This story was first published by the Miami Herald on July 29, 2012.
Long before the University of Miami announced in May that its Miller School of Medicine had financial problems big enough to force layoffs of about 900 full-time and part-time workers, there were signs of serious trouble.
As far back as October, billionaire car dealer Norman Braman wrote in a memo to fellow UM trustees that he and colleagues had been receiving anonymous letters for months “outlining a host of wrongdoings, mostly at the medical school.” Braman and others closely tied to the school warned UM officials the medical school was spending too much, too fast in the push to build a world-class medical center.
The expansion was occurring just as healthcare revenue — the foundation for much of the medical school's expansion — was starting to dry up, with lower rates of reimbursement from insurers and cuts in federal and state funding.
The medical school also had major problems of its own. According to internal documents, the school suffered from bloated staffing, a faulty billing system and prices that sometimes ran much higher than at other South Florida hospitals. Internal controls apparently were weak at best: A whopping $14 million in expensive cancer drugs disappeared from a UM pharmacy over three years before an employee was charged with theft in June 2011.
The medical school's difficulties even began to impede its relationship with the ailing, taxpayer-financed Jackson Health System, endangering a decades-long partnership with the public hospital system.
By the time the layoffs were announced May 8, rumors had been swirling for weeks. UM President Donna Shalala insisted the medical school problems were caused by factors beyond her control.
“We live in a world in healthcare in which our flows of funds are unpredictable,” Shalala told the Herald in May, adding that she had responded as quickly as possible to the problems once they became apparent.
The medical school, she said, would emerge as a “much stronger healthcare system of a much higher quality.”
In the past five years, Shalala has presided over major initiatives designed to reshape UM's medical school and propel it to the top tier. Hiring more than 100 high-profile researchers and creating a biotech research park boosted the school's national profile. Purchasing a hospital — the old Cedars Medical Center, now University of Miami Hospital — cemented the school's status as a leading healthcare provider.
Reinventing the relationship between UM and Jackson allowed the medical school to launch new — potentially competing — roles.
Together, the ambitious moves vaulted UM's medical school to the national stage — but they may also have seriously damaged it.
Layoffs weren't part of the plan, leaving critics and community leaders to wonder whether Shalala, who earns $1 million a year at UM and was for eight years the nation's No. 1 health official as secretary of the U.S. Department of Health and Human Services during the Clinton administration, simply failed to heed the warning signs in her quest to make UM a national powerhouse.
“Ultimately, Donna Shalala has to bear the responsibility for this failed strategy,” says Stephen Dresnick, a Miami-Dade physician-entrepreneur. He points out that during the 1990s, when she led HHS, she battled to keep down soaring healthcare costs. “Reducing the spending on Medicare, that was her goal — first reducing payments to hospitals, then to doctors. And now she sits there and says, ‘Gee, these are factors outside our control’.”
Shalala said in May she's done everything she can: “We're in a brave new world in healthcare, both in terms of how we're funded and in how fast we have to move.”
In a statement to the Herald on Thursday, the medical school's dean, Pascal Goldschmidt, said, “Throughout my tenure at the Miller School we have focused on strategic initiatives to deliver the best possible care to our community, open new frontiers for research, and provide state-of-the-art training for our students and residents.
“We make decisions on the best information available and our assessment of where the field is moving. Not every decision is perfect, nor does the world around us function perfectly. ... What is important is that ... these programs are delivering life-changing discoveries, expanding our impact on the community, and building the reputation of UM as a great research institution.”
Early warnings of trouble . . . and how they were dismissed
Signs of problems with UM's finances go back to at least June 2011. That's when the Chronicle for Higher Education ran an article: Fast-Growing Strategy Has Its Costs at U. of Miami.
The story noted that the “expansion is looking overambitious to some” and quoted several anonymous faculty members as saying UM “promised too much and is now hustling to cover costs, even if it means taking from the poverty-plagued population that it pledged to serve.”
Shalala decried the article shortly after publication as “a shocking example of irresponsible and lazy reporting.”
Behind the scenes, others were raising alarms. In October, Braman, a longtime UM supporter, wrote a scathing letter to fellow UM trustees: “Poorly conceived decisions by the medical school administration have put the university at significant risk and, at the same time, injured Jackson Memorial Hospital.”
Braman said UM “looks nothing like the strong institution it was five years ago,” and blamed “the poor performance of the medical school, a half-billion dollars of new debt and the depletion of almost all our cash reserves.”
In his letter, Braman was particularly irate about UM's purchase of Cedars, directly across the street from Jackson Memorial Hospital. UM leaders predicted the hospital would earn almost $90 million in its first six years, but Braman had serious doubts: “We have missed our projections ... by hundreds of millions yet we continue to accept forecasts from the same people as if they are credible.”
In February, Braman resigned from the UM board, fed up with what he viewed as the bungled finances at the medical school.
Twice in the few months after Braman's letter, two former deans of the medical school met with Stuart Miller, the UM board member whose family donated $100 million to the medical school, to raise the alarm about the negative financial picture, according to UM insiders. Former deans Bernie Fogel and John Clarkson outlined a long list of major problems that needed to be addressed quickly, including the deteriorating relationship with Jackson.
Six months after the letter, UM leaders announced the layoffs, including the removal of several executives.
Shalala told The Herald in May that she reacted with reasonable speed to situations she couldn't control. “No one wants to lay anyone off. We waited as long as we could possibly wait to make some very tough decisions. In the process, we were doing some very careful planning. There is nothing we’re doing that everybody else in healthcare is not doing.”
Braman doesn't buy that logic. Earlier this month, he told The Herald that the layoffs “were a real tragedy that never should have happened. ... The people at the top were very much more interested in flash than substance.”
Jackson and UM med school: inextricably entwined — and now troubled
UM and Jackson are among the region’s biggest employers and most crucial institutions. But both are now troubled. Jackson has lost $419 million the past three years.
UM has placed tremendous emphasis on its medical school, which in fiscal 2011 had $1.7 billion in revenue, according to a medical school financial report. The whole university generated $2.3 billion in revenue, according to UM’s audited statements.
Mark Rogers, a physician and former Duke University executive who has served on Jackson’s board, says the situation “calls into question the whole economic future of the entire county. ... This applies not only to how residents get high quality healthcare, but also to the aspirations of Miami to become an economic center for the vibrant and growing biotechnology industry.”
Braman put it this way: “This is really a double tragedy — UM and Jackson. And you can't disconnect the two.” With UM’s purchase of a hospital across the street of Jackson, “taking away paying patients, you can't underestimate the problems this has caused Jackson.”
The partnership between the medical school and Jackson had generally worked well for years, despite occasional squabbles. For 25 years, the two previous medical school deans grew the institution slowly without layoffs. That changed in 2005, when Shalala announced she had hired Goldschmidt as the new dean, a renowned cardiologist and veteran Duke University administrator, for a $1-million-a-year compensation package.
Goldschmidt quickly began to push for UM to have its own hospital. “World-class doctors like to come to an environment where the university has its own hospital,” he said. In 2007, UM purchased the 560-bed Cedars and renamed it.
Many were skeptical. Myra Hurt, a dean of Florida State University's medical school, said many universities found owning hospitals to be “financially tricky.” Others criticized the purchase price: $275 million.
Joshua Nemzoff, a specialist in buying and selling hospitals, was stunned by the amount. “They paid three times what I thought that hospital was worth,” he said. UM used bonds to pay for the hospital plus $50 million in improvements.
Shalala remains a strong supporter of the purchase. In the midst of layoffs in May, she called the hospital “part of the solution,” not the problem.
Last week, Goldschmidt said of the Cedars purchase: “Some things went according to, or better than, plan; some did not,” but the UM hospital has shown improvements in performance metrics and provides “new life-saving care.”
Jackson officials had been worried all along. As far back as 2006, Larry Handfield, then chairman of Jackson’s board, looked at UM’s ambitious expansion plans and felt Jackson would be the loser: “My concern is ... if they have a hospital where they have to meet their bills, they are going to put a patient in that hospital first, and put one in Jackson second.”
Meanwhile, UM had been in expansion mode, attracting more than 100 high-priced star scientists from the nation's top schools, including 30 researchers who arrived with Marc Lippman, a University of Michigan breast cancer researcher. He and the team received a combined $52 million compensation package, according to Braman.
Goldschmidt said such packages tend to include not only the salaries of team members, but also laboratories, clinics and expensive equipment.
The biggest catches were more than 50 scientists from Duke's Center for Human Genetics, who became the bulwark of UM's Institute for Human Genomics. They were given housing assistance and other perks. UM subsidized the institute with $10 million.
Two Florida legislators, Marco Rubio and David Rivera, shepherded a bill through the Legislature in 2007 to give the new UM Genomics Institute $80 million in state funding on the premise it would create 296 high-paying jobs within five years.
Shalala was enthusiastic: “We're trying to become one of the world's great research universities. And we're well on our way. We're building a scientific powerhouse.”
Others were concerned about the money needed to create the powerhouse. Steve Green, former head of UM's faculty senate, told The Herald several weeks ago: “I don't know of anybody who disagrees with the vision that the dean has” to greatly increase research, but “the expectations of some of these high-priced people have not yet been realized.”
Last week, Dean Goldschmidt said, “Recruitment of talented individuals is expensive — that is the norm for academic medicine,” but the hiring was done carefully. “Some of these recruitments achieved their plans or better, while others did not.”
A new Life Science Park was built by an independent developer, without any cost to the university, according to Shalala, but the medical school was pouring money into construction: a $100 million clinical research lab and another $80 million biomedical building, to be paid for by new revenue.
Medical school executives told trustees that they expected the new UM Hospital (formerly Cedars) would increase net income by $88.9 million during its first six years, including $44 million in the fiscal year that ended May 31, according to an attachment that Braman sent board members. But in the first 10 months of that fiscal year, the hospital's income was just $4.8 million.
And the entire UM medical center — the clinical enterprise of doctors and the hospital, plus research and education — lost $17.9 million for the first 10 months, according to March UM financial reports. Such reports are private but The Herald obtained a copy of the March financial statement.
Making matters worse: UM's executives had budgeted the medical center to show a $25 million surplus for the year. Chief Operating Officer Jack Lord told The Herald last week that the medical school finished its fiscal year on May 31 $50 million below budget because of billing problems, “overly aggressive revenue targets” and a “need to more actively manage our expenses.”
Joe Natoli, UM's chief financial officer, explained in May that UM needed surpluses from the medical school because “we have made significant and important investments in the medical school over the last decade and in particular over the last several years,” with the expectation that the investments would yield cash to help the university's balance sheet, improve medical facilities and build up the underfunded pension plan.
One major problem for UM was revealed in a February report from PricewaterhouseCoopers, which said its survey showed patients think highly of the quality of care in academic medical centers, but they don't want to pay more for it — a huge challenge since academic centers are perceived, often correctly, as costing more.
A July memo to employees from Goldschmidt and Lord reported faculty complaining that some tests that usually cost hundreds of dollars at other hospitals can cost “several thousands when performed at our hospital.”
Where the money went (including the millions in missing meds)
When Shalala explained the medical school's problems in May, she listed factors that had either reduced revenue or driven up costs, some related to the national recession. Other reasons for UM’s troubles may be its own inefficiencies, according to internal documents.
Among the factors listed by Shalala:
Insurers are reducing payments to hospitals as the national push to reduce medical costs continues.
State funding for UM was cut by $8 million in the most recent legislative session.
Research money, mostly from the National Institutes of Health, has remained flat while the number of scientists competing for research dollars has gone up.
UM, like many other research centers, ramped up its programs because of stimulus funds. The medical school received $63 million in stimulus money to help fund research jobs. But even in August 2011, the former chief operating officer, William Donelan, warned that some of those positions could be lost when the money ran out.
Shalala didn't think so. “We were all warned about the stimulus money,” she told The Herald, “but at the same time, everybody expected the federal budgets to start going up and for the economy to somewhat recover. We waited. It didn't happen.”
The Hussman Institute for Human Genomics, which has received state and philanthropic funding for research, has remained among the school's biggest financial drains. In the first 10 months of the current fiscal year, it lost $9.8 million. UM leaders have supported the institute on the theory that genetic research offers the biggest chance for medical breakthroughs. “They're doing great,” Shalala said of the institute in May, adding that some researchers had “moved on” because they didn't get NIH grants.
In its latest quarterly report to the state Department of Economic Opportunity, the institute said it had created 199.5 jobs by Feb. 29 and was projected to create 25 more jobs in June, on its way to the promised 296.
Jackson's reduced payments to UM have hurt the medical school.
For years, UM has relied on a lump sum payment of about $130 million from taxpayer-supported Jackson to pay for UM doctors to treat Jackson patients and for other services. Last year, the struggling Jackson insisted on a $16 million cut.
As UM’s financial picture grew dimmer, medical school leaders — while pledging support for Jackson — emphasized that if a patient came to a UM doctor, the doctor could decide where to put the patient, and that was increasingly likely to be the UM Hospital.
Earlier this year, Jackson Chief Executive Carlos Migoya set out to rewrite the financial agreement to allow Jackson to “lease” or hire UM doctors at fair market value, with Jackson receiving the money from any insurance billings. The arrangement seems likely to reduce payments to UM. Shalala says UM wants to get an agreement done. “We've got to make this work.”
With no new agreement in place, UM doctors are working under a temporary arrangement. At the moment, Jackson is paying far higher rates than last year.
UM is also struggling with internal inefficiencies.
Some are shared by many medical schools; a February report by a consultant on general problems at academic medical centers noted entrenched faculty and decentralized administration as frequent problems. One issue is specific to UM, though.
A pharmacy employee, Manuel Pacheco, 55, was arrested last year on charges of grand theft, dealing in stolen property and trafficking in prescription drugs. Court records say Pacheco was caught twice on video surveillance cameras removing expensive cancer drugs from a refrigerator.
Law enforcement investigators found seven cancer medications worth $734,000 in Pacheco's home, court records say. A filing by UM says that Pacheco confessed to taking drugs every other day from November 2010 to June 2011. A UM consultant found “the university’s total loss as a result of Pacheco’s thefts over a three year period was at least $14,358,637.”
In a court filing, Pacheco’s attorney, David S. Markus, said the evidence doesn't prove his client stole all the missing drugs. In an interview last week, he wondered about UM’s control system: “After a million, you would think someone would notice.”
That’s precisely the point Braman made. In his October letter to fellow trustees, he complained that discovering the extent of the thefts took months “because of nonexistent inventory controls.”
Shalala told The Herald in May: “Actually, it didn’t take any time at all to unravel. ... Fraud is a problem in healthcare in South Florida. We are not exempt from that.”
Natoli, UM’s CFO, said he has been working to strengthen internal controls. He said he’s convinced the problems have been fixed.
There’s another internal problem: billing. After UM patients received letters explaining that new billing software was sending out statements for service more than a year old. UM leaders established a “War Room” to handle the problems.
Tightening the screws — and the tempestuous staff meetings that followed
Upper level shakeups at the medical school began in March, after the Braman letter and the former deans’ meetings with Miller. Lord, a former Humana executive, was brought in as chief operating officer to replace Donelan, a longtime colleague of Goldschmidt's from their Duke days. Since then, a half-dozen high-level Goldschmidt appointees have been fired or otherwise departed. The layoffs that followed were based on judgments made by PricewaterhouseCoopers, with input from school executives. Managers, administrators and researchers who were not getting grants were targeted. Shalala told The Herald that the cuts removed administrative duplication, taking out “a whole layer” of management.
In a series of tempestuous meetings with school leaders, faculty complained that they were not adequately consulted about the layoff decisions. Shalala said in May that faculty always complain about change.
Most of those laid off in early May were told to leave immediately. One of those was Michele Misurelli-Gillis, who supervised researchers. Though she was told she would be given preference for rehiring, she said in mid-July that she had applied for 63 UM openings and gotten nowhere.
Lord said Thursday 758 people were laid off, with 194 rehired in other positions, for an annual saving of $50 million.
UM is continuing to expand its reach as a way of increasing revenue, by opening new medical office buildings in Weston and Plantation and relying less on Jackson Memorial by planning to have its obstetricians also deliver babies at other hospitals.
In early July, Goldschmidt and Lord, responding to faculty questions about the potential for more layoffs, said there would be a consolidation of services in several departments "in the next few months, " presumably leading to a reduction in workers.
On Thursday, Goldschmidt wrote to the Herald: “Our national ranking in National Institutes of Health funding (a key measure of academic success for a U.S. medical school) has increased from 51st to 39th in the past six years, a truly exceptional performance. ...
“Leadership is about making decisions, taking calculated risks, and constantly learning ways to be better. We have made decisions that we believe were in the interest of advancing UM ... and in the interest of bringing the best possible care to South Florida.”
UM medical school by the numbers
Medical school annual revenue
UM total annual revenue
About 800 full-time in June
About 190 part-time in March
$14 million amount of drugs allegedly stolen by employee
Institute for Human Genomics
Special state funding, $80 million
Losses after 10 months fiscal 2012, $9.8 million
President Donna Shalala $1.16 million a year
Dean Pascal Goldschmidt $1.1 million a year
Sources: UM medical school financial statements, audited report, court records, IRS documents