MercyOne seeking documents for defense, counterclaims against Mercy Iowa City

IOWA CITY — In seeking its own batch of records from a bankrupt Mercy Iowa City — which last week won a court order for voluminous documents in its ongoing liquidation battle — the community hospital’s former managing affiliate MercyOne is airing new details about backroom discussions, discord, and deals that precipitated Mercy Iowa City’s downfall.

“At the time (Mercy Iowa City) reached out to MercyOne for assistance, (Mercy Iowa City) had been facing a slow decline in financial performance for more than 15 years, none of which could be blamed on MercyOne,” according to the health network’s appeal for records — which attorneys said they need to dispute inaccurate accusations, investigate other liable parties, and mount a defense against what appears to be looming litigation.

MercyOne recently lost an appeal of Mercy Iowa City’s liquidation plan that allows the bankrupt hospital to sue it while releasing everyone else.

In addition to flagging its plan to appeal that decision, MercyOne on March 28 — in a motion asking a bankruptcy judge to compel the liquidation oversight committee to produce records — laid out its version of events.

That motion came three days after Judge Thad Collins on March 25 ordered MercyOne to produce documents on more than 40 topics so the liquidation oversight committee can evaluate “any and all claims (it) may have against MercyOne.”

“If there is to be litigation, having MercyOne at a large information disadvantage at the outset, besides being unfair, would delay any litigation, as MercyOne would begin its investigation of the (committee’s) claims from ground zero,” MercyOne argued in its records request. “It also makes sense to allow MercyOne the opportunity to investigate counterclaims it may have against (Mercy Iowa City’s) estate and affirmative defenses as well as claims against third parties.”

Essentially, MercyOne is arguing it’s entitled to records from Mercy Iowa City for the following reasons:

“At present, the (committee) has not provided MercyOne with a single document supporting any claim,” according to its records request.

‘David versus Goliath’

MercyOne’s dispute with Mercy Iowa City’s narrative starts at the beginning of their relationship in 2017 with a “management and affiliation agreement” that MercyOne said held it as an “independent contractor” but Mercy Iowa City said gave the Des Moines network management oversight, along with three seats on its board of directors.

“By operation of the management and affiliation agreement, MercyOne stepped into the role of a non-statutory insider, supervising and directing large portions of (the hospital’s) business affairs,” according to Mercy Iowa City, which paid MercyOne $2 million a year for its services.

But MercyOne in its recent filing pushed back — including against the characterization of it as an insider.

“The agreement made clear that the parties had no agency, partnership or joint venture relationship,” according to MercyOne. “The agreement was non-exclusive and (the hospital) at all times was free to obtain management services from others.”

Mercy Iowa City’s board “routinely exercised that control and contractual veto power over MercyOne to reject MercyOne’s recommendations and kept MercyOne at a distance,” according to the affiliate.

For example, according to MercyOne, the hospital’s senior management team chose Allscripts as its new electronic medical record provider because its cost model let Mercy defer payment for a year.

“The implementation of the conversion to Allscripts proved to be a disaster, as billing functions were disrupted for several months,” according to MercyOne.

Before the medical record debacle and COVID — which crippled Mercy operations, as it did for many hospitals — MercyOne said Mercy Iowa City was showing signs of financial improvement “due to MercyOne’s assistance.”

But in 2021, following COVID lockdowns, the Mercy Iowa City board — “not MercyOne” — decided to sell the hospital, hiring a consultant to market it and find a buyer.

“(Mercy Iowa City) was also facing what it believed was an unwinnable ‘David versus Goliath’ situation in competition with the University of Iowa Hospitals and Clinics,” according to MercyOne. “UIHC had been acquiring key practices of (Mercy) and had already demoted (Mercy) from UIHC’s preferred tier/payor provider network.”

In marketing itself for sale, Mercy received several offers — as reported by The Gazette — including one worth $605 million from UIHC.

None of the offers materialized.

“The (oversight committee) misleads about this … asserting that MercyOne ‘oversaw (Mercy’s) failed request for proposal process in 2021’,” according to MercyOne, which reported, “The combination of (Mercy) being sold and its operational challenges led to an exodus of staff.”

“This accelerated once UIHC received a certificate of need to build a hospital in North Liberty, Iowa. Because of the dire risk that this new hospital posed to (Mercy), MercyOne worked tirelessly to oppose the (certificate), and was successful in that opposition on the initial application.”

UIHC filed a revised application, “against which MercyOne again led opposition,” and succeeded in achieving approval.

Regarding Mercy Iowa City’s discussions with UIHC, MercyOne asserts the consultant led negotiations — “without MercyOne.”

“During these negotiations, the possibility of UIHC making a stalking horse bid in a bankruptcy arose,” according to MercyOne. “MercyOne strenuously advised (the hospital) not to use bankruptcy as a means to sell the organization but was overruled.”

In its records appeal, MercyOne said it “made vigorous efforts to demonstrate to UIHC that there was enough money in (the hospital’s) coffers to make all stakeholders whole and to persuade UIHC to pursue alternatives to bankruptcy that were cheaper, faster, easier and would protect pensioners.”

“But UIHC could not be swayed.”

In 2023 — when MercyOne and Mercy Iowa City parted ways — the Des Moines affiliate said the hospital asked it to continue the relationship, something MercyOne noted is “hardly the move of someone who believed (it) was the cause of (Mercy Iowa City’s) troubles.”

“Because MercyOne’s recommendations had been disregarded, and because MercyOne disagreed with choices recommended by consultants to the board, and because the board had excluded MercyOne from information and meetings — including with potential buyers — MercyOne declined.”

Document demands

Post-bankruptcy, Mercy Iowa City’s chief restructuring officer blamed the hospital’s bankruptcy on COVID, bondholders who called out its financial woes publicly, and the electronic medical record failure, according to MercyOne.

“Notably, (he) did not question the quality of MercyOne’s services or identify MercyOne as a cause for (the hospital’s) failure in his first-day declaration,” MercyOne attorneys wrote in all capitalized letters in their records request demanding a catalog of items including:

Vanessa Miller covers higher education for The Gazette.

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