Most medical service contracts for treatment of California prison inmates are awarded without competitive bidding, resulting in millions of dollars in unnecessary costs, according to a state audit released Tuesday.

While 23 million Californians are in managed health care programs that control costs, the Bureau of State Audits found the Department of Corrections relies on a 30-year-old policy exemption that allows officials to award contracts without seeking competitive bids.

Moreover, the Department of General Services could not provide auditors with documentation to support the original justification for the bidding exemption and does not know if it is still valid.

"Flawed" contract negotiations with private hospitals, specialty-care physicians and laboratories that provide services not performed in prisons are driving up expenses, auditors said.

Contract costs have increased 15 percent in each of the last four fiscal years, rising to $239 million in 2002-03, according to the review conducted at the request of the Legislature's Joint Audit Committee.

The increases in the prison system have been far higher than those experienced by the general population, health care experts said.

"As these costs rise, so does the importance of Corrections negotiating and awarding medical services that are in the state's best interest," according to the report signed by state Auditor Elaine Howle.

The audit is the latest in a series of critical reports by the Legislature and other agencies aimed at the state's $5.7 billion correctional system, alleging, among other things, brutality at the California Youth Authority, a failing parole system, perennial budget overruns and a code of silence among guards that shields wrongdoers.

Annual inmate health care costs account for about 20 percent of the Corrections Department's expenditures, Corrections officials say.

State Controller Steve Westly said inmate health costs have doubled since 1998 to more than $900 million a year.

The controller has urged Gov. Arnold Schwarzenegger to expedite the adoption of a managed care system in the state's 32 prisons, which hold about 161,000 inmates.

"Everyone else is cutting costs and getting better efficiencies in health care and, ironically, some in the prison population are getting some of the better health care," Westly said in an interview.

As a candidate for governor, Schwarzenegger promised to conduct performance audits and implement management reforms to reduce waste.

On Tuesday, the Governor's Office said it would await the findings of the panel appointed by Schwarzenegger and chaired by former Gov. George Deukmejian that is looking into making prisons more cost-efficient and is expected to report this spring.

Meanwhile, the Corrections Department referred inquiries to its written responses incorporated in the audit.

"(Corrections) will coordinate with the Department of General Services and other affected departments to determine if it is in the state's best interest to remove the policy exemption," according to the response.

The Department of General Services said it would convene a meeting of various state agencies to re-evaluate the need for the bidding policy exemption.

"Although this exemption most likely resulted because of a determination that medical service providers such as physicians would typically not bid for state work, documentation is no longer available to support the department's decision-making process," the Department of General Services said in its response.

Despite the Corrections Department's policies supporting competitive bidding, only 259 of 1,149 contracts awarded during 2001-02 and 2002-03, or 23 percent, were put out for competitive bidding, according to the audit.

The audit cited instances in which vital information was left out of contracts to ensure the state received agreed-upon discounts.

The department also was unable to justify awarding contracts for rates above its standards, violating a requirement in its own contract manual, the auditors said.

The report said the department sometimes exceeds the authorized contract amount and fails to obtain proper approvals before receiving nonemergency services.

"We found four contracts in which prisons exceeded the funding authorized in the contracts by $5.9 million and some instances of prisons obtaining medical services for inmates before receiving General Services (Department) approval," auditors said.

"Not only is Corrections unable to demonstrate that its contracts are in the state's best interest, but also its prisons may be paying inappropriate and invalid medical claims."

States are constitutionally mandated to provide reasonable levels of health care to inmates. In California, the settlement of lawsuits filed by advocates for inmates also has driven up costs, officials say.

Other factors contributing to the rise of Corrections' health costs include services and treatment for hepatitis C, HIV/AIDS, mental illness and an aging inmate population.

In recent interviews, Corrections officials said the department has begun implementing cost-cutting measures, including standardizing care and negotiating bulk drug purchases.

Dr. Renee Kanan, assistant deputy of clinical policy and field management, said the department is also monitoring medical service contracts more closely.

"We actually have increased the number of staff that we have in our contract unit over the last year," Kanan said, estimating there are now 10 people in the unit.

"There was almost nobody here in contracts a couple of years ago," Kanan said.

Kanan said the department has been able to successfully negotiate "preferred provider rates" with a number of contractors.

According to an audit released in 2000 by the Bureau of State Audits, costs per inmate for nurses and medical technical assistants, lengths of hospital stays and total medical costs vary significantly among prisons.

"There's always going to be discrepancies among different institutions," Kanan said. "That's because there are some remote areas - particularly in emergencies - where we don't have access to our preferred providers."

In such instances, Kanan said prisons have to send inmates to the closest private emergency units without the luxury of negotiating lower rates.

She said the department also has a chronic nursing shortage, particularly in rural areas, that forces it to rely on more costly nursing registries.

Kanan said the department is phasing in managed care, which should be in "various stages" at all of its prisons by 2008.

Westly said that pace is unacceptable and is supporting a measure - AB 249 by Assemblywoman Barbara Matthews, D-Tracy - that would give his office power to conduct performance audits of health care spending and other potentially wasteful programs.

Audit report
Here are some findings of the California Bureau of State Audits' report on medical service contracts in the state prison system:
* Costs for treatment of prison inmates have increased 15 percent in each of the last four fiscal years, rising to $239 million in 2002-03.

* Only 23 percent of the contracts awarded during 2001-02 and 2002-03 were put out for competitive bidding.

* In four contracts, prisons exceeded the funding authorized in the contracts by $5.9 million.

* In some instances, prisons obtained medical services for inmates before receiving approval from the Department of General Services.

* The state may be paying inappropriate and invalid medical claims.