Texas investment company files to take over financially troubled Iowa City hospital

A Texas-based investment company has requested a court order to take over management of Mercy Hospital in Iowa City to prevent closing the facility over its ongoing financial problems.

On Monday, Preston Hollow Community Capital filed a petition in Johnson County District Court to place the 194-bed hospital under a court-appointed receivership, allowing the Dallas-based investment firm to take over operations and address the hospital's financial instability.

In a statement Monday, Preston Hollow Community Capital officials accused Mercy Iowa City's board of directors and management of making a series of decisions in recent years that have jeopardized the facility's ability to pay off its debts, including $62 million in publicly issued bonds and $40 million in pension plans.

The move, company officials said, will rehabilitate the hospital and ensure patients continue to have access to health care services.

"With the board having refused to shift its approach to address these issues and with the hospital now on the verge of insolvency, the choice remaining for Preston Hollow Community Capital is to request that Mercy Iowa City be placed in a court-appointed receivership in order to stem its unsustainable financial losses, stabilize its operations and avoid a closure of the facility," a statement says.

Leadership at the 150-year-old Iowa City hospital have disputed the company's claims that it's unable to pay its debts, calling the court filings and statements against the hospital's board of directors a publicity tactic in an "effort to advance their false narrative."

“Preston Hollow’s assertions are incorrect and their decision to only contact the media and not hospital leaders is inexcusable,” Mark Toney, chief restructuring officer at Mercy Iowa City, said in a statement late Monday. “Our Board and management team have tried to work collaboratively with Preston Hollow on many fronts, but have found many of Preston Hollow’s threats, statements, and actions to be harmful to Mercy Iowa City.”

Leadership in dispute over the hospital's finances

Preston Hollow Community Capital, which invested nearly $41.8 million in the hospital in 2018, alleges that Mercy Iowa City is in "financial freefall."

Company officials say Mercy Iowa City is suffering unsustainable operating losses, and its liquid assets have dropped by $40 million — more than 51% — in the past nine months, according to the court filings.

The hospital is operating at a "cash burn" of about $2.6 million a month. Mercy Iowa City's own financial projections show that by Sept. 29, its liquid assets are expected to fall to less than $5 million, an insufficient amount to continue operations, according to court documents.

Further, Preston Hollow claims that despite those projections, Mercy Iowa City's leaders "have no plan or strategy to stem or reverse the (hospital's) operating losses and revitalize its business," company officials said. If action is not taken immediately, they say the hospital "may be forced to cease operations and shutter."

"Preston Hollow has even offered to provide interim bridge financing to (Mercy Iowa City) to provide for its continued operation and delivery of patient services while such a turnaround plan is being implemented. But (Mercy Iowa City's) board and management have buried their heads in the sand, refusing to develop a turnaround plan," according to court filings.

Last week, Preston Hollow issued a notice of default to Mercy Iowa City on it's bonds from 2011 and 2018, stating in the notice that the hospital has admitted it is "unable to cure the financial covenant violations based upon its financial distress, negative cash flow and depleting liquidity."

The hospital, however, says those claims are inaccurate, and that the hospital is current on its bond payments. In a letter sent in response to Preston Hollow's notice of default, Mercy Iowa City's attorney also states the hospital has never admitted it's unable to pay its debts as they come due.

Hospital officials say talks have broken down

Mercy Iowa City officials said late Monday they had been working to resolve those differences with Preston Hollow since February, an effort the investment company unexpectedly broke off earlier this week.

According to hospital leadership, senior officials with Preston Hollow were scheduled to meet in-person with the board of directors on Tuesday to discuss possible resolutions. However, company officials canceled the meeting Sunday afternoon.

On Monday afternoon, Preston Hollow sent a press release on its request for a court-receivership without discussion with the hospital, Mercy Iowa City officials say.

“We are deeply disappointed by Preston Hollow’s actions when we have taken many steps to improve our finances and kept them informed and involved with our day-to-day operations and strategies,” Toney said in a statement. “Our preference is to work with the bondholders to find viable solutions, but the Board will continue to protect all stakeholders as it fulfills its duties and the mission of the organization.”

As this dispute is decided by the courts, Mercy Iowa City leadership said the hospital will continue to provide care for patients under the guidance and direction of its current management team and board of directors.

“Mercy Iowa City continues to provide care to our patients and their families. Our dedicated physicians and staff are focused on caring for our community, which is what we have done for the past 150 years,” Tom Clancy, board chair and CEO of Mercy Iowa City, said in a statement. “We have taken great care to be as forthcoming as possible with our employees, recognizing they are the lifeblood of our organization and the care provided for our community.”

Trouble for Mercy Iowa City before

This petition is the latest in the Iowa City hospital's troubled financial history.

A recent analysis from Moody's painted a grim picture for the hospital's finances after downgrading the facility near the bottom of its rankings for its poor financial standing and "very high credit risk."

In a March report, Moody's stated the hospital is experiencing "continued weak cash metrics" and a "limited clinical array" compared to its in-town competitor, the University of Iowa Hospitals and Clinics.

In April, Mercy Iowa City had hired a management firm — ToneyKorf Partners, which is based in New York — that specializes in helping struggling health care systems improve their operations.

Mercy Iowa City also announced in April plans to exit its partnership with MercyOne, the larger statewide health system, in favor of striking out alone. The hospital had initially joined the network in 2017 before announcing in 2021 plans to seek a new affiliate partnership.

Michaela Ramm covers health care for the Des Moines Register. She can be reached at mramm@registermedia.com, at (319) 339-7354 or on Twitter at @Michaela_Ramm

This article originally appeared on Des Moines Register: Mercy Iowa City calls firms' efforts to take over hospital a publicity tactic