Bankruptcy judge: MercyOne should produce records related to Mercy Iowa City downfall

IOWA CITY — A federal judge this week ordered MercyOne to produce a long list of records associated with its six-year management of the bankrupt Mercy Iowa City after a committee overseeing the hospital’s liquidation accused the former managing partner of withholding documents and details about what led to Mercy Iowa City’s “swift financial decline.”

In seeking a court order to subpoena thousands of documents and communications from Des Moines-based MercyOne, which managed Mercy Iowa City from 2017 to 2023, the liquidation trust oversight committee highlighted several reasons the records are imperative in determining “any and all claims (it) may have against MercyOne on behalf of (Mercy Iowa City).”

“It is clear that MercyOne and its employees possess a large number of documents and communications related to this investigation, as well as highly relevant information about (Mercy Iowa City’s) business, financial condition, and affairs in the six years before (it) filed chapter 11,” according to the committee’s January petition for records. “The (committee) takes seriously its obligation to balance the potential costs of litigation against the benefit to (Mercy Iowa City’s) creditors.”

Spotlighting MercyOne’s potential liability, former Mercy Iowa City executives pointed to its oversight of the bankrupt hospital’s financial affairs and operations, its direction of critical aspects of the hospital’s pre-petition operations “such as turnaround management,” and its oversight of Mercy Iowa City’s “failed request for proposal process in 2021 in an attempt to sell (the hospital) to another party.”

The University of Iowa in 2021 made an offer worth more than $605 million to buy Mercy Iowa City and transform it into the “centerpiece” of a new UIHC “community division,” according to reporting from The Gazette. The offer didn’t materialize at that time, and Mercy Iowa City maintained its partnership with MercyOne until just months before it filed for bankruptcy in August 2023.

Post-bankruptcy, UIHC ended up buying Mercy Iowa City at auction for $28 million — plus more in promised upgrades.

“Circumstances leading up to the Chapter 11 cases circumstantially indicate that MercyOne may not have fully performed its obligations under the management and affiliation agreement,” according to the committee’s appeal for records. “For example, the (agreement) required MercyOne to assist (Mercy Iowa City) with replacing its existing information technology system and provide consultation regarding changes to (the hospital’s) medical records management.”

Implementation of that work was “disastrous,” according to the petition, causing Mercy Iowa City to “suffer substantial operational problems and incur significant lost revenue.”

“While the (committee) has documents and communications from (Mercy Iowa City), it needs documents and communications from MercyOne — the entity that was ostensibly in control of the (hospital) during this period of time — to determine what MercyOne did or did not do in relation to the (electronic medical record) rollout.”

Mercy agrees to release executives’ communications

In his order Tuesday granting the oversight committee’s request for authorization to subpoena records, the bankruptcy judge said MercyOne — despite its earlier objection — has agreed to release a long catalog of documents and records.

They include a wide range of communication sent to or received from a handful of current and former MercyOne top executives, many of whom were assigned to lead Mercy Iowa City in some capacity — including former Mercy Health Network CEO Dave Vellinga, who retired in 2017, MercyOne’s current CEO Bob Ritz, and former acting Mercy Iowa City President and CEO Mike Trachta; retention agreements with law firms; and performance-related documents and communications.

Responsive emails, per the court order, should include even those that did not go to or come from mercyic.org email addresses.

The judge also authorized the committee to subpoena testimony from Ritz and Trachta “on matters related to (Mercy Iowa City).”

And, according to the judge, his order should not be interpreted to impinge the committee’s “right to seek additional discovery.”

MercyOne last month objected to the committee’s request for records and court intervention, calling it “unnecessary” and asserting the petition was “designed to harass as shown by its gross mischaracterization of known facts.”

“The (committee’s) motion should be denied as it seeks costly and burdensome discovery from MercyOne based on false facts and unsupported (and unsupportable) assertions,” according to the MercyOne objection that this week was overruled.

Vanessa Miller covers higher education for The Gazette.

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