NEWS SUMMARY _______________________________________
Mercy Hospital of Iowa City, a well-known healthcare institution, is currently facing a turbulent period as it has filed for bankruptcy. The hospital’s financial troubles have led to a situation where potential buyers are vying for ownership, with bids from the University of Iowa and Preston Hollow Community Capital. Initially, the University of Iowa was declared the winning bidder, but the auction was reopened due to a misunderstanding regarding Preston Hollow’s funding plans. Now, as a hearing is scheduled for Nov. to seek court approval for the sale, the future of Mercy Hospital hangs in the balance. The fate of Mercy Hospital of Iowa City remains in question this week amid competing bids for the 150-year-old medical center. In August, after Mercy filed for bankruptcy, the Iowa Board of Regents approved the University of Iowa’s request to purchase the hospital with a bid of $20 million. Mercy’s property, equipment, inventory, hospital employees, supplies, and active business operations were included in the proposed sale.
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by Clark Kauffman, Iowa Capital Dispatch
October 30, 2023
(This news story was first published by Iowa Capital Dispatch)
The fate of Mercy Hospital of Iowa City remains in question this week amid competing bids for the 150-year-old medical center.
In August, after Mercy filed for bankruptcy, the Iowa Board of Regents approved the University of Iowa’s request to purchase the hospital with a bid of $20 million. Mercy’s property, equipment, inventory, hospital employees, supplies, and active business operations were included in the proposed sale.
On Oct. 10, one of Mercy’s primary lenders, Preston Hollow Community Capital, was declared to have submitted the winning bid of $29 million for Mercy. Within days, however, Mercy indicated it misunderstood Preston Hollow’s plans for the manner in which operating losses will be funded after November of this year. The auction was then reopened, and Mercy declared the University of Iowa to be the winning bidder, even after Preston Hollow had increased its bid.
A hearing is scheduled for Nov. 6, at which Mercy is expected to seek a court order approving the sale of the hospital to the University of Iowa.
Pensioners raise conflict-of-interest concerns
In a written statement, Preston Hollow said that since “being declared the winning bidder on October 10, we have been working toward a smooth transition for the hospital to ensure continuity of care. In the coming days, the bankruptcy court will rule on this matter. 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.”
Recently, the bankruptcy court heard from attorneys representing Mercy’s pension plan beneficiaries, arguing that the committee of Mercy creditors who will vote on key issues related to the disposition of Mercy’s remaining assets has put the pensioners at a disadvantage.
Mercy’s pension plan is underfunded and attorneys for the beneficiaries are concerned that even if they are granted one or two seats on the creditors’ committees, the interests of pensioners may not be protected due to what they call “potential and actual conflicts.”
They note that a representative or officer of Mercy may be functioning as the trustee for the pension plan itself, “a situation that, if true, would appear to give rise to potentially untenable conflicts of interest as the case progresses.”
The beneficiaries’ attorneys argue that “the pensioners have interests that are different in kind and potentially adverse to those of the other creditor’s committee members” who may be competing for Mercy’s assets.
“While, in theory, pensioners on the creditor’s committee could advocate for pensioner interests within that structure, in practice they would be consistently outvoted and have no real power or voice,” the pensioners’ attorneys have told the court.
Preston Hollow sought receiver before bankruptcy
Days before Mercy filed for bankruptcy, Preston Hollow, as the hospital’s largest senior secured creditor, claimed Mercy was in “a financial freefall.” The specialty finance company went to court asking a judge to appoint a receiver who could take control of the hospital’s assets, claiming the 234-bed, acute care hospital was incurring “unsustainable financial losses” and arguing that a receiver was needed to avoid a shutdown of the hospital.
Mercy sought to have that case dismissed, calling Preston Hollow’s actions a “pretextual power play by an investment fund that puts the medical team, employees, patients and larger community at risk.”
According to Preston Hollow’s petition, Mercy’s liquidity had declined by $40 million, or 51%, over the past nine months and the hospital had a negative cash flow of roughly $2.6 million per month.
The hospital’s own financial projections showed that its liquidity would dwindle to less than $5 million – a level that’s insufficient to pay the cost of ongoing operations – by late September, the petition alleged.
“If action is not taken immediately, the hospital may be forced to cease operations and shutter,” the petition stated, adding that Preston Hollow had implored the board to initiate a financial turnaround plan “before it falls off the financial cliff” in September.
Tax records show that the hospital finished the 2022 fiscal year $16.8 million in the red, taking in $177 million while spending almost $194 million. That was a dramatic shift from the previous year when the hospital took in $10.4 million more than it spent.
According to those same records, the hospital’s net assets or fund balances dropped precipitously over that same period, from $96.8 million in 2021 to $55.8 million in 2022.
Iowa Capital Dispatch is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Iowa Capital Dispatch maintains editorial independence. Contact Editor Kathie Obradovich for questions: info@iowacapitaldispatch.com. Follow Iowa Capital Dispatch on Facebook and Twitter.
