Regents approve UI-Mercy Hospital acquisition with few questions asked

DES MOINES — The Board of Regents unanimously approved Tuesday a University of Iowa request to buy most of Iowa City-based Mercy Hospital’s assets for $20 million — without asking questions about the deal’s finances, including how the price was determined, where the money will come from and what will happen with the $63 million Mercy owes on publicly-issued bonds.

“I'm 100 percent behind this,” Regent Nancy Dunkel said of the deal — disclosed Monday, when Mercy Iowa City filed for Chapter 11 reorganization in U.S. Bankruptcy Court and announced the UI had signed a letter of intent to acquire “substantially all” its operating facilities and assets.

Regents spokesman Brock Ascher told The Gazette: “The bankruptcy court will determine what happens with Mercy’s debt, but the state will not be responsible.”

Under the proposed purchase agreement, the university will not “be obligated to pay, discharge, perform, or assume any debt, obligation, expense, or liability of sellers.”

To a question from regent David Barker about timing of the sale, UIHC Associate Vice President for Legal Affairs Joseph Clamon said the court ultimately will dictate that, but Mercy and the university are seeking an “aggressive timeline.”

“That's what's in the best interest of the patients and employees of that institution,” Clamon said.

The specific request, he said, is that the assets auction — for which UIHC is the first bidder, establishing the minimum price — take place no later than the end of September.

“And then the matter be resolved, we would hope, in October or November,” Clamon said. “Obviously, that is a request that's going to be made by Mercy Iowa City, but we would support that request and we support moving quickly.”

Mercy approached UI

UI President Barbara Wilson — in presenting the proposed deal to regents — said Mercy "did approach us and ask us to submit a bid to continue their long tradition of health care in our community and beyond.”

The university’s $20 million offer differs from the $605 million package it offered in 2021 to take ownership of Mercy and make it the “centerpiece” of a new UIHC “community division,” according to an investigation by The Gazette.

UIHC’s 2021 offer included $85 million in capital investment over 10 years, split between Mercy’s unfunded pension liability and workforce development efforts. It committed the remaining $520 million over the decade “to grow and reestablish service lines, and upgrade facilities, equipment, and technology.”

No deal materialized because none of the entities that submitted indications of interest, including the UI, “were willing to move forward,” Mercy attorney Felicia Perlman told a bankruptcy judge Tuesday.

So Mercy continued its managing partnership with Des Moines-based MercyOne, which began in 2017 — even as the hospital continued to look for an off ramp.

And at the end of 2022, the UI reengaged with Mercy on an offer to take over the hospital that would have required a bankruptcy filing, Perlman said.

Mercy brought in bondholder Preston Hollow Community Capitol of Texas, which invested $41.8 million in Mercy’s 2018 bond issue, on the offer. But, Perlman said, “They were not interested in moving forward with the bankruptcy filing and a purchase that was below the level of debt.”

So Mercy focused its conversations on getting Preston Hollow “up to speed on the financial situation of the hospital” and exploring alternative transactions. Perlman said Preston Hollow brought in ToneyKorf Partners to lead a restructuring — until, on June 8, the bondholder asked that ToneyKorf be replaced.

“In the end, (Mercy’s) board concluded that replacing TonyKorf would cause substantial harm to the operations and increase the hospital's instability,” Perlman said. "In addition, the increased cost of replacing a management team was value-destructive, given the liquidity challenges already facing the hospital.“

Preston Hollow and Computershare Trust Company asked a District Court last month to intervene in what it characterized as Mercy’s “financial free fall” by appointing a receiver. The impact of that request was significant, Perlman said.

“Numerous calls were received asking if the hospital had closed,” she said. “Patients canceled procedures, interview candidates canceled their interviews, and there was an increase in employee resignations.”

Seeking to stabilize the hospital, Perlman said, Mercy went to work on finding a new partner.

“Recognizing the importance of Mercy to the community, the university stepped up and renewed its offer to purchase the hospital,” she said.

During the regents meeting, Wilson reiterated the goal of continuing uninterrupted care for Mercy patients as it goes through the bankruptcy proceedings and pending sale.

“We share a goal to preserve the ability to offer health care access to a wide variety of individuals, both in the community and beyond,” she said.

Noting increasing pressures on health care across Iowa — as its population ages, patients present with increasingly complex needs and hospitals and clinics face a shortage of physicians and nurses — Wilson said UIHC remains committed to its “mission of care for all citizens of the state.”

“In many ways, this particular move is part of that commitment,” she said. “The potential affiliation with Mercy Iowa City is one way we can continue to meet the health care needs of citizens in this community and in outlying areas around our community, as well as across the state.”

Steindler construction continues

UIHC has 866 inpatient beds on its main campus, including 190 in its six-year-old Stead Familiy Children’s Hospital. It’s planning a new 842,000-gross-square-foot tower that would include multiple floors of inpatient units — at 48 beds a floor. And that construction comes in addition to a new $525.6 million UIHC hospital campus underway in North Liberty — adding 469,000 square feet to the UIHC footprint.

Mercy Iowa City, which has no affiliation with Mercy Medical Center in Cedar Rapids, has 194 acute care beds, a 23-bed nursery, 28 primary and specialty care clinics and a medical staff of 250 physicians, among 1,350 total employees.

In seeking a new partner last year, Mercy boasted its longtime relationship with Steindler Orthopedic Clinic, the region’s “leading orthopedic group” with 37 providers — and more in the wings to be added, as soon as individual noncompete periods expire, according to the clinic’s President and CEO Patrick Magallanes.

Steindler is building its own new clinic and ambulatory surgical center just west of UIHC’s new North Liberty facility — which some UI leaders have characterized as an “orthopedic hospital.”

When asked this week how the UIHC-Mercy acquisition would affect Steindler, Magallanes acknowledged Steindler has been the “primary revenue generator for Mercy, via the orthopedic procedures we perform in Mercy’s operating rooms.”

“Currently, we continue to provide orthopedic management services and exceptional value to Mercy,” he said. “I would be surprised if either (Mercy Iowa City or UIHC) didn’t want Steindler to continue to provide the exception orthopedic care we are known for.”

But, he said, neither entity has given him specifics, and Steindler’s North Liberty project will continue as planned — with expectations to open in 2025, just before UIHC’s North Liberty opening is scheduled.

“We have received a lot of interest today from hospitals interested in providing operating rooms for our surgeons,” Magallanes said Monday. “Currently, we are proceeding as normal with our planned procedures at Mercy Iowa City.”

Vanessa Miller covers higher education for The Gazette.

Comments: (319) 339-3158; vanessa.miller@thegazette.com