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Overreach at the University of Miami?

In pursuit of a world-class reputation under President Donna Shalala, the University of Miami in the last decade joined other Florida universities — and indeed, the state itself — in betting big on the life sciences.

Among other moves, it paid big bucks to recruit stars, including such seven- figure recruits as famed cardiologist Pascal Goldschmidt, chairman of the Duke University Medical Center medicine department, who came in 2006 to head UM’s Leonard M. Miller School of Medicine and create a UHealth system. It brought in a high-profile Duke team to create a human genomics institute that would employ 296 — an institute launched with an $80-million state grant and a pledge of $100 million of its own. It bought 560-bed Cedars Medical Hospital in 2007, renaming it University of Miami Hospital. It partnered with a commercial developer to build the University of Miami Life Science& Technology Park, the first 252,000-sq.-ft. phase of which opened in 2011.

UM’s overall budget ballooned with the buildup, more than doubling to $2.4 billion from when Shalala arrived in Coral Gables 12 years ago this month. Financially, UM resembles a medical enterprise with an undergraduate college attached. Patient-care revenue makes up just over half the university’s revenue. Medical employees make up 60% of UM’s workforce.

The investment looked to pay off. The UM med school moved into the top 50 in U.S. News & World Report’s rankings. Its Bascom Palmer Eye Institute has been best in its category for nine straight years, and UM’s Miller School became the top National Institutes of Health-funded med school in Florida. The undergraduate institution rose too. UM passed the University of Florida in U.S. News’ much-watched ratings in 2010 and, for the last three years, has been the only Florida institution in the magazine’s top 50 national universities. It was 67th when Shalala arrived.

But problems appeared. As early as 2011, some began to question whether UM had overreached. The Chronicle of Higher Education that year ran an article titled, “Fast-Growing Strategy Has Its Costs at U. of Miami.” UM trustee and auto dealership mogul Norman Braman penned a letter that year warning of UM’s financial risk. “They didn’t act on it,” says Braman, who quit in protest in February 2012. “Everything I said has transpired.”

The new, larger UM med enterprise Shalala built tottered as state and federal research money, and health care revenue didn’t grow to support it. UM appeared to have overpaid for Cedars. Insurers tightened reimbursements. Jackson Memorial Hospital, the public hospital for which UM provides doctors, had its own financial troubles, leading to lower revenue for UM.

By January 2012, the med enterprise was $28 million in the red. The Miami Herald later reported: “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.”

In March 2012, UM made Jack Lord, a pathologist and former Humana executive, COO at the med enterprise to right the fiscal ship. UM laid off 182 temporary workers and two months later announced it would save $40 million annually by axing 800 — 8% of the medical enterprises’ workforce — in administration, appointment scheduling and unfunded research staff. The layoffs were one of the largest in Florida in the recession’s aftermath. (UM is one of Miami-Dade’s top private employers with more than 13,000 employees.)

UM says 19 departments handled their own clinical scheduling; a single call center could handle the job. No doctors, faculty or nurses lost jobs, and UM was adamant there would be no effect on students or patients.

Financially, the restructuring moved the medical enterprise to the black, but Goldschmidt and Lord drew the ire of the med school faculty. A substantial, but never disclosed, number of the school’s 1,200 faculty signed a no-confidence petition against Goldschmidt and Lord. Goldschmidt, Shalala says, has her confidence. Lord appears to have been sacrificed, one of several high-ranking shifts at the medical enterprise. He was replaced as COO but remains on the pathology faculty.

Moody’s, in November, gave UM’s bonds a stable outlook, though it cited challenges including health care exposure, weakened operating performance in the medical enterprise, thin liquidity and a $394-million unfunded pension liability. (UM closed its defined benefit pension plan in 2007 to newcomers and moved to defined contribution.)

Goldschmidt and Shalala faced the faculty in January and promised change. Goldschmidt told faculty the enterprise was $8 million in the black and said 3% merit raises were coming. A special faculty committee on the med school reported that finances indeed had improved but that faculty feared the cuts would negatively affect the future.

Shalala, in an interview, says the cuts were necessary. “A rough patch,” she says of the time. “We didn’t touch anything on the clinical side or the faculty or student body. It was removing an administrative layer that frankly we couldn’t afford anymore if we were going to compete in the market. We went through a year in which we had to restructure, but so did every other health care company in the country.”

Nor does she regret UM’s ambitious buildup. Without it, she says, UM wouldn’t be tops in Florida in NIH funding and have a top 50 ranking for its med school and overall university. “We were ambitious, and we make no apologies for it. We have recovered smartly,” she says. “Financially, we’re in very good shape.”

All academic health centers face a difficult future, however. For decades, the model for such centers was to underwrite education and research with a web of cross-subsidies. Losses on Medicaid and Medicare patients were made up on profits from commercially insured patients. That overall profit from care by UM doctors and from UM hospital patients in turn underwrote teaching and research.

Now, all the payers — insurers and the government — are getting tighter with the dollars. Add in federal budget cuts in research, more changes in Medicare and issues with the Affordable Care Act. “We’re in an era of uncertainty,” says Steven Wartman, CEO and president of the Association of Academic Health Centers.

What’s more, the academic centers compete with doctors, practices and hospitals that don’t have research demands and can be more nimble. Academic centers have the challenge of getting academic-minded doctors to act as profit-motivated businesspeople. In short, the centers have to answer the question of how to deliver what they see as world-class health care at neighborhood clinic reimbursement levels.

Shalala, a former secretary of U.S. Department of Health and Human Services, knows this well. “I think in the long run everyone should be fine as long as they streamline. We can’t have more administration than we need. We can’t do things the old way. We have to organize ourselves in different ways. That’s not easy for people who have been here through generations. It’s painful but it has to be done. The competition is fierce out there. Cost containment is going to be the next great debate in health care.”

The university has fallen behind its promise on the state human genomics institute grant. The state so far has paid out $59 million of the $80 million it has committed, while the university has created 175 jobs out of the 194 it was to have created by now on the way to 296.

UM remains a school in demand. Tuition revenue was up 8% last year. Undergraduate applications were up 5% for the upcoming fall freshman class, to 28,800 for 2,000 seats. UM, like plenty of schools nationally, has seen surging interest from China with as many applicants from there as it has entire spots in its freshman class. Rising high school seniors likely will apply in droves this fall. “We’ve just been inundated” with visiting students during high school spring and Easter breaks, dean of enrollment management Edward Gillis said in April.

The average SAT for the incoming class for the most recent reported year was 1325, up from 1190 when Shalala came. Freshman retention is 91%, up from 80% some 15 years ago, and the graduation rate is 81%, up from 58%. “Almost everything we’re measuring is getting better,” says provost and Executive Vice President Thomas LeBlanc.

UM full, associate and assistant professors are the state’s best paid, with full professors — excluding medical faculty — making an average of $144,800, according to an American Association of University Professors survey. (UF is second at $122,500.)

UM in 2007 completed a $1.4-billion fundraising campaign, branded Momentum. It’s now $1.1 billion into the $1.6-billion Momentum2 goal. “That’s a sure sign people want to invest in the University of Miami,” Shalala says.

Shalala, who is 72, says she hasn’t decided when she will retire. But she is decisive on this question: “We’re the next great American research university.”