The firing of McMillan comes two weeks after the organization gave him a contract extension. Earlier this month, the team reworked the final year of McMillan's deal for the 2020-21 season and added a team option for the 2021-22 campaign.
Heat head coach Erik Spoelstra said the Pacers' decision to part ways with McMillan was "ridiculous."
"It seems totally ridiculous. It seems like you're talking out of both sides of your mouth," Spoelstra told reporters Wednesday. "Just two weeks ago at the beginning of our series you're giving him an extension, but really it's just a media fake extension to appease whatever they felt like they needed to appease.
"And then after this series to make that quick of an emotional decision is really disappointing."
League sources told ESPN that Indiana will target Houston Rockets head coach Mike D'Antoni -- who is in the final year of his current contract -- if he becomes available. The outlet said the Pacers also plan to search from a list of candidates they consider "program builders" over the long term.
In four seasons as the Pacers' head coach, McMillan posted a 183-136 record in the regular season and a 3-16 mark in the playoffs. Indiana was swept in the opening round of the postseason in each of the last two years.
The Pacers have failed to reach the second round of the playoffs since advancing to the Eastern Conference finals in 2013 and 2014. The team has lost a franchise-record nine straight playoff games.
Injuries have played a significant part in the Pacers' lack of success over the past few years. Indiana played last season without All-Star guard Victor Oladipo, who suffered a major knee injury, and didn't have All-Star forward Domantas Sabonis for its series against the Heat this month due to a foot injury.
"On behalf of the Simon family and the Pacers organization, I'd like to thank Nate for his years with the team," Pacers president of basketball operations Kevin Pritchard said in a statement Wednesday. "This was a very hard decision for us to make; but we feel it's in the best interest of the organization to move in a different direction.
"Nate and I have been through the good times and the bad times; and it was an honor to work with him for those 11 years [in Indiana and Portland]."
McMillan has posted a 661-588 career record across 16 seasons as a head coach for the Portland Trail Blazers, Pacers and then-Seattle SuperSonics.