Sept. 10 (Bloomberg) -- When he was a child, David Adams pretended to operate on his stuffed animals.
As a teen, the Salt Lake City native became a paramedic. He wanted to train to become a physician after graduating from the University of Utah with a bachelor’s degree in health promotion and education in 2009 but was rejected by two dozen U.S. medical schools.
Three years later, he earned a Master of Science in medical health sciences from Touro University Nevada and applied again, Bloomberg Markets will report in its October issue. Adams was accepted to American University of the Caribbean School of Medicine, which is owned by Downers Grove, Illinois-based DeVry Inc.
Adams, now 31, moved with his wife, Jessica, and their two young children to a two-bedroom apartment that smelled of dog urine and had a broken stove on the Dutch part of St. Maarten on Jan. 1. After financing his first two semesters with $67,000 in U.S. government-backed loans, Adams expects to leave medical school with as much as $400,000 in debt -- and about a 20 percent chance of never practicing as a physician in the U.S.
”I understand that I am coming from behind a little bit, attending a Caribbean medical school,” Adams says, standing on his apartment’s terrace, watching sailboats glide by on the deep-blue waters of Simpson Bay Lagoon.
DeVry, which has two for-profit medical schools in the Caribbean, is accepting hundreds of students who were rejected by U.S. medical colleges. These students amass more debt than their U.S. counterparts -- a median of $253,072 in June 2012 at AUC versus $170,000 for 2012 graduates of U.S. medical schools.
And that gap is even greater because the U.S. figure, compiled by the Association of American Medical Colleges, includes student debt incurred for undergraduate or other degrees, while the DeVry number is only federal medical school loans.
Many DeVry students quit, particularly in the first two semesters, taking their debt with them. While the average attrition rate at U.S. med schools was 3 percent for the class that began in the fall of 2008, according to the AAMC, DeVry says its rate ranges from 20 to 27 percent.
Of those who remained, 66 percent of AUC students and 52 percent of students at DeVry’s other Caribbean medical school, Ross University School of Medicine, finished their program -- typically two years of sciences followed by two years of clinical rotations -- on time in the academic year ended on June 30, 2012.
And though neither AUC nor Ross, in the island nation of Dominica, is accredited by the body that approves medical programs in the U.S., students at both schools are eligible for loans issued by the U.S. Education Department. The loans, which totaled about $310 million in the year ended June 2012, leave the U.S. taxpayer -- not DeVry -- on the hook if students should fail to get jobs and be unable to repay them.
DeVry is also paying hospitals in the U.S. to take its students for the two years of clinical training that they need to complete their degree. U.S. medical schools typically provide the training hospitals benefits such as a faculty appointment and access to a medical school library, not cash per student per week, says Glenn Tung, associate dean for clinical affairs at Brown University’s Warren Alpert Medical School, who has studied for-profit medical schools.
DeVry’s pay-for-play model has drawn the ire of the American Medical Association. In June, the state of Texas passed a law prohibiting foreign medical schools from sending students to the state.
Congress needs to examine the law that makes foreign for-profit medical schools eligible for federal loans, says Senator Dick Durbin, a Democrat from DeVry’s home state of Illinois.
“These schools are taking advantage of an offshore loophole that allows federal funding to be released to students attending a medical school that is not accredited in the U.S.,” Durbin says. “Until Congress acts, these schools will stop at nothing to keep the American taxpayer dollars flowing.”
Durbin, in a Sept. 10 letter to Education Secretary Arne Duncan, called for an examination of the medical schools in the Caribbean that have federal loan access, yet may be subject to standards below those set for medical students in the U.S.
Students at the four schools -- the two DeVry schools, along with St. George’s University School of Medicine and, since July, Saba University School of Medicine -- are also eligible for tuition benefits from the U.S. Department of Veterans Affairs.
DeVry’s policies shortchange students, says David Bergeron, who recently retired as head of postsecondary education at the U.S. Department of Education.
“If they have to make a choice between students and profit, they choose profit,” Bergeron says of the for-profit Caribbean schools. “Because their students heavily depend on student loans, it creates risk for the student and the taxpayers throughout the system.”
Adds Ernie Yoder, dean of Central Michigan University’s newly opened medical school, “I have grave concerns about the financial welfare of some of these kids and how they’re led to believe that they will be successful as physicians and be able to pay back their debt.”
A DeVry spokesman, Chris Railey, says, “Students who don’t succeed academically typically leave school before accumulating a large debt load.”
Michael Uva, a 2010 graduate of St. George’s in Grenada, twice failed to land a residency spot that would be the next step to practicing medicine in the U.S.
“I spent my entire life preparing for this career, and I am now 33 years old with massive debt and an unfulfilled dream,” Uva says. The Oswego, New York, native has almost $400,000 in medical school loans and currently earns $30 an hour overseeing a blood donation clinic in New Jersey, where he also draws blood.
Medical education is crucial to the future of DeVry, which is trying to diversify from its base in undergraduate studies. When DeVry, the No. 3 publicly traded for-profit education company in the U.S. based on revenue, announced in April that undergraduate enrollment had declined 21 percent in March from a year earlier, the company’s shares plummeted 20 percent in a single day.
Once among the fastest-growing U.S. industries, for-profit education faces increased competition and scrutiny from Congress and state and federal prosecutors.
“The vast majority of the students are left with student-loan debt that may follow them throughout their lives,” said a July 2012 report by the Senate Committee on Health, Education, Labor and Pensions, led by Iowa Democrat Tom Harkin, that criticized for-profit colleges.
“They are left with high monthly payments, but without a commensurate increase in earning power.”
DeVry said in April that the attorneys general of Massachusetts and Illinois are investigating its use of student loans and its compensation practices. The company said in a filing that it’s cooperating with the investigations, with the aim of demonstrating that its practices comply with the law. Other for-profits have also been struggling.
Phoenix-based Apollo Group Inc., which owns the University of Phoenix, was demoted from the Standard & Poor’s 500 Index to the S&P MidCap 400 in June as its market value shrank. Shares of Apollo, the largest public for-profit education company, traded at $20.05 on Sept. 6, down from a high of $89.22 in January 2009.
And the Kaplan education division of Washington Post Co. reported a $105.4 million operating loss for 2012, partly because of restructuring costs related to declining enrollment.
DeVry got 34 percent of its revenue in the year ended on June 30 from medical and health-care education, including a chain of U.S. nursing schools. The unit contributed $673 million of DeVry’s $1.96 billion in revenue, up more than sevenfold from $91 million in fiscal 2005.
“The diversification strategy is working,” Chief Executive Officer Daniel Hamburger said at an investor conference in Chicago in June. “About a third now of our enrollment is in the growing field of health-care education.”
In addition to AUC and Ross, which also trains veterinarians, DeVry owns companies that specialize in prepping students for the U.S. medical-licensing and certified public accountant exams. It’s expanding DeVry Brasil, which operates six educational institutions with 30,000 students in Brazil, including a medical school.
DeVry acquired AUC in 2011 for $235 million, attracted partly by the school’s eligibility for federal loans, says Harold Shapiro, DeVry’s chairman and a former president of Princeton University.
“Access to federal student loans is very important for a lot of DeVry programs, including that one,” says Shapiro, 78, an economist by training, who plans to retire from DeVry in November after 12 years on the board and five years as chairman. “Obviously, it’s part of what makes it work.”
Shapiro says he was recruited to DeVry by its co-founder, Dennis Keller, a 1963 Princeton graduate and former trustee who has donated at least $35 million to Princeton. Shapiro joined DeVry the year he stepped down as Princeton’s president.
DeVry is ramping up its capacity to take on more medical students. It’s adding a $30 million building at AUC that students were to begin using in September. Including the 3,500 students at Ross and about 1,300 at AUC, DeVry is currently training some 4,800 would-be doctors. Ross typically enrolls 900 to 950 students per academic year, who start in either January, May or September.
That’s about seven times the average of 139 for the 2013 graduating class of U.S. med schools, according to figures from the AAMC. St. George’s has about 4,900 students.
Many of those students, like Adams, failed to gain admission to U.S. schools, where the mean score on the Medical College Admission Test, or MCAT, was 31.2 out of a possible 45 last year. At DeVry’s schools, the average score was 25.
“I don’t feel that these schools are very selective all the time and will potentially take students whose failures could be predicted based on their academic record,” says Jessica Freedman, a physician who runs MedEdits, a company that advises applicants to medical schools. Freedman, who charges $400 for an initial consulting session, says she refuses clients whose academic credentials show they’re not likely to succeed. “There are a lot of important ethical issues here,” she says.
DeVry’s Shapiro says the school gives prospective students the information they need to decide whether to attend.
Heidi Chumley, AUC’s executive dean, says the school has permission from its accreditor to increase its enrollment by 10 to 20 percent but won’t do so without adequate resources and qualified applicants. The Accreditation Commission on Colleges of Medicine, an Ireland-based body, accredits four Caribbean medical schools, including AUC, according to its website.
As enrollment grows at the DeVry medical schools, so does revenue -- 81 percent of which came from federal student loans in the year ended June 2011. First-year tuition on Dominica costs $56,475, based on the three terms Ross divides the year into. That compares with a median of $50,309 for tuition and fees at private U.S. medical schools in the 2012-to-2013 school year.
Students can also borrow for living expenses and other costs, which can run thousands more.
“Applicants who were denied admission or wait listed at U.S. schools constitute a large segment of prospective students,” DeVry says in its 2012 annual report. Some 91 percent of Ross’s students are from the U.S., while at AUC, the figure is 86 percent.
$271,000 in Loans
Clint Walls was rejected by more than a dozen U.S. medical schools over three application cycles and went to work as a real estate appraiser in Arizona. He applied to Ross, he says, because “I just couldn’t really shake the itch.”
Now a third-year student doing rotations in Atlanta, Walls, 29, has about $271,000 in student loans and expects to graduate with $400,000.
“Even on a physician’s salary plus whatever my wife earns, there is still doubt in our minds whether we will be able to pay the loans off in their entirety,” he says.
Still, Walls says he feels grateful for the opportunity to be in medical school. Giving those shut out of U.S. medical schools that chance is AUC’s aim, says Ron Testa, a Ph.D. in clinical and community psychology who is dean of medical sciences.
“When the world says no, and you have a burning desire to study medicine, there’s a place that provides you an opportunity to fulfill your dreams,” Testa says.
The U.S. is facing a shortage of doctors as the population ages and President Barack Obama’s health-care law makes medical insurance available to 32 million more people. That means U.S. medical schools need to increase enrollment 30 percent by 2015, the AAMC says.
Caribbean schools aren’t the only ones ramping up capacity to meet the demand. The AAMC estimates in its 2012 Medical School Enrollment Survey that by the 2017-to-2018 school year, there will be 21,434 first-year students in the U.S., matching the 30 percent increase it recommended.
About two-thirds of the gain will come from the 125 U.S. medical schools that were accredited as of 2002, while most of the rest will come from new, accredited U.S.-based schools, such as the one at Central Michigan. As of mid-August, 141 U.S. schools were accredited by the Liaison Committee on Medical Education.
Caribbean-educated students such as DeVry’s will now have to vie with grads of accredited U.S. schools for a limited number of residency positions.
“It’s new competition that they didn’t have before, and the competition has a better brand,” says Trace Urdan, an analyst at Wells Fargo & Co. who follows for-profit colleges. “They have to duke it out on the merits.” As of mid-August, Urdan rated DeVry’s stock outperform, citing the company’s potential for cost cutting, among other things.
Some of the new U.S. schools are taking training slots in hospitals that had previously gone to DeVry.
When Central Michigan’s first 64 students, who began classes Aug. 4, reach their third year, they will be trained at a consortium of affiliated hospitals, CMU Medical Education Partners, based in Saginaw, Michigan. Up to now, as many as 100 positions at CMU have been occupied by students from Ross, which is paying the hospital consortium $1.75 million a year for the slots, Yoder says.
Central Michigan plans to add students each year until it reaches a capacity of 400.
“The offshore schools know they’re in for a tough time from the perspective of access to clinical sites for student training,” Yoder says.
Quinnipiac University, based in Hamden, Connecticut, is also starting a medical school whose first 60 students began classes in August. They’ll take the majority of their clinical rotations at St. Vincent’s Medical Center in Bridgeport, Connecticut, says Anthony Ardolino, the executive dean.
The hospital currently has a paid contract with Ross, says Stuart Marcus, the hospital’s president.
“We are forgoing revenue because of the affiliation with Quinnipiac,” Marcus says, declining to specify how much.
“Clinical slots are dynamic,” AUC’s Chumley says. “If something changes in a hospital that results in more or less space, we adjust the number of students. The most important thing is that the site provides an excellent clinical experience.”
DeVry is making deals elsewhere as well. Last year, Ross signed a $35 million, 10-year contract for 96 third-year slots annually at Kern Medical Center, a public hospital in Bakersfield, California, says Paul Hensler, Kern’s CEO.
The hospital also has the option of providing up to 96 fourth-year spots at $500 per student per week, Hensler says.
In New York, AUC is paying Nassau University Medical Center on Long Island about $1.4 million annually until 2022 for 64 slots, or about $425 per student per week, according to Steven Walerstein, the hospital’s chief medical officer. AUC also has paid Nassau $5 million for capital improvements, he says.
DeVry isn’t the only for-profit med school taking this route: St. George’s University has a 10-year, $100 million contract with New York City Health & Hospitals Corp., a consortium of city-owned hospitals, to provide at least 600 places at seven hospitals for its third- and fourth-year students. St. George’s pays HHC $650 per week for each third-year medical student and $400 for each fourth-year student, HHC says.
“It corrupts the whole academic system,” says Brown’s Tung, whose medical students train at seven affiliated teaching hospitals in the Providence, Rhode Island, area, where they’re supervised by Brown faculty.
Paying the hospitals makes them accountable, says Margaret Lambert, dean of enrollment planning at St. George’s, whose students borrowed almost $160 million in federal loans in the year ended on June 30, 2012.
“They’re expending energy and time teaching our students,” she says. “If you don’t pay them, you’re sending students there and hoping that someone teaches them something.”
Chumley says DeVry’s payments to hospitals cover the revenue lost when a physician is less productive because he or she is teaching. “We should pay for this,” she says.
AUC asked Texas regulators for permission to negotiate deals with hospitals in 2011. This past June, the Texas legislature prohibited foreign schools from operating in the state.
“The first and foremost reason was it would compromise the quality of the learning experience for the medical students that the state is investing in here,” says John Zerwas, an anesthesiologist who’s a member of the Texas House of Representatives.
Texas plans to open two new medical schools that eventually will have 200 students each. Dell Inc. founder Michael Dell promised to donate $50 million toward the one in Austin, which will be named after him.
DeVry’s Shapiro, who’s still a Princeton economics professor, says he wasn’t familiar with the Texas legislation, which he described in business terms.
“They’d rather protect their market than open it,” he says in his Princeton office. “Rather than try to win by quality, try to win by regulation.”
The American Medical Association also opposes payments by schools for the rotations and said last year that it would ask state and federal regulators to outlaw the practice.
In 2012, 78 percent of U.S. medical schools surveyed by the AAMC said they were concerned about the number of clinical training sites available for their students, with 24 percent of schools citing competition from offshore medical schools.
AUC signed its contract with New York’s Nassau in 2008. Since then, the public Stony Brook University School of Medicine has lost key training spots in areas such as pediatrics and obstetrics, says Latha Chandran, Stony Brook’s vice dean of undergraduate medical education.
“It is becoming more difficult to place medical students into clinical rotations at hospitals within our region that have arrangements with medical schools in the Caribbean,” says Kenneth Kaushansky, dean of the medical school.
The training slots, known as clerkships, can lead to the student’s being taken on after graduation as a resident at the same hospital, the first step toward becoming a licensed physician.
“Once we get students in those hospitals to do clerkships, they want them as residents,” says Joseph Flaherty, Ross’s dean, who came to the Caribbean after serving as dean of the medical school at the University of Illinois.
To obtain a license, medical graduates from U.S. schools need to spend a year or more in a residency program, according to state regulations. Some 25 states, including New York, require three years for graduates of overseas schools, even if they’re U.S. citizens. To become a specialist such as a neurosurgeon can take as many as seven years of residency.
Though the U.S. needs more doctors, it has only a limited number of residencies after Congress in 1997 effectively froze the number of positions Medicare would help support.
Graduates are matched with hospitals that want them via an algorithm refined by Alvin Roth, the Stanford University economist who shared the Nobel Memorial Prize in Economic Sciences in 2012.
The National Resident Matching Program says 94 percent of fourth-year students schooled in the U.S. landed a first-year match in 2013, while 53 percent of U.S. citizens trained internationally did.
DeVry students fare better than the average foreign-trained student. Of the 914 Ross students who applied for residency in 2013, 76 percent, or 699, earned places. Another 41 had preliminary one-year spots, which would require the students to win a second residency in order to be eligible for a medical license in 48 states.
Of the 268 AUC students who applied for residency, 212, or 79 percent, got matches, and seven more had one-year slots. The remainder of the students failed to win a residency.
In this year’s match, the biggest contingent of residents from AUC -- 12 -- went to Nassau. California’s Kern hospital took six Ross students, according to Ross’s website.
Those who fail to match can try again the following year, but more than half of those fail the second time, according to 2013 data from the matching program.
“It gets harder the second time and near impossible the third time,” says Eric Scher, vice president of medical education at Henry Ford Health System in Detroit, which is affiliated with Wayne State University.
Some graduates pursue related fields such as working in insurance or public health, Ross’s Flaherty says. They could also earn a master’s degree in business, public health or health education, he says. St. George’s offers free tuition for a master’s of public health to those who fail to match.
Adams, the former paramedic, has high hopes that his AUC education will lead to a residency that will take him to pediatric cardiothoracic surgery, even after he received mediocre grades his first semester as he and his family acclimated to St. Maarten.
The former Eagle Scout attended college while working full-time, mostly at Primary Children’s Medical Center in Salt Lake City, where he became inspired by a cardiothoracic surgeon.
“What keeps me focused on this goal is the difference that these surgeons make in the lives of these precious children,” says Adams, whose current debt includes about $60,000 for his graduate degree.
To become a pediatric cardiothoracic surgeon, Adams would need to complete three residencies that could take nine years after medical school.
“I realize it’s a very small minority getting very, very, very good match spots,” he says. “But it’s what I have to hold on to.”
Carina Crookston, a 36-year-old aspiring oncologist and mother of three from Minnesota, had sticker shock just from the cost of living in St. Maarten. Her family’s first air-conditioning bill was $700 and had to be paid at the utility office in cash. A gallon of milk cost about $7, more than twice the price back home.
Crookston shared a two-bedroom apartment with her daughters, 3-year-old Piper and 14-year-old Andi, and her 22-year-old sister, Michelle, who cared for the girls. Her husband, a computer programmer, and teenage son returned to Minnesota, where work was steadier.
Crookston, who incurred $176,000 in federal loans for her first five semesters, is now back there as well, preparing for exams that she hopes will lead to a clerkship. Her debt may double before she graduates.
“We have to have a degree of faith in ourselves and hope for success,” says Crookston, who watched a younger sister die of cancer when they were children. “You hope for the best.”
Shapiro says the vast majority of DeVry students will make very good doctors, even if they’re taking on more risk than U.S. students.
“It’s not compulsory,” Shapiro says of medical education. “You can go or not go. You have to make your own judgments.”
To contact the reporter on this story: Janet Lorin in New York email@example.com.