University of Iowa plans to acquire Mercy Hospital for $20M as facility files for bankruptcy

The University of Iowa has revealed plans to acquire Mercy Hospital on the heels of the organization's recent bankruptcy filing.

Mercy "voluntarily" filed a bankruptcy petition, the company announced in a press release Monday morning. The 194-bed facility has served area residents since 1873.

“Mercy Iowa City believes this plan is the best path forward to preserve our hospital operations,” saidTom Clancy, Chairman of the Board and CEO of Mercy Iowa City in a press release. “As we implement this plan, our dedicated Mercy Iowa City staff remain steadfast in their commitment to provide compassionate care toour community.”

The State of Iowa Board of Regents will consider the university's proposed $20 million acquisition of Mercy's facilities and business operations at Tuesday morning's special session.

In an attached letter of intent filed in bankruptcy court, the hospital said the university plans to integrate the Mercy system into UI Health Care.

The University of Iowa's acquisition would integrate 14 buildings largely located on the Mercy Iowa City campus in addition to smaller offices in North Liberty, Kalona, Tipton and Williamsburg.

“We have always maintained great respect for Mercy Iowa City, knowing the vital role it has played in our community since 1873. As members of the same community, many of us know and care about people who work at Mercy Iowa City,” the University of Iowa president’s office said in a statement early Monday.

“We want you to know that leaders from the University of Iowa, UI Health Care, and Mercy Iowa City are working together to avoid significant disruption. Although many decisions will be in the hands of the bankruptcy court, we share a goal to preserve and enhance local and regional access to quality health care and jobs.”

Mercy will remain operating at its usual capacity with no plans to close. The bankruptcy court will decide many of the deal's specifics in the coming months.

“In the meantime, Mercy Iowa City will continue to see patients as its hospital proceeds through bankruptcy and we will prepare, to the extent permissible, for a potential future where our entities join as one to continue to serve the health care needs of Iowans," the University of Iowa president's office said it in its statement.

Texas company tried to buy out Mercy last month

Dallas-based Preston Hollow Community filed a motion last month to try and take over business operations of Mercy Hospital.

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

“Mercy Iowa City’s decision to file for bankruptcy is the result of years of financial mismanagement and an ongoing refusal to take the necessary steps to restructure and stabilize its operations," Preston Hollow said in a news release provided to the Press-Citizen on Monday. "Even now, after years of inaction on their part, the hospital chooses to point fingers at others rather than take any accountability for their financial losses or demonstrate any willingness to seriously address the factors that led to those losses,”

Mercy management alluded to issues with financial creditors in their announcement Monday.

“The recent actions of one of our largest creditors has significantly and negatively impacted the hospital and resulted in this bankruptcy filing,” Mercy Hospital Chief Restructuring Officer Mark. E Toney said in a press release. “The board and management moved rapidly to secure a partner to maintain health care in our community.”

Mercy has struggled financially for years

Preston Hollow said Mercy Iowa City was in “financial freefall" in its July petition to the court.

The company invested more than $40 million in Mercy in 2018 but said the hospital was suffering unsustainable losses, including a $2.6 million monthly “cash burn.”

Mercy Iowa City's financial projections show that by Sept. 29, its liquid assets will fall below $5 million, a mark they feel cannot sufficiently maintain operations.

Mercy Iowa City revealed they had tried resolving their differences with Preston Hollow before talks broke down a few days before the firm's court petition.

Preston Hollow officials said they provided a suitable plan for the future, but Mercy didn't follow through.

“The Preston Hollow Community Capital team has consistently advised and encouraged Mercy Iowa City to develop and implement a substantive plan to rehabilitate and recapitalize the hospital," the company added in Monday's release. "The fact that they chose not to do so is the fault of Mercy Iowa City and no one else.

Preston Hollow Community Capital remains committed to ensuring families in Johnson County have access to high-quality, affordable health care services and will take the steps necessary, including legal steps, to ensure that outcome is achieved.”

The hospital announced plans to leave its partnership with MercyOne, the largest statewide healthcare system, in April, less than seven years after joining. Previous plans to exit the MercyOne partnership failed in 2021.

The hospital’s credit rating was downgraded in March by Moody’s, a financial services company that analyzes credit ratings and provides risk analysis for investors. The company's analysis said 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, the Register reported that Mercy Iowa City hired New York-based financial management firm ToneyKorf Partners, a company specializing in helping struggling healthcare systems improve their operations.

Michaela Ramm contributed reporting.

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

This article originally appeared on Iowa City Press-Citizen: Mercy files for bankruptcy, UI seeks approval to purchase for $20M