Mercy IC officially a UI asset after months-long saga

At one point the loser in the bankruptcy auction, the UI now owns the 150-year-old community hospital.
Mercy Hospital Iowa City is seen on Monday, Nov. 6, 2023.
Mercy Hospital Iowa City is seen on Monday, Nov. 6, 2023.
Isabella Tisdale

After a months-long process with enough plot twists to keep those following the case on the edge of their seat, the future of health care access and coverage in Iowa City will be unified under one umbrella after the University of Iowa acquired Mercy Iowa City.

Mercy Iowa City, one of the oldest and longest-running hospitals in the state, was officially sold to UI on Nov. 6 after a bankruptcy court approved the sale.

But the UI’s process to obtain Mercy has been a months-long process that at one point saw it lose in an auction for the hospital before decisions were reversed in the UI’s favor.

Mercy Iowa City’s bankruptcy filing

The case started when investors and creditors of Mercy Iowa City filed a petition with the courts on July 24 for the hospital to be placed in receivership. The plaintiffs noted that Mercy had been going through a period of negative cash flow, its liquidity having declined by $42 million when the receivership request was filed.

Mercy had also received notice that it defaulted on bonds it received after the hospital had its credit rating decrease in May.

In response, Mercy asked a judge to dismiss the case shortly after the plaintiffs’ receivership request and argued it worked to improve its financial situation. Mercy filed a second petition with the courts on Aug. 4 for the case to be dismissed.

Then days later, on Aug. 7, the hospital announced it had filed for bankruptcy. That same day, the UI announced its intention to acquire Mercy.

Mercy and the UI signed a letter of intent to merge the two entities with the goal of preserving health care access in Iowa City.

“Mercy Iowa City leadership did approach us and ask us to submit a bid, to continue their long tradition of health care in our community and beyond,” UI President Barbara Wilson said during the regents’ meeting.

This meant that the UI would receive Mercy’s real estate, employees, equipment and supplies, and active business operations, although it would not take on the hospital’s debts.

The UI and Mercy would subsequently file an agreement with the U.S. Bankruptcy Court in the Northern District of Iowa, aiming to have a deal completed by November.

Prolonged bankruptcy auction

Little would happen until September when the UI submitted a “stalking horse bid” in the bankruptcy proceedings. This early bid did a few things. First, it set the floor price for any subsequent bids; in other words, other bids would have to be worth more than the UI’s bid.

Per court filings, the UI would acquire Mercy and its assets unchallenged if no other bid was made by Oct. 2 at 5 p.m.

For weeks, no other bids were entered, making it appear as though the UI would receive the hospital and related assets unchallenged. But court filings on Oct. 2 revealed that an unknown party had made a valid bid for the hospital.

According to the rules for the auction, any competing bids would have to match the UI’s $20 million, plus an additional breakup fee of $800,000 and a required bid increment of $100,000. As a result, the competing bid would have likely equaled a minimum of $20.9 million.

With a competing bid made, the bankruptcy proceedings would head to auction for later in October.

The auction was briefly postponed following a continuance to allow for negotiations, although court documents stipulated that a final decision would be reached by Oct. 10.

The sale hearing would end up being postponed on Oct. 9 after Mercy filed a motion to move it, citing ongoing and unresolved negotiations for the sale. Behind closed doors, the negotiations would continue between Mercy, the UI, a committee of unsecured creditors, and the still unnamed bidder.

But on Oct. 10, the original date for when the final decision would be reached, the winner of the auction was revealed — Preston Hollow Community Capital. A private equity company based in Dallas, Texas, Preston Hollow was one of Mercy’s bondholders, and it had teamed up with for-profit company American Health Systems to launch the successful bid.

In a press release shortly after being named the auction winner, Preston Hollow outlined its intention to keep Mercy as a community hospital. It was also revealed that American Health Systems would take over the operations of the hospital with the financial support of Preston Hollow’s investors.

In an interview shortly after the sale results were announced, Wilson said the UI was disappointed by the outcome but happy that Mercy would at least stay open as a hospital.

“That’s the most important thing for us for all along — it was how do we support community health care, because we can’t take everybody over at UIHC,” Wilson said. “That’s been the challenge for a long time where we are stretched to the limit over there, and so we don’t need Mercy to close because where are all these patients going to go?”

Auction results reversed, UI named winner

On Oct. 27, 17 days after Preston Hollow was named the auction winner, the results were changed and the UI was named as the ultimate winner.

According to court filings, the reversal came about due to “material disagreements” between Mercy and Preston Hollow. The filings revealed that Preston Hollow was unwilling to pay Mercy’s debts if it were to acquire the hospital.

In comparison, the UI’s bid included an obligation to fund the operating losses of the debtors on and after Dec. 1 until a closing occurred. Jamieson, in an interview from October, revealed that the UI’s final bid was worth $28 million.

In addition to the base bid, the UI had also made a commitment of $25 million for facility upgrades and $23 million for salaries and benefits for Mercy employees.

Preston Hollow’s bid was worth $29 million, according to court documents, and a $1 million addition was offered to its bid to convince Mercy, although the UI was still selected as the winner.

With the outcome of the auction decided, the UI would have to wait until Nov. 6 to find out if a bankruptcy court judge would approve the sale. And receive approval it did, finally closing the book.

After receiving the judge’s approval, the UI put out a statement that outlined the four next steps with the acquisition now complete. The first was that all Mercy employees would retain their jobs and remain in good standing under the new ownership.

Next was that community providers could continue practicing at Mercy under an “open medical staff model.” Steindler Orthopedic Clinic objected to any assignment of contracts between Steindler and Mercy to any other party.

The final two commitments were that there would be no change of service for anyone who used or worked at Mercy and that the community should continue to receive its treatment at Mercy as normal.

The statement also said the two entities would officially merge in 2024.

In the meantime, those involved will have to pay attorneys’ fees, which is close to $1 million if adding up the fees for every party involved. This includes a $649,102.80 fee from the firm McDermott Will & Emery Counsel, which was representing Mercy, the fee accrued between Sept. 1 and Sept. 30.

Although the UI agreed to pay Mercy’s debts, its winning bid does not outline an obligation to pay for attorney’s fees, meaning Mercy will have to pay the cost itself. Mercy will also have to pay any debts accrued before Dec. 1, per the language of the UI’s winning bid.

History of Mercy Iowa City

Mercy celebrated its 150th anniversary in September, and its history can be traced back to 1873 when a group of four nuns first opened the hospital.

The nuns, members of the Sisters of Mercy, came to Iowa City from Davenport intending to establish a hospital. According to an article about the history of Mercy Iowa City from Our Iowa Heritage, the nuns traveled to Iowa City bringing what medical supplies and furnishings they could carry.

The building that Mercy was first established in was originally the Mechanics Academy, one of the original campus buildings of the UI in the 1850s. It was first built by the Mechanic of Iowa City for the Mechanics’ Mutual Aid Association, but would later be used by the UI for varying uses, from a space for teaching classes to later being a dorm.

But by 1873, the building was being refurbished and utilized by the nuns to establish Mercy Iowa City, a hospital that served dual purposes. The main purpose was for the nuns to administer health care and aid to the Iowa City community, as was their goal from the beginning.

The other purpose was for the hospital to serve as a training ground for students interested in going into medicine. It was for this reason that the hospital entered a partnership between the UI’s then-recently-established College of Medicine, and the hospital itself to provide students with first-hand experience.

The first person to be treated at Mercy, a man with tuberculosis, came on Sept. 27, 1893, a few weeks after the hospital first opened.

By 1885, however, the UI would separate from Mercy to establish its independent hospital in 1898 using funds given to it by the regents. With this separation, Mercy continued to operate as a community hospital for the area.

Member of MercyOne network

In 2017, Mercy would become a member of the MercyOne network based out of Des Moines. According to its website, the MercyOne network is comprised of 18 medical centers and 23 affiliated organizations in Iowa and select other states.

Locations for some of its hospitals or clinics in Iowa include Des Moines, Waterloo, Cedar Falls, and Dubuque. Mercy Iowa City would first join the MercyOne network on June 1, 2017, paying an annual fee of $2 million to the organization for its inclusion in the network.

But the partnership was short-lived, as Mercy Iowa City announced its intention to leave the network in 2021. The reasoning, it reported, was the goal to align itself with a different and larger organization.

An internal memo announcing its intention to sever its partnership revealed that one reason for the change was that the hospital was hoping to “further integrate its ministry into the health practices.”

The change was also made at a time when the hospital, like most others, had gone through the COVID-19 pandemic, which presented it with different challenges. Despite the change in partnership, the MercyOne network promised it would continue to work with and help provide services to Mercy Iowa City.

During this time when the hospital was looking for a new entity to manage it, the UI submitted its first offer to purchase the hospital. According to the Cedar Rapids Gazette, this offer rang out to the tune of $605 million.

The deal, however, never materialized, and neither did any other offers Mercy Iowa City received.

UIHC’s North Liberty Hospital project

The UI would instead return its focus to building a new hospital in North Liberty, its ongoing project that is about halfway done. Construction on the new hospital began on Oct. 14, 2021, with the hospital being built roughly a mile north of the UI’s research park on Forevergreen Road, and costing roughly $525 million.

The project’s original budget was $395 million, made to account for inflation.

The new North Liberty hospital will house UIHC’s orthopedics and sports medicine, and feature a bevy of other things, including a rehabilitation gym for patients, and an onsite pharmacy for patients and the community alike, among others.

Construction for the hospital is slated to be completed in 2024, with the goal of beginning to receive patients in 2025.

Editor’s note: A previous version of this article said Steindler Orthopedic Clinic objected to the sale of Mercy Iowa City. Steindler Orthopedic Clinic objected to any assignment of contracts between Steindler and Mercy to any other party. The Daily Iowan regrets this error.

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