In seeking investigation, bondholder says Mercy Iowa City to become ‘behavioral health hospital’

IOWA CITY — Accusing Mercy Iowa City of shifting blame for its “prolonged” financial deterioration that preceded “a bankruptcy fire sale process for a mere $20 million,” bondholders have asked a judge to appoint an examiner to investigate the hospital’s downfall and answer key questions.

In court filings Monday, major Mercy Iowa City investor Preston Hollow Community Capital — along with the master trustee of its debt — said the hospital “threw in the towel” and filed for bankruptcy protection without consulting them. Should a “below-market” offer from the University of Iowa go through, the filing asserted, Mercy will cease to be an independent “full-service acute care hospital.”

“Upon information and belief, the University of Iowa intends to reduce Mercy’s existing acute care service lines and convert Mercy into largely a behavioral health hospital,” the filing alleged.

In last week’s announcement of the proposed sale — which is not a done deal, should another qualifying entity outbid the $20 million UI offer — Mercy and the university said the purchase would afford a “more sustainable future” for the hospital. The UI, according to Mercy’s court filings, plans to establish a Mercy advisory board, allow Mercy to have its own chief administrative officer responsible for operations and make certain strategic upgrades.

Mercy doctors in good standing will keep their jobs, according to the proposal, and other employees will be allowed to reapply to the university.

In a statement provided Tuesday to The Gazette, Mercy officials said they dispute Preston Hollow’s assertions in its request for an examiner: “In due course, we will address these issues in the bankruptcy court. In the meantime, Mercy remains focused on moving the sale process forward to achieve a fair value for all creditors, while continuing to provide quality patient care at our hospitals and clinics and protecting our employees and physicians.”

Earlier negotiations

Among questions the bondholder and master trustee want answered is what happened with Mercy’s “prior secretive sale negotiations with the University of Iowa and other parties in 2021, 2022, and the first quarter of 2023.”

An investigation last year by The Gazette year found Mercy — in seeking to exit its managing partnership with Des Moines-based MercyOne in 2021 and find a new partner or owner — received offers from at least four health care systems.

All four addressed Mercy’s debt obligations and unfunded pension plan.

The 2021 offer from the UI committed over the span of a decade more than $605 million, “including $85 million in capital investment split between Mercy Iowa City’s unfunded pension liability and workforce development efforts.” The remaining $520 million would go toward growing and reestablishing service lines and upgrading facilities, equipment and technology.

“The examiner should investigate these earlier negotiations and sale efforts, the terms and conditions of any prior proposals made by the University of Iowa and other parties, and how or why those negotiations or potential transactions failed,” according to the request for an examiner.

Preston Hollow was the main investor in $41.8 million in bonds Mercy issued in 2018 — with $37.9 million still owed. Computershare is the master trustee for all $63 million the hospital owes in publicly-issued bonds, including from a 2011 series for $44.6 million.

The two in July petitioned a district court to appoint a receiver to take over Mercy’s operations — arguing the 150-year-old hospital was in default.

News of that petition started a chain reaction that Mercy officials called “destructive” and said led to their Chapter 11 bankruptcy. As part of the bankruptcy, Mercy signed a letter of agreement allowing the UI to buy its assets for $20 million — should it not be outbid.

A bankruptcy judge set an Aug. 31 hearing to discuss the proposed bid deadline, a potential auction date and the new appeal for an examiner, among other matters.

In a statement Tuesday, Preston Hollow officials said that(Mercy’s) financial mismanagement led to the news last week that it would be liquidated through a bankruptcy fire sale process of a mere $20 million, even though the hospital’s leadership reportedly rejected a purchase offer of $605 million.“

The aim of an examiner is to “maximize financial recovery for all creditors, including the pensions of hospital employees and retirees,” it said.

'Cannot be trusted’

Among its bankruptcy filings, in which Mercy reported liabilities topping $100 million, Chief Restructuring Officer Mark Toney said Preston Hollow’s receivership petition and subsequent media blitz caused “swift and harmful” repercussions — including employee resignations and patient cancellations.

“It is uncontroverted that the careless and callous actions taken by Preston Hollow jeopardized the health and well-being of Mercy Hospital’s patients, the viability of Mercy Hospital’s future, and damaged the organization’s reputation,” according to Toney.

But Preston Hollow disputed that assertion, saying it’s being used as a scapegoat for “mismanagement, incompetence, corporate waste, and breach of contract.”

"Mercy’s financial failure was not caused by a sudden, unforeseen cataclysmic event,” according to the request for an examiner, noting the hospital for a year has been burning through $2.6 million in cash a month.

“Despite (Mercy’s) incredulous attempt at blame-shifting, the reality is (Mercy) has been burning through their scarce remaining operating capital and continue to do so.”

The bondholders asked an examiner to investigate Mercy’s current and former officers and directors; its former managing partner MercyOne; and its former electronic medical records vendor, Allscripts Healthcare Solutions.

“Examples of the fiduciary breaches, mismanagement, incompetence, and corporate waste include the board and management’s decision to migrate the hospital’s electronic medical records system to an inferior platform, which had a devastating financial effect resulting in potentially millions of dollars of losses,” according to the court filing.

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