Mercy: $162M in patient fees ‘doubtful’ to be paid

IOWA CITY — In tallying up assets for its Chapter 11 bankruptcy filing — adding together everything from investments and real estate to office furniture and petty cash — Mercy Iowa City is reporting it’s “doubtful’ or even impossible to collect $161.7 million in patient account receivables.

That nearly $162 million is out of $189 million in currently owed patient fees for services billed or rendered — which could include charges not just to patients, but to insurance providers or government payers.

“The health care industry practice is to state accounts receivable at the gross value of the charges,” Mercy officials told The Gazette when asked about the many millions it won’t collect. “Contractual reductions by commercial and government payers, charitable care, and uncollected bad debt substantially reduce the cash collected by the provider/hospital.”

Still, Mercy acknowledged that a deeply flawed rollout of an updated electronic medical record system in March 2022 “created significant operational problems,” including challenges with coding, billing and collecting for patient services.

“Mercy continues to work through the poor implementation of its IT system that negatively impacted its cash collections,” officials said.

Recommended Reading

Couple winning record verdict among Mercy’s creditors

Given the steep value of “doubtful or uncollectable accounts,” Mercy is projecting an actual accounts-receivable value of just $27.5 million — bringing the total worth of its property, cash and cash equivalents, investments and other assets to $235.2 million.

Conversely, in listing all the companies, consultants, individuals and other creditors to whom Mercy owes money, the hospital identified more than 450 with either secured, unsecured priority or unsecured nonpriority claims — totaling well over $79.5 million.

That actual total owed is far higher because Mercy didn’t attach dollar amounts to most of the 22 creditors with claims secured by property — a list that includes Wells Fargo, which started as Mercy’s master trustee for multiple bond issues. The bonds have a combined $62.1 million still due.

It also reported “unknown” amounts owed to a list of 40 creditors with claims that aren’t secured with collateral but hold priority over a list of 396 companies, consultants, lawyers and other individuals with “nonpriority unsecured” claims against Mercy.

To that nonpriority unsecured group, Mercy owes more than $17.3 million — a figure that, again, likely totals higher because the hospital reported owing “undetermined” amounts to some of them,

Among the hundreds listed in the nonpriority group are 97 Iowa-based businesses or individuals owed a combined total of over $1.9 million, according to The Gazette’s review of court documents.

In bankruptcy, if money is available after claims secured by property, priority unsecured claims are paid first. Most nonpriority unsecured claims are “dischargeable,” according to legal experts, meaning the debt could be eliminated under bankruptcy.

Businesses affected

The 22 Iowa creditors considered a priority for payment — although their claims are not secured with collateral — include state agencies supported by taxpayer dollars, like the Iowa Department of Health and Human Services and the Iowa Department of Revenue, along with county departments like the Iowa County, Johnson County and Muscatine County Treasurer’s Offices, and the Johnson County Public Health Department.

The nearly 100 Iowa-based businesses that appear unlikely to receive payment from Mercy on their nonpriority unsecured claims include more taxpayer-supported agencies like the city of Iowa City, owed more than $18,780; and other entities like the Iowa Hospital Association, owed more than $101,700; and the Iowa Heart Center, owed at least $268,250.

The many Eastern Iowa businesses to which Mercy, according to its petition, owes money include:

Although businesses The Gazette reached out to either declined to comment or didn’t respond, some have had attorneys enter appearances with the bankruptcy court on their behalf.

Among some of the highest claims considered nonpriority and unsecured are held by Medefis Consolidated of Omaha, owed $6.4 million, and Allscripts Healthcare in Raleigh, N.C., the electronic medical record system that Mercy blames for a botched update.

Mercy, which has said in bankruptcy records it’s considering a lawsuit against Allscripts — since rebranded to Altera Digital Health — reported still owing the company $1.8 million.

“The EMR implementation, which went live in March 2022, immediately created significant operational problems,” according to court testimony from Mercy Chief Restructuring Officer Mark Toney. “These included difficulties in coding, billing and collecting for patient encounters, an inability to submit regulatory reports on time, and misconfigured workflows.”

The “flawed system” caused revenue loss in 2022 and 2023 “due to delayed patient bill submissions, resulting in a substantial backlog of accounts receivable payments that could not be collected promptly.”

Mercy’s accounts receivable “ballooned by more than 40 percent during this period despite lower year-over-year net patient revenues,” Toney testified. “As a result, (Mercy’s) financial liquidity was severely affected during the latter half of 2022 and the first quarter of 2023.”

$950 an hour

Court documents show Mercy in the 90 days before filing for bankruptcy protection did pay $48 million to clients and creditors.

And, in the last year, it paid more than $7 million to companies associated with its restructuring and bankruptcy — including $3.2 million to ToneyKorf Partners LLC, which it hired five months ago on March 30 for “interim management and restructuring services.”

At that time, newly-appointed Mercy Chief Executive Officer Tom Clancy sent an email to employees announcing it was parting ways — again — with managing partner MercyOne and had hired ToneyKorf “to develop and implement a plan to position Mercy Iowa City to improve its operations.”

In a March engagement letter with Mercy, ToneyKorf agreed to provide a team of staffers, including Toney, who as chief restructuring officer would “oversee and manage all restructuring, operations, and assets of the company.”

ToneyKorf also agreed to “lead and oversee the negotiations with potential acquirers of the assets of the company” and develop “possible restructuring plans and strategic alternatives for maximizing the enterprise value of the company’s various business lines.”

One of the many aspects of that March 30 agreement that Mercy has asked a bankruptcy judge to continue through its bankruptcy proceedings is the ToneyKorf fee schedule — including paying Toney $950 an hour, which would come to $38,000 if he works a 40-hour week.

Mercy’s interim chief financial officer, also provided through ToneyKorf, is James Porter, who makes $725 an hour but no more than $105,000 a month — which would require him to work less than 40 hours a week in a four-week month on this project.

The agreement, which also covers expenses, doesn’t cap Toney’s monthly pay like it does for Porter and other ToneyKorf employees working on the Mercy project, including a chief operating officer making $650 an hour, a vice president of human resources making $610 an hour and a finance manager making $300 an hour.

And the engagement deal includes a “success fee,” entitling ToneyKorf to another $250,000 — “earned and payable upon court approval of a transaction and/or transition of substantially all assets to a new owner, resulting in the continuation of Mercy as a health care facility serving the community.”

The agreement notes that if Mercy “closes substantially all of the facilities and its operations and eliminates substantially all staff, ToneyKorf Partners will not be entitled to a success fee.”

Had Mercy transitioned without bankruptcy, ToneyKorf’s success fee could have been $1 million under the deal.

'Success fee’

Years before Mercy’s recent bankruptcy filing, it hired H2C Securities Inc. in summer 2021 to help find the community hospital a new owner or managing partner. Through an H2C-issued request for proposals, Mercy received offers from the University of Iowa, Mercy Medical Center in Cedar Rapids, UnityPoint Health and others, according to an investigation by The Gazette.

Although none of those materialized — including a UI offer committing $605 million over the next decade — H2C had outlined a “preliminary partnership timeline” aiming to close a deal in December 2021. When that didn’t happen, Mercy signed an amended agreement with the firm in November 2022 working into its “scope of services” a clause about bankruptcy.

“In the event the company voluntarily commences a bankruptcy case, or an involuntary case is commenced against the company under title 11 of the U.S. Code,” H2C would help Mercy again review its assets, negotiate a sale and help close the deal, among other services. The company would earn a $600,000 “success fee” upon closing a “strategic transaction.”

In new court filings asking a bankruptcy judge to allow Mercy to continue using H2C as its investment banker, the hospital said H2C “has been instrumental in assisting (Mercy) in analyzing, negotiating, and documenting the current stalking horse bid provided by the State of Iowa’s University of Iowa.”

Without mentioning the 2021 UI offer that didn’t materialize, Mercy in its bankruptcy filings cited H2C’s efforts leading up to the current offer from the UI to acquire Mercy assets for $20 million.

“After numerous discussions with potential interested parties, (Mercy’s) marketing process ultimately culminated with the proposed sale to the university.”

Mercy has asked a bankruptcy judge to set a Sept. 19 deadline for any bids beyond the UI’s. But a hearing where deadlines could be set will not happen until just about a week before, on Sept. 13.

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