Mercy Hospital and Medical Center – South Side Hospital Files for Chapter 11 After Request to Move to Outpatient Business Model is Denied; Bleeding $7mn a Month and Hospital Staff, Debtors to Seek Sale, Reorganization or Liquidation

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February 10, 2021 – Mercy Hospital and Medical Center and one affiliated debtor (“Mercy” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of Illinois, lead case number 21-01805 (Judge Barnes). The Debtors, a not-for-profit 258-bed medical center located in Chicago’s South Side, are represented by Edward Green and Matthew Stocki of Foley & Lardner LLP. Further board-authorized engagements include Epiq Corporate Restructuring as claims agent. 

The Debtors are part of the Trinity Health Corporation ("Trinity") one of the largest multi-institutional Catholic Health Care Delivery systems in the nation, serving more than 30 million people through 94 hospitals across 22 states. 

At filing, the Debtors note between 200 and 1,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Biofire Diagnostics, LLC ($130k trade claim), (ii) General Mechanical Services ($109k trade claim) and (iii) United Security Services Inc. ($65k trade claim).

The decision to file for Chapter 11 follows the December 2020 decision of the Illinois Health Facilities and Services Review Board (the "Board") to deny the Debtors' request to convert their hospital into an outpatient center.

The Debtors had argued that the switch from hospital to outpatient center was both necessary to fulfill their community mission and imperative from an economic/financial perspective if they were to continue to function at all. In a press release announcing their application to the Board in November 2020 and detailing the rationale behind the desired change in business/operational model, the Debtors noted: "Declining inpatient volumes, an aging facility that needs at least $100 million in capital investments in the next five years to maintain a safe environment of care, competition from large systems and academic medical centers (with new and updated facilities), and the increasing demand for outpatient services, all played a role in the decision."

As the Debtors note in their lead Petition as to the deterioration of their business, "The quality of care at Mercy is an increasing concern as physicians and other colleagues have left Mercy and operating losses have accelerated to $7 million per month."

The Debtors have further noted that the change in model followed only after they had otherwise pursued efforts to address what state legislators had referred to as an under-served, "healthcare desert," through the formation of a healthcare coalition. The Debtors' CEO, Carol L. Garikes Schneider, states in the Debtors' application to the Board: "In January of 2020, we at Mercy Hospital and Trinity Health formed a coalition with three other South Side hospitals to create an independent health system and build a new state-of-the-art hospital and three to six outpatient centers to ultimately replace the aged hospital facilities. No one hospital or system could address the southside health inequities on their own. Sadly, it was not meant to be. During the last few hours of the Spring Legislative Session, the Illinois Legislature elected not to fund the South Side Transformation Plan as part of the funding for the Illinois Hospital Transformation Program.

In their unanimous December decision to request the Debtors' request, the six-member Board noted the Debtors' key healthcare role and that the closure of the Debtors' hospital would leave that part of Chicago (where life expectancy is an astonishing 30 years shorter than in parts of North Side) without critical hospital beds/facilities with the Board's order reading in part: "The State Board rules require the Board to determine if the health care services will exist within the established radius of Mercy Hospital (10-miles) should the discontinuation of the hospital be approved.  The State Board is also asked to determine if a shortage of beds or  services  in  the  planning  area  (A-03 Hospital  Planning  Area)  will  exist  should  the  discontinue be approved and if the proposed discontinuation will impact access to health care services. 

There will be a need for intensive care beds in the A-03 Planning Area and the City of Chicago and the loss of emergency care services will result in health risk to the population that Mercy Hospital serves."  

Goals of the Chapter 11 Filings

The lead Petition, which does not otherwise note the engagement of financial advisors or investment bankers, makes clear that the Debtors' approach to Chapter 11 remains wide open, providing that it is: "desirable to pursue and maximize the benefits of the restructuring in Chapter 11, including without limitation: (i) making arrangements for post-petition financing and/or use of cash collateral by Mercy Health System and/or Mercy; (ii) pursuing and consummating any sale or sales of Mercy Health System’s and/or Mercy’s assets they deem necessary or appropriate; and (iii) developing, negotiating, confirming and performing under, a bankruptcy plan of reorganization or liquidation."

Events Leading to Chapter 11

In a Declaration filed in support of the Debtors' Chapter 11 filing (the "Schneider Declaration) [Docket No. 12], Mercy President and Chief Executive Officer Carol L. Garikes Schneider provided details of the events leading to the filing. The Schneider Declaration states, "Guided by the aforementioned realities, the Community Health Needs Assessment compiled by the Alliance for Health Equity, and its own community health needs assessment, the Mercy Hospital Board of Directors, in collaboration with Trinity, ultimately concluded that Mercy Hospital needed to completely transform its care delivery model from an inpatient model to an outpatient model.

To that end, in August of 2019, senior management from the Hospital approached the Illinois Department of Healthcare & Family Services (the 'Department') to discuss closure of Mercy Hospital and the transformation of Mercy Hospital to an outpatient care center that will offer preventative and urgent care, diagnostic services and care coordination. These conversations led the Department to convene a group with Mercy Hospital, St. Bernard Hospital, Advocate Trinity Hospital and South Shore Hospital (collectively, the 'South Side Coalition'). In January of 2020, the South Side Coalition members signed a non-binding memorandum of understanding to create an independent health system and build one to two new, state-of-the-art hospitals and three to six outpatient centers to ultimately replace the four hospital facilities.

The South Side Transformation Plan was to be funded with public and private commitments over ten years for a total investment of $1.1 billion. The South Side Transformation Plan was to include a medical group with 140 employed providers (from Mercy Hospital and Advocate Trinity Hospital) and would have maintained 3,445 jobs in the Community (with retraining and reassignment of health care workers to work in the new centers). Critically, the South Side Transformation Plan requested that the State commit $520 million over five years as part of the Illinois Hospital Transformation Program funding. During the last few hours of the Spring Legislative Session in May of 2020, however, the Illinois Legislature changed course and elected not to fund the South Side Transformation Plan as part of the funding for the Illinois Hospital Transformation Program.

On May 25, 2020, the South Side Coalition notified the Department that there was no path forward. The Coalition subsequently disbanded at the end of May in 2020. Upon the consideration of the foregoing, the Debtors and Trinity made the decision to discontinue the Hospital’s categories of service and all of its authorized inpatient beds. The Debtors and Trinity also concluded that an outpatient care center was needed in the community. The care center would offer diagnostic services (including CT, MRI, X-Ray, ultrasound, mammography, echo, bone densitometry), urgent care (non-emergent on-demand medical services) and care coordination (to connect patients with specialty providers, develop care plans and facilitate access to community services). This care center would have the potential to serve more than 50,000 patients annually, provide access to preventive and early diagnostic services and help local residents avoid expensive emergency room visits and hospitalizations.

On July 30, 2020, the Debtors and Trinity submitted a notice of intent to file an Application for Permit ('Application') with the Illinois Health Facilities and Services Review Board ('Review Board') to discontinue current services at the Hospital, effective as early as February 1, 2021 and no later than May 31, 2021. The Application was ultimately filed on August 31, 2020. On December 15, 2020, the Review Board issued a Notice of Intent to Deny the Hospital’s Application. The Hospital submitted a response on December 18, 2020 setting forth its intent to appear before the Review Board again and to submit additional information about the closure. The Debtors and Trinity are scheduled to appear in front of the Review Board again on March 16, 2021.

Since the Debtors and Trinity first filed the Application, losses at the Hospital have accelerated from $4 million a month to nearly $9 million in January of 2021. The Hospital has also suffered staffing losses since the Application was filed. The Debtors intend to use the bankruptcy process to reduce the monthly losses at the Hospital, wind-down services and ultimately close the Hospital on or about May 31, 2021 in a manner that protects the health and safety of the Hospital’s patients (all in compliance with State law). The Debtors also intend to continue the various severance retention, and placement programs for their employees that are currently in place (with Court permission as needed) and to continue their efforts to find medical homes for their patients by working with other area healthcare providers.

Assuming the Debtors are able to close the Hospital on or about May 31, 2021, the Debtors intend to file a plan (or make other arrangements to effectuate a transaction) that pays each and every creditor with an allowed claim in full (with the necessary financial support coming from Trinity)."

Prepetition Indebtedness

  • HUD Loan: Mercy Hospital executed a mortgage (the “Mortgage”) to Prudential Huntoon Paige Associates, Ltd., dated as of June 1, 2011, with the Cook County Recorder of Deeds (the “Recorder”) to secure a loan in the original principal amount of $65,224,000.00 (the “HUD Loan”). The Mortgage encumbers real property commonly known as the Mercy Hospital Main Campus and Parking Lot located at 2525 South Michigan Avenue, 3316 South Ashland Avenue, and 5525 South Pulaski Avenue, Chicago, Illinois 60616. As of the Petition date, the balance of the HUD Loan was approximately $24,347,000.
  • Trinity Unsecured Debt: Trinity maintains a centralized cash management program for its hospitals. As of the Petition date, the Debtors maintained an overdraft in the cash management program in the amount of approximately $83.0mn resulting from advances of funds by the DIP Lender to pay shared expenses and other operating expenses of the Hospital. In addition, Trinity and Mercy Hospital are parties to that certain Intercompany Loan Agreement dated as of October 8, 2015 (the “Loan Agreement”). As of January 31, 2021, the amount owed to Trinity pursuant to the Loan Agreement was $53,937,000. Thus, as of the Petition date, the Debtors were indebted under the Pre-Petition Credit Arrangement with Trinity for unsecured credit obligations in the total outstanding principal amount of $136,937,000.
  • Other Unsecured Debt: As of January 31, 2021, the Debtors had approximately $28.7 million of accounts payable and accrued expenses and $6.7 million due to third party payors on their balance sheet.

DIP Financing

The Debtors are requesting Court approval to access up to $30.0mn in DIP Financing from Trinity Health Corporation [Docket No. 9].

The DIP Motion states, "The only source of secured credit available to the Debtors is the DIP Facility. The Debtors require financing under the DIP Term Sheet to satisfy their postpetition liquidity needs. The Debtors believe that the DIP Term Sheet will allow them to continue their operations in the ordinary course, maintain prudent cash balances and meet their liquidity needs through the bankruptcy cases….

The Debtors have concluded, in an exercise of their sound business judgment, that the financing to be provided by the DIP Lender pursuant to the terms of the DIP Term Sheet and the Interim DIP Order represent the best (and only) financing presently available to the Debtors. The 5 percent interest rate on the DIP Loan is well below market for healthcare entities in bankruptcy, which is currently in the 10 to 12 percent range."

About the Debtors

According to the Debtors: “Founded in 1852, Mercy holds the privilege of being Chicago’s first chartered teaching hospital. Since its founding, Mercy has become an integral part of the city, advancing our mission of providing access to compassionate care to our communities. Today, patients find care that combines world-class medicine with compassion, convenience and an undeniable spirit that sets it apart from other city hospitals. Here are just a few ways our experts and nationally ranked programs are leading the way in healthcare:

  • pioneering the treatment of heart and vascular disease, providing the most progressive care.
  • offering sophisticated and advanced minimally invasive surgical options of the future, including robotic assisted, 3D, and scarless surgery.
  • providing comprehensive, academic-level cancer treatment in an accessible, community based setting.
  • offering a new, first of its kind, innovative care pathway for the relief of back pain, providing access to a spine specialist within 48 hours .

Mercy is a people centered environment—which means you are at the center of everything we do, and every decision we make. At Mercy, patients are first, and we are transforming the delivery of healthcare to Chicago and across the nation, helping our communities live well. Every day, we are hard at work finding ways to enrich the patient experience—in service and treatment options."

About Trinity Health

Trinity Health is one of the largest multi-institutional Catholic health care delivery systems in the nation, serving diverse communities that include more than 30 million people across 22 states. Trinity Health includes 92 hospitals, as well as 100 continuing care locations that include PACE programs, senior living facilities, and home care and hospice services. Its continuing care programs provide nearly 2.5 million visits annually. Based in Livonia, Mich., and with annual operating revenues of $18.8 billion, the organization returns $1.3 billion to its communities annually in the form of charity care and other community benefit programs. Trinity Health employs 123,000 colleagues, including 6,800 employed physicians and clinicians.

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