Receiver sought for Iowa hospital that’s alleged to be in a ‘financial freefall’

Board members accused of burying their heads in the sand

By: - July 24, 2023 5:35 pm

Mercy Hospital-Iowa City, located at 500 E. Market St. in Iowa City, is alleged in court documents to be in a “financial freefall.” (Photo via Google Earth)

An Iowa City hospital that is alleged to be in a “financial freefall” and on the brink of financial collapse may soon be placed in receivership.

One of the bondholders and biggest lenders for Mercy Hospital-Iowa City went to court on Monday seeking the appointment of a receiver who would take control over the assets of Mercy. Preston Hollow Community Capital, a specialty finance company that represents the bondholder, argues a receiver is needed to stem “unsustainable financial losses” at Mercy and avoid the closure of the 234-bed, acute care hospital.

In its court petition and in a separate written statement, Preston Hollow, which invested in Mercy five years ago and is now the hospital’s largest senior secured creditor, placed the blame for the situation squarely on Mercy’s board of directors.

The firm said in its statement that the board “has made a series of decisions that have put that mission at risk, along with the hospital’s ability to meet its financial obligations to their talented team of nurses, doctors, and more.”

The firm said because the board “refused to shift its approach to address these issues,” the hospital is “now on the verge of insolvency.” Preston Hollow said it’s hopeful that receivership will provide a framework for the rehabilitation and recapitalization of Mercy and “ensure that its existing patients continue to receive the care they need.”

Thomas R. Clancy, the hospital’s CEO and president, told employees in an email Friday that “we received notice from our bondholder — the equivalent of a bank that holds the mortgage on your home — that they consider Mercy-Iowa City in default on its bond agreements. We disagree with the notice, and our attorneys have responded with a letter that disputes their assertions and outlines our view of the facts.”

Clancy said the hospital has made all of the payments on the bonds as required and reduced the hospital’s costly reliance on traveling nurses by 30%, all while completing critical maintenance repairs and upgrades.

“We are Iowa City’s only community hospital and have much to celebrate and honor – including 150 years of service to this community,” Clancy said in his email.

While the hospital has yet to file a response to the court petition, lawyers for the hospital wrote to Preston Hollow on Friday and argued there had been no default that would warrant the appointment of a receiver. The letter indicates the hospital and its bondholder have been engaged in “restructuring negotiations” since February of this year and it calls for the parties to “re-engage in a constructive dialogue.”

Petition: Board members ‘buried their heads in the sand’

In its petition for receivership, Preston Hollow calls Mercy “a vital community asset that, unfortunately, is in financial freefall.”

The company alleges the nonprofit hospital’s board of directors and management have made a series of decisions over the past several years that have placed the hospital on a path toward insolvency. According to the petition, Mercy’s liquidity has declined by $40 million, or 51%, over the past nine months and the hospital has a negative cash flow of roughly $2.6 million per month.

The hospital’s own financial projections show that its liquidity will dwindle to less than $5 million – a level that’s insufficient to pay the cost of ongoing operations – by late September, the petition alleges.

“If action is not taken immediately, the hospital may be forced to cease operations and shutter,” the petition states, adding that Preston Hollow has implored the board to initiate a financial turnaround plan “before it falls off the financial cliff” in September. The board and management “have buried their heads in the sand,” the petition alleges.

Preston Hollow is asking the court to appoint a receiver on an emergency basis in order to protect and preserve its collateral and to ensure the hospital “remains operational for the safety and care of its patients.”

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.

The hospital’s shifting financial situation appears to be tied to both a drop in revenue and an increase in expenses. For example, total revenue in 2022 was $177 million, which represented a sharp decrease from 2021’s $193 million. Over that same period of time, spending increased by $11 million.

The tax records indicate that Sean Williams, the former chief executive officer of Mercy Hospital-Iowa City, was paid $972,326 in compensation by the hospital’s management company, MercyOne, in 2022. There were five physicians who, in 2021, each collected more than half a million dollars in compensation from the hospital, according to the tax records.

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Clark Kauffman
Clark Kauffman

Deputy Editor Clark Kauffman has worked during the past 30 years as both an investigative reporter and editorial writer at two of Iowa’s largest newspapers, the Des Moines Register and the Quad-City Times. He has won numerous state and national awards for reporting and editorial writing.