Mercy Iowa City Hospital in Iowa City, Iowa, on Monday, August 7, 2023. The financially struggling hospital has signed a letter of intent with the University of Iowa to acquire the university for a proposed $20 million. The hospital and staff would move to UI Health Care. (Jim Slosiarek/The Gazette)
IOWA CITY – In a surprising turn of events that many – including Mercy Iowa City and its executives – did not expect, bondholder Preston Hollow Community Capital outbid the University of Iowa for Mercy’s assets in a long and drawn-out auction As part of the hospital’s Chapter 11 bankruptcy case.
That means Dallas-based Preston Hollow will join the collaborative rather than transferring the 150-year-old community hospital to UI ownership — something many are considering considering the university’s $20 million “stalking horse offer” as part of the deal American Healthcare Systems supports Mercy Iowa City as a “viable community hospital” during Mercy’s bankruptcy proceedings.
“In connection with the acquisition of the hospital, Preston Hollow Community Capital and the other bond investors will also make significant capital investments to stabilize the operations of the hospital, restore community care services and return the facility to profitability,” according to a press release from Preston Hollow.
News of the auction results emerged on Tuesday evening in bankruptcy proceedings.
In a news release, Preston Hollow said the community hospital it plans to operate with American Healthcare Systems will be organized as “an Iowa nonprofit organization with board members comprised of community leaders in Iowa City and Johnson County.”
Preston Hollow – which in early August, before Mercy filed for bankruptcy, asked a district court to appoint a receiver to take over operations at the troubled hospital – touted American HealthCare Systems’ “extensive experience in turning around hospitals throughout the United States.”
Although none of the parties involved shared many details of a new hospital concept Tuesday, Preston Hollow suggested that Steindler Orthopedic Clinic will be involved.
“Preston Hollow, along with our partner American Healthcare Systems, looks forward to building on Mercy Iowa City’s strong legacy in the community, reflected in the exceptional work of the hospital’s talented team of physicians, nurses and other staff who continue to provide high-quality care services will be provided. high-quality, affordable health care for individuals and families in the region,” Jim Thompson, chairman and CEO of Preston Hollow Community Capital, said in a statement.
“We are also looking forward to working with the Steindler Orthopedic Clinic as part of this transition process.”
In a statement, Steindler President and CEO Patrick Magallanes said Steindler has been the orthopedic care provider at Mercy for nearly 75 years.
“We believe Preston Hollow is committed to maintaining a community hospital and associated services in Iowa City,” he said. “What this means for the doctors, nurses and staff who have remained loyal to Mercy through a long period of uncertainty, and what this means for our community, cannot be overstated.”
Short-term transition
As part of the transfer and transition, Preston Hollow and American Healthcare Systems will conduct team meetings with physicians, nurses and other Mercy employees to solicit feedback and recommendations, answer questions and “build the partnership necessary to continue fulfilling the hospital’s mission.” “. in the coming years.”
“We know Preston Hollow as a bondholder and have learned more about American Healthcare Systems,” Mercy President and CEO Tom Clancy said in a news release. “AHS has experience operating and rehabilitating hospitals across the country.
“As we celebrate our 150th anniversary here in Iowa City, it is reassuring to know that they will continue to operate the hospital and our network of clinics as a community-based health system.”
Details about how much Preston Hollow offered and what is and is not included in the pending sales agreement have not been released. A judge has not yet postponed the hearing for the sale, which was previously scheduled for Tuesday before the auction delays.
However, Mercy reported that final approval is expected “shortly,” allowing American Healthcare Systems to assume operational and financial responsibility for the hospital as early as mid-November.
“Transition planning has already begun,” Mercy Chief Restructuring Officer Mark E. Toney said in a news release. “We look forward to AHS’s new vision and path forward for the health system and appreciate the commitment of AHS and Preston Hollow.”
Credit bid option
Tuesday’s auction news matched communications Mercy executives sent to employees last week, reporting: “All bids received were for an ongoing acute care hospital including our vendors and employees.”
In the days leading up to last Wednesday’s auction, UI administrators – assuming they would win as Mercy’s stalking horse bidder – had already begun reaching out to Mercy staff to set up meetings about to agree the expected acquisition, according to an email from Mercy obtained by The Gazette.
But when Preston Hollow and lead trustee Computershare — as Mercy’s largest bondholders — exercised their option to “purchase” the nearly $63 million in debt Mercy owes them, the university finally gave up.
In the end, Preston Hollow and American Healthcare System gave “the best overall offer” — an amount that included a mandatory $800,000 fee to break up the UI-Mercy deal.
Hoping to persuade the university to increase its bid, Mercy continued the auction past the original auction date last week, sources told the Gazette. But despite backroom negotiations that continued over the weekend and into today, Mercy officials ultimately agreed to Preston Hollow’s bid on Tuesday, according to court documents.
The credit offering option allowed Preston Hollow to take over the assets free of debt, pension liabilities, unpaid contributions and unfinished contracts that the Mercy operation had accumulated over years of financial decline.
Although Mercy executives reserved the right in their tender procedures to raise or challenge objections to the “validity, extent or priority of the liens and security interests relating to the alleged claim underlying a loan offer,” there were none Details about if and when Mercy might do this have been made public.
“We are also grateful for the work and commitment shown by the University of Iowa as a leading horse in the auction process,” Toney said in his statement. “The university’s commitment has been driven by preserving health care in Iowa City, and we believe this process has contributed to that.”
Look forward, look back
A relatively new website for American Healthcare Systems — a for-profit organization based in Glendale, California with experience in healthcare management — lists a four-person corporate leadership team and six press releases from July 2021.
Half of them report a series of healthcare acquisitions in the last year, including Gateway Regional Medical Center in Granite City, Illinois. in November 2022; Vista Medical Center East in Waukegan, Illinois in May; and ProMedica Coldwater Regional Hospital in Coldwater, Michigan, two weeks later.
In announcing the Michigan acquisition, American Healthcare Systems said financial challenges prompted the completion of the asset purchase agreement.
“American Healthcare Systems has a plan in place to ensure the sustainability of Coldwater Regional Hospital and is expected to focus on maintaining or expanding hospital services,” the release said.
When Mercy filed for bankruptcy protection on August 7, it did not disclose how or why it had agreed to the $20 million purchase agreement with the university – worth more than $605 million over 10 years in 2021 provided for the takeover of ownership.
That UI offer two years ago included $85 million for Mercy’s unfunded pension liabilities and employee retention efforts, according to documents obtained by The Gazette; $250 million for growth in primary and specialty care; $150 million to improve financial performance; $95 million for facility upgrades; and $25 million to recruit new community providers.
The university also proposed a $10 million endowment at the time “to preserve and continue (the Sisters of Mercy’s) mission outside the walls of the health care enterprise.”
Details about why that offer never materialized were not released.
The UI’s $20 million bankruptcy offer would have excluded Mercy liabilities such as tax liabilities, settlement costs and employee-related charges – including those related to severance or retirement benefits.
Vanessa Miller covers higher education for The Gazette.
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