I'm willing to wait until more information is in, but yeah, it sure SOUNDS bad, especially since we've all got a story of university staff failing to report something to the police fresh in our minds.
There are always questions of doctor-patient confidentiality to consider, and that's something that needs to be stressed in ANY conversation about mental health -- we can't treat EVERYONE who sees a psychiatrist as a potential mass-murderer. Which of course is an obvious point, but stories like this CAN make people with legitimate but benign mental illness feel like people are coming for them with pitchforks and torches.
Basically: I think we'll see an investigation here. And it'll clear up whether the case was dropped simply because it became Not Our Problem Anymore, or because the psychiatrist and staff ultimately decided that whatever he told her in confidence did not rise to the level of contacting the police. Either way, they failed to stop a tragedy, but the distinction between the two REASONS for it is a pretty damned important one.
(Related: my knowledge of the Tucson case -- that teachers, students, and administrators were UNCOMFORTABLE with the killer but ultimately did not find anything to suggest that he was violent or dangerous -- suggests that they did their jobs and exercised reasonable judgement and, unfortunately, he turned out to be far more dangerous than his weird outbursts suggested.)
There's always going to be a tension between erring on the side of public safety and personal privacy, between false positives and false negatives. False negatives can lead to far worse outcomes, but false positives happen far more frequently (look at any given story in the TSA thread). Determining when it's appropriate to call the police because somebody told a doctor something in confidence can be a tricky decision to make, and it's definitely relevant to find out why they made the decision they did in this case.
But you're right -- if it WAS just because "Hey, he's not our problem anymore" then that's pretty fucked up.