Mercy Iowa City files complaint against MercyOne, CEO it says refused to mask

IOWA CITY — A committee representing the bankrupt Mercy Iowa City has filed a complaint against its former managing partner MercyOne — along with the president it appointed to lead the community hospital — in hopes of recovering at least $55 million for alleged “breach of contract, unjust enrichment, breach of fiduciary duty, and negligent misrepresentation.”

The complaint — seeking to return to Mercy Iowa City the money it paid MercyOne over the course of their six-year affiliation agreement, among other losses — is a long time coming, as the hospital since filing for bankruptcy in August 2023 has been hinting at and outright airing plans to sue the Des Moines-based health care entity.

Throughout its more than 100 pages, the complaint lays out decades of drama between the two Catholic health care systems and the players involved — including the MercyOne-appointed former Mercy Iowa City CEO Sean Williams, accused in the complaint of being regularly absent and refusing to wear a mask during COVID.

“Numerous staff and medical providers at (Mercy Iowa City) were furious that their CEO risked their safety during the pandemic by refusing to wear a mask,” according to the complaint. “Williams placed (the hospital’s) reputation and, most importantly, the health and lives of (its) employees, at significant risk during the COVID-19 pandemic by refusing to wear a mask.”

In a statement, MercyOne said it “remains steadfast in our statement that we have always acted in the best interests of Mercy Iowa City.”

“MercyOne has become a potential scapegoat for the impact of bankruptcy, while many others who caused or contributed to Mercy Iowa City’s decision to file for bankruptcy have received releases,” according to the statement. “An appeal is pending in the Eighth Circuit Court of Appeals concerning the propriety and validity of those releases. Regardless of the outcome of that appeal, there is no basis for any claim against MercyOne or any affiliated entity or individual."

‘An engagement ring’

The insolvent community hospital’s accusations date back to 1998, when MercyOne began soliciting Mercy Iowa City to partner or merge “as part of MercyOne’s goal of having a unified Catholic health care system in Iowa,” according to the complaint.

Those solicitations evolved into “serious conversations” by 2013 and 2014 — with Mercy Iowa City’s Sisters of Mercy advising its then CEO Ronald Reed to pursue a long-term affiliation and pointing to MercyOne as a “potential acquirer.”

“Given the dramatic and ongoing changes in the national health care landscape during this period of time, the board and (Mercy Iowa City’s) then-management determined that (it) needed to affiliate, join, or otherwise partner with an outside organization to ensure continuation of community health care services for tens of thousands of patients in Eastern Iowa,” according to the complaint.

Among those changes — driving the need to affiliate — was the 2015 establishment of national electronic health record standards to qualify for Medicare reimbursement, requiring Mercy Iowa City implement a fully functional system by April 2022. Failure to do so would cut the hospital’s reimbursement by $1.4 million annually, complicate patient transfers, and make it hard to collect insurance payments, comply with state regulations, and meet data privacy regulations — potentially resulting in millions in escalating costs and penalties.

By summer 2016, after years of discussion and the looming 2018 sunsetting of Mercy Iowa City’s old electronic health record system, the hospital landed on MercyOne as its best option for a “strategic affiliation partner” — who would, among other things, help replace the EHR, establish telehealth services, and lead a financial turnaround.

But MercyOne, according to the complaint, backtracked in fall 2016 and told the hospital it no longer wanted strategic affiliation — instead proposing a management arrangement that Mercy Iowa City rejected, compelling it to look more broadly for potential long-term partnerships and affiliations.

MercyOne was among the entities that responded to Mercy Iowa City’s solicitation, bringing the two together in compromise in May 2017, when they entered an initial management agreement — like MercyOne wanted — with the goal of eventually merging via strategic affiliation, like Mercy Iowa City wanted.

“MercyOne’s promise in the affiliation agreement to assist (Mercy Iowa City) in replacing its EHR system ‘not later than Nov. 1, 2018’ was a significant reason (the hospital) entered into the affiliation agreement,” according to the complaint, noting that MercyOne was “aware that full strategic affiliation in the future was critical to (Mercy Iowa City’s) continued existence as a viable, operating health care organization.

“Individuals at (Mercy Iowa City) viewed the affiliation agreement as an ‘engagement ring,’ with the details and formalities of the corporate ‘wedding’ left to be worked out.”

‘Not satisfying its obligations’

But instead of replacing Mercy Iowa City’s EHR, working toward full affiliation, and helping to address the hospital’s serious and growing financial issues, the partnership exacerbated them — with Mercy Iowa City suffering “significant financial losses during the approximately six-year term of the affiliation agreement,” according to the complaint.

“The affiliation agreement saddled (Mercy Iowa City) with steep payment obligations to MercyOne in exchange for a number of services that MercyOne did not provide,” per the complaint accusing MercyOne of never making any real effort to “plan, evaluate, and implement strategic affiliation” between the two — despite public assertions to the contrary.

“Rather than immediately pursuing a different strategic partner, (Mercy Iowa City) was induced to continue on in an expensive relationship with MercyOne for over four years,” per the complaint. “When MercyOne finally told (Mercy Iowa City) in the summer of 2021 that it was no longer planning on strategically affiliating with (the hospital), (its) deteriorating financial condition — caused in significant part by MercyOne’s mismanagement … left (the hospital) much less attractive to any potential acquirer.”

Under the agreement, MercyOne’s obligations included providing staffing and services related to financial management, risk aversion, purchasing and supply chain issues, clinical and quality oversight, medical staff review and credentialing, strategic planning, and IT implementation.

MercyOne also had to provide legal aid, recruitment services, and telemedicine development, but benefited not just from the millions in fees but entrée into Eastern Iowa, seats on Mercy Iowa City’s governing board, and advertising purchase in a previously-untapped market for the Des Moines entity.

“MercyOne used its placement with (Mercy Iowa City) to solicit numerous third-party rural health care organizations in Eastern Iowa to enter into management agreements with MercyOne,” according to the complaint. “Any such management agreements would benefit MercyOne through receipt of management fees and driving referrals back to MercyOne’s owned hospitals, including its headquarters in Des Moines.”

The complaint cataloged a long list of MercyOne’s contract failures — including around COVID, which brought out the larger partner’s survival-of-the-fittest impulse.

In August 2020, for example, MercyOne declined to help Mercy Iowa City determine if it qualified for federal aid under the CARES Act “despite previously advising (Mercy Iowa City) and its other affiliates that any requests for assistance, funding, or other relief in response to COVID-19 were only to be conducted by MercyOne.”

Even MercyOne CEO Bob Ritz in a January 2021 memo to hospital leadership admitted, “MercyOne understood that it was not satisfying its obligations under the affiliation agreement,” according to the complaint.

“It does not appear we are fulfilling our responsibilities in the manner in which they are described in the agreement,” Ritz wrote.

“That failure,” according to the complaint, “exacerbated (Mercy Iowa City’s) difficult financial situation and forced (the hospital) to pay excessive fees to MercyOne under the affiliation agreement for services that (it) did not receive.”

‘Critical failures’

The complaint said MercyOne’s decision not to provide support for the hospital’s new EHR system or its financial turnaround — beyond hiring or helping Mercy Iowa City hire consultants — was a conscious one, even as it continued to collect management fees.

“Despite (Mercy Iowa City’s) financial condition and MercyOne’s failure to perform under the affiliation agreement, MercyOne refused to reduce its management fees to (Mercy Iowa City) until summer 2022,” according to the complaint. “In fact, on June 15, 2020, Williams — MercyOne’s own employee — emailed Ritz requesting that MercyOne reduce its management fee as part of MercyOne’s request that (the hospital) correct its financial performance and reduce expenses.

“Ritz flatly refused after observing that other entities MercyOne was managing could make the same request, leading to financial loss for MercyOne.”

Regarding Mercy Iowa City’s problematic EHR system, MercyOne recommended it go with EPIC community connect and contact Mercy Cedar Rapids and University of Iowa Health Care to negotiate a license. But going that route would have cost Mercy Iowa City $12 to $18 million up front, with ongoing annual expenses between $2.1 and $3.3 million.

“These costs exceeded what (Mercy Iowa City) could afford,” according to the complaint.

So a Mercy Iowa City EHR selection steering committee identified an alternative as its preferred system, deciding to move on from “Allscripts Horizon, its existing EHR system for which technical support had been terminated.” Allscripts had been an option for Mercy Iowa City’s replacement EHR, but the committee wanted something else “due to outages of Allscripts’ Horizon system and harsh criticism regarding the flexibility and ease of use of Allscripts Sunrise, the proposed replacement.”

Despite the committee’s preference, Williams directed it to go with Allscripts, and in February 2021 dozens of Mercy Iowa City medical staff signed a letter to the board stating, “Mercy Hospital will not survive without a functioning EHR system.”

“Please hear us,” the medical staff wrote, according to the complaint. “We cannot work with this medical record system any longer.”

“Disregarding these concerns, Ritz noted that implementation of Allscripts Sunrise EHR System would ease (Mercy Iowa City’)s integration with MercyOne,” and the board voted to approve the Allscripts EHR acquisition on March 9, 2021.

Even as hospital employees raised concerns to MercyOne that their campus wasn’t ready to “go live” with Allscripts in May 2021, administrators directed a live launch on May 17 — two and a half years later than the deadline set in the affiliation agreement, according to the complaint.

“The Allscripts EHR system suffered critical failures,” the complaint read, including integration and implementation of systems covering clinical coding and records, finance and revenue cycle functions, regulatory and compliance tracking, and ancillary facility and infrastructure management.

“Those failures resulted in significant issues integrating clinical and medical records and also resulted in major revenue cycle issues,” according to the complaint, “delaying billing, cash collection, and financial record generation, thereby limiting cash collection on accounts receivable and payment requests to individual, government, and insurance payors.”

Less than a year later, in July 2022, Mercy Iowa City officials reminded MercyOne of their earlier concerns and said they’d had to liquidate “large portions of its investment portfolio as a result of billing problems stemming from the Allscripts implementation.”

Additionally, the hospital’s average unbilled accounts receivable balance had jumped from $43 million before implementation to $61 million after.

“(Mercy Iowa City) had been unable to bill numerous patients’ insurers because the Allscripts system had defaulted to billing patients directly by treating the patients as the primary financial responsibility party rather than by billing their respective insurers followed by requests for payment of any unreimbursed sums from the patients,” according to the complaint.

In response, MercyOne’s appointed CEO for Mercy Iowa City “merely recommended that the problem needed to be fixed because it harmed (the hospital’s) reputation and cash flow, but he took no definitive action.”

Wading through the problem with the help of consultants rather than MercyOne, Mercy Iowa City “identified approximately $37.53 million in losses traceable to issues with the EHR implementation and attributable to inadequate revenue cycle and financial management support.”

‘Regularly absent’

Addressing its allegations against MercyOne-appointed Mercy Iowa City CEO Sean Williams, the complaint accused him of being “regularly absent from (Mercy Iowa City) during business hours.”

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“His absence from (Mercy Iowa City) was well-known around the hospital,” according to the complaint. “On one of his first days of employment with (Mercy Iowa City), Williams directed staff to remove the desktop computer that had been set up for him.”

Williams, according to the complaint, said he didn’t need a desktop computer and rarely was seen using one.

“Instead, Williams largely attempted to perform his role as CEO of (Mercy Iowa City) from a smartphone and was known to have issues reviewing or accessing important documents,” according to the complaint.

From the start of COVID through his departure in September 2021 — “when he was strongly encouraged to and did resign” — Williams “refused to wear a mask at (Mercy Iowa City) despite the mask-related orders from the State of Iowa and MercyOne’s own mask policy.”

Aware of Williams’ “poor performance as CEO,” MercyOne placed him on a “performance improvement plan” in December 2020. A January 2021 memo from MercyOne observed “Williams’ leadership and high leadership turnovers were cause for concern; that Williams struggled to make decisions or implement decisions; that Williams needed to strongly enforce MercyOne policies, structures, systems; and that he generally struggled as a leader.”

Those issues — which eventually led to his resignation — “raised real concerns about MercyOne’s leadership effectiveness during a difficult time in addition to raising general structural concerns about systems in place at Mercy Iowa City and how MercyOne was fulfilling its leadership obligations,” according to the complaint.

Vanessa Miller covers higher education for The Gazette.

Comments: (319) 339-3158; vanessa.miller@thegazette.com