Judge approves Mercy sale to University of Iowa, ushering in new health care era

IOWA CITY — With little debate or discord — after months of twists, turns and objections — a U.S. Bankruptcy Court judge Monday approved the sale of Mercy Hospital, Iowa City’s only community hospital, to the University of Iowa for $28 million.

The university will fund the purchase — which it plans to supplement with a $25 million infrastructure investment over five years — with its UI Hospitals and Clinics revenue, according to UI spokeswoman Jeneane Beck.

During a relatively brief hearing that left many issues unresolved — including some related to the hospital’s waning cash resources — Mercy attorneys said court approval of the sale marked a “banner day” for the hospital.

“At a time when many hospitals nationwide are experiencing significant financial challenges, we are heartened to begin the planning to bring Mercy Iowa City into UI Health Care,” according to a combined statement from UI President Barbara Wilson, UI Vice President for Medical Affairs Denise Jamieson, Mercy President and Chief Executive Officer Tom Clancy and Mercy Chief Restructuring Officer Mark Toney. “Together, we will preserve and enhance access to quality health care and jobs for those throughout our region.”

Immediate first steps, according to the four leaders, include:

"Please continue to schedule and go to your appointments as usual,“ according to the statement. ”There will be no immediate changes for patients, employees, or physicians.“

‘New unified model’

The dramatic union is actually a reunion after the two entities split in 1885 “due to different priorities.”

Four Sisters of Mercy in 1873 traveled by train from Davenport to Iowa City to establish a hospital, which admitted the first Mercy Iowa City patient — a man with tuberculosis — on Sept. 27 that year. The university also in 1873 debuted a small hospital in conjunction with Mercy, before the pair parted ways and eventually became competitors.

As Mercy began to struggle financially in recent years, it partnered in 2017 with Des Moines-based MercyOne — before trying to exit that relationship in 2021.

It was that year UIHC offered a commitment of $605 million over 10 years to buy Mercy Iowa City, a deal that didn’t materialize and left Mercy — with mounting financial woes — to eventually file for Chapter 11 bankruptcy protection Aug. 7.

In a statement about Monday’s sale sent to Mercy employees, Clancy and Toney acknowledged the ups and downs the staff has endured.

“We recognize that Mercy has experienced tremendous financial uncertainty over the past decade, especially in the past two years,” they wrote. “While it has been difficult, you have continued to demonstrate our healing mission.

“Now, in conjunction with the university, and with a shared commitment to providing excellent patient care in the Eastern Iowa region, there is so much the two organizations can accomplish together."

UI leadership projected the transaction will be final by the end of January. And Monday’s court approval, according to the Mercy executives, allows the UI to “to start organizing its detailed plans to strengthen Mercy’s operations to serve our region more effectively and efficiently.”

“The benefits derived from this new unified model are centered around stabilizing Mercy and creating opportunity for our staff,” Mercy’s Clancy and Toney wrote. “The university will provide financial resources that will allow Mercy to continue providing quality patient care and employment for our providers and staff.”

With the "new beginning,“ Mercy can ramp up recruiting, garner renewed support from existing providers and ease pressure on team members, ”resulting in better patient care,“ they wrote.

Given the many questions that Mercy employees have, Toney and Clancy announced town hall meetings Tuesday with workers.

“Thank you for your perseverance during the most challenging times,” according to the Mercy employee letter. “Your commitment to caring for our patients, their families, and one another has not gone unnoticed. We look forward with hope and opportunity.”

'Does not have enough money’

Among the issues that derailed Mercy’s potential sale to its largest bondholder and master trustee — which it at first declared as winner of its assets at an Oct. 10 auction — was how to keep operating through the transition, given Mercy’s shrinking resources.

Bondholder Preston Hollow Community Capital of Texas expected the roughly $10 million Mercy was to receive from its nonprofit foundation would help cover operating losses — after which it, too, would contribute to keep the hospital running.

But Mercy argued the foundation dollars weren’t part of the deal — compelling it to switch gears and instead pick UI as the auction winner, given the university’s commitment to cover operating losses after Dec. 1 without help from the foundation.

“The court’s well aware that there have been significant cash flow and funding issues for the hospital,” UI attorney David Gordon, from Tennessee-based law firm Polsinelli, told the court Monday about why his client agreed to start covering the hospital’s operating losses come December.

“Mercy Iowa City does not have enough money to remain open and operating.”

Preston Hollow — which previously aired a plan to collaborate with American Healthcare Systems of California to continue operating Mercy as a community hospital — didn’t object to Monday’s sale.

And, in a declaration filed Sunday with the court, Toney for the first time indicated that collaboration wasn’t final. “To (Mercy’s) knowledge, the (bondholders) had not reached agreement with (American Healthcare Systems) on a definitive agreement to allow AHS to operate the hospital,” he wrote.

That, in addition to Mercy’s inability to agree with Preston Hollow on funding issues, was the deal breaker.

“The operating loss commitment was a crucial term that (Mercy and a committee of unsecured creditors) weighed in evaluating the bids submitted by the bondholder,” according to Toney. “In the absence of an operating loss commitment — that is, a commitment to backstop (Mercy’s) operating losses without requiring (Mercy) to obtain liquidity from assets beyond its operations — (Mercy) and the committee firmly believed that the last bid submitted by the (bondholders) … was materially lower than the last bid by the university.”

Susan Goodman — a lawyer and registered nurse from Arizona who has been appointed as patient care ombudsman for the case — told the court Monday she’s been all over the hospital and community, talking to relevant and affected individuals.

“Let's just say this has gone the direction that community members want it to go,” she said.

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