Prison solution became problem

Two appointees whom Gov. Arnold Schwarzenegger sent to fix California’s dysfunctional prison healthcare system pushed a $26-million, no-bid contract for outside medical services while contract reviewers steadfastly maintained it was overpriced and illegal, records and interviews show.

But instead of providing a strong step toward reforming the California Department of Corrections and Rehabilitation’s $1.8-billion medical system, the handling of this relatively small contract erupted into a fight that forced out the two appointees and highlights what critics say are systemic contracting breakdowns that helped bloat healthcare costs at the state’s 33 prisons.

The contract for a pilot program at two Southern California prisons was supposed to be a model for improving the care of inmates who need to see specialists -- one of the major failings that led a federal judge to seize control of prison healthcare and appoint a receiver last year to oversee it.

However, John Hagar, chief of staff for receiver Robert Sillen, said, “This is a classic example of the department looking at a problem and jumping to a solution that, in fact, does not work and increases costs unnecessarily....

“It appears there were outside influences,” he said. “It was not being done at the urging of the contract staff who usually negotiate the contract. They were saying ‘No.’ ”

After hiring a private prison industry lobbyist, a Florida company successfully submitted a proposal for the three-year pilot program. Although the contract was not finalized, corrections officials last summer gave the company permission to start working and bill the state. After finding out about the deal, Hagar swiftly froze the contract process before Christmas and later halted payments.

The appointees who arranged the contract soon resigned. The state inspector general launched a conflict-of-interest investigation of one who held stock in a company listed as a subcontractor. And now the contractor wants the state to repay $2.6 million for inmate medical expenses that company officials say they incurred.

This ugly contract dispute has been a distraction in the first year of a long-overdue effort to improve inmate medical treatment, said Don Specter, director of the Prison Law Office, a nonprofit whose lawsuit on behalf of the state’s 175,000 prisoners prompted U.S. District Court Judge Thelton Henderson to take over prison healthcare in 2005.

The contract uproar centered on Medical Development International, a $100 million-a-year business that arranges medical appointments, handles billing, and contracts with doctors and hospitals to serve inmates. It was founded in 1992 by a father and son, Richard and Ted Willich.

MDI has grown into one of the largest medical providers for the Federal Bureau of Prisons, having won contracts at 27 facilities. That work led California lawmakers to invite a company official to testify at a 2004 hearing into skyrocketing prison healthcare costs in the state.

About two years ago, MDI officials hired Mark Nobili, a Sacramento lobbyist whose clients included a private prison operator. To date, records show that MDI has paid Nobili at least $170,000.

MDI representatives learned that the point people for new prison contracts were Peter Farber-Szekrenyi and Darc Keller -- both longtime medical administrators appointed by Schwarzenegger in late 2005 to help reform healthcare.

In March 2006, MDI submitted a proposal to deliver up to $26 million in services at the state prisons in Tehachapi and Lancaster, where backlogs for outside medical appointments were acute. Among the providers MDI listed was Mobile Medical International Corp., which supplies surgical and diagnostic facilities in big tractor-trailer trucks.

Keller recently had served as a senior vice president at Mobile Medical and, according to his economic interest statement, he owned $10,000 to $100,000 in the company’s stock.

As MDI was preparing its California proposal, company Vice President Ted Willich said he learned that Keller once had worked at Mobile Medical, so he asked Keller to call the firm because MDI was having trouble contacting it about potential work on a federal contract.

However, Willich denied that Keller encouraged MDI to use Mobile Medical for the California pilot program. “To me, it is ridiculous,” he said of the inspector general’s probe. “There is a whole lot of nothing there.”

Keller said that, although he called Mobile Medical to help out MDI, he was unaware that his former employer was being lined up as a subcontractor until Mobile Medical later appeared in MDI’s proposal.

Keller said that he had moved to liquidate his stock in Mobile Medical shortly after his appointment and that the sale was completed Aug. 8 -- a few weeks before MDI began work on the project. “There is no conflict because there is no enrichment,” he said. “No one got money.... We never did have a [final] contract.”

Although MDI ultimately did not use Mobile Medical, Keller’s participation in the contracting process may have violated the state Political Reform Act, said Robert Stern, president of the Center for Governmental Studies in Los Angeles.

“The violation could be that he participated in a decision where he had a financial interest: the stock he owned,” Stern said. Violations are punishable by a fine or jail term.

The state Fair Political Practices Commission, which enforces the conflict-of-interest law, would neither confirm nor deny that it was conducting an investigation. The inspector general’s office, an independent corrections oversight agency, declined to comment.

The MDI contract mess unfolded as the state controller issued an audit report in early August outlining waste and abuse in medical contracting at prisons.

On Aug. 31, Farber-Szekrenyi requested issuance of a $26-million contract to MDI, then the company began work.

Farber-Szekrenyi “gave us the green light,” said Willich of MDI. “We were given assurances by Darc [Keller] and Peter that we would be paid, and we were told to do the work.”

To become final, the contract required approvals by contracting and legal staff at corrections as well as attorneys at the state Department of General Services.

But interviews and corrections department e-mails reviewed by the receiver’s office show that contracting staff raised objections, such as whether the contract should have been competitively bid, whether MDI needed a medical license and whether the rates were too high.

When MDI complained about the delays, Hagar said, Farber-Szekrenyi and Keller repeatedly urged the employees to move the contract ahead.

“Nobody leaned on them to approve a contract; we asked them the status of the contract,” Farber-Szekrenyi said, adding that he told the contractor to start work without a contract because there was an emergency, with hundreds of medical appointments backlogged.

Concerned about delays with the contract last fall, Farber-Szekrenyi said he gave MDI and a corrections attorney a couple of weeks to resolve the medical licensing issue -- and it was.

Meanwhile, employees who process medical contracts were placed under the receiver. A short time later, Hagar learned from one of them that Farber-Szekrenyi and Keller were implementing a pilot program without competitive bidding -- and that contracting staff thought the price was exorbitant and that the work required a medical license.

Hagar stopped the contract and later asked the inspector general to investigate.

Although the receiver said he had been unaware of the pilot program, Farber-Szekrenyi said he personally informed Sillen about it.

Farber-Szekrenyi and Keller said that earlier this year they were forced to resign by the governor’s office, which declined to comment.

Though MDI said it saved the state money and had dramatically reduced backlogs for appointments at the two prisons, Hagar said his investigators found healthcare still in crisis there.

Tehachapi Warden Joe Sullivan, who served as interim warden at Lancaster early this year, said MDI had inmates scheduled for appointments but they had not all been seen by doctors. “In my view, they were doing an excellent job,” he said.

The receiver’s office now is developing its own contracts with providers. And MDI is threatening to sue if necessary to recoup $2.6 million not reimbursed by the state.

MDI’s Willich said the company apparently was caught in a fight between two gubernatorial appointees and a powerful court-appointed receiver. “We were the meat in the sandwich,” he said.

tim.reiterman@latimes.com