Report 2006-501 Summary - April 2007

California Department of Corrections and Rehabilitation: 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


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


The 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.

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 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 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 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 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 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.


To ensure that it protects the State's interests and receives the best possible services at the most competitive prices, Corrections should:

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:

To improve its procedures and practices for requesting registry services and paying for these services, Corrections should:

To ensure that it complies with the political reform act, Corrections should:

To improve its oversight of registry contractors and their providers who provide medical services to inmate patients, Corrections should:


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.

1 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.