University of Iowa awarded rights to Mercy Iowa City after talks with Preston Hollow stall

The University of Iowa was awarded rights to Mercy Iowa City's property and assets Friday in a sudden twist nearly three weeks after a bankruptcy auction initially gave operations to an out-of-state investment company.

The hospital said a "material disagreement" over the definition of operating losses dampened Preston Hollow Community Capital's winning bid, derailing contract negotiations.

The Texas-based company was set to take over full operations of the hospital thanks to its winning $29 million bid in an auction in early October. However, Mercy opened discussions again thanks to concerns over who was financially responsible for the hospital's "operating losses."

Filings in the Bankruptcy Court for the Northern District of Iowa indicate that the disagreement brought transition progress to a halt, pushing the hospital to head to auction again.

The auction process was reopened on Friday morning.

More: Mercy, Preston Hollow deadlocked over definition of operating losses, freezing $29M sale

Initial auction lasted nearly a week

Preston Hollow's $29 million bid on Oct. 10 earned them a $1 million edge over the University of Iowa in a six-day auction that began Oct. 4 in Chicago.

As contract negotiations accelerated, disagreements convinced Mercy to "believe that the final bid submitted by the Bondholders was not higher or otherwise better than the final bid submitted by the State of Iowa’s University of Iowa," court documents filed on Friday afternoon said.

In an email to University of Iowa and UI Health Care employees on Oct. 11, President Barbara Wilson and Denise J. Jamieson, vice president for medical affairs and dean of the Carver College of Medicine, said Mercy's decision to go with Preston Hollow was "not the outcome they had hoped for."

Still, news of Preston Hollow's "not financially viable" bid gave the UI hope in its efforts to keep Mercy operations local.

"We are very pleased that the university’s renewed bid has been selected by Mercy Iowa City," Wilson and Jamieson's email said. "This long-time hospital has had a significant impact on our community, and we are gratified that we will be able to honor its 150-year history as an anchor of care in eastern Iowa."

The university also said they look forward to providing "stronger access to health care for Iowans."

More: Mercy, Preston Hollow deadlocked over definition of operating losses, freezing $29M sale

Mercy Iowa City said in a statement on Friday that the university will "conduct an in-depth analysis of the healthcare needs of the Iowa City community" before it makes any changes to hospital operations. The UI also plans to offer employment to "substantially all" Mercy employees upon assuming control of the long-time local hospital.

“The Board of Directors and management are confident that the sale of Mercy Iowa City to the University of Iowa is the best path forward for our patients, physicians, staff, and community," Mercy CEO and Chairman Tom Clancy said in a statement. "We are pleased to be working closely with a health system widely regarded as world-class, and one who understands and can meet the needs of Iowa City. We anticipate forward momentum as we close the chapter on the last 150 years and start a new one hand-in-hand with the University.”

The university's "winning or otherwise best bid" will now go before the bankruptcy court "on or about" Nov. 6, 2023, for approval.

“Though it has been an unusual process, we are incredibly grateful to the University and the State of Iowa for their graciousness during this process," Mercy Chief Restructuring Officer Mark Toney said in a statement. "We expect to work with all the stakeholders in the bankruptcy case in order to transition the patient care and this important institution to new stewardship."

University altered its bid to end dispute over “operating losses”

Preston Hollow and Mercy Iowa City were deadlocked in a disagreement over who would cover the hospital’s “operating costs." Each side offered different definitions in the weeks since the initial auction.

That varied definitions worried Mercy and its bankruptcy committee with how invested Preston Hollow would be in helping the hospital operate.

“Needless to say, this disagreement necessarily meant that the value of the final bid from Preston Hollow was materially different than what the Debtors and the Committee determined at the auction,” Daniel M. Simon, one of the attorneys for Mercy, said in court on Friday morning.

Preston Hollow responds to selection of UI bid

Preston Hollow first invested more than $40 million in Mercy Iowa City in 2018, saying in a statement on Friday that they have "been working to ensure that residents and families living in Johnson County can continue accessing critical health care services through a community-based hospital" in the five years since their initial investment and that their commitment remains the same today.

In the weeks since their winning bid, Preston Hollow said they worked toward a "smooth transition," but Mercy "concluded that they misunderstood a material fact of our bid."

"Mercy now contends that the University of Iowa’s bid is higher than Preston Hollow’s, even after we increased our bid today when the auction was reopened," Preston Hollow said in a statement.

The company's $30 million total bid will now go in front of a federal judge, who will determine the future holder of the hospital.

"In the meantime, our team will continue to evaluate the process to ensure the hospital remains viable long-term and the facility's nurses, doctors, and other staff can continue to deliver high-quality services to patients across the community," the company wrote.

Preston Hollow also responded to the UI's statement, which they say contained an inaccurate statement regarding the viability of the company's bid. The firm confirmed on Monday that a representative for the university clarified that the UIHC email was prepared "out of context" and was erroneous.

The university's email to employees originally said that Preston Hollow "determined its previously selected bid was not financially viable." The company continues to stand by its amended $30 million bid, made Friday.

UI plans to invest at least $53 million in Mercy Hospital

One University of Iowa’s lawyers, David E. Gordon, presented the original $28 million bid Friday, adding a line to cover the hospital's actual operating losses, excluding bankruptcy-related costs, between Dec. 1, 2023, and the final closure of the sale.

The UI’s lawyers also pledged that the university will invest “at least $25 million” on medical equipment, information technology infrastructure and hospital infrastructure such as parking ramps and roofing “within five years” of the closing date.

In response, Preston Hollow’s attorneys opted to offer a $1 million increase in the company’s capital bid, raising their bid to $30 million, which amounts to a $28.7 million “credit bid” and a $1.3 million cash bid.

The auction transcript did not indicate whether a recess was taken after Preston Hollow’s counterbid. The on-the-record proceedings took a five-minute pause after the university offered their modified bid.

The hospital’s representatives “do not believe that any bid that requires use of (Mercy’s) remaining cash and Foundation cash prior to closing is a viable transaction under the circumstances,” Simon said.

“We thank both of the bidding parties,” Simon said at the close of Friday’s auction. “We believe that the transaction with the University of Iowa will go a long way to restoring confidence in the Debtors' employees and ensuring ongoing patient care in the community for many years to come.”

Ryan Hansen covers local government and crime for the Press-Citizen. He can be reached at rhansen@press-citizen.com or on X, formerly known as Twitter, @ryanhansen01.

This article originally appeared on Iowa City Press-Citizen: Mercy halts contract talks with Preston Hollow, awards rights to U of I