Report 2003-117 Summary - April 2004

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


Our review of the California Department of Corrections' (Corrections) processes to contract for health care services not currently available within its own facilities concludes that:


The California Department of Corrections (Corrections) supervises an inmate population of about 161,000 in 32 state prisons. To fulfill its responsibility to provide medically necessary health care for these inmates, Corrections operates various facilities, including acute care hospitals and treatment centers. Because it cannot provide all the necessary health care services, Corrections contracts with medical service providers in the community, such as hospitals, specialty care physicians, and laboratories. Costs incurred for services from these outside providers have increased more than 15 percent in each of the last four fiscal years, rising to $239 million in fiscal year 2002-03. As these costs rise, so does the importance of Corrections negotiating and awarding medical service contracts that are in the State's best interest. However, despite public policy and Corrections' policies supporting the practice, Corrections does not competitively bid most of its contracts for medical services. Of 1,149 contracts awarded during fiscal years 2001-02 and 2002-03, only 259, or 23 percent, were put out for competitive bidding.

Corrections' Health Care Services Division (HCSD) provides inmate health care and says it aims to deliver both competent and cost-effective health services. In reality, HCSD and prison staff who negotiate contracts tend to rely on a 30-year-old state policy exemption that allows them to award contracts for most medical services without seeking competitive bids. The Department of General Services (General Services) could not provide documentation to support the original justification for the policy exemption and has not evaluated whether it is currently valid. Yet, the policy exemption has the distinct disadvantage of lacking any criteria to determine whether a contract's costs are reasonable.

Another barrier to cost-effective contracts for medical services is Corrections' flawed negotiating practices. Some contracts that HCSD and the prisons have entered with hospitals leave out information vital to obtaining the discounts specified in the contracts. In other contracts, HCSD and the prisons do not justify awarding rates that are higher than Corrections' standard rates, violating a requirement of Corrections' contract manual. Overall, contract files lack evidence that Corrections routinely uses its database of information on medical costs and utilization to negotiate contracts with medical service providers that are in the State's best interest. Further, staff at HCSD and at the prisons are not offered specialized training in negotiating contract terms and rates with providers.

The cost of medical services in the state prisons is also somewhat dependent on the varying compensation methods Corrections negotiates. Sometimes Corrections uses a daily set fee rather than a flat percentage discount, a practice that has shown to dramatically lower total hospital expenses. Moreover, because of the different compensation methods it uses, Corrections has a wide variety of rates for physician procedures compared with the rates established by the federal Medicare program.

Further hindering the effectiveness of its contracting process, Corrections sometimes approves late requests for contracts, exceeds the authorized contract amount, and fails to obtain proper approvals before receiving nonemergency services. Of the 56 contracts we reviewed, 14 (25 percent) were not submitted by HCSD or the prisons to its Office of Contract Services' Institution Contract Section within the required time frames. We also found four contracts in which prisons exceeded the funding authorized in the contracts by $5.9 million and some instances of prisons obtaining medical services for inmates before receiving General Services' approval.

Not only is Corrections unable to demonstrate that its contracts are in the State's best interest, but also its prisons may be paying inappropriate and invalid medical claims. Prisons are not adhering to HCSD's utilization management (UM) program, established to ensure that inmates receive quality care at contained costs. The UM program requires prisons contracting for medical services to perform three reviews—prospective, concurrent, and retrospective—to ensure that medical services and their prices are appropriate. However, the prisons cannot show that they perform the prospective and concurrent reviews. Further, several deficiencies in the retrospective reviews that prisons have conducted have resulted in documented overpayment of medical service charges and possible payment for nonexistent services. Nurses with the UM program are not consistently reviewing a percentage of medical service invoices to verify that the charges are appropriate to the services. In addition, the prisons' analysts with the health care cost and utilization program (HCCUP) do not always identify discrepancies between contract rates and medical charges on providers' invoices—or even obtain evidence that medical services were actually received. Consequently, prisons are overpaying for some services, incurring unnecessary costs for the State. Until HCSD enforces its review policy for nurses in the UM program and performs quality control reviews of invoices processed by the HCCUP analysts, Corrections cannot contain or reduce health care costs at California's prisons.


To protect the State's interest when entering future contracts for medical services, General Services should consider removing its long-standing policy exemption that allows Corrections to award most medical service contracts without advertising or competitive bidding.

If General Services chooses not to remove the policy exemption, it should prescribe the methods and criteria for Corrections to use in determining the reasonableness of contract costs. For example, General Services could amend the State Contracting Manual or its policy exemption to require Corrections to follow the method it uses for the noncompetitively bid procurement process that requires agencies to conduct a market survey and prepare a price analysis demonstrating that the contract is in the State's best interest.

To improve its negotiation practices to obtain medical service contracts that are in the State's best interest, Corrections should do the following:

To fulfill its contract management responsibilities, Corrections should do the following:

To improve its efforts to provide only medically necessary services and contain medical services costs, Corrections should do the following:


General Services stated that it would take appropriate actions to address our recommendations. Corrections generally agreed with our recommendations, but it expressed concern with our recommendations to General Services regarding the removal of the long-standing policy exemption.