O FFICE OF THE I NSPECTOR G ENERAL
STEVE WHITE, INSPECTOR GENERAL
• PROMOTING INTEGRITY •

SPECIAL REVIEW OF THE
MEDICAL CONTRACTING PROCESS
HEALTH CARE SERVICES DIVISION
CALIFORNIA DEPARTMENT OF CORRECTIONS

OCTOBER 2002

GRAY DAVIS, GOVERNOR

OFFICE OF THE INSPECTOR GENERAL
STEVE WHITE, INSPECTOR GENERAL

SPECIAL REVIEW OF THE
MEDICAL CONTRACTING PROCESS
HEALTH CARE SERVICES DIVISION
CALIFORNIA DEPARTMENT OF CORRECTIONS

REPORT
OCTOBER 2002

● PROMOTING INTEGRITY ●

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 1

CONTENTS
EXECUTIVE SUMMARY...........................................................................................

3

INTRODUCTION ....................................................................................................

5

BACKGROUND ......................................................................................................

5

OBJECTIVES, SCOPE, AND METHODOLOGY ......................................

11

FINDINGS AND RECOMMENDATIONS .............................................................

12

FINDING 1 ................................................................................................................ 12
FINDING 2 ................................................................................................................ 13
FINDING 3 ................................................................................................................ 15
FINDING 4 ................................................................................................................ 16
ATTACHMENTS
ATTACHMENT A - RESPONSE OF THE DEPARTMENT OF
CORRECTIONS
ATTACHMENT B - COMMENTS OF THE OFFICE OF THE INSPECTOR
GENERAL

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

18
24

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 2

EXECUTIVE SUMMARY
This report presents the results of a special review conducted by the Office of the Inspector
General of the administrative process used by the California Department of Corrections for
selecting and paying medical professionals who provide contracted services to inmates. The
review was performed under the oversight authority assigned to the Office of the Inspector
General in California Penal Code Section 6126. The review centered on the processes and
controls employed statewide by the California Department of Corrections to procure and pay
for contract medical services at the most effective and efficient rates. The review was
performed at California Department of Corrections headquarters and state correctional
institutions.
The Office of the Inspector General found that the Department of Corrections is not
effectively managing its medical services to incarcerated inmates and should adopt statewide
policies to ensure cost-effective contracts, quality case management, and continuity of care.
Specifically, the Office of the Inspector General found the following:
FINDING 1. The California Department of Corrections lacks a comprehensive statewide
policy for managing its medical services contracts.
The California Department of Corrections has experienced a significant increase over the
last decade in the cost of providing medical care to inmates, yet it has not developed a
comprehensive statewide policy to manage its medical service contracts. In just the last three
years, the cost of medical services contracts has jumped 82 percent, from $92 million to
$168 million. Despite that increase, the department has failed to adopt comprehensive
statewide policies to manage those costs while ensuring the most cost-effective care. Most
significantly absent are efforts on the part of the department to recruit interested physicians
in communities near state correctional institutions to provide medical services or to attempt
to obtain the most cost-effective rates from physicians and other medical service providers.
The department also lacks data on current rates being charged for certain medical services in
different parts of the state and does not include custody and support services costs when
calculating the cost of sending an inmate outside the institution for medical care.
FINDING 2. Lack of sound contract management by the Department of Corrections
resulted in payments of $77,000 for clinical services not performed and of more than $1
million for services not authorized under a California Medical Facility contract with
an outside physician.
When the department decided to amend a medical services contract to expand services to
other institutions and later to incorporate the amended contract and new rates into a
statewide contract, it did not properly amend or manage the contracts. This led to
misunderstandings about contract provisions and ultimately to overbilling and overpayment
because there was no system for checking invoices against the contract.

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 3

FINDING 3. The contracting process of the Department of Corrections is vulnerable
to potentially serious conflicts of interest because the person selecting the
contractor is also authorized to approve invoices and payments under the contract.
The chief medical officer or equivalent at an institution or the deputy director of the
Health Care Services Division can select a contractor and approve a contract without an
independent review of the solicitation and negotiation efforts. The same individual can
also approve payments under the contract, thereby creating a potentially serious conflict
of interest.
FINDING 4. The current deficiencies in the department’s contracting process may
lead to problems in the quality and continuity of inmate medical care.
The quality and continuity of medical care to inmates may suffer if the continued lack of
sound contract management interferes with the selection and use of medical services.
This review found that in some instances continuity of care was interrupted by changes
in medical contractors and lack of case management by health services staff in the
institutions.
RECOMMENDATIONS
The Office of the Inspector General recommends that the Department of
Corrections adopt statewide policies and procedures for contract management,
including but not limited to advertising and soliciting proposals and awarding,
monitoring, and enforcing contracts to provide cost-effective medical services to
inmates. Pending resolution of contract issues, the department should also take
whatever interim steps are needed to ensure that inmates receive continuity of
medical care without interruption due to contract problems. The statewide
contract management policies and procedures should include the following:
•

A requirement that institutions advertise the need for medical service
providers and solicit proposals from the local medical community near
institutions seeking the services.

•

A requirement that institutions document their efforts to advertise and
solicit proposals before approving any contract. This would lessen the
potential for abuse in the state contracting process and enhance the
department’s ability to secure cost-effective contracts from physicians and
other providers in areas adjacent to institutions.

•

Implementation of a statewide survey every three to four years to determine
what constitutes a reasonable hourly fee for various medical specialties in
selected regions of the state. The results of this survey can be used to develop
reasonable contract amounts for specific services in different geographical
regions.

•

A requirement that the cost of custody and support staff be included in
calculations of the cost of providing medical care to inmates outside an

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 4

institution and that the cost be applied in developing a “reasonable” rate for
care inside the institution.
•

Stringent controls for monitoring and authorizing payments for contract health
care services. The controls should be effectively communicated to staff through
special training on contract language and the proper procedures to be followed
when authorizing and processing invoices for payment. The department should
also improve the procedures for amending existing contracts to avoid confusion
and misunderstanding.

•

Provisions to prevent the same individual from both selecting and approving the
contractor and authorizing payment under that contract.

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 5

INTRODUCTION
This review of the medical contracting process was conducted in response to a complaint
received by the Office of the Inspector General alleging inappropriate contracting practices
between the California Department of Corrections and Newport Oncology and Healthcare,
Inc., located in Fairfield, California. The purpose of the review was to ensure that the
California Department of Corrections is following prescribed state contracting procedures
and identify any areas of noncompliance or deficiency.
The review was conducted under the provisions of California Penal Code Section 6125,
which established the Office of the Inspector General to provide oversight of the Youth and
Adult Correctional Agency and its subordinate departments, and of California Penal Code
Section 6126, which authorizes the Inspector General to initiate audits and investigations to
identify areas of noncompliance with state policies and procedures and recommend
corrective actions.
BACKGROUND
The Department of Corrections established the Health Care Services Division in 1992 to
manage and oversee the delivery of health care services to state correctional institution
inmates. In fiscal year 2000-01, the Department of Corrections spent $675 million for
health care services at its 33 institutions and headquarters. Of this total, $168 million was
expended on contract medical services with outside community hospitals, physicians,
nurses, pharmacists, and other medical staff to obtain specialized services its own staff and
facilities could not provide. In some cases, the department uses contracted staff to fill
temporary staff vacancies in medical classifications where recruitment is difficult. As shown
in the chart below, the total cost for contract medical services has increased significantly
during the last three years, from $92 million in fiscal year 1997-98 to more than $168
million in fiscal year 2000-01—an increase of 82 percent.
Contract Medical Expenditures ($ millions)
$168

$200
$150

$92

$117

$104

$100
$50
$0

1997/98

1998/99

1999/00

2000/01

Fiscal Year

Although the inmate population has leveled off and even declined in recent years, the
average cost per inmate for contracted medical service has significantly increased, as shown
in the following chart:

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 6

Contract Me dical Cost Pe r Inmate
$1,042

$1,200
$1,000
$588

$800

$726

$652

$600
$400
$200
$0
1997/98

1998/99

1999/00

2000/01

Fiscal Ye ar

The Health Care Services Division is currently projecting contracted medical expenditures
in excess of $200 million for fiscal year 2001-02. According to figures provided by the
Office of Budget Management, the Department of Corrections contract medical budget is
only $124 million. Unless funding can be obtained internally, the Department of
Corrections will be facing a deficit of between $70 and $80 million. 1
Contract process for medical services. The Department of Corrections is not required to
solicit competitive bids for many of its medical services. Section 5.80 of the State
Contracting Manual exempts non-registry physicians, hospitals, medical groups, and 911
emergency ambulance calls from advertising and competitive bidding.2 As a result, the
majority of the medical contracts with the Department of Corrections are not the result of
competitive bids.
According to the Department of Corrections, either the institution health care staff or the
Health Care Services Division in Sacramento can negotiate medical service contracts. In
fiscal year 1992-93, the newly created Health Care Services Division established a contract
exploration and negotiations unit in an effort to reduce the department’s medical costs. The
unit is responsible for negotiating all hospital contracts and statewide physician contracts.
For physician contracts, the Health Care Services Division established an hourly rate of
$100 as the cap for medical services compensation. If an institution receives proposals from
a physician or medical group above this rate, a rate exemption request must be submitted to
the Health Care Services Division to justify the higher rate of compensation. The rate
exemption form includes a section for indicating whether other providers were solicited for
the services, as well as for providing justification for the proposed rate. The Health Care
Services Division forwards the approved form, along with additional documentation, to the
department’s Contract Management Branch, which writes the contract. The Contract
Management Branch does not participate in the negotiation process but ensures that all of
1

The charts do not include the cost of custody and support staff required when an inmate is sent outside the
institution for treatment.
2
Registry services used by the Department of Corrections include full-time nurses and lab services (such as
blood and urine testing). All registry contracts require competitive bids. Some general practice physicians may
work for a registry but it is not common to find specialists through a registry.
STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 7

the required contract language, scope of services, and required provisions are included in the
contract before forwarding it to the Department of General Services for final approval.
Problems obtaining medical professionals to work in a correctional setting. Staff at the
Health Care Services Division and the institutions identified the difficulty in recruiting
physicians and other medical professionals to provide services in a correctional setting as a
central problem. The rural location of many institutions also makes it difficult to recruit
medical staff, particularly for medical specialties not commonly located in small, rural
communities. In addition, many physicians, including those in urban areas, refuse to contract
with the Department of Corrections because of the location of the facilities and the low
compensation rates. Because of these constraints, the Department of Corrections is in a poor
bargaining position to negotiate favorable rates with hospitals, medical groups, and other
medical professionals.
The California State Prison, Sacramento medical staff said that many hospitals refuse to
negotiate with the Department of Corrections. For example, Mercy Hospital in Folsom
previously contracted with the department to provide a variety of medical services, but now
will only accept emergency patients. The medical staff interviewed by the Office of the
Inspector General from both the Health Care Services Division and the institutions said they
have attempted to solicit physicians and specialists to provide services, but that the
candidate pool is limited and there is little interest in contracting with the Department of
Corrections.
The chief medical officer at Mule Creek State Prison told the Office of the Inspector General
that he located an orthopedic surgeon in Galt willing to provide onsite services to inmates
for $200 an hour. He said he then contacted a local orthopedic surgeon to compete for the
services, but was quoted a rate of $500 an hour. He contacted several other orthopedic
surgeons in the Sacramento area, but none were interested in providing the services.
History of the Newport Oncology and Healthcare Medical Corporation contract. The
contract with Newport Oncology and Healthcare Medical Corporation illustrates many of
the problems inherent in the department’s present medical services contracting methods.
In the late 1990s, the California Medical Facility in Vacaville was having trouble finding
physicians willing to provide on-site cancer treatment to inmates after a physician who had
previously provided the on-site services left the state. The California Medical Facility had
begun contracting with a local medical group, but, according to the California Medical
Facility staff, was not satisfied with their services because the doctors would not provide onsite services, making it necessary for the institution to send inmates to the hospital for
treatment. The medical director of the Newport Oncology and Healthcare Medical
Corporation, who was a colleague of the physician who had left the state, was aware of the
need for on-site services at the California Medical Facility and contacted the institution in
March 1999. He subsequently negotiated a contract to provide on-site oncology services in
fiscal year 1998-99. The contract was renewed for $300,000 in fiscal year 1999-00 to cover
the period January 1, 2000 through June 30, 2002. The rate of compensation negotiated for
the contract was $175 per hour. According to the provider, his original contract with the
institution also provided for a minimum billing of 10 hours per visit to cover the physicians’

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 8

travel time.3 The California Medical Facility concurred with this interpretation and paid
invoices submitted under this condition.
In September 1999, the Health Care Services Division contacted the Newport Oncology and
Healthcare Medical Corporation medical director and requested his services for a Level IV
inmate at California State Prison, Corcoran. The inmate could not be moved to the
California Medical Facility for treatment because of his custody level, so the provider
agreed to send a physician and nurse to California State Prison, Corcoran to provide
treatment. The verbal agreement was for the services to be paid out of the California
Medical Facility contract. In October 2000, in response to state senate hearings held by
Senator Richard Polanco about several deaths involving cancer patients at the Central
California Women’s Facility, the Health Care Services Division contacted the provider
again, this time to provide services to cancer patients at the Central California Women’s
Facility. The Newport Oncology and Healthcare Medical Corporation medical director
subsequently began providing services to several other institutions under the California
Medical Facility contract. The Health Care Services Division gave the provider verbal
authorization to begin providing services to these institutions before amending the contract
with the California Medical Facility or initiating a new contract.
In January 2001, the Health Care Services Division completed negotiations with the medical
director of the Newport Oncology and Healthcare Medical Corporation on compensation
and services to these and other institutions. A contract request form was submitted to the
department’s Contract Management Branch on January 26, 2001 to amend the existing
contract with the California Medical Facility to accommodate the expanded scope of service
and to increase the rate of compensation as follows:
$300 per hour for medical doctor oncology services
$60 per hour for nursing services
$200 per hour for tele-medicine services
$1,200 per week for on-call medical services
The Health Care Services Division approved the higher rates to compensate the contractor
for travel, per diem, staff recruitment, and other administrative costs.
The documentation obtained during the review revealed that the Health Care Services
Division proposed to amend the contract from the original $300,000 to $1,255,000 and to
adjust the hourly rates and scope of service. However, after receiving the contract request,
the Contract Management Branch recommended that the Health Care Services Division
cancel the existing contract between the California Medical Facility and the Newport
Oncology and Healthcare Medical Corporation and prepare a new statewide contract to
accommodate the expanded scope of service and new rates. Although the contract between
the California Medical Facility and the Newport Oncology and Healthcare Medical
Corporation was eventually amended to add additional funds through the end of the fiscal
year 2000-01, no changes were made to address the rate increase or additional services and

3

Several of the Newport Oncology and Healthcare Medical Corporation physicians traveled from southern
California to the California Medical Facility to provide on-site services.
STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 9

locations. The amended contract also made no mention of a 10-hour minimum visit for
billing purposes.
The amended contract with the California Medical Facility was terminated effective June 30,
2001 when a new statewide contract was initiated.
The new statewide contract with the Newport Oncology and Healthcare Medical
Corporation became effective July 1, 2001. It provides for up to $50 million for onsite
oncology and other services through June 30, 2004. With a three-year master contract in
place, institutions using the Newport Oncology and Healthcare Medical Corporation could
now initiate a notice to proceed4 rather than waiting for approval of the contract
amendments. Institutions are not required to use the $50 million Newport Oncology and
Healthcare Medical Corporation contract, but institutions using the Newport Oncology and
Healthcare Medical Corporation can do so under the umbrella contract. Nothing in the
contract precludes institutions from finding and contracting for their own oncology services
with another provider.
Two of the institutions visited by the Office of the Inspector General issued notices to
proceed with the Newport Oncology and Healthcare Medical Corporation but indicated they
would likely continue to use their existing contract with other providers for oncology
services. The institutions said the notices to proceed provide them with flexibility should
the need arise, but they are not obligated to use the Newport Oncology and Healthcare
Medical Corporation. The current statewide contract rates with Newport Oncology and
Healthcare Medical, Inc. are as follows:
$315 per hour for oncology/hematology services
$100 per hour for nursing services
$300 per hour for legal/medical reviews
$200 per hour for tele-medicine services
There is no mention in the statewide contract of a 10-hour minimum visit per physician.
In addition, the Health Care Services Division negotiated a separate three-year contract with
the Newport Oncology and Healthcare Medical Corporation to provide medical care to
inmates requiring chronic care at Pelican Bay State Prison and the Central California
Women’s Facility. The contract for chronic care services is capped at $13 million.
After the statewide contract was implemented, the Newport Oncology and Healthcare
Medical Corporation medical director continued to bill for the 10 hours per institutional visit
and was paid on that basis for the months of July 2001 through September 2001. In October
2001, when the provider received a check from California State Prison, Los Angeles
County, for less than the invoice, he immediately contacted the institution. The staff
informed him that the billing had been adjusted in accordance with the contract, which
authorizes the Department of Corrections to pay only for the actual hours the physician was
on grounds providing services to the inmates. The provider contends this was the first time

4

A notice to proceed allows the institution to use a contractor’s services under a statewide contract without
amending the contract.
STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 10

he learned that the contract no longer provided for the 10-hour minimum per institutional
visit.
While the Office of the Inspector General recognizes that the department’s billing
adjustments are appropriate, its timing and approach underscore the department’s lack of fair
and effective contract management. The issue also reflects a serious lack of communication
between the institutions and the Health Care Services Division. The Newport Oncology and
Healthcare Medical Corporation billing dispute led to a significant reduction in services,
which could affect the effectiveness of medical care and services to inmates.
OBJECTIVES, SCOPE AND METHODOLOGY
The Office of the Inspector General was informed by the Department of Corrections that an
investigation by the Office of Investigative Services of the allegations of inappropriate
contracting practices between the California Department of Corrections and Newport
Oncology and Healthcare, Inc. was in progress at the time of this review. The Office of the
Inspector General therefore limited its review to the medical contracting process to
determine whether there are deficiencies that would allow the alleged practices to occur. The
Office of the Inspector General also examined contract management functions used by the
department to ensure contract compliance.
The scope of the review included the following:
•

Procedures for soliciting, selecting, and negotiating with medical service providers;

•

The process for determining rates of compensation for Newport Oncology and
Healthcare, Inc.;

•

Contract monitoring and invoice approval processes for Newport Oncology and
Healthcare, Inc.

The review procedures included:
•

Interviews with management and staff from the Department of Corrections Health Care
Services Division, Contract Management Branch, and regional accounting offices;

•

Interviews with chief medical officers, contract liaisons, and health care cost and
utilization analysts at several institutions throughout the state;

•

Interviews with medical director and administrative personnel from Newport Oncology
and Healthcare, Inc.;

•

Review of the state contracting manual published by the Department of General Services
for medical service contracts;

•

Review of departmental policies and procedures for soliciting and processing medical
service contracts;

•

Review of the invoices and payments for services provided by Newport Oncology and
Healthcare, Inc.; and

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 11

•

Review of the Department of Corrections budget and expenditure data.

The Office of the Inspector General received excellent cooperation from the management
and staff of the Department of Corrections. The review was performed at headquarters,
institutions, and regional accounting offices from December 2001 to February 2002.

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 12

FINDINGS AND RECOMMENDATIONS
FINDING 1
The California Department of Corrections lacks a comprehensive statewide policy for
managing its medical services contracts.
The California Department of Corrections has experienced a significant increase over the
last decade in the cost of providing medical care to inmates, yet it has not developed a
comprehensive statewide policy to manage its medical service contracts. In just the last three
years, the cost of medical services contracts has jumped 82 percent, from $92 million to
$168 million. Despite that increase, the department has failed to adopt comprehensive
statewide policies to manage the costs while ensuring the most cost-effective care. Most
significantly absent are efforts on the part of the department to recruit interested physicians
in communities near state correctional institutions to provide medical services or to attempt
to obtain the most cost-effective rates from physicians and other medical service providers.
Although the state exempts non-registry physicians, hospitals, medical groups, and 911
emergency ambulance calls from advertising and competitive bid requirements, there is
nothing to prevent a department from using the bid process if it so chooses. Without
soliciting proposals and bids from interested physicians and others in the local community,
the department cannot control costs or obtain the most cost-effective medical contracts.
In addition, there is no requirement that the Health Care Services Division or institutions
document attempts to procure the most efficient and cost-effective contract. The deputy
director for the Health Care Services Division or the chief medical officer or equivalent at an
institution can select and approve a contract without an independent review of solicitation,
selection, and negotiation efforts. There is no review to ensure that all available medical
providers had the opportunity to compete on the contract or that the most effective and
efficient contractor was selected. The review revealed that although there is no requirement
to do so, some institutions do attempt to solicit medical service providers but find it difficult
to establish a large candidate pool.
The difficulty in soliciting proposals from physicians is compounded by the requirement that
institutions must obtain departmental approval for proposals exceeding $100/hour. To get
that approval, an institution must demonstrate that the rate is justified and indicate whether
other alternatives were considered. Neither the institution nor headquarters is required to
take into account the added cost of custody and support staff if an inmate must travel outside
the institution for medical care. Consequently there is no universal formula for weighing
proposals to compare cost effectiveness of inside versus outside medical services. Were
those additional costs to be included in the base rate, the $100/hour rate for on-site services
might appear to be even more unrealistic.
The Department of Corrections has not reevaluated the $100-per-hour rate ceiling since it
was established in 1992. Currently the only way the department can approve a higher rate is
by getting a waiver from the Health Care Services Division. California’s geographic size
and wide variables in living costs would suggest that medical service providers in different
parts of the state would charge different rates depending on locale.
STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 13

RECOMMENDATIONS
The Office of the Inspector General recommends that the Department of
Corrections adopt statewide policies and procedures for contract
management, including but not limited to advertising and soliciting
proposals and awarding, monitoring, and enforcing contracts to provide
cost-effective medical services to inmates. The policies and procedures
should include the following:
•

A requirement that institutions advertise the need for medical service
providers and solicit proposals from the local medical community near
institutions seeking the services.

•

A requirement that institutions document their efforts to advertise and
solicit proposals before approving any contract. This would lessen the
potential for abuse in the state contracting process and enhance the
department’s ability to secure cost-effective contracts from physicians
and other providers in areas adjacent to institutions.

•

Implementation of a statewide survey every three to four years to
determine what constitutes a reasonable hourly fee for various medical
specialties in selected regions of the state. The results of this survey can
be used to develop reasonable contract amounts for specific services in
different geographical regions.

•

A requirement that the cost of custody and support staff be included in
calculations of the cost of providing medical care to inmates outside an
institution and that the cost be applied in developing a “reasonable” rate
for care inside the institution.

FINDING 2
Lack of sound contract management by the Department of Corrections resulted in
payments of more than $77,000 for clinical services not performed and of more than $1
million for services not authorized under a California Medical Facility contract with
an outside physician.
A review of the contract and payments to the Newport Oncology and Healthcare, Inc.
revealed that the Department of Corrections overpaid the group $77,000 for services not
rendered in addition to more than $1 million for services not covered by the contract. The
discrepancies can be attributed in part to the department's lack of sound contract
management.
As explained in the background section of this report, the original contract with Newport
Oncology and Healthcare was interpreted as providing that physicians would be
compensated for a minimum of 10 hours for each institution visit. The new statewide
contract negotiated between the Health Care Services Division and Newport Oncology and
Healthcare, however, did not include the 10-hour minimum requirement. The review found
STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 14

that, because of confusion over the requirement, some institutions reimbursed the contractor
for the amounts billed without regard to the actual hours spent providing the services. As a
result, the contractor was reimbursed for services not provided. For example, California
State Prison, Corcoran authorized all invoices submitted for payment from July 1, 2001
through September 30, 2001 without validating the time physicians and nurses had actually
spent providing clinical services to inmates. The staff told investigators that the review
process was implemented in October 2001 when they realized the contractor had not been
on the grounds for the hours billed. When questioned as to whether they planned to recover
the previous over-billings, the staff said they did not have the records available to make such
an adjustment. However, the Office of the Inspector General was able to obtain the sign-in
log sheets and found significant discrepancies between the log and the hours billed by the
contractor. The review revealed that the department overpaid the contractor $77,000 for
services not rendered. It should be noted that the Office of the Inspector General found that
the staff at San Quentin State Prison did perform reviews and took corrective action before
making payments to the medical providers.
A review of the accounting records showed that payments to Newport Oncology and
Healthcare were authorized by the former deputy director for the Health Care Services
Division and were paid by the State Controller’s Office under the California Medical
Facility contract in the amount of $1,026,233. Although the Health Care Services Division
gave verbal authorization to Newport Oncology and Healthcare to provide services to these
locations, the contract was never amended to include the rate adjustments or additional
services. These payments, therefore, did not meet contract requirements.
The chart below lists the categories and amounts paid to Newport Oncology and Healthcare
under the California Medical Facility contract for fiscal year 2000-01.5
Type of Service

Staff

Institution

Amount Paid

Oncology

Physician

CCWF

$300 per hour

Oncology

Physician

Corcoran

$300 per hour

146,565

Oncology

Physician

CIW

$300 per hour

2,985

Oncology

Physician

CVSP

$300 per hour

2,985

Oncology

Physician

NCWF

$300 per hour

2,985

Oncology

Nursing

CCWF

$100 per hour

35,905

Oncology

Nursing

Corcoran

$100 per hour

56,318

Medical/Legal Review

Physician

Various

$300 per hour

29,300

Internal Medicine

Physician

CCWF

$200 per hour

259,850

Emergency Room

Physician

CCWF

$200 per hour

126,912

On Call Coverage

Physician

CMF/COR/CCWF

$1200/week/Inst

Telemedicine

Physician

Various

$200 per hour

1,194

Chemo Drugs

Physician

Corcoran & CCWF

Cost plus 10%

108,391

Totals

5

Rates

$

176,385

76,458

$

1,026,233

The chart does not indicate how much of the total amount paid reflected a 10-hour minimum charge per visit.

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 15

When investigators questioned a member of the department accounting staff about why the
payments were made, the employee said she was not aware the rates had exceeded the
contract amount or that the contract did not allow for services at other institutions. Although
she had a copy of the approved contract, she said she did not review the invoice for contract
compliance. She simply checked to ensure that the invoices had the appropriate approvals
from the Health Care Services Division—a procedure that does not comply with State
Administrative Manual, Section 8422.1.
One factor contributing to the inconsistencies statewide is lack of training for institution
staff. Several health care cost and utilization analysts interviewed said the training has been
significantly reduced or cancelled entirely because of lack of training funds. While training
may be an issue, supervisors and staff responsible for contract compliance should be aware
of their responsibilities before signing and authorizing invoices for payment.
RECOMMENDATION
The Office of the Inspector General recommends that the Department of
Corrections establish tight controls to ensure compliance with provisions in a given
contract, including monitoring and authorizing payments covered by contracts.
The controls should be enhanced by providing special training in contract language
and management to staff responsible for authorizing payments. The department
should also strengthen its procedures for amending existing contracts to avoid
confusion and misunderstandings.
FINDING 3
The contracting process of the Department of Corrections is vulnerable to
potentially serious conflicts of interest because the person selecting the contractor is
also authorized to approve invoices and payments under the contract.
The chief medical officer or equivalent at an institution or the deputy director at the Health
Care Services Division can select and approve a contract without an independent review of
solicitation and negotiation efforts. The person selecting and approving the contract may
also authorize the invoices for payment. Without an independent review of the
documentation supporting the contractor’s selection before the authorization of service, the
department may not be receiving “best value” and may open itself to potential employee
misconduct.
For example, the former deputy director for the Health Care Services Division selected the
medical director of the Newport Oncology and Healthcare Medical Corporation to provide
oncology services at several other institutions in addition to the California Medical Facility,
which had an existing contract. No other medical providers were solicited for this extended
service. When the invoices were received from the provider, the former deputy director
authorized payment. That activity raised suspicions that the former deputy director was
benefiting from the contract. The Office of the Inspector General found no evidence to
suggest impropriety in this instance, but the current process does not prevent improprieties
from occurring in the future.

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 16

RECOMMENDATION
The Office of the Inspector General recommends that the Department of
Corrections include in its contracting policies provisions for preventing the
same individual from selecting and approving a contractor and also authorizing
payment by approving invoices under that contract.
FINDING 4
The current deficiencies in the department’s contracting process may lead to problems
in the quality and continuity of inmate medical care.
The lack of sound contract management at the Department of Corrections has led to
concerns about using existing contractors. This in turn may interfere with inmates receiving
the medical care they need. The problem is particularly acute for cancer patients, for whom
continuity of care is vital.
Because of the convoluted contracting process and subsequent billing dispute with the
Newport Oncology and Healthcare Medical Corporation, many institutions are refusing to
use Newport Oncology and Healthcare Medical Corporation’s services. Both California
State Prison, Solano and California State Prison, Corcoran have notified the medical director
of the Newport Oncology and Healthcare Medical Corporation that they intend to terminate
their notice to proceed with the Newport Oncology and Healthcare Medical Corporation. In
one instance, the provider found it necessary to document the termination to avoid any
appearance of patient abandonment. Although an inmate may receive scheduled treatments
from someone else, the continuity of care has been disrupted.
Interviews with the Health Care Services Division and institution medical staff indicate that
the care provided by Newport Oncology and Healthcare Medical Corporation physicians and
nurses has been of high quality and that any disagreements with the Newport Oncology and
Healthcare Medical Corporation center on compensation rates and billing practices, not
quality of care. As a result of the contract issues, institutions are now soliciting others to
provide the specialty medical services previously provided by the Newport Oncology and
Healthcare Medical Corporation.
RECOMMENDATION
The Office of the Inspector General recommends that the Department of
Corrections take whatever interim steps are needed, pending resolution of
contract issues, to ensure that inmates receive good quality, needed medical care
without interruption due to contract problems.

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 17

ATTACHMENT A
RESPONSE OF THE DEPARTMENT OF CORRECTIONS

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 18

ATTACHMENT B
COMMENTS OF THE OFFICE OF THE INSPECTOR GENERAL

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 24

COMMENTS OF THE OFFICE OF THE INSPECTOR GENERAL ON THE
RESPONSE OF THE DEPARTMENT OF CORRECTIONS TO THE DRAFT REPORT
The following comments by the Office of the Inspector General correspond to circled
numbers in the response of the Department of Corrections.
1.

The Office of the Inspector General visited six institutions and requested
documentation of their solicitation efforts. In all cases the documentation was not
available. Although the lack of documentation does not mean that the solicitation
did not occur, it does raise questions about what efforts were made and whether they
were sufficient. In addition, the department does not require three bids for the
majority of medical contracts. For example, the $50 million statewide contract with
Newport Oncology and Healthcare, Inc. was not competitively bid. For that contract,
the Department of Corrections negotiated solely with one medical provider. The
same provider was also the only contractor involved in the negotiation of the $13
million statewide contract for chronic care services at the Central California
Women’s Facility and Pelican Bay State Prison.

2.

The Office of the Inspector General found that some institutions are already doing an
effective job of monitoring their contracts with existing resources. At San Quentin,
for example, the health care cost and utilization analyst developed an effective
process for monitoring contractors. The Health Care Services Division should
explore the feasibility of adopting similar processes at the other institutions,
including those that presently have no means of monitoring contracts.

STATE OF CALIFORNIA
OFFICE OF THE INSPECTOR GENERAL

GRAY DAVIS, GOVERNOR
CONFIDENTIAL

PAGE 25