University of Iowa won’t take on Steindler Orthopedic contracts in Mercy deal

IOWA CITY — As part of the University of Iowa’s takeover of Mercy Iowa City — which became official Wednesday and continued UI Health Care’s accelerating expansion statewide — it is assuming more than 1,000 of Mercy’s contracts, requiring $3.4 million to “cure” amounts the former community hospital owed under those agreements.

Some of the larger “cure costs” attached to the Mercy contracts include $235,260 to Smith & Nephew, a London-based medical equipment manufacturer; $207,859 to Renovo Solutions, a California-based health care asset management provider; and $136,313 to MidAmerican Energy Co.

The $3.4 million in cure costs for 1,006 contracts is well below the $25.7 million that Mercy in September listed as cure costs for 1,404 “potential assumed” contracts it could pass on to any successful buyer in a bankruptcy auction for its assets.

Notably absent from the shortened list of contracts is Mercy agreements with its electronic medical record provider Altera Digital Health — with which the university is entering a new temporary agreement for transition services — and agreements with Iowa City-based Steindler Orthopedic Clinic, with which Mercy had a 70-year history of collaboration.

“The university has already determined that it will not seek assignment of the Steindler executory contracts,” according to a motion Mercy filed last week with the bankruptcy court seeking approval to reject its ongoing agreements with Steindler. “(Mercy) will not need the Steindler-related executory contracts identified in this motion following the closing date since (Mercy’s) operations will effectively cease.

“Following the closing, the Steindler-related executory contracts that are not assumed and assigned to the university will only serve to potentially burden the (Mercy) estates.”

Mercy has asked Steindler to assert claims for “rejection damages” by March 1.

North Liberty projects

Steindler was connected to 13 Mercy contracts in September — compelling Steindler in November to object to any of those contracts being assigned to the university, which won the auction to buy Mercy for $28 million.

Among Steindler’s chief concerns were agreements tied to its development of an ambulatory surgery center in North Liberty — just west of where the university is building a 469,000-square-foot, $525.6 million orthopedics-heavy hospital near the intersection of Forevergreen Road and Highway 965.

UIHC broke ground in September 2021, and Steindler broke ground in July 2023, with both planning to open in 2025.

Months before Steindler began building, it unveiled a new formal partnership with Mercy Iowa City to collaborate on developing the 36 acres of land Steindler owns in North Liberty.

“The partnership includes enhanced care coordination and shared management responsibility of the orthopedic service line at Mercy Iowa City, plans to collaborate on a medical park in North Liberty and improved access to high-quality orthopedic care in Eastern Iowa,” according to a February 2022 news release on the collaboration.

As part of the new arrangement, Steindler included restrictions barring Mercy from assigning the agreement to any “third party” without Steindler’s consent.

“Steindler at one point had contemplated developing the North Liberty site with Mercy involved and we put some agreements in place and didn’t want those being turned over to anyone else,” Steindler President and CEO Patrick Magallanes told The Gazette. “So we objected to that months ago.”

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Mercy, in asking to exclude the Steindler contracts from UI assignment last week, “was giving us what we asked for,” Magallanes said.

Land available

In the November court documents, Steindler officials spelled out in more detail its reasoning behind the UIHC-specific objection.

“Mercy should not be allowed to use the bankruptcy filing to attempt to dictate to Steindler that other entities may have an opportunity to interject themselves into Steindler’s ambulatory surgical center’s development and operation,” according to the Steindler objection, referencing a previous UIHC offer to buy Mercy for a commitment of $605 million over 10 years.

“This is of particular importance because in June of 2022, Steindler was approached by Mercy and its representatives, who provided Steindler with ‘UIHC Requirements and Mitigating Alternatives’ and stipulated that UIHC’s offer to acquire Mercy would fail if Steindler would not alter the North Liberty Ambulatory Surgery Center Agreements, including modifying the restrictive covenants in the North Liberty Ambulatory Surgery agreements and agreeing to grant 51 percent ownership of Steindler’s North Liberty ASC to UIHC.”

Although Steindler will continue to operate on the former Mercy Iowa City campus for the time being, Magallanes said that by retaining complete control over its North Liberty development and land, Steindler can continue talking with potential collaborators about future projects on the site.

“We have 36 acres of land and 28 acres available for other health care-related projects, and we welcome all conversations,” he said.

Vanessa Miller covers higher education for The Gazette.

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