University of Iowa eyes $20M acquisition of ‘substantially all’ Mercy Iowa City facilities

IOWA CITY — The University of Iowa has signed a letter of intent to acquire for $20 million “substantially all the operating facilities and key assets” of Iowa City’s Mercy Hospital — which filed Monday for bankruptcy protection — in hopes of ”preserving the continuity of care for patients and continuing opportunities for physicians and employees.“

Mercy Iowa City, in filing a voluntary petition for Chapter 11 reorganization in U.S. Bankruptcy Court in Iowa’s Northern District, is seeking approval of the sale process, with UI making the opening offer. The goal, according to Mercy, is to transition the 150-year-old community hospital and its employees to a new owner and operator that “intends to preserve the services provided by the hospital to the community.”

The proposed $20 million purchase price is a far cry from a $605 million package that UI Health Care offered in 2022 to take ownership and make Mercy the “centerpiece” of a new UIHC “community division,” an investigation by The Gazette found. That deal never materialized as Mercy continued an on-again, off-again relationship with Des Moines-based MercyOne, which began managing Mercy Iowa City in 2017.

Both Mercy and MercyOne in 2021 said they wanted to end the arrangement — as the Iowa City hospital’s finances continued to devolve — although they didn’t because the hospital failed to find a new managing partner or owner. Then in April — after Moody’s Investor Service lowered Mercy’s credit rating — the partners again announced plans to terminate their relationship.

“Mercy Iowa City believes this plan is the best path forward to preserve our hospital operations,” Mercy Chief Executive Officer and board Chair Tom Clancy said in a statement Monday. “As we implement this plan, our dedicated Mercy Iowa City staff remain steadfast in their commitment to provide compassionate care to our community, just as we have since 1873.”

In announcing the bankruptcy filing and pending acquisition, Mercy said the hospital and its clinics remain open — with providers continuing to focus on patient care.

Mark Toney — who Mercy recently appointed as its chief restructuring officer — said a bondholder’s recent demand for a court-appointed receiver played into its moves.

“The recent actions of one of our largest creditors has significantly and negatively impacted the hospital and resulted in this bankruptcy,” Toney said in a statement. “The board and management moved rapidly to secure a partner to maintain health care in our community.”

Bondholder Preston Hollow Community Capitol of Texas, which invested $41.8 million in Mercy’s 2018 bond series, and Computershare Trust Company wanted Peter Chadwick of Berkeley Research Group to serve as Mercy’s receiver.

Those petitioners told the court that Mercy owes $63 million on publicly-issued bonds and a receiver could "take operational control of the hospital facilities, maintain and preserve the bondholders’ real property and personal property collateral, receive and recover funds and proceeds constituting collateral, and, if necessary, conduct a process for the sale or monetization of the collateral and hospital facilities“ that could include selling or partnering with other health care providers.

“We are deeply appreciative of the university for finalizing an agreement that, if approved, will allow us to emerge from this process with a more sustainable future,” CEO Clancy said in his statement.

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Finger pointing

Preston Hollow released its own statement Monday, accusing Mercy of failing to take accountability for its fiscal shortcomings.

“Mercy Iowa City’s decision to file for bankruptcy is the result of years of financial mismanagement and an ongoing refusal to take the necessary steps to restructure and stabilize its operations,” according to the statement. “Even now, after years of inaction on their part, the hospital chooses to point fingers at others rather than take any accountability for their financial losses or demonstrate any willingness to seriously address the factors that led to those losses.”

Airing years of backroom discussions during which Preston Hollow said it tried to get Mercy to “develop and implement a substantive plan to rehabilitate and recapitalize the hospital,” the investor said Mercy fell short. “The fact that they chose not to do so is the fault of Mercy Iowa City and no one else,” it said in the statement.

In arguing for a receiver, Preston Hollow revealed “confidential” financial reports that showed, among other things, that Mercy was headed for a “cash horizon event” in mid- to late-October. Documents show Mercy’s liquidity dropped about $40 million, or 52 percent, over the last five months and its cash flow projections have plummeted from $18.4 million in June to a forecast $1.2 million by October.

Although Preston Hollow is the largest of Mercy’s secured creditors, the hospital has a long list of unsecured creditors — including claims worth hundreds of thousands to many millions from firms in North Carolina, Nebraska, Texas, Massachusetts, Pennsylvania, Virginia, Tennessee and others. Mercy, in its filing, reported “funds will be available for distribution to unsecured creditors.”

‘Avoid significant disruption’

Mercy asked the court to expedite its bankruptcy case and for permission to use its cash and investments to fund operations and pay and provide benefits to employees. Mercy’s “people costs” — including payroll and pension plans — were listed as $2.5 million in a July report on cash flow over a 13-week period.

In a video message shared Monday with Mercy employees, Clancy acknowledged the word “bankruptcy” is “frightening,” and that the hospital has struggled financially.

"That is not a secret,” he said. “However, the financial pressures escalated when one of our largest creditors filed a petition with the court to put our hospital into receivership a couple of weeks ago. Since then, we have been looking at ways to stabilize our finances.”

Acknowledging many outstanding questions, Clancy said Mercy will hold meetings for its employees Wednesday.

Denise Jamieson — who took over as UI Health Care’s vice president for medical affairs just a week ago — released a statement Monday with UI President Barbara Wilson stressing the importance of community medical care.

“We have always maintained great respect for Mercy Iowa City, knowing the vital role it has played in our community since 1873,” according to their statement. “As members of the same community, many of us know and care about people who work at Mercy Iowa City. We want you to know that leaders from the University of Iowa, UI Health Care, and Mercy Iowa City are working together to avoid significant disruption.”

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The transaction requires not just court approval, but Board of Regents approval. The board has called an emergency meeting Tuesday to consider the deal.

‘There may be opposition’

In breaking down the deal, regents report the university would acquire 19 properties or “improvements” — including the hospital’s main campus in Iowa City; pediatric and OBGYN services in Coralville; and family medicine clinics in Muscatine, Solon, Kalona, Tipton, West Liberty, Williamsburg and West Branch.

Even before this acquisition, UI Health Care reported it has more than 250 specialty and subspecialty clinics statewide, including in Waterloo, Des Moines and Cedar Rapids. It employs more than 11,200 across its 866-bed main campus and cross-state clinics.

And UIHC is growing to the tune of more than $1 billion in new construction — including a $525.6 million hospital campus in North Liberty that regional hospitals and clinics tried to stop, accusing UIHC of threatening community providers with its expansion.

Mercy Iowa City officials, during state hearings about UIHC’s North Liberty project, said the community hospital could go out of business if the state allowed the university to build its facility near Interstate 380 and Forevergreen Road — which it eventually did.

As a “stalking horse bidder” in Mercy’s bankruptcy filings, the university set the low bar with its opening $20 million bid — preventing others from offering less. Among caveats written into the purchase agreement, Mercy can contact “through whatever means are reasonable” other potential buyers until the deal closes.

If the UI-Mercy deal goes through, the university would establish an advisory board for the hospital — which will maintain its own chief administrative officer responsible for its operations — and invest in upgrades, like to its information technology software.

Providers and doctors at Mercy would be allowed to keep their “medical staff privileges at the hospital as of the closing” — and won’t be required to have a UI faculty appointment to stay on staff — so long as they're in “good standing.”

Steindler Orthopedic Clinic, which has a long history of partnership and collaboration with Mercy, in its own internal communication Monday told employees, “We are working with Mercy and UIHC to continue providing the exceptional care Steindler is known for.”

No patient changes are expected, according to Steindler CEO Patrick Magallanes, and no surgeries are being rescheduled.

“There may be opposition from other community hospitals and antitrust objections by the (Federal Trade Commission)” he said in an employee email. “For now, we will continue to function as we always have.”

Documents obtained by The Gazette in 2022 revealed that in addition to UIHC, Mercy Medical Center in Cedar Rapids, UnityPoint Health and Marshfield Clinic Health System of Wisconsin also offered to take over Mercy Iowa City.

UnityPoint Health-St. Luke’s Hospital declined to comment for the story.

Tim Quinn, president and CEO of Cedar Rapids-based Mercy Medical Center — which is a stand-alone, independent hospital with no affiliation to Mercy Iowa City — said, “We express our deep sentiments on the loss of independence of this community hospital, an institution that was founded by the valiant and visionary efforts of the Sisters of Mercy 150 years ago.”

“The value of non-academic community hospitals has always been that they provide value through high quality and lower cost for residents and employers,” Quinn said.

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