, Associate Chief Counsel
Erika Giorgi, Staff Counsel

Staff:	
	
	
	
	
	
	
	
	
	
	

Joanne Quarles, CPA, Audit Principal
Tammy Lozano, CPA, CGFM
Brooke Blanchard
Natalya Fedorova
Ralph Flynn, JD
Gregory B. Harrison, MBA, CIA
Daniel Hoang, MPP
Bruce Smith, CPA
Whitney Smith
Erik Stokes, MBA
Sonja L. Thorington, MPP

California State Auditor Report 2006-501	71

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APPENDIX
The California Department of
Corrections and Rehabilitation Could
Strengthen Delivery of Medical Care
to Inmates by Adding Key Terms to
Its Contracts With Medical Providers

A

s we discussed more fully in the Introduction, in
February 2006 the federal court issued an order
appointing a receiver to provide leadership and
executive management of the Department of Corrections
and Rehabilitation’s (Corrections) medical health care delivery
system with the goal of restructuring day‑to‑day operations and
developing, implementing, and validating a new, sustainable
system that provides constitutionally adequate medical care to
all members of the class action lawsuit as soon as practicable.
To achieve these goals, the receiver has the duty to control,
oversee, supervise, and direct all administrative, personnel,
financial, contractual, legal, and other operational functions of
Corrections’ medical health care delivery system. The court also
appointed a correctional expert to investigate and report to the
receiver concerning the status of state contracts relating to health
care services and of contract payments to service providers who
provide health care services to Corrections’ inmates.
The court-appointed receiver asked the Bureau of State Audits
to determine whether the language used in medical registry
contracts is adequate and complete and written in the best
interests of the State. In doing so, our legal counsel attempted
to determine what a model contract for prisoner medical
care would look like if it were designed to provide medically
appropriate care in a way that was also fiscally sound. Table A
on the following pages summarize the key findings of reports
by public, private, and academic organizations reviewed by our
legal counsel to determine model terms.

California State Auditor Report 2006-501	73

Table A
Study Citation and Brief Summary of 18 Studies Related
to Best Practices in Medical Care Contracts
Study Citation

Brief Summary

American Medical Association, Annotated Model Physician
Agreement (2000)

This manual provides sample agreements and information
regarding employment contracts geared to assist both medical
and physician groups as well as physician employees.

American Medical Association, Model Managed Care
Contract, with Annotations and Supplemental Discussion
Pieces (Fourth Edition 2005)

This manual provides sample Model Managed Care Contracts and
information to assist both medical and physician groups.

California State Controller, California Department of
Corrections and Rehabilitation, Review Report, Healthcare
Delivery System (2006)

California State Controller’s Office fiscal review of the California
Department of Corrections and Rehabilitation’s budget and
spending practices for its health care delivery system.

Dickey, B. Best Practices: Are Financial Incentives and Best
Practices Compatible? Psychiatric Services 55:130-131
(2004) ftp://www.psychservices.psychiatryonline.org/cgi/
content/full/55/2/130]

A study of best practices in a clinical setting examining whether
financial incentives can promote best practices that will benefit
patients and health systems.

Firestone, K. and LaRoux, K. Prison Health Care: An
Overview (2000) http://www.senate.michigan.gov/sfa/
Publications/Issues/PrisonHealthCare/PrisonHealthCare.pdf

This paper provides general information about managed care and
health care in prison systems. The authors also present information
about the costs of Michigan’s prison health care system and
provides a comparison to other states’ systems.

Longman, P. The Best Care Anywhere (2005) Washington
Monthly (electronically retrieved December 2006)

This article details the shift of veterans hospitals as they
transitioned to providing significantly higher quality care
compared to some other health care providers.

Maxor National Pharmacy Services Corporation, An Analysis
of the Crisis in the California Prison Pharmacy System Including
a Road Map from Despair to Excellence (2006)

An analysis of the California Department of Corrections and
Rehabilitation’s pharmacy operations, which includes data and
findings from previous audits and reviews. The authors also
provide detailed recommendations for improving operations.

Mercer Health and Benefits, California Prison System:
Assessment of Organizational Structures (2006)

An overview and assessment of the organizational structure of
California’s prison system.

Raimer, B. and Sobo, J. Health Care Delivery in the
Texas Prison System: The Role of Academic Medicine,
Journal of American Medicine, 292:485-489 (2004)

A review of the organizational structure of Texas’ prison health
care system and the various levels of care that are provided to the
state’s prisoners.

Rosenthal, M. Prescription for Recovery: Keeping South
Carolina’s Prison Heath Care Public and Making it Better
(2004)

This report addresses South Carolina’s proposed decision to
privatize its prison health care delivery system and provides an
analysis of how the costs and services compare to other states. The
authors also provide recommendations for improvements.

State of California, Employment Development
Department, Information Sheet (1997)
http://www.edd.ca.gov

The Employment Development Department presents a table
of determining factors that help to define the legal status of a
working relationship as either “employment” or “independent
contractor” status.

Stoller, N. Improving Access to Health Care for California’s
Woman Prisoners: A Working Paper Prepared for the
California Program on Access to Care (2000)
http://www.prisonerswithchildren.org/pubs/stoller.pdf

This report examines access to health care for women who are
incarcerated in California state prisons and compares the current
models of delivery to “best practices” models.

U.S. Department of Health and Human Services, Office of
the Inspector General, Advisory Opinion relating to whether
certain contractual arrangements for nurses violate the
anti‑kickback statute, Section 1128(b) of the Social Security
Act (1998) (Advisory op. No. 98.9) http://oig.hhs.gov/
fraud/docs/advisoryopinions/1998/ao98_9.html

Legal Analysis related to federal anti-kickback statute.

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Study Citation

Brief Summary

U.S. Department of Justice, National Institute of
Corrections. Prison Medical Care: Special Needs Populations
and Cost Control (1997) [Electronic version]

This report is based on the results of a national survey of prison
medical services exploring how correctional facilities provided
care to the elderly, chronically ill, and terminally ill inmates and
how each facility managed the health care costs for this special
population.

U.S. Department of Justice, National Institute of
Corrections, Correctional Health Care: Guidelines for the
Management of an Adequate Delivery System (2001)

Provides a comprehensive guide to providing effective medical
care in a prison setting.

U.S. Government Accountability Office, Private and Public
Prisons: Studies Comparing Operational Costs and/or Quality
of Service (1996) (GAO Publication No. GAO/GGD-96-158)

This report describes the findings of several studies that compare
the operational costs and quality of services of prison health care
systems that are public to those that have been privatized.

Vista Staffing Solutions, General Tax Information for
Independent Contractor Physicians (2003)
http://www.vistastaff.com/pdfs/physicians/physicians_tax.pdf

General guidance on tax issues for independent contractors.

Young, M. Prison Privatization: Possibilities and Approaches
to the Privatization of Prisoner Security and Services (2006)
[Electronic version]

A report on the privatization of prison services.

California State Auditor Report 2006-501	75

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Agency’s comments provided as text only.
California Prison Health Care Receivership Corp.
501 J Street, Suite 605
Sacramento, CA 95814

April 4, 2007
Elaine M. Howle
State Auditor
555 Capitol Mall, Suite 300
Sacramento, CA 95814

Dear Elaine,
On behalf of the Receiver, I would like to thank you for the audit of the contracting and credentialing
functions for the California Department of Corrections and Rehabilitation (CDCR) Division of
Correctional Health Care Services (DCHCS). Due to the unique circumstances of the Receivership,
you graciously changed your auditing schedule to accommodate our needs. I also wish to take this
opportunity to commend the professionalism of your staff, under the leadership of Joanne Quarles,
during the audit process and the briefing provided to me and the Receiver’s staff.
At this time, the Receiver has decided not to provide a written response to the draft report. Instead,
we intend to fully study the audit results and provide a realistic strategy to remedy the deficiencies.
Unlike past audits of the DCHCS, when remedial promises were easily made and just as easily
broken, the Receiver will actually fix the broken systems your staff has identified. The Receiver will
respond to the final audit report with a remedial plan within sixty days.
If you have any questions please feel free to contact Rich Kirkland at (916) 327-1427.
Sincerely,
(Signed by: John Hagar)
John Hagar
Chief of Staff

California State Auditor Report 2006-501	77

cc:	 Members of the Legislature
	
Office of the Lieutenant Governor
	
Milton Marks Commission on California State
		 Government Organization and Economy
	
Department of Finance
	
Attorney General
	
State Controller
	
State Treasurer
	
Legislative Analyst
	
Senate Office of Research
	
California Research Bureau
	
Capitol Press

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