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More Expensive Hospital Services and Greater
Use of Hospital Facilities Have Driven the Rapid
Rise in Contract Payments for Inpatient and
Outpatient Care

R
U
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California State Auditor

California
Department of
Corrections:

July 2004
2003-125

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July 27, 2004

2003-125

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its audit report concerning the
California Department of Corrections (Corrections) and its contracts for hospital medical services. This report concludes that
overall, Corrections’ payments for hospital care services have risen $59.4 million from fiscal years 1998–99 through 2002–03,
and grew at an average rate of 21 percent per year, outpacing the national consumer price index average of 8 percent annual
growth for hospital services during this same period. The reasons for this growth can be attributed to the combination of more
expensive health care and to Corrections’ increased use of contracted hospital facilities. Our analysis indicates that increases
in its inpatient hospital payments are driven primarily by more expensive services, whereas increases in its outpatient hospital
payments are driven by increases in both the price of services and number of hospital visits.
Two institutions attributed the increases, among other reasons, to changes in contract terms resulting in hospital inpatient
payments that were three times as much as they would have paid previously for the same inpatient stay. Further, partly because
Corrections pays some hospitals a percentage of the hospital bill when the bill exceeds a contractual threshold rather than
base its payment on hospital cost, Corrections paid some hospitals amounts that were from two to eight times the amounts
Medicare would have paid the same hospitals for the same services. One of these hospitals included a hospital operated by
the Tenet Healthcare Corporation, for which Corrections paid eight times the amount that Medicare would have paid for the
invoices we reviewed.
Similarly, one institution’s payments for outpatient services increased significantly primarily because its average payment
per emergency room outpatient visit, which are paid at a percentage of the hospital bill without a maximum limit, increased
from less than $950 per visit to more than $3,300 per visit. Moreover, a second institution could not say why its number of
outpatient hospital visits increased from 147 to 630 between fiscal years 1998–99 and 2002–03, in part, because the institution,
not unlike other institutions, did not consistently enter into Corrections’ computer database codes that would allow it to know
the procedures it paid for. Additionally, similar to its inpatient hospital payments, because Corrections typically pays hospitals
a percentage of their billed charges for outpatient services, rather than base its payments on hospital costs, it paid on average
two and one-half times the amounts Medicare would have paid for the same outpatient services.
Respectfully submitted,

ELAINE M. HOWLE
State Auditor

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CONTENTS
Summary

1

Introduction

7

Audit Results
Increases in Both the Price Paid for Care and the Use of
Hospital Facilities Drove a Substantial Rise in Hospital
Payments for the California Department of Corrections 19
Institutions Cited Several Reasons for Significant
Increases in Inpatient Hospital Payments

41

Certain Contract Provisions Resulted in Corrections
Paying Higher Amounts for Inpatient Health Care

47

Institutions’ Reasons for Rising Outpatient
Hospital Payments Were Similarly Varied

57

Contract Provisions Also Resulted in Corrections
Paying Higher Amounts for Outpatient Health Care

68

Recommendations

71

Appendix A
Hospital Payments by Correctional Institution for
Fiscal Years 1998–99 Through 2002–03

75

Appendix B
Price-Volume Analysis of Hospital Payments
Made by Correctional Institutions

83

Response to the Audit From the
Youth and Adult Correctional Agency,
California Department of Corrections

89

SUMMARY
RESULTS IN BRIEF

Audit Highlights . . .
Our review of the California
Department of Corrections’
(Corrections) contracts for
medical services revealed
the following:

þ Corrections’ hospital
payments have risen
$59.4 million from fiscal
years 1998–99 through
2002–03, growing at an
average rate of 21 percent
per fiscal year.

þ Inpatient hospital
payments increased by
$38.5 million from fiscal
years 1998–99 through
2002–03, primarily driven
by increased payments per
hospital admittance.

T

he level of health care the California Department of
Corrections (Corrections) provides inmates housed in its
32 correctional institutions (institutions) varies depending
on whether the institution contains a skilled nursing facility, a
general acute care hospital, a correctional treatment center, or
an outpatient housing unit.1 Medical care that an institution
cannot provide within its walls is administered by a public
or private hospital on either an inpatient or outpatient basis.
From fiscal years 1998–99 through 2002–03, the average total
inmate population has remained relatively constant at about
160,000 inmates, with roughly 151,000 inmates housed at
institutions and 9,000 at community-based facilities. However,
during this four-year period, Corrections’ hospital payments
increased $59.4 million, from $53.2 million to $112.6 million,
averaging a 21 percent rate of growth per year. In contrast,
the consumer price index for hospital services averaged less
than 8 percent annual growth from 1998 through 2003. For
Corrections, the growth was most evident beginning in fiscal
year 2000–01 with a 37 percent increase over the prior year. Of
the $59.4 million increase, $38.5 million related to inpatient
hospital payments, $12.7 million to outpatient services, and
$8.2 million to other hospital payments.

þ Outpatient hospital
payments increased by
$12.7 million from fiscal
years 1998–99 through
2002–03, driven by both
increased payments
per hospital visit and
increased numbers of
hospital visits.

þ Two institutions attributed
their inpatient hospital
payment increases, among
other reasons, to changes
in contract terms resulting
in hospital payments that
were three times as much
as they would have paid
previously for the same
inpatient stay.
continued on next page . . .

Our analysis of inpatient hospital payments with associated
admission numbers found that 71 percent of the increase
Corrections experienced in the four-year period could be
attributed to increased costs per admittance and 29 percent
to a greater number of admittances to hospitals with which
Corrections contracts. The primary driver, increased costs per
admittance, relates to either Corrections paying a higher
price for the same service or to an increase in the complexity of
cases for which inmates were admitted to the hospital. We were
unable to determine the extent to which more-complex cases
were contributing to increased costs because Corrections did
not consistently require and enter into its computer database
the necessary data, such as the diagnosis related group (DRG)

1

Although California currently has 32 adult correctional institutions, 33 institutions were
counted in this audit because the Northern California Women’s Facility made payments
for hospital services during fiscal year 2002–03 but was deactivated early in 2003.

California State Auditor Report 2003-125

1

þ Corrections paid some
hospitals amounts that
were from two to eight
times the amounts
Medicare would have
paid the same hospitals
for the same inpatient
services, including a
hospital operated by Tenet
Healthcare Corporation,
which was paid eight times
the amount Medicare
would have paid.

þ One institution’s outpatient
hospital payments
increased by $821,000
primarily because its
average payment per
emergency room visit,
which are paid at a
percentage of the hospital
bill without a maximum
limit, increased from less
than $950 per visit to more
than $3,300 per visit.

þ Corrections’ outpatient
payment amounts
averaged two and onehalf times the amount
Medicare would have paid
for the same services.

þ A lack of key data being
entered into Corrections’
database limits analyses
behind causes of increased
payments and utilization,
such as the extent to which
case severity is a cause.

code, which indicates the typical level of hospital resources for
a particular inpatient hospital case and is an important factor in
determining if there was an increase in the severity level across
all DRGs. For example, in its computer database, Corrections
recorded DRG codes in only 482 of 5,779 inpatient hospital
payment records in fiscal year 2002–03.
In contrast, our analysis of outpatient hospital payments revealed
that higher prices and more outpatient visits were roughly equal
drivers of increasing costs, with $6.9 million of the increase
attributable to increased costs per visit and $5.8 million attributable
to the increased number of visits. As with inpatient payments,
however, Corrections entered incomplete medical procedure codes,
thus hampering its ability to analyze and determine the reasons
why its outpatient costs increased.
Higher numbers of costly cases significantly affected Corrections’
rising costs for both inpatient and outpatient hospital care.
Although payments for inpatient hospital cases costing less than
$50,000 increased 68 percent from fiscal years 1998–99 through
2002–03, payments for cases costing $50,000 or more increased
254 percent. For example, in the four-year period, the number
of cases costing more than $200,000 increased from seven to 25,
with two exceeding $670,000 each.
For outpatient visits, payments related to cases costing less
than $1,000 increased 73 percent over the four-year period, and
payments for cases costing $5,000 or more tripled in fiscal year
2002–03 compared with two years earlier. Of equal importance
for outpatient costs is that the number of outpatient visits nearly
doubled from approximately 7,500 to 14,900, even though the
number of inmates remained relatively constant. This doubling
of outpatient visits also has a significant effect on Corrections’
nonhospital costs because each inmate visiting an outpatient
facility must be transported and guarded by correctional officers,
who are frequently paid at an overtime rate for these tasks.
When we asked selected correctional institutions why their
inpatient or outpatient costs increased dramatically from fiscal
years 1998–99 through 2002–03, we received some insightful
information. Two institutions performed analyses showing that
changes in contract terms resulted in their paying hospitals three
times as much as they previously paid for the same inpatient stay.
One of these institutions also said it had fewer inpatient beds
because, according to the Department of Health Services’ standards,
its inpatient rooms were not suited to house two medical patients.

2

California State Auditor Report 2003-125

Another factor this institution cited as contributing to higher
inpatient costs was a larger number of inmates with complex
medical and mental health issues that led to an increase in
hospitalizations for drug overdoses and seizure disorders.
To test the reasonableness of what Corrections paid hospitals
for inpatient services, we compared Corrections’ payments to
what Medicare would have paid hospitals for the same services,
including an allowance for exceptional cases. This analysis
showed that for more than half of the 15 hospitals we reviewed,
Corrections paid amounts that were from two to eight times the
amounts Medicare would have paid the same hospitals for the
same services. To more fully understand the inpatient hospital
payments that were multiples of Medicare payments, we reviewed
contracts related to these hospitals and found that the addition
of stop-loss provisions significantly increased Corrections’ costs.
Stop-loss provisions are intended to protect hospitals from
incurring financial losses for exceptional cases in which patients
develop complications that cause their hospital stays to be longer
or more expensive than anticipated. In Corrections’ stop-loss
cases, once cumulative hospital charges for a case exceeded a
contractual threshold amount, Corrections paid the hospitals a
percentage of their billed charges rather than a per diem rate for
typical cases. If Corrections had been able to negotiate hospital
contracts without its typical stop-loss provisions, we estimate
that Corrections might have saved at most approximately
$9.3 million in fiscal year 2002–03 for the six hospitals we
reviewed that have stop-loss provisions in their contracts. With
better negotiated stop-loss provisions, Corrections may have
achieved some of these savings at these six hospitals if its stoploss provisions had not paid the hospitals a discount from billed
charges for the entire stay. Instead, a better arrangement would be
to pay per diem for the days up to when the stop-loss threshold is
met, then pay the hospitals’ costs plus a reasonable percentage for
the remaining days of the inpatient stay.
We performed additional analysis on publicly available data and
found that the hospitals we reviewed had costs that on average
were from 8 percent to 54 percent of their billed charges. Thus,
even if Corrections paid a discount on the billed charges, it
paid much more than the hospitals’ costs. For example, one
hospital operated by the Tenet Healthcare Corporation, for
which our review of a sample of 2002–03 payments revealed
that Corrections paid eight times the rate that Medicare would
have paid, had an operating profit margin of approximately
71 percent on the payments it received from Corrections.
California State Auditor Report 2003-125

3

We also asked institutions that had experienced significant
increases in outpatient costs to explain what they knew about
the cost drivers. One institution said the facility charge for a
routine scheduled appointment increased 143 percent from
fiscal years 1998–99 through 2002–03. This institution also
indicated that its increasing costs resulted from its growing
population of reception-center inmates. A reception center
provides short-term housing to inmates who are just entering
the correctional system and must be processed, classified, and
evaluated. According to this institution, unlike inmates who
have been in the system and receiving regular health care, many
reception-center inmates have severe health problems that
have been neglected in their previous environments (county
jails or parole) and require expensive and immediate outpatient
treatment. However, a closer analysis of this institution’s
outpatient payments revealed that its outpatient hospital
costs increased significantly primarily because of significant
increases in its average payment per outpatient visit to an
emergency room, which is paid at a percentage of the hospital bill
without a maximum limit.
In contrast with the assertions of this institution, we found that
the increase in costs for outpatient visits was higher at some
institutions that did not have reception centers than at others that
did have them. In addition, inmates at some institutions
that did not have reception centers went to outpatient visits
more frequently than did inmates at some institutions with
reception centers. For example, at California State Prison,
Sacramento, which does not have a reception center, an average
of one in five inmates visited an outpatient facility, while at
North Kern State Prison, which does have a reception center, an
average of one in 24 inmates visited an outpatient facility.
At California State Prison, Sacramento, the health care manager
could not say why the number of outpatient visits increased from
147 to 630 per year over the four-year period, in part because
the institution entered into Corrections’ computer database
certain outpatient procedure codes for only two of its outpatient
payment records in fiscal year 1998–99 and for none of its
outpatient payment records for fiscal year 2002–03.
Finally, we compared Corrections’ payments for outpatient
hospital services to what Medicare would have paid hospitals for
the same services. We found that because Corrections typically
pays a percentage of a hospital’s billed charges rather than costs
for its outpatient services, it paid on average two and one-half
4

California State Auditor Report 2003-125

times the amounts Medicare would have paid for the same
outpatient services. These higher payments were most evident
with Corrections’ payments for emergency room outpatient
services that are typically paid without a limit. The significant
difference in Corrections’ payments to what Medicare would
have paid indicates that Corrections could possibly achieve
significant savings if it could pay the same rates as Medicare for
its outpatient services. Medicare bases its outpatient payments
on an estimate of the resources used by hospitals and their
associated costs for the services provided. Although not a
statistically valid estimate, as a rough illustration of the potential
savings that Corrections might achieve if it could pay the same
rates as Medicare and if the outpatient payments we reviewed
were representative of its nearly 15,000 outpatient payments,
Corrections could potentially reduce the $19.8 million it
spent on outpatient hospital services in fiscal year 2002–03 to
$8.4 million. Although we realize that the potential savings
of $11.4 million may not be entirely achievable, the potential for
Corrections to achieve some level of savings appears significant if
it based its outpatient hospital payments on the cost of hospital
resources used, similar to Medicare.

RECOMMENDATIONS
To understand the reasons behind the rising trend in its hospital
payments, Corrections should do the following:
• Enter complete and accurate hospital billing and medical
procedures data in its computer database for subsequent
comparison and analysis of the medical procedures that
hospitals are performing and their associated costs.
• Perform regular analysis of its health care cost and utilization
data, monitor its hospital payment trends, and investigate
fully the reasons why its costs are rising for the purpose of
implementing cost containment measures.
• Follow up with all correctional institutions using new hospital
contracts to determine if renegotiated contract payment terms
are resulting in significantly higher costs for them as well.
To control increases in inpatient and outpatient hospital
payments caused by hospital contract payment provisions,
Corrections should do the following:

California State Auditor Report 2003-125

5

• Revisit hospital contract provisions that pay a discount on
the hospital-billed charges and consider renegotiating these
contract terms based on hospital costs rather than hospital
charges. Corrections could use either existing cost-based
benchmarks, such as Medicare or Medi-Cal rates, or hospital
cost-to-charge ratios to estimate hospital costs and negotiate
contract rates from those costs. Further, should Corrections
renegotiate hospital contract payment terms, it should perform
subsequent analysis to quantify and track the realized savings
or increased costs resulting from each renegotiated contract.
• Require hospitals to include DRG codes on invoices they
submit for inpatient services to help provide a standard, along
with hospital charges, by which Corrections can measure its
payments to hospitals as well as case complexity.
• Detect abuses of contractual stop-loss provisions by
monitoring the volume and total amounts of hospital
payments made under stop-loss provisions.
To control rising inpatient and outpatient hospital payments
caused by increases in the number of hospital admissions or
visits, Corrections should do the following:
• Include in its utilization management quality control
process a review of how medical staff assess and determine
medical necessity, appropriateness of treatment, and need for
continued hospital stays.
• Investigate the reasons why the number of outpatient visits by
inmates has nearly doubled even though the inmate population
has remained relatively constant, and implement plans to
correct the significant increase in outpatient hospital visits.

AGENCY COMMENTS
Corrections agreed with our recommendations and stated that
the recommendations, as presented, would help guide it with
future management decisions regarding inpatient and outpatient
care for its inmates. n

6

California State Auditor Report 2003-125

INTRODUCTION
BACKGROUND

T

he California Department of Corrections (Corrections)
operates 32 correctional institutions (institutions),
oversees various community correctional facilities, and
supervises parolees’ reentry into society.2 As of April 30, 2004,
Corrections’ population totaled nearly 163,000 inmates. The
average inmate population for fiscal years 1998–99 through
2002–03 was 160,000, with approximately 151,000 inmates
housed at institutions and 9,000 at community-based facilities.
Corrections is organized into four programs: the institution
program, the community correctional program, the central
administration program, and the health care services program.
The health care services program provides mandated health care
to Corrections’ inmate population and comprises the medical,
dental, and psychiatric services sections at the institutions as
well as the Health Care Services Division (HCSD) at Corrections’
headquarters. For fiscal year 2003–04, Corrections projected it
would dedicate $974 million, or 17 percent, of its $5.7 billion
budget to the health care services program.
Corrections’ payments to hospitals for medical services provided
to inmates totaled $112.6 million in fiscal year 2002–03. As
Figure 1 on the following page shows, Corrections paid hospitals
$72.1 million for inpatient services, $19.8 million for outpatient
services, and the remaining $20.7 million for other hospital
services, such as physician, ambulance, and laboratory services.

HEALTH CARE IN CORRECTIONAL FACILITIES
To provide medically necessary health care to inmates,
Corrections operates four types of health care facilities: four
general acute care hospitals, 14 correctional treatment centers,
13 outpatient housing units, and one skilled nursing facility.
Additionally, it contracts with the Department of Mental Health
to provide all inpatient acute mental health services to certain
inmates at the California Medical Facility in Vacaville and to
2

Although California currently has 32 adult correctional institutions, 33 institutions were
counted in this audit because the Northern California Women’s Facility made payments
for hospital services during fiscal year 2002–03 but was deactivated early in 2003.

California State Auditor Report 2003-125

7

FIGURE 1
The California Department of Corrections Made
$112.6 Million in Hospital Payments in Fiscal Year 2002–03
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Source: California Department of Corrections’ health care cost and utilization
program database.
* Other payments were for laboratory, dental, psychiatric, and other medical services.

some of the inmates at the correctional treatment center at
Salinas Valley State Prison. For care not available in its own
facilities, Corrections contracts with medical service providers
in the surrounding communities, including hospitals. Table 1
presents the types of health care facilities, the number of doctors
available on site, the average daily inmate population, and the
average daily inmate population per doctor at each institution
during fiscal year 2002–03.

CORRECTIONS’ ROLE IN CONTROLLING
HEALTH CARE COSTS
The mission of Corrections’ HCSD is to manage and deliver
to the State’s inmate population health care consistent with
adopted standards for quality and scope of services within a
custodial environment. HCSD is composed of two branches,
and although it is centrally located in Sacramento, most staff
responsible for managing and delivering health care services

8

California State Auditor Report 2003-125

TABLE 1
Each Correctional Institution Had a Specific Type of Facility to
Provide Health Care to Inmates in Fiscal Year 2002–03
Health Care
Facility*

Physicians and
Surgeons on Site

Average Daily
Inmate Population

Average Daily Inmate
Population Per Physician
and Surgeon

California Institution for Men

HOSP

17.3

6,446

373

California Medical Facility

HOSP

18.0

3,289

183

California Men’s Colony

HOSP

18.1

6,505

359

California State Prison, Corcoran

HOSP

13.6

4,862

358

California State Prison, Los Angeles County

CTC

6.9

4,177

605

California State Prison, Sacramento

CTC

5.7

2,977

522

California State Prison, Solano

CTC

6.6

5,778

875

California Substance Abuse Treatment Facility in Corcoran

CTC

6.0

6,583

1,097

Centinela State Prison

CTC

6.2

4,502

726

High Desert State Prison

CTC

4.8

4,319

900

Ironwood State Prison

CTC

6.2

4,564

736

Mule Creek State Prison

CTC

4.0

3,628

907

North Kern State Prison

CTC

9.5

5,040

531

Pelican Bay State Prison

CTC

5.0

3,278

656

Pleasant Valley State Prison

CTC

7.6

4,569

601

R. J. Donovan Correctional Facility

CTC

8.2

4,345

530

Salinas Valley State Prison

CTC

7.0

4,186

598

Wasco State Prison

CTC

10.3

5,989

581

Avenal State Prison

OHU

9.7

6,882

709

California Correctional Center

OHU

5.6

5,812

1,038

California Correctional Institution

OHU

8.4

5,330

635

California Institution for Women

OHU

6.9

1,676

243

California Rehabilitation Center

OHU

9.1

4,587

504

Calipatria State Prison

OHU

6.3

4,126

655

Chuckawalla Valley State Prison

OHU

5.1

3,613

708

Correctional Training Facility

OHU

10.0

6,922

692

Deuel Vocational Institution

OHU

6.3

3,909

620

Folsom State Prison

OHU

7.5

3,714

495

Northern California Women’s Facility†

OHU

1.0

409

409

San Quentin State Prison

OHU

10.4

5,736

552

Sierra Conservation Center

OHU

7.2

6,332

879

Valley State Prison for Women

OHU

6.5

3,262

502

Central California Women’s Facility

SNF

9.5

3,254

343

Correctional Institution

Sources: California Department of Corrections’ (Corrections) Health Care Services Division; fiscal year 2004–05 California Salaries and Wages;
Corrections’ Estimates and Statistical Analysis Section, Offender Information Services Branch.
* Health Care Facilities:

†

HOSP

General acute care hospital: provides 24-hour inpatient care, including basic services such as medical, nursing, surgical, anesthesia,
laboratory, radiology, pharmacy, and dietary.

CTC

Correctional treatment center: provides inpatient health care to inmates who do not require acute care but need health care beyond
that normally provided in the community on an outpatient basis.

OHU

Outpatient housing unit: typically houses inmates who do not require admission to a licensed health care facility but need monitoring or
isolation from the general prison population.

SNF

Skilled nursing facility: provides continuous skilled nursing and supportive care to inmates on an extended basis, including services such
as medical, nursing, pharmacy, dietary, and an activity program.

The Northern California Women’s Facility was deactivated early in 2003.

California State Auditor Report 2003-125

9

are located in the correctional institutions. HCSD’s health
care managers and utilization management assistance teams
are located in correctional institutions throughout the State
and organized by region—northern, central, and southern—as
shown in Figure 2. The health care managers, who are overseen
by three regional administrators, administer and manage health
care programs in the field based on statewide priorities, policies,
and performance requirements. The registered nurses responsible
for conducting reviews to determine the appropriateness of
charges for inmate health care services are grouped into three
regional teams in the utilization management program, which is
part of the quality management assistance program.
The fiscal and business management section of HCSD also
has analysts organized by region. HCSD’s health care and
cost utilization program (HCCUP) has analysts within each
institution. The HCCUP uses a health care database to track
cost and utilization data related to all types of health care
services provided to inmates. The HCCUP database, which uses
Microsoft Access database software, contains information such
as which inmates received health care services, the dates of
services, the principal diagnoses, and the estimated costs of and
actual payments for the services rendered. The HCCUP analyst
at each institution reviews the invoices health care providers
submit to the institution to ensure that the charges are paid in
accordance with the rates of compensation in the providers’
contracts and enters information from the invoices into the
HCCUP database for later reporting of health care cost and
utilization information.

BENCHMARK SET BY PAYMENTS CALCULATED
UNDER MEDICARE
To determine how much to pay for a particular health care
service, Medicare considers various factors that affect the costs
the hospital incurs to provide the service. Therefore, Medicare
payments are useful benchmarks from which to compare
and analyze Corrections’ payments to hospitals. Analyzing
Corrections’ payments to hospitals for inpatient and outpatient
services requires looking at the differences among medical cases
as well as the differences among hospitals. Differences among
medical cases include, but are not limited to, the principal
diagnosis; the medical procedures performed; and the patient’s

10

California State Auditor Report 2003-125

FIGURE 2
Each Correctional Institution in California Has a Health Care Facility
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��� ���������

����� ���������� ����������� ����� ���

������ ������������ ������ �����

����� ���������

������ ����� ������ ��� ����� ����� ���
������� ���������� ������� �������� ����� ���
������

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������� ������

������������ �������� �������� �����
������� ������ ����� ������ �����

���������� ����� ������� �������� ������
���������� ��������� ����� ��������� ��������
��� ����� ������� �������� �����

�������� ������ ����� ������ �����
������ ����� ������ �����
���������� ����� ������ ������

����� ���� ����� ������ ����� ���
����� ����� ������ ����� ���

��� ���� ������

�����������

���������� ������������ ����������� ����� ���
���������� ����� ������� ��� ������� ������ �����
����� �������

�������� ������
��� �������

���������� ����������� ��� ��� ������ ���
���������� ����������� ��� ����� ����� ���
���������� �������������� ������ �����

������

�������� ����� ������ �����
����������� ������
����� ������ �����

���������� ����� ������ �����
��� �����

�� �� ������� ������������ �������� ����� ���

�� ������

��������� ����� ������ �����

Source: California Department of Corrections’ Web site.
Note: Although California currently has 32 adult correctional institutions, 33 institutions were counted in this audit because the
Northern California Women’s Facility made payments for hospital services during fiscal year 2002–03 but was deactivated early in
2003. For more detailed descriptions of the health care facilities, see Table 1 on page 9.

California State Auditor Report 2003-125

11

age, sex, and discharge status. Medicare uses these factors to
classify medical cases according to a list of diagnosis related
groups (DRGs). For each DRG, Medicare assigns a payment
weight based on the average resources used to treat patients in
that group. Additionally, differences among hospitals include
geographic-related factors such as the prevailing wage level
in the hospital’s community, the volume of low-income patients
the hospital serves, and whether the hospital is an approved
teaching facility. Medicare also evaluates the costs hospitals
incur to determine if any additional payments for unusually
expensive cases are appropriate to help protect hospitals from
large financial losses.

RESULTS FROM OUR RECENT AUDIT OF CORRECTIONS’
HEALTH CARE SERVICES CONTRACTS
Our April 2004 audit report titled 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 reported that despite public policy and
Corrections’ policies supporting the practice, Corrections did
not competitively bid most of its contracts for medical services.
Additionally, the report determined that institutions did not
adhere to Corrections’ utilization management program,
which was established to ensure that inmates receive quality
care at contained costs. Consequently, the report concluded,
institutions paid excessive amounts for some services and
incurred unnecessary costs for the State.
Specifically, the report revealed that instead of competitively
bidding many of its contracts for medical services, both the
institutions and HCSD relied on a 30-year-old state policy
exemption that allowed them to award contracts for most
medical services without seeking competitive bids. The report
noted that the Department of General Services could not
provide any documentation to support the original justification
for the policy exemption and had not evaluated whether it was
valid. The report concluded that by not competitively bidding
its contracts, Corrections failed to ensure that the State met the
medical needs of inmates at competitive prices.
The report also discussed how Corrections could dramatically
lower total hospital expenses by using certain methods of
compensation rather than others. For example, the report stated
that, generally, Corrections paid less when it was able to negotiate
12

California State Auditor Report 2003-125

per diem, or daily, fees for specific services or outcomes regardless
of the actual charges. Further, the report noted that the effect of
Corrections’ negotiated compensation method on the State’s costs
was also apparent in expenditures for individual procedures, such
as physician procedures, for which Corrections had a wide variety
of rates compared with those established by Medicare.
Another point we made in our earlier report was that not
only was Corrections unable to demonstrate that its contracts
were in the State’s best interest, but also institutions may have
been paying inappropriate and invalid medical claims. The
report discussed how institutions did not comply with HCSD’s
utilization management program, established to ensure that
inmates receive quality care at contained costs. The utilization
management program requires institutions contracting for
medical services to perform three reviews—prospective,
concurrent, and retrospective—to ensure that medical services
and prices are appropriate. However, the report found that
institutions could not show that they performed the prospective
and concurrent reviews. Further, several deficiencies in the
retrospective reviews institutions conducted resulted in
overpayments for medical services and possibly in payments for
nonexistent services. Additionally, nurses with the utilization
management program were not consistently reviewing a set
percentage of medical service invoices to verify that the charges
were appropriate, and the institutions’ HCCUP analysts did
not always identify discrepancies between contract rates and
medical charges on providers’ invoices—or even obtain evidence
that medical services were actually received. Consequently,
institutions overpaid for some services and incurred unnecessary
costs for the State. The report concluded that until HCSD
enforced its review policy for nurses in the utilization
management program and performed quality control reviews
of invoices processed by HCCUP analysts, Corrections could
not adequately contain or reduce health care costs at California
correctional institutions.

SCOPE AND METHODOLOGY
The Joint Legislative Audit Committee (audit committee)
requested that the Bureau of State Audits (bureau) review
Corrections’ contracts for medical services, including contracts
with Tenet Healthcare Corporation (Tenet). Specifically, the audit
committee asked the bureau to identify any trends and, to the
extent possible, reasons for the trends in the costs Corrections
California State Auditor Report 2003-125

13

is paying for contracted inpatient and outpatient health care
services and costs for similar services among hospitals as well
as hospital systems. Further, the audit committee asked the
bureau to compare the costs Corrections is paying Tenet for
inpatient and outpatient health care services to the costs paid
for similar services at other hospitals and, to the extent possible
and permissible, publicly report the results and reasons for
any differences. The audit committee also requested that the
bureau examine the payment terms for a sample of contracts to
determine if they provide the best value to the State and review
Corrections’ policies and procedures for processing claims for
contracted Tenet health care services to determine if Corrections
is monitoring and verifying claims before making payments.
To identify any trends in the costs Corrections is paying for
contracted health care services, we summarized Corrections’
payments to hospitals by type of health care service, such
as inpatient and outpatient services, for fiscal years 1998–99
through 2002–03 and compared the change in payments over
the four-year period. To identify the reasons behind the trends
in Corrections’ hospital payments, we calculated the overall
change in its hospital payments in fiscal year 2002–03 from
fiscal year 1998–99 and analyzed the change to determine
the amount caused by a change in price versus a change in the
volume of hospital services. Additionally, we presented our
results to HCSD and asked it to provide us with any analysis it
might have performed that would explain the reasons behind
the trends in its hospital payments and the reasons behind
changes in its hospital payments that are caused by changes in
price or volume of services. Similarly, we provided our analysis
of the change in hospital payments to selected correctional
institutions and asked each to explain the reasons for the
changes caused by changes in price or changes in volume of
services at the institution.
To compare the costs Corrections is paying Tenet for inpatient
and outpatient health care services to the costs paid for similar
services at other hospitals, we selected 15 hospitals to review,
including five Tenet hospitals, and calculated what Medicare
would have paid each of these hospitals for similar services. We
used these Medicare payments as a benchmark to measure the
amounts Corrections paid the 15 hospitals in fiscal year 2002–03
and compared how each hospital fared among the other hospitals
we reviewed. Specifically, we stratified and randomly selected a
sample of invoices paid in fiscal year 2002–03 for inpatient and
outpatient services from each hospital, calculated what Medicare
14

California State Auditor Report 2003-125

would have paid for the same hospital services, calculated a ratio
of Corrections’ payments to what Medicare would have paid each
hospital for similar services, and compared each hospital’s ratio
with those of the other hospitals we reviewed. To determine the
reasons for any significant differences in the calculated ratios
among these hospitals, we reviewed the contract payment terms
for each hospital, presented the results of our analysis to HCSD,
and asked it to provide any analysis it might have performed that
would explain the reasons behind the differences in amounts paid
among the hospitals we reviewed.
Because our April 2004 audit, discussed in the previous section,
had already reviewed Corrections’ health care contract payment
terms, including hospital contracts, to determine if they provided
the best value to the State and reviewed its processing of claims
for contracted health care services to determine if it is monitoring
and verifying claims before making payments, we did not repeat
or perform similar audit procedures for the current audit.
During the course of our audit, we performed a variety of tests to
determine the reliability of certain data that we used to complete
various audit analyses. For example, we verified the total fiscal
year 2002–03 payment amounts in the HCCUP database to
accounting reports, and the individual HCCUP database hospital
payment record amounts to the respective accounting payment
records for the hospital invoices we selected to review. We
also traced the HCCUP database invoice amounts to the billed
charges on the respective inpatient hospital invoices we selected
to review. If the billed charge on the hospital invoice did not
agree with the HCCUP database invoice amount for more than
one of the 10 inpatient invoices we selected to review for that
hospital, we did not use the HCCUP database invoice amount
for our analysis of that hospital. For medical diagnosis and
procedure codes, we limited our analysis to determining the
extent to which this data existed in the HCCUP database. We
also used other HCCUP database data to identify and classify
records as inpatient or outpatient records and those records
associated with correctional institutions and hospitals.
Corrections has asserted the privilege contained in California
Government Code, Section 6254.14, that permits it to protect from
disclosure certain information associated with the negotiation
of health care services contracts. This section specifically allows
Corrections to protect from disclosure, for up to four years after
the related contract or amendment is fully executed, those
portions of contracts that contain payment rates. Corrections
California State Auditor Report 2003-125

15

asserted that certain information in our report, if associated with
the name of a provider, would allow a third party to determine
the rates Corrections is paying hospitals. Therefore, Corrections
requested that we use generic hospital names—Tenet, nonTenet, and University hospitals—to replace the actual names of
the hospitals in our report. Corrections also requested that we
maintain the confidentiality of the hospital contracts and other
documents related to contract payment rates and negotiations
that we relied on during the course of our audit, based on its
assertion of this privilege.
In addition, Corrections expressed concerns that although our
report withholds the exact identity of the hospital by using
generic hospital names, examples in our report disclose the
specific contract payment terms, such as percentages of billed
charges, associated with specific institutions, and that this
disclosure could allow a third party to then determine the
hospital. Corrections asserted to us that in some cases there
is only one Tenet or University of California hospital that
provides services to the particular institutions named in our
examples, thus, permitting a third party to identify the hospital
that is the subject of our discussion on specific payment terms.
Therefore, because of Corrections’ concerns, we simply refer to
a “hospital” as the provider of services rather than specify the
hospital’s actual or generic name and do not disclose the details
of contract provisions in examples where we discuss the contract
payments terms related to a specific institution.
Further, although state law allows Corrections to protect from
disclosure the payment rates of health care services contracts
for up to four years after the execution of the contracts or
amendments, it does not prohibit Corrections from disclosing
these rates and other related information if it chooses to do
so. However, Corrections has entered into a contract term that
prohibits it from disclosing this information. This term reads
as follows:
[Corrections] is exempt from publicly disclosing the
rates of payment contained in [Corrections] health care
contracts for four (4) years after the date of execution
of a contract or a contract amendment per Government
Code Section 6254.14. [Corrections] and Provider agree

16

California State Auditor Report 2003-125

to protect the confidentiality of the rates contained in
this contract or contract amendment for four (4) years
after the date of execution.
By entering into this contract term, Corrections becomes legally
obligated not to disclose the rates contained in contracts with its
providers for a period of four years after the date of execution. As
a result, Corrections has effectively waived any right it otherwise
had under state law to disclose contract payment terms.3
Finally, Corrections asserted that disclosure of the floor amount
of a stop-loss provision could impact its ability to negotiate
future contracts with providers who may insist on like terms,
and our disclosure may weaken its negotiating position.
Corrections further requested that we not disclose the floor
and ceiling amounts of the stop-loss provisions we reviewed to
avoid these amounts from becoming the floor and ceiling in
future negotiations, as well. We honored its request and do not
disclose the floor or ceiling amounts of its various contract
stop-loss provisions. n

3

Our legal counsel has advised, however, that despite this contract term, Corrections
must still comply with other requirements contained in Section 6254.14 of the
Government Code that require disclosure of the entire health care services contracts or
amendments, including payment rates, to the Joint Legislative Audit Committee and
the Bureau of State Audits.

California State Auditor Report 2003-125

17

Blank page inserted for reproduction purposes only.

18

California State Auditor Report 2003-125

AUDIT RESULTS
INCREASES IN BOTH THE PRICE PAID FOR CARE
AND THE USE OF HOSPITAL FACILITIES DROVE A
SUBSTANTIAL RISE IN HOSPITAL PAYMENTS FOR THE
CALIFORNIA DEPARTMENT OF CORRECTIONS

I

n April 2004, we reported that the California Department
of Corrections (Corrections) needs to ensure that it awards
medical service contracts competitively and that it pays
for only valid medical claims. The current report reveals that
overall, Corrections’ payments for hospital services have risen
an average of 21 percent annually since fiscal year 1998–99,
outpacing the consumer price index average of 8 percent annual
growth for hospital services from 1998 through 2003. Although
the factors affecting this trend vary among the 33 institutions
that Corrections operated in fiscal year 2002–03,4 the reasons
for the growth can primarily be attributed to a combination of
more expensive health care and Corrections’ increased use of
contracted hospital facilities.

Corrections’ Health Care Data Revealed an Upward Trend in
Hospital Payments
According to the United States Department of Labor, Bureau of
Labor Statistics, the consumer price index for hospital services
increased nearly 38 percent from 1998 through 2003, based on
national data. Thus, the annual increase in consumer prices
for hospital services averaged less than 8 percent during this
period. Corrections’ data on health care services indicate that,
in contrast to the national trend, its payments to hospitals have
increased at an average rate of 21 percent per year since fiscal
year 1998–99, despite average inmate populations in correctional
institutions and community-based facilities that have remained
relatively stable at approximately 151,000 and 9,000 inmates,
respectively. As shown in Figure 3 on the following page, the
increase in hospital payments became more pronounced in
fiscal year 2000–01, when the growth was more than 37 percent
from the prior year. Further analysis revealed that the increase
in hospital payments in fiscal year 2000–01 was primarily driven

4

Although California currently has 32 adult correctional institutions, 33 institutions were
counted in this audit because the Northern California Women’s Facility made payments
for hospital services during fiscal year 2002–03 but was deactivated early in 2003.

California State Auditor Report 2003-125

19

by a nearly 43 percent growth in inpatient hospital payments
from the prior year. As will be discussed in a later section, this
significant increase in inpatient hospital payments appears
related, at least in part, to contract terms that were more
disadvantageous to Corrections in fiscal year 2000–01 compared
with the previous fiscal year.

FIGURE 3
The California Department of Corrections’ Hospital Payments
Have Grown Since Fiscal Year 1998–99
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����

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Source: California Department of Corrections’ health care cost and utilization
program database.

Additionally, four of the 33 correctional institutions statewide
had an increase in average payment per inmate of at least
113 percent in fiscal year 2000–01 from fiscal year 1999–2000.
For example, the average payment per inmate at California State
Prison, Sacramento, was $204 in fiscal year 1999–2000 and $514
in fiscal year 2000–01, an increase of 152 percent. Appendix A
presents Corrections’ hospital payment data by institution for
each fiscal year from 1998–99 through 2002–03.

20

California State Auditor Report 2003-125

Because Corrections’ payments for inpatient and outpatient
services represented the largest proportion of its payments to
hospitals overall, we focused our analysis on these payments. As
shown in Appendix A, of the $401.1 million in total payments
Corrections made to hospitals from fiscal years 1998–99 through
2002–03, inpatient hospital payments represented $252.5 million
(63 percent), whereas outpatient hospital payments represented
$63.3 million (16 percent). Other payments to hospitals for
services such as physician, laboratory, and ambulance services
combined represented $85.3 million (21 percent). The following
sections discuss the results of our review of Corrections’ hospital
payments for inpatient and outpatient services in the aggregate.

More-Expensive Hospital Services Drove Higher Inpatient
Payments, and a Greater Number of Hospital Visits Was an
Added Factor in Higher Outpatient Payments

The more-expensive
hospital admittances and
outpatient visits could
have been caused by
either an increased price
paid for similar procedures
or more complex and
costly procedures
being performed.

Our analysis of Corrections’ payment data showed that
more-expensive hospital admittances were the predominant
reason for the increase in hospital payments associated with
inpatient services, whereas increases in both the price per
visit and the number of visits contributed almost equally
to increasing payments for hospital outpatient services. We
conducted an analysis to determine the extent to which
the increase in hospital payments from fiscal years 1998–99
through 2002–03 was due to an increase in the amount paid
per hospital inpatient admittance or outpatient visit versus
an increase in the number of hospital inpatient admittances
or outpatient visits. The more-expensive hospital admittances
and increased payment per outpatient visit could have been
caused by either an increased price paid for similar procedures
or more complex and costly procedures being performed. As we
discuss in later sections, although institutions provided some
analysis indicating that they paid significantly more for similar
services at some hospitals, neither Corrections nor we could
determine if Corrections was paying for procedures that were
more complex because it did not enter in its computer database
complete medical procedures data associated with the payments
it made to hospitals. The results of our analysis for inpatient and
outpatient hospital payments are presented in Tables 2 and 3.5
As shown in Table 2 on the following page, Corrections’ payments
to hospitals for inpatient services increased by $38.4 million
(more than 114 percent) from fiscal years 1998–99 through
2002–03. Most of this increase was associated with a higher average
5

See Appendix B for a discussion of the methodology for our price-volume analysis.

California State Auditor Report 2003-125

21

payment per admittance. Specifically, approximately $27.3 million
(71 percent) was associated with an increase in the average payment
per admittance, whereas $11.1 million (29 percent) was associated
with an increase in the number of admittances to hospitals.

TABLE 2
More-Expensive Hospital Admittances Were the Main Reason for the
California Department of Corrections’ Increasing Inpatient Hospital Payments
(Dollars in Millions)
Fiscal Year
1998–99

Fiscal Year
2002–03

Increase

Percentage
Increase

Total number of inpatient admittances

4,044

5,362

1,318

32.6%

Total inpatient hospital payments*

$33.5

$71.9

$38.4

114.6%

Increase attributable to higher payments
per admittance†

$27.3

71.1%

Increase attributable to greater number
of admittances†

$11.1

28.9%

Source: California Department of Corrections’ (Corrections) health care cost and utilization program database.
* The total inpatient payments do not agree with the total payments presented in Appendix A by approximately $160,000 because we
excluded from our price-volume analysis those payment records for which Corrections did not enter a community hospital inpatient
admission number. In addition, the fiscal year 1998–99 inpatient payment amount does not agree with Table B.1 in Appendix B due
to rounding.
†

See Appendix B for a discussion of the methodology for our price-volume analysis and our price-volume analysis for each correctional
institution. We performed the analysis for each of the correctional institutions and summed the results for this aggregate analysis.

Similarly, Table 3 shows that outpatient hospital payments
increased by $12.7 million (more than 181 percent) from fiscal
years 1998–99 through 2002–03. However, unlike the inpatient
hospital payments, the reasons for this increase are closely
split between increases in the average payment per outpatient
hospital visit and increases in the number of visits. Specifically,
approximately $6.9 million of the increase (54 percent)
was associated with an increase in the average payment per
outpatient hospital visit, whereas $5.8 million (46 percent) was
associated with an increase in the number of outpatient hospital
visits. More striking is the fact that outpatient hospital visits
nearly doubled from 7,547 visits in fiscal year 1998–99 to 14,923
visits in fiscal year 2002–03, even though Corrections’ inmate
population remained relatively constant during this period.
This doubling of outpatient hospital visits would also have a
significant effect on Corrections’ cost for correctional officers
because each hospital visit would require medical transportation
guarding costs, and a previous audit found that these guarding
costs were frequently paid at overtime pay rates.
22

California State Auditor Report 2003-125

TABLE 3
Increases in the Payment Per Visit and the Number of Visits Caused the Growth
in the California Department of Corrections’ Outpatient Hospital Payments
(Dollars in Millions)

Total number of outpatient visits
Total outpatient hospital payments*
Increase attributable to higher payments per visit†
Increase attributable to greater number of

visits†

Fiscal Year
1998–99

Fiscal Year
2002–03

Increase

Percentage
Increase

7,547

14,923

7,376

97.7%

$7.0

$19.7

$12.7

181.4%

$6.9

54.3%

$5.8

45.7%

Source: California Department of Corrections’ (Corrections) health care cost and utilization program database.
* The total outpatient payments do not agree with the total payments presented in Appendix A by approximately $70,000 because
we excluded from our price-volume analysis those payment records for which Corrections did not enter a community hospital
outpatient number. In addition, the fiscal year 1998–99 outpatient payment amount does not agree with Table B.2 in Appendix B
due to rounding.
†

See Appendix B for a discussion of the methodology for our price-volume analysis and our price-volume analysis for each
correctional institution. We performed the analysis for each of the correctional institutions and summed the results for this
aggregate analysis.

Corrections Did Not Have Detailed Analysis to Explain the
Reasons Behind the Overall Increase in Its Hospital Payments
In fiscal year 1990–91, Corrections implemented its health care
cost and utilization program (HCCUP) to develop a statewide
system for collecting and reporting inmate health
care data. In its mission statement, HCCUP
expresses its intention to capture costs and
Mission Statement of Corrections’
utilization data for use in day-to-day health care
Health Care Cost and
management and planning (see the text box).
Utilization Program (HCCUP)
According to its fiscal year 1999–2000 procedures
HCCUP, a team of professionals, provides
guide, which Corrections’ Health Care Services
timely and accurate collection, analysis and
Division (HCSD) provided as its current guide, the
reporting of health care service information,
systems HCCUP maintains collect detailed health
and is an integral part of the Health Care
Services Division’s efforts to achieve the goal of
care costs, diagnosis, medical procedures, and other
providing cost-effective quality health care to
utilization management data. The guide indicates
inmates on behalf of the citizens of California.
that the data is used to determine such things as
the average cost of medical services per inmate,
Source: HCCUP mission statement prepared in 1997.
average cost per medical procedure, and average
inpatient length of stay. Further, the guide states
that the data is used for cost comparisons, trends,
contract expenditures, and other health care activities. The guide
goes on to define three key words that are part of the HCCUP
mission statement:

California State Auditor Report 2003-125

23

Accurate
• Perform activities according to established procedures.
• Perform quality assurance, including database reconciliation,
to ensure information is valid and complete.
• Identify errors, follow up with institution staff to correct
errors, and revise data files to reflect corrected information.
• Ensure that invoices are processed for valid services,
consistent with contract provisions, adjusted for discounts,
and coded with appropriate account codes.
Analysis—The process by which raw data is combined, studied,
and synthesized to provide:
• Insights into the interrelationships of the data.
• New understandings of the meaning of the data, including
cause and effect, for the purpose of making projections as to
its meaning and future impact.
Cost-effective quality health care—medical services provided
to inmates:
• At the lowest possible costs.
• In the most efficient manner possible.
• Consistent with sound medical practices and “community
standards of care.”
If the HCCUP mission had been accomplished by ensuring all
necessary data elements were accurately entered and relevant
analysis of the available data had been performed, Corrections
should have been able to determine if it was providing costeffective quality health care, identify the causes of the increase
in its payments to hospitals, and implement corrective action to
limit the upward trend.
Although HCSD agreed that growth in hospital payments
occurred, it did not explain with supporting analysis the
reasons behind the dramatic overall increase in its payments
to hospitals. When asked for its perspective on the causes of
rising payments, HCSD cited several factors, including renewed
24

California State Auditor Report 2003-125

hospital contracts with higher payment rates, an aging inmate
population, and litigation mandating increased medical care to
inmates. However, HCSD did not demonstrate how each of these
factors specifically contributed to the overall growth in hospital
payments and by how much. According to HCSD:
The HCSD does not currently have a comprehensive
model that would include all conceivable and testable
influences on medical expenditures to determine the
factors that have contributed to the growth. A good
model requires resources to develop, as it is the end
result of a winnowing process. With the anticipated
additional resources noted in the May revise, the HCSD
[will] begin development of a comprehensive model that
includes all conceivable, testable influences on medical
expenditures. Then, using factor analytic techniques to
reduce the number of variables and to detect structure
in the relationships between variables, i.e., to classify
variables, a final simple predictive model can be
generated. This technique tests the components of the
initial comprehensive model by creating and testing
sub-models. From these candidate sub-models, a single
simple sub-model that provides the “best” explanation is
selected. This simple model is easier to put to test again
in replication and cross-validation studies and is less
costly to implement in predicting and controlling the
outcome in the future. [Corrections] will continue to
pursue a model in an effort to better analyze the health
care cost and utilization data.

The best test of whether
Corrections’ proposed
comprehensive and
complex model achieves
its objective is if
the model identifies
quantifiable cost savings.

With the model this statement describes, potentially,
Corrections could generate an abundance of interesting data,
but that does not result in the identification of cost drivers
that would allow Corrections to implement cost containment
measures. The best test of whether Corrections’ proposed
comprehensive and complex model achieves its objective is if
the model identified quantifiable cost savings. For instance, as
discussed later, one institution simply compared prices it paid
under an existing contract to what it would have paid under
a prior contract and revealed that the new contract payment
terms resulted in its costs rising from more than $355,000 to
nearly $1.1 million related to the services shown on nine of its
inpatient hospital invoices.

California State Auditor Report 2003-125

25

When we asked HCSD how it uses the available data in its
HCCUP database to monitor and control the upward trend in
hospital payments, HCSD indicated that it prepares and makes
available to management an annual report of health care cost
statistics. We subsequently reviewed its latest available annual
report and found that although HCSD had compiled systemwide
statistics on health care costs that compared current-year results
with those of the prior year, as of May 13, 2004, it was only able
to provide the annual report for fiscal year 2001–02. HCSD told
us the following:

HCSD’s annual report
for fiscal year 2001–02
provides no indication to
Corrections’ management
that a problem existed in
the rates it was paying
for inpatient hospital
facility charges.

The last Annual Health Care Cost Report was completed
for FY 2001/02. This standardized annual report provided
bed utilization data for both community hospital and
institution medical and mental health beds. In addition,
the report included diagnoses and procedural data
as well as costs associated with community hospital
utilization. While this report does not provide the type
of comprehensive analysis described [in the previous
quotation] to determine reasons for cost increases, it is
what the HCCUP was staffed to provide. Unfortunately,
this same report was not completed for FY 2002/03 due
to significant staffing shortages as a result of vacancies
and workers’ compensation cases within [the] program.
In addition, since FY 1997/98 the workload for this
program has increased dramatically . . . The impact
on the HCCUP staff has been exponential, . . . with
no increase in staff. In order to keep up with the data
collection function, priorities were assessed and resources
were directed to the most critical needs, which included
the processing of invoices in the field. As a result, the
annual report was not completed. Recognizing the
significant workload and the critical nature of the work
performed by the HCCUP analysts, the administration
has requested an additional 24 positions in the May
Revise be added to this unit effective July 1, 2004, to
provide the resources necessary to input all critical
data and provide the resources necessary to provide the
required analysis.
However, HCSD’s annual report for fiscal year 2001–02 provides
no indication to Corrections’ management that a problem
existed in the rates it was paying for inpatient hospital facility
charges. Instead, it concludes, “Annual community healthcare
utilization (using the [average length of stay], total [length
of stay] and total discharges as indicators) was, overall, less

26

California State Auditor Report 2003-125

than utilization in the ‘free world’. This in spite of significant
increases in: [Corrections] community [hospital] inpatient
cases, and contract medical costs.” The annual report supports
its conclusion with tables showing that Corrections’ costs per
inmate for inpatient hospital care were half that of the national
average and that its admittances and lengths of stays were
approximately one-third the national average. In addition, the
report compared the data in Corrections’ tables with state data
and various other statistics. However, the report did not indicate
whether it considered the existence and use of various inpatient
beds at its institutions or whether it considered other factors
that may affect the comparability of Corrections’ data to the
national averages.

According to its fiscal year
2001–02 annual report,
HCSD did not know the
medical procedure codes
for more than 61 percent
of its hospital inpatient
cases because it did not
enter that data in its
HCCUP database.

Nevertheless, in reporting the results of Corrections’ health care
services program, HCSD’s fiscal year 2001–02 annual report also
presented statewide data that showed it calculated the cost per
case by International Classification of Diseases, Ninth Revision,
Clinical Modification (ICD-9-CM) diagnosis code for 98.9 percent
of its 6,397 cases, but calculated the cost per case by ICD-9-CM
procedure code for only 38.5 percent of its cases. In other words,
according to its annual report, HCSD did not know the procedure
codes for 3,936 (61.5 percent) of its 6,397 cases because it did
not enter that data in its HCCUP database. Furthermore, HCSD
prepared a year-end systemwide budget report for fiscal year
2002–03 displaying monthly projections of annual health care
costs. The report revealed the dramatically increasing trend in
overall health care costs from fiscal years 1999–2000 through
2002–03. However, it only displayed the increasing trend for fiscal
year 2002–03 up to the month of November 2002. Moreover,
HCSD did not perform and provide an accompanying analysis to
explain the reasons for the trends in increasing health care costs
evident in its systemwide data.
We specifically asked HCSD for its perspective on the reasons
for increases in inpatient hospital payments that became more
pronounced in fiscal year 2000–01. HCSD attributed the fiscal
year 2000–01 growth in inpatient hospital payments to an
increase in the number of days that inmates stayed in hospitals
(census days), but it did not explain the reasons why the number
of census days increased dramatically in that fiscal year. In fact,
according to HCSD data, average census days per admittance
increased from 4.6 days in fiscal year 1998–99 to 5.2 days in
fiscal year 2000–01 and remained relatively steady for the next
two fiscal years.

California State Auditor Report 2003-125

27

According to HCSD, although it is doubtful that any single
factor can account for the entire increase, its high-level analyses
determined that a small number of outlier cases from its male
inmate population significantly impacted the annual average length
of stay. However, even after we excluded these outlier cases, as well
as female cases, from the analysis for its male inmate population,
HCSD’s own data shows that the annual average length of stay
jumped from 3.9 days in fiscal year 1998–99 to 4.3 days in fiscal
year 2000–01 and increased to 4.5 days in fiscal year 2002–03.
Moreover, HCSD did not provide any analysis to explain whether
the increase in average census days in fiscal year 2000–01 was due to
a suddenly sicker inmate population that required longer hospital
stays or to other factors. HCSD acknowledged that it lacked the
clinical information needed to assess whether inmates were sicker
and required longer hospitalization or if some other factor was
causing the longer hospital stays and increasing hospital payments.
According to HCSD, it developed a database that will capture that
clinical health care data. Specifically, HCSD said the following:
The lack of a single repository of clinical information
led to the development of the recently implemented
Utilization Management database that will collect
detailed clinical information. This system was designed,
in large part, to collect the clinical information that,
when combined with the fiscal and administrative data
collected by HCCUP, will enable the HCSD to perform
the type of research and analysis to identify clinical
and cost drivers. However, due to limited resources, the
Utilization Management program cannot gather and
enter this data for prior fiscal years.

Although HCSD is
developing a database
that will capture clinical
health data, it would
continue to depend
on entering the same
medical procedure codes
that it did not enter into
its HCCUP database.

28

However, Corrections’ new database still requires staff to enter
the same procedure codes that have not been entered into its
HCCUP database. The documents Corrections gave us from its
new utilization management database indicate that although
the database is set up to provide some additional utilization
management information, such as which nurse is approving
procedures, and may help identify inconsistency among nurse
approvals, Corrections also needs to consistently enter the same
procedure codes that it did not always enter in its HCCUP database.
As we discussed earlier, HCSD indicated in its fiscal year 2001–02
annual report that it did not know the procedure codes for
3,936 (61.5 percent) of its 6,397 cases because it did not enter
that data in its HCCUP database. Moreover, although both the
new utilization management database and the HCCUP database
California State Auditor Report 2003-125

Medical Coding Systems
• ICD-9-CM codes: International
Classification of Diseases, Ninth Revision,
Clinical Modification (ICD-9-CM) is the
official system of assigning codes to
diagnoses and procedures associated with
hospital utilization. Medical staff uses
the information that physicians include
in the inpatient and outpatient medical
records to classify and assign ICD-9-CM
diagnosis and procedure codes.
• DRG codes: A diagnosis related group
(DRG) code classifies an inpatient hospital
stay based on groupings of patient
diagnoses and the medical procedures
performed. DRGs are based on ICD-9-CM
diagnosis and procedure codes and on
patient age, sex, length of stay, and
other factors. Medicare pays for inpatient
hospital stays based on DRG weights and
other factors specific to the hospital. DRG
weights are determined according to the
intensity of the resources, on average,
that are needed to treat a particular kind
of case. The higher the DRG weight, the
greater the reimbursement.

use Microsoft Access database software, the two
systems are not linked. Therefore, Corrections
cannot use the new utilization management
database for analysis requiring both medical
and cost data. Further, such analysis requires
Corrections to establish a process to reconcile
the procedures it paid, as recorded in the HCCUP
database, with the procedures performed, as
reflected in the utilization management database.
Had Corrections entered complete data about
the procedures it paid for in its current HCCUP
database and had it analyzed this data,
Corrections could have identified the extent to
which it was paying more for the same medical
procedures than in earlier years and the extent to
which case complexity was increasing.

Medical codes are used to facilitate payment of health
care services, to evaluate utilization patterns, and
to study the appropriateness of health care costs.
Additionally, this coding must be performed correctly
and consistently to produce meaningful information
• CPT codes: The Current Procedure
to aid in the planning for health care needs. Our
Terminology (CPT) coding system was
review of the information HCSD collects in its HCCUP
developed to assist with accurate reporting
of procedures and services. Hospitals use
database revealed that, although the database has
CPT codes for reporting certain outpatient
the capability to capture some clinical information
procedures, and are clustered with other
Corrections needs to make its assessment, such as
service or procedure codes to determine
an ambulatory payment classification.
medical diagnosis and procedure codes, many of the
records in the HCCUP database are incomplete. Our
• APC: Ambulatory payment classifications
(APCs) group together hospital outpatient
review of the database for fiscal year 2002–03 showed
services, supplies, drugs, and devices
that although 5,773 of the 5,779 inpatient hospital
that are used in particular procedures,
payment records in the database included ICD-9-CM
and encompass services that are clinically
similar and require similar resources. Each
diagnosis codes, 3,864 included ICD-9-CM procedure
APC is assigned a relative payment weight,
codes and only 482 included diagnosis related group
based on the median costs of the services
within the APC. Medicare pays hospitals for
(DRG) codes (see the text box for explanations of
outpatient services based on APC weights
medical coding systems). For the 15,361 outpatient
and other factors specific to the hospital.
hospital payment records in the database, 15,325
The higher the APC weight, the greater
the reimbursement.
had ICD-9-CM diagnosis codes but only 3,403 had
ICD-9-CM procedure codes and only 558 included
Sources: United States Department of Health and
Current Procedure Terminology (CPT) codes. Because
Human Services; American Medical Association.
the most complete clinical information available in
the HCCUP database is primarily limited to diagnosis
codes, the available data do not allow Corrections to
identify the procedures it is paying for when attempting to analyze
the clinical reasons associated with Corrections’ increasing hospital
payments. HCSD told us the following about the HCCUP database:
California State Auditor Report 2003-125

29

HCSD stated that
there are occasions or
circumstances when
medical services would
not require a medical
code to be entered onto
the invoices by hospitals.

The HCCUP database was designed to collect and track
contract medical expenditure data that is extracted
from the medical invoices. As the program’s data
collection process has evolved, and as the need for
further information is assessed, new fields are added to
the database in order to collect additional information.
However, there are occasions or circumstances when the
service would not require [that] a code be entered onto
the invoices, as noted below.

Missing inpatient ICD-9[-CM] diagnosis codes
The HCCUP database does have validation reports that
are run monthly to capture admissions with missing
diagnoses.

Missing ICD-9-CM procedure codes
Not all inpatient admissions include any invasive
procedures that would require an ICD-9-CM procedure
code to be coded and placed on the invoice. Therefore,
the field will be blank.

Missing DRG codes
The field to capture DRGs was added to the HCCUP
database in order to track the invoices that were paid
based on DRG case rate. The [hospital invoice] does not
have a designated field for entry of a DRG. The HCCUP
only captures DRGs for those contracts that provide for a
reimbursement based on DRG case rates.

Missing CPT or ICD-9-CM procedures codes for outpatients
Not all outpatient procedures performed at the hospitals are
coded to ICD-9-CM procedure codes and CPT codes. In the
case of an outpatient service such as [an] MRI, the hospital
will only use a CPT code for the technical (hospital) portion
but would not code it with an ICD-9-CM procedure code.
In the case of an emergency room visit, the service may
include an EKG, an x-ray or some lab work, which [is] not
normally coded by ICD-9-CM for those procedures. The
hospital may or may not list the CPT code for them. Since
minor procedures such as EKGs and x-rays are routine
procedures, [they] would not be something that would

30

California State Auditor Report 2003-125

necessarily be entered into the database by HCCUP, unless
the reason the patient was sent to the hospital was to
receive those procedures specifically.
The HCSD recognizes the importance of data entry.
When the additional resources requested via the May
Revise are received, a quality control process will be
implemented to ensure data integrity.

Although Corrections
may not have required
hospitals to provide
procedure data on
invoices, the absence of
the data from its HCCUP
database limits the
analysis it can perform.

It is unclear whether the reasons HCSD gave us explain why it
entered the ICD-9-CM procedure codes for only 38.5 percent
of the 6,397 cases it presented in its fiscal year 2001–02 annual
report. Although Corrections may not have required hospitals to
provide data such as procedure codes on invoices, the absence
of the data from its database limits the analysis it can perform.
Contrary to Corrections’ assertion, the HCCUP database system
was designed to collect and track not only medical expenditure
data but also utilization data from invoices. Both types of data
are needed to achieve the stated goal of providing cost-effective
quality health care to inmates.
As discussed in a previous section, according to its fiscal year
1999–2000 procedure guide, the systems HCCUP maintains
collect detailed health care cost, diagnosis, medical procedure,
and other utilization data. Although not all types of codes may
need to be entered in all cases, if Corrections does not enter
into its database system the codes of procedures for which it
is paying, it is missing basic information needed to analyze
both cost and utilization. Moreover, Corrections’ fiscal year
2001–02 annual report, which provided some cost information
by medical procedure category for the hospital admittances that
included procedure codes, also reported on the amount spent
for diagnosis and noninvasive procedures. Therefore, if HCCUP
analysts had entered complete codes for all types of procedures
into its HCCUP database, Corrections would have known how
much it was paying for diagnosis and noninvasive procedures, as
well as other procedures.
Similarly, although we presented HCSD with the results of our
price-volume analysis, it provided no analysis explaining why
an increase in the average payment per inpatient admittance
was driving the growth in inpatient hospital payments. Nor did
HCSD provide any formal analysis explaining why increases in
both the average payment per outpatient visit and the number
of outpatient visits were driving the growth in outpatient
hospital payments. HCSD stated the following:

California State Auditor Report 2003-125

31

The HCSD agrees with the statement insofar as there is
no formal analysis explaining the increases. However,
[Corrections] is aware of a number of factors, which
may have contributed to this situation. These include
differences in the number and types of diseases treated;
advances in medical care resulting in changes in the
diagnosing and treatment of disease; better and earlier
identification of disease resulting in a greater number
of referrals; changes in the amount hospitals bill for
services, etc. The additional staffing resources requested
via the May Revise will allow the HCSD to perform price/
volume analyses in the future.

More High-Cost Cases Account for More Inpatient
Hospital Payments

Corrections paid
$29.4 million to hospitals
for high-cost inpatient
hospital services in fiscal
year 2002–03 compared
with $8.3 million in fiscal
year 1998–99, a growth
of 254 percent.

32

A closer review of Corrections’ inpatient hospital payments
revealed that Corrections spent more on high-cost inpatient
hospital services in fiscal year 2002–03 than it did in fiscal year
1998–99. The benchmark Corrections has set for high-cost
cases is $50,000 in payments for the hospital services associated
with one continuous hospital stay. Using this benchmark
and Corrections’ hospital payment data, we distinguished
inpatient hospital payments for high-cost cases from payments
for cases falling below the $50,000 benchmark. As Figure 4
shows, Corrections paid $42.5 million to inpatient hospitals
for cases that totaled less than $50,000 per case in fiscal year
2002–03 compared with $25.3 million in fiscal year 1998–99,
a growth of 68 percent. On the other hand, Corrections paid
$29.4 million to hospitals for high-cost inpatient hospital
services in fiscal year 2002–03 compared with $8.3 million in
fiscal year 1998–99, a growth of 254 percent. Overall, highcost inpatient hospital payments comprised nearly 41 percent
of total inpatient hospital payments in fiscal year 2002–03
compared with nearly 25 percent in fiscal year 1998–99. In
other words, Corrections paid $50,000 or more per case for
inpatient hospital services nearly 41 percent of the time
in fiscal year 2002–03 compared with nearly 25 percent of
the time in fiscal year 1998–99. Moreover, $17.1 million
(58 percent) of the $29.4 million in high-cost inpatient
hospital payments for fiscal year 2002–03 involved cases in
which Corrections paid $100,000 or more per case.

California State Auditor Report 2003-125

FIGURE 4
High-Cost Hospital Inpatient Cases Drove Up the
California Department of Corrections’ Hospital Payments
From Fiscal Years 1998–99 Through 2002–03
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���

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��
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Source: California Department of Corrections’ health care cost and utilization
program database.

Additional analysis of these high-cost cases showed that
Corrections experienced more cases with at least $100,000
in inpatient hospital services in fiscal year 2002–03 than it
did in fiscal year 1998–99. Using Corrections’ payment data,
we identified cases for which Corrections paid $100,000 or
more in inpatient hospital services in fiscal years 1998–99
and 2002–03. As shown in Figure 5 on the following page,
Corrections had 91 cases with hospital payments exceeding
$100,000 in fiscal year 2002–03 compared with only 27 cases
in fiscal year 1998–99. Figure 5 also shows that of the
91 cases in fiscal year 2002–03, 25 cases had inpatient hospital
payments that exceeded $200,000 each.

California State Auditor Report 2003-125

33

FIGURE 5
The California Department of Corrections Had More Cases
With Inpatient Hospital Stays Costing at Least $100,000 Each
in Fiscal Year 2002–03 Than in Fiscal Year 1998–99
������ ���� �������
������ ���� �������

��

��

������ �� �����

��

��

��
��

��

��

��

��
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�

�

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Source: California Department of Corrections’ health care cost and utilization
program database.

When we asked HCSD whether it had performed any analysis
to determine the extent to which high-cost inpatient cases were
causing an increase in inpatient hospital payments, it stated that
a HCCUP manager had done so while preparing for the midyear
fiscal review process for fiscal year 2002–03. HCSD provided the
following explanation:
At that time, it appeared as [though] the number of high
costs cases were increasing at an aggressive rate, and as
such could be propelling the growth in total contract
medical expenditures (CME). However, at that time the
unchanging dollar threshold used to identify high-cost
cases was questioned. . . .

34

California State Auditor Report 2003-125

When the unit of analysis is switched from number
of cases to expenditure, high-cost case expenditures
also prove a poor predictor of CME. . . . This suggest[s]
a third, related variable, such as an increase in total
number of inpatient cases, or an unrelated variable, such
as the growth in registry staff or hospital reimbursement
rate, may be better candidates as the force behind the
notable increase in CME. This analysis was updated and
re-examined as a result of this audit response and the
findings remain unchanged.
Despite a lack of effect due to high-cost cases, the
HCSD considers all high-cost cases worthy of additional
scrutiny, observation, and oversight. . . . The patients
will be transferred to a preferred provider setting as soon
as clinically possible to take advantage of lower rates and
secure guarded space.

By adjusting its threshold
for high-cost cases
upward, HCSD may reduce
the number of cases it
should investigate, but it
does not relieve itself from
investigating the reasons
why so many cases are
exceeding its threshold.

HCSD told us it plans to adjust the high-cost threshold in
correlation with the medical consumer price index effective
July 2004. Although on the surface this adjustment might
appear to have merit to account for increasing prices, the
purpose for having such a threshold is to establish a standard by
which it can measure its outcomes and investigate the reasons
why these high-cost cases surpassed that standard. By adjusting
its threshold or its standard upward, HCSD might reduce the
number of cases it should investigate, but it does not mitigate
HCSD’s responsibility to thoroughly investigate factors causing
the high number of cases exceeding the threshold. Further, by
simply applying the medical consumer price index to its existing
high-cost threshold, HCSD misses an opportunity to update
its high-cost threshold based on criteria that consider relevant
factors such as recent advancements in medical procedures,
treatments, and technology, among others.
HCSD’s response to our inquiries regarding high-cost inpatient
cases indicates that HCSD apparently performed some analysis
on cases that exceeded its high-cost case threshold. Although
HCSD may have found better potential candidates—the increase
in the total number of inpatient cases, the growth in registry
staff, and a higher hospital reimbursement rate—for the forces
driving its notable increase in expenditures, it apparently has not
fully investigated these possible causes. However, the analysis
HCSD did perform was consistent with ours. As noted earlier in
the report, our analysis of the increase in Corrections’ inpatient
hospital payments from fiscal years 1998–99 to 2002–03 revealed

California State Auditor Report 2003-125

35

that approximately 71 percent of the increase is due to an
increase in the average amount paid to hospitals per inpatient
admittance versus 29 percent due to an increase in the number of
admittances.

Four of the 25 inpatient
hospital cases exceeding
$200,000 per case cost
Corrections more than
$2.4 million in total.

Further, four of the 25 fiscal year 2002–03 cases exceeding
$200,000 per case cost Corrections more than $2.4 million
in total, with each case costing more than $450,000 and two
cases exceeding $670,000 each. According to documents in
Corrections’ medical case files, one inmate, who incurred more
than $670,000 in inpatient hospital services, was treated for
diabetic complications. The inmate spent a total of 73 days in the
hospital, mostly in the intensive care unit using a ventilator to
help with breathing. A second inmate, who also incurred more
than $670,000 in inpatient hospital services, was treated for
chronic obstructive pulmonary disease and bowel obstruction.
This inmate spent a total of 117 days in the hospital, staying at
least part of the time in the intensive care unit using a ventilator
to help with breathing. A third inmate, who incurred costs of
more than $610,000 during a 13-day inpatient hospital stay, was
treated for swelling of the neck that could have led to airway
blockage if left untreated, according to the inmate’s medical case
file. While at the hospital, doctors found that this inmate also
had a bleeding disorder. Records indicate that the inmate was
admitted to the hospital’s intensive care unit and maintained on
a ventilator to help with breathing. The medical case file of the
fourth inmate who incurred more than $450,000 in inpatient
hospital services indicates that he was treated for an inflamed
intestine. While at the hospital, the inmate pulled out his feeding
and breathing tubes, experienced respiratory arrest, and needed
a ventilator to help with breathing, according to medical case file
documents. This inmate spent a total of 54 days in the hospital,
mostly on a ventilator.
For all four cases in which hospital payments exceeded
$450,000, Corrections provided us with concurrent review
documents that utilization management staff used to track
the inmates’ progress during their hospital stays. However, the
documents showed that the reviews were not conducted on
a regular basis during the inmates’ hospital stays and did not
demonstrate how Corrections evaluated the level of care or
medical services to determine the ongoing appropriateness of
the medical procedures and to ensure the continued medical
necessity of the hospitalization. When we brought these issues
to HCSD’s attention, we received the following response:

36

California State Auditor Report 2003-125

HCSD recognized that standardizing the documentation
of the concurrent reviews was needed. As part of
the Quality Management System, HCSD conducted
mandatory statewide videoconference training in
December 2003 on Utilization Management (UM). The
goal of the course was to provide information regarding
effectively performing the UM duties, which includes
the UM review process, focus and selected scope, UM
reviewer responsibilities, UM review guideline criteria,
standardized UM forms and UM reporting documents.
Development of the UM database was the most important
tool in establishing not only a central data collection
component for UM, but it assisted in standardizing the
review and documentation process. . . . The HCSD UM
staff have begun monitoring and performing assessments
of UM processes, including the expected Concurrent
Review documentation within the UM database. Within
the next six months, development of a quality control
process will include monthly reviews of a sample of
prospective and concurrent reviews performed by
UM staff at each institution. In addition, the HCSD is
obtaining the InterQual Acute Care Criteria, which will
assist with standardizing the concurrent and retrospective
review processes.

When asked why it could
not treat these inmates
at its own hospitals,
Corrections responded
that its hospitals do not
provide ventilator services.

Further, when asked why it could not treat these inmates at its
own hospitals, Corrections responded that its hospitals were
not equipped to handle the medical circumstances of these four
inmates. Specifically, Corrections stated that its hospitals do not
provide ventilator services. HCSD elaborated as follows:
HCSD has not conducted a formal cost benefit
analysis for ventilator services. However, a review of
the necessary components to meet regulatory and
quality care requirements for ventilator patients within
[Corrections] does not appear to be cost effective or
prudent at this time. [Corrections] generally only
has 0 [to] 3 ventilator patients statewide at any given
time. . . . As such, the requirements of care, staffing,
equipment, space, training, and physical plant
modifications for the few patients that require this
service makes this proposal not cost effective and not
prudent from a medico-legal risk perspective.

California State Auditor Report 2003-125

37

More Expensive Outpatient Visits Account for Larger
Outpatient Hospital Payments

In fiscal year 2002–03,
Corrections paid more
than three times the
amount it paid two years
earlier for outpatient
hospital visits that cost
$5,000 or more each.

Similar to its inpatient hospital payments, Corrections also spent
more on expensive outpatient hospital services in fiscal year
2002–03 than it did in fiscal year 1998–99. Because Corrections
has no set amount that it uses to identify expensive outpatient
hospital visits, we separated Corrections’ fiscal years 1998–99
through 2002–03 outpatient payment data into visits costing less
than $1,000 each, those costing $1,000 or more but less than
$5,000 each, and those costing $5,000 or more each. As Figure 6
shows, for outpatient hospital visits costing less than $1,000 each,
Corrections paid a total of $2.6 million in fiscal year 2002–03
compared with $1.5 million in fiscal year 1998–99, a growth of
more than 73 percent. More significantly, for outpatient hospital
visits costing $1,000 or more each, Corrections paid a total of
$17.1 million in fiscal year 2002–03 compared with $5.6 million
in fiscal year 1998–99, a growth of $11.5 million or more than
205 percent. Of the $17.1 million Corrections paid in fiscal year
2002–03, $6.2 million (more than 36 percent), was for visits in
which Corrections paid $5,000 or more per outpatient hospital
visit. Moreover, this $6.2 million represented a 244 percent growth
from the $1.8 million Corrections paid in fiscal year 2000–01 for
outpatient hospital visits that cost $5,000 or more each. In other
words, in fiscal year 2002–03, Corrections paid more than three
times the amount it paid two years earlier for outpatient hospital
visits that cost $5,000 or more each.
Additional analysis of these outpatient hospital payments
revealed that Corrections also experienced more cases of
expensive outpatient hospital visits in fiscal year 2002–03 than
in fiscal year 1998–99. Using Corrections’ data on hospital
outpatient payments, we identified cases in which Corrections
paid at least $5,000 for one outpatient hospital visit in fiscal
years 1998–99 and 2002–03. As shown in Figure 7 on page 38,
Corrections had 706 outpatient hospital visits costing $5,000
or more per visit in fiscal year 2002–03 compared with 148
outpatient hospital visits in fiscal year 1998–99. Figure 7 also
shows that of the 706 outpatient visits from fiscal year 2002–03,
159 outpatient visits exceeded $10,000 each.

38

California State Auditor Report 2003-125

FIGURE 6
From Fiscal Years 2000–01 Through 2002–03
the California Department of Corrections’ Expenditures More
Than Tripled for Outpatient Visits Costing $5,000 or More
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Source: California Department of Corrections’ health care cost and utilization
program database.

Moreover, for fiscal year 2002–03, 10 of the 159 hospital
outpatient visits that cost Corrections more than $10,000 each
exceeded $25,000 each, with three visits costing it more than
$30,000 each. For these three visits, we asked Corrections to
explain the inmates’ medical conditions, the reasons they needed
the medical attention, what hospital outpatient services were
provided, the treatments they received, and how long they
received treatments. Additionally, we asked Corrections to provide
the documentation preauthorizing the hospital visits, including
who preauthorized the hospital visit and any reviews it conducted
of the appropriateness and medical necessity of the visits.

California State Auditor Report 2003-125

39

FIGURE 7
The California Department of Corrections Had Nearly Five
Times as Many Cases of Expensive Outpatient Hospital Visits
in Fiscal Year 2002–03 as in Fiscal Year 1998–99
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Source: California Department of Corrections’ health care cost and utilization
program database.

For one outpatient visit that cost it nearly $48,000, Corrections
explained that the inmate was diagnosed with a malformation of
the brain vessels and needed the outpatient procedure to localize
the malformations within the brain to prevent a potentially fatal
aneurysm. However, as of June 30, 2004, Corrections could not
locate the request for services or the utilization management
worksheet forms outlined in its utilization management program
guidelines; therefore, it could not demonstrate that a request
was made and authorized for its most expensive outpatient
visit in fiscal year 2002–03. For the other two outpatient visits,
one totaling nearly $32,000 and the other more than $38,000,
Corrections explained and provided hospital invoices showing
that these visits were related to one inmate who received several
weeks of radiation treatment and ultimately surgery for prostate
cancer. In total, Corrections paid more than $90,000 for this
40

California State Auditor Report 2003-125

inmate’s outpatient visits in fiscal year 2002–03. However,
similar to the first case, as of June 30, 2004, Corrections could
not demonstrate that requests were made and authorized for
these expensive outpatient visits in fiscal year 2002–03 because
it could not locate the requests for services nor the utilization
management worksheet forms. Corrections explained that these
forms are filed with the inmate’s health records and follow the
inmate. According to Corrections, because this second inmate was
paroled, it could not obtain from the parole office the documents
we requested from this inmate’s health records within the two
weeks it was given.

INSTITUTIONS CITED SEVERAL REASONS
FOR SIGNIFICANT INCREASES IN INPATIENT
HOSPITAL PAYMENTS

Rising average payments
per hospital admittance
were a major factor in
the growth of inpatient
hospital payments for
many institutions, yet
for some institutions,
increasing numbers of
hospital admittances
were the major factor.

Although our analysis of aggregate inpatient hospital payments
showed that an increase in the average payment per inpatient
admittance appears to be the primary factor in the growth of
inpatient hospital payments, our analysis of inpatient hospital
payments made by individual correctional institutions revealed
that the factors affecting each institution vary. Rising average
payments per inpatient admittance were the major factor for
many institutions, yet for some institutions, an increasing
number of inpatient hospital admittances was the most
significant factor driving increased hospital payments. Table B.1
in Appendix B presents the results of our analysis of inpatient
hospital payments for each correctional institution.
We asked two correctional institutions to explain why an increase
in their average payments per inpatient admittance appeared to
be a reason behind the growth in their hospital payments, and
why an increase in the number of admittances was also a factor for
one of them. The California Substance Abuse Treatment Facility
at Corcoran (Corcoran) informed us that a change in its mission
and its becoming a designated dialysis facility caused its health
care payments to increase. The R. J. Donovan Correctional Facility
(Donovan) cited various reasons for the significant increase in its
hospital inpatient costs that were significantly driven by increases
in both the average amount paid for inpatient stays and the
number of inpatient admittances.
According to the health care manager at Corcoran, the
Substance Abuse Treatment Facility opened in August 1997.
By fiscal year 1998–99, with an average daily population

California State Auditor Report 2003-125

41

of almost 6,000, the Corcoran facility still was not fully
implemented. In fiscal year 2002–03, the average daily
population was roughly 6,600. Although this is not a
dramatic population increase, the health care manager stated
that in the past two to three years, the population of elderly
inmates suffering from long-term, chronic diseases increased,
as did the population of inmates with disabilities such as
mobility, visual, and hearing impairments, and that Corcoran
had approximately 150 inmates confined to wheelchairs.
Further, the health care manager explained that Corcoran had
received increasingly severe and complex dialysis cases, and
in fiscal year 2002–03, Corcoran became the central location
for housing inmates requiring dialysis. Although these reasons
may be contributing factors, Corcoran provided no analysis
quantifying the extent that these factors drove higher average
costs, such as an analysis of average medical costs with and
without dialysis patients.

The Corcoran health
care manager explained
that using ICD-9-CM
diagnosis codes for
comparison is not an
accurate method for
determining the overall
treatment inmates receive.

To assist with its analysis of increasing hospital costs, we provided
the Corcoran health care manager with the ICD-9-CM diagnosis
codes associated with its inpatient hospital payments. However,
the Corcoran health care manager explained that using ICD-9-CM
diagnosis codes for comparison is not an accurate method for
determining the overall treatment inmates receive. A hospital
reimbursement is not based on ICD-9-CM diagnosis codes but
on the type of service the hospital provides and the length of
time the patient stays in the hospital. The ICD-9-CM diagnosis
codes only indicate why the inmate was seeking medical
attention, have no bearing on cost, and often vary greatly with
the codes used on discharge. In addition, the health care manager
indicated that the ICD-9-CM diagnosis codes give no information
on the length of the hospital stay, coexisting diseases or medical
conditions, the complexity and severity of the case, and the
overall treatment of the inmate.
The health care manager’s comments about the limited use of
ICD-9-CM diagnosis codes alone are correct. Neither Corrections
nor we can perform adequate analysis using the data in its
HCCUP database because institutions did not consistently
enter the ICD-9-CM procedure codes or request and enter the
DRG codes from the hospital invoices that would have allowed
an analyst to determine the procedures that had been paid
for without laboriously locating and reviewing invoices. For
example, during fiscal year 1998–99, Corcoran entered the
ICD-9-CM procedure codes for 101 of its 161 inpatient payment

42

California State Auditor Report 2003-125

records and the DRG codes for none. In fiscal year 2002–03, the
numbers increased to 218 of 264 inpatient payment records for
the ICD-9-CM procedure codes, but the number of DRG codes
entered remained at zero.

Corcoran’s analysis for
10 of its 20 fiscal year
2002–03 high-cost
inpatient cases revealed
that it paid more than
four times what it would
have paid using the earlier
fiscal year 1998–99
contract payment terms.

Corcoran provided an analysis of the extent to which a renegotiated
contract significantly increased the price it paid for inpatient
hospital stays. We asked Corcoran to analyze its high-cost cases—
those incurring $50,000 or more in inpatient payments—to a
hospital it used.6 In its analysis, Corcoran compared the payments
made under the renegotiated contract with this hospital to the
amounts it would have paid using the earlier contract payment
terms. Corcoran’s analysis of its four high-cost inpatient cases
from fiscal year 2000–01 revealed that it paid nearly three times
what it would have paid under the earlier fiscal year 1998–99
contract payment terms. Additionally, Corcoran’s analysis for 10
of its 20 fiscal year 2002–03 high-cost cases revealed that it paid
more than four times what it would have paid using the earlier
contract payment terms. One of the 10 high-cost cases resulted in
Corrections paying more than 34 times what it would have paid
using the fiscal year 1998–99 contract payment terms. However,
even after setting aside this large case from Corcoran’s analysis,
it still paid nearly three times what it would have paid using the
earlier contract payment terms.
Our comparison of the payment terms of this hospital’s contract
for fiscal year 1998–99 with the terms of the fiscal year 2002–03
contract showed that the most significant difference was the
addition of an inpatient stop-loss provision. This provision requires
Corrections to pay a percentage of the hospital’s total billed charges
once these charges reach the contractual stop-loss threshold per
inpatient discharge. According to the fiscal year 2002–03 contract
payment terms, once this stop-loss threshold is met, the stated per
diem, case rate, or add-on rates no longer apply.
At the second institution, Donovan, inpatient hospital payments
increased from $1.8 million to $5.3 million between fiscal years
1998–99 and 2002–03, a 194 percent increase. Approximately
$1.6 million of this increase was associated with an increase in
the average amount paid per admittance, and approximately

6

As we discuss in the Scope and Methodology section of the report, Corrections
asserted the privilege contained in California Government Code, Section 6254.14, that
permits it to protect from disclosure certain information associated with health care
services contracts, including rates. Thus, we use generic names in lieu of actual hospital
names in our report and do not disclose the generic hospital name in examples where we
name specific institutions.

California State Auditor Report 2003-125

43

$1.9 million was associated with the significant increase in the
number of admittances, from 197 in fiscal year 1998–99 to 403
in fiscal year 2002–03.
Donovan informed us that one factor affecting its average
payment per inpatient hospital admittance also was a new
contract with a hospital in fiscal year 2000–01. According to
Donovan’s health care manager, on July 1, 2000, it received
a new contract for a hospital. The new contract includes
inpatient per diem as well as stop-loss rates. The health
care manager provided a comparison analysis of nine highcost cases that occurred in fiscal year 2000–01, illustrating
the difference in paid amounts between the old and new
contracts. As shown in Table 4, the analysis revealed results
similar to Corcoran: Under the new contract, Donovan paid
almost three times what it would have paid under the terms
of the prior contract. According to the health care manager,
all cases exceeding $100,000 for any fiscal year after fiscal
year 1998–99 would have been significantly less based on
the previous contract payment rates. He further informed us
that the charges included in the hospital’s charge description
master—an itemized list of prices for the services the hospital
provides—also increased during the term of the new contract.

TABLE 4
An Analysis by the R. J. Donovan Correctional Facility Revealed
Significantly Higher Costs for Inpatient Services Under
Its New Hospital Contract Compared With Its Prior Contract
Fiscal Year 2000–01
High-Cost Case

Payment Under
Fiscal Year 2000–01
Contract Terms

Payment Using
Fiscal Year 1998–99
Contract Terms

Percentage of
New Payment to
Prior Payment

Payment Increase
Due to New
Contract Terms

1

$ 184,666

$ 72,956

253.1%

$111,710

2

269,052

107,463

250.4

161,589

3

82,878

26,701

310.4

56,177

4

89,809

34,091

263.4

55,718

5

60,925

15,754

386.7

45,171

6

134,271

39,358

341.2

94,913

7

117,554

32,460

362.2

85,094

8

59,094

18,170

325.2

40,924

9

57,073

8,242

692.5

48,831

$1,055,322

$355,195

Totals

297.1%

$700,127

Source: Health care manager at the R. J. Donovan Correctional Facility.

44

California State Auditor Report 2003-125

According to Department
of Health Services’
standards, Donovan’s
inpatient rooms were
suitable for only one
patient rather than two;
therefore, Donovan reduced
its inpatient capacity by
almost one-half.

Additionally, Donovan’s health care manager cited a few reasons
why inmates stayed at off-site hospitals rather than at its 30-bed
correctional treatment center. The health care manager said that
during preparations for correctional treatment center licensure
in 2000, Donovan discovered that according to Department
of Health Services’ standards, the facility’s inpatient rooms
were suitable for only one patient rather than two. As a result,
Donovan reduced its inpatient capacity by almost one-half.
Further, this reduction in the number of inpatient beds at
Donovan was compounded by its role as a hub for mental
health crisis beds. According to Donovan’s health care manager,
not only did its number of mental health crisis bed population
increase from six to 15 from fiscal years 1998–99 through
2002–03, but also transfers of mental health crisis patients from
other institutions to Donovan increased. As a result, Donovan
had to occasionally transfer its medical patients to a community
hospital to provide more beds for mental health crisis patients.
Moreover, the health care manager told us that a full population
of mental health crisis patients occasionally prevented Donovan
from accepting into its correctional treatment center inmates
who had been discharged from the hospital but still required
admission to a correctional treatment center for convalescence.
Donovan’s health care manager provided additional insights
into both the payments and the number of inpatient stays. The
health care manager stated that although Donovan’s average
daily population did not significantly change, an increase in the
number of its inmates possessing more-complex medical and
mental health problems led to an increase in hospitalizations.
For example, according to the health care manager, from fiscal
years 1998–99 through 2002–03, the average number of dialysis
patients increased from five to 17 per month, and the number of
mental health patients increased from 600 to 1,200. According
to the Donovan health care manager, medical complications
are common with dialysis patients. Although the correctional
treatment center at Donovan is equipped to handle basic dialysis
cases, inmates who experience complications must be sent to
community hospitals for specialized treatment. Additionally,
the increase in mental health patients has led to an increase in
hospitalizations for seizure disorders and drug overdoses related
to suicide attempts. Finally, the health care manager noted that
the increased number of hospital admissions was in part caused
by repeat admissions by inmates for the same medical problems.
For example, he identified one instance of a patient with
12 admissions and two others with five admissions each.

California State Auditor Report 2003-125

45

We asked HCSD whether it had performed any analysis or
studies that would explain the effects of new contract payment
terms and fewer inpatient beds on hospital payments. HCSD
told us the following:
The HCSD has not performed, in the past, a detailed
analysis of new contract payment terms on the cost
of inpatient care. Such an analysis would be beneficial
for future negotiation purposes. . . . [Corrections]
plans to improve its negotiating practices, including
standardizing rate review and approval that will include
consideration of medical inflation cost-to-charge data,
Medi-[C]al and Medicare rates, etc. In fact, the HCSD has
recently completed a reorganization that has provided
additional resources to the [Health Contracts Unit],
thus allowing for improved analysis and negotiations.
Furthermore, [Corrections] is seeking legislative relief to
enhance its negotiating abilities.

HCSD stated that it has
performed no analysis
regarding the impact
of increased occupancy
of its internal beds on
utilization of community
hospital beds.

46

The HCSD has collected data regarding occupancy rates
for its internal bed utilization. To date, no analysis
has been performed regarding the impact of increased
occupancy of the [Corrections] beds on utilization
of community hospital beds. . . . The percentage of
occupancy is very high within our inpatient facilities.
On a daily basis inmates are being transported to various
[Corrections] licensed facilities to accommodate those
patients who cannot be cared for in a community
setting. The need for inpatient [Corrections] beds has
been realized, and funding and construction of a 50-bed
mental health crisis facility is under way. In addition,
[Corrections] is contracting with the Department of
Mental Health for 25 acute inpatient psychiatric beds at
Atascadero State Hospital to provide crisis beds for the
California Men’s Colony, one of [Corrections] largest
mental health facilities that currently has no licensed
mental health beds on site. In June 2005 Delano II will
open with 25 Correctional Treatment Center (CTC) beds,
and the California Institution for Women will open
their 20 bed CTC facility in the spring of 2005 as well.
Additional [Corrections] mental health licensed beds
are being considered in the future under the mental
health facility study currently under way. It is expected
that these new licensed beds will provide the necessary
relief to allow the medical patients to be accommodated,

California State Auditor Report 2003-125

as appropriate, within the prison health care facilities
in the future. The new UM database will be able to
effectively identify aberrant days and the reason why
these community hospital patients are not returned to
the institution once discharged.

CERTAIN CONTRACT PROVISIONS RESULTED IN
CORRECTIONS PAYING HIGHER AMOUNTS FOR
INPATIENT HEALTH CARE

If hospital administrators
inflated charges to take
advantage of stop-loss
provisions, Corrections
could unknowingly
pay higher amounts to
hospitals than expected.

Our review of inpatient hospital payments for selected hospitals
revealed that the terms of some contracts resulted in payments
that were significantly higher than those made by Medicare for
similar hospital services. This effect appeared most pronounced
for hospitals whose contracts include stop-loss provisions. Stoploss provisions are intended to protect hospitals from incurring
financial losses for exceptional cases, when patients develop
complications requiring unexpectedly long, expensive hospital
stays. A stop-loss provision in a contract sets a dollar threshold
for hospital charges per admittance. Typically, if the charges per
admittance exceed the threshold, Corrections pays a percentage
of the total charge, rather than a per diem or other rate. However,
should hospital administrators inflate charges to take advantage
of stop-loss provisions, Corrections could unknowingly pay
higher amounts to hospitals than expected unless Corrections
takes additional steps to monitor and investigate potentially
inflated hospital charges. Among the contracts we reviewed
that included stop-loss provisions, the threshold triggering the
stop-loss provisions was based on a wide range of each hospital’s
billed charges, and the percentage to be paid under the stop-loss
provisions varied, but was a percent of billed charges for the entire
inpatient stay.7
As an alternative to the disadvantageous stop-loss arrangements,
Corrections could apply hospital cost-to-charge ratios to hospital
charges to estimate the actual costs for the services provided
and then use these estimates to evaluate the reasonableness of
hospital payments or as a starting point in negotiating future
contract terms. For example, instead of paying a percentage of

7

As we discuss in the Scope and Methodology section of the report, Corrections asserted
the privilege contained in California Government Code, Section 6254.14, that permits
it to protect from disclosure certain information associated with health care services
contracts, including rates. Thus, we do not disclose the floor and ceiling of the various
stop-loss provisions because Corrections asserts that disclosure of this information could
impact its ability to negotiate future contracts with providers that may insist on like terms.

California State Auditor Report 2003-125

47

the hospital’s entire billed charges for stop-loss cases, a better
arrangement for Corrections would be to pay per diem up to the
stop-loss threshold and then pay cost plus a percentage for the
services beyond the stop-loss threshold. This is not necessarily
the best or only arrangement for Corrections, but is presented
as an example of a better stop-loss arrangement than the one
Corrections currently uses.

Corrections’ Stop-Loss Provisions, That Are Based on Hospital
Charges, Result in Higher Payments to Hospitals
Our comparison of Corrections’ inpatient hospital payments
with the amount Medicare would pay for similar services
revealed that, in general, Corrections’ payments to hospitals that
have stop-loss provisions in their contracts are higher than those
to hospitals whose contracts do not include stop-loss provisions.

Recognizing that
each medical case is
unique and not directly
comparable from hospital
to hospital, we compared
Corrections’ payment for
each inpatient invoice
to what Medicare would
have paid that hospital
for a similar service.

We compared Corrections’ payments to hospitals against a
common base to account for the uniqueness of medical cases and
the variability of hospital attributes. Specifically, we identified
15 hospitals that received at least $5 million in inpatient and
outpatient payments based on payment data in Corrections’ HCCUP
database from fiscal years 1998–99 through 2002–03. Five of the
15 hospitals were hospitals run by the Tenet Healthcare Corporation
(Tenet). Next, we stratified the inpatient invoices Corrections paid in
fiscal year 2002–03 for each of the 15 hospitals. We then randomly
selected 10 inpatient invoices to review from each hospital. However,
recognizing that each medical case is unique and not directly
comparable from hospital to hospital, we compared Corrections
payment for each inpatient invoice to what Medicare would have
paid each of the 15 hospitals for similar services.
The Medicare payment provided a common benchmark
useful in comparing Corrections’ hospital payments among
the hospitals we reviewed. Medicare’s payment calculations
take into account variables specific to each hospital that can
affect costs—for example, hospital location and the portion
of hospital resources expended for teaching and to serve
economically disadvantaged groups. The Medicare payment
formula for inpatient services begins with a DRG code that
categorizes patients into groups that are the same in terms
of hospital resources used. Each DRG is assigned a weighting
factor representing the average proportion of hospital resources
typically used to treat a particular condition. Medicare uses
DRGs, along with hospital-specific weights that account for cost
differences associated with such factors as location, to arrive at

48

California State Auditor Report 2003-125

hospital-specific payments for services. Thus, because Medicare
payments encapsulate the cost variability among hospitals and
the uniqueness of a patient’s medical condition, we used them
to measure Corrections’ payments to hospitals by calculating
ratios of Corrections’ hospital payments to Medicare payments
and comparing the resulting ratios among the selected hospitals.
We calculated Medicare payments for each of the invoices using
software obtained from the Centers for Medicare and Medicaid
Services (CMS), the federal agency that administers the Medicare
system. However, we adjusted the payment calculated by the CMS
software to account for CMS’s use of potentially outdated data
in its calculation of outlier payments. Outlier payments provide
additional Medicare compensation to hospitals for certain unusually
costly cases. Under rules in place before October 2003, CMS used
the historical relationship between a hospital’s Medicare costs and
its Medicare-billed charges to determine cost-to-charge ratios, which
CMS used to calculate outlier payments. Because the information
used in calculating cost-to-charge ratios was approximately two
years old, some hospitals manipulated the outlier formula to
increase their Medicare payments by aggressively increasing
their billed charges. After discovering this flaw in its payment
system, CMS changed its rule for outlier payment calculations in
October 2003 to require more-current hospital cost and billing data.
To compensate for the potential flaw in the Medicare payments
we used to compare against Corrections’ payments, we obtained
from CMS fiscal intermediaries—contractors that process and
pay Medicare claims—updated cost-to-charge ratios based on
hospital costs and billed charges from periods covering fiscal
year 2002–03. To arrive at an updated Medicare payment, we
used the updated cost-to-charge ratios to calculate any outlier
payments due on the inpatient invoices in our sample and
added this outlier payment to the standard Medicare payment
for each invoice as calculated by CMS’s Pricer software. To
facilitate the hospital-to-hospital comparison, we divided
Corrections’ payments for the invoices we reviewed by our
updated Medicare payments for the invoices and calculated a
weighted average ratio for each hospital.
Corrections’ payments
to some hospitals we
reviewed represented a
significant premium over
Medicare payments for
the same services.

The resulting Corrections-to-Medicare payment ratios, presented in
Figure 8 on the following page, indicate that Corrections’ payments
to some hospitals we reviewed represented a significant premium
over Medicare payments for the same services. In Figure 8, the
horizontal dashed line at 1.0 represents the Medicare payment
baseline—that is, the ratio that would have resulted had Corrections

California State Auditor Report 2003-125

49

paid the same amount as Medicare. As the figure shows, eight of
the 15 hospitals had ratios that were more than twice the Medicare
baseline, indicating that Corrections’ payment was more than twice
what Medicare would have paid. Moreover, six hospitals, including
three Tenet hospitals, had ratios that were more than three times
the Medicare baseline. To examine the factors driving Corrections’
payments to be multiples of what Medicare would have paid, we
analyzed the payment terms in Corrections’ contracts with the
15 hospitals we reviewed.

FIGURE 8
The California Department of Corrections’ Payments to Hospitals With Stop-Loss Contract
Provisions Generally Were Significantly Higher Than Updated Medicare Payments
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Sources: Hospital invoices for care provided to the California Department of Corrections’ (Corrections) inmates, Corrections’
hospital contract rate sheets, and the Centers for Medicare and Medicaid Services’ Pricer software and fiscal intermediaries.
Note: As we discuss in the Scope and Methodology section of the report, Corrections asserted the privilege contained in California
Government Code, Section 6254.14, that permits it to protect from disclosure certain information associated with health care
services contracts, including payment rates. Therefore, it requested that we use generic names instead of actual hospital names in
our report.
* Hospitals with stop-loss contract provisions.
†

Charges based on per diem or case rates.

‡

Per diem includes facility and physician services.

50

California State Auditor Report 2003-125

In our review, we found that hospital contracts that include
stop-loss provisions, based on charges, generally resulted in
higher Corrections-to-Medicare payment ratios. We found that
Corrections uses a variety of contractual payment terms, ranging
from per diem only to combinations of per diem, percentage-ofbilling, and stop-loss provisions. Corrections’ stop-loss provisions
typically require it to pay a percentage of any total hospital charge
that exceeds a contractual dollar threshold. Table 5 shows the
variety of payment terms in the 15 hospital contracts we reviewed
and shows that six include stop-loss provisions.

TABLE 5
The California Department of Corrections’ Inpatient Hospital Contracts
Include Various Payment Terms
Hospital

Per Diem or
Case Rates

Percentage
of Billing

Stop Loss

Calculated Corrections-to-Medicare
Payment Ratio

X

4.2

Tenet 1

X

Tenet 2

X

Tenet 3

X

X

8.0

Tenet 4

X

X

4.9

Tenet 5

X

Non-Tenet 1

X

Non-Tenet 2

X

1.6

Non-Tenet 3

X

1.8

Non-Tenet 4

X

Non-Tenet 5

X

Non-Tenet 6

X

Non-Tenet 7
Non-Tenet 8

1.4

0.9
X

X

3.5

2.8
X

2.8
1.7

X

3.3

X

1.7

University 1

X

X*

5.4

University 2

X

X*

X

1.9

Source: California Department of Corrections’ (Corrections) hospital contract rate sheets.
Note: As we discuss in the Scope and Methodology section of the report, Corrections asserted the privilege contained in
California Government Code, Section 6254.14, that permits it to protect from disclosure certain information associated with
health care services contracts, including payment rates. Therefore, it requested that we use generic names instead of actual
hospital names in our report.
* Includes percentage-of-billing provisions for certain medical products.

A number of patterns emerged from our analysis of hospital
contracts. First, as Figure 8 illustrates, hospital contracts that
include stop-loss provisions generally resulted in higher
payments compared with Medicare payments. Table 5 shows
that of the six hospitals with ratios more than three times the
California State Auditor Report 2003-125

51

Medicare baseline, four hospitals—Tenet 1, Tenet 3, Tenet 4, and
Non-Tenet 1—have contracts with stop-loss provisions,
and one hospital, Non-Tenet 7, is paid a percentage of its billed
charges. The sixth hospital, University 1, had a larger ratio, in
part because it has a relatively large contractual per diem rate
that includes fees for physicians and other professionals in
addition to its facility charge. Second, hospitals with per diem
rate structures and no stop-loss contract provisions—Tenet 2,
Tenet 5, Non-Tenet 2, Non-Tenet 3, and Non-Tenet 6—had
ratios closer to the Medicare baseline. Third, of the five Tenet
hospitals in our sample, the three whose contracts include
stop-loss provisions—Tenet 1, Tenet 3, and Tenet 4—had ratios
significantly larger than those without stop-loss provisions—
Tenet 2 and Tenet 5.

Corrections could achieve
significant savings if it
were able to negotiate
contracts without stoploss provisions or base
stop-loss payments on
hospital costs rather than
hospital charges.

These results further corroborate those of our April 2004 report
titled 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, in which we
reported that Corrections could obtain substantially better rates
when paying a per diem rate than when paying a flat discount
rate. These results also may point to a potential weakness in
Corrections’ stop-loss provisions: Unchecked, Corrections’
stop-loss provisions, which serve purposes similar to CMS’s
outlier payments, are open to exploitation by hospitals that seek
to increase their payments. In fact, as previously mentioned,
CMS announced in 2003 that it was changing its method of
calculating outlier payments after discovering the year before
that a few hundred hospitals had manipulated Medicare’s outlier
formula to receive higher payments by aggressively increasing
their charges. Hospitals investigated as part of the federal
government probe into potentially inflated outlier payments
included some Tenet hospitals. CMS estimated that hospitals’
manipulation of the outlier formula have cost U.S. taxpayers
$1 billion to $2 billion in overpayments annually since 1999.
Corrections could achieve significant savings if it were able to
negotiate contracts without stop-loss provisions or base stop-loss
payments on hospital costs rather than hospital charges. To provide
a rough illustration of the potential savings that Corrections
might achieve by changing the terms of its hospital contracts,
we recalculated the payments that Corrections appeared to make
under the stop-loss provisions included in contracts for hospitals
we reviewed. In our recalculations, we identified those payments
that appeared to be made using stop-loss provisions and separated
those from the other payments (non-stop-loss payments). Using

52

California State Auditor Report 2003-125

the lengths of stays and payments associated with those non-stoploss payments, we calculated an average daily payment rate. Finally,
we multiplied the lengths of stays associated with the stop-loss
payments by the average daily payment rate we calculated from the
non-stop-loss payments.
It is important to recognize that although contract provisions
are subject to negotiation, Corrections may not be able to
negotiate hospital contracts without provisions to shield
hospitals from exceptional cases with the potential for
extraordinary financial losses, or Corrections may need to
pay higher per diem rates. However, as an illustration of the
maximum savings Corrections might have achieved had it
been able to negotiate contracts without its typical stop-loss
provisions for the hospitals we reviewed, Table 6 shows potential
savings of up to $9.3 million (35.1 percent) in inpatient hospital
payments in fiscal year 2002–03. This analysis illustrates
how Corrections’ stop-loss provisions not only protected the
hospitals financially but also benefited most of the hospitals we
reviewed whose contracts include these provisions.

TABLE 6
The California Department of Corrections Could Achieve Savings by Negotiating Hospital
Contracts Without Stop-Loss Provisions for Inpatient Services in Fiscal Year 2002–03
(Dollars in Millions)
Hospital With
Stop-Loss Contract
Provisions

Total Inpatient
Payment

Stop-Loss
Payment

Stop-Loss
Recalculated at
Average Daily
Amount Paid

Maximum
Potential
Savings*

Total Inpatient
Payment After
Maximum
Savings

Percentage
Difference in Total
Payment With
Maximum Savings

Tenet 1

$ 7.1

$ 3.3

$1.9

$1.4

$ 5.7

Tenet 3

2.1

1.9

0.3

1.6

0.5

76.2

Tenet 4

1.8

1.2

0.2

1.0

0.8

55.6

Non-Tenet 1

12.4

6.5

1.9

4.6

7.8

37.1

Non-Tenet 5

2.0

1.1

0.4

0.7

1.3

35.0

University 2
Totals

1.1

0.5

0.5

—

1.1

$26.5

$14.5

$5.2

$9.3

$17.2

19.7%

0.0
35.1%

Sources: California Department of Corrections’ (Corrections) health care cost and utilization program database; Corrections’
hospital contract rate sheets.
Note: As we discuss in the Scope and Methodology section of the report, Corrections asserted the privilege contained in California
Government Code, Section 6254.14, that permits it to protect from disclosure certain information associated with health care services
contracts, including payment rates. Therefore, it requested that we use generic names instead of actual hospital names in our report.
* These calculated savings are rough estimates based on payment data from Corrections’ health care cost and utilization program
database. Additionally, it is important to note that hospital contract payment provisions are subject to negotiation and that
Corrections may not always be able to negotiate hospital contracts that would achieve similar savings.

California State Auditor Report 2003-125

53

Corrections’ stop-loss
payments accounted
for over 55 percent of
total payments to the
Tenet 4 hospital and
over 76 percent of
total payments to the
Tenet 3 hospital.

Our analysis further revealed that Corrections’ proportion of
stop-loss payments exceeded CMS’s target for outlier payments.
For many years, CMS has targeted 5.1 percent of total inpatient
payments to be used to pay for outliers. In contrast, the additional
inpatient payments—the potential savings calculated in the
analysis illustrated in Table 6—made by Corrections in fiscal year
2002–03 under stop-loss provisions accounted for 55.6 percent of
total payments to Tenet 4 and 76.2 percent of total payments to
Tenet 3. Corrections had the following reaction to our analysis:
. . . The stop-loss provisions [is] a form of mutual risk
sharing. [Corrections] attempts to negotiate for per diem
rates. Unfortunately some hospital providers refuse to
contract without a stop-loss provision. [Corrections] is
also planning to prepare a Request for Proposal to obtain
a consultant with significant experience in negotiating
contracts with hospitals and specialty providers to
train and advise [Health Contracts Unit] negotiations
staff. [Corrections] is continuing to explore and discuss
negotiating options with the Department of Health Services
and [the California Medical Assistance Commission].

Using Hospital Cost-to-Charge Ratios Could Help Corrections
Evaluate Its Hospital Payments and Negotiate Future Contracts
The factors used to construct hospital cost-to-charge ratios
make them a valuable tool for monitoring the reasonableness
of payments to hospitals and negotiating contract rates with
hospitals. A cost-to-charge ratio results from dividing total
costs incurred by a hospital to deliver all medical services by
the total amount it charged for all services over a given period.
The distinction should be noted between charged amounts and
amounts ultimately paid to hospitals for their services. In general,
a hospital will charge all payers the same amount for a given
service or product, but the amount a hospital actually receives
in payment from each payer for that service may be different,
depending on factors such as contract terms.
To analyze the reasonableness of Corrections’ payments to the
15 hospitals we reviewed, we used the updated cost-to-charge ratios
that we obtained from the CMS fiscal intermediaries to estimate
the costs the 15 hospitals incurred in providing the inpatient
medical services Corrections paid for in fiscal year 2002–03. We
calculated the estimated hospital costs by multiplying the amounts
hospitals charged—that is, the billed amount, according to data in
Corrections HCCUP database—by the hospitals’ respective
54

California State Auditor Report 2003-125

cost-to-charge ratios. We then compared those estimated
hospital costs with Corrections’ payments to the hospitals to
estimate the operating profit realized by the hospitals for those
inpatient services. Because Corrections did not consistently record
the correct charged amount for some of the hospitals in our
review, we were only able to perform this analysis for nine of the
15 hospitals. As Table 7 shows on the following page, estimated
operating profit margins for inpatient services that the nine hospitals
provided to Corrections ranged from 71.4 percent for Tenet 3 to
3.3 percent for Non-Tenet 3. Our analysis revealed that the nine
hospitals collected a total of $26.1 million in payments from
Corrections and made an estimated operating profit of $10.2 million,
or an average operating profit margin of 39.1 percent.
Additionally, a low cost-to-charge ratio can result in a higher
operating profit margin. As shown in Table 7, Tenet 3, which
generated the largest operating profit margin among the nine
hospitals we analyzed, also had the lowest cost-to-charge ratio.
Although operating profit differs from net income in that net
income further excludes nonoperating costs, the net income
range for hospitals reported by CMS is significantly less than
the average operating profit for the hospitals we reviewed. In a
July 2003 update on the health care industry, CMS cited results
from several studies indicating that most hospitals’ net incomes
ranged from 3 percent to 5 percent. Had Corrections performed a
similar analysis on hospital charges using cost-to-charge ratios, it
could have determined whether the payment rates in its contracts
were resulting in reasonable profits for its contracted hospitals.

Similar to Medi-Cal,
Corrections could use
hospital costs to help
determine reasonable
rates for hospitals in its
contract negotiations.

Corrections could use cost-to-charge ratios to estimate hospital
costs and use the estimates as a base from which to negotiate
payment rates with hospitals. A lag will always exist between the
time a hospital incurs costs and levies charges and the time the
information is reported and used to calculate a cost-to-charge
ratio; therefore, costs determined using cost-to-charge ratios
can only be estimates. However, like Medicare, the State’s public
health insurance program, Medi-Cal, uses hospital costs as one
factor in determining rates for hospitals with which the State
has not negotiated a contract. Hospitals are paid for Medi-Cal
services under two payment structures. Hospitals that have
contracts with the State to provide Medi-Cal services are paid a
negotiated per diem rate. For hospitals not under contract, the
State pays a percentage of the amounts charged based on the
hospital’s historical cost-to-charge ratio. Similarly, Corrections
could use hospital costs to help determine reasonable rates for
hospitals in its contract negotiations.

California State Auditor Report 2003-125

55

TABLE 7
Lower Cost-to-Charge Ratios Generally Result in
Higher Profits for Hospitals in Fiscal Year 2002-03
(Dollars in Millions)

Inpatient
Hospital

Total Inpatient
Cost-to-Charge
Ratio*

Hospital
Charges for
Inpatient
Services

Calculated
Hospital Costs
for Inpatient
Services

Corrections’
Payment for
Inpatient
Services

Estimated
Hospital
Operating
Profit

Percentage
of Estimated
Hospital
Operating Profit

71.4%

Tenet 1

0.16

†

Tenet 2

0.10

†

Tenet 3

0.12

$ 4.5

$ 0.6

$ 2.1

$ 1.5

Tenet 4

0.14

9.8

1.4

1.8

0.4

Tenet 5

0.08

†

Non-Tenet 1

0.24

†

Non-Tenet 2

0.46

†

Non-Tenet 3

0.46

12.5

5.8

6.0

0.2

3.3

Non-Tenet 4

0.26

10.9

2.8

7.5

4.7

62.7

Non-Tenet 5

0.43

3.8

1.6

2.0

0.4

20.0

Non-Tenet 6

0.33

2.8

0.9

1.5

0.6

40.0

Non-Tenet 7

0.49

3.8

1.9

3.4

1.5

44.1

Non-Tenet 8

0.54

0.8

0.4

0.7

0.3

42.9

University 1

0.18

†

University 2

0.34

1.6

0.5

1.1

0.6

54.5

$50.5

$15.9

$26.1

$10.2

Totals

22.2

39.1%

Sources: Centers for Medicare and Medicaid Services fiscal intermediaries; payment data from the California Department of
Corrections’ (Corrections) health care cost and utilization program database.
Note: As we discuss in the Scope and Methodology section of the report, Corrections asserted the privilege contained in
California Government Code, Section 6254.14, that permits it to protect from disclosure certain information associated with
health care services contracts, including payment rates. Therefore, it requested that we use generic names instead of actual
hospital names in our report.
* The cost-to-charge ratios use the most current available data and are pre-audit figures.
†

For more than one of the 10 inpatient hospital invoices we reviewed for this hospital, the actual hospital charges—that is, the
billed amounts—did not agree with the respective charges (billed) amounts in Corrections’ health care cost and utilization
program (HCCUP) database. Therefore, because HCCUP hospital charge data was clearly not reliable for this hospital, we did not
calculate its estimated costs, profits, and profit margin.

In 2003, Corrections staff met with staff from the California
Medical Assistance Commission, which negotiates Medi-Cal
hospital contracts, to discuss how the California Medical
Assistance Commission might assist Corrections in negotiating
hospital contracts. In addition, according to HCSD, Corrections
worked with the Department of Health Services to establish
legislative language for an appropriate reimbursement structure
and process. HCSD stated that Corrections’ proposed trailer
bill would allow it to pay hospitals “reasonable and allowable

56

California State Auditor Report 2003-125

costs” and to pay ambulance and any other emergency or
nonemergency response services at rates established by
Medicare. According to HCSD, Corrections continues to seek the
advice of the California Medical Assistance Commission before
and during contract negotiations with hospitals.
Corrections staff told us they were aware that hospital cost-tocharge data were available from state agencies, including the
Office of Statewide Health Planning and Development, which
makes spreadsheets containing hospital financial data available
for public download on its Web site. However, Corrections staff
elaborated that they have not explored using cost data to analyze
its payment experience or to negotiate rates, focusing their efforts
instead on monitoring performance under its existing hospital
contract terms. Specifically, HCSD told us the following:
The HCSD has not historically utilized [the Office of
Statewide Health Planning and Development (OSHPD)]
data to analyze its payments or for rate negotiations.
Until October of 2003 the Health Contracts Unit did not
have sufficient resources to perform this level of analysis.
However, the HCSD is in the process of standardizing its
negotiating and rate analysis processes and, as a result,
has begun to routinely utilize OSHPD data.
Nevertheless, Corrections would be unable to consistently
analyze hospital costs using cost-to-charge ratios because, as
we noted earlier, it does not always record accurate charges for
all hospital services in its HCCUP database. Regardless of how
Corrections ultimately accomplishes making hospital costs
a basis for contract negotiations, costs represent a valuable,
untapped tool for determining the reasonableness of the rates
for which it contracts with hospitals.

Increasing average
payments and increasing
numbers of hospital
visits appear to be nearly
equal factors in overall
outpatient hospital
payment growth.

INSTITUTIONS’ REASONS FOR RISING OUTPATIENT
HOSPITAL PAYMENTS WERE SIMILARLY VARIED
Our analysis of outpatient hospital payments revealed that both
increasing average payments and increasing numbers of hospital
visits appear to be nearly equal factors in the growth of outpatient
hospital payments overall. However, like our findings regarding
inpatient hospital payments by institution, the factors resulting
in larger outpatient hospital payments varied for each institution

California State Auditor Report 2003-125

57

(see Table B.2 in Appendix B). The institutions we asked for
insight about increasing outpatient hospital payments provided
several reasons why their outpatient hospital payments increased.
The Deuel Vocational Institution (Deuel) stated that a factor
causing its average payment per outpatient visit to increase
was the dramatic increase in its population of reception-center
inmates over the past five years. A reception center provides shortterm housing to inmates who are just entering the correctional
system and require processing, classification, and evaluation.
According to the institution’s health care manager, the average
daily population at Deuel’s reception center was 47 percent of
the total inmate population in fiscal year 1998–99 and grew to
more than 60 percent of the total inmate population by fiscal
year 2002–03. The health care manager stated that the growth
in the number of reception-center inmates increased its hospital
outpatient payments because reception-center inmates typically
have more pressing health care issues than do other members
of the prison population. According to the health care manager,
reception-center inmates likely did not have good health care
in their previous environments and thus came to Deuel with
serious and urgent health care needs. The health care manager
went on to say that the growing number of reception-center
inmates being sent to Deuel, coupled with their health risks,
caused a dramatic increase in the number of more-expensive
emergency room visits made by its prison population. In
contrast, because Corrections has provided care to stabilize the
health of existing inmates, they generally require less expensive
routine health care.

New Inmates Do Not Appear to Need More Costly
Outpatient Procedures Than Do Existing Inmates

Corrections’ data do
not fully support Deuel’s
conclusion that its
reception-center inmates
caused the increase
in Deuel’s outpatient
hospital payments.

58

Although the observations made by Deuel’s health care manager
may have merit, Corrections’ data do not fully support the
health care manager’s conclusion that Deuel’s reception-center
inmates caused the increase in the institution’s outpatient
hospital payments. Instead, a significant price increase for
similar services, as well as potentially more complex services
being performed, caused the increased price per visit.
To test the validity of the assertion of Deuel’s health care
manager, we analyzed the eight prisons that had the largest
increase in payments for outpatient visits that were attributable
to price increases. As shown in Table 8, four of the institutions
California State Auditor Report 2003-125

had reception centers and four did not. In addition, during fiscal
year 2002–03, two of the four institutions with reception centers
had very small average daily populations at those centers.
Therefore, the high outpatient costs at these two institutions
were likely not attributable to their reception-center inmates.
Specifically, Donovan and High Desert State Prison (High Desert)
had average daily populations of only 981 and 388, respectively,
at their reception centers during that year. In contrast, other
institutions with reception centers and significantly larger
reception-center populations had significantly smaller increases
in payments to outpatient facilities due to price increases. For
example, Wasco State Prison had an average daily population of
4,572 at its reception center, with $270,808 in outpatient cost
increases attributable to price increases, which is comparatively
less than Donovan and High Desert, as shown in Table 8.
Similarly, North Kern State Prison had an average daily
population of 4,068 at its reception center, with $125,599 in
outpatient cost increase attributable to price increases.

TABLE 8
Large Inmate Populations at Reception Centers Do Not Appear to
Drive Increased Outpatient Costs

Reception Center

Amount of Fiscal Year 2002–03
Outpatient Cost Increase
Attributable to Price Increases

California Substance Abuse Treatment Facility at Corcoran

No

$733,689

R. J. Donovan Correctional Facility

Yes

652,395

Deuel Vocational Institution

Yes

635,038

San Quentin State Prison

Yes

530,081

Folsom State Prison

No

480,921

High Desert State Prison

Yes

424,091

California Correctional Center

No

375,378

Sierra Conservation Center

No

365,159

Correctional Institution

Sources: California Department of Corrections’ Estimates and Statistical Analysis Section, Offender Information Services Branch;
Appendix B, Table B.2.

On the other hand, the comments of Deuel’s health care
manager about the expensive outpatient services indicate that
significant price increases for similar services were the cause
of that institution’s increased price per visit. The health care
manager informed us that the outpatient services for scheduled
appointments or surgery were reimbursed at a percentage of
California State Auditor Report 2003-125

59

charges with a limit in fiscal year 1998–99 and a higher limit in
fiscal year 2002–03. In addition, the health care manager told
us that the hospital’s usual and customary charges increased.
For example, a routine scheduled appointment was reimbursed
at a certain percentage in each fiscal year, but in fiscal year
1998–99, the adjusted amount Corrections paid was 143 percent
higher than in fiscal year 2002–03.8 Moreover, the health care
manager said outpatient services provided in the emergency
room were reimbursed at a higher percentage of total charges
and are essentially unlimited.

A significant increase in
Deuel’s average payment
for emergency room
visits caused its average
payment for outpatient
visits to increase overall.

If the 143 percent price increase in the hospital’s usual and
customary charges carried forward to other outpatient services
for Deuel, then significant price increases by the hospital for
similar services, as well as potentially more-complex services
being performed, were the cause of the increased price per
outpatient visit. A closer analysis of Deuel’s hospital payments
for outpatient visits from fiscal years 1998–99 through 2002–03
revealed that payments made for outpatient visits to an
emergency room, mostly one hospital, increased $821,000.
This increase accounts for 90 percent of its $909,000 overall
increase in outpatient hospital payments. Although the number
of emergency room and nonemergency room outpatient
visits each increased by about 200 in the four-year period,
a significant increase in its average payment for emergency
room visits caused its average payment for outpatient visits to
increase overall. Specifically, Deuel’s average hospital payment
for emergency room outpatient visits increased from less than
$950 per visit in fiscal year 1998–99 to more than $3,300 per
visit in fiscal year 2002–03. In contrast, Deuel’s average payment
per nonemergency room outpatient visit decreased from nearly
$475 in fiscal year 1998–99 to slightly more than $450 in
fiscal year 2002–03. Therefore, the more-expensive outpatient
services provided in an emergency room, for which Deuel pays a
percentage of the hospital’s total charge without a limit, caused
its average payment per outpatient visit to increase.
We asked HCSD whether it had performed any analysis to
determine the extent to which increases in outpatient costs were
driven by rising costs per visit at reception centers versus other
institutions and received the following response:
8

60

As we discuss in the Scope and Methodology section of the report, Corrections asserted
the privilege contained in California Government Code, Section 6254.14, that permits
it to protect from disclosure certain information associated with health care services
contracts, including rates. Thus, we do not disclose the rates Corrections paid because
it asserts that disclosure of this information could impact its ability to negotiate future
contracts with providers that may insist on like terms.

California State Auditor Report 2003-125

HCSD has not conducted a comprehensive analysis of
outpatient cost drivers between reception centers vs.
general population institutions. In recognition of the
need for analysis of cost drivers, in the Spring of 2004,
[Corrections] formed a specialty care cost mitigation
work group. This work group is tasked with developing
an instrument to perform an analysis of “outlier”
cost and utilization for both inpatient and outpatient
services. HCSD will conduct an analysis of high cost
outpatient visits upon the hiring of additional resources
for HCCUP.
We also specifically asked if Corrections had performed any
studies on the cost of health care for individuals coming into a
reception center from parole versus from a county jail and were
told the following:
Currently, [Corrections] lacks the automation
infrastructure to perform this type of analysis. The
Departmental databases that collect reception center
inmate data [are] not linked to any of the programs
that collect health care data. Until such time that there
is sufficient resources and automation infrastructure to
comprehensively collect and track all data elements,
[Corrections] cannot perform this level of analysis.
[Corrections] is moving forward with such technology
through the Business Information System and the
Strategic Offender Management System information
databases.

New and Existing Inmates’ Visits to Off-Site Emergency
Rooms Varied Significantly

The frequency of inmates
going to hospital
emergency rooms for
outpatient visits varied
significantly, regardless
of the type of health
care facility at the
correctional institution.

To test further the validity of the Deuel health care manager’s
observation related to the high number of emergency room
visits at reception centers, we analyzed the number of offsite emergency room visits made by inmates at various
institutions with and without reception centers. In our
analysis, we also considered the level of medical care that
could be provided at each institution—whether it had a
general acute care hospital, a correctional treatment center,
or an outpatient housing unit. Table 9 on the following
page shows that the frequency of inmates going to hospital
emergency rooms for outpatient visits varied significantly,
regardless of the type of health care facility at the
correctional institution.

California State Auditor Report 2003-125

61

TABLE 9
The Frequency of Outpatient Visits to Emergency Rooms Varied Significantly for
Institutions Housing New and Existing Inmates
Type of Health Care Facility*

Frequency of Inmate Emergency Room
Outpatient Visits in Fiscal Year 2002–03†

CTC

1 in 25

North Kern State Prison

CTC

1 in 48

Deuel Vocational Institution

OHU

1 in 15

San Quentin State Prison

OHU

1 in 76

California State Prison, Sacramento

CTC

1 in 18

California State Prison, Solano

CTC

1 in 1,926

Correctional Institution
With a Reception Center
R. J. Donovan Correctional Facility

Without a Reception Center

California Men’s Colony

HOSP

1 in 89

California Medical Facility

HOSP

1 in 411

California Correctional Center

OHU

1 in 26

California Rehabilitation Center

OHU

1 in 353

Sources: California Department of Corrections’ (Corrections) health care cost and utilization program database; Corrections’
Estimates and Statistical Analysis Section, Offender Information Services Branch.
* HOSP: general acute care hospital; CTC: correctional treatment center; OHU: outpatient housing unit.
†

We calculated the frequency of visits by dividing the average daily inmate population at the respective correctional institution by
the number of hospital emergency room visits and present the resulting average as a ratio.

It is interesting to note that both Deuel and San Quentin State
Prison have reception centers with average daily populations
that are about half of their total average daily populations,
and both have outpatient housing units. However, one in
15 inmates from Deuel was sent to an off-site emergency
room, and only one in 76 San Quentin State Prison inmates
was sent to an off-site emergency room. Our analysis revealed
similar findings when comparing the frequency of emergency
room visits at other institutions with and without reception
centers. For example, California State Prison, Sacramento
(Sacramento), which has a correctional treatment center but no
reception center, sent more inmates to emergency rooms than
did Donovan and North Kern State Prison, which also have
correctional treatment centers as well as reception centers.
Also surprising is the number of off-site emergency room visits
at the California Men’s Colony, which has a hospital on site.
Although one in 89 inmates at that facility was sent to an
off-site emergency room for an outpatient visit, only one in
411 inmates at the California Medical Facility, which also has a
62

California State Auditor Report 2003-125

Based on Corrections’
data, we concluded that
an institution’s increasing
outpatient costs could
not be directly related to
the institutions having a
reception center.

hospital on site, was sent to an off-site emergency room. Based
on these data, we concluded that an institution’s increasing
outpatient costs could not be directly related to the institution’s
having a reception center.
We asked HCSD if it had performed any analysis related to the
extent that increased use of emergency rooms were contributing
to the price per outpatient visit and were informed:
As stated . . . above, HCSD has established a work group
to develop and provide on-going analysis on such
outpatient [emergency room] visits.

It Is Unclear Why the Number of Outpatient Visits From Each
Institution Varied Widely and the Aggregate Number of
Outpatient Visits Increased Significantly
Our analysis of outpatient visits made by inmates from each
institution revealed that Sacramento had one of the largest
increases in payments for outpatient services due to an increased
number of outpatient visits. As we did for emergency room visits,
we analyzed total outpatient visits by the type of health care
facilities within institutions with reception centers and those
without reception centers. For example, as shown in Table 10,
Sacramento, which does not have a reception center but does
have a correctional treatment center, had an average of one
outpatient visit for every five inmates—more than three and
one-half times greater than that of California State Prison, Solano,
which also does not have a reception center but has a correctional
treatment center. Considering the perspective of the Deuel health
care manager regarding the effect that having a reception center
had on the number of outpatient visits per inmate, Sacramento’s
volume of inmate visits is of even more concern because it is
nearly five times that of North Kern State Prison, which has a
correctional treatment center like Sacramento but had an average
daily population of nearly 4,100 inmates at its reception center.
While some institutions may have inmate populations that are
generally healthier than others, this reason alone would not seem
to account for some institutions sending inmates to outpatient
visits at rates three to 20 times the rate of institutions with similar
types of health care facilities.

California State Auditor Report 2003-125

63

TABLE 10
The Frequency of Outpatient Visits Per Inmate
Varied Significantly Between Similar Institutions
Correctional Institution

Type of Health Care Facility*

Frequency of Inmate Outpatient
Visits in Fiscal Year 2002–03†

With a Reception Center
R. J. Donovan Correctional Facility

CTC

1 in 6

North Kern State Prison

CTC

1 in 24

Deuel Vocational Institution

OHU

1 in 7

San Quentin State Prison

OHU

1 in 19

California State Prison, Sacramento

CTC

1 in 5

California State Prison, Solano

CTC

1 in 18

California Men’s Colony

HOSP

1 in 21

California Medical Facility

HOSP

1 in 11

California Correctional Center

OHU

1 in 15

California Rehabilitation Center

OHU

1 in 353

Without a Reception Center

Sources: California Department of Corrections’ (Corrections) health care cost and utilization program database; Corrections’
Estimates and Statistical Analysis Section, Offender Information Services Branch.
* HOSP: general acute care hospital; CTC: correctional treatment center; OHU: outpatient housing unit.
†

We calculated the frequency of visits by dividing the average daily inmate population at the respective correctional institution by
the number of hospital outpatient visits and present the resulting average as a ratio.

We asked the health care manager at Sacramento a series of
questions to determine a reason for a 329 percent increase
in the number of outpatient visits for this institution—from
147 in fiscal year 1998–99 to 630 in fiscal year 2002–03.
However, the manager was unable to provide any insights. For
example, according to the health care manager, the number of
inmates housed at the prison had not increased, no changes
occurred requiring institutions to provide more frequent
outpatient hospital care to inmates, and no crises arose related
to health care, such as an epidemic. Additionally, Sacramento’s
health care manager provided no indication that any change had
occurred in how the institution determined when an inmate
needed outpatient hospital services. Further, he indicated it
would be difficult to obtain the data that would have allowed
him to determine if there had been a reduction in the number
of inmates who were treated on site or at other nonhospital
settings, such as other correctional medical facilities.

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The Sacramento health care manager also said that the data we
sent him from the HCCUP database that included the ICD-9-CM
diagnosis codes was of limited value because the diagnosis
codes are general in nature and not completely descriptive of
what patients actually need or receive. Also, according to the
health care manager, the same diagnosis code, used for different
patients, could result in varying charges based on patient need
and the actual services provided. In line with the Sacramento
health care manager, the Deuel health care manager agreed
that the ICD-9-CM diagnosis codes are only indicators of why
patients seek medical attention and have no bearing on actual
costs. ICD-9-CM diagnosis codes do not give an accurate picture
of the scope of service that was received by a patient or serve
as a true indicator of what really happened. According to the
Deuel health care manager, ICD-9-CM diagnosis codes are
very subjective for several reasons. One reason is that typically
a physician does not use an ICD-9-CM diagnosis code in a
report or consult; rather, the staff responsible for coding and
submitting the medical claim interprets the doctor’s notes
and selects a code that they feel is appropriate. Also, the same
ICD-9-CM diagnosis code is used for a surgery consult, the
surgery itself, and the follow-up appointment.

Neither Corrections
nor we can adequately
analyze the data in
Corrections’ HCCUP
database because
medical procedure codes
were not consistently
entered from hospital
outpatient invoices.

The Sacramento and Deuel health care managers’ comments are
correct. Neither Corrections nor we could adequately analyze the
data in its HCCUP database because although Sacramento and
Deuel consistently entered the ICD-9-CM diagnosis codes, they
did not consistently enter the ICD-9-CM procedure codes or CPT
codes from the hospital outpatient invoices they paid. Therefore,
to determine the outpatient procedures that had been paid for
would require someone to laboriously locate and review invoices.
For example, during fiscal year 1998–99, Sacramento entered the
ICD-9-CM procedure codes for only 13 of 152 outpatient payment
records and the CPT codes for two of the 152 outpatient payment
records. In fiscal year 2002–03, the numbers were only 45 of
647 outpatient payment records for the ICD-9-CM procedure codes
and none of 647 outpatient payment records for the CPT codes (an
outpatient visit can have more than one payment record).
Because the Sacramento health care manager did not provide
any insights about the cause of the 329 percent increase in
outpatient visits from our series of questions, we repeated our
questions. We inquired again to ensure that he understood
that we were interested in any causes that he had analyzed or
could now analyze based on either the data we sent him or data
that he already had available to him. In response to a question

California State Auditor Report 2003-125

65

regarding inmate demographics, his second response indicated
that no changes in the demographics of the inmate population
had occurred. In response to a question regarding analysis of
the dramatic increase in outpatient visits he may have already
performed, he provided no indication of having performed such
an analysis.
The Sacramento health care manager did, however, indicate
that he reviewed 90 of the 230 cases we found in which the
charges totaled less than $100. He stated that all these charges
were for office visits to specialists regarding medical conditions
that could not be treated at correctional facilities. Although it
appears that very little of the outside facilities’ resources were
used for these visits, the Sacramento health care manager stated
that many of these visits were either initial consultations or
follow-up visits with specialists. According to the health care
manager, it is customary for a specialist to see a patient before
recommending a specific course of treatment, such as surgery,
and to provide at least one follow-up visit for a patient after
providing treatment.
Because he gave us no insights into the nearly 100 other cases
that had charges of less than $100 and for which the patient
had no additional procedure performed during the fiscal year,
we asked HCSD to explain why these cases could not have been
treated at correctional treatment centers like Sacramento. HCSD
responded as follows:
In order to evaluate medical necessity, it is sometimes
necessary for a patient to be seen by outside specialists
knowledgeable in that specific medical and/or surgical
area. The evaluation assists in determining the clinical
management plan, including conservative management
that may not require additional treatment, studies,
procedures or follow-up consultation.

HCSD stated that it
had not completed an
analysis of the causes of
the increases in outpatient
visits between fiscal years
1998–99 and 2002–03.

66

To gain perspective on reasons for the rising trend in outpatient
visits systemwide, we asked HCSD if it had performed any
analysis of the causes of the dramatic 98 percent increase in
outpatient visits—from 7,547 in fiscal year 1998–99 to 14,923 in
fiscal year 2002–03—and were informed that:
The HCSD has not completed a detailed analysis of the
causes of the increases in outpatient visit[s] from FY
1998/99 to 200[2]/2003. As stated above, [Corrections]

California State Auditor Report 2003-125

acknowledges the need for this type of analysis. With
the anticipated staff augmentation and focus, HCSD will
prepare this analysis within the next fiscal year.
We also asked HCSD what quality control review procedures
it has implemented to ensure that its health care professionals
do not request outside outpatient services that could be
performed within the institution. HCSD provided the
following information:
Healthcare policy dictates that inmate-patients receive
[cost-effective] medical care, which does not differ in its
essential elements from what is provided in the general
community. To this purpose, [Corrections] performs
utilization management statewide. The purpose of the
program is to execute a process for providing quality
health care while containing cost. The UM process
includes select prospective, concurrent and retrospective
reviews, and the prospective review process can include
four levels of review to determine eligibility. In addition,
all off-site medical care requires an approval by the
Health Care Manager or designee . . .

HCSD stated that within
the next six months, a
quality control process
will be developed that
includes monthly audits
of a sample of reviews
performed by UM staff.

The UM Guidelines provides an overview of the
UM Program within [Corrections’] health care delivery
system. The UM Program was taught in the mandatory
statewide videoconference in December 2003. The
training included all physicians and nurses as well as
many other classifications. One of the objectives as
stated in the UM Guidelines is to determine the most
appropriate statewide utilization of health care resources,
including the site of service delivery. HCSD UM staff
have begun monitoring and performing assessments of
compliance with the UM processes as noted [earlier].
Within the next six months, a quality control process
will be developed that includes monthly audits of a
sample of reviews performed by UM staff. The data
reviewed will include the site of service delivery for
quality and cost containment measures.
In addition, the HCSD is defining and developing a
Specialty Care Program standard management report
that will better integrate contracts, cost, utilization and
clinical information. This report will be used to identify
patterns at a statewide, institution and provider level
in order to reduce inappropriate use of services, and

California State Auditor Report 2003-125

67

assist with prioritizing and developing select policies,
protocols and training and with contract negotiations
and developing budgets and projections.

CONTRACT PROVISIONS ALSO RESULTED IN
CORRECTIONS PAYING HIGHER AMOUNTS FOR
OUTPATIENT HEALTH CARE

On average, Corrections
paid two to four times the
amounts Medicare would
have paid the same
hospitals for the same
outpatient services.

Similar to its contract provisions for inpatient hospital care,
Corrections’ outpatient contract provisions base payments on
a percentage of the hospitals’ billed charges rather than costs
and generally resulted in Corrections paying on average two
to four times the amounts Medicare would have paid for the
same outpatient services. The outpatient payment terms varied
among the contracts Corrections has with the 14 hospitals
we reviewed.9 Generally, however, the contracts stipulate that
Corrections pay certain percentages of the hospitals’ billed
charges.10 Some hospital contracts place limits (caps) on
Corrections’ payments—for example, a cap on the payment for
each outpatient visit or for a particular outpatient service, such
as surgery. However, for emergency room outpatient services,
all but three contracts stipulate that Corrections pay emergency
room outpatient services at a percentage of the hospitals’ billed
charges without a cap.
We compared the amounts Corrections paid hospitals, on
the outpatient invoices we randomly selected to review, to the
amounts Medicare would have paid for the same outpatient
services. Our comparison revealed that Corrections generally
paid most of the 14 hospitals we reviewed multiples of the
Medicare payment amount, as shown in Table 11. Corrections’
higher payments were most evident for emergency room
outpatient services. Specifically, for the invoices we reviewed,
Corrections paid on average two and one-half times the

68

9

Although we reviewed Corrections’ inpatient payments to 15 hospitals, we did not
review Corrections’ outpatient payments for one of the 15 hospitals because in fiscal
year 2002–03 Corrections paid this hospital less than $10,000 for outpatient services.

10

As we discuss in the Scope and Methodology section of the report, Corrections
asserted the privilege contained in California Government Code, Section 6254.14, that
permits it to protect from disclosure certain information associated with health care
services contracts, including rates. Thus, we do not disclose the floor and ceiling of
the contract provisions because Corrections asserts that disclosure of this information
could impact its ability to negotiate future contracts with providers that may insist on
like terms.

California State Auditor Report 2003-125

amounts Medicare would have paid for the same outpatient
services overall. However, when the outpatient care was an
emergency room visit, Corrections paid on average four times
the amount Medicare would have paid for the same service.
Corrections typically pays a percentage of the hospital charge
without a cap for emergency room outpatient services,
apparently in recognition of the urgent and potentially intensive
health care that inmates need. By comparison, Medicare would
pay hospitals for the same emergency room services based on
the CPT codes the hospitals submit, which represent the varied
levels or intensity of the hospital services provided. Thus, the
higher the level or intensity of hospital services, the higher
the code submitted by the hospital and the higher the Medicare
payment. Medicare also pays for most ancillary tests and
procedures, such as laboratory tests and X-rays, that the hospital
might perform as part of an emergency room visit.

TABLE 11
The California Department of Corrections’ Outpatient
Payments Were Higher Than What Medicare Would
Have Paid for the Same Services
Number of
Invoices Reviewed

Calculated Corrections to
Medicare Payment Ratio†

Emergency room visits

17

4.0

Nonemergency room
outpatient visits

38

2.0

Overall

55

2.5

Type of Payment*

Sources: Hospital invoices that the California Department of Corrections (Corrections)
paid for the outpatient care hospitals provided to inmates; Medicare outpatient payment
calculations based on the ambulatory payment classification codes derived from the
hospital-invoiced outpatient services and procedures.
* Corrections’ accounting codes in its health care cost and utilization program database
identify payments for emergency room visits versus nonemergency room outpatient visits.
†

Unlike our analysis of Corrections’ inpatient payments, we did not adjust the Medicare
outpatient payments to reflect the updated hospital cost-to-charge ratios from fiscal
year 2002–03.

The wide range in Corrections’ payments to hospitals compared
with the amounts Medicare would have paid these hospitals
for the same outpatient services indicates the disparity
between payments based on a percentage of hospital-billed
California State Auditor Report 2003-125

69

charges (Corrections’ payment system) to payments based
on the level of services provided and their estimated costs
(Medicare’s payment system). Our analysis of Corrections’
outpatient payments revealed that 10 of the 17 payments for
emergency room visits were to Tenet hospitals and ranged
from 2.8 to 19.8 times the amounts that Medicare would have
paid the Tenet hospitals for the same services. The other seven
payments for emergency room outpatient visits were to non-Tenet
hospitals and ranged from 1.1 to 11.1 times the amounts that
Medicare would have paid the non-Tenet hospitals for the same
services. Additionally, of the 38 payments for nonemergency
room outpatient visits, 13 were to Tenet hospitals and 25 were to
non-Tenet hospitals. Corrections’ payments to the Tenet hospitals
for the nonemergency room outpatient visits ranged from
0.2 to 6.9 times the amounts that Medicare would have paid,
and its payments to the non-Tenet hospitals ranged from 1.3 to
14.6 times the amounts that Medicare would have paid.
As we discussed in a previous section, some hospitals, including
some Tenet hospitals, manipulated the Medicare outlier formula
to receive higher payments by aggressively increasing their billed
charges. Therefore, as with its inpatient hospital payments,
Corrections could improve its payment system by basing its
outpatient hospital payments on costs rather than hospital charges.

The significant difference
in Corrections’ payments
to what Medicare would
have paid indicates that
Corrections could achieve
significant savings if it
could pay the same rates as
Medicare for its outpatient
hospital services.

For the invoices we reviewed, Corrections paid more than the
amount Medicare would have paid for the same outpatient
services for all 17 emergency room outpatient visits and all but
five of the 38 nonemergency room outpatient visits. In total,
Corrections paid $90,800 for the 17 emergency room outpatient
visits compared with $23,000 that Medicare would have paid;
and Corrections paid $136,800 for the 38 nonemergency room
outpatient visits compared with $66,900 that Medicare would
have paid. Although we did not use a sampling methodology
that would allow us to determine a statistically valid projection
for the entire universe of Corrections’ outpatient payments, the
significant difference in Corrections’ payments to what Medicare
would have paid indicates that Corrections could achieve
significant savings if it could pay the same rates as Medicare for
its outpatient hospital services.
As a rough illustration of the potential savings that Corrections
might achieve if it could pay the same rates as Medicare, and
if the 17 emergency room outpatient payments we reviewed

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California State Auditor Report 2003-125

were representative of its nearly 3,500 payments it classified as
payments for emergency room outpatient services at all hospitals,
Corrections could potentially reduce the $6.2 million it spent
on emergency room outpatient services in fiscal year 2002–03 to
$1.6 million. Similarly, if it could pay Medicare rates and if the
38 nonemergency room outpatient payments we reviewed were
representative of its nearly 11,500 payments for nonemergency
room outpatient services at all hospitals, Corrections could
potentially reduce the $13.6 million it spent for nonemergency
outpatient services in fiscal year 2002–03 to $6.8 million. We
realize that the potential savings of $4.6 million in emergency
room outpatient payments and $6.8 million in nonemergency
room outpatient payments may not be entirely achievable.
However, the potential for Corrections to achieve some level
of savings appears significant if it could pay hospitals amounts
determined by a payment system such as Medicare’s, which is
based on an estimate of the resources the hospitals use and the
associated costs for the services the hospitals provide.

RECOMMENDATIONS
To understand the reasons behind the rising trend in its
inpatient and outpatient hospital payments, Corrections should
do the following:
• Enter complete and accurate hospital-billing and medical
procedures data in its HCCUP database for subsequent
comparison and analysis by HCSD and correctional
institutions of the medical procedures that hospitals are
performing and their associated costs.
• Perform regular analysis of its health care cost and utilization
data, monitor its hospital payment trends, and investigate
fully the reasons why its costs are rising for the purpose of
implementing cost containment measures.
• Investigate the significant and sudden increase in its inpatient
hospital payments, beginning in fiscal year 2000–01, for
the purpose of determining whether renegotiating contract
payment rates, reducing the length of stay in contract hospital
beds, or other cost containment measures can most effectively
reduce its contract hospital costs.

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71

• Complete its analysis of high-cost cases to determine why
the number of high-cost inpatient cases and more-expensive
outpatient visits are rising so that it can identify cost-effective
solutions to its increasing health care costs. For example,
Corrections should fully investigate the extent to which each
of the potential cost drivers it has identified as part of its
analysis of high-cost inpatient cases is increasing its hospital
inpatient costs.
• Follow up with all institutions using new hospital contracts
to determine if renegotiated contract payment terms are
resulting in significantly higher costs, as they did for the two
institutions that informed us of the significant effect on their
inpatient hospital costs for high-cost cases.
To control increases in inpatient and outpatient hospital
payments caused by contract payment provisions, Corrections
should do the following:
• Revisit hospital contract provisions that pay a discount on
the hospital-billed charges and consider renegotiating these
contract terms based on hospital costs rather than hospital
charges. Corrections should also reassess hospital contract
provisions that require it to pay a percentage of hospitals’
billed charges for outpatient visits, including emergency room
outpatient visits. To renegotiate contract rates, Corrections
should use either existing cost-based benchmarks, such as
Medicare or Medi-Cal rates, or hospital cost-to-charge ratios to
estimate hospital costs. Further, should Corrections renegotiate
hospital contract payment terms, it should perform subsequent
analysis to quantify and track the realized savings or increased
costs resulting from each renegotiated contract.
• Obtain and maintain updated cost-to-charge ratios for each
contracted hospital, using data from the Centers for Medicare
and Medicaid Services, the Department of Health Services, or
the Office of Statewide Health Planning and Development. It
should use these ratios to calculate estimated hospital costs for
use as a tool in contract negotiations with hospitals and
for monitoring the reasonableness of payments to hospitals.
• Require hospitals to include DRG codes on invoices they
submit for inpatient services to help provide a standard, along
with hospital charges, by which Corrections can measure its
payments to hospitals as well as case complexity.

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California State Auditor Report 2003-125

• Detect abuses of contractual stop-loss provisions by monitoring
the volume and total amounts of hospital payments made
under stop-loss provisions, which are intended to protect
hospitals from financial loss in exceptional cases, not to
become a common method of payment.
To control rising inpatient and outpatient hospital payments
caused by increases in the numbers of hospital admissions or
visits, Corrections should do the following:
• Include in its utilization management quality control process
a review of how utilization management medical staff
assess and determine medical necessity, appropriateness of
treatment, and need for continued hospital stays.
• Investigate the reasons why the number of outpatient visits by
inmates has nearly doubled even though the inmate population
has remained relatively constant, and implement plans to
correct the significant increase in outpatient hospital visits.
• Continue with its plan to analyze how mentally ill inmates
are affecting inpatient costs and utilization at its institutions.

We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
government auditing standards. We limited our review to those areas specified in the audit
scope section of this report.
Respectfully submitted,

ELAINE M. HOWLE
State Auditor
Date: July 27, 2004
Staff:

Philip J. Jelicich, CPA, Deputy State Auditor
Robert C. Cabral, CPA, CIA, CISA
Joe Azevedo
Dawn M. Beyer
Vaughn Hagerty

California State Auditor Report 2003-125

73

Blank page inserted for reproduction purposes only.

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California State Auditor Report 2003-125

APPENDIX A
Hospital Payments by Correctional
Institution for Fiscal Years 1998–99
Through 2002–03

T

he California Department of Corrections (Corrections)
uses its health care cost and utilization program (HCCUP)
database to track data related to the health care services
inmates receive, including payments to hospitals. Each
correctional institution typically employs a HCCUP analyst, who
is responsible for processing and adjusting health care invoices
before sending the invoices to the institution’s assigned regional
accounting office, where the invoice is ultimately processed for
payment. Using Corrections’ HCCUP database, we identified
payments made to hospitals for fiscal years 1998–99 through
2002–03 for medical services that inmates received. These
medical services included but were not limited to inpatient,
outpatient, physician, ambulance, and laboratory services.
Table A.1 on the following page shows hospital payments for
health care provided to inmates at each of the 33 correctional
institutions in California, along with the average daily
population for each institution for fiscal years 1998–99 through
2002–03.11 The table shows that the total average cost per inmate
rose to $748 in fiscal year 2002–03 from $353 in fiscal year
1998–99, an increase of nearly 112 percent. The biggest increase
occurred in fiscal year 2000–01, when the cost per inmate grew
to $527, an increase of more than 37 percent over fiscal year
1999–2000. The table also shows that the average daily inmate
population remained relatively stable at approximately 151,000
inmates within the institutions. The stability of the inmate
population is also reflected in the average daily populations at
most institutions; Avenal State Prison and Wasco State Prison
were among the few exceptions to this trend.
The reasons for the trend in increasing hospital payments are
discussed in more detail in the Audit Results section.

11

Although California currently has 32 adult correctional institutions, 33 institutions were
counted in this audit because the Northern California Women’s Facility made payments
for hospital services during fiscal year 2002–03 but was deactivated early in 2003.

California State Auditor Report 2003-125

75

TABLE A.1
Hospital Payments Increased Although Inmate Populations Remained Relatively Stable
Fiscal Year
Correctional Institution

1998–99

1999–2000

2000–01

2001–02

2002–03

Totals

Avenal State Prison
$811,047

$684,335

$1,245,370

$1,469,677

$2,036,693

$6,247,122

Outpatient

157,589

132,407

173,955

387,553

617,616

1,469,120

Other

470,914

453,728

580,283

721,649

704,074

2,930,648

$1,439,550

$1,270,470

$1,999,608

$2,578,879

$3,358,383

$10,646,890

Average daily population

5,735

6,381

6,789

6,692

6,882

Average per inmate

$251

$199

$295

$385

$488

Inpatient

Totals

California Correctional Center
$1,274,722

$1,160,405

$356,023

$1,281,673

$2,100,692

$6,173,515

Outpatient

230,251

257,046

216,056

602,838

796,948

2,103,139

Other

373,070

334,427

223,371

466,995

484,666

1,882,529

$1,878,043

$1,751,878

$795,450

$2,351,506

$3,382,306

$10,159,183

Average daily population

5,860

5,845

5,840

5,837

5,812

Average per inmate

$320

$300

$136

$403

$582

$329,401

$545,286

$927,650

$690,092

$872,919

66,554

94,368

164,909

226,264

291,029

843,124

349,819

396,097

489,224

442,903

366,133

2,044,176
$6,252,648

Inpatient

Totals

California Correctional Institution
Inpatient
Outpatient
Other
Totals

$3,365,348

$745,774

$1,035,751

$1,581,783

$1,359,259

$1,530,081

Average daily population

5,929

5,577

5,429

5,233

5,330

Average per inmate

$126

$186

$291

$260

$287

$2,955,391

$2,409,727

$2,824,723

$3,799,455

$3,205,368

$15,194,664

57,478

47,780

27,851

53,118

73,944

260,171

California Institution for Men
Inpatient
Outpatient

347,175

297,423

346,718

423,716

358,322

1,773,354

$3,360,044

$2,754,930

$3,199,292

$4,276,289

$3,637,634

$17,228,189

Average daily population

6,348

6,268

6,251

6,322

6,445

Average per inmate

$529

$440

$512

$676

$564

$1,653,914

$2,442,137

$2,344,937

$2,062,237

$1,940,709

$10,443,934

62,674

83,989

132,192

175,737

216,220

670,812

Other
Totals

California Institution for Women
Inpatient
Outpatient

234,726

220,744

386,892

378,406

413,993

1,634,761

$1,951,314

$2,746,870

$2,864,021

$2,616,380

$2,570,922

$12,749,507

1,791

1,888

1,881

1,769

1,676

$1,090

$1,455

$1,523

$1,479

$1,534

$2,899,488

$2,156,569

$3,630,938

$3,470,277

$5,186,988

$17,344,260

Outpatient

459,902

540,342

682,454

589,880

643,292

2,915,870

Other

893,064

737,936

1,165,122

1,053,596

1,120,704

4,970,422

$4,252,454

$3,434,847

$5,478,514

$5,113,753

$6,950,984

$25,230,552

Other
Totals
Average daily population
Average per inmate
California Medical Facility
Inpatient

Totals
Average daily population
Average per inmate

76

3,110

3,044

3,119

3,239

3,289

$1,367

$1,128

$1,756

$1,579

$2,113

California State Auditor Report 2003-125

Fiscal Year
Correctional Institution

1998–99

1999–2000

2000–01

2001–02

2002–03

Totals

California Men’s Colony
$989,502

$1,374,173

$1,776,482

$1,398,265

$2,244,653

$7,783,075

Outpatient

326,394

303,361

361,095

421,370

642,172

2,054,392

Other

474,718

478,334

574,209

602,696

766,531

2,896,488
$12,733,955

Inpatient

Totals

$1,790,614

$2,155,868

$2,711,786

$2,422,331

$3,653,356

Average daily population

6,655

6,816

6,755

6,567

6,505

Average per inmate

$269

$316

$401

$369

$562

$829,988

$1,131,147

$1,097,201

$1,511,716

$796,377

$5,366,429

10,642

19,322

23,525

33,575

17,201

104,265

California Rehabilitation Center
Inpatient
Outpatient

51,666

76,187

125,443

147,937

59,433

460,666

$892,296

$1,226,656

$1,246,169

$1,693,228

$873,011

$5,931,360

Average daily population

4,881

4,850

4,790

4,614

4,587

Average per inmate

$183

$253

$260

$367

$190

$596,024

$761,604

$1,434,112

$1,827,710

$2,424,270

$7,043,720

Outpatient

110,947

147,798

135,524

246,260

728,169

1,368,698

Other

348,073

292,569

451,438

658,753

1,196,176

2,947,009

$1,055,044

$1,201,971

$2,021,074

$2,732,723

$4,348,615

$11,359,427

Average daily population

4,760

4,950

4,922

4,913

4,862

Average per inmate

$222

$243

$411

$556

$894

$536,766

$838,739

$1,344,479

$1,873,189

$1,704,943

$6,298,116

93,646

108,729

176,440

190,058

276,367

845,240

115,050

148,436

123,733

212,513

318,807

918,539
$8,061,895

Other
Totals

California State Prison, Corcoran
Inpatient

Totals

California State Prison,
Los Angeles County
Inpatient
Outpatient
Other
Totals

$745,462

$1,095,904

$1,644,652

$2,275,760

$2,300,117

Average daily population

4,188

4,189

4,180

4,034

4,177

Average per inmate

$178

$262

$393

$564

$551

California State Prison, Sacramento
Inpatient

$715,432

$292,477

$994,558

$1,352,438

$2,176,227

$5,531,132

Outpatient

153,942

168,947

237,718

699,283

739,426

1,999,316

Other

249,383

152,567

286,080

450,026

408,362

1,546,418
$9,076,866

Totals

$1,118,757

$613,991

$1,518,356

$2,501,747

$3,324,015

Average daily population

3,090

3,011

2,952

2,945

2,977

Average per inmate

$362

$204

$514

$849

$1,117

$947,082

$1,061,464

$1,880,733

$1,674,056

$2,978,305

$8,541,640

83,542

84,112

350,860

340,069

404,446

1,263,029

California State Prison, Solano
Inpatient
Outpatient

265,717

169,828

581,120

511,899

507,126

2,035,690

$1,296,341

$1,315,404

$2,812,713

$2,526,024

$3,889,877

$11,840,359

Average daily population

5,711

5,790

5,803

5,803

5,778

Average per inmate

$227

$227

$485

$435

$673

Other
Totals

continued on next page

California State Auditor Report 2003-125

77

Fiscal Year
Correctional Institution

1998–99

1999–2000

2000–01

2001–02

2002–03

Totals

California Substance Abuse
Treatment Facility at Corcoran
Inpatient
Outpatient

$649,089

$914,757

$1,590,636

$3,654,395

$4,346,943

$11,155,820

111,715

178,698

280,155

637,642

1,060,041

2,268,251

352,113

360,195

631,019

1,239,824

1,078,112

3,661,263

$1,112,917

$1,453,650

$2,501,810

$5,531,861

$6,485,096

$17,085,334

Average daily population

5,997

6,384

6,271

6,384

6,583

Average per inmate

$186

$228

$399

$867

$985

$393,090

$198,473

$458,020

$276,124

$2,231,355

$3,557,062

Outpatient

222,065

192,215

299,136

235,954

401,284

1,350,654

Other

179,687

161,914

309,144

284,934

537,133

1,472,812

$794,842

$552,602

$1,066,300

$797,012

$3,169,772

$6,380,528

Average daily population

4,073

4,112

4,128

4,053

4,126

Average per inmate

$195

$134

$258

$197

$768

$342,933

$213,323

$340,259

$369,640

$1,250,151

$2,516,306

Outpatient

269,176

275,391

377,448

446,721

435,395

1,804,131

Other

198,343

211,381

317,132

353,670

422,001

1,502,527

$810,452

$700,095

$1,034,839

$1,170,031

$2,107,547

$5,822,964

Average daily population

4,419

4,531

4,470

4,313

4,502

Average per inmate

$183

$155

$232

$271

$468

$1,575,620

$1,263,953

$2,322,338

$1,698,594

$1,720,564

$8,581,069

664,434

858,783

1,015,846

1,396,460

987,225

4,922,748

1,064,131

1,030,597

1,497,057

1,255,491

1,187,326

6,034,602
$19,538,419

Other
Totals

Calipatria State Prison
Inpatient

Totals

Centinela State Prison
Inpatient

Totals

Central California Women’s Facility
Inpatient
Outpatient
Other
Totals

$3,304,185

$3,153,333

$4,835,241

$4,350,545

$3,895,115

Average daily population

3,655

3,437

3,395

3,075

3,253

Average per inmate

$904

$917

$1,424

$1,415

$1,197

$378,968

$576,357

$899,437

$674,735

$962,816

$3,492,313

65,613

65,359

104,081

124,435

60,940

420,428

114,689

183,386

282,513

204,619

127,351

912,558
$4,825,299

Chuckawalla Valley State Prison
Inpatient
Outpatient
Other
Totals

$559,270

$825,102

$1,286,031

$1,003,789

$1,151,107

Average daily population

3,614

3,618

3,615

3,613

3,613

Average per inmate

$155

$228

$356

$278

$319

$707,936

$1,112,740

$2,433,086

$1,944,955

$2,912,043

$9,110,760

247,655

167,177

268,292

301,630

470,519

1,455,273

Correctional Training Facility
Inpatient
Outpatient

342,462

437,019

615,556

567,195

715,437

2,677,669

$1,298,053

$1,716,936

$3,316,934

$2,813,780

$4,097,999

$13,243,702

Average daily population

7,160

7,208

7,091

5,874

6,922

Average per inmate

$181

$238

$468

$479

$592

Other
Totals

78

California State Auditor Report 2003-125

Fiscal Year
Correctional Institution

1998–99

1999–2000

2000–01

2001–02

2002–03

Totals

Deuel Vocational Institution
Inpatient
Outpatient
Other
Totals

$494,950

$687,100

$857,930

$1,526,746

$1,967,666

$5,534,392

94,639

165,396

270,019

769,538

1,003,232

2,302,824

180,129

293,816

318,656

523,068

525,013

1,840,682
$9,677,898

$769,718

$1,146,312

$1,446,605

$2,819,352

$3,495,911

Average daily population

3,695

3,753

3,899

3,920

3,909

Average per inmate

$208

$305

$371

$719

$894

$333,706

$330,057

$948,977

$1,338,373

$2,103,983

$5,055,096

55,478

100,448

217,891

335,095

866,163

1,575,075

Folsom State Prison
Inpatient
Outpatient

129,870

149,884

309,761

322,175

515,554

1,427,244

$519,054

$580,389

$1,476,629

$1,995,643

$3,485,700

$8,057,415

Average daily population

3,825

3,835

3,857

3,747

3,714

Average per inmate

$136

$151

$383

$533

$939

$1,015,362

$1,611,352

$2,285,377

$2,210,821

$2,502,016

$9,624,928

185,864

356,251

269,252

378,736

690,710

1,880,813

Other
Totals

High Desert State Prison
Inpatient
Outpatient

404,773

438,756

497,334

489,676

514,969

2,345,508

$1,605,999

$2,406,359

$3,051,963

$3,079,233

$3,707,695

$13,851,249

Average daily population

4,114

4,295

4,322

4,190

4,320

Average per inmate

$390

$560

$706

$735

$858

$867,336

$472,384

$851,271

$937,254

$1,294,806

Other
Totals

Ironwood State Prison
Inpatient

$4,423,051

55,786

64,946

110,421

140,721

148,137

520,011

169,118

240,331

313,452

335,523

250,342

1,308,766

$1,092,240

$777,661

$1,275,144

$1,413,498

$1,693,285

$6,251,828

Average daily population

4,342

4,595

4,565

4,588

4,564

Average per inmate

$252

$169

$279

$308

$371

Outpatient
Other
Totals

Mule Creek State Prison
$538,127

$496,329

$360,615

$764,873

$2,315,757

$4,475,701

Outpatient

135,170

193,214

173,093

354,434

701,206

1,557,117

Other

258,001

333,104

242,038

435,944

578,245

1,847,332

$931,298

$1,022,647

$775,746

$1,555,251

$3,595,208

$7,880,150

Average daily population

3,580

3,519

3,501

3,594

3,628

Average per inmate

$260

$291

$222

$433

$991

$403,297

$891,057

$771,807

$1,135,637

$1,790,938

58,572

64,418

97,747

211,908

269,617

702,262

268,680

416,561

426,437

483,803

535,896

2,131,377
$7,826,375

Inpatient

Totals

North Kern State Prison
Inpatient
Outpatient
Other
Totals

$730,549

$1,372,036

$1,295,991

$1,831,348

$2,596,451

Average daily population

4,875

4,891

4,976

4,932

5,040

Average per inmate

$150

$281

$260

$371

$515

$4,992,736

continued on next page

California State Auditor Report 2003-125

79

Fiscal Year
Correctional Institution

1998–99

1999–2000

2000–01

2001–02

2002–03

Totals

Northern California Women’s Facility
Inpatient
Outpatient
Other
Totals
Average daily population
Average per inmate

$100,025

$134,057

$192,800

$276,506

$199,022

$902,410

126,998

250,890

405,993

528,488

477,497

1,789,866

97,950

180,811

213,895

250,741

197,368

940,765

$324,973

$565,758

$812,688

$1,055,735

$873,887

$3,633,041

765

752

755

658

409

$425

$752

$1,076

$1,604

$2,137

$467,118

$1,131,988

$1,369,042

$1,367,815

$1,116,066

$5,452,029

753,506

975,681

907,097

1,296,900

1,055,249

4,988,433

Pelican Bay State Prison
Inpatient
Outpatient

564,240

809,179

838,696

817,287

590,029

3,619,431

$1,784,864

$2,916,848

$3,114,835

$3,482,002

$2,761,344

$14,059,893

Average daily population

3,363

3,372

3,293

3,283

3,278

Average per inmate

$531

$865

$946

$1,061

$842

$357,291

$843,159

$653,018

$1,067,531

$1,895,423

$4,816,422
1,024,873

Other
Totals

Pleasant Valley State Prison
Inpatient
Outpatient

114,923

72,927

155,275

226,510

455,238

Other

263,703

288,879

275,490

484,580

517,245

1,829,897

$735,917

$1,204,965

$1,083,783

$1,778,621

$2,867,906

$7,671,192

Average daily population

4,582

4,637

4,631

4,641

4,569

Average per inmate

$161

$260

$234

$383

$628

$4,148,377

$3,255,606

$4,896,899

$7,766,412

$5,443,268

$25,510,562
6,151,341

Totals

R. J. Donovan Correctional Facility
Inpatient
Outpatient
Other
Totals
Average daily population
Average per inmate

719,782

939,037

1,543,796

1,406,826

1,541,900

1,089,881

981,456

1,238,785

1,729,930

1,396,304

6,436,356

$5,958,040

$5,176,099

$7,679,480

$10,903,168

$8,381,472

$38,098,259

4,625

4,660

4,627

4,560

4,345

$1,288

$1,111

$1,660

$2,391

$1,929

Salinas Valley State Prison
$742,922

$892,711

$2,361,015

$2,235,376

$2,181,342

$8,413,366

Outpatient

113,199

129,921

255,251

492,521

493,547

1,484,439

Other

371,545

297,799

604,535

698,428

673,468

2,645,775
$12,543,580

Inpatient

Totals

$1,227,666

$1,320,431

$3,220,801

$3,426,325

$3,348,357

Average daily population

4,192

4,196

4,137

4,194

4,186

Average per inmate

$293

$315

$779

$817

$800

San Quentin State Prison
$3,026,434

$2,147,836

$3,082,588

$3,443,055

$3,441,797

$15,141,710

Outpatient

484,084

617,550

293,561

651,122

1,178,368

3,224,685

Other

615,208

722,921

603,201

669,598

721,714

3,332,642
$21,699,037

Inpatient

Totals

$4,125,726

$3,488,307

$3,979,350

$4,763,775

$5,341,879

Average daily population

5,874

5,824

5,757

5,625

5,737

Average per inmate

$702

$599

$691

$847

$931

80

California State Auditor Report 2003-125

Fiscal Year
Correctional Institution

1998–99

1999–2000

2000–01

2001–02

2002–03

Totals

Sierra Conservation Center
$669,931

$578,522

$796,349

$971,362

$837,288

$3,853,452

Outpatient

330,309

549,974

679,212

839,258

724,051

3,122,804

Other

427,980

552,816

650,176

686,660

459,895

2,777,527
$9,753,783

Inpatient

Totals

$1,428,220

$1,681,312

$2,125,737

$2,497,280

$2,021,234

Average daily population

6,288

6,325

6,329

6,327

6,332

Average per inmate

$227

$266

$336

$395

$319

$1,122,280

$1,700,813

$1,458,608

$2,223,804

$2,018,798

$8,524,303

390,576

597,467

809,648

1,117,397

901,180

3,816,268

Valley State Prison for Women
Inpatient
Outpatient

920,587

1,268,324

1,361,191

1,868,355

1,721,434

7,139,891

$2,433,443

$3,566,604

$3,629,447

$5,209,556

$4,641,412

$19,480,462

Average daily population

3,650

3,578

3,355

3,043

3,262

Average per inmate

$667

$997

$1,082

$1,712

$1,423

$695,839

$1,299,084

$1,966,173

$2,153,081

$1,906,378

$8,020,555
1,082,610

Other
Totals

Wasco State Prison
Inpatient
Outpatient

46,261

75,395

213,543

318,407

429,004

354,529

543,488

844,823

912,196

709,293

3,364,329

$1,096,629

$1,917,967

$3,024,539

$3,383,684

$3,044,675

$12,467,494

Average daily population

5,837

5,692

5,799

5,734

5,989

Average per inmate

$188

$337

$522

$590

$508

$33,569,388

$35,609,721

$50,753,451

$60,447,874

$72,106,564

$252,486,998
63,342,082

Other
Totals

All Institutions
Inpatient*
Outpatient*

7,059,366

8,879,339

11,429,336

16,176,708

19,797,333

Other

12,540,994

13,660,893

17,724,524

20,684,786

20,678,456

85,289,653

Totals

$53,169,748

$58,149,953

$79,907,311

$97,309,368

$112,582,353

$401,118,733

150,583

151,823

151,484

148,316

150,601

$353

$383

$527

$656

$748

Totals average daily population
Totals average per inmate

Sources: California Department of Corrections’ (Corrections) health care cost and utilization program database; Corrections’
Estimates and Statistical Analysis Section, Offender Information Services Branch.
* The total inpatient and outpatient payments do not agree with the respective total payments presented in Tables 2, 3, B.1, and
B.2 because we excluded from our price-volume analyses those inpatient payment records for which Corrections did not enter
a community hospital inpatient admission number and those outpatient payment records for which Corrections did not enter a
community hospital outpatient number. We used the community hospital inpatient admission numbers and outpatient numbers
to identify inpatient admissions and outpatient visits for the purpose of calculating the average payment for each inpatient stay
or outpatient visit.

California State Auditor Report 2003-125

81

Blank page inserted for reproduction purposes only.

82

California State Auditor Report 2003-125

APPENDIX B
Price-Volume Analysis of Hospital
Payments Made by Correctional
Institutions

W

e conducted a price-volume analysis to determine
the extent to which the overall increase in hospital
payments for inpatient and outpatient services was
the result of an increase in the average amount paid for each
hospital inpatient admittance or outpatient visit and the extent
to which the increase was the result of a greater number of
hospital admittances or visits. Using the California Department
of Corrections’ (Corrections) separate payment data for inpatient
and outpatient services, we identified the numbers of hospital
admittances or visits and the associated payments made to
hospitals in fiscal years 1998–99 and 2002–03 for each of the
33 correctional institutions in California.12 We determined an
average payment for each admittance or visit for each fiscal year
and calculated the increase in the average amount paid. We
multiplied the increase in average payment between fiscal years
1998–99 and 2002–03 by the number of hospital admittances or
visits in fiscal year 2002–03 to determine the increase in hospital
payments associated with the increase in the average amount
paid for hospital admittances or visits. To determine the increase
in hospital payments due to more admittances or visits, we
multiplied the increase in the number of hospital admittances or
visits between fiscal years 1998–99 and 2002–03 by the average
amount paid for each admittance or visit in fiscal year 1998–99.
As Table B.1 beginning on page 85 shows, overall payments for
hospital inpatient services increased by more than $38 million
between fiscal years 1998–99 and 2002–03. The results of our
price-volume analysis showed that of that amount, roughly
$27 million (71 percent) was caused by an increase in the
average amount paid for each hospital inpatient admittance.
However, the amounts and the reasons for the increase varied
by institution. For example, the California Substance Abuse
Treatment Facility at Corcoran had the highest dollar increases
at $3.7 million, of which $3.3 million (90 percent) was due

12

Although California currently has 32 adult correctional institutions, 33 institutions were
counted in this audit because the Northern California Women’s Facility made payments
for hospital services during fiscal year 2002–03 but was deactivated early in 2003.

California State Auditor Report 2003-125

83

to an increase in the facility’s average amount paid for each
hospital inpatient admittance. In contrast, the R. J. Donovan
Correctional Facility had the second highest dollar increase at
about $3.5 million, yet nearly $1.9 million of its total increase
(53 percent) was due to an increase in the number of hospital
inpatient admittances.
Table B.2 on page 87 shows that overall payments for hospital
outpatient services increased by roughly $13 million between
fiscal years 1998–99 and 2002–03. According to our price-volume
analysis, nearly $7 million (54 percent) of that amount was
caused by an increase in the average amount paid for each
outpatient visit, whereas nearly $6 million (46 percent) was
caused by an increase in the number of hospital outpatient
visits. As was the case with hospital inpatient services, the
amount of the increase and the reasons for the increase varied
by institution. For example, Deuel Vocational Institution had a
total dollar increase of $909,000, of which $635,000 (70 percent)
was due to an increase in the average amount paid for
hospital outpatient services. However, California State Prison,
Sacramento, had a total dollar increase of about $586,000, of
which $506,000 (86 percent) was due to an increase in the
number of hospital outpatient visits.
The Audit Results section of the report discusses the conclusions
from our price-volume analysis.

84

California State Auditor Report 2003-125

California State Auditor Report 2003-125

TABLE B.1
Price-Volume Analysis of Correctional Institutions’ Inpatient Hospital Payments

Facility

Fiscal Year
1998–99
Payments

Fiscal Year
1998–99
Number of
Admittances

Fiscal Year
1998–99
Average
Payment
Per
Admittance

Fiscal Year
2002–03
Payments

Fiscal Year
2002–03
Number of
Admittances

Fiscal Year
2002–03
Average
Payment Per
Admittance

Increase
(Decrease)
in Payments

Increase
(Decrease) in
Number of
Admittances

Increase
(Decrease)
in Average
Payment
Per
Admittance

Increase
(Decrease)
in Payments
Due to
Number of
Admittances

Percentage
Increase
(Decrease)
Due to
Number of
Admittances

Increase
(Decrease)
in Payments
Due to
Average
Payment
Per
Admittance

Percentage
Increase
(Decrease)
Due to
Average
Payment Per
Admittance

California Substance Abuse Treatment
Facility at Corcoran

$649,089

158

$4,108

$4,346,943

249

$17,458

$3,697,854

91

$13,350

$373,842

10.1%

R. J. Donovan Correctional Facility*

1,796,559

197

9,120

5,325,057

403

13,214

3,528,498

206

4,094

1,878,635

53.2

1,649,863

46.8

Correctional Training Facility*

711,104

77

9,235

2,912,043

137

21,256

2,200,939

60

12,021

554,107

25.2

1,646,832

74.8

California State Prison, Solano

947,082

79

11,988

2,978,305

135

22,062

2,031,223

56

10,074

671,349

33.1

1,359,874

66.9

3,300,893

186

17,747

5,186,988

208

24,937

1,886,095

22

7,190

390,428

20.7

1,495,667

79.3

Mule Creek State Prison

538,127

75

7,175

2,315,757

105

22,055

1,777,630

30

14,880

215,251

12.1

1,562,379

87.9

Folsom State Prison

333,706

32

10,428

2,103,983

113

18,619

1,770,277

81

8,191

844,693

47.7

925,584

52.3

California State Prison, Corcoran*

792,792

120

6,607

2,424,270

178

13,619

1,631,478

58

7,012

383,183

23.5

1,248,295

76.5

California Medical Facility*

Pleasant Valley State Prison

$3,324,012

89.9%

357,291

67

5,333

1,895,423

139

13,636

1,538,132

72

8,303

383,955

25.0

1,154,177

75.0

1,015,362

49

20,722

2,502,016

80

31,275

1,486,654

31

10,553

642,372

43.2

844,282

56.8

Deuel Vocational Institution

494,950

95

5,210

1,967,666

262

7,510

1,472,716

167

2,300

870,070

59.1

602,646

40.9

California State Prison, Sacramento

715,432

68

10,521

2,174,535

118

18,428

1,459,103

50

7,907

526,053

36.1

933,050

63.9

Salinas Valley State Prison*

749,257

72

10,406

2,181,342

93

23,455

1,432,085

21

13,049

218,533

15.3

1,213,552

84.7

North Kern State Prison*

409,507

98

4,179

1,790,938

147

12,183

1,381,431

49

8,004

204,753

14.8

1,176,678

85.2

Wasco State Prison

695,839

169

4,117

1,906,378

237

8,044

1,210,539

68

3,927

279,983

23.1

930,556

76.9

Avenal State Prison*

830,737

140

5,934

2,036,693

186

10,950

1,205,956

46

5,016

272,956

22.6

933,000

77.4

High Desert State Prison

California State Prison, Los Angeles County

536,766

91

5,899

1,704,943

119

14,327

1,168,177

28

8,428

165,159

14.1

1,003,018

85.9

California Men’s Colony*

1,109,416

126

8,805

2,244,653

149

15,065

1,135,237

23

6,260

202,512

17.8

932,725

82.2

Calipatria State Prison*

1,212,506

92

13,179

2,231,355

121

18,441

1,018,849

29

5,262

382,203

37.5

636,646

62.5

Valley State Prison for Women

1,122,280

367

3,058

2,018,798

404

4,997

896,518

37

1,939

113,145

12.6

783,373

87.4

California Correctional Center

1,274,722

63

20,234

2,100,692

102

20,595

825,970

39

361

789,114

95.5

36,856

4.5

Pelican Bay State Prison*

517,303

70

7,390

1,116,066

78

14,309

598,763

8

6,919

59,120

9.9

539,643

90.1

Centinela State Prison*

656,216

69

9,510

1,250,151

90

13,891

593,935

21

4,381

199,718

33.6

394,217

66.4

Chuckawalla Valley State Prison

378,968

47

8,063

962,816

87

11,067

583,848

40

3,004

322,526

55.2

261,322

44.8

85

continued on next page

86
Fiscal Year
1998–99
Number of
Admittances

Fiscal Year
1998–99
Average
Payment
Per
Admittance

Fiscal Year
2002–03
Payments

Fiscal Year
2002–03
Number of
Admittances

Fiscal Year
2002–03
Average
Payment Per
Admittance

Increase
(Decrease) in
Number of
Admittances

Increase
(Decrease)
in Payments
Due to
Number of
Admittances

Facility

Fiscal Year
1998–99
Payments

San Quentin State Prison

$3,026,434

297

$10,190

$3,441,797

178

$19,336

$415,363

880,973

79

11,152

1,294,806

115

11,259

413,833

36

California Institution for Men

2,955,391

224

13,194

3,205,368

281

11,407

249,977

57

California Institution for Women

1,653,914

233

7,098

1,891,184

280

6,754

237,270

47

669,931

143

4,685

843,407

97

8,695

173,476

(46)

California Correctional Institution*

724,518

110

6,587

872,919

95

9,189

148,401

(15)

Central California Women’s Facility

1,575,620

223

7,066

1,720,564

224

7,681

144,944

1

615

7,066

Northern California Women’s Facility

100,025

36

2,778

199,022

43

4,628

98,997

7

1,850

California Rehabilitation Center

829,988

92

9,022

796,377

109

7,306

(33,611)

17

(1,716)

$33,562,698

4,044

$71,943,255

5,362

Ironwood State Prison*

Sierra Conservation Center*

Totals†

Increase
(Decrease)
in Payments

Increase
(Decrease)
in Average
Payment
Per
Admittance

$38,380,557

(119)

1,318

$9,146
107

($1,212,612)

Percentage
Increase
(Decrease)
Due to
Number of
Admittances
-291.9%

Increase
(Decrease)
in Payments
Due to
Average
Payment
Per
Admittance
$1,627,975

391.9%

401,456

97.0

(1,787)

752,041

300.8

(502,064)

(344)

333,622

140.6

(96,352)

-40.6

4,010

(215,502)

-124.2

388,978

224.2

2,602

(98,798)

-66.6

247,199

166.6

4.9

137,878

95.1

19,449

19.6

79,548

153,367

-456.3

$11,083,749

12,377

Percentage
Increase
(Decrease)
Due to
Average
Payment Per
Admittance

(186,978)

3.0
-200.8

80.4
556.3

$27,296,808

Source: California Department of Corrections’ (Corrections) health care cost and utilization program database.
* The R. J. Donovan Correctional Facility (Donovan) informed us that prior to the end of fiscal year 2001–02, it had made hospital payments for other institutions. However, there are occasions when Donovan still makes hospital payments for
other institutions. Therefore, we adjusted the data for Donovan and the noted institutions to properly reflect payments for inmates from their respective institutions.
†

California State Auditor Report 2003-125

We performed this analysis for each of the correctional institutions and summed the results for the aggregate analysis shown in Table 2 of this report. The total inpatient payments do not agree with the total payments presented in Appendix A
by approximately $160,000 because we excluded from our price-volume analysis those payment records for which Corrections did not enter a community hospital inpatient admission number. We used the community hospital inpatient
admission number to identify inpatient admissions for the purpose of calculating Corrections’ average payment for inpatient stays.

California State Auditor Report 2003-125

TABLE B.2
Price-Volume Analysis of Correctional Institutions’ Outpatient Hospital Payments

Fiscal Year
1998–99
Payments

Fiscal Year
1998–99
Number of
Visits

$111,715

309

620,824

543

Deuel Vocational Institution

94,639

Folsom State Prison

Fiscal Year
1998–99
Average
Payment
Per Visit

Fiscal Year
2002–03
Average
Payment
Per Visit

Increase
(Decrease)
in Average
Payment
Per Visit

Percentage
Increase
(Decrease)
Due to
Number of
Visits

Increase
(Decrease)
in Payments
Due to
Average
Payment Per
Visit

Percentage
Increase
(Decrease)
Due to
Average
Payment
Per Visit

Fiscal Year
2002–03
Payments

Fiscal Year
2002–03
Number of
Visits

$ 362

$1,059,073

900

$1,177

$947,358

591

$ 815

$213,669

1,143

1,541,900

778

1,982

921,076

235

839

268,681

29.2

652,395

70.8

137

691

1,003,232

533

1,882

908,593

396

1,191

273,555

30.1

635,038

69.9

55,478

125

444

866,163

868

998

810,685

743

554

329,764

40.7

480,921

59.3

San Quentin State Prison

484,084

230

2,105

1,180,437

309

3,820

696,353

79

1,715

166,272

23.9

530,081

76.1

California State Prison, Corcoran*

144,446

236

612

728,169

610

1,194

583,723

374

582

228,910

39.2

354,813

60.8

California State Prison, Sacramento

153,942

147

1,047

739,467

630

1,174

585,525

483

127

505,809

86.4

79,716

13.6

California Correctional Center

230,251

207

1,112

796,948

379

2,103

566,697

172

991

191,319

33.8

375,378

66.2

Mule Creek State Prison

135,170

215

629

701,206

652

1,075

566,036

437

446

274,741

48.5

291,295

51.5

Valley State Prison for Women

390,576

358

1,091

901,180

846

1,065

510,604

488

(26)

532,405

104.3

(21,801)

-4.3

High Desert State Prison

185,864

145

1,282

690,710

208

3,321

504,846

63

2,039

80,755

16.0

424,091

84.0

Avenal State Prison*

166,813

220

758

617,616

463

1,334

450,803

243

576

184,253

40.9

266,550

59.1

Sierra Conservation Center

328,729

643

511

724,051

702

1,031

395,322

59

520

30,163

7.6

365,159

92.4

46,261

112

413

429,004

383

1,120

382,743

271

707

111,935

29.2

270,808

70.8

Salinas Valley State Prison

113,199

178

636

493,547

449

1,099

380,348

271

463

172,342

45.3

208,006

54.7

Northern California Women’s Facility

126,998

493

258

477,497

569

839

350,499

76

581

19,578

5.6

330,921

94.4

Pleasant Valley State Prison

114,923

165

697

455,238

556

819

340,315

391

122

272,333

80.0

67,982

20.0

83,542

58

1,440

404,446

327

1,237

320,904

269

(203)

387,462

120.7

(66,558)

-20.7

California Men’s Colony

326,394

204

1,600

642,172

308

2,085

315,778

104

485

166,397

52.7

149,381

47.3

Pelican Bay State Prison

753,506

507

1,486

1,055,249

544

1,940

301,743

37

454

54,990

18.2

246,753

81.8

Central California Women’s Facility

664,434

545

1,219

915,010

802

1,141

250,576

257

(78)

313,320

125.0

(62,744)

-25.0

Facility
California Substance Abuse Treatment Facility
at Corcoran
R. J. Donovan Correctional Facility*

Wasco State Prison

California State Prison, Solano

California Correctional Institution*

Increase
(Decrease)
in Payments

Increase
(Decrease)
in Number
of Visits

Increase
(Decrease)
in Payments
Due to
Number of
Visits

22.6%

$733,689

77.4%

72,162

144

501

291,029

395

737

218,867

251

236

125,783

57.5

93,084

42.5

247,655

274

904

470,519

421

1,118

222,864

147

214

132,866

59.6

89,998

40.4

58,572

85

689

269,617

209

1,290

211,045

124

601

85,446

40.5

125,599

59.5

California Medical Facility*

494,702

289

1,712

643,292

292

2,203

148,590

3

491

5,135

3.5

143,455

96.5

California State Prison, Los Angeles County*

100,245

327

307

276,367

549

503

176,122

222

196

68,056

38.6

108,066

61.4

Correctional Training Facility
North Kern State Prison

87

continued on next page

88
Fiscal Year
1998–99
Average
Payment
Per Visit

Fiscal Year
2002–03
Average
Payment
Per Visit

Increase
(Decrease)
in Number
of Visits

Increase
(Decrease)
in Average
Payment
Per Visit
($248)

Percentage
Increase
(Decrease)
Due to
Number of
Visits

Increase
(Decrease)
in Payments
Due to
Average
Payment Per
Visit

Percentage
Increase
(Decrease)
Due to
Average
Payment
Per Visit

Fiscal Year
1998–99
Payments

Fiscal Year
1998–99
Number of
Visits

Calipatria State Prison*

$228,814

139

$1,646

$401,284

287

$1,398

$172,470

148

Centinela State Prison*

271,654

212

1,281

435,395

289

1,507

163,741

77

226

98,667

60.3

California Institution for Women

62,674

82

764

216,220

459

471

153,546

377

(293)

288,148

187.7

Ironwood State Prison

55,786

74

754

148,137

115

1,288

92,351

41

534

30,908

33.5

61,443

66.5

California Institution for Men

57,478

43

1,337

73,944

39

1,896

16,466

(4)

559

(5,347)

-32.5

21,813

132.5

California Rehabilitation Center

10,642

15

709

17,201

13

1,323

6,559

(2)

614

(1,419)

-21.6

7,978

121.6

Chuckawalla Valley State Prison

65,613

86

763

60,940

39

1,563

(4,673)

(47)

800

(35,858)

767.3

31,185

-667.3

$7,057,785

7,547

$19,726,260

14,923

Facility

Totals†

Fiscal Year
2002–03
Payments

Fiscal Year
2002–03
Number of
Visits

Increase
(Decrease)
in Payments
Due to
Number of
Visits

Increase
(Decrease)
in Payments

$12,668,475

7,376

$243,629

$5,814,667

141.3%

($71,159)
65,074
(134,602)

-41.3%
39.7
-87.7

$6,853,808

Source: California Department of Corrections’ (Corrections) health care cost and utilization program database.
* The R. J. Donovan Correctional Facility (Donovan) informed us that prior to the end of fiscal year 2001–02, it had made hospital payments for other institutions. However, there are occasions when Donovan still makes hospital payments for
other institutions. Therefore, we adjusted the data for Donovan and the noted institutions to properly reflect payments for inmates from their respective institutions.
†

We performed this analysis for each of the correctional institutions and summed the results for the aggregate analysis shown in Table 3 of this report. The total outpatient payments do no agree with the total payments presented in
Appendix A by approximately $70,000 because we excluded from our price-volume analysis those payment records for which Corrections did not enter a community hospital outpatient number. We used the community hospital outpatient
number to identify outpatient visits for the purpose of calculating Corrections’ average payment for outpatient visits.

California State Auditor Report 2003-125

Agency’s comments provided as text only.
Youth and Adult Correctional Agency
1515 K Street, Suite 520
Sacramento, CA 95814
July 8, 2004

Ms. Elaine Howle
State Auditor
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, California 95814
Dear Ms. Howle:
Thank you for the opportunity to review and comment on the draft of your recent audit
titled, “California Department of Corrections: More Expensive Hospital Services and Greater Use
of Hospital Facilities Have Driven the Rapid Rise in Contract Payments for Inpatient and Outpatient
Care.” We are forwarding the enclosed memorandum prepared by the California Department of
Corrections (CDC) as our response to the draft audit.
In our efforts to continually improve all aspects of the CDC’s health care services delivery system,
we welcome the independent review and recommendations provided by the Bureau of State Audits.
We look forward to providing you with periodic updates that document our continued efforts to
improve our ability to negotiate contracts and expand data collection and analysis efforts.
If you have any questions or wish to discuss my responses or recommendations, please contact me
at 323-6001.
Continued Success,
(Signed by: Roderick Q. Hickman)
RODERICK Q. HICKMAN
Secretary
Youth and Adult Correctional Agency
Enclosures

California State Auditor Report 2003-125

89

State of California

Department of Corrections

Memorandum
Date:
To:

Roderick Q. Hickman, Secretary
Youth and Adult Correctional Agency
1515 K Street, Suite 520
Sacramento, CA 95814

SUBJECT: BUREAU OF STATE AUDITS’ DRAFT REPORT “CALIFORNIA DEPARTMENT
OF CORRECTIONS: MORE EXPENSIVE HOSPITAL SERVICES AND GREATER
USE OF HOSPITAL FACILITIES HAVE DRIVEN THE RAPID RISE IN CONTRACT
PAYMENTS FOR INPATIENT AND OUTPATIENT CARE”

The California Department of Corrections (CDC) has reviewed the Bureau of State
Audits’ Report titled, “California Department of Corrections: More Expensive Hospital
Services and Greater Use of Hospital Facilities Have Driven the Rapid Rise in Contract
Payments for Inpatient and Outpatient Care”.
The CDC wishes to express its appreciation for the time and effort of the auditors
dedicated to this review. The recommendations, as presented, will help guide the
Department with future management decisions regarding inpatient and outpatient care
for our inmates.
As recommended, the CDC will explore methods of standardizing and improving its data
collection to ensure an understanding of the rising trends in inpatient and outpatient
hospital payments. CDC will also review all hospital contract rate provisions and continue
to consult with other state agencies to ensure effective negotiation strategies and
reduced hospital expenditures.
As noted in the response, the Health Care Services Division (HCSD) collects its data on an
ACCESS database. This program has very limited abilities and presents daily challenges when
trying to extract information. To ensure the Department is providing appropriate, economical
managed care, the HCSD is exploring the ability to contract with a vendor to process medical
invoices and provide a data infrastructure to collect the required medical information, which
would allow the HCSD analysts to perform the analysis the BSA recommends.
The HCSD, has, or will be accomplishing the following to assist in better managing the
medical, as well as the fiscal, programs of the Division:
• Benchmark contract rates in concert with the Office of Statewide Health and Policy
Development and the Department of Health Services.
• Develop the Utilization Management database to determine the specific reasons for
changes in utilization patterns and identify whether services are medically necessary.

90

California State Auditor Report 2003-125

Roderick Q. Hickman, Secretary
Page 2
• Fill vacant Health Care Cost and Utilization Program positions and begin hiring for the
proposed new positions identified in the FY 2004/05 May Revision if approved in the
State’s budget.
• Develop new policies and procedures in the Health Contracts Unit to ensure effective
negotiations for inpatient and outpatient services.
As the report clearly indicates, there are areas where CDC can improve its practices.
We will continue to report our progress on the recommendations made by the Bureau of
State Audits. If you have any questions regarding the attached response, please contact
me at (916) 445-7688.

(Signed by: J. S. Woodford)
J. S. WOODFORD
Director
Attachment

California State Auditor Report 2003-125

91

RESPONSE TO THE JULY 1, 2004
BUREAU OF STATE AUDITS’ DRAFT REPORT “CALIFORNIA DEPARTMENT OF
CORRECTIONS: MORE EXPENSIVE HOSPITAL SERVICES AND GREATER USE OF HOSPITAL
FACILITIES HAVE DRIVEN THE RAPID RISE IN CONTRACT PAYMENTS FOR INPATIENT AND
OUTPATIENT CARE”
To ensure Corrections understands the reasons behind the rising trend in its inpatient and
outpatient hospital payments, it should do the following:
• Enter complete and accurate hospital billing and medical procedures data in its HCCUP
database for subsequent comparison and analysis by HCSD and correctional institutions
of the medical procedures that hospitals are performing and their associated costs.
The California Department of Corrections (CDC) agrees with the recommendation stated
above. Hospitals follow the standards of ethical coding regulations and procedures guidelines
outlined by the American Health Information Management Association. Therefore, where coding
is appropriate for procedures, the Health Care Cost and Utilization Program (HCCUP) staff will
continue to manually enter the invoice information into the database prior to payment. Omission
of appropriate coding will be disputed for payment. The CDC recognizes the importance of data
entry and will develop a quality control process, which will ensure data integrity.
• Perform regular analysis of its health care cost and utilization data, monitor its hospital
payment trends, and investigate fully the reasons why its costs are rising for the purpose
of implementing cost containment measures.
The CDC agrees with the recommendation as stated above. Since fiscal
year (FY) 1997/98, HCCUP data entry has increased by 89 percent with no additional resources.
Recognizing the need to perform trend analysis and investigate reasons for cost increases, the
administration included additional HCCUP resources in the FY 2004/05 Governor’s Budget.
With this augmentation, the Health Care Services Division will identify any additional data
elements and/or validation reports to be added to the database; develop standard reports for the
identification of outlier utilization; develop standardized trend reports specific to potential cost
drivers; establish a process of reporting and tracking response to outlier utilization information
provided to management, etc. This review and reporting will occur on a quarterly basis.
Additionally, the CDC will explore methods of standardizing and improving its data collection and
analysis efforts within the parameters of its existing resources.
It should be noted that, within the last year, changes have been made to HCSD’s periodic review
of cost and utilization data and now includes analyses performed by Health Care Services
Division’s fiscal staff. These staff will be reviewing HCCUP utilization and expenditure data each
month as part of the Department’s Monthly Budget Plan process. This change will increase the
HCSD’s ability to detect increases in costs and implement cost containment measures.

1
92

California State Auditor Report 2003-125

Within the next six months, HCCUP’s cost and basic utilization data will be augmented by
detailed clinical data (not currently available in the HCCUP database) acquired from the newly
implemented Utilization Management (UM) database. This will increase HCSD’s ability to
compare and analyze cost and utilization data and to quantify concerns such as why increased
utilization has occurred.
• Investigate the significant and sudden increase in its inpatient hospital payments,
beginning in fiscal year 2000-01, for the purpose of determining whether renegotiated
contract payment rates, reducing the length of stay in contract hospital beds, or other
cost containment measures can most effectively reduce contract hospital rates.
The CDC agrees, in part, with the recommendation as stated above. While we recognize that it
is useful to review historic data from this period, the CDC plans to focus its review on FY 2002/03
and FY 2003/04 as it relates to the average length of stay as the data for these periods is more
robust and complete and are relative to current contract processes. We will perform a contract
review to determine what provisions were advantageous to the State based on negotiated rates
and utilization patterns. We believe this is the best use of our available resources.
The HCU is in the process of compiling a report identifying all hospital contract rate provisions.
Utilizing this report, the HCU will obtain data from HCCUP to analyze the impact of utilization,
current rates, and stop-loss provisions. Contracts with a percent discount from billed charges
will be analyzed to identify increases to charge masters (e.g., usual and customary billing rates)
during the fiscal year. An ongoing analysis, utilizing statewide HCCUP expenditure data, will be
developed to compare rate structures with Medicare and Medi-Cal rates.
To complete a valid case-to-case comparison, this analysis requires clinical data that, until
recently, was unavailable in easily accessible database format. Although HCCUP data includes
diagnostic and procedural data along with cost and utilization data, the aforementioned data
was generally limited to primary diagnoses and procedures only, making it difficult to determine
why patients with similar case profiles varied in cost. To get to the required level of detail,
such analysis previously required manual clinical review of the patient case files. The pending
combination of HCCUP and UM data will significantly enhance HCSD’s ability to perform this
type of analysis.
The HCSD is currently implementing a detailed contract database, which in the near future will
also be connected to the HCCUP/UM database, which will further enhance HCSD’s ability to
complete the recommended analysis.

2
California State Auditor Report 2003-125

93

• Complete its analysis of high-cost cases to determine why the number of high-cost
inpatient cases and more expensive outpatient visits are rising so that it can identify costeffective solutions to its increasing health care costs. For example, Corrections should
fully investigate the extent to which each of the potential cost drivers it has identified as
part of its analysis if its high-cost inpatient cases is increasing its hospital inpatient costs.
The CDC agrees with the recommendation as stated above. The HCSD has completed a
preliminary analysis of this matter and has made some progress in developing a multivariate cost
model. The model, at this time, is limited to HCCUP data, and as such lacks clinical data needed
to adequately compare cases within the broad diagnostic categories captured by HCCUP.
The HCSD will augment the Monthly Budget Plan with the monthly Utilization Management
case review report as a first step towards understanding the causation between high cost cases
and increased expenditure. Status will be provided in the 60-Day Response to this audit on the
implementation plan of this process. Further, in the next six months the HCSD will strive to create
a better expenditure model by combining HCCUP and UM datasets into a single database, thus
capturing detailed expenditure data with detailed clinical data in a single system. This will be
augmented with data captured by the contract-tracking database, which is currently being developed.
• Follow up with other institutions using new hospital contracts to determine if re-negotiated
contract payment terms are resulting in significantly higher costs for other institutions as
well, similar to the two that informed us of the significant effect on their inpatient hospital
costs for high-cost cases.
The CDC agrees with the recommendation as stated above. The CDC will perform an analysis of
cost and utilization data associated with two existing hospital contracts--one new and one recently
amended to determine if renegotiated contract payment terms are resulting in significantly higher
costs for other institutions within the next six months. During the next six months, the HCU will follow
up with all of the institutions participating in the use of the new preferred provider hospital contracts.
To ensure Corrections adequately controls rising inpatient and outpatient hospital payments
due to contract payment provisions, it should do the following:
• Revisit hospital contract provisions that pay a discount on the hospital billed charges and
consider renegotiating these contract terms based on hospital costs rather than hospital
charges. This would include hospital contract provisions that require it to pay a percentage
of hospitals’ billed charges for outpatient visits, including emergency room outpatient visits.
Either use existing cost-based benchmarks such as Medicare or Medi-Cal rates, or use
hospital cost-to-charge ratios to estimate hospital costs and negotiate contract rates from
those costs. Further, should Corrections renegotiate hospital contract payment terms, it
should perform subsequent analysis to quantify and track the realized savings or increased
costs resulting from each renegotiated contract.
The CDC agrees with the recommendation as stated above. The Health Contract Unit (HCU) is
in the process of compiling a report identifying all hospital contract rate provisions. Utilizing this
report, the HCU will obtain data from HCCUP to analyze the impact of utilization, current rates,
and stop-loss provisions. Contracts with a percent discount from billed charges will be analyzed
to identify increases to charge masters during the fiscal year. During the next six months, an
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ongoing analysis, utilizing statewide HCCUP expenditure data, will be developed to compare
rate structures with Medicare and Medi-Cal rates. The HCU will continue consulting with other
state agencies, including the Department of Health Services (DHS), the California Medical
Assistance Commission, and the Office of Statewide Health Planning and Development (OSHPD)
to determine each hospital’s cost-to-charge ratios in order to estimate hospital costs that will be
used to establish benchmark rates for the purpose of negotiations. The HCU is currently reviewing
OSHPD data for each hospital rate approval. Within the next year, the HCU will identify contracts
requiring renegotiation and begin the renegotiation process. The criteria for renegotiation will be
directed towards contracts with high utilization that contains stop loss provisions and low percent
discounts from billed charges. The HCU is performing complete analysis of all new and renewed
hospital contracts that includes comparing HCCUP’s utilization data and HCCUP invoice data with
OSHPD data, and comparisons with other hospitals within the state providing the same service.
• Obtain and maintain updated cost-to-charge ratios for each contracted hospital, using data
from the Centers for Medicare and Medicaid Services, the Department of Health Services,
or the Office of Statewide Health Planning and Development. It should use these ratios to
calculate estimated hospital costs for use as a tool in contract negotiations with hospitals
and for monitoring the reasonableness of payments to hospitals.
The CDC agrees with the recommendation as stated above. The HCU will continue consulting with
other state agencies to identify each hospital’s cost-to-charge ratios in order to estimate hospital
costs and use these rates as a benchmark for negotiations. As indicated in CDC’s response to
the BSA questions of June 4, 2004, the CDC is in the process of working with DHS to establish
legislative language for an appropriate reimbursement structure and process. This structure would
be based on established Medicare and Medicaid reimbursement rates. Additionally, the HCU has
begun to routinely utilize OSHPD data when analyzing hospital contract rate proposals. To reduce
medical contract expenditures, the HCU will perform major hospital solicitations in several locations
during the next fiscal year, will continue to explore rate benchmarking, and will perform effective
negotiations practices.
• Require hospitals to include DRG codes on invoices they submit for inpatient services to
help provide a standard, along with hospital charges, by which to measure its payments to
hospitals as well as case complexity.
The CDC agrees, in part, that the Diagnostic Related Groups (DRG) information would be helpful
to measure payments to hospitals and measure case complexity. However, the complexity of the
DRG system doesn’t allow for a standard format for means of comparative treatment and cost. For
example, two patients may have the same DRG, but both cases will not include the same or all of
the diagnoses or procedures included in that DRG. DRG 116 includes a cardiovascular procedure
for insertion of a pacemaker. It also includes the cardiovascular procedure for Percutaneous
Transluminal Coronary Angioplasty (PTCA). These two are significantly different in performance
of the procedure and in cost. Additionally, the DRGs are reviewed, and additions, deletions, and
changes are made annually. In 2002, DRG 112 was deleted and the diagnosis and procedural codes
were moved to three different DRGs (116, 517, and 518). When CDC did a cursory review of the
DRGs for FY 2002/03, data showed that the procedure code for PTCA (36.01) along with the same
ICD-9-CM Diagnostic code for Coronary Atherosclerosis (414.01) could be found listed in different
DRGs (116 and 518). The service was performed at different hospitals. Therefore, utilizing the DRG
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code alone, one cannot perform the review and analysis for comparative purposes. Thus, this data
will be but one component of our analysis.
Within the next 60 days, CDC will update their hospital contract boilerplate language for new
contracts to include submission of the DRG on all inpatient admissions on the hospital billing form
(UB-92). Within the next year, CDC will also amend current contracts, which will not expire within
the next six months, to include the same language. The pending combination of HCCUP and UM
data will significantly enhance HCSD’s ability to perform this type of analysis. The CDC is exploring
the ability to contract with a vendor to process medical invoices and provide a data infrastructure to
collect the required medical data, which would allow the HCSD analysts to perform the analyses the
BSA recommends. However, we are currently limited to the constraints of manual data entry and the
building of additional validations into our current ACCESS databases.
• Detect abuses of contractual stop-loss provisions, by monitoring the volume and total amounts
of payments made under stop-loss provisions, which are intended to protect hospitals from
financial loss in exceptional cases, not to become a common method of payment.
The CDC agrees with this recommendation as stated above. The HCU continues to explore methods
to reduce and eliminate the usage of stop-loss in the hospital contracts. The HCU will perform an
ongoing analysis utilizing HCCUP invoicing data to demonstrate the number of times in a fiscal year
the stop loss prevailed. If the analysis demonstrates a significant number of claims reimbursed at
the stop loss provision, the analysis may be expanded to identify each encounter defining the acuity
of the patient’s condition, the length of stay or if the hospital’s charge master structure accounts for
the high cost. Further analysis may be required to identify if the hospital’s charge master significantly
increased from the onset of the contract.
Additionally, the CDC will perform audits of those contracts with stop-loss provisions.
• Include in its utilization management quality control process a review of how utilization
management medical staff assess and determine medical necessity, appropriateness of
treatment, and need for continued hospital stays.
The CDC agrees with this recommendation. The UM is a strategy designed to ensure that health
care expenditures are restricted to those that are medically necessary and delivered on a timely basis
at the most appropriate and resource efficient level. The use of community criteria provides CDC with
a thorough, current, clinically relevant and objective basis for ensuring a standardized and consistent
application. Examples of CDC approved guideline criteria include, healthcare criteria developed by
licensed physicians, Milliman Care Guidelines, health care policies and procedures and program
guidelines. Acquisition of InterQual care guidelines is also underway.
The CDC UM Program applies prospective, concurrent, and retrospective examination of health care
service requests and service delivery. The data gathered allows for analysis, trending and planning of
health care needs. The Department recognizes the need for quality control, and as such, began with
instruction via a mandatory statewide videoconference on the UM Program in December 2003. The
training was directed to physicians and nurses as well as other classifications. The training included
all elements of the program’s focuses, target areas, roles and responsibilities. In addition, HCSD UM
staff have begun monitoring and performing assessments of compliance with the UM processes.
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Within the upcoming months, a quality control process will be developed. This process will include
monthly audits of a sample of reviews performed by UM staff. The data reviewed will include the site
of service delivery for quality and cost containment measures.
• Continue with its plan to analyze how mentally ill inmates are affecting institution inpatient
costs and utilization.
The CDC agrees with the recommendation as stated above. In order to complete such an analysis,
data from currently disparate systems will need to be merged into a single data repository, thus we
will strive to connect the UM, HCCUP, and Health Care Placement Unit (HCPU) data in the near
future. Currently, no single piece can be used to adequately answer this question.
The HCSD has collected data regarding occupancy rates for its internal bed utilization. On a daily
basis inmates are transported to various CDC licensed facilities to accommodate those patients who
cannot be cared for in a community setting. The need for inpatient CDC beds has been realized
and funding and construction of a 50-bed mental health crisis facility is underway. In addition, the
CDC is contracting with the Department of Mental Health for 25 acute inpatient psychiatric beds at
Atascadero State Hospital to provide crisis beds for the California Men’s Colony, one of the CDC’s
largest mental health facilities that currently has no on site licensed mental health beds. In June 2005
Delano II will open with 25 Correctional Treatment Center (CTC) beds and the California Institution for
Women will open its 20-bed CTC facility in the spring of 2005 as well. Additionally, future CDC mental
health licensed beds are being considered under the mental health facility study currently under
way. It is expected that these new licensed beds will provide the necessary relief to allow the medical
patients to be accommodated, as appropriate, within the prison health care facilities.

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Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
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California Research Bureau
Capitol Press

California State Auditor Report 2003-125