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Audit of California DOC Contracted Healthcare Expenditures Reveals Rampant Waste, Abuse and Management Deficiencies

In August 2006, State Controller Steve Westly reported his fiscal review of the California Department of Corrections and Rehabilitation?s (CDCR) prisoner healthcare delivery system expenditures to Robert Sillen, Receiver for the California Prison Receivership (see: PLN, Mar. 2006, p.1, Federal Court Seizes California Prisons? Medical Care; Appoints Receiver With Unprecedented Powers). After examining whether these expenditures were legal, necessary, reasonable and valid, Westly lambasted, ?My office found evidence strongly suggesting that waste, abuse, and management deficiencies are rampant in the department?s expenditures and oversight of contracted healthcare services. In addition, despite previous audit recommendations by the Office of the Inspector General and the Bureau of State Audits [frequently reported in PLN], the CDCR has not implemented appropriate control measures to provide oversight over contract expenditures.?

From 2000 to 2004, CDCR?s medical expenditures increased 56% to $1.05 billion. For 2006, the annual tab was forecast to grow to $1.48 billion, and that is before the new Receiver makes a real dent in bringing healthcare operations into constitutional compliance. Of this latest total, $821 million is projected to be outside-contract care -- an increase of 437% since 2000. Thus, curing defects in outside contracting costs becomes paramount.

Westly made eight principal findings. First, CDCR had no comprehensive system-wide policy to manage its medical service contracts. This led to inadequate oversight of contract payments. Westly identified one contractor who snuck in a false subcontractor?s rate schedule that gleaned that contractor an estimated $418,000 in overcharges in ten months. Despite being made aware of this, CDCR recently renewed that contract for three more years. Worse yet, this contractor?s hepatitis-C blood test results were so inconsistent that doctors didn?t believe them, and had to order backup tests elsewhere. And for over six months, many CDCR prisons had no contracts for cardiology, urology and oncology because of bureaucratic paperwork deadlocks. When one podiatrist was called to Iraq for six months, all podiatry at that prison simply stopped. A cost-cutting suggestion to buy ten sets of liver-biopsy machines was implemented after 18 months. CSP-Corcoran used one to perform 178 biopsies (saving $400,000 in outside costs plus transportation/guarding). But most of the other sets remain idle, costing CDCR an estimated $3.6 million in avoidable outside biopsy costs. And it took 3 ½ years to put in a new ventilation machine at Corcoran for the oncologist to mix toxic-fume-generating drugs. In the interim, he used the restroom until employees complained, finally heroically doing his dirty work in the parking lot.

Second, CDCR?s contract negotiation process is so deficient that CDCR pays significantly more than other major users of healthcare services.
In a prior audit by the Bureau of State Audits (BSA), CDCR was rebuked for paying a hospital 4.16 times what Medicare would pay. But after CDCR renegotiated its contract -- wherein the average daily hospital rate had been $2,789 -- it now pays an average of $3,994 per day (43.2%, more).
And where a new statewide contract was negotiated for certain medical services, one prison was compelled to pay twice what it had been paying its local contractor.

Third, despite earlier audit recommendations to CDCR not to pay hospitals based simply upon a percentage of their billed charges, CDCR continued to do so, thereby incurring expenses far in excess of those allowed by Medi-Cal or Medicare. In one example, CDCR paid 30% of the $40,255 bill ($12,379) for drugs given to a prisoner with cancer -- drugs that Medi-Cal pays only $300 to $400 for. In another case, a hospital billed CDCR $20,742 for two dosages of ?Immune Globulin 1 GM? to a cancer patient, followed by another $20,512 for one dose five days later. But an audit of that hospital?s rate sheet listed ?Immune Globulin 10 MG? at $1,648, suggesting the value of 1 GM to be about $165. By comparison, Medi-Cal payment authorizations for 5 GM and 10 GM are $518 and $1,037, respectively. [Someone should be in prison, not contracting with one, for such outrageous overcharges.] But it took Westly?s audit to catch this; CDCR blindly just paid the bills. Another hospital was found to routinely double-bill for the hospital costs on top of the orthopedic surgeon?s hospital bill -- to the tune of $5,600 per day. Another hospital billed for ?24 units? of respiratory care, instead of ?1 unit? for 24 hours of such care -- a $36,000 boo-boo CDCR didn?t catch.

In a fourth concern, Westly noted that an outside contractor for CDCR?s 150 dialysis patients (Colonial Medical Group) was offered a new contract to provide those services at the prisons rather than at outside facilities, which would result in considerably reduced billings for the contractor. Sensing this, the disincentified contractor allegedly delayed the changeover for three years to keep his billings up.

A fifth area, the utilization rate of two of CDCR?s four acute-care hospitals, revealed that they are operating at only a tiny fraction of their capacity due to bureaucratic strangulation. Major surgeries at one of the hospitals (California Medical Facility) (CMF) declined from 291 in 2000 to only eight in 2004 and eight in 2005. At the other prison (Substance Abuse and Treatment Facility) (SATF), only one of the two operating rooms was functioning, and then at a very limited capacity.
The other room (built in 1993), has never functioned due to a lack of proper equipment, supplies and staffing. All this results in patients being routinely sent to outside hospitals for surgeries -- even minor ones -- at greatly increased costs. Indeed, CMF?s outside contract services increased over four-fold since 2000 to $54.2 million in 2005, while SATF?s tripled to $19.7 million.

The sixth area criticized the first line of defense in cost control, the use of Utilization Management (UM) nurses to review the necessity and appropriateness of requested services. They ensure contract guideline compliance and review invoices. But some UM nurses told the auditor that they never received any training. As a result, their reviews are often ineffectual, resulting in increased costs. When one hospital negotiated a significant rate increase, its utilization rate by the prison increased a remarkable 38.7% in the next 11 months. And for the following year, costs there were projected to increase a whopping 29 %.

Seventh, Westly found that some prisoners were being given carte-blanche treatment in fear of CDCR otherwise suffering potentially devastating lawsuits. This would seem to translate into an admission that CDCR knows that it is providing unconstitutionally deficient care, but would rather grease the occasional squeaking wheel rather than fix known deficiencies. One quadriplegic lifer who had been stabbed in prison received $312,000 worth of contract registry nursing care assigned solely to him during 2004 alone.

The final category criticized CDCR?s Health Care Cost and Utilization (HCCUP) internal audit process, where HCCUP staff complained that they had little or no training on criteria to review contractors? charges. In the alternative, they complained that they were overloaded, and could not adequately delve into each bill. One urologist who was contracted by the hour but billed by the patient churned his effective hourly rate up to $2,036/hr. An opthamologist used this scheme to boost his hourly rate up to $580/hr. When his contract expired, and he was replaced by another doctor at $175/hr., CDCR inexplicably continued to use the uncontracted doctor instead of the new one. An orthopedic surgeon who billed $1.48 million in 2004 based his billings on a 60-minute consult schedule, but claimed he saw 35 prisoners in one day?s visit. Those 35 claimed procedures would take 30 hours to perform, a Herculean feat to accomplish in less than the 24 hours normally associated with one day. Only Westly?s audit caught this.

The bottom line was five recommendations from Westly to the Receiver to get CDCR healthcare costs under control. Of course, cost control is only an adjunct to Receiver Sillen?s healthcare delivery task. First, he has to get constitutionally adequate services delivered, period. But given Westly?s narrow focus on CDCR? inept medical cost controls, one can only wonder how much waste exists in the other $8.5 billion of CDCR?s annual costs to California taxpayers. See: CDCR, Review Report, Healthcare Delivery System, Steve Westly, California State Controller, August 2006.

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