At a time when the California Department of Corrections (CDC) is already under intense Legislative criticism for overspending its annual budget by $544.8 million (see: PLN, Aug. 2004, p. 41), an April, 2004 report by the California State Auditor revealed that CDC repeatedly violated its own policies regarding contracting for prisoner medical care, overspending $6 million in just four analyzed contracts alone. Flaws identified by the auditors include exceeding standard rates for particular medical procedures, overspending contract limits and ignoring guidelines intended to contain costs. In addition, 77% of such contracts were awarded without competitive bidding.

CDC's costs for contracts with private hospitals, specialty care physicians and outside laboratories have risen 15% per year for the past four years, reaching $239 million in fiscal year 2003-2004. These increases far exceed the growth rate seen in the outside community, although CDC's needs are understandably skewed by the concentrated need to treat AIDS, hepatitis, mental illness and an aging prison population as 25,000 lifers continues to be denied parole.

CDC's annual health care costs run over $900 million per year, approaching 20% of their budget. And that is with fewer than 1% of Hepatitis-C infected prisoners presently being treated while 40% of CDC's prisoners are infected. (See: PLN, May, 2004, p.1, Prisons Nationwide Fail To Treat HCV Epidemic.)

A principal audit observation was that the non-competitive bidding was traced to a 30-year-old state policy giving CDC exemptions for such medical service contracts. This policy is distinguished by its lack of any criteria to determine whether a contract's costs are reasonable. Moreover, many contracts omit all hospital "standard" bid rate information on grounds of privacy, thereby leaving CDC unable to verify if it is paying the "discounted" rate the contracts provide for. On numerous occasions, the audit showed that bills exceeded authorized contract amounts and that required approvals for non-emergency services were not obtained.

The auditors noted cost variances between prisons running 30 to 60 percent for various contract services. They attributed this to non-competitive bidding, but allowed that in some rural regions where prisons are located, multiple sources for such specialty treatment are often simply not available.

Recommendations by the auditors focused on upgrading in-place Utilization Management (UM) programs to review on a monthly basis all health-care contracts and bills submitted against them. The auditors requested CDC to go back and collect overcharges from past billings, where errors have been found. They further amplified the need for quality control of the UM program, which, if followed religiously, would have prevented many of the audit problems found. The UM's objectives include cost controls, but also call for minimum use of outside hospitals, decreasing litigation, providing care at accepted community standard levels and complying with regulatory and licensing requirements.

In an appendix to the audit report, the status of recommendations made by the Bureau of State Audits in its previous report (January, 2000) was reviewed. One recommendation there was to implement comprehensive cost controls which have not been done, per the new audit report. And as of February, 2004, only nine of CDC's sixteen Correctional Treatment Centers have gained licensure. On the plus side, the new report states that CDC is in "the beginning stages of implementing its plan" to comply with the Plata v. Davis health care litigation settlement agreement.

Before issuing the instant audit report, the audit agency submitted a draft to CDC for comment. CDC issued a nine page answer, partly in agreement and partly in rebuttal, to which the auditors replied in their final report with eleven sharp disagreements with CDC's response.

Although CDC is under new leadership (Director Jeanne Woodford replaced the disgraced Edward Alameida in March, 2004) it remains to be seen how much change in response to the audit can be brought to bear in such a huge bureaucracy. CDC has more than mere audit problems in dealing with the realities of providing constitutionally sufficient health care to a growing, aging and inherently unhealthy population of 162,000 prisoners. See: 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, California State Auditor (April, 2004), available from: Bureau of State Audits, 555 Capitol Mall, Suite 300, Sacramento, CA 95814 (916) 445-0255, www.bsa.ca.gov/bsa.