University of Iowa Health Care offered $605M to buy Mercy Iowa City

IOWA CITY — Among four proposals Mercy Iowa City entertained last year in its search for a partner was one from University of Iowa Health Care, offering over $605 million to take ownership of the community hospital and make it the “centerpiece” of a new UIHC “community division.”

The landmark deal, if it had materialized, would have ended a 137-year — at times contentious — separation dating to 1885, when UIHC’s founding medical department split from the Sister of Mercy Catholic order due to “different priorities.” And it would have struck at the heart of recent concerns aired by community hospitals in Eastern Iowa — including Mercy Iowa City — that UIHC increasingly aims to veer out of its advanced-care lane and compete with them for primary and secondary-care patients.

“When a state funded academic and medical institution crosses the line into providing the same primary and secondary care services which are provided by community hospitals, it threatens the continued existence of other providers; it reduces patient choice and access to care; and it creates an atmosphere or an environment of distrust among possible collaborators,” Sister Helen Marie Burns, a Mercy Iowa City board member, told the State Health Facilities Council last August during a hearing to consider a UIHC proposal to build a new hospital in North Liberty.

Suresh Gunasekaran, then the chief executive officer of UI Hospitals and Clinics, at the state hearing rejected the idea his hospital’s expansion would threaten community health care.

“There are numerous possible ways that we can collaborate with all community hospitals, it won’t change the need for North Liberty,” Gunasekaran said. “Because North Liberty is really going to be focused on tertiary and quaternary care.”

The council eventually approved that project — which UIHC initially disclosed as a $230 million, 300,000-square-foot facility at the corner of Forevergreen Road and Highway 965 and later revealed was a 469,000-square-foot multi-building project, now costing more than $525 million due to inflation.

But just about three weeks before that hearing, on Aug. 6, 2021, UIHC submitted a proposal to take over Mercy Iowa City and initiate a new division focused on community care.

“We believe that UI Health Care is the ideal partner for Mercy Iowa City,” according to the university’s proposal, which was obtained by The Gazette. “Our goal is to combine the resources of UI Health Care’s comprehensive, integrated delivery network with the unique local strengths of Mercy Iowa City to expand the scope of care and improve access.”

UIHC said it planned to launch a community hospital division — separate from its academic divisions — centered on Mercy Iowa City, which would remain a hub for primary and secondary care in the region with its own local governance and board.

“Unlike others, we see Mercy Iowa City not as simply another asset in our portfolio but as the centerpiece of a new community division,” according to the proposal.

‘Did not find a partner’

The deal never materialized, according to an email Mercy officials sent employees just over a week ago, reporting they received and vetted several offers in response to the July 2021 request for proposals but failed to identify a good long-term fit and would remain an affiliate of MercyOne.

Last year, both Mercy Iowa City and MercyOne said they wanted out of that partnership. The Des Moines-based MercyOne, to which Mercy Iowa City pays an annual $2 million management fee, cited the hospital’s “historical operating challenges, the impact of the pandemic, and the changing health care dynamics” in its decision at that time to cut ties.

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

Mercy Iowa City officials didn’t answer The Gazette’s questions about why the four partnership proposals didn’t pan out, calling those decisions “proprietary and confidential.”

“The board, Mercy Iowa City, and MercyOne leaders are legally bound by nondisclosure agreements with all those who were potential partners, therefore, we cannot legally confirm, deny, or share any information about proposals or names,” Mercy Iowa City spokeswoman Lisa Steigleder said. “It is important for you to know that the Mercy Iowa City Board reviewed the proposals, narrowed down the potential partners and ultimately did not find a partner who was a good long-term fit.”

Mercy Medical Center President and CEO Tim Charles told The Gazette conversations are ongoing with Mercy Iowa City.

“We viewed ourselves as a potential partner in finding a solution to the current challenges that Mercy Iowa City is facing,” he said. “Of course, arriving at a structure for a relationship can be challenging. That said, I can confirm that we are in conversations, but can’t discuss specific details.”

Mercy Cedar Rapid’s motivation, in part, was the importance of preserving community health care in and around Johnson County.

“We believe that there is a constituency within those communities that has long valued the ease of access, quality of care and intimate experience that Mercy Iowa City is able to provide,” Charles said. “However, over time, we have also watched the efforts of UIHC to diminish Mercy Iowa City’s capacity and ability to continue its essential mission.”

In its proposition, UnityPoint Health said Mercy Iowa City offers “the opportunity to grow the population we serve through expansion of our footprint into the Iowa City and southeastern Iowa markets.”

“The Iowa City area represents one of the most favorable geographies in the state in terms of growth and population demographics,” according to the UnityPoint proposal offering to bring Mercy Iowa City into its Cedar Rapids region, making it similar to St. Luke’s Hospital.

As to why that deal didn’t go through, UnityPoint Health officials told The Gazette its doesn’t comment on “ explorations” and only talks about them publicly “when we have news to share.”

None of the proposals came close to UIHC’s $605 million offer.

Mercy-UIHC collaboration

The UIHC financial commitment described in its proposal wouldn’t come in an upfront lump sum but rather over a decade and include:

On top of those investments, UIHC offered to dedicate an additional $10 million to establish a foundation for the Sisters of Mercy West Midwest Community “to preserve and continue the sisters’ mission outside of the walls of the health care enterprise.”

A Gazette review of Mercy Iowa City’s recent financial statements showed its total net assets have plummeted from near $14 million at the start of the 2022 budget year to a loss of $11.2 million at the time of the most recent March 31 report. Where it had $23.1 million cash on hand June 30, 2021, the hospital was down to $2.8 million cash in March.

UIHC’s proposal stipulated, “Mercy Iowa City’s existing working capital is not part of UI Health Care’s $605 million commitment, and we would ensure that such working capital and reserves would continue to be used to benefit Mercy Iowa City and the local communities it serves.”

Among other commitments UIHC made in its offer:

Outlining what it has to gain, UIHC said its market strategy to date “has been entirely focused on tertiary and quaternary excellence.”

“A Mercy Iowa City-UI Health Care collaboration would satisfy an increasingly unmet need for primary and secondary care in Southeast Iowa that UI Health Care has never had the intention or capacity to satisfy before.”

What changed?

Like Mercy, UIHC officials declined to answer The Gazette’s questions about why the deal never closed.

“While the University of Iowa cannot comment on any discussions or documents potentially covered by a nondisclosure agreement, the University of Iowa and Mercy Iowa City have a long history of working together and we look forward to continuing our partnership,” it said in a statement.

Just weeks after UIHC engaged with Mercy Iowa City’s new partner search, the State Health Facilities Council heard hours of testimony — including from vocal opponents — over UIHC’s North Liberty project, finally approving it.

UIHC promptly broke ground just as one of Mercy’s affiliate providers — Steindler Orthopedic Clinic — unveiled its vision for a medical park near UIHC’s new hospital in North Liberty. To start that project, which over time could include a new Steindler clinic and possibly a hospital, a Steindler surgeon applied to build a new $19.2 million 35,880-square-foot ambulatory surgery center.

The state OK’d the new surgical center, being built for orthopedic procedures with six operating rooms and the ability to expand.

Although Steindler provides Mercy Iowa City’s orthopedic service line, currently using its operating suites, they’ll do so far less once the new ambulatory surgery center opens in a few years — depriving Mercy of some of its lucrative orthopedics revenue.

In Mercy’s request for proposals, it shared financial details — noting the 2020 budget year was on track for “significant improvement” before the pandemic struck. But where Mercy showed improvement in 2021, its financial performance has declined since.

Its operating income — which had been in negative territory for years but improved to a loss of $6.3 million in fiscal 2021 — was down again to a negative $15.6 million as of March 31, according to publicly available financial reports.

Mercy’s earnings before interest, depreciation and amortization had been back up to $8.3 million in fiscal 2021, according to its documents. But recent financial reports show those earnings through March were a negative $5.2 million, compared with its budgeted $11 million in the positive.

Earlier this year, in March, a Johnson County jury found Mercy Iowa City and its affiliated OB-GYN Associates were negligent and responsible for permanent brain damage an infant suffered during his delivery — awarding the family $97.4 million.

In April, another family sued Mercy’s affiliated ENT Medical Services after their 2-year-old died following a routine procedure to put tubes in his ears and remove his adenoids.

UIHC reported a strong financial position through April of the recent 2022 budget year, with an operating margin of 17 percent and operating income reaching $370.8 million — more than five times its budgeted $71.8 million, boosted by enhanced Medicaid funding.

But, with numerous construction projects ongoing, UIHC also has been hit hard by inflation.

Personnel, property changes

In announcing Mercy’s decision to stay with MercyOne, Acting President and CEO Mike Trachta revealed the hospital’s chief financial officer and chief operating officer were leaving.

Trachta, who is based in Des Moines and also serves as vice president of network affiliates for MercyOne, stepped in after former Mercy Iowa City President Sean Williams resigned last September after three years on the job.

MercyOne tax documents show Trachta in fiscal 2019 earned a salary of $392,645 from “related organizations,” plus another $40,440 from either MercyOne or a related organization.

Since Mercy Iowa City began its management partnership with MercyOne in June 2017, the organization has sold several of Mercy Iowa City’s properties, according to assessor records.

It sold Mercy’s Coral West Health Center off Heartland Drive in Coralville for $4.7 million in June 2018. It sold the Mercy Family Medicine clinics in Coralville and Solon for $2.2 million and $528,506, respectively, on Feb. 28, 2019.

And it sold Mercy’s new $23 million rehabilitation hospital — which it opened with Kindred Healthcare in 2020 at 2801 Heartland Drive in Coralville — on Nov. 15, 2021 for $28.9 million.

Community hospital mission

Iowa has 124 hospitals, including 88 of the smallest critical access hospitals, four rehabilitation or long-term care hospitals, 15 characterized as rural or “rural referral” and 22 “urban” hospitals — which are the largest in the state’s bigger cities.

In appealing to Mercy Iowa City in their partnership proposals, Mercy Cedar Rapids and UnityPoint Health highlighted the need for strong community hospitals and support of Mercy’s mission.

Mercy Cedar Rapids listed among its acquisition objectives, “optimizing operational and clinical integration to ensure Mercy Iowa City continues to serve the community” in hopes of — among other things — preserving “Catholic health care in the corridor and surrounding communities.”

Mercy Medical Center President Charles told The Gazette, “Clearly, there continues to be an essential role for Catholic health care, as institutions like ours are rooted in values that are committed to ensuring that all individuals have access to health care, including the sick and the poor.

“We believe that the community needs an alternative,” he said. “Employers need an alternative. It has been demonstrated many times over that when communities are reduced to a single hospital, the cost of health care increases and the level of service diminishes.”

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